UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2006
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
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Commission file number 000-21914
HEALTHRENU MEDICAL, INC.
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(Exact name of small business issuer as specified in its charter)
NEVADA 25-1907744
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
12777 Jones Road, Suite 481, Houston, Texas 77070
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(Address of principal executive offices)
(281) 890-2561
-------------------------------
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [_] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of March 31, 2006 the issuer had
26,094,589 shares of common stock, $.001 par value per share, outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
HEALTHRENU MEDICAL, INC.
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 2006
INDEX
PAGE
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PART 1--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Balance Sheet as of March 31, 2
2006 and September 30, 2005
Unaudited Condensed Statement of Operations for the 3
three and six months ended March 31, 2006 and 2005
Unaudited Condensed Statement of Cash Flows for the 4
six months ended March 31, 2006 and 2005
Notes to Unaudited Condensed Financial Statements 5-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS 12-25
ITEM 3. CONTROLS AND PROCEDURES 26
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 26
ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS 26
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 26
ITEM 5. OTHER INFORMATION 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 27
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHRENU MEDICAL, INC.
BALANCE SHEET
March 31, 2006 and September 30, 2005
March 31, September 30,
2006 2005
ASSETS (Unaudited)
------ ----------- -----------
Current assets:
Cash and cash equivalents $ 67,360 $ 163,095
Accounts receivable 2,482 716
Inventories 20,826 18,188
Prepaid expense _2,146 2,146
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Total current assets 92,742 184,145
Property and equipment, net 13,504 9,592
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Total assets $ 106,318 $ 193,737
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 224,301 $ 117,863
Accounts payable-stockholder - 2,329
Accrued liabilities 21,027 27,403
Note payable 199,803 188,843
Total current liabilities 445,131 336,438
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Convertible notes Payable 343,684 10,960
Total liabilities 788,815 347,398
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Stockholders' equity:
Convertible preferred stock, Series 2000A, $0.001 par value; 1,500,000 shares
authorized, 1,763 shares issued and
outstanding at March 31 2006 and September 30, 2005 2 2
Common stock, $.001 par value; 150,000,000 shares authorized,
26,094,589 and 25,019,589 shares issued and outstanding at
March 31 2006 and September 30, 2005, respectively 26,082 25,620
Additional paid-in capital 4,617,460 4,616,672
Accumulated deficit (5,326,040) (4,795,955)
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Total stockholders' equity (383,854) (153,661)
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Total liabilities and stockholders' equity $ 106,318 $ 193,737
========== ===========
See accompanying notes to financial statements.
-2-
HEALTHRENU MEDICAL, INC.
UNAUDITED CONDENSED STATEMENT OF OPERATIONS
for the three and six months ended March 31, 2006 and 2005
Three Months Ended Six Months Ended
March 31, March 31,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Sales $ 4,470 $ 3,744 $ 9,834 $ 7,497
Cost of sales 4,650 1,353 5,732 2,301
------------ ------------ ------------ ------------
Gross profit (loss) (180) 2,391 4,102 5,196
General and administrative expenses 155,193 44,482 401,894 93,760
------------ ------------ ------------ ------------
Loss from operations (155,013) (42,091) (405,997) (88,564)
Interest and financing expense (62,420) (7) (124,088) (18)
------------ ------------ ------------ ------------
Net loss $ (217,433) $ (42,098) $ (530,085) $ (88,582)
============ ============ ============ ============
Weighted average shares outstanding 25,514,709 28,099,325 26,086,897 26,362,745
============ ============ ============ ============
Basic and diluted net loss per common share $ (0.01) $ (0) $ (0) $ (0.02)
============ ============ ============ ============
See accompanying notes to financial statements.
-3-
HEALTHRENU MEDICAL, INC.
UNAUDITED CONDENSED STATEMENT OF CASH FLOWS
for the six months ended March 31, 2006 and 2005
Six Months Ended
March 31,
----------------------------------------
2006 2005
------------------ ------------------
Cash flows from operating activities:
Net loss ($ 530,085) $(88,582)
Adjustments to reconcile net loss to net cash used
in operating activities: -
Depreciation 1,042 646
Common stock issued as settlement 750
Amortization of debt issuance costs - -
Common stock issued for services 1,250 -
Changes in operating assets and liabilities:
Accounts receivable ($ 1,766) 1,957
Other current assets 2,086
Inventories ($ 2,638) 10,473
Accounts payable & Accrued liabilities ($ 97,732) 91
------------------ ------------------
Net cash used in operating activities ($ 434,465) 101,611
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Cash flows from investing activities:
Purchase of fixed assets ($ 4,945) 506
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Net cash used in investing activities ($ 4,945) 506
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Cash flows from financing activities:
Common stock issued for cash 91,650
Increase in Bank Overdraft 407
Proceeds from issuance of debt 343,684
Payment received on stock subscription receivable 2,500
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Net cash provided by financing activities 343,684 94,557
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(Decrease)/Increase in cash and cash equivalents ($95,735) (7,560)
Cash and cash equivalents, beginning of year $163,095 7,560
------------------ ------------------
Cash and cash equivalents, end of year ($67,360) -
================== ==================
Supplemental disclosure of cash flow information:
Cash paid for interest - 18
================== ==================
Non-cash investing and financing activities:
Issuance of common stock as payment of liability - 52,512
================== ==================
See accompanying notes to financial statements
-4-
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/A 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.
The accompanying unaudited interim financial statements have not been
reviewed by an independent public accountant.
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.
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.
-5-
HEALTHRENU MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
3. Significant Accounting Policies, continued
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 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 March 31, 2006, 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.
-6-
HEALTHRENU MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
3. Significant Accounting Policies, continued
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.
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.
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 in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 123R, Share-Based Payment, as
interpreted by SEC Staff Accounting Bulletin No. 107. The Company adopted
SFAS 123R on January 1, 2006. The adoption of this standard had no effect
on the financial statements of Health Renu.
Prior to January 1, 2006, the Company accounted for stock options
according to the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related
interpretations, and therefore no related compensation expense was
recorded for awards granted with no intrinsic value.
-7-
HEALTHRENU MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
3. Significant Accounting Policies, continued
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.
4. Going Concern
Health Renu's financial statements have been presented on the basis that
it will continue as a going concern, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business.
Health Renu has incurred net losses of $404,240 for the six months ended
March 31, 2006 and cumulative net losses of $5,260,160 since its inception
and has a working capital deficit of $352,318. These conditions raise
substantial doubt about Health Renu's ability to continue as a going
concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities
that may result from the outcome of these uncertainties.
Health Renu is working to secure additional financing to fund its
operating activities and to meet its obligations and working capital
requirements over the next twelve months.
There are no assurances that Health Renu will be able to either (1)
achieve a level of revenues adequate to generate sufficient cash flow from
operations; or (2) obtain additional financing through either private
placement, public offerings or bank financing necessary to support Health
Renu' working capital requirements. To the extent that funds generated
from operations and any private placements, public offerings or bank
financing are insufficient, Health Renu will have to raise additional
working capital. No assurance can be given that additional financing will
be available, or if available, will be on terms acceptable to Health Renu.
If adequate working capital is not available, Health Renu may be required
to curtail or cease its operations.
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.
-8-
HEALTHRENU MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
5. Litigation
In October 2005, Chris A. Grevenow, a stockholder, filed a lawsuit against
The Company, 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 The Company's 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 The
Company 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.
The Company believes this claim is without merit and has filed an answer
to defend against such complaint.
6. Convertible Notes Payable
In August and September 2005 the Company entered into agreements to issue
convertible promissory notes in the total amount of $548,000 and received
proceeds of $410,800, net of $137,200 debt issuance costs. 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 holders of
the notes have the option to convert the notes at any time on or after the
issuance date. 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.
-9-
HEALTHRENU MEDICAL, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
6. Convertible Notes Payable, continued
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 March 31, 2006, the Company recognized $61,666 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.
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 March 31, 2006 61,666
----------
Convertible notes payable at March 31, 2006 $ 45,041
==========
-10-
In February 2006 the Company entered into agreements to issue convertible
promissory notes in the total amount of $600,000 and received proceeds of
$600,000 net of $105,000. The notes are for a term of five years and bear
interest at 8% per annum, which is payable annually in shares of the
Company's common stock. The holders of the notes have the option to
convert the notes at any time on or after the issuance date. The notes are
convertible at 80% 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 eight
warrants to purchase the Company's common stock for each share of common
stock issued upon conversion of the notes with two warrants to purchase
one share of common stock at an exercise price of 100% of the conversion
price of the notes then in effect, three warrants to purchase one share of
common stock at an exercise price of 125% of the conversion price of the
notes then in effect and three warrants to purchase one share of common
stock at an exercise price of 150% of the conversion price of the notes
then in effect.
7. Related Party Transaction
During the three months ended March 31, 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. The fair market value of the shares
issued of $0.02 per share was based on recent cash sales of the Company's
common stock.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This report contains forward looking statements. These forward looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical results or anticipated
results, including those set forth under "Risk Factors" in this Management's
Discussion and Analysis or Plan of Operation" and elsewhere in this report. The
following discussion and analysis should be read in conjunction with our
financial statements and notes thereto included elsewhere in this report and
appearing in our annual report filed on Form 10-KSB/A for the year ended
September 30, 2005.
OVERVIEW
On September 26, 2003, we acquired 100% of the outstanding shares of Health
Renu, Inc., a Delaware corporation to whose business we succeeded ("Health
Renu-DE"), pursuant to an exchange agreement. As a result of the exchange
agreement, the business of Health Renu-DE became our business, our control
shifted to the former Health Renu-DE stockholders and we subsequently changed
our name to HealthRenu Medical, Inc.
Since its inception, Health Renu-DE had been in the medical research and
development stage, with a focus on creating and improving its skin care and
wound care products. During this period, Health Renu-DE had very little
production or revenue.
Our products are specifically used for skin care and wound care. Our products
are used for diabetic skin care, diabetic neuropathy, circulation, non-healing
wounds, various types of skin disorders, and arthritis. We are also 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 LOTION
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.
We have not yet commenced commercial distribution of our BetterSkin products. 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 expect
to commence initial distribution of the BetterSkin line during our third fiscal
quarter ending June 30, 2006.
-12-
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 positive feedback from customers and patients in
the form of testimonials, confirmations and reorders and personal experience of
our management. Our products come with a satisfaction guarantee to the medical
field as well as to the household consumer.
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. All our products are registered with the FDA.
We provide essential fatty acid ingredients to a third party manufacturing
laboratory 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.
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. We may also seek to
enter into joint ventures or other alliances with strategic partners.
CRITICAL ACCOUNTING POLICIES
The following discussion and analysis of our financial condition and results of
operations is based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate these estimates, including those related to revenue
recognition, inventories and stock-based compensation. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Of the significant accounting policies used in the preparation of our financial
statements, the following are critical accounting policies, which may involve a
higher degree of judgment, complexity and estimates.
Revenue Recognition
Revenue is recognized when products are shipped and when all of the following
have occurred: a firm sales agreement is in place, pricing is fixed or
determinable and collection is reasonably assured. Sales are reported net of
estimated returns, consumer and trade promotions, rebates and freight allowed.
-13-
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 March 31, 2006, we did not
have a reserve for obsolescence.
Stock-Based Compensation
Stock-based compensation is accounted for in accordance Statement of Financial
Accounting Standards ("SFAS") No. 123R, Share-Based Payment, as interpreted by
SEC Staff Accounting Bulletin No. 107. The Company adopted SFAS 123R on January
1, 2006. The adoption of this standard had no effect on the financial statements
of Health Renu.
Prior to January 1, 2006, the Company accounted for stock options according to
the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations, and therefore no
related compensation expense was recorded for awards granted with no intrinsic
value.
COMPARISON OF OPERATING RESULTS
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2006
Revenues increased from $3,744 for the three months ended March 31, 2005 to
$4,470 for the three months ended March 31, 2006. The increase in revenues is
due to increased sales volume related to increased marketing activity.
Cost of sales increased from $1,353 for the three months ended March 31, 2005 to
$4,650 for the three months ended March 31, 2006. The increase in cost of sales
is due to increased sales volume, as well as new product development.
Gross profit decreased from $2,391 for the three months ended March 31, 2005 to
($180) for the three months ended March 31, 2006. The decrease in gross profit
is due to increased cost of sales.
General and administrative expenses increased from $44,482 for the three months
ended March 31, 2005 to $155,193 for the three months ended March 31, 2006. The
increase in general and administrative expenses was due to higher costs related
to our expansion efforts and increased compensation to our chief executive
officer.
Interest and financing expense increased from $7 for three months ended March
31, 2005 to $62,420 for the three months ended March 31, 2006. The increase is
attributable to the additional interest related to the note payable and the
convertible note payable and $61,666 of amortized debt issuance costs recorded
in the three months ended March 31, 2006.
We recorded a loss from operations of $42,091 for the three months ended March
31, 2005 compared to a loss from operations of $153,147 for the three months
ended March 31, 2006. The increase in loss from operations is principally due to
the increase in general and administrative expenses.
We reported a net loss of $42,098 for the three months ended March 31, 2005
compared to a net loss of $151,553 for the three months ended March 31, 2006.
The increase in net loss is principally due to the increase in general and
administrative expenses and interest financing expenses.
Basic and diluted net loss per common share was $.00 for the three months ended
March 31, 2005 compared to $.01 for the three months ended March 31, 2006.
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Six Months Ended March 31, 2005 Compared to Six Months Ended March 31, 2006
Revenues increased from $7,497 for the six months ended March 31, 2005 to $9,834
for the six months ended March 31, 2006. The increase in revenues is due to
increased sales volume related to increased marketing activity.
Cost of sales increased from $2,301 for the six months ended March 31, 2005 to
$5,732 for the six months ended March 31, 2006. The increase in cost of sales is
due to increased sales volume, as well as new product development.
Gross profit decreased from $5,196 for the six months ended March 31, 2005 to
$4,102 for the six months ended March 31, 2006. The decrease in gross profit is
due to increased cost of sales.
General and administrative expenses increased from $93,760 for the six months
ended March 31, 2005 to $405,997 for the six months ended March 31, 2006. The
increase in general and administrative expenses was due to higher costs related
to our expansion efforts and increased compensation to our chief executive
officer.
Interest and financing expense increased from $18 for six months ended March 31,
2005 to $124,088 for the six months ended March 31, 2006. The increase is
attributable to the additional interest related to the note payable and the
convertible note payable and $106,692 of amortized debt issuance costs recorded
in the six months ended March 31, 2006.
We recorded a loss from operations of $88,564 for the six months ended March 31,
2005 compared to a loss from operations of $405,997 for the six months ended
March 31, 2006. The increase in loss from operations is principally due to the
increase in general and administrative expenses.
We reported a net loss of $88,582 for the six months ended March 31, 2005
compared to a net loss of $530,085 for the six months ended March 31, 2006. The
increase in net loss is principally due to the increase in general and
administrative expenses and interest financing expenses.
Basic and diluted net loss per common share was $0.02 for the six months ended
March 31, 2005 compared to $0 for the six months ended March 31, 2006.
LIQUIDITY AND CAPITAL RESOURCES
For the three and six months ended March 31, 2006 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 March 31, 2006, our cash totaled $67,360 and total current assets were
$92,813. Inventory at March 31, 2006 was $20,826.
As of March 31, 2006, our accounts payable totaled $224,301. Total current
liabilities were $445,131.
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 currently expected to be provided from the
private placement of our convertible debt securities of $600,000 closed in
February 2006 as described below. Such financing was required in order to pay
professional fees associated with our securities and corporate compliance
requirements, for registration of our shares to be issued in connection with the
standby equity distribution agreement ("SEDA") described below and to fund our
inventory and working capital needs until the SEDA is available for us to draw
upon. Such private placement financing may not be sufficient to
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meet our needs until the SEDA is available for us to draw on.
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 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.
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, subject to registration of
such shares. 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 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 on
August 31, 2006 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 the 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.
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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 the 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 March 31, 2006,
we had an accumulated deficit of approximately $5.3 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. 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 SEDA or otherwise.
Continuing our operations is dependent upon obtaining such further financing.
These conditions raise substantial doubt about our ability to continue as a
going concern.
RISK FACTORS
FINANCIAL CONDITION RISKS
o We have had limited product sales, a history of operating losses and
may not become profitable in the near future or at all.
We have had limited sales of our products to date. We incurred net losses
of approximately ($5.3 million) from inception in 1997 to March 31, 2006,
including approximately ($404,000) of net loss during the six months ended
March 31, 2006. We expect to incur substantial additional operating losses
in the future. During the year ended September 30, 2005 and the six months
ended March 31, 2006, we only generated revenues from product sales in the
amounts of approximately $9,785 and $9,905, 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.
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We may not be able to obtain sufficient funds to continue to operate or
implement our business plan. We estimate that we will need approximately
$1,000,000 to continue to operate over the next 12 months and an
additional $500,000 in each of the two following years to continue to
operate. We will need approximately $2,000,000 over the next two years in
order to implement our business plan, including increased marketing and
product production. We are dependent on external financing to fund our
operations. Our immediate financing needs are expected to be provided from
a private placement of our convertible debt securities of $600,000 closed
in February, 2006. Such private placement financing may not be sufficient
to meet our needs until the standby equity distribution agreement is
available for us to draw on. Our long-term financing needs are expected to
be provided from the standby equity distribution agreement, in large part.
Such financing may not be available on favorable terms, in sufficient
amounts or at all when needed, in part because the amount of financing
available under the standby equity distribution agreement will fluctuate
with the price of our common stock. As the price declines, the number of
shares the investor under the standby equity distribution agreement must
purchase to satisfy an advance request from us will increase, resulting in
additional dilution to existing stockholders and potentially causing the
investor to hold more than 9.9% of our outstanding stock which is
prohibited under the agreement. Other financing may not be available to us
on favorable terms or at all.
o The report of our independent auditors expresses doubt about our
ability to continue as a going concern.
In its report dated January 25, 2006, except for note 14 which is dated
March 31, 2006, our former auditors, Ham, Langston & Brezina, L.L.P.,
expressed an opinion that there is substantial doubt about our ability to
continue as a going concern. Our accompanying financial statements have
been prepared on a going concern basis, which contemplates our
continuation of operations, realization of assets and liquidation of
liabilities in the ordinary course of business. Since inception, we have
incurred substantial operating losses and expect to incur additional
operating losses over the next several years. As of the six months ended
March 31, 2006, we had an accumulated deficit of approximately $5.3
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 distribution
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.
o We have a working capital loss, which means that our current assets
on March 31, 2006 were not sufficient to satisfy our current
liabilities.
We had a working capital deficit of ($352,318) at March 31, 2006, which
means that our current liabilities exceeded our current assets on March
31, 2006 by $352,318. 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 March 31, 2006 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 unwilling or
unable to fulfill its commitment under the standby equity distribution
agreement for whatever reason, our ability to implement our business plan
will suffer.
-18-
o Sales made under our standby equity distribution agreement may
adversely affect our stock price and our ability to raise funds in
new stock offerings.
Even if we are able to obtain the financing we require to implement our
business plan pursuant to the standby equity distribution agreement, sales
made under our standby equity distribution agreement may result in one or
more of the following consequences:
>> Sales made under our standby equity distribution agreement may
adversely affect our stock price.
>> 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 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 further
contribute to the decline of our stock price.
>> Existing stockholders will experience significant dilution
from our sale of shares under the standby equity distribution
agreement.
>> 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.
>> We may not be able to access funds under the standby equity
distribution agreement sufficient to meet our operating needs.
o Since Health Renu-DE became a public reporting company under the
Securities Exchange Act of 1934 by acquiring us when we were a
publicly-traded shell corporation, we remain subject to the shell
corporation's unknown liabilities, if any. If any significant
unknown liabilities arise, they could materially and adversely
affect our ability to continue in business.
On September 26, 2003, we entered into an exchange agreement with Health
Renu-DE, a Delaware corporation, and the former Health Renu-DE
stockholders whereby our control shifted to the former Health Renu-DE
stockholders. We were then a non-operating, publicly-traded corporation.
The exchange agreement represented a recapitalization of Health Renu-DE
with accounting treatment similar to that used in a reverse acquisition.
Health Renu-DE 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 then 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,
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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 If we are unable to successfully compete in the skin and wound care
industry on the basis of our products' prices, effectiveness, and
other factors, our business and financial condition will be
significantly negatively impacted.
The personal skin care industry and wound care industry is extremely
competitive and consists of major domestic and international medical,
pharmaceutical, cosmetic consumer products and other companies, most 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 and would likely experience production
delays and interruption in sales if the laboratory discontinued
production of our products.
Our products are 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.
Our production 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. If, however, any of
these ingredients are not available to us on favorable pricing terms or at
all when they are needed, we may experience production delays and
interruption of sales.
o We do not own our products' formulas and if the owner of the
formulas does not honor its contractual commitment to sell the
formulas to us if and when requested by us, we could lose use of our
proprietary products.
We do not own our product formulas. The production laboratory owns our
product formulas subject to an agreement of indefinite term which provides
for our exclusive use and right to purchase them. It is possible that the
production laboratory may not honor its contractual commitments and may
disclose our proprietary formulas to a third party or refuse to sell the
formulas to us in the event the laboratory ceases to produce products for
us, either of which would materially and adversely affect our business.
o We may be unable to protect our proprietary products or prevent the
development of similar products by our competitors, which could
materially and adversely affect our ability to successfully compete.
-20-
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.
Darrell Good, the founder and principal of Health Renu-DE, 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 filed a lawsuit against Mr. Good in the U.S.
District Court for the Southern District of Texas seeking recovery of
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, non-appealable 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 shares have been cancelled on the
books and records of our transfer agent. We may not be able to prevent Mr.
Good from continuing to compete with us or soliciting our customers. If
Mr. Good continues to compete with us or to solicit our customers, it
could have a material adverse effect on our business.
o We may not achieve the market acceptance of our products necessary
to generate revenues.
Products we produce may not achieve market acceptance. Market acceptance
will depend on a number of factors, including:
>> our ability to keep production costs low.
>> our ability to successfully market our products. We must
create an advertising campaign to create product recognition
and demand for our products.
>> 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 reasonable terms or at all. Further,
such liability insurance may not be sufficient to cover any claims that
may be brought against us.
-21-
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. We have only three full-time employees, including our Chief
Executive Officer. We contract with consultants and outsource key
functions to control costs. If we lose the services of our Chief Executive
Officer or any of our key employees or consultants or are unable to hire
and retain key employees or senior management as needed in the future, it
could have a significant negative impact on our business.
o If we do not continue to comply with regulations imposed on us by
the U.S. Food and Drug Administration, we may be unable to sell one
or more of our products or otherwise face liability.
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:
>> 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;
>> our operating results;
>> quarterly fluctuations in our financial results;
>> our need for additional financing;
>> announcements of product innovations or new products by us or
our competitors;
>> developments in our proprietary rights or our competitors'
developments;
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>> our relationships with current or future suppliers,
manufacturers, distributors or other strategic partners;
>> governmental regulation; and
>> other factors and events beyond our control, such as changes
in the overall economy or condition of the financial markets.
In addition, our common stock has been relatively thinly traded. Thinly
traded common stock can be more volatile than common stock trading in an
active public market. We cannot predict the extent to which an active
public market for our common stock will develop.
In addition, the stock market in general has experienced extreme
volatility that often has been unrelated to the operating performance of
particular companies. These broad market and industry fluctuations may
adversely affect the trading price of our common stock, regardless of our
actual operating performance.
As a result of potential stock price volatility, investors may be unable
to resell their shares of our common stock at or above the cost of their
purchase prices. In addition, companies that have experienced volatility
in the market price of their stock have been the subject of securities
class action litigation. If we were to become the subject of securities
class action litigation, this could result in substantial costs, a
diversion of our management's attention and resources and harm to our
business and financial condition.
o Future sales of currently outstanding shares of our common stock
could adversely affect our stock price.
As of March 31, 2006, we had 26,094,589 shares of common stock
outstanding. Of these shares, as of March 31, 2006, approximately 22
million shares of our common stock were subject to restrictions on resale
pursuant to Rule 144 and approximately 4 million outstanding shares of our
common stock were eligible for sale in the public market without
restriction or registration.
In addition, we intend to register under the Securities Act of 1933 the
sale by selling security holders of 1,465,065 shares of common stock
issued as a commitment fee, 90,909 shares of common stock issued as a
placement agent fee and up to $10,000,000 of common stock issuable
pursuant to the standby equity distribution agreement, shares of common
stock issuable upon conversion or exercise of securities issued in our
2005 and 2006 private placements of units and up to 1,587,237 shares of
common stock underlying compensation warrants.
o Our common stock is deemed to be "penny stock," which may make it
more difficult for investors to sell their shares due to suitability
requirements.
Our common stock is deemed to be "penny stock" as that term is defined in
Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. These
requirements may reduce the potential market for our common stock by
reducing the number of potential investors. This may make it more
difficult for investors in our common stock to sell shares to third
parties or to otherwise dispose of them. This could cause our stock price
to decline. Penny stocks are stocks:
>> with a price of less than $5.00 per share;
>> that are not traded on a "recognized" national exchange;
>> whose prices are not quoted on the Stock Market (NASDAQ-listed
stocks must still have a price of not less than $5.00 per
share); or
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>> 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 is
quoted 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.
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 March 31, 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. 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.
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. 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.
Conversion of a material amount of our notes or exercise of a material
amount of our warrants could significantly dilute the value of a
stockholder's investment in us. 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.
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Assuming a conversion price of $0.16 (85% of the closing price of our
common stock on the OTC Bulletin Board of $0.19 on March 31, 2006), the
2005 notes would convert into 3,425,000 shares of our common stock and the
related warrants would be exercisable to purchase 6,850,000 shares.
Assuming a conversion price of $0.15 (80% of the closing price of our
common stock on the OTC Bulletin Board of $0.19 on March 31, 2006), the
2006 notes would convert into 4,000,000 shares of our common stock and the
related warrants would be exercisable to purchase 32,000,000 shares. 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) and exercise of related warrants. The calculations in the table are
based upon the 26,094,589 shares of our common stock which were outstanding on
March 31, 2006 and shares issuable upon conversion of the 2005 notes at the
following prices:
Conversion At Conversion At Conversion At Conversion At
Assumed Trading Assumed Trading Assumed Trading Assumed Trading
Price of $0.19 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 of Notes 3,425,000 4,566,667 6,850,000 13,700,000
Shares Issuable on Exercise of Warrants 6,850,000 9,133,333 13,700,000 27,400,000
Percentage of Outstanding Common Stock 28.25% 34.43% 44.06% 61.17%
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) and exercise of related warrants. The calculations in the table are
based upon the 26,094,589 shares of our common stock which were outstanding on
March 31, 2006 and shares issuable upon conversion of the 2006 notes at the
following prices:
Conversion At Conversion At Conversion At Conversion At
Assumed Trading Assumed Trading Assumed Trading Assumed Trading
Price of $0.19 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 of Notes 4,000,000 5,454,545 7,500,000 15,000,000
Shares Issuable on Exercise of Warrants 32,000,000 43,636,364 60,000,000 120,000,000
Percentage of Outstanding Common Stock 57.98% 65.29% 72.12% 83.80%
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ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our management, including
our Chief Executive Officer, has determined that the effectiveness of
disclosures controls and procedures under Rule 13a-15(e) and Rule 15d-15(e) of
the Securities Exchange Act of 1934 are inadequate as of March 31, 2006.
Our management, including our Chief Executive Officer, has determined that our
disclosure controls and procedures were not effective as of March 31, 2006. We
are attempting to remediate the material weakness in internal control over
financial reporting and the ineffectiveness of our disclosure controls and
procedure by conducting a review of our accounting treatment of our financing
transactions and correcting our method of accounting for such transactions.
Additionally, we are considering engaging outside expertise to enable us to
properly apply complex accounting principles to our financial statements, when
necessary.
(b) Changes in internal control over financial reporting. There were no
significant changes in our internal control over financial reporting during the
second fiscal quarter that materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECUIRTY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
31 Certificate of the Chief Executive Officer and Chief
Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
32 Certificate of the Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
*Filed herewith as an exhibit.
(b) Reports on Form 8-K. During the quarter ended March 31, 2006, the issuer
filed the following Reports on Form 8-K:
Report on Form 8-K dated January 6, 2006 and filed with the Securities and
Exchange Commission on January 20, 2006.
Report on Form 8-K dated February 10, 2006 and filed with the Securites
and Exchange Commission on February 16, 2006.
Report on Form 8-K dated February 17, 2006 and filed with the Securites
and Exchange Commission of February 22, 2006.
Report on Form 8-K/A dated May 23, 2005 and filed with the Securities and
Exchange Commission on February 22, 2006.
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SIGNATURES
In accordance the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HEALTHRENU MEDICAL, INC.
DATED: May 22, 2006 By: /s/ Robert W. Prokos
------------------------
Robert W. Prokos
Chief Executive Officer and President
(Principal Executive, Financial and
Accounting Officer)
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