As filed with the Securities and Exchange Commission on April 12, 2006
Registration No. __________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
HEALTHRENU MEDICAL, INC.
(Name of Small Business Issuer in Its Charter)
Nevada 2844 25-1907744
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or Organization) Classification Code Number) Identification No.)
12777 Jones Road
Suite 481
Houston, TX 77070
(281) 890-2561
(Address and Telephone Number of Principal Executive Offices)
12777 Jones Road, Suite 481
Houston, TX 77070
(Address of Principal Place of Business or
Intended Principal Place of Business)
Copies to:
Robert W. Prokos Thomas P. Gallagher, Esq.
President and Chief Executive Officer Deborah L. Carroll, Esq.
HealthRenu Medical, Inc. Gallagher, Briody & Butler
12777 Jones Road, Suite 481 155 Village Boulevard
Houston, TX 77070 Princeton, NJ 08540
(281) 890-2561 (609) 452-6000
(Name, Address and Telephone (Name, Address and Telephone
Number of Agent for Service) Number of Agent for Service)
---------------
Approximate Date of Commencement of Proposed Sale to the Public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. |_|
CALCULATION OF REGISTRATION FEE
- --------------------------------------------- ---------------------- ----------------- --------------------- --------------
Proposed
Title Of Each Maximum Proposed Maximum Amount Of
Class Of Securities Amount To Offering Price Aggregate Offering Registration
To Be Registered Be Registered Per Share (1) Price (1) Fee (3)
- --------------------------------------------- ---------------------- ----------------- --------------------- --------------
Common Stock, par value $0.001 per share 120,000,000 shares(2) $0.19 $22,800,000 $2,440
- --------------------------------------------- ---------------------- ----------------- --------------------- --------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended. The
proposed maximum offering price per share and proposed maximum aggregate
offering price is based upon the mean between the closing bid and asked
prices for the common stock as quoted by the Over-the-Counter Bulletin
Board on April 11, 2006.
(2) Represents (a) up to 64,690,666 shares of common stock issuable pursuant
to a Standby Equity Distribution Agreement with Cornell Capital Partners,
LP at an estimated price of $0.16 per share, representing 97% of the
lowest volume weighted average price of the common stock as quoted by
Bloomberg, LP; (b) 1,465,065 shares of common stock issued to Cornell
Capital Partners, LP as a commitment fee pursuant to a Standby Equity
Distribution Agreement with Cornell Capital Partners, LP, including
293,013 shares held by its transferee; (c) 90,909 shares of common stock
issued to Monitor Capital, Inc. as placement agent under the Standby
Equity Distribution Agreement; (d) 500,000 shares of common stock
underlying warrants issued to MultiGrow Advisors, LLC for consulting
services; (e) 100,000 shares of common stock underlying warrants issued to
Portfolio Lenders II, LLC for services; (f) 4,456,362 shares of common
stock underlying warrants issued to North Coast Securities Corporation and
its agents for services as placement agent of the 2006 private placement
and the 2005 private placement and for consulting services; and (g) up to
48,696,098 shares of selling stockholders participating in the 2006
private placement and the 2005 private placement.
(3) A Registration Fee in the amount of $5,179 was previously paid in
connection with Registration Statement No. 333-128757 filed on September
30, 2005.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
ii
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION DATED APRIL 12, 2006
HEALTHRENU MEDICAL, INC.
120,000,000 Shares of Common Stock
Our common stock is quoted on the Over-the-Counter Bulletin Board under
the stock symbol "HRUM.OB". On April 11, 2006, the closing price for our common
stock was $0.19 per share.
This prospectus relates to the sale of up to 120,000,000 shares of our
common stock from time to time by the selling stockholders identified in the
selling stockholder table appearing on page 25 of this prospectus.
We will receive no proceeds from the sale of our common stock by the
selling stockholders identified in this prospectus.
You should read this prospectus carefully before you invest in us.
Investing in our common stock is speculative and involves a high degree of
risk. See "Risk Factors" beginning on page 8.
Neither the Securities Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is __________, 2006
TABLE OF CONTENTS
PAGE
----
Prospectus Summary ..........................................................2
Risk Factors ................................................................8
Forward Looking Statements..................................................20
Use of Proceeds.............................................................20
Plan of Distribution........................................................21
Selling Stockholders........................................................25
Market Prices and Dividend Policy...........................................31
Business....................................................................34
Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................................41
Management..................................................................48
Executive Compensation......................................................49
Principal Stockholders......................................................50
Certain Transactions........................................................51
Description of Securities...................................................53
Legal Matters...............................................................56
Experts.....................................................................56
Where You Can Find More Information.........................................56
Index to Financial Statements..............................................F-1
PROSPECTUS SUMMARY
The following is only a summary of the information, financial statements and
notes included in this prospectus. It does not contain all of the information
that may be important to you. You should read the entire prospectus carefully,
including "Risk Factors" and the financial statements and notes thereto, before
deciding to invest in our common stock offered by this prospectus.
OVERVIEW
We are a biotechnology company that develops and distributes proprietary
products for personal skin care and wound care under the Health Renu(R) brand
name. Our products are all natural and provide nutrients and proteins designed
to aid the body in its healing process. We believe that our products provide an
effective and affordable answer to healthcare's major skin related challenges.
We have developed two product lines - our HealthRenu medical line and our
BetterSkin consumer line - which consist of the following products:
HEALTHRENU MEDICAL LINE:
o DERM-ALL GEL
Used for non-healing wounds, pressure ulcers, diabetic ulcers, and
surgical wounds.
o SKIN RENU PLUS
Used for diabetic neuropathy, circulation, skin preparation for
pre-operative surgery patients, used in post-operative surgical
wound care to prevent against possible staph infections and promote
rapid recovery and scar reduction of the wound site.
o SKIN RENU LOTION
Used for diabetic preventive skin care, preventive skin care for
pressure ulcers, dermatitis, eczema, age spots, chronic bruising
associated with thin skin, skin conditioner for thin skin, chronic
dry skin, cracked hands, and preventive care against latex
allergies.
o SKIN RENU
Used for age spots, bruising, and burns as well as by people with
serious allergic reactions to insect bites.
o RENU CARE
Used as a non-rinse cleanser for bed patients, provides skin
protection and can be used for stage 1 pressure ulcers (bedsores).
2
o DEEP RELIEF
Has transdermal ability to penetrate through skin layers,
transferring anti-inflammatory ingredients through muscle tissue to
inflamed joints. Made with a heat action and used for severe
arthritis.
o HEALTH RENU SPORTS MEDICINE
Has transdermal ability to penetrate through skin layers,
transferring anti-inflammatory ingredients through muscle tissue to
inflamed joints. Made with peppermint oil which gives a peppermint
fragrance as well as anti-inflammatory action. Made with a mild heat
action.
o FACIAL SOAP
Used for facial skin disorders. Contains omega 3,6 and 9 fatty acids
as well as vitamins.
BETTERSKIN CONSUMER LINE:
Our BetterSkin scented body lotions and body washes 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.
We distribute our HealthRenu products directly to consumers and through
distributors to nursing homes, hospices, doctors' offices, pharmacies and other
medical markets and retailers throughout the U.S. Our products are registered
for such sale and distribution by the U.S. Food and Drug Administration.
Historically, most of our sales have been to consumers, nursing homes, home
health care, pharmacies, smaller medical supply companies, family clinics, and
orthopedic surgeons, with some sales to hospitals. We have not yet commenced
distribution of our BetterSkin products.
BUSINESS DEVELOPMENT
We were originally incorporated in Colorado as American Merger Control, Inc. on
January 6, 1986. In 1990, we changed our name to Ultratech Knowledge Systems,
Inc., and in 1993 we changed our name again to AGTsports, Inc. During the fiscal
years ended September 30, 1991 through September 30, 1998, our business plan was
to pursue providing technological and software services to golf and related
industries. In 1998, we abandoned this business plan and were considered a
"shell" or "blank check" company whose sole purpose was to search for and enter
into new business opportunities.
On September 4, 2003, we merged into AGTsports, Inc., our wholly-owned Nevada
subsidiary. As a result of the merger, we became a Nevada corporation.
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 Health Renu, Inc. became our wholly-owned subsidiary and our control
shifted to the former Health Renu, Inc. stockholders. Since its inception in
1997, Health Renu, Inc. had been in the medical research and development stage,
with a focus on creating and improving its skin care and wound care products.
Health Renu, Inc. had very little production or revenue.
3
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. As a result of our acquisition of Health Renu, Inc. and
a change in our business focus to skin care and wound care products, we changed
our name to HealthRenu Medical, Inc. In this prospectus, a reference to us
includes a reference to Health Renu, Inc. and vice-versa unless otherwise
indicated.
Our principal executive offices are located at 12777 Jones Road, Suite 481,
Houston, Texas 77070 and our telephone number is (281) 890-2561.
Information contained on our web site (www.healthrenumedical.com) does not
constitute part of this prospectus.
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 $5.1 million.
We have financed our operations since inception primarily through equity
financings and loans from our officers, directors and stockholders. We have
recently entered into a standby equity distribution agreement. 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 standby equity credit agreement or otherwise. Continuing our
operations in 2006 is dependent upon obtaining such further financing.
Our accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
4
THE OFFERING
This offering relates to the sale of common stock by certain persons who are our
stockholders. The selling stockholders are:
o Cornell Capital Partners, L.P. and its transferee, which intend to
sell up to 1,465,065 shares of common stock issued to Cornell
Capital Partners, L.P., as a commitment fee pursuant to the standby
equity distribution agreement entered into between us and them and
up to 64,690,666 shares of common stock to be issued pursuant to the
standby equity distribution agreement;
o Monitor Capital, Inc., which intends to sell up to 90,909 shares of
common stock received as a placement agent fee;
o Two selling stockholders who intend to sell up to 600,000 shares of
common stock issuable upon warrants issued for service;
o North Coast Securities Corporation and its designees who intend to
sell up to 4,456,362 shares of common stock underlying warrants
issued as a fee for serving as our placement agent in our private
placement of units closed in February 2006 and our private placement
of units closed in August and September 2005 and for consulting
services; and
o Selling stockholders, who intend to sell up to 3,425,000 shares of
common stock issued or issuable upon conversion of 8% unsecured
convertible notes, related interest payable in up to 822,000 shares
and up to 6,850,000 shares of common stock issuable upon the
exercise of related warrants, sold in our private placement of units
conducted in August and September 2005.
o Selling stockholders, who intend to sell up to 4,000,000 shares of
common stock issued or issuable upon conversion of 8% secured
convertible notes, related interest payable in up to 1,600,000
shares and up to 32,000,000 shares of common stock issuable upon the
exercise of related warrants, sold in our private placement of units
conducted in February 2006.
Pursuant to the standby equity distribution agreement, we may sell to Cornell
Capital Partners, L.P. up to $10.0 million worth of our common stock at a price
equal to 97% of the lowest volume weighted average price as quoted by Bloomberg,
L.P. for the five consecutive trading days after the date upon which we request
an advance under the agreement. In addition, Cornell Capital Partners, L.P. will
retain a cash fee of 5% from the proceeds received by us for each advance under
the agreement for a total effective discount to the market price of our common
stock of 8%. This 8% discount is an underwriting discount.
Cornell Capital Partners, L.P. intends to sell any shares it acquires pursuant
to the standby equity distribution agreement at the then prevailing market
price. Such sales may cause our stock price to decline.
Cornell Capital Partners, L.P. may sell shares of our common stock subject to an
advance notice from us at any time from and after its receipt of the notice,
including during the applicable five-day pricing period for determination of
stock price and prior to our issuance of the shares to it. This could cause
downward pressure on the price of our common stock and therefore reduce the
purchase price that Cornell Capital Partners, L.P. pays for the common stock.
Cornell Capital Partners, L.P. may not know the precise number of shares that it
will purchase prior to the fifth trading day after a notice is given but may (1)
make an informed estimate based on recent market prices, (2) provide for a sale
of a dollar value rather than a number of securities or (3) sell shares from its
current holdings to cover any short sale that might otherwise result. A short
sale results if a prospective seller sells stock that it does not yet own. The
prospective seller hopes that the stock price will decline, at which time the
seller can purchase shares at a lower price to deliver to the purchaser. The
seller profits when the stock price declines because it is purchasing shares at
a price lower than the price at which it is selling the stock.
We may not request advances under the standby equity distribution agreement if
the shares to be issued in connection with such advances would result in Cornell
Capital Partners, L.P. owning more than 9.9% of our then outstanding common
stock. As of April 11, 2006, we had 26,094,589 shares outstanding so Cornell
Capital Partners, L.P. could not own in excess of 2,583,364 shares. We will be
unable to sell additional shares of our common stock to the investor under the
standby equity distribution agreement if it is unable to reduce its holdings so
as to remain below the 9.9% threshold.
Cornell Capital Partners, L.P. is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with the sale of common stock issuable
under the standby equity distribution agreement.
Monitor Capital, Inc., North Coast Securities Corporation and certain of its
designees are "underwriters" within the meaning of the Securities Act of 1933 in
connection with the sale of the securities held by them.
5
Common Stock Offered Up to 120,000,000 shares by selling
stockholders. This equals 459.87% of our
outstanding common stock on the date
hereof.
Offering Price Market price
Common Stock Outstanding 26,094,589 shares
Before The Offering
Use Of Proceeds We will not receive any proceeds from
sales of the shares offered by the
selling stockholders. Any proceeds we
receive from the sale of common stock to
Cornell Capital Partners, L.P. under the
standby equity distribution agreement
will be used for sales and marketing,
product development and general working
capital purposes. See "Use of Proceeds."
Risk Factors The securities offered hereby involve
a high degree of risk and immediate
substantial dilution. See "Risk Factors".
Over-The-Counter Bulletin HRUM.OB
Board Symbol
6
SUMMARY FINANCIAL INFORMATION
We are providing the following summary financial information to aid you in your
analysis of the financial aspects of an investment in us. The table includes
summary historical financial data for us for the years ended September 30, 2005
and 2004 and the three months ended December 31, 2005 and 2004. In our opinion,
the unaudited financial statements contain all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of our financial condition
as of December 31, 2005 and our results of operations for the three month
periods ended December 31, 2005 and 2004. Interim results are not necessarily
indicative of operations for a full year. The following financial information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
related notes appearing elsewhere in this prospectus.
SUMMARY STATEMENT OF OPERATIONS DATA:
Three Months Ended Years Ended
December 31, September 30,
---------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
(Unaudited)
Sales $ 5,364 $ 3,753 $ 9,785 $ 21,806
Cost of sales $ 1,083 $ 948 $ 13,458 $ 43,306
Gross margin $ 4,281 $ 2,805 $ (3,673) $ (21,500)
General and administrative expense $ 255,266 $ 349,278 $ (1,347,138) $ (1,457,701)
Net loss $ (312,652) $ (346,484) $ (1,992,402) $ (1,479,631)
Net loss per share (basic and $ (0.01) $ (0.01) $ (0.07) $ (0.08)
diluted)
SUMMARY BALANCE SHEET DATA:
December 31, 2005 September 30, 2005
------------------ ------------------
(Unaudited)
Working capital (deficit) $ (478,608) $ (163,253)
Current assets $ 26,103 $ 184,145
Total assets $ 39,648 $ 193,737
Current liabilities $ 504,711 $ 347,398
Stockholders' equity (deficit) $ (465,063) $ (153,661)
7
RISK FACTORS
You should carefully consider the risks and uncertainties described below and
the other information in this prospectus before deciding to invest in our common
stock offered by this prospectus.
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 ($5.1 million) from inception in 1997 to December 31, 2005,
including approximately ($312,000) of net loss during the three months ended
December 31, 2005 and ($1.9 million) of net loss during the year ended September
30, 2005. We expect to incur substantial additional operating losses in the
future. During the three months ended December 31, 2005 and the year ended
September 30, 2005, we generated revenues from product sales in the amounts of
approximately and $5,364 and $9,785, 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
$400,000 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
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
and terms of financing available 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 diluation 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, except for note 14 which is dated March
31, 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 December 31,
2005, we had an accumulated deficit of approximately $5.1 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.
8
As is disclosed in the notes to our financial statements, our long-term
viability as a going concern is dependent upon our ability to:
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 deficit, 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
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.
9
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
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.
10
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 commitment and may disclose our
proprietary formulas to a third party or refuse to sell the 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.
11
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.
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.
12
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.
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;
13
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.
Further, 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.
o Future sales of currently outstanding shares of our common stock could
adversely affect our stock price.
As of April 11, 2006, we had 26,094,589 shares of common stock outstanding. Of
these shares, as of April 11, 2006, approximately 22.0 million shares of our
common stock are subject to restrictions on resale pursuant to Rule 144 and
approximately 4.1 million outstanding shares of our common stock are eligible
for sale in the public market without restriction or registration.
This prospectus relates to 1,465,065 shares of common stock issued as a
commitment fee, 90,909 shares of common stock issued as a placement agent fee up
to 64,690,666 shares of common stock issuable pursuant to the standby equity
distribution agreement, up to 48,696,098 shares of common stock issuable upon
conversion or exercise of securities issued in our private placements of units
and up to 5,056,362 shares of commmon stock underlying compensation warrants,
all of which are being offered for the accounts of selling stockholders.
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.
14
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; 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 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.
RISKS RELATED TO THIS OFFERING
o Future sales by the investor under the standby equity distribution
agreement or our stockholders may adversely affect our stock price and our
ability to raise funds in new stock offerings.
Sales of our common stock in the public market following this offering could
lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all.
15
Upon issuance of the maximum number of shares being registered in this offering,
there will be approximately 120,000,000 additional shares of common stock
outstanding. The selling stockholders intend to sell in the public market the
shares of common stock being registered in this offering. That means that up to
120,000,000 shares of common stock, the number of shares being registered in
this offering, may be sold. Such sales may cause our stock price to decline.
We have the ability to issue and register additional shares under the standby
equity distribution agreement by filing a new registration statement. There is
essentially no limit on the number of shares that we can issue and register in
future registration statements. All of these shares of common stock may be
immediately resold in the public market upon effectiveness of the accompanying
registration statement and the sale to the investor under the terms of the
standby equity distribution agreement.
o Existing stockholders will experience significant dilution from our sale
of shares under the standby equity distribution agreement.
The sale of shares pursuant to the standby equity distribution agreement will
have a dilutive impact on our stockholders. As a result, our net income per
share could decrease in future periods, and the market price of our common stock
could decline. In addition, the lower our stock price is, the more shares of
common stock we will have to issue under the standby equity distribution
agreement to draw down the full amount. If our stock price is lower, then our
existing stockholders will experience greater dilution.
o The investor under the standby equity distribution agreement will pay
eight percent less than the then-prevailing market price of our common stock.
The common stock to be issued under the standby equity distribution agreement
will be issued at a 3% discount to the lowest volume weighted average price as
quoted by Bloomberg, L.P. for the five trading days immediately following the
notice date of an advance. In addition, the investor will retain a cash fee of
5% from the proceeds received by us for each advance under the standby equity
distribution agreement for an effective total discount to the market price of
our common stock of 8%. These discounted sales could cause the price of our
common stock to decline.
o The selling stockholders intend to sell their shares of common stock in
the market, which sales may cause our stock price to decline.
The selling stockholders intend to sell in the public market the shares of
common stock being registered in this offering. That means up to 120,000,000
shares of common stock, the number of shares being registered in this offering,
may be sold. Such sales may cause our stock price to decline.
o The sale of our stock under our standby equity distribution agreement
could encourage short sales by third parties, which could contribute to the
future decline of our stock price.
The significant downward pressure on the price of our common stock caused by the
sale of material amounts of common stock under the standby equity distribution
agreement could encourage short sales by third parties. In a short sale, a
prospective seller borrows stock from a stockholder or broker and sells the
borrowed stock. The prospective seller hopes that the stock price will decline,
at which time the seller can purchase shares at a lower price to repay the
lender. The seller profits when the stock price declines because it is
purchasing shares at a price lower than the sale price of the borrowed stock.
Such sales could place further downward pressure on the price of our common
stock by increasing the number of shares being sold.
16
o The investor under the standby equity distribution agreement may sell
shares of our common stock acquired under the standby equity distribution
agreement during an applicable pricing period for determination of stock price,
which could contribute to the decline of our stock price.
The sale of common stock to be acquired by Cornell Capital Partners, L.P.
pursuant to an advance notice given by us under the standby equity distribution
agreement during an applicable pricing period for determination of stock price
under the agreement could cause downward pressure on the price of our common
stock and, therefore, affect the purchase price that the investor pays for such
common stock.
o The price you pay for our common stock in this offering will fluctuate
and may be higher or lower than the prices paid by other people participating in
this offering.
The price in this offering will fluctuate based on the prevailing market price
of the common stock on the Over-the-Counter Bulletin Board. Accordingly, the
price you pay in this offering may be higher or lower than the prices paid by
other people participating in this offering.
o The standby equity distribution agreement prohibits us from raising
capital at less than the market price which may severely limit our ability to
raise capital from the sale of equity.
The standby equity distribution agreement contains a covenant that restricts us
from raising capital from the sale of stock or other securities convertible into
stock at a price less than the market price of our common stock on the date of
issuance. This covenant may severely limit our ability to raise capital from the
sale of stock or convertible securities because purchasers of our stock or
convertible securities may want to pay a discount to the market price of our
stock.
o We may not be able to access funds under the standby equity distribution
agreement sufficient to meet our operating needs.
We are dependent on external financing to fund our operations. Our 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
and terms of financing available 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.
17
There are additional restrictions on our ability to request advances under the
standby equity distribution agreement. For example, our ability to request an
advance is conditioned upon us registering and maintaining the registration of
the shares of common stock under the Securities Act of 1933. Even if we request
advances, the amount of each advance is limited to a maximum draw down of
$350,000 every five trading days.
Further, we may not have enough shares of common stock authorized to issue
shares of common stock under the standby equity distribution agreement depending
upon our stock price. In such event, we will seek stockholder approval of an
increase in the authorized number of shares of our common stock to make
available that number of shares of our common stock as will be required for
issuance under the standby equity distribution agreement. Although a majority of
our stockholders have indicated a willingness to vote in favor of an increase in
the authorized number of shares of our common stock, no assurance can be given
that we will be able to obtain a stockholder vote in favor of such an increase
in a timely manner or at all. In addition, we may be required to file a proxy
statement or information statement with the Securities Exchange Commission prior
to taking certain corporate actions necessary to increase our authorized number
of shares. In such event, we may not be able to file or obtain Securities
Exchange Commission approval of a proxy or information statement on a timely
basis or at all.
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 April 11, 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 $0.16 (85% of the average of the trading prices
of our common stock on the OTC Bulletin Board for the ten trading days ending on
April 11, 2006 of $0.19), the 2005 notes would convert into 3,425,000 shares of
our common stock. Assuming a conversion price of $0.15 (80% of the average of
the trading prices of our common stock on the OTC Bulletin Board of for the ten
trading days ending on April 11, 2006 of $0.19), the 2006 notes would convert
into 4,000,000 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 (excluding accrued
interest). The calculations in the table are based upon the 26,094,089 shares of
our common stock which were outstanding on April 11, 2006 and shares issuable
upon conversion of the 2005 notes at the following prices:
Conversion At Conversion At Conversion At Conversion At
Assumed Average Assumed Average Assumed Average Assumed Average
Trading Trading Trading Trading
Price of $0.19 Price of $0.14 Price of $0.095 Price of $0.048
--------------- --------------- --------------- ---------------
Conversion Price $ 0.16 $ 0.12 $ 0.08 $ 0.04
Shares Issuable on Conversion 3,425,000 4,566,667 6,850,000 13,700,000
Percentage of Outstanding Common Stock 11.60% 14.89% 20.79% 34.43%
18
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 (excluding accrued
interest). The calculations in the table are based upon the 26,094,089 shares of
our common stock which were outstanding on April 11, 2006 and shares issuable
upon conversion of the 2006 notes at the following prices:
Conversion At Conversion At Conversion At Conversion At
Assumed Average Assumed Average Assumed Average Assumed Average
Trading Trading Trading Trading
Price of $0.19 Price of $0.14 Price of $0.095 Price of $0.048
--------------- --------------- --------------- ---------------
Conversion Price $0.15 $0.11 $0.08 $0.04
Shares Issuable on Conversion 4,000,000 5,454,545 7,500,000 15,000,000
Percentage of Outstanding Common Stock 13.29% 17.29% 22.33% 36.50%
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.
19
FORWARD LOOKING STATEMENTS
This prospectus contains certain forward-looking statements and information that
are based on the beliefs of our management, assumptions made by our management
and information currently available to our management. The statements contained
in this prospectus relating to matters that are not historical facts are
forward-looking statements that involve risks and uncertainties, including, but
not limited to, the successful commercialization of our products, future demand
for our products, general economic conditions, government regulation,
competition and customer strategies, changes in our business strategy or
development plans, capital deployment, business disruptions, our ability to
consummate future financings and other risks and uncertainties, certain of which
are beyond our control. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may differ materially from those described herein as anticipated, believed,
estimated or expected.
Forward-looking statements are based on our management's current views and
assumptions and involve unknown risks that could cause actual results,
performance or events to differ materially from those expressed or implied in
those statements. These risks include, but are not limited to, the risks set
forth under the caption "Risk Factors."
Information included or incorporated by reference in this prospectus may contain
forward-looking statements. This information may involve known and unknown
risks, uncertainties and other factors which may cause our actual results,
performance or achievements to be materially different from the future results,
performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project" or the negative of these words or other
variations on these words or comparable terminology.
This prospectus contains forward-looking statements, including statements
regarding, among other things, (a) our projected sales and profitability, (b)
our growth strategies, (c) anticipated trends in our industry, (d) our future
financing plans and (e) our anticipated needs for working capital. These
statements may be found under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," as well as in this
prospectus generally. Actual events or results may differ materially from those
discussed in forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under "Risk Factors" and
matters described in this prospectus generally. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this prospectus will in fact occur.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered and
sold from time to time by certain selling stockholders. There will be no
proceeds to us from the sale of shares of common stock in this offering.
However, we will receive cash proceeds from the sale of shares of common stock
to Cornell Capital Partners, L.P. ("Cornell Capital") under the standby equity
distribution agreement (the "SEDA"). The purchase price of the shares purchased
under the SEDA will be equal to 97% of the lowest volume weighted average price
of our common stock as quoted by Bloomberg, L.P. for the five trading days
immediately following the date upon which we request an advance under the SEDA.
In addition, Cornell Capital will retain a cash fee of 5% from the proceeds
received by us for each advance under the standby equity distribution agreement
for a total effective discount to the market price of our common stock of 8%.
Cornell Capital will receive the proceeds from the sale of shares it purchases
from us under the SEDA to the extent it chooses to sell those shares.
The cash proceeds we receive from sale of shares to Cornell Capital under the
SEDA will be used approximately as follows:
20
========================================================================================
Assumed Funding Level under SEDA $ 2,500,000 $ 5,000,000 $ 7,500,000 $10,000,000
Assumed Expenses $ 400,000 $ 600,000 $ 800,000 $ 1,000,000
Estimated Net Proceeds $ 2,100,000 $ 4,400,000 $ 6,700,000 $ 9,000,000
- ----------------------------------------------------------------------------------------
Operations $ 400,000 $ 400,000 $ 400,000 $ 400,000
Marketing $ 800,000 $2,250,000 $2,250,000 $3,300,000
Sales $ 250,000 $ 250,000 $ 250,000 $ 250,000
Research and Development $ 400,000 $ 600,000 $1,500,000 $1,900,000
Product Design $ 50,000 $ 100,000 $ 100,000 $ 100,000
New Personnel -- $ 400,000 $ 400,000 $ 680,000
Equipment and Installation -- -- -- $2,140,000
Working Capital $ 200,000 $ 400,000 $1,800,000 $ 230,000
================================================================================
The amounts listed above are estimates. Our Board of Directors has broad
discretion to spend the proceeds for other business purposes if our Board of
Directors determines it to be in our best interest. Thus, the actual amount
expended to finance any category of expenses may be increased or decreased or
reallocated to new uses by our Board of Directors, in its discretion. To the
extent our expenditures are less than projected, the excess funds will be used
for general working capital purposes. We may use working capital to acquire
complementary products or businesses. We have not sought nor identified any
potential acquisition targets nor is such in our current business plan.
The SEDA provides that we may use the net proceeds we receive from the sale of
shares to Cornell Capital under the SEDA for general corporate purposes,
including the payment of loans we incur and for working capital purposes. The
SEDA prohibits us from using any proceeds for the payment (or loan for the
payment) of any judgment or other liability incurred by any of our officers,
directors or employees, except for any liability owed to such person for
services rendered or if we have indemnified such person from liability.
PLAN OF DISTRIBUTION
The selling stockholders may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately-negotiated transactions;
o broker-dealers may agree with the selling stockholders to sell
a specified number of such shares at a stipulated price per
share;
o through the writing of options on the shares;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
21
The selling stockholders shall have the sole and absolute discretion not to
accept any purchase offer or make any sale of shares if they deem the purchase
price to be unsatisfactory at any particular time.
The selling stockholders may pledge their shares to their brokers under the
margin provisions of customer agreements. If a selling stockholder defaults on a
margin loan, the broker may, from time to time, offer and sell the pledged
shares.
The selling stockholders may also sell the shares directly to market makers
acting as principals and/or broker-dealers acting as agents for themselves or
their customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that selling stockholders will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. Cornell
Capital and any brokers, dealers or agents, upon effecting the sale of any of
the shares offered in this prospectus, may be deemed "underwriters" as that term
is defined under the Securities Act of 1933 (the "Securities Act"), or the
Securities Exchange Act of 1934 (the "Exchange Act"), or the rules and
regulations under such acts. In such event, any commissions received by such
broker-dealers or agents and any profit on the resale of the shares purchased by
them may be deemed to be underwriting commissions or discounts under the
Securities Act.
The selling stockholders, alternatively, may sell all or any part of the shares
offered in this prospectus through an underwriter. No selling stockholder has
entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
If a selling stockholder notifies us that they have a material arrangement with
a broker-dealer for the resale of the common stock, then we would be required to
amend this prospectus to describe the agreements between the selling stockholder
and the broker-dealer.
INDEMNIFICATION
We have agreed to indemnify the selling stockholders, or their transferees or
assignees, against certain liabilities, including liabilities under the
Securities Act or to contribute to payments the selling stockholder or their
respective pledgees, transferees or other successors in interest, may be
required to make in respect of such liabilities. The selling stockholders have
agreed to indemnify us against certain losses, claims, damages and liabilities,
including liabilities under the Securities Act, including any untrue statement
of a material fact with respect to such selling stockholder contained in this
prospectus or an omission to state any material fact necessary to make the
statements with respect o such selling stockholder in this prospectus not
misleading.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing, or otherwise, we have been advised that in the opinion of the
Securities and Exchange Commission (the "SEC") such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
22
STATUTORY UNDERWRITER
Cornell Capital is an "underwriter" within the meaning of the Securities Act in
connection with the sale of common stock under the SEDA. For so long as Cornell
Capital is an "underwriter," Cornell Capital may not sell shares by relying on
Rule 144. Cornell Capital will pay us 97% of the lowest volume weighted average
price of our common stock on the Over-the-Counter Bulletin Board ("OTC-BB") or
other principal trading market on which our common stock is traded for the five
trading days immediately following the advance date under the SEDA. In addition,
Cornell Capital will retain a cash fee of 5% from the proceeds received by us
for each advance under the SEDA for an effective total discount to the market
price of our common stock of 8%. Cornell Capital also received a one-time
commitment fee of 1,465,065 shares of our common stock, including 293,013 shares
held by its transferee, and a 12% interest bearing promissory note in the
principal amount of $188,843 from us.
Cornell Capital was formed in February 2000 as a Delaware limited partnership.
Cornell Capital is a domestic hedge fund in the business of investing in and
financing public companies. Cornell Capital does not intend to make a market in
our stock or to otherwise engage in stabilizing or other transactions intended
to help support the stock price. Prospective investors should take these factors
into consideration before purchasing our common stock.
BLUE SKY LAWS
Under the securities laws of certain states, the shares of common stock may be
sold in such states only through registered or licensed brokers or dealers. The
selling stockholders are advised to ensure that any underwriters, brokers,
dealers or agents effecting transactions on behalf of the selling stockholders
are registered to sell securities in all 50 states. In addition, in certain
states the shares of common stock may not be sold unless the shares have been
registered or qualified for sale in such state or an exemption from registration
or qualification is available and is complied with.
COSTS OF REGISTRATION
We will pay all the expenses incident to the registration, offering and sale of
the shares of common stock to the public hereunder other than commissions, fees
and discounts of underwriters, brokers, dealers and agents. We have agreed to
indemnify Cornell Capital and its controlling persons against certain
liabilities, including liabilities under the Securities Act. We estimate that
the expenses of the offering to be borne by us will be approximately $200,000.
We estimate that the offering expenses will consist of: a SEC registration fee
of $2,440, transfer agent expenses of $2,500, printing expenses of $20,000, blue
sky fees and expenses of $2,500, accounting fees of $70,000, legal fees of
$90,000 and miscellaneous expenses of $12,500. We will not receive any proceeds
from the sale of any of the shares of common stock by the selling stockholders.
We will, however, receive proceeds from the sale of common stock under the SEDA.
23
REGULATION M
The selling stockholders should be aware that the anti-manipulation provisions
of Regulation M under the Exchange Act will apply to purchases and sales of
shares of common stock by the selling stockholders, and that there are
restrictions on market-making activities by persons engaged in the distribution
of the shares. Under Regulation M, the selling stockholders or their agents may
not bid for, purchase, or attempt to induce any person to bid for or purchase,
shares of our common stock while such selling stockholders are distributing
shares covered by this prospectus. The selling stockholders are not permitted to
cover short sales by purchasing shares while the distribution is taking place.
The selling stockholders are advised that if a particular offer of common stock
is to be made on terms constituting a material change from the information set
forth above with respect to the plan of distribution, then, to the extent
required, a post-effective amendment to the registration statement of which this
prospectus forms a part must be filed with the SEC.
24
SELLING STOCKHOLDERS
The following table presents information regarding the selling stockholders. A
description of each selling stockholder's relationship to us and how each
selling stockholder acquired or will acquire the shares to be sold in this
offering is detailed in the information immediately following this table.
Percentage of
Outstanding Percentage of Percentage of
Shares Shares Shares to Outstanding Shares to Shares to be
Beneficially Beneficially be Acquired Shares to be be Sold In Beneficially
Owned Before Owned Before Under the Acquired Under the Owned After
Selling Stockholder Offering (1) Offering (1) SEDA(2) the SEDA(2) Offering(2) the Offering
- ---------------------- -------------- ----------------- ------------- ----------------- ------------- ----------------
Cornell Capital
Partners, L.P. (3) 1,172,052 4.50% 64,690,666 71.26% 65,862,716 0%
Yonah Kopstick 293,013 1.12% 0 0% 293,013 0%
Monitor Capital,
Inc.(4) 90,909 * 0 0% 90,909 0%
North Coast 246,849 * 0 0% 246,849 0%
Securities
Corporation(5)
James Fuller(6) 120,000 * 0 0% 120,000 0%
Frank Pasterczyk(7) 476,000 1.79% 0 0% 476,000 0%
Capital Investing,
LLC(8) 3,613,513 12.16% 0 0% 3,613,513 0%
Portfolio Lenders
II, LLC(9) 100,000 * 0 0% 100,000 0%
Woody's Tomato Corp.
401(K) did 8/1/2001,
Thomas R. Forrest
and Lynn F. Teachey,
Trustees 1,383,583(10) 5.04% 0 0% 1,383,583(10) 0%
H. Dale Herring 8,291,667(11) 24.11% 0 0% 8,291,667(11) 0%
Leonard Vonhof 6,170,833(12) 19.13% 0 0% 6,170,833(12) 0%
Walter K. Hoch 384,750(13) 1.45% 0 0% 384,750(13) 0%
Alvin E. Parker 1,142,500(14) 4.19% 0 0% 1,142,500(14) 0%
Richard and Dana Diment 1,658,333(15) 5.98% 0 0% 1,658,333(15) 0%
Troy Taylor 202,500(16) * 0 0% 202,500(16) 0%
Gordon Boyer 101,250(17) * 0 0% 101,250(17) 0%
Judith M. Guthrie 1,658,333(15) 5.98% 0 0% 1,658,833(15) 0%
BSSC C/F Barbara M
Holder - IRA 303,750(18) 1.15% 0 0% 303,750(18) 0%
Orthopaedic
Multispecialty
Network Savings Plan
& Trust(19) 283,500 1.07% 0 0% 283,500 0%
Mark A. McDaniel 829,167(20) 3.08% 0 0% 829,167(20) 0%
Dr. Dana E. Fender 202,500(21) * 0 0% 202,500(21) 0%
Wayne Bernitt 2,376,667(22) 8.35% 0 0% 2,376,667(22) 0%
Daryll W. Futch 1,455,833(23) 5.28% 0 0% 1,455,833(23) 0%
Steven D. Alford 101,250(17) * 0 0% 101,250(17) 0%
David W. and Judith
N. True 1,012,500(24) 3.74% 0 0% 1,012,500(24) 0%
William H. Burger 303,750(17) 1.15% 0 0% 303,750(17) 0%
Joseph Fund Partners
LP(25) 405,000 1.53% 0 0% 405,000 0%
Jennifer Sasaki 1,880,000(26) 6.72% 0 0% 1,880,000(26) 0%
Jacson Long 1,253,333(27) 4.58% 0 0% 1,253,333(27) 0%
Paul Cartmell 5,326,667(28) 16.95% 0 0% 5,326,667(28) 0%
Franklin Brown 1,253,333(27) 4.58% 0 0% 1,253,333(27) 0%
Dr. Johnny Colegrove 1,253,333(27) 4.58% 0 0% 1,253,333(27) 0%
William K. and
Theresa A. Hood 940,000(29) 3.48% 0 0% 940,000(29) 0%
Dr. Stanley Marable 376,000(30) 1.42% 0 0% 376,000(30) 0%
William Scheel 3,133,333(31) 10.72% 0 0% 3,133,333(31) 0%
John Philip Reeves 4,073,333(32) 13.50% 0 0% 4,073,333(32) 0%
Joy Setina 940,000(29) 3.48% 0 0% 940,000(29) 0%
MultiGrow Advisors,
LLC(33) 500,000 1.88% 0 0% 500,000 0%
TOTAL 55,309,334 69.27% 64,690,666 71.26% 120,000,000 0%
25
* Less than 1%
(1) Applicable percentage of ownership is based on 26,094,589 shares of common
stock outstanding as of April 11, 2006, together with securities
exercisable or convertible into shares of common stock within 60 days of
April 11, 2006. Beneficial ownership is determined in accordance with the
rules of the SEC and generally includes voting or investment power with
respect to securities. Shares of common stock subject to securities
exercisable or convertible into shares of common stock that are currently
exercisable or exercisable within 60 days of April 11, 2006 are deemed to
be beneficially owned by the person holding such securities for the
purpose of computing the percentage of ownership of such person, but are
not treated as outstanding for the purpose of computing the percentage
ownership of any other person. In addition, shares of common stock
issuable as interest on the convertible notes issued in our private
placements of units closed in 2005 and 2006 have been included in the
calculation of number of shares beneficially owned by each noteholder
although only a portion of such interest shares will have been earned and
accrued as of or within 60 days of April 11, 2006.
(2) We cannot predict the actual number of shares of common stock that will be
issued pursuant to the SEDA, in part because the purchase price of the
shares under the SEDA will fluctuate based on prevailing market conditions
and we have not determined the total amount of advances under the SEDA
that we intend to draw. Therefore, the number of shares of common stock
registered in connection with the SEDA is based on our good-faith estimate
of the maximum number of shares that we will issue with respect thereto
based upon current market prices of our common stock.
(3) Cornell Capital may purchase up to $10.0 million worth of our common stock
pursuant to the SEDA at a price equal to 97% of the lowest volume weighted
average price of our common stock as quoted by Bloomberg, L.P. for the
five consecutive trading days after the notice date. The terms of the SEDA
prohibit Cornell Capital from acquiring such number of shares that would
result in its holding in excess of 9.9% of our outstanding common stock.
The figures in this row assume that this provision does not apply.
Investment decisions of Cornell Capital are made by its general Partner,
Yorkville Advisors, LLC ("Yorkville"). Mark Angelo, the managing member of
Yorkville, makes investment decisions on its behalf. Cornell Capital is an
"underwriter" within the meaning of the Securities Act in connection with
the sale of common stock under the SEDA.
(4) Investment decisions of Monitor are made by Hsiao-Wen Kao.
(5) Represents shares issuable pursuant to warrants to purchase shares of
common stock issued to North Coast Securities Corporation ("North Coast").
On September 23, 2005, 48,724 warrants were issued as compensation for
services rendered as placement agent in connection with our private
placement of units closed in August and September 2005 (the "2005 Private
Placement") with an exercise price of $0.48 per share, and 10,000 warrants
were issued as compensation for consulting services under our Financial
Advisory and Investment Banking Services Agreement (the "Financial
Consulting Agreement") with an exercise price of $0.50 per share. On
February 17, 2006, 188,125 warrants were issued as compensation for
services rendered as placement agent in connection with our private
placement of units closed in February 2006 (the "2006 Private Placement")
with exercise prices ranging from $0.17 to $0.18 per share. Investment
decisions of North Coast are made by Frank Pasterczyk.
(6) Represents 20,000 shares issuable pursuant to warrants to purchase shares
of common stock issued to North Coast designee on September 23, 2005 as
compensation for consulting services under our Financial Consulting
Agreement with an exercise price of $0.50 per share and 100,000 shares
issuable pursuant to warrants to purchase shares of common stock issued to
North Coast designee on February 17, 2006 as compensation for services
rendered as placement agent in connection with our 2006 Private Placement
with an exercise price of $0.17 per share. Mr. Fuller is an "underwriter"
within the meaning of the Securities Act in connection with the sale of
these securities.
(7) Represents 20,000 shares issuable pursuant to warrants to purchase shares
of common stock issued to North Coast designee on September 23, 2005 as
compensation for consulting services under our Financial Consulting
Agreement with an exercise price of $0.50 per share and 456,000 shares
issuable pursuant to warrants to purchase shares of common stock issued to
North Coast designee on February 17, 2006 as compensation for services
rendered as placement agent in connection with our 2006 Private Placement
with an exercise price of $0.17 per share. Mr. Pasterczyk is an
"underwriter" within the meaning of the Securities Act in connection with
the sale of these securities.
(8) Represents shares issuable pursuant to warrants to purchase shares of
common stock issued to North Coast designee. On September 23, 2005,
438,513 warrants were issued as compensation for services rendered as
placement agent in connection with the 2005 Private Placement with
exercise prices ranging from $0.30 to $0.48 per share, and 450,000
warrants were issued as compensation for consulting services under our
Financial Consulting Agreement with an exercise price of $0.50 per share.
On February 17, 2006, 2,725,000 warrants were issued as compensation for
services rendered as placement agent in connection with our 2006 Private
Placement with exercise prices ranging from $0.17 to $0.18 per share. This
stockholder is prohibited from converting such number of shares as would
result in its holding in excess of 4.99% of our outstanding common stock,
which provision may be waived by the stockholder upon 65 days' notice. The
figures in this row assume that this provision does not apply. Capital
Investing, LLC ("Capital Investing") is an "underwriter" within the
meaning of the Securities Act in connection with the sales of these
securities. Investment decisions of Capital Investing are made by Paul
Kotos.
(9) Represents shares issuable pursuant to warrants issued on September 23,
2005 as compensation for its agreement to provide future financing of
inventory acquisition and product sales growth. These warrants have an
exercise price of $0.50 per share and are subject to forfeiture six months
from their date of issuance in the event that certain performance criteria
is not satisfied. Investment decisions of Portfolio Lenders II, LLC are
made by the trustee of the JGM Family Trust, the managing member of
Portfolio Lenders II, LLC.
26
(10) Represents 156,250 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.16 per share),
37,500 shares of common stock issuable as interest on the 8% convertible
notes (at an assumed conversion price of $0.16 per share and assuming a
three-year term) and 312,500 shares of common stock issuable upon exercise
of warrants purchased in the 2005 Private Placement. Represents 93,333
shares of common stock issuable upon the conversion of 8% convertible
notes (at an assumed conversion price of $0.15 per share), 37,333 shares
of common stock issuable as interest on the 8% convertible notes (at an
assumed conversion price of $0.15 per share and assuming a five-year term)
and 746,667 shares of common stock issuable upon exercise of warrants
purchased in the 2006 Private Placement. This stockholder is prohibited
from converting such number of shares as would result in its holding in
excess of 4.99% of our outstanding common stock, which provision may be
waived by the stockholder upon 65 days' notice. The figures in this row
assume that this provision does not apply.
(11) Represents 625,000 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.16 per share),
150,000 shares of common stock issuable as interest on the 8% convertible
notes (at an assumed conversion price of $0.16 per share and assuming a
three-year term) and 1,250,000 shares of common stock issuable upon
exercise of warrants purchased in the 2005 Private Placement. Represents
666,667 shares of common stock issuable upon the conversion of 8%
convertible notes (at an assumed conversion price of $0.15 per share),
266,667 shares of common stock issuable as interest on the 8% convertible
notes (at an assumed conversion price of $0.15 per share and assuming a
five-year term) and 5,333,333 shares of common stock issuable upon
exercise of warrants purchased in the 2006 Private Placement. This
stockholder is prohibited from converting such number of shares as would
result in its holding in excess of 4.99% of our outstanding common stock,
which provision may be waived by the stockholder upon 65 days' notice. The
figures in this row assume that this provision does not apply.
(12) Represents 937,500 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.16 per share),
255,000 shares of common stock issuable as interest on the 8% convertible
notes (at an assumed conversion price of $0.16 per share and assuming a
three-year term) and 1,875,000 shares of common stock issuable upon
exercise of warrants purchased in the 2005 Private Placement. Represents
333,333 shares of common stock issuable upon the conversion of 8%
convertible notes (at an assumed conversion price of $0.15 per share),
133,333 shares of common stock issuable as interest on the 8% convertible
notes (at an assumed conversion price of $0.15 per share and assuming a
five-year term) and 2,666,667 shares of common stock issuable upon
exercise of warrants purchased in the 2006 Private Placement. This
stockholder is prohibited from converting such number of shares that would
result in its holding in excess of 4.99% of our outstanding common stock,
which provision may be waived by the stockholder upon 65 days' notice. The
figures in this row assume that this provision does not apply.
(13) Represents 118,750 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.16 per share),
28,500 shares of common stock issuable as interest on the 8% convertible
notes (at an assumed conversion price of $0.16 per share and assuming a
three-year term) and 237,500 shares of common stock issuable upon exercise
of warrants purchased in the 2005 Private Placement.
(14) Represents 62,500 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.16 per share),
15,000 shares of common stock issuable as interest on the 8% convertible
notes (at an assumed conversion price of $0.16 per share and assuming a
three-year term) and 125,000 shares of common stock issuable upon exercise
of warrants purchased in the 2005 Private Placement. Represents 100,000
shares of common stock issuable upon the conversion of 8% convertible
notes (at an assumed conversion price of $0.15 per share), 40,000 shares
of common stock issuable as interest on the 8% convertible notes (at an
assumed conversion price of $0.15 per share and assuming a five-year
term) and 800,000 shares of common stock issuable upon exercise of
warrants purchased in the 2006 Private Placement.
(15) Represents 125,000 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.16 per share),
30,000 shares of common stock issuable as interest on the 8% convertible
notes (at an assumed conversion price of $0.16 per share and assuming a
three-year term) and 250,000 shares of common stock issuable upon exercise
of warrants purchased in the 2005 Private Placement. Represents 133,333
shares of common stock issuable upon the conversion of 8% convertible
notes (at an assumed conversion price of $0.15 per share), 53,333 shares
of common stock issuable as interest on the 8% convertible notes (at an
assumed conversion price of $0.15 per share and assuming a five-year term)
and 1,066,667 shares of common stock issuable upon exercise of warrants
purchased in the 2006 Private Placement. This stockholder is prohibited
from converting such number of shares as would result in its holding in
excess of 4.99% of our outstanding common stock, which provision may be
waived by the stockholder upon 65 days' notice. The figures in this row
assume that this provision does not apply.
(16) Represents 62,500 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.16 per share),
15,000 shares of common stock issuable as interest on the 8% convertible
notes (at an assumed conversion price of $0.16 per share and assuming a
three-year term) and 125,000 shares of common stock issuable upon exercise
of warrants purchased in the 2005 Private Placement.
(17) Represents 31,250 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.16 per share),
7,500 shares of common stock issuable as interest on the 8% convertible
notes (at an assumed conversion price of $0.16 per share and assuming a
three-year term) and 62,500 shares of common stock issuable upon exercise
of warrants purchased in the 2005 Private Placement.
27
(18) Represents 93,750 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.16 per share),
22,500 shares of common stock issuable as interest on the 8% convertible
notes (at an assumed conversion price of $0.16 per share and assuming a
three-year term) and 187,500 shares of common stock issuable upon exercise
of warrants purchased in the 2005 Private Placement.
(19) Represents 87,500 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.16 per share),
21,000 shares of common stock issuable as interest on the 8% convertible
notes (at an assumed conversion price of $0.16 per share and assuming a
three-year term) and 175,000 shares of common stock issuable upon exercise
of warrants purchased in the 2005 Private Placement. Investment decisions
of Orthopaedic Multispecialty Network Savings Plan and Trust are made by
Alexander Michael III, Trustee.
(20) Represents 62,500 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.16 per share),
15,000 shares of common stock issuable as interest on the 8% convertible
notes (at an assumed conversion price of $0.16 per share and assuming a
three-year term) and 125,000 shares of common stock issuable upon exercise
of warrants purchased in the 2005 Private Placement. Represents 66,667
shares of common stock issuable upon the conversion of 8% convertible
notes (at an assumed conversion price of $0.15 per share), 26,667 shares
of common stock issuable as interest on the 8% convertible notes (at an
assumed conversion price of $0.15 per share and assuming a five-year term)
and 533,333 shares of common stock issuable upon exercise of warrants
purchased in the 2006 Private Placement.
(21) Represents 62,500 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.16 per share),
15,000 shares of common stock issuable as interest on the 8% convertible
notes (at an assumed conversion price of $0.16 per share and assuming a
three-year term) and 125,000 shares of common stock issuable upon exercise
of warrants purchased in the 2005 Private Placement.
(22) Represents 250,000 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.16 per share),
60,000 shares of common stock issuable as interest on the 8% convertible
notes (at an assumed conversion price of $0.16 per share and assuming a
three-year term) and 500,000 shares of common stock issuable upon exercise
of warrants purchased in the 2005 Private Placement. Represents 166,667
shares of common stock issuable upon the conversion of 8% convertible
notes (at an assumed conversion price of $0.15 per share), 66,667 shares
of common stock issuable as interest on the 8% convertible notes (at an
assumed conversion price of $0.15 per share and assuming a five-year term)
and 1,333,333 shares of common stock issuable upon exercise of warrants
purchased in the 2006 Private Placement. This stockholder is prohibited
from converting such number of shares as would result in its holding in
excess of 4.99% of our outstanding common stock, which provision may be
waived by the stockholder upon 65 days' notice. The figures in this row
assume that this provision does not apply.
(23) Represents 62,500 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.16 per share),
15,000 shares of common stock issuable as interest on the 8% convertible
notes (at an assumed conversion price of $0.16 per share and assuming a
three-year term) and 125,000 shares of common stock issuable upon exercise
of warrants purchased in the 2005 Private Placement. Represents 133,333
shares of common stock issuable upon the conversion of 8% convertible
notes (at an assumed conversion price of $0.15 per share), 53,333 shares
of common stock issuable as interest on the 8% convertible notes (at an
assumed conversion price of $0.15 per share and assuming a five-year term)
and 1,066,667 shares of common stock issuable upon exercise of warrants
purchased in the 2006 Private Placement. This stockholder is prohibited
from converting such number of shares as would result in its holding in
excess of 4.99% of our outstanding common stock, which provision may be
waived by the stockholder upon 65 days' notice. The figures in this row
assume that this provision does not apply.
(24) Represents 312,500 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.16 per share),
75,000 shares of common stock issuable as interest on the 8% convertible
notes (at an assumed conversion price of $0.16 per share and assuming a
three-year term) and 625,000 shares of common stock issuable upon exercise
of warrants purchased in the 2005 Private Placement.
28
(25) Represents 125,000 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.16 per share),
30,000 shares of common stock issuable as interest on the 8% convertible
notes (at an assumed conversion price of $0.16 per share and assuming a
three-year term) and 250,000 shares of common stock issuable upon exercise
of warrants purchased in the 2005 Private Placement. Investment decisions
of Joseph Fund Partners LP are made by its general partner, TAT Inc.
Investment decisions of TAT Inc. are made by Thomas Troncalli.
(26) Represents 200,000 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.15 per share),
80,000 shares of common stock issuable as interest on the 8% convertible
notes (at an assumed conversion price of $0.15 per share and assuming a
five-year term) and 1,600,000 shares of common stock issuable upon
exercise of warrants purchased in the 2006 Private Placement. This
stockholder is prohibited from converting such number of shares as would
result in its holding in excess of 4.99% of our outstanding common stock,
which provision may be waived by the stockholder upon 65 days' notice. The
figures in this row assume that this provision does not apply.
(27) Represents 133,333 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.15 per share),
53,333 shares of common stock issuable as interest on the 8% convertible
notes (at an assumed conversion price of $0.15 per share and assuming a
five-year term) and 1,066,667 shares of common stock issuable upon
exercise of warrants purchased in the 2006 Private Placement.
(28) Represents 566,667 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.15 per share),
226,667 shares of common stock issuable as interest on the 8% convertible
notes (at an assumed conversion price of $0.15 per share and assuming a
five-year term) and 4,533,333 shares of common stock issuable upon
exercise of warrants purchased in the 2006 Private Placement. This
stockholder is prohibited from converting such number of shares as would
result in its holding in excess of 4.99% of our outstanding common stock,
which provision may be waived by the stockholder upon 65 days' notice. The
figures in this row assume that this provision does not apply.
(29) Represents 100,000 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.15 per share),
40,000 shares of common stock issuable as interest on the 8% convertible
notes (at an assumed conversion price of $0.15 per share and assuming a
five-year term) and 800,000 shares of common stock issuable upon exercise
of warrants purchased in the 2006 Private Placement.
(30) Represents 40,000 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.15 per share),
16,000 shares of common stock issuable as interest on the 8% convertible
notes (at an assumed conversion price of $0.15 per share and assuming a
five-year term) and 320,000 shares of common stock issuable upon exercise
of warrants purchased in the 2006 Private Placement.
(31) Represents 333,333 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.15 per share),
133,333 shares of common stock issuable as interest on the 8% convertible
notes (at an assumed conversion price of $0.15 per share and assuming a
five-year term) and 2,666,667 shares of common stock issuable upon
exercise of warrants purchased in the 2006 Private Placement. This
stockholder is prohibited from converting such number of shares as would
result in its holding in excess of 4.99% of our outstanding common stock,
which provision may be waived by the stockholder upon 65' days notice. The
figures in this row assume that this provision does not apply.
(32) Represents 433,333 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.15 per share),
173,333 shares of common stock issuable as interest on the 8% convertible
notes (at an assumed conversion price of $0.15 per share and assuming a
five-year term) and 3,466,667 shares of common stock issuable upon
exercise of warrants purchased in the 2006 Private Placement. This
stockholder is prohibited from converting such number of shares as would
result in its holding in excess of 4.99% of our outstanding common stock,
which provision may be waived by the stockholder upon 65' days notice. The
figures in this row assume that this provision does not apply.
(33) Represents shares issuable pursuant to warrants issued on July 31, 2005 as
compensation for consulting services under our Consulting Agreement and
have an exercise price of $0.50 per share. Investment decisions of
MultiGrow Advisors, LLC ("MultiGrow Advisors") are made by John Murphy.
A description of the selling stockholders' relationship to us and how the
selling stockholders acquired the shares to be sold in this offering is set
forth in the footnotes to the selling stockholders table above and below. Except
as set forth therein, the selling stockholders have not held a position or
office, or had any other material relationship, with us, and we do not expect to
have a continuing relationship with the selling stockholders.
CORNELL CAPITAL
Cornell Capital is the investor under the SEDA. Yorkville Advisors, LLC
("Yorkville") is the general partner of Cornell Capital. All investment
decisions of Cornell Capital are made by its investment manager, Yorkville
Advisors Management, LLC ("Yorkville Management"). Mark Angelo, the managing
member of Yorkville and Yorkville Management, makes investment decisions on
behalf of Yorkville and Yorkville Management. Cornell Capital acquired all
shares being registered in this offering in the following financing transaction
with us.
In May 2005, we entered into the SEDA with Cornell Capital. Pursuant to the
SEDA, we may, at our discretion, periodically sell to Cornell Capital shares of
common stock for a total purchase price of up to $10.0 million. For each share
of common stock purchased under the SEDA, Cornell Capital will pay us 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. Further, Cornell Capital
will retain a cash fee of 5% from each advance under the SEDA for an effective
total discount to the market price of our common stock of 8%. In connection with
the SEDA, Cornell Capital received a commitment fee of 1,465,065 shares of our
common stock, including 293,013 shares held by its transferee, and a 12%
interest bearing promissory note in the principal amount of $188,843 from us.
Cornell Capital does not own or benefit from any other of our debt or equity
securities. Yorkville Management received a structuring fee of $10,000 in
connection with the SEDA and is entitled to receive an additional $5,000 upon
the effectiveness of the registration statement of which this prospectus forms a
part. Yorkville Management will also receive a structuring fee of $500 from the
proceeds of each advance under the SEDA. In addition, we engaged Monitor, a
registered broker-dealer, to advise us in connection with the SEDA. For its
services, Monitor received a fee of 90,909 shares of our common stock. We are
registering 64,690,666 shares in this offering that may be issued under the
SEDA.
Cornell Capital is an "underwriter" within the meaning of the Securities Act in
connection with the sale of common stock under the SEDA.
29
RISKS RELATED TO SALES BY CORNELL CAPITAL
There are certain risks related to sales by Cornell Capital, including:
o The shares will be issued to Cornell Capital based on a discount to
the market rate. As a result, the lower the stock price is at the
time Cornell Capital is issued shares, the greater the likelihood is
that Cornell Capital will receive more shares. This could result in
substantial dilution to the interests of other holders of common
stock.
o To the extent Cornell Capital sells its common stock, our common
stock price may decrease due to the additional shares in the market.
This could allow Cornell Capital to sell greater amounts of common
stock, the sales of which could further depress our stock price.
o The significant downward pressure on the price of our common stock
as Cornell Capital sells material amounts of shares could encourage
short sales by others to the extent permitted by applicable law.
This could place further downward pressure on the price of our
common stock.
MONITOR
Monitor is a registered broker-dealer that we engaged to advise us in connection
with the SEDA. Hsiao-Wen Kao makes the investment decisions on behalf of
Monitor. We paid Monitor a fee of 90,909 shares of our common stock. We are
registering these shares in this offering. Monitor is an "underwriter" within
the meaning of the Securities Act in connection with the sale of these
securities.
NORTH COAST SECURITIES CORPORATION
North Coast served as placement agent for us in our 2006 private placement of
units closed in February 2006 and our 2005 private placement of units closed in
August and September 2005.
As consideration for services rendered as placement agent in the 2006 Private
Placement, we paid North Coast fees consisting of:
o $72,000 representing commissions of 12% of the gross offering
proceeds raised by North Coast;
o $18,000 representing a non-accountable expense allowance of 3% of
the gross offering proceeds raised by North Coast;
o warrants to purchase 3,469,125 shares of our common stock at
exercise prices ranging from $0.17 to $0.18 representing 10% of the
number of shares of common stock that would be issuable to investors
in the offering assuming conversion of their 8% notes at each
closing date, with an exercise price equal to 110% of their
conversion prices on such date; and
o a due diligence and pre-marketing fee and North Coast's legal fees
for the offering of $15,000.
As consideration for services rendered as placement agent in the 2005 Private
Placement, we paid North Coast fees consisting of:
o $65,760 representing commissions of 12% of the gross offering
proceeds raised by North Coast;
o $16,440 representing a non-accountable expense allowance of 3% of
the gross offering proceeds raised by North Coast;
o warrants to purchase 487,237 shares of our common stock at exercise
prices ranging from $0.30 to $0.48 representing 10% of the number of
shares of common stock that would be issuable to investors in the
offering assuming conversion of their 8% notes at each closing date,
with an exercise price equal to 110% of their conversion prices on
such date;
o a due diligence and pre-marketing fee of $25,000; and
o North Coast's legal fees for the offering of $6,690.
As consideration for services pursuant to our Financial Consulting Agreement
with North Coast, we paid North Coast fees of:
o $15,000 ; and
o warrants to purchase 500,000 shares of our common stock at an
exercise price of $0.50.
o In addition, North Coast is entitled to receive a monthly fee of
$5,000 for the 12 month term of the agreement.
The warrants are held by North Coast and its designees. North Coast and its
affiliates are under "underwriters" within the meaning of the Securities Act in
connection with the sale of these securities.
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WARRANT HOLDERS
MultiGrow Advisors was issued warrants to purchase up to 500,000 shares of our
common stock at an exercise price of $0.50 per share as compensation for
services rendered to us under our Consulting Agreement. The Consulting Agreement
requires MultiGrow Advisors to advise us with respect to strategic relationships
and alliances in the personal skin care, wound care and pharmaceutical
industries for a term of 12 months. Portfolio Lenders II, LLC was issued
warrants to purchase up to 100,000 shares of our common stock for its agreement
to provide future financing of inventory acquisition and product sales growth.
These warrants are subject to forfeiture six months from their date of issuance
in the event that certain performance criteria is not satisfied.
PRIVATE PLACEMENT STOCKHOLDERS
All other selling stockholders included in the registration statement of which
this prospectus forms a part were subscribers in our 2006 or 2005 Private
Placement.
We will file a prospectus supplement to name successors to any named selling
stockholders who are able to use this prospectus to resell securities.
MARKET PRICES AND DIVIDEND POLICY
Our common stock is traded in the over-the-counter market, and "bid" and "asked"
prices in the common stock are quoted on the OTC-BB under the symbol "HRUM.OB".
The symbol was changed from "AGTP" in connection with our name change on
September 15, 2003. The following table sets forth certain information with
respect to the high and low bid prices for our common stock as of the close of
each of the calendar quarters of 2006, 2005 and 2004. Such quotations reflect
inter-dealer prices, without retail mark-ups, mark-downs or commissions, and may
not represent actual transactions.
Bid Prices for Common Stock
---------------------------
High Low
------------ -----------
2006
Second Quarter
(through April 11, 2006) $ 0.19 $ 0.19
First Quarter $ 0.30 $ 0.13
2005 $ 0.40 $ 0.17
Fourth Quarer $ 0.95 $ 0.21
Third Quarter
Second Quarter $ 0.34 $ 0.08
First Quarter $ 0.31 $ 0.10
2004
Fourth Quarter
Third Quarter $ 0.11 $ 0.07
Second Quarter $ 0.80 $ 0.51
First Quarter $ 2.75 $ 1.60
On April 11, 2006, the last sale price quoted on the OTC - BB for our common
stock was $0.19. As of April 11, 2006, there were approximately 1,020 holders of
record of our common stock.
DIVIDENDS
We have never paid cash dividends on our common stock and do not presently
anticipate paying cash dividends in the foreseeable future. It is anticipated
that earnings, if any, will be retained for use in our business for an
indefinite period. Payments of dividends in the future, if any, will depend on,
among other things, our ability to generate earnings, our need for capital, and
our financial condition. Additionally, our ability to pay dividends is limited
by applicable state law. Declaration of dividends in the future will remain
within the discretion of our Board of Directors, which will review the dividend
policy from time to time.
31
STANDBY EQUITY DISTRIBUTION AGREEMENT
In May 2005, we entered into the SEDA with Cornell Capital. Cornell Capital is a
private limited partnership whose business operations are conducted through its
general partner, Yorkville.
Sales of shares under the SEDA:
o Pursuant to the SEDA, we may periodically sell shares of common
stock to Cornell Capital to raise capital to fund our working
capital needs.
o At our discretion, we may periodically sell to Cornell Capital
shares of common stock for a total purchase price of up to $10.0
million.
o For each share of common stock purchased under the SEDA, Cornell
Capital will pay us 97% of the lowest volume weighted average price
on the OTC-BB or other principal market on which our common stock is
traded for the five trading days immediately following the date upon
which we request an advance under the SEDA. The volume weighted
average price is calculated automatically by Bloomberg L.P., a
reporting service, and is calculated by multiplying the number of
our shares sold on a given day by the actual sales prices.
o A closing will be held one trading day after the end of each pricing
period at which time we will deliver shares of common stock and
Cornell Capital will pay the advance amount requested by us.
Advances under the SEDA:
o The periodic sale of shares is known as an advance. We may request
an advance every five trading days.
o Our ability to request advances is conditioned upon us registering
the shares of common stock under the Securities Act. We may request
advances under the SEDA once the underlying shares are registered
under the Securities Act.
o Thereafter, we may continue to request advances until Cornell
Capital has advanced $10.0 million or 24 months after the effective
date of the registration statement of which this prospectus forms a
part, whichever occurs first.
o The amount of each advance is limited to a maximum draw down of
$350,000 every five trading days.
o In addition, we may not request advances if the shares to be issued
in connection with such advances would result in Cornell Capital
owning more than 9.9% of our outstanding common stock.
Sales by Cornell Capital of shares acquired under the SEDA:
o We do not have any agreements with Cornell Capital regarding the
distribution of such stock, although Cornell Capital has indicated
that it intends to promptly sell any stock received under the SEDA.
Fees under the SEDA:
o In connection with the SEDA, Cornell Capital received a commitment
fee of 1,465,065 shares of our common stock, 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 also paid
$2,500 to Cornell Capital for due diligence expenses.
o Further, Cornell Capital will retain a cash fee of 5% from each
advance under the SEDA. This represents an effective discount of 8%
when taken together with the 3% discount to the market price of our
common stock that Cornell Capital will pay to purchasae shares under
the SEDA.
o Yorkville Management received a structuring fee of $10,000 in
connection with the SEDA and is entitled to receive an additional
$5,000 upon the effectiveness of the registration statement of which
this prospectus forms a part.
o Yorkville Management will also receive a structuring fee of $500
from the proceeds of each advance under the SEDA.
o We engaged Monitor, a registered broker-dealer, to advise us in
connection with the SEDA. For its services, Monitor received a fee
of 90,909 shares of our common stock.
Registration of shares under the SEDA :
o We are registering 64,690,666 shares of common stock for the SEDA
pursuant to the registration statement of which this prospectus
forms a part. The costs associated with this registration will be
borne by us.
32
There are certain other conditions to our right to request an advance. These
conditions include:
o maintaining our authorization for quotation on the OTC-BB;
o having an effective registration statement related to the
stock to be issued;
o the absence of a stop order or other action adversely
affecting the registration statement;
o no events shall have occurred that would require us to file a
post-effective amendment to the effective registration
statement; and
o the advance will not cause Cornell Capital to beneficially own
more than 9.9% of our outstanding common stock.
Cornell Capital is permitted to terminate the SEDA if (i) there is a stop order
or suspension of the effectiveness of the registration statement of which this
prospectus forms a part for 50 trading days or (ii) we fail to materially comply
with certain covenants, which include the following:
o maintaining a quotation of the common stock on the OTC-BB;
o maintaining our status as public company under Section 12(g)
of the Exchange Act;
o delivering instructions to the transfer agent to issue shares
in connection with an advance notice;
o notifying Cornell Capital of events impacting the registration
of the stock to be issued, including the issuance of a stop
order;
o issuing stock or convertible securities at a price not less
than the market price of our common stock on the date of
issuance; and
o not merging or consolidating us with another company where the
acquiring entity does not assume our obligations under the
SEDA.
We cannot predict the actual number of shares of common stock that will be
issued pursuant to the SEDA, in part, because the purchase price of the shares
will fluctuate based on prevailing market conditions and we have not determined
the total amount of advances we intend to draw. Nonetheless, we can estimate the
number of shares of our common stock that will be issued using certain
assumptions. Assuming we issue the number of shares of common stock being
registered in the registration statement of which this prospectus forms a part
at a recent price of $0.19 per share less the 3% discount to the market price of
our common stock, we would issue 54,347,826 shares of common stock to Cornell
Capital for gross proceeds of $10.0 million. These shares would represent 67.56%
of our outstanding common stock upon issuance. In addition, we would pay
$500,000 in cash to Cornell Capital, representing the cash fee of 5% of each
advance under the SEDA. This represents an effective discount of 8% when taken
together with the 3% discount to the market price of our common stock that
Cornell Capital will pay to purchase shares under the SEDA.
Proceeds used under the SEDA will be used in the manner set forth in "Use of
Proceeds". We cannot predict the total amount of proceeds to be raised in this
transaction because we have not determined the total amount of the advances we
intend to draw.
33
We expect to incur expenses of approximately $200,000 in connection with this
registration, consisting primarily of professional fees. In connection with the
SEDA, we paid Cornell Capital a one-time commitment fee of 1,465,065 shares of
common stock, including 293,013 shares held by its transferee, and a 12%
interest bearing promissory note in the principal amount of $188,843 from us and
will pay to Cornell Capital 5% of each advance we draw. We issued 90,909 shares
of our common stock to Monitor, a registered broker-dealer, as a placement agent
fee.
BUSINESS
We are a biotechnology company that develops and distributes proprietary
products for personal skin care and wound care under the Health Renu(R) brand
name. Our products are all natural and provide nutrients and proteins designed
to aid the body in its healing process. We believe that our products provide an
effective and affordable answer to healthcare's major skin related challenges.
We have developed two product lines - our HealthRenu medical line and our
BetterSkin consumer line - which consist of the following products:
HEALTHRENU MEDICAL LINE:
o DERM-ALL GEL
Used for non-healing wounds, pressure ulcers, diabetic ulcers, and
surgical wounds.
o SKIN RENU PLUS
Used for diabetic neuropathy, circulation, skin preparation for
pre-operative surgery patients, used in post-operative surgical
wound care to prevent against possible staph infections and promote
rapid recovery and scar reduction of the wound site.
o SKIN RENU LOTION
Used for diabetic preventive skin care, preventive skin care for
pressure ulcers, dermatitis, eczema, age spots, chronic bruising
associated with thin skin, skin conditioner for thin skin, chronic
dry skin, cracked hands, and preventive care against latex
allergies.
o SKIN RENU
Used for age spots, bruising, and burns as well as by people with
serious allergic reactions to insect bites.
o RENU CARE
Used as a non-rinse cleanser for bed patients, provides skin
protection and can be used for stage 1 pressure ulcers (bedsores).
34
o DEEP RELIEF
Has transdermal ability to penetrate through skin layers,
transferring anti-inflammatory ingredients through muscle tissue to
inflamed joints. Made with a heat action and used for severe
arthritis.
o HEALTH RENU SPORTS MEDICINE
Has transdermal ability to penetrate through skin layers,
transferring anti-inflammatory ingredients through muscle tissue to
inflamed joints. Made with peppermint oil which gives a peppermint
fragrance as well as anti-inflammatory action. Made with a mild heat
action.
o FACIAL SOAP
Used for facial skin disorders. Contains omega 3, 6 and 9 fatty
acids as well as vitamins.
BETTERSKIN CONSUMER LINE:
Our BetterSkin scented body lotions and body washes 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 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.
Our management estimates that the wound care industry in the U.S. is a $2.8
billion a year industry and that the personal skin care industry in the U.S.,
including cosmeceutical (skincare products designed for both cosmetic and health
purposes such as suncare, anti-acne and lip care products) and anti-aging
products and hand and body lotions, is a $10 billion a year industry. The wound
care industry consists primarily of products designed to maintain non-healing
wounds (i.e., wounds that do not heal).
There is a growing population of older and elderly persons in the U.S. The 50
year and older age group is the fastest growing age group in the U.S. With that
age group comes various types of skin disorders, non-healing diabetic ulcers,
diabetic neuropathy, pressure ulcers, arthritis, heart disease and surgery. U.S.
persons are living longer lives but generating higher medical care costs. Our
product line is specifically designed to meet the needs of the elderly
population for home healthcare and for use in assisted living and skilled care
nursing facilities.
Aging and poor immune systems can cause the body to lose its ability to maintain
production of certain fatty acids and amino acids that are critical for
maintaining normal body function. Due to this problem, there are very few
medical treatments that have a positive effect in treating skin diseases of the
elderly and many of the treatments that seem to have some success also have
serious side effects.
We believe that our products have a positive effect in treating certain skin
conditions, especially those of the elderly, with little or no known side
effects. 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,
35
omega-6 and omega-9 essential fatty acids. These fatty acids and our products
are recognized by the body as natural substances. When treating wounds or
providing care of the skin, essential fatty acids increase blood flow to the
affected areas. When blood flow increases, it aids the body's natural ability to
heal, providing a positive response to the affected area. These fatty acids are
readily absorbed by the body. The body uses these ingredients to aid in healing
and does not fight them off as foreign.
Medicare or Medicaid cover some of the costs of providing non-healing wound care
to senior citizens who are covered by those programs. In the context of
non-healing wound care provided by institutional healthcare providers, our
products are currently not specifically reimbursable by insurance companies, but
are classified as costs associated with providing services to the patient. Over
the last several years, Medicare has placed a cap on how much reimbursement will
be allowed for treatment of non-healing wounds in home healthcare and nursing
homes.
We believe that our products provide a very simple, rapidly working, effective
and less expensive way to address skin disorders. We believe these factors will
incentivize the long-term care and home healthcare industries to use our
products. 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 management.
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 U.S. Food
and Drug Administration (the "FDA").
DISTRIBUTION
We distribute our HealthRenu products directly to consumers and through
distributors to nursing homes, hospices, doctors' offices, pharmacies and other
medical markets and retailers throughout the U.S. Our products are registered
for such sale and distribution by the FDA. Historically, most of our sales have
been to consumers, nursing homes, home health care, pharmacies, smaller medical
supply companies, family clinics, and orthopedic surgeons, with some sales to
hospitals. During the year ended September 30, 2004, $19,000 or 88% of our sales
were to a distributor who is also a stockholder of us. We have not made any
sales to this distributor in fiscal 2005. We do not expect to make significant
sales to this distributor in the future. We have not yet commenced 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 and in addition, to attend trade shows, create product
samples, new catalogs and sales materials, and promote retail sales through
drug, convenience and dollar stores. We also plan to hire a marketing
consultant. We anticipate expending approximately $800,000 to implement this
marketing plan. If we have sufficient additional capital, we may also conduct
educational programs for nurses ($300,000) and increase our marketing budget
generally (by up to $1,000,000) and specifically for our medical line (by up to
$600,000), including for infomercial sales of our medical line (additional
$600,000). 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.
36
MANUFACTURE OF PRODUCTS
Our products are contract-manufactured by a Texas-based pharmaceutical
laboratory which has been approved by the FDA. We do not have a contract with
this laboratory. We cannot assure you that this laboratory will continue to
maintain its FDA certification or that it will 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.
The laboratory owns our product formulas subject to our exclusive use and right
to purchase the formulas. The laboratory is responsible for supplying the
formula 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.
INTELLECTUAL PROPERTY
We own the registered trademark, Health Renu(R). We do not own any patents or
licenses. Our production laboratory owns our product formulas subject to our
rights to exclusive use of our product formulas and to purchase these formulas
at prices that we believe are reasonable. We claim proprietary rights in various
unpatented technologies, know-how, trade secrets and trademarks relating to our
products and manufacturing processes. We protect our proprietary rights in our
product formulas and operations through contractual obligations with our
consultants and vendors. We cannot guarantee the adequacy of these protections,
or that our competitors will not independently develop or patent products that
are substantially equivalent or superior to our products.
Darrell Good, the founder and principal of Health Renu, 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.
Although a final default judgment against Mr. Good was entered in this case, we
cannot assure you that we will be able to prevent Mr. Good from continuing to
compete with us or solicit our customers. If Mr. Good continues to compete with
us or solicit our customers, it could have a material adverse effect on our
business. See "-- Legal Proceedings".
GOVERNMENT REGULATION
Our products are considered over-the-counter ("OTC") and meet the FDA's
requirements for sales directly to consumers and medical related companies. We
are currently developing new OTC products for which we will need to meet FDA
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 FDA requirements. We believe that we are in material
compliance with these requirements. We cannot assure you that these FDA
requirements will not change, that our products will continue to be considered
OTC products, that they will maintain their FDA registrations or that we will be
able to obtain OTC classification or FDA registration for any future products
that we may develop. All of our product production is outsourced to a FDA
certified laboratory.
37
RESEARCH AND DEVELOPMENT
We continually seek to develop new products to aid in personal skin care and
wound care. We seek to conduct research and development on an on-going basis. If
we develop and test new products, we seek to bring them to the market. We may
not be able to develop any new products and any new products we develop may not
be marketable. We did not incur any research and development expenses in the
fiscal years ended September 30, 2004 and 2005, respectively.
Dr. Daniel Sparks, M.D., an orthopedic surgeon and member of our Board of
Directors, is completing a clinical write-up of the use of our products for
pre-operative and post-operative surgical wound care. The write-up covers a
two-year period of time that has resulted in the design of two new products that
will be discussed in the write-up.
EMPLOYEES
Our Chief Executive Officer had been our only full-time employee. In 2005, we
hired two additional full-time employees. We contract with consultants to assist
in numerous areas of our operations and development. Additionally, we outsource
key functions to control costs and keep our overhead low. We intend to hire
additional full-time employees on an as needed basis. This will depend upon our
receiving additional capital funding pursuant to the SEDA.
COMPETITION
We estimate that the U.S. market for personal skincare products is $10 billion
per year, including cosmeceutical (skin care products designed for both cosmetic
and health purposes such as suncare, anti-acne and lip care products) and
anti-aging products and hand and body lotions, and the U.S. market for wound
care products is $2.8 billion per year. Our product lines accounts for a less
than one-percent market share of this market. We will depend on marketing and
distribution efforts to increase our market share. We believe that with an
aggressive marketing campaign, we can distribute our product line on a
nationwide basis and generate more revenue. We plan to devote a significant
amount of our resources to increase our market share. This plan depends upon our
receiving additional capital funding pursuant to the SEDA.
The personal skin care and wound care industries are served by a number of
sources, including major domestic and international medical, pharmaceutical,
cosmetic, consumer products and other companies. Most of these companies have
financial, technical, marketing, sales, manufacturing, distribution and other
resources substantially greater than ours. Large corporations dominate sales in
these industries although we believe many opportunities exist for medium and
smaller-sized companies like us to compete. Medical/Pharmaceutical competitors
include such large corporations such as Johnson & Johnson, Pfizer, Merck and 3M.
The consumer skin care arena includes leaders such as Procter & Gamble and Eli
Lilly. The cosmeceutical market is led by such well known companies as Clinique,
Lancome and Estee Lauder.
We believe that we compete based upon the effectiveness of our products and upon
price. We minimize our product prices by minimizing our expenses, including for
product production, inventory, advertising and other overhead expenses. We
intend to operate with minimal overhead costs by outsourcing our shipping,
receiving, purchasing, and production functions. We also believe that our wound
care products work simply, rapidly and effectively thus reducing the average
cost of a wound closure to less than that for many of our competitors.
38
Also, Darrell Good, the founder and principal of Health Renu, has competed
against us by posting products similar to ours on his website for sale and
soliciting sales from our customers. We filed a lawsuit in federal court against
Mr. Good and a final default judgment was entered against Mr. Good prohibiting
him from competing with us for one year. The time for appeal of the order has
expired. We cannot assure you that Mr. Good will not continue to compete with us
notwithstanding the order. We intend to enforce the order. We cannot assure you
that we will be able to prevent Mr. Good from continuing to compete with us,
which could had a material adverse effect on our business. See "-- Legal
Proceedings."
PROPERTY
We have an office at 12777 Jones Road, Suite 481, Houston, Texas 77070
consisting of 1,692 square feet of office space. We amended our lease effective
January 31, 2006 through January 31, 2009. Initial monthly payments under the
lease are $3,407, escalating each year of the lease term. Future minimum
payments under the lease are $36,797 for 2006, $41,713 for 2007, $42,952 for
2008 and $14,455 for 2009.
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 claim is
without merit and have filed an answer to defend against such complaint.
In April 2005, we filed a lawsuit in U.S. Federal District Court for the
Southern District of Texas seeking to recover approximately 8.1 million shares
of our common stock from the founder and principal of HealthRenu, Darrell Good,
and requesting that Mr. Good cease competing with us and soliciting our
customers. The lawsuit, among other claims, alleged breach of contract, fraud
and breach of fiduciary duty on the part of Mr. Good. 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 cannot assure
you that we will be able to prevent Mr. Good from continuing to compete with us
or to solicit our customers. See "Risk Factors - Risks Related to our Operations
- - Risk No. 5".
BUSINESS DEVELOPMENT
We were originally incorporated in Colorado as American Merger Control, Inc. on
January 6, 1986. In 1990, we changed our name to Ultratech Knowledge Systems,
Inc., and in 1993, we changed our name again to AGTsports, Inc. During the
fiscal years ended September 30, 1991 through September 30, 1998, our business
plan was to pursue providing technological and software services to golf and
related industries. In 1998, we abandoned this business plan. Prior to entering
into and consummating the exchange agreement (the "Exchange Agreement") with
Health Renu, a Delaware corporation to whose business we succeeded, and its
stockholders discussed below, we were considered a "shell" or "blank check"
company whose sole purpose was to search for and enter into new business
opportunities.
39
On September 4, 2003, we merged into AGTsports, Inc., our wholly-owned Nevada
subsidiary. As a result of the merger, we were reincorporated in Nevada.
On September 26, 2003, we entered into the Exchange Agreement with Health Renu
and the former Health Renu stockholders whereby Health Renu became our
wholly-owned subsidiary and our control shifted to the former Health Renu
stockholders.
The Exchange Agreement represented a recapitalization of Health Renu with
accounting treatment similar to that used in a reverse acquisition, except that
no goodwill or intangible asset is recorded. A recapitalization is characterized
by the merger of a private operating company into a non-operating public shell
corporation with nominal net assets and typically results in the owners and
managers of the private company having effective or operating control after the
transaction.
Health Renu emerged as the surviving financial reporting entity under the
Exchange Agreement, but we remained as the legal reporting entity. As a result
of our acquisition of Health Renu and a change in our business focus to skin
care and wound care products, we changed our name to HealthRenu Medical, Inc. A
reference herein to us includes a reference to Health Renu and vice-versa unless
otherwise indicated.
Since its inception, Health Renu has, and since the recapitalization, we have,
been in the medical research and development stage, with a focus on creating and
improving our skin care and wound care products.
On February 29, 2004, we entered into an agreement with Darrell Good, a former
stockholder and the founder and principal of Health Renu whereby we transferred
to Mr. Good 100% of the issued and outstanding shares of our wholly-owned Health
Renu subsidiary and certain of our assets and liabilities in exchange for a
return to us from the stockholder of 25,000 shares of our common stock and all
rights and formulas to produce Health Renu's products. The gain on the
disposition of these assets and liabilities was $15,468 and recorded an
additional paid in capital. We filed a lawsuit against Mr. Good alleging breach
of contract, breach of fiduciary duty and fraud on his part in connection with
this agreement and the Exchange Agreement. See "-- Legal Proceedings."
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this prospectus.
This discussion contains forward-looking statements within the meaning of the
Securities Act and the Securities Exchange Act.
OVERVIEW
On September 26, 2003, we acquired 100% of the outstanding shares of Health
Renu, a Delaware corporation to whose business we succeeded, pursuant to the
Exchange Agreement. As a result of the Exchange Agreement, the business of
Health Renu became our business, our control shifted to the former Health Renu
stockholders and we subsequently changed our name to HealthRenu Medical, Inc.
Since its inception, Health Renu 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 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 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.
41
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 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. During the year ended September
30, 2004, $19,000 or 88% of our sales were to a distributor who is also a
stockholder of us. We do not expect to make significant sales to this
distributor in the future.
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
o Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the U.S. requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
42
o 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.
o 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.
o Stock-Based Compensation
We account for employee stock options using the intrinsic value method
prescribed in Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees", and have adopted the disclosure-only alternative
of SFAS No. 123R, "Accounting for Stock-Based Compensation", as amended by SFAS
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure".
Effective January 1, 2006, we adopted FAS 123R using the "modified prospective"
transition method as defined. Under the modified prospective method we will
record compensation cost prospectively for the unvested portion as of January 1,
2006, of previously issued and outstanding awards over the remaining vesting
period of such awards.
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 decreased from $349,278 for the three months
ended December 31, 2004 to $255,266 for the three months ended December 31,
2005. The decrease in general and administrative expenses was due to stock based
compensation of $300,000 recorded in 2004 offset by higher costs in 2005 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.
43
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 $346,473 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 decrease in loss from operations is
principally due to the decrease in general and administrative expenses.
We reported a net loss of $346,484 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 decrease in net loss is principally due to the decrease in general and
administrative expenses.
Basic and diluted net loss per common share was $.01 for the three months ended
December 31, 2004 compared to $.01 for the three months ended December 31, 2005.
FISCAL YEAR ENDED SEPTEMBER 30, 2005 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
2004
We experienced a decrease in sales of $12,021 for the fiscal year ended
September 30, 2005 to $9,785 as compared to $21,806 for the fiscal year ended
September 30, 2004. During the fiscal year ended September 30, 2005, we were
primarily focused on expansion. We would have ordinarily allocated the funds
that we used for the expansion to promote the Company's products. In addition,
approximately $19,000 of the sales in 2004 were made to one of our stockholders
which did not occur in 2005.
Gross profit (loss) for the fiscal year ended September 30, 2005 decreased
$17,827 to a negative $3,673 compared to a negative $21,500 for the fiscal year
ended September 30, 2004. The decrease was attributable to a higher cost of
sales related to inventory adjustments of approximately $15,000 during the year
ended September 30, 2004.
General and administrative expenses were $1,347,138 and $1,457,701 for the years
ended September 30, 2005 and 2004, respectively. The decrease in general and
administrative expenses is due to approximately $1,000,000 of stock based
compensation expense recorded in the year ended September 30, 2004 and only
$850,000 recorded in the year ended September 30, 2005 offset by additional
costs associated with our expansion efforts. During 2005, we hired two
additional employees to provide support for our anticipated growth.
44
Interest expense increased to $318,279 for the fiscal year ended September 30,
2005 from $430 for the fiscal year ended September 30, 2004. The increase is
primarily related to the recording of a $240,333 beneficial conversion feature,
$10,960 amortization of debt issuance costs and $55,151 of interest expense
related to the convertible notes payable that were converted as of September 30,
2005.
During the year ended September 30, 2005, we incurred $360,000 of syndication
costs related to the SEDA. Due to the contingencies associated with the
completion of the SEDA, as of September 30, 2005 the syndication costs were
written off as an expense in the statement of operations.
As of September 30, 2005, we had an accumulated deficit of ($4,795,955).
LIQUIDITY AND CAPITAL RESOURCES
Since inception, and 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 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 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 SEDA described below and to fund our inventory and working
capital needs until the SEDA is available for us to draw upon. Such financing
may not be sufficient to meet our needs until the SEDA is available for us to
draw on if we experience unexpected delays or obstacles to meeting the
conditions precedent to drawing upon the SEDA.
Our near term financing needs are currently expected to be provided in large
part from the SEDA described below. Financing under the SEDA may not be
available on favorable terms, in sufficient amounts or at all when needed, in
part, because the amount of financing available will 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.
45
If we are unable to obtain financing on a timely basis, 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 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.
46
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 $5.1 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.
47
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning our directors and
executive officers as of April 11, 2006:
Name Age Position
---------------- --- -------------------
Robert W. Prokos 34 President and Chief
Executive Officer, Director
Dr. Dianne Love 59 Director
David Spencer 52 Director
Edward Watler Zieverink, III 42 Director
Dr. Daniel Sparks 56 Director
ROBERT W. PROKOS has been our President and Chief Executive Office and a
Director since March 2004. From 2001 to 2004, Mr. Prokos was President of Rhino
Capital Management where he counseled public and private company clients as to
business growth strategies, including revenue building, mergers, acquisitions,
venture capital, business to business solutions and financing. We were a client
of Mr. Prokos and Rhino Capital Management. In 2000, Mr. Prokos was a financial
consultant to several companies and engaged in entrepreneurial activities for
his own account, including owning interests in several real estate and mortgage
companies and LD Connect, a VOIP (voice over Internet protocol) telecom company,
which he sold to a public company.
DR. DIANNE LOVE, PH.D., has been our Director since March 2004. Dr. Love has
been a professor of Medical Accounting at the University of Houston since 1989
and is also an Adjunct Professor at Auburn University Physicians Executive MBA
Program and University of Texas Medical Branch. Dr. Love is on the advisory
board for YourDoctor.com. She has published numerous articles on medical
economics, finance and administration. Dr. Love received her Ph.D. in business
administration from the University of Arkansas and her MBA and B.S. in Education
from Auburn University.
DAVID SPENCER has been our Director since January 2005. Mr. Spencer has been the
National Sales Manager in Canada and Regional Sales Manager for the Midwestern
U.S. for Fischer Imaging, a diagnostic imaging company, since 2002. From 2001 to
2002, Mr. Spencer owned and operated a consulting firm with emphasis on capital
equipment sales and leasing. From 2000 to 2001, he was a National Account
Executive for FirstEnergy Services Corporation.
EDWARD WALTER ZIEVERINK, III has been our Director since June 2004. Mr.
Zieverink has been President and owner of Horizon Environmental Services, Inc.,
a commercial and residential landscape management company servicing Birmingham,
Alabama and the surrounding areas since 1987.
48
DR. DANIEL SPARKS, M.D., has been our Director since January 2004. Dr. Sparks is
an orthopedic surgeon and since 1988 has practiced in a private orthopedic
surgical practice established by him in Gadsden, Alabama. His subspeciality
interests include surgery of the peripheral nerve system and wound care issues.
Dr. Sparks graduated from the University of Tennessee School of Medicine. He
served 12 years in the U.S. Air Force during which time he completed his
orthopedic surgical residency at the University of Mississippi. He completed his
military service at Langley Air Force Base, as TAC headquarters Chief of
Orthopedic Surgery.
AUDIT COMMITTEE
We do not currently have a separate audit committee. Currently, our entire Board
of Directors performs all the functions that may be delegated to an audit
committee. We plan to establish an audit committee during fiscal 2006 and are
currently assessing which members of our Board are best qualified, based on
their accounting or related financial management expertise, independence, time
availability, corporate experience and other relevant factors, to serve on our
audit committee. Based on our small size, early development stage and limited
financial and human resources, we did not believe that creating an audit
committee separate and distinct from our full Board of Directors would have been
cost-effective prior to fiscal 2006.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid by
us during the three years ended on September 30, 2005 to our Chief Executive
Officer. We have no other executive officers who were serving as executive
officers on September 30, 2005 and received total salary and bonus in excess of
$100,000 during fiscal year 2005 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
------------------------------------
OTHER
NAME AND PRINCIPAL ANNUAL
POSITION YEAR(1) SALARY COMPENSATION
- ------------------------ --------- ------------------- ------------
Robert W. Prokos, 2005 $ 95,000 $ 749,199(2)
President, Chief 2004 $ 95,000 $ 346,810(3)
Executive Officer and 2003 $ 7,000 $ 942,500(4)
Director
- ----------
(1) Mr. Prokos commenced service as a director and our President and Chief
Executive Officer in March 2004. Prior to March 2004, Mr. Prokos served as
a consultant to us and received compensation from us in such capacity.
(2) Includes 2,959,386 shares of common stock valued at $736,799 based solely
upon the quoted market price of the stock at the respective dates of the
transactions.
(3) Includes 655,527 shares of common stock valued at $334,349 based solely
upon the quoted market price of the stock at the respective dates of the
transactions.
(4) Includes 1,450,000 shares of common stock valued at $942,500 based solely
upon the quoted market price of the stock at the date of the transaction.
EMPLOYMENT AGREEMENTS
Effective March 1, 2004, we entered into a three-year employment agreement with
Robert W. Prokos. Mr. Prokos is employed as our President and Chief Executive
Officer. Mr. Prokos receives an annualized base salary of $95,000. Mr. Prokos
may be eligible to participate in performance bonuses and any stock option plans
established by the compensation committee of our Board of Directors. Mr. Prokos
may be terminated only for cause as defined in the agreement by our Board of
Directors. If Mr. Prokos is terminated other than for cause, he is entitled to
receive a lump sum severance payment in an amount equal to his annual salary in
cash or shares at our option. Mr. Prokos devotes his full business time to our
affairs.
COMPENSATION OF DIRECTORS
It is currently our policy to compensate each non-employee director serving on
our Board of Directors for such service and attendance at Board meetings in an
amount equal to 10% of the compensation paid to our Chief Executive Officer
which may be paid at our discretion in cash or shares of our common stock.
49
PRINCIPAL STOCKHOLDERS
The following table sets forth as of April 11, 2006, the number and percentage
of outstanding shares of our common stock beneficially owned by our Named
Executive Officers, directors, stockholders owning more than 5% of our common
stock and our executive officers and directors as a group:
Name and Address of Shares Owned % of Class
Beneficial Owner Beneficially(1) Owned
Robert W. Prokos(2)(3) 5,044,203 19.33%
16510 Westwego Drive
Cypress, Texas 77429
Walter Zieverink(3) 985,080 3.78%
c/o 4024 Autumn Lane
Birmingham, Alabama 35243
Dr. Daniel Sparks(3) 1,743,163 6.68%
1026 Goodyear Avenue
Suite 100-B
Gadsden, Alabama 35903
Dr. Dianne Love(3) 932,009 3.57%
2503 Jasmine Ridge
Houston, Texas77062
David Spencer(3) 1,452,922 5.57%
2078 Edgeview Drive
Hudson, Ohio 44236
Anita Jones 1,487,500 5.70%
c/o 4024 Autumn Lane
Birmingham, Alabama 35243
Greg Lemon 1,688,410 6.47%
2705 Hunter's Glen Drive
Plainsboro, New Jersey 08536
All Officers and Directors 10,157,377 38.93%
as a Group (5 people)
- ----------
(1) The number of shares of common stock owned are those "beneficially owned"
as determined under the rules of the SEC, including any shares of common
stock as to which a person has sole or shared voting or investment power
and any shares of common stock which the person has the right to acquire
within 60 days through the exercise of any option, warrant or right. As of
April 11, 2006, there were 26,094,589 shares of common stock outstanding.
(2) President and Chief Executive Officer.
(3) Director.
50
CHANGE IN CONTROL
The issuance of shares in this offering will not result in a change of control
of us. Although this offering contemplates the issuance to Cornell Capital of up
to 64,690,666 addition to the 1,172,052 shares currently held by Cornell Capital
(which would result in Cornell Capital holding approximately 72.55% of our
issued and outstanding common stock after issuance), we are restricted from
issuing shares under the SEDA to Cornell Capital which would result in its
owning in excess of 9.9% of our issued and outstanding shares of common stock.
CERTAIN TRANSACTIONS
In September 2003, we entered into a consulting services agreement with Robert
Prokos, who became our Chief Executive Officer in March 2004. We engaged Mr.
Prokos to advise us with respect to our acquisition of Health Renu and related
matters. The agreement had a four month term which expired in January 2004. Mr.
Prokos received 1,450,000 shares of our registered common stock as consideration
under the agreement.
One of our former offices was located in the home of a major stockholder of us
during the year ended September 30, 2003 and for the period from October 1, 2003
to December 31, 2003. The stockholder did not charge us rent for this space. The
fair market value of the rent has been estimated at approximately $250 per
month. Therefore, included in the accompanying statement of operations is $750
of rent expense for the year ended September 30, 2004. Effective April 30, 2002,
we entered into a lease agreement with the father of our Chief Executive Officer
who is also a stockholder of us to lease 33 acres of land in Texas to be used in
the production of raw materials. The lease payments are $250 per month for ten
years. As of February 29, 2004, upon the sale of our Health Renu subsidiary to a
stockholder of us, the $5,500 liability was written off the books and the lease
obligation was transferred to the stockholder.
During the year ended September 30, 2004, our Chief Executive Officer directly
paid vendors on behalf of us in the total amount of $23,559. In addition, our
Chief Executive Officer advanced us $6,000. During the year ended September 30,
2004, we issued our Chief Executive Officer 295,587 shares of our common stock
to reimburse him for these transactions. However, based on the quoted market
price of our common stock at the time of $0.75 per share, we recorded additional
compensation expense $192,000 to our Chief Executive Officer.
During the year ended September 30, 2004, we recognized revenue of $19,213 from
sales of product to a stockholder and consultant to us.
We have an oral understanding with Dr. Daniel Sparks, a member of our Board of
Directors, relating to a potential future product based on Dr. Sparks' patent.
We would pay to Dr. Sparks royalties in an amount to be determined in connection
therewith.
51
We have a consulting services agreement with Dr. Dianne Love, a member of our
Board of Directors, whereby Dr. Love provides management advisory services,
strategic planning, professional introductions and company growth services to
us. We issued 250,000 shares of our common stock to Dr. Love in consideration
for her services under the agreement and have agreed to issue an additional
50,000 shares to her for each $100,000 in revenues over $300,000 that she
generates for us up to a maximum of 350,000 additional shares. We indemnify Dr.
Love against any actions brought against her for breach of representation,
warranty or agreement by us, our negligence or willful misconduct or content
provided by us under the agreement. The agreement commenced on May 1, 2004 and
expires on May 1, 2009.
In April 2005, we filed a lawsuit in U.S. Federal District Court for the
Southern District of Texas seeking to recover approximately 8.1 million shares
of our common stock from the founder and principal of HealthRenu, Darrell Good,
and requesting that Mr. Good cease competing with us and soliciting our
customers. The lawsuit, among other claims, alleged breach of contract, fraud
and breach of fiduciary duty on the part of Mr. Good. 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 to solicit our
customers. See "Business-Legal Proceedings".
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 and related accrued interest 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
was converted into 2,506,807 shares of common stock and repaid by approximately
$32,000 in cash, including accrued interest.
During the year ended September 30, 2005, we issued 2,000,000 shares of our
common stock as payment of accrued compensation of $40,000 owed to our Chief
Executive Officer. However, based on the quoted market price at the time of
$0.17 per share, we recorded additional compensation expense of $300,000 related
to this stock issuance.
We have entered into agreements with our executive officers and compensate our
non-employee directors as described above in "Executive Compensation".
We believe that the transactions described above were fair to us and were as
favorable to us as those that we might have obtained from non-affiliated third
parties, given the circumstances under which such transactions were proposed and
effectuated.
52
DESCRIPTION OF SECURITIES
We have summarized below the material provisions of our Articles of
Incorporation, By-Laws and other instruments defining the rights of our
securities holders. Our summary may not contain all of the information that is
important to you. See "Where You Can Find More Information" for information
about how to obtain a copy of the documents described in this section.
GENERAL
Our authorized capital stock consists of 150,000,000 shares of common stock, par
value $0.001 per share, and 5,000,000 shares of preferred stock, par value
$0.001 per share. As of April 11, 2006, 26,094,589 shares of our common stock
and 1,763 shares of our 2000A Convertible Preferred Stock were issued and
outstanding. In addition, we had outstanding as of March 20, 2006, the
below-described convertible securities, warrants and commitments to issue
securities.
REVERSE STOCK SPLIT
Effective September 15, 2003, we implemented a one-for-850 reverse stock split
of our common stock.
COMMON STOCK
Dividends may be declared and paid on the common stock from funds lawfully
available therefor as and when determined by the Board of Directors and subject
to any preferential dividend rights of any then outstanding preferred stock.
In the event of dissolution, liquidation or winding up of our affairs, whether
voluntary or involuntary, each issued and outstanding share of common stock
shall entitle the holder thereof to receive an equal portion of our net assets
available for distribution to holders of common stock after payment of
liabilities, subject to any preferential rights of any then outstanding
preferred stock.
Except as otherwise required by law, each holder of common stock will have one
vote in respect of each share of stock held by such holder of record for the
election of directors and on all matters submitted to a vote of our
shareholders. There is no cumulative voting.
PREFERRED STOCK
We are authorized to issue up to 5,000,000 shares of preferred stock in one or
more series as may be designated by our Board of Directors.
The preferred stock may be entitled to such dividends, redemption rights,
liquidation rights, exercise rights and voting rights as the Board of Directors,
in its discretion, may determine, in a resolution or resolutions providing for
the issuance of any such stock. Rights granted by the Board of Directors may be
superior to those of existing shareholders (including the right to elect a
controlling number of directors as a class). Preferred stock can be issued
without the vote of the holders of common stock.
53
We have authorized for issuance up to 1,500,000 shares 2000A Convertible
Preferred Stock and up to 500,000 shares 2003A Preferred Stock. At September 26,
2005, 1,763 shares of 2000A Convertible Preferred Stock were outstanding and no
shares of 2003A Preferred Stock were outstanding. The 2000A Convertible
Preferred Stock is entitled to a liquidation preference of $0.10 per share over
our common stock and participates as to voting and dividends with our common
stock. Our 2000A Convertible Preferred Stock is convertible into an equal number
of shares of our common stock any time at the option of the holder thereof and
automatically upon the consent of two-thirds of the outstanding shares of 2000A
Convertible Preferred Stock or the closing a firm commitment underwritten public
offering with proceeds of $2,000,000 to us. The 2003A Preferred Stock is not
entitled to participate in dividends or voting and has no conversion or rights
upon liquidation.
WARRANTS
o Warrants to purchase 3,469,125 shares of common stock at prices
ranging from $0.17 to $0.18 per share were issued on February 17,
2005 to North Coast and its designees for services as placement
agent for the 2006 Private Placement. The exercise prices for these
warrants represent a 10% premium over the 2006 Private Placement
investors' assumed conversion prices.
o Warrants to purchase 487,237 shares of common stock at prices
ranging from $0.30 to $0.48 per share were issued on September 23,
2005 to North Coast and its designees for services as placement
agent for the 2005 Private Placement. The exercise prices for these
warrants represent a 10% premium over the 2005 Private Placement
investors' assumed conversion prices.
o Warrants to purchase 500,000 shares of common stock at a price of
$0.50 per share were issued on September 23, 2005 to North Coast and
its designees for consulting services. The exercise price for these
warrants represents a premium over the market price of our common
stock at the time at which the consulting arrangements pursuant to
which they were issued were agreed upon.
o Warrants to purchase 100,000 shares of common stock at a price of
$0.50 per share were issued on September 23, 2005 to Portfolio
Lenders II, LLC for its agreement to provide future financing of
inventory acquisition and product sales growth. The warrants are
subject to forfeiture six months from their date of issuance in the
event that certain performance criteria is not satisfied. The
exercise price for these warrants represents a premium over the
market price of our common stock at the time at which the consulting
arrangements pursuant to which they were issued were agreed upon.
o Warrants to purchase 500,000 shares of common stock at a price of
$0.50 per share were issued on July 31, 2005 to MultiGrow Advisors,
LLC for consulting services. The exercise price for these warrants
represents a premium over the market price of our common stock at
the time at which the consulting arrangements pursuant to which they
were issued were agreed upon.
Standby Equity Distribution Agreement
On May 23, 2005, we entered into a SEDA with Cornell Capital, pursuant to which
we may, at our discretion, periodically sell to Cornell Capital shares of our
common stock for a total purchase price of up to $10,000,000. For each share of
common stock purchased under the SEDA, Cornell Capital will pay us 97% of the
lowest volume weighted average price of our common stock on the OTC-BB or other
principal market on which our common stock is traded for the five days
immediately following the date we deliver a notice requiring Cornell Capital to
purchase our shares under the SEDA. In addition, Cornell Capital will retain a
5% cash fee from the proceeds received by us for each advance under the SEDA for
a toal effective discount to the market price of our common stock of 8%.
54
Cornell Capital's obligation to purchase shares of our common stock under the
SEDA is subject to certain conditions, including us obtaining an effective
registration statement for shares of common stock sold under the SEDA and is
limited to $350,000 per weekly advance.
The commitment period under the SEDA commences on the earlier to occur of (i)
the date that the registration statement is declared effective by the SEC (the
"Effective Date"), or (ii) such earlier date as we and Cornell Capital may
mutually agree in writing.
The commitment period under the SEDA expires on the earliest to occur of (i) the
date on which Cornell Capital has purchased an aggregate amount of $10,000,000
shares of our common stock under the SEDA, (ii) the date occurring twenty-four
months after the Effective Date, or (iii) the date the SEDA is earlier
terminated (in the event that (x) there occurs any stop order or suspension of
the effectiveness of the registration statement for an aggregate of fifty
trading days, other than due to the acts of Cornell Capital, during the
commitment period, and (y) we fail materially to comply with any of the
covenants contained in the SEDA and such failure is not cured within thirty days
after receipt of written notice from Cornell Capital, provided, however, that
this termination provision does not apply to any period commencing upon the
filing of a post-effective amendment to the registration statement and ending
upon the date on which such post effective amendment is declared effective by
the SEC).
2005 Private Placement
In August and September 2005, we closed on $548,000 of 2005 Units in a private
placement. Each Unit consists of 8% unsecured convertible promissory notes in
the principal amount of $1,000, and two 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 8% 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 8% 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 125% and 150%,
respectively, of the conversion price of the 8% Notes. The warrants are
exercisable for shares of our common stock at any time beginning on the date of
conversion of the 8% Notes and ending on October 31, 2009 and are subject to
adjustment for anti-dilution purposes.
2006 Private Placement
In February 2006, we closed on $600,000 of 2006 Units in a private placement.
Each Unit consists of 8% secured convertible promissory notes in the principal
amount of $1,000, 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 8% 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 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 8% 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 8% Notes. The warrants are exercisable for shares of
our common stock at any time beginning on the date of conversion of the 8% Notes
and ending on March 31, 2011 and are subject to adjustment for anti-dilution
purposes.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Articles of Incorporation and By-laws provide for:
o indemnification of our directors or persons serving in various
business capacities at our request against judgments, penalties,
fines and amounts paid in settlement and reasonable expenses
actually incurred by such person by reason of the fact that such
person is or was serving as provided above in connection with a
threatened, pending or completed proceeding, whether civil or
criminal, administrative, arbitrative or investigative, any appeal
in any of the foregoing, or inquiry or investigation that could lead
to such, if such individual acted in good faith and in a manner such
person reasonably believed to be in, or not opposed to, our best
interests, and, if the action was a criminal proceeding, if such
person had no reasonable cause to believe that such person's conduct
was unlawful; and
55
o mandatory indemnification of such persons who have been successful
in defense of any proceeding against reasonable expenses incurred in
connection with such proceeding.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon
for us by _____________. Gallagher, Briody and Butler, Princeton, New Jersey,
has served as special counsel to us in connection with the SEDA transaction and
preparation of the registration statement of which this prospectus forms a part.
EXPERTS
The financial statements of HealthRenu Medical, Inc. as of September 30, 2005
and for each of the two years ended September 30, 2005, included in this
prospectus have been so included in reliance on the report (which contains an
explanatory paragraph relating to our ability to continue as a going concern as
disclosed in Note 3 to the financial statements) of Ham, Langston & Brezina,
L.L.P., an independent registered public accounting firm, given on the authority
of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form SB-2 under the
Securities Act with respect to the securities offered by this prospectus. As
permitted by the SEC rules and regulations, this prospectus, which forms a part
of the registration statement, does not contain all of the information contained
in the registration statement or in the exhibits to the registration statement.
For further information with respect to us and the securities offered by this
prospectus, reference is made to the registration statement. You may read and
copy the registration statement and exhibits at the public reference room of the
SEC at 450 5th Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. The SEC charges a fee for copies. The SEC maintains a website at
http://www.sec.gov that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC.
56
INDEX TO FINANCIAL STATEMENTS
HEALTHRENU MEDICAL, INC.
INDEX TO FINANCIAL STATEMENTS
Page(s)
-------
Financial Statements for the Two Years Ended September 30, 2005
Report of Independent Registered Public Accounting Firm F-2
Balance Sheet as of September 20, 2005 and 2004 F-3
Statement of Operations for the years ended September 30, 2005 and 2004 F-4
Statement of Stockholders' Equity (Deficit) for the years ended September 30, 2005 and 2004 F-5
Statement of Cash Flows for the years ended September 30, 2005 and 2004 F-7
Notes to Financial Statements F-8
Financial Statements for the Quarter Ended December 31, 2005
Unaudited Condensed Balance Sheet as of December 31, 2005 F-21
Unaudited Condensed Statement of Operations for the three months ended December 31, 2005 and 2004 F-22
Unaudited Condensed Statement of Stockholders' Equity (Deficit) for the three months
ended December 31, 2005 F-23
Unaudited Condensed Statement of Cash Flows for the three months ended December 31, 2005 and 2004 F-24
Notes to Unaudited Condensed Financial Statements F-25
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
To the Board of Directors and Stockholders of
HealthRenu Medical, Inc.
We have audited the accompanying balance sheet of HealthRenu Medical, Inc. (the
"Company") as of September 30, 2005 and 2004, and the related statements of
operations, stockholders' equity (deficit) and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of HealthRenu Medical, Inc. as of
September 30, 2005 and 2004, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming HealthRenu
Medical, Inc. will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred significant recurring losses from
operations and at September 30, 2005 is in a negative working capital position
and a stockholders' deficit position. These factors raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
with regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Houston, Texas
January 25, 2006, except for note 14 which is March 31, 2006.
/s/ Ham, Langston & Brezina, LLP
F-2
HEALTHRENU MEDICAL, INC.
BALANCE SHEET
September 30, 2005 and 2004
----------
ASSETS
2005 2004
------------ ------------
Current assets:
Cash and cash equivalents $ 163,095 $ 7,560
Accounts receivable 716 2,500
Inventories 18,188 22,430
Prepaids and other assets 2,146 --
------------ ------------
Total current assets 184,145 32,490
Property and equipment, net 9,592 4,048
------------ ------------
Total assets $ 193,737 $ 36,538
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 117,863 $ 131,223
Accounts payable-stockholder 2,329 2,329
Note payable 188,843 --
Accrued liabilities 27,403 59,661
------------ ------------
Total current liabilities 336,438 193,213
------------ ------------
Convertible notes payable 10,960 --
------------ ------------
Total liabilities 347,398 193,213
------------ ------------
Stockholders' equity (deficit):
Convertible preferred stock, Series 2000A, $0.001
par value; 1,500,000 shares authorized, 1,763
shares issued and outstanding at September 30,
2005 2 2
Common stock; $.001 par value, 150,000,000 shares
authorized, 25,619,589 and 22,454,451 shares
issued and outstanding at September 30, 2005 and
2004, respectively 25,620 22,454
Additional paid-in capital 4,616,672 2,581,911
Unissued common stock -- 42,511
Accumulated deficit (4,795,955) (2,803,553)
------------ ------------
Total stockholders' equity (deficit) (153,661) (156,675)
------------ ------------
Total liabilities and stockholders' equity
(deficit) $ 193,737 $ 36,538
============ ============
See accompanying notes to financial statements.
F-3
HEALTHRENU MEDICAL, INC.
STATEMENT OF OPERATIONS
for the years ended September 30, 2005 and 2004
----------
2005 2004
------------ ------------
Sales $ 9,785 $ 21,806
Cost of sales 13,458 43,306
------------ ------------
Gross margin (3,673) (21,500)
General and administrative expenses (1,347,138) (1,457,701)
------------ ------------
Loss from operations (1,350,811) (1,479,201)
------------ ------------
Other income (expense):
Write down of syndication costs (360,000) --
Interest and financing expense (318,279) (430)
Gain on extinguishment of debt 36,688 --
------------ ------------
Total other income (expense), net (641,591) (430)
------------ ------------
Net loss $ (1,992,402) $ (1,479,631)
============ ============
Weighted average shares outstanding 27,398,634 19,280,788
============ ============
Basic and diluted net loss per common share $ (0.07) $ (0.08)
============ ============
See accompanying notes to financial statements.
F-4
HEALTHRENU MEDICAL, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
for the years ended September 30, 2005 and 2004
----------
Additional Unissued Stock
Preferred Stock Common Stock Paid-In Common Subscription
Shares Amount Shares Amount Capital Stock Receivable
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 2003 1,763 $ 2 15,506,962 $ 15,507 $ 674,830 $ 698,602 $ (31,000)
Common stock issued for cash
and receivable -- -- 1,822,000 1,822 100,378 -- --
Common stock issued as
payment of liabilities and
additional compensation -- -- 745,587 745 790,813 -- --
Common stock issued for
consulting services -- -- 325,000 325 277,625 -- --
Common stock issued for
employee compensation -- -- 275,000 275 27,225 -- --
Issuance of common stock for
committed stock -- -- 3,779,902 3,780 694,822 (698,602)
Shares committed and issuable
for employee and directors
compensation -- -- -- -- -- 42,511 --
Additional capital
contributed upon sale of
assets and liabilities -- -- -- -- 15,468 -- --
Collection of subscription
receivable -- -- -- -- -- -- 31,000
Rent contributed by
stockholder -- -- -- -- 750 -- --
Net loss -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 2004 1,763 $ 2 22,454,451 $ 22,454 $ 2,581,911 $ 42,511 $ --
=========== =========== =========== =========== =========== =========== ===========
Accumulated
Deficit Total
----------- -----------
Balance at September 30, 2003 $(1,323,922) $ 34,019
Common stock issued for cash
And receivable -- 102,200
Common stock issued as payment
of liabilities and additional
compensation -- 791,558
Common stock issued for
consulting services -- 277,950
Common stock issued for
employee compensation -- 27,500
Issuance of common stock for
committed stock -- --
Shares committed and issuable
for employee and directors
compensation -- 42,511
Additional capital
contributed upon sale of
assets and liabilities -- 15,468
Collection of subscription
receivable -- 31,000
Rent contributed by
stockholder -- 750
Net loss (1,479,631) (1,479,631)
----------- -----------
Balance at September 30, 2004 $(2,803,553) $ (156,675)
=========== ===========
See accompanying notes to financial statements.
F-5
HEALTHRENU MEDICAL, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
for the years ended September 30, 2005 and 2004
Additional Unissued Stock
Preferred Stock Common Stock Paid-In Common Subscription
Shares Amount Shares Amount Capital Stock Receivable
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 2004 1,763 $ 2 22,454,451 $ 22,454 $ 2,581,911 $ 42,511 $ --
Common stock issued as
settlement -- -- 25,000 25 725 -- --
Common stock issued as payment
for liabilities and additional
compensation -- -- 2,623,850 2,624 349,888 -- --
Common stock issued for
services -- -- 25,000 25 2,475 -- --
Issuance of common stock
committed -- -- 1,585,563 1,585 40,926 (42,511)
Warrants issued for consulting
services -- -- -- -- 457,270 -- --
Warrants issued with convertible
notes -- -- -- -- 313,503 -- --
Common stock issued for
syndication costs -- -- 1,555,974 1,556 169,601 -- --
Common stock issued for cash -- -- 3,274,667 3,275 143,175 -- --
Common stock cancelled -- -- (8,777,500) (8,777) 8,777 -- --
Common stock issued as
compensation -- -- 291,777 292 87,241 -- --
Effect of beneficial
conversion feature -- -- -- -- 337,630 -- --
Common stock issued upon
conversion of notes and related
accrued interest -- -- 2,560,807 2,561 123,550 -- --
Net loss -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 2005 1,763 $ 2 25,619,589 $ 25,620 $ 4,616,672 $ -- $ --
=========== =========== =========== =========== =========== =========== ===========
Accumulated
Deficit Total
----------- -----------
Balance at September 30, 2004 $(2,803,553) $ (156,675)
Common stock issued as
settlement -- 750
Common stock issued as payment
of liabilities and additional
compensation -- 352,512
Common stock issued for
services -- 2,500
Issuance of common stock
committed -- --
Warrants issued for consulting
services -- 457,270
Warrants issued with convertible
notes -- 313,503
Common stock issued for
syndication costs -- 171,157
Common stock issued for cash -- 146,450
Common stock cancelled -- --
Common stock issued as
compensation -- 87,533
Effect of beneficial
conversion feature -- 337,630
Common stock issued upon
conversion of notes and related
accrued interest -- 126,111
Net loss (1,992,402) (1,992,402)
----------- -----------
Balance at September 30, 2005 $(4,795,955) $ (153,661)
=========== ===========
See accompanying notes to financial statements.
F-6
HEALTHRENU MEDICAL, INC.
STATEMENT OF CASH FLOWS
for the years ended September 30, 2005 and 2004
----------
2005 2004
------------ ------------
Cash flows from operating activities:
Net loss $ (1,992,402) $ (1,479,631)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 1,689 7,184
Rent expense contributed by stockholder -- 750
Effect of beneficial conversion feature 240,333 --
Amortization of debt issuance costs 10,960 --
Write off of syndication costs 360,000 --
Common stock issued for interest and financing costs 53,111 --
Common stock issued for services and settlement 460,520 277,950
Common stock issued for compensation 387,533 800,797
Gain on extinguishment of debt (36,688) --
Changes in operating assets and liabilities:
Accounts receivable 1,784 (1,994)
Employee receivable -- 5,771
Other current assets (2,146) 4,936
Inventories 4,242 24,473
Accounts payable and accrued liabilities 43,582 227,030
------------ ------------
Net cash used in operating activities (467,482) (132,734)
------------ ------------
Cash flows from investing activities:
Purchase of fixed assets (7,233) (8,090)
------------ ------------
Net cash used in investing activities (7,233) (8,090)
------------ ------------
Cash flows from financing activities:
Proceeds from convertible notes payable 513,800 --
Repayment of convertible notes payable (30,000) --
Proceeds from issuance of common stock 146,450 99,700
Proceeds from collection of subscription receivable -- 31,000
------------ ------------
Net cash provided by financing activities 630,250 130,700
------------ ------------
(Decrease)/increase in cash and cash equivalents 155,535 (10,124)
Cash and cash equivalents, beginning of year 7,560 17,684
------------ ------------
Cash and cash equivalents, end of year $ 163,095 $ 7,560
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 2,040 $ --
============ ============
Cash paid for income taxes $ -- $ --
============ ============
See accompanying notes to financial statements.
F-7
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS
----------
1. Background and Summary of Significant Accounting Policies
Background
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 in 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 that remained on the date of the acquisition. The
historical financial statements presented herein are those of HealthRenu
Medical, Inc., and its predecessor, Health Renu, Inc.
On February 29, 2004, the Company entered into an agreement with a
stockholder and former owner of the non-public entity to exchange 100% of
the issued and outstanding shares of Health Renu, Inc., a Delaware
corporation, and certain assets and liabilities of the Company for a
return of 25,000 shares of common stock of the Company (which the Company
has not yet received and has placed $-0- value on due to the uncertainty
of receipt of these shares) and exclusive rights to the formulas to
produce its products. The disposition of these assets and liabilities
resulted in the Company recording additional paid-in capital of $15,468.
Following is a summary of the Company's 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.
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 in the United
States. Collateral is generally not required for credit granted.
Continued
F-8
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
1. Background and Summary of Significant Accounting Policies, continued
Concentrations of Credit Risk, continued
Sales of product to a stockholder of the Company comprised approximately
88% of the Company's revenue for the year ended September 30, 2004. There
were no such sales in 2005.
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 September 30, 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.
Debt Issuance Costs
Debt issuance costs are deferred and recognized, using the interest
method, over the term of the related debt.
Continued
F-9
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
1. Background and Summary of 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 years ended September 30, 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.
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
The Company accounts for employee stock options using the intrinsic value
method prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees", and has adopted the
disclosure-only alternative of SFAS No. 123, "Accounting fort Stock-Based
Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure".
Unissued Common Stock
The Company records unissued common stock when it receives cash or
services for common stock which has yet to be issued. Such unissued common
stock is included in weighted average shares outstanding for the
calculation of the loss per share during the period for which the cash was
committed and services provided if there were no further contingencies
associated with the transaction and the unissued common stock was entitled
to participate in dividends.
Continued
F-10
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
1. Background and Summary of Significant Accounting Policies, continued
Reclassifications
Certain amounts included in the 2004 financial statements have been
reclassified to confirm to the current year presentation. Such
reclassifications did not have any effect on the reported net loss or
stockholders' deficit.
Recent Accounting Pronouncements
In December 2004 the FASB issued revised SFAS No. 123R, "Share-Based
Payment". SFAS No. 123R sets accounting requirements for "share-based"
compensation to employees and requires companies to recognize in the
income statement the grant-date fair value of stock options and other
equity-based compensation. SFAS No. 123R is effective in interim or annual
periods beginning after June 15, 2005. The Company will be required to
adopt SFAS No. 123R in its fiscal year 2006 and currently discloses the
effect on net (loss) income and (loss) earnings per share of the fair
value recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation". The Company is currently evaluating the impact of the
adoption of SFAS 123R on its financial position and results of operations,
including the valuation methods and support for the assumptions that
underlie the valuation of the awards.
In November 2004 the FASB issued SFAS No. 151, "Inventory Costs". The new
Statement amends ARB No. 43, Chapter 4, "Inventory Pricing", to clarify
the accounting for abnormal amounts of idle facility expense, freight,
handling costs and wasted material. This Statement requires that those
items be recognized as current period charges and requires that allocation
of fixed production overheads to the cost of conversion be based on the
normal capacity of the production facilities. This statement is effective
for fiscal years beginning after June 15, 2005. The adoption of this
statement is not expected to have a material impact on our financial
condition or results of operations.
In December 2004 the FASB issued SFAS No. 153 "Exchanges of Nonmonetary
Assets - An Amendment of APB Opinion No. 29". SFAS No. 153 amends APB
Opinion No. 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance.
SFAS No. 153 is to be applied prospectively for nonmonetary exchanges
occurring in fiscal periods beginning after June 15, 2005. The Company's
adoption of SFAS No. 153 is not expected to have a material impact on its
financial position or results of operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No.
3", which requires retrospective application to prior periods' financial
statements for changes in accounting principle, unless it is impracticable
to determine either the period-specific effects or the cumulative effect
of the change. If such determinations are impracticable, there are other
disclosures required under the standard. This standard is effective for
fiscal years beginning after December 15, 2005 and early adoption is
allowed. The adoption of this standard is not expected to have a material
impact on the Company's financial position or results of operations.
Continued
F-11
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
2. Going Concern
During the years ended September 30, 2005 and 2004, the Company has
continued to accumulate payables to its vendors and has experienced
negative financial results as follows:
2005 2004
------------ ------------
Net loss $ (1,992,402) $ (1,479,631)
Negative cash flows from operations (467,482) (132,734)
Negative working capital (152,293) (160,722)
Accumulated deficit (4,795,955) (2,803,553)
Stockholder deficit (153,661) (156,674)
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.
Continued
F-12
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
3. Inventories
Inventories consist of the following at September 30, 2005 and 2004:
2005 2004
---------- ----------
Work-in-process $ -- $ 14,000
Finished goods 18,188 8,430
---------- ----------
$ 18,188 $ 22,430
========== ==========
4. Property and Equipment
Property and equipment consisted of the following at September 30,2005 and
2004:
2005 2004
---------- ----------
Furniture and fixtures $ 9,314 $ 2,893
Buildings and equipment 5,335 5,552
Software 1,029 --
---------- ----------
15,678 8,445
Less: accumulated depreciation (6,086) (4,397)
---------- ----------
Property and equipment, net $ 9,592 $ 4,048
========== ==========
Depreciation expense for the years ended September 30, 2005 and 2004 was
$1,689 and $2,135, respectively.
5. Note Payable
In May 2005 the Company entered into a SEDA agreement (See Note 9). In
conjunction with this agreement, the Company entered into a promissory
note for $188,843 to pay for certain of its financing costs associated
with this agreement. The note bears interest at 12% per year and matured
on October 3, 2005. This note has been verbally extended and is due on
demand. The note is not collateralized. Due to the contingencies
associated with the completion of the SEDA agreement, this amount has been
expensed and included in write off of syndication costs in the statement
of operations for the year ended September 30, 2005.
6. Convertible Notes Payable
During April and May 2005, the Company received $103,000 in the form of
convertible notes payable from certain of its officers and directors.
These notes bear interest at 8% per year, plus contain an additional 8%
financing charge, and are convertible into the Company's common stock at
$0.03 per share. The notes matured on August 31, 2005. Since the
conversion price of $0.03 was less than the fair market value of the
Company's common stock of $0.10, which was determined based on the quoted
market price of the common stock, the Company recorded a $240,333
beneficial conversion feature, which is included in interest and financing
expenses in the accompanying statement of operations for the year ended
September 30, 2005. During the year ended September 30, 2005, 2,560,807
shares of common stock were issued upon the conversion of $73,000 of
principal and $53,111 in interest and financing expense related to the
convertible notes payable. The remaining $30,000 in principal and $2,040
in interest was repaid in cash during the year ended September 30, 2005.
Continued
F-13
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
6. Convertible Notes Payable, continued
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 $120,566 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 year ended
September 30, 2005, the Company recognized $10,960 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
F-14
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
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 (120,566)
----------
Convertible notes payable at date of origination --
Amortization of loan costs 10,960
----------
Convertible notes payable at September 30, 2005 $ 10,960
==========
7. Income Taxes
The Company has incurred losses since its inception and, therefore, has
not been subject to federal income taxes. As of September 30, 2005, the
Company had net operating loss ("NOL") carryforwards for income tax
purposes of approximately $2,455,000 which expire in various tax years
through 2024. Under the provisions of Section 382 of the Internal Revenue
Code an ownership change in the Company could severely limit the Company's
ability to utilize its NOL carryforward to reduce future taxable income
and related tax liabilities. Additionally, because United States tax laws
limit the time during which NOL carryforwards may be applied against
future taxable income, the Company may be unable to take full advantage of
its NOL for federal income tax purposes should the Company generate
taxable income.
The composition of deferred tax assets and liabilities and the related tax
effects at September 30, 2005 and 2004 are as follows:
2005 2004
---------- ----------
Deferred tax assets:
Net operating losses $ 834,701 $ 626,817
Valuation allowance (834,701) (626,817)
---------- ----------
Net deferred tax asset (liability) $ -- $ --
========== ==========
Continued
F-15
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
7. Income Taxes, continued
The difference between the income tax benefit in the accompanying
statement of operations and the amount that would result if the U.S.
federal statutory rate of 34% were applied to pre-tax loss for the years
ended September 30, 2003 and 2002 is as follows:
2005 2004
------------------------ ------------------------
Amount Percent Amount Percent
---------- ---------- ---------- ----------
Benefit for income tax at
federal statutory rate $ 677,417 34.0% $ 503,075 34.0%
Non-deductible expense (469,533) (23.6) (321,783) (21.7)
Increase in valuation
allowance (207,884) (10.4) (181,292) (12.3)
---------- ---------- ---------- ----------
$ -- --% $ -- --%
========== ========== ========== ==========
8. Commitments and Contingencies
Leases
The Company leases office space and facilities under an operating lease
which expires in January 2006. This lease required monthly lease payments
of $2,115. The Company renewed its lease effective January 31, 2006. The
new lease requires initial monthly payments of $3,407 escalating each year
through the term of the lease, which expires on January 31, 2009. Future
minimum lease payments on this lease are as follows:
Operating
Leases
----------
2006 $ 36,797
2007 41,713
2008 42,952
2009 14,455
----------
$ 135,917
Total rent expense for the years ended September 30, 2005 and 2004 was
$26,173 and $13,525, respectively.
Litigation
In 2004, Cause Number 825,095, "David M. Loev v. HealthRenu Medical, Inc,"
was filed against the Company in the County Court at Law No. 4, Harris
County, Texas. The amount of damages sought by David Loev is approximately
$16,600 for nonpayment of legal services he performed for the Company. The
amount has been recorded as a liability as of September 30, 2004 in the
accompanying financial statements. This matter was settled in 2005 with
the Company paying $16,600 in cash.
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
F-16
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
8. Commitments and Contingencies, continued
Consulting and Employment Agreements
In March 2004, the Company entered into an employment agreement with its
new chief executive officer. The three-year employment agreement provides
for an annual salary as well as a one-time issuance of 350,000 shares of
common stock of the Company at $0.06 per share, which was the fair value
of the common stock determined based on recent cash sales of the Company's
common stock, as payment of accrued compensation owed to him of
approximately $21,214. However, since the quoted market price of the
Company's common stock was $1.60 per share at the grant date, the Company
recorded additional compensation expense of $538,786 in the statement of
operations for the year ended September 30, 2004.
In May 2004 the Company entered into a consulting services agreement with
a member of the Board of Directors to provide management advisory
services, strategic planning, professional introductions and company
growth services. The Company issued 250,000 shares of common stock, which
was valued at $0.80 per share based on the quoted market price of the
Company's common stock, to the board member in consideration for services
under the agreement and have agreed to issue an additional 50,000 shares
for each $100,000 in revenues over $300,000 that she generates for the
Company up to a maximum of 350,000 additional shares. The agreement
expires on May 1, 2009. As a result, the Company has recorded $200,000 as
consulting expense in the statement of operations for the year ended
September 30, 2004.
9. Standby Equity Distribution Agreement
In May 2005, the Company entered into a Standby Equity Distribution
Agreement ("SEDA") with Cornell Capital Partners, L.P. ("Cornell").
Pursuant to the SEDA, the Company may periodically sell to Cornell shares
of its common stock for a purchase price of up to a maximum $10 million.
For each share of common stock purchased under the SEDA, Cornell will pay
the Company 97% of the lowest volume weighted average price on which its
common stock is traded for the five trading days immediately following the
notice date. Subject to the Company completing the registration of its
common stock related to the SEDA agreement, under the Securities Act of
1933, the Company may request advances until Cornell has advanced $10
million or within 24 months after the effective date of the Company's
related registration statement, whichever occurs first. The amount of each
advance is limited to a maximum draw down of $350,000 every five trading
days. Cornell will retain a fee of 5% of each advance under the SEDA,
resulting in a total effective discount to the market price of the
Company's common stock of 8%. The Company also issued 1,465,065 shares of
its common stock valued at $0.11 per share which was the fair market value
of the common stock when the number of shares were agreed upon and a
promissory note in the principal amount of $188,843 to Cornell and issued
90,909 shares of its common stock valued at the fair market value of $0.11
per share to a placement agent, resulting in total financing costs of
$360,000, which was expensed as of September 30, 2005.
Continued
F-17
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
10. Preferred Stock
The articles of incorporation of the Company stipulate that the Company is
authorized to issue 5,000,000 shares of preferred stock, $.001 par value.
Of the 5,000,000 authorized shares, 1,500,000 shares of preferred stock
have been designated Series 2000A Convertible Preferred stock (Series
2000A Preferred). The shareholders of these preferred shares are entitled
to a preference in liquidation of ten cents per share. These preferred
shareholders also receive dividends on a pro-rata basis with common
stockholders at the election of the board of directors. No dividends have
been declared as of September 30, 2005. Each share is convertible at the
option of the shareholder to one share of common stock. In addition, the
shares will automatically convert to common shares upon the closing of a
firm commitment underwritten public offering with net proceeds in excess
of $2,000,000 or a vote of two-thirds of the preferred shareholders. As of
September 30, 2005, there are 1,763 shares of Series 2000A Preferred stock
outstanding. No other preferred stock is outstanding at September 30,
2005.
11. Stock Warrants
In September 2005 the Company granted warrants to certain consultants to
purchase 1,100,000 shares of the Company's common stock at $0.50 per
share, at which time the trading price was $0.44 per share. The warrants
were fully vested, exercisable at the date of grant and expire on October
31, 2009. Using the Black-Scholes option pricing model with the following
assumptions: (i) volatility of 188%, (ii) risk-free interest rate of 4.5%,
dividend yield of -0-% and (iv) weighted average term of four years, the
value of the warrants was estimated to be $457,270, which was recorded as
general and administrative expense in the statement of operations for the
year ended September 30, 2005.
A summary of the Company's stock warrant activity and related information
is as follows:
Weighted
Average
Number of Exercise
Shares Price
---------- ----------
Outstanding at September 30, 2003 -- $ --
Granted -- --
Exercised -- --
Forfeited -- --
---------- ----------
Outstanding at September 30, 2004 -- --
Granted 1,587,237 0.46
Exercised -- --
Forfeited -- --
---------- ----------
Outstanding at September 30, 2005 1,587,237 $ 0.46
==========
Exercisable at September 30, 2005 1,587,237
==========
Continued
F-18
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
11. Stock Warrants, continued
Following is a summary of outstanding stock warrants at September 30,
2005:
Number of Expiration Weighted Average
Shares Vested Date Exercise Price
--------- --------- ---------- ----------------
1,100,000 1,100,000 2009 $0.50
119,318 119,318 2009 $0.48
106,875 106,875 2009 $0.35
121,818 121,818 2009 $0.36
139,226 139,226 2009 $0.30
--------- ---------
1,587,237 1,587,237
========= =========
12. Related Party Transactions
During the year ended September 30, 2005, 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. However, based on the quoted market
price of the Company's common stock of $0.17 per share the Company
recorded additional compensation expense of $300,000 in the statement of
operations for the year ended September 30, 2005.
During the year ended September 30, 2004, the Company's chief executive
officer directly paid vendors on behalf of the Company in the total amount
of $23,559. In addition, the chief executive officer advanced the Company
$6,000. During the year ended September 30, 2004, the Company issued the
chief executive officer 295,587 shares of the Company's common stock to
reimburse him for these transactions. However, based on the quoted market
price of the Company's common stock of $0.75 per share the Company
recorded additional compensation expense of $192,000 in the statement of
operations for the year ended September 30, 2004.
During the year ended September 30, 2004, the Company recognized revenue
of $19,213 from cash sales of product to a stockholder and consultant to
the Company.
13. Non-Cash Investing and Financing Activities
During the years ended September 30, 2005 and 2004, the Company engaged in
certain non-cash investing and financing activities as follows:
2005 2004
------------ ------------
Issuance of note payable for funding costs $ 188,843 $ --
============ ============
Common stock issued for funding costs $ 171,157 $ --
============ ============
Common stock issued for conversion of notes $ 73,000 $ --
============ ============
Issuance of common stock as payment of liability $ 52,512 $ 60,773
============ ============
Transfer of property for reduction in accrued
liability $ -- $ 3,632
============ ============
Continued
F-19
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
13. Non-Cash Investing and Financing Activities, continued
Sale of common stock for subscription
receivable recorded in other current
assets $ -- $ 2,500
============ ============
Sale of assets for reduction in liabilities:
Accounts receivable $ -- $ 1,994
============ ============
Other asset $ -- $ 64
============ ============
Fixed assets $ -- $ 50,129
============ ============
Notes payable $ -- $ (15,403)
============ ============
Accounts payable $ -- $ (52,252)
============ ============
14. Restatement of Financial Statements
The accompanying financial statements have been restated to reflect the
correction of the accounting for a beneficial conversion feature, stock
based compensation and the recording of a gain on sale of assets. The
price used to value the beneficial conversion feature and stock based
compensation has been restated to reflect the value based on the quoted
market price of the common stock issued on the date of the transaction. As
a result of this restatement, the Company recorded an additional $471,667
and $930,786 of interest and compensation expense and reduced the gain on
sale of assets by $-0- and $15,468 during the years ended September 30,
2005 and 2004, respectively. The effect of the restatement on the
September 30, 2005 financial statements is as follows:
As Previously
Reported As Restated
----------- -----------
Net loss $(1,520,735) $(1,992,402)
----------- -----------
Additional paid-in capital $ 3,198,751 $ 4,616,672
----------- -----------
Accumulated deficit $(3,378,034) $(4,795,955)
----------- -----------
Basic and diluted net loss per common share $ (0.06) $ (0.07)
----------- -----------
The effect of the restatement on the September 30, 2004 financial
statements is as follows:
As Previously
Reported As Restated
----------- -----------
Net loss $ (533,377) $(1,479,631)
----------- -----------
Additional paid-in capital $ 1,635,657 $ 2,581,911
----------- -----------
Accumulated deficit $(1,857,299) $(2,803,553)
----------- -----------
Basic and diluted net loss per common share $ (0.03) $ (0.08)
----------- -----------
F-20
HEALTHRENU MEDICAL, INC.
BALANCE SHEET
December 31, 2005
December 31,
2005
(Unaudited)
------------
ASSETS
Current assets:
Cash and cash equivalents $ 226
Accounts receivable 1,689
Inventories 22,042
Prepaid expense 2,146
------------
Total current assets 26,103
Property and equipment, net 13,545
------------
Total assets $ 39,648
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 218,810
Accounts payable-stockholder --
Accrued liabilities 41,057
Note payable 188,843
Convertible notes payable 56,001
------------
Total current liabilities 504,711
------------
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
Common stock, $.001 par value; 150,000,000 shares authorized,
26,082,089 and 25,619,589 shares issued and outstanding at
December 31, 2005 and September 30, 2005,respectively 26,082
Additional paid-in capital 4,617,460
Accumulated deficit (5,108,607)
------------
Total stockholders' equity (465,063)
------------
Total liabilities and stockholders' equity $ 39,648
============
See accompanying notes to financial statements.
F-21
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 255,266 349,278
-------------- --------------
Loss from operations (250,985) (346,473)
Interest and financing expense (61,667) (11)
-------------- --------------
Net loss $ (312,652) $ (346,484)
============== ==============
Weighted average shares outstanding 25,629,589 26,073,972
============== ==============
Basic and diluted net loss per common share $ (0.01) $ (0.01)
============== ==============
See accompanying notes to financial statements.
F-22
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 $ 4,616,672 $(4,795,955) $ (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 $ 4,617,460 $(5,108,607) $ (465,063)
=========== =========== =========== =========== =========== =========== ===========
See accompanying notes to financial statements.
F-23
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) $ (346,484)
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 1,250 300,000
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
F-24
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
F-25
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
F-26
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
F-27
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 $(5,108,607)
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
F-28
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
F-29
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. However, based on the quoted market price of $0.17
per share the Company recorded additional compensation expense of $300,000 in
the statement of operations for the three months ended December 31, 2004.
8. Restatement of Financial Statements
The accompanying financial statements have been restated to reflect the
correction of the accounting for a beneficial conversion feature, stock based
compensation and the recording of a gain on sale of assets during the years
ended September 30, 2005 and 2004. The price used to value the beneficial
conversion feature and stock based compensation has been restated to reflect the
value based on the quoted market price of the common stock issued on the date of
the transaction. As a result of this restatement, the Company recorded an
additional $471,667 and $930,786 of interest and compensation expense and
reduced the gain on sale of assets by $-0- and $15,468 during the years ended
September 30, 2005 and 2004, respectively. The effect of the restatement on the
financial statements for the three months ended December 31, 2005 is as follows:
As Previously
Reported As Restated
Additional paid-in capital $ 3,199,539 $ 4,617,460
----------- -----------
Accumulated deficit $(3,690,686) $(5,108,607)
----------- -----------
The effect of the restatement on the statement of operations for the
three months ended December 31, 2004 is as follows:
As Previously
Reported As Restated
Net loss $ (46,484) $ (346,484)
----------- -----------
Basic and diluted net loss per common share $ (0.00) $ (0.01)
----------- -----------
F-30
===================================================================================================================================
No dealer, salesperson or other person has been authorized
to give any information or to make any representations,
other than those contained or incorporated by reference in
this prospectus, in connection with the offering contained
herein. If given or made, such information and
representations must not be relied upon as having been HEALTHRENU MEDICAL, INC.
authorized by HealthRenu Medical, Inc. or the selling
stockholders. This prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction in which such
offer or solicitation would be unlawful or to any person to 120,000,000 Shares of Common Stock
whom it is unlawful to make such offer or solicitation.
Neither the delivery of this prospectus nor any sale made
hereunder shall under any circumstances create any ----------------
implication that there has been no change in the affairs of
HealthRenu Medical, Inc. since the date hereof. PROSPECTUS
----------------
_________, 2006
Until ______, 2006, all dealers that effect transactions in
these securities, whether or not participating in this
offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
====================================================================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Articles of Incorporation and By-laws provide for:
o indemnification of our directors or persons serving in various
business capacities at our request against judgments, penalties,
fines and amounts paid in settlement and reasonable expenses
actually incurred by such person by reason of the fact that such
person is or was serving as provided above in connection with a
threatened, pending or completed proceeding, whether civil or
criminal, administrative, arbitrative or investigative, any appeal
in any of the foregoing, or inquiry or investigation that could lead
to such, if such individual acted in good faith and in a manner such
person reasonably believed to be in, or not opposed to, our best
interests, and, if the action was a criminal proceeding, if such
person had no reasonable cause to believe that such person's conduct
was unlawful; and
o mandatory indemnification of such persons who have been successful
in defense of any proceeding against reasonable expenses incurred in
connection with such proceeding.
II-1
Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION(1)
Registration Fee - Securities and Exchange Commission ............... $ 2,440
Transfer Agent Expenses (2) ......................................... $ 2,500
Printing of Registration Statement, Prospectus, etc. (2) ............ $ 20,000
Blue Sky Fee and Expenses(2) ........................................ $ 2,500
Accounting Services(2) .............................................. $ 70,000
Legal Fees(2) ....................................................... $ 90,000
Miscellaneous(2) .................................................... $ 12,560
Total .......................................................... $200,000
- ----------
(1) No portion of these expenses will be borne by selling stockholders.
(2) Estimated.
II-2
Item 26. RECENT SALES OF UNREGISTERED SECURITIES
Principal
Amount
or Number
of Price per Nature of Exemption
Date of Sale Title Securities Security Transaction Claimed(1)
------------ ----- --------- --------- ----------- ----------
February 17, 2006 Warrants 3,469,125 $0.20 Warrants issued to ss.4(2) of the Securities Act
placement agent and
agents as
compensation in
connection with
2006 private
placement.
February 2006 Units consisting of $600,000 $1,000 Securities issued to ss.4(2) of the Securities Act
8% Secured accredited investors
Convertible Notes in private placement
and Warrants for cash.
September 23, 2005 Warrants 100,000 $0.42 Warrants issued to ss.4(2) of the Securities Act
accredited investor
for services.
September 23, 2005 Warrants 487,237 $0.40 Warrants issued to ss.4(2) of the Securities Act
placement agent and
agents as
compensation in
connection with
2005 private
placement.
September 23, 2005 Warrants 500,000 $0.42 Warrants issued to ss.4(2) of the Securities Act
placement agent
and agents for
services under
consulting
agreement.
September 19, 2005 Common Stock 20,000 $0.30 Shares issued to ss.4(2) of the Securities Act
employees as
compensation.
September 19, 2005 Common Stock 271,777 $0.30 Shares issued to ss.4(2) of the Securities Act
Directors as
compensation.
August 31, 2005 Common Stock 2,560,807 $0.03- Shares issued to ss.4(2) of the Securities Act
$0.30 Directors and
consultant upon
conversion of loans.
August and September Units consisting of $548,000 $1,000 Securities issued ss.4(2) of the Securities Act
2005 8% Unsecured to accredited and Regulation D thereunder
Convertible Notes investors in
and Warrants private placement
for cash.
July 31, 2005 Warrants 500,000 $0.42 Warrants issued to ss.4(2) of the Securities Act
accredited investor
for services
rendered under
consulting
agreement.
July 18, 2005 Common Stock 500,000 $0.10 Shares issued to ss.4(2) of the Securities Act
individual investor
for cash.
June 28, 2005 Common Stock 25,000 $0.10 Shares issued to ss.4(2) of the Securities Act
distributor as
compensation.
II-3
Principal
Amount
or Number
of Price per Nature of Exemption
Date of Sale Title Securities Security Transaction Claimed(1)
------------ ----- --------- --------- ----------- ----------
June 16, 2005 Common Stock 116,000 $0.04- Shares issued to ss.4(2) of the Securities Act
$0.05 individual
investors for cash.
June 14, 2005 Common Stock 830,988 $0.03- Shares issued to ss.4(2) of the Securities Act
$0.30 Chief Executive
Officer and
Directors as
compensation.
May 23, 2005 Common Stock 90,909 $0.11 Shares issued to ss.4(2) of the Securities Act
placement agent as
compensation in
connection with
standby equity
distribution
agreement.
May 23, 2005 Common Stock 1,465,065 $0.11 Shares issued to ss.4(2) of the Securities Act
accredited investor
as compensation
under standby
equity distribution
agreement.
May 23, 2005 Promissory Note $188,843 $188,843 Issued to ss.4(2) of the Securities Act
accredited investor
as compensation
under standby
equity distribution
agreement.
January 26, 2005 - Common Stock 1,718,667 $0.03- Shares issued to ss.4(2) of the Securities Act
March 14, 2005 $0.05 individual investor
for cash.
November 23, 2004 Common Stock 623,850 $0.03 Shared issued to ss.4(2) of the Securities Act
accredited investor
for cash.
November 9, 2004 Common Stock 2,000,000 $0.17 Shares issued to ss.4(2) of the Securities Act
Chief Executive
Officer
in payment
of accrued
compensation.
November 9, 2004 Common Stock 1,000,000 $0.03 Shares issued to ss.4(2) of the Securities Act
two investors for
cash.
November 9, 2004 Common Stock 25,000 $0.02 Shares issued to ss.4(2) of the Securities Act
stockholder as
reimbursement for
credit advanced.
II-4
Principal
Amount
or Number
of Price per Nature of Exemption
Date of Sale Title Securities Security Transaction Claimed(1)
------------ ----- --------- --------- ----------- ----------
November 9, 2004 Common Stock 694,575 $0.02 Shares issued to ss.4(2) of the Securities Act
Directors as
compensation.
September 2004 Common Stock 295,587 $0.75 Issued to Chief ss.4(2) of the Securities Act
Executive Officer
as reimbursement
for advances and
additional
compensation.
September 2004 Common Stock 1,000,000 $0.02 Shares issued to ss.4(2) of the Securities Act
two individual
investors for cash.
August 2004 Common Stock 337,500 $0.10 Shares issued to ss.4(2) of the Securities Act
two individuals for
services.
August 2004 Common Stock 27,000 $0.10 Shares issued to ss.4(2) of the Securities Act
two individuals for
cash.
January 12, 2004 Common Stock 187,500 $0.10 Shares issued to ss.4(2) of the Securities Act
Chief Executive
Officer as
compensation.
December 2003 Common Stock 50,000 $1.00 Shares issued to ss.4(2) of the Securities Act
Chief Executive
Officer
in cancellation
of note payable.
November 2003 Common Stock 450,000 $0.10 Shares issued to ss.4(2) of the Securities Act
Chief Executive
Officer as
compensation.
September 26, 2003 Common Stock 15,447,699 $0.001 Shares issued to ss.4(2) of the Securities Act
stockholders of
acquired company
pursuant to
exchange agreement.
September 26, 2003 Common Stock 379,902 $379,902 Shares issued to ss.4(2) of the Securities Act
executive officer and Regulation D thereunder
in respect of conversion
of notes and accrued
wages.
August 1, 2003 Series 2003A 500,000 $0.10 Shares issued to ss.4(2) of the Securities Act
Preferred Stock Chief Executive
Officer as
compensation.
(1) All transactions described in Item 26 were, in the opinion of the
Registrant, exempt from registration under the Securities Act by reason of
Section 4(2) thereof, since the sale of such securities did not involve any
public offering. Each person who purchased such securities represented that such
shares were purchased for investment and not with a view to any distribution
thereof. The purchasers of these securities were officers or directors of the
Registrant or persons who were sophisticated in financial matters and had access
to information about the Registrant and an opportunity to ask questions of the
directors and officers of the Registrant.
II-5
Item 27. EXHIBITS
Exhibit No. Description of Exhibit
2.1 Articles of Merger (2)
2.2 Plan of Merger (2)
2.3 Exchange Agreement (3)
3.1 Articles of Amendment to Articles of Incorporation (1)
3.2 Articles of Incorporation (2)
3.3 Articles of Amendment to Articles of Incorporation (2)
3.4 Articles of Amendment to Articles of Incorporation (2)
3.5 Bylaws (2)
3.6 Articles of Amendment to Articles of Incorporation (10)
4.1 Amended and Restated Standby Equity Distribution Agreement dated as of February 3, 2006
between the Registrant and Cornell Capital Partners, LP (11)
4.2 Registration Rights Agreement dated May 23, 2005 by and between the Registrant and Cornell Capital
Partners, LP in connection with the Standby Equity Distribution Agreement (7)
4.3 Placement Agent Agreement dated as of May 23, 2005 by and among the Registrant, Cornell Capital
Partners, LP and Monitor Capital, Inc. in connection with the Standby Equity Distribution Agreement (7)
4.4 Intentionally Omitted
4.5 Form of Promissory Note by Registrant in favor of Cornell Capital Partners, LP (7)
4.6 Form of 8% Unsecured Convertible Notes (8)
4.7 Form of 125% Warrant (8)
4.8 Form of 150% Warrant (8)
4.9 Form of 8% Secured Warrant (12)
4.10 Form of Warrants (12)
4.11 Form of Security Agreement (12)
5.0 Legal Opinion +
10.1 First Amendment to Office Building Lease Agreement effective as of January 1, 2006 between the
Registrant and Denmark House Investment, Ltd. (10)
10.2 Agreement dated July 22, 2004 between the Registrant and Rosel & Adys Inc. (10)
10.3 Consulting Agreement between Robert Prokos and the Registrant (5)
10.4 Employment Agreement between Robert Prokos and the Registrant (6)
10.5 Placement Agent Agreement dated as of July 28, 2005 between the Registrant and North Coast
Securities Corporation (9)
10.6 Financial Advisory and Investment Banking Agreement dated as of July 28, 2005 between the
Registrant and North Coast Securities Corporation (9)
10.7 Consulting Agreement dated as of July 31, 2005 between the Registrant and MultiGrow Advisors,
LLC (9)
10.8 Letter Agreement dated February 3, 2006 between the Registrant and Cornell Capital Partners, LP
(exhibits omitted) (11)
10.9 Termination Agreement dated February 3, 2006 among the Registrant, Cornell Capital Partners,
LP and David Gonzalez, Esq. (11)
10.10 Placement Agent Agreement dated as of February 3, 2006 between the Registrant and North Coast
Securities Corporation ++
23.1 Consent of Ham, Langston & Brezina, L.L.P. ++
23.2 Consent of __________ (included in Exhibit 5.0) +
II-6
- ----------
(1) Filed as Exhibits 3.1 and 10.1 to our Form 8-K filed with the Securities
and Exchange Commission on August 6, 2003, and incorporated herein by
reference.
(2) Filed as Exhibits 2.1, 2.2, 3.1, 3.2, 3.3 and 3.4 to our Form 8-K filed
with the Securities and Exchange Commission on September 15, 2003, and
incorporated herein by reference.
(3) Filed as Exhibit 2.1 to our Form 8-K filed with the Securities and
Exchange Commission on September 29, 2003, and incorporated herein by
reference.
(4) Filed as Exhibit 15.1 to our Form 8-K filed with the Securities and
Exchange Commission on February 19, 2003 and incorporated herein by
reference.
(5) Filed as Exhibits 10.1, 10.2, 10.3, 10.4 and 10.5 to our Form S-8 filed
with the Securities and Exchange Commission on November 26, 2003, and
incorporated herein by reference.
(6) Filed as Exhibit 10.2 to our Form 10-QSB filed with the Securities and
Exchange Commission on May 24, 2004, and incorporated herein by reference.
(7) Filed as Exhibits 10.1, 10.2, 10.3, 10.4 and 10.5 to our Form 8-K filed
with the Securities and Exchange Commission on May 27, 2005, and
incorporated herein by reference.
(8) Filed as Exhibits 10.1, 10.2 and 10.3 to our Form 8-K filed with the
Securities and Exchange Commission on September 9, 2005, and incorporated
herein by reference.
(9) Filed as Exhibits 10.5, 10.6 and 10.7 to our Registration Statement on
Form SB-2 filed with the Securities and Exchange Commission on September
30, 2005.
(10) Filed as Exhibits 10.1 and 10.2 to our Form 10-KSB/A filed with the
Securities and Exchange Commission on April 6, 2006, and incorporated
herein by reference.
(11) Filed as Exhibit 4.1, 10.1 and 10.2 to our Form 10-QSB/A filed with the
Securities and Exchange Commission on April 6, 2006, and incorporated
herein by reference.
+ To be filed by amendment.
++ Exhibit filed herewith in this Registration Statement.
II-7
Item 28. UNDERTAKINGS
The undersigned registrant will:
(a)(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement. Notwithstanding
the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in the volume and price represent no
more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) Include any addition or changed material on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
II-8
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Houston,
Texas, on April 11, 2006.
HEALTHRENU MEDICAL, INC.
By: /s/ Robert W. Prokos
------------------------------------------------
Robert W. Prokos
Chief Executive Officer (Principal
Executive, Financial and Accounting
Officer)
II-9
POWER OF ATTORNEY
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
Each person, in so signing, also makes, constitutes and appoints Robert W.
Prokos, Chief Executive Officer, his true and lawful attorney-in-fact, in his
name, place and stead to execute and cause to be filed with the Securities and
Exchange Commission any or all amendments (including post-effective amendments)
to the registration statement, with all exhibits and any and all documents
required to be filed with respect thereto, and to do and perform each and every
act and thing necessary to effectuate the same.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below on the 11th day of April, 2006 by
the following persons in the capacities indicated.
Signature Title
- --------- -----
/s/ Robert W. Prokos
- ------------------------------ President, Chief Executive
Robert W. Prokos Officer and Director
/s/ Dr. Dianne Love
- ------------------------------ Director
Dr. Dianne Love
/s/ David Spencer
- ------------------------------ Director
David Spencer
/s/ Dr. Daniel Sparks
- ------------------------------ Director
Dr. Daniel Sparks
/s/ Edward Walter Zieverink, III
- ------------------------------ Director
Edward Walter Zieverink, III
II-10
Exhibit No. Exhibit Index
2.1 Articles of Merger (2)
2.2 Plan of Merger (2)
2.3 Exchange Agreement (3)
3.1 Articles of Amendment to Articles of Incorporation (1)
3.2 Articles of Incorporation (2)
3.3 Articles of Amendment to Articles of Incorporation (2)
3.4 Articles of Amendment to Articles of Incorporation (2)
3.5 Bylaws (2)
3.6 Articles of Amendment to Articles of Incorporation (10)
4.1 Amended and Restated Standby Equity Distribution Agreement dated as of February 3, 2006
between the Registrant and Cornell Capital Partners, LP (11)
4.2 Registration Rights Agreement dated May 23, 2005 by and between the Registrant and Cornell
Capital Partners, LP in connection with the Standby Equity Distribution Agreement (7)
4.3 Placement Agent Agreement dated as of May 23, 2005 by and among the Registrant, Cornell Capital
Partners, LP and Monitor Capital, Inc. in connection with the Standby Equity Distribution Agreement (7)
4.4 Intentionally Omitted
4.5 Form of Promissory Note by Registrant in favor of Cornell Capital Partners, LP (7)
4.6 Form of 8% Unsecured Convertible Notes (8)
4.7 Form of 125% Warrant (8)
4.8 Form of 150% Warrant (8)
4.9 Form of 8% Secured Warrant (12)
4.10 Form of Warrants (12)
4.11 Form of Security Agreement (12)
5.0 Legal Opinion +
10.1 First Amendment to Office Building Lease Agreement effective as of January 1, 2006 between the
Registrant and Denmark House Investment, Ltd. (10)
10.2 Agreement dated July 22, 2004 between the Registrant and Rosel & Adys Inc. (10)
10.3 Consulting Agreement between Robert Prokos and the Registrant (5)
10.4 Employment Agreement between Robert Prokos and the Registrant (6)
10.5 Placement Agent Agreement dated as of July 28, 2005 between the Registrant and North Coast
Securities Corporation (9)
10.6 Financial Advisory and Investment Banking Agreement dated as of July 28, 2005 between the
Registrant and North Coast Securities Corporation (9)
10.7 Consulting Agreement dated as of July 31, 2005 between the Registrant and MultiGrow Advisors,
LLC (9)
10.8 Letter Agreement dated February 3, 2006 between the Registrant and Cornell Capital Partners, LP
(exhibits omitted) (11)
10.9 Termination Agreement dated February 3, 2006 among the Registrant, Cornell Capital Partners,
LP and David Gonzalez, Esq. (11)
10.10 Placement Agent Agreement dated as of February 3, 2006 between the Registrant and North Coast
Securities Corporation ++
23.1 Consent of Ham, Langston & Brezina, L.L.P. ++
23.2 Consent of __________ (included in Exhibit 5.0) +
- ----------
(1) Filed as Exhibits 3.1 and 10.1 to our Form 8-K filed with the Securities
and Exchange Commission on August 6, 2003, and incorporated herein by
reference.
(2) Filed as Exhibits 2.1, 2.2, 3.1, 3.2, 3.3 and 3.4 to our Form 8-K filed
with the Securities and Exchange Commission on September 15, 2003, and
incorporated herein by reference.
(3) Filed as Exhibit 2.1 to our Form 8-K filed with the Securities and
Exchange Commission on September 29, 2003, and incorporated herein by
reference.
(4) Filed as Exhibit 15.1 to our Form 8-K filed with the Securities and
Exchange Commission on February 19, 2003 and incorporated herein by
reference.
(5) Filed as Exhibits 10.1, 10.2, 10.3, 10.4 and 10.5 to our Form S-8 filed
with the Securities and Exchange Commission on November 26, 2003, and
incorporated herein by reference.
(6) Filed as Exhibit 10.2 to our Form 10-QSB filed with the Securities and
Exchange Commission on May 24, 2004, and incorporated herein by reference.
(7) Filed as Exhibits 10.1, 10.2, 10.3, 10.4 and 10.5 to our Form 8-K filed
with the Securities and Exchange Commission on May 27, 2005, and
incorporated herein by reference.
(8) Filed as Exhibits 10.1, 10.2 and 10.3 to our Form 8-K filed with the
Securities and Exchange Commission on September 9, 2005, and incorporated
herein by reference.
(9) Filed as Exhibits 10.5, 10.6 and 10.7 to our Registration Statement on
Form SB-2 filed with the Securities and Exchange Commission on September
30, 2005.
(10) Filed as Exhibits 10.1 and 10.2 to our Form 10-KSB/A filed with the
Securities and Exchange Commission on April 6, 2006, and incorporated
herein by reference.
(11) Filed as Exhibit 4.1, 10.1 and 10.2 to our Form 10-QSB/A filed with the
Securities and Exchange Commission on April 6, 2006, and incorporated
herein by reference.
+ To be filed by amendment.
++ Exhibit filed herewith in this Registration Statement.