UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended December 31, 2005
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _________ to _________
Commission file number 000-21914
HEALTHRENU MEDICAL, INC.
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(Exact name of small business issuer as specified in its charter)
NEVADA 25-1907744
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
12777 Jones Road, Suite 481, Houston, Texas 77070
-------------------------------------------------
(Address of principal executive offices)
(281) 890-2561
------------------------------------------------
(Issuer's telephone number, including area code)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 |_|
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes |_| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of February 1, 2006 the issuer had
26,082,089 shares of common stock, $.001 par value per share, outstanding.
Transitional Small Business Disclosure Format: Yes |_| No |X|
HEALTHRENU MEDICAL, INC.
FORM 10-QSB
FOR THE QUARTER ENDED DECEMBER 31, 2005
INDEX
PAGE
PART 1--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Balance Sheet as of December 31,
2005 and September 30, 2005 2
Unaudited Condensed Statement of Operations for the
three months ended December 31, 2005 and 2004 3
Unaudited Condensed Statement of Stockholder's Equity
for the three months ended December 31, 2005 4
Unaudited Condensed Statement of Cash Flows for the
three months ended December 31, 2005 and 2004 5
Notes to Unaudited Condensed Financial Statements 6-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS 12
ITEM 3. CONTROLS AND PROCEDURES 26
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 28
ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS 28
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 28
ITEM 5. OTHER INFORMATION 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 28
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHRENU MEDICAL, INC.
BALANCE SHEET
December 31, 2005 and September 30, 2005
December 31, September 30,
2005 2005
(Unaudited) (Note)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 226 $ 163,095
Accounts receivable 1,689 716
Inventories 22,042 18,188
Prepaid expense 2,146 2,146
------------ ------------
Total current assets 26,103 184,145
Property and equipment, net 13,545 9,592
------------ ------------
Total assets $ 39,648 $ 193,737
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 218,810 $ 117,863
Accounts payable-stockholder -- 2,329
Accrued liabilities 41,057 27,403
Note payable 188,843 188,843
Convertible notes payable 56,001 10,960
------------ ------------
Total current liabilities 504,711 347,398
------------ ------------
Stockholders' equity:
Convertible preferred stock, Series 2000A, $0.001 par value;
1,500,000 shares authorized, 1,763 shares issued and
outstanding at December 31 2005 and September 30, 2004 2 2
Common stock, $.001 par value; 50,000,000 shares authorized,
26,082,089 and 25,619,589 shares issued and outstanding at
December 31, 2005 and September 30, 2005,respectively 26,082 25,620
Additional paid-in capital 3,199,539 3,198,751
Accumulated deficit (3,690,686) (3,378,034)
------------ ------------
Total stockholders' equity (465,063) (153,661)
------------ ------------
Total liabilities and stockholders' equity $ 39,648 $ 193,737
============ ============
Note: The balance sheet at September 30, 2005 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes to financial statements.
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HEALTHRENU MEDICAL, INC.
UNAUDITED CONDENSED STATEMENT OF OPERATIONS
for the three months ended December 31, 2005 and 2004
Three Months Ended
December 31,
2005 2004
-------------- --------------
Sales $ 5,364 $ 3,753
Cost of sales 1,083 948
-------------- --------------
Gross profit (loss) 4,281 2,805
General and administrative expenses 255,266 49,278
-------------- --------------
Loss from operations (250,985) (46,473)
Interest and financing expense (61,667) (11)
-------------- --------------
Net loss $ (312,652) $ (46,484)
============== ==============
Weighted average shares outstanding 25,629,589 26,073,972
============== ==============
Basic and diluted net loss per common share $ (0.01) $ (0.00)
============== ==============
See accompanying notes to financial statements.
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HEALTHRENU MEDICAL, INC.
UNAUDITED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
for the three months ended December 31, 2005
Common Common Additional
Stock Stock Paid In Accumulated
Shares Amount Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 2005 1,763 $ 2 25,619,589 $ 25,620 $ 3,198,751 $(3,378,034) $ (153,661)
Common stock issued for
consulting services -- -- 12,500 12 1,238 -- 1,250
Rescinding the previous
cancellation common stock -- -- 450,000 450 (450) -- --
Net loss -- -- -- -- -- (312,652) (312,652)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2005 1,763 $ 2 26,082,089 $ 26,082 $ 3,199,539 $(3,690,686) $ (465,063)
=========== =========== =========== =========== =========== =========== ===========
See accompanying notes to financial statements.
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HEALTHRENU MEDICAL, INC.
UNAUDITED CONDENSED STATEMENT OF CASH FLOWS
for the three months ended December 31, 2005 and 2004
Three Months Ended
December 31,
2005 2004
------------ ------------
Cash flows from operating activities:
Net loss $ (312,652) $ (46,484)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 190 359
Common stock issued as settlement -- 750
Amortization of debt issuance costs 45,041 --
Common stock issued for services 1,250 --
Changes in operating assets and liabilities:
Accounts receivable (973) (1,389)
Other current assets -- (2,086)
Inventories (3,854) 665
Accounts payable 100,947 (18,266)
Accrued liabilities 11,325 9,106
------------ ------------
Net cash used in operating activities (158,726) (57,345)
------------ ------------
Cash flows from investing activities:
Purchase of fixed assets (4,143) --
------------ ------------
Net cash used in investing activities (4,143) --
------------ ------------
Cash flows from financing activities:
Common stock issued for cash -- 30,450
Proceeds from common stock committed -- 25,600
Payment received on stock subscription receivable -- 2,500
------------ ------------
Net cash used by financing activities -- 58,550
------------ ------------
(Decrease)/Increase in cash and cash equivalents (162,869) 1,205
Cash and cash equivalents, beginning of year 163,095 7,560
------------ ------------
Cash and cash equivalents, end of year $ 226 $ 8,765
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ -- $ --
============ ============
Cash paid for income taxes $ -- $ --
============ ============
Non-cash investing and financing activities:
Issuance of common stock as payment of liability $ -- $ 52,512
============ ============
See accompanying notes to financial statements
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HEALTHRENU MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. Interim Financial Statements
The accompanying unaudited interim financial statements have been prepared
without audit pursuant to the rules and regulations of the U.S. Securities
and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America
have been condensed or omitted, pursuant to such rules and regulations.
These unaudited condensed financial statements should be read in
conjunction with the audited financial statements and notes thereto of
HealthRenu Medical, Inc. (the "Company") included in the Company's Annual
Report on Form 10-KSB for the year ended September 30, 2005. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of financial
position, results of operations and cash flows for the interim periods
presented have been included. Operating results for the interim periods
are not necessarily indicative of the results that may be expected for the
respective full year.
2. Organization
HealthRenu Medical, Inc. (the "Company"), a Nevada corporation, is
headquartered in Houston, Texas. The Company provides raw materials to a
third party manufacturing company who produces various skin care products
that are purchased and distributed by the Company primarily to the home
health care and other medical markets throughout the United States.
The Company was originally incorporated in Delaware as Health Renu, Inc.
in 1997. In September 2003, upon completion of a recapitalization through
acquisition of a non-operating public shell, the name was changed to
HealthRenu Medical, Inc. The public shell had no significant assets or
operations at the date of acquisition. The Company assumed all liabilities
of the public shell on the date of the acquisition. The historical
financial statements presented herein are those of HealthRenu Medical,
Inc., and its predecessor, Health Renu, Inc.
3. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts
and related disclosures. Actual results could differ from those estimates.
Revenue Recognition
Revenue is recognized when products are shipped and when all of the
following have occurred: a firm sales agreement is in place, pricing is
fixed or determinable and collection is reasonably assured. Sales are
reported net of estimated returns, consumer and trade promotions, rebates
and freight allowed.
Concentrations of Credit Risk
Financial instruments which subject the Company to concentrations of
credit risk include cash and cash equivalents and accounts receivable.
Continued
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HEALTHRENU MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
3. Significant Accounting Policies, continued
Concentrations of Credit Risk, continued
The Company maintains its cash in well-known banks selected based upon
management's assessment of the banks' financial stability. Balances may
periodically exceed the $100,000 federal depository insurance limit;
however, the Company has not experienced any losses on deposits.
Accounts receivable generally arise from sales of various skin care
products to the home health care and other medical markets throughout the
United States. Collateral is generally not required for credit granted.
Cash Equivalents
For purposes of reporting cash flows, the Company considers all short-term
investments with an original maturity of three months or less to be cash
equivalents.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the
assets, which range from three to twenty-five years. Expenditures for
major renewals and betterments that extend the original estimated economic
useful lives of the applicable assets are capitalized. Expenditures for
normal repairs and maintenance are charged to expense as incurred. The
cost and related accumulated depreciation of assets sold or otherwise
disposed of are removed from the accounts, and any gain or loss is
included in operations.
Inventories
Inventories consist of raw materials, work-in-process and finished goods
and are stated at the lower of cost or market. Cost is computed using
actual costs on a first-in, first-out basis. Since the inventory typically
has a very long shelf life, management reviews the inventory on an annual
basis and records a reserve for obsolescence when considered necessary. As
of December 31, 2005, the Company did not have a reserve for obsolescence.
Shipping and Delivery Costs
The cost of shipping and delivery are charged directly to cost of sales at
the time of shipment.
Research and Development
Research and development activities are expensed as incurred, including
costs relating to patents or rights, which may result from such
expenditures.
Income Taxes
The Company uses the liability method of accounting for income taxes.
Under this method, deferred income taxes are recorded to reflect the tax
consequences on future years of temporary differences between the tax
basis of assets and liabilities and their financial amounts at year-end.
The Company provides a valuation allowance to reduce deferred tax assets
to their net realizable value.
Continued
-7-
HEALTHRENU MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
3. Significant Accounting Policies, continued
Loss Per Share
Basic and diluted loss per share is computed on the basis of the weighted
average number of shares of common stock outstanding during each period.
Common equivalent shares from convertible preferred stock and common stock
options and warrants are excluded from the computation as their effect
would dilute the loss per share for all periods presented. If the Company
had reported net income for the three months ended December 31, 2005 or
2004, the calculation of diluted net income per share would have included
367,919 and -0-, respectively, and 1,763 and 1,763, respectively, of
additional common equivalent shares for the Company's stock warrants and
convertible preferred stock, respectively.
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the carrying value
of a long-lived asset, including associated intangibles, may be impaired,
an evaluation of recoverability is performed by comparing the estimated
future undiscounted cash flows associated with the asset or the asset's
estimated fair value to the asset's carrying amount to determine if a
write-down to market value or discounted cash flow is required.
Fair Value of Financial Instruments
The Company includes fair value information in the notes to financial
statements when the fair value of its financial instruments is different
from the book value. When the book value approximates fair value, no
additional disclosure is made.
Comprehensive Income
Comprehensive income includes such items as unrealized gains or losses on
certain investment securities and certain foreign currency translation
adjustments. The Company's financial statements include none of the
additional elements that affect comprehensive income. Accordingly,
comprehensive income (loss) and net income (loss) are identical.
Stock-Based Compensation
Stock-based compensation is accounted for using the intrinsic value method
prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees", rather than applying the fair
value method prescribed in SFAS No. 123, "Accounting for Stock-Based
Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure".
Debt Issuance Costs
Debt issuance costs are deferred and recognized, using the interest
method, over the term of the related debt.
Reclassifications
Certain items in the prior period financial statements have been
reclassified to conform to the current period financial statement
presentation. Such reclassifications had no effect on stockholders' equity
(deficit) or net loss.
Continued
-8-
HEALTHRENU MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
4. Going Concern
During the three months ended December 31, 2005, the Company has continued
to accumulate payables to its vendors and has experienced negative
financial results as follows:
Net loss $ (312,652)
Negative cash flows from operations $ (158,726)
Negative working capital $ (478,608)
Accumulated deficit $(3,690,686)
Stockholders' deficit $ (465,063)
Management has developed specific current and long-term plans to address
its viability as a going concern as follows:
o Effective September 2003, the Company entered into a
recapitalization transaction with a public shell to gain access to
public capital markets, to increase attractiveness of its equity and
to create liquidity for stockholders.
o The Company is also attempting to raise funds through debt and/or
equity offerings. If successful, these additional funds will be used
to pay down liabilities and to provide working capital.
o In the long-term, the Company believes that cash flows from growth
in its operations will provide the resources for continued
operations.
o In May 2005 the Company entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, L.P., where the Company may
periodically sell shares of common stock for a purchase price up to
a maximum of $10 million subject to the completion of the
registration of the Company's common stock under the Securities Act
of 1933.
There can be no assurance that the Company will have the ability to
implement its business plan and ultimately attain profitability. The
Company's long-term viability as a going concern is dependent upon three
key factors, as follows:
o The Company's ability to obtain adequate sources of debt or equity
funding to meet current commitments and fund the continuation of its
business operations in the near term.
o The ability of the Company to control costs and expand revenues.
o The ability of the Company to ultimately achieve adequate
profitability and cash flows from operations to sustain its
operations.
5. Litigation
The Company is currently a party to certain litigation arising in the
normal course of business. Management believes that such litigation will
not have a material impact on the Company's financial position or results
of operations.
Continued
-9-
HEALTHRENU MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
6. Convertible Notes Payable
In August and September 2005 the Company entered into agreements to issue
convertible promissory notes and received gross proceeds of $548,000. The
notes are for a term of three years and bear interest at 8% per annum,
which is payable annually in shares of the Company's common stock. The
holder of the note has the option to convert the note at any time on or
after the issuance date of the note. The notes are convertible at 85% of
the average of the trading prices of the common stock for the ten days
ending one day prior to the Company's receipt of the conversion notice.
The note holders are also to be granted two warrants to purchase the
Company's common stock for each share of common stock issued upon
conversion of the notes with each warrant to purchase one share of common
stock at an exercise price of 125% and 150%, respectively, of the
conversion price of the notes then in effect.
Based on the conversion price at the date of issuance of the notes, the
warrants that would have been granted would have entitled the holders to
purchase 3,246,002 shares of the Company's common stock at a price range
of $0.40 to $0.66 per share. These warrants, once granted, will expire on
October 31, 2009. The Company allocates the proceeds received from
convertible debt with detachable warrants using the relative fair value of
the individual elements at the time of issuance. The amount allocated to
the warrants as a debt discount was calculated using the Black-Scholes
option pricing model with the following assumptions: (i) volatility of
188%, (ii) risk-free interest rate of 4.5%, (iii) dividend rate of -0-%,
and (iv) weighted average term of four years. The value allocated to the
warrants was estimated to be $120,556 and will be recognized as interest
expense over the three-year term of the notes.
Since the conversion price is less than the Company's stock price on the
date of issuance, the Company recorded a $97,297 beneficial conversion
feature, which is being amortized as additional interest expense over the
three-year term of the notes. In addition, the Company incurred $137,200
in debt issuance costs paid to the broker-dealer as a placement fee and
granted warrants to purchase 487,237 shares of the Company's common stock
as an additional placement fee to the broker-dealer. The warrants are
exercisable at prices ranging from $0.30 to $0.48 per share upon issuance
of the notes and expire on October 31, 2009. The fair market value of the
warrants issued was determined to be $192,947 using the Black-Scholes
option pricing model. The assumptions used in the fair value calculation
of the warrants were as follows: (i) weighted average term of four years,
(ii) volatility of 188%, (iii) dividend rate of -0-% and (iv) risk-free
interest rate of 4.5%. The Company will amortize the relative fair value
of the warrants to interest expense over the three-year life of the notes
using the interest method. Accordingly, the actual weighted average
interest rate on these debentures, including the effect of the cost of the
beneficial conversion feature, is approximately 45%. During the three
months ended December 31, 2005, the Company recognized $45,041 in interest
expense related to the amortization of the value of the warrants, the
beneficial conversion feature and the additional debt issuance costs
recorded on these convertible promissory notes. In the event the debt is
settled prior to the maturity date, an expense will be recognized based on
the difference between the carrying amount and the amount of the note
payment.
Continued
-10-
HEALTHRENU MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
6. Convertible Notes Payable, continued
Following is an analysis of the convertible note balance as of and during
the year ended September 30, 2005:
Proceeds received from the note holders $ 548,000
----------
Total contractual amounts due under the notes 548,000
Direct costs of the financing (137,200)
----------
Net proceeds to the Company 410,800
Value of stock warrants issued as a placement fee (192,947)
Value of beneficial conversion feature (97,297)
Allocated value of future warrants to be granted
to note holders (120,556)
----------
Convertible notes payable at date of origination --
Amortization of loan costs as of September 30, 2005 10,960
Amortization of loan costs during the three months
ended December 31, 2005 45,041
----------
Convertible notes payable at December 31, 2005 $ 56,001
==========
7. Related Party Transaction
During the three months ended December 31, 2004, the Company issued
2,000,000 shares of its common stock as payment of accrued compensation of
$40,000 owed to an officer of the Company. The fair market value of the
shares issued of $0.02 per share was based on recent cash sales of the
Company's common stock.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This report contains forward looking statements within the meaning of Section
27a of the Securities Act of 1933 and Section 21e of the Securities Exchange Act
of 1934. These forward looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical results or anticipated results, including those set forth under "Risk
Factors" in this Management's Discussion and Analysis or Plan of Operation" and
elsewhere in this report. The following discussion and analysis should be read
in conjunction with our financial statements and notes thereto included
elsewhere in this report and appearing in our annual report filed on Form 10-KSB
for the year ended September 30, 2005.
OVERVIEW
On September 26, 2003, we acquired 100% of the outstanding shares of Health
Renu, Inc., a Delaware corporation to whose business we succeeded ("Health
Renu-DE"), pursuant to an exchange agreement. As a result of the exchange
agreement, the business of Health Renu-DE became our business, our control
shifted to the former Health Renu-DE stockholders and we subsequently changed
our name to HealthRenu Medical, Inc.
Since its inception, Health Renu-DE had been in the medical research and
development stage, with a focus on creating and improving its skin care and
wound care products. During this period, Health Renu-DE had very little
production or revenue.
Our products are specifically used for skin care and wound care. Our products
are used for diabetic skin care, diabetic neuropathy, circulation, non-healing
wounds, various types of skin disorders, and arthritis. We are aggressively
pursuing additional uses for our products in other areas of the medical field.
For example, we are researching using our products as transdermal carriers of
other medications into the body, which could result in many different
applications for our products.
We currently have eight major products in our medical line, including:
o DERM-ALL GEL WOUND DRESSING
o SKIN RENU PLUS CIRCULATION FORMULA
o SKIN RENU LOTIN
o SKIN RENU SKIN THERAPY
o RENU CARE SKIN-CARE WASH CREAM
o HEALTH RENU DEEP RELIEF PAIN RELIEVER
o HEALTH RENU SPORT MEDICINE
o HEALTH RENU FACIAL SOAP
Our BetterSkin consumer line consists of scented body lotions and body washes
that are designed for every day use by consumers. Our BetterSkin products come
in the most popular selling scents in the U.S. - vanilla, strawberry,
grapefruit, mango, cucumber melon, rose and peach - and contain seven essential
oils and vitamins. Unlike a majority of the consumer scented lotion
-12-
lines on the market today which can damage fat cells of the skin, we believe
that BetterSkin products offer a higher quality, healthier and less expensive
lotion.
We have priced our BetterSkin products at a price point that covers the top 22%
of the volume sales in personal skin care market. We intend to place our
BetterSkin 8 ounce lotion and body soaps in low end retail markets, with the 13
ounce sizes in high end retail and drug stores.
We believe that our products provide a very simple, cost effective way to
address skin disorders and have a positive effect in treating certain skin
conditions, especially those of the elderly, with little or no known side
effects. Our belief in the effectiveness of our products in treating certain
skin conditions is based upon the observation of the response in his patients by
an orthopedic surgeon with a subspecialty in wound care issues, positive
feedback from customers and patients in the form of testimonials, confirmations
and reorders and personal experience of our management. All of our products are
made with a heavy concentration of essential fatty acids. Essential fatty acids
have been widely reported to have significant anti-inflammatory effects, and are
currently being used in cosmetics and therapeutic vehicles. All of our products
use omega-3, omega-6 and omega-9 essential fatty acids. Our products come with a
satisfaction guarantee to the medical field as well as to the household
consumer. All our products are registered with the FDA.
We provide essential fatty acid ingredients to a third party manufacturing
company who provides all other raw materials needed and produces our products
for skin care and wound care. We then purchase the products from the
manufacturer and distribute our products. The manufacturing laboratory owns our
product formulas subject to our exclusive use and right to purchase the formulas
at prices that we believe are reasonable.
Historically, most of our sales have been to nursing homes, hospices and clinics
in the area of emergency, non-healing wounds of the human body such as staph
infections, diabetic ulcers, and amputations.
We have not yet commenced commercial distribution of our BetterSkin products.
Our current marketing efforts include use of regional medical supply
distribution companies, mailings and magazine advertising targeted to older
consumers in limited U.S. markets, and internet sales. We plan to increase our
marketing efforts to include infomercial sales, create catalogs and sales
materials, and retail sales through drug, convenience and dollar stores. We also
intend to pursue other business opportunities that compliment our products. This
plan depends upon our receiving additional capital funding pursuant to the SEDA.
We may also seek to enter into joint ventures or other alliances with strategic
partners.
CRITICAL ACCOUNTING POLICIES
The following discussion and analysis of our financial condition and results of
operations is based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate these estimates, including those related to revenue
recognition, inventories and stock-based
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compensation. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
Of the significant accounting policies used in the preparation of our financial
statements, the following are critical accounting policies, which may involve a
higher degree of judgment, complexity and estimates.
Revenue Recognition
Revenue is recognized when products are shipped and when all of the following
have occurred: a firm sales agreement is in place, pricing is fixed or
determinable and collection is reasonably assured. Sales are reported net of
estimated returns, consumer and trade promotions, rebates and freight allowed.
Inventories
Inventories consist of raw materials, work-in-process and finished goods and are
stated at the lower of cost or market. Cost is computed using actual costs on a
first-in, first-out basis. Since the inventory typically has a very long shelf
life, management reviews the inventory on an annual basis and records a reserve
for obsolescence when considered necessary. As of December 31, 2005, we did not
have a reserve for obsolescence.
Stock-Based Compensation
Stock-based compensation is accounted for using the intrinsic value method
prescribed in Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees", rather than applying the fair value method
prescribed in SFAS No. 123, "Accounting for Stock-Based Compensation", as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure".
COMPARISON OF OPERATING RESULTS
Three Months Ended December 31, 2005 Compared to Three Months Ended December 31,
2004
Revenues increased from $3,753 for the three months ended December 31, 2004 to
$5,364 for the three months ended December 31, 2005. The increase in revenues is
due to increased sales volume related to increased marketing activity.
Cost of sales increased from $948 for the three months ended December 31, 2004
to $1,083 for the three months ended December 31, 2005. The increase in cost of
sales is due to increased sales volume.
Gross profit increased from $2,805 for the three months ended December 31, 2004
to $4,076 for the three months ended December 31, 2005. The increase in gross
profit is due to increased sales volume.
General and administrative expenses increased from $49,278 for the three months
ended December 31, 2004 to $255,266 for the three months ended December 31,
2005. The increase in general and administrative expenses was
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due to higher costs related to our expansion efforts, increased compensation to
our chief executive officer, and approximately $100,000 related to increased
legal and financing expenses related to seeking and obtaining outside financing.
Interest and financing expense increased from $11 for three months ended
December 31, 2004 to $61,667 for the three months ended December 31, 2005. The
increase is attributable to the additional interest related to the note payable
and the convertible note payable and $45,041 of amortized debt issuance costs
recorded in the three months ended December 31, 2005.
We recorded a loss from operations of $46,473 for the three months ended
December 31, 2004 compared to a loss from operations of $250,985 for the three
months ended December 31, 2005. The increase in loss from operations is
principally due to the increase in general and administrative expenses.
We reported a net loss of $46,484 for the three months ended December 31, 2004
compared to a net loss of $312,652 for the three months ended December 31, 2005.
The increase in net loss is principally due to the increase in general and
administrative expenses and interest financing expenses.
Basic and diluted net loss per common share was $.00 for the three months ended
December 31, 2004 compared to $.01 for the three months ended December 31, 2005.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended December 31, 2005 we have not generated positive cash
flow from our own operations due to the preliminary nature of our operations and
our ongoing investment in our expansion. Consequently, we have been dependent on
external financing to fund our cash requirements.
As of December 31, 2005, our cash totaled $226 and total current assets were
$26,103. Inventory at December 31, 2005 was $22,042.
As of December 31, 2005, our accounts payable totaled $218,810. Total current
liabilities were $504,711.
We have very limited debt and operate with minimal overhead costs by outsourcing
our shipping, receiving, purchasing and production functions. We also contract
with consultants to assist in numerous areas of our operations and developments
in order to minimize expenses. We intend to hire additional employees as needed.
Our immediate financing needs are currently expected to be provided by a private
placement of our debt of equity securities of $600,000 as described below. We
require such financing in order to pay professional fees associated with our
securities and corporate compliance requirements, for registration of our shares
to be issued in connection with the standby equity distribution agreement
("SEDA") described below and to fund our inventory and working capital needs
until the SEDA is available for us to draw upon. We cannot assure you that
financing will be available on favorable terms, in sufficient amounts or at all.
Our near term financing needs are currently expected to be provided in large
part from the SEDA described below. We cannot assure you that financing under
the SEDA will be available on favorable terms, in sufficient amounts or at all
when needed, in part, because the amount of financing available will
-15-
fluctuate with the price of our common stock. As the price declines, the number
of shares we must issue in order to receive such financing will increase.
If we are unable to obtain financing upon terms that we deem sufficiently
favorable, or at all, it would have a materially adverse impact upon our ability
to pursue our marketing strategy and maintain our current operations. Without
capital funding, we cannot continue to operate in 2006 and cannot expand or meet
our business objectives. Failure by us to obtain adequate financing may require
us to delay, curtail or scale back some or all of our operations, sales,
marketing efforts and research and development programs. If we do not receive
external financing, our revenue stream cannot expand, would likely decrease and
significant opportunities would be lost which would be a limiting factor on our
growth.
In May 2005, we entered into the SEDA with Cornell Capital Partners, LP
("Cornell Capital"). Pursuant to this agreement, we may, at our discretion for
up to two years, periodically issue and sell to Cornell Capital shares of common
stock for a total purchase price of $10.0 million. If we request an advance
under the SEDA, Cornell Capital will purchase shares of common stock for 97% of
the lowest volume weighted average price on the OTC-BB or other principal market
on which our common stock is traded as quoted by Bloomberg, L.P. for the five
trading days immediately following the notice date. In addition, Cornell Capital
will retain a cash fee of 5% from the proceeds received by us for each advance
under the SEDA for a total effective discount to the market price of our common
stock of 8%. Cornell Capital intends to sell any shares purchased under the SEDA
at the market price. The effectiveness of the sale of the shares under the SEDA
is conditioned upon us registering the shares of common stock under the
Securities Act and maintaining such registration. Upon the execution of the
SEDA, we issued as compensation to Cornell Capital 1,465,065 shares of our
common stock with a value of $161,157, including 293,013 shares held by its
transferee, and a 12% interest bearing promissory note in the principal amount
of $188,843 from us. We issued to Monitor Capital, Inc., as a placement fee
pursuant to the placement agent agreement between us and Monitor, 90,909 shares
with an aggregate value of $10,000 in connection with the SEDA.
We issued convertible debt securities in respect of loans in the aggregate
amount of $103,000 made to us by members of our Board of Directors and a
consultant to us in May and June 2005. The debt was convertible into shares of
our common stock at the option of the holders at the rate of $0.03 per share.
The loans accrued interest at the rate of 8% per annum. The convertible debt has
been converted or repaid in full. The convertible debt and related accrued
interest was converted into 2,560,807 shares of common stock and repaid by
approximately $32,000 in cash, including accrued interest.
In August and September 2005, we closed on $548,000 of equity units (the "2005
Units") in a private placement. Each Unit consists of a unsecured convertible
promissory note in the principal amount of $1,000 (the "2005 Notes") and two
warrants for each share of common stock issued upon conversion of the 2005 Notes
to purchase one share of our common stock. The purchase price per Unit was
$1,000. The 2005 Notes are convertible at the election of the holder thereof, at
any time commencing from and after their date of issuance and for a period of
three years thereafter at a price equal to 85% of the average closing price of
our common stock on the OTC-BB for the 10 trading days immediately preceding the
day upon which we receive a conversion notice from the noteholder. The 2005
Notes are entitled to receive
-16-
an 8% annual interest payment payable in shares of our common stock. The per
share exercise price of the warrants is 125% and 150%, respectively, of the
conversion price of the 2005 Notes. The warrants are exercisable for shares of
our common stock at any time beginning on the date of conversion of the 2005
Notes and ending on October 31, 2009 and are subject to adjustment for
anti-dilution purposes.
In February 2006, we closed on $600,000 of equity units (the "2006 Units") in a
private placement. Each Unit consists of a secured convertible promissory note
in the principal amount of $1,000 (the "2006 Notes") and eight warrants for each
share of common stock issued upon conversion of the 8% Notes to purchase one
share of our common stock. The purchase price per Unit was $1,000. The 2006
Notes are convertible at the election of the holder thereof, at any time
commencing from and after their date of issuance and for a period of five years
thereafter at a price equal to 80% of the average closing price of our common
stock on the OTC-BB for the 10 trading days immediately preceding the day upon
which we receive a conversion notice from the noteholder. The 2006 Notes are
entitled to receive an 8% annual interest payment payable in shares of our
common stock. The per share exercise price of the warrants is 100% for two
warrants, 125% for three warrants and 150% for three warrants, respectively, of
the conversion price of the 2006 Notes. The warrants are exercisable for shares
of our common stock at any time beginning on the date of conversion of the 2006
Notes and ending on March 31, 2011 and are subject to adjustment for
anti-dilution purposes.
GOING CONCERN
Our accompanying financial statements have been prepared on a going concern
basis, which contemplates our continuation of operations, realization of assets
and liquidation of liabilities in the ordinary course of business. Since
inception, we have incurred substantial operating losses and expect to incur
additional operating losses over the next several years. As of December 31,
2005, we had an accumulated deficit of approximately $3.7 million. Our
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
We have financed our operations since inception primarily through equity and
debt financings and loans from our officers, directors and stockholders. We have
recently entered into the SEDA. No assurances can be given that the additional
capital necessary to meet our working capital needs or to sustain or expand our
operations will be available in sufficient amounts or at all under the SEDA or
otherwise. Continuing our operations is dependent upon obtaining such further
financing. These conditions raise substantial doubt about our ability to
continue as a going concern.
RISK FACTORS
FINANCIAL CONDITION RISKS
o We have had limited product sales, a history of operating losses and may
not become profitable in the near future or at all.
We have had limited sales of our products to date. We incurred net losses of
approximately ($3.7 million) from inception in 1997 to December 31, 2005,
including approximately ($1.6 million) of net loss during the year ended
September 30, 2005 and ($312,000) of net losses during the three months ended
December 31, 2005. We expect to incur substantial additional operating losses in
the future. During the year ended September 30, 2005 and the three months
-17-
ended December 31, 2005, we only generated revenues from product sales in the
amounts of approximately $9,785 and $5,364, respectively. We may not continue to
generate revenues from operations or achieve profitability in the near future or
at all.
o We may not be able to obtain the significant financing that we need to
continue to operate.
We may not be able to obtain sufficient funds to continue to operate or
implement our business plan. We estimate that we will need approximately
$1,000,000 to continue to operate over the next 12 months and an additional
$500,000 in each of the two following years to continue to operate. We will need
approximately $2,000,000 over the next two years in order to commence
implementing our business plan, including increased marketing and product
production. We are dependent on external financing to fund our operations. Our
immediate financing needs are expected to be provided from a private placement
of our equity or debt securities of up to $600,000 and our long-term financing
needs are expected to be provided from the standby equity distribution
agreement, in large part. Such financing may not be available on favorable
terms, in sufficient amounts or at all when needed, in part because the amount
of financing available under the standby equity distribution agreement will
fluctuate with the price of our common stock. As the price declines, the number
of shares the investor under the standby equity distribution agreement must
purchase to satisfy an advance request from us will increase, resulting in
additional dilution to existing stockholders and potentially causing the
investor to hold more than 9.9% of our outstanding stock which is prohibited
under the agreement. Other financing may not be available to us on favorable
terms or at all.
o The report of our independent auditors expresses doubt about our ability
to continue as a going concern.
In its report dated January 25, 2006 our auditors, Ham, Langston & Brezina,
L.L.P., expressed an opinion that there is substantial doubt about our ability
to continue as a going concern. Our accompanying financial statements have been
prepared on a going concern basis, which contemplates our continuation of
operations, realization of assets and liquidation of liabilities in the ordinary
course of business. Since inception, we have incurred substantial operating
losses and expect to incur additional operating losses over the next several
years. As of the three months ended December 31, 2005, we had an accumulated
deficit of approximately $3.7 million. Our accompanying financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
We have financed our operations since inception primarily through equity and
debt financings and loans from our officers, directors and stockholders. We have
recently entered into a standby equity distribution agreement. The additional
capital necessary to meet our working capital needs or to sustain or expand our
operations may not be available in sufficient amounts or at all under the
standby equity credit agreement or otherwise. Continuing our operations in 2006
is dependent upon obtaining such further financing. These conditions raise
substantial doubt about our ability to continue as a going concern.
As is disclosed in the notes to our financial statements, our long-term
viability as a going concern is dependent upon our ability to:
-18-
o obtain adequate sources of debt or equity funding to meet current
commitments and fund the continuation of our business operations in
the near term;
o control costs and expand revenues; and
o ultimately achieve adequate profitability and cash flows from
operations to sustain our operations.
o We have a working capital loss, which means that our current assets on
December 31, 2005 were not sufficient to satisfy our current liabilities.
We had a working capital deficit of ($478,608) at December 31, 2005, which means
that our current liabilities exceeded our current assets on December 31, 2005 by
$478,608. Current assets are assets that are expected to be converted to cash or
otherwise utilized within one year and, therefore, may be used to pay current
liabilities as they become due. Our working capital deficit means that our
current assets on December 31, 2005 were not sufficient to satisfy all of our
current liabilities on that date.
o We may be unable to implement our business plan if the investor under the
standby equity distribution agreement does not fulfill its obligations
under the agreement.
We will be reliant upon the ability of Cornell Capital Partners, L.P. to provide
a significant amount of funding pursuant to the standby equity distribution
agreement, which it has agreed to do in accordance with the terms of the standby
equity distribution agreement. In the event that the investor is unable to
fulfill its commitment under the standby equity distribution agreement for
whatever reason, our ability to implement our business plan will suffer.
o Since Health Renu, Inc. became a public reporting company under the
Securities Exchange Act of 1934 by acquiring us when we were a
publicly-traded shell corporation, we are subject to the shell
corporation's known and unknown liabilities.
On September 26, 2003, we entered into an exchange agreement with Health Renu,
Inc, a Delaware corporation, and the former Health Renu, Inc. stockholders
whereby our control shifted to the former Health Renu, Inc. stockholders. We
were then a non-operating, publicly-traded corporation. The exchange agreement
represented a recapitalization of Health Renu, Inc. with accounting treatment
similar to that used in a reverse acquisition. Health Renu, Inc. emerged as the
surviving financial reporting entity but we remained as the legal reporting
entity. We then changed our business focus to skin care and wound care products
and our name to HealthRenu Medical, Inc.
This process is commonly referred to as a "public shell merger" because we
already had achieved public-trading status and were a reporting company with the
U.S. Securities and Exchange Commission and had previously ceased our day-to-day
business. The advantages that we hope to achieve in effecting this acquisition
include gaining access to sources of capital that are generally limited to
publicly-traded entities on an expedited basis since the public shell merger
process can typically be completed in less time than a traditional registered
initial public offering.
The risks and uncertainties involved in this strategy include that we are
subject to the shell corporation's existing liabilities, including any
-19-
undisclosed liabilities of the shell corporation arising out of the shell
corporation's prior business operations, financial activities or equity
dealings. There is a risk of litigation by third parties or governmental
investigations or proceedings. There is also a risk of sales of undisclosed
stock into the public market by stockholders of the shell corporation as we
improve our business and financial condition and stock price, which would result
in dilution to our stockholders and could negatively impact our stock price. In
addition, within certain segments of the financial and legal communities there
may be a negative perception of corporations that have achieved public-trading
status by means of a public shell merger. This negative perception could
adversely affect us in the future including in our efforts to raise capital in
certain markets.
RISKS RELATED TO OUR OPERATIONS
o We may not successfully compete in the skin and wound care industry.
The personal skin care industry and wound care industry consist of major
domestic and international pharmaceutical, cosmetic and other companies, many of
which have financial, technical, manufacturing, distribution, marketing, sales
and other resources substantially greater than ours. We compete against
companies producing and selling medical as well as consumer skin care products.
We compete based upon our product quality and price. Our competitors may
introduce more effective or less expensive products which could compete with our
products and have a significant negative impact on our business and financial
condition.
o We are dependent upon a third party pharmaceutical laboratory for
manufacture of our products.
Our products are contract-manufactured by Rosel & Adys Inc., a Texas-based
pharmaceutical laboratory which has been approved by the U.S. Food and Drug
Administration. We do not have a contract with this laboratory for manufacture
of our products. This laboratory may not continue to maintain its Food and Drug
Administration certification or continue to be willing or able to produce our
products for us at reasonable prices or at all. If for any reason this
laboratory discontinues production of our products, it would likely result in
significant delays in production of our products and interruption of our product
sales as we seek to establish a relationship and commence production with a new
laboratory. We may be unable to make satisfactory production arrangements with
another laboratory on a timely basis or at all.
The laboratory is responsible for supplying our formulas ingredients other than
the essential fatty acids which we supply for quality control purposes. We
currently have on hand sufficient essential fatty acid supplies to meet our
short terms needs and we have developed sources for their supply for the
long-term future, however, these ingredients may not be available to us on
favorable pricing terms or at all when they are needed.
o We do not own our products' formulas and are dependent upon our agreement
with the owner of the formulas.
We do not own our product formulas. The production laboratory owns our product
formulas subject to an agreement of indefinite term which provides for our
exclusive use and right to purchase them. It is possible that the production
laboratory may not honor its contractual commitments and may disclose our
proprietary formulas to a third party or refuse to sell the
-20-
formulas to us in the event the laboratory ceases to produce products for us,
either of which would materially and adversely effect our business.
o We may be unable to protect our proprietary products or prevent the
development of similar products by our competitors.
We claim proprietary rights in various unpatented technologies, know-how and
trade secrets relating to our products and their manufacturing processes. The
protection that these claims afford may prove to be inadequate. We protect our
proprietary rights in our products and operations through contractual
obligations, including nondisclosure agreements, with our production laboratory,
employees and consultants. These contractual measures may not provide adequate
protection. Further, our competitors may independently develop or patent
products that are substantially equivalent or superior to our products.
o Our founder and former president has competed with us by selling similar
products and soliciting our customers and has otherwise defrauded us.
Darrell Good, the founder and principal of Health Renu, Inc., has competed
against us by posting products similar to ours with the same product numbers on
his website for sale. Mr. Good has also attempted to solicit sales from our
customers. We have various other claims against Mr. Good including for fraud,
breach of contract and breach of fiduciary duty based on Mr. Good's
misrepresentation to us that we owned our products' formulas when in fact they
are owned by the production laboratory. We filed a lawsuit against Mr. Good in
the U.S. District Court for the Southern District of Texas seeking recovery for
these claims. Among other recovery sought, we sought to recover approximately
8.1 million shares of our common stock from Mr. Good and requested that Mr. Good
cease competing with us and soliciting our customers. A final default judgment
against Mr. Good was entered in this case on July 29, 2005 and the court ordered
that the shares be cancelled and returned to us and that Mr. Good is enjoined
from competing with us for one year. The time for appeal of the order expired on
August 28, 2005. We plan to pursue enforcement of the judgment. The shares have
been cancelled on the books and records of our transfer agent. We may not be
able to prevent Mr. Good from continuing to compete with us or soliciting our
customers. If Mr. Good continues to compete with us or to solicit our customers,
it could have a material adverse effect on our business.
o We may not achieve the market acceptance of our products necessary to
generate revenues.
Products we produce may not achieve market acceptance. Market acceptance will
depend on a number of factors, including:
o our ability to keep production costs low.
o our ability to successfully market our products. We must create an
advertising campaign to create product recognition and demand for
our products.
o timely introductions of new products. Our introduction of new
products will be subject to the inherent risks of unforeseen
problems and delays. Delays in product availability may negatively
affect their market acceptance.
-21-
o We may not be able to generate increased demand for our products or
successfully meet any increased product demands.
We have had limited sales of our products to date. Rapid growth of our business
may significantly strain our management, operations and technical resources. If
we are successful in obtaining large orders for our products, we will be
required to deliver large volumes of quality products to our customers on a
timely basis and at a reasonable cost. We outsource production of our products.
We may not obtain large scale orders for our products or if we do, we may not be
able to satisfy large scale production requirements on a timely and cost
effective basis. As our business grows, we will also be required to continue to
improve our operations, management and financial systems and controls. Our
failure to manage our growth effectively could have an adverse effect on our
ability to produce products and meet the demands of our customers.
o We may face liability if our products cause injury or fail to perform
properly.
We maintain liability insurance coverage that we believe is sufficient to
protect us against potential claims. Our liability insurance may not continue to
be available to us on its current terms or at all. Further, such liability
insurance may not be sufficient to cover any claims.
o Our business and growth will suffer if we are unable to hire and retain
key personnel.
Our success depends in large part upon the services of our Chief Executive
Officer. Our Chief Executive Officer is our only full-time employee. We contract
with consultants and outsource key functions to control costs. If we lose the
services of our Chief Executive Officer or key consultants or are unable to hire
and retain key employees or senior management as needed in the future, it could
have a significant negative impact on our business.
o We may not comply with any regulations imposed on us by the U.S. Food and
Drug Administration.
Our products are considered over-the-counter and meet the U.S. Food and Drug
Administration's requirements for sales directly to consumers and medical
related companies. We are currently developing new over-the-counter products for
which we will need to meet Food and Drug Administration requirements in order to
sell these products to consumers and medical related companies. Any product
claims we make on our product packaging or sales literature must comply with
Food and Drug Administration requirements. We believe that we are in material
compliance with these requirements. It is possible that these Food and Drug
Administration requirements will change such that we no longer so comply, that
our products are no longer considered over-the-counter products, that our
products do not maintain their Food and Drug Administration registrations or
such that we may not be able to obtain over-the-counter classification or Food
and Drug Administration registration for any future products that we may
develop.
RISKS ASSOCIATED WITH OUR COMMON STOCK
o We do not intend to pay dividends on our common stock so stockholders must
sell their shares at a profit to recover their investment.
-22-
We have never declared or paid any cash dividends on our common stock. We intend
to retain any future earnings for use in our business and do not anticipate
paying cash dividends on our common stock in the foreseeable future. Because we
may not pay dividends, our stockholders' return on investment in our common
stock will depend on their ability to sell our shares at a profit.
o The market price of our common stock may be volatile, which could cause
the value of an investment in our stock to decline.
The market price of shares of our common stock has been and is likely to
continue to be highly volatile. Factors that may have a significant effect on
the market price of our common stock include the following:
o sales of large numbers of shares of our common stock in the open
market, including shares issuable at a fluctuating conversion price
or at a discount to the market price of our common stock;
o our operating results;
o quarterly fluctuations in our financial results;
o our need for additional financing;
o announcements of product innovations or new products by us or our
competitors;
o developments in our proprietary rights or our competitors'
developments;
o our relationships with current or future suppliers, manufacturers,
distributors or other strategic partners;
o governmental regulation; and
o other factors and events beyond our control, such as changes in the
overall economy or condition of the financial markets.
In addition, our common stock has been relatively thinly traded. Thinly traded
common stock can be more volatile than common stock trading in an active public
market. We cannot predict the extent to which an active public market for our
common stock will develop.
In addition, the stock market in general has experienced extreme volatility that
often has been unrelated to the operating performance of particular companies.
These broad market and industry fluctuations may adversely affect the trading
price of our common stock, regardless of our actual operating performance.
As a result of potential stock price volatility, investors may be unable to
resell their shares of our common stock at or above the cost of their purchase
prices. In addition, companies that have experienced volatility in the market
price of their stock have been the subject of securities class action
litigation. If we were to become the subject of securities class action
litigation, this could result in substantial costs, a diversion of our
management's attention and resources and harm to our business and financial
condition.
-23-
o Future sales of currently outstanding shares of our common stock could
adversely affect our stock price.
As of February 1, 2006, we had 26,082,089 shares of common stock outstanding. Of
these shares, as of February 1, 2006, approximately 22 million shares of our
common stock are subject to restrictions on resale pursuant to Rule 144 and
approximately 4 million outstanding shares of our common stock are eligible for
sale in the public market without restriction or registration.
In addition, we intend to register under the Securities Act of 1933 the sale by
selling security holders of 1,465,065 shares of common stock issued as a
commitment fee, 90,909 shares of common stock issued as a placement agent fee
and up to $10,000,000 of common stock issuable pursuant to the standby equity
distribution agreement, shares of common stock issuable upon conversion or
exercise of securities issued in our 2005 and 2006 private placements of units
and up to 1,587,237 shares of common stock underlying compensation warrants.
o Our common stock is deemed to be "penny stock," which may make it more
difficult for investors to sell their shares due to suitability
requirements.
Our common stock is deemed to be "penny stock" as that term is defined in Rule
3a51-1 promulgated under the Securities Exchange Act of 1934. These requirements
may reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for investors in our common
stock to sell shares to third parties or to otherwise dispose of them. This
could cause our stock price to decline. Penny stocks are stocks:
o with a price of less than $5.00 per share;
o that are not traded on a "recognized" national exchange;
o whose prices are not quoted on the NASDAQ automated quotation system
(NASDAQ-listed stocks must still have a price of not less than $5.00
per share); or
o of issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years) or
$5.0 million (if in continuous operation for less than three years),
or with average revenues of less than $6.0 million for the last
three years.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor.
o Our common stock has been relatively thinly traded and we cannot predict
the extent to which a trading market will develop.
There has been a limited public market for our common stock and an active
trading market for our stock may not develop. Absence of an active trading
market could adversely affect our stockholders' ability to sell our common stock
in short time periods, or possibly at all. Our common stock has traded on the
Over-the-Counter Bulletin Board. Our common stock is thinly traded compared to
larger more widely known companies in our industry. Thinly traded common stock
can be more volatile than common stock trading in an active
-24-
public market. Our common stock has experienced, and is likely to experience in
the future, significant price and volume fluctuations that could adversely
affect the market price of our common stock without regard to our operating
results. We cannot predict the extent to which an active public market for our
common stock will develop or be sustained after this offering.
o Our 8% convertible notes have a fluctuating conversion rate which could
cause substantial dilution to stockholders and adversely affect our stock
price.
Conversion of a material amount of the 8% convertible notes included in our 2005
and 2006 private placements of units could materially affect a stockholder's
investment in us. As of February 1, 2006, $548,000 of notes issued in our 2005
private placement and $600,000 of notes issued in our 2006 private placement
were issued and outstanding. The notes are convertible into a number of shares
of common stock determined by dividing the principal amount of the notes
converted by their respective conversion prices in effect.
The 2005 private placement notes are convertible by the holders into shares of
our common stock at any time at a conversion price equal to 85% of the average
of the trading prices of our common stock for the ten trading days ending one
day prior to the date we receive a conversion notice from a 2005 noteholder. The
2006 private placement notes are convertible by the holders into shares of our
common stock at any time at a conversion price equal to 80% of the average of
the trading prices of our common stock for the ten trading days ending one day
prior to the date we receive a conversion notice from a 2006 noteholder.
Conversion of a material amount of our notes could significantly dilute the
value of a stockholder's investment in us.
Assuming a conversion price of $0.17 (85% of the closing price of our common
stock on the OTC Bulletin Board of $0.20 on February 1, 2006), the 2005 notes
would convert into 3,223,529 shares of our common stock. Assuming a conversion
price of $0.16 (80% of the closing price of our common stock on the OTC Bulletin
Board of $0.20 on February 1, 2006), the 2006 notes would convert into 2,181,250
shares of our common stock. These numbers of shares, however, could be
significantly greater in the event of a decrease in the trading price of our
stock.
Set forth in the table below is the potential dilution to the stockholders and
ownership interest of the holders of our 2005 notes which could occur upon
conversion of $548,000 in principal amount of our 2005 notes. The calculations
in the table are based upon the 26,082,089 shares of our common stock which were
outstanding on February 1, 2006 and shares issuable upon conversion of the 2005
notes at the following prices:
Conversion At Conversion At Conversion At
Conversion At Assumed Trading Assumed Trading Assumed Trading
Assumed Trading Price of $0.15 Price of $0.10 Price of $0.05
Price of $0.20 (75%) (50%) (25%)
--------------- --------------- --------------- ---------------
Conversion Price $0.17 $0.1275 $0.085 $0.0425
Shares Issuable on Conversion 3,223,529 4,298,039 6,477,059 12,894,118
Percentage of Outstanding Common Stock 11.0% 14.1% 19.8% 33.1%
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In addition, two warrants to purchase shares of common stock have been issued to
each purchaser of the 2005 notes. The warrants are exercisable for one share of
common stock for each share acquired upon conversion of the 2005 notes and are
exercisable over the next four years at fluctuating prices equal to 125% and
150%, respectively, of the conversion price of the 2005 notes.
Set forth in the table below is the potential dilution to the stockholders and
ownership interest of the holders of our 2006 notes which could occur upon
conversion of $600,000 in principal amount of our 2006 notes. The calculations
in the table are based upon the 26,082,089 shares of our common stock which were
outstanding on February 1, 2006 and shares issuable upon conversion of the 2006
notes at the following prices:
Conversion At Conversion At Conversion At
Conversion At Assumed Trading Assumed Trading Assumed Trading
Assumed Trading Price of $0.15 Price of $0.10 Price of $0.05
Price of $0.20 (75%) (50%) (25%)
--------------- --------------- --------------- ---------------
Conversion Price $0.16 $0.12 $0.08 $0.04
Shares Issuable on Conversion 3,750,000 5,000,000 7,500,000 15,000,000
Percentage of Outstanding Common Stock 12.6% 16.1% 22.3% 36.5%
In addition, eight warrants to purchase shares of common stock have been issued
to each purchaser of the 2006 notes. The warrants are exercisable for one share
of common stock for each share acquired upon conversion of the 2006 notes and
are exercisable over the next five years at fluctuating prices equal to 100%,
125% and 150%, respectively, of the conversion price of the 2006 notes.
Also, in the absence of a proportionate increase in our earnings and book value,
an increase in the aggregate number of our outstanding shares of common stock
caused by a conversion of the 8% notes or exercise of the warrants would dilute
the earnings per share and book value of all of our outstanding shares of common
stock. If these factors were reflected in the trading price of our common stock,
the potential realizable value of a stockholder's investment in us could also be
adversely affected.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our management, including
our Chief Executive Officer, has determined that the effectiveness of
disclosures controls and procedures under Rule 13a-15(e) and Rule 15d-15(e) of
the Securities Exchange Act of 1934 are inadequate as of December 31, 2005.
Our auditors, Ham, Langston & Brezina, LLP have advised us that, under standards
established by the Public Company Oversight Accounting Board (United States),
reportable conditions involve matters that come to the attention of auditors
that relate to significant deficiencies in the design or operation of internal
controls of an organization that, in the auditors' judgment, could adversely
affect the organization's ability to record,
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process, summarize and report financial data consistent with the assertions of
management in the financial statements.
Ham, Langston & Brezina, LLP has advised our management that, in Ham, Langston &
Brezina, LLP's opinion, there were reportable conditions during 2005 which
constituted "material weaknesses" in internal controls. The weakness concerned
the interpretation and implementation of various complex accounting principles
in the area of our financing transactions, and resulted from the fact that we
needed additional personnel and outside consulting expertise with respect to the
application of some of these more complex accounting principles to our financial
statements. While all of these transactions were recorded, Ham, Langston &
Brezina in their audit work noted instances where Generally Accepted Accounting
Principles were not correctly applied and adjustments to our financial
statements were required. The adjustments relate solely to the accounting
treatment of these financing transactions and do not affect our historical cash
flow.
As a result of the material weaknesses described above, our management,
including our Chief Executive Officer, has determined that our disclosure
controls and procedures were not effective as of December 31, 2005. We are
attempting to remediate the material weakness in internal control over financial
reporting and the ineffectiveness of our disclosure controls and procedure by
conducting a review of our accounting treatment of our financing transactions
and correcting our method of accounting for such transactions. Additionally, we
are considering engaging outside expertise to enable us to properly apply
complex accounting principles to our financial statements, when necessary.
(b) Changes in internal control over financial reporting. There were no
significant changes in our internal control over financial reporting during the
fourth fiscal quarter that materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings pending against us except as described
below.
In October 2005, Chris A. Grevenow, a stockholder, filed a lawsuit against us,
our chief executive officer and a former chief executive officer, in the
District Court for the City and County of Denver, State of Colorado. Mr.
Grevenow claims he was issued 44,000 shares of common stock of AGTSports, Inc.,
a Colorado corporation and our predecessor, prior to 1997 which shares were
intended to be "non-dilutive" and that he purchased 44,000 additional shares in
May 1997. He further claims that he was not given notice of or an opportunity to
vote with the respect to the reincorporation and exchange transaction in
September 2003 whereby we became HealthRenu Medical, Inc. and that he was
prevented from liquidating his shares at $8.50 per share. Mr. Grevenow alleges
various claims for relief based upon negligent misrepresentation and
concealment, fraudulent misrepresentation, fraudulent concealment, civil
conspiracy, civil theft, breach of fiduciary duty, breach of contract, failure
to provide notice of dissenter rights, violation of the Colorado Securities Act,
and intentional infliction of emotional distress. Mr. Grevenow seeks relief
including compensation for his stock, forfeited opportunities to liquidate his
stock, actual, compensatory and punitive damages, costs and attorney fees and
treble damages with respect to his civil theft claim. We believe this complaint
is without merit and has filed an answer to defend against such complaint.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECUIRTY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
4.1 Amended and Restated Standby Equity
Distribution Agreement dated as of February
3, 2006 between the issuer and Cornell
Capital Partners, LP*
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10.1 Letter Agreement dated as of February 3,
2006 between the issuer and Cornell Capital
Partners, LP (exhibits omitted)*
10.2 Termination Agreement dated as of February
3, 2006 between the issuer, David Gonzalez,
Esq. and Cornell Capital Partners, LP*
31 Certificate of the Chief Executive Officer
and Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of
2002.*
32 Certificate of the Chief Executive Officer
and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.*
*Filed herewith as an exhibit.
(b) Reports on Form 8K. During the quarter ended September 30, 2005, the
issuer filed the following Reports on Form 8-K:
None.
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SIGNATURES
In accordance the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HEALTHRENU MEDICAL, INC.
DATED: February 21, 2006 By: /s/ Robert W. Prokos
------------------------
Robert W. Prokos
Chief Executive Officer and President
(Principal Executive, Financial and
Accounting Officer)
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