OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-ENDOutstanding Equity Awards at Fiscal Year-End
The following table summarizes the outstanding equity awards for the year ended December 31, 2010 prior to the effect of the anticipated 10-for-1 reverse stock split:
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 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | |
* Warrant | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
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 | | | | — | | | | — | | | | — | | | | — | |
________ | | | | | | | | | |
* Warrant | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Judith C. Norstrud (3) | | | 200,000 | | | | — | | | | — | | | $ | 0.45 | | | | 10/15/2019 | | | | — | | | | — | | | | — | | | | — | |
| | | 50,000 | | | | 100,000 | | | | 100,000 | | | $ | 0.30 | | | | 6/25/2020 | | | | — | | | | — | | | | — | | | | — | |
David E. Longacre (4) | | | — | | | | 200,000 | | | | — | | | $ | 0.28 | | | | 1/20/2020 | | | | — | | | | — | | | | — | | | | — | |
| | | — | | | | 100,000 | | | | — | | | $ | 0.30 | | | | 7/6/2020 | | | | — | | | | — | | | | — | | | | — | |
The following table summarizes the outstanding equity awards for the year ended December 31, 2010 upon giving effect to the anticipated 10-for-1 reverse stock split:
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) | | | 82,500 | | | | — | | | | — | | | $ | 2.60 | | | | 9/23/2014 | | | | — | | | | — | | | | — | | | | — | |
| | | 15,000 | | | | — | | | | — | | | $ | 1.00 | | | | 5/10/2015 | | | | — | | | | — | | | | — | | | | — | |
| | | 12,000 | | | | — | | | | — | | | $ | 1.00 | | | | 10/1/2015 | | | | — | | | | — | | | | — | | | | — | |
| | | 4,000 | | | | — | | | | — | | | $ | 3.00 | | | | 5/2/2016 | | | | — | | | | — | | | | — | | | | — | |
| | | 11,000 | | | | — | | | | — | | | $ | 5.50 | | | | 11/1/2016 | | | | — | | | | — | | | | — | | | | — | |
| | | 14,000 | | | | — | | | | — | | | $ | 5.50 | | | | 2/20/2017 | | | | — | | | | — | | | | — | | | | — | |
| | | 30,000 | | | | — | | | | — | | | $ | 2.10 | | | | 8/18/2017 | | | | — | | | | — | | | | — | | | | — | |
| | | 35,000 | | | | — | | | | — | | | $ | 2.10 | | | | 1/30/2018 | | | | — | | | | — | | | | — | | | | — | |
| | | 300,000 | * | | | — | | | | — | | | $ | 3.60 | | | | 8/4/2013 | | | | — | | | | — | | | | — | | | | — | |
| | | 7,500 | | | | — | | | | — | | | $ | 3.00 | | | | 8/4/2018 | | | | — | | | | — | | | | — | | | | — | |
| | | 10,000 | | | | — | | | | — | | | $ | 4.20 | | | | 11/12/2019 | | | | — | | | | — | | | | — | | | | — | |
| | | 354,006 | | | | — | | | | — | | | $ | 4.20 | | | | 11/12/2019 | | | | — | | | | — | | | | — | | | | — | |
| | | 40,000 | | | | — | | | | — | | | $ | 3.00 | | | | 6/25/2020 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | |
* Warrant | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Scott G. Ehrenberg (2) | | | 14,000 | | | | — | | | | — | | | $ | 2.60 | | | | 9/23/2014 | | | | — | | | | — | | | | — | | | | — | |
| | | 11,000 | | | | — | | | | — | | | $ | 1.00 | | | | 5/10/2015 | | | | — | | | | — | | | | — | | | | — | |
| | | 8,000 | | | | — | | | | — | | | $ | 1.00 | | | | 10/1/2015 | | | | — | | | | — | | | | — | | | | — | |
| | | 4,000 | | | | — | | | | — | | | $ | 5.50 | | | | 11/1/2016 | | | | — | | | | — | | | | — | | | | — | |
| | | 12,000 | | | | — | | | | — | | | $ | 5.50 | | | | 2/20/2017 | | | | — | | | | — | | | | — | | | | — | |
| | | 5,000 | | | | — | | | | — | | | $ | 2.10 | | | | 8/18/2017 | | | | — | | | | — | | | | — | | | | — | |
| | | 25,000 | | | | — | | | | — | | | $ | 3.00 | | | | 8/4/2018 | | | | — | | | | — | | | | — | | | | — | |
| | | *25,000 | | | | — | | | | — | | | $ | 3.00 | | | | 8/4/2013 | | | | — | | | | — | | | | — | | | | — | |
| | | 12,500 | | | | 25,000 | | | | 25,000 | | | $ | 3.00 | | | | 6/25/2020 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | |
* Warrant | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Judith C. Norstrud (3) | | | 20,000 | | | | — | | | | — | | | $ | 4.50 | | | | 10/15/2019 | | | | — | | | | — | | | | — | | | | — | |
| | | 5,000 | | | | 10,000 | | | | 10,000 | | | $ | 3.00 | | | | 6/25/2020 | | | | — | | | | — | | | | — | | | | — | |
David E. Longacre (4) | | | — | | | | 20,000 | | | | — | | | $ | 2.80 | | | | 1/20/2020 | | | | — | | | | — | | | | — | | | | — | |
| | | — | | | | 10,000 | | | | — | | | $ | 3.00 | | | | 7/6/2020 | | | | — | | | | — | | | | — | | | | — | |
___________
(1) | The April 2008 warrant grant to Mr. Tangredi for 3,000,000 shares (300,000 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 36,834,73537,517,604 shares of common stock outstanding as of September 12,October 10 , 2011 (3,683,474( 3,751,760 shares of common stock upon giving effect to the anticipated 10-for-1 reverse stock split) plus, for each individual, any securities that individual has the right to acquire within 60 days of September 12,October 10 , 2011. 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 Stock Beneficially Owned Number of Shares of Common Stock | | | Percentage of Class | | Common Stock Beneficially Owned Number of Shares of Common Stock after giving effect to the anticipated reverse stock | | | Common Stock Beneficially Owned Number of Shares of Common Stock | | Percentage of Class | | Common Stock Beneficially Owned Number of Shares of Common Stock after giving effect to the anticipated reverse stock | |
| | | | | | | | |
Timothy N. Tangredi | | | | | | | | | | | | | | |
(Officer and Chairman) (1) | | | 12,230,477 | | | 25.0 | % | | 1,223,048 | | | 12,310,477 | | 25.0 | % | | 1,231,048 | |
David Longacre (Officer) (2) | | | 100,001 | | | .3 | % | | 10,000 | | | 100,001 | | | .3 | % | | 10,000 | |
Scott G. Ehrenberg (3) (Officer) | | | 2,077,800 | | | 5.4 | % | | 207,780 | | | 2,077,800 | | | 5.3 | % | | 207,780 | |
Judith Norstrud (Officer) (4) | | | 537,500 | | | 1.4 | % | | 53,750 | | | 572,500 | | 1.5 | % | | 57,250 | |
Raymond Kazyaka Sr. (Director) (5) | | | 1,129,600 | | | 3.0 | % | | 112,960 | | | 1,174,600 | | 3.0 | % | | 117,460 | |
Robert W. Schwartz (Director) (6) | | | 1,099,600 | | | 2.9 | % | | 109,960 | | | 1,144,6 00 | | 3.0 | % | | 114,460 | |
Richard Rutkowski (Director Nominee) | | 0 | | 0.0 | % | | 0 | | | 0 | | 0.0 | % | | 0 | |
Lon Bell (Director Nominee) | | 0 | | 0.0 | % | | 0 | | | 0 | | 0.0 | % | | 0 | |
Peter Termyn (Director Nominee) | | 0 | | 0.0 | % | | 0 | | | 0 | | 0.0 | % | | 0 | |
Executive officers, directors and nominees, as a group (9 persons) | | | 17,174,978 | | | 31.9 | % | | 1,717,498 | | | 17,379,978 | | | 31.8 | % | | 1,737,998 | |
Brian A. Kelly | | | | | | | | | | | | | | |
181C Hague Blvd. Glenmont, N.Y. 12077 | | | 2,254,085 | | | 6.1 | % | | 225,409 | | | 2,254,085 | | 6.0 | % | | 225,409 | |
Michael Gostomski (7) | | | | | | | | | | | | | | |
1666 Valley View Dr. Winnona, MN 55987 | | | 3,355,535 | | | 8.9 | % | | 335,554 | | | 3,355,535 | | 8.8 | % | | 335,554 | |
Louis M. Jaffe (8) | | | | | | | | | | | | | | |
1500 S. Ocean Blvd #5201 Boca Raton, FL 33432 | | | 3,684,300 | | | 9.7 | % | | 368,430 | | | 3,684,300 | | 9.5 | % | | 368,430 | |
Mark Nordlich (9) | | | | | | | | | | | | | | |
152 West 575th St. 4th Floor New York, NY 10019 | | | 3,680,436 | | | 9.99 | % | | 368,044 | | | 3,793,240 | | 9.99 | % | | 379,324 | |
Leonard Samuels ( 10 ) | | | | | | | | |
Leonard Samuels (10) | | | | | | | | |
1011 Centennial Road Penn Valley, PA 19072 | | | 13,478,165 | | | 32.3 | % | | 1,347,817 | | | 13,478,165 | | 31.8 | % | | 1,347,817 | |
Leah Kaplan Samuels ( 11 ) | | | | | | | | |
Leah Kaplan Samuels (11) | | | | | | | | |
1011 Centennial Road Penn Valley, PA 19072 | | | 3,629,696 | | | 9.6 | % | | 362,970 | | | 3,629,696 | | 9.4 | % | | 362,970 | |
________
______________(1) | Includes 9,375,0589,420,058 shares (937,506( 942,006 shares upon giving effect to the anticipated 10-for-1 reverse stock split) of common stock issuable upon exercise of stock options and warrants and 2,828,3582,863,358 shares (282,836( 286,336 shares upon giving effect to the anticipated 10-for-1 reverse stock split) beneficially owned by Mr. Tangredi’s wife, Patricia Tangredi. 2,700,5582,735,558 of Ms. Tangredi’s shares (270,056( 273,556 shares upon giving effect to the anticipated 10-for-1 reverse stock split) are issuable upon the exercise of stock options. Excludes an estimated 166, 971166,971 shares of common stock that would be issued in partial payment of Mr. Tangredi’s accrued unpaid compensation (assuming completion of the offering at a public offering price of $4.00 per share after taking into account the anticipated 10-for-1 reverse stock split and cash payment of approximately $380,000). |
(2) | Includes 100,001 shares of common stock ( 10,000(10,000 shares upon giving effect to the anticipated 10-for-1 reverse stock split) issuable upon exercise of stock options. |
(3) | Includes 1 ,990,0001,990,000 shares of common stock ( 199,000(199,000 shares upon giving effect to the anticipated 10-for-1 reverse stock split) issuable upon the exercise of stock options and warrants and 41,400 shares (4,140 shares upon giving effect to the anticipated 10-for-1 reverse stock split) beneficially owned by Mr. Ehrenberg’s wife, Linda Ehrenberg. |
(4) | Includes 537,500572,500 shares of common stock (53,750( 57,250 shares upon giving effect to the anticipated 10-for-1 reverse stock split) issuable upon exercise of stock options. |
(5) | Includes 1,129,6001,174,600 shares of common stock (112,960( 117,460 shares upon giving effect to the anticipated 10-for-1 reverse stock split) issuable upon exercise of stock options. |
(6) | Includes 1,099,6001,144,600 shares of common stock (109,960( 114,460 shares upon giving effect to the anticipated 10-for-1 reverse stock split) issuable upon exercise of stock options. |
(7) | Includes 807,087 common shares issuable (80,709 shares upon giving effect to the anticipated 10-for-1 reverse stock split upon exercise of certain warrants. |
(8) | Includes 666,500 shares of common stock (66,650 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (29,808 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (181,972 shares upon giving effect to the anticipated 10-for-1 reverse stock split) held by the aforementioned trust, 250,004 shares (25,000 shares upon giving effect to the anticipated 10-for-1 reverse stock split) held by the Louis Jaffe TTEE Irrevocable Trust – Jennifer Jaffe and 250,004 shares (25,000 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (10,000 shares upon giving effect to the anticipated 10-for-1 reverse stock split) held by the Diana G. Jaffe Revocable Trust Dated 8/4/99 and 50,000 shares (5,000 shares upon giving effect to the anticipated 10-for-1 reverse split) 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 (25,000 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (332,474 shares upon giving effect to the anticipated 10-for-1 reverse stock split), and 355,696468,500 shares ( 35,57046,850 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 Nordlich. Platinum Montaur Life Sciences, LLC hold warrants for the purchase of up to 7,999,000 shares of common stock (799,990 shares upon giving effect to the anticipated 10-for-1 reverse stock split). Among these warrants, excluded from the above table are 7,643,3047,530,500 shares of common stock ( 764,330753,050 shares upon giving effect to the anticipated 10-for-1 reverse stock split) issuable upon exercise of those warrants, and two convertible notes which would (as of September 12October 10 , 2011) result in the issuance of 10,558,48510,632,244 shares (1,055,849( 1,063,224 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 September 12October 10 , 2011 we estimate that at the closing of the contemplated offering, approximately $1.51 million of net proceeds from the offering will be used to repay principal and interest under these notes, and that approximately 474,200481,800 shares of common stock will be issued in the conversion of the notes (see sections titled “Use of Proceeds” and “Capitalization” below in this prospectus). |
(1 0 )(10) | Includes 905,000 shares of common stock (90,500 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 3,193,466 shares of common stock (319,347 shares upon giving effect to the anticipated 10-for-1 reverse stock split) and 3,025,000 shares of common stock (302,500 shares upon giving effect to the anticipated 10-for-1 reverse stock split) issuable upon exercise of certain outstanding warrants issued to shareholder RBC Dain – Custodian for Leonard Samuels IRA. |
(1 1 )(11) | Includes 905,000 shares of common stock (90,500 shares upon giving effect to the anticipated 10 - for - 1 reverse stock split) 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 (1,500,000 upon giving effect to the anticipated 10-for-1 reverse stock split) 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 | |
| | 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 | | | 8,606,556 | | $ | 0.26 | | 7.58 | | $ | 38,294 | |
Granted | | | 4,190,058 | | | $ | 0.21 | | | — | | | — | | | 4,240,058 | | $ | 0.21 | | — | | — | |
Exercised | | | (25,000 | ) | | $ | 0.17 | | | — | | $ | 3,250 | | | (25,000 | ) | | $ | 0.17 | | — | | $ | 3,250 | |
Forfeited or expired | | | (472,732 | ) | | $ | 0.58 | | | — | | | — | | | | (472,732 | ) | | $ | 0.58 | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding at December 31, 2009 | | | 12,298,882 | | | $ | 0.26 | | | 7.64 | | $ | 1,052,839 | | | 12,348,882 | | $ | 0.26 | | 7.64 | | $ | 1,052,839 | |
Granted | | | 2,970,000 | | | $ | 0.30 | | | — | | | — | | | 2,970,000 | | $ | 0.30 | | — | | — | |
Forfeited or expired | | | (371,125 | ) | | $ | 0.32 | | | — | | | — | | | | (371,125 | ) | | $ | 0.32 | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding at December 31, 2010 | | | 14,897,757 | | | $ | 0.25 | | | 7.19 | | $ | 946,754 | | | 14,947,757 | | $ | 0.25 | | 7.19 | | $ | 946,754 | |
Granted | | | 2,510,000 | | | $ | 0.3 3 | | | — | | | — | | | 2,510,000 | | $ | 0.33 | | — | | — | |
Forfeited or expired | | (136,667 | ) | | $ | 0.11 | | | — | | | — | | | | (136,667 | ) | | $ | 0.11 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding at June 30 , 2011 | | | 1 7,271,090 | | | $ | 0. 32 | | | 7. 04 | | $ | 1,406,643 | | |
Outstanding at June 30, 2011 | | | | 17,321,090 | | $ | 0.32 | | | 7.04 | | $ | 1,406,643 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exercisable at June 3 0 , 2011 | | | 15 ,958,937 | | | $ | 0. 32 | | | 6. 86 | | $ | 1,326,355 | | |
Exercisable at June 30, 2011 | | | | 16,008,937 | | $ | 0.32 | | | 6.86 | | $ | 1,326,355 | |
The following summarizes the information relating to outstanding stock options activity with employees during 2011, 2010 and 2009 upon giving effect to the anticipated 10-for-1 reverse stock split:
| | | Common Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value | |
| | Common Shares | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (in years) | | | Aggregate Intrinsic Value | | | | | | | | | | |
Outstanding at December 31, 2008 | | | 860,656 | | | $ | 2.60 | | | 7.58 | | $ | 38,294 | | | 860,656 | | $ | 2.60 | | 7.58 | | $ | 38,294 | |
Granted | | | 419,006 | | | $ | 2.10 | | | — | | | — | | | 424,006 | | $ | 2.10 | | — | | — | |
Exercised | | | (2,500 | ) | | $ | 1.70 | | | — | | $ | 3,250 | | | (2,500 | ) | | $ | 1.70 | | — | | $ | 3,250 | |
Forfeited or expired | | | (47,273 | ) | | $ | 5.80 | | | — | | | — | | | | (47,273 | ) | | $ | 5.80 | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding at December 31, 2009 | | | 1,229,889 | | | $ | 2.60 | | | 7.64 | | $ | 1,052,839 | | | 1,234,889 | | $ | 2.60 | | 7.64 | | $ | 1,052,839 | |
Granted | | | 297,000 | | | $ | 3.00 | | | — | | | — | | | 297,000 | | $ | 3.00 | | — | | — | |
Forfeited or expired | | | (37,113 | ) | | $ | 3.20 | | | — | | | – | | | | (37,113 | ) | | $ | 3.20 | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding at December 31, 2010 | | | 1,489,776 | | | $ | 2.50 | | | 7.19 | | $ | 946,754 | | | 1,494,776 | | $ | 2.50 | | 7.19 | | $ | 946,754 | |
Granted | | | 251 ,000 | | | $ | 3. 30 | | | — | | | — | | | 251,000 | | $ | 3.30 | | — | | — | |
Forfeited or expired | | | (13,667 | ) | | $ | 1.10 | | | | — | | | | — | | | | (13,667 | ) | | $ | 1.10 | | | | — | | | | — | |
Outstanding at June 30 , 2011 | | | 1, 727,109 | | | $ | 3.20 | | | 7. 04 | | $ | 1,406,643 | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Exercisable at June 30 , 2011 | | | 1,5 95,894 | | | $ | 3.20 | | | 6. 86 | | | $ | 1,326,355 | | |
Outstanding at June 30, 2011 | | | | 1,732,109 | | $ | 3.20 | | | 7.04 | | $ | 1,406,643 | |
| | | | | | | | | | | | | |
Exercisable at June 30, 2011 | | | | 1,600,894 | | $ | 3.20 | | | 6.86 | | $ | 1,326,355 | |
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, 2010 and 2009, we recorded $48,792 and $49,604, in rent expense to this related party, respectively. The Company recognized rent expense of approximately $11,400 and $22,800 for each of the three and six months ended June 30, 2011 and 2010. At June 30, 2011 and December 31, 2010, $45,779 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. 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 this 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 this 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 the offering.
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 (53,704 and 14,583 shares, respectively, upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (24,490 and 18,823 shares, respectively, upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (20,270 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (62,538 shares of common stock upon giving effect to the anticipated 10-for-1 reverse split). 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 (6,254 shares of common stock, at an exercise price of $7.50 upon giving effect to the anticipated 10-for-1 reverse split) 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 (266,750 shares of common stock upon giving effect to the anticipated 10-for-1 reverse split) 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 (96,250 shares of common stock at an exercise price of $4.50 after giving effect to the anticipated reverse split). 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 one 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 (105,295 shares of common stock, at a purchase price of $2.60 upon giving effect to the anticipated 10-for-1 reverse split) 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 Nordlich, 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 ($2.60 upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (100,000 shares of the Company’s common stock at an exercise price of $4.50 per share upon giving effect to the anticipated 10-for-1 reverse split), 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 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 ($2.60 upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (300,000 shares of the Company’s common stock at an exercise price of $4.50 per share upon giving effect to the anticipated 10-for-1 reverse split), 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, 268,4721,268,472 shares of Common Stock at a purchase price of $0.26 per share (126, 847(126,847 shares of the Company’s common stock at an exercise price of $2.60 per share upon giving effect to the anticipated 10-for-1 reverse stock split), 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 (17,014 shares of the Company’s common stock upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (87,175 and 319,347 shares our common stock, respectively, upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (7,500 and 27,500 shares, respectively, of common stock, at an exercise price of $7.50 per share upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (80,000 shares of our common stock upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (8,000 shares of our common stock at an exercise price of $7.50 upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (59,615 shares of Company’s Common Stock and a five year warrant to purchase an additional 29, 808 shares of Common Stock at an exercise price of $2.60 per share upon giving effect to the anticipated 10-for-1 reverse stock split) . 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 (25,000 shares of Common Stock at an exercise price of $2.60 per share upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (83,562 shares of Common Stock upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (24,975 shares of common stock at an exercise price of $2.50 per share upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (55,425 shares of Common Stock upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (16,650 shares of common stock at an exercise price of $2.50 per share upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (57,692 shares of common stock and a five year warrant to purchase an additional 28,846 shares of common stock at an exercise price of $2.60 per share upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (41,504 and 332,474 shares of common stock, respectively upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (12,488 and 99,900 shares of common stock, respectively, and $2.50 per share upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (25,000 shares of Common Stock upon giving effect to the anticipated 10-for-1 reverse stock split) 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 ($3.00 per share upon giving effect to the anticipated 10-for-1 reverse stock split).
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 (300,000 shares of Common Stock at an exercise price of $3.60 upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (10,000 shares of Common Stock upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (2,000 shares of Common Stock upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (1,475,000 shares of Common Stock at an exercise price of $2.50 per share upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (140,000 shares at $2.50 per share upon giving effect to the anticipated 10-for-1 reverse stock split).
We also have accrued compensation due to the Chief Executive Officer and one other employee for deferred salaries earned and unpaid as of June 30, , 2011 and December 31, 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 (52,000 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 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. 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 board 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. 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. 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 (4,000 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 a 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 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 (5,000 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 September 14, 2011, we entered into an Executive Compensation Agreement with Tim Tangredi. Under this agreement, upon closing of the offering Mr. Tangredi’s accrued compensation through the closing date in the approximate amount of $1.05 million shall be paid with a 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, for the remainder (which is assumed for purposes of this calculation to be $4.00 per share after giving effect to the anticipated 10-for-1 reverse stock split, and based on this assumption would consist of approximately 166, 971166,971 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 2008 fiscal year, we have 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 t wotwo 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 financial statements and related notes appearing elsewhere in this prospectus. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited, to those set forth under “Risk Factors” and elsewhere in this prospectus.
OVERVIEW
We have developed and patented a nano-structure polymer technology, which is being commercialized in products based on the functionality of these materials. We believe the applications of our technology have promise in a number of diverse market segments and 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.
We also have new product applications 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 ventilation needs of the growing “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 product sproducts primarily to commercial user susers with a growing emphasis on low rise structures (small commercial buildings, multi-purpose structures, and residences). In addition, we and 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 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 components contain proprietary products of our suppliers, or the processes used by our suppliers to manufacture these components are proprietary. If we are required to replace any of our suppliers, while we should be able to obtain comparable components from alternative suppliers at comparable costs, this would create a delay in 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 | |
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 also 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 implementation of lean manufacturing and QRM processes. The effect of 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.
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.
Summary of Three Months Ended June 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 June 30, | |
| | 2011 | | | 2010 | |
| | | | | restated | |
Revenues | | $ | 1,124,079 | | | $ | 1,010,142 | |
Percentage of revenues | | | 100.0 | % | | | 100.0 | % |
Cost of goods sold | | $ | 806,674 | | | $ | 550,196 | |
Percentage of revenues | | | 71.8 | % | | | 54.5 | % |
Research and development expenses, net grant revenue | | $ | 11,119 | | | $ | - | |
Percentage of revenues | | | 1.0 | % | | | 0.0 | % |
Selling, general and administrative expenses | | $ | 792,606 | | | $ | 1,029,394 | |
Percentage of revenues | | | 70.5 | % | | | 101.9 | % |
Interest expense | | $ | 416,899 | | | $ | 55,233 | |
Percentage of revenues | | | 37.1 | % | | | 5.5 | % |
Change in fair value of warrant liability (gain) | | $ | (1,694,170 | ) | | $ | (1,835,094 | ) |
Percentage of revenues | | | 150.7 | % | | | 181.7 | % |
Net income | | $ | 791,585 | | | $ | 1,210,413 | |
Percentage of revenues | | | 70.4 | % | | | 119.8 | % |
Revenues: Total revenues for the three months ended June 30, 2011 and 2010 were $1,124,079 and $1,010,142, respectively, an increase of $113,937 or 11.3%. The increase in revenues in the 2011 period is primarily attributable to an increase in ConsERV™ core sales of 21% and an increase in ConsERV™ System sales of 10%. The increases were due to additional sales in product enhancements and an increase in the number and size of our sales transactions in 2011 compared to 2010.
Cost of Goods Sold: Cost of goods sold increased $256,478 to $806,674 and represented 72% of revenues, for the three months ended June 30, 2011 compared to $550,196 or 55% of revenues for the three months ended June 30, 2010. Gross profit margin decreased from 46% in 2010 to 28% in 2011. The decrease in the gross profit margin was due to an increase in the cost of materials of approximately $238,000. We also had an increase in the cost of contract labor of approximately $30,000 and an increase in testing services of approximately $13,200.
Selling, General and Administrative Expenses: Selling, general and administrative expenses of $792,606 for the three months ended June 30, 2011 decreased $236,788 from $1,029,394 in the same period of 2010 or 23%. The decrease was primarily due a decrease in stock-based compensation of approximately $210,700 and a decrease in expenditures on professional services by approximately $53,000.
Interest Expense: Interest expense was $416,899 for the three months ended June 30, 2011 compared to $55,233 for the same period of 2010, an increase of $361,666. During the three months ended June 30, 2011, $332,750 of interest expense was related to the amortization of the discount and embedded beneficial conversion feature on a convertible note.
Change in Fair Value of Warrant Liability: The change in the fair value of warrant liability decreased by $140,924 for the three months ended June 30, 2011 to ($1,694,170) from ($1,835,094) in the prior period ended June 30, 2010 due to the change in the fair value of the underlying warrant liability based on the Black-Scholes option pricing model.
NET INCOME: Net income for the three months ended June 30, 2011 decreased by $418,828 to $791,585 from $1,210,413 for the three months ended June 30, 2010. The decrease in net income was primarily due to a decrease in the change in the fair value of the warrant liability and an increase in interest expense as discussed above.
Summary of Six Months Ended June 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:
| | Six Months Ended June 30, | |
| | 2011 | | | 2010 | |
| | | | | restated | |
Revenues | | $ | 1,982,773 | | | $ | 1,417,454 | |
Percentage of revenues | | | 100.0 | % | | | 100.0 | % |
Cost of goods sold | | $ | 1,507,564 | | | $ | 871,522 | |
Percentage of revenues | | | 76.0 | % | | | 61.5 | % |
Research and development expenses, net grant revenue | | $ | 13,155 | | | $ | - | |
Percentage of revenues | | | 0.7 | % | | | 0.0 | % |
Selling, general and administrative expenses | | $ | 1,714,903 | | | $ | 1,588,914 | |
Percentage of revenues | | | 86.5 | % | | | 112.1 | % |
Interest expense | | $ | 580,438 | | | $ | 101,736 | |
Percentage of revenues | | | 29.3 | % | | | 7.2 | % |
Change in fair value of warrant liability loss/(gain) | | $ | 657,937 | | | $ | (327,066 | ) |
Percentage of revenues | | | 33.2 | % | | | 23.1 | % |
Net loss | | $ | 2,490,560 | | | $ | 817,652 | |
Percentage of revenues | | | 125.6 | % | | | 57.7 | % |
Revenues: Total revenues for the six months ended June 30, 2011 and 2010 were $1,982,773 and $1,417,454, respectively, an increase of $565,319 or 39.9%. The increase in revenues in the six months ended June 30, 2011 is primarily attributable to an increase in ConsERV™ core sales by 42% and an increase in ConsERV™ System sales by 41%. The increases were due to additional sales in product enhancements and an increase in the number and size of our sales transactions in 2011 compared to 2010. During the six months ended June 30, 2011 and 2010, four and five customers accounted for approximately 52% and 55% of revenues, respectively.
Cost of Goods Sold: Cost of goods sold increased $636,042 to $1,507,564 and represented 76% of revenues, for the six months ended June 30, 2011 compared to $871,522 or 61% of revenues for the six months ended June 30, 2010. Gross profit margin decreased from 38.5% in 2010 to 24% in 2011. The decrease in the gross profit margin was due to an increase in the cost of materials of approximately $626,000. We also had an increase in the cost of contract labor of approximately $34,000 and an increase in the cost of freight by approximately $16,500.
Selling, General and Administrative Expenses: Selling, general and administrative expenses of $1,714,903 for the six months ended June 30, 2011 represented an increase of $125,989 from $1,588,914 in the same period of 2010 or 8%. The increase was primarily due to an increase in stock based compensation by approximately $152,000.
INTEREST EXPENSE: Interest expense was $580,438 for the six months ended June 30, 2011 compared to $101,736 for the same period of 2010, an increase of $478,702. During the six months ended June 30, 2011, $450,568 of interest expense was related to the amortization of the discount and embedded beneficial conversion feature on a convertible note.
CHANGE IN FAIR VALUE OF WARRANT LIABILITY: The change in the fair value of warrant liability increased by $985,003 for the six months ended June 30, 2011 to $657,937 from ($327,066) in the prior period ended June 30, 2010 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 six months ended June 30, 2011 increased by $1,672,908 to $2,490,560 from $817,652 for the six months ended June 30, 2010. The increase in net loss is primarily due to an increase in selling, general and administrative expenses, interest expense and the change in fair value of warrant liability as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
We finance our operations primarily through sales of our ConsERV™ products, sales of our common stock, the issuance of convertible promissory notes, unsecured promissory notes and license 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 flow 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 of up to fifteen million dollars. We have engaged MDB Capital Group LLC as underwriter for this public offering. 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 c onvertible n otes,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 (1,355,382 after giving effect to the anticipated 10-for-1 reverse stock split). 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 (166,500 at $2.50 after giving effect to the anticipated 10-for-1 reverse stock split) and valued at $126,367, and 575,000 warrants, exercisable immediately at $0.75 per share (57,500 at $7.50 after giving effect to the anticipated 10-for-1 reverse stock split) valued at $286,641 which was recorded as interest expense during the twelve months ended December 31, 2009.
During 2009, four investors holding c onvertible n otesconvertible 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 c onvertible n otes.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 .us. Under that agreement, the three investors had the right, should we fail to pay all principal and interest due pursuant to their c onvertible n otesconvertible 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 c onvertible n otesconvertible 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 c onvertible n oteconvertible note in the principal amount of $200,000, agreed to extend said note to September 2009. In November 2009, we modified the c onvertible n oteconvertible 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 c onvertible n oteconvertible note as of November 20, 2009 into 170,137 shares of our common stock (17,014 after giving effect to the anticipated 10-for-1 reverse stock split). 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 (32,500 after giving effect to the anticipated 10-for-1 reverse stock split).
As of December 31, 2010, $50,000 of principal on the c onvertible n otesconvertible notes was outstanding, in default and due and payable in full. On March 23, 2011 this note was paid in full by us .us. As of the date of this filing all c onvertible n otesconvertible 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 n ote,note, including all accrued interest, to purchase our c ommon s tock.common stock. Pursuant to this transaction, the investor subscribed for and purchased 1,268,472 shares of Common Stock (126,847 at $2.60 after giving effect to the anticipated 10-for-1 reverse stock split) 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 th isthis 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 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 ($2.60 after giving effect to the ancticipatedanticipated 10-for-1 reverse stock split). 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 above Exchange Agreements, we entered into an Amendment to 2007 Warrant and an Amendment to 2009 Warrant to extend the term of the Stock Purchase Warrant, dated on or about December 31, 2007, and the term of the 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, we issued an additional Stock Purchase Warrant to the Investor to purchase 1,000,000 shares of our common stock at $0.45 per share (100,000 and $4.50 after giving effect to the anticipated 10-for-1 stock split), 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 terminating 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 holder providing for either redemption of principal and interest in cash (forward component) or conversion into our 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 (100,000 after giving effect to the anticipated 10-for-1 reverse stock split) 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 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 ($2.60 after giving effect to the anticipated 10-for-1 reverse stock split). 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 (300,000 and $4.50 after giving effect to the anticipated 10-for-1 reverse stock split) 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. F orFor the three and six month periods ended June 30, 2011, we recognized $ 450,568$450,568 and $332,749, 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. Pursuant to the terms and conditions of the Exchange Agreements, the investor will not, if requested in writing by the underwriter, sell, offer to sell or otherwise transfer or dispose of (other than to affiliates) any securities issued by us and 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.
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 (266,750 shares of common stock at an exercise price of $2.60 after giving effect to the anticipated 10-for-1 stock split) 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 (96,250 shares of common stock at an exercise price of $4.50 after giving effect to the anticipated 10-for-1 stock split). 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.
We expect to repay all of our outstanding convertible notes, via a combination of cash and stock conincidentcoincident with closing of this offering. If we do not consumate this offering, at maturity, we may not be able to repay all or any of the outstanding 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 alternative, management could attempt to renegotiate the repayment terms of 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 consumate this offering, we will be dependent upon our existing cash of $841,797 at June 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 approximately $415,400. We must raise additional capital in the amount of approximately $13 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 September 2012. 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.
The accompanying financial statements have been prepared assuming that we will continue as a going concern. For the six months ended June 30, 2011, we incurred a net loss of $ 2,490,560$2,490,560 and we ha vehave incurred significant losses since inception. As of June 30, , 2011, we have an accumulated deficit of $38, 128,522 ,$38,128,522, negative working capital of $1,8 46,593$1,846,593 and a stockholders’ deficit of $ 6,323,185 .$6,323,185. We used $ 463,334$463,334 and $ 1,183,705$1,183,705 of cash from operations during the six months ended June 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 we will continue as a going concern. In addition to the proceeds we shall secure if we complete this offering, we are 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 cash flow sufficient to fund our working capital 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 material adverse consequences on our financial 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.
Cash and cash equivalents as of December 31, 2010 was $304,656 compared to $1,085,628 as of December 31, 2009. Cash is primarily used to fund our working capital requirements.
As of December 31, 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 to 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 received during 2010 in connection with the issuance of debt.
Net cash used in operating activities was approximately $1,180,800 for the year ended December 31, 2010 compared to approximately $818,000 for the same period in 2009. During the year ended December 31, 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 $620,000 from the issuance of debt net of $100,000 of payments on notes payable.
Cash Flows for the Six Months Ended June 30, , 2011 Compared to June 30, , 2010
The following table sets forth, for the periods indicated, selected cash flow information:
| | Six Months Ended June 30, | |
| | 2011 | | | 2010 | |
| | | | | restated | |
Cash flows used in operating activities | | $ | (463,334 | ) | | $ | (1,183,705 | ) |
Cash flows used in investing activities | | | (27,342 | ) | | | (10,484 | ) |
Cash flows provided by financing activities | | | 1,027,817 | | | | 520,000 | |
| | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | $ | 537,141 | | | $ | (674,189 | ) |
Cash and cash equivalents as of June 30, 2011 was $841,797 compared to $411,439 as of June 30, 2010. Cash is primarily used to fund our working capital requirements.
For the six months ended June 30, 2011, we had an increase in working capital of $1,018,596, resulting in a working capital deficit of $1,842,892$ 1,846,892 compared to $2,861,488 of working capital deficit as of December 31, 2010. During the six months ended June 30, 2011, we used approximately $463,300 of cash to fund our operations, approximately $50,000 to repay debt, approximately $422,200 for debt issue costs and deferred offering costs and approximately $13,700 to purchase property and equipment. These uses of cash are offset by approximately $1,500,000 of proceeds from the issuance of convertible debt received during the six months ended June 30, 2011.
Net cash used in operating activities was approximately $463,300 for the six months ended June 30, 2011 compared to approximately $1,183,700 for the same period in 2010. During the six months ended June 30, 2011, we used additional cash to fund operating losses of approximately $2,490,600 (of this amount approximately $1,870,000 related to non-cash expenses) and working capital requirements of approximately $1,843,000$ 1,847,000 compared to the same period in 2010.
Net cash used in investing activities was approximately $27,300 for the six months ended June 30, 2011 compared to approximately $10,500 for the same period in 2010. During the six months ended June 30, 2011, we used additional cash for patents and to purchase equipment.
Net cash provided by financing activities was approximately $1,027,800 for the six months ended June 30, 2011 compared to approximately $520,000 for the same period in 2010. During the six months ended June 30, 2011, we received net proceeds of $1,500,000 from the issuance of debt net of $50,000 of payments on notes payable.
Economy and Inflation
Except as disclosed herein, we have not experienced any significant cancellation of orders due to the downturn in the economy and only a small number of customers have requested delays in delivery or production of orders in process. Our management believes that inflation has not had a material effect on our results of operations.
Contractual Obligations
As of September 12October 10 , 2011, we have contractual obligations of $ 2,597,150$2,619,004 as indicated below:
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 | | | 97,150 | | | | 97,150 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 2, 597,150 | | | $ | 2 ,597,150 | | | $ | 0 | | | $ | 0 | |
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 | | | 119,004 | | | | 119,004 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 2,619,004 | | | $ | 2,619,004 | | | $ | 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 Estimates
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.
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).
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 $1 5 ,000$15,000 and $11,500 for future warranty expenses at June 30, , 2011 and December 31, 2010, respectively.
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.
Impairment of Long-Lived and Intangible Assets
Long-lived and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. We periodically 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 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.
Stock-Based Compensation
We recognize 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 is 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.
The basis for the Black-Scholes assumptions are as follows: the dividend rate is based upon our 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 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 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.
Derivative Financial Instruments
We do 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 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
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.
Recent Accounting Pronouncements
Recent accounting pronouncements issued by FASB (including EITF), the AICPA and the SEC did not or are not believed by management to have a material impact on our present or future financial statements.
Our common stock was traded from November 15, 2005 to November 23, 2008 on the Pink Sheets and from November 24, 2008 to present on the Over the Counter Bulletin Board under the trading symbol “DLYT.” The following table sets forth the range of reported high and low sales prices of our common stock reported during the periods indicated, giving effect to the anticipated 10-for-1 reverse stock split. 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.”
| | | | | | | | After giving effect to the anticipated 10-for-1 reverse stock split | |
| | High | | | Low | | | High | | | Low | |
For the year ending December 31, 2011: | | | | | | | | | | | | | | | | |
First Quarter | | $ | 0.50 | | | $ | 0.27 | | | $ | 5.00 | | | $ | 2.70 | |
Second Quarter | | $ | 0.44 | | | $ | 0.35 | | | $ | 4.40 | | | $ | 3.50 | |
| | | | |
For the year ending December 31, 2010: | | | | | | | | | | | | | | | | |
First Quarter | | $ | 0.44 | | | $ | 0.22 | | | $ | 4.40 | | | $ | 2.20 | |
Second Quarter | | $ | 0.50 | | | $ | 0.23 | | | $ | 5.00 | | | $ | 2.30 | |
Third Quarter | | $ | 0.40 | | | $ | 0.27 | | | $ | 4.00 | | | $ | 2.70 | |
Fourth Quarter | | $ | 0.37 | | | $ | 0.24 | | | $ | 3.70 | | | $ | 2.40 | |
| | | | |
For the year ending December 31, 2009: | | | | | | | | | | | | | | | | |
First Quarter | | $ | 0.20 | | | $ | 0.08 | | | $ | 2.00 | | | $ | 0.80 | |
Second Quarter | | $ | 0.19 | | | $ | 0.13 | | | $ | 1.90 | | | $ | 1.30 | |
Third Quarter | | $ | 0.26 | | | $ | 0.10 | | | $ | 2.60 | | | $ | 1.00 | |
Fourth Quarter | | $ | 0.95 | | | $ | 0.22 | | | $ | 9.50 | | | $ | 2.20 | |
| | | | |
For the year ending December 31, 2008: | | | | | | | | | | | | | | | | |
First Quarter | | $ | 0.51 | | | $ | 0.15 | | | $ | 5.10 | | | $ | 1.50 | |
Second Quarter | | $ | 0.51 | | | $ | 0.24 | | | $ | 5.10 | | | $ | 2.40 | |
Third Quarter | | $ | 0.45 | | | $ | 0.16 | | | $ | 4.50 | | | $ | 1.60 | |
Fourth Quarter | | $ | 0.20 | | | $ | 0.07 | | | $ | 2.00 | | | $ | 0.70 | |
| | | | | | | | After giving effect to the anticipated 10-for-1 reverse stock split | |
| | High | | | Low | | | High | | | Low | |
| | | | | | | | | | | | | | | | |
For the year ending December 31, 2011: | | | | | | | | | | | | | | | | |
First Quarter | | $ | 0.50 | | | $ | 0.27 | | | $ | 5.00 | | | $ | 2.70 | |
Second Quarter | | $ | 0.44 | | | $ | 0.35 | | | $ | 4.40 | | | $ | 3.50 | |
Third Quarter | | $ | 0.60 | | | $ | 0.22 | | | $ | 6.00 | | | $ | 2.20 | |
| | | | | | | | | | | | | | | | |
For the year ending December 31, 2010: | | | | | | | | | | | | | | | | |
First Quarter | | $ | 0.44 | | | $ | 0.22 | | | $ | 4.40 | | | $ | 2.20 | |
Second Quarter | | $ | 0.50 | | | $ | 0.23 | | | $ | 5.00 | | | $ | 2.30 | |
Third Quarter | | $ | 0.40 | | | $ | 0.27 | | | $ | 4.00 | | | $ | 2.70 | |
Fourth Quarter | | $ | 0.37 | | | $ | 0.24 | | | $ | 3.70 | | | $ | 2.40 | |
| | | | |
For the year ending December 31, 2009: | | | | | | | | | | | | | | | | |
First Quarter | | $ | 0.20 | | | $ | 0.08 | | | $ | 2.00 | | | $ | 0.80 | |
Second Quarter | | $ | 0.19 | | | $ | 0.13 | | | $ | 1.90 | | | $ | 1.30 | |
Third Quarter | | $ | 0.26 | | | $ | 0.10 | | | $ | 2.60 | | | $ | 1.00 | |
Fourth Quarter | | $ | 0.95 | | | $ | 0.22 | | | $ | 9.50 | | | $ | 2.20 | |
| | | | |
For the year ending December 31, 2008: | | | | | | | | | | | | | | | | |
First Quarter | | $ | 0.51 | | | $ | 0.15 | | | $ | 5.10 | | | $ | 1.50 | |
Second Quarter | | $ | 0.51 | | | $ | 0.24 | | | $ | 5.10 | | | $ | 2.40 | |
Third Quarter | | $ | 0.45 | | | $ | 0.16 | | | $ | 4.50 | | | $ | 1.60 | |
Fourth Quarter | | $ | 0.20 | | | $ | 0.07 | | | $ | 2.00 | | | $ | 0.70 | |
Transfer Agent
Our transfer agent is Clear Trust Transfer located at 16540 Pointe Village Dr., Suite 201, Lutz, Florida 33558, telephone (813) 235- 4490.
Holders
As of September 12October 10 , 2011 there were approximately 19 2192 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 our 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 June 30, , 2011:
Plan Category | | (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) | | | (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: | | | 17, 321,090 | | | $ | 0.3 2 | | | | 9,530,000 | | | | 17,321,090 | | | $ | 0.32 | | | | 9,530,000 | |
Equity compensation plans approved by security holders (after giving effect to the anticipated 10-for-1 reverse stock split) | | | 1,732,109 | | | $ | 3.20 | | | | 953,000 | | | | 1,732,109 | | | $ | 3.20 | | | | 953,000 | |
In June 2000 and November 2009, our board of directors adopted, and our shareholders approved, the 2000 Plan and 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 plans, including, but not limited to, our officers, directors and employees. Certain awards under the Plans may be subject to performance conditions.
Number of Shares of Common Stock Available Under the Plans. As of December 31, 2007, our board of directors approved and made available 6,093,882 shares of common stock (609,388 after giving effect to the anticipated 10-for-1 reverse stock split) to be issued pursuant to the 2000 Plan. Subsequently, our board of directors approved and made available an additional 5,000,000 shares of our common stock (500,000 after giving effect to the anticipated 10-for-1 reverse stock split) for issuance under the 2000 Plan. 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. On November 5, 2009, our board of directors approved and made available a total of 15,000,000 shares of common stock (1,500,000 after giving effect to the anticipated 10-for-1 reverse stock split) to be issued pursuant to the 2009 Plan.
Administration of the Plans. The Plans are administered by a committee of two or more directors designated by the board of directors to administer the Plans (the “Committee”) or, in the absence of such Committee, by the full board of directors. Currently, the Plans are administered by our board of directors. The board of directors has the authority to select the participants to whom awards under Plans 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 Plans and to prescribe the rules and regulations for the administration of the Plans. No option or stock appreciation rights granted under the Plans 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 Plans are generally not transferable by the optionee otherwise than by will or the laws of descent and distribution and generally exercisable during the lifetime of the optionee only by the optionee.
Change in Control. All awards granted under the 2000 Plan which were not previously exercisable and vested shall become fully exercisable and vested upon a change of control, which includes the consummation of a merger or consolidation with or into any other entity, sale of all or substantially all of our assets, replacement of a majority of our board of directors, 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 board of directors determines would materially alter our structure or ownership.
Options Granted to Non-Employee Directors. Non-employee directors are usually granted options each year, which generally become exercisable upon the date of grant, and 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 Plans. The terms of these grants may be individually negotiated.
Our net tangible book value as of June 30, , 2011 was approximately $( 1,699,399) ,( $6,402,494 ), or $(0. 05)($0.18 ) per share of our common stock (($ 0.47) $1.77 ) after giving effect to the anticipated 10-for-1 reverse stock split). 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 June 30, , 2011. Assuming that we (i) effect a 10-for-1 reverse stock split, (ii) issue all of the shares of our common stock offered by us at an assumed public offering price of $4.00 per share, (iii) convert all convertible notes outstanding in the aggregate principal amount of $2,500,000 plus accrued interest, discharged by conversion or repayment using proceeds from the offering, which as of September 12,October 10 , 2011 we estimate will be approximately $1.51 million of net proceeds from the offering and approximately 474,200481,800 shares of common stock, (iv) issue approximately 166,971 shares of common stock pursuant to the executive compensation agreement, as described in “certain relationships and related party transactions,” (v) issue 30,655 shares of common stock for services rendered, and (vi) issued 43,313111,599 shares of common stock in connection with the exercise of warrants subsequent to June 30, 2011, and after deducting the commissions and estimated offering expenses payable by us, our net tangible book value as of June 30, , 2011 would have been approximately $ 13,713,574$8,618,070 or $ 1.70$1.06 per share of our common stock. This amount represents an immediate increase in net tangible book value of $ 1.75$2.83 per share for our existing stockholders and an immediate dilution in net tangible book value of $ 2.30$2.94 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:
Public offering price per share | | | | | $ | 4.00 | | | | | $ | 4.00 | |
Net tangible book deficit per share available to common shareholders as of June 30, 2011 | | $ | (0.05 | ) | | | | | | $ | (1.77 | ) | | | |
Increase attributable to pro forma adjustments before the offering | | $ | 0.53 | | | | | | | $ | 0.53 | | | | |
Pro forma net tangible book value per share before the offering | | $ | 0.48 | | | | | | | $ | (1.24 | ) | | | |
Increase per share attributable to new investors in the offering | | $ | 1.22 | | | | | | | $ | 2.30 | | | | |
Pro forma net tangible book value per share after the offering | | | | | | $ | 1.70 | | | | | | $ | 1.06 | |
Dilution per share to new investors in the offering | | | | | | $ | 2.30 | | | | | | $ | 2.94 | |
The following shares were not included in the above calculation:
Shares of our common stock issuable upon exercise of stock options under our stock plans, which includes (as of June 30, , 2011) approximately 1 7,321,09017,321,090 shares of common stock (1, 732,109(1,732,109 shares of common stock upon giving effect to the anticipated 10-for-1 reverse split);
Shares of our common stock reserved for issuance under various outstanding warrant agreements, which includes (as of June 30, , 2011) approximately 27,825,333 shares of our common stock ( 2,782,533(2,782,533 upon effecting the anticipated 10-for-1 reverse split); however, we included 892,3102,142,308 shares of common stock (89,231( 214,231 shares of common stock upon effecting the anticipated 10-for-1 reverse split) issuable pursuant to common stock warrants, which were exercised via cashless exercise into approxinately 433,130approximately 1,115,991 shares of common stock (43,313( 111,599 shares of common stock upon effecting the anticipated 10-for-1 reverse split) after June 30, 2011; and
Shares of our common stock reserved for future issuance under our stock plans, which includes as of June 30, 2011 approximately 9,530,000 shares of our common stock (953,000 shares after giving effect to the anticipated 10-for-1 reverse stock split).
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 the Underwriter’s Warrant.
The table below sets forth our capitalization as of June 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.
| | | June 30, 2011 Actual * | | After giving effect to the anticipated 10- for-1 reverse stock split June 30, 2011 | | Conversion and Repayment of Convertible Notes | | Issuance of Shares for Accrued Unpaid Compensation | | Issuance of Shares for Services and Cashless Exercise of Warrants | | The Offering | | June 30, 2011 Proforma ** | |
| | June 30 , 2011 Actual * | | | After giving effect to the anticipated 10- for -1 reverse stock split June 30 , 2011 | | | Conversion and Repayment of Convertible Notes | | | Issuance of Shares for Accrued Unpaid Compensation | | | Issuance of Shares for Services and Cashless Exercise of Warrants | | | The Offering | | | June 30 , 2011 Proforma ** | | | | | | | | | | | | | | | | |
Common stock issued and outstanding | | | 36,095,064 | | | | 3, 609,506 | | | | 474,200 | | | | 166, 971 | | | | 73,968 | | | | 3,750,000 | | | | 8,074,645 | | | | 36,095,064 | | | | 3,609,506 | | 481,800 | | | | 166,971 | | | | 142,254 | | | | 3,750,000 | | | | 8,150,531 | |
Common stock underlying warrants | | | 2 8,717,641 | | | | 2,871,764 | | | | | | | | | | | | (89,231 | ) | | | 375,000 | | | | 3,157,533 | | | | 28,717,641 | | | | 2,871,764 | | | | | | | | | | | | (214,231 | ) | | | 375,000 | | | | 3,032,533 | |
Common stock underlying convertible promissory notes | | | 9,615,385 | | | | 961,538 | | | | (961,538 | ) | | | | | | | | | | | | | | | 0 | | | | 9,615,385 | | | | 961,538 | | | | (961,538 | ) | | | | | | | | | | | | | 0 | |
Options authorized and issued | | | 17,321,090 | | | | 1,732,109 | | | | | | | | | | | | | | | | | | | | 1,727,109 | | | | 17,321,090 | | | | 1,732,109 | | | | | | | | | | | | | | | | | | 1,732,109 | |
| | | 91,749,180 | | | | 9,174,917 | | | | | | | | | | | | | | | | | | | | 12,963,287 | | | | 91,749,180 | | | | 9,174,917 | | | | | | | | | | | | | | | | | | 12,915,173 | |
| * | | on an actual basis as of June 30, , 2011 (as indicated in the first column from the left); and |
| ** | | on a pro forma basis as adjusted (as indicated in the column to the far right) to give effect to the anticipated 10-for-1 reverse stock split, conversion and repayment of convertible notes in connection with the offering, the issuance of shares to our CEO as payment for accrued and unpaid compensation, the issuance of shares to two vendors for services rendered, the exercise of warrants and the issuance of 3,750,000 shares in the offering (excluding( excludes the overallotment option and at an assumed public offering price of $4.00 per share).share and further excludes 31,500 options issued subsequent to June 30, 2011 ). |
DESCRIPTION OF CAPITAL 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 210,000,000, consisting of 200,000,000 shares of common stock, par value $0.01 per share, and 10,000,000 shares of preferred stock, par value $0.01 per share.
Common Stock
We have approximately 36, 834,73537,517,604 shares of common stock issued and outstanding as of September 12October 10 , 2011 (3,6 83,474( 3,751,760 after giving effect to the anticipated 10-for-1 reverse stock split). We also have 257,213 shares (25,721 after giving effect to the anticipated 10-for-1 reverse stock split) 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.
Stock Options and Warrants
As of September 12October 10 , 2011, the following were outstanding:
17, 346,090 (1,7 34,60917,636,090 ( 1,763,609 upon giving effect to the anticipated reverse split) shares of our common stock issuable upon exercise of stock options under our stock plans at a weighted average exercise price of $0 .31$0.32 per share ($ 3.103.20 per share after giving effect to the anticipated 10-for-1 reverse stock split);
27,825,332 (2 ,782,53326,575,332 ( 2,657,533 upon effecting the anticipated reverse split) shares of our common stock reserved for issuance under various outstanding warrant agreements, at a weighted average exercise price of $0.32$0.33 per share ($3.203.30 per share after giving effect to the anticipated 10-for-1 reverse stock split).
Assuming the full exercise of the above options and warrants for 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 ,474,962$5,576,462 from the exercise of outstanding options and $9, 020,590$8,708,090 from the exercise of outstanding warrants, which would add up to an aggregate amount of $14, 495,552.$14,284,552 . 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.
We are offering the shares of common stock described in this prospectus through MDB Capital Group LLC, which is acting as the sole book-running manager of the offering.
Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to the underwriter, and the underwriter has agreed to purchase, the offered shares of common stock at the public offering price, less the underwriting discounts and commissions set forth on the cover page of this prospectus. The underwriter is committed to purchase all the common shares offered by us, other than those covered by the option to purchase additional shares described below, if they purchase any shares.
A copy of the underwriting agreement has been filed as an exhibit to the registration statement of which this prospectus forms a part.
We have been advised by the underwriter that it proposes to offer the shares of common stock to the public at the offering price set forth on the cover page of this prospectus. The underwriter may allow some dealers that are members of the Financial Industry Regulatory Authority (FINRA) selling concessions not in excess of $ per share and the dealers may re-allow a concession not in excess of $ per unit to other dealers. After the public offering of the shares, the offering price and other selling terms may be changed by the underwriter.
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 offer and sales of any of our common stock be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that 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.
The underwriter has advised us that it does not intend to confirm sales to any accounts over which they exercise discretionary authority.
Underwriting Discount and Expenses
The following table summarizes the underwriting discount and commission to be paid to the underwriter by us.
| | Without Over-Allotment | | | With Over-Allotment | |
Public offering price | | $ | | | | $ | | |
Underwriting discount and commission to be paid to the underwriter by us for the common stock | | | | | | | | |
Proceeds, before expenses, to us | | | | | | | | |
We have also agreed to pay up to $125,000 of the Underwriter’s reasonable legal fees and expenses in the event this offering is consummated and up to $30,000 of the Underwriter’s reasonable legal fees and expenses in the event no closing of this offering takes place, of which $ 30 ,000$30,000 has already been paid .
We estimate the expenses payable by us for this offering to be $ , including the underwriting discount, or $ if the underwriter’s over-allotment option is exercised in full.
Over-allotment option
We have granted to the underwriter an option, exercisable not later than 45 days after the date of the final prospectus, to purchase up to an additional 562,500 shares of our common stock (15% of the shares the underwriter is committed to purchase) at the public offering price, less the underwriting discount, set forth on the cover page of this prospectus. The underwriter may exercise the option solely to cover over-allotments, if any, made in connection with this offering. If any additional shares of our common stock are purchased pursuant to the over-allotment option, the underwriter will offer these additional shares of our common stock on the same terms as those on which the other shares of common stock are being offered hereby.
Determination of Offering Price
The public offering price of the common stock was negotiated between the underwriter and us, based on the trading price of the common stock prior to the offering, and subject to a reverse split, among other things. Other factors considered in determining the price of the common stock include the history and prospects of the company, the stage of development of our business, our business plans for the future and the extent to which they have been implemented, an assessment of our management, general conditions of the financial markets at the time of the offering and such other factors as were deemed relevant.
Underwriter Warrant
We have agreed to issue MDB Capital Group, LLC a warrant to purchase shares of our common stock (10% of the shares of common stock sold in this offering, including the number of shares sold pursuant to the overallotment option). This warrant is exercisable at $ per share (equal to % of the price of the common stock sold in this offering), commencing on the date of effectiveness of the registration statement of which this prospectus forms a part, and expiring five years thereafter. We have granted the underwriter one demand registration right, and unlimited “piggy-back” registration rights, which rights are exercisable one year after the date of effectiveness of the registration statement of which this prospectus forms a part, for a period of four years, with respect to the shares of common stock underlying the warrant. The warrant and the shares of common stock underlying the warrant have been deemed compensation by the FINRA, and therefore they are subject to a one year lock-up pursuant to Rule 5110(g)(1) of the FINRA. Except as permitted by the FINRA rules, MDB Capital Group, LLC and any permitted assignees will not sell, transfer, assign, pledge, or hypothecate this warrant or the securities underlying this option, nor will it engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the warrant or the underlying securities for a period of one year from the date of effectiveness of the registration statement for this offering.
This warrant will be valued based on the underlying shares of common stock obtainable and valuation factors appropriate at the time it is issued. We currently estimate that value to be approximately $ , based on the number of shares of common stock subject to the warrant, an offering price of the shares of $ , the resulting exercise prices related to the warrant on the shares of common stock, the five year term of the warrant, a risk-free interest rate of % currently commensurate with that term, an expected dividend yield of % and estimated volatility of %, based on a review of our historical volatility. The initial value of the warrant will be charged to additional paid-in capital as part of this offering costs incurred.
Lock-Up Agreements
We intend to have all of our officers and directors agree that, for a period of 180 days from the date of the underwriting agreement , they will not sell, contract to sell, grant any option for the sale or otherwise dispose of any of our equity securities, or any securities convertible into or exercisable or exchangeable for our equity securities, without the consent of the underwriter, except for exercise or conversion of currently outstanding warrants, options and convertible debentures, as applicable; and exercise of options under our existing stock incentive plan s .plans. The underwriter may consent to an early release from the lock-up periods if, in its opinion, the market for the common stock would not be adversely impacted by sales and in cases of a financial emergency of an officer or director.
Indemnification
We will agree to indemnify the underwriter, pursuant to the terms of the underwriting agreement, against certain liabilities, including certain liabilities arising under the Securities Act, and to contribute to payments that the underwriter may be required to make for these liabilities.
Stabilization, Short Positions and Penalty Bids
The underwriter may engage in over-allotment, stabilizing transactions, syndicate covering transactions, and penalty bids or purchases for the purpose of pegging, fixing or maintaining the price of the common stock, in accordance with Regulation M under the Exchange Act.
Over-allotment involves sales by the underwriter of shares in excess of the number of shares the underwriter is obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by an underwriter is not greater than the number of shares that it may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriter may close out any short position by either exercising its over-allotment option and/or purchasing shares in the open market.
Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.
Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriter will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which it may purchase shares through the over-allotment option. If an underwriter sells more shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if an underwriter is concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.
Penalty bids permit an underwriter to reclaim a selling concession from a syndicate member when the shares originally sold by the syndicate member are purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of the common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the AMEX, in the case of the common stock or otherwise and, if commenced, may be discontinued at any time.
Neither we nor the underwriter 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. In addition, neither we nor the underwriter make any representation that the underwriter will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.
Passive Market Making
In connection with the offering, the underwriter may engage in passive market making transactions in the common stock on AMEX in accordance with Rule 103 of Regulation M under the Exchange Act during the period before the commencement of offers or sales of common stock and extending through the completion of distribution. A passive market maker must display its bids at a price not in excess of the highest independent bid of the security. However, if all independent bids are lowered below the passive market maker’s bid, that bid must be lowered when specified purchase limits are exceeded.
Electronic Distribution
A prospectus in electronic format may be made available on the Internet sites or through other online services maintained by the underwriter, or by its affiliates. In those cases, prospective investors may view offering terms online and, depending upon the underwriter, prospective investors may be allowed to place orders online. The underwriter may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made by the underwriter on the same basis as other allocations.
Other than the prospectus in electronic format, the information on the underwriter’s website and any information contained in any other website maintained by the underwriter is not part of the prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or the underwriter in its capacity as underwriter and should not be relied upon by investors.
The underwriter’s compensation in connection with this offering is limited to the fees and expenses described above under “Underwriting Discount and Expenses” and “Underwriter Warrant”.
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.
Under our Director and Officer Insurance Policy, our directors and officers are provided liability coverage of $5 million subject to retention. In addition, we have secured a form following excess Director and Officer Insurance Policy in the amount of $2.5 million. The policies have a one year term with annual renewal possible. The policies can be terminated by the insurer if there is a merger or consolidation which includes a change in ownership of 50% of the voting shares. Upon such an occurrence the insurer may elect to cancel the policies. We may elect to then obtain “run off” insurance for a period of between one and six years at a cost of between 125% and 225% of the initial policy premiums. The policies are claims made policies. Each policy covers only 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 reported within 60 days of the termination or expiration policy, the claim will not be covered.
Insofar as indemnification for liabilities arising under the Securities Act 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.
LEGAL MATTERS
Certain legal matters will be passed upon by Richardson & Patel, LLP, Los Angeles, CA, as counsel to Dais. Certain legal matters will be passed upon by Golenbock Eiseman Assor Bell & Peskoe LLP, New York, New York, as counsel to the underwriter. 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 ( 169,875(169,875 shares upon giving effect to the anticipated 10 for 1 reverse stock split).
INTEREST OF NAMED EXPERTS AND COUNSEL
Our audited financial statements for the fiscal years ended December 31, 2010 and 2009 have been included in this prospectus in reliance on the 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 ( 169,875(169,875 shares upon giving effect to the anticipated 10 for 1 reverse stock split), which represents 4.6%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, 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. Copies of all of our filings with the Commission may be viewed on the Commission’s internet web site at http://www.sec.gov. We also maintain a website at http://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
Effective 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 longer 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 new independent certified public accounting firm for the fiscal 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 prior to engaging Cross, Fernandez and Riley, LLP neither we nor anyone on behalf of 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. |
INDEX TO FINANCIAL STATEMENTS
| | Page No. | |
| | | | |
ANNUAL FINANCIAL INFORMATION | | | | |
| |
Report of Independent Registered Public Accounting Firm for the years ended 2010 and 2009 | | | F-1 | |
Balance Sheets for the years ended December 31, 2010 and 2009 | | | F-2 | |
Statements of Operations for the years ended December 31, 2010 and 2009 | | | F-3 | |
Statements of Stockholders’ Deficit for the years ended December 31, 2010 and 2009 | | | F-4 | |
Statements of Cash Flows for the years ended December 31, 2010 and 2009 | | | F-5 | |
Notes to Financial Statements | | | F-7 | |
| |
INTERIM FINANCIAL INFORMATION | | | | |
| |
Balance Sheets March 31,June 3 0 , 2011 (Unaudited) and December 31, 2010 | | | F-26F-25 | |
Statements of Operations for the three and six months periods ended June 3 0 , 2011 and 2010 (Unaudited) | | | F-26 | |
Statement of Stockholders’ Deficit for the six months ended March 31,June 3 0 , 2011 and 2010 (Unaudited) | | | F-27 | |
Statement of Stockholders’ Deficit three months ended March 31, 2011 (Unaudited) | | | F-28 | |
Statements of Cash Flows threefor the six months ended March 31,June 3 0 , 2011 and 2010 (Unaudited) | | | F-29F-28 | |
Notes to Financial Statements (Unaudited) | | | F-30F-29 | |
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Dais Analytic Corporation
Odessa, Florida
We have audited the accompanying balance sheets of Dais Analytic Corporation (“the Company”) as of December 31, 2010 and 2009, and the related statements of operations, stockholders’ deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls 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, 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 Analytic Corporation as of December 31, 2010 and 2009, 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 States.
As more fully discussed in Note 12, the Company has restated the accompanying financial statements as of 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 working capital deficit and stockholders’ deficit of $2,861,448 and $6,722,092 at December 31, 2010. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also discussed 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 |
Dais Analytic Corporation
Balance Sheets
| 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 Operations
| Year Ended December 31, | | Year Ended December 31, | |
| 2010 | | 2009 | | 2010 | | 2009 | |
| | | Restated | | | | Restated | |
Revenue: | | | | | | | | | | | | |
Sales | | $ | 3,260,468 | | | $ | 1,447,071 | | | $ | 3,260,468 | | | $ | 1,447,071 | |
License fees | | | 82,000 | | | | 84,144 | | | | 82,000 | | | | 84,144 | |
| | | | | | | | | | | | | | | | |
| | | 3,342,468 | | | | 1,531,215 | | | | 3,342,468 | | | | 1,531,215 | |
| | | | | | | | | | | | | | | | |
Cost of goods sold | | | 2,290,041 | | | | 1,071,098 | | | | 2,290,041 | | | | 1,071,098 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | 1,052,427 | | | | 460,117 | | | | 1,052,427 | | | | 460,117 | |
Expenses: | | | | | | | | | | | | | | | | |
Research and development expenses, net of government grant proceeds of $99,732 and $0 | | | 238,182 | | | | 6,600 | | | | 238,182 | | | | 6,600 | |
Selling, general and administrative | | | 2,693,092 | | | | 3,217,992 | | | | 2,693,092 | | | | 3,217,992 | |
| | | | | | | | | |
| | | 5,221,315 | | | | 4,295,690 | | |
| | | | | | | | | | | 2,931,274 | | | | 3,224,592 | |
| | |
Loss from operations | | | (1,878,847 | ) | | | (2,764,475 | ) | | | (1,878,847 | ) | | | (2,764,475 | ) |
| | |
Other expense (income): | | | | | | | | | | | | | | | | |
| | |
Other (income) | | | (36,003 | ) | | | — | | | | (36,003 | ) | | | — | |
Change in fair value of warrant liability | | | (618,801 | ) | | | 3,731,694 | | | | (618,801 | ) | | | 3,731,694 | |
Interest expense | | | 209,550 | | | | 621,574 | | | | 209,550 | | | | 621,574 | |
Interest income | | | — | | | | (667 | ) | | | — | | | | (667 | ) |
| | | | | | | | | | | | | | | | |
| | | (445,254 | ) | | | 4,352,601 | | | | (445,254 | ) | | | 4,352,601 | |
| | | | | | | | | | | | | | | | |
Net loss | | $ | (1,433,593 | ) | | $ | (7,117,076 | ) | | $ | (1,433,593 | ) | | $ | (7,117,076 | ) |
| | | | | | | | | | | | | | | | |
Net loss per common share, basic and diluted | | $ | (0.05 | ) | | $ | (0.36 | ) | | $ | (0.05 | ) | | $ | (0.36 | ) |
| | | | | | | | | | | | | | | | |
Weighted average number of common shares, basic and diluted | | | 29,985,632 | | | | 19,960,150 | | | | 29,985,632 | | | | 19,960,150 | |
The accompanying notes are an integral part of the financial statements.
Dais Analytic Corporation
Statements of Stockholders’ Deficit
Years Ended December 31, 2010 and 2009
| Common Stock | | | Capital in Excess of Par Value | | | Accumulated Deficit | | | Prepaid Services Paid for with Common Stock | | | Treasury Stock | | | Total Stockholders’ Deficit | | Common Stock | | | Capital in Excess of Par Value | | | Accumulated Deficit | | | Prepaid Services Paid for with Common Stock | | | Treasury Stock | | | Total Stockholders’ Deficit | |
Shares | | Amount | | | | 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 | ) | 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 | | 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 | | 344,692 | | | 3,448 | | | 105,029 | | | — | | | 23,375 | | | — | | | 131,852 | |
Stock-based compensation expense | — | | | — | | | 1,504,669 | | | — | | | — | | | — | | | 1,504,669 | | — | | | — | | | 1,504,669 | | | — | | | — | | | — | | | 1,504,669 | |
Issuance of warrants for debt conversion | — | | | — | | | 413,008 | | | — | | | — | | | — | | | 413,008 | | — | | | — | | | 413,008 | | | — | | | — | | | — | | | 413,008 | |
Issuance of common stock and warrants for cash | 2,490,385 | | | 24,904 | | | 613,596 | | | — | | | — | | | — | | | 638,500 | | 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 | ) | — | | | — | | | (3,623,448 | ) | | 1,689,476 | | | — | | | — | | | (1,933,972 | ) |
Exercise of warrants and options | 801,633 | | | 8,016 | | | 1,084,781 | | | — | | | — | | | — | | | 1,092,797 | | 801,633 | | | 8,016 | | | 1,084,781 | | | — | | | — | | | — | | | 1,092,797 | |
Net loss, restated | — | | | — | | | — | | | | (7,117,076 | ) | | | — | | | | — | | | | (7,117,076 | ) | — | | | — | | | — | | | | (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 | ) | 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 | | 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 | | 1,000,384 | | | 10,004 | | | 190,073 | | | — | | | — | | | — | | | 200,077 | |
Stock based compensation | — | | | — | | | 651,032 | | | — | | | — | | | — | | | 651,032 | | — | | | — | | | 651,032 | | | — | | | — | | | — | | | 651,032 | |
Issuance of common stock in exchange for debt settlement | 2,321,422 | | | 23,214 | | | 580,356 | | | — | | | — | | | — | | | 603,570 | | 2,321,422 | | | 23,214 | | | 580,356 | | | — | | | — | | | — | | | 603,570 | |
Net loss | — | | | — | | | — | | | (1,433,593 | ) | | — | | | — | | | (1,433,593 | ) | — | | | — | | | — | | | (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 | ) | 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
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.
The 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 components contain proprietary products of our suppliers, or the processes used by our suppliers to manufacture these components are proprietary. If we are required to replace any of our suppliers, while we should be able to obtain comparable components from alternative suppliers at comparable costs, this would create a delay in production.
For the years ended December 31, 2010 and 2009, seven five customers accounted for approximately 61% (seven customers represented the following percentages of sales 13%, 13%, 9%, 7%, 7%, 6% and 6%) and 66% (five customers represented the following percentages of sales 27%, 16%, 12%, 7% and 4%) of the Company’s total revenue, respectively. At December 31, 2010 and 2009 amounts due from these customers was approximately 61% and 25% of total 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, 2010, the Company incurred a net loss of $1,433,593 and has incurred significant losses since inception. As of December 31, 2010, the Company has an accumulated deficit of $35,673,962, negative working capital of $2,861,488 and a stockholders’ deficit of $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 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. |
The Company’s ability to continue as a going concern is highly dependent on our ability to obtain additional sources of cash flow sufficient to fund our working capital requirements. However, there can be no assurance that the Company will be successful in its 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.
3. Significant Accounting Policies
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.
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.
Research and development expenses, and grant proceeds - Expenditures for research, development, and engineering of products are expensed as incurred. For the years ended December 31, 2010 and 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.
Forfeitures 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, 2010 and 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 | | | | | |
| | Warrant Liability | |
| | | | |
Balance at December 31, 2009 | | $ | 4,577,119 | |
Changes in fair value | | | (618,801 | ) |
| | | | |
Balance at December 31, 2010 | | $ | 3,958,318 | |
Income 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.
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 be 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 through 2009.
Loss per share - Basic and diluted earnings per share are computed based on the weighted-average common shares and 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.
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.
Recent accounting pronouncements
Recent accounting pronouncements issued by FASB (including 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. Property and Equipment
Property and equipment consist of the following:
| | 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 | |
6. Accrued Expenses, Other
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:
| | 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
December 2007 and January 2008, the Company issued convertible promissory notes (the “Convertible Notes”) and warrants to purchase common stock in exchange for proceeds totaling $2,950,000. The Convertible Notes bear interest at nine percent per annum and have stated maturity dates from December 2008 to January 2009. The Convertible Notes are repayable in cash or convertible into shares of the Company’s stock at a rate of one share per $0.20 of outstanding principal and interest. Warrants to purchase 14,750,000 shares of the Company’s common stock accompanying the Convertible Notes are, subject to certain 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 2007, January 2008 and August 2008, if the Company issues 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 values.
To recognize the fair value of the warrants, the Company discounted the notes and increased additional paid in capital. The fair value of the beneficial conversion feature of $1,383,437 and discount of $1,566,563 related to the warrants were amortized over the term of the Convertible Notes. For the years ended December 31, 2010 and 2009, the Company recognized interest expense from the amortization of the beneficial conversion feature and discount of $0 and $30,136, respectively.
During the year ended December 31, 2009 eighteen holders converted their Convertible Notes, having an aggregate 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.
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
| 124,875 | |
March 2009 | | | 999,000
| 999,000 | |
April 2009 | | | 416,250
| 416,250 | |
August 2009 | | | 124,875
| 124,875 | |
| | | | |
| | | 1,665,00 | |
| |
September 2009 | | | 162,500
| 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 NotesBalance Sheets
In July 2009 we secured a loan of $300,000 from | 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 investor and issued the lender an unsecured promissory note for the principal amount on December 8, 2009. Pursuant to the termsintegral part of the note, wefinancial statements.
Dais Analytic Corporation
Statements of Operations
| 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 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 durationintegral part of the event. Should we not curefinancial statements.
Dais Analytic Corporation
Statements of Stockholders’ Deficit
Years Ended December 31, 2010 and 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 default within 60 daysfinancial statements.
Dais Analytic Corporation
Statements of receiving noticeCash 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 holder may, at his option, declare all interest accrued and unpaid and principal outstanding immediately due and payable. On December 30, 2010, the investorholders elected to apply all of the proceeds due and payable under the Note,their notes, including all accrued interest, to the purchase 2,321,422 shares 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 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 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 number of shares issued was based upon the $0.26 fair value of the Company’s common stock on the settlement date.
The $620,000 note’s maturity date was extended to April 30, 2011.
Accrued interest on the notes was $157,683 and $13,502 at December 31, 2010 and 2009, respectively.
8. Related Party Transactions
Timothy Tangredi, the Company’s Chief Executive Officer and Chairman, is a founder and a member of the Board 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 entered 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 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 term of each respective license runs for the duration of the patented technology.
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 $49,000 in each of years ended December 31, 2010 and 2009. At December 31, 2010 and 2009, $151,440 and $150,740, 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 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$603,570.
During the year ended December 31, 2009, the Company’s board of directors approved proposals to amend the Articles of Incorporation to increase the number of authorized shares of common stock from 100,000,000 to 200,000,000, respectively.
10. Preferred Stock
The Company’s Board of Directors has authorized 10,000,000 million shares of preferred stock with a par value of $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. 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.
11. Stock Options and Warrants
In June 2000 and November 2009, our Board of Directors adopted, and our shareholders approved, the 2000 Plan and 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. As of December 31, 2009, 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 the Company’s Board of Directors.
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 years ended December 31, 2010 and 2009, was $0the Company issued 888,692 and $3,250,344,692 shares of common stock and warrants for services valued at $512,880 and $110,316, 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 $651,000The cumulative effect for the year ended December 31, 2010change in accounting principle related to warrant classification resulted in an increase of $1,689,476 to retained earnings and $1,580,000 fora $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 including approximately $75,000resulted 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
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.
The 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 was accrued for warrants issued subsequentmeet our quality, quantity and cost requirements or our technical specifications, or the inability to year end. The total fair valueobtain alternative sources of shares vested duringthese 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 components contain proprietary products of our suppliers, or the processes used by our suppliers to manufacture these components are proprietary. If we are required to replace any of our suppliers, while we should be able to obtain comparable components from alternative suppliers at comparable costs, this would create a delay in production.
For the years ended December 31, 2010 and 2009, wasseven five customers accounted for approximately $556,00061% (seven customers represented the following percentages of sales 13%, 13%, 9%, 7%, 7%, 6% and $1,549,000,6%) and 66% (five customers represented the following percentages of sales 27%, 16%, 12%, 7% and 4%) of the Company’s total revenue, 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.
The following table represents our non vested share-based payment activity with employees for the year ended At December 31, 2010 and 2009:2009 amounts due from these customers was approximately 61% and 25% of total accounts receivable, respectively.
| | 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:
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 Services2. Going Concern
The accompanying financial statements have been prepared assuming that the Company entered intowill continue as 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.going concern. For the year ended December 31, 2010, the Company incurred a net loss of $1,433,593 and has issued 106,000 sharesincurred significant losses since inception. As of common stockDecember 31, 2010, the Company has an accumulated deficit of $35,673,962, negative working capital of $2,861,488 and recorded $44,050a stockholders’ deficit of $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 that the Company will continue as consulting expensea 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. |
The Company’s ability to continue as a going concern is highly dependent on our ability to obtain additional sources of cash flow sufficient to fund our working capital requirements. However, there can be no assurance that the Company will be successful in its statementefforts 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.operations and cash flows.
The Company entered into an agreement for consulting services in April 2010. The termfinancial statements of the agreementCompany 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
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.
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 twelve monthsany bad debts based on an analysis of the Company’s collection experience, customer credit worthiness, and callscurrent 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 Companyyears 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 issueexpense as incurred.
Intangible assets - Identified intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the consultant 100,000 sharescarrying amount may not be recoverable. The Company’s existing intangible assets consist solely of common stock upon executionpatents. 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 agreementasset 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 additional 100,000 shares of common stock after six months of service. The agreement also calls for a monthly cash payment of $6,000 for the first six months and $7,500 per month for the remainderestimate of the agreement.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.
Research and development expenses, and grant proceeds - Expenditures for research, development, and engineering of products are expensed as incurred. For the years ended December 31, 2010 and 2009, the Company incurred research and development costs of approximately $337,900 and $6,600, respectively. The Company has fair valued the initial 100,000 shares of common stock at $53,000accounts for proceeds received from government grants for research as a reduction in research 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.development costs. For the year ended December 31, 2010, the Company has recorded $68,000 as consulting expenseapproximately $99,000 in grant proceeds against research and development expenses on itsthe statement of operations and included $21,000 as prepaid expenses in the balance sheet.
The Company issued 207,692 shares of common stock duringoperations. No such grant proceeds were recognized for the year ended December 31, 2010 valued2009.
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 $64,384 for legal services to be provided from January 1, 2010 through December 31, 2010. For
Revenue derived from the yearsale 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 the Company has recorded $64,384 as legal expense in its statement of operations.and 2009, respectively.
On November 4, 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 entered intoreduces 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 agreement for legalemployee is required to provide services in exchange for 375,000 sharesthe award, known as the requisite service period (usually the vesting period).
The value of Common Stock valuedeach grant is estimated at $150,000. For the yeargrant date using the Black-Scholes option model with the following assumptions for options granted during the years ended December 31, 2010 the Company has recorded $150,000 as prepaid expenses in the accompanying balance sheet.and 2009:
12. Derivative Financial Instruments | 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.
Forfeitures 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, 2010 and 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 ratifiedAccounting Standards Codification (ASC) 820 “Fair Value Measurements and Disclosures” (ASC 820) which defines fair value as the consensus reachedexchange 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 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 asthe measurement date. ASC 815-40-15-5). This EITF provides guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to820 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 stock.assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The EITF appliesfair value hierarchy consists of three broad levels, which gives the highest priority to any freestanding financial instrumentunadjusted quoted prices in active markets for identical assets or embedded featureliabilities (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 has allare accessible at the characteristics of a derivative under ASC 815-10- 15-13 through 15-130, Accountingmeasurement date for Derivative Instruments and Hedging Activities, for purposes of determining whetheridentical, unrestricted assets or liabilities.
Level 2 - Inputs other than quoted prices included within Level 1 that instrument or embedded feature qualifiesare observable for the first partasset 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 scope exception. 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 EITF also appliesCompany’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 | |
Income 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 any freestanding financial instrument that is potentially settled in an entity’s own stock, regardless of whetherreduce deferred tax assets to 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 Indexedamount expected 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.be realized.
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 be 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 through 2009.
Loss per share - Basic and diluted earnings per share are computed based on the weighted-average common shares and 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.
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.
Recent accounting pronouncements
Recent accounting pronouncements issued by FASB (including 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. Property and Equipment
Property and equipment consist of the following:
| | 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 | |
6. Accrued Expenses, Other
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:
| | 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
December 2007 and January 2008, the Company issued convertible promissory notes (the “Convertible Notes”) and warrants to purchase common stock in exchange for proceeds totaling $2,950,000. The Convertible Notes bear interest at nine percent per annum and have stated maturity dates from December 2008 to January 2009. The Convertible Notes are repayable in cash or convertible into shares of the Company’s stock at a rate of one share per $0.20 of outstanding principal and interest. Warrants to purchase 14,750,000 shares of the Company’s common stock accompanying the Convertible Notes are, subject to certain 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 exercise priceterms 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 thanbelow the then current warrant exercise price, thesethe 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 inCompany 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 values.
To recognize the fair value of the warrants, is recorded in the statement of operations and 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 thandiscounted 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)notes and recorded a $618,801 gain on theincreased additional paid in capital. The fair value of the warrant liability forbeneficial conversion feature of $1,383,437 and discount of $1,566,563 related to 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 reviewamortized over the term of the warrants, it was determined that these warrants were not indexed to the 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 during the year 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 license agreement of 10 years. In addition, the Company received royalties of $100,000 in each of the first three years of the agreement. The Company recognized revenue of approximately $77,000 for this agreement during each ofConvertible Notes. For the years ended December 31, 2010 and 2009, the Company recognized interest expense from the amortization of the beneficial conversion feature and discount of $0 and $30,136, respectively.
During the year ended December 31, 2009 eighteen holders converted their Convertible Notes, having an aggregate 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.
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 licensingconfession 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 biomedical entity duringjudgment 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, 20052010 the remaining principal balance of said loan of $175,000 was extinguished in full by the Company through cash payments of $100,000 and received an initial license feethe conversion of $50,000. This fee is deferred and recognized$75,000 into 375,000 shares of common stock based on a straight-line basis over the lifeper share conversion rate of the license agreement of 7 years. The Company recognized revenue of approximately $5,000 for this agreement during each of the years ended December 31, 2010 and 2009.
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.$0.20. As of December 31, 2010 the Company has recorded a liabilityoutstanding principal balance of $5,000 in accrued expenses related to this agreement on its balance sheet.said loan was $0.
On September 17,November 4, 2010, an investor elected to convert his 9% secured convertible note of $100,000 principal and the U.S. Departmentrelated accrued interest $25,077 into 625,384 shares of Energy approved a grant ofCompany’s Common Stock. Said investor also received an additional five-year warrant to purchase up to $681,322 to the Company62,538 shares of Common Stock, at an exercise price of $0.75 per share in consideration 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 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.
15. Income Taxes
There is no current or deferred income tax expense or benefit for the years ended December 31, 2010 and 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, | |
| | 2010 | | | 2009 | |
Tax benefit at U.S. statutory rate | | $ | (487,000 | ) | | $ | (2,420,000 | ) |
State income tax benefit, net of federal benefit | | | (52,000 | ) | | | (258,000 | ) |
Effect of non-deductible expenses | | | 1,000 | | | | 1,000 | |
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 | | | 373,000 | | | | (132,000 | ) |
| | | | | | | | |
| | $ | — | | | $ | — | |
converting his 9% secured convertible note.
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, | |
| | 2010 | | | 2009 | |
Deferred tax assets (liabilities), current: | | | | | | | | |
Bonus payable | | $ | 108,300 | | | $ | 108,300 | |
Accrued deferred compensation payable | | | 428,300 | | | | 386,300 | |
Stock warrant consideration and other | | | 84,000 | | | | 49,100 | |
Deferred license revenue | | | 30,900 | | | | 32,400 | |
Valuation allowance | | | (651,500 | ) | | | (576,100 | ) |
| | | | | | | | |
| | $ | — | | | $ | — | |
| | | | | | | | |
Deferred tax assets (liabilities), noncurrent: | | | | | | | | |
Deferred license revenue | | $ | 48,100 | | | $ | 77,400 | |
Depreciation | | | 3,400 | | | | 3,400 | |
Net operating loss carryforwards | | | 7,644,600 | | | | 7,261,000 | |
Valuation allowance | | | (7,596,100 | ) | | | (7,341,800 | ) |
| | | | | | | | |
| | $ | — | | | $ | — | |
As of December 31, 2010, and 2009, the Company had federal and state net operating loss carry-forwards totaling approximately $20,100,000 and $21,400,000, respectively, which begin expiring in 2012. The 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 these assets.
As$50,000 of December 31, 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 2010. However, the Company will complete the study prior to the utilization of any of its recorded net operating losses.
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 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 interestConvertible Notes was outstanding, in default and principal due and payable in cash on or before June 17, 2010 the note’s maturity date was extended to April 30, 2011.full. On March 22,23, 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 forthnote was paid in the Exchange Agreements, the Company and the Investor amended and restated the $1,000,000 unsecured promissory note issuedfull 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.Company.
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
| | December 31, | |
| | June 30, 2011 | | December 31, 2010 | | 2010 | | 2009 | |
| | (unaudited) | | | | | | Restated | |
Assets | Current assets: | | | | | | | | | | | |
Cash and cash equivalents | | $ | 841,797 | | $ | 304,656 | | | $ | 304,656 | | | $ | 1,085,628 | |
Accounts receivable, net of allowance for doubtful accounts of $18,650 and $0 at June 30, 2011 and December 31, 2010, respectively | | 807,967 | | 828,632 | | |
Accounts receivable | | | | 828,632 | | | | 187,434 | |
Other receivables | | 69,526 | | 59,526 | | | | 59,526 | | | | | |
Inventory | | 371,970 | | 294,069 | | | | 294,069 | | | | 149,986 | |
Deferred offering costs | | 547,376 | | 175,000 | | |
Debt issue costs | | 49,807 | | — | | |
Prepaid expenses and other current assets | | 57,916 | | 83,136 | | | | 258,136 | | | | 103,571 | |
| | | | | | | | | |
| | | | | | |
Total current assets | | 2,746,359 | | 1,745,019 | | | | 1,745,019 | | | | 1,526,619 | |
| | | | | | | | | |
| | | | | | | | | | |
Property and equipment, net | | 144,914 | | 147,911 | | | | 147,911 | | | | 19,383 | |
| | | | | | | | | | | | | | |
| | | | | | |
Other assets: | | | | | | | | | | | | | |
| | | | | | |
Deposits | | 2,280 | | 3,280 | | | | 3,280 | | | | 2,280 | |
Patents, net of accumulated amortization of $120,890 and $112,240 at June 30, 2011 and December 31, 2010, respectively | | 79,309 | | 74,363 | | |
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 | | 81,589 | | 77,643 | | | | 77,643 | | | | 74,744 | |
| | | | | | | | | |
| | | $ | 1,970,573 | | | $ | 1,620,746 | |
| | | | | | | | | |
| | $ | 2,972,862 | | $ | 1,970,573 | | | | | | |
Liabilities and Stockholders’ Deficit | Current liabilities: | | | | | | | | | | | | | |
Accounts payable, including related party payables of $434,437 and $151,440 at June 30, 2011 and December 31, 2010, respectively | | $ | 877,239 | | $ | 620,196 | | |
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 | | 1,405,606 | | 1,426,022 | | | | 1,426,022 | | | | 1,314,356 | |
Accrued expenses, other | | 268,374 | | 241,861 | | | | 241,861 | | | | 223,597 | |
Current portion of deferred revenue | | 590,541 | | 647,804 | | | | 647,804 | | | | 292,457 | |
Current portion of convertible notes payable | | — | | 50,000 | | |
Current portion of notes payable | | | | 50,000 | | | | 150,000 | |
Current portion of notes payable, related party | | 624 | | 1,620,624 | | | | 1,620,624 | | | | 1,425,624 | |
Current portion of convertible notes payable, related party net of unamortized discount of $1,049,432 and $0 at June 30, 2011 and December 31, 2010, respectively | | 1,450,568 | | — | | |
| | | | | | | | | |
| | | | | | |
Total current liabilities | | 4,592,952 | | 4,606,507 | | | | 4,606,507 | | | | 3,791,989 | |
| | | | | | |
Long-term liabilities: | | | | | | | | | | | | | |
| | | | | | |
Long-term portion of notes payable, related party | | | | — | | | | 300,000 | |
Warrant liability | | 4,616,255 | | 3,958,318 | | | | 3,958,318 | | | | 4,577,119 | |
Deferred revenue, less current portion | | 86,840 | | 127,840 | | |
Deferred revenue, net of current portion | | | | 127,840 | | | | 207,696 | |
| | | | | | | | | |
| | | | | | |
Total long-term liabilities | | 4,703,095 | | 4,086,158 | | | | 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; 36,352,277 and 33,563,428 shares issued and 36,095,064 and 33,306,215 shares outstanding at June 30, 2011 and December 31, 2010, respectively | | 363,523 | | 335,635 | | |
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 | | 32,713,926 | | 29,852,347 | | | | 29,852,347 | | | | 27,926,893 | |
Accumulated deficit | | (38,128,522 | ) | | (35,637,962 | ) | | | (35,637,962 | ) | | | (34,204,369 | ) |
| | (5,051,073 | ) | | (5,449,980 | ) | | | | | | | | |
| | | | (5,449,980 | ) | | | (5,983,946 | ) |
Treasury stock at cost, 257,213 shares | | (1,272,112 | ) | | (1,272,112 | ) | | | (1,272,112 | ) | | | (1,272,112 | ) |
| | | | | | | | | |
Total stockholders’ deficit | | (6,323,185 | ) | | (6,722,092 | ) | | | (6,722,092 | ) | | | (7,256,058 | ) |
| | | | | | | | | | | | | | | | |
| | $ | 2,972,862 | | $ | 1,970,573 | | | $ | 1,970,573 | | | $ | 1,620,746 | |
The accompanying notes are an integral part of the financial statements.
Dais Analytic Corporation
Statements of Operations
| 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 | |
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | (restated) | | (restated) |
Revenue: | | | | | | | | | | | | | | | | |
Sales | | $ | 1,103,579 | | | $ | 989,642 | | | $ | 1,941,773 | | | $ | 1,376,424 | |
License fees | | | 20,500 | | | | 20,500 | | | | 41,000 | | | | 41,030 | |
| | | 1,124,079 | | | | 1,010,142 | | | | 1,982,773 | | | | 1,417,454 | |
| | | | |
Cost of goods sold | | | 806,674 | | | | 550,196 | | | | 1,507,564 | | | | 871,522 | |
Gross profit | | | 317,405 | | | | 459,946 | | | | 475,209 | | | | 545,932 | |
Expenses: | | | | | | | | | | | | | | | | |
Research and development expenses, net of government grant proceeds of $126,109, $0, 287,473 and $0, respectively | | | 11,119 | | | | — | | | | 13,155 | | | | — | |
Selling, general and administrative | | | 792,606 | | | | 1,029,394 | | | | 1,714,903 | | | | 1,588,914 | |
| | | 803,725 | | | | 1,029,394 | | | | 1,728,058 | | | | 1,588,914 | |
Loss from operations | | | (486,320 | ) | | | (569,448 | ) | | | (1,252,849 | ) | | | (1,042,982 | ) |
| | | | |
Other expense (income): | | | | | | | | | | | | | | | | |
Change in fair value of warrant liability | | | (1,694,170 | ) | | | (1,835,094 | ) | | | 657,937 | | | | (327,066 | ) |
Interest expense | | | 416,899 | | | | 55,233 | | | | 580,438 | | | | 101,736 | |
Interest income | | | (634 | ) | | | — | | | | (664 | ) | | | — | |
| | | (1,277,905 | ) | | | (1,779,861 | ) | | | 1,237,711 | | | | (225,330 | ) |
Net income (loss) | | $ | 791,585 | | | $ | 1,210,413 | | | $ | (2,490,560 | ) | | $ | (817,652 | ) |
| | | | | | | | | | | | | | | | |
Net income (loss) per common share, basic | | $ | 0.02 | | | $ | 0.04 | | | $ | (0.07 | ) | | $ | (0.03 | ) |
Net income (loss) per common share, diluted | | $ | 0.02 | | | $ | 0.03 | | | $ | (0.07 | ) | | $ | (0.03 | ) |
| | | | | | | | | | | | | | | | |
Weighted average number of common shares, basic | | | 35,089,169 | | | | 29,800,194 | | | | 34,335,348 | | | | 29,577,797 | |
Weighted average number of common shares, diluted | | | 56,239,845 | | | | 40,245,491 | | | | 34,335,348 | | | | 29,577,797 | |
The accompanying notes are an integral part of the financial statements.
Dais Analytic Corporation
Statements of Stockholders’ Deficit
(Unaudited)
For the Six MonthsYears Ended June 30, 2011December 31, 2010 and 2009
| | 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 | | | 121,346 | | | | 1,213 | | | | 41,608 | | | | — | | | | — | | | | 42,821 | |
Stock based compensation | | | — | | | | — | | | | 630,096 | | | | — | | | | — | | | | 630,096 | |
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 | |
Revaluation of common stock issued to vendors for services | | | — | | | | — | | | | 23,000 | | | | — | | | | — | | | | 23,000 | |
Net loss | | | — | | | | — | | | | — | | | | (2,490,560 | ) | | | — | | | | (2,490,560 | ) |
Balance, June 30, 2011 | | | 36,352,277 | | | $ | 363,523 | | | $ | 32,713,926 | | | $ | (38,128,522 | ) | | $ | (1,272,112 | ) | | $ | (6,323,185 | ) |
| 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 | |
| | For the Six Months Ended June 30, | |
| | 2011 | | | 2010 | |
| | | | | (restated) | |
Operating activities | | | | | | | | |
Net loss | | $ | (2,490,560 | ) | | $ | (817,652 | ) |
| | | | | | | | |
Adjustments to reconcile net loss to net cash used by operating activities: | | | | | | | | |
Depreciation and amortization | | | 25,393 | | | | 2,153 | |
Amortization of discount and beneficial conversion feature on notes payable | | | 450,568 | | | | — | |
Issuance of common stock, stock options and stock warrants for services and amortization of common stock issued for services | | | 87,937 | | | | 163,164 | |
Stock based compensation | | | 630,096 | | | | 478,548 | |
Change in fair value of warrant liability | | | 657,937 | | | | (327,066 | ) |
Increase in allowance for doubtful accounts | | | 18,450 | | | | — | |
(Increase) decrease in: | | | | | | | | |
Accounts receivable | | | 2,215 | | | | (999,829 | ) |
Other receivables | | | (10,000 | ) | | | — | |
Inventory | | | (77,901 | ) | | | (96,982 | ) |
Prepaid expenses and other current assets | | | 4,104 | | | | (6,415 | ) |
Increase (decrease) in: | | | | | | | | |
Accounts payable and accrued expenses | | | 357,106 | | | | 51,279 | |
Accrued compensation and related benefits | | | (20,416 | ) | | | 56,667 | |
Deferred revenue | | | (98,263 | ) | | | 312,428 | |
Net cash used by operating activities | | | (463,334 | ) | | | (1,183,705 | ) |
| | | | | | | | |
| | |
Investing activities | | | | | | | | |
Increase in patent costs | | | (13,596 | ) | | | — | |
Purchase of property and equipment | | | (13,746 | ) | | | (10,484 | ) |
Net cash used by investing activities | | | (27,342 | ) | | | (10,484 | ) |
| | | | | | | | |
| | |
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 | | | (422,183 | ) | | | — | |
Net cash provided by financing activities | | | 1,027,817 | | | | 520,000 | |
| | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 537,141 | | | | (674,189 | ) |
| | |
Cash and cash equivalents, beginning of period | | | 304,656 | | | | 1,085,628 | |
Cash and cash equivalents, end of period | | $ | 841,797 | | | $ | 411,439 | |
Supplemental cash flow information: | | | | | | | | |
| | |
Cash paid during the year for interest | | $ | 34,158 | | | $ | — | |
| | | | | | | | |
Supplemental disclosure of non-cash investing and financing activities: | | | | | | | | |
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 six monthsyears ended June 30, 2011, aDecember 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 holderholders elected to apply all of the proceeds due and payable under note,their notes, including all accrued interest, to purchase 2,667,5032,321,422 shares of the Company’s Common Stock at a purchase price of $0.26 per share resulting in an aggregate purchase price of $693,550.
During the six months ended June 30, 2011, the Company issued a convertible note payable with a beneficial conversion feature of $1,064,760 and a discount equivalent to the relative fair value of the accompanying warrant of $435,240.$603,570.
During the six monthsyears ended June 30,December 31, 2010 and 2009, the Company issued 375,000888,692 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 conversionaccounting principle related to warrant classification resulted in an increase of $75,000$1,689,476 to retained earnings and a $3,623,448 decrease to capital in excess of notes payable.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
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.
The 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 components contain proprietary products of our suppliers, or the processes used by our suppliers to manufacture these components are proprietary. If we are required to replace any of our suppliers, while we should be able to obtain comparable components from alternative suppliers at comparable costs, this would create a delay in production.
For the years ended December 31, 2010 and 2009, seven five customers accounted for approximately 61% (seven customers represented the following percentages of sales 13%, 13%, 9%, 7%, 7%, 6% and 6%) and 66% (five customers represented the following percentages of sales 27%, 16%, 12%, 7% and 4%) of the Company’s total revenue, respectively. At December 31, 2010 and 2009 amounts due from these customers was approximately 61% and 25% of total 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, 2010, the Company incurred a net loss of $1,433,593 and has incurred significant losses since inception. As of December 31, 2010, the Company has an accumulated deficit of $35,673,962, negative working capital of $2,861,488 and a stockholders’ deficit of $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 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. |
The Company’s ability to continue as a going concern is highly dependent on our ability to obtain additional sources of cash flow sufficient to fund our working capital requirements. However, there can be no assurance that the Company will be successful in its 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.
3. Significant Accounting Policies
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.
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.
Research and development expenses, and grant proceeds - Expenditures for research, development, and engineering of products are expensed as incurred. For the years ended December 31, 2010 and 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.
Forfeitures 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, 2010 and 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 | |
Income 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.
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 be 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 through 2009.
Loss per share - Basic and diluted earnings per share are computed based on the weighted-average common shares and 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.
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.
Recent accounting pronouncements
Recent accounting pronouncements issued by FASB (including 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. Property and Equipment
Property and equipment consist of the following:
| | 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 | |
6. Accrued Expenses, Other
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:
| | 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
December 2007 and January 2008, the Company issued convertible promissory notes (the “Convertible Notes”) and warrants to purchase common stock in exchange for proceeds totaling $2,950,000. The Convertible Notes bear interest at nine percent per annum and have stated maturity dates from December 2008 to January 2009. The Convertible Notes are repayable in cash or convertible into shares of the Company’s stock at a rate of one share per $0.20 of outstanding principal and interest. Warrants to purchase 14,750,000 shares of the Company’s common stock accompanying the Convertible Notes are, subject to certain 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 2007, January 2008 and August 2008, if the Company issues 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 values.
To recognize the fair value of the warrants, the Company discounted the notes and increased additional paid in capital. The fair value of the beneficial conversion feature of $1,383,437 and discount of $1,566,563 related to the warrants were amortized over the term of the Convertible Notes. For the years ended December 31, 2010 and 2009, the Company recognized interest expense from the amortization of the beneficial conversion feature and discount of $0 and $30,136, respectively.
During the year ended December 31, 2009 eighteen holders converted their Convertible Notes, having an aggregate 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.
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 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 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 number of shares issued was based upon the $0.26 fair value of the Company’s common stock on the settlement date.
The $620,000 note’s maturity date was extended to April 30, 2011.
Accrued interest on the notes was $157,683 and $13,502 at December 31, 2010 and 2009, respectively.
8. Related Party Transactions
Timothy Tangredi, the Company’s Chief Executive Officer and Chairman, is a founder and a member of the Board 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 entered 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 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 term of each respective license runs for the duration of the patented technology.
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 $49,000 in each of years ended December 31, 2010 and 2009. At December 31, 2010 and 2009, $151,440 and $150,740, 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 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, 2009, the Company’s board of directors approved proposals to amend the Articles of Incorporation to increase the number of authorized shares of common stock from 100,000,000 to 200,000,000, respectively.
10. Preferred Stock
The Company’s Board of Directors has authorized 10,000,000 million shares of preferred stock with a par value of $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. 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.
11. Stock Options and Warrants
In June 2000 and November 2009, our Board of Directors adopted, and our shareholders approved, the 2000 Plan and 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. As of December 31, 2009, 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 the Company’s Board of Directors.
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 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 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.
The following table represents our non vested share-based payment activity with employees for the year ended December 31, 2010 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:
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
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.
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 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 has recorded $68,000 as consulting expense on its statement of operations 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, 2010 valued at $64,384 for legal services to be provided from January 1, 2010 through December 31, 2010. For the year ended December 31, 2010, the Company has 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 accompanying 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 and 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 the 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 during the year 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 license agreement of 10 years. In addition, the Company received royalties of $100,000 in each of the first three years of the agreement. The Company recognized revenue of approximately $77,000 for this agreement during each of the years ended December 31, 2010 and 2009.
The Company entered into a licensing agreement with a biomedical entity during the year ended December 31, 2005 and received an initial license fee of $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 years ended December 31, 2010 and 2009.
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 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.
15. Income Taxes
There is no current or deferred income tax expense or benefit for the years ended December 31, 2010 and 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, | |
| | 2010 | | | 2009 | |
Tax benefit at U.S. statutory rate | | $ | (487,000 | ) | | $ | (2,420,000 | ) |
State income tax benefit, net of federal benefit | | | (52,000 | ) | | | (258,000 | ) |
Effect of non-deductible expenses | | | 1,000 | | | | 1,000 | |
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 | | | 373,000 | | | | (132,000 | ) |
| | | | | | | | |
| | $ | — | | | $ | — | |
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, | |
| | 2010 | | | 2009 | |
Deferred tax assets (liabilities), current: | | | | | | | | |
Bonus payable | | $ | 108,300 | | | $ | 108,300 | |
Accrued deferred compensation payable | | | 428,300 | | | | 386,300 | |
Stock warrant consideration and other | | | 84,000 | | | | 49,100 | |
Deferred license revenue | | | 30,900 | | | | 32,400 | |
Valuation allowance | | | (651,500 | ) | | | (576,100 | ) |
| | | | | | | | |
| | $ | — | | | $ | — | |
| | | | | | | | |
Deferred tax assets (liabilities), noncurrent: | | | | | | | | |
Deferred license revenue | | $ | 48,100 | | | $ | 77,400 | |
Depreciation | | | 3,400 | | | | 3,400 | |
Net operating loss carryforwards | | | 7,644,600 | | | | 7,261,000 | |
Valuation allowance | | | (7,596,100 | ) | | | (7,341,800 | ) |
| | | | | | | | |
| | $ | — | | | $ | — | |
As of December 31, 2010 and 2009, the Company had federal and state net operating loss carry-forwards totaling approximately $20,100,000 and $21,400,000, respectively, which begin expiring in 2012. The 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 these assets.
As of December 31, 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 2010. However, the Company will complete the study prior to the utilization of any of its recorded net operating losses.
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 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
| | June 30, 2011 | | | December 31, 2010 | |
| | (unaudited) | | | | |
Assets |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 841,797 | | | $ | 304,656 | |
Accounts receivable, net of allowance for doubtful accounts of $18,650 and $0 at June 30, 2011 and December 31, 2010, respectively | | | 807,967 | | | | 828,632 | |
Other receivables | | | 69,526 | | | | 59,526 | |
Inventory | | | 371,970 | | | | 294,069 | |
Deferred offering costs | | | 547,376 | | | | 175,000 | |
Debt issue costs | | | 49,807 | | | | — | |
Prepaid expenses and other current assets | | | 57,916 | | | | 83,136 | |
Total current assets | | | 2,746,359 | | | | 1,745,019 | |
| | | | | | | | |
Property and equipment, net | | | 144,914 | | | | 147,911 | |
| | | | | | | | |
Other assets: | | | | | | | | |
Deposits | | | 2,280 | | | | 3,280 | |
Patents, net of accumulated amortization of $120,890 and $112,240 at June 30, 2011 and December 31, 2010, respectively | | | 79,309 | | | | 74,363 | |
Total other assets | | | 81,589 | | | | 77,643 | |
| | $ | 2,972,862 | | | $ | 1,970,573 | |
Liabilities and Stockholders’ Deficit |
Current liabilities: | | | | | | | | |
Accounts payable, including related party payables of $434,437 and $151,440 at June 30, 2011 and December 31, 2010, respectively | | $ | 877,239 | | | $ | 620,196 | |
Accrued compensation and related benefits | | | 1,405,606 | | | | 1,426,022 | |
Accrued expenses, other | | | 268,374 | | | | 241,861 | |
Current portion of deferred revenue | | | 590,541 | | | | 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 $1,049,432 and $0 at June 30, 2011 and December 31, 2010, respectively | | | 1,450,568 | | | | — | |
| | |
Total current liabilities | | | 4,592,952 | | | | 4,606,507 | |
| | |
Long-term liabilities: | | | | | | | | |
Warrant liability | | | 4,616,255 | | | | 3,958,318 | |
Deferred revenue, less current portion | | | 86,840 | | | | 127,840 | |
Total long-term liabilities | | | 4,703,095 | | | | 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; 36,352,277 and 33,563,428 shares issued and 36,095,064 and 33,306,215 shares outstanding at June 30, 2011 and December 31, 2010, respectively | | | 363,523 | | | | 335,635 | |
Capital in excess of par value | | | 32,713,926 | | | | 29,852,347 | |
Accumulated deficit | | | (38,128,522 | ) | | | (35,637,962 | ) |
| | | (5,051,073 | ) | | | (5,449,980 | ) |
Treasury stock at cost, 257,213 shares | | | (1,272,112 | ) | | | (1,272,112 | ) |
Total stockholders’ deficit | | | (6,323,185 | ) | | | (6,722,092 | ) |
| | | | | | | | |
| | $ | 2,972,862 | | | $ | 1,970,573 | |
The accompanying notes are an integral part of the financial statements.
Dais Analytic Corporation
Statements of Operations
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | (restated) | | (restated) |
Revenue: | | | | | | | | | | | | | | | | |
Sales | | $ | 1,103,579 | | | $ | 989,642 | | | $ | 1,941,773 | | | $ | 1,376,424 | |
License fees | | | 20,500 | | | | 20,500 | | | | 41,000 | | | | 41,030 | |
| | | 1,124,079 | | | | 1,010,142 | | | | 1,982,773 | | | | 1,417,454 | |
| | | | |
Cost of goods sold | | | 806,674 | | | | 550,196 | | | | 1,507,564 | | | | 871,522 | |
Gross profit | | | 317,405 | | | | 459,946 | | | | 475,209 | | | | 545,932 | |
Expenses: | | | | | | | | | | | | | | | | |
Research and development expenses, net of government grant proceeds of $126,109, $0, 287,473 and $0, respectively | | | 11,119 | | | | — | | | | 13,155 | | | | — | |
Selling, general and administrative | | | 792,606 | | | | 1,029,394 | | | | 1,714,903 | | | | 1,588,914 | |
| | | 803,725 | | | | 1,029,394 | | | | 1,728,058 | | | | 1,588,914 | |
Loss from operations | | | (486,320 | ) | | | (569,448 | ) | | | (1,252,849 | ) | | | (1,042,982 | ) |
| | | | |
Other expense (income): | | | | | | | | | | | | | | | | |
Change in fair value of warrant liability | | | (1,694,170 | ) | | | (1,835,094 | ) | | | 657,937 | | | | (327,066 | ) |
Interest expense | | | 416,899 | | | | 55,233 | | | | 580,438 | | | | 101,736 | |
Interest income | | | (634 | ) | | | — | | | | (664 | ) | | | — | |
| | | (1,277,905 | ) | | | (1,779,861 | ) | | | 1,237,711 | | | | (225,330 | ) |
Net income (loss) | | $ | 791,585 | | | $ | 1,210,413 | | | $ | (2,490,560 | ) | | $ | (817,652 | ) |
| | | | | | | | | | | | | | | | |
Net income (loss) per common share, basic | | $ | 0.02 | | | $ | 0.04 | | | $ | (0.07 | ) | | $ | (0.03 | ) |
Net income (loss) per common share, diluted | | $ | 0.02 | | | $ | 0.03 | | | $ | (0.07 | ) | | $ | (0.03 | ) |
| | | | | | | | | | | | | | | | |
Weighted average number of common shares, basic | | | 35,089,169 | | | | 29,800,194 | | | | 34,335,348 | | | | 29,577,797 | |
Weighted average number of common shares, diluted | | | 56,239,845 | | | | 40,245,491 | | | | 34,335,348 | | | | 29,577,797 | |
The accompanying notes are an integral part of the financial statements.
Dais Analytic Corporation
Statements of Stockholders’ Deficit
(Unaudited)
For the Six Months Ended June 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 | | | 121,346 | | | | 1,213 | | | | 41,608 | | | | — | | | | — | | | | 42,821 | |
Stock based compensation | | | — | | | | — | | | | 630,096 | | | | — | | | | — | | | | 630,096 | |
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 | |
Revaluation of common stock issued to vendors for services | | | — | | | | — | | | | 23,000 | | | | — | | | | — | | | | 23,000 | |
Net loss | | | — | | | | — | | | | — | | | | (2,490,560 | ) | | | — | | | | (2,490,560 | ) |
Balance, June 30, 2011 | | | 36,352,277 | | | $ | 363,523 | | | $ | 32,713,926 | | | $ | (38,128,522 | ) | | $ | (1,272,112 | ) | | $ | (6,323,185 | ) |
The accompanying notes are an integral part of the financial statements.
Dais Analytic Corporation
Statements of Cash Flows
| | For the Six Months Ended June 30, | |
| | 2011 | | | 2010 | |
| | | | | (restated) | |
Operating activities | | | | | | | | |
Net loss | | $ | (2,490,560 | ) | | $ | (817,652 | ) |
| | | | | | | | |
Adjustments to reconcile net loss to net cash used by operating activities: | | | | | | | | |
Depreciation and amortization | | | 25,393 | | | | 2,153 | |
Amortization of discount and beneficial conversion feature on notes payable | | | 450,568 | | | | — | |
Issuance of common stock, stock options and stock warrants for services and amortization of common stock issued for services | | | 87,937 | | | | 163,164 | |
Stock based compensation | | | 630,096 | | | | 478,548 | |
Change in fair value of warrant liability | | | 657,937 | | | | (327,066 | ) |
Increase in allowance for doubtful accounts | | | 18,450 | | | | — | |
(Increase) decrease in: | | | | | | | | |
Accounts receivable | | | 2,215 | | | | (999,829 | ) |
Other receivables | | | (10,000 | ) | | | — | |
Inventory | | | (77,901 | ) | | | (96,982 | ) |
Prepaid expenses and other current assets | | | 4,104 | | | | (6,415 | ) |
Increase (decrease) in: | | | | | | | | |
Accounts payable and accrued expenses | | | 357,106 | | | | 51,279 | |
Accrued compensation and related benefits | | | (20,416 | ) | | | 56,667 | |
Deferred revenue | | | (98,263 | ) | | | 312,428 | |
Net cash used by operating activities | | | (463,334 | ) | | | (1,183,705 | ) |
| | | | | | | | |
| | |
Investing activities | | | | | | | | |
Increase in patent costs | | | (13,596 | ) | | | — | |
Purchase of property and equipment | | | (13,746 | ) | | | (10,484 | ) |
Net cash used by investing activities | | | (27,342 | ) | | | (10,484 | ) |
| | | | | | | | |
| | |
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 | | | (422,183 | ) | | | — | |
Net cash provided by financing activities | | | 1,027,817 | | | | 520,000 | |
| | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 537,141 | | | | (674,189 | ) |
| | |
Cash and cash equivalents, beginning of period | | | 304,656 | | | | 1,085,628 | |
Cash and cash equivalents, end of period | | $ | 841,797 | | | $ | 411,439 | |
Supplemental cash flow information: | | | | | | | | |
| | |
Cash paid during the year for interest | | $ | 34,158 | | | $ | — | |
| | | | | | | | |
Supplemental disclosure of non-cash investing and financing activities: | | | | | | | | |
During the six months ended June 30, 2011, a note holder elected to apply all of the proceeds due and payable under note, including all accrued interest, to purchase 2,667,503 shares of the Company’s Common Stock at a purchase price of $0.26 per share resulting in an aggregate purchase price of $693,550.
During the six months ended June 30, 2011, the Company issued a convertible note payable with a beneficial conversion feature of $1,064,760 and a discount equivalent to the relative fair value of the accompanying warrant of $435,240.
During the six months ended June 30, 2010, the Company issued 375,000 shares of common stock in conversion of $75,000 of notes payable.
The accompanying notes are an integral part of the financial statements.
Dais Analytic Corporation
Notes to Financial Statements
Three and Six Months Ended June 30, 2011
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 six month periods ended June 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 six months ended June 30, 2011, the Company incurred net income of $791,585 and net loss of $2,490,560, respectively. As of June 30, 2011, the Company has an accumulated deficit of $38,128,522, negative working capital of $1,846,593 and a stockholder’s deficit of $6,323,185. 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 six month periods ended June 30, 2011 and 2010, (b) the financial position at June 30, 2011 and December 31, 2010, and (c) cash flows for the six month periods ended June 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 June 30, 2011, the day’s sales outstanding were 76, as compared to 93 at December 31, 2010. Based on management’s review of accounts receivable, an allowance of $18,450 is considered adequate at June 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 six months ended June 30, 2011 and 2010, four and five customers accounted for approximately 52% and 55% 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 $15,000 for future warranty expenses at June 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 $41,000 from license agreements for the three and six months ended June 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 during the six months ended June 30, 2011 and 2010:
| | Six Months Ended June 30, 2011 | | | Six Months Ended June 30, 2010 | |
Dividend rate | | | 0 | % | | | 0 | % |
Risk free interest rate | | | 2.70 – 2.93 | % | | | 2.38% - 2.59 | % |
Expected term | | 6.5 years | | | 5 – 10 years | |
Expected volatility | | | 101 - 103 | % | | | 96% - 107 | % |
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. The Company used a peer company’s historical activity due to the limited trading volume and historical information of the Company’s own common stock.
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 six month periods ended June 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 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 common stock issued for services is based on the closing stock price on the date the common stock was issued. During the six months ended June 30, 2011, the Company issued 121,346 shares of common stock valued at $42,821 for services rendered. During the six months ended June 30, 2010, the Company issued 186,000 shares of common stock valued at $175,111 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 June 30, 2011 and 2010, the Company incurred research and development costs of approximately $137,200 and $0, respectively. For the six months ended June 30, 2011 and 2010, the Company incurred research and development costs of approximately $300,600 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 six months ended June 30, 2011, the Company recorded approximately $126,100 and $287,500, respectively, in grant proceeds against research and development expenses on the statement of operations. No such grant proceeds were recognized for the three and six months ended June 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 June 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 $736,506 at June 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 June 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 | | $ | 4,616,255 | | | | — | | | | — | | | $ | 4,616,255 | |
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 | |
Changes in fair value | | | 657,937 | |
Balance at June 30, 2011 | | $ | 4,616,255 | |
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 June 30, 2011 and 2010, the Company had 52,026,555 and 38,043,167 potentially dilutive common shares, respectively, which were not included in the computation of loss per share.
The following sets forth the computation of basic and diluted net earnings (loss) per common share for three and six months ended June 30, 2011 and 2010:
| | For the Three Months Ended | | | For the Six Months Ended | |
| | June 30, 2011 | | | June 30, 2010 | | | June 30, 2011 | | | June 30, 2010 | |
Numerator: | | | (1) | | | | (2) | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net income (loss) to common shareholders | | $ | 791,585 | | | $ | 1,210,413 | | | $ | (2,490,560 | ) | | $ | (817,652 | ) |
Interest on convertible debentures | | | 62,500 | | | | 5,625 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Net income (loss) available to common stockholders | | $ | 854,085 | | | $ | 1,216,038 | | | $ | (2,490,560 | ) | | $ | (817,652 | ) |
| | | | | | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | | | | | |
Weighted average basic shares outstanding | | | 35,089,169 | | | | 29,800,194 | | | | 34,335,348 | | | | 29,577,797 | |
Effect of dilutive securities: | | | | | | | | | | | | | | | | |
Convertible debt | | | 10,363,542 | | | | 981,090 | | | | — | | | | — | |
Stock options | | | 4,085,153 | | | | 4,617,032 | | | | — | | | | — | |
Stock warrants | | | 6,701,980 | | | | 4,847,175 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Weighted average fully diluted shares outstanding | | | 56,239,845 | | | | 40,245,491 | | | | 34,335,348 | | | | 29,577,797 | |
| | | | | | | | | | | | | | | | |
Net income (loss) per common share—Basic | | $ | 0.02 | | | $ | 0.04 | | | $ | (0.07 | ) | | $ | (0.03 | ) |
| | | | | | | | | | | | | | | | |
Net income (loss) per common share—Diluted | | $ | 0.02 | | | $ | 0.03 | | | $ | (0.07 | ) | | $ | (0.03 | ) |
(1) | For the three months ended June 30, 2011, 13,185,937 stock options and 22,065,661 warrants were excluded as their exercise price was higher than the Company's average stock price for the quarter. |
(2) | For the three months ended June 30, 2010, 10,473,225 stock options and 18,480,428 warrants were excluded as their exercise price was higher than the Company's average stock price for the quarter. |
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 June 30, 2010 to conform to the presentation as of and for the three and six months ended June 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 is effective beginning July 1, 2011, and should be applied retrospectively to January 1, 2011. The Company does not anticipate the adoption of this update to have a material impact on the Company’s financial statements.
Other recent accounting pronouncements issued by the FASB (including EITF), 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:
| | June 30, 2011 | | | December 31, 2010 | |
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 | | | (1,049,432 | ) | | | — | |
| | |
Less amounts currently due, net of unamortized discount | | | 1,451,192 | | | | 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 firm commitment underwritten public offering 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 six and three months ended June 30, 2011, the Company recognized $450,568 and $332,749, 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. Pursuant to the terms and conditions of the Exchange Agreements, the investor will not, if requested in writing by the underwriter, 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.
As previously noted, on February 19, 2010, the Company issued an unsecured promissory note from 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 $194,521 and $157,683 at June 30, 2011 and December 31, 2010, respectively.
5. | Related Party Transactions |
Timothy Tangredi, the Company’s Chief Executive Officer and Chairman, is a founder and a member of the Board 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 entered 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 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 term of each respective license runs for the duration of the patented technology.
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 $22,800 each of the three and six months ended June 30, 2011 and 2010. At June 30, 2011 and December 31, 2010, $45,779 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 June 30, 2011 and December 31, 2010 of $1,405,606 and $1,426,022, respectively.
The Company has contracted with Richardson and Patel LLP, a stockholder, for legal services rendered in connection with the Form S-1 Offering. As of June 30, 2011, the Company has included approximately $388,000 in accounts payable.
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 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 the Company’s Board of Directors.
The average fair value of options granted at market during six months ended June 30, 2011 and 2010 was $0.27 and $0.24 per option, respectively. There were no options exercised during the six months ended June 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 | | | 2,510,000 | | | $ | 0.33 | | | | | | | | | |
Expired/Forfeited | | | (136,667 | ) | | $ | 0.11 | | | | | | | | | |
Outstanding at June 30, 2011 | | | 17,271,090 | | | $ | 0.32 | | | | 7.04 | | | $ | 1,406,643 | |
Exercisable at June 30, 2011 | | | 15,958,937 | | | $ | 0.32 | | | | 6.86 | | | $ | 1,326,355 | |
Stock compensation expense was approximately $238,500 and $630,100 for the three and six months ended June 30, 2011, respectively, and approximately $397,700 and $478,500 for the three and six months ended June 30, 2010, respectively. The total fair value of shares vested during the six months ended June 30, 2011 and 2010 was approximately $527,200 and $30,800, respectively.
As of June 30, 2011, there was approximately $319,000 of unrecognized employee stock-based compensation expense related to non vested stock options, of which $82,000, $160,000 and $77,000 is expected to be recognized for the remainder of the fiscal year ending December 31, 2011, and for the fiscal years ending 2012 and 2013, respectively.
The following table represents our non-vested share-based payment activity with employees for the six months ended June 30, 2011:
| | Number of Options | | | Weighted Average Grant Date Fair Value | |
Nonvested options - December 31, 2010 | | | 1,063,194 | | | $ | 0.25 | |
Granted | | | 2,510,000 | | | $ | 0.27 | |
Vested | | | (2,261,041 | ) | | $ | 0.24 | |
Nonvested options – June 30, 2011 | | | 1,312,153 | | | $ | 0.24 | |
Warrants
At June 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 | | | Remaining Number Outstanding | | Weighted Average Remaining Life (Years) | | Weighted Average Exercise Price | |
Warrants-Daily Financing | | 197,055 | | .49 | | $ | 0.55 | | | 197,055 | | .49 | | $ | 0.55 | |
Warrants-Additional Financing | | 428,637 | | 1.21 | | $ | 0.40 | | | 428,637 | | 1.21 | | $ | 0.40 | |
Warrants-Robb Trust Note | | 50,000 | | .93 | | $ | 0.55 | | | 50,000 | | .93 | | $ | 0.55 | |
Warrants-Financings (2007, 2008 and 2011) | | 18,750,000 | | 2.19 | | $ | 0.29 | | | 18,750,000 | | 2.19 | | $ | 0.29 | |
Warrants-Placement Agent Warrants | | 793,641 | | 1.76 | | $ | 0.25 | | | 793,641 | | 1.76 | | $ | 0.25 | |
Warrants-Tangredi | | 3,000,000 | | 1.76 | | $ | 0.36 | | | 3,000,000 | | 1.76 | | $ | 0.36 | |
Warrants-Ehrenberg | | 250,000 | | 2.10 | | $ | 0.30 | | | 250,000 | | 2.10 | | $ | 0.30 | |
Warrants-Consulting Agreements | | 825,000 | | 3.28 | | $ | 0.31 | | | 825,000 | | 3.28 | | $ | 0.31 | |
Warrants-Note Conversions | | 2,302,538 | | 2.93 | | $ | 0.39 | | | 2,302,538 | | 2.93 | | $ | 0.39 | |
Warrants-Stock Purchases | | 1,720,770 | | 4.00 | | $ | 0.40 | | | 1,720,770 | | 4.00 | | $ | 0.40 | |
Warrants-Mandelbaum | | 50,000 | | 2.84 | | $ | 0.19 | | | 50,000 | | 2.84 | | $ | 0.19 | |
Warrants-Services | | | 400,000 | | | 3.56 | | $ | 0.50 | | | | 400,000 | | | 3.56 | | $ | 0.50 | |
Tota | | | 28,767,641 | | | | | | | | |
Total | | | | 28,767,641 | | | | | | | |
The Company issued 103,846 shares of common stock during the six months ended June 30, 2011 valued at $36,346 for legal services provided from January 1, 2011 through June 30, 2011. For the three and six months ended June 30, 2011, the Company has recorded $18,173 and $36,346, respectively, as legal expense related to these services in its statements of operations.
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 100,000 shares of common stock after six months of service. The agreement also calls for a 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 three and six months ended June 30, 2011, the Company has recorded $3,667 and $29,000 as consulting expense on its statements 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.
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 amended and restated employment agreement with Mr. Timothy N. Tangredi, our President, Chief Executive Officer, and director, dated as of May 23, 2011. Mr. Tangredi’s employment agreement provides for an initial term of three 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. Tangredi’s initial base salary is $170,000, with an increase to $210,000 per annum or a 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. If our market capitalization at the end of the calendar year is more than two times greater than the year before Mr. Tangredi is to receive a cash payment of 0.25% of the difference in capitalization from last year to the current year. Additionally, at the discretion of our board of directors and its compensation committee, Mr. Tangredi may be eligible for an annual bonus which amount, if any, will not be below 75% of his effective base salary and not exceeding 200% of his then effective base salary; provided that, under certain extraordinary circumstances, Mr. Tangredi may be eligible for an annual bonus greater than 200% of his then effective base salary. Mr. Tangredi is entitled to medical, disability and life insurance, as well as 4 weeks of vacation annually, an automobile allowance of $800 per month, reimbursement of all reasonable business expenses, automobile insurance and maintenance and up to $7,500 for one executive conference or educational venue.
For each product for which we commence commercial sale or licensing during the term and receives more than $1 million of revenue during any 12 month period, Mr. Tangredi, in addition to any other compensation which he may receive under the agreement, shall be granted options to purchase a minimum of 200,000 shares of our common stock at an exercise price equal to either (i) the lower of: (a) $.50 per share or (b) the fair market value per share of the stock on the date of grant as determined in good faith by the Compensation Committee of the Board of Directors, if we have not conducted a secondary public offering prior to the date of grant, or (ii) at an exercise price equal to 75% of the market price of the common stock, if we have completed a secondary public offering of our common stock prior to the date of grant (with the market price to be the average of the closing sale prices during the five trading days immediately preceding the date of grant of the option).
In the event that the fair market value of our common stock (the average of the closing prices of the common stock for any five consecutive trading days, as reported by the principal exchange or other stock market on which the common stock is then traded) equals or exceeds 200% of the price at which we sell common stock in a secondary public offering (the “Target Value”) at any time during the term of the agreement, Mr. Tangredi shall be granted options to purchase 500,000 shares of common stock at an exercise price equal to 75% of the Target Value, on terms identical to the options provided for above.
In April 2011, the Company entered 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 $120,000 with an increase to $150,000 upon completion of a 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.
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 upon submission of reimbursement request for allowable expenses. As of June 30, 2011, the Company has incurred $229,049 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 June 30, 2011, the Company has incurred $57,262 in expenses and recognized the same amount as revenue related to 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.
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 June 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.
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.
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:
No other material subsequent events have occurred since June 30, 2011 that requires recognition or disclosure in these financial statements.
Until , 2011, 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 unsold allotments or subscriptions.
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the fees and expenses the Company expects to incur in connection with the issuance and distribution of the securities being registered. With the exception of the SEC registration fee, all amounts are estimates:
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 may 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 our Director and Officer Insurance Policy, our directors and officers are provided liability coverage of $5 million subject to retention. In addition, we have secured a form following excess Director and Officer Insurance Policy in the amount of $2.5 million. The policies have a one year term with annual renewal possible. The policies can be terminated by the insurer if there is a merger or consolidation which includes a change in ownership of 50% of the voting shares. Upon such an occurrence the insurer may elect to cancel the policies. We may elect to then obtain “run off” insurance for a period of between one and six years at a cost of between 125% and 225% of the initial policy premiums. The policies are claims made policies. Each policy covers only 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 reported within 60 days of the termination or expiration policy, the claim will not be covered.
Insofar as indemnification for liabilities arising under the Securities Act 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.
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 (24,490 and 18,823 shares, respectively, upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (20,270 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (10,385 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (266,750 shares of common stock upon giving effect to the anticipated 10 for 1 reverse split) 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 (96,250 shares of common stock at an exercise price of $4.50 after giving effect to the anticipated reverse split). 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 (10,385 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 February 18, 2011, the Company issued 17,500 shares of common stock (1,750 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (37,500 shares upon giving effect to the anticipated 10 - for - 1 reverse stock split) 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 (105,295 shares of common stock, at a purchase price of $2.60 upon giving effect to the anticipated 10 for 1 reverse split) 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 (126,693 shares of the Company’s common stock at an exercise price of $2.60 per share upon giving effect to the anticipated 10 for 1 reverse stock split), 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 (62,538 shares upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (6,254 shares at $7.50 per share upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (10,000 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (24,769 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (1,500 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (37,500 shares upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (1,000 shares upon giving effect to the anticipated 10-for1 reverse stock split) 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 (5,600 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (25,000, 5,000, 5,000 and 6,000 shares at $2.80 per share, respectively, upon giving effect to the anticipated 10-for-1 reverse stock split). 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 ($15.00 per share upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (2,500 shares upon giving effect to the anticipated 10-for1 reverse stock split) 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 (1,278,673 shares upon giving effect to the anticipated 10-for-1 reverse stock split ).split). 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 (2,500 and 2,000 shares, respectively, upon giving effect to the anticipated 10-to1 reverse stock split) 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 (17,014 shares upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (87,175, 319,347, 14,430 and 28,995 shares, respectively, upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (7,500, 27,500, 1,250 and 2,500 shares, respectively, of Common Stock at an exercise price of $7.50 upon giving effect to the anticipated 10 - for - 1 reverse stock split) 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 (8,864, 22,542, 1,474, 22,542, 2,054, 15,670 and 4,518 shares, respectively, upon giving effect to the anticipated 10-for-1 reverse stock split) 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 Stock (28,933 shares upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (2,500 shares at $7.50 per share upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (10,000 shares upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (1,000 shares at $7.50 per share upon giving effect to the anticipated 10-for-1 reverse stock split). 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 ($15.00 per share upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (19,231 and 12,500 shares, respectively, upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (1,923 and 1,250 shares at $7.50 per share, respectively, upon giving effect to the anticipated 10-for-1 reverse stock split). 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 ($15.00 per share upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (29,013 and 58,026 shares, respectively, upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (2,500 and 5,000 shares at $7.50 per share upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (29,007 shares upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (2,500 shares at $7.50 per share upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (43,464 and 28,933 shares, respectively, upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (3,750 and 2,500 shares at $7.50 per share, respectively, upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (80,000 and 10,000 shares upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (8,000 and 1,000 shares, respectively, at $7.50 per share upon giving effect to the anticipated 10-for-1 reverse stock split). 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 ($15.00 per share upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (28,637, 28,884 and 57,792 shares upon giving effect to the anticipated 10-for-1 reverse stock split).
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 (20,000 and 5,000 shares at $3.70 and $5,10 per share, respectively, upon giving effect to the anticipated 10-for-1 reverse stock split). 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 ($15.00 per share upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (42,771 shares upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (12,488 shares at $2.50 per share upon giving effect to the anticipated 10-for-1 reverse stock split) in consideration for converting their 9% secured convertible note.
On August 3, 2009, we issued 32,000 shares of the Company’s Common Stock (3,200 shares upon giving effect to the anticipated 10- for-1 reverse stock split) 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 (10,385 shares upon giving effect to the anticipated 10- for-1 reverse stock split) 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 (59,615 shares upon giving effect to the anticipated 10-for-1 reverse stock split) and a five year warrant to purchase an additional 298,078 shares of Common Stock at an exercise price of $0.26 per share (29,808 shares at $2.60 per share upon giving effect to the anticipated 10-for-1 reverse stock split). 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 ($15.00 per share upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (3,200 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (1,600 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (25,000 shares at $2.60 per share upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (55,425 and 83,562 shares upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (16,650 and 24,975 shares at $2.50 per share upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (57,692 shares upon giving effect to the anticipated 10-for-1 reverse stock split) and a five year warrant to purchase an additional 288,462 shares of Common Stock at an exercise price of $0.26 per share (28,846 shares at $2.60 per share upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (10,000 shares upon giving effect to the anticipated 10-for-1 reverse stock split) and a five year warrant to purchase an additional 50,000 shares of Common Stock at a purchase price of $0.26 per share (5,000 shares at $2.60 per share upon giving effect to the anticipated 10-for-1 reverse stock split). 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 ($15.00 per share upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (9,600 shares giving effect to the anticipated 10-for-1 reverse stock split) pursuant to a consulting agreement. Said agreement required the Company to issue 16,000 shares (1,600 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (41,504 and 332,474 shares upon giving effect to the anticipated 10-for-1 reverse stock split). 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 (12,488 and 99,900 shares at $2.50 per share upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (900 and 10,385 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (25,000 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (10,000 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (300,000 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (14,000 shares upon giving effect to the anticipated 10-for-1 reverse stock split) and warrants to purchase an additional 140,000 shares (14,000 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 (25,231 shares upon giving effect to the anticipated 10-for-1 reverse stock split) and warrants to purchase an additional 252,308 shares (25,231 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 14,750,000 shares of our common stock (1,475,000 shares upon giving effect to the anticipated 10-for-1 reverse stock split). 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 the warrants issued to convertible note holders, or 1,400,000 (140,000 shares upon giving effect to the anticipated 10-for-1 reverse stock split). 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 documents 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 exemption from the registration requirements of the Securities Act is available.
In January 2008, we issued 439,293 shares of common stock and warrants to purchase 50,000 additional shares (5,000 shares upon giving effect to the anticipated 10-for-1 reverse stock split) of common stock to the Robb Charitable Trust pursuant to exemption from registration under Section 4(2) and Regulation D of the Securities Act. The 439,293 shares of common stock (43,929 shares upon giving effect to the anticipated 10-for-1 reverse stock split) 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 $108,540. The warrant was issued pursuant to the terms of the original note. The warrants 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 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 adjustment to 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 warrants do not contain any redemption features.
Item 16. Exhibits.
Item 17. Undertakings.
(1) File, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to:
i. Include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended (the “Securities Act”);
ii. Reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information in the 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 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.
iii. Include any additional or changed material information on the plan of distribution.
(2) For determining liability under the Securities Act, each such post-effective amendment as a new registration statement relating to the securities offered, and the offering of such securities at that time shall be deemed to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration by means of a post-effective amendment any of the securities that remain unsold at the end of the offering.
(4) For determining liability of the undersigned under the Securities Act to any purchaser in the initial distribution of the securities, the undersigned undertakes that in a primary offering of securities of the undersigned pursuant to this 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 will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
i. Any preliminary prospectus or prospectus of the undersigned relating to the offering required to be filed pursuant to Rule 424;
ii. Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned or used or referred to by the undersigned;
iii. The portion of any other free writing prospectus relating to the offering containing material information about the undersigned or its securities provided by or on behalf of the undersigned; and
iv. Any other communication that is an offer in the offering made by the undersigned to the purchaser.
(b) Provide to the underwriters at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
(c) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the undersigned pursuant to the foregoing provisions, or otherwise, the undersigned has been advised that in the opinion of the 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 undersigned of expenses incurred or paid by a director, officer or controlling person of the undersigned 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 undersigned 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.
(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 this registration statement relating, 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 this registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in this registration statement or prospectus that is part of this registration statement or made in a document incorporated or deemed incorporated by reference into this registration statement or prospectus that is part of this 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 this registration statement or prospectus that was part of this registration statement or made in any such document immediately prior to such date of first use.
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this registration statement to be signed on behalf of the undersigned, thereunto duly authorized, in the City of Odessa, State of Florida on September 19,October 13 , 2011.
Each person whose signature appears below constitutes and appoints Mr. Timothy Tangredi or Judith Norstrud as his or her true and lawful attorneys-in-fact and agents, 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 capacities, to sign any or all amendments (including post-effective amendments) to the Registration Statement, and to sign any registration statement for 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, as amended, and all 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 ratifying and confirming all that said attorneys-in-fact and agents, 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 has been signed by the following persons in the capacities with Dais Analytic Corporation and on the dates indicated.