U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2007
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from: __________ to __________
Commission File Number: 0-28704
INGEN TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Georgia 84-1122431
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
35193 Avenue "A", Suite-C, Yucaipa, California 92399
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(Address of principal executive offices) (Zip Code)
(800) 259-9622
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(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, no par value
--------------------------
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [x]
At September 30, 2007, 43,537,110 shares of the registrant's common stock
(no par value) were outstanding.
Transitional Small Business Disclosure Format (check one):
YES / / NO /X/
INGEN TECHNOLOGIES, INC. AND SUBSIDIARY
PART I. - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS FOR QUARTER ENDED AUGUST 31, 2007
CONSOLIDATED BALANCE SHEET (UNAUDITED)
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AS OF AUGUST 31,
2007
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ASSETS
Current Assets
Cash $ 7,762
Accounts receivable 78,090
Inventory 74,953
Prepaid expenses 18,107
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Total current assets 178,912
------------
Property and equipment, net of accumulated depreciation
of $134,246 273,371
Debt issue cost, net of accumulated amortization of $112,593 255,607
Other assets 68,895
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TOTAL ASSETS $ 776,785
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 80,654
Accrued expenses 269,742
Taxes payable 8,350
Current portion of long-term debt 14,539
Officer's loans 92,829
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Total current liabilities 466,114
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Long-term Liabilities
Note payable 96,817
Convertible notes payable, net of unamortized discount of $1,526,176 608,824
Derivative liabilities 5,799,375
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Total long-term liabilities 6,505,016
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Stockholders' deficit
Preferred stock Series A, no par value, 40,000,000
authorized; and 16,078,991 issued and outstanding
as of August 31, 2007 673,313
Common stock, no par value, 100,000,000 shares authorized;
43,537,110 issued and outstanding as of
August 31, 2007 8,336,149
Series A preferred stock subscription receivable (220,000)
Common stock subscription receivable (45,000)
Accumulated deficit (14,938,807)
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Total stockholders' deficit (6,194,345)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 776,785
============
See notes to interim unaudited consolidated financial statements
2
INGEN TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- - ------------------------------------------------------------------------------
For the three months ended
August 31,
------------------------------
2007 2006
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Revenue $ 117,471 $ 189,158
Cost of Sales 67,413 115,547
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Gross Profit 50,058 73,611
Selling, General and Administrative Expenses 406,694 329,104
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Operating Loss (356,636) (255,493)
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Other (Expenses):
Interest Expenses (446,911) (3,540,915)
Change in Derivative Liabilities (573,779) 1,031,094
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Net Loss before Taxes (1,377,326) (2,765,314)
Provision for Income Taxes 10 800
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Net Loss $ (1,377,336) $ (2,766,114)
============ ============
Basic and diluted net loss per share $ (0.04) $ (0.12)
============ ============
Weighted average number of common shares 37,766,443 22,207,208
See notes to interim unaudited consolidated financial statements
3
INGEN TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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FOR THE THREE MONTHS ENDED AUGUST 31, 2007 2006
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CASH FLOW FROM OPERATING ACTIVITIES:
Net Loss (1,377,336) $(2,766,114)
Adjustments to Reconcile Net Loss to Net Cash Used in Operations:
Depreciation and amortization 14,470 4,576
Amortization of debt issue cost 25,930 16,400
(Increase) Decrease in:
Change in derivative liabilities 385,343 (1,031,094)
Noncash interest expense and financing costs 573,779 3,523,454
Changes in operating assets and liabilities:
Increase in accounts receivable (78,090) --
Decrease in inventory 10,642
Decrease in accounts payable (3,863) --
Increase (decrease) in accrued expenses 81,472 (2,138)
Decrease in prepaid expenses 15,526 --
Expenses paid with stock 80,000 --
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NET CASH USED IN OPERATING ACTIVITIES (272,127) (254,916)
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CASH FLOW FROM INVESTING ACTIVITIES
Addition to fixed assets -- (34,480)
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NET CASH USED IN INVESTING ACTIVITIES -- (34,480)
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CASH FLOW FROM FINANCING ACTIVITIES:
Repayments of loan owed to officer (3,000) (63,941)
Proceeds from loan from officer 11,486 --
Repayments of notes payable (3,635) --
Proceeds from issuance of common stock 74,800 --
Net proceeds from convertible debt 200,000 1,066,800
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NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES 279,651 1,002,859
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NET INCREASE IN CASH 7,524 713,463
Cash Balance at Beginning of Period 238 111,112
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CASH BALANCE AT END OF PERIOD $ 7,762 $ 824,575
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 4,988 $ --
Taxes paid $ 800 $ --
Noncash Financing Activities:
Value of issuance of warrants in connection with convertible debt $ -- $ 1,987,103
Recorded a beneficial conversion feature $ 428,343 $ 2,903,777
Stock subscription receivable for preferred stock $ -- $ 220,000
Stock subscription receivable for common stock $ 45,000 $ --
See notes to interim unaudited consolidated financial statements
4
INGEN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Ingen Technologies, Inc., a Georgia corporation (formerly known as Creative
Recycling Technologies Inc., the "Company" or "Ingen Technologies"), is a public
company trading under NASDAQ OTC: IGTG. Ingen Technologies is a growth-oriented
technology company that offers diverse and progressive services and products.
Ingen Technologies, Inc. owns 100% of the capital stock of Ingen Technologies,
Inc. a Nevada corporation that has been in business since 1999.
The Company's flagship product is its BAFI (TM) line of products. These are the
world's first wireless digital low gas warning system for pressurized gas
cylinders. These products include Oxyview(TM), OxyAlert(TM)and GasAlert(TM). On
October 24, 2000, the Company received a U.S. Patent for the BAFI (TM) with
Patent No. 6,137,417. BAFI (TM), now in its second generation, is an accurate
and cost-effective, real-time pressurized gas warning system that will alert
users when gas levels are approaching empty.
The BAFI (TM) line has multiple applications, inclusive but not limited to, the
Medical Industry, Home Consumer, Residential Development Industry, Safety &
Protection (fire and police), Aircraft Industry, and the Recreational Vehicle
Industry. BAFI (TM) meets or exceeds regulatory compliance of this type of
product and is completed and in production.
The Company's Secure Balance (TM) product is a private-label product that
includes a vestibular function testing system and balance therapy system
available to physicians throughout the United States.
On November 16, 2006, the Company purchased the intellectual property rights for
Oxyview(TM). The Company had co-invented the Oxyview (TM) product with a third
party. The agreement gave the Company sole ownership of the product and
intangible pending patents associated with Oxyview (TM), which is part of the
Company's BAFI(TM) line of products. Patents for Oxyview (TM) are pending in the
United States, Japan, People's Republic of China and the European Communities.
Oxyview(TM) relates to flow meters which provide a visual signal for gas flow
through a conduit. More particularly it relates to a flow meter which provides a
visual cue viewable with the human eye, as to the flow of gas through a cannula
which conventionally employs very low pressure and gas volume to a patient using
the Oxyview(TM). The Company began recording sales of Oxyview(TM) in November of
2006.
Presentation of Interim Information: The accompanying consolidated financial
statements for the three months ended August 31, 2007 and 2006, have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in consolidated financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. However, the Company believes
that the disclosures are adequate to make the information presented not
misleading. These consolidated financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended May 31, 2007.
In the opinion of Management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows for the three months ended August 31, 2007
and 2006, have been made. The results of operations for the three months ended
August 31, 2007 are not necessarily indicative of the operating results for the
full year.
Principle of Consolidation and Presentation: The accompanying consolidated
financial statements include the accounts of Ingen Technologies, Inc. and its
subsidiary after elimination of all intercompany accounts and transactions.
Certain prior period balances have been reclassified to conform to the current
period presentation.
5
INGEN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Fair Value of Financial Instruments: The Company's financial instruments consist
principally of cash, accounts receivable, inventories, accounts payable and
borrowings. The Company believes the financial instruments' recorded values
approximate current values because of their nature and respective durations. The
fair value of embedded conversion options and stock warrants are based on a
Black-Scholes fair value calculation. The fair value of convertible notes
payable has been discounted to the extent that the fair value of the embedded
conversion option feature exceeds the face value of the note. This discount is
being amortized over the term of the convertible note.
Cash Equivalents: For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments with an original maturity of three
months or less to be cash equivalents.
Revenue Recognition: The Company generally recognizes product revenue when
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable, and collection is probable. In instances where final
acceptance of the product is specified by the customer, revenue is deferred
until all acceptance criteria have been met. No provisions were established for
estimated product returns and allowances based on the Company's historical
experience. All orders are customized with substantial down payments. Products
are released upon receipt of the remaining funds.
Use of estimates: The preparation of the accompanying consolidated financial
statements in conformity with accounting principles generally accepted in the
United States requires management to make certain estimates and assumptions that
directly affect the results of reported assets, liabilities, revenue, and
expenses. Actual results may differ from these estimates.
Property and Equipment: Property and Equipment are valued at cost. Maintenance
and repair costs are charged to expenses as incurred. Depreciation is computed
on the straight-line method based on the following estimated useful lives of the
assets: 3 to 5 years for computer, software and office equipment, and 5 to 7
years for furniture and fixtures.
Convertible Notes Payable and Derivative Liabilities: The Company accounts for
convertible notes payable and warrants in accordance with Statement of Financial
Accounting Standards (SFAS) No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES." This standard requires the conversion feature of
convertible debt be separated from the host contract and presented as a
derivative instrument if certain conditions are met. Emerging Issue Task Force
(EITF) 00-19, "ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO AND
POTENTIALLY SETTLED IN A COMPANY'S OWN STOCK" and EITF 05-2, "THE MEANING OF
"CONVENTIONAL CONVERTIBLE DEBT INSTRUMENT" IN ISSUE NO. 00-19" were also
analyzed to determine whether the debt instrument is to be considered a
conventional convertible debt instrument and classified in stockholders' equity.
The convertible notes payable issued on June 6, 2006, July 27, 2006, August 30,
2006, January 24, 2007, March 15, 2007, April 15, 2007, May 15, 2007, June 15,
2007 and July 31, 2007 were evaluated and determined not conventional
convertible and, therefore, because of certain terms and provisions including
liquidating damages under the associated registration rights agreement the
embedded conversion option was bifurcated and has been accounted for as a
derivative liability instrument. The stock warrants issued in conjunction with
the convertible notes payable were also evaluated and determined to be a
derivative instrument and, therefore, classified as a liability on the balance
sheet. The accounting guidance also requires that the conversion feature and
warrants be recorded at fair value for each reporting period with changes in
fair value recorded in the consolidated statements of operations.
A Black-Scholes valuation calculation was applied to both the conversion
features and warrants at issuance dates and August 31, 2007. The issuance date
valuation was used for the effective debt discount that these instruments
represent. The debt discount is amortized over the three-year life of the debts
using the effective interest method. The August 31, 2007 valuation was used to
record the fair value of these instruments at the end of the reporting period
with any difference from prior period calculations reflected in the consolidated
statement of operations.
Income Taxes: Income tax expense is based on pretax financial accounting income.
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts.
Net Loss Per Share: Basic net loss per share includes no dilution and is
computed by dividing net loss available to common stockholders by the weighted
average number of common stock outstanding for the period. Diluted net loss per
share does not differ from basic net loss per share since potential shares of
common stock are anti-dilutive for all periods presented. Potential shares
consist of Series A preferred stock and outstanding warrants.
6
INGEN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
In February, 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 155, ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS. SFAS No. 155
eliminates the temporary exemption of bifurcation requirements to securitized
financial assets, contained in SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. As a result, similar financial instruments
are accounted for similarly regardless of the form of the instruments. In
addition, in instances where a derivative would otherwise have to be bifurcated,
SFAS No. 155 allows a preparer on an instrument-by-instrument basis to elect
fair value measurement at acquisition, at issuance, or when a previously
recognized financial instrument is subject to remeasurement. SFAS No. 155 is
effective for our fiscal year beginning June 1, 2007.
In March, 2006, the FASB issued SFAS No. 156, ACCOUNTING FOR SERVICING OF
FINANCIAL ASSETS, an amendment of FASB Statement No. 140, ACCOUNTING FOR
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES.
The pronouncement establishes standards whereby servicing assets and servicing
liabilities are initially measured at fair value, where applicable. In addition,
SFAS No. 156 allows subsequent measurement of servicing assets and liabilities
at fair value, and where applicable, derivative instruments used to mitigate
risks inherent with servicing assets and liabilities are likewise measured at
fair value. SFAS No. 156 is effective for our fiscal year beginning June 1,
2007.
In September, 2006, the FASB issued SFAS No. 157, FAIR VALUE MEASUREMENTS. The
statement defines fair value, determines appropriate measurement methods, and
expands disclosure requirements about those measurements. SFAS No. 157 is
effective for our fiscal year beginning June 1, 2008.
In February 2007, the FASB issued SFAS No. 159, THE FAIR VALUE OPTION FOR
FINANCIAL ASSETS AND FINANCIAL LIABILITIES, including an amendment of FASB
Statement No. 115. This pronouncement permits entities to choose to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. SFAS 159 is effective as of the
beginning of our fiscal year which begins June 1, 2008.
NOTE 2 - GOING CONCERN
The Company's consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and liabilities and
commitments in the normal course of business. In the near term, the Company
expects operating costs to continue to exceed funds generated from operations.
As a result, the Company expects to continue to incur operating losses and may
not have sufficient funds to grow its business in the future. The Company can
give no assurance that it will achieve profitability or be capable of sustaining
profitable operations. As a result, operations in the near future are expected
to continue to use working capital.
To successfully grow the individual segments of the business, the Company must
decrease its cash burn rate, improve its cash position and the revenue base of
each segment, and succeed in its ability to raise additional capital through a
combination of primarily public or private equity offering or strategic
alliances. The Company also depends on certain contractors, and its sole
employee, the CEO, and the loss of any of those contractors or the employee, may
harm the Company's business.
In the quarter ended August 31, 2007, the Company received net proceeds from the
sale of callable secured convertible notes of $200,000 (the principal balance of
the notes was $220,000). The Company also made equity sales which netted $74,800
in the quarter (an additional $45,000 was booked as a stock subscription
receivable and was subsequently received in September of 2007). Management of
the Company is actively increasing marketing efforts to increase revenues. The
ability of the Company to continue as a going concern is dependent on its
ability to meet its financing arrangement and the success of its future
operations. The consolidated financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
The Company incurred a loss of $1,377,336 for the three months ended August 31,
2007, and as of that date, had an accumulated deficit of $14,938,807.
7
INGEN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment as of August 31, 2007 and 2006 is summarized as follow:
2007 2006
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Automobile $ 9,500 $ 9,500
Mobile Demonstration Unit 136,096 --
Furniture & Fixture 31,706 27,222
Machinery & Equipment 120,252 65,900
Leasehold Improvements 41,606 32,047
Molds 68,457 29,857
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407,617 164,526
Less accumulated depreciation (134,246) (102,984)
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Property and Equipment, net $ 273,371 $ 61,542
========= =========
NOTE 4 - ACCRUED EXPENSES
Accrued expenses at August 31, 2007 and 2006 consist of:
2007 2006
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Accrued officer's compensation $163,356 $112,000
Accrued Professional Fees -- 6,000
Accrued Interest Expense 104,572 33,844
Accrued taxes -- 25,811
Royalty payable 1,814 --
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Total $269,742 $177,655
======== ========
NOTE 5 - CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITIES
6% $75,000 DEBT
On June 7, 2006, the Company entered into an agreement with an accredited
investor for sale of a convertible debenture. The Company received proceeds of
$75,000 from the sale of the convertible debenture on June 7, 2006. The
debenture is convertible at any time within a three year period into 3,750,000
shares of common stock at $0.02 per share. The debenture carries an interest
rate of 6% per annum, and payable annually. In the event that the debenture is
not converted to common stock, any unpaid balance, including interest and the
principal, becomes due on May 31, 2009.
6/7/2006
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Approximate risk free rate 4.99%
Average expected life 3 years
Dividend yield 0%
Volatility 202.01%
Estimated fair value of conversion feature
on date of note issuance $437,565
Estimated fair value of conversion feature
as of August 31, 2007 $209,251
The Company recorded the fair value of the conversion feature of $437,565, as a
discount to the convertible debt in the accompanying balance sheet up to the
proceeds received with the excess of $362,565 charged to expense. Amortization
expense related to the conversion feature discount for the quarter ended August
31, 2007 was $6,342. Remaining unamortized discount as of that date was $43,980.
CALLABLE SECURED CONVERTIBLE NOTES AND WARRANTS
July 25, 2006 Securities Purchase Agreement ($1.5 Million Convertible Debt)
On July 25, 2006, we entered into a Securities Purchase Agreement with New
Millennium Capital Partners II, LLC, AJW Qualified Partners, LLC, AJW Offshore,
Ltd. and AJW Partners, LLC (the "Investors") and agreed to issue and sell (i)
callable secured convertible notes up to $2 million, and (ii) warrants to
acquire an aggregate of 20 million shares of our common stock. The notes bear
interest at 6% per annum (15% "default interest" per annum), and mature three
years from the date of issuance. The notes are convertible into our common stock
at the applicable percentage of the average of the lowest three trading prices
for our shares of common stock during the twenty trading day period prior to
conversion. The applicable percentage is 50%; however, the percentage shall be
increased to: (i) 55% in the event that a Registration Statement is filed within
thirty days from July 25, 2006, and (ii) 60% in the event that the Registration
Statement becomes effective within one hundred and twenty days from July 26,
2006. Since we did not have a Registration Statement become effective within one
hundred and twenty days of July 25, 2006, the applicable percentage is 50%.
Under the Agreement, the conversion price of the secured convertible notes will
be adjusted in the event we issue securities below the fixed conversion price
and may be adjusted in certain circumstances such as merger, consolidation or if
we pay a stock dividend. At May 31, 2007, only $1.5 million of the convertible
notes were funded.
8
INGEN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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We received the first tranche of $700,000 on July 27, 2006, less issuance costs
of $295,200, the second tranche of $600,000, less issuance costs of $13,000 on
August 30, 2006, and the third tranche of $200,000 was received on January 24,
2007.
We may prepay the notes in the event that no event of default exists, there are
a sufficient number of shares available for conversion, and the market price is
at or below $0.10 per share. Prepayment of the convertible notes is to be made
in cash equal to 140% of the outstanding principal and accrued interest (for
prepayment occurring after the 60th day following the issue date of the notes).
In addition, in the event that the reported average daily price of the common
stock for each day of the month ending on any determination date is below $0.10,
we may repay a portion of the outstanding principal amount of the notes equal to
101% of the principal amount divided by thirty-six plus one month's interest and
this will stay all conversions for the month.
Events of default under the notes generally include failure to repay the
principal or interest when due, failure to issue shares of common stock upon
conversion by the holder, failure to timely file a registration statement or
have such registration statement declared effective, breach of certain covenants
or representation or warranty in the Securities Purchase Agreement or related
convertible note, the assignment or appointment of a receiver to control a
substantial part of our property or business, a money judgment, writ or similar
process entered or filed against us in excess of $50,000 which continues for 20
days unless consented to by the holder, the commencement of a bankruptcy,
insolvency, reorganization or liquidation proceeding against us without stay or
the delisting of our common stock. Upon the occurrence of an event of default,
the note holders may by written notice demand repayment in an amount equal to
the greater of (i) the then outstanding principal amount of the convertible
notes, together with unpaid interest and any outstanding penalties times 140% or
(ii) the "parity value" of the default sum, where parity value means (a) the
highest number of shares of common stock issuable upon conversion of the default
sum, treating the trading day immediately preceding the prepayment date as the
"conversion date" for the purpose of determining the lowest applicable
conversion price (unless the event of default is a result of a breach in
reference to a specific conversion date), multiplied by (b) the highest closing
price for the common stock during the period beginning on the date of first
occurrence of the event of default and ending one day prior to the prepayment
date. In addition, we granted the Investors a security interest in substantially
all of our assets and intellectual property pursuant to a Security Agreement and
an Intellectual Property Security Agreement.
The warrants have an exercise price of $0.10 per share and expire after seven
years. The Investors may exercise the warrants on a cashless basis if the shares
of common stock underlying the warrants are not then registered pursuant to an
effective registration statement. In addition, the exercise price of the
warrants will be adjusted in the event we issue common stock at a price below
market, with the exception of any securities issued as of the date of the
warrants, certain issuances under our employee stock plans, or shares issued
upon exercise of the warrants.
The Investors have contractually agreed to restrict their ability to convert the
notes and exercise the warrants and receive shares of our common stock so that
the number of shares of our common stock held by them and their affiliates after
such conversion or exercise does not exceed 4.99% of the then issued and
outstanding shares of our common stock.
Without the prior written consent of a majority-in-interest of the Investors,
subject to certain exceptions as set forth in the agreement, we may not
negotiate or contract with any party to obtain additional equity financing
(including debt financing with an equity component) that involves (A) the
issuance of common stock at a discount to the market price of the common stock
on the date of issuance (taking into account the value of any warrants or
options to acquire common stock issued in connection therewith) or (B) the
issuance of convertible securities that are convertible into an indeterminate
number of shares of common stock or (C) the issuance of warrants during the
lock-up period beginning on July 25, 2006 and ending on the later of (i) two
hundred seventy (270) days from July 25, 2006 and (ii) one hundred eighty (180)
days from the date the registration statement is declared effective. In
addition, subject to certain exceptions as set forth in the agreement, we agreed
that we would not conduct any eq uity financing (including debt with an equity
component) during the period beginning on July 25, 2006 and ending two (2) years
after the end of the above lock-up period unless we have first provided to each
Investor an option to purchase its prorata share (based on the ratio of each
Investor's purchase under the Securities Purchase Agreement) of the securities
being offered in any proposed equity financing. We must provide each Investor
written notice describing any proposed equity financing at least 20 business
days prior to the closing and the option must be extended to each Investor for
15 days following delivery of the notice.
We agreed to file a registration statement for the shares underlying the notes
and the warrants within thirty days of closing, to be declared effective within
120 days of closing. We filed an SB-2 registration statement with the Securities
and Exchange Commission ("SEC") on August 25, 2006 for the securities underlying
the agreement; however, we requested withdrawal of this statement on October 31,
2006. We intend to file a new SB-2 to register the underlying shares of these
convertible notes and 6 million additional shares once we have cured our
delinquent filings with the SEC. Because the required registration statement was
not effective by the due date, we may be declared to be in default under the
agreement. Further, per the agreement, we are subject to liquidated damages in
the amount of 0.02% of the outstanding principal amount of the notes per month,
payable in cash or common stock, until the registration is effective.
9
INGEN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
We also agreed to increase our number of authorized shares of common stock from
100 million to 500 million within thirty days of the agreement. From this
reserved amount, we are required to have a number of common shares reserved for
issuance equal to no less than two times the number issuable upon conversion of
the notes and the warrants (based on the conversion price of the notes and the
exercise price of the warrants in effect from time to time). If the amount
reserved is below the amount to be reserved for the Investors under the
agreement, we are required to take all corporate action necessary to authorize
and reserve a sufficient number of shares. Under the agreement, if we fail to
obtain the shareholder approval necessary to increase the number of authorized
shares within thirty days following the date which the number of required
reserve shares exceeds the authorized and reserved shares, we may be noticed of
an event of default and required to pay the Investors liquidated damages of
three (3) perce nt of the outstanding amount of the notes per month plus accrued
and unpaid interest on the notes, prorated for partial months, in cash or shares
at the Investor's option. We currently do not have enough shares reserved under
the agreement.
The issuance costs incurred in connection with the convertible notes are
deferred and being amortized to interest expense over the life of each debenture
tranche.
The Company is accounting for the conversion option in the debentures and the
associated warrants as derivative liabilities in accordance with SFAS 133,
"ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," EITF 00-19,
"ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO AND POTENTIALLY
SETTLED IN A COMPANY'S OWN STOCK" and EITF No. 05-2, "THE MEANING OF
"CONVENTIONAL CONVERTIBLE DEBT INSTRUMENT" IN ISSUE NO. 00-19." The Company
attributed beneficial conversion features to the convertible debt using the
Black-Scholes Option Pricing Model. The fair value of the conversion feature has
been included as a discount to debt in the accompanying balance sheet up to the
proceeds received from each tranche, with any excess charged to interest and
financing expense. The discount is being amortized over the life of each
debenture tranche using the interest method.
The following tables describe the valuation of the conversion feature of each
tranche of the convertible debenture, using the Black Scholes pricing model on
the date of each note:
7/27/2006 8/30/2006 1/24/2007
Tranche Tranche Tranche
------------- ------------- -------------
Approximate risk free rate 5.25% 4.80% 4.65%
Average expected life 3 years 3 years 2.5 years
Dividend yield 0% 0% 0%
Volatility 202.01% 201.26% 138.21%
Estimated fair value
of conversion feature
on date of notes $ 1,328,118 $ 1,137,064 $ 371,193
Estimated fair value
of conversion feature
as of August 31, 2007 $ 1,291,543 $ 1,114,208 $ 379,472
The Company recorded the fair value of the conversion feature, aggregate of
$2,836,375, as a discount to the convertible debt in the accompanying balance
sheet up to the proceeds received from each tranche, with the excess of
$1,336,375 charged to expense. Amortization expense related to the conversion
feature discount for the quarter ended August 31, 2007 was $131,041. Remaining
unamortized discount as of that date was $976,479.
The Company also granted warrants to purchase 20,000,000 shares of
common stock in connection with the financing. The warrants are exercisable at
$0.10 per share for a period of seven years, and were fully vested. The warrants
were originally valued at $1,987,103 using the Black-Scholes Option Pricing
Model with the following weighted-average assumptions used.
7/26/2006
-------------
Approximate risk free rate 5.23%
Average expected life 7 years
Dividend yield 0%
Volatility 201.26%
Number of warrants granted 20,000,000
Estimated fair value of total warrants granted $ 1,987,103
The warrants were revalued as of the date of this report at a value of
$1,192,270 using the Black-Scholes Option Pricing Model. For the quarter ended
August 31, 2007, the Company has reported $396,806 in other expense related to
changes in its derivative liability associated with these warrants.
10
INGEN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
March 15, 2007 Securities Purchase Agreement ($450,000 Convertible Debt)
On March 15, 2007, we entered into a Securities Purchase Agreement with New
Millennium Capital Partners II, LLC, AJW Qualified Partners, LLC, AJW Offshore,
Ltd. and AJW Partners, LLC (the "Investors") and agreed to issue and sell (i)
callable secured convertible notes up to $450,000, and (ii) warrants to acquire
an aggregate of 9 million shares of our common stock. The callable secured
convertible notes (4 notes, $450,000 total loan principal; 3 year term; 6%
annual interest, 15% annual "default interest") are convertible into shares of
our common stock at a variable conversion price based upon the applicable
percentage of the average of the lowest three trading prices for the common
stock during the twenty trading day period prior to conversion. The "Applicable
Percentage" means 50%; provided, however, that the Applicable Percentage shall
be increased to (i) 55% in the event that a Registration Statement is filed
within thirty days of the required filing and (ii) 60% in the event that the
Registration Stat ement becomes effective within ninety days from the required
filing. Under the Agreement, the conversion price of the secured convertible
notes will be adjusted in the event we issue securities below the fixed
conversion price and may be adjusted in certain circumstances such as merger,
consolidation or if we pay a stock dividend.
We received the first tranche of $120,000 on March 15, 2007, less issuance costs
of $20,000, the second tranche of $110,000, less issuance costs of $10,000 on
April 16, 2007, and the third tranche of $110,000 was received on May 15, 2007,
less issuance costs of $10,000 and the final tranche of $110,000 was received on
June 12, 2007.
We may prepay the notes in the event that no event of default exists, there are
a sufficient number of shares available for conversion, and the market price is
at or below $0.10 per share. Prepayment of the convertible notes is to be made
in cash equal to either (i) 120% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issuance of the
notes, (ii) 130% of the outstanding principal and accrued interest for
prepayment occurring between 31 and 60 days following the issue dates of the
notes; and (iii) 140% of the outstanding principal and accrued interest for
prepayment occurring after the 60th day following the issue date of the notes.
In addition, in the event that the average daily price of the common stock for
each day of the month ending on any determination date is below $0.10, we may
repay a portion of the outstanding principal amount of the notes equal to 101%
of the principal amount divided by thirty-six plus one month's interest and this
will stay all conversions for the month.
Events of default under the notes generally include failure to repay the
principal or interest when due, failure to issue shares of common stock upon
conversion by the holder, failure to timely file a registration statement or
have such registration statement declared effective, breach of certain covenants
or representation or warranty in the Securities Purchase Agreement or related
convertible note, the assignment or appointment of a receiver to control a
substantial part of our property or business, a money judgment, writ or similar
process entered or filed against us in excess of $50,000 which continues for 20
days unless consented to by the holder, the commencement of a bankruptcy,
insolvency, reorganization or liquidation proceeding against us without stay or
the delisting of our common stock. Upon the occurrence of an event of default,
the note holders may demand repayment in an amount equal to the greater of (i)
the then outstanding principal amount of the convertible notes, together with
unpaid inter est and any outstanding penalties times 140% or (ii) the "parity
value" of the default sum, where parity value means (a) the highest number of
shares of common stock issuable upon conversion of the default sum, treating the
trading day immediately preceding the prepayment date as the "conversion date"
for the purpose of determining the lowest applicable conversion price (unless
the event of default is a result of a breach in reference to a specific
conversion date), multiplied by (b) the highest closing price for the common
stock during the period beginning on the date of first occurrence of the event
of default and ending one day prior to the prepayment date. In addition, we
granted the Investors a security interest in substantially all of our assets and
intellectual property pursuant to a Security Agreement and an Intellectual
Property Security Agreement.
We issued seven year warrants to purchase 9,000,000 shares of our common stock
at an exercise price of $0.06 per share. The Investors may exercise the warrants
on a cashless basis if the shares of common stock underlying the warrants are
not then registered pursuant to an effective registration statement. In
addition, the exercise price of the warrants will be adjusted in the event we
issue common stock at a price below market, with the exception of any securities
issued as of the date of the warrants, certain issuances under our employee
stock plans, or shares issued upon exercise of the warrants. Under the terms of
the callable secured convertible notes and the related warrants, the callable
secured convertible notes and the warrants are exercisable by any holder only to
the extent that the number of shares of common stock issuable pursuant to such
securities, together with the number of shares of common stock owned by such
holder and its affiliates (but not including shares of common stock underlying
unco nverted shares of callable secured convertible notes or unexercised
portions of the warrants) would not exceed 4.99% of the then outstanding common.
Per the agreement, we must file a registration statement covering two times the
number of shares underlying the notes and the shares underlying the warrants,
within 30 days of written demand. A penalty of .02% of the outstanding principal
amount per month for each month will accrue if the registration is not effective
in ninety days from filing.
Without the prior written consent of a majority-in-interest of the Investors,
subject to certain exceptions as set forth in the agreement, we may not
negotiate or contract with any party to obtain additional equity financing
(including debt financing with an equity component) that involves (i) the
issuance of common stock at a discount to the market price of the common stock
on the date of issuance (taking into account the value of any warrants or
options to acquire common stock issued in connection therewith) or (B) the
issuance of convertible securities that are convertible into an indeterminate
number of shares of common stock or (C) the issuance of warrants during the
lock-up period beginning on March 15, 2007 and ending one hundred eighty (180)
days from March 15, 2007. In addition, subject to certain exceptions as set
forth in the agreement, we agreed that we will not conduct any equity financing
(including debt with an equity component) during the period beginning on March
15, 2007 and ending two (2) years after the end of the above lock-up period
unless we have first provided to each Investor an option to purchase its prorata
share (based on the ratio of each Investor's purchase under the Securities
Purchase Agreement) of the securities being offered in any proposed equity
financing and the option must be extended to each Investor during the 15-day
period following delivery of notice.
11
INGEN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Subject to shareholder approval, we are required to have a number of common
shares reserved for issuance equal to no less than two times the number issuable
upon conversion of the notes and the warrants (based on the conversion price of
the notes and the exercise price of the warrants in effect from time to time).
If the amount reserved is below the amount to be reserved for the Investors
under the agreement, we are required to take all corporate action necessary to
authorize and reserve a sufficient number of shares. Under the agreement, if we
fail to obtain the shareholder approval necessary to increase the number of
authorized shares within thirty days following the date which the number of
required reserve shares exceeds the authorized and reserved shares, we may be
noticed of default and required to pay the Investors liquidated damages of three
(3) percent of the outstanding amount of the notes per month plus accrued and
unpaid interest on the notes, prorated for partial months in cash or shares at t
he Investor's option.
The issuance costs incurred in connection with the convertible notes are
deferred and being amortized to interest expense over the life of each debenture
tranche.
The Company is accounting for the conversion option in the debentures and the
associated warrants as derivative liabilities in accordance with SFAS 133,
"ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," EITF 00-19,
"ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO AND POTENTIALLY
SETTLED IN A COMPANY'S OWN STOCK" and EITF No. 05-2, "THE MEANING OF
"CONVENTIONAL CONVERTIBLE DEBT INSTRUMENT" IN ISSUE NO. 00-19." The Company
attributed beneficial conversion features to the convertible debt using the
Black-Scholes Option Pricing Model. The fair value of the conversion feature has
been included as a discount to debt in the accompanying balance sheet up to the
proceeds received from each tranche, with any excess charged to interest and
financing expense. The discount is being amortized over the life of each
debenture tranche using the interest method.
The following tables describe the valuation of the conversion feature of each
tranche of the convertible debenture, using the Black Scholes pricing model on
the date of each note:
3/15/2007 4/16/2007 5/15/2007 6/12/2007
Tranche Tranche Tranche Tranche
------------- ------------- ------------- ------------
Approximate risk free rate 4.47% 4.80% 4.87% 5.13%
Average expected life 3 years 3 years 3 years 3 years
Dividend yield 0% 0% 0% 0%
Volatility 182.97% 193.30% 193.30% 235.23%
Estimated fair value
of conversion feature
on date of notes $ 237,789 $ 218,638 $ 218,638 $ 214,099
Estimated fair value
of conversion feature
as of August 31, 2007 $ 228,297 $ 210,565 $ 211,167 $ 211,764
The Company recorded the fair value of the conversion feature, aggregate of
$889,164, as a discount to the convertible debt in the accompanying balance
sheet up to the proceeds received from each tranche, with the excess of $439,164
charged to expense. Amortization expense related to the conversion feature
discount for the quarter ended August 31, 2007 was $36,402. Remaining
unamortized discount as of that date was $398,931.
The Company also granted warrants to purchase 9,000,000 shares of common
stock in connection with the financing. The warrants are exercisable at $0.06
per share for a period of seven years, and were fully vested. The warrants were
originally valued at $443,468 using the Black-Scholes Option Pricing Model with
the following weighted-average assumptions used.
3/15/2007
-------------
Approximate risk free rate 4.47%
Average expected life 7 years
Dividend yield 0%
Volatility 182.97%
Number of warrants granted 9,000,000
Estimated fair value of total warrants granted $ 443,468
The warrants were revalued as of the date of this report at a value of
$538,320 using the Black-Scholes Option Pricing Model. For the quarter ended
August 31, 2007, the Company has reported $179,302 in other expense related to
changes in its derivative liability associated with these warrants.
July 30, 2007 Callable Secured Convertible Note ($110,000 Convertible Debt)
On July 30, 2007, the Company issued a callable secured convertible note in the
amount of $110,000. This note was issued under the same terms as the 6% $450,000
Convertible Debt above (the March 15, 2007 Securities Purchase Agreement).
The issuance cost of $10,000 incurred in connection with the convertible note is
deferred and being amortized to interest expense over the life of the note.
12
INGEN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company is accounting for the conversion option in the debenture as
derivative liabilities in accordance with SFAS 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES," EITF 00-19, "ACCOUNTING FOR DERIVATIVE
FINANCIAL INSTRUMENTS INDEXED TO AND POTENTIALLY SETTLED IN A COMPANY'S OWN
STOCK" and EITF No. 05-2, "THE MEANING OF "CONVENTIONAL CONVERTIBLE DEBT
INSTRUMENT" IN ISSUE NO. 00-19." The Company attributed beneficial conversion
features to the convertible debt using the Black-Scholes Option Pricing Model.
The fair value of the conversion feature has been included as a discount to debt
in the accompanying balance sheet up to the proceeds received from the note,
with any excess charged to interest and financing expense. The discount is being
amortized over the life of the note using the interest method.
The following tables describe the valuation of the conversion feature of the
convertible debenture, using the Black Scholes pricing model on the date of the
note:
7/30/2007
-------------
Approximate risk free rate 4.57%
Average expected life 3 years
Dividend yield 0%
Volatility 236.86%
Estimated fair value
of conversion feature
on date of notes $ 214,244
Estimated fair value
of conversion feature
as of August 31, 2007 $ 212,517
The Company recorded the fair value of the conversion feature at $214,244, as a
discount to the convertible debt in the accompanying balance sheet up to the
proceeds received, with the excess of $104,244 charged to expense. Amortization
expense related to the conversion feature discount for the quarter ended August
31, 2007 was $3,215. Remaining unamortized discount as of that date was
$106,785.
EVENTS OF DEFAULT UNDER NOTE AGREEMENTS
The Company has committed various acts which constitute events of default under
its Securities Agreements dated July 25, 2006, and March 15, 2007 (and the notes
thereunder with a total principal balances of $2,060,000). The Company has
received assurance from counsel for the investors that the investors have not
placed the Company in default under the notes and therefore the Company does not
consider itself in default. There can be no assurance that the investors will
not declare a default in the future. Should such notice of default be received
by the Company, its liabilities would increase dramatically due to the
penalties, reset provisions, and other damages specified in the transaction
documents. The increase in liabilities attributed to a notice of default under
the transaction documents could exceed the Company's current market
capitalization and affect negatively on its financial condition by $7-13 million
dollars. The debentures are collateralized by the Company's assets and, in the
event if the Company is unable to repay or restructure these debentures when
required, there is no assurance that the holders of the debentures will not
institute legal proceedings to recover the amounts owed including foreclosure on
the Company's assets.
DERIVATIVE LIABILITIES
In accordance with EITF 00-19, the conversion feature of each convertible
debenture and the stock warrants issued in conjunction with convertible
debentures have been included as long-term liabilities and were originally
valued at fair value at the date of issuance. As a liability, the convertible
features and the stock warrants are revalued each period until and unless the
debt is converted. As of August 31, 2007, the fair values of the conversion
feature and the stock warrants aggregated to $5,799,375. The Company recorded
expense of $573,779 related to the change in fair value from the last date of
valuation of the convertible debt to August 31, 2007. This amount is recorded as
"Change in Derivative Liabilities" a component of other income in the
accompanying consolidated statement of operations. If the debt is converted
prior to maturity, the carrying value will be transferred to equity.
NONEMPLOYEE OPTIONS
The Company has accounted for options granted to nonemployees in accordance with
FAS 123. Under FAS 123, the option award is based on the fair market value of
the underlying security based on the Black-Scholes Pricing Model, less the
option price.
13
INGEN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - PREFERRED STOCKS
On December 7, 2005, the Company had a reverse stock split of 3 to 1 for all
issued and outstanding preferred shares and converted all classes of preferred
shares into Series A preferred stock. The Company is authorized to issue
40,000,000 shares of no par value Series A preferred stock. As of August 31,
2007, the Company had 16,078,991 shares of preferred stock Series A issued and
outstanding. No dividends shall accrue or be payable on the Series A preferred
stocks. The Company has the right to redeem each share of Series A preferred
stock for $1; however, there is no obligation for this redemption. Each share of
Series A preferred stock is entitled to vote on all matters with holders of the
common stock; however, each Series A preferred stock is entitled to 1 vote. Each
share of Series A preferred stock is convertible, at the option of the holder
and subject to a 65 day written notice to the Company, at any time after the
date of the issuance into 1 share of fully paid and non-assessable share of
common stock. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of Series A preferred
stock shall be entitled to be paid $1 per share before any payments or
distribution of assets of the Company to the holders of the common stock or any
other equity securities of the Company.
During the quarter ending August 31, 2007, holders of the Company's Series A
preferred stock converted 500,000 shares of their Series A preferred stock into
500,000 shares of the Company's common stock.
On May 21, 2006, the Company and a subscriber entered into an Investment
Contract (the "Contract") in which the subscriber agreed to purchase 3 million
shares of the Company's restricted series A preferred shares at a price of
$0.0733 per share or $220,000. Under the Contract, these shares are to be
registered by the Company on Form SB-2. Such registration has not occurred. As
of August 31, 2007, all 3 million shares of restricted series A preferred shares
were issued and a subscription receivable of $220,000 was recorded against the
Company's equity.
NOTE 7 - COMMON STOCK
On October 31, 2005, the Board approved a reverse split to reduce the authorized
common shares to 100 million and also approved the reverse split of 40 to 1
outstanding and issued common shares; the effective date was on December 7,
2005. The accompanying consolidated financial statements reflect the reverse
stock split.
On June 15, 2007, the Company entered into an Investment Contract with an
existing shareholder to purchase 2,500,000 shares of its restricted common stock
for a price of $50,000 ($0.02 per share). The purchase price was payable in full
on or before September 15, 2007. The Investor paid $5,000 as of August 31, 2007.
The remaining $45,000 has been booked as a stock subscription receivable. The
remaining $45,000 was paid in September of 2007.
NOTE 8 - NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per
share:
For the three months ended
August 31,
---------------------------------
2007 2006
Numerator:
Net Loss $(1,377,336) $(2,766,114)
Denominator:
Weighted Average Number of Shares 37,766,443 22,207,208
--------------- ---------------
Net loss per share-Basic and Diluted $ (0.04) $ (0.12)
14
INGEN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - NET LOSS PER SHARE (CONTINUED)
As the Company incurred a net loss for the three months ended August 31, 2007
and 2006, it has excluded from the calculation of diluted net loss per share
approximately 121,162,326 and 26,083,333 shares, respectively. These shares
represent the Series A preferred stock, outstanding warrants and assume that all
convertible notes could be converted at the market price as of August 31, 2007
and 2006, respectively.
NOTE 9 - SEGMENT INFORMATION
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" requires that a publicly traded company must disclose information
about its operating segments when it presents a complete set of financial
statements. Since the Company has only one segment detailed information of the
reportable segment is not presented.
NOTE 10 - RELATED PARTY TRANSACTIONS
The Company had notes payable to its CEO, Scott Sand, in the amounts of $92,829
and $6,886 as of August 31, 2007 and 2006, respectively. Interest on the loan
was accrued at 6% for the quarter ended August 31, 2006. The bulk of the balance
due as of August 31, 2007 was a result of business expenses paid by Mr. Sand on
his personal credit cards. The Company will record interest in the amount of
finance charges on the credit cards. The related accrued interest of $4,988 is
included in the note balance as of August 31, 2007. In addition to the note
amounts, the Company also has accrued salary expense payable to Mr. Sand in the
amounts of $163,356 and $112,000 as of August 31, 2007 and 2006, respectively.
NOTE 11 - LEASE OBLIGATION
The Company leases its administrative office under a two unsecured leases
agreement which expire on April 1, 2008 and December 31, 2009. The Company also
maintains a corporate office under a month-to-month lease agreement. As of
August 31, 2007, the remaining lease obligation is as follows:
Year Ending Lease
May 31, Obligation
---------------------------------------
2008 $ 9,200
2009 9,300
2010 5,425
------------
$ 23,925
============
The total rent expense for the quarter ended August 31, 2007 was $7,850.
NOTE 12 - INTANGIBLE ASSETS
The Company has recorded patents at a cost of $67,345. This represents legal
costs of filing for patents and the purchase of the exclusive rights for a
patent with common stock valued at $60,000.
NOTE 13 - GUARANTEES
The Company from time to time enters into certain types of contracts that
contingently require the Company to indemnify parties against third-party
claims. These contracts primarily relate to: (i) divestiture agreements, under
which the Company may provide customary indemnifications to purchasers of the
Company's businesses or assets; and (ii) certain agreements with the Company's
officers, directors and employees, under which the Company may be required to
indemnify such persons for liabilities arising out of their employment
relationship.
The terms of such obligations vary. Generally, a maximum obligation is not
explicitly stated. Because the obligated amounts of these types of agreements
often are not explicitly stated, the overall maximum amount of the obligation
cannot be reasonably estimated. Historically, the Company has not been obligated
to make significant payments for these obligations, and no liabilities have been
recorded for these obligations on its balance sheet as of August 31, 2007.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
This Quarterly Report on Form 10-QSB contains forward-looking statements, which
reflect management's current views with respect to future events and financial
performance. In this report, the words "anticipates," "believes," "expects,"
"intends," "future," "may" and similar expressions identify forward-looking
statements. These and other forward-looking statements are subject to certain
risks and uncertainties, including those discussed in the Risk Factors section
of this Item 2 and elsewhere in this Form 10-QSB, that could cause actual
results to differ materially from historical results or those anticipated.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. We undertake no obligation
to publicly release the results of any revisions to these forward-looking
statements which may be made to reflect events or circumstances occurring
subsequent to the filing of the Form 10-QSB with the Securities and Exchange
Commission.
OVERVIEW
We are a medical device manufacturer and service provider for medical and
consumer markets both domestic and abroad. All of our manufacturing is currently
subcontracted. We have four products, two of which are currently generating
revenues; Secure Balance(TM) and Oxyview(TM). The Secure Balance(TM) product is
a private-label product that includes a vestibular function testing system and
balance therapy system. Oxyview(TM) is part of our product line for wireless,
digital, low gas warning systems for pressurized gas cylinders, known as
BAFI(TM). The other oxygen and gas monitoring safety devices in our BAFI product
line that are still being developed are OxyAlert(TM) and GasAlert(TM).
GasAlert(TM) development is currently "on hold" and we do not intend to focus on
it until we have OxyAlert(TM) in a production and sales mode. We also have an
agri-business concept known as Pure Produce, which involves establishing
soil-less indoor farming facilities near population centers to grow food and
neutriceuticals. Our development plans for Pure Produce are currently suspended,
pending the full launch of our BAFI product line and additional funding.
Our Oxyview(TM) product went into production after FDA registration in October
of 2006. Our first sale of this product was on November 11, 2006. We have
launched a marketing campaign and have entered into agreements with several
distributors to sell Oxyview(TM) units. All manufacturing of Oxyview(TM) units
has been subcontracted with Accent Plastics. The Company is the registered
manufacturer of Oxyview(TM) and owns the tooling and molds on location at the
manufacturing plant of Accent Plastics, Inc. The Company placed its first order
with Accent on October 20, 2006. The Company's arrangement with Accent is solely
based on purchase orders from the Company and invoices from Accent at an agreed
price per unit.
Oxyview (TM), has a U.S. (as well as in the People's Republic of China, Japan
and Europe) patent and trademark pending, and is a pneumatic gauge that provides
visual safety warning of oxygen flow to hospitalized patients. This product is
designed to enhance the safety, assurance and accuracy of hospitalized patients
being administered oxygen from any source. Oxyview (TM) is a lightweight
pneumatic gauge that is attached to the oxygen tubing just below the neck. It
informs the nursing staff of oxygen flow rate near the patient. It is designed
to quickly inform the hospital staff of any leak or inaccuracy between the
delivery source and the patient.
We have filed for approval with the FDA to commence marketing of our
OxyAlert(TM) units. Upon approval of the FDA, we will begin marketing and sales
of OxyAlert(TM). The OxyAlert(TM) system is intended to be used in monitoring
oxygen intake pressure to a recipient of supplemental oxygen. The caregiver is
alerted when the oxygen level falls below a predetermined threshold. The
OxyAlert Receiver Monitor is an interface that provides the caregiver with
visual or audio signals notifying them of the low oxygen levels.
Both the Oxyview (TM) and OxyAlert (TM) products are low-oxygen safety warning
devices used on remote oxygen cylinders for patients, commercial aircraft,
military transport, and fire and safety equipment. OxyAlert(TM) technology
encompasses the use of digital sensing and RF frequency transfer so that care
givers can access a hand-held remote to monitor the actual oxygen level of any
oxygen cylinder at a reasonable distance.
Using the same patented and proprietary technology, the Company also plans to
offer our GasAlert(TM) product; a device that interfaces between any gas line
and accessory, such as a water heater, dryer, stove or heater, to detect leaks.
This is a mass consumer item. We do not have an anticipated market date for
GasAlert(TM).
Our business plan for the remainder of fiscal year ending May 31, 2008 is to
continue our efforts to increase the market share for Secure Balance(TM) and to
continue with the world-wide sales of one of our BAFI(TM) product lines,
OxyView(tm). We will also continue to develop OxyAlert(TM) if funds allow. The
marketing costs incurred to increase the sales of OxyView(TM) could be quite
substantial.
16
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED AUGUST 31, 2007
COMPARED TO THE THREE MONTHS ENDED AUGUST 31, 2006
We reported gross sales of $117,471 in the quarter ended August 31, 2007. Our
total sales fell 38% from sales of $189,158 in the quarter ended August 31,
2006. Our sales decrease was attributable to less sales of our Secure Balance
(TM) product. Our Secure Balance (TM) sales were $75,695 in the current quarter,
compared to $189,158 in the quarter ended August 31, 2006. Secure Balance (TM)
sales accounted for 64% of our current quarter's sales and 100% of the sales in
the quarter ended August 31, 2006. Management attributes the drop in Secure
Balance(TM) sales in comparison to a year ago to a change in billing practices
of Medicare. The government "changed" the rules, telling physicians that they
could not utilize the balance therapy equipment in their offices without having
a licensed physical therapist on hand while the equipment was in use. Therefore,
for a period of time, only physicians willing to bring physical therapists into
their offices were willing to purchase or lease Secure Balance(TM). However,
after an outcry from physicians, management has learned that Medicare's decision
has been reversed. It is management's understanding that now Secure Balance(TM)
can be utilized by physicians, in their offices without the need to have a
physical therapist present, as long as the use is "incident" to their practices.
As a result, management expects Secure Balance(TM) sales to increase. Further,
our sales of Oxyview (TM) are anticipated to continue to increase from the
current quarter's sales as we expand sales channels. After shipping our first
sale of Oxyview (TM) in November of 2006, our sales of Oxyview (TM) were $40,544
in the quarter ended August 31, 2007. We also reported $132 in sales of supplies
and $1,100 in freight charges that we collected and recorded as income in the
quarter ended August 31, 2007.
Our total cost of sales was $67,413 in the quarter ended August 31, 2007 and our
gross profit was $50,058 (a gross margin of 42.6%). We reported cost of sales of
$115,547 in the quarter ended August 31, 2006 with a gross profit of $73,611 (a
gross margin of 38.9%). We anticipate that our gross margin will continue to
improve as we increase our Oxyview (TM) sales which generates a higher gross
margin than our Secure Balance (TM) sales. The cost of sales for our Oxyview
(TM) sales was $10,642 which generated a gross profit of $29,902 (a gross margin
of 73.8%). Secure Balance sales in the quarter ended August 31, 2007 generated a
gross margin of 25% (cost of sales of $56,771 generating a gross profit of
$18,924).
Our selling, general and administrative expenses were $406,694 in the quarter
ended August 31, 2007. This was an increase of approximately 23.6% from the
selling, general and administrative expenses of $329,104 reported in the quarter
ended August 31, 2006. The increase in SG&A is primarily attributable to
expenses associated with the marketing and development of sales channels for the
Oxyview (TM) product.
Our interest expense for the quarter ended August 31, 2007 was $446,911. This
was a decrease of 87.4% from the interest expense of $3,540,915 in the quarter
ended August 31, 2006. The vast majority of our interest expense related to the
accounting treatment of the convertible feature of the notes payable. The
interest expense relating to financing costs in the quarters ended August 31,
2007 and 2006 were $411,273 and $3,523,545, respectively. The interest expense
accrued on the notes payable and other interest paid in the quarters ended
August 31, 2007 and 2006 were $35,638 and $17,370, respectively.
We recorded expense due to the change in our derivative liability in the amount
of $573,779 in the quarter ended August 31, 2007. This is compared to the income
that we reported in the amount of $1,031,094 in the quarter ended August 31,
2006. This expense and income was a result of the Company's treatment of certain
convertible notes payable and warrants. The Company is required to value the
convertible feature of each convertible note and also value the warrants when
they are issued. The valuation was done again as of August 31, 2007 and 2006.
Any increases in these values, which are based on a Black Scholes valuation,
have been recorded as expense and decreases are recorded as income.
We have not generated net profit to date and therefore have not paid any federal
income taxes since inception. We paid $10 and $800 in state taxes in the
quarters ended August 31, 2007 and 2006, respectively. We estimate that our
federal tax net operating loss carryforward will be approximately $4.6 million
as of May 31, 2007, the end of our last fiscal year. This carryforward was equal
to $3,009,598 as of May 31, 2006. The loss carryforward will begin to expire in
2019, if not utilized. Our ability to utilize our net operating loss and tax
credit carryforwards may be limited in the event of a change in ownership.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 2007, our current assets totaled $178,912 (including cash of
$7,762, accounts receivable of $78,090, inventory of $74,953 and prepaid
expenses of $18,107). Total current liabilities were $466,114, consisting of
$80,654 in accounts payable, $269,742 in accrued expense, $8,350 in taxes
payable, $92,829 in an officer's loan and $14,539 representing the current
portion of long-term debt. We had $117,471 of sales in the quarter ended August
31, 2007, sales of convertible debentures on which we netted $200,000 and sales
of common stock on which we netted $74,800. Our finances were assisted by
deferments from our CEO and Chairman Scott R. Sand. Mr. Sand accrued $50,000 in
salary in the quarter. As of August 31, 2007, we owed Mr. Sand $163,356 in
accrued salary and an additional $92,829 for expenses that he has paid on behalf
of the Company.
17
Our future cash requirements will depend on many factors, including finishing
the development of our BAFI(TM) product line (largely completed, as our Oxyview
product is now being sold), the costs involved in filing, prosecuting and
enforcing patents, competing technological and market developments and the cost
of product commercialization for OxyAlert in particular, as well as our ongoing
Secure Balance(TM) and Oxyview sales efforts. We intend to seek additional
funding through public or private financing transactions. Successful future
operations are subject to a number of technical and business risks, including
our continued ability to obtain future funding, satisfactory product development
and market acceptance for our products.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have off-balance sheet arrangements, financings, or other
relationships with unconsolidated entities or other persons, also known as
"special purpose entities" (SPEs).
SIGNIFICANT FINANCING
July 25, 2006 Securities Purchase Agreement
On July 25, 2006, we entered into a Securities Purchase Agreement with New
Millennium Capital Partners II, LLC, AJW Qualified Partners, LLC, AJW Offshore,
Ltd. and AJW Partners, LLC (the "Investors") and agreed to issue and sell (i)
callable secured convertible notes up to $2 million, and (ii) warrants to
acquire an aggregate of 20 million shares of our common stock. The notes bear
interest at 6% per annum (15% "default interest" per annum), and mature three
years from the date of issuance. The notes are convertible into our common stock
at the applicable percentage of the average of the lowest three trading prices
for our shares of common stock during the twenty trading day period prior to
conversion. The applicable percentage is 50%; however, the percentage shall be
increased to: (i) 55% in the event that a Registration Statement is filed within
thirty days from July 25, 2006, and (ii) 60% in the event that the Registration
Statement becomes effective within one hundred and twenty days from July 26,
2006. Since we did not have a Registration Statement become effective within one
hundred and twenty days of July 25, 2006, the applicable percentage is 50%.
Under the agreement, the conversion price of the secured convertible notes will
be adjusted in the event we issue securities below the fixed conversion price
and may be adjusted in certain circumstances such as merger, consolidation or if
we pay a stock dividend. At May 31, 2007, only $1.5 million of the convertible
notes were funded.
We received the first tranche of $700,000 on July 27, 2006, less issuance costs
of $295,200, the second tranche of $600,000, less issuance costs of $13,000 on
August 30, 2006, and the third tranche of $200,000 was received on January 24,
2007.
We may prepay the notes in the event that no event of default exists, there are
a sufficient number of shares available for conversion, and the market price is
at or below $0.10 per share. Prepayment of the convertible notes is to be made
in cash equal to 140% of the outstanding principal and accrued interest (for
prepayment occurring after the 60th day following the issue date of the notes).
In addition, in the event that the reported average daily price of the common
stock for each day of the month ending on any determination date is below $0.10,
we may repay a portion of the outstanding principal amount of the notes equal to
101% of the principal amount divided by thirty-six plus one month's interest and
this will stay all conversions for the month.
Events of default under the notes generally include failure to repay the
principal or interest when due, failure to issue shares of common stock upon
conversion by the holder, failure to timely file a registration statement or
have such registration statement declared effective, breach of certain covenants
or representation or warranty in the Securities Purchase Agreement or related
convertible note, the assignment or appointment of a receiver to control a
substantial part of our property or business, a money judgment, writ or similar
process entered or filed against us in excess of $50,000 which continues for 20
days unless consented to by the holders, the commencement of a bankruptcy,
insolvency, reorganization or liquidation proceeding against us without stay or
the delisting of our common stock. Upon the occurrence of an event of default,
the note holders may by written notice demand repayment in an amount equal to
the greater of (i) the then outstanding principal amount of the convertible
notes, toget her with unpaid interest and any outstanding penalties times 140%
or (ii) the "parity value" of the default sum, where parity value means (a) the
highest number of shares of common stock issuable upon conversion of the default
sum, treating the trading day immediately preceding the prepayment date as the
"conversion date" for the purpose of determining the lowest applicable
conversion price (unless the event of default is a result of a breach in
reference to a specific conversion date), multiplied by (b) the highest closing
price for the common stock during the period beginning on the date of first
occurrence of the event of default and ending one day prior to the prepayment
date. In addition, we granted the Investors a security interest in substantially
all of our assets and intellectual property pursuant to a Security Agreement and
an Intellectual Property Security Agreement.
The warrants have an exercise price of $0.10 per share and expire after seven
years. The Investors may exercise the warrants on a cashless basis if the shares
of common stock underlying the warrants are not then registered pursuant to an
effective registration statement. In addition, the exercise price of the
warrants will be adjusted in the event we issue common stock at a price below
market, with the exception of any securities issued as of the date of the
warrants, certain issuances under our employee stock plans, or shares issued
upon exercise of the warrants.
18
The Investors have contractually agreed to restrict their ability to convert the
notes and exercise the warrants and receive shares of our common stock so that
the number of shares of our common stock held by them and their affiliates after
such conversion or exercise does not exceed 4.99% of the then issued and
outstanding shares of our common stock.
Without the prior written consent of a majority-in-interest of the Investors,
subject to certain exceptions as set forth in the agreement, we may not
negotiate or contract with any party to obtain additional equity financing
(including debt financing with an equity component) that involves (A) the
issuance of common stock at a discount to the market price of the common stock
on the date of issuance (taking into account the value of any warrants or
options to acquire common stock issued in connection therewith) or (B) the
issuance of convertible securities that are convertible into an indeterminate
number of shares of common stock or (C) the issuance of warrants during the
lock-up period beginning on July 25, 2006 and ending on the later of (i) two
hundred seventy (270) days from July 25, 2006 and (ii) one hundred eighty (180)
days from the date the registration statement is declared effective. In
addition, subject to certain exceptions as set forth in the agreement, we agreed
that we would not conduct any eq uity financing (including debt with an equity
component) during the period beginning on July 25, 2006 and ending two (2) years
after the end of the above lock-up period unless we have first provided to each
Investor an option to purchase its prorata share (based on the ratio of each
Investor's purchase under the Securities Purchase Agreement) of the securities
being offered in any proposed equity financing. We must provide each Investor
written notice describing any proposed equity financing at least 20 business
days prior to the closing and the option must be extended to each Investor for
15 days following delivery of the notice.
We agreed to file a registration statement for the shares underlying the notes
and the warrants within thirty days of closing, to be declared effective within
120 days of closing. We filed an SB-2 registration statement with the Securities
and Exchange Commission ("SEC") on August 25, 2006 for the securities underlying
the agreement; however, we requested withdrawal of this statement on October 31,
2006. We intend to file a new SB-2 to register the underlying shares of these
convertible notes and 6 million additional shares once we have cured our
delinquent filings with the SEC. Because the required registration statement was
not effective by the due date, we may be declared to be in default under the
agreement. Further, per the agreement, we are subject to liquidated damages in
the amount of 0.02% of the outstanding principal amount of the notes per month,
payable in cash or common stock, until the registration is effective.
We also agreed to increase our number of authorized shares of common stock from
100 million to 500 million within thirty days of the agreement. From this
reserved amount, we are required to have a number of common shares reserved for
issuance equal to no less than two times the number issuable upon conversion of
the notes and the warrants (based on the conversion price of the notes and the
exercise price of the warrants in effect from time to time). If the amount
reserved is below the amount to be reserved for the Investors under the
agreement, we are required to take all corporate action necessary to authorize
and reserve a sufficient number of shares. Under the agreement, if we fail to
obtain the shareholder approval necessary to increase the number of authorized
shares within thirty days following the date which the number of required
reserve shares exceeds the authorized and reserved shares, we may be noticed of
an event of default and required to pay the Investors liquidated damages of
three (3) perce nt of the outstanding amount of the notes per month plus accrued
and unpaid interest on the notes, prorated for partial months, in cash or shares
at the Investor's option. We currently do not have enough shares reserved under
the agreement.
March 15, 2007 Securities Purchase Agreement
On March 15, 2007, we entered into a Securities Purchase Agreement with New
Millennium Capital Partners II, LLC, AJW Qualified Partners, LLC, AJW Offshore,
Ltd. and AJW Partners, LLC (the "Investors") and agreed to issue and sell (i)
callable secured convertible notes up to $450,000, and (ii) warrants to acquire
an aggregate of 9 million shares of our common stock. The callable secured
convertible notes (4 notes, $450,000 total loan principal; 3 year term; 6%
annual interest, 15% annual "default interest") are convertible into shares of
our common stock at a variable conversion price based upon the applicable
percentage of the average of the lowest three trading prices for the common
stock during the twenty trading day period prior to conversion. The "Applicable
Percentage" means 50%; provided, however, that the Applicable Percentage shall
be increased to (i) 55% in the event that a Registration Statement is filed
within thirty days of the required filing and (ii) 60% in the event that the
Registration Stat ement becomes effective within ninety days from the required
filing. Under the agreement, the conversion price of the secured convertible
notes will be adjusted in the event we issue securities below the fixed
conversion price and may be adjusted in certain circumstances such as merger,
consolidation or if we pay a stock dividend.
We received the first tranche of $120,000 on March 15, 2007, less issuance costs
of $20,000, the second tranche of $110,000, less issuance costs of $10,000 on
April 16, 2007, and the third tranche of $110,000 was received on May 15, 2007,
less issuance costs of $10,000 and the final tranche of $110,000 was received on
June 12, 2007.
We may prepay the notes in the event that no event of default exists, there are
a sufficient number of shares available for conversion, and the market price is
at or below $0.10 per share. Prepayment of the convertible notes is to be made
in cash equal to either (i) 120% of the outstanding principal and accrued
interest for prepayments occurring with 30 days following the issuance of the
notes, (ii) 130% of the outstanding principal and accrued interest for
prepayment occurring between 31 and 60 days following the issue dates of the
notes; and (iii) 140% of the outstanding principal and accrued interest for
prepayment occurring after the 60th day following the issue date of the notes.
In addition, in the event that the average daily price of the common stock for
each day of the month ending on any determination date is below $0.10, we may
repay a portion of the outstanding principal amount of the notes equal to 101%
of the principal amount divided by thirty-six plus one month's interest and this
will stay al l conversions for the month.
19
Events of default under the notes generally include failure to repay the
principal or interest when due, failure to issue shares of common stock upon
conversion by the holder, failure to timely file a registration statement or
have such registration statement declared effective, breach of certain covenants
or representation or warranty in the Securities Purchase Agreement or related
convertible note, the assignment or appointment of a receiver to control a
substantial part of our property or business, a money judgment, writ or similar
process entered or filed against us in excess of $50,000 which continues for 20
days unless consented to by the holders, the commencement of a bankruptcy,
insolvency, reorganization or liquidation proceeding against us without stay or
the delisting of our common stock. Upon the occurrence of an event of default,
the note holders may demand repayment in an amount equal to the greater of (i)
the then outstanding principal amount of the convertible notes, together with
unpaid inte rest and any outstanding penalties times 140% or (ii) the "parity
value" of the default sum, where parity value means (a) the highest number of
shares of common stock issuable upon conversion of the default sum, treating the
trading day immediately preceding the prepayment date as the "conversion date"
for the purpose of determining the lowest applicable conversion price (unless
the event of default is a result of a breach in reference to a specific
conversion date), multiplied by (b) the highest closing price for the common
stock during the period beginning on the date of first occurrence of the event
of default and ending one day prior to the prepayment date. In addition, we
granted the Investors a security interest in substantially all of our assets and
intellectual property pursuant to a Security Agreement and an Intellectual
Property Security Agreement.
We issued seven year warrants to purchase 9,000,000 shares of our common stock
at an exercise price of $0.06 per share. The Investors may exercise the warrants
on a cashless basis if the shares of common stock underlying the warrants are
not then registered pursuant to an effective registration statement. In
addition, the exercise price of the warrants will be adjusted in the event we
issue common stock at a price below market, with the exception of any securities
issued as of the date of the warrants, certain issuances under our employee
stock plans, or shares issued upon exercise of the warrants. Under the terms of
the callable secured convertible notes and the related warrants, the callable
secured convertible notes and the warrants are exercisable by any holder only to
the extent that the number of shares of common stock issuable pursuant to such
securities, together with the number of shares of common stock owned by such
holder and its affiliates (but not including shares of common stock underlying
unco nverted shares of callable secured convertible notes or unexercised
portions of the warrants) would not exceed 4.99% of the then outstanding common.
Per the agreement, we must file a registration statement covering two times the
number of shares underlying the notes and the shares underlying the warrants,
within 30 days of written demand. A penalty of .02% of the outstanding principal
amount per month for each month will accrue if the registration is not effective
in ninety days from filing.
Without the prior written consent of a majority-in-interest of the Investors,
subject to certain exceptions as set forth in the agreement, we may not
negotiate or contract with any party to obtain additional equity financing
(including debt financing with an equity component) that involves (i) the
issuance of common stock at a discount to the market price of the common stock
on the date of issuance (taking into account the value of any warrants or
options to acquire common stock issued in connection therewith) or (B) the
issuance of convertible securities that are convertible into an indeterminate
number of shares of common stock or (C) the issuance of warrants during the
lock-up period beginning on March 15, 2007 and ending one hundred eighty (180)
days from March 15, 2007. In addition, subject to certain exceptions as set
forth in the agreement, we agreed that we will not conduct any equity financing
(including debt with an equity component) during the period beginning on March
15, 2007 and ending two (2) years after the end of the above lock-up period
unless we have first provided to each Investor an option to purchase its prorata
share (based on the ratio of each Investor's purchase under the Securities
Purchase Agreement) of the securities being offered in any proposed equity
financing and the option must be extended to each Investor during the 15-day
period following delivery of notice.
Subject to shareholder approval, we are required to have a number of common
shares reserved for issuance equal to no less than two times the number issuable
upon conversion of the notes and the warrants (based on the conversion price of
the notes and the exercise price of the warrants in effect from time to time).
If the amount reserved is below the amount to be reserved for the Investors
under the agreement, we are required to take all corporate action necessary to
authorize and reserve a sufficient number of shares. Under the agreement, if we
fail to obtain the shareholder approval necessary to increase the number of
authorized shares within thirty days following the date which the number of
required reserve shares exceeds the authorized and reserved shares, we may be
noticed of default and required to pay the Investors liquidated damages of three
(3) percent of the outstanding amount of the notes per month plus accrued and
unpaid interest on the notes, prorated for partial months in cash or shares at t
he Investor's option.
On July 30, 2007, we issued a callable secured convertible note in the amount of
$110,000. This note was issued under the same terms as the 6% $450,000
Convertible Debt described above (the March 15, 2007 Securities Purchase
Agreement).
The foregoing is a general description of the securities purchase agreements and
related obligations, copies of the July 25, 2006 agreements were filed as
exhibits to our Current Report on Form 8-K, filed with the SEC on August 8, 2006
and copies of the March 15, 2007 agreements were filed as exhibits to our Form
10-KSB, filed with the SEC on August 29, 2007. Under the transaction documents,
we have committed various acts and failed to timely perform other acts that
constitute events of default under the transaction documents. We have received
assurance from counsel for the investors that "You are not in default. We [the
investors] have to put you into default and we have not." There can be no
assurance that the investors will not declare a default in the future. Our
stockholders should be aware that if the investors provide written notice of
default to us, then our liabilities would increase dramatically due to the
penalties, reset provisions, and other damages specified in the transaction
documents. The increase in liabilities attributed to a notice of default under
the transaction documents could exceed our current market capitalization and
affect negatively our financial condition by $7-13 million dollars. The
debentures are collateralized by our assets and, in the event if we are unable
to repay or restructure these debentures, there is no assurance that the holders
of the debentures will not institute legal proceedings to recover the amounts
owed including foreclosure on our assets.
20
TRENDS THAT MAY IMPACT OUR LIQUIDITY
Positive Trends:
The United States has an increasingly elderly population. Our Secure Balance(TM)
and BAFI(TM) product line (except GasAlert(TM) which targets the entire adult
population) are made to meet some of the challenges and circumstances
experienced by our senior citizens. As a result, we expect our sales to increase
in time in reflection of this positive trend.
Management also believes that our products provide increasing protection in
relation to medical malpractice issues. Use of our Secure Balance(TM) system and
OxyAlert(TM) and Oxyview(TM) products enhance the safety of patients, and
therefore, we believe, lessen the chances of medical malpractice exposure to our
physician clients.
We have been developing our BAFI(TM) product line since 1999. Now, some 7 years
later, we still have not identified competition in the marketplace for our
BAFI(TM) product line. The lack of competition is expected to enhance our
planned marketing campaign.
We believe that Secure Balance(TM) is now among the leaders in the balance and
fall prevention industry. We expect to be able to capitalize on this notoriety
and increase our Secure Balance(TM) sales in fiscal year 2007 and beyond (as
long as physicians are not impacted by Medicare billing changes, that may
fluctuate periodically, as discussed above, and below).
Negative Trends:
Our product sales are impacted by Medicare, and are Medicare dependent. Adverse
economic conditions, federal budgetary concerns and politics can affect Medicare
regulations and could negatively impact our product sales.
SEASONAL ASPECTS THAT EFFECT MAY IMPACT OUR MEDICAL MARKET
Traditionally, the medical market experiences an economic decrease in purchasing
during the summer months. Peak months are usually October through February,
followed by a decrease from March to May. This is the common "bell curve" that
has been consistent for several decades and will affect our sales during the
course of a year.
OUR SECURE BALANCE(TM) LEASING AND FINANCING PROGRAMS
Our Secure Balance(TM) Leasing and Financing Programs are offered to allow our
physician and medical facility clients a variety of affordable leasing and
financing options. Our financing option includes a 90 day deferral program,
giving clients a chance to earn revenues from Secure Balance(TM) before payments
are due.
BUSINESS RISKS
The following is a summary of the many risks and uncertainties we face in our
business. You should carefully read these risks and uncertainties as well as the
other information in this report in evaluating our business and its prospects.
RISKS RELATED TO OUR BUSINESS:
WE HAVE A HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT, AND WE MAY NOT
ACHIEVE OR MAINTAIN PROFITABILITY IN THE FUTURE.
We have experienced significant operating losses in each period since our
inception. As of August 31, 2007, we have incurred total accumulated losses of
$14,938,807. We expect these losses to continue and it is uncertain when, if
ever, we will become profitable. These losses have resulted principally from
costs incurred in the development of our products and from general and
administrative costs associated with operations. We expect to incur increasing
operating losses in the future as a result of expenses associated with research
and product development as well as general and administrative costs. Even if we
do achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis.
21
WE WILL NEED ADDITIONAL CAPITAL IN THE FUTURE TO SUPPORT OUR GROWTH, AND RAISING
SUCH CAPITAL WILL LIKELY CAUSE SUBSTANTIAL DILUTION TO EXISTING STOCKHOLDERS. IF
ADDITIONAL CAPITAL IS NOT AVAILABLE, WE MAY HAVE TO CURTAIL OR CEASE OPERATIONS.
Our current plans indicate we will need significant additional capital for
research and development and market penetration before we have substantial
revenue generated from our BAFI(TM) product line. The actual amount of funds
that we will need will be determined by many factors, some of which are beyond
our control, and we may need funds sooner than currently anticipated. These
factors include:
o the extent to which we enter into licensing arrangements,
collaborations or joint ventures;
o our progress with research and development;
o the costs and timing of obtaining new patent rights;
o cost of continuing operations and sales;
o the extent to which we acquire or license other technologies; and
o regulatory changes and competition and technological developments in
the market.
We will be relying on future securities sales or additional loans to enable us
to grow and reach profitability. There is no guarantee we will be able to sell
our securities or secure additional loans. Further, future sales of securities
will likely subject our shares to dilution.
WE HAVE RELIED ON CAPITAL CONTRIBUTED BY RELATED PARTIES, AND SUCH CAPITAL MAY
NOT BE AVAILABLE IN THE FUTURE.
The Company has relied on loans and compensation deferrals from our CEO and
Chairman, Scott R. Sand, and investment in the form of convertible notes payable
from various individuals and entities to sustain the Company from 1999 into the
current fiscal year. Although we have paid much of these loans from Mr. Sand
back, we may be unable to repay the remainder as planned and may have to look
again to Mr. Sand for assistance in financing. There is no guarantee that Mr.
Sand will have financial resources available to assist in our funding. Mr.
Sand's executive compensation continues to accrue; currently we are obligated to
pay him $200,000 per year under his employment contract with the Company. As of
August 31, 2007, the Company owes Mr. Sand $163,356 under his employment
contract and also owes him $92,829 in loans made to the Company. If future
capital is not available from Mr. Sand or other third parties in the future, the
Company's operations may be negatively affected.
OUR BAFI PRODUCTS MAY NOT BE SUCCESSFULLY DEVELOPED OR COMMERCIALIZED, WHICH
WOULD HARM US AND FORCE US TO CURTAIL OR CEASE OPERATIONS.
We are a relatively new company and most of our BAFI(TM) product line is still
in the late stages of development as we still need manufacturing prototypes. Of
the BAFI(TM) products, only Oxyview (TM) is currently being marketed and sold.
Our Oxyview (TM) sales for the quarter ended August 31, 2007 were $40,544. These
products, once marketing commences, may not be successfully developed or
commercialized on a timely basis, or at all. If we are unable, for technological
or other reasons, to complete the development, introduction or scale-up of
manufacturing of these products or other potential products, or if our products
do not achieve a significant level of market acceptance, we would be forced to
curtail or cease operations. Even if we develop our products for commercial use,
we may not be able to develop products that:
o are accepted by, and marketed successfully to, the medical
marketplace;
o are safe and effective;
o are protected from competition by others;
o do not infringe the intellectual property rights of others;
o are developed prior to the successful marketing of similar products
by competitors; or
o can be manufactured in sufficient quantities or at a reasonable
cost.
WE MAY NOT BE ABLE TO FORM AND MAINTAIN THE COLLABORATIVE RELATIONSHIPS THAT OUR
BUSINESS STRATEGY REQUIRES, AND IF WE CANNOT DO SO, OUR ABILITY TO DEVELOP
PRODUCTS AND REVENUE WILL SUFFER.
22
We must form research collaborations and licensing arrangements with several
partners at the same time to operate our business successfully. To succeed, we
will have to maintain our existing relationships and establish additional
collaborations. We may not be able to establish any additional research
collaborations or licensing arrangements necessary to develop and commercialize
products using our technology or do so on terms favorable to us. If our
collaborations are not successful or we are not able to manage multiple
collaborations successfully, our programs may suffer.
Collaborative agreements generally pose the following risks:
o collaborators may not pursue further development and
commercialization of products resulting from collaborations or may
elect not to continue or renew research and development programs;
o collaborators may delay clinical trials, under-fund a clinical trial
program, stop a clinical trial or abandon a product, repeat or
conduct new clinical trials or require a new formulation of a
product for clinical testing;
o collaborators could independently develop, or develop with third
parties, products that could compete with our future products;
o the terms of our agreements with our current or future collaborators
may not be favorable to us;
o a collaborator with marketing and distribution rights to one or more
products may not commit enough resources to the marketing and
distribution of our products, limiting our potential revenues from
the commercialization of a product;
o disputes may arise delaying or terminating the research, development
or commercialization of our products, or result in significant
litigation or arbitration; and
o collaborations may be terminated and, if terminated, we would
experience increased capital requirements if we elected to pursue
further development of the product.
OUR QUARTERLY OPERATING RESULTS WILL FLUCTUATE
Our quarterly operating results will fluctuate for many reasons, including:
o our ability to retain existing customers, attract new customers and
satisfy our customers' demands;
o our ability to acquire merchandise, manage our inventory and fulfill
orders;
o changes in gross margins of our current and future products,
services, and markets;
o introduction of our new sites, services and products or those of
competitors;
o changes in usage of the Internet and online services and consumer
acceptance of the Internet and online commerce;
o timing of upgrades and developments in our systems and
infrastructure;
o the level of traffic on our Web site;
o the effects of acquisitions and other business combinations, and
related integration;
o technical difficulties, system downtime or Internet brownouts;
o our ability to properly anticipate demand;
o our ability to prevent fraud perpetrated by third parties through
credit card transactions, and payments transactions;
o our level of merchandise returns;
o disruptions in service by common shipping carriers due to strikes or
otherwise;
o disruption of our ongoing business;
o problems retaining key technical and managerial personnel;
o expenses associated with amortization of goodwill and other
purchased intangible assets;
o additional operating losses and expenses of acquired businesses, if
any;
o impairment of relationships with existing employees, customers and
business partners.
23
SECURE BALANCE(TM) IS A PRIVATE LABEL PRODUCT THAT IS NOT EXCLUSIVE TO US.
We provide education, training and services related to the SportKat product
lines that all constitute what we call "Secure Balance(TM)." However, the
devices themselves are provided to us on a non-exclusive basis, meaning that
other companies are marketing the same devices under other names (or using the
SportKat name). The non-exclusive nature of the provision of the devices to us
may negatively impact our ability to capture a meaningful market share. If our
sales of Secure Balance(TM) suffer because of this non-exclusive relationship,
our financial prospects and operational results will be negatively impacted.
ALTHOUGH WE DO NOT HAVE DIRECT COMPETITION IN RELATION TO OUR BAFI(TM) PRODUCT
LINE, WE EXPECT IT IN THE FUTURE.
Although we are unaware of any current competition for our BAFI(TM) product
line, we expect competition to develop after marketing our products. It is
unknown at this time what impact any such competition could have on us. However,
we are a "going concern" enterprise and it is certainly foreseeable that more
than one competitor could emerge that is much stronger financially than we are
and/or could already have significant marketing relationships for other medical
devices.
WE DO NOT HAVE INTERNATIONAL PATENTS; WHICH MAY NEGATIVELY IMPACT OUR PLANS FOR
FOREIGN OPERATIONS.
Although we have stated that we intend to apply for international patents for
our BAFI(TM) product line, we have not as yet done so except for European,
Chinese and Japanese patents for Oxyview. We do not know when, and if, we will
apply for such patents. If we do not apply for these patents, or if there are
delays in obtaining the patents, or if we are unable to obtain the patents, we
may not be able to adequately protect our technologies in foreign markets.
IF WE ARE UNABLE TO PROTECT EFFECTIVELY OUR INTELLECTUAL PROPERTY, THIRD PARTIES
MAY USE OUR TECHNOLOGY, WHICH COULD IMPAIR OUR ABILITY TO COMPETE IN OUR
MARKETS.
Our success will depend on our ability to obtain and protect patents on our
technology and to protect our trade secrets. The patents we currently own may
not afford meaningful protection for our technology and products. Others may
challenge our patents and, as a result, our patents could be narrowed,
invalidated or unenforceable. In addition, our current and future patent
applications may not result in the issuance of patents in the United States or
foreign countries. Competitors might develop products similar to ours that do
not infringe on our patents. In order to protect or enforce our patent rights,
we may initiate interference proceedings, oppositions, or patent litigation
against third parties, such as infringement suits. These lawsuits could be
expensive, take significant time and divert management's attention from other
business concerns. The patent position of medical firms generally is highly
uncertain, involves complex legal and factual questions, and has recently been
the subject of much litigation. No consistent policy has emerged from the U.S.
Patent and Trademark Office or the courts regarding the breadth of claims
allowed or the degree of protection afforded under biotechnology patents. In
addition, there is a substantial backlog of applications at the U.S. Patent and
Trademark Office, and the approval or rejection of patent applications may take
several years.
We cannot guarantee that our management and others associated with us will not
improperly use our patents, trademarks and trade secrets. Further, others may
gain access to our trade secrets or independently develop substantially
equivalent proprietary information and techniques.
OUR SUCCESS WILL DEPEND PARTLY ON OUR ABILITY TO OPERATE WITHOUT INFRINGING ON
OR MISAPPROPRIATING THE PROPRIETARY RIGHTS OF OTHERS.
We may be sued for infringing on the patent rights or misappropriating the
proprietary rights of others. Intellectual property litigation is costly, and,
even if we prevail, the cost of such litigation could adversely affect our
business, financial condition and results of operations. In addition, litigation
is time consuming and could divert management attention and resources away from
our business. If we do not prevail in any litigation, we could be required to
stop the infringing activity and/or pay substantial damages. Under some
circumstances in the United States, these damages could be triple the actual
damages the patent holder incurs. If we have supplied infringing products to
third parties for marketing or licensed third parties to manufacture, use or
market infringing products, we may be obligated to indemnify these third parties
for any damages they may be required to pay to the patent holder and for any
losses the third parties may sustain themselves as the result of lost sales or
damages paid to the patent holder.
If a third party holding rights under a patent successfully asserts an
infringement claim with respect to any of our products, we may be prevented from
manufacturing or marketing our infringing product in the country or countries
covered by the patent we infringe, unless we can obtain a license from the
patent holder. Any required license may not be available to us on acceptable
terms, or at all. Some licenses may be non-exclusive, and therefore, our
competitors may have access to the same technology licensed to us. If we fail to
obtain a required license or are unable to design around a patent, we may be
unable to market some of our anticipated products, which could have a material
adverse effect on our business, financial condition and results of operations.
24
IF WE LOSE OUR KEY MANAGEMENT PERSONNEL, OUR PRODUCT DEVELOPMENT AND
COMMERCIALIZATION EFFORTS WOULD SUFFER.
Our performance is substantially dependent on the performance of our current
senior management, Board of Directors and key scientific and technical personnel
and advisers. The loss of the services of any member of our senior management,
in particular Mr. Sand, our CEO and Chairman, Board of Directors, scientific or
technical staff or advisory board may significantly delay or prevent the
achievement of product development and other business objectives and could have
a material adverse effect on our business, operating results and financial
condition.
WE HAVE NO COMMERCIAL PRODUCTION CAPABILITY YET FOR MOST OF OUR BAFI(TM) PRODUCT
LINE AND WE MAY ENCOUNTER PRODUCTION PROBLEMS OR DELAYS, WHICH COULD RESULT IN
LOWER REVENUE.
To date, we have not produced most of our BAFI(TM) product line product for
sale. We have begun production and sales of our Oxyview product, but not
OxyAlert or GasAlert. Customers for any potential products and regulatory
agencies will require that we comply with current good manufacturing practices
that we may not be able to meet. We may not be able to maintain acceptable
quality standards if we ramp up production. To achieve anticipated customer
demand levels, we will need to scale-up our production capability and maintain
adequate levels of inventory. We may not be able to produce sufficient
quantities to meet market demand. If we cannot achieve the required level and
quality of production, we may need to outsource production or rely on licensing
and other arrangements with third parties. This reliance could reduce our gross
margins and expose us to the risks inherent in relying on others. We may not be
able to successfully outsource our production or enter into licensing or other
arrangements under acceptable terms with these third parties, which could
adversely affect our business.
WE HAVE NO MARKETING OR SALES STAFF, AND IF WE ARE UNABLE TO ENTER INTO
COLLABORATIONS WITH MARKETING PARTNERS OR IF WE ARE UNABLE TO DEVELOP OUR OWN
SALES AND MARKETING CAPABILITY, WE MAY NOT BE SUCCESSFUL IN COMMERCIALIZING OUR
PRODUCTS.
We currently have no in-house sales, marketing or distribution capability. As a
result, we will depend on collaborations with third parties that have
established distribution systems and direct sales forces. To the extent that we
enter into co-promotion or other licensing arrangements, our revenues will
depend upon the efforts of third parties, over which we may have little or no
control.
If we are unable to reach and maintain an agreement with one or more
distribution entities or collaborators under acceptable terms, we may be
required to market our products directly. This requires that we establish our
own specialized sales force and marketing organization to market our products.
To do this, we would have to develop a marketing and sales force with technical
expertise and with supporting distribution capability. Developing a marketing
and sales force is expensive and time consuming and could delay a product
launch. We may not be able to develop this capacity, which would make us unable
to commercialize our products.
IF WE ARE SUBJECT TO PRODUCT LIABILITY CLAIMS AND HAVE NOT OBTAINED ADEQUATE
INSURANCE TO PROTECT AGAINST THESE CLAIMS, OUR FINANCIAL CONDITION WOULD SUFFER.
As we continue to launch commercially our BAFI(TM) product line, we will face
increased exposure to product liability claims. We have exposure selling Secure
Balance(TM). We have limited product liability insurance coverage, but there is
no guarantee that it is adequate coverage. There is also a risk that third
parties for which we have agreed to indemnify could incur liability. We cannot
predict all of the possible harms or side effects that may result and,
therefore, the amount of insurance coverage we obtain may not be adequate to
protect us from all liabilities. We may not have sufficient resources to pay for
any liabilities resulting from a claim beyond the limit of, or excluded from,
our insurance coverage.
RISKS RELATING TO OUR CURRENT FINANCING AGREEMENTS:
EVENTS OF DEFAULT UNDER OUR CONVERTIBLE DEBENTURES
As previously disclosed in our current reports on Form 8-K filed August 8, 2006,
and March 16, 2007, we entered a series of agreements to obtain financing during
the last 18 months. Under the transaction
25
documents, we have committed various acts and failed to timely perform other
acts that constitute events of default under the transaction documents. We have
received assurance from counsel for the investors that "You are not in default.
We [the investors] have to put you into default and we have not." There can be
no assurance that the investors will not declare a default in the future. Our
stockholders should be aware that if the investors provide written notice of
default to us, then our liabilities would increase dramatically due to the
penalties, reset provisions, and other damages specified in the transaction
documents. The increase in liabilities attributed to a notice of default under
the transaction documents could exceed our current market capitalization and
affect negatively our financial condi tion by $7-13 million dollars. The
debentures are collateralized by our assets and, in the event if we are unable
to repay or restructure these debentures, there is no assurance that the holders
of the debentures will not institute legal proceedings to recover the amounts
owed including foreclosure on our assets.
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR CONVERTIBLE
DEBENTURES COULD REQUIRE US TO ISSUE A SUBSTANTIALLY GREATER NUMBER OF SHARES TO
THE HOLDERS, WHICH WILL CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS.
Our obligation to issue shares upon conversion of our convertible securities
under the June 2006 and March 2007 agreements is essentially limitless.
The following table shows the effect on the number of shares issuable upon full
conversion ($2,060,000 aggregate principal)(without taking into account the
4.99% limitation or any interest, penalties, events of default or other amounts
under the notes), in event our common stock price declines by 25%, 50% and 75%
from the trading price at August 31, 2007.
PRICE DECREASES BY
- --------------------------------------------------------------------------------
8/31/07 25% 50% 75%
----------- ---------- ----------- -----------
Common Stock Price(1) 0.0503 0.0377 0.0252 0.0126
Conversion Price (2) 0.0252 0.0189 0.0126 0.0063
100% Conversion Shares 81,746,032 108,994,709 163,492,064 326,984,127
(1) Represents the average of the lowest three (3) trading prices for the
common stock during the twenty (20) trading day period prior to August 31, 2007
as calculated pursuant to the agreements
(2) Assuming 50% applicable percentage
The issuance of shares upon conversion of the convertible debentures and
exercise of warrants may result in substantial dilution to the interests of
other stockholders since the holders of such securities may ultimately convert
and sell the full amount issuable on conversion. Although the holders of our
convertible debentures and warrants may not convert and/or exercise such
securities if such conversion or exercise would cause them to own more than
4.99% of our outstanding common stock, this restriction does not prevent them
from converting and/or exercising some of their holdings, selling the stock and
then converting the rest of their holdings. In this way, the holders of our
convertible debentures, and warrants could sell more than this limit while never
holding more than this limit. There is no upper limit on the number of shares
that may be issued which will have the effect of further diluting the
proportionate equity interest and voting power of all holders of our common
stock. In addition, the number of shares of common stock issuable upon
conversion of the outstanding convertible debentures may increase if the market
price of our stock declines. The sale of these shares may adversely affect the
market price of our common stock.
IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING CONVERTIBLE
DEBENTURES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE,
OR RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE CONVERTIBLE DEBENTURES, IF
REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE
OF SUBSTANTIAL ASSETS.
We have entered into convertible debenture agreements that total $2,135,000.
Unless sooner converted into shares of our common stock, we are required to
repay the convertible debentures. To do so, we would be required to use our
working capital, if any at that time, and/or raise additional funds. If we were
unable to repay the debentures when required, the debenture holders could
commence legal action against us to recover the amounts due. Any such action may
require us to curtail or cease operations.
RISKS RELATED TO OUR COMMON STOCK:
THE SEC HAS THREATENED TO SUSPEND TRADING OF OUR STOCK
On October 13, 2005, we received a letter from the Division of Corporate Finance
of the Securities and Exchange Commission ("SEC") in connection with our failure
to file periodic reports as required by the Securities Exchange Act of 1934.
Specifically, as of the date of the SEC's letter, our predecessor management
failed to file periodic reports dating to fiscal year ended 1998. After the
merger, we recommenced filing of our periodic reports on November 7, 2005. We
have worked diligently on getting these past due filings completed and filed
with the SEC. To date, we have filed all past due Forms 10-KSB and 10-QSB. We
are still required to file a Form 8-K that was due with the acquisition of Ingen
Technologies, Inc., a Nevada corporation, in March 2004. This Form 8-K requires
audited financial statements of our (now) wholly-owned subsidiary. This audit is
in process and we anticipate the filing of this Form 8-K soon. Upon the filing
of this report, we believe that all delinquencies will be cured.
26
Our counsel is keeping the SEC Staff abreast of our efforts on a continuing
basis. However, there is no guarantee that we will be able to complete our back
filings in a manner and within a period of time acceptable to the SEC. There is
no guarantee that we will be able to maintain an uninterrupted public market for
our securities.
A SUBSTANTIAL NUMBER OF SHARES WE HAVE ISSUED IN EXEMPT TRANSACTIONS ARE, OR ARE
BEING MADE, AVAILABLE FOR SALE ON THE OPEN MARKET. THE RESALE OF THESE
SECURITIES MIGHT ADVERSELY AFFECT OUR STOCK PRICE.
Most of our common shares have been held by our shareholders for periods of one
or two years or longer. As of August 31, 2007, we have 21,668,119 unrestricted
shares issued. We will undoubtedly have unrestricted shares issued in the
future. There is no way to control the sale of these shares on the secondary
market. The resale of these unrestricted shares might adversely affect our stock
price.
OUR STOCK IS THINLY TRADED, WHICH CAN LEAD TO PRICE VOLATILITY AND DIFFICULTY
LIQUIDATING YOUR INVESTMENT.
The trading volume of our stock has been low, which can cause the trading price
of our stock to change substantially in response to relatively small orders. In
addition, during the last two fiscal years, our common stock has traded as low
as $0.03 and as high as $2.20 (adjusted for our 40 to 1 reverse split which was
effected in December of 2005). Both volume and price could also be subject to
wide fluctuations in response to various factors, many of which are beyond our
control, including:
o actual or anticipated variations in quarterly and annual operating
results;
o announcements of technological innovations by us or our competitors;
o developments or disputes concerning patent or proprietary rights;
and
o general market perception of medical device and provider companies.
WE MAY ISSUE PREFERRED STOCK IN THE FUTURE, AND THE TERMS OF THE PREFERRED STOCK
MAY REDUCE THE VALUE OF YOUR COMMON STOCK.
We are authorized to issue up to 40,000,000 shares of Series A Preferred Stock.
The Series A is convertible upon 65 days written notice into one share of common
stock and votes with the common stock on an as converted basis. Our Board of
Directors are able to determine the terms of preferred stock without further
action by our stockholders. We have issued 16,078,991 shares of preferred stock
as of August 31, 2007. To the extent we issue preferred stock, it could affect
your rights or reduce the value of your common stock.
WE HAVE NOT, AND CURRENTLY DO NOT ANTICIPATE, PAYING DIVIDENDS ON OUR COMMON
STOCK.
We have never paid any dividends on our common stock and do not plan to pay
dividends on our common stock for the foreseeable future. We currently intend to
retain future earnings, if any, to finance operations, capital expenditures and
the expansion of our business.
THERE IS A LIMITED MARKET FOR OUR COMMON STOCK WHICH MAKES IT DIFFICULT FOR
INVESTORS TO ENGAGE IN TRANSACTIONS IN OUR SECURITIES.
Our common stock is quoted on the Pink Sheets under the symbol "IGTG." There is
a limited trading market for our common stock. If public trading of our common
stock does not increase, a liquid market will not develop for our common stock.
The potential effects of this include difficulties for the holders of our common
shares to sell our common stock at prices they find attractive. If liquidity in
the market for our common stock does not increase, investors in our company may
never realize a profit on their investment.
OUR STOCK PRICE IS VOLATILE WHICH MAY MAKE IT DIFFICULT FOR INVESTORS TO SELL
OUR SECURITIES FOR A PROFIT.
The market price of our common stock is likely to be highly volatile and could
fluctuate widely in price in response to various factors, many of which are
beyond our control, including:
o technological innovations or new products and services by us or our
competitors;
o additions or departures of key personnel;
27
o sales of our common stock;
o our ability to integrate operations, technology, products and
services;
o our ability to execute our business plan;
o operating results below expectations;
o loss of any strategic relationship;
o industry developments;
o economic and other external factors; and
o period-to-period fluctuations in our financial results.
Because we have a limited operating history with little revenues to date, you
may consider any one of these factors to be material. Our stock price may
fluctuate widely as a result of any of the above.
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of our common stock.
OUR COMMON STOCK IS DEEMED A "PENNY STOCK" UNDER THE RULES OF THE SEC, WHICH
MAKES TRANSACTIONS IN OUR STOCK CUMBERSOME.
Our common stock is currently listed for trading on the Pink Sheets which is
generally considered to be a less efficient market than markets such as NASDAQ
or other national exchanges, and which may cause difficulty in conducting trades
and difficulty in obtaining future financing. Further, our securities are
subject to the "penny stock rules" adopted pursuant to Section 15 (g) of the
Securities Exchange Act of 1934, as amended, or Exchange Act. The penny stock
rules apply to non-NASDAQ companies whose common stock trades at less than $5.00
per share or which have tangible net worth of less than $5,000,000 ($2,000,000
if the company has been operating for three or more years). Such rules require,
among other things, that brokers who trade "penny stock" to persons other than
"established customers" complete certain documentation, make suitability
inquiries of investors and provide investors with certain information concerning
trading in the security, including a risk disclosure document and quote
information under certain circumstances. Many brokers have decided not to trade
"penny stocks" because of the requirements of the penny stock rules and, as a
result, the number of broker-dealers willing to act as market makers in such
securities is limited. In the event that we remain subject to the "penny stock
rules" for any significant period, there may develop an adverse impact on the
market, if any, for our securities. Because our securities are subject to the
"penny stock rules," investors will find it more difficult to dispose of our
securities. Further, for companies whose securities are traded on the Pink
Sheets, it is more difficult: (i) to obtain accurate quotations, (ii) to obtain
coverage for significant news events because major wire services, such as the
Dow Jones News Service, generally do not publish press releases about such
companies, and (iii) to obtain needed capital.
A SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK MAY CAUSE THE PRICE
OF OUR COMMON STOCK TO DECLINE.
If our shareholders sell substantial amounts of our common stock in the public
market, including shares issued upon the exercise of outstanding options or
warrants, or conversion of convertible notes or Series A Preferred Stock, the
market price of our common stock could fall. These sales also may make it more
difficult for us to sell equity or equity-related securities in the future at a
time and price that we deem reasonable or appropriate. As of August 31, 2007,
21,668,119 shares of our issued common stock are unrestricted and 21,868,991
shares are restricted (but many may be eligible to have restrictions lifted).
ITEM 3. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures designed to ensure that material
information related to our company is recorded, processed, summarized and
reported within the time periods specified in the SEC rules and forms.
(a) As of the end of the period covered by this report, we carried out an
evaluation under the supervision and with the participation of our Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Securities
Exchange Act of 1934). Based upon that evaluation, our CEO and CFO concluded, as
of the date of such evaluation, that our disclosure controls and procedures were
effective.
(b) No changes were made in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most
recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
28
(c) Limitations. Our management, including our CEO and CFO, does not expect that
our disclosure controls or internal controls over financial reporting will
prevent all errors or all instances of fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not absolute, assurance
that the control system's objectives will be met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within our company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. The design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and any design may not succeed in achieving its stated goals
under all potential future conditions. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance
with policies or procedures. Because of the inherent limitation of a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
29
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We may from time to time become a party to legal proceedings arising in the
ordinary course of business. We are not currently a party to any material
pending litigation or material legal proceeding.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarter ended August 31, 2007, we sold the following securities
without registration under the Securities Act of 1933 in reliance on the
exemption contained in Section 4(2) and Regulation D promulgated thereunder:
Common Stock
- -------------
Previously Reported.
30
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(All exhibits with original signatures are contained in the corporate office
files of Ingen Technologies, Inc. ("Ingen"))
Exhibit No. Document Description
- ----------- --------------------
10.1 Agreement between Ingen Technologies, Inc. and GV Product
and Engineering, Inc. dated January 1, 2007.
10.2 Agreement between Ingen Technologies, Inc. and Christopher A.
Wirth dated June 1, 2007
10.3 Form of Callable Convertible Secured Note by and among the
Company and the Investors under Securities Purchase Agreement
dated March 15, 2007 (notes dated March 15, April 15 and
June 14, 2007)
10.4 Form of Callable Convertible Secured Note by and among the
Company and the Investors dated July 30, 2007
31.1 Certification of Chief Executive Officer as required pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer as required pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.3 Certification of Chief Executive Officer and Chief Financial
Officer as required pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
31
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INGEN TECHNOLOGIES, INC.
October 22, 2007 /s/ Scott R. Sand
-------------------------------------
Scott R. Sand
Chief Executive Officer and Chairman
October 22, 2007 /s/ Thomas J. Neavitt
-------------------------------------
Thomas J. Neavitt
Secretary and Chief Financial Officer
32