As filed with the Securities and Exchange Commission on November 13, 2006
Registration No. 333-133239
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
Amendment No. 1 to
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
HEALTHRENU MEDICAL, INC.
(Name of Small Business Issuer in Its Charter)
Nevada 2844 25-1907744
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or Organization) Classification Code Number) Identification No.)
12777 Jones Road
Suite 481
Houston, TX 77070
(281) 890-2561
(Address and Telephone Number of Principal Executive Offices)
12777 Jones Road, Suite 481
Houston, TX 77070
(Address of Principal Place of Business or
Intended Principal Place of Business)
Copies to:
Robert W. Prokos Thomas P. Gallagher, Esq.
President and Chief Executive Officer Deborah L. Carroll, Esq.
HealthRenu Medical, Inc. Gallagher, Briody & Butler
12777 Jones Road, Suite 481 155 Village Boulevard
Houston, TX 77070 Princeton, NJ 08540
(281) 890-2561 (609) 452-6000
(Name, Address and Telephone (Name, Address and Telephone
Number of Agent for Service) Number of Agent for Service)
---------------
Approximate Date of Commencement of Proposed Sale to the Public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. |_|
CALCULATION OF REGISTRATION FEE
- --------------------------------------------- ---------------------- ----------------- --------------------- --------------
Proposed
Title Of Each Maximum Proposed Maximum Amount Of
Class Of Securities Amount To Offering Price Aggregate Offering Registration
To Be Registered Be Registered Per Share (1) Price (1) Fee
- --------------------------------------------- ---------------------- ----------------- --------------------- --------------
Common Stock, par value $0.001 per share 120,000,000 shares $0.19 $22,800,000 $2,440(2)
- --------------------------------------------- ---------------------- ----------------- --------------------- --------------
Common Stock, par value $0.001 per share 269,676,800 shares $0.05 $13,483,840 $1,443(3)
- --------------------------------------------- ---------------------- ----------------- --------------------- --------------
Total Shares 389,676,800 shares $36,283,840 $3,883
- --------------------------------------------- ---------------------- ----------------- --------------------- --------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended. The
proposed maximum offering price per share and proposed maximum aggregate
offering price is based upon average of between the closing bid and asked
prices for the common stock as of a recent date.
(2) Previously paid, by application of $2,440 from previously paid
Registration Fee referenced in footnote (3) below.
(3) A Registration Fee in the amount of $5,179 was previously paid in
connection with Registration Statement No. 333-128757 filed on September
30, 2005.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
ii
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION DATED NOVEMBER 13, 2006
HEALTHRENU MEDICAL, INC.
389,676,800 Shares of Common Stock
Our common stock is quoted through various market makers on the Pink
Sheets Electronic Quotation Service under the stock symbol "HRUM". On
November 1, 2006, the closing price for our common stock was $0.05 per share.
This prospectus relates to the sale of up to 389,676,800 shares of our
common stock from time to time by the selling stockholders identified in the
selling stockholder table appearing on page 25 of this prospectus.
We will receive no proceeds from the sale of our common stock by the
selling stockholders identified in this prospectus.
You should read this prospectus carefully before you invest in us.
Investing in our common stock is speculative and involves a high degree of
risk. See "Risk Factors" beginning on page 8.
Neither the Securities Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is __________, 2006
TABLE OF CONTENTS
PAGE
----
Prospectus Summary ..........................................................2
Risk Factors ................................................................8
Forward Looking Statements..................................................19
Use of Proceeds.............................................................19
Plan of Distribution........................................................20
Selling Stockholders........................................................25
Market Prices and Dividend Policy...........................................31
Business....................................................................34
Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................................41
Management..................................................................48
Executive Compensation......................................................49
Principal Stockholders......................................................50
Certain Transactions........................................................51
Description of Securities...................................................53
Legal Matters...............................................................56
Experts.....................................................................56
Where You Can Find More Information.........................................56
Index to Financial Statements..............................................F-1
PROSPECTUS SUMMARY
The following is only a summary of the information, financial statements and
notes included in this prospectus. It does not contain all of the information
that may be important to you. You should read the entire prospectus carefully,
including "Risk Factors" and the financial statements and notes thereto, before
deciding to invest in our common stock offered by this prospectus.
OVERVIEW
We are a biotechnology company that develops and distributes proprietary
products for personal skin care under the Health Renu Medical brand name. Our
products are natural and provide nutrients and proteins designed to benefit the
body.
We have developed two product lines - our HealthRenu medical line and our
BetterSkin consumer line - which consist of the following products:
HEALTHRENU MEDICAL LINE:
o DERM-ALL GEL
Hydrating gel which brings essential nourishing ingredients deep
within the skin's surface.
o SKIN RENU PLUS
Penetrating moisturizer made from essential oils.
o SKIN RENU LOTION
Advanced formula moisturing skin protectant. Continued use of this
product may reduce the appearance of wrinkles and fine lines.
o SKIN RENU SKIN THERAPY
Vitamin E moisturizer in combination with Omegas 3,6 and 9 essential
fatty acids to revitalize skin.
o RENU CARE WASH NON-RINSE CLEANSER
Non-rinse cleanser, moisturizer and protectant for those who are
bedridden or otherwise immobile.
2
o DEEP RELIEF PAIN RELIEVER
Deep Relief provides penetrating pain relief of minor aches and
pains in muscles and joints with arthritis, strains and sprains.
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.
BETTERSKIN CONSUMER LINE:
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.
BUSINESS DEVELOPMENT
We were originally incorporated in Colorado as American Merger Control, Inc. on
January 6, 1986. In 1990, we changed our name to Ultratech Knowledge Systems,
Inc., and in 1993 we changed our name again to AGTsports, Inc. During the fiscal
years ended September 30, 1991 through September 30, 1998, our business plan was
to pursue providing technological and software services to golf and related
industries. In 1998, we abandoned this business plan and were considered a
"shell" or "blank check" company whose sole purpose was to search for and enter
into new business opportunities.
On September 4, 2003, we merged into AGTsports, Inc., our wholly-owned Nevada
subsidiary. As a result of the merger, we became a Nevada corporation.
On September 26, 2003, we entered into an exchange agreement with Health Renu,
Inc., a Delaware corporation, and the former Health Renu, Inc. stockholders
whereby Health Renu, Inc. became our wholly-owned subsidiary and our control
shifted to the former Health Renu, Inc. stockholders. Since its inception in
1997, Health Renu, Inc. had been in the medical research and development stage,
with a focus on improving its skin care and developing wound care products.
Health Renu, Inc. had nominal production and revenue.
3
The exchange agreement represented a recapitalization of Health Renu, Inc. with
accounting treatment similar to that used in a reverse acquisition. Health Renu,
Inc. emerged as the surviving financial reporting entity but we remained as the
legal reporting entity. As a result of our acquisition of Health Renu, Inc. and
a change in our business focus to skin care products and wound care, we changed
our name to HealthRenu Medical, Inc. In this prospectus, a reference to us
includes a reference to Health Renu, Inc. and vice-versa unless otherwise
indicated.
Our principal executive offices are located at 12777 Jones Road, Suite 481,
Houston, Texas 77070 and our telephone number is (281) 890-2561.
Information contained on our web site (www.healthrenumedical.com) does not
constitute part of this prospectus.
GOING CONCERN
Our accompanying financial statements have been prepared on a going concern
basis, which contemplates our continuation of operations, realization of assets
and liquidation of liabilities in the ordinary course of business. Since
inception, we have incurred substantial operating losses and expect to incur
additional operating losses over the next several years. As of June 30, 2006, we
had an accumulated deficit of approximately $14.25 million. These factors raise
substantial doubt regarding our ability to continue as a going concern.
We have financed our operations since inception primarily through debt and
equity 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 credit agreement or otherwise.
Continuing our operations is dependent upon obtaining such further financing.
Our accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
4
THE OFFERING
This offering relates to the sale of common stock by certain persons who are our
stockholders. The selling stockholders are:
o Cornell Capital Partners, L.P. and its transferee, which intend to
sell up to 1,465,065 shares of common stock issued to Cornell
Capital Partners, L.P., as a commitment fee pursuant to the standby
equity distribution agreement entered into between us and them,
including 293,013 shares held by its transferee, and up to
206,185,567 shares of common stock to be issued pursuant to the
standby equity distribution agreement;
o Monitor Capital, Inc., which intends to sell up to 90,909 shares of
common stock received as a placement agent fee;
o Two selling stockholders who intend to sell up to 600,000 shares of
common stock issuable upon warrants issued for consulting services;
o A selling stockholder who intends to sell up to 400,000 shares of
common stock issuable upon warrants issued in connection with our
August 2006 bridge loan;
o North Coast Securities Corporation and its designees who intend to
sell up to 4,456,362 shares of common stock underlying warrants
issued as a fee for serving as our placement agent in our private
placement of units closed in February 2006 and our private placement
of units closed in August and September 2005 and for consulting
services;
o Selling stockholders, who intend to sell up to 631,134 shares of
common stock issued upon conversion of 8% unsecured convertible
notes, 12,070,586 shares of common stock issuable upon conversion of
such notes, related interest payable in up to 2,896,942 shares and
up to 25,317,649 shares of common stock issuable upon the exercise
of related warrants, sold in our private placement of units
conducted in August and September 2005; and
o Selling stockholders, who intend to sell up to 1,371,934 shares of
common stock issued upon conversion of 8% secured convertible notes,
13,152,500 shares of common stock issuable upon conversion of such
notes, related interest payable in up to 5,261,000 shares and up to
115,777,152 shares of common stock issuable upon the exercise of
related warrants, sold in our private placement of units conducted
in February 2006.
Pursuant to the standby equity distribution agreement, we may sell to Cornell
Capital Partners, L.P. up to $10.0 million worth of our common stock at a price
equal to 97% of the lowest volume weighted average price as quoted by Bloomberg,
L.P. for the five consecutive trading days after the date upon which we request
an advance under the agreement. In addition, Cornell Capital Partners, L.P. will
retain a cash fee of 5% from the proceeds received by us for each advance under
the agreement for a total effective discount to the market price of our common
stock of 8%. This 8% discount is an underwriting discount.
We do not expect to draw down the full dollar amount available under the standby
equity distribution agreement. We currently expect the total amount of our draw
downs to be in the $2 million range.
Cornell Capital Partners, L.P. intends to sell any shares it acquires pursuant
to the standby equity distribution agreement at the then prevailing market
price. Such sales may cause our stock price to decline. Cornell Capital
Partners, L.P. may sell shares of our common stock subject to an advance notice
from us at any time from and after its receipt of the notice, including during
the applicable five-day pricing period for determination of stock price and
prior to our issuance of the shares to it. This could cause downward pressure on
the price of our common stock and therefore reduce the purchase price that
Cornell Capital Partners, L.P. pays for the common stock. Cornell Capital
Partners, L.P. may not know the precise number of shares that it will purchase
prior to the fifth trading day after a notice is given but may (1) make an
informed estimate based on recent market prices, (2) provide for a sale of a
dollar value rather than a number of securities or (3) sell shares from its
current holdings to cover any short sale that might otherwise result. A short
sale results if a prospective seller sells stock that it does not yet own. The
prospective seller hopes that the stock price will decline, at which time the
seller can purchase shares at a lower price to deliver to the purchaser. The
seller profits when the stock price declines because it is purchasing shares at
a price lower than the price at which it is selling the stock.
We may not request advances under the standby equity distribution agreement if
the shares to be issued in connection with such advances would result in Cornell
Capital Partners, L.P. owning more than 9.9% of our then outstanding common
stock. As of November 1, 2006, we had 28,097,657 shares outstanding so Cornell
Capital Partners, L.P. could not own in excess of 2,781,668 shares. Giving
effect to the 1,172,052 shares of our common stock currently held by Cornell
Capital Partners, L.P., it could purchase 1,609,616 additional shares for
approximately $78,000 under the standby equity distribution agreement (at an
assumed purchase price of $0.0485 per share based upon 97% of an assumed lowest
trading price of $0.05 on the Pink Sheets during the five consecutive trading
days ending November 1, 2006). We will be unable to sell additional shares of
our common stock under the standby equity distribution agreement if Cornell
Capital Partners, L.P. is unable to reduce its holdings so as to remain below
the 9.9% threshold.
Cornell Capital Partners, L.P. is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with the sale of common stock issuable
under the standby equity distribution agreement.
Monitor Capital, Inc., North Coast Securities Corporation and certain of its
designees are "underwriters" within the meaning of the Securities Act of 1933 in
connection with the sale of the securities held by them.
5
Common Stock Offered Up to 389,676,800 shares by selling
stockholders.
Offering Price Market price
Common Stock Outstanding 28,097,657 shares
Before The Offering
Use Of Proceeds We will not receive any proceeds from
sales of the shares offered by the
selling stockholders. Any proceeds we
receive from the sale of common stock to
Cornell Capital Partners, L.P. under the
standby equity distribution agreement
will be used principally for operations,
marketing, sales, research and
development and general working capital
purposes. We do not expect to draw down
the full amount available under the
standby euqity agreement. We currently
expect the total amount of our draw downs
to be in the $2 million range. See "Use
of Proceeds".
Risk Factors The securities offered hereby involve a
high degree of risk and immediate
substantial dilution. See "Risk Factors".
Trading Symbol HRUM
6
SUMMARY FINANCIAL INFORMATION
We are providing the following summary financial information to aid you in your
analysis of the financial aspects of an investment in us. The table includes
summary historical financial data for us for the years ended September 30, 2005
and 2004 and the nine months ended June 30, 2006 and 2005. In our opinion, the
unaudited financial statements contain all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of our financial condition
as of June 30, 2006 and our results of operations for the nine month periods
ended June 30, 2006 and 2005. Interim results are not necessarily indicative of
operations for a full year. The following financial information should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and related notes
appearing elsewhere in this prospectus.
SUMMARY STATEMENT OF OPERATIONS DATA:
Nine Months Ended Years Ended
June 30, September 30,
---------------------------- ---------------------------
2006 2005 2005 2004
------------ ------------ ------------ ------------
(Unaudited)
Sales $ 2,753 $ 3,044 $ 9,785 $ 21,806
Cost of sales $ 949 $ 1,106 $ 13,458 $ 43,306
Gross profit $ 1,804 $ 1,938 $ (3,673) $ (21,500)
General and administrative expense $ 108,577 $ 91,727 $ (889,868) $ (1,457,701)
Loss on embedded derivative liability $ (6,937,905) $ -- $ (2,082,121) $ --
Net loss $ (493,295) $ (149,997) $ (3,619,434) $ (1,479,631)
Net loss per share (basic and $ (0.02) $ (0.01) $ (0.13) $ (0.08)
diluted)
SUMMARY BALANCE SHEET DATA:
June 30, 2006 September 30, 2005
------------------ ------------------
(Unaudited)
Working capital (deficit) $ (10,561,477) $ (2,785,338)
Current assets $ 20,817 $ 184,145
Total assets $ 232,613 $ 330,044
Derivative liability $ 10,168,026 $ 2,630,121
Current liabilities $ 10,582,294 $ 2,969,483
Stockholders' equity (deficit) $ (10,465,810) $ (2,648,763)
7
RISK FACTORS
You should carefully consider the risks and uncertainties described below and
the other information in this prospectus before deciding to invest in our common
stock offered by this prospectus.
FINANCIAL CONDITION RISKS
o We have had limited product sales, a history of operating losses and
may not become profitable in the near future or at all.
We have had limited sales of our products to date. We incurred net losses of
approximately $14.25 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.
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 notes 15 and 16 which are dated
October 10, 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 June 30, 2006, we had an accumulated deficit of approximately
$14.25 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 is dependent upon obtaining such further financing. These conditions
raise substantial doubt about our ability to continue as a going concern.
8
o We have a working capital deficit, 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 $10,561,477 at June 30, 2006, which means
that our current liabilities exceeded our current assets on June 30, 2006 by
$10,561,477. 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 liability for embedded derivative features contained in our
convertible notes payable and warrants.
o We may be unable to implement our business plan if the investor
under the standby equity distribution agreement does not fulfill its
obligations under the agreement.
We will be reliant upon the ability of Cornell Capital Partners, L.P. to provide
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 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 concluded that it was necessary to restate our
financial statements for the quarters ended June 30, 2006, 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 Annual Report for the year ended September 30,
2005 and our Amended Quarterly Reports for each of the quarters ended December
31, 2005, March 31, 2006, and June 30, 2006.
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 June 30, 2006, March 31, 2006, December 31, 2005 and September 30,
2005 operating results, we identified certain deficiencies in certain disclosure
controls and procedures which we have addressed as stated below.
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. Ineffective internal and disclosure controls could 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 Since Health Renu, Inc. became a public reporting company under the
Securities Exchange Act of 1934 by acquiring us when we were a
publicly-traded shell corporation, we 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.
9
On September 26, 2003, we entered into an exchange agreement with Health Renu,
Inc., a Delaware corporation, and the former Health Renu, Inc. stockholders
whereby our control shifted to the former Health Renu, Inc. stockholders. We
were then a non-operating, publicly-traded corporation. The exchange agreement
represented a recapitalization of Health Renu, Inc. with accounting treatment
similar to that used in a reverse acquisition. Health Renu, Inc. emerged as the
surviving financial reporting entity but we remained as the legal reporting
entity. We then changed our business focus to skin care products and wound care
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 on 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.
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.
10
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 is 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 commitment and may disclose our
proprietary formulas to a third party or refuse to sell the formulas to us in
the event the laboratory ceases to produce products for us, either of which
would materially and adversely 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.
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 sales of products are subject to regulation by the U.S. Food and Drug
Administration, or FDA. The two most important laws pertaining to cosmetics
marketed in the United States are the Federal Food, Drug, and Cosmetic Act, or
FD&C Act, and the Fair Packaging and Labeling Act, or FPLA. The FD&C Act
prohibits the marketing of adulterated or misbranded cosmetics. Violations of
the Act involving product composition--whether they result from ingredients,
contaminants, processing, packaging, or shipping and handling--cause cosmetics
to be adulterated and are subject to regulatory action. Improperly labeled or
deceptively packaged products are considered misbranded and are subject to
regulatory action. In addition, under the authority of the FPLA, the FDA
requires an ingredient declaration to enable consumers to make informed
purchasing decisions. Cosmetic products and ingredients are not generally
subject to FDA premarket approval authority, however, the FDA may pursue
enforcement action against violative products or companies who violate the law.
We are responsible for substantiating the safety of our products and ingredients
before marketing them.
Over-the-counter (OTC) drugs, however, are subject to FDA approval. Generally,
OTC drugs must either receive premarket approval by FDA or conform to final
regulations specifying conditions whereby they are generally recognized as safe
and effective, and not misbranded. OTC drugs must also be labeled according to
OTC drug regulations, including the "Drug Facts" labeling. Currently, certain
OTC drugs that were marketed before the beginning of the OTC Drug Review (May
11, 1972) may be marketed without specific approval pending publication of final
regulations under the ongoing OTC Drug Review. Once a regulation covering a
specific class of OTC drugs is final, those drugs must either:
o be the subject of an approved New Drug Application (NDA), or
o comply with the appropriate monograph, or rule, for an OTC drug.
An NDA is the vehicle through which drug sponsors formally propose that the FDA
approve a new pharmaceutical for sale and marketing in the U.S. The FDA only
approves an NDA after determining that the data are adequate to show the drug's
safety and effectiveness for its proposed use and that its benefits outweigh the
risks. The NDA process can be expensive and time consuming for a drug sponsor.
The FDA has published monographs, or rules, for a number of OTC drug categories.
These monographs state requirements for categories of non-prescription drugs,
such as what ingredients may be used and for what intended use. Among the many
non-prescription drug categories covered by OTC monographs are acne medications,
treatments for dandruff, seborrheic dermatitis, and psoriasis and sunscreens.
Our management, with the help of a FDA consultant, has determined that our
currently marketed products are either cosmetics or OTC drugs that may be
marketed without specific FDA approval as they are covered by OTC monographs.
The FDA, however, may disagree with our management's classification of our
products.
The FDA has broad regulatory and enforcement powers. If the FDA determines that
we have failed to comply with applicable regulatory requirements, it can impose
a variety of enforcement actions from public warning letters, fines,
injunctions, consent decrees and civil penalties to suspension or delayed
issuance of approvals, seizure or recall of our products, total or partial
shutdown of production, withdrawal of approvals or clearances already granted,
and criminal prosecution. The FDA can also require us to replace or refund the
cost of products that we distributed. If any of these events were to occur, it
could materially adversely affect our ability to market our products and our
business and financial condition.
The FDA recently required us to change certain of our product classifications,
certain of 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 policies, regulations or
interpretations thereof will change such that we no longer so comply, that our
products are no longer considered OTC or cosmetic products, or such that we may
not be able to obtain favorable product classification for any future products
that we may develop. Any of the foregoing could materially adversely impact our
ability to market our products and our business and financial condition.
o Our founder and former president has competed with us by selling similar
products and soliciting our customers and has otherwise defrauded us.
Darrell Good, the founder and principal of Health Renu, Inc., has competed
against us by posting products similar to ours with the same product numbers on
his website for sale. Mr. Good has also attempted to solicit sales from our
customers. We have various other claims against Mr. Good including for fraud,
breach of contract and breach of fiduciary duty based on Mr. Good's
misrepresentation to us that we owned our products' formulas when in fact they
are owned by the production laboratory. We filed a lawsuit against Mr. Good in
the U.S. District Court for the Southern District of Texas seeking recovery for
these claims. Among other recovery sought, we sought to recover approximately
8.1 million shares of our common stock from Mr. Good and requested that Mr. Good
cease competing with us and soliciting our customers. A final, non-appealable
default judgment against Mr. Good was entered in this case on July 29, 2005 and
the court ordered that the shares be cancelled and returned to us and that Mr.
Good is enjoined from competing with us for one year. The shares have been
cancelled on the books and records of our transfer agent. We may not be able to
prevent Mr. Good from continuing to compete with us or soliciting our customers.
If Mr. Good continues to compete with us or to solicit our customers, it could
have a material adverse effect on our business.
11
o We may not achieve the market acceptance of our products necessary to
generate revenues.
Products we produce may not achieve market acceptance. Market acceptance will
depend on a number of factors, including:
o the effectiveness of our products.
o our ability to keep production costs low.
o our ability to successfully market our products. We must
create product recognition and demand for our products.
o timely introductions of new products. Our introduction of new
products will be subject to the inherent risks of unforeseen
problems and delays. Delays in product availability may
negatively affect their market acceptance.
o We may not be able to generate increased demand for our products or
successfully meet any increased product demands.
We have had limited sales of our products to date. Rapid growth of our business
may significantly strain our management, operations and technical resources. If
we are successful in obtaining large orders for our products, we will be
required to deliver large volumes of quality products to our customers on a
timely basis and at a reasonable cost. We outsource production of our products.
We may not obtain large scale orders for our products or if we do, we may not be
able to satisfy large scale production requirements on a timely and cost
effective basis. As our business grows, we will also be required to continue to
improve our operations, management and financial systems and controls. Our
failure to manage our growth effectively could have an adverse effect on our
ability to produce products and meet the demands of our customers.
o We may face liability if our products cause injury or fail to perform
properly.
We maintain liability insurance coverage that we believe is sufficient to
protect us against potential claims. Our liability insurance may not continue to
be available to us on 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
consultants or employees or are unable to hire and retain key employees or
senior management as needed in the future, it could have a significant negative
impact on our business.
12
o We may 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 assisted care facilities
or wound care clinics. Management believes that such business strategy may
create additional distribution outlets for our products thus 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.
RISKS ASSOCIATED WITH OUR COMMON STOCK
o We do not intend to pay dividends on our common stock so stockholders
must sell their shares at a profit to recover their investment.
We have never declared or paid any cash dividends on our common stock. We intend
to retain any future earnings for use in our business and do not anticipate
paying cash dividends on our common stock in the foreseeable future. Because we
may not pay dividends, our stockholders' return on investment in our common
stock will depend on their ability to sell our shares at a profit.
o The market price of our common stock may be volatile, which could cause
the value of an investment in our stock to decline.
The market price of shares of our common stock has been and is likely to
continue to be highly volatile. Factors that may have a significant effect on
the market price of our common stock include the following:
o sales of large numbers of shares of our common stock in the
open market, including shares issuable at a fluctuating
conversion price or at a discount to the market price of our
common stock;
o our operating results;
o quarterly fluctuations in our financial results;
o our need for additional financing;
o announcements of product innovations or new products by us or
our competitors;
13
o developments in our proprietary rights or our competitors'
developments;
o our relationships with current or future suppliers,
manufacturers, distributors or other strategic partners;
o governmental regulation; and
o other factors and events beyond our control, such as changes
in the overall economy or condition of the financial markets.
In addition, our common stock has been relatively thinly traded. Thinly traded
common stock can be more volatile than common stock trading in an active public
market. We cannot predict the extent to which an active public market for our
common stock will develop.
Further, the stock market in general has experienced extreme volatility that
often has been unrelated to the operating performance of particular companies.
These broad market and industry fluctuations may adversely affect the trading
price of our common stock, regardless of our actual operating performance.
As a result of potential stock price volatility, investors may be unable to
resell their shares of our common stock at or above the cost of their purchase
prices. In addition, companies that have experienced volatility in the market
price of their stock have been the subject of securities class action
litigation. If we were to become the subject of securities class action
litigation, this could result in substantial costs, a diversion of our
management's attention and resources and harm to our business and financial
condition.
o Future sales of currently outstanding shares of our common stock could
adversely affect our stock price.
As of November 1, 2006, we had 28,097,657 shares of common stock outstanding.
Of these shares, approximately 24.0 million were subject to restrictions on
resale pursuant to Rule 144 and approximately 4.1 million outstanding shares of
our common stock were eligible for sale in the public market without restriction
or registration.
This prospectus relates to 389,676,800 shares of common stock, all of which are
being offered for the accounts of selling stockholders.
o The OTC Bulletin Board, or OTC-BB, 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 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 November 1, 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.
Assuming a conversion price of $0.0425 (85% of the closing price of our common
stock in the Pink Sheets of $0.05 on November 1, 2006), the outstanding 2005
notes would convert into 12,070,588 shares of our common stock (excluding
interest) and the related warrants would be exercisable to purchase 24,141,176
shares. Assuming a conversion price of $0.04 (80% of the closing price of our
common stock in the Pink Sheets of $0.05 on November 1, 2006), the 2006 notes
outstanding would convert into 13,152,500 shares of our common stock (excluding
interest) and the related warrants would be exercisable to purchase 105,220,000
shares. These numbers of shares, however, could be significantly greater in the
event of a decrease in the trading price of our stock.
Set forth in the table below is the potential dilution to the stockholders and
ownership interest of the holders of our 2005 notes which could occur upon
conversion of $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 November 1, 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 $0.05 Price of $0.04 Price of $0.03 Price of $0.01
--------------- --------------- --------------- ---------------
Conversion Price $ 0.0425 $ 0.034 $ 0.0255 $ 0.0085
Shares Issuable on 12,070,586 15,088,235 20,117,647 60,352,941
Conversion of 2005 Notes
Shares Issuable on 24,141,175 30,176,471 40,235,294 120,705,882
Exercise of Warrants
Percentage of Outstanding
Common Stock 56.3% 61.7% 68.2% 86.6%
Set forth in the table below is the potential dilution to the stockholders and
ownership interest of the holders of our 2006 notes which could occur upon
conversion of $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 November 1, 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 $0.05 Price of $0.04 Price of $0.03 Price of $0.01
--------------- --------------- --------------- ---------------
Conversion Price $ 0.04 $ 0.032 $ 0.024 $ 0.008
Shares Issuable on 13,152,500 16,440,625 21,920,833 65,762,500
Conversion of 2006 Notes
Shares Issuable on 105,220,000 131,525,000 175,366,667 526,100,000
Exercise of Warrants
Percentage of Outstanding
Common Stock 80.8% 84.0% 87.5% 95.5%
o Our common stock is deemed to be "penny stock," which may make it more
difficult for investors to sell their shares due to suitability requirements.
14
Our common stock is deemed to be "penny stock" as that term is defined in Rule
3a51-1 promulgated under the Securities Exchange Act of 1934. These requirements
may reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for investors in our common
stock to sell shares to third parties or to otherwise dispose of them. This
could cause our stock price to decline. Penny stocks are stocks:
o with a price of less than $5.00 per share;
o that are not traded on a "recognized" national exchange;
o whose prices are not quoted on the Nasdaq stock market; or
o of issuers with net tangible assets less than $2.0 million (if
the issuer has been in continuous operation for at least three
years) or $5.0 million (if in continuous operation for less
than three years), or with average revenues of less than $6.0
million for the last three years.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor.
o Our common stock has been relatively thinly traded and we cannot predict
the extent to which a trading market will develop.
There has been a limited public market for our common stock and an active
trading market for our stock may not develop. Absence of an active trading
market could adversely affect our stockholders' ability to sell our common stock
in short time periods, or possibly at all. Our common stock is thinly traded
compared to larger more widely known companies in our industry. Thinly traded
common stock can be more volatile than common stock trading in an active public
market. Our common stock has experienced, and is likely to experience in the
future, significant price and volume fluctuations that could adversely affect
the market price of our common stock without regard to our operating results. We
cannot predict the extent to which an active public market for our common stock
will develop or be sustained after this offering.
RISKS RELATED TO THIS OFFERING
o Future sales by the investor under the standby equity distribution
agreement or our stockholders may adversely affect our stock price and our
ability to raise funds in new stock offerings.
Sales of our common stock in the public market following this offering could
lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all.
15
Upon issuance of the maximum number of shares being registered in this offering,
there will be approximately 389,676,800 additional shares of common stock
outstanding. The selling stockholders intend to sell in the public market the
shares of common stock being registered in this offering. That means that up to
389,676,800 shares of common stock, the number of shares being registered in
this offering, may be sold. Such sales may cause our stock price to decline.
We have the ability to issue and register additional shares under the standby
equity distribution agreement by filing a new registration statement. There is
essentially no limit on the number of shares that we can issue and register in
future registration statements. All of these shares of common stock may be
immediately resold in the public market upon effectiveness of the accompanying
registration statement and the sale to the investor under the terms of the
standby equity distribution agreement.
o Existing stockholders will experience significant dilution from our sale
of shares under the standby equity distribution agreement.
The sale of shares pursuant to the standby equity distribution agreement will
have a dilutive impact on our stockholders. As a result, our net income per
share could decrease in future periods, and the market price of our common stock
could decline. In addition, the lower our stock price is, the more shares of
common stock we will have to issue under the standby equity distribution
agreement to draw down the full amount. If our stock price is lower, then our
existing stockholders will experience greater dilution.
Set forth in the table below is the potential dilution to the stockholders which
could occur upon a draw down of $250,000 under the standby equity distribution
agreement. The calculations in the table are based upon the 28,097,657 shares of
our common stock which were outstanding on November 1, 2006 and shares issuable
under the standby equity distribution agreement at the following prices:
Draw Down At Draw Down At Draw Down At Draw Down At
Assumed Trading Assumed Trading Assumed Trading Assumed Trading
Price of $0.05 Price of $0.04 Price of $0.03 Price of $0.01
--------------- --------------- --------------- ---------------
Draw Down Price $ 0.0485 $ 0.0388 $ 0.0291 $ 0.0097
Shares Issuable on Draw Down 5,154,640 6,443,299 8,591,066 25,773,196
o The investor under the standby equity distribution agreement will pay
eight percent less than the then-prevailing market price of our common stock.
The common stock to be issued under the standby equity distribution agreement
will be issued at a 3% discount to the lowest volume weighted average price as
quoted by Bloomberg, L.P. for the five trading days immediately following the
notice date of an advance. In addition, the investor will retain a cash fee of
5% from the proceeds received by us for each advance under the standby equity
distribution agreement for an effective total discount to the market price of
our common stock of 8%. These discounted sales could cause the price of our
common stock to decline.
o The selling stockholders intend to sell their shares of common stock in
the market, which sales may cause our stock price to decline.
The selling stockholders intend to sell in the public market the shares of
common stock being registered in this offering. That means up to 389,676,800
shares of common stock, the number of shares being registered in this offering,
may be sold. Such sales may cause our stock price to decline.
o The sale of our stock under our standby equity distribution agreement
could encourage short sales by third parties, which could contribute to the
future decline of our stock price.
The significant downward pressure on the price of our common stock caused by the
sale of material amounts of common stock under the standby equity distribution
agreement could encourage short sales by third parties. In a short sale, a
prospective seller borrows stock from a stockholder or broker and sells the
borrowed stock. The prospective seller hopes that the stock price will decline,
at which time the seller can purchase shares at a lower price to repay the
lender. The seller profits when the stock price declines because it is
purchasing shares at a price lower than the sale price of the borrowed stock.
Such sales could place further downward pressure on the price of our common
stock by increasing the number of shares being sold.
16
o The investor under the standby equity distribution agreement may sell
shares of our common stock acquired under the agreement during an applicable
pricing period for determination of stock price, which could contribute to the
decline of our stock price.
The sale of common stock to be acquired by Cornell Capital Partners, L.P.
pursuant to an advance notice given by us under the standby equity distribution
agreement during an applicable pricing period for determination of stock price
under the agreement could cause downward pressure on the price of our common
stock and, therefore, reduce the purchase price that Cornell Capital Partners,
L.P. pays for such common stock.
o The price you pay for our common stock in this offering will fluctuate
and may be higher or lower than the prices paid by other people participating in
this offering.
The price in this offering will fluctuate based on the prevailing market price
of the common stock. Accordingly, the price you pay in this offering may be
higher or lower than the prices paid by other people participating in this
offering.
o The standby equity distribution agreement prohibits us from raising
capital at less than the market price which may severely limit our ability to
raise capital from the sale of equity.
The standby equity distribution agreement contains a covenant that restricts us
from raising capital from the sale of stock or other securities convertible into
stock at a price less than the market price of our common stock on the date of
issuance. This covenant may severely limit our ability to raise capital from the
sale of stock or convertible securities because purchasers of our stock or
convertible securities may want to pay a discount to the market price of our
stock.
o We may not be able to access funds under the standby equity distribution
agreement sufficient to meet our operating needs.
We are dependent on external financing to fund our operations. Our financing
needs are expected to be provided from the standby equity distribution
agreement, in large part. Such financing may not be available on favorable
terms, in sufficient amounts or at all when needed, in part, because the amount
and terms of financing available will fluctuate with the price of our common
stock. As the price declines, the number of shares the investor under the
standby equity distribution agreement must purchase to satisfy an advance
request from us will increase, resulting in additional dilution to existing
stockholders and potentially causing the investor to hold more than 9.9% of our
outstanding stock which is prohibited under the agreement. As of November 1,
2006, we had 28,097,657 shares outstanding so Cornell Capital Partners, L.P.
could not own in excess of 2,781,668 shares. Giving effect to the 1,172,052
shares of our common stock currently held by Cornell Capital Partners, L.P., it
could purchase 1,609,616 additional shares for approximately $78,000 under the
standby equity distribution agreement (at an assumed purchase price of $0.0485
per share based upon 97% of an assumed lowest trading price of $0.05 on the Pink
Sheets during the five consecutive trading days ending November 1, 2006). We
will be unable to sell additional shares of our common stock under the standby
equity distribution agreement if Cornell Capital Partners, L.P. is unable to
reduce its holdings so as to remain below the 9.9% threshold.
17
There are additional restrictions on our ability to request advances under the
standby equity distribution agreement. For example, our ability to request an
advance is conditioned upon us registering and maintaining the registration of
the shares of common stock under the Securities Act of 1933. Even if we request
advances, the amount of each advance is limited to a maximum draw down of
$350,000 every five trading days.
Further, we may not have enough shares of common stock authorized to issue
shares of common stock under the standby equity distribution agreement depending
upon our stock price. In such event, we will seek stockholder approval of an
increase in the authorized number of shares of our common stock to make
available that number of shares of our common stock as will be required for
issuance under the standby equity distribution agreement. Although a majority of
our stockholders have indicated a willingness to vote in favor of an increase in
the authorized number of shares of our common stock, we may not be able to
obtain a stockholder vote in favor of such an increase in a timely manner or at
all. In addition, we may be required to file a proxy statement or information
statement with the Securities Exchange Commission prior to taking certain
corporate actions necessary to increase our authorized number of shares. In such
event, we may not be able to file or obtain Securities Exchange Commission
approval of a proxy or information statement on a timely basis or at all.
o 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.
18
FORWARD LOOKING STATEMENTS
This prospectus contains certain forward-looking statements and information that
is based on the beliefs of our management, assumptions made by our management
and information currently available to our management. The statements contained
in this prospectus relating to matters that are not historical facts are
forward-looking statements that involve risks and uncertainties, including, but
not limited to, the successful commercialization of our products, future demand
for our products, general economic conditions, government regulation,
competition and customer strategies, changes in our business strategy or
development plans, capital deployment, business disruptions, our ability to
consummate future financings and other risks and uncertainties, certain of which
are beyond our control. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may differ materially from those described herein as anticipated, believed,
estimated or expected.
Forward-looking statements are based on our management's current views and
assumptions and involve unknown risks that could cause actual results,
performance or events to differ materially from those expressed or implied in
those statements. These risks include, but are not limited to, the risks set
forth under the caption "Risk Factors."
Information included or incorporated by reference in this prospectus may contain
forward-looking statements. This information may involve known and unknown
risks, uncertainties and other factors which may cause our actual results,
performance or achievements to be materially different from the future results,
performance or achievements expressed or implied by any forward-looking
statements.
Forward-looking statements, which involve assumptions and describe our future
plans, strategies and expectations, are generally identifiable by use of the
words "may," "will," "should," "expect," "anticipate," "estimate," "believe,"
"intend" or "project" or the negative of these words or other variations on
these words or comparable terminology.
This prospectus contains forward-looking statements, including statements
regarding, among other things, (a) our projected sales and profitability, (b)
our growth strategies, (c) anticipated trends in our industry, (d) our future
financing plans and (e) our anticipated needs for working capital. These
statements may be found under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," as well as in this
prospectus generally. Actual events or results may differ materially from those
discussed in forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under "Risk Factors" and
matters described in this prospectus generally. In light of these risks and
uncertainties, the forward-looking statements contained in this prospectus may
not in fact occur.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered and
sold from time to time by certain selling stockholders. There will be no
proceeds to us from the sale of shares of common stock in this offering.
However, we will receive cash proceeds from the sale of shares of common stock
to Cornell Capital Partners, L.P. ("Cornell Capital") under the standby equity
distribution agreement (the "SEDA"). The purchase price of the shares purchased
under the SEDA will be equal to 97% of the lowest volume weighted average price
of our common stock on the Over-the-Counter Bulletin Board ("OTC-BB") or other
principal trading market on which our common stock is traded as quoted by
Bloomberg, L.P. for the five trading days immediately following the date upon
which we request an advance under the SEDA. In addition, Cornell Capital will
retain a cash fee of 5% from the proceeds received by us for each advance under
the standby equity distribution agreement for a total effective discount to the
market price of our common stock of 8%. Cornell Capital will receive the
proceeds from the sale of shares it purchases from us under the SEDA to the
extent it chooses to sell those shares.
We do not expect to draw down the full dollar amount available under the SEDA.
We currently expect the total amount of our draw downs to be in the $2 million
range. The table below illustrates our estimated use of the cash proceeds we
receive from sale of shares to Cornell Capital under the SEDA assuming various
levels of funding under the SEDA:
19
========================================================================================
Assumed Funding Level under SEDA $ 2,500,000 $ 5,000,000 $ 7,500,000 $10,000,000
Assumed Expenses $ 500,000 $ 700,000 $ 900,000 $ 1,100,000
Estimated Net Proceeds $ 2,000,000 $ 4,300,000 $ 6,600,000 $ 8,900,000
- ----------------------------------------------------------------------------------------
Operations $ 400,000 $ 400,000 $ 400,000 $ 400,000
Marketing $ 800,000 $2,250,000 $2,250,000 $3,300,000
Sales $ 250,000 $ 250,000 $ 250,000 $ 250,000
Research and Development $ 400,000 $ 600,000 $1,500,000 $1,900,000
Product Design $ 50,000 $ 100,000 $ 100,000 $ 100,000
New Personnel -- $ 400,000 $ 400,000 $ 680,000
Equipment and Installation -- -- -- $2,140,000
Working Capital $ 100,000 $ 300,000 $1,700,000 $ 130,000
================================================================================
The amounts listed above are estimates. Our Board of Directors has broad
discretion to spend the proceeds for other business purposes if our Board of
Directors determines it to be in our best interest. Thus, the actual amount
expended to finance any category of expenses may be increased or decreased or
reallocated to new uses by our Board of Directors, in its discretion. To the
extent our expenditures are less than projected, the excess funds will be used
for general working capital purposes. We may use working capital to acquire
complementary products or businesses or otherwise form ventures or alliances
with complementary businesses, possibly including assisted living or long-term
assisted care facilities and would care clinics that utilize our products. We
have not identified any potential acquisition or joint venture targets.
The SEDA provides that we may use the net proceeds we receive from the sale of
shares to Cornell Capital under the SEDA for general corporate purposes,
including the payment of loans we incur and for working capital purposes. The
SEDA prohibits us from using any proceeds for the payment (or loan for the
payment) of any judgment or other liability incurred by any of our officers,
directors or employees, except for any liability owed to such person for
services rendered or if we have indemnified such person from liability.
PLAN OF DISTRIBUTION
The selling stockholders may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately-negotiated transactions;
o broker-dealers may agree with the selling stockholders to sell
a specified number of such shares at a stipulated price per
share;
o through the writing of options on the shares;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
20
The selling stockholders shall have the sole and absolute discretion not to
accept any purchase offer or make any sale of shares if they deem the purchase
price to be unsatisfactory at any particular time.
The selling stockholders may pledge their shares to their brokers under the
margin provisions of customer agreements. If a selling stockholder defaults on a
margin loan, the broker may, from time to time, offer and sell the pledged
shares.
The selling stockholders may also sell the shares directly to market makers
acting as principals and/or broker-dealers acting as agents for themselves or
their customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that selling stockholders will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price.
Upon effecting the sale of any of the shares offered in this prospectus, Cornell
Capital will, and any brokers, dealers or agents, will be deemed "underwriters"
as that term is defined under the Securities Act of 1933 (the "Securities Act"),
or the Securities Exchange Act of 1934 (the "Exchange Act"), or the rules and
regulations under such acts. Any commissions and any profit on the resale of the
shares received by Cornell Capital, or any broker-dealers or agents deemed to be
underwriters, will be deemed to be underwriting commissions or discounts under
the Securities Act.
The selling stockholders, alternatively, may sell all or any part of the shares
offered in this prospectus through an underwriter. No selling stockholder has
entered into any agreement with a prospective underwriter and may not enter into
any such agreement in the future.
If a selling stockholder notifies us that they have a material arrangement with
a broker-dealer for the resale of the common stock, then we would be required to
amend this prospectus to describe the agreements between the selling stockholder
and the broker-dealer.
In addition, some or all of the shares offered in this prospectus may not be
issued to, or sold by, the selling stockholders.
INDEMNIFICATION
We have agreed to indemnify the selling stockholders, or their transferees or
assignees, against certain liabilities, including liabilities under the
Securities Act or to contribute to payments the selling stockholder or their
respective transferees or other successors in interest, may be required to make
in respect of such liabilities. The selling stockholders have agreed to
indemnify us against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act, including for any untrue statement of a
material fact with respect to such selling stockholder contained in this
prospectus or an omission to state any material fact necessary to make the
statements with respect to such selling stockholder in this prospectus not
misleading.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing, or otherwise, we have been advised that in the opinion of the
Securities and Exchange Commission (the "SEC") such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
22
STATUTORY UNDERWRITER
Cornell Capital is an "underwriter" within the meaning of the Securities Act in
connection with the sale of common stock under the SEDA. For so long as Cornell
Capital is an "underwriter," Cornell Capital may not sell shares by relying on
Rule 144. Cornell Capital will pay us 97% of the lowest volume weighted average
price of our common stock for the five trading days immediately following the
advance date under the SEDA. In addition, Cornell Capital will retain a cash fee
of 5% from the proceeds received by us for each advance under the SEDA for an
effective total discount to the market price of our common stock of 8%. Cornell
Capital also received a one-time commitment fee of 1,465,065 shares of our
common stock, including 293,013 shares held by its transferee, and a 12%
interest bearing promissory note in the principal amount of $188,843 from us.
Cornell Capital was formed in February 2000 as a Delaware limited partnership.
Cornell Capital is a domestic hedge fund in the business of investing in and
financing public companies. Cornell Capital does not intend to make a market in
our stock or to otherwise engage in stabilizing or other transactions intended
to help support the stock price. Prospective investors should take these factors
into consideration before purchasing our common stock.
BLUE SKY LAWS
Under the securities laws of certain states, the shares of common stock may be
sold in such states only through registered or licensed brokers or dealers. The
selling stockholders are advised to ensure that any underwriters, brokers,
dealers or agents effecting transactions on behalf of the selling stockholders
are registered to sell securities in all 50 states. In addition, in certain
states the shares of common stock may not be sold unless the shares have been
registered or qualified for sale in such state or an exemption from registration
or qualification is available and is complied with.
COSTS OF REGISTRATION
We will pay all the expenses incident to the registration, offering and sale of
the shares of common stock to the public hereunder other than commissions, fees
and discounts of underwriters, brokers, dealers and agents. We have agreed to
indemnify Cornell Capital and its controlling persons against certain
liabilities, including liabilities under the Securities Act. We estimate that
the expenses of the offering to be borne by us will be approximately $300,000.
We estimate that the offering expenses will consist of: a SEC registration fee
of $3,883, transfer agent expenses of $2,500, printing expenses of $30,000, blue
sky fees and expenses of $2,500, accounting fees of $100,000, legal fees of
$150,000 and miscellaneous expenses of $11,117. We will not receive any proceeds
from the sale of any of the shares of common stock by the selling stockholders.
We will, however, receive proceeds from the sale of common stock under the SEDA.
23
REGULATION M
The selling stockholders should be aware that the anti-manipulation provisions
of Regulation M under the Exchange Act will apply to purchases and sales of
shares of common stock by the selling stockholders, and that there are
restrictions on market-making activities by persons engaged in the distribution
of the shares. Under Regulation M, the selling stockholders or their agents may
not bid for, purchase, or attempt to induce any person to bid for or purchase,
shares of our common stock while such selling stockholders are distributing
shares covered by this prospectus. The selling stockholders are not permitted to
cover short sales by purchasing shares while the distribution is taking place.
The selling stockholders are advised that if a particular offer of common stock
is to be made on terms constituting a material change from the information set
forth above with respect to the plan of distribution, then, to the extent
required, a post-effective amendment to the registration statement of which this
prospectus forms a part must be filed with the SEC.
24
SELLING STOCKHOLDERS
The following table presents information regarding the selling stockholders. A
description of each selling stockholder's relationship to us and how each
selling stockholder acquired or will acquire the shares to be sold in this
offering is detailed in the information immediately following this table.
Percentage of
Shares Shares to Shares to Shares to be
Beneficially be Acquired be Sold In Beneficially
Owned Before Under the the Owned After
Selling Stockholder Offering (1) SEDA(2) Offering(2) the Offering
- ---------------------- ------------ ----------- ----------- -------------
Cornell Capital
Partners, L.P.(3) 1,172,052 206,185,567 207,357,619 0%
Yonah Kopstick 293,013 0 293,013 0%
Monitor Capital,
Inc.(4) 90,909 0 90,909 0%
North Coast 246,849 0 246,849 0%
Securities
Corporation(5)
James Fuller(6) 120,000 0 120,000 0%
Frank Pasterczyk(7) 476,000 0 476,000 0%
Capital Investing,
LLC(8) 3,613,513 0 3,613,513 0%
Portfolio Lenders
II, LLC(9) 100,000 0 100,000 0%
Woody's Tomato Corp.
401(K) did 8/1/2001,
Thomas R. Forrest
and Lynn F. Teachey,
Trustees(10) 5,195,882 0 5,195,882 0%
H. Dale Herring(11) 31,123,529 0 31,123,529 0%
Leonard Vonhof(12) 22,618,779 0 22,618,779 0%
Walter K. Hoch(13) 1,325,787 0 1,325,787 0%
Alvin E. Parker(14) 4,287,353 0 4,287,353 0%
Richard and Dana Diment(36) 5,658,071 0 5,658,071 0%
Troy Taylor(37) 639,669 0 639,669 0%
Gordon Boyer(17) 381,176 0 381,176 0%
Judith M. Guthrie(15) 6,224,706 0 6,224,706 0%
BSSC C/F Barbara M
Holder - IRA(18) 1,143,529 0 1,143,529 0%
Orthopaedic
Multispecialty
Network Savings Plan
& Trust(19) 1,067,294 0 1,067,294 0%
Mark A. McDaniel(20) 3,112,353 0 3,112,353 0%
Dr. Dana E. Fender(16) 762,353 0 762,353 0%
Wayne Bernitt(21) 8,357,988 0 8,357,988 0%
Daryll W. Futch(22) 5,462,353 0 5,462,353 0%
Steven D. Alford(17) 381,176 0 381,176 0%
David W. and Judith
N. True(23) 3,442,607 0 3,442,607 0%
William H. Burger(33) 1,401,654 0 1,401,654 0%
Joseph Fund Partners
LP(24) 1,020,478 0 1,020,478 0%
Jennifer Sasaki(25) 6,483,576 0 6,483,576 0%
Jacson Long(26) 4,332,195 0 4,332,195 0%
Paul Cartmell(27) 19,808,485 0 19,808,485 0%
Franklin Brown(34) 4,133,365 0 4,133,365 0%
Dr. Johnny Colegrove(35) 4,332,058 0 4,332,058 0%
William K. and
Theresa A. Hood(28) 3,157,058 0 3,157,058 0%
Dr. Stanley Marable(29) 1,410,000 0 1,410,000 0%
William Scheel(30) 11,183,365 0 11,183,365 0%
John Philip Reeves(31) 15,275,000 0 15,275,000 0%
Joy Setina(28) 3,157,058 0 3,157,058 0%
MultiGrow Advisors,
LLC(32) 500,000 0 500,000 0%
TOTAL 183,491,233 206,185,567 389,676,800 0%
25
* Less than 1%
(1) Applicable percentage of ownership is based on 28,097,657 shares of common
stock outstanding as of November 1, 2006, together with securities
exercisable or convertible into shares of common stock within 60 days of
November 1, 2006. Beneficial ownership is determined in accordance with
the rules of the SEC and generally includes voting or investment power
with respect to securities. Shares of common stock subject to securities
exercisable or convertible into shares of common stock that are currently
exercisable or exercisable within 60 days of November 1, 2006 are deemed
to be beneficially owned by the person holding such securities for the
purpose of computing the percentage of ownership of such person, but are
not treated as outstanding for the purpose of computing the percentage
ownership of any other person. In addition, shares of common stock
issuable as interest on the convertible notes issued in our private
placements of units closed in 2005 and 2006 have been included in the
calculation of number of shares beneficially owned by each noteholder
although only a portion of such interest shares will have been earned and
accrued as of or within 60 days of November 1, 2006.
(2) We cannot predict the actual number of shares of common stock that will be
issued pursuant to the SEDA, in part because the purchase price of the
shares under the SEDA will fluctuate based on prevailing market conditions
and we have not determined the total amount of advances under the SEDA
that we intend to draw. Therefore, the number of shares of common stock
registered in connection with the SEDA is based on our good-faith estimate
of the maximum number of shares that we will issue with respect thereto
based upon current market prices of our common stock.
(3) Cornell Capital may purchase up to $10.0 million worth of our common stock
pursuant to the SEDA at a price equal to 97% of the lowest volume weighted
average price of our common stock as quoted by Bloomberg, L.P. for the
five consecutive trading days after the date upon which we request an
advance under the SEDA. In addition, Cornell Capital will retain a cash
fee of 5% from the proceeds received by us for each advance under the SEDA
for a total effective discount to the market price of our common stock of
8%. This 8% discount is an underwriting discount. The terms of the SEDA
prohibit Cornell Capital from acquiring such number of shares that would
result in its holding in excess of 9.9% of our outstanding common stock.
The figures in this row assume that this provision does not apply.
Yorkville Advisors, LLC ("Yorkville") is the general partner of Cornell
Capital. Mark Angelo, the managing member of Yorkville and Yorkville
Advisors Management, LLC ("Yorkville Management"), the investment manager
of Cornell Capital, has voting and investment control over the securities
held by Cornell Capital. Mr. Angelo disclaims beneficial ownership of our
common stock held by Cornell Capital. Cornell Capital is an "underwriter"
within the meaning of the Securities Act in connection with the sale of
common stock under the SEDA.
(4) Hsiao-Wen Kao has voting and investment control over the securities held
by Monitor Capital, Inc. ("Monitor"). Mr. Kao disclaims beneficial
ownership of our common stock held by Monitor.
(5) Represents shares issuable pursuant to warrants to purchase shares of
common stock issued to North Coast Securities Corporation ("North Coast").
On September 23, 2005, 48,724 warrants were issued as compensation for
services rendered as placement agent in connection with our private
placement of units closed in August and September 2005 (the "2005 Private
Placement") with an exercise price of $0.48 per share, and 10,000 warrants
were issued as compensation for consulting services under our Financial
Advisory and Investment Banking Services Agreement (the "Financial
Consulting Agreement") with an exercise price of $0.50 per share. On
February 17, 2006, 188,125 warrants were issued as compensation for
services rendered as placement agent in connection with our private
placement of units closed in February 2006 (the "2006 Private Placement")
with exercise prices ranging from $0.17 to $0.18 per share. Frank
Pasterczyk is president of North Coast and has voting and investment
control over the securities held by North Coast. Mr. Pasterczyk disclaims
beneficial ownership of our common stock held by North Coast.
(6) Represents 20,000 shares issuable pursuant to warrants to purchase shares
of common stock issued to North Coast designee on September 23, 2005 as
compensation for consulting services under our Financial Consulting
Agreement with an exercise price of $0.50 per share and 100,000 shares
issuable pursuant to warrants to purchase shares of common stock issued to
North Coast designee on February 17, 2006 as compensation for services
rendered as placement agent in connection with our 2006 Private Placement
with an exercise price of $0.17 per share. Mr. Fuller is an "underwriter"
within the meaning of the Securities Act in connection with the sale of
these securities.
(7) Represents 20,000 shares issuable pursuant to warrants to purchase shares
of common stock issued to North Coast designee on September 23, 2005 as
compensation for consulting services under our Financial Consulting
Agreement with an exercise price of $0.50 per share and 456,000 shares
issuable pursuant to warrants to purchase shares of common stock issued to
North Coast designee on February 17, 2006 as compensation for services
rendered as placement agent in connection with our 2006 Private Placement
with an exercise price of $0.17 per share. Mr. Pasterczyk is an
"underwriter" within the meaning of the Securities Act in connection with
the sale of these securities.
(8) Represents shares issuable pursuant to warrants to purchase shares of
common stock issued to North Coast designee. On September 23, 2005,
438,513 warrants were issued as compensation for services rendered as
placement agent in connection with the 2005 Private Placement with
exercise prices ranging from $0.30 to $0.48 per share, and 450,000
warrants were issued as compensation for consulting services under our
Financial Consulting Agreement with an exercise price of $0.50 per share.
On February 17, 2006, 2,725,000 warrants were issued as compensation for
services rendered as placement agent in connection with our 2006 Private
Placement with exercise prices ranging from $0.17 to $0.18 per share.
Capital Investing, LLC ("Capital Investing") is prohibited from converting
such number of shares as would result in its holding in excess of 4.99% of
our outstanding common stock, which provision may be waived by the
stockholder upon 65 days' notice. The figures in this row assume that this
provision does not apply. Capital Investing is an "underwriter" within the
meaning of the Securities Act in connection with the sales of these
securities. Paul Kotos has voting and investment control over the
securities held by Capital Investing.
(9) Represents shares issuable pursuant to warrants issued on September 23,
2005 as compensation for its agreement to provide future financing of
inventory acquisition and product sales growth. These warrants have an
exercise price of $0.50 per share. The JGM Family Trust is the managing
member of Portfolio Lenders II, LLC ("Portfolio Lenders"). Thomas
Gallagher is the trustee of the JGM Family Trust and, in such capacity,
has voting and investment control over the securities held by Portfolio
Lenders. Mr. Gallagher disclaims beneficial ownership of our common stock
held by Portfolio Lenders.
26
(10) Represents 588,235 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.0425 per
share), 141,176 shares of common stock issuable as interest on the 8%
convertible notes (at an assumed conversion price of $0.0425 per share and
assuming a three-year term) and 1,176,471 shares of common stock issuable
upon exercise of warrants (at assumed exercise prices ranging from $0.0531
to $0.0638 assuming a note conversion price of $0.0425 per share)
purchased in the 2005 Private Placement. Represents 350,000 shares of
common stock issuable upon the conversion of 8% convertible notes (at an
assumed conversion price of $0.04 per share), 140,000 shares of common
stock issuable as interest on the 8% convertible notes (at an assumed
conversion price of $0.04 per share and assuming a five-year term) and
2,800,000 shares of common stock issuable upon exercise of warrants (at
assumed exercise prices ranging from $0.04 to $0.06 assuming a note
conversion price of $0.04 per share) purchased in the 2006 Private
Placement. This stockholder is prohibited from converting such number of
shares as would result in its holding in excess of 4.99% of our
outstanding common stock, which provision may be waived by the stockholder
upon 65 days' notice. The figures in this row assume that this provision
does not apply.
(11) Represents 2,352,941 shares of common stock issuable upon the conversion
of 8% convertible notes (at an assumed conversion price of $0.0425 per
share), 564,706 shares of common stock issuable as interest on the 8%
convertible notes (at an assumed conversion price of $0.0425 per share and
assuming a three-year term) and 4,705,882 shares of common stock issuable
upon exercise of warrants (at assumed exercise prices ranging from $0.531
to $0.0638 assuming a note conversion price of $0.0425 per share)
purchased in the 2005 Private Placement. Represents 2,500,000 shares of
common stock issuable upon the conversion of 8% convertible notes (at an
assumed conversion price of $0.04 per share), 1,000,000 shares of common
stock issuable as interest on the 8% convertible notes (at an assumed
conversion price of $0.04 per share and assuming a five-year term) and
20,000,000 shares of common stock issuable upon exercise of warrants (at
assumed exercise prices ranging from $0.04 to $0.06 assuming a note
conversion price of $0.04 per share) purchased in the 2006 Private
Placement. This stockholder is prohibited from converting such number of
shares as would result in its holding in excess of 4.99% of our
outstanding common stock, which provision may be waived by the stockholder
upon 65 days' notice. The figures in this row assume that this provision
does not apply.
(12) Represents 142,985 shares of common stock. Represents 3,529,412 shares of
common stock issuable upon the conversion of 8% convertible notes (at an
assumed conversion price of $0.0425 per share), 847,059 shares of common
stock issuable as interest on the 8% convertible notes (at an assumed
conversion price of $0.0425 per share and assuming a three-year term) and
7,058,824 shares of common stock issuable upon exercise of warrants (at
assumed exercise prices ranging from $0.0531 to $0.0638 assuming a note
conversion price of $0.0425 per share) purchased in the 2005 Private
Placement. Represents 1,057,500 shares of common stock issuable upon the
conversion of 8% convertible notes (at an assumed conversion price of
$0.04 per share), 423,000 shares of common stock issuable as interest on
the 8% convertible notes (at an assumed conversion price of $0.04 per
share and assuming a five-year term) and 9,560,000 shares of common stock
issuable upon exercise of warrants (275,000 at $0.0560, 412,500 at
$0.0700, 412,500 at $0.0840, and 8,460,000 at assumed exercise prices
ranging from $0.04 to $0.06 assuming a note conversion price of $0.04 per
share) purchased in the 2006 Private Placement. This stockholder is
prohibited from converting such number of shares that would result in its
holding in excess of 4.99% of our outstanding common stock, which
provision may be waived by the stockholder upon 65 days' notice. The
figures in this row assume that this provision does not apply.
(13) Represents 90,425 shares of common stock. Represents 329,412 shares of
common stock issuable upon the conversion of 8% convertible notes (at an
assumed conversion price of $0.0425 per share), 79,059 shares of common
stock issuable as interest on the 8% convertible notes (at an assumed
conversion price of $0.0425 per share and assuming a three-year term) and
826,892 shares of common stock issuable upon exercise of warrants (84,034
at $0.0744, 84,034 at $0.0893, and 658,824 at assumed exercise prices
ranging from $0.531 to $0.0638 assuming a note conversion price of $0.0425
per share) purchased in the 2005 Private Placement.
(14) Represents 235,924 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.0425 per
share), 56,471 shares of common stock issuable as interest on the 8%
convertible notes (at an assumed conversion price of $0.0425 per share and
assuming a three-year term) and 470,588 shares of common stock issuable
upon exercise of warrants (at assumed exercise prices ranging from $0.0531
to $0.0638 assuming a note conversion price of $0.0425 per share)
purchased in the 2005 Private Placement. Represents 375,000 shares of
common stock issuable upon the conversion of 8% convertible notes (at an
assumed conversion price of $0.04 per share), 150,000 shares of common
stock issuable as interest on the 8% convertible notes (at an assumed
conversion price of $0.04 per share and assuming a five-year term) and
3,000,000 shares of common stock issuable upon exercise of warrants (at
assumed exercise prices ranging from $0.04 to $0.06 assuming a note
conversion price of $0.04 per share) purchased in the 2006 Private
Placement.
(15) Represents 470,588 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.0425 per
share), 112,941 shares of common stock issuable as interest on the 8%
convertible notes (at an assumed conversion price of $0.0425 per share and
assuming a three-year term) and 941,176 shares of common stock issuable
upon exercise of warrants (at assumed exercise prices ranging from $0.0531
to $0.0638 assuming a note conversion price of $0.0425 per share)
purchased in the 2005 Private Placement. Represents 500,000 shares of
common stock issuable upon the conversion of 8% convertible notes (at an
assumed conversion price of $0.04 per share), 200,000 shares of common
stock issuable as interest on the 8% convertible notes (at an assumed
conversion price of $0.04 per share and assuming a five-year term) and
4,000,000 shares of common stock issuable upon exercise of warrants (at
assumed exercise prices ranging from $0.04 to $0.06 assuming a note
conversion price of $0.04 per share) purchased in the 2006 Private
Placement. This stockholder is prohibited from converting such number of
shares as would result in its holding in excess of 4.99% of our
outstanding common stock, which provision may be waived by the stockholder
upon 65 days' notice. The figures in this row assume that this provision
does not apply.
(16) Represents 235,294 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.0425 per
share), 56,471 shares of common stock issuable as interest on the 8%
convertible notes (at an assumed conversion price of $0.0425 per share and
assuming a three-year term) and 470,588 shares of common stock issuable
upon exercise of warrants (at assumed exercise prices ranging from $0.0531
to $0.0638 assuming a note conversion price of $0.0425 per share)
purchased in the 2005 Private Placement.
(17) Represents 117,647 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.0425 per
share), 28,235 shares of common stock issuable as interest on the 8%
convertible notes (at an assumed conversion price of $0.0425 per share and
assuming a three-year term) and 235,294 shares of common stock issuable
upon exercise of warrants (at assumed exercise prices ranging from $0.0531
to $0.0638 assuming a note conversion price of $0.0425 per share)
purchased in the 2005 Private Placement.
27
(18) Represents 352,941 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.0425 per
share), 84,706 shares of common stock issuable as interest on the 8%
convertible notes (at an assumed conversion price of $0.0425 per share and
assuming a three-year term) and 705,882 shares of common stock issuable
upon exercise of warrants (at assumed exercise prices ranging from $0.0531
to $0.0638 assuming a note conversion price of $0.0425 per share)
purchased in the 2005 Private Placement.
(19) Represents 329,412 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.0425 per
share), 79,059 shares of common stock issuable as interest on the 8%
convertible notes (at an assumed conversion price of $0.0425 per share and
assuming a three-year term) and 658,824 shares of common stock issuable
upon exercise of warrants (at assumed exercise prices ranging from $0.0531
to $0.0638 assuming a note conversion price of $0.0425 per share)
purchased in the 2005 Private Placement. Alexander Michael III is the
trustee of the Orthopaedic Multispecialty Network Savings Plan and Trust
(the "Trust") and, in such capacity, has voting and investment control
over the securities held by the Trust. Mr. Michael disclaims beneficial
ownership of our common stock held by the Trust.
(20) Represents 235,294 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.0425 per
share), 56,471 shares of common stock issuable as interest on the 8%
convertible notes (at an assumed conversion price of $0.0425 per share and
assuming a three-year term) and 470,588 shares of common stock issuable
upon exercise of warrants (at assumed exercise prices ranging from $0.0531
to $0.0638 assuming a note conversion price of $0.0425 per share)
purchased in the 2005 Private Placement. Represents 250,000 shares of
common stock issuable upon the conversion of 8% convertible notes (at an
assumed conversion price of $0.04 per share), 100,000 shares of common
stock issuable as interest on the 8% convertible notes (at an assumed
conversion price of $0.04 per share and assuming a five-year term) and
2,000,000 shares of common stock issuable upon exercise of warrants (at
assumed exercise prices ranging from $0.04 to $0.06 assuming a note
conversion price of $0.04 per share) purchased in the 2006 Private
Placement.
(21) Represents 143,076 shares of common stock. Represents 941,176 shares of
common stock issuable upon the conversion of 8% convertible notes (at an
assumed conversion price of $0.0425 per share), 225,882 shares of common
stock issuable as interest on the 8% convertible notes (at an assumed
conversion price of $0.0425 per share and assuming a three-year term) and
1,882,353 shares of common stock issuable upon exercise of warrants (at
assumed exercise prices ranging from $0.0531 to $0.0638 assuming a note
conversion price of $0.0425 per share) purchased in the 2005 Private
Placement. Represents 432,500 shares of common stock issuable upon the
conversion of 8% convertible notes (at an assumed conversion price of
$0.04 per share), 173,000 shares of common stock issuable as interest on
the 8% convertible notes (at an assumed conversion price of $0.04 per
share and assuming a five-year term) and 4,560,000 shares of common stock
issuable upon exercise of warrants (275,000 at $0.0560, 412,500 at
$0.0700, 412,500 at $0.0840, and 3,460,000 at assumed exercise prices
ranging from $0.04 to $0.06 assuming a note conversion price of $0.04 per
share) purchased in the 2006 Private Placement. This stockholder is
prohibited from converting such number of shares as would result in its
holding in excess of 4.99% of our outstanding common stock, which
provision may be waived by the stockholder upon 65 days' notice. The
figures in this row assume that this provision does not apply.
(22) Represents 235,294 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.0425 per
share), 56,471 shares of common stock issuable as interest on the 8%
convertible notes (at an assumed conversion price of $0.0425 per share and
assuming a three-year term) and 470,588 shares of common stock issuable
upon exercise of warrants (at assumed exercise prices ranging from $0.0531
to $0.0638 assuming a note conversion price of $0.0425 per share)
purchased in the 2005 Private Placement. Represents 500,000 shares of
common stock issuable upon the conversion of 8% convertible notes (at an
assumed conversion price of $0.04 per share), 200,000 shares of common
stock issuable as interest on the 8% convertible notes (at an assumed
conversion price of $0.04 per share and assuming a five-year term) and
4,000,000 shares of common stock issuable upon exercise of warrants (at
assumed exercise prices ranging from $0.04 to $0.06 assuming a note
conversion price of $0.04 per share) purchased in the 2006 Private
Placement. This stockholder is prohibited from converting such number of
shares as would result in its holding in excess of 4.99% of our
outstanding common stock, which provision may be waived by the stockholder
upon 65 days' notice. The figures in this row assume that this provision
does not apply.
(23) Represents 270,170 shares of common stock. Represents 823,529 shares of
common stock issuable upon the conversion of 8% convertible notes (at an
assumed conversion price of $0.0425 per share), 197,647 shares of common
stock issuable as interest on the 8% convertible notes (at an assumed
conversion price of $0.0425 per share and assuming a three-year term) and
2,151,261 shares of common stock issuable upon exercise of warrants
(252,101 at $0.0744, 252,101 at $0.0893, and 1,647,059 at assumed exercise
prices ranging from $0.0531 to $0.0638 assuming a note conversion price of
$0.0425 per share) purchased in the 2005 Private Placement.
28
(24) Represents 90,057 shares of common stock. Represents 235,294 shares of
common stock issuable upon the conversion of 8% convertible notes (at an
assumed conversion price of $0.0425 per share), 56,471 shares of common
stock issuable as interest on the 8% convertible notes (at an assumed
conversion price of $0.0425 per share and assuming a three-year term) and
638,656 shares of common stock issuable upon exercise of warrants (84,034
at $0.0744, 84,034 at $0.0893, and 470,588 at assumed exercise prices
ranging from $0.0531 to $0.0638 assuming a note conversion price of
$0.0425 per share) purchased in the 2005 Private Placement. Thomas
Troncalli has voting and investment control over the securities held by
Joseph Fund Partners LP.
(25) Represents 143,076 shares of common stock. Represents 557,500 shares of
common stock issuable upon the conversion of 8% convertible notes (at an
assumed conversion price of $0.04 per share), 223,000 shares of common
stock issuable as interest on the 8% convertible notes (at an assumed
conversion price of $0.04 per share and assuming a five-year term) and
5,560,000 shares of common stock issuable upon exercise of warrants
(275,000 at $0.0560, 412,500 at $0.0700, 412,500 at $0.0840, and 4,460,000
at assumed exercise prices ranging from $0.04 to $0.06 assuming a note
conversion price of $0.04 per share) purchased in the 2006 Private
Placement. This stockholder is prohibited from converting such number of
shares as would result in its holding in excess of 4.99% of our
outstanding common stock, which provision may be waived by the stockholder
upon 65 days' notice. The figures in this row assume that this provision
does not apply.
(26) Represents 92,907 shares of common stock. Represents 375,000 shares of
common stock issuable upon the conversion of 8% convertible notes (at an
assumed conversion price of $0.04 per share), 150,000 shares of common
stock issuable as interest on the 8% convertible notes (at an assumed
conversion price of $0.04 per share and assuming a five-year term) and
3,714,288 shares of common stock issuable upon exercise of warrants
(178,572 at $0.0560, 267,858 at $0.0700, 267,858 at $0.0840, and 3,000,000
at assumed exercise prices ranging from $0.04 to $0.06 assuming a note
conversion price of $0.04 per share) purchased in the 2006 Private
Placement.
(27) Represents 142,985 shares of common stock. Represents 1,932,500 shares of
common stock issuable upon the conversion of 8% convertible notes (at an
assumed conversion price of $0.04 per share), 773,000 shares of common
stock issuable as interest on the 8% convertible notes (at an assumed
conversion price of $0.04 per share and assuming a five-year term) and
16,960,000 shares of common stock issuable upon exercise of warrants
(400,000 at $0.05, 275,000 at $0.0560, 412,500 at $0.0700, 412,500 at
$0.0840, and 15,460,000 at assumed exercise prices ranging from $0.04 to
$0.06 assuming a note conversion price of $0.04 per share) purchased in
the 2006 Private Placement. This stockholder is prohibited from converting
such number of shares as would result in its holding in excess of 4.99% of
our outstanding common stock, which provision may be waived by the
stockholder upon 65 days' notice. The figures in this row assume that this
provision does not apply.
(28) Represents 92,770 shares of common stock. Represents 250,000 shares of
common stock issuable upon the conversion of 8% convertible notes (at an
assumed conversion price of $0.04 per share), 100,000 shares of common
stock issuable as interest on the 8% convertible notes (at an assumed
conversion price of $0.04 per share and assuming a five-year term) and
2,714,288 shares of common stock issuable upon exercise of warrants
(178,572 at $0.0560, 267,858 at $0.0700, 267,858 at $0.0840, and 2,000,000
at assumed exercise prices ranging from $0.04 to $0.06 assuming a note
conversion price of $0.04 per share) purchased in the 2006 Private
Placement.
(29) Represents 150,000 shares of common stock issuable upon the conversion of
8% convertible notes (at an assumed conversion price of $0.04 per share),
60,000 shares of common stock issuable as interest on the 8% convertible
notes (at an assumed conversion price of $0.04 per share and assuming a
five-year term) and 1,200,000 shares of common stock issuable upon
exercise of warrants (at assumed exercise prices ranging from $0.04 to
$0.06 assuming a note conversion price of $0.04 per share) purchased in
the 2006 Private Placement.
(30) Represents 142,865 shares of common stock. Represents 1,057,500 shares of
common stock issuable upon the conversion of 8% convertible notes (at an
assumed conversion price of $0.04 per share), 423,000 shares of common
stock issuable as interest on the 8% convertible notes (at an assumed
conversion price of $0.04 per share and assuming a five-year term) and
9,560,000 shares of common stock issuable upon exercise of warrants
(275,000 at $0.0560, 412,500 at $0.0700, 412,500 at $0.0840, and 8,460,000
at assumed exercise prices ranging from $0.04 to $0.06 assuming a note
conversion price of $0.04 per share) purchased in the 2006 Private
Placement. This stockholder is prohibited from converting such number of
shares as would result in its holding in excess of 4.99% of our
outstanding common stock, which provision may be waived by the stockholder
upon 65' days notice. The figures in this row assume that this provision
does not apply.
(31) Represents 1,625,000 shares of common stock issuable upon the conversion
of 8% convertible notes (at an assumed conversion price of $0.04 per
share), 650,000 shares of common stock issuable as interest on the 8%
convertible notes (at an assumed conversion price of $0.04 per share and
assuming a five-year term) and 13,000,000 shares of common stock issuable
upon exercise of warrants (at assumed exercise prices ranging from $0.04
to $0.06 assuming a note conversion price of $0.04 per share) purchased in
the 2006 Private Placement. This stockholder is prohibited from converting
such number of shares as would result in its holding in excess of 4.99% of
our outstanding common stock, which provision may be waived by the
stockholder upon 65' days notice. The figures in this row assume that this
provision does not apply.
(32) Represents shares issuable pursuant to warrants issued on July 31, 2005 as
compensation for consulting services under our Consulting Agreement and
have an exercise price of $0.50 per share. John Murphy has voting and
investment control over the securities held by MultiGrow Advisers, LLC.
(33) Represents 90,057 shares of common stock. Represents 352,941 shares of
common stock issuable upon the conversion of 8% convertible notes (at an
assumed conversion price of $0.0425 per share), 84,706 shares of common
stock issuable as interest on the 8% convertible notes (at an assumed
conversion price of $0.0425 per share and assuming a three-year term) and
873,950 shares of common stock issuable upon exercise of warrants (84,034
at $0.0744, 84,034 at $0.0893, and 705,882 at assumed exercise prices
ranging from $0.0531 to $0.0638 assuming a note conversion price of
$0.0425 per share) purchased in the 2005 Private Placement.
(34) Represents 142,865 shares of common stock. Represents 307,500 shares of
common stock issuable upon the conversion of 8% convertible notes (at an
assumed conversion price of $0.04 per share), 123,000 shares of common
stock issuable as interest on the 8% convertible notes (at an assumed
conversion price of $0.04 per share and assuming a five-year term) and
3,560,000 shares of common stock issuable upon exercise of warrants
(275,000 at $0.0560, 412,500 at $0.0700, 412,500 at $0.0840, and 2,460,000
at assumed exercise prices ranging from $0.04 to $0.06 assuming a note
conversion price of $0.04 per share) purchased in the 2006 Private
Placement.
(35) Represents 92,770 shares of common stock. Represents 375,000 shares of
common stock issuable upon the conversion of 8% convertible notes (at an
assumed conversion price of $0.04 per share), 150,000 shares of common
stock issuable as interest on the 8% convertible notes (at an assumed
conversion price of $0.04 per share and assuming a five-year term) and
3,714,288 shares of common stock issuable upon exercise of warrants
(178,572 at $0.0560, 267,858 at $0.0700, 267,858 at $0.0840, and 3,000,000
at assumed exercise prices ranging from $0.04 to $0.06 assuming a note
conversion price of $0.04 per share) purchased in the 2006 Private
Placement.
(36) Represents 142,865 shares of common stock. Represents 470,588 shares of
common stock issuable upon the conversion of 8% convertible notes (at an
assumed conversion price of $0.0425 per share), 112,941 shares of common
stock issuable as interest on the 8% convertible notes (at an assumed
conversion price of $0.0425 per share and assuming a three-year term) and
941,176 shares of common stock issuable upon exercise of warrants at
assumed exercise prices ranging from $0.0531 to $0.0638 assuming a note
conversion price of $0.0425 per share) purchased in the 2005 Private
Placement. Represents 307,500 shares of common stock issuable upon the
conversion of 8% convertible notes (at an assumed conversion price of
$0.04 per share), 123,000 shares of common stock issuable as interest on
the 8% convertible notes (at an assumed conversion price of $0.04 per
share and assuming a five-year term) and 3,560,000 shares of common stock
issuable upon exercise of warrants (275,000 at $0.0560, 412,500 at
$0.0700, 412,500 at $0.0840, and 2,460,000 at assumed exercise prices
ranging from $0.04 to $0.06 assuming a note conversion price of $0.04 per
share) purchased in the 2006 Private Placement. This stockholder is
prohibited from converting such number of shares as would result in its
holding in excess of 4.99% of our outstanding common stock, which
provision may be waived by the stockholder upon 65 days' notice. The
figures in this row assume that this provision does not apply.
(37) Represents 90,425 shares of common stock. Represents 117,647 shares of
common stock issuable upon the conversion of 8% convertible notes (at an
assumed conversion price of $0.0425 per share), 28,235 shares of common
stock issuable as interest on the 8% convertible notes (at an assumed
conversion price of $0.0425 per share and assuming a three-year term) and
403,362 shares of common stock issuable upon exercise of warrants (84,034
at $0.0744, 84,034 at $0.0893, and 235,294 at assumed exercise prices
ranging from $0.0531 to $0.0638 assuming a note conversion price of
$0.0425 per share) purchased in the 2005 Private Placement.
A description of the selling stockholders' relationship to us and how the
selling stockholders acquired the shares to be sold in this offering is set
forth in the footnotes to the selling stockholders table above and below. Except
as set forth therein, the selling stockholders have not held a position or
office, or had any other material relationship, with us, and we do not expect to
have a continuing relationship with the selling stockholders.
CORNELL CAPITAL
Cornell Capital is the investor under the SEDA. Yorkville is the general partner
of Cornell Capital. All investment decisions of Cornell Capital are made by its
investment manager, Yorkville Management. Mark Angelo, the managing member of
Yorkville and Yorkville Management, makes investment decisions on behalf of
Yorkville and Yorkville Management. Cornell Capital acquired all shares being
registered in this offering in the following financing transaction with us.
In May 2005, we entered into the SEDA with Cornell Capital. Pursuant to the
SEDA, we may, at our discretion, periodically sell to Cornell Capital shares of
common stock for a total purchase price of up to $10.0 million. For each share
of common stock purchased under the SEDA, Cornell Capital will pay us 97% of the
lowest volume weighted average price on the OTC-BB or other principal market on
which our common stock is traded as quoted by Bloomberg, L.P. for the five
trading days immediately following the notice date. Further, Cornell Capital
will retain a cash fee of 5% from each advance under the SEDA for an effective
total discount to the market price of our common stock of 8%. In connection with
the SEDA, Cornell Capital received a commitment fee of 1,465,065 shares of our
common stock, including 293,013 shares held by its transferee, and a 12%
interest bearing promissory note in the principal amount of $188,843 from us.
Cornell Capital does not own or benefit from any other of our debt or equity
securities. Yorkville Management received a structuring fee of $10,000 in
connection with the SEDA and is entitled to receive an additional $5,000 upon
the effectiveness of the registration statement of which this prospectus forms a
part. Yorkville Management will also receive a structuring fee of $500 from the
proceeds of each advance under the SEDA. We are registering 343,642,612 shares
in this offering that may be issued under the SEDA.
Cornell Capital is an "underwriter" within the meaning of the Securities Act in
connection with the sale of common stock under the SEDA.
29
RISKS RELATED TO SALES BY CORNELL CAPITAL
There are certain risks related to sales by Cornell Capital, including:
o The shares will be issued to Cornell Capital based on a discount to
the market rate. As a result, the lower the stock price is at the
time Cornell Capital is issued shares, the greater the likelihood is
that Cornell Capital will receive more shares. This could result in
substantial dilution to the interests of other holders of common
stock.
o To the extent Cornell Capital sells its common stock, our common
stock price may decrease due to the additional shares in the market.
This could allow Cornell Capital to sell greater amounts of common
stock, the sales of which could further depress our stock price.
o The significant downward pressure on the price of our common stock
as Cornell Capital sells material amounts of shares could encourage
short sales by others to the extent permitted by applicable law.
This could place further downward pressure on the price of our
common stock.
o For additional risks related to sales by Cornell Capital, see "Risk
Factors - Risks Related to this Offering".
MONITOR
Monitor is a registered broker-dealer that we engaged to advise us in connection
with the SEDA. Hsiao-Wen Kao makes the investment decisions on behalf of
Monitor. We paid Monitor a fee of 90,909 shares of our common stock. We are
registering these shares in this offering. Monitor is an "underwriter" within
the meaning of the Securities Act in connection with the sale of these
securities.
NORTH COAST SECURITIES CORPORATION
North Coast served as placement agent for us in our 2006 private placement of
units closed in February 2006 and our 2005 private placement of units closed in
August and September 2005.
As consideration for services rendered as placement agent in the 2006 Private
Placement, we paid North Coast fees consisting of:
o $72,000 representing commissions of 12% of the gross offering
proceeds raised by North Coast;
o $18,000 representing a non-accountable expense allowance of 3% of
the gross offering proceeds raised by North Coast;
o warrants to purchase 3,469,125 shares of our common stock at
exercise prices ranging from $0.17 to $0.18 representing 10% of the
number of shares of common stock that would be issuable to investors
in the offering assuming conversion of their 8% notes and exercise
of the related warrants at each closing date, with an exercise price
equal to 110% of the note conversion prices on such date; and
o a due diligence and pre-marketing fee and North Coast's legal fees
for the offering of $15,000.
As consideration for services rendered as placement agent in the 2005 Private
Placement, we paid North Coast fees consisting of:
o $65,760 representing commissions of 12% of the gross offering
proceeds raised by North Coast;
o $16,440 representing a non-accountable expense allowance of 3% of
the gross offering proceeds raised by North Coast;
o warrants to purchase 487,237 shares of our common stock at exercise
prices ranging from $0.30 to $0.48 representing 10% of the number of
shares of common stock that would be issuable to investors in the
offering assuming conversion of their 8% notes and exercise of the
related warrants at each closing date, with an exercise price equal
to 110% of the note conversion prices on such date;
o a due diligence and pre-marketing fee of $25,000; and
o North Coast's legal fees for the offering of $6,690.
As consideration for services pursuant to our Financial Consulting Agreement
with North Coast, we paid North Coast fees of:
o $15,000 ; and
o warrants to purchase 500,000 shares of our common stock at an
exercise price of $0.50.
o In addition, North Coast is entitled to receive a monthly fee of
$5,000 for the 12 month term of the agreement.
The warrants are held by North Coast and its designees. North Coast and its
designees are under "underwriters" within the meaning of the Securities Act in
connection with the sale of these securities.
30
WARRANT HOLDERS
MultiGrow Advisors was issued warrants to purchase up to 500,000 shares of our
common stock at an exercise price of $0.50 per share as compensation for
services rendered to us under our Consulting Agreement. The Consulting Agreement
requires MultiGrow Advisors to advise us with respect to strategic relationships
and alliances in the personal skin care, wound care and pharmaceutical
industries for a term of 12 months. Portfolio Lenders II, LLC was issued
warrants to purchase up to 100,000 shares of our common stock for its agreement
to provide future financing of inventory acquisition and product sales growth.
Paul Cartmell, the bridge lender in our August 2006 bridge loan, was issued
warrants to purchase up to 400,000 shares of our common stock at an exercise
price of $0.05 per share in connection with the making of the bridge loan.
PRIVATE PLACEMENT STOCKHOLDERS
All other selling stockholders included in the registration statement of which
this prospectus forms a part were subscribers in our 2006 or 2005 Private
Placement.
We will file a prospectus supplement to name successors to any named selling
stockholders who are able to use this prospectus to resell securities.
MARKET PRICES AND DIVIDEND POLICY
Our common stock is quoted through various market makers on the Pink Sheets
Electronic Quotation Service, and "bid" and "asked" prices in the common stock
are quoted on the Pink Sheets under the symbol "HRUM". Our common stock was
quoted in the over-the-counter market on the OTC-BB until July 12, 2006. The
following table sets forth certain information with respect to the high and low
bid prices for our common stock as of the close of each of the calendar quarters
of 2006, 2005 and 2004. Such quotations reflect inter-dealer prices, without
retail mark-ups, mark-downs or commissions, and may not represent actual
transactions.
Bid Prices for Common Stock
---------------------------
High Low
------------ -----------
2006
Fourth Quarter
(through November 1, 2006) $ 0.12 $ 0.05
Third Quarter $ 0.25 $ 0.07
Second Quarter $ 0.19 $ 0.13
First Quarter $ 0.30 $ 0.13
2005
Fourth Quarer $ 0.44 $ 0.17
Third Quarter $ 2.00 $ 0.21
Second Quarter $ 0.38 $ 0.08
First Quarter $ 0.35 $ 0.09
2004
Fourth Quarter $ 0.26 $ 0.05
Third Quarter $ 0.51 $ 0.06
Second Quarter $ 4.95 $ 0.50
First Quarter $ 5.00 $ 1.60
On November 1, 2006, the last sale price quoted on the Pink Sheets for our
common stock was $0.05. As of November 1, 2006, there were approximately 1,107
holders of record of our common stock.
DIVIDENDS
We have never paid cash dividends on our common stock and do not anticipate
paying cash dividends in the foreseeable future. It is anticipated that
earnings, if any, will be retained for use in our business for an indefinite
period. Payments of dividends in the future, if any, will depend on, among other
things, our ability to generate earnings, our need for capital, and our
financial condition. Additionally, our ability to pay dividends is limited by
applicable state law. Declaration of dividends in the future will remain within
the discretion of our Board of Directors, which will review the dividend policy
from time to time.
31
STANDBY EQUITY DISTRIBUTION AGREEMENT
In May 2005, we entered into the SEDA with Cornell Capital. Cornell Capital is a
private limited partnership whose business operations are conducted through its
general partner, Yorkville.
Sales of shares under the SEDA:
o Pursuant to the SEDA, we may periodically sell shares of common
stock to Cornell Capital to raise capital to fund our working
capital needs.
o At our discretion, we may periodically sell to Cornell Capital
shares of common stock for a total purchase price of up to $10.0
million.
o For each share of common stock purchased under the SEDA, Cornell
Capital will pay us 97% of the lowest volume weighted average price
on the OTC-BB or other principal market on which our common stock is
traded for the five trading days immediately following the date upon
which we request an advance under the SEDA. The volume weighted
average price is calculated automatically by Bloomberg L.P., a
reporting service, and is calculated by multiplying the number of
our shares sold on a given day by the actual sales prices.
o A closing will be held one trading day after the end of each pricing
period at which time we will deliver shares of common stock and
Cornell Capital will pay the advance amount requested by us.
Advances under the SEDA:
o The periodic sale of shares is known as an advance. We may request
an advance every five trading days.
o Our ability to request advances is conditioned upon us registering
the shares of common stock under the Securities Act. We may request
advances under the SEDA once the underlying shares are registered
under the Securities Act.
o Thereafter, we may continue to request advances until Cornell
Capital has advanced $10.0 million or 24 months after the effective
date of the registration statement of which this prospectus forms a
part, whichever occurs first.
o The amount of each advance is limited to a maximum draw down of
$350,000 every five trading days.
o In addition, we may not request advances if the shares to be issued
in connection with such advances would result in Cornell Capital
owning more than 9.9% of our outstanding common stock.
o As of November 1, 2006, we had 28,097,657 shares outstanding so
Cornell Capital could not own in excess of 2,781,668 shares. Giving
effect to the 1,172,052 of our common stock currently held by
Cornell Capital, it could purchase 1,609,616 additional shares for
approximately $78,000 under the SEDA (assuming a per share purchase
price of $0.0485 based on 97% of an assumed lowest trading price of
$0.05 on the Pink Sheets during the five consecutive trading days
ending November 1, 2006.)
Sales by Cornell Capital of shares acquired under the SEDA:
o We do not have any agreements with Cornell Capital regarding the
distribution of such stock, although Cornell Capital has indicated
that it intends to promptly sell any stock received under the SEDA.
For discussion of the risks associated with sales of our stock by
Cornell Capital, see "Risk Factors - Risks Related to this
Offering".
Fees under the SEDA:
o In connection with the SEDA, Cornell Capital received a commitment
fee of 1,465,065 shares of our common stock, including 293,013
shares held by its transferee, and a 12% interest bearing promissory
note in the principal amount of $188,843 from us. We also paid
$2,500 to Cornell Capital for due diligence expenses. For discussion
of the risks associated with sales of our stock by Cornell Capital,
see "Risk Factors - Risks Related to this Offering".
o Further, Cornell Capital will retain a cash fee of 5% from each
advance under the SEDA. This represents an effective discount of 8%
when taken together with the 3% discount to the market price of our
common stock that Cornell Capital will pay to purchase shares under
the SEDA.
o Yorkville Management received a structuring fee of $10,000 in
connection with the SEDA and is entitled to receive an additional
$5,000 upon the effectiveness of the registration statement of which
this prospectus forms a part.
o Yorkville Management will also receive a structuring fee of $500
from the proceeds of each advance under the SEDA.
o We engaged Monitor, a registered broker-dealer, to advise us in
connection with the SEDA. For its services, Monitor received a fee
of 90,909 shares of our common stock.
Registration and issuance of shares under the SEDA :
o We are registering 206,185,567 shares of common stock for the SEDA
pursuant to the registration statement of which this prospectus
forms a part. The costs associated with this registration will be
borne by us.
o We cannot predict the actual number of shares of common stock that
will be issued pursuant to the SEDA, in part, because the purchase
price of the shares will fluctuate based on prevailing market
conditions. Further, we have not determined the total amount of
advances we intend to draw.
o Nonetheless, we can estimate the number of shares of our common
stock that will be issued using certain assumptions. Assuming we
issue the full $10.0 million in value of shares covered by the SEDA
at a recent price of $0.05 per share less the 3% discount to the
market price of our common stock, we would issue 206,185,567 shares
of common stock to Cornell Capital. These shares would represent 88%
of our outstanding common stock upon issuance. In addition, we would
pay $500,000 in cash to Cornell Capital, representing the cash fee
of 5% of each advance under the SEDA. This represents an effective
discount of 8% when taken together with the 3% discount to the
market price of our common stock that Cornell Capital will pay to
purchase shares under the SEDA.
32
There are certain other conditions to our right to request an advance. These
conditions include:
o maintaining our authorization for quotation on the OTC-BB;
o having an effective registration statement related to the
stock to be issued;
o the absence of a stop order or other action adversely
affecting the registration statement;
o no events shall have occurred that would require us to file a
post-effective amendment to the effective registration
statement; and
o the advance will not cause Cornell Capital to beneficially own
more than 9.9% of our outstanding common stock.
Cornell Capital is permitted to terminate the SEDA if (i) there is a stop order
or suspension of the effectiveness of the registration statement of which this
prospectus forms a part for 50 trading days or (ii) we fail to materially comply
with certain covenants, which include the following:
o maintaining a quotation of the common stock on the OTC-BB;
o maintaining our status as public company under Section 12(g)
of the Exchange Act;
o delivering instructions to the transfer agent to issue shares
in connection with an advance notice;
o notifying Cornell Capital of events impacting the registration
of the stock to be issued, including the issuance of a stop
order;
o issuing stock or convertible securities at a price not less
than the market price of our common stock on the date of
issuance; and
o not merging or consolidating with another company where the
acquiring entity does not assume our obligations under the
SEDA.
Use of proceeds:
o Proceeds used under the SEDA will be used in the manner set forth in
"Use of Proceeds". We cannot predict the total amount of proceeds to
be raised in this transaction because we have not determined the
total amount of the advances we intend to draw. We do not expect to
draw down the full amount available under the SEDA. We currently
expect the total amount of our draw downs to be in the $2 million
range.
33
o We expect to incur expenses of approximately $200,000 in connection
with this registration, consisting primarily of professional fees.
In connection with the SEDA, we paid Cornell Capital a one-time
commitment fee of 1,465,065 shares of common stock, including
293,013 shares held by its transferee, and a 12% interest bearing
promissory note in the principal amount of $188,843 from us and will
pay to Cornell Capital 5% of each advance we draw. We issued 90,909
shares of our common stock to Monitor, a registered broker-dealer,
as a placement agent fee.
Alternative financing methods considered:
o Alternative financing methods that we considered before entering
into the SEDA were investment by angel investors, as well as by
other accredited individual and corporate investors. We ultimately
decided to enter into the SEDA because our research of Cornell
Capital and the SEDA financing structure indicated a history of
client satisfaction among companies financed by Cornell Capital with
respect to the quality of financing, management and other assistance
provided by Cornell Capital. In addition, we felt that the SEDA
structure, including offering 97% of the market value of our stock
and providing restrictions against short selling, was extremely
competitive and fair. Furthermore, of those angel investors with
whom we met, some were not interested in financing us and others
presented highly dilutive or otherwise unattractive financing
structures.
o Ultimately we also consummated the 2005 Private Placement and 2006
Private Placement to satisfy our immediate financing needs pending
our ability to draw down on the SEDA. See " Management's Discussion
and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
BUSINESS
We are a biotechnology company that develops and distributes proprietary
products for personal skin care under the Health Renu Medical brand name. Our
products are natural and provide nutrients and proteins designed to benefit the
body.
We have developed two product lines - our HealthRenu Medical line and our
BetterSkin consumer line - which consist of the following products:
HEALTHRENU MEDICAL LINE:
o DERM-ALL GEL
Hydrating gel which brings essential nourishing ingredients deep
within the skin's surface.
o SKIN RENU PLUS
Penetrating moisturizer made from essential oils.
o SKIN RENU LOTION
Advanced formula moisturizing skin protectant. Continued use of this
product may reduce the appearance of wrinkles and fine lines.
o SKIN RENU SKIN THERAPY
Vitamin E moisturizer in combination with Omegas 3, 6 and 9
essential fatty acids to revitalize the skin.
o RENU CARE WASH NON-RINSE CLEANSER
Non-rinse cleanser, moisturizer and skin protectant for those who
are bedridden or otherwise immobile.
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o DEEP RELIEF PAIN RELIEVER
Deep Relief provides penetrating pain relief of minor aches and
pains in muscles and joints with arthritis, strains and sprains.
BETTERSKIN CONSUMER LINE:
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 have
not yet commenced distribution of our BetterSkin products, although four
BetterSkin scented lotion products are available for sale on our website.
THE INDUSTRY
Our management estimates that the personal skin care industry in the U.S.,
including cosmeceutical (skincare products designed for both cosmetic and health
purposes such as suncare, anti-acne and lip care products) and anti-aging
products and hand and body lotions, is a $10 billion a year industry.
There is a growing population of older and elderly persons in the U.S. The 50
year and older age group is the fastest growing age group in the U.S. U.S.
persons are living longer lives. Aging and poor immune systems can cause the
body to lose its ability to maintain production of certain fatty acids and amino
acids that are critical for maintaining normal body function.
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 can 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 relief from minor aches and pains in muscles and joints.
35
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 incentivize 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 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 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 in many cosmetic
products and therapeutic vehicles.
DISTRIBUTION
Many of our medical line and consumer line products are offered for sale on our
website. We also distribute our HealthRenu medical line products directly to
consumers and through distributors to nursing homes, hospices, doctors' offices,
and other medical markets and retailers throughout the U.S. Historically, most
of our sales have been from our medical line to consumers, nursing homes,
hospices and clinics. During the year ended September 30, 2004, $19,000 or 88%
of our sales were to a distributor who is also a stockholder of us. We have not
made any sales to this distributor in fiscal 2005 or 2006. We do not expect to
make significant sales to this distributor in the future.
We have not yet commenced distribution of our BetterSkin products, although four
BetterSkin scented lotions are available for sale on our website. 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, mailings and magazine advertising targeted to older
consumers in limited U.S. markets.
We may consider forming ventures or alliances with certain existing and
potential users of our products such as assisted living or long term assisted
care facilities that use of our products. We have not identified any such
potential joint venturer. This plan depends upon our receiving additional
capital funding pursuant to the SEDA.
36
MANUFACTURE OF PRODUCTS
Our products are manufactured by a Texas-based pharmaceutical laboratory which
has been approved by the FDA. We do not have a contract with this laboratory.
This laboratory may not continue to maintain its FDA 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.
This laboratory owns our product formulas subject to our exclusive use and right
to purchase the formulas. The laboratory is responsible for supplying the
formula ingredients other than the essential fatty acids which we supply for
quality control purposes. We currently have on hand sufficient essential fatty
acid supplies to meet our short terms needs and we have developed sources for
their supply for the long-term future. We do not have agreements with the
suppliers of essential fatty acids and expect that we would enter into purchase
orders with them for purchases of essential fatty acids from time to time on an
as needed basis.
INTELLECTUAL PROPERTY
We have applied to register the trademark "HealthRenu Medical".
We do not own any patents or licenses. Our production laboratory owns our
product formulas subject to our rights to exclusive use of our product formulas
and to purchase these formulas at prices that we believe are reasonable. We
claim proprietary rights in various unpatented technologies, know-how, trade
secrets and trademarks relating to our products and manufacturing processes. We
protect our proprietary rights in our product formulas and operations through
contractual obligations with our consultants and vendors. These protections may
prove inadequate. Further, our competitors may independently develop or patent
products that are substantially equivalent or superior to our products.
Darrell Good, the founder and principal of Health Renu, Inc., a Delaware
corporation to whose business we succeeded ("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 have various other claims against Mr. Good including for fraud,
breach of contract and breach of fiduciary duty based on Mr. Good's
misrepresentation to us that we owned our products' formulas when in fact they
are owned by the production laboratory. We filed a lawsuit against Mr. Good in
the U.S. District Court for the Southern District of Texas seeking recovery for
these claims. Although a final default judgment against Mr. Good was entered in
this case, we may not be able to prevent Mr. Good from continuing to compete
with us or solicit our customers. See "-- Legal Proceedings".
GOVERNMENT REGULATION
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 sales of products are subject to regulation by the U.S. Food and Drug
Administration, or FDA. The two most important laws pertaining to cosmetics
marketed in the United States are the Federal Food, Drug, and Cosmetic Act, or
FD&C Act, and the Fair Packaging and Labeling Act, or FPLA. The FD&C Act
prohibits the marketing of adulterated or misbranded cosmetics. Violations of
the Act involving product composition--whether they result from ingredients,
contaminants, processing, packaging, or shipping and handling--cause cosmetics
to be adulterated and are subject to regulatory action. Improperly labeled or
deceptively packaged products are considered misbranded and are subject to
regulatory action. In addition, under the authority of the FPLA, the FDA
requires an ingredient declaration to enable consumers to make informed
purchasing decisions. Cosmetic products and ingredients are not generally
subject to FDA premarket approval authority, however, the FDA may pursue
enforcement action against violative products or companies who violate the law.
We are responsible for substantiating the safety of our products and ingredients
before marketing them.
Over-the-counter (OTC) drugs, however, are subject to FDA approval. Generally,
OTC drugs must either receive premarket approval by FDA or conform to final
regulations specifying conditions whereby they are generally recognized as safe
and effective, and not misbranded. OTC drugs must also be labeled according to
OTC drug regulations, including the "Drug Facts" labeling. Currently, certain
OTC drugs that were marketed before the beginning of the OTC Drug Review (May
11, 1972) may be marketed without specific approval pending publication of final
regulations under the ongoing OTC Drug Review. Once a regulation covering a
specific class of OTC drugs is final, those drugs must either:
o be the subject of an approved New Drug Application (NDA), or
o comply with the appropriate monograph, or rule, for an OTC drug.
An NDA is the vehicle through which drug sponsors formally propose that the FDA
approve a new pharmaceutical for sale and marketing in the U.S. The FDA only
approves an NDA after determining that the data are adequate to show the drug's
safety and effectiveness for its proposed use and that its benefits outweigh the
risks. The NDA process can be expensive and time consuming for a drug sponsor.
The FDA has published monographs, or rules, for a number of OTC drug categories.
These monographs state requirements for categories of non-prescription drugs,
such as what ingredients may be used and for what intended use. Among the many
non-prescription drug categories covered by OTC monographs are acne medications,
treatments for dandruff, seborrheic dermatitis, and psoriasis and sunscreens.
Our management, with the help of a FDA consultant, has determined that our
currently marketed products are either cosmetics or OTC drugs that may be
marketed without specific FDA approval as they are covered by OTC monographs.
The FDA, however, may disagree with our management's classification of our
products.
The FDA has broad regulatory and enforcement powers. If the FDA determines that
we have failed to comply with applicable regulatory requirements, it can impose
a variety of enforcement actions from public warning letters, fines,
injunctions, consent decrees and civil penalties to suspension or delayed
issuance of approvals, seizure or recall of our products, total or partial
shutdown of production, withdrawal of approvals or clearances already granted,
and criminal prosecution. The FDA can also require us to replace or refund the
cost of products that we distributed. If any of these events were to occur, it
could materially adversely affect our ability to market our products and our
business and financial condition.
The FDA recently required us to change certain of our product classifications,
certain of 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 policies, regulations or
interpretations thereof will change such that we no longer so comply, that our
products are no longer considered OTC or cosmetic products, or such that we may
not be able to obtain favorable product classification for any future products
that we may develop. Any of the foregoing could materially adversely impact our
ability to market our products and our business and financial condition.
37
RESEARCH AND DEVELOPMENT
We seek to conduct research and development on an on-going basis. We seek to
develop new products to aid in personal skin care and wound care. Our recent
research and development efforts have been primarily in the area of wound care
for non-healing wounds (i.e., wounds that do not heal), including diabetic and
pressure ulcers and surgical wounds. If we sucessfully develop and test any new
products, we will seek to bring them to the market. Any wound care products that
we may develop would have to qualify as an OTC drug in compliance with
applicable FDA requirements, including being the subject of an approved NDA.
Such requirements include extensive clinical testing which would likely be
expensive and time consuming. We may not be able to develop any new products and
any new products we develop may not obtain necessary FDA approvals or be
marketable. We did not incur any research and development expenses in the fiscal
years ended September 30, 2004 and 2005, respectively.
EMPLOYEES
Our Chief Executive Officer had been our only full-time employee. In 2005, we
hired two additional full-time employees. We contract with consultants to assist
in numerous areas of our operations and development. Additionally, we outsource
key functions to control costs and keep our overhead low. We intend to hire
additional full-time employees on an as needed basis. This will depend upon our
receiving additional capital funding pursuant to the SEDA.
COMPETITION
We estimate that the U.S. market for personal skincare products is $10 billion
per year, including cosmeceutical (skin care products designed for both cosmetic
and health purposes such as suncare, anti-acne and lip care products) and
anti-aging products and hand and body lotions. Our products account for a less
than one-percent market share of this market.
The personal skin care industry is served by a number of sources, including
major domestic and international medical, pharmaceutical, cosmetic, consumer
products and other companies. Most of these companies have financial, technical,
marketing, sales, manufacturing, distribution and other resources substantially
greater than ours. Large corporations dominate sales in these industries
although we believe many opportunities exist for medium and smaller-sized
companies like us to compete. Medical/Pharmaceutical competitors include such
large corporations such as Johnson & Johnson, Pfizer, Merck and 3M. The consumer
skin care arena includes leaders such as Procter & Gamble and Eli Lilly. The
cosmeceutical market is led by such well known companies as Clinique, Lancome
and Estee Lauder.
We compete based upon the effectiveness of our products and upon price. We
minimize our product prices by minimizing our expenses, including for product
production, inventory, advertising and other overhead expenses. We intend to
operate with minimal overhead costs by outsourcing our shipping, receiving,
purchasing, and production functions. We believe that our products work simply,
rapidly and effectively.
38
Also, Darrell Good, the founder and principal of Health Renu-DE, has competed
against us by posting products similar to ours on his website for sale and
soliciting sales from our customers. We filed a lawsuit in federal court against
Mr. Good and a final default judgment was entered against Mr. Good prohibiting
him from competing with us for one year, although we may not be able to prevent
Mr. Good from continuing to compete with us. See "-- Legal Proceedings."
PROPERTY
We have an office at 12777 Jones Road, Suite 481, Houston, Texas 77070
consisting of 1,692 square feet of office space. Our lease is effective through
January 31, 2009. Monthly base rent under the lease is $2,362.50 through January
2007, $2,397 through February 2008 and $2,467.50 through January 2009.
LEGAL PROCEEDINGS
There are no material legal proceedings pending against us except as described
below.
In October 2005, a stockholder, filed a lawsuit against us, our chief executive
officer and a former chief executive officer, in the District Court for the City
and County of Denver, State of Colorado. The stockholder claims he was issued
44,000 shares of common stock of AGTSports, Inc., a Colorado corporation and our
predecessor, prior to 1997 which shares were intended to be "non-dilutive" and
that he purchased 44,000 additional shares in May 1997. He further claims that
he was not given notice of or an opportunity to vote with the respect to the
reincorporation and exchange transaction in September 2003 whereby we became
HealthRenu Medical, Inc. and that he was prevented from liquidating his shares
at $8.50 per share. The stockholder alleges various claims for relief based upon
negligent and fraudulent misrepresentation and concealment, civil conspiracy,
civil theft, breach of fiduciary duty, breach of contract, failure to provide
notice of dissenter rights, violation of the Colorado Securities Act, and
intentional infliction of emotional distress. The stockholder seeks relief
including compensation for his stock, forfeited opportunities to liquidate his
stock, actual, compensatory and punitive damages, costs and attorney fees and
treble damages with respect to his civil theft claim. We believe this claim is
without merit and have filed an answer to defend against such complaint. The
case is currently in the discovery phase. We have made a settlement offer to the
stockholder in the amount of $11,000 representing his purchase price for the
shares, which we believe is fair and reasonable compensation for these claims.
In April 2005, we filed a lawsuit in U.S. Federal District Court for the
Southern District of Texas seeking to recover approximately 8.1 million shares
of our common stock from the founder and principal of Health Renu-DE, Darrell
Good, and requesting that Mr. Good cease competing with us and soliciting our
customers. The lawsuit, among other claims, alleged breach of contract, fraud
and breach of fiduciary duty on the part of Mr. Good. A final default judgment
against Mr. Good was entered in this case on July 29, 2005 and the court ordered
that the shares be cancelled and returned to us and that Mr. Good is enjoined
from competing with us for one year. The time for appeal of the order expired on
August 28, 2005. The shares have been cancelled on the books and records of our
transfer agent. We may not be able to prevent Mr. Good from continuing to
compete with us or to solicit our customers.
BUSINESS DEVELOPMENT
We were originally incorporated in Colorado as American Merger Control, Inc. on
January 6, 1986. In 1990, we changed our name to Ultratech Knowledge Systems,
Inc., and in 1993, we changed our name again to AGTsports, Inc. During the
fiscal years ended September 30, 1991 through September 30, 1998, our business
plan was to pursue providing technological and software services to golf and
related industries. In 1998, we abandoned this business plan. Prior to entering
into and consummating the exchange agreement (the "Exchange Agreement") with
Health Renu-DE, a Delaware corporation to whose business we succeeded, and its
stockholders discussed below, we were considered a "shell" or "blank check"
company whose sole purpose was to search for and enter into new business
opportunities.
39
On September 4, 2003, we merged into AGTsports, Inc., our wholly-owned Nevada
subsidiary. As a result of the merger, we were reincorporated in Nevada.
On September 26, 2003, we entered into the Exchange Agreement with Health
Renu-DE and the former Health Renu-DE stockholders whereby Health Renu-DE became
our wholly-owned subsidiary and our control shifted to the former Health Renu-DE
stockholders.
The Exchange Agreement represented a recapitalization of Health Renu-DE with
accounting treatment similar to that used in a reverse acquisition, except that
no goodwill or intangible asset was recorded. A recapitalization is
characterized by the merger of a private operating company into a non-operating
public shell corporation with nominal net assets and typically results in the
owners and managers of the private company having effective or operating control
after the transaction.
Health Renu-DE emerged as the surviving financial reporting entity under the
Exchange Agreement, but we remained as the legal reporting entity. As a result
of our acquisition of Health Renu-DE and a change in our business focus to skin
care and wound care products, we changed our name to HealthRenu Medical, Inc.
("HealthRenu Medical") A reference herein to us includes a reference to Health
Renu-DE and vice-versa unless otherwise indicated.
Since its inception, Health Renu-DE had, and since the recapitalization, we
have, been in the medical research and development stage, with a focus on
creating and improving our skin care and developing wound care products.
On February 29, 2004, we entered into an agreement with Darrell Good, a former
stockholder and the founder and principal of Health Renu-DE whereby we
transferred to Mr. Good 100% of the issued and outstanding shares of our
wholly-owned Health Renu subsidiary and certain of our assets and liabilities in
exchange for a return to us from the stockholder of 25,000 shares of our common
stock and all rights and formulas to produce Health Renu-DE's products. The gain
on the disposition of these assets and liabilities was $15,468 and recorded an
additional paid in capital. We filed a lawsuit against Mr. Good alleging breach
of contract, breach of fiduciary duty and fraud on his part in connection with
this agreement and the Exchange Agreement. See "-- Legal Proceedings."
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our
financial statements and notes thereto included elsewhere in this prospectus.
This discussion 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" and elsewhere in the
prospectus.
OVERVIEW
On September 26, 2003, we acquired 100% of the outstanding shares of Health
Renu-DE, a Delaware corporation to whose business we succeeded, pursuant to the
Exchange Agreement. Since its inception, Health Renu-DE had been in the medical
research and development stage, with a focus on improving its skin care and
developing wound care products. During this period, Health Renu-DE had nominal
production and revenue. 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.
41
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, inventory 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.
42
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.
Inventory
Inventory consists solely of finished goods and is 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.
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
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.
43
Loss on embedded derivative liability. We recognized a loss on derivative
instruments of $6,937,905 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 $211,355 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 $7,819,923 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.
FISCAL YEAR ENDED SEPTEMBER 30, 2005 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
2004
We experienced a decrease in sales of $12,021 for the fiscal year ended
September 30, 2005 to $9,785 as compared to $21,806 for the fiscal year ended
September 30, 2004. During the fiscal year ended September 30, 2005, we were
primarily focused on expansion. We would have ordinarily allocated the funds
that we used for the expansion to promote our products. In addition,
approximately $19,000 of the sales in 2004 was made to one of our stockholders
which did not occur in 2005.
Gross profit (loss) for the fiscal year ended September 30, 2005 decreased
$17,827 to a negative $3,673 compared to a negative $21,500 for the fiscal year
ended September 30, 2004. The decrease was attributable to a higher cost of
sales related to inventory adjustments of approximately $15,000 during the year
ended September 30, 2004.
General and administrative expenses were $889,868 and $1,457,701 for the years
ended September 30, 2005 and 2004, respectively. The decrease in general and
administrative expenses is due to approximately $1,000,000 of stock based
compensation expense recorded in the year ended September 30, 2004 and only
approximately $400,000 recorded in the year ended September 30, 2005 offset by
additional costs associated with our expansion efforts. During 2005, we hired
two additional employees to provide support for our anticipated growth.
Gain (loss) on derivative instruments liabilities, net. We recognized a loss
onderivative instruments of $2,082,121 during the year ended September 30, 2005
compared to no activity during the year ended September 30, 2004, an increase of
$2,082,121. 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 August and September of fiscal 2005.
44
Interest expense increased to $320,460 for the fiscal year ended September 30,
2005 from $4130 for the fiscal year ended September 30, 2004. The increase is
primarily related to the recording of a $240,333 beneficial conversion feature
and $55,151 of interest expense related to the convertible notes payable that
were converted as of September 30, 2005.
During the year ended September 30, 2005, we incurred $360,000 of syndication
costs related to the SEDA. Due to the contingencies associated with the
completion of the SEDA, as of September 30, 2005 the syndication costs were
written off as an expense in the statement of operations.
As of September 30, 2005, we had an accumulated deficit of ($6,422,987).
LIQUIDITY AND CAPITAL RESOURCES
Since inception, and for the nine months ended June 30, 2006, we have not
generated positive cash flow from our 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 $10,582,294 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 SEDA described below and to fund our inventory and
working capital needs until the SEDA is available for us to draw upon. Such
private placement financing may not be sufficient to meet our needs until the
SEDA is available for us to draw on.
Our near term financing needs are currently expected to be provided in large
part from the SEDA described below. Financing under the SEDA may not 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.
45
If we are unable to obtain financing on a timely basis, upon terms that we deem
sufficiently favorable, or at all, it would have a materially adverse impact
upon our ability to maintain our current operations or pursue our business
strategy. Without capital funding, we cannot continue to operate 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. Pursuant to this
agreement, we may, at our discretion for up to two years, periodically issue and
sell to Cornell Capital shares of common stock for a total purchase price of
$10.0 million, subject to registration of such shares. If we request an advance
under the SEDA, Cornell Capital will purchase shares of common stock for 97% of
the lowest volume weighted average price on the OTC-BB or other principal market
on which our common stock is traded as quoted by Bloomberg, L.P. for the five
trading days immediately following the notice date. In addition, Cornell Capital
will retain a cash fee of 5% from the proceeds received by us for each advance
under the SEDA for a total effective discount to the market price of our common
stock of 8%. Cornell Capital intends to sell any shares purchased under the SEDA
at the market price. The sale of the shares under the SEDA is conditioned upon
us registering the shares of common stock under the Securities Act and
maintaining such registration. Upon the execution of the SEDA, we issued as
compensation to Cornell Capital 1,465,065 shares of our common stock with a
value of $161,157, including 293,013 shares held by its transferee, and a 12%
interest bearing promissory note in the principal amount of $188,843. We issued
to Monitor Capital, 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 into 2,560,807
shares of common stock and repaid by approximately $32,000 in cash, including
accrued interest.
In August and September 2005, we closed on $548,000 of equity units (the "2005
Units") in a private placement. Each Unit consists of an 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 commencing from and after the date
of issuance and for a period of three years thereafter at a price equal to 85%
of the average closing price of our common stock 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 November 1, 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.
46
In February 2006, we closed on $600,000 of equity units (the "2006 Units") in a
private placement. Each Unit consists of a secured convertible promissory note
in the principal amount of $1,000 (the "2006 Notes") and eight warrants for each
share of common stock 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 commencing from and after the date of issuance and
for a period of five years thereafter at a price equal to 80% of the average
closing price of our common stock 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 November 1, 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 matured on October 17,
2006. The note has not been repaid. 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.
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 $14.25 million. These factors raise
substantial doubt about our ability to continue as a going concern. 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.
47
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning our directors and
executive officers as of November 1, 2006:
Name Age Position
---------------- --- -------------------
Robert W. Prokos 35 President and Chief
Executive Officer, Director
Dr. Dianne Love 58 Director
David Spencer 55 Director
Edward Watler Zieverink, III 44 Director
Dr. Daniel Sparks 56 Director
ROBERT W. PROKOS has been our President and Chief Executive Office and a
Director since March 2004. From 2001 to 2004, Mr. Prokos was President of Rhino
Capital Management where he counseled public and private company clients as to
business growth strategies, including revenue building, mergers, acquisitions,
venture capital, business to business solutions and financing. We were a client
of Mr. Prokos and Rhino Capital Management. In 2000, Mr. Prokos was a financial
consultant to several companies and engaged in entrepreneurial activities for
his own account, including owning interests in several real estate and mortgage
companies and LD Connect, a VOIP (voice over Internet protocol) telecom company,
which he sold to a public company.
DR. DIANNE LOVE, PH.D., has been our Director since March 2004. Dr. Love has
been a professor of Healthcare Administration at the University of Houston Clear
Lake since 1989 and is also an Adjunct Professor at Auburn University Physicians
Executive MBA Program and University of Texas Medical Branch. Dr. Love is on the
advisory board for YourDoctor.com. She has published numerous articles on
medical economics, finance and administration. Dr. Love received her Ph.D. in
business administration from the University of Arkansas and her MBA and B.S. in
Education from Auburn University.
DAVID SPENCER has been our Director since January 2005. Mr. Spencer has been the
National Sales Manager in Canada and Regional Sales Manager for the Midwestern
U.S. for Fischer Imaging, a diagnostic imaging company, since 2002. From 2001 to
2002, Mr. Spencer owned and operated a consulting firm with emphasis on capital
equipment sales and leasing. From 2000 to 2001, he was a National Account
Executive for FirstEnergy Services Corporation.
EDWARD WALTER ZIEVERINK, III has been our Director since June 2004. Mr.
Zieverink has been President and owner of Horizon Environmental Services, Inc.,
a commercial and residential landscape management company servicing Birmingham,
Alabama and the surrounding areas since 1987.
48
DR. DANIEL SPARKS, M.D., has been our Director since January 2004. Dr. Sparks is
an orthopedic surgeon and since 1988 has practiced in a private orthopedic
surgical practice established by him in Gadsden, Alabama. His subspeciality
interests include surgery of the peripheral nerve system and wound care issues.
Dr. Sparks graduated from the University of Tennessee School of Medicine. He
served 12 years in the U.S. Air Force during which time he completed his
orthopedic surgical residency at the University of Mississippi. He completed his
military service at Langley Air Force Base, as TAC headquarters Chief of
Orthopedic Surgery.
AUDIT COMMITTEE
We do not currently have a separate audit committee. Currently, our entire Board
of Directors performs all the functions that may be delegated to an audit
committee. We plan to establish an audit committee and are currently assessing
which members of our Board are best qualified, based on their accounting or
related financial management expertise, independence, time availability,
corporate experience and other relevant factors, to serve on our audit
committee. Based on our small size, early development stage and limited
financial and human resources, we did not believe that creating an audit
committee separate and distinct from our full Board of Directors would have been
cost-effective prior to fiscal 2006.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid by
us during the three years ended on September 30, 2005 to our Chief Executive
Officer. We have no other executive officers who were serving as executive
officers on September 30, 2005 and received total salary and bonus in excess of
$100,000 during fiscal year 2005 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
------------------------------------
OTHER
NAME AND PRINCIPAL ANNUAL
POSITION YEAR(1) SALARY COMPENSATION
- ------------------------ --------- ------------------- ------------
Robert W. Prokos, 2005 $ 95,000 $ 749,199(2)
President, Chief 2004 $ 95,000 $ 346,810(3)
Executive Officer and 2003 $ 7,000 $ 942,500(4)
Director
- ----------
(1) Mr. Prokos commenced service as a director and our President and Chief
Executive Officer in March 2004. Prior to March 2004, Mr. Prokos served as
a consultant to us and received compensation from us in such capacity.
(2) Includes 2,959,386 shares of common stock valued at $736,799 based solely
upon the quoted market price of the stock at the respective dates of the
transactions.
(3) Includes 655,527 shares of common stock valued at $334,349 based solely
upon the quoted market price of the stock at the respective dates of the
transactions.
(4) Includes 1,450,000 shares of common stock valued at $942,500 based solely
upon the quoted market price of the stock at the date of the transaction.
EMPLOYMENT AGREEMENTS
Effective March 1, 2004, we entered into a three-year employment agreement with
Robert W. Prokos. Mr. Prokos is employed as our President and Chief Executive
Officer. Mr. Prokos receives an annualized base salary of $95,000. Mr. Prokos
may be eligible to participate in performance bonuses and any stock option plans
established by any compensation committee of our Board of Directors or the full
Board of Directors. Mr. Prokos may be terminated only for cause as defined in
the agreement by our Board of Directors. If Mr. Prokos is terminated other than
for cause, he is entitled to receive a lump sum severance payment in an amount
equal to his annual salary in cash or shares at our option. Mr. Prokos devotes
his full business time to our affairs.
COMPENSATION OF DIRECTORS
It is currently our policy to compensate each non-employee director serving on
our Board of Directors for such service and attendance at Board meetings in an
amount equal to 10% of the compensation paid to our Chief Executive Officer
which may be paid at our discretion in cash or shares of our common stock.
49
PRINCIPAL STOCKHOLDERS
The following table sets forth as of November 1, 2006, the number and
percentage of outstanding shares of our common stock beneficially owned by our
Named Executive Officers, directors, stockholders owning more than 5% of our
common stock known to us and our executive officers and directors as a group:
Name and Address of Shares Owned % of Class
Beneficial Owner Beneficially(1) Owned
Robert W. Prokos(2)(3) 5,044,203 17.95%
16510 Westwego Drive
Cypress, Texas 77429
Walter Zieverink(3) 985,080 3.51%
c/o 4024 Autumn Lane
Birmingham, Alabama 35243
Dr. Daniel Sparks(3) 1,743,163 6.20%
1026 Goodyear Avenue
Suite 100-B
Gadsden, Alabama 35903
Dr. Dianne Love(3) 932,009 3.32%
2503 Jasmine Ridge
Houston, Texas77062
David Spencer(3) 1,452,922 5.17%
2078 Edgeview Drive
Hudson, Ohio 44236
Anita Jones 1,487,500 5.29%
c/o 4024 Autumn Lane
Birmingham, Alabama 35243
Greg Lemon 1,688,410 6.01%
2705 Hunter's Glen Drive
Plainsboro, New Jersey 08536
All Officers and Directors 10,157,377 36.15%
as a Group (5 people)
- ----------
(1) The number of shares of common stock owned are those "beneficially owned"
as determined under the rules of the SEC, including any shares of common
stock as to which a person has sole or shared voting or investment power
and any shares of common stock which the person has the right to acquire
within 60 days through the exercise of any option, warrant or right. As of
November 1, 2006, there were 28,097,657 shares of common stock
outstanding.
(2) President and Chief Executive Officer.
(3) Director.
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CHANGE IN CONTROL
The issuance of shares in this offering will not result in a change of control
of us. Although this offering contemplates the issuance to Cornell Capital of up
to 206,185,567 addition to the 1,172,052 shares currently held by Cornell
Capital (which would result in Cornell Capital holding approximately 88.51% of
our issued and outstanding common stock after issuance), we are restricted from
issuing shares under the SEDA to Cornell Capital which would result in its
owning in excess of 9.9% of our issued and outstanding shares of common stock.
CERTAIN TRANSACTIONS
During the year ended September 30, 2004, our Chief Executive Officer directly
paid vendors on behalf of us in the total amount of $23,559. In addition, our
Chief Executive Officer advanced us $6,000. During the year ended September 30,
2004, we issued our Chief Executive Officer 295,587 shares of our common stock
to reimburse him for these transactions. However, based on the quoted market
price of our common stock at the time of $0.75 per share, we recorded additional
compensation expense $192,000 to our Chief Executive Officer.
During the year ended September 30, 2004, we recognized revenue of $19,213 from
sales of product to a stockholder and consultant to us.
We have an oral understanding with Dr. Daniel Sparks, a member of our Board of
Directors, relating to a potential future product based on Dr. Sparks' patent.
We would pay to Dr. Sparks royalties in an amount to be determined in connection
therewith.
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We have a consulting services agreement with Dr. Dianne Love, a member of our
Board of Directors, whereby Dr. Love provides management advisory services,
strategic planning, professional introductions and company growth services to
us. We issued 250,000 shares of our common stock to Dr. Love in consideration
for her services under the agreement and have agreed to issue an additional
50,000 shares to her for each $100,000 in revenues over $300,000 that she
generates for us up to a maximum of 350,000 additional shares. We indemnify Dr.
Love against any actions brought against her for breach of representation,
warranty or agreement by us, our negligence or willful misconduct or content
provided by us under the agreement. The agreement commenced on May 1, 2004 and
expires on May 1, 2009.
In April 2005, we filed a lawsuit in U.S. Federal District Court for the
Southern District of Texas seeking to recover approximately 8.1 million shares
of our common stock from the founder and principal of Health Renu-DE, Darrell
Good, and requesting that Mr. Good cease competing with us and soliciting our
customers. The lawsuit, among other claims, alleged breach of contract, fraud
and breach of fiduciary duty on the part of Mr. Good. A final default judgment
against Mr. Good was entered in this case on July 29, 2005 and the court ordered
that the shares be cancelled and returned to us and that Mr. Good is enjoined
from competing with us for one year. The shares have been cancelled on the books
and records of our transfer agent. We may not be able to prevent Mr. Good from
continuing to compete with us or to solicit our customers. See "Business-Legal
Proceedings".
We issued convertible debt securities in respect of loans in the aggregate
amount of $103,000 made to us by members of our Board of Directors and a
consultant to us in May and June 2005. The debt and related accrued interest was
convertible into shares of our common stock at the option of the holders at the
rate of $0.03 per share. The loans accrued interest at the rate of 8% per annum.
The convertible debt has been converted or repaid in full. The convertible debt
was converted into 2,560,807 shares of common stock and repaid by approximately
$32,000 in cash, including accrued interest.
During the year ended September 30, 2005, we issued 2,000,000 shares of our
common stock as payment of accrued compensation of $40,000 owed to our Chief
Executive Officer. However, based on the quoted market price at the time of
$0.17 per share, we recorded additional compensation expense of $300,000 related
to this stock issuance.
We have entered into agreements with our executive officers and compensate our
non-employee directors as described above in "Executive Compensation".
We believe that the transactions described above were fair to us and were as
favorable to us as those that we might have obtained from non-affiliated third
parties, given the circumstances under which such transactions were proposed and
effectuated.
52
DESCRIPTION OF SECURITIES
We have summarized below the material provisions of our Articles of
Incorporation, By-Laws and other instruments defining the rights of our
securities holders. Our summary may not contain all of the information that is
important to you. See "Where You Can Find More Information" for information
about how to obtain a copy of the documents described in this section.
GENERAL
Our authorized capital stock consists of 150,000,000 shares of common stock, par
value $0.001 per share, and 5,000,000 shares of preferred stock, par value
$0.001 per share. As of November 1, 2006, 28,097,657 shares of our common stock
and 1,763 shares of our 2000A Convertible Preferred Stock were issued and
outstanding. In addition, we had outstanding as of November 1, 2006, the
below-described convertible securities, warrants and commitments to issue
securities.
Our Board of Directors has approved an amendment of our Articles of
Incorporation to increase our authorized shares of common stock to 750,000,000
shares (the "Amendment"). We intend to seek approval of the Amendment by our
stockholders prior to the effectiveness of the accompanying registration
statement.
COMMON STOCK
Dividends may be declared and paid on the common stock from funds lawfully
available therefor as and when determined by the Board of Directors and subject
to any preferential dividend rights of any then outstanding preferred stock.
In the event of dissolution, liquidation or winding up of our affairs, whether
voluntary or involuntary, each issued and outstanding share of common stock
shall entitle the holder thereof to receive an equal portion of our net assets
available for distribution to holders of common stock after payment of
liabilities, subject to any preferential rights of any then outstanding
preferred stock.
Except as otherwise required by law, each holder of common stock will have one
vote in respect of each share of stock held by such holder of record for the
election of directors and on all matters submitted to a vote of our
shareholders. There is no cumulative voting.
PREFERRED STOCK
We are authorized to issue up to 5,000,000 shares of preferred stock in one or
more series as may be designated by our Board of Directors.
The preferred stock may be entitled to such dividends, redemption rights,
liquidation rights, exercise rights and voting rights as the Board of Directors,
in its discretion, may determine, in a resolution or resolutions providing for
the issuance of any such stock. Rights granted by the Board of Directors may be
superior to those of existing shareholders (including the right to elect a
controlling number of directors as a class). Preferred stock can be issued
without the vote of the holders of common stock.
53
We have authorized for issuance up to 1,500,000 shares 2000A Convertible
Preferred Stock and up to 500,000 shares 2003A Preferred Stock. At November 1,
2006, 1,763 shares of 2000A Convertible Preferred Stock were outstanding and no
shares of 2003A Preferred Stock were outstanding. The 2000A Convertible
Preferred Stock is entitled to a liquidation preference of $0.10 per share over
our common stock and participates as to voting and dividends with our common
stock. Our 2000A Convertible Preferred Stock is convertible into an equal number
of shares of our common stock any time at the option of the holder thereof and
automatically upon the consent of two-thirds of the outstanding shares of 2000A
Convertible Preferred Stock or the closing a firm commitment underwritten public
offering with proceeds of $2,000,000 to us. The 2003A Preferred Stock is not
entitled to participate in dividends or voting and has no conversion or rights
upon liquidation.
WARRANTS
o Warrants to purchase 400,000 shares of common stock at a price of
$0.05 per share were issued on August 18, 2006 to our bridge loan
investor. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital
Resources."
o Warrants to purchase eight shares of common stock for each share of
common stock issued upon conversion of the 2006 notes was issued in
our 2006 Private Placement. See " -- 2006 Private Placement" below.
o Warrants to purchase two shares of common stock for each share of
common stock issued upon conversion of the 2005 notes was issued in
our 2005 Private Placement. See " -- 2005 Private Placement" below.
o Warrants to purchase 3,469,125 shares of common stock at prices
ranging from $0.17 to $0.18 per share were issued on February 17,
2005 to North Coast and its designees for services as placement
agent for the 2006 Private Placement. The exercise prices for these
warrants represent a 10% premium over the 2006 Private Placement
investors' assumed conversion prices.
o Warrants to purchase 487,237 shares of common stock at prices
ranging from $0.30 to $0.48 per share were issued on September 23,
2005 to North Coast and its designees for services as placement
agent for the 2005 Private Placement. The exercise prices for these
warrants represent a 10% premium over the 2005 Private Placement
investors' assumed conversion prices.
o Warrants to purchase 500,000 shares of common stock at a price of
$0.50 per share were issued on September 23, 2005 to North Coast and
its designees for consulting services. The exercise price for these
warrants represents a premium over the market price of our common
stock at the time at which the consulting arrangements pursuant to
which they were issued were agreed upon.
o Warrants to purchase 100,000 shares of common stock at a price of
$0.50 per share were issued on September 23, 2005 to Portfolio
Lenders for its agreement to provide future financing of inventory
acquisition and product sales growth. The warrants were subject to
forfeiture six months from their date of issuance in the event that
certain performance criteria was not satisfied. The exercise price
for these warrants represents a premium over the market price of our
common stock at the time at which the consulting arrangements
pursuant to which they were issued were agreed upon.
o Warrants to purchase 500,000 shares of common stock at a price of
$0.50 per share were issued on July 31, 2005 to MultiGrow Advisors,
LLC for consulting services. The exercise price for these warrants
represents a premium over the market price of our common stock at
the time at which the consulting arrangements pursuant to which they
were issued were agreed upon.
Standby Equity Distribution Agreement
On May 23, 2005, we entered into a SEDA with Cornell Capital, pursuant to which
we may, at our discretion, periodically sell to Cornell Capital shares of our
common stock for a total purchase price of up to $10,000,000. For each share of
common stock purchased under the SEDA, Cornell Capital will pay us 97% of the
lowest volume weighted average price of our common stock on the OTC-BB or other
principal market on which our common stock is traded for the five trading days
immediately following the date we deliver a notice requiring Cornell Capital to
purchase our shares under the SEDA. In addition, Cornell Capital will retain a
5% cash fee from the proceeds received by us for each advance under the SEDA for
a toal effective discount to the market price of our common stock of 8%.
54
Cornell Capital's obligation to purchase shares of our common stock under the
SEDA is subject to certain conditions, including us obtaining an effective
registration statement for shares of common stock sold under the SEDA and is
limited to $350,000 per weekly advance.
The commitment period under the SEDA commences on the earlier to occur of (i)
the date that the registration statement is declared effective by the SEC (the
"Effective Date"), or (ii) such earlier date as we and Cornell Capital may
mutually agree in writing.
The commitment period under the SEDA expires on the earliest to occur of (i) the
date on which Cornell Capital has purchased an aggregate amount of $10,000,000
shares of our common stock under the SEDA, (ii) the date occurring twenty-four
months after the Effective Date, or (iii) the date the SEDA is earlier
terminated (in the event that (x) there occurs any stop order or suspension of
the effectiveness of the registration statement for an aggregate of fifty
trading days, other than due to the acts of Cornell Capital, during the
commitment period, and (y) we fail materially to comply with any of the
covenants contained in the SEDA and such failure is not cured within thirty days
after receipt of written notice from Cornell Capital, provided, however, that
this termination provision does not apply to any period commencing upon the
filing of a post-effective amendment to the registration statement and ending
upon the date on which such post effective amendment is declared effective by
the SEC).
2005 Private Placement
In August and September 2005, we closed on $548,000 of 2005 Units in a private
placement. Each Unit consists of 8% unsecured convertible promissory notes in
the principal amount of $1,000, and two warrants for each share of common stock
issued upon conversion of the 8% Notes to purchase one share of our common
stock. The purchase price per Unit was $1,000.
The 8% Notes are convertible at the election of the holder thereof, at any time
commencing from and after their date of issuance and for a period of five years
thereafter 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 8% Notes are entitled to
receive an 8% annual interest payment payable in shares of our common stock. The
per share exercise price of the warrants is 125% and 150%, respectively, of the
conversion price of the 8% Notes. The warrants are exercisable for shares of our
common stock at any time beginning on the date of conversion of the 8% Notes and
ending on October 31, 2009 and are subject to adjustment for anti-dilution
purposes.
As of November 1, 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.
2006 Private Placement
In February 2006, we closed on $600,000 of 2006 Units in a private placement.
Each Unit consists of 8% secured convertible promissory notes in the principal
amount of $1,000, and eight warrants for each share of common stock issued upon
conversion of the 8% Notes to purchase one share of our common stock. The
purchase price per Unit was $1,000.
The 8% Notes are convertible at the election of the holder thereof, at any time
commencing from and after their date of issuance and for a period of five years
thereafter 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 8% Notes are entitled to
receive an 8% annual interest payment payable in shares of our common stock. The
per share exercise price of the warrants is 100% for two warrants, 125% for
three warrants and 150% for three warrants, respectively, of the conversion
price of the 8% Notes. The warrants are exercisable for shares of our common
stock at any time beginning on the date of conversion of the 8% Notes and ending
on March 31, 2011 and are subject to adjustment for anti-dilution purposes.
As of November 1, 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.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Articles of Incorporation and By-laws provide for:
o indemnification of our directors or persons serving in various
business capacities at our request against judgments, penalties,
fines and amounts paid in settlement and reasonable expenses
actually incurred by such person by reason of the fact that such
person is or was serving as provided above in connection with a
threatened, pending or completed proceeding, whether civil or
criminal, administrative, arbitrative or investigative, any appeal
in any of the foregoing, or inquiry or investigation that could lead
to such, if such individual acted in good faith and in a manner such
person reasonably believed to be in, or not opposed to, our best
interests, and, if the action was a criminal proceeding, if such
person had no reasonable cause to believe that such person's conduct
was unlawful; and
55
o mandatory indemnification of such persons who have been successful
in defense of any proceeding against reasonable expenses incurred in
connection with such proceeding.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon
for us by _____________. Gallagher, Briody and Butler, Princeton, New Jersey,
has served as special counsel to us in connection with the SEDA transaction and
preparation of the registration statement of which this prospectus forms a part.
EXPERTS
The financial statements of HealthRenu Medical, Inc. as of September 30, 2005
and for each of the two years ended September 30, 2005, included in this
prospectus have been so included in reliance on the report (which contains an
explanatory paragraph relating to our ability to continue as a going concern as
disclosed in Note 3 to the financial statements) of Ham, Langston & Brezina,
L.L.P., an independent registered public accounting firm, given on the authority
of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form SB-2 under the
Securities Act with respect to the securities offered by this prospectus. As
permitted by the SEC rules and regulations, this prospectus, which forms a part
of the registration statement, does not contain all of the information contained
in the registration statement or in the exhibits to the registration statement.
For further information with respect to us and the securities offered by this
prospectus, reference is made to the registration statement. You may read and
copy the registration statement and exhibits at the public reference room of the
SEC at 450 5th Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. The SEC charges a fee for copies. The SEC maintains a website at
http://www.sec.gov that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC.
56
INDEX TO FINANCIAL STATEMENTS
HEALTHRENU MEDICAL, INC.
Page(s)
-------
Financial Statements for the Two Years Ended September 30, 2005
Report of Independent Registered Public Accounting Firm F-2
Balance Sheets as of September 30, 2005 and 2004 F-3
Statements of Operations for the years ended September 30, 2005 and 2004 F-4
Statements of Stockholders' Equity (Deficit) for the years ended September 30, 2005 and 2004 F-5
Statements of Cash Flows for the years ended September 30, 2005 and 2004 F-7
Notes to Financial Statements F-8
Financial Statements for the Quarter Ended June 30, 2006
Unaudited Balance Sheet as of June 30, 2006 F-25
Unaudited Statements of Operations for the nine months ended June 30, 2006 and 2005 F-26
Unaudited Statements of Cash Flows for the nine months ended June 30, 2006 and 2005 F-27
Notes to Unaudited Financial Statements F-28
F-1
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
To the Board of Directors and Stockholders of
HealthRenu Medical, Inc.
We have audited the accompanying balance sheet of HealthRenu Medical, Inc. (the
"Company") as of September 30, 2005 and 2004, and the related statements of
operations, stockholders' equity (deficit) and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of HealthRenu Medical, Inc. as of
September 30, 2005 and 2004, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming HealthRenu
Medical, Inc. will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred significant recurring losses from
operations and at September 30, 2005 is in a negative working capital position
and a stockholders' deficit position. These factors raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
with regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As discussed in Note 15 and 16 to the financial statements, the Company has
restated its financial statements as of and for the year ended September 30,2005
to correct errors in its accounting for convertible notes payable, warrants to
purchase common stock and stock based compensation.
Houston, Texas
January 25, 2006, except for note 15 and 16 which is October 10, 2006.
/s/ Ham, Langston & Brezina, LLP
F-2
HEALTHRENU MEDICAL, INC.
BALANCE SHEETS
September 30, 2005 and 2004
----------
ASSETS
2005 2004
------------ ------------
(Restated)
Current assets:
Cash and cash equivalents $ 163,095 $ 7,560
Accounts receivable 716 2,500
Inventories 18,188 22,430
Prepaids and other assets 2,146 --
------------ ------------
Total current assets 184,145 32,490
Property and equipment, net 9,592 4,048
Deferred loan costs, net 136,307 --
------------ ------------
Total assets $ 330,044 $ 36,538
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 117,863 $ 131,223
Accounts payable-stockholder 2,329 2,329
Note payable 188,843 --
Accrued liabilities 30,327 59,661
Derivative liabilities 2,630,121 --
------------ ------------
Total current liabilities 2,969,483 193,213
------------ ------------
Convertible notes payable 9,324 --
------------ ------------
Total liabilities 2,978,807 193,213
------------ ------------
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; $0.001 par value, 150,000,000 shares
authorized, 25,619,589 and 22,454,451 shares
issued and outstanding at September 30, 2005 and
2004, respectively 25,620 22,454
Additional paid-in capital 3,748,602 2,581,911
Unissued common stock -- 42,511
Accumulated deficit (6,422,987) (2,803,553)
------------ ------------
Total stockholders' deficit (2,648,763) (156,675)
------------ ------------
Total liabilities and stockholders' equity
(deficit) $ 330,044 $ 36,538
============ ============
See accompanying notes to financial statements.
F-3
HEALTHRENU MEDICAL, INC.
STATEMENTS OF OPERATIONS
for the years ended September 30, 2005 and 2004
----------
2005 2004
------------ ------------
(Restated)
Sales $ 9,785 $ 21,806
Cost of sales 13,458 43,306
------------ ------------
Gross margin (3,673) (21,500)
General and administrative expenses (889,868) (1,457,701)
------------ ------------
Loss from operations (893,541) (1,479,201)
------------ ------------
Other income (expense):
Write down of syndication costs (360,000) --
Interest and financing expense (320,460) (430)
Gain on extinguishment of debt 36,688 --
Loss on embedded derivative liability (2,082,121) --
------------ ------------
Total other income (expense), net (2,725,893) (430)
------------ ------------
Net loss $ (3,619,434) $ (1,479,631)
============ ============
Weighted average shares outstanding 27,398,634 19,280,788
============ ============
Basic and diluted net loss per common share $ (0.13) $ (0.08)
============ ============
See accompanying notes to financial statements.
F-4
HEALTHRENU MEDICAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
for the years ended September 30, 2005 and 2004
----------
Additional Unissued Stock
Preferred Stock Common Stock Paid-In Common Subscription
Shares Amount Shares Amount Capital Stock Receivable
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 2003 1,763 $ 2 15,506,962 $ 15,507 $ 674,830 $ 698,602 $ (31,000)
Common stock issued for cash
and receivable -- -- 1,822,000 1,822 100,378 -- --
Common stock issued as
payment of liabilities and
additional compensation -- -- 745,587 745 790,813 -- --
Common stock issued for
consulting services -- -- 325,000 325 277,625 -- --
Common stock issued for
employee compensation -- -- 275,000 275 27,225 -- --
Issuance of common stock for
committed stock -- -- 3,779,902 3,780 694,822 (698,602)
Shares committed and issuable
for employee and directors
compensation -- -- -- -- -- 42,511 --
Additional capital
contributed upon sale of
assets and liabilities -- -- -- -- 15,468 -- --
Collection of subscription
receivable -- -- -- -- -- -- 31,000
Rent contributed by
stockholder -- -- -- -- 750 -- --
Net loss -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 2004 1,763 $ 2 22,454,451 $ 22,454 $ 2,581,911 $ 42,511 $ --
=========== =========== =========== =========== =========== =========== ===========
Accumulated
Deficit Total
----------- -----------
Balance at September 30, 2003 $(1,323,922) $ 34,019
Common stock issued for cash
And receivable -- 102,200
Common stock issued as payment
of liabilities and additional
compensation -- 791,558
Common stock issued for
consulting services -- 277,950
Common stock issued for
employee compensation -- 27,500
Issuance of common stock for
committed stock -- --
Shares committed and issuable
for employee and directors
compensation -- 42,511
Additional capital
contributed upon sale of
assets and liabilities -- 15,468
Collection of subscription
receivable -- 31,000
Rent contributed by
stockholder -- 750
Net loss (1,479,631) (1,479,631)
----------- -----------
Balance at September 30, 2004 $(2,803,553) $ (156,675)
=========== ===========
See accompanying notes to financial statements.
F-5
HEALTHRENU MEDICAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
for the years ended September 30, 2005 and 2004
Additional Unissued Stock
Preferred Stock Common Stock Paid-In Common Subscription
Shares Amount Shares Amount Capital Stock Receivable
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 2004 1,763 $ 2 22,454,451 $ 22,454 $ 2,581,911 $ 42,511 $ --
Common stock issued as
settlement -- -- 25,000 25 725 -- --
Common stock issued as payment
for liabilities and additional
compensation -- -- 2,623,850 2,624 349,888 -- --
Common stock issued for
services -- -- 25,000 25 2,475 -- --
Issuance of common stock
committed -- -- 1,585,563 1,585 40,926 (42,511)
Common stock issued for
syndication costs -- -- 1,555,974 1,556 169,601 -- --
Common stock issued for cash -- -- 3,274,667 3,275 143,175 -- --
Common stock cancelled -- -- (8,777,500) (8,777) 8,777 -- --
Common stock issued as
compensation -- -- 291,777 292 87,241 -- --
Effect of beneficial
conversion feature -- -- -- -- 240,333 -- --
Common stock issued upon
conversion of notes and related
accrued interest -- -- 2,560,807 2,561 123,550 -- --
Net loss -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 2005
(Restated) 1,763 $ 2 25,619,589 $ 25,620 $ 3,748,602 $ -- $ --
=========== =========== =========== =========== =========== =========== ===========
Accumulated
Deficit Total
----------- -----------
Balance at September 30, 2004 $(2,803,553) $ (156,675)
Common stock issued as
settlement -- 750
Common stock issued as payment
of liabilities and additional
compensation -- 352,512
Common stock issued for
services -- 2,500
Issuance of common stock
committed -- --
Common stock issued for
syndication costs -- 171,157
Common stock issued for cash -- 146,450
Common stock cancelled -- --
Common stock issued as
compensation -- 87,533
Effect of beneficial
conversion feature -- 240,333
Common stock issued upon
conversion of notes and related
accrued interest -- 126,111
Net loss (3,619,434) (3,619,434)
----------- -----------
Balance at September 30, 2005 $(6,442,987) $(2,648,763)
=========== ===========
See accompanying notes to financial statements.
F-6
HEALTHRENU MEDICAL, INC.
STATEMENTS OF CASH FLOWS
for the years ended September 30, 2005 and 2004
----------
2005 2004
------------ ------------
(Restated)
Cash flows from operating activities:
Net loss $ (3,619,434) $ (1,479,631)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 1,689 7,184
Rent expense contributed by stockholder -- 750
Effect of beneficial conversion feature 240,333 --
Accretion of debt discount 9,324 --
Amortization of debt issuance costs 893 --
Write off of syndicated costs 360,000 750
Common stock issued for services 3,250 --
Common stock issued for compensation 387,533 277,950
Common stock issued for interest 53,111 800,797
Gain on extinguishment of debt (36,688) --
Loss on embedded derivative liability 2,082,121 --
Changes in operating assets and liabilities:
Accounts receivable 1,784 (1,994)
Employee receivable -- 5,771
Other current assets (2,146) 4,936
Inventories 4,242 24,473
Accounts payable and accrued liabilities 46,506 227,030
------------ ------------
Net cash used in operating activities (467,482) (132,734)
------------ ------------
Cash flows from investing activities:
Purchase of fixed assets (7,233) (8,090)
------------ ------------
Net cash used in investing activities (7,233) (8,090)
------------ ------------
Cash flows from financing activities:
Net proceeds from convertible notes payable 513,800 --
Repayment of convertible notes payable (30,000) --
Proceeds from sale of common stock 146,450 99,700
Proceeds from collection of subscription receivable -- 31,000
------------ ------------
Net cash provided by financing activities 630,250 130,700
------------ ------------
(Decrease)/increase in cash and cash equivalents 155,535 (10,124)
Cash and cash equivalents, beginning of period 7,560 17,684
------------ ------------
Cash and cash equivalents, end of period $ 163,095 $ 7,560
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 2,040 $ --
============ ============
Cash paid for income taxes $ -- $ --
============ ============
See accompanying notes to financial statements.
F-7
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS
----------
1. Background and Summary of Significant Accounting Policies
Background
HealthRenu Medical, Inc. (the "Company" or "HealthRenu"), a Nevada
corporation, is headquartered in Houston, Texas. The Company provides raw
materials to a third party manufacturing company who produces various skin
care products that are purchased and distributed by the Company primarily
to the home health care and other medical markets in the United States.
The Company was originally incorporated in Delaware as Health Renu, Inc.
in 1997. In September 2003, upon completion of a recapitalization through
acquisition of a non-operating public shell, the name was changed to
HealthRenu Medical, Inc. The public shell had no significant assets or
operations at the date of acquisition. The Company assumed all liabilities
of the public shell that remained on the date of the acquisition. The
historical financial statements presented herein are those of HealthRenu
Medical, Inc., and its predecessor, Health Renu, Inc.
On February 29, 2004, the Company entered into an agreement with a
stockholder and former owner of the non-public entity to exchange 100% of
the issued and outstanding shares of Health Renu, Inc., a Delaware
corporation, and certain assets and liabilities of the Company for a
return of 25,000 shares of common stock of the Company (which the Company
has not yet received and has placed $-0- value on due to the uncertainty
of receipt of these shares) and exclusive rights to the formulas to
produce its products. The disposition of these assets and liabilities
resulted in the Company recording additional paid-in capital of $15,468.
Following is a summary of the Company's significant accounting policies.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts
and related disclosures. Actual results could differ from those estimates.
Restatements
Restatements of 2005 information previously reported were made. See Note
16 for details.
Revenue Recognition
Revenue is recognized when products are shipped and when all of the
following have occurred: a firm sales agreement is in place, pricing is
fixed or determinable and collection is reasonably assured. Sales are
reported net of estimated returns, consumer and trade promotions, rebates
and freight allowed.
Concentrations of Credit Risk
Financial instruments which subject the Company to concentrations of
credit risk include cash and cash equivalents and accounts receivable.
The Company maintains its cash in well-known banks selected based upon
management's assessment of the banks' financial stability. Balances may
periodically exceed the $100,000 federal depository insurance limit;
however, the Company has not experienced any losses on deposits.
Accounts receivable generally arise from sales of various skin care
products to the home health care and other medical markets in the United
States. Collateral is generally not required for credit granted.
Continued
F-8
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
1. Background and Summary of Significant Accounting Policies, continued
Concentrations of Credit Risk, continued
Sales of product to a stockholder of the Company comprised approximately
88% of the Company's revenue for the year ended September 30, 2004. There
were no such sales in 2005.
The Company establishes an allowance for doubtful accounts based upon the
aging of customer balances and the likelihood of collection. As of
September 30, 2005, the Company has determined that no allowance for
doubtful accounts is necessary.
Cash Equivalents
For purposes of reporting cash flows, the Company considers all short-term
investments with an original maturity of three months or less to be cash
equivalents.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the
assets, which range from three to twenty-five years. Expenditures for
major renewals and betterments that extend the original estimated economic
useful lives of the applicable assets are capitalized. Expenditures for
normal repairs and maintenance are charged to expense as incurred. The
cost and related accumulated depreciation of assets sold or otherwise
disposed of are removed from the accounts, and any gain or loss is
included in operations.
Inventories
Inventories consist of raw materials, work-in-process and finished goods
and are stated at the lower of cost or market. Cost is computed using
actual costs on a first-in, first-out basis. Since the inventory typically
has a very long shelf life, management reviews the inventory on an annual
basis and records a reserve for obsolescence when considered necessary. As
of September 30, 2005, the Company has determined that no reserve for
obsolescence is necessary.
Shipping and Delivery Costs
The cost of shipping and delivery are charged directly to cost of sales at
the time of shipment.
Research and Development
Research and development activities are expensed as incurred, including
costs relating to patents or rights, which may result from such
expenditures.
Income Taxes
The Company uses the liability method of accounting for income taxes.
Under this method, deferred income taxes are recorded to reflect the tax
consequences on future years of temporary differences between the tax
basis of assets and liabilities and their financial amounts at year-end.
The Company provides a valuation allowance to reduce deferred tax assets
to their net realizable value.
Debt Issuance Costs
Debt issuance costs are deferred and recognized, using the effective
interest method, over the expected term of the related debt.
Continued
F-9
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
1. Background and Summary of Significant Accounting Policies, continued
Loss Per Share
Basic and diluted loss per share is computed on the basis of the weighted
average number of shares of common stock outstanding during each period.
Common equivalent shares from convertible preferred stock and common stock
options and warrants are excluded from the computation, as their effect
would dilute the loss per share for all periods presented. If the Company
had reported net income for the years ended September 30, 2005 or 2004,
the calculation of diluted net income per share would have included
367,919 and -0-, respectively, and 1,763 and 1,763, respectively, of
additional common equivalent shares for the Company's stock warrants and
convertible preferred stock.
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the carrying value
of a long-lived asset, including associated intangibles, may be impaired,
an evaluation of recoverability is performed by comparing the estimated
future undiscounted cash flows associated with the asset or the asset's
estimated fair value to the asset's carrying amount to determine if a
write-down to market value or discounted cash flow is required.
Fair Value of Financial Instruments
The Company includes fair value information in the notes to financial
statements when the fair value of its financial instruments is different
from the book value. When the book value approximates fair value, no
additional disclosure is made.
Comprehensive Income
Comprehensive income includes such items as unrealized gains or losses on
certain investment securities and certain foreign currency translation
adjustments. The Company's financial statements include none of the
additional elements that affect comprehensive income. Accordingly,
comprehensive income (loss) and net income (loss) are identical.
Stock-Based Compensation
The Company accounts for employee stock options using the intrinsic value
method prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees", and has adopted the
disclosure-only alternative of SFAS No. 123, "Accounting fort Stock-Based
Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure".
Unissued Common Stock
The Company records unissued common stock when it receives cash or
services for common stock which has yet to be issued. Such unissued common
stock is included in weighted average shares outstanding for the
calculation of the loss per share during the period for which the cash was
committed and services provided if there were no further contingencies
associated with the transaction and the unissued common stock was entitled
to participate in dividends.
Continued
F-10
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
1. Background and Summary of Significant Accounting Policies, continued
Reclassifications
Certain amounts included in the 2004 financial statements have been
reclassified to confirm to the current year presentation. Such
reclassifications did not have any effect on the reported net loss or
stockholders' deficit.
Derivative Financial Instruments
The Company does 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,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.
Recent Accounting Pronouncements
In December 2004 the FASB issued revised SFAS No. 123R, "Share-Based
Payment". SFAS No. 123R sets accounting requirements for "share-based"
compensation to employees and requires companies to recognize in the
income statement the grant-date fair value of stock options and other
equity-based compensation. SFAS No. 123R is effective in interim or annual
periods beginning after June 15, 2005. The Company will be required to
adopt SFAS No. 123R in its fiscal year 2006 and currently discloses the
effect on net (loss) income and (loss) earnings per share of the fair
value recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation". The Company is currently evaluating the impact of the
adoption of SFAS 123R on its financial position and results of operations,
including the valuation methods and support for the assumptions that
underlie the valuation of the awards.
In November 2004 the FASB issued SFAS No. 151, "Inventory Costs". The new
Statement amends ARB No. 43, Chapter 4, "Inventory Pricing", to clarify
the accounting for abnormal amounts of idle facility expense, freight,
handling costs and wasted material. This Statement requires that those
items be recognized as current period charges and requires that allocation
of fixed production overheads to the cost of conversion be based on the
normal capacity of the production facilities. This statement is effective
for fiscal years beginning after June 15, 2005. The adoption of this
statement is not expected to have a material impact on our financial
condition or results of operations.
In December 2004 the FASB issued SFAS No. 153 "Exchanges of Nonmonetary
Assets - An Amendment of APB Opinion No. 29". SFAS No. 153 amends APB
Opinion No. 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance.
SFAS No. 153 is to be applied prospectively for nonmonetary exchanges
occurring in fiscal periods beginning after June 15, 2005. The Company's
adoption of SFAS No. 153 is not expected to have a material impact on its
financial position or results of operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No.
3", which requires retrospective application to prior periods' financial
statements for changes in accounting principle, unless it is impracticable
to determine either the period-specific effects or the cumulative effect
of the change. If such determinations are impracticable, there are other
disclosures required under the standard. This standard is effective for
fiscal years beginning after December 15, 2005 and early adoption is
allowed. The adoption of this standard is not expected to have a material
impact on the Company's financial position or results of operations.
Continued
F-11
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
2. Going Concern
During the years ended September 30, 2005 and 2004, the Company has
continued to accumulate payables to its vendors and has experienced
negative financial results as follows:
2005 2004
------------ ------------
Net loss $ (3,619,434) $ (1,479,631)
Negative cash flows from operations (467,482) (132,734)
Negative working capital (2,785,338) (160,722)
Accumulated deficit (6,422,987) (2,803,553)
Stockholder deficit (2,648,763) (156,674)
Management has developed specific current and long-term plans to address
its viability as a going concern as follows:
o Effective September 2003, the Company entered into a
recapitalization transaction with a public shell to gain access to
public capital markets, to increase attractiveness of its equity and
to create liquidity for stockholders.
o The Company is also attempting to raise funds through debt and/or
equity offerings. If successful, these additional funds will be used
to pay down liabilities and to provide working capital.
o In the long-term, the Company believes that cash flows from growth
in its operations will provide the resources for continued
operations.
o In May 2005 the Company entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, L.P., where the Company may
periodically sell shares of common stock for a purchase price up to
a maximum of $10 million subject to the completion of the
registration of the Company's common stock under the Securities Act
of 1933.
There can be no assurance that the Company will have the ability to
implement its business plan and ultimately attain profitability. The
Company's long-term viability as a going concern is dependent upon three
key factors, as follows:
o The Company's ability to obtain adequate sources of debt or equity
funding to meet current commitments and fund the continuation of its
business operations in the near term.
o The ability of the Company to control costs and expand revenues.
o The ability of the Company to ultimately achieve adequate
profitability and cash flows from operations to sustain its
operations.
Continued
F-12
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
3. Inventories
Inventories consist of the following at September 30, 2005 and 2004:
2005 2004
---------- ----------
Work-in-process $ -- $ 14,000
Finished goods 18,188 8,430
---------- ----------
$ 18,188 $ 22,430
========== ==========
4. Property and Equipment
Property and equipment consisted of the following at September 30,2005 and
2004:
2005 2004
---------- ----------
Furniture and fixtures $ 9,314 $ 2,893
Buildings and equipment 5,335 5,552
Software 1,029 --
---------- ----------
15,678 8,445
Less: accumulated depreciation (6,086) (4,397)
---------- ----------
Property and equipment, net $ 9,592 $ 4,048
========== ==========
Depreciation expense for the years ended September 30, 2005 and 2004 was
$1,689 and $2,135, respectively.
5. Deferred Loan Costs
In connection with the Convertible Notes Payable described in Note 7
below, theCompany incurred certain direct expenses as a result of these
debt agreements.As of September 30, 2005 the total costs capitalized by
the Company were$137,200. These deferred loan costs are being amortized
using the effectiveinterest method over the three-year estimated life of
the related debtagreements. The Company recorded $893 of amortization
expense during the yearended September 30, 2005 related to these deferred
loan costs which are includedin the statement of operations as additional
interest and financing expense. Theaccumulated amortization of deferred
loan costs was $893 at September 30, 2005.
6. Note Payable
In May 2005 the Company entered into a SEDA agreement (See Note 9). In
conjunction with this agreement, the Company entered into a promissory
note for $188,843 to pay for certain of its financing costs associated
with this agreement. The note bears interest at 12% per year and matured
on October 3, 2005. This note has been verbally extended and is due on
demand. The note is not collateralized. Due to the contingencies
associated with the completion of the SEDA agreement, this amount has been
expensed and included in write off of syndication costs in the statement
of operations for the year ended September 30, 2005.
7. Convertible Notes Payable
During April and May 2005, the Company received $103,000 in the form of
convertible notes payable from certain of its officers and directors.
These notes bear interest at 8% per year, plus contain an additional 8%
financing charge, and are convertible into the Company's common stock at
$0.03 per share. The notes matured on August 31, 2005. Since the
conversion price of $0.03 was less than the fair market value of the
Company's common stock of $0.10, which was determined based on the quoted
market price of the common stock, the Company recorded a $240,333
beneficial conversion feature, which is included in interest and financing
expenses in the accompanying statement of operations for the year ended
September 30, 2005. During the year ended September 30, 2005, 2,560,807
shares of common stock were issued upon the conversion of $73,000 of
principal and $53,111 in interest and financing expense related to the
convertible notes payable. The remaining $30,000 in principal and $2,040
in interest was repaid in cash during the year ended September 30, 2005.
Continued
F-13
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
7. Convertible Notes Payable, continued
In August and September 2005 the Company entered into agreements to issue
convertible promissory notes and received proceeds of $410,800, net of
$137,200 offering costs. The notes are for a term of three years and bear
interest at 8% per annum, which is payable annually in shares of the
Company's common stock. The holder of the note has the option to convert
the note at any time on or after the issuance date of the note. The notes
are convertible at 85% of the average of the trading prices of the common
stock for the ten days ending one day prior to the Company's receipt of
the conversion notice. The note holders were also granted two warrants to
purchase the Company's common stock to become exercisable for each share
of common stock to be issued upon conversion of the notes with each
warrant to purchase one share of common stock at an exercise price of 125%
and 150%, respectively, of the conversion price of the notes then in
effect. These warrants will expire on October 31, 2009.
Since the number of warrants to become exercisable in connection with the
convertible note issuance is indeterminable, it has been classified as a
derivative instrument based on the guidance of SFAS No. 133 and EITF 00-19
(see Note 15 below for further discussion)
Continued
F-14
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
8. Income Taxes
The Company has incurred losses since its inception and, therefore, has
not been subject to federal income taxes. As of September 30, 2005, the
Company had net operating loss ("NOL") carryforwards for income tax
purposes of approximately $2,455,000 which expire in various tax years
through 2024. Under the provisions of Section 382 of the Internal Revenue
Code an ownership change in the Company could severely limit the Company's
ability to utilize its NOL carryforward to reduce future taxable income
and related tax liabilities. Additionally, because United States tax laws
limit the time during which NOL carryforwards may be applied against
future taxable income, the Company may be unable to take full advantage of
its NOL for federal income tax purposes should the Company generate
taxable income.
The composition of deferred tax assets and liabilities and the related tax
effects at September 30, 2005 and 2004 are as follows:
2005 2004
---------- ----------
Deferred tax assets:
Net operating losses $ 834,701 $ 626,817
Valuation allowance (834,701) (626,817)
---------- ----------
Net deferred tax asset (liability) $ -- $ --
========== ==========
Continued
F-15
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
8. Income Taxes, continued
The difference between the income tax benefit in the accompanying
statement of operations and the amount that would result if the U.S.
federal statutory rate of 34% were applied to pre-tax loss for the years
ended September 30, 2005 and 2004 is as follows:
2005 2004
------------------------------ ------------------------------
Amount Percent Amount Percent
------------- ------------- ------------- -------------
Benefit for income tax at
federal statutory rate $ 1,230,608 34.0% $ 503,075 34.0%
Non-deductible expense (1,022,724) (28.3) (321,783) (21.7)
Increase in valuation
allowance (207,884) (5.7) (181,292) (12.3)
------------- ------------- ------------- -------------
$ -- --% $ -- --%
============= ============= ============= =============
9. Commitments and Contingencies
Leases
The Company leases office space and facilities under an operating lease
which expires in January 2006. This lease required monthly lease payments
of $2,115. The Company renewed its lease effective January 31, 2006. The
new lease requires initial monthly payments of $3,407 escalating each year
through the term of the lease, which expires on January 31, 2009. Future
minimum lease payments on this lease are as follows:
Operating
Leases
----------
2006 $ 36,797
2007 41,713
2008 42,952
2009 14,455
----------
$ 135,917
Total rent expense for the years ended September 30, 2005 and 2004 was
$26,173 and $13,525, respectively.
Litigation
In 2004, Cause Number 825,095, "David M. Loev v. HealthRenu Medical, Inc,"
was filed against the Company in the County Court at Law No. 4, Harris
County, Texas. The amount of damages sought by David Loev is approximately
$16,600 for nonpayment of legal services he performed for the Company. The
amount has been recorded as a liability as of September 30, 2004 in the
accompanying financial statements. This matter was settled in 2005 with
the Company paying $16,600 in cash.
The Company is from time to time party to certain litigation arising in
the normal course of business. Management believes that such litigation
will not have a material impact on the Company's financial position or
results of operations.
Continued
F-16
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
9. Commitments and Contingencies, continued
Consulting and Employment Agreements
In March 2004, the Company entered into an employment agreement with its
new chief executive officer. The three-year employment agreement provides
for an annual salary as well as a one-time issuance of 350,000 shares of
common stock of the Company at $0.06 per share, which was the fair value
of the common stock determined based on recent cash sales of the Company's
common stock, as payment of accrued compensation owed to him of
approximately $21,214. However, since the quoted market price of the
Company's common stock was $1.60 per share at the grant date, the Company
recorded additional compensation expense of $538,786 in the statement of
operations for the year ended September 30, 2004.
In May 2004 the Company entered into a consulting services agreement with
a member of the Board of Directors to provide management advisory
services, strategic planning, professional introductions and company
growth services. The Company issued 250,000 shares of common stock, which
was valued at $0.80 per share based on the quoted market price of the
Company's common stock, to the board member in consideration for services
under the agreement and have agreed to issue an additional 50,000 shares
for each $100,000 in revenues over $300,000 that she generates for the
Company up to a maximum of 350,000 additional shares. The agreement
expires on May 1, 2009. As a result, the Company has recorded $200,000 as
consulting expense in the statement of operations for the year ended
September 30, 2004.
10. Standby Equity Distribution Agreement
In May 2005, the Company entered into a Standby Equity Distribution
Agreement ("SEDA") with Cornell Capital Partners, L.P. ("Cornell").
Pursuant to the SEDA, the Company may periodically sell to Cornell shares
of its common stock for a purchase price of up to a maximum $10 million.
For each share of common stock purchased under the SEDA, Cornell will pay
the Company 97% of the lowest volume weighted average price on which its
common stock is traded for the five trading days immediately following the
notice date. Subject to the Company completing the registration of its
common stock related to the SEDA agreement, under the Securities Act of
1933, the Company may request advances until Cornell has advanced $10
million or within 24 months after the effective date of the Company's
related registration statement, whichever occurs first. The amount of each
advance is limited to a maximum draw down of $350,000 every five trading
days. Cornell will retain a fee of 5% of each advance under the SEDA,
resulting in a total effective discount to the market price of the
Company's common stock of 8%. The Company also issued 1,465,065 shares of
its common stock valued at $0.11 per share which was the fair market value
of the common stock when the number of shares were agreed upon and a
promissory note in the principal amount of $188,843 to Cornell and issued
90,909 shares of its common stock valued at the fair market value of $0.11
per share to a placement agent, resulting in total financing costs of
$360,000, which was expensed as of September 30, 2005.
Continued
F-17
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
11. Preferred Stock
The articles of incorporation of the Company stipulate that the Company is
authorized to issue 5,000,000 shares of preferred stock, $.001 par value.
Of the 5,000,000 authorized shares, 1,500,000 shares of preferred stock
have been designated Series 2000A Convertible Preferred stock (Series
2000A Preferred). The shareholders of these preferred shares are entitled
to a preference in liquidation of ten cents per share. These preferred
shareholders also receive dividends on a pro-rata basis with common
stockholders at the election of the board of directors. No dividends have
been declared as of September 30, 2005. Each share is convertible at the
option of the shareholder to one share of common stock. In addition, the
shares will automatically convert to common shares upon the closing of a
firm commitment underwritten public offering with net proceeds in excess
of $2,000,000 or a vote of two-thirds of the preferred shareholders. As of
September 30, 2005, there are 1,763 shares of Series 2000A Preferred stock
outstanding. No other preferred stock is outstanding at September 30,
2005.
12. Stock Warrants
In September 2005 the Company granted warrants to certain consultants and
placement agents to purchase 1,587,237 shares of the Company's common
stock exercisable at $0.30 to $.50 per share, at which time the trading
price ranged from $0.31 to $0.44 per share. The warrants were fully
vested, exercisable at the date of grant and expire on October 31, 2009.
As a result of the Company's determination that their convertible notes as
described in Note 15 result in an indeterminate number of shares to be
issued the warrant instruments described above and listed below are being
valued as embedded derivatives consistent with SFAS No. 133. The fair
value of these warrants are recorded in the Company's balance sheet as a
component of derivative liability with changes in the values of these
embedded derivatives reflected in the statement of operations as "Gain
(loss) on embedded derivative liability."
A summary of the Company's stock warrant activity and related information
is as follows:
Weighted
Average
Number of Exercise
Shares Price
---------- ----------
Outstanding at September 30, 2003 -- $ --
Granted -- --
Exercised -- --
Forfeited -- --
---------- ----------
Outstanding at September 30, 2004 -- --
Granted 1,587,237 0.46
Exercised -- --
Forfeited -- --
---------- ----------
Outstanding at September 30, 2005 1,587,237 $ 0.46
==========
Exercisable at September 30, 2005 1,587,237
==========
Continued
F-18
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
12. Stock Warrants, continued
Following is a summary of outstanding stock warrants at September 30,
2005:
Number of Expiration Weighted Average
Shares Vested Date Exercise Price
--------- --------- ---------- ----------------
1,100,000 1,100,000 2009 $0.50
119,318 119,318 2009 $0.48
106,875 106,875 2009 $0.35
121,818 121,818 2009 $0.36
139,226 139,226 2009 $0.30
--------- ---------
1,587,237 1,587,237
========= =========
13. Related Party Transactions
During the year ended September 30, 2005, the Company issued 2,000,000
shares of its common stock as payment of accrued compensation of $40,000
owed to an officer of the Company. However, based on the quoted market
price of the Company's common stock of $0.17 per share the Company
recorded additional compensation expense of $300,000 in the statement of
operations for the year ended September 30, 2005.
During the year ended September 30, 2004, the Company's chief executive
officer directly paid vendors on behalf of the Company in the total amount
of $23,559. In addition, the chief executive officer advanced the Company
$6,000. During the year ended September 30, 2004, the Company issued the
chief executive officer 295,587 shares of the Company's common stock to
reimburse him for these transactions. However, based on the quoted market
price of the Company's common stock of $0.75 per share the Company
recorded additional compensation expense of $192,000 in the statement of
operations for the year ended September 30, 2004.
During the year ended September 30, 2004, the Company recognized revenue
of $19,213 from cash sales of product to a stockholder and consultant to
the Company.
14. Non-Cash Investing and Financing Activities
During the years ended September 30, 2005 and 2004, the Company engaged in
certain non-cash investing and financing activities as follows:
2005 2004
------------ ------------
Issuance of note payable for funding costs $ 188,843 $ --
============ ============
Common stock issued for funding costs $ 171,157 $ --
============ ============
Common stock issued for conversion of notes $ 73,000 $ --
============ ============
Issuance of common stock as payment of liability $ 52,512 $ 60,773
============ ============
Transfer of property for reduction in accrued
liability $ -- $ 3,632
============ ============
Continued
F-19
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
14. Non-Cash Investing and Financing Activities, continued
Sale of common stock for subscription
receivable recorded in other current
assets $ -- $ 2,500
============ ============
Sale of assets for reduction in liabilities:
Accounts receivable $ -- $ 1,994
============ ============
Other asset $ -- $ 64
============ ============
Fixed assets $ -- $ 50,129
============ ============
Notes payable $ -- $ (15,403)
============ ============
Accounts payable $ -- $ (52,252)
============ ============
15. 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 ("Notes Payable")
2. Warrants to purchase common stock associated with the convertible
notes payables;
3. Warrants to purchase common stock issued to placement agent
("Placement Warrants")
4. Warrants to purchase common stock issued to consultants
("Consulting Warrants")
Continued
F-20
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
Based on the guidance in SFAS 133 and EITF 00-19, the Company concluded
that these instruments were required to be accounted for as derivatives.
SFAS 133 and EITF 00-19 require the Company to bifurcate and separately
account for the conversion features of the convertible notes payables and
warrants issued as embedded derivatives.
Pursuant to SFAS 133, the Company 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, the Company 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 the Company
has a sufficient number of authorized shares to settle these warrants. As
such, the warrants were accounted for as derivative instrument
liabilities. The Company 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
derivativeliabilities were not previously classified as such in the
Company's historical financial statements. In order to reflect these
changes, HealthRenu is concurrently restating its financial statements for
the year ended September 30, 2005 and each of the quarters ended December
31, 2005, March 31, 2006, and June 30, 2006.
The impact of the application of SFAS No. 133 and EITF 00-19 on the
balancesheet as of September 30, 2005 is as follows:
Embedded derivative liability balance September 30, 2005
Notes Payable $1,933,729
Placement Warrants 213,835
Consulting Warrants 482,557
----------
Total: $2,630,121
The impact on statements of operations for the years ended September 30,
2005 and 2004 is as follows:
Gain (loss) on embedded Derivative liabilities:
year ended
--------------------------------------
September 30,2005 September 30, 2004
----------------- -----------------
Notes Payable $ (1,516,937) $--
Placement Warrants (176,338) --
Consulting Warrants (388,846) --
----------------- -----------------
Total gain (loss) on
embedded derivative
liabilities: $ (2,082,121) $--
----------------- -----------------
Continued
F-21
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
16. Restatement
The Company has restated its annual financial statements from amounts
previously reported on September 30, 2005. The Company previously recorded
the convertible features of its debt as a beneficial conversion feature
and reflected such discount as a reduction in the debt as a discount. The
Company has determined that certain financial instruments issued by the
Company contain features that require the Company 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 15 was added to disclose the derivative instrument
liabilities and provide information on subsequent changes.
The Company 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 year ended September
30, 2005, was an increase in the net loss attributable to common
shareholders of $2,082,121. Basic earnings (loss) attributable to common
shareholders per share for the year ended September 30, 2005 increased
$0.06 per share.
The Company has also determined that costs related to certain debt
agreements were directly related to these debt agreements and therefore
are now accounted for as deferred loan costs net of accumulated
amortization rather than as equity. Additionally the Company has added
Note 5 to provide information related to these assets.
The effect of the (non-cash) changes related to accounting for these
deferred loan costs on the statement of operations for the twelve months
ended September 30, 2005 was an increase in the Company's net loss
attributable to common shareholders of $893. The cumulative effect on the
balance sheet as of September 30, 2005 was an additional deferred loan
cost net of accumulated amortization of $136,037.
Basic earnings (loss) attributable to common shareholders per share for
the year ended September 30, 2005 increased $0.06 per share for the
cumulative effect of the adjustments.
Continued
F-22
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
----------
Restatement, continued
In all other material respects, the financial statements are
unchanged. Following is a summary of the restatement adjustments:
As of September 30, 2005
---------------------------------------------------
As Reported Adjustments As Restated
------------- ------------- -------------
SUMMARY BALANCE SHEET
ASSETS
Current assets:
Cash and cash equivalents $ 163,095 $ -- $ 163,095
Accounts receivable 716 -- 716
Inventories 18,188 -- 18,188
Prepaid expense 2,146 -- 2,146
------------- ------------- -------------
Total current assets 184,145 -- 184,145
------------- ------------- -------------
Property and equipment, net 9,592 -- 9,592
Deferred Financing Costs, net -- 136,307 (a) 136,307
------------- ------------- -------------
Total assets $ 193,737 $ 136,307 $ 330,044
============= ============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 117,863 $ -- $ 117,863
Accounts payable-stockholder 2,329 -- 2,329
Accrued liabilities 27,403 2,924 (b) 30,327
Note payable 188,843 -- 188,843
Derivative liability -- 2,630,121 (c) 2,630,121
------------- ------------- -------------
Total current liabilities 336,438 2,633,045 2,969,483
------------- ------------- -------------
Convertible notes payable 10,960 (1,636) (d) 9,324
Total liabilities 347,398 2,631,409 2,978,807
============= ============= =============
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, $0.001 par value; 150,000,000 shares
authorized, 25,019,589 shares issued and outstanding at
September 30, 2005 25,620 -- 25,620
Additional paid-in capital 4,616,672 (868,070) (e) 3,748,602
Accumulated deficit (4,795,955) (1,627,032) (f) (6,442,987)
------------- ------------- -------------
Total stockholders' deficit (153,661) (2,495,102) (2,648,763)
------------- ------------- -------------
Total Liability and Stockholders' deficit 193,737 136,307 330,044
============= ============= =============
(a) To record net deferred loan costs associated with the 2005
convertible notes payable.
(b) To adjust accrued interest to actual based upon previous errors.
(c) To record the estimated fair value of warrants and embedded
derivatives.
(d) To adjust debt discount to actual resulting from errors in the
initial establishment of debt discounts resulting from accounting
for embedded derivatives and warrants
(e) To adjust additional paid-in capital for derivative instruments
previously considered having beneficial conversion features.
Included in this adjustment is the effect of the prior consideration
of convertible notes payable previously considered having beneficial
conversion features ($410,800) and warrants that are now included in
the Company's estimated embedded derivative liability that were
previously recorded as additional paid-in capital. ($457,270).
(f) To close out the adjustments to the statement of operation below to
accumulated deficit.
Continued
F-23
HEALTHRENU MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
Restatement, continued
For the year ended September 30, 2005
---------------------------------------------------
As Reported Adjustments As Restated
------------- ------------- -------------
SUMMARY STATEMENT OF OPERATIONS
Sales 9,785 -- 9,785
Cost of sales 13,458 -- 13,458
------------- ------------- -------------
Gross profit (loss) (3,673) -- (3,673)
General and administrative expenses (1,347,138) 457,270 (a) (889,868)
------------- ------------- -------------
Loss from operations (1,350,138) -- (893,541)
============= ============= =============
Other income/(expense)
Write down of syndicated costs (360,000) -- (360,000)
Interest and financing expense (318,279) (2,181) (b) (320,460)
Gain on extinguishment of debt 36,688 -- 36,688
Loss on embedded derivative liability -- (2,082,121) (c) (2,082,121)
------------- ------------- -------------
Total other income (expense), net (641,591) (2,084,302) (2,725,893)
------------- ------------- -------------
Net loss (1,992,402) (1,627,032) (3,619,434)
============= ============= =============
Weighted average shares outstanding 27,398,634 -- 27,398,634
Basic and diluted net loss per common share (0.07) (0.06) (0.13)
(a) To adjust general and administrative expense as a result of the
Company's determination that certain equity instruments are to be
recorded as derivatives. This adjustment represents warrants that
were previously reported as a component of General and
Administrative expense but are now considered in the Company's
estimated embedded derivative liability.
(b) To adjust interest expense to actual based upon amortization errors,
to record current period deferred loan cost amortization, and to
adjust the accretion of debt discounts
(c) To record the expense associated with the fair value of warrants of
and embedded derivatives less the amount recorded as debt discount
related to the convertible notes.
Continued
F-24
HEALTHRENU MEDICAL, INC.
BALANCE SHEET
(UNAUDITED)
JUNE 30,
2006
ASSETS (RESTATED)
------ -------------
Current assets:
Cash and cash equivalents $ 69
Accounts receivable 637
Inventory 20,111
Prepaid expense --
-------------
Total current assets 20,817
Property and equipment, net 10,908
-------------
Deferred loan costs, net 200,888
-------------
Total assets $ 232,613
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
Current liabilities:
Accounts payable $ 120,661
Accounts payable-stockholder --
Accrued interest 75,070
Accrued liabilities 29,694
Note payable 188,843
Derivative liability 10,168,026
-------------
Total current liabilities 10,582,294
-------------
Convertible notes payable, net of discount of $1,031,870
and $538,676 at June 30, 2006 and September 30, 2005
respectively 116,129
-------------
Total liabilities 10,698,423
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
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
Additional paid-in capital 3,751,003
Accumulated deficit (14,242,910)
-------------
Total stockholders' deficit (10,465,810)
-------------
Total liabilities and stockholders' deficit $ 232,613
=============
See accompanying notes to financial statements.
F-25
HEALTHRENU MEDICAL, INC.
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 2006 AND 2005
(Unaudited)
NINE MONTHS ENDED
JUNE 30,
2006 2005
(RESTATED)
------------ ------------
SALES $ 12,587 $ 10,541
COST OF SALES 7,603 3,407
------------ ------------
GROSS PROFIT 4,984 7,134
GENERAL AND ADMINISTRATIVE EXPENSES 675,647 185,487
------------ ------------
LOSS FROM OPERATIONS (670,663) (178,353)
INTEREST AND FINANCING EXPENSE (211,355) (60,226)
LOSS ON EMBEDDED DERIVATIVE LIABILITY (6,937,905) --
------------ ------------
NET LOSS $ (7,819,923) $ (238,579)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 25,937,721 27,622,562
============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.30) $ (0.01)
============ ============
See accompanying notes to financial statements.
F-26
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
(RESTATED)
----------- -----------
Cash flows from operating activities:
Net loss $(7,819,923) $ (238,579)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 2,827 1,133
Common stock issued as compensation -- 3,250
Accretion of debt discount 106,806 --
Amortization of deferred financing costs 40,455 --
Common stock issued for services 2,876 --
Loss on embedded derivative liability 6,937,905 --
Net changes in:
Accounts receivable 79 (314)
Prepaids Assets and Other 2,146 39,484
Inventory (1,923) (1,398)
Accounts payable & Accrued liabilities 74,905 8,949
----------- -----------
Net cash used in operating activities (653,847) (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
Proceeds from convertible notes, net 494,964 90,000
----------- -----------
Net cash provided by financing activities 494,964 199,449
----------- -----------
(Decrease)/Increase in cash (163,026) 11,468
Cash and cash equivalents, beginning of period 163,095 7,560
----------- -----------
Cash and cash equivalents, end of period 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 related to derivatives 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.
F-27
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.
These unaudited financial statements should be read in conjunction with
the audited financial statements and notes thereto of HealthRenu Medical,
Inc. included in the Company's Annual Report on Form 10-KSB/A-2 for the
year ended September 30, 2005. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation of financial position, results of
operations and cash flows for the interim periods presented have been
included. Operating results for the interim periods are not necessarily
indicative of the results that may be expected for the full year.
RESTATEMENTS
Restatements of previously reported 2006 financial results were made. See
Note 11.
2. ORGANIZATION
HealthRenu Medical, Inc. (the "Company" or "HealthRenu"), a Nevada
corporation, is headquartered in Houston, Texas. The Company provides raw
materials to a third party manufacturing company who produces various skin
care products that are purchased and distributed by the Company primarily
to the home health care and other medical markets throughout the United
States.
The Company was originally incorporated in Delaware as Health Renu, Inc.
in 1997. In September 2003, upon completion of a recapitalization through
acquisition of a non-operating public shell, the name was changed to
HealthRenu Medical, Inc. The public shell had no significant assets or
operations at the date of acquisition. The Company assumed all liabilities
of the public shell on the date of the acquisition.
3. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts
and related disclosures. Actual results could differ from those estimates.
F-28
REVENUE RECOGNITION
Revenue is recognized when products are shipped and when all of the
following have occurred: a firm sales agreement is in place, pricing is
fixed or determinable and collection is reasonably assured. Sales are
reported net of estimated returns, consumer and trade promotions, rebates
and freight allowed.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which subject the Company to concentrations of
credit risk include cash and cash equivalents and accounts receivable.
The Company maintains its cash in well-known banks selected based upon
management's assessment of the banks' financial stability. Balances may
periodically exceed the $100,000 federal depository insurance limit;
however, the Company has not experienced any losses on deposits.
Accounts receivable generally arise from sales of various skin care
products to the home health care and other medical markets throughout the
United States. Collateral is generally not required for credit granted.
The Company establishes an allowance for doubtful accounts based upon the
aging of customer balances and the likelihood of collection. As of June
30, 2006 the Company has determined that no allowance for doubtful
accounts is necessary.
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.
INVENTORY
Inventory consists solely of finished goods and is 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 has determined that no reserve for inventory obsolescence is
necessary.
SHIPPING AND DELIVERY COSTS
The cost of shipping and delivery are charged directly to cost of sales at
the time of shipment.
F-29
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.
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.
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.
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 effective
interest method over the expected 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.
F-30
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 its 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'
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 $7,819,923 for the nine months ended
June 30, 2006 and cumulative net losses of $14,242,910 since its inception
and has a working capital deficit of $10,561,477. 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.
There are no assurances that HealthRenu will be able to either (1) achieve
a level of revenues adequate to generate sufficient cash flow from
operations; or (2) obtain additional financing through either private
placement, public offerings or bank financing necessary to support
HealthRenu's working capital requirements. To the extent that funds
generated from operations and any private placements, public offerings or
bank financing are insufficient, Health Renu will have to raise additional
working capital. No assurance can be given that additional financing will
be available, or if available, will be on terms acceptable to Health Renu.
If adequate working capital is not available, Health Renu may be required
to curtail or cease its operations.
F-31
5. DEFERRED LOAN COSTS
In connection with the Convertible Notes Payable described in Note 7 below
the Company incurred certain direct expenses as a result of these debt
agreements. As of June 30, 2006, the total costs capitalized by the
Company were $242,236. These deferred loan costs are being amortized using
the effective interest method over the three-year and five-year estimated
lives of the related debt agreements. The Company recorded $16,687 and
$40,454 of amortization expense during the three month and nine month
periods ending June 30, 2006 related to these deferred loan costs which
are included in the statement of operations as additional interest and
financing expense. The accumulated amortization of deferred loan costs was
$41,348 at June 30, 2006.
6. LITIGATION
The Company is a party to certain litigation arising in the normal course
of business from time to time. Management believes that such litigation
will not have a material impact on the Company's financial position or
results of operations.
7. CONVERTIBLE NOTES PAYABLE
In August and September 2005, the Company entered into agreements to issue
convertible promissory notes and received proceeds of $410,800, net of
$137,200 offering costs. The notes are for a term of three years and bear
interest at 8% per annum, which is payable annually in shares of the
Company's common stock. The holders of the notes have the option to
convert the note at any time on or after the issuance date of the note.
The notes are convertible at 85% of the average of the trading prices of
the common stock for the ten days ending one day prior to the Company's
receipt of the conversion notice. The note holders were also granted two
warrants to purchase the Company's common stock to become exercisable for
each share of common stock to be issued upon conversion of the notes with
each warrant to purchase one share of common stock at an exercise price of
125% and 150%, respectively, of the conversion price of the notes then in
effect. These warrants will expire on October 31, 2009.
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.
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 No. 133 and EITF
00-19 (see Note 9 below for further discussion).
F-32
8. 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.
9. DERIVATIVES
HealthRenu evaluated the application of SFAS No.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 No. 133 and EITF 00-19, HealthRenu concluded
that these instruments were required to be accounted for as derivatives.
SFAS No. 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 No. 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 "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 is concurrently restating its financial statements for the year
ended September 30, 2005, and each of the quarters ended December 31,
2005, March 31, 2006, and June 30, 2006.
F-33
The impact of the application of SFAS No. 133 and EITF 00-19 on the
balance sheet as of June 30, 2006 is as follows:
Embedded derivative
liability balance
Notes Payable 9,267,310
Placement Warrants 707,642
Consulting Warrants 193,074
-----------
Total: 10,168,026
-----------
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: nine months ended
June 30, 2006 June 30, 2005
-------------- --------------
Notes Payable $ (6,733,581) $ --
Placement Warrants (493,807) --
Consulting Warrants 289,483 --
-------------- --------------
Total loss on
embedded derivative
liabilities: $ (6,937,905) $ --
-------------- --------------
10. WARRANTS
In September 2005 the Company granted warrants to certain consultants and
placement agents to purchase 1,587,237 shares of the Company's common
stock exercisable at $0.30 to $0.50 per share, at which time the trading
price ranged from $0.31 to $0.44 per share. The warrants were fully
vested, exercisable at the date of grant and expire on October 31, 2009.
During the month of February 2006 the Company granted warrants to certain
consultants and placement agents to purchase a total of 3,469,125 shares
of the Company's common stock exercisable at $0.17 to $0.18 per share, at
which time the trading price ranged from $0.16 to $0.20 per share. The
warrants were fully vested, exercisable at the date of grant and expire
during March 2011.
As a result of the Company's determination that their convertible notes as
described in Note 7 result in an indeterminate number of shares to be
issued the warrant instruments described above and listed below are being
valued as embedded derivatives consistent with SFAS No. 133. The fair
value of these warrants are recorded in the Company's balance sheet as a
component of derivative liability with changes in the values of these
embedded derivatives reflected in the statement of operations as "Gain
(loss) on embedded derivative liability."
F-34
Outstanding options and warrants as of June 30, 2006 are as follows:
Grant Expiration Exerc. Outstanding New Exercises Outstanding
Date Date Price 09/30/05 Grants 06/30/06
9/05 10/09 $0.50 1,100,000 - - 1,100,000
9/05 10/09 $0.48 119,318 - - 119,318
9/05 10/09 $0.35 106,875 - - 106,875
9/05 10/09 $0.36 121,818 - - 121,818
9/05 10/09 $0.30 139,226 - - 139,226
2/06 03/11 $0.18 1,181,250 1,181,250
2/06 03/11 $0.18 781,875 781,875
2/06 03/11 $0.17 1,506,000 1,506,000
-----------------------------------------------------------
Totals 1,587,237 3,469,125 - 5,056,362
-----------------------------------------------------------
11. RESTATEMENT
The Company has restated its quarterly financial statements from amounts
previously reported June 30, 2006. The Company has identified certain
accounting errors related to its debt arrangements and specifically
instruments which have previously been determined to contain embedded
derivatives. The Company's original accounting adjustments for these
instruments did not include fully reducing the associated net convertible
notes payable balance to zero and accreting these discounts throughout the
estimated expected life of the related instruments. There were also other
minor adjustments related to changes in the estimated fair market value of
its derivative instruments. The Company is required to accrete these debt
discounts over the life of the related debt instrument. The Company's
policy is to use the effective interest method of amortization over the
expected estimated life of the underlying instruments. The effect of the
(non-cash) changes related to the increase in the basis of these discounts
along with slight adjustments in the fair market value of the Company's
derivative liability, on the statement of operations for the three and
nine months ended June 30, 2006, was an increase in the net loss
attributable to common shareholders of $4,617 and $4,952, respectively.
Basic earnings (loss) attributable to common shareholders per share for
the three and nine months ended June 30, 2006 increased $0.01 per share as
a result of the restatement.
F-35
In all other material respects, the financial statements are unchanged.
Following is a summary of the restatement adjustments:
AS OF JUNE 30, 2006
AS REPORTED ADJUSTMENTS AS RESTATED
------------ ------------ ------------
SUMMARY BALANCE SHEET
- ---------------------
ASSETS
Current assets:
Cash and cash equivalents $ 69 $ -- $ 69
Accounts receivable 637 -- 637
Inventory 20,111 -- 20,111
Prepaid expense -- -- --
------------ ------------ ------------
Total current assets 20,817 -- 20,817
------------ ------------ ------------
Property and equipment, net 10,908 -- 10,908
Deferred Financing Costs, net 200,888 -- 200,888
------------ ------------ ------------
Total assets $ 232,613 $ -- $ 232,613
============ ============ ============
LIABILITIES AND
STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 120,661 $ -- $ 120,661
Accounts payable-stockholder -- -- --
Accrued interest 77,604 (2,534) (a) 75,070
Accrued liabilities 29,694 -- 29,694
Note payable 188,843 -- 188,843
Derivative liability 10,177,505 (9,479) (b) 10,168,026
------------ ------------ ------------
Total current liabilities 10,594,307 (12,013) 10,582,294
------------ ------------ ------------
Convertible notes payable 159,231 (43,102) (c) 116,129
Total liabilities 10,753,538 (55,115) 10,698,423
============ ============ ============
Stockholders' deficit:
Convertible preferred stock, Series 2000A 2 -- 2
Common stock 26,095 -- 26,095
Additional paid-in capital 4,208,273 (457,270) (d) 3,751,003
Accumulated deficit (14,755,295) 512,385 (e) (14,242,910)
------------ ------------ ------------
Total stockholders' deficit (10,520,925) 55,115 (10,465,810)
------------ ------------ ------------
Total liabilities and stockholders' deficit $ 232,613 $ -- $ 232,613
============ ============ ============
(a) To adjust accrued interest to actual based upon errors in the Company's
amortization schedules.
(b) To record changes in the estimated fair value of warrants of and embedded
derivatives based upon revisions in the Company's estimated fair market
value.
(c) To adjust debt discount to actual resulting from errors in the initial
establishment of debt discount resulting from accounting for embedded
derivatives and warrants.
(d) To adjust additional paid-in capital for derivative instruments previously
considered having beneficial conversion features. See the Company's
September 30, 2005 form 10KSB/A-2 or subsequent amendment thereof for
further discussion.
(e) To adjust accumulated deficit for the correction of prior period errors as
discussed in the statement regarding this amendment in the front of this
filing along with closing net loss related to the re-statement entries for
the current period.
F-36
FOR THE NINE MONTHS ENDED JUNE 30, 2006
AS REPORTED ADJUSTMENTS AS RESTATED
------------ ------------ ------------
SUMMARY STATEMENT OF
OPERATIONS
Sales $ 12,587 $ -- $ 12,587
Cost of sales 7,603 -- 7,603
------------ ------------ ------------
Gross profit (loss) 4,984 -- 4,984
General and
administrative
expenses 675,647 -- 675,647
------------ ------------ ------------
Loss from operations (670,663) -- (670,663)
Interest and financing
expense (205,820) (5,535) (a) (211,355)
Loss on embedded
derivative liability (6,938,488) 583 (b) (6,937,905)
Net loss $ (7,814,971) $ (4,952) $ (7,819,923)
============ ============
Weighted average
shares outstanding 25,937,721 -- 25,937,721
Basic and diluted net
loss per common share $ (0.30) $ -- $ (0.30)
(a) To record changes in the amortization of debt discounts based upon changes
in the basis of the Company's debt discount and adjustments to interest
expense as a result of certain errors in the Company's interest
amortization schedules.
(b) To record the change in the estimated fair value of warrants of and
embedded derivatives based upon revisions in the Company's estimated fair
market value.
12. 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.
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.
F-37
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.
F-38
===================================================================================================================================
No dealer, salesperson or other person has been
authorized to give any information or to make any
representations, other than those contained or
incorporated by reference in this prospectus, in HEALTHRENU MEDICAL, INC.
connection with the offering contained herein. If given
or made, such information and representations must not
be relied upon as having been authorized by HealthRenu
Medical, Inc. or the selling stockholders. This
prospectus does not constitute an offer to sell or a 389,676,800 Shares of Common Stock
solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction in which such offer
or solicitation would be unlawful or to any person to ----------------
whom it is unlawful to make such offer or solicitation.
Neither the delivery of this prospectus nor any sale PROSPECTUS
made hereunder shall under any circumstances create any
implication that there has been no change in the affairs ----------------
of HealthRenu Medical, Inc. since the date hereof.
_________, 2006
Until ______, 2006, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
====================================================================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Articles of Incorporation and By-laws provide for:
o indemnification of our directors or persons serving in various
business capacities at our request against judgments, penalties,
fines and amounts paid in settlement and reasonable expenses
actually incurred by such person by reason of the fact that such
person is or was serving as provided above in connection with a
threatened, pending or completed proceeding, whether civil or
criminal, administrative, arbitrative or investigative, any appeal
in any of the foregoing, or inquiry or investigation that could lead
to such, if such individual acted in good faith and in a manner such
person reasonably believed to be in, or not opposed to, our best
interests, and, if the action was a criminal proceeding, if such
person had no reasonable cause to believe that such person's conduct
was unlawful; and
o mandatory indemnification of such persons who have been successful
in defense of any proceeding against reasonable expenses incurred in
connection with such proceeding.
II-1
Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION(1)
Registration Fee - Securities and Exchange Commission ............... $ 3,883
Transfer Agent Expenses (2) ......................................... $ 2,500
Printing of Registration Statement, Prospectus, etc. (2) ............ $ 30,000
Blue Sky Fee and Expenses(2) ........................................ $ 2,500
Accounting Services(2) .............................................. $100,000
Legal Fees(2) ....................................................... $150,000
Miscellaneous(2) .................................................... $ 11,117
Total .......................................................... $300,000
- ----------
(1) No portion of these expenses will be borne by selling stockholders.
(2) Estimated.
II-2
Item 26. RECENT SALES OF UNREGISTERED SECURITIES
Principal
Amount
or Number
of Price per Nature of Exemption
Date of Sale Title Securities Security Transaction Claimed(1)
------------ ----- --------- --------- ----------- ----------
August 18, 2006 Warrants 400,000 $0.25 Warrants issued Section 4(2) of the Securities Act
to accredited
investor in
private placement
for cash.
February 17, 2006 Warrants 3,469,125 $0.20 Warrants issued to Section 4(2) of the Securities Act
placement agent and
agents as
compensation in
connection with
2006 private
placement.
February 2006 Units consisting of $600,000 $1,000 Securities issued to Section 4(2) of the Securities Act
8% Secured accredited investors
Convertible Notes in private placement
and Warrants for cash.
September 23, 2005 Warrants 100,000 $0.42 Warrants issued to Section 4(2) of the Securities Act
accredited investor
for services.
September 23, 2005 Warrants 487,237 $0.40 Warrants issued to Section 4(2) of the Securities Act
placement agent and
agents as
compensation in
connection with
2005 private
placement.
September 23, 2005 Warrants 500,000 $0.42 Warrants issued to Section 4(2) of the Securities Act
placement agent
and agents for
services under
consulting
agreement.
September 19, 2005 Common Stock 20,000 $0.30 Shares issued to Section 4(2) of the Securities Act
employees as
compensation.
September 19, 2005 Common Stock 271,777 $0.30 Shares issued to Section 4(2) of the Securities Act
Directors as
compensation.
August 31, 2005 Common Stock 2,560,807 $0.03- Shares issued to Section 4(2) of the Securities Act
$0.30 Directors and
consultant upon
conversion of loans.
August and September Units consisting of $548,000 $1,000 Securities issued Section 4(2) of the Securities Act
2005 8% Unsecured to accredited and Regulation D thereunder
Convertible Notes investors in
and Warrants private placement
for cash.
July 31, 2005 Warrants 500,000 $0.42 Warrants issued to Section 4(2) of the Securities Act
accredited investor
for services
rendered under
consulting
agreement.
July 18, 2005 Common Stock 500,000 $0.10 Shares issued to Section 4(2) of the Securities Act
individual investor
for cash.
June 28, 2005 Common Stock 25,000 $0.10 Shares issued to Section 4(2) of the Securities Act
distributor as
compensation.
II-3
Principal
Amount
or Number
of Price per Nature of Exemption
Date of Sale Title Securities Security Transaction Claimed(1)
------------ ----- --------- --------- ----------- ----------
June 16, 2005 Common Stock 116,000 $0.04- Shares issued to Section 4(2) of the Securities Act
$0.05 individual
investors for cash.
June 14, 2005 Common Stock 830,988 $0.03- Shares issued to Section 4(2) of the Securities Act
$0.30 Chief Executive
Officer and
Directors as
compensation.
May 23, 2005 Common Stock 90,909 $0.11 Shares issued to Section 4(2) of the Securities Act
placement agent as
compensation in
connection with
standby equity
distribution
agreement.
May 23, 2005 Common Stock 1,465,065 $0.11 Shares issued to Section 4(2) of the Securities Act
accredited investor
as compensation
under standby
equity distribution
agreement.
May 23, 2005 Promissory Note $188,843 $188,843 Issued to Section 4(2) of the Securities Act
accredited investor
as compensation
under standby
equity distribution
agreement.
January 26, 2005 - Common Stock 1,718,667 $0.03- Shares issued to Section 4(2) of the Securities Act
March 14, 2005 $0.05 individual investor
for cash.
November 23, 2004 Common Stock 623,850 $0.03 Shared issued to Section 4(2) of the Securities Act
accredited investor
for cash.
November 9, 2004 Common Stock 2,000,000 $0.17 Shares issued to Section 4(2) of the Securities Act
Chief Executive
Officer
in payment
of accrued
compensation.
November 9, 2004 Common Stock 1,000,000 $0.03 Shares issued to Section 4(2) of the Securities Act
two investors for
cash.
November 9, 2004 Common Stock 25,000 $0.02 Shares issued to Section 4(2) of the Securities Act
stockholder as
reimbursement for
credit advanced.
II-4
Principal
Amount
or Number
of Price per Nature of Exemption
Date of Sale Title Securities Security Transaction Claimed(1)
------------ ----- --------- --------- ----------- ----------
November 9, 2004 Common Stock 694,575 $0.02 Shares issued to Section 4(2) of the Securities Act
Directors as
compensation.
September 2004 Common Stock 295,587 $0.75 Issued to Chief Section 4(2) of the Securities Act
Executive Officer
as reimbursement
for advances and
additional
compensation.
September 2004 Common Stock 1,000,000 $0.02 Shares issued to Section 4(2) of the Securities Act
two individual
investors for cash.
August 2004 Common Stock 337,500 $0.10 Shares issued to Section 4(2) of the Securities Act
two individuals for
services.
August 2004 Common Stock 27,000 $0.10 Shares issued to Section 4(2) of the Securities Act
two individuals for
cash.
January 12, 2004 Common Stock 187,500 $0.10 Shares issued to Section 4(2) of the Securities Act
Chief Executive
Officer as
compensation.
December 2003 Common Stock 50,000 $1.00 Shares issued to Section 4(2) of the Securities Act
Chief
Executive
Officer in
cancellation
of note
payable.
November 2003 Common Stock 450,000 $0.10 Shares issued to Section 4(2) of the Securities Act
Chief Executive
Officer as
compensation.
(1) All transactions described in Item 26 were, in the opinion of the
Registrant, exempt from registration under the Securities Act by reason of
Section 4(2) thereof, since the sale of such securities did not involve any
public offering. Each person who purchased such securities represented that such
shares were purchased for investment and not with a view to any distribution
thereof. The purchasers of these securities were officers or directors of the
Registrant or persons who were sophisticated in financial matters and had access
to information about the Registrant and an opportunity to ask questions of the
directors and officers of the Registrant.
II-5
Item 27. EXHIBITS
Exhibit No. Description of Exhibits
2.1 Articles of Merger (2)
2.2 Plan of Merger (2)
2.3 Exchange Agreement (3)
3.1 Articles of Incorporation (2)
3.2 Articles of Amendment to Articles of Incorporation (1)
3.3 Articles of Amendment to Articles of Incorporation (2)
3.4 Articles of Amendment to Articles of Incorporation (2)
3.5 Bylaws (2)
3.6 Articles of Amendment to Articles of Incorporation (8)
4.1 Amended and Restated Standby Equity Distribution Agreement dated as of February 3, 2006
between the Registrant and Cornell Capital Partners, LP (9)
4.2 Registration Rights Agreement dated May 23, 2005 by and between the Registrant and Cornell Capital
Partners, LP in connection with the Standby Equity Distribution Agreement (5)
4.3 Placement Agent Agreement dated as of May 23, 2005 by and among the Registrant, Cornell Capital
Partners, LP and Monitor Capital, Inc. in connection with the Standby Equity Distribution Agreement (5)
4.4 Form of Promissory Note by Registrant in favor of Cornell Capital Partners, LP (5)
4.5 Form of 8% Unsecured Convertible Notes (6)
4.6 Form of 125% Warrant (6)
4.7 Form of 150% Warrant (6)
4.8 Form of 8% Secured Warrant (10)
4.9 Form of Warrants (10)
4.10 Form of Security Agreement (10)
5.0 Legal Opinion +
10.1 First Amendment to Office Building Lease Agreement effective as of January 1, 2006 between the
Registrant and Denmark House Investment, Ltd. (12)
10.2 Second Amendment to Office Building Lease Agreement effective as of May 1, 2006 between
the Registrant and Denmark House Investment, Ltd. (13)
10.3 Disclaimer Letter Agreement dated July 22, 2004 between the Registrant and Rosel & Adys Inc. (8)
10.4 Employment Agreement between Robert Prokos and the Registrant (4)
10.5 Placement Agent Agreement dated as of July 28, 2005 between the Registrant and North Coast
Securities Corporation (7)
10.6 Financial Advisory and Investment Banking Agreement dated as of July 28, 2005 between the
Registrant and North Coast Securities Corporation (7)
10.7 Consulting Agreement dated as of July 31, 2005 between the Registrant and MultiGrow Advisors,
LLC (7)
10.8 Letter Agreement dated February 3, 2006 between the Registrant and Cornell Capital Partners, LP
(exhibits omitted) (9)
10.9 Termination Agreement dated February 3, 2006 among the Registrant, Cornell Capital Partners,
LP and David Gonzalez, Esq. (9)
10.10 Placement Agent Agreement dated as of February 3, 2006 between the Registrant and North Coast
Securities Corporation (11)
23.1 Consent of Ham, Langston & Brezina, L.L.P. ++
23.2 Consent of __________ (included in Exhibit 5.0) +
II-6
- ----------
(1) Filed as Exhibit 3.1 to our Form 8-K filed with the Securities and
Exchange Commission on August 6, 2003, and incorporated herein by
reference.
(2) Filed as Exhibits 2.1, 2.2, 3.1, 3.2, 3.3 and 3.4 to our Form 8-K filed
with the Securities and Exchange Commission on September 18, 2003, and
incorporated herein by reference.
(3) Filed as Exhibit 2.1 to our Form 8-K filed with the Securities and
Exchange Commission on September 29, 2003, and incorporated herein by
reference.
(4) Filed as Exhibit 10.2 to our Form 10-QSB filed with the Securities and
Exchange Commission on May 24, 2004, and incorporated herein by reference.
(5) Filed as Exhibits 10.2, 10.3 and 10.5 to our Form 8-K filed
with the Securities and Exchange Commission on May 27, 2005, and
incorporated herein by reference.
(6) Filed as Exhibits 10.1, 10.2 and 10.3 to our Form 8-K filed with the
Securities and Exchange Commission on September 9, 2005, and incorporated
herein by reference.
(7) Filed as Exhibits 10.5, 10.6 and 10.7 to our Registration Statement on
Form SB-2 filed with the Securities and Exchange Commission on September
30, 2005, and incorporated herein by reference.
(8) Filed as Exhibits 3.6, 10.1 and 10.2 to our Form 10-KSB/A filed with the
Securities and Exchange Commission on April 6, 2006, and incorporated
herein by reference.
(9) Filed as Exhibits 4.1, 10.1 and 10.2 to our Form 10-QSB/A filed with the
Securities and Exchange Commission on April 6, 2006, and incorporated
herein by reference.
(10) Filed as Exhibits 10.1, 10.2 and 10.3 to our Form 8-K filed with the
Securities and Exchange Commission on February 16, 2006, and incorporated
herein by reference.
(11) Filed as Exhibit 10.10 to our Form SB-2 filed with the Securities and
Exchange Commission on April 12, 2006, and incorporated herein by
reference.
(12) Filed as Exhibit 10.1 to our Form 10-KSB/A-2 filed with the Securities and
Exchange Comission on October 23, 2006, and incorporated herein by
reference.
(13) Filed as Exhibit 10.1 to our Form 10-QSB for the quarter ended June 30,
2006 filed with the Securities and Exchange Commission on October 3, 2006
and incorporated herein by reference
+ To be filed by amendment.
++ Exhibit filed herewith in this Registration Statement.
II-7
Item 28. UNDERTAKINGS
The undersigned registrant will:
(a)(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement. Notwithstanding
the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in the volume and price represent no
more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) Include any addition or changed material on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
(g) Each prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness, provided,
however, that no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time
of contract of sale prior to such first use, supersede or modify any statement
that was made in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately prior to such
date of first use.
II-8
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this amendment to be
signed on its behalf by the undersigned, in the City of Houston, Texas, on
November 13, 2006.
HEALTHRENU MEDICAL, INC.
By: /s/ Robert W. Prokos
------------------------------------------------
Robert W. Prokos
Chief Executive Officer (Principal
Executive, Financial and Accounting
Officer)
II-9
In accordance with the requirements of the Securities Act of 1933, this
amendment has been signed by the following persons in the capacities and on the
13th day of November, 2006.
Signature Title
- --------- -----
/s/ Robert W. Prokos
- ------------------------------ President, Chief Executive
Robert W. Prokos Officer and Director
/s/ Dr. Dianne Love
- ------------------------------ Director
Dr. Dianne Love
/s/ David Spencer
- ------------------------------ Director
David Spencer
/s/ Dr. Daniel Sparks
- ------------------------------ Director
Dr. Daniel Sparks
/s/ Edward Walter Zieverink, III
- ------------------------------ Director
Edward Walter Zieverink, III
II-10
Exhibit No. Exhibit Index
23.1 Consent of Ham, Langston & Brezina, L.L.P.