All significant medical treatments and procedures, including treatment utilizing our protocols,programs, involve the risk of serious injury or death. Even under proper medical supervision, withdrawal from alcohol may cause severe physical reactions. While we do not treat patients or determine whether treatment using our protocols is appropriate for any particular patient, and have not been the subject of any personal injurysuch claims, for patients treated by providers using our protocols, our business entails an inherent risk of claims for personal injuries which are subject to the attendant risk ofand substantial damage awards. We cannot control whether individual physicians will properly select patients, apply the appropriate standard of care, or conform to our protocolstreatment programs in determining how to treat their patients. A significant source of potential liability is negligence or alleged negligence by physicians treating patients using our protocols. While our agreements typically require themphysicians to indemnify us for their negligence, there can be no assurance they will be willing and financially able to do so if claims are made. In addition, our license agreements require us to indemnify physicians, hospitals or their affiliates for losses resulting from our negligence. There can be no assurance that a future claim
Our future revenue growth will depend in part upon the availability of reimbursement for treatment using our programs from third-party payors for treatment providers using our protocols. Such third-party payors includepayers such as government health programs such asincluding Medicare and Medicaid, managed care providers, private health insurers and other organizations. TheseTo date, we have received an insignificant amount of revenue from our PROMETA Treatment Programs from governmental payers, managed care organizations and other third-party payorspayers, and acceptance of our PROMETA Treatment Programs is important to the future prospects of our business. In addition, third-party payers are increasingly attempting to contain healthcare costs, by demanding price discounts or rebates and limiting both coverage on which procedures they will pay for and the amounts that they will pay for new procedures. As a result, they may not cover or provide adequate payment for treatment using our protocols. We might need to conduct studies in order to demonstrate the cost-effectiveness of treatment using our protocols to such payors’ satisfaction. Such studies might require us to commit a significant amount of management time and financial and other resources.programs. Adequate third-party reimbursement might not
be available to enable us to realize an appropriate return on investment in research and product development, and the lack of such reimbursement could have a material adverse effect on our operations and could adversely affect our revenues and earnings.
Our planned international operations may be subject to foreign regulation, and the success of our foreign operations will depend on many factors.factors
While we will establish policies and procedures that we believe will be sufficient to ensure that we operate in substantial compliance with applicable
The criteria of foreign laws, regulations and requirements the criteria are often vague and subject to change and interpretation. Our international operations may become the subject of foreign regulatory, civil, criminal or other investigations or proceedings, and our interpretations of applicable laws and regulations may be challenged. The defense of any such challenge could result in substantial cost and a diversion of management’s time and attention. Thus, any such challenge could have a material adverse effect on our international business and our plan to expand our international operations,attention, regardless of whether it ultimately is successful. If we fail to comply with any applicable international laws, or a determination is made that we have failed to comply with these laws, our financial condition and results of operations, including our domestic operations, could be adversely affected.
In addition, the private pay healthcare system in Europe is not as developed as in the USU.S. and as a result it may be more difficult to convince patients in these countries to pay or to pay substantial amounts for treatment. We will be reliant on relationships that we establish with local companies, thought leaders and governments. There can be no assurance we will be able to establish these relationships, maintain them or that the partners will retain their influence in the market. It may take longer than we expect to commence operations or to operate our business at profitable levels as we do not have the established relationships and or knowledge of the regulations and business practices in the markets we are in or entering.
Our ability to utilize net operating loss carryforwards may be limited
As of December 31, 2007, we had net operating loss carryforwards (NOLs) of approximately $100 million for federal income tax purposes that will begin to expire in 2024. These NOLs may be used to offset future taxable income, to the extent we generate any taxable income, and thereby reduce or eliminate our future federal income taxes otherwise payable. Section 382 of the Internal Revenue Code imposes limitations on a corporation's ability to utilize NOLs if it experiences an ownership change as defined in Section 382. In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percent over a three-year period. In the event that an ownership change has occurred, or were to occur, utilization of our NOLs would be subject to an annual limitation under Section 382 determined by multiplying the value of our stock at the time of the ownership change by the applicable long-term tax-exempt rate as defined in the Internal Revenue Code. Any unused annual limitation may be carried over to later years. We may be found to have experienced an ownership change under Section 382 as a result of events in the past or the issuance of shares of common stock upon a conversion of notes, or a combination thereof. If so, the use of our NOLs, or a portion thereof, against our future taxable income may be subject to an annual limitation under Section 382, which may result in expiration of a portion of our NOLs before utilization.
Risks related to our controlling interest in CompCare
CompCare has incurred significant operating losses and negative cash flows which raises substantial doubt about its ability to continue as a going concern.
As a result of significant operating losses and negative cash flows, CompCare has limited available cash, which raises substantial doubt about its ability to continue as a going concern. There can be no assurance that CompCare will be successful in its efforts to obtain a rate increase from its major Indiana client, generate, increase, or maintain revenue, or raise additional capital on acceptable terms, or at all, or that CompCare will be able to continue as a going concern. The inability or failure to raise funds before CompCare's available cash is depleted will have a material adverse effect on CompCare's business and may result in discontinuation of operations.
We may not realize the expected benefits of our controlling interest in CompCare, and may not be able to successfully utilize CompCare’s infrastructure
We may not be successful in realizing the expected benefits of our license agreement with Comprehensive Care Corporation or the recent acquisition of a majority controlling interest in CompCare. Achieving the benefits of our relationship with CompCare will depend in part on our ability to successfully utilize CompCare’s infrastructure and integrating with the benefits of its operations and personnel in a timely and efficient manner. The process will divert management time and attention from our other business, and require the effective coordination of personnel, systems, applications, policies, procedures, business processes and operations. This, too, will be difficult, unpredictable, and subject to delay because of possible cultural conflicts and different opinions on technical decisions and business strategy. CompCare is engaged in a business with which we have little experience, and this may present additional challenges to us. Further, we may be unable to realize synergies between our PROMETA business and CompCare's managed behavioral healthcare business. CompCare may be unable to retain its key management, technical, sales and customer support personnel. If we cannot successfully coordinate our operations and personnel, we will not realize the expected benefits of our relationship. In addition, because of the significant publicly held minority interest in CompCare, we may be unable to gain access to the cash flows for CompCare and may be unable to realize the same level of benefits that we might be able to realize if CompCare were a wholly-owned subsidiary of ours.
There may be ongoing legal challenges to our relationship with CompCare, which could adversely affect our results of operations
On May 25, 2007, we entered into a Termination Agreement with CompCare terminating a proposed merger with CompCare and the acquisition of the remaining common stock of CompCare. There are potential legal and economic risks associated with terminating the merger agreement and continuing with our ongoing relationship as CompCare’s controlling shareholder, including challenges from public minority shareholders concerning the procedural and financial fairness of our existing agreements, and any future agreements or arrangement between us. Current or future litigation may be expensive and time consuming, and may impede or restrict our ability to operate effectively, which could negatively impact our results of operations.
Risks related to CompCare’s business
CompCare may not be able to accurately predict utilization of its full-risk contracts resulting in contracts priced at levels insufficient to ensure profitability
CompCare's managed care operations are at risk for costs incurred to provide agreed upon levels of service. Failure to anticipate or control costs could have material, adverse effects on CompCare’s business. A very large percentage of CompCare's services are provided on a full-risk capitation basis which exposes CompCare to significant risk that contracts negotiated and entered into may ultimately be unprofitable if utilization levels require it to provide services at a cost in excess of the capitation rates CompCare receives for the services. The population CompCare began managing in 2007 for its large Indiana client had not been subject to managed care previously and consequently there was little historical utilization data upon which to base initial pricing. Actual utilization experience has been greater than initial estimates, resulting in higher claim costs and lower profit margins. Failure to manage its costs or achieve anticipated cost reductions in populations brought under management would have an adverse effect on CompCare’s financial results.
CompCare has been unsuccessful in profitably managing its new Indiana Medicaid contract, and may not be able to maintain specified performance measures that would allow it to retain an increase in the rate
CompCare has been unsuccessful in managing its new Indiana Medicaid contract that started January 1, 2007, which provided over 46% of its operating revenues for the six months ended June 30, 2008. Providing services under a new contract for populations at risk that have not been managed before exposes CompCare to the risk it may be unprofitable. There is a limited historical basis for the actuarial assumptions about the utilization of benefits by members covered under this new managed care behavioral program, and premiums based on these assumptions may be insufficient to cover the benefits provided and CompCare may be unable to obtain offsetting rate increases. Contract premiums have been set based on anticipated significant savings and on types of utilization management
that may not be possible, may cause disagreements with providers and divert management resources, which would have an adverse impact on CompCare’s financial results. Claims expense exceeded revenues for this contract for the six months ended June 30, 2008. CompCare received a rate increase effective January 1, 2008, provided it complies with monthly performance measures it believes it will meet. Although CompCare believes it will meet these standards, any failure to comply with one or more of the measurement criteria will reduce CompCare's anticipated cash flow and profitability from this contract.
CompCare’s existing and potential managed care clients operate in a highly competitive environment and may be subject to a higher rate of merger, acquisition and regulation than in other industries
CompCare typically contracts with small to medium sized HMOs which may be adversely affected by the continuing efforts of governmental and third party payers to contain or reduce the costs of healthcare through various means. Its clients may also determine to manage the behavioral healthcare benefits “in house” and, as a result, discontinue contracting with CompCare. Additionally, its clients may be acquired by larger HMOs, in which case there can be no assurance that the acquiring company would renew its contract.
Many of CompCare’s managed care company clients provide services to groups covered by Medicare, Medicaid or Children’s Health Insurance Program (CHIP) plans susceptible to annual changes in reimbursement rates and eligibility requirements that could ultimately affect CompCare
As of June 30, 2008, CompCare managed over 975,000 lives in connection with behavioral and substance abuse services covered through Medicaid and CHIP programs in Medicare and Medicaid in programs in Texas, Medicare and Medicaid in Florida and Michigan, Medicaid in California and Indiana and Michigan, and Medicare in Maryland, Pennsylvania and Connecticut. Any delays in payment or changes in Medicare, Medicaid and/or CHIP reimbursement could adversely affect CompCare through contract bidding and cost structures with the health plans impacted by such changes. Temporary reductions have previously had a negative impact on CompCare, and if implemented in the future could have a material, adverse impact on its operations. In addition, states in which CompCare operates may pass legislation that would reduce its revenue through changes in the reimbursement rates or in the number of eligible participants. CompCare may be unable to reduce its costs to a level that would allow it to maintain current gross margins specific to its Medicare, Medicaid and CHIP programs.
CompCare is dependent on its provider network to provide services to its members
CompCare contracts with providers as a means to assure access to behavioral health services for its members. Some providers could refuse to contract with CompCare, demand higher payments, or take other actions which could result in higher healthcare operating expenses. In addition, certain providers may have significant market position, which could cause disruption to provider access in a particular geographic area for CompCare’s members and affect its contractual requirements with its customers of maintaining an adequate network.
Because providers are responsible for claims submission, the timing of which is uncertain, CompCare must estimate the amount of claims incurred but not reported, and actual results may differ materially
CompCare’s costs of care include estimated amounts for claims incurred but not reported (IBNR). The IBNR is estimated using an actuarial paid completion factor methodology and other statistical analyses that it continually reviews and adjusts, if necessary, to reflect any change in the estimated liability. These estimates are subject to the effects of trends in utilization and other factors. CompCare’s estimates of IBNR may be inadequate, which would negatively affect results of operations. Considerable variability is inherent in such estimates, its unpaid claims liability may be inadequate, and actual results may differ materially from the estimates reported.
CompCare is dependent on a limited number of customers, and loss or reduction in business of any one could have a material adverse effect on working capital and results of operations
For the six months ended June 30, 2008, CompCare provided behavioral healthcare services to the members of four health plans under contracts that on a combined basis represented approximately 89% of CompCare’s operating revenue. The terms of each contract are generally for one year periods and are automatically renewable for additional one-year periods unless terminated by either party by giving the requisite written notice. The loss of one
or more of these clients, unless replaced by new business, would negatively affect the financial condition of CompCare. In the past, CompCare has experienced the loss of major customers.
CompCare may be unsuccessful in obtaining performance bonds or other security that is required by its existing or future clients, and consequently may lose clients
CompCare’s new Indiana client requires CompCare to maintain a performance bond in the amount of $1,000,000. In addition, certain of CompCare’s other customers may require restricted cash accounts or other security with respect to its obligations to pay IBNR claims and claims not yet processed and paid. Due to CompCare’s small size and financial condition, it may be unable to provide the security required by its client, which could result in the loss of a client or clients which would negatively affect CompCare’s financial condition.
CompCare’s industry is subject to diverse licensure requirements varying by state, and regulation changes could adversely affect contract profitability and ability to gain and retain clients
CompCare is required to hold licenses or certificates to perform utilization review and third party administrator (TPA) services in certain states in which it does business. Additional utilization review or TPA licenses may be required in the future and CompCare may not qualify to obtain them. In many states, entities that assume risk under contract with licensed insurance companies or health plans have not been considered by state regulators to be conducting an insurance or HMO business. As a result, CompCare has not sought licensure as either an insurer or HMO in any state. If the regulatory positions of these states were to change, its business could be materially affected until such time as it is able to meet the regulatory requirements, if at all. Additionally, some states may determine to contract directly with companies such as CompCare for managed behavioral healthcare services in which case they may also require it to maintain financial reserves or net worth requirements that it may not be able to meet. Currently, CompCare cannot quantify the potential effects of additional regulation of the managed care industry, but such costs will have an adverse effect on CompCare’s future operations to the extent that they are not able to be recouped in future managed care contracts.
CompCare is subject to existing clients issuing RFPs for the management of behavioral services currently being managed
CompCare’s clients are aware of the highly competitive nature of the industry, and its contracts with them frequently contain provisions allowing termination of the contract by either party without cause with 90 days written notice. Consequently, CompCare’s clients may request from CompCare and any of its competitors a request for proposal (RFP) for behavioral services currently managed by CompCare, putting CompCare at risk of losing a client or clients. For example, in January 2008 a major Pennsylvania and Maryland Medicare Advantage client issued an RFP prior to the end of CompCare’s contract. CompCare submitted a proposal but was not chosen to continue services, resulting in a significant reduction in revenue. In addition, certain administrative and overhead costs continued to be incurred past the termination date.
CompCare is subject to intense competition that may prevent it from gaining new customers or pricing its contracts at levels to achieve sufficient gross margins to ensure profitability
CompCare is continually pursuing new business. However, many of CompCare's competitors are significantly larger and better capitalized than CompCare and the smaller size and financial condition of CompCare have proved a deterrent to some prospective customers. Additionally, CompCare will likely have difficulty in matching the financial resources expended on marketing by its competitors. As a result, CompCare may not be able to successfully compete in its industry. CompCare's major competitors include Magellan Health Services, United Behavioral Health, ValueOptions, and APS Healthcare.
CompCare's sales cycle is long, which complicates its ability to predict its growth.
The sales and implementation process of CompCare's services is lengthy and requires CompCare's potential clients to commit time and other resources. CompCare's sales cycle is unpredictable and has generally ranged from 12 to 18 months from initial contact to an executed contract. Accordingly, it may be difficult to replace any lost business quickly.
A failure of CompCare's information systems would significantly impair its ability to serve its customers and manage its business.
An effective and secure information system, available at all times, is vital to CompCare's health plan customers and their members. CompCare depends on its computer systems for significant service and management functions, such as providing membership verification, monitoring utilization, processing provider claims, and providing regulatory data and other client and managerial reports. Although CompCare's computer and communications hardware is protected by physical and software safeguards, it is still vulnerable to computer viruses, fire, storm, flood, power loss, telecommunications failures, physical or software break-ins and similar events. CompCare does not have 100% redundancy for all of its computer and telecommunications facilities. A catastrophic event could have a significant negative effect on CompCare's business, results of operations, and financial condition.
CompCare also depends on a third party provider of application services for its core business application. Any sustained disruption in their services to us would have a material effect on our business.
CompCare is subject to fines and penalties being assessed by its clients
Many of CompCare’s contracts contain provisions stating that if its clients are assessed penalties or fines by a regulatory agency due to CompCare’s noncompliance with a contractual requirement, CompCare will be responsible for paying the assessed fine or penalty. Though to date, no material fines have been assessed under such provisions, any future fines would have a negative impact on results of operations.
CompCare may be unsuccessful in renewing its NCQA accreditation and may lose customers who require such accreditation
NCQA accreditation is required by several of CompCare’s client contracts and is an important consideration to its prospective clients. CompCare is periodically evaluated by NCQA to validate the Company’s adherence to NCQA industry-accepted standards covering operational areas such as preventative care, utilization management, credentialing, member rights and responsibilities, and quality improvement. Maintaining these quality standards and the NCQA accreditation are important considerations of our customers and prospective clients who are evaluated against similar standards. If CompCare is not successful in renewing its NCQA accreditation, this could result in the loss of a client or clients which would negatively affect CompCare’s financial condition.
Risks related to our intellectual property
We may not be able to adequately protect the proprietary treatment protocolsPROMETA Treatment Programs which are the core of our business
We consider the protection of our proprietary treatment protocolsPROMETA Treatment Programs to be critical to our business prospects.
We obtained the rights to some of our most significant patent-pendingPROMETA technologies through a licensean agreement whichthat is subject to a number of conditions and restrictions, and a breach or termination of that agreement or the bankruptcy of any party to that agreement could significantly impact our ability to use and develop our technologies. WeWhile we have two issued U.S. patents, one relating to the treatment of cocaine dependency with our PROMETA Treatment Program and one relating to our PROMETA Treatment Program for the treatment of certain symptoms associated with alcohol dependency, we currently have no issued U.S. patents covering our PROMETA protocols. In addition,Treatment Program for the treatment of methamphetamine dependency. The patent applications we have licensed or filed and licensed may not issue as patents, and any issued patents may be too narrow in scope to provide us with a competitive advantage. Our patent position is uncertain and includes complex factual and legal issues, including the existence of prior art that may preclude or limit the scope of patent protection. Other inventors may have filed earlier patent applications of which we are unaware and which may prevent our applications from being granted. Patent examiners and third parties may object to the validity or scope of some or all of our claims. Any of theIssued patents that may be issued to us will generally expire twenty years after they were first filed.their priority date. Our two issued U.S. patents will expire in 2021. Further, our patents and pending applications for patents and other intellectual property have been pledged as collateral to secure our obligations to pay certain debts, and our default with respect to those obligations could result in the transfer of our patents to our creditor. In the event of such a transfer, we may be unable to continue to operate our business.
Patent examiners may reject our patent applications and thereby prevent us from receiving more patents. Competitors, orlicensees and others may institute challenges against the validity or enforceability of any patent owned by us,challenge our patents and, if successful, our patents may be denied,
subjected to reexamination, rendered unenforceable, or invalidated. The cost of litigation to uphold the validity of patents, and to protect and prevent infringement, of patents can be substantial. Maintaining, prosecuting, and enforcing a patent portfolio might require funds that may not be available.
We may not be able to adequately protect the aspects of our treatment protocolsprograms that are not subject to patent protection,patented or are subject tohave only limited patent protection. Furthermore, competitors and others may independently develop similar or more advanced treatment protocolsprograms and technologies, may design around aspects of our technology, or may discover or duplicate our trade secrets and proprietary methods.
To the extent we utilize processes and technology that constitute trade secrets under applicable laws, we must implement appropriate levels of security for those trade secrets to secure theensure protection of such laws, which we may not do effectively. For some of our proprietary rights, we may need to secure assignments of rights from independent contractors and third parties to perfect our rights, and if we fail to do so they may retain ownership rights in the intellectual property upon which our business is based. Policing compliance with our confidentiality agreements and unauthorized use of our technology is difficult, and we may be unable to determine whether piracy of our technology has occurred.difficult. In addition, the laws of many foreign countries do not protect proprietary rights as fully as the laws of the United States.
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While we have not had any significant issues to date, the The loss of any of our trade secrets or proprietary rights which may be protected under the foregoing intellectual property safeguards may result in the loss of our competitive advantage over present and potential competitors. Our intellectual property may not prove to be an effective barrier to competition, in which case our business could be materially adversely affected.
Our pending patent applications disclose and claim various approaches to the use of the PROMETA Treatment Program. There is no assurance that we will receive one or more patents from these pending applications, or that, even if we receive one or more patents, the patent claims will be sufficiently broad to create patent infringement liability for competitors using treatment programs similar to the PROMETA Treatment Programs.
Confidentiality agreements with employees, licensees and others may not adequately prevent disclosure of trade secrets and other proprietary information
In order to protect our proprietary technology and processes, we rely in part on confidentiality provisions in our agreements with employees, licensees, treating physicians and others. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position. To date weWe have had one instance, in February 2004,three instances in which it was necessary to send a formal demand to cease and desist using our protocolsprograms to treat patients due to a consultant whobreach of confidentiality provisions in our agreements, and in one instance have had signed a confidentiality agreement. He subsequently complied with the demand and signed an innovation, proprietary information and confidentiality agreement, and an intellectual property assignment agreement.to file suit to enforce these provisions.
We may not be able to adequately protect our other intellectual property rights, which could limit our ability to compete
While we believe we have proprietary ownership, assigned or licensed rights in intellectual property which is capable of protection under federal trademark, copyright and/or patent laws, and under state laws regarding trade secrets, we may not have taken, or in the future may not take, appropriate legal measures, and may not be able to adequately secure the necessary protections for our intellectual property. We currently have no issued U.S. patents protecting our PROMETA protocols, and have not yet registered all of our trademarks or copyrights and, until we do so, we must rely on various state and common law rights for enforcement of the rights to exclusive use of our trade secrets, trademark and copyrights.
Although Hythiam® and PROMETA® are registered trademarks, our trademark applications for other trademarks are pending before the U.S. Patent and Trademark Office, and we have not yet been granted registration for these marks. If our trademark registrations are objected to or denied that may impact our ability to use and protect our brand names and company and product identity.
Although we have applied for trademarks for some of our brand names, and patents on some of our technology, in the future we may decide not to secure federal protection of certain copyrights, trademarks or patents to which we may be entitled. Failure to do so, in the case of copyrights and trademarks, may reduce our access to the courts, and to certain remedies of statutory damages and attorneys’ fees, to which we may be entitled in the event of a violation of our proprietary and intellectual rights by third parties. Similarly, the failure to seek issuance of any patents to which we may be entitled may result in loss of patent protection should a third party copy the patentable technology. The loss of any proprietary rights which are protectable under any of the foregoing intellectual property safeguards may result in the loss of a competitive advantage over present or potential competitors, with a resulting decrease in revenues and profitability for us. There is no guarantee that such a loss of competitive advantage could be remedied or overcome by us at a price which we would be willing or able to pay, which could have a material adverse effect on our operations and could adversely affect our revenues and earnings.
We may be subject to claims that we infringe the intellectual property rights of others, and unfavorable outcomes could harm our business
Our future operations may be subject to claims, and potential litigation, arising from our alleged infringement of patents, trade secrets or copyrights owned by other third parties. We intend to fully comply with the law in avoiding such infringements. However, withinWithin the healthcare, drug and bio-technology industry, establishedmany companies have actively pursued such infringements, and have initiated suchpursue infringement claims and litigation, which has mademakes the entry of competitive products more difficult. We may experience such claims or litigation initiated by existing, better-funded competitors.competitors and by other third parties. Court-ordered injunctions may prevent us from continuing to market existing products or from bringing new products to market and the outcome of litigation and any resulting loss of revenues and expenses of litigation may substantially affect our ability to meet our expenses and continue operations.
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Risks related to our industry
The healthcare industry in which we operate is subject to substantial
Our policies and procedures may not fully comply with complex and increasing regulation by state and federal authorities, which could hinder, delaynegatively impact our business operations
Our PROMETA Treatment Programs have not been approved by the Food and Drug Administration (FDA), and while the drugs incorporated in the PROMETA Treatment Program have been approved for other indications, they are not FDA approved for the treatment of alcohol or preventsubstance dependency. We have not sought, and do not currently intend to seek, FDA approval for the PROMETA Treatment Program. It is possible that in the future the FDA could require us from commercializing our protocolsto seek FDA approval for the PROMETA Treatment Program.
The healthcare industry is highly regulated and continues to undergo significant changes as third-party payors,payers, such as Medicare and Medicaid, traditional indemnity insurers, managed care organizations and other private payorspayers increase efforts to control cost, utilization and delivery of healthcare services. Although our licensees do not currently bill or seek reimbursement from Medicare, Medicaid or other governmental organizations for the treatment of patients using the PROMETA protocols, we are nevertheless subject to the overall effect of the changes created by increased cost control and financial pressures on the industry.
Healthcare companies are subject to extensive and complex federal, state and local laws, regulations and judicial decisions governing various matters such as the licensing and certification of facilities and personnel, the conduct of operations, billing policies and practices, policies and practices with regard to patient privacy and confidentiality, and prohibitions on payments for the referral of business and self-referrals. There are federaldecisions. The U.S. Congress and state laws, regulations and judicial decisionslegislatures are considering legislation that govern patient referrals, physician financial relationships, submission of healthcare claims and inducement to beneficiaries of federal healthcare programs. Many states prohibit business corporations from practicing medicine, employing or maintaining control over physicians who practice medicine, or engaging in certain business practices, such as splitting fees with healthcare providers. Many healthcare laws and regulations applicablecould limit funding to our business are complex, applied broadlylicensees and subject to interpretation by courts and government agencies. Our failure, or the failure of our licensees, to comply with these healthcare laws and regulations could create liability for us and negatively impact our business.
CompCare's clients. In addition, the Food and Drug Administration (FDA),FDA regulates development, testing, labeling, manufacturing, marketing, promotion, distribution, record-keeping and reporting requirements for prescription drugs, medical devices and biologics. Other regulatory requirements apply to dietary supplements, (including vitamins).including vitamins. Compliance with laws and regulations enforced by the FDA and other regulatory agencies who have broad discretion in applying them may be required relative tofor our protocolsprograms or any other medical productsprograms or services developed or used by us. Failure to comply with applicableMany healthcare laws and regulations may result in various adverse consequences, including withdrawal ofapplicable to our protocols from the market, the imposition of civil or criminal sanctions, or the required modification or redesign of our protocols. We may not have the financial resources to modify our protocols or implement new techniques. Accordingly, our ability to market our protocols in compliance with applicable lawsbusiness are complex, applied broadly and regulations may be a threshold test for our survival.
We believe that this industry will continue to be subject to increasing regulation,interpretation by courts and government agencies. Regulatory, political and legal action and pricing pressures the scope and effect of which we cannot predict. Legislation is continuously being proposed, enacted and interpreted at the federal, state and local levels to regulate healthcare delivery and relationships between and among participants in the healthcare industry. Any such changes could prevent us from marketing some or all of our products and services for a period of time or permanently. Our failure, or the failure of our licensees, to comply with applicable regulations may result in the imposition of civil or criminal sanctions that we cannot afford, or require redesign or withdrawal of our programs from the market.
We may be subject to regulatory, enforcement and investigative proceedings, which may find thatcould adversely affect our policies and procedures do not fully comply with complex and changing healthcare regulationsfinancial condition or operations
While we have established policies and procedures that we believe will be sufficient to ensure that we operate in substantial compliance with applicable laws, regulations and requirements, the criteria are often vague and subject to change and interpretation.
We maycould become the subject of regulatory, enforcement, or other investigations or proceedings, and our relationships, business structure, and interpretations of applicable laws and regulations may be challenged. The defense of any such challenge could result in substantial cost and a diversion of management’s time and attention. Thus,In addition, any such challenges could require significant changes to how we conduct our business. Any such challenge could have a material adverse effect on our business, regardless of whether it ultimately is successful. If we fail to comply with any applicable laws, or a determination is made that we have failed to comply with theseany applicable laws, our business, financial condition and results of operations could be adversely affected.
The promotion of our protocolstreatment programs may be found to violate federal law concerning “off-label”off-label uses of prescription drugs, which could prevent us from marketing our protocolsprograms
The
Generally, the Food, Drug, &and Cosmetic (FDC) Act, requires that a prescription drugsdrug be approved by FDA for a specific medical indication bybefore the FDA prior to their marketingproduct can be distributed in interstate commerce. In addition, promotion of dietary supplements for uses beyond those permitted by law may be treated as the unlawful promotion of drugs absent FDA approval. Violations ofAlthough the FDC Act may resultdoes not prohibit a doctor’s use of a drug for another indication (this is referred to as off-label use), it does prohibit the promotion of a drug product for an unapproved use. FDA also permits the non-promotional discussion of information related to off-label use in either civil (seizurethe context of scientific or injunction) or criminal penalties.medical communications. Our procedural medical protocols call fortreatment programs include the use of prescription drugs that have been approved by FDA, but not for the treatment of chemical dependence and
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drug addiction, conditions not approved for usewhich is how the drugs are used in our programs. Although we carefully structure our communications in a way that is intended to comply with the drugs’ official labeling,FDC Act and physicians prescribe and use these drugs when treating patients usingFDA regulations, it is possible that our protocols.actions could be found to violate the prohibition on off-label promotion of drugs. In addition, the FDC Act imposes limits on the types of claims that may be made for a dietary supplement, and the promotion of a dietary supplement beyond such claims may also be seen as the unlawful promotion of a drug product for an unapproved use. Because our protocolstreatment programs also include the use of nutritional supplements. While thesupplements, it is possible that claims made for those products could also put us at risk of FDA generally does not regulate licensed physicians who prescribe approved drugsenforcement for non-approved or “off-label” uses in the independent practicemaking unlawful claims.
Violations of medicine, our promotion of our protocols through advertising and other means may be found to violate FDA regulations or the FDC Act. The FDA has broad discretion in interpreting those regulations. If the FDA determines that our promotion of our medical treatment protocols violates the FDC Act or brings an enforcement action against us for violating the FDC Act or FDA regulations that iscan result in a range of sanctions, including administrative actions by FDA (such as issuance of a Warning Letter), seizure of product, issuance of an injunction prohibiting future violations, and imposition of criminal or civil penalties. A successful ourenforcement action could prevent promotion of our protocols will have to stoptreatment programs and we may be unable to continue operating under our current business model. Even if we defeat any FDA challenge,an enforcement action, the expenses associated with defendingdoing so, as well as the claim or negative publicity concerning the off-label“off-label” use of drugs in our protocolstreatment programs, could adversely affect our business and results of operation.
The FDA has recently increased enforcement efforts in the area of promotion of “off-label” use of drugs, and we cannot assure you that our business practices or third party clinical trials will not come under scrutiny.
Treatment using our protocolsprograms may be found to require FDA or other review or approval, which could delay or prevent the study or use of our protocolstreatment programs
The
Under authority of the FDC Act, FDA asserts jurisdiction over manyextensively regulates entities and individuals engaged in the conduct of clinical trials, orwhich broadly includes experiments in which a drug is administered to human subjects. Hospitalshumans. FDA regulations require, among other things, submission of a clinical trial treatment program for FDA review, obtaining from the agency an investigational new drug (IND) exemption before initiating a clinical trial, obtaining appropriate informed consent from study subjects, having the study approved and clinics have establishedsubject to continuing review by an Institutional Review Boards,Board (IRB), and reporting to FDA safety information regarding the conduct of the trial. Certain third parties have engaged or IRBs, to review and approve clinical trials using investigational treatmentsare engaging in their facilities. Certain investigations involving new drugs or off-label uses for approved drugs must be the subject of an FDA Investigational New Drug exemption (IND). Useuse of our treatment protocolprogram and the collection of outcomes data in ways that may be considered to constitute a clinical trial, and that may be subject to FDA regulations and require IRB approval and oversight. In addition, it is possible that use of our treatment program by individual physicians in treating their patients may be found to constitute a clinical trial or investigation that requires IRB review or submission of an IND. TheIND or is otherwise subject to regulation by FDA. FDA has broad authority in interpreting and applying its regulations, so it may find that use of our protocols by our licensees or collection of outcomes data on that use constitutes ato inspect clinical investigation subjectsites and IRBs, and to IRBtake action with regard to any violations. Violations of FDA regulations regarding clinical trials can result in a range of actions, including suspension of the trial, prohibiting the clinical investigator from ever participating in clinical trials, and FDA jurisdiction and may take enforcement action against us.criminal prosecution. Individual hospitals and physicians may also submit their use of our protocols in treatment programs to their IRBs, and individual IRBs may find that use to be a clinical trial that requires FDA approval or theywhich may prohibit or place restrictions on that use. Any of these results mayit. FDA enforcement actions or IRB restrictions could adversely affect our business and the ability of our customers to use our protocols.treatment programs.
The FDA has recently increased enforcement efforts regarding clinical trials, and we cannot assure you that the activities of our customers or others using our treatment programs will not come under scrutiny.
Failure to comply with the Federal Trade Commission ActFTC or similar state laws could result in sanctions or limit the claims we can make
Our promotional activities and materials, including advertising to consumers and physicians,professionals, and materials provided to licensees for their use in promoting our protocols,treatment programs, are regulated by the Federal Trade Commission (FTC) under the FTC Act, which prohibits unfair and deceptive acts and practices, including claims which are false, misleading or inadequately substantiated. The FTC typically requires competent and reliable scientific tests or studies to substantiate express or implied claims that a product or service is safe or effective. If the FTC were to interpret our promotional materials as making express or implied claims that our protocolstreatment programs are safe or effective for the treatment of alcohol, cocaine or methamphetamine addiction, or any other claims, it may find that we do not have adequate substantiation for such claims. FailureAllegations of a failure to comply with the FTC Act or similar laws enforced by state attorneys general and other state and local officials could result in administrative or judicial orders limiting or eliminating the claims we can make about our protocols,treatment programs, and other sanctions including fines.substantial financial penalties.
Our business practices may be found to constitute illegal fee-splitting or corporate practice of medicine, which may lead to penalties and adversely affect our business
Many states, including California in which our principal executive offices and one of our managed treatment centers are located, have laws that prohibit business corporations, such as us, from practicing medicine, exercising control over medical judgments or decisions of physicians, or engaging in certain arrangements with physicians such as employment, payment for referrals or fee-splitting, with physicians.fee-splitting. Courts, regulatory authorities or other parties, including physicians, may assert that we are engaged in the unlawful corporate practice of medicine by providing administrative and ancillaryother services in connection with our protocols,treatment programs or by consolidating the revenues of the physician practices we manage, or that licensing our technology for a license fee that could be characterized as a portion of the patient fees, or subleasing space and providing turn-key business management to affiliated medical groups in exchange for management and licensing fees, constitute improper fee-splitting or payment for referrals, in which case we could be subject to civil and criminal penalties, our contracts could be found legally invalid and unenforceable, in whole or in part, or we could be required to restructure our contractual arrangements. There canIf so, we may be no assurance that this will not occur or, if it does, that we would be ableunable to restructure our contractual arrangements on favorable terms.terms, which would adversely affect our business and operations.
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Our business practices may be found to violate anti-kickback, physician self-referral or false claims laws, which may lead to penalties and adversely affect our business
The healthcare industry is subject to extensive federal and state regulation with respect to financial relationships and “kickbacks”kickbacks involving healthcare providers, physician self-referral arrangements, filing of false claims and other fraud and abuse issues. Federal anti-kickback laws and regulations prohibit certain offers, payments, solicitations, or receipts of remuneration in return for (i) referring patients for items or services covered by Medicare, Medicaid or other federal healthcare programs, or (ii) purchasing, leasing, ordering or arranging for or recommending any service, good, item or facility for which payment may be made by a federal health care program. In addition, subject to numerous exceptions, federal physician self-referral legislation, commonly known as the Stark law, generally prohibits a physician from orderingreferring patients for certain designated health services reimbursable by Medicare Medicaid or other federal healthcare programsMedicaid from any entity with which the physician has a financial relationship. While providers who license our protocols currently do not seek such third party reimbursement for treatment using our protocols, we anticipate they may do so in the future. In addition,relationship, and many states have similar laws, some of which are not limited to services reimbursed by federal healthcare programs.analogous laws. Other federal and state laws govern the submission of claims for reimbursement, or false claims laws. One of the most prominent of these laws is the federal Civil False Claims Act, and violations of other laws, such as the federal anti-kickback lawslaw or the FDA prohibitions against promotion of off-label uses of drugs, may also be prosecuted as violations of the Civil False Claims Act. CompCare provides services to health plans that could become involved with false claims, which could include allegations against CompCare as well.
While we believe we have structured our relationships to comply with all applicable requirements, federal
Federal or state authorities may claim that our fee arrangements, agreements and relationships with contractors, hospitals and physicians violate these anti-kickback, self-referral or false claims laws and regulations. These laws are broadly worded and have been broadly interpreted by courts. It is often difficult to predict how these laws will be applied, and they potentially subject many typical business arrangements to government investigation and prosecution, which can be costly and time consuming. Violations of these laws aremay be punishable by monetary fines, civil and criminal penalties, exclusion from participation in government-sponsored health carehealthcare programs and forfeiture of amounts collected in violation of such laws. Some states also have similar anti-kickback and self-referral laws, imposing substantial penalties for violations. If our business practices are found to violate any of these provisions, we may be unable to continue with our relationships or implement our business plans, which would have an adverse effect on our business and results of operations.
We may be subject to healthcare anti-fraud initiatives, which may lead to penalties and adversely affect our business
State and federal governments are devoting increased attention and resources to anti-fraud initiatives against healthcare providers, takingand may take an expansive definition of fraud that includes receiving fees in connection with a healthcare business that is found to violate any of the complex regulations described above. While to our knowledge we have not been the subject of any anti-fraud investigations, if such a claim were made defending our business practices could be time consuming and expensive, and an adverse finding could result in substantial penalties or require us to restructure our operations, which we may not be able to do successfully.
Our use and disclosure of patient information is subject to privacy and security regulations, which may result in increased costs
In conducting research or providing administrative services to healthcare providers in connection with the use of our protocols,treatment programs, we may collect, use, disclose, maintain and transmit patient information in ways that will be subject to many of the numerous state, federal and international laws and regulations governing the collection, dissemination, use, anddisclosure, storage, transmission and/or confidentiality of patient-identifiable health information, including the federaladministrative simplification requirements of the Health Insurance Portability and Accountability Act (HIPAA)of 1996 and related rules.its implementing regulations (HIPAA). The three rulesHIPAA Privacy Rule restricts the use and disclosure of patient information, and requires safeguarding that were promulgated pursuant toinformation. The HIPAA that could most significantly affect our business are the StandardsSecurity Rule establishes elaborate requirements for Electronic Transactions,safeguarding patient information transmitted or Transactions Rule; the Standards for Privacy of Individually Identifiable Health Information, or Privacy Rule; and the Health Insurance Reform: Security Standards, or Security Rule.stored electronically. HIPAA applies to covered entities, which may include most healthcare facilities and does include health plans that will contract for the use of our protocolsprograms and our services. The HIPAA rules require covered entities to bind contractors like us to compliance with certain burdensome HIPAA rule requirements known as business associate requirements. If we are providing management services that include electronic billing on behalf of a physician practice or facility that is a covered entity, we may be required to conduct those electronic transactions in accordance with the HIPAA regulations governing the form and format of those transactions (HIPAA Transactions Rule). Other federal and state laws restricting the use and protecting the privacy and security of patient information also apply to our licensees directly and in some cases to us, either directly or indirectly.
The HIPAA Transactions Rule establishes format and data content standards for eight of the most common healthcare transactions. When we perform billing and collection services on behalf of our licensees we may be engaging in one of more of these standard transactions and will be required to conduct those transactions in
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compliance with the required standards. The HIPAA Privacy Rule restricts the use and disclosure of patient information, requires entities to safeguard that information and to provide certain rights to individuals with respect to that information. The HIPAA Security Rule establishes elaborate requirements for safeguarding patient information transmitted or stored electronically. We may be required to make costly system purchases and modifications to comply with the HIPAA rule requirements that are imposed on us and our failure to comply may result in liability and adversely affect our business.
CompCare is subject to HIPAA for most healthcare facilities and health plans that contract for the use of CompCare’s services. The HIPAA Transactions Rule requires CompCare to comply with format and data content standards for common healthcare transactions on behalf of our licensees. Failure to comply may result in civil and criminal liability and penalties, and have a material adverse effect on CompCare’s ability to retain its customers or to gain new business.
Federal and state consumer protection laws are being applied increasingly by the FTC and state attorneys general to regulate the collection, use, storage, and disclosure of personal or patient information, through web sites or otherwise, and to regulate the presentation of web site content. Courts may also adopt the standards for fair information practices promulgated by the FTC, which concern consumer notice, choice, security and access.
Numerous other federal and state laws protect the confidentiality and security of personal and patient information. These laws in many cases are not preempted by the HIPAA rules and may be subject to varying interpretations by courts and government agencies, creating complex compliance issues for us and our licensees and potentially exposing us to additional expense, adverse publicity and liability. Other countries also have, or are developing laws governing the collection, use, disclosure and transmission of personal or patient information and these laws could create liability for us or increase our cost of doing business.
Our business arrangements with health care providers may be deemed to be franchises, which could negatively impact our business operations
Franchise arrangements in the United States are subject to rules and regulations of the FTC and various state laws relating to the offer and sale of franchises. A number of the states in which we operate regulate the sale of franchises and require registration of the franchise offering circular with state authorities and the delivery of a franchise offering circular to prospective franchisees. State franchise laws often limit, among other things, the duration and scope of non-competitive provisions, the ability of a franchisor to terminate or refuse to renew a franchise and the ability of a franchisor to designate sources of supply. Franchise laws and regulations are complex, apply broadly and are subject to interpretation by courts and government agencies. Federal or state authorities or healthcare providers with whom we contract may claim that the agreements under which we license rights to our technology and trademarks and provide services violate these laws and regulations. Violations of these laws are punishable by monetary fines, civil and criminal penalties, and forfeiture of amounts collected in violation of such laws. If our business practices are found to constitute franchises, we could be subject to civil and criminal penalties, our contracts could be found invalid and unenforceable, in whole or in part, or we could be required to restructure our contractual arrangements. We may not be ableunable to profitably adapt to the changing healthcare and substance dependence treatment industry,continue with our relationships or restructure them on favorable terms, which may reduce or eliminate our commercial opportunity
Healthcare organizations, public and private, continue to change the manner in which they operate and pay for services. In recent years, the healthcare industry has been subject to increasing levels of government regulation of reimbursement rates and capital expenditures, among other things. We cannot predict the likelihood of all future changes in the healthcare industry in general, or the substance dependence treatment industry in particular, or what impact they maywould have an adverse effect on our earnings, financial conditionbusiness and results of operations. We may also be required to furnish prospective franchisees with a franchise offering circular containing prescribed information, and restrict how we market to or deal with healthcare providers, potentially limiting and substantially increasing our cost of doing business.
Risks related to our common stock
The sale
Over 25% of our stock is controlled by our chairman and chief executive officer, who has the ability to substantially influence the election of directors and other matters submitted to stockholders
Reserva Capital, LLC and Bonmore, LLC, whose sole managing member is our chairman and chief executive officer, beneficially own 13,700,000 shares of our common stock, may significantly impact the market pricewhich represent approximately 25% of our common stock
54,536,339 shares outstanding. As a result, he has and is expected to continue to have the ability to significantly influence the election of our board of directors and the outcome of all other issues submitted to our stockholders. The saleinterests of securities pursuantthese principal stockholders may not always coincide with our interests or the interests of other stockholders, and they may act in a manner that advances his best interests and not necessarily those of other stockholders. One consequence to this prospectussubstantial influence or control is that it may significantly affectbe difficult for investors to remove management of the company. It could also deter unsolicited takeovers, including transactions in which stockholders might otherwise receive a premium for their shares over then current market price of our common stock. In addition, future sales of substantial amounts of our common stock, or the expectation of such sales, including shares that we may issue upon exercise of outstanding options and warrants, could adversely affect the market price of our common stock. Further, if we raise additional funds through the issuance of common stock or securities convertible into or exercisable for common stock, the percentage ownership of our stockholders will be reduced and the price of our common stock may fall.prices.
Our stock price may be subject to substantial volatility, and you may lose all or a substantial partthe value of your investment.investment may decline
Our common stock is traded on The NasdaqNASDAQ Global Market. There is a limited public float,Market, and trading volume historicallymay be limited or sporadic. The market price of our common stock has been limitedexperienced, and sporadic.may continue to experience, substantial volatility. Over 2006,2007, our common stock traded between $4.77$2.68 and $9.35$10.21 per share, on limited and sporadic volume ranging from approximately 18,00050,000 to 3.73 million shares per day. As a result, the current price for our common stock on the NasdaqNASDAQ is not necessarily a
reliable indicator of our fair market value. The price at which our common stock will trade may be highly volatile and may fluctuate as a result of a number of factors, including without limitation, the number of shares available for sale in the market, quarterly variations in our operating results and actual or anticipated announcements of pilots and scientific studies of the effectiveness of our PROMETA Treatment Programs, new products or services by us or competitors, regulatory investigations or determinations, acquisitions or strategic alliances by us or our competitors, recruitment or departures of key personnel, the gain or loss of significant customers, changes in the estimates of our operating performance, actual or threatened litigation, market conditions in our industry and the economy as a whole.
We are controlled by a single principal stockholder who has
Volatility in the ability to determine the election of directors and the outcome of matters submitted to stockholders.
As of September 30, 2006, Reserva Capital, LLC, a limited liability company whose sole managing member is Terren S. Peizer, our chairman and chief executive officer, beneficially owned 13,700,000 shares, which represent approximately 31%price of our 44,295,099common stock on the NASDAQ Global Market may depress the trading price of the common stock our common stock. The risk of volatility and depressed prices of our common stock also applies to warrant holders who receive shares of common stock upon conversion.
Numerous factors, including many over which we have no control, may have a significant impact on the market price of our common stock, including:
| ● | announcements of new products or services by us or our competitors; current events affecting the political, economic and social situation in the United States and other countries where we operate; |
| ● | trends in our industry and the markets in which we operate; |
| ● | changes in financial estimates and recommendations by securities analysts; |
| ● | acquisitions and financings by us or our competitors; |
| ● | the gain or loss of a significant customer; |
| ● | quarterly variations in operating results; |
| ● | volatility in exchanges rate between the US dollar and the currencies of the foreign countries in which we operate; |
| ● | the operating and stock price performance of other companies that investors may consider to be comparable; and |
| ● | purchases or sales of blocks of our securities. |
Furthermore, stockholders may initiate securities class action lawsuits if the market price of our stock drops significantly, which may cause us to incur substantial costs and could divert the time and attention of our management.
Future sales of common stock by existing stockholders, or the perception that such sales may occur, could depress our stock price
The market price of our common stock could decline as a result of sales by, or the perceived possibility of sales by, our existing stockholders. We have completed a number of private placements of our common stock and other securities over the last several years, and we have effective resale registration statements pursuant to which the purchasers can freely resell their shares into the market. In addition, most of our outstanding shares are eligible for public resale pursuant to Rule 144 under the Securities Act of 1933, as amended. Approximately 15 million shares of our common stock are currently held by our affiliates and may be sold pursuant to an effective registration statement or in accordance with the volume and other limitations of Rule 144 or pursuant to other exempt transactions. Future sales of common stock by significant stockholders, including those who acquired their shares in private placements or who are affiliates, or the perception that such sales may occur, could depress the price of our common stock.
Future issuances of common stock and hedging activities may depress the trading price of our common stock
Any future issuance of equity securities, including the issuance of shares upon exercise of outstanding warrants, could dilute the interests of our existing stockholders, and could substantially decrease the trading price of our common stock. As of June 30, 2008, we had outstanding more than 10 million warrants and options to acquire our common stock at prices between $2.50 and $9.24 per share. We may issue equity securities in the future for a result, he presentlynumber of reasons, including to finance our operations and is expectedbusiness strategy, in connection with acquisitions, to continueadjust our ratio of debt to equity, to satisfy our obligations upon the exercise of outstanding warrants or options or for other reasons.
Additionally, we have the abilityoutstanding warrants to determine or significantly influence the electionacquire up to 1,300,000 shares of our boardcommon stock at an exercise price of directors and$2.15 per share that contain anti-dilution adjustments that will be triggered if the outcomesale price of all other issues submitted to our stockholders. The interestsa future issuance of this stockholder may not alwayscommon stock is at a per share price of less than $2.15.
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coincide with our interests or the interests of other stockholders, and it may act in a manner that advances its best interests and not necessarily those of other stockholders. One consequence to this substantial stockholder’s control is that it may be difficult for investors to remove management of the company. It could also deter unsolicited takeovers, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices.
Provisions in our certificate of incorporation, bylaws, charter documents and Delaware law could discourage a change in control, or an acquisition of us by a third party, even if the acquisition would be favorable to you, thereby and adversely affect existing stockholders
Our certificate of incorporation and the Delaware General Corporation Law contain provisions that may have the effect of making more difficult or delaying attempts by others to obtain control of our company, even when these attempts may be in the best interests of stockholders. OurFor example, our certificate of incorporation also authorizes our board of directors, without stockholder approval, to issue one or more series of preferred stock, which could have voting and conversion rights that adversely affect or dilute the voting power of the holders of common stock. Delaware law also imposes conditions on certain business combination transactions with “interested stockholders.”
These provisions and others that could be adopted in the future could deter unsolicited takeovers or delay or prevent changes in our control or management, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices. These provisions may also limit the ability of stockholders to approve transactions that they may deem to be in their best interests.
We have never paid cash dividends and do not intendexpect to do sopay dividends in the foreseeable future, and accordingly you must rely on stock appreciation for any return on your investment
We have never declared or paid no cash dividends on our common stock. Westock to date, and we currently planintend to retain our future earnings, if any, earnings to financefund the continued development and growth of our business rather thanbusiness. As a result, we do not expect to pay cash dividends. Payments of any cash dividends in the futureforeseeable future. Further, any payment of cash dividends will also depend on our financial condition, results of operations, and capital requirements as well asand other factors, deemed relevant byincluding contractual restrictions to which we may be subject, and will be at the discretion of our board of directors.
SpecialSpecial note regarding forward-looking statements
This prospectus, including the documents that we incorporate by reference, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that are subject to the “safe harbor” created by those sections. Forward-looking statements include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts. Words or phrases such as “anticipate,” “believe,” “continue,” “ongoing,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project” or similar words or phrases, or the negatives of those words or phrases, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. Examples of forward-looking statements include, but are not limited to, statements regarding the following:
• | ● | the anticipated results of clinical studies on the efficacy of our protocols, and the publication of those results in medical journals |
| | |
• | ● | plans to have our protocols approved for reimbursement by third-party payors |
|
• | ● | plans to license our protocols to more hospitals and healthcare providers |
|
| |
• | ● | marketing plans to raise awareness of our PROMETA protocols |
|
| |
• | ● | anticipated trends and conditions in the industry in which we operate, including regulatory changes |
| | |
• | ● | our future operating results, capital needs, and ability to obtain financing. |
Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements. Our actual results could differ materially from those anticipated in forward-looking statements for many reasons, including the factors described in the section titled “Risk factors” in this prospectus. Accordingly, you should not unduly rely on these forward-looking statements, which speak only as of the date of this prospectus. We undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this prospectus or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describe in the reports we file from time to time with the SEC. See “Where you can find more information.”
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All of our common stock being offered under this prospectus is being sold by or for the account of the Selling Stockholders. We will not receive any proceeds from the sale of our common stock by or for the account of the Selling Stockholders. We may receive up to $2,795,000 from the cash exercise of warrants from which 1,300,000 of the shares are issuable. Any proceeds will be used for working capital and general corporate purposes.
Selling Stockholders
The shares of common stock being offered by Highbridge International LLC, one of the Selling Stockholders may be acquired through the exercise of an Amended and Restated Warrant to Purchase Common Stock dated July 31, 2008, for 1,300,000 shares at a price of $2.15 per share, based on the $2.14 closing price of our common stock on July 22, 2008, issued in connection with an amendment to our $5 million senior secured note with Highbridge and subject to possible future adjustment. The amended warrant expires five years from the amendment date. We are currently assessing the accounting impact that the amendment will have on our consolidated statements.
The shares of common stock being offered by all but onethe law firm of Dreier Stein Kahan Browne Woods George LLP were issued in exchange for legal services to us. A partner in the Selling Stockholders were purchased by them in a private placement on December 18, 2006 at $7.30 per share. Tratamientos Avanzados de la Adiccion S.L. obtainedfirm also holds options to purchase up 50,000 shares of our shares in consideration for a Technology Purchase and Royalty Agreement, as amended, as described in our Current Report on Form 8-K filed October 1, 2004. common stock.
We are registering the shares of common stock in order to permit the Selling Stockholders to offer the shares for resale from time to time. Except as noted below, the Selling Stockholders have not had any position, office, or material relationship with us or any of our affiliates within the past three years.
The table below lists the Selling Stockholders and other information regarding the beneficial ownership of the shares of common stock by each of the Selling Stockholders. The second column lists the number of shares of common stock beneficially owned by each Selling Stockholder. The third column lists the shares of common stock being offered by this prospectus by each Selling Stockholder. The fourth column assumes the sale of all of the shares offered by the Selling Stockholders pursuant to this prospectus, and the fifth column lists the percentage of common stock owned by the Selling Stockholders after completion of the offering. The Selling Stockholders may sell all, some or none of their shares in this offering. See “Plan of Distribution.”
| | | | | | | | | | | | | | | | | |
| | | | | | | Maximum Number of | | | | |
| | | Number of Shares | | Shares to be Sold | | Number of Shares | | Percentage of |
| | | Owned | | Pursuant | | Owned | | Shares Owned After |
| Name of Selling Stockholder | | Prior to Offering | | to this Prospectus | | After Offering | | Offering (1) (2) |
Gartmore Small Cap Fund, by Gartmore Mutual Fund Capital Trust, its discretionary investment adviser 1200 River Road
Suite 1000
Conshohocken, PA 19428
Attn: Richard F. Fonash, VP, COO- Investments | | | 400,000 | | | | 400,000 | | | | 0 | | | | — | |
The Hartford Mutual Funds, Inc., on behalf of The Hartford Small Company Fund 200 State Street
Boston, MA 02109Attn: Mark Waterhouse, Executive Vice President | | | 96,000 | | | | 96,000 | | | | 0 | | | | — | |
Hartford Fire Insurance Company Boston, MA 02109 Attn: Mark Waterhouse, Executive Vice President | | | 44,000 | | | | 44,000 | | | | 0 | | | | — | |
Hartford Series Fund, Inc., on behalf of Hartford Small Company HLS Fund Boston, MA 02109Attn: Mark Waterhouse, Executive Vice President | | | 240,000 | | | | 240,000 | | | | 0 | | | | — | |
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| | | | | | | | | | | | | | | | | |
| | | | | | | Maximum Number of | | | | |
| | | Number of Shares | | Shares to be Sold | | Number of Shares | | Percentage of |
| | | Owned | | Pursuant | | Owned | | Shares Owned After |
| Name of Selling Stockholder | | Prior to Offering | | to this Prospectus | | After Offering | | Offering (1) (2) |
UBS O’Connor, LLC fbo O’Connor PIPES Corporate Strategies Master Limited 1 North Wacker Drive
Chicago, IL 60606
Attn: Jeff Putman, Executive Director | | | 250,000 | (3) | | | 250,000 | | | | 0 | | | | — | |
Small Cap Growth Portfolio, a Series of Ohio National Fund, Inc. 151 Detroit Street
Denver, CO 80206
Attn: William H. Bales, Portfolio Manager | | | 9,521 | | | | 9,521 | | | | 0 | | | | — | |
Janus Capital Management LLC, as sub-advisor, on behalf of JCF US Venture Fund 151 Detroit Street
Denver, CO 80206
Attn: William H. Bales, Portfolio Manager | | | 49,627 | | | | 49,627 | | | | 0 | | | | — | |
Janus Investment Fund on behalf of its series Janus Venture Fund 151 Detroit Street
Denver, CO 80206
Attn: William H. Bales, Portfolio Manager | | | 684,932 | | | | 684,932 | | | | 0 | | | | — | |
Sherleigh Associates Inc. Profit Sharing Plan 920 Fifth Avenue #3B
New York, NY 10021
Attn: Jack Silver, Trustee | | | 205,479 | | | | 205,479 | | | | 0 | | | | — | |
Highbridge International LLC 9 West 57th Street
27th Floor
New York, NY 10019
Attn: Adam Chill, Managing Director | | | 684,932 | | | | 684,932 | | | | 0 | | | | — | |
Emerson Family Foundation 1522 Ensley Avenue
Los Angeles, CA 90024
Attn: J. Steven Emerson | | | 44,300 | | | | 40,000 | | | | 4,300 | | | | * | |
Bear Stearns SEC Corp. FBO J. Steven Emerson IRA R/O II 1522 Ensley Avenue
Los Angeles, CA 90024
Attn: J. Steven Emerson | | | 456,700 | | | | 220,000 | | | | 236,700 | | | | * | |
| | | | | | | | | | | | | | | | | |
| | | | | | | Maximum Number of | | | | |
| | | Number of Shares | | Shares to be Sold | | Number of Shares | | Percentage of |
| | | Owned | | Pursuant | | Owned | | Shares Owned After |
| Name of Selling Stockholder | | Prior to Offering | | to this Prospectus | | After Offering | | Offering (1) (2) |
Bear Stearns SEC Corp. FBO J. Steven Emerson Roth IRA 1522 Ensley Avenue
Los Angeles, CA 90024
Attn: J. Steven Emerson | | | 189,400 | | | | 140,000 | | | | 49,400 | | | | * | |
Europa International, Inc.
666 5th Avenue
Suite 3702
New York, NY 10103
Attn: Fred Knoll, Investment Manager | | | 1,273,937 | | | | 136,987 | | | | 1,136,950 | | | | 5.5 | %(4) |
Trinad Capital Master Fund Ltd.
2121 Avenue of the Stars
Suite 1650
Los Angeles, CA 90067
Attn: Jay Wolf, Director | | | 191,780 | | | | 191,780 | | | | 0 | | | | — | |
Rachel Glicksman
369 Lexington Avenue
4th Floor
New York, NY 10017 | | | 1,354,440 | | | | 150,000 | | | | 1,204,440 | | | | 2.9 | %(5) |
Steven B. Solomon
5420 LBJ Freeway #1600
Dallas, Texas 75240 | | | 62,857 | | | | 30,000 | | | | 32,857 | | | | * | |
| Tratamientos Avanzados de la Adiccion S.L. | | | 919,137 | | | | 532,000 | | | | 387,137 | | | | * | |
Avda Fuentelarreina 8
Madrid 28035 Spain
Attn: Dr. Juan José Legarda | | | | | | | | | | | | | | | | |
Name of Selling Stockholder | Number of Shares Owned Prior to Offering | Maximum Number of Shares to be Sold Pursuant to this Prospectus | Number of Shares Owned After Offering | Percentage of Shares owned After Offering (1) |
*Highbridge International LLC(2) c/o Highbridge Capital Management, LLC 9 West 57th Street, 27th Floor New York, NY 10019 | 1,869,627(3) | 1,300,000(4) | 569,627(3) | 1.04% |
| | | | |
Dreier Stein Kahan Browne Woods George LLP 1620 26th Street, 6th Fl, North Tower Santa Monica, CA 90404 Attn: Marc S. Dreier, Managing Partner | 300,000(5) | 250,000 | 50,000(5) | * |
| * | Less than one percent. |
| |
(1) | | Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. |
| |
(2) | (1) | Percentages are calculated based on 44,137,52754,536,339 shares of Common Stock outstanding as of January 19, 2007.August 6, 2008. |
| | |
| (2) | Highbridge Capital Management, LLC is the trading manager of Highbridge International LLC and has voting control and investment discretion over the securities held by Highbridge International LLC. Glenn Dubin and Henry Swieca control Highbridge Capital Management LLC and have voting control and investment discretion over the securities held by Highbridge International LLC. Each of Highbridge Capital Management LLC, Glenn Dubin and Henry Swieca disclaims beneficial ownership of the securities held by Highbridge International LLC. |
| |
| (3) | | Represents shares issued to an affiliate of a registered broker dealer who, with respect to theIncludes 29,439 shares of our common stock they may sell pursuantand 540,188 warrants with an exercise price of $5.75 per share. |
| |
| (4) | Due to this prospectus, is an “underwriter” withinpossible future adjustment in the meaningnumber of shares to be received upon exercise of the Securities Actwarrant; 1,430,000 shares are being registered for resale. |
| |
| (5) | Includes 50,000 shares issuable on the exercise of 1933, as amended. The affiliate purchased the sharesoptions held by a partner in the ordinary course of business,firm. |
The Selling Stockholders may sell all or a portion of the shares of common stock beneficially owned by them and offered hereby from time to time directly or through one or more underwriters, broker-dealers or agents. If the shares of common stock are sold through underwriters or broker-dealers, the Selling Stockholders will be responsible for underwriting discounts or commissions or agent's commissions. The shares of common stock may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale, or at negotiated prices. These sales may be effected in transactions, which may involve crosses or block transactions,
| ● | on any national securities exchange or quotation service on which the securities may be listed or quoted at the time of the purchase had no agreements or understandings, directly or indirectly, with any person to distribute the securities. |
| sale; |
| |
|
(4)● | | Percentage includes 1,275,250 shares of Common Stock held by Knoll Capital Fund II Master Fund. |
| in the over-the-counter market; |
| |
|
(5)● | | Percentage includes 63,444 shares of Common Stock heldin transactions otherwise than on these exchanges or systems or in the name of CEOcast, Inc.over-the-counter market; |
|
Plan of distribution
The Selling Stockholders and any of their pledgees, donees, transferees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The Selling Stockholders may use any one or more of the following methods when selling shares:
| | • |
| ● | through the writing of options, whether such options are listed on an options exchange or otherwise; |
| |
| ● | ordinary brokerage transactions and transactions in which the broker-dealer solicits investors; |
| purchasers; |
| | • |
| ● | block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; |
|
| • | ● | purchases by a broker-dealer as principal and resale by the broker-dealer for its account; |
| | |
| • | ● | an exchange distribution in accordance with the rules of the applicable exchange; |
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| | • |
| ● | privately negotiated transactions; |
| |
| | • | | to cover short sales made after the date that this Registration Statement is declared effective by the Commission; |
| ● | short sales; |
| | • |
| ● | sales pursuant to Rule 144; |
| |
| ● | broker-dealers may agree with the Selling Stockholdersselling securityholders to sell a specified number of such shares at a stipulated price per share; |
| | |
| • | ● | a combination of any such methods of sale; and |
| | |
| • | ● | any other method permitted pursuant to applicable law. |
The
If the Selling Stockholders effect such transactions by selling shares of common stock to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or agents may alsoreceive commissions in the form of discounts, concessions or commissions from the Selling Stockholders or commissions from purchasers of the shares of ommon stock for whom they may act as agent or to whom they may sell shares under Rule 144 underas principal (which discounts, concessions or commissions as to particular underwriters, broker-dealers or agents may be in excess of those customary in the Securities Act, if available, rather than under this prospectus.
types of transactions involved). In connection with sales of the shares of common stock or otherwise, the Selling Stockholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the shares of common stock in the course of hedging in positions they assume. The Selling Stockholders may also sell shares of common stock short and deliver shares of common stock covered by athis prospectus filed as part of a Registration Statement to close out short positions and to return borrowed shares in connection with such short sales. The Selling Stockholders may also loan or pledge shares of common stock to broker-dealers that in turn may sell such shares.
Broker-dealers engaged by the Selling Stockholders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The Selling Stockholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved.
The Selling Stockholders may from time to time pledge or grant a security interest in some or all of the warrants or shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time underpursuant to this prospectus or under anany amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933, as amended, amending, if necessary, the list of Selling Stockholders to include the pledgee, transferee or other successors in interest as Selling Stockholders under this prospectus.
Upon the Company being notified in writing by a Selling Stockholder that any material arrangement has been entered into with a broker-dealer for the sale of common stock through a block trade, special offering, exchange distribution or secondary distribution or a purchase by a broker or dealer, a supplement to this prospectus will be filed, if required, pursuant to Rule 424(b) under the Securities Act, disclosing (i) the name of each such Selling Stockholder and of the participating broker-dealer(s), (ii) the number of shares involved, (iii) the price at which such the shares of common stock were sold, (iv) the commissions paid or discounts or concessions allowed to such broker-dealer(s), where applicable, (v) that such broker-dealer(s) did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus, and (vi) other facts material to the transaction. In addition, upon the Company being notified in writing by a Selling Stockholder that a donee or pledgee intends to sell more than 500 shares of common stock, a supplement to this prospectus will be filed if then required in accordance with applicable securities law.
The Selling Stockholders also may transfer and donate the shares of common stock in other circumstances in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.
The Selling Stockholders and any broker-dealers or agents that are involvedbroker-dealer participating in sellingthe distribution of the shares of common stock may be deemed to be “underwriters”"underwriters" within the meaning of the Securities Act, in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by themcommission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act. Discounts, concessions,At the time a particular offering of the shares of common stock is made, a prospectus supplement, if required, will be distributed which will set forth the aggregate amount of shares of common stock being offered and the terms of the offering, including the name or names of any broker-dealers or agents, any discounts, commissions and similar selling expenses, ifother terms constituting compensation from the Selling Stockholders and any thatdiscounts, commissions or concessions allowed or reallowed or paid to broker-dealers.
Under the securities laws of some states, the shares of common stock may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the shares of common stock may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.
There can be attributedno assurance that any selling stockholder will sell any or all of the shares of common stock registered pursuant to the saleshelf registration statement, of securitieswhich this prospectus forms a part.
The Selling Stockholders and any other person participating in such distribution will be paidsubject to applicable provisions of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, including, without limitation, Regulation M of the Exchange Act, which may limit the timing of purchases and sales of any of the shares of common stock by the Selling Stockholder and/orStockholders and any other participating person. Regulation M may also restrict the purchasers. Each Selling Stockholder has represented and warrantedability of any person engaged in the distribution of the shares of common stock to engage in market-making activities with respect to the Company
15
that it acquiredshares of common stock. All of the securities subject to this registration statement inforegoing may affect the ordinary coursemarketability of such Selling Stockholder’s businessthe shares of common stock and at the timeability of its purchase of such securities such Selling Stockholder had no agreements or understandings, directly or indirectly, with any person or entity to distribute any such securities.engage in market-making activities with respect to the shares of common stock.
The Company has
We have advised each Selling Stockholder that it may not use shares registered on this registration statement to cover short sales of common stock made prior to the date on which this registration statement shall have been declared effective by the Commission. If a Selling Stockholder uses this prospectus for any sale of the common stock, it will be subject to the prospectus delivery requirements of the Securities Act. The Selling Stockholders will be responsible to comply with the applicable provisions of the Securities Act and Exchange Act, and the rules and regulations thereunder promulgated, including, without limitation, Regulation M, as applicable to such Selling Stockholders in connection with resales of their respective shares under this registration statement.
The Company is
We are required to pay all fees and expenses incident to the registration of the shares, but the Companywe will not receive any proceeds from the sale of the Common Stock. The Company hasWe have agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.
NASDAQ NationalGlobal Market quotation
Our common stock is traded on The Nasdaq Global Market under the symbol “HYTM.”
IncorporationIncorporation of certain information by reference
The following documents filed by Hythiam, Inc. (the “Registrant”) with the Commission pursuant to the Securities Act and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are specifically incorporated herein by reference into this prospectus:reference:
|
| (a) | (1) | | OurThe Registrant’s annual report on Form 10-K for the year ended December 31, 2006;2007, filed with the Commission pursuant to Section 13(a) or Section 15(d) of the Exchange Act on March 17, 2008; |
|
|
| (b) | (2) | | Our Proxy StatementThe Registrant's current report on Form DEF14A8-K dated May 12, 2008, filed with the Commission pursuant to Section 13(a) or Section 15(d) of the Exchange Act on May 12, 2008. |
| (c) | The Registrant's quarterly report on Form 10-Q for our annual meeting of stockholders held on June 16, 2006; |
|
|
|
|
| (3) | | All other reportsthe quarterly period ended March 31, 2008, filed with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act sinceon May 12, 2008. |
| (d) | The Registrant's current report on Form 8-K dated July 16, 2008, filed with the endCommission pursuant to Section 13(a) or Section 15(d) of the fiscal year covered byExchange Act on July 18, 2008. |
| (e) | The Registrant's current report on Form 8-K dated July 31, 2008, filed with the document referredCommission pursuant to in (1) above;Section 13(a) or Section 15(d) of the Exchange Act on August 1, 2008. |
| (f) | The Registrant's current report on Form 8-K dated August 11, 2018, filed with the Commission pursuant to Section 13(a) or Section 15(d) of the Exchange Act on August 11, 2008. |
| (g) | (4)The Registrant's quarterly report on Form 10-Q for the quarterly period ended June 30, 2008, filed with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act on August 11, 2008. |
| (h) | The Description of Capital Stock contained in ourthe Registration Statement on Form S-1/A filed with the SECCommission on June 23, 2004; and |
|
| (5) | | All documents that we file with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the termination of the offering. |
| 2004. |
We will provide each person, including any beneficial owner,
All documents subsequently filed by the Registrant pursuant to whomSections 13(a), 13(c), 14 and 15(d) of the
Exchange Act, prior to the filing of a prospectus is delivered, a copy of anypost-effective amendment which indicates that all securities offered hereby have been sold or which deregisters all of the information that has beensecurities then remaining unsold, shall be deemed to be incorporated by reference in this prospectus but not delivered withherein and to be part hereof from the prospectus. We will provide this information upon written or oral request at no charge todate of the requester. The request for this information must be made to the following:filing of such documents.
Investor Relations
Hythiam, Inc.
11150 Santa Monica Boulevard, Suite 1500
Los Angeles, California 90025
(310) 444-4300
Wherere you can find more information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. Our SEC filings are available to the public over the Internet at the SEC’s website athttp://www.sec.gov. The SEC’s website contains reports, proxy and information statements and other information regarding issuers, such as us, that file electronically with the SEC. You may also read and copy any document we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may also obtain copies of these documents at prescribed rates by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the
16
operation of its Public Reference Room. We maintain a website athttp://www.hythiam.com. We have not incorporated by reference into this prospectus the information in, or that can be accessed through, our website, and you should not consider it to be a part of this prospectus.
Legal matters
Various legal matters with respect to the validity of the securities offered by this prospectus will be passed upon for us by Dreier Stein & Kahan Browne Woods George LLP, Santa Monica, California. Dreier Stein & Kahan Browne Woods George LLP and its attorneys hold noholds 250,000 shares of our common stock, but an attorneyand a partner with the firm holds a warrantoptions to purchase up to 50,000 shares of our common stock.
Experts
The financial statements as of December 31, 2007 and management’s report on2006 and for each of the three years in the period ended December 31, 2007 and management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2007 incorporated by reference in this Prospectus have been audited byso incorporated in reliance on the reports of BDO Seidman, LLP, an independent registered public accounting firm, to the extent and for the periods set forth in their reports incorporated herein by reference, and are incorporated herein in reliance upon such reports given uponon the authority of said firm as experts in auditing and accounting.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth the various costs and expenses payable by the registrant in connection with the sale of the securities being registered. All such costs and expenses shall be borne by the undersigned Registrant. Except for the SEC registration fee, all the amounts shown are estimates.
| | | | | | |
| SEC registration fee | | $ | 3,858 | | | $ | 134 | |
| Legal fees and expenses | | 25,000 | | | | 25,000 | |
| Accounting fees and expenses | | 35,000 | | | | 7,500 | |
| Printing and related expenses | | 1,142 | | | | | |
| Miscellaneous | | 5,000 | | | | 366 | |
| | | | | |
| Total | | $ | 70,000 | | | $ | 33,000 | |
| | | | | |
Item 15. Indemnification of Officers and Directors
Under Section 145 of the General Corporation Law of the State of Delaware, the Registrant has broad powers to indemnify its directors and officers against liabilities they may incur in such capacities, including liabilities under the Securities Act. The Certificate of Incorporation and the Bylaws of the Registrant provide that the Registrant will indemnify, to the fullest extent permitted by the Delaware General Corporation Law, each person who is or was a director, officer, employee or agent of the Registrant, or who serves or served any other enterprise or organization at the request of the Registrant. Pursuant to Delaware law, this includes elimination of liability for monetary damages for breach of the directors’ fiduciary duty of care to the Registrant and its stockholders. These provisions do not eliminate the directors’ duty of care and, in appropriate circumstances, equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director’s duty of loyalty to the Registrant, for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for any transaction from which the director derived an improper personal benefit, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director’s responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws.
The Registrant has entered into agreements with its directors and executive officers that require the Registrant to indemnify these persons against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred (including expenses of a derivative action) in connection with any proceeding, whether actual or threatened, to which any such person may be made a party by reason of the fact that the person is or was a director or officer of the Registrant or any of its affiliated enterprises, provided the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the Registrant’s best interests and, with respect to any criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful. The indemnification agreements will also establish procedures that will apply if a claim for indemnification arises under the agreements.
The Registrant maintains a policy of directors’ and officers’ liability insurance that insures its directors and officers against the cost of defense, settlement or payment of a judgment under some circumstances.
Item 16. Exhibits
| | | |
| Exhibit No. | | Description |
| 3.1 | | Certificate of Incorporation of the Company(1) |
| | Company (1) |
| 3.2 | | Bylaws of the Company(1) |
| | Company (1) |
| 4.1 | | Specimen of Common Stock Certificate(2) |
| | |
| Certificate (2) |
| 5.1 | | Opinion of Dreier Stein & Kahan LLP(3) |
|
| | |
| Browne Woods George LLP |
| 23.1 | | Consent of Dreier Stein & Kahan Browne Woods George LLP (3) |
|
| | |
| (included in Exhibit 5.1) |
| 23.2 | | Consent of BDO Seidman, LLP (3) |
|
| | |
|
| 24.1 | | Power of Attorney (3) |
| (included in signature page hereof) |
