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 June 30, 2006
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from __________ to ___________
Commission file number 000-21914
HEALTHRENU MEDICAL, INC.
---------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
NEVADA 25-1907744
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
12777 Jones Road, Suite 481, Houston, Texas 77070
-------------------------------------------------
(Address of principal executive offices)
(281) 890-2561
-------------------------------
(Issuer's telephone number, including area code)
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 September 15, 2006 the issuer had 28,097,657 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 JUNE 30, 2006
INDEX
PAGE
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PART 1--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited Balance Sheets as of June 30, 3
2006 and September 30, 2005
Unaudited Statements of Operations for the 4
three and nine months ended June 30, 2006 and 2005
Unaudited Statements of Cash Flows for the 5
nine months ended June 30, 2006 and 2005
Notes to Unaudited Financial Statements 6-13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS 14-33
ITEM 3. CONTROLS AND PROCEDURES 34
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 35
ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS 35
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 35
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 35
ITEM 5. OTHER INFORMATION 35
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 35-41
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHRENU MEDICAL, INC.
BALANCE SHEETS
(UNAUDITED)
JUNE 30, SEPTEMBER 30,
2006 2005
ASSETS (RESTATED)
-------------- ------------
Current assets:
Cash and cash equivalents $ 69 $ 163,095
Accounts receivable 637 716
Inventories 20,111 18,188
Prepaid expense -- 2,146
------------ ------------
Total current assets 20,817 184,145
Property and equipment, net 10,908 9,592
------------ ------------
Deferred loan costs, net 200,888 136,307
------------ ------------
Total assets $ 232,613 $ 330,044
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 120,660 $ 117,863
Accounts payable-stockholder -- 2,329
Accrued interest 77,604 13,591
Accrued liabilities 29,694 19,270
Note payable 188,843 188,843
Derivative liability 10,177,505 2,639,017
------------ ------------
Total current liabilities 10,594,307 2,980,913
------------ ------------
Convertible notes payable, net of discount of $988,769
and $490,039 at June 30, 2006 and September 30, 2005
respectively 159,231 57,961
------------ ------------
Total liabilities 10,753,538 3,038,874
Stockholders' deficit:
Convertible preferred stock, Series 2000A, $0.001 par value;
1,500,000 shares authorized, 1,763 shares issued and
outstanding at June 30, 2006 and September 30, 2005 2 2
Common stock, $.001 par value; 150,000,000 shares authorized,
26,094,589 and 25,619,589 shares issued and outstanding at
June 30, 2006 and September 30, 2005, respectively 26,095 25,620
Additional paid-in capital 4,208,273 4,205,872
Accumulated deficit (14,755,295) (6,940,324)
------------ ------------
Total stockholders' deficit (10,520,925) (2,708,830)
------------ ------------
Total liabilities and stockholders' deficit $ 232,613 $ 330,044
============ ============
See accompanying notes to financial statements.
3
HEALTHRENU MEDICAL, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2006 AND 2005
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
SALES $ 2,753 $ 3,044 $ 12,587 $ 10,541
COST OF SALES 949 1,106 7,603 3,407
------------ ------------ ------------ ------------
GROSS PROFIT (LOSS) 1,804 1,938 4,984 7,134
GENERAL AND ADMINISTRATIVE EXPENSES 108,577 91,727 675,647 185,487
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (106,773) (89,789) (670,663) (178,353)
INTEREST AND FINANCING EXPENSE (97,065) (60,208) (205,820) (60,226)
------------ ------------ ------------ ------------
LOSS ON EMBEDDED DERIVATIVE LIABILITY (294,074) -- (6,938,488) --
NET LOSS $ (497,912) $ (149,997) $ (7,814,971) $ (238,579)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 26,094,589 30,142,197 25,937,721 27,622,562
============ ============ ============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.02) $ (0.01) $ (0.30) $ (0.01)
============ ============ ============ ============
See accompanying notes to financial statements.
4
HEALTHRENU MEDICAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2006 AND 2005
(UNAUDITED)
NINE MONTHS ENDED
JUNE 30,
--------------------------
2006 2005
----------- -----------
Cash flows from operating activities:
Net loss $(7,814,971) $ (238,579)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 2,828 1,133
Common stock issued as settlement -- 3,250
Accretion of debt discount 101,270
Effect on beneficial conversion feature 60,000
Amortization of deferred financing costs 40,454
Common stock issued for services 2,876 --
Deferred financing costs (105,036) --
Embedded derivative liability 6,938,488 --
Net changes in:
Accounts receivable 79 (314)
Prepaids and Other current assets 2,146 (20,516)
Inventories (1,923) (1,398)
Accounts payable & Accrued liabilities 77,235 8,949
----------- -----------
Net cash used in operating activities (756,554) (187,475)
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (4,143) (506)
----------- -----------
Cash flows from financing activities:
Common stock issued for cash -- 109,449
Payments to stockholder (2,329)
Issuance of convertible promissory notes 600,000 90,000
----------- -----------
Net cash used by financing activities 597,671 199,449
----------- -----------
(Decrease)/Increase in cash (163,026) 11,468
Cash and cash equivalents, beginning of year 163,095 7,560
----------- -----------
Cash and cash equivalents, end of year 69 19,028
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest -- 226
=========== ===========
Cash paid for income taxes -- --
=========== ===========
Non-cash investing and financing activities:
Debt discount 600,000 --
=========== ===========
Issuance of common stock and notes payable for financing
costs -- 360,000
=========== ===========
Issuance of common stock as payment of liability -- 52,512
=========== ===========
See accompanying notes to financial statements.
5
HEALTHRENU MEDICAL, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
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. 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.
3. SIGNIFICANT ACCOUNTING POLICIES
RESTATEMENTS
Restatements of previously reported 2005 financial results were made. See
Note 8.
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.
6
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 ten 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 solely of 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 June 30, 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.
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.
7
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 the Company.
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.
DEBT ISSUANCE COSTS
Debt issuance costs are deferred and recognized, using the interest
method, over the term of the related debt.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not use derivative instruments to hedge exposures to cash
flow, market, or foreign currency risks.
8
Derivative financial instruments are initially measured at their fair value. For
derivative financial instruments that are accounted for as liabilities, the
derivative instrument is initially recorded at it fair value and is then
re-valued at each reporting date, with changes in the fair value reported as
charges or credits to income. For option-based derivative financial instruments,
the Company uses the Black-Scholes model to value the derivative instruments.
The classification of derivative instruments, including whether such
instruments should be recorded as liabilities or as equity, is reassessed
at the end of each reporting period. Derivative instrument liabilities are
classified in the balance sheet as current or non-current based on whether
or not net-cash settlement of the derivative instrument could be required
within 12 months of the balance sheet date.
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
HealthRenu'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.
HealthRenu has incurred net losses of $7,814,971 for the nine months ended
June 30, 2006 and cumulative net losses of $14,755,295 since its inception
and has a working capital deficit of $10,573,490. These conditions raise
substantial doubt about HealthRenu'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.
HealthRenu 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.
5. CONVERTIBLE NOTES PAYABLE
In February 2006, HealthRenu issued convertible promissory notes for
$600,000 and received proceeds of $494,964, after $105,036 offering costs.
The notes are for a term of five years and bear interest at 8% per annum,
which is payable annually in shares of HealthRenu'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 HealthRenu's receipt of the conversion notice. The note
holders were also granted eight warrants to purchase HealthRenu's common
stock to become exercisable for each share of common stock to be 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. The warrants will expire on March 31, 2011.
9
Since the number of warrants to become exercisable in connection with both
convertible note issuances are indeterminable, they have been classified
as a derivative instrument based on the guidance of SFAS 133 and EITF
00-19 (see Note 4 below for further discussion).
6. COMMON STOCK
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.
7. DERIVATIVES
HealthRenu evaluated the application of SFAS 133 and EITF 00-19 for all of
its financial instruments and identified the following financial
instruments as derivatives:
1. Convertible notes payable
2. Warrants to purchase common stock associated with the Notes Payable
("Note Warrants")
3. Warrants to purchase common stock issued to placement agent
("Placement Warrants")
4. Warrants to purchase common stock issued to consultants ("Consulting
Warrants")
Based on the guidance in SFAS 133 and EITF 00-19, HealthRenu concluded
that these instruments were required to be accounted for as derivatives.
SFAS 133 and EITF 00-19 require HealthRenu to bifurcate and separately
account for the conversion features of the Notes Payable and warrants
issued as embedded derivatives.
Pursuant to SFAS 133, HealthRenu bifurcated the conversion feature from
the Notes Payable because the conversion price is not fixed and the Notes
Payable are not convertible into a fixed number of shares. Accordingly,
the embedded derivative must be bifurcated and accounted for separately.
Furthermore, HealthRenu concluded that the exercise price and the number
of shares to be issued under the Placement Warrants and the Consulting
Warrants are fixed. However, since the Notes Payable were issued prior to
these warrants and these debentures might result in issuing an
indeterminate number of shares, it cannot be concluded that HealthRenu has
a sufficient number of authorized shares to settle these warrants. As
such, the warrants were accounted for as derivative instrument
liabilities. HealthRenu is required to record the fair value of the
conversion features and the warrants on its balance sheet at fair value
with changes in the values of these derivatives reflected in the statement
of operations as "Gain (loss) on embedded derivative liability." The
derivative liabilities were not previously classified as such in
HealthRenu's historical financial statements. In order to reflect these
changes, HealthRenu must restate its financial statements for the year
ended September 30, 2005 and the three months ended December 31, 2005.
10
The impact of the application of SFAS 133 and EITF 00-19 on the balance
sheet as of June 30, 2006 is as follows:
Embedded derivative
Liability balance
June 30, 2006
------------------
Notes Payable 9,276,789
Placement Warrants 707,642
Consulting Warrants 193,074
-----------
Total: 10,177,505
The impact on statements of operations as of the three and nine months
ended June 30, 2006 is as follows:
Gain (loss) on embedded
derivative liabilities: three months ended nine months ended
- ----------------------- ---------------------------- -----------------------------
June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
------------- ------------- ------------- -------------
Notes Payable $ (348,474) $ -- $ (6,734,164) $ --
Placement Warrants (41,465) -- (493,807) --
Consulting Warrants 12,935 -- 289,483 --
------------- ------------- ------------- -------------
Total gain (loss) on
embedded derivative
liabilities: $ (294,074) $ -- $ (6,938,488) $_ --
------------- ------------- ------------- -------------
8. RESTATEMENT
HealthRenu has restated its financial statements from amounts previously
reported September 30, 2005. HealthRenu has determined that certain
financial instruments contain features that require HealthRenu to account
for these features as derivative instruments. Accordingly, warrants issued
to consultants, the conversion features of the Notes Payable and
associated warrants have been accounted for as derivative instrument
liabilities rather than as equity. Additionally, the embedded conversion
features of the Notes Payable and warrants related to the debt have been
bifurcated from the debt and accounted for separately as derivative
instrument liabilities. Note 7 was added to disclose the derivative
instrument liabilities and provided information on subsequent changes.
HealthRenu is required to record the fair value of the conversion features
and the warrants on the balance sheet at fair value with changes in the
values of these derivatives reflected in the statement of operations as
"Gain (loss) on derivative instrument liabilities." The effect of the
(non-cash) changes related to accounting separately for these derivative
instrument liabilities and modifying the estimated volatility, on the
statement of operations for the quarter and nine months ended June 30,
2006, was an increase in the net loss attributable to common shareholders
by $294,074 and $6,938,488 to $497,912 and $7,814,971 respectively. Basic
earnings (loss) attributable to common shareholders per share for the
quarter and nine months ended June 30, 2006 decreased to $0.02 and $0.30
per share, respectively.
11
In all other material respects, the financial statements are unchanged.
Following is a summary of the restatement adjustments:
September 30, 2005
-------------------------------------------
As Reported Adjustments As Restated
------------ ------------ -----------
ASSETS
Current assets: 184,145 -- 184,145
Property and equipment, net 9,592 -- 9,592
Deferred loan costs -- 137,200 137,200
Accumulated Amortization -- (893) (893)
------------ -----------
Total assets $ 193,797 $ 330,044
============ ===========
Current liabilities:
Accounts payable $ 117,863 $ -- $ 117,863
Accounts payable-stockholder 2,329 -- 2,329
Accrued liabilities 19,270 -- 19,270
Accrued Interest 8,133 5,458 13,591
Note payable 188,843 -- 188,843
Derivative liability -- (2,639,017) 2,639,017
------------ -----------
Total current liabilities 336,438 2,980,913
Convertible notes payable 10,960 537,040 548,000
Debt Discount -- (490,039) (490,039)
------------ -----------
Total liabilities 347,398 3,038,874
------------ -----------
Stockholders' 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 shares
issued and outstanding at
September 30, 2005, 25,620 25,620
Additional paid-in capital 4,616,672 (410,800) 4,205,872
Accumulated deficit (4,795,955) (2,144,369) (6,940,324)
------------ -----------
Total stockholders' deficit (153,661) (2,708,830)
------------ -----------
Total Liability and Stockholders' Deficit 193,737 330,044
============ ===========
9. SUBSEQUENT EVENTS
As of September 15, 2006, an aggregate of $35,000 in principal amount of
2005 Notes has been converted, together with accrued interest, into an
aggregate of 631,134 shares. Warrants to purchase an aggregate of 588,237
shares at an exercise price of $0.0744 per share and warrants to purchase
an aggregate of 588,237 shares at an exercise price of $0.0893 per share
also became exercisable in connection with the 2005 Note conversions.
As of September 15, 2006, an aggregate of $73,900 in principal amount of
2006 Notes has been converted, together with accrued interest, into an
aggregate of 1,371,934 shares. Warrants to purchase an aggregate of
2,639,288 shares at an exercise price of $0.056 per share, warrants to
purchase an aggregate of 3,958,932 shares at an exercise price of $0.07
per share and warrants to purchase an aggregate of 3,958,932 shares at an
exercise price of $0.0840 per share also became exercisable in connection
with the 2006 Note conversions.
12
0n August 18, 2006, HealthRenu borrowed $60,000 in a privately placed
bridge loan financing. The bridge loan investor, a beneficial owner of
HealthRenu securities, received a promissory note in the principal amount
of $60,000 and warrants to purchase 400,000 shares of HealthRenu common
stock at an exercise price of $0.05 per share. The note is secured by the
grant of a security interest in advance notices that may be issued from
time to time by HealthRenu under the SEDA, entitled to receive a 15%
annual interest payment and matures on October 17, 2006. The warrants are
exercisable for shares of HealthRenu common stock at any time until August
18, 2011 and are subject to adjustment for anti-dilution purposes.
The warrants were classified as a derivative instrument. The fair value of
$99,910 was recorded as a liability on the date of issuance. HealthRenu
used the Black-Scholes model to value the warrants.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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" 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.
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.
Health Renu-DE had been in the research and development stage, with a focus on
improving its skin care and developing wound care products. Health Renu-DE had
very little production or revenue.
We currently have six products in our HealthRenu medical line, including:
o DERM-ALL GEL
o SKIN RENU PLUS
o SKIN RENU LOTION
o SKIN RENU SKIN THERAPY
o RENU CARE WASH NON-RINSE CLEANSER
o DEEP RELIEF PAIN RELIEVER
We believe that our medical line products have a positive effect in caring for
aging skin, including skin care problems that often affect the elderly. We
believe that our products deliver nutrients deep within the skin's surface to
provide nourishment and hydration of the skin, reduce the appearance of fine
lines and wrinkles and provide relief from minor aches and pains in muscles and
joints.
We believe that our medical line products provide a very simple, rapidly
working, effective and less expensive way to address skin problems, including
those associated with aging. We believe these factors will incentize the home
healthcare, long-term and assisted care industries to use our medical line
products. Our belief in the effectiveness of these products is based upon
responses in and positive feedback and reorders from customers and the personal
experiences of our management.
All of our medical line products are made with a heavy concentration of omega-3,
omega-6 and omega-9 essential fatty acids. These fatty acids in our medical line
products are recognized by the body as natural substances and are readily
absorbed by the body. The body uses these ingredients to benefit the body and
does not fight them off as foreign. Essential fatty acids are currently being
used in many cosmetic products and therapeutic vehicles.
14
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 bean, strawberry, juicy
mango, cucumber melon, grapefruit, rose, peach, and pomegranate - and contain
seven essential oils and vitamins. We currently sell the vanilla bean,
strawberry, juicy mango, and cucumber melon BetterSkin lotions on our website.
Our manufacturing laboratory has completed the research and development for the
following BetterSkin body lotion and body wash scents: grapefruit, rose, peach,
and pomegranate. Unlike a majority of the consumer scented lines on the market
today which can damage fat cells of the skin, we believe that our BetterSkin
products offer a higher quality, healthier and less expensive lotion.
We provide essential fatty acid ingredients to a third party manufacturing
laboratory that provides all other raw materials needed and produces our skin
care products. 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.
Many of our medical line and consumer line products are offered for sale on our
website. Historically, most of our sales have been from our medical line to
nursing homes, hospices and clinics. We have not yet commenced commercial retail
distribution of our BetterSkin products. We intend to place our BetterSkin 8
ounce lotion and body washes in low end retail markets, with the 13 ounce sizes
in high end retail and drug stores. Our initial plans for sale of our BetterSkin
line include sales through large dollar stores. We expect to commence retail
distribution of the BetterSkin line during our first quarter of fiscal 2007
ending December 31, 2006.
Our current marketing efforts include use of regional medical supply
distribution companies and mailings and magazine advertising targeted to older
consumers in limited U.S. markets.
We also intend to pursue other products and business opportunities that
compliment our products. We may also seek to enter into joint ventures or other
alliances with strategic partners such as assisted living and long term care
facilities. This plan depends upon our receiving additional capital funding.
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.
15
Revenue Recognition
Revenue is recognized when products are shipped and when all of the following
have occurred: a firm sales agreement is in place, pricing is fixed or
determinable and collection is reasonably assured. Sales are reported net of
estimated returns, consumer and trade promotions, rebates and freight allowed.
Inventories
Inventories consist solely of 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 June 30, 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. We adopted SFAS 123R on January 1, 2006.
The adoption of this standard had no effect on our financial statements.
Prior to January 1, 2006, we 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.
Derivative Financial Instruments
We do not use derivative instruments to hedge exposures to cash flow, market, or
foreign currency risks.
Derivative financial instruments are initially measured at their fair value. For
derivative financial instruments that are accounted for as liabilities, the
derivative instrument is initially recorded at it fair value and is then
re-valued at each reporting date, with changes in the fair value reported as
charges or credits to income. For option-based derivative financial instruments,
we use the Black-Scholes model to value the derivative instruments.
The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is reassessed at the end of each
reporting period. Derivative instrument liabilities are classified in the
balance sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument could be required within 12 months of
the balance sheet date.
COMPARISON OF OPERATING RESULTS
Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005
Revenues decreased to $2,753 for the three months ended June 30, 2006 from
$3,044 for the three months ended June 30, 2005. The decrease in revenues is due
to decreased sales volume related to changes in packaging labeling and
advertising for FDA compliance purposes.
Cost of sales decreased to $949 for the three months ended June 30, 2006 from
$1,106 for the three months ended June 30, 2005. The decrease in cost of sales
is due to decreased sales volume.
16
Gross profit decreased to $1,804 for the three months ended June 30, 2006 from
$1,938 for the three months ended June 30, 2005. The decrease in gross profit is
due to decreased sales volume.
General and administrative expenses increased to $108,577 for the three months
ended June 30, 2006 to $91,727 for the three months ended June 30, 2005. 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.
Gain (loss) on derivative instruments liabilities, net. We recognized a loss on
derivative instruments of $(294,074) during the three months ended June 30, 2006
compared to no activity during the three months ended June 30, 2005. The
increase is a result of the net unrealized (non-cash) change in the fair value
of our derivative instrument liabilities related to certain warrants and
embedded derivatives in our debt instruments that have been bifurcated and
accounted for separately. These warrants and debt instruments were issued during
the August and September of our 2005 fiscal year and February of our 2006 fiscal
year.
Interest and financing expense increased to $(97,065) for three months ended
June 30, 2006 from $(60,208) for the three months ended June 30, 2005. The
increase is attributable to the additional interest related to our outstanding
note payable and convertible notes.
We recorded a loss from operations of $(106,773) for the three months ended June
30, 2006 compared to a loss from operations of $(89,789) for the three months
ended June 30, 2005. The increase in loss from operations is principally due to
the increase in general and administrative expenses.
We reported a net loss of $(497,912) for the three months ended June 30, 2006
compared to a net loss of $(149,997) for the three months ended June 30, 2005.
The increase in loss is due to the loss on embedded derivative liabilities.
Basic and diluted net loss per common share was ($.02) for the three months
ended June 30, 2006 compared to $(0.01) for the three months ended June 30,
2005.
Nine Months Ended June 30, 2006 Compared to Nine Months Ended June 30, 2005
Revenues increased to $12,587 for the nine months ended June 30, 2006 from
$10,541 for the nine months ended June 30, 2005. The increase in revenues is due
to increased purchases from new vendors.
Cost of sales increased to $7,603 for the nine months ended June 30, 2006 from
$3,407 for the nine months ended June 30, 2005. The increase in cost of sales is
due to the costs of purchasing new product labels and shipping supplies.
Gross profit decreased to $4,984 for the nine months ended June 30, 2006 from
$7,134 for the nine months ended June 30, 2005. The decrease in gross profit is
due to increased cost of sales.
General and administrative expenses increased to $675,647 for the nine months
ended June 30, 2006 from $185,487 for the nine months ended June 30, 2005. 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.
17
Gain (loss) on derivative instruments liabilities, net. We recognized a loss on
derivative instruments of $(6,938,488) during the nine months ended June 30,
2006 compared to no activity during the nine months ended June 30, 2005. The
increase is as a result of the net unrealized (non-cash) change in the fair
value of our derivative instrument liabilities related to certain warrants and
embedded derivatives in our debt instruments that have been bifurcated and
accounted for separately. These warrant and debt instruments were issued during
August and September of our 2005 fiscal year and February of our 2006 fiscal
year.
Interest and financing expense increased to $(205,820) for nine months ended
June 30, 2006 from $(60,226) for the nine months ended June 30, 2005. The
increase is attributable to the additional interest related to our outstanding
note payable and convertible notes.
We recorded a loss from operations of $(670,663) for the nine months ended June
30, 2006 compared to a loss from operations of $(178,353) for the nine months
ended June 30, 2005. The increase in loss from operations is principally due to
the increase in general and administrative expenses.
We reported a net loss of $(7,814,971) for the nine months ended June 30, 2006
compared to a net loss of $(238,579) for the nine months ended June 30, 2005.
The increase in loss is due to the loss on embedded derivative liabilities.
Basic and diluted net loss per common share was ($0.30) for the nine months
ended June 30, 2006 compared to ($0.01) for the nine months ended June 30, 2005.
LIQUIDITY AND CAPITAL RESOURCES
For the three and nine months ended June 30, 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 June 30, 2006, our cash totaled $69 and total current assets were $20,817.
Inventory at June 30, 2006 was $20,111.
As of June 30, 2006, our accounts payable totaled $120,661. Total current
liabilities were $10,594,307 primarily attributable to derivative liabilities.
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 development in order to minimize
expenses. We intend to hire additional employees only as needed.
Our immediate financing needs are currently expected to be provided from the
bridge loan of $60,000 closed in August 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 working capital needs until the SEDA is
available for us to draw upon. Such bridge loan financing may not be sufficient
to meet our needs until the SEDA is available for us to draw on.
18
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. We
may not be able to satisfy the conditions precedent to enable us to draw down
upon the SEDA, including registration of the shares to be issued thereunder.
Furthermore, 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 maintain our current operations or pursue our marketing
strategy. 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 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 shares under the SEDA at the market price. The sale of shares
under the SEDA is conditioned upon us registering the shares of common 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. 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 to
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, 2005
into 2,560,807 shares of common stock and repaid by approximately $32,000 in
cash, including accrued interest.
19
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 to be issued upon conversion of the 2005
Notes, with each warrant exercisable 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 for a period of three years from
their date of issuance at a price equal to 85% of the average closing price of
our common stock 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.
As of September 15, 2006, an aggregate of $35,000 in principal amount of 2005
Notes has been converted, together with accrued interest, into an aggregate of
631,134 shares. Warrants to purchase an aggregate of 588,237 shares at an
exercise price of $0.0744 per share and warrants to purchase an aggregate of
588,237 shares at an exercise price of $0.0893 per share also became exercisable
in connection with the 2005 Note conversions.
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 to be issued upon conversion of the 2006 Notes, with each
warrant exercisable 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 for a period of five years from their date of
issuance at a price equal to 80% of the average closing price of our common
stock 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.
As of September 15, 2006, an aggregate of $73,900 in principal amount of 2006
Notes has been converted, together with accrued interest, into an aggregate of
1,371,934 shares. Warrants to purchase an aggregate of 2,639,288 shares at an
exercise price of $0.056 per share, warrants to purchase an aggregate of
3,958,932 shares at an exercise price of $0.07 per share and warrants to
purchase an aggregate of 3,958,932 shares at an exercise price of $0.0840 per
share also became exercisable in connection with the 2006 Note conversions.
0n August 18, 2006, we closed on a privately placed bridge loan financing in the
amount of $60,000. The bridge loan investor, a beneficial owner of our
securities, received a promissory note in the principal amount of $60,000 and
warrants to purchase 400,000 shares of our common stock at an exercise price of
$0.05 per share. The note is secured by the grant of a security interest in
advance notices that may be issued from time to time by us under the SEDA,
entitled to receive a 15% annual interest payment and matures on October 17,
2006. The warrants are exercisable for shares of our common stock at any time
until August 18, 2011 and are subject to adjustment for anti-dilution purposes.
20
The warrants were classified as derivative instruments. The fair value of
$99,910 was recorded as a liability on the date of issuance. The Black-Scholes
model was used to value the warrants.
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 for the foreseeable future. As of June 30, 2006, we
had an accumulated deficit of approximately $14.5 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 $14.5 million from inception in 1997 to June 30, 2006, including
approximately $7.8 million of net loss during the nine months ended June 30,
2006. We expect to incur substantial additional operating losses for the
foreseeable future. During the nine months ended June 30, 2006, we only
generated revenues from product sales in the amount of approximately $12,587. 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.
21
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. We are dependent on external financing to fund our operations.
Our immediate financing needs are expected to be provided from a privately
placed bridge loan of $60,000 closed in August 2006. Such bridge loan 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. We may not be able to satisfy the conditions
precedent to enable us to draw upon the standby equity distribution agreement,
including registration of the shares to be issued thereunder. Furthermore, 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 nine months
ended June 30, 2006, we had an accumulated deficit of approximately $13 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, on favorable terms, 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
June 30, 2006 were not sufficient to satisfy our current liabilities.
We had a working capital deficit of $10,573,490 at June 30, 2006, which means
that our current liabilities exceeded our current assets on June 30, 2006 by
$10,573,490. 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 June 30, 2006 were not sufficient to satisfy all of our
current liabilities on that date. Our working capital deficit is in large part a
reflection of our loss on embedded derivatives.
22
o We face risks related to our accounting restatements.
On July 11, 2006 we publicly announced that we had discovered accounting errors
in previously reported financial statements. Following consultation with our
independent accountants, we decided to restate our financial statements for the
quarters ended March 31, 2006 and December 31, 2005 and the year ended September
30, 2005. The restatements relate to the accounting for certain debt financings
we conducted in August 2005 and February 2006 as well as certain warrants issued
by us. Further information about these restatements is contained in our Current
Report on Form 8-K filed July 11, 2006 and our Amended Quarterly Report on Form
10-QSB/A for the three months ended March 31, 2006. We anticipate filing
restated financial statements for the quarter ended December 31, 2005 and the
year ended September 30, 2005 as soon as practicable.
The restatement of these financial statements may lead to litigation claims
and/or regulatory proceedings against us. The defense of any such claims or
proceedings may cause the diversion of our management's attention and resources,
and we may be required to pay damages if any such claims or proceedings are not
resolved in our favor. Any litigation or regulatory proceeding, even if resolved
in our favor, could cause us to incur significant legal and other expenses. We
also may have difficulty raising equity capital or obtaining other financing. We
may not be able to effectuate our current business strategy. Moreover, we may be
the subject of negative publicity focusing on the financial statement errors and
resulting restatements and negative reactions from our stockholders, creditors
or others with whom we do business. The occurrence of any of the foregoing could
harm our business and reputation and cause the price of our securities to
decline.
o If we fail to maintain an effective system of internal and disclosure
controls, we may not be able to accurately report our financial results or
prevent fraud. As a result, current and potential stockholders could lose
confidence in our financial reporting which would harm our business and
the trading price of our securities.
Effective internal and disclosure controls are necessary for us to provide
reliable financial reports and effectively prevent fraud and to operate
successfully as a public company. If we cannot provide reliable financial
reports or prevent fraud, our reputation and operating results would be harmed.
We have in the past discovered, and may in the future discover, areas of our
disclosure and internal controls that need improvement. As a result after a
review of our March 31, 2006, December 31, 2005 and September 30, 2005 operating
results, we identified certain deficiencies in some of our disclosure controls
and procedures which we have addressed as stated above.
23
We have undertaken improvements to our internal controls in an effort to
remediate these deficiencies through the following: (1) implementing a review of
all convertible securities to identify any securities that are not conventional
convertible securities, (2) engaging the consulting services of an outside
accountant to review our financial statements each month, and (3) improving
supervision and training of our accounting staff to understand and implement
applicable accounting requirements, policies and interpretations. We cannot be
certain that our efforts to improve our internal and disclosure controls will be
successful or that we will be able to maintain adequate controls over our
financial processes and reporting in the future. Any failure to develop or
maintain effective controls or difficulties encountered in their implementation
or other effective improvement of our internal and disclosure controls could
harm our operating results or cause us to fail to meet our reporting
obligations. If we are unable to adequately establish or improve our internal
controls over financial reporting, our external auditors may not be able to
issue an unqualified opinion on the effectiveness or our controls. Ineffective
internal and disclosure controls could also cause investors to lose confidence
in our reported financial information, which would likely have a negative effect
on the trading price of our securities.
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 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.
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 further 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.
24
>> We may not be able to access funds under the standby equity
distribution agreement sufficient to meet our operating needs.
o We may be required to amend our standby equity distribution agreement.
As a result of the number of shares that could be acquired by Cornell Capital
upon full utilization of our standby equity distribution agreement, Cornell
Capital could become an affiliate of us and own a majority of our outstanding
common shares. Accordingly, we may be required to amend our standby equity
distribution agreement to substantially reduce the dollar amount available
thereunder. To the extent that we must substantially reduce the amount of
financing available under the standby equity distribution agreement, our
financing plans may be materially adversely affected. Additionally, further
delays could occur with respect to the review and approval of the registration
statement covering the standby equity distribution agreement shares.
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 products and wound care
development 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. For example, we have been sued by a stockholder
based upon alleged equity dealings between the stockholder and management of the
shell corporation. 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.
25
RISKS RELATED TO OUR OPERATIONS
o If we are unable to successfully compete in the skin 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 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
or products with greater market recognition or acceptance 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. Our 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.
26
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 If we do not 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 either over-the-counter or cosmetic and we believe
they comply with the U.S. Food and Drug Administration's (FDA) requirements for
sales directly to consumers and medical related companies. Any product claims we
make on our product packaging or sales literature must comply with FDA
requirements. The FDA recently required us to change our package labeling and
sales literature, and refrain from making certain claims about our product uses.
We complied and now believe that we are in material compliance with the FDA's
requirements. It is possible that the FDA will determine that we do not so
comply or that its requirements will change such that we no longer so comply,
that our products are no longer considered over-the-counter or cosmetic
products, or such that we may not be able to obtain over-the-counter or cosmetic
classifications for any future products that we may develop.
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 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 was 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:
>> the effectiveness of our products.
>> our ability to keep production costs low.
>> our ability to successfully market our products. We must create an
effective advertising campaign to create product recognition and
demand for our products.
27
>> 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.
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 We may consider including in our business plan forming ventures or
alliances with certain users of our products which may divert the time and
attention of our management and ultimately prove to be not feasible or
unsuccessful.
We may consider forming joint ventures, strategic alliances or possibly
acquisitions of complementary businesses, such as existing and potential users
of our products including assisted living or long-term care facilities or wound
care clinics. Management believes that such business strategy may create
additional distribution outlets for our products thereby increasing our product
sales and revenues with minimal advertising and marketing costs. We may
ultimately decide not to pursue this strategy or if we choose to pursue it, find
that this strategy is not feasible, be unable to identify or structure
agreements with complementary businesses or be unsuccessful in any ventures or
alliances we form or acquisitions we make.
If we devote significant human or financial resources to this strategy and
ultimately abandon it or are not successful at it, such would materially
adversely affect our financial condition and business operations.
28
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;
>> 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.
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.
29
o Future sales of currently outstanding shares of our common stock could
adversely affect our stock price.
As of September 15, 2006, we had 28,097,657 shares of common stock outstanding.
Of these shares, approximately 24 million shares were subject to restrictions on
resale pursuant to Rule 144 and approximately 4 million shares 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 2006 bridge financing and up to 1,587,237 shares of common stock underlying
compensation warrants.
o The OTC Bulletin Board has temporarily ceased quoting our common stock and
although our stock is again eligible for quotation on the OTC-BB, it is
uncertain as to if or when the reinclusion of our share quotation on the
OTC-BB will be achieved.
On July 12, 2006, the OTC-BB temporarily ceased quoting our shares because our
Quarterly Report on Form 10-QSB for the quarter ended March 31, 2006 had not
been timely filed. We filed our 10-QSB for the quarter ended March 31, 2006 on
July 12, 2006, and we believe that our stock is again eligible for quotation on
the OTC-BB. We intend to pursue reinclusion of our share quotation on the OTC-BB
in the future. It is uncertain as to if or when the reinclusion of our share
quotation on the OTC-BB will be achieved.
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 Nasdaq Stock Market; or
>> 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.
30
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 through
various market makers on the Pink Sheets Electronic Quotation Service published
by the National Quotation Bureau. 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 September 15, 2006, $513,000 of notes issued in our 2005
private placement and $526,100 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 the 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 to be acquired upon conversion of the 2005 notes and
are exercisable until October 31, 2009 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 to be acquired upon conversion of the 2006 notes and
are exercisable until March 31, 2011 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.
31
Assuming a conversion price of $0.102 (85% of the closing price of our common
stock in the Pink Sheets of $0.12 on September 15, 2006), the outstanding 2005
notes would convert into 5,029,412 shares of our common stock (excluding
interest) and the related warrants would be exercisable to purchase 10,058,834
shares. Assuming a conversion price of $0.096 (80% of the closing price of our
common stock in the Pink Sheets of $0.12 on September 15, 2006), the 2006 notes
outstanding would convert into 5,480,208 shares of our common stock (excluding
interest) and the related warrants would be exercisable to purchase 43,841,667
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 $513,000 in principal amount of our 2005 notes (excluding
interest). The calculations in the table are based upon the 28,097,657 shares of
our common stock which were outstanding on September 15, 2006 and shares
issuable upon conversion of the 2005 notes at the following prices:
Conversion At Conversion At Conversion At Conversion At
Assumed Assumed Assumed Assumed
Average Trading Average Trading Average Trading Average Trading
Price of $0.12 Price of $0.09 Price of $0.06 Price of $0.03
--------------- --------------- --------------- ---------------
Conversion Price $ 0.102 $ 0.0765 $ 0.051 $ 0.0255
Shares Issuable on 5,029,412 6,705,882 10,058,824 20,117,647
Conversion of 2005 Notes
Shares Issuable on 10,058,824 13,411,765 20,117,647 40,235,294
Exercise of Warrants
Percentage of Outstanding
Common Stock 34.9% 41.7% 51.8% 68.2%
32
et 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 $526,100 in principal amount of our 2006 notes (excluding
interest). The calculations in the table are based upon the 28,097,657 shares of
our common stock which were outstanding on September 15, 2006 and shares
issuable upon conversion of the 2006 notes at the following prices:
Conversion At Conversion At Conversion At Conversion At
Assumed Assumed Assumed Assumed
Average Trading Average Trading Average Trading Average Trading
Price of $0.12 Price of $0.09 Price of $0.06 Price of $0.03
--------------- --------------- --------------- ---------------
Conversion Price $ 0.096 $ 0.072 $ 0.048 $ 0.024
Shares Issuable on 5,480,208 7,306,944 10,960,417 21,920,833
Conversion of 2006 Notes
Shares Issuable on 43,841,667 58,455,556 87,683,833 175,366,667
Exercise of Warrants
Percentage of Outstanding
Common Stock 63.7% 70.1% 77.8% 87.5%
33
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our management, including
our Chief Executive Officer, has performed an evaluation of the effectiveness of
the design and operation of our disclosure controls and procedures. Disclosure
controls and procedures are designed to insure that information required to be
disclosed by a company in the reports that it files under the Exchange Act are
recorded, processed, summarized and reported within the required time periods
specified by the Securities and Exchange Commission rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed in our reports
filed under the Exchange Act is accumulated and communicated to management,
including our president and chief financial officer as appropriate, to allow
timely decisions regarding required disclosure.
(b) Changes in internal control over financial reporting. The following
significant changes in our internal control over financial reporting, that
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting were made during our third fiscal quarter.
We have adopted and are in the process of implementing disclosure controls and
procedures designed to provide reasonable assurance that all reportable
information will be recorded, processed, summarized and reported within the time
period specified in the SEC's rules and forms. Under the supervision and with
the participation of our management, including our President and Chief Executive
Officer, we have evaluated the effectiveness of design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) as of
the end of the fiscal quarter covered by this report. Based on that evaluation,
the President and Chief Executive Officer (Principal Financial and Accounting
Officer) concluded that our disclosure controls and procedures were not
effective as of the end of the period covered by this report.
The deficiencies identified in our disclosure controls and procedures are a
result of our lack of accounting personnel due to our limited financial
resources. Additional financing would allow us to obtain the necessary resources
to execute our business plan including personnel and other resources to improve
our disclosure controls and procedures.
Previously, we had identified deficiencies in our internal controls and
disclosure controls related to the accounting for convertible debt with
conversion features contingent upon future prices of our stock and convertible
debt with detachable warrants, primarily with respect to accounting for
derivative liabilities in accordance with EITF 00-19 and SFAS 133. We must
restate our financial statements for the year ended September 30, 2005 and for
the interim period ending December 31, 2005, in order to correct the accounting
in such financial statements with respect to derivative liabilities in
accordance with EITF 00-19 and SFAS 133. During our third fiscal quarter ended
June 30, 2006, we have undertaken improvements to our internal controls in an
effort to remediate these deficiencies through the following efforts: 1)
implementing a review of all convertible securities to identify any securities
that are not conventional convertible securities 2) engaging the consulting
services of an outside accountant to review our financial statements each month
and; 3)improving supervision and training of our accounting staff to understand
and implement the requirements of EITF 00-19 and SFAS 133.
34
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 SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
10.1 Second Amendment to Office Building Lease Agreement
effective as of May 1, 2006 between HealthRenu Medical,
Inc. and Denmark House Investment, Ltd.*
31 Certificate of the Chief Executive Officer and Principal
Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
32 Certificate of the Chief Executive Officer and Principal
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 June 30, 2006 and up to and
including September 15, 2006, the issuer filed the following Reports on
Form 8-K:
Report on Form 8-K dated April 28, 2006 and filed with the Securities and
Exchange Commission on May 4, 2006.
Report on Form 8-K/A dated April 28, 2006 and filed with the Securites and
Exchange Commission on May 18, 2006.
Report on Form 8-K dated July 11, 2006 and filed with the Securities and
Exchange Commission of July 11, 2006.
Report on Form 8-K dated July 12, 2005 and filed with the Securities and
Exchange Commission on July 12, 2006.
35
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: October 2, 2006 By: /s/ Robert W. Prokos
------------------------
Robert W. Prokos
Chief Executive Officer and President
(Principal Executive, Financial and
Accounting Officer)
36