NOTES
TO FINANCIAL STATEMENTS
(UNAUDITED)
Basis of Financial Statement
Presentation
The
accompanying condensed financial statements of the Company have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. These condensed
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) that, in the opinion of management, are necessary to
present fairly the results of operations of the Company for the periods
presented. These condensed financial statements should be read in conjunction
with the financial statements and the notes thereto included in the Company's
Form 10-K for the year ended December 31, 2008. The
results of operations for the three months ended March 31, 2009, are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 2009.
On December 5, 2008, the Company’s
shareholders approved a 1-for-100 reverse stock split, which became effective on
December 5, 2008. All references to share and per-share data for all periods
presented in this report have been adjusted to give effect to this reverse
split.
Going
Concern
The accompanying financial statements
have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of
business. Historically, the Company has not demonstrated the ability
to generate sufficient cash flows from operations to satisfy its liabilities and
sustain operations, and the Company has incurred significant
losses. These factors raise substantial doubt about the Company’s
ability to continue as a going concern.
The Company’s continuation as a going
concern is dependent on its ability to generate sufficient income and cash flow
to meet its obligations on a timely basis and/or obtain additional financing as
may be required. The Company is actively seeking options to obtain
additional capital and financing.
In addition, the Company has taken
significant steps to reduce costs and increase operating
efficiencies. Specifically, the Company has significantly reduced the
use of consultants, which has resulted in a large decrease in
expenses. In addition, the Company has reduced the number of its
direct sales representatives, which has resulted in less payroll, travel and
other expenses. Although these cost savings have significantly
reduced the Company’s losses and ongoing cash flow needs, if the Company is
unable to obtain equity or debt financing, it may be unable to continue
development of its products and may be required to substantially curtail or
cease operations.
Net Loss Per
Share
Net loss per common share is computed
on the weighted average number of common and common equivalent shares
outstanding during each period. Common stock equivalents consist of convertible
preferred stock, common stock options and warrants. Common Stock equivalent
shares are excluded from the computation when their effect is anti-dilutive.
Other common stock equivalents consisting of options and warrants to purchase
660,094 and 653,344 shares of common stock and preferred stock convertible into
6,125 and 6,125 shares of common stock, and outstanding commitments to issue
shares underlying the convertible notes into 6,290,328,333 and 95,402,350 shares
of common stock at March 31, 2009 and 2008, respectively, have been considered
but have not been included in loss periods because their inclusion would have
been anti-dilutive.
The following table is a
reconciliation of the basic and fully diluted earnings per share for the nine
month periods ended March 31, 2009 and March 31, 2008:
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Basic
weighted average shares outstanding
|
|
|
155,854,759
|
|
|
|
7,003,904
|
|
|
Diluted
weighted average shares outstanding
|
|
|
155,854,759
|
|
|
|
7,003,094
|
|
|
Net
loss
|
|
$
|
(282,000
|
)
|
|
$
|
(566,000
|
)
|
|
Per
share amount basic
|
|
$
|
(0.00
|
)
|
|
$
|
(0.08
|
)
|
|
Per
share amount diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.08
|
)
|
Convertible
Notes
April 27, 2005 Sale of $2,500,000 in
Convertible Notes.
To obtain funding for the Company's ongoing
operations, the Company entered into a securities purchase agreement with four
accredited investors on April 27, 2005 for the sale of (i) $2,500,000 in
convertible notes and (ii) warrants to purchase 165,344 shares of its common
stock. The sale of the convertible notes and warrants is to occur in three
traunches and the investors provided the Company with an aggregate of$2,500,000
as follows:
|
•
|
$850,000
was disbursed on April 27, 2005;
|
|
•
|
$800,000
was disbursed on June 23, 2005 after the Company filed a registration
statement on June 22, 2005 to register the shares of common stock issuable
upon conversion of the convertible notes and exercise of warrants;
and
|
|
•
|
$850,000
was disbursed on June 30, 2005, the effective date of the registration
statement.
|
Under the
terms of the securities purchase agreement, the Company agreed it would not,
without the prior written consent of a majority-in-interest of the investors,
negotiate or contract with any party to obtain additional equity financing
(including debt financing with an equity component) that involves (i) the
issuance of common stock at a discount to the market price of the common stock
on the date of issuance (taking into account the value of any warrants or
options to acquire common stock in connection therewith), (ii) the issuance of
convertible securities that are convertible into an indeterminate number of
shares of common stock, or (iii) the issuance of warrants during the lock-up
period beginning April 27, 2005 and ending on the later of (a) 270 days from
April 27, 2005, or (b) 180 days from the date the registration statement is
declared effective.
In
addition, the Company agreed not to conduct any equity financing (including debt
financing with an equity component) during the period beginning April 27, 2005
and ending two years after the end of the above lock-up period unless it first
provided each investor an option to purchase its pro rata share (based on the
ratio of each investor's purchase under the securities purchase agreement) of
the securities being offered in any proposed equity financing. Each
investor must be provided written notice describing any proposed
equity financing at least 20 business days prior to the closing of such proposed
equity financing and the option must be extended to each investor during the
15-day period following delivery of such notice.
The
$2,500,000 in convertible notes bear interest at 8% per annum from the date of
issuance. Interest is computed on the basis of a 365-day year and is payable
quarterly in cash, with six months of interest payable up front. The interest
rate resets to zero percent for any month in which the stock price is greater
than 125% of the initial market price, or $9.45, for each trading day during
that month. Any amount of principal or interest on the convertible notes that is
not paid when due will bear interest at the rate of 15% per annum from the date
due thereof until such amount is paid. The notes mature in three
years from the date of issuance, and are convertible into the Company's common
stock at the noteholders' option, at the lower of (i) $9.00 or (ii) 60% of the
average of the three lowest intraday trading prices for the common stock on the
OTC Bulletin Board for the 20 trading days before but not including the
conversion date. Accordingly, there is no limit on the number of shares into
which the notes may be converted. On June 16, 2008, the Company
agreed to reduce the applicable percentage for calculating the conversion price
from 60% to 45% of the average of the three lowest intraday trading prices of
the Company's common stock. The Company agreed to this change as a
condition to receiving further funding for its ongoing operations on June 16,
2008.
The
$2,500,000 in convertible notes are secured by the Company's assets, including
the Company's inventory, accounts receivable and intellectual property.
Moreover, the Company has a call option under the terms of the notes. The call
option provides the Company with the right to prepay all of the outstanding
convertible notes at any time, provided there is no event of default by the
Company and the Company's stock is trading at or below $.09 per share. An event
of default includes the failure by the Company to pay the principal or interest
on the notes when due or to timely file a registration statement as required by
the Company or obtain effectiveness with the Securities and Exchange Commission
of the registration statement. Prepayment of the notes is to be made in cash
equal to either (a) 125% of the outstanding principal and accrued interest for
prepayments occurring within 30 days following the issue date of the notes; (b)
130% of the outstanding principal and accrued interest for prepayments occurring
between 31 and 60 days following the issue date of the notes; or (c) 145% of the
outstanding principal and accrued interest for prepayments occurring after the
60
th
day following the issue date of the notes.
The
warrants are exercisable until five years from the date of issuance at a
purchase price of $20 per share. The investors may exercise the warrants on a
cashless basis if the shares of common stock underlying the warrants are not
registered pursuant to an effective registration statement. In the event the
investors exercise the warrants on a cashless basis, the Company will not
receive any proceeds therefrom. In addition, the exercise price of the warrants
will be adjusted in the event the Company issues common stock at a price below
market, with the exception of any securities issued as of the date of the
warrants or issued in connection with the callable secured convertible notes
issued pursuant to the securities purchase agreement.
The
noteholders have agreed to restrict their ability to convert their convertible
notes or exercise their warrants and receive shares of the Company's common
stock such that the number of shares of common stock held by them in the
aggregate and their affiliates after such conversion or exercise does not exceed
4.99% of the then issued and outstanding shares of common stock. However, the
noteholders may repeatedly sell shares of common stock in order to reduce their
ownership percentage, and subsequently convert additional convertible
notes.
As of
March 31, 2009, there was an outstanding balance of $1,251,405 in principle
remaining on the convertible notes. During the three months ended
March 31, 2009 and 2008, the Company issued 2,229,100 and 2,538,932 shares of
common stock for the conversion of $6,062 and $112,168 of convertible notes,
respectively.
February 28, 2006 Sale of $1,500,000
in Convertible Notes.
To obtain additional funding for the Company's
ongoing operations, the Company entered into a second securities purchase
agreement on February 28, 2006 with the same four accredited investors for the
sale of (i) $1,500,000 in convertible notes and (ii) warrants to purchase
120,000 shares of its common stock. The sale of the convertible notes and
warrants is to occur in three traunches and the investors are obligated to
provide the Company with an aggregate of $1,500,000 as follows:
|
•
|
$500,000
was disbursed on February 28, 2006;
|
|
•
|
$500,000
was disbursed on June 28, 2006 after the Company filed a registration
statement on June 15, 2006 to register the shares of common stock
underlying the convertible notes. The registration statement was
subsequently withdrawn on July 25, 2006 and a new registration statement
was filed on September 15, 2006 to register 60,000,000 shares of common
stock issuable upon conversion of the
notes.
|
|
•
|
$500,000
was disbursed on April 30, 2007, the day prior to the effective date of
the registration statement on May
1,2007.
|
Under the
terms of the securities purchase agreement, the Company also agreed it would
not, without the prior written consent of a majority-in-interest of the
investors, negotiate or contract with any party to obtain additional equity
financing (including debt financing with an equity component) that involves (i)
the issuance of common stock at a discount to the market price of the common
stock on the date of issuance (taking into account the value of any warrants or
options to acquire common stock in connection therewith), (ii) the issuance of
convertible securities that are convertible into an indeterminate number of
shares of common stock, or (iii) the issuance of warrants during the lock-up
period beginning February 28, 2006 and ending on the later of (a) 270 days from
February 28, 2006, or (b) 180 days from the date the registration statement is
declared effective.
In
addition, the Company agreed not to conduct any equity financing (including debt
financing with an equity component) during the period beginning February 28,
2006 and ending two years after the end of the above lock-up period unless it
first provided each investor an option to purchase its pro rata share (based on
the ratio of each investor's purchase under the securities purchase agreement)
of the securities being offered in any proposed equity financing. Each investor
must be provided written notice describing any proposed equity financing at
least 20 business days prior to the closing of such proposed equity financing
and the option must be extended to each investor during the 15-day period
following delivery of such notice.
The
$1,500,000 in convertible notes bear interest at 8% per annum from the date of
issuance. Interest is computed on the basis of a 365-day year and is payable
quarterly in cash, with six months of interest payable up front. The interest
rate resets to zero percent for any month in which the stock price is greater
than 125% of the initial market price, or $2.75, for each trading day during
that month. Any amount of principal or interest on the convertible notes that is
not paid when due will bear interest at the rate of 15% per annum from the date
due thereof until such amount is paid. The notes mature in three years from the
date of issuance, and are convertible into the Company's common stock at the
noteholders' option, at the lower of (i) $2.00 or (ii) 60% of the average of the
three lowest intraday trading prices for the common stock on the OTC Bulletin
Board for the 20 trading days before but not including the conversion date.
Accordingly, there is no limit on the number of shares into which the notes may
be converted. On June 16, 2008, the Company agreed to reduce the
applicable percentage for calculating the conversion price from 60% to 45% of
the average of the three lowest intraday trading prices of the Company's common
stock. The Company agreed to this change as a condition to receiving
further funding for its ongoing operations on June 16, 2008.
The
$1,500,000 in convertible notes are secured by the Company's assets, including
the Company's inventory, accounts receivable and intellectual property.
Moreover, the Company has a call option under the terms of the notes. The call
option provides the Company with the right to prepay all of the outstanding
convertible notes at any time, provided there is no event of default by the
Company and the Company's stock is trading at or below $2.00 per share. An event
of default includes the failure by the Company to pay the principal or interest
on the notes when due or to timely file a registration statement as required by
the Company or obtain effectiveness with the Securities and Exchange Commission
of the registration statement. Prepayment of the notes is to be made in cash
equal to either (a) 125% of the outstanding principal and accrued interest for
prepayments occurring within 30 days following the issue date of the notes; (b)
130% of the outstanding principal and accrued interest for prepayments occurring
between 31 and 60 days following the issue date of the notes; or (c) 145% of the
outstanding principal and accrued interest for prepayments occurring after the
60`'day following the issue date of the notes.
The
warrants are exercisable until five years from the date of issuance at a
purchase price of $10 per share. The investors may exercise the warrants on a
cashless basis if the shares of common stock underlying the warrants are not
registered pursuant to an effective registration statement. In the event the
investors exercise the warrants on a cashless basis, the Company will not
receive any proceeds therefrom. In addition, the exercise price of the warrants
will be adjusted in the event the Company issues common stock at a price below
market, with the exception of any securities issued as of the date of the
warrants or issued in connection with the callable secured convertible notes
issued pursuant to the securities purchase agreement.
The
noteholders have agreed to restrict their ability to convert their convertible
notes or exercise their warrants and receive shares of the Company's common
stock such that the number of shares of common stock held by them in the
aggregate and their affiliates after such conversion or exercise does not exceed
4.99% of the then issued and outstanding shares of common stock. However, the
noteholders may repeatedly sell shares of common stock in order to reduce their
ownership percentage, and subsequently convert additional convertible
notes.
The
Company received notice from the accredited investors holding convertible notes
dated June 28, 2006 and convertible notes dated April 30, 2007, that
on January 22, 2009, E-Lionheart, LLC and other third parties purchased $500,000
of the convertible notes dated June 28, 2006 and the $500,000 of convertible
notes dated April 30, 2007. The total purchase price of these
convertible notes was $1,514,444. Between February 18, 2009 and March
27, 2009, the third parties converted a total $452,406 of the June
28, 2006 convertible notes at conversion prices ranging from $.0009 to .00105
per share and received a total of 500,511,410 shares of the Company's common
stock pursuant to said conversions.
As of
March 31, 2009, there was an outstanding balance of $881,869 in principle
remaining on the convertible notes. During the three months ended
March 31, 2009 and 2008, the Company issued 500,511,410 and no shares of common
stock for the conversion of $452,406 and $0.00 of convertible notes,
respectively.
June 11, 2007 Sale of $500,000 in
Callable Secured Convertible Notes:
To obtain further funding for the
Company's ongoing operations, the Company entered into a third securities
purchase agreement on June 11, 2007 with the same four accredited investors for
the sale of (i) $500,000 in callable secured convertible notes and (ii) warrants
to purchase 100,000 shares of its common stock. The investors disbursed $500,000
to the Company on June 11, 2007.
Under the
terms of the June 11, 2007 securities purchase agreement, the Company agreed
that it would not, without the prior written consent of a majority-in-interest
of the investors, negotiate or contract with any party to obtain additional
equity financing (including debt financing with an equity component) that
involves (i) the issuance of common stock at a discount to the market price of
the common stock on the date of issuance (taking into account the value of any
warrants or options to acquire common stock in connection therewith), (ii) the
issuance of convertible securities that are convertible into an indeterminate
number of shares of common stock, or (iii) the issuance of warrants during the
lock-up period beginning June 11, 2007 and ending on the later of (a) 270 days
from June 11, 2007, or (b) 180 days from the date the registration statement is
declared effective.
In
addition, the Company agreed not to conduct any equity financing (including debt
financing with an equity component) during the period beginning June 11, 2007
and ending two years after the end of the above lock-up period unless it first
provided each investor an option to purchase its pro-rata share (based on the
ratio of each investor's purchase under the securities purchase agreement) of
the securities being offered in any proposed equity financing. Each investor
must be provided written notice describing any proposed equity financing at
least 20 business days prior to the closing of such proposed equity financing
and the option must be extended to each investor during the 15-day period
following delivery of such notice.
The
$500,000 in convertible notes bear interest at 8% per annum from the date of
issuance. Interest is computed on the basis of a 365-day year and is payable
quarterly in cash, with six months of interest payable up front. The interest
rate resets to zero percent for any month in which the stock price is greater
than 125% of the initial market price, or $2.75, for each trading day during
that month. Any amount of principal or interest on the callable secured
convertible notes that is not paid when due will bear interest at the rate of
15% per annum from the date due thereof until such amount is paid. The
convertible notes mature in three years from the date of issuance, and are
convertible into the Company's common stock at the noteholders' option, at the
lower of (i) $2.00 or (ii) 50% of the average of the three lowest intraday
trading prices for the common stock on the OTC Bulletin Board for the 20 trading
days before but not including the conversion date. Accordingly, there is no
limit on the number of shares into which the notes may be
converted. On June 16, 2008, the Company agreed to reduce the
applicable percentage for calculating the conversion price from 60% to 45% of
the average of the three lowest intraday trading prices of the Company's common
stock. The Company agreed to this change as a condition to receiving
further funding for its ongoing operations on June 16, 2008.
The
convertible notes are secured by the Company's assets, including the Company's
inventory, accounts receivable and intellectual property. Moreover, the Company
has a call option under the terms of the notes. The call option provides the
Company with the right to prepay all of the outstanding convertible notes at any
time, provided there is no event of default by the Company and its stock is
trading at or below $10.00 per share. An event of default includes the failure
by the Company to pay the principal or interest on the convertible notes when
due or to timely file a registration statement as required by the Company or
obtain effectiveness with the Securities and Exchange Commission of the
registration statement. Prepayment of the convertible notes is to be made in
cash equal to either (a) 125% of the outstanding principal and accrued interest
for prepayments occurring within 30 days following the issue date of the notes;
(b) 130% of the outstanding principal and accrued interest for prepayments
occurring between 31 and60 days following the issue date of the notes; or (c)
145% of the outstanding principal and accrued interest for prepayments occurring
after the 60th day following the issue date of the notes.
The
warrants are exercisable until seven years from the date of issuance at a
purchase price of $.50 per share. The investors may exercise the warrants on a
cashless basis if the shares of common stock underlying the warrants are not
then registered pursuant to an effective registration statement. In the event
the investors exercise the warrants on a cashless basis, the Company will not
receive any proceeds therefrom. In addition, the exercise price of the warrants
will be adjusted in the event the Company issues common stock at a price below
market, with the exception of any securities issued as of the date of the
warrants or issued in connection with the convertible notes issued pursuant to
the securities purchase agreement.
The
noteholders have agreed to restrict their ability to convert their convertible
notes or exercise their warrants and receive shares of the Company's common
stock such that the number of shares of common stock held by them in the
aggregate and their affiliates after such conversion or exercise does not exceed
4.99% of the then issued and outstanding shares of common stock. However, the
noteholders may repeatedly sell shares of common stock in order to reduce their
ownership percentage, and subsequently convert additional convertible notes,
provided, however, that such conversions do not exceed $75,000 per calendar
month, or the average daily dollar volume calculated during the ten business
days prior to conversion multiplied by the number of trading days of that
calendar month, per calendar month.
The
Company is required to register the shares of its common stock issuable upon the
conversion of the convertible notes and the exercise of the warrants that were
issued to the noteholders pursuant to the securities purchase agreement the
Company entered in to on June 11, 2007. The registration statement must be filed
with the Securities and Exchange Commission within 60 days of the June 11, 2007
closing date and the effectiveness of the registration is to be within 135days
of such closing date. Penalties of 2% of the outstanding principal balance of
the convertible notes plus accrued interest are to be applied for each month the
registration is not effective within the required time. The penalty may be paid
in cash or stock at the Company's option.
As of
March 31, 2009, there have been no conversions of these convertible
notes. Upon conversion of the convertible notes, the Company
extinguishes the convertible debt and related embedded derivatives and no gain
or loss is recorded on the Company's statements of operations as a result of
said conversion.
December 19, 2007 Issuance of
$389,010 in Callable Convertible Notes:
On December 19, 2007, the Company
was notified by the holders of the convertible notes that there was a past due
interest owing on the outstanding convertible notes. The total amount of
interest owed was $389,010. To pay this interest, the noteholders were willing
to accept $389,010 in additional convertible notes due on December 31, 2010.
Accordingly, on December 19, 2007, the Company issued $389,010 in convertible
notes to the noteholders as full payment of the past due interest.
The
$389,010 in convertible notes bear interest at 2% per annum from December 31,
2007. Interest is computed on the basis of a 365-day year and is payable
quarterly in cash. Any amount of principal or interest on the callable secured
convertible notes that is not paid when due will bear interest at the rate of
15% per annum from the date due thereof until such amount is paid. The
convertible notes mature on December 31, 2010, and are convertible into the
Company's common stock at the noteholders' option, at the lower of (i) $2.00 or
(ii) 50% of the average of the three lowest intraday trading prices for the
common stock on the OTC Bulletin Board for the 20 trading days before but not
including the conversion date. Accordingly, there is no limit on the number of
shares into which the notes may be converted. On June 16, 2008, the
Company agreed to reduce the applicable percentage for calculating the
conversion price from 60% to 45% of the average of the three lowest intraday
trading prices of the Company's common stock. The Company agreed to
this change as a condition to receiving further funding for its ongoing
operations on June 16, 2008.
The
$389,010 in convertible notes have a call option under the terms of the notes.
The call option provides the Company with the right to prepay all of the
outstanding convertible notes at any time, provided there is no event of default
by the Company and its stock is trading at or below $4.00 per share. An event of
default includes the failure by the Company to pay the principal or interest on
the convertible notes when due. Prepayment of the convertible notes is to be
made in cash equal to either (a) 135% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issue date of
the notes; (b) 145% of the outstanding principal and accrued interest for
prepayments occurring between 31 and 60 days following the issue date of the
notes; or (c) 150% of the outstanding principal and accrued interest for
prepayments occurring after the 60
th
day
following the issue date of the notes.
The
noteholders have agreed to restrict their ability to convert their convertible
notes and receive shares of the Company's common stock such that the number of
shares of common stock held by them in the aggregate and their affiliates after
such conversion does not exceed 4.9% of the then issued and outstanding shares
of common stock. However, the noteholders may repeatedly sell shares of common
stock in order to reduce their ownership percentage, and subsequently convert
additional convertible notes, provided, however, that such conversions do not
exceed the average daily dollar volume calculated during the ten business days
prior to conversion multiplied by the number of trading days of that calendar
month, per calendar month.
As of
March 31, 2009, there have been no conversions of these convertible
notes. Upon conversion of the convertible notes, the Company
extinguishes the convertible debt and related embedded derivatives and no gain
or loss is recorded on the Company's statements of operations as a result of
said conversion.
December 24, 2007 Sale of $250,000
in Callable Secured Convertible Notes:
To obtain further funding for the
Company's ongoing operations, the Company entered into a fourth securities
purchase agreement on December 24, 2007 with the same four accredited investors
for the sale of (i) $250,000 in callable secured convertible notes and (ii)
warrants to purchase 150,000 shares of its common stock. The investors disbursed
$250,000 to the Company on December 24, 2007.
Under the
terms of the December 24, 2007 securities purchase agreement, the Company agreed
that it would not, without the prior written consent of a majority-in-interest
of the investors, negotiate or contract with any party to obtain additional
equity financing (including debt financing with an equity component) that
involves (i) the issuance of common stock at a discount to the market price of
the common stock on the date of issuance (taking into account the value of any
warrants or options to acquire common stock in connection therewith), (ii) the
issuance of convertible securities that are convertible into an indeterminate
number of shares of common stock, or (iii) the issuance of warrants during the
lock-up period beginning December 24, 2007 and ending on the later of (a) 270
days from December 24, 2007, or (b) 180 days from the date the registration
statement is declared effective.
In
addition, the Company agreed not to conduct any equity financing (including debt
financing with an equity component) during the period beginning December24, 2007
and ending two years after the end of the above lock-up period unless it first
provided each investor an option to purchase its pro-rata share (based on the
ratio of each investor's purchase under the securities purchase agreement) of
the securities being offered in any proposed equity financing. Each investor
must be provided written notice describing any proposed equity financing at
least 20 business days prior to the closing of such proposed equity financing
and the option must be extended to each investor during the 15-day period
following delivery of such notice.
The
$250,000 in convertible notes bear interest at 8% per annum from the date of
issuance. Interest is computed on the basis of a 365-day year and is payable
quarterly in cash, with six months of interest payable up front. The interest
rate resets to zero percent for any month in which the stock price is greater
than 125% of the initial market price, or $2.75, for each trading day during
that month. Any amount of principal or interest on the callable secured
convertible notes that is not paid when due will bear interest at the rate of
15% per annum from the date due thereof until such amount is paid. The
convertible notes mature in three years from the date of issuance, and are
convertible into the Company's common stock at the noteholders' option, at the
lower of (i) $2.00 or (ii) 50% of the average of the three lowest intraday
trading prices for the common stock on the OTC Bulletin Board for the 20 trading
days before but not including the conversion date. Accordingly, there is no
limit on the number of shares into which the notes may be
converted. On June 16, 2008, the Company agreed to reduce the
applicable percentage for calculating the conversion price from 60% to 45% of
the average of the three lowest intraday trading prices of the Company's common
stock. The Company agreed to this change as a condition to receiving
further funding for its ongoing operations on June 16, 2008.
The
$250,000 in convertible notes are secured by the Company's assets, including the
Company's inventory, accounts receivable and intellectual property. Moreover,
the Company has a call option under the terms of the notes. The call option
provides the Company with the right to prepay all of the outstanding convertible
notes at any time, provided there is no event of default by the Company and its
stock is trading at or below $10.00 per share. An event of default includes the
failure by the Company to pay the principal or interest on the convertible notes
when due or to timely file a registration statement as required by the Company
or obtain effectiveness with the Securities and Exchange Commission of the
registration statement. Prepayment of the convertible notes is to be made in
cash equal to either (a) 125% of the outstanding principal and accrued interest
for prepayments occurring within 30 days following the issue date of the notes;
(b) 130% of the outstanding principal and accrued interest for prepayments
occurring between 31 and 60 days following the issue date of the notes; or (c)
145% of the outstanding principal and accrued interest for prepayments occurring
after the 60
th
day
following the issue date of the notes.
The
warrants are exercisable until seven years from the date of issuance at a
purchase price of $.10 per share. The investors may exercise the warrants on a
cashless basis if the shares of common stock underlying the warrants are not
then registered pursuant to an effective registration statement. In the event
the investors exercise the warrants on a cashless basis, the Company will not
receive any proceeds therefrom. In addition, the exercise price of the warrants
will be adjusted in the event the Company issues common stock at a price below
market, with the exception of any securities issued as of the date of the
warrants or issued in connection with the convertible notes issued pursuant to
the securities purchase agreement.
The
noteholders have agreed to restrict their ability to convert their convertible
notes or exercise their warrants and receive shares of the Company's common
stock such that the number of shares of common stock held by them in the
aggregate and their affiliates after such conversion or exercise does not exceed
4.99% of the then issued and outstanding shares of common stock. However, the
noteholders may repeatedly sell shares of common stock in order to reduce their
ownership percentage, and subsequently convert additional convertible notes,
provided, however, that such conversions do not exceed $75,000 per calendar
month, or the average daily dollar volume calculated during the ten business
days prior to conversion multiplied by the number of trading days of that
calendar month, per calendar month.
The
Company is required to register the shares of its common stock issuable upon the
conversion of the convertible notes and the exercise of the warrants that were
issued to the noteholders pursuant to the securities purchase agreement the
Company entered in to on December 24, 2007. The registration statement must be
filed with the Securities and Exchange Commission within 60 days of the December
24, 2007 closing date and the effectiveness of the registration is to be within
135 days of such closing date. Penalties of 2% of the outstanding principal
balance of the convertible notes plus accrued interest are to be applied for
each month the registration is not effective within the required time. The
penalty may be paid in cash or stock at the Company's option.
As of
March 31, 2009, there have been no conversions of these convertible
notes. Upon conversion of the convertible notes, the Company
extinguishes the convertible debt and related embedded derivatives and no gain
or loss is recorded on the Company's statements of operations as a result of
said conversion.
June 16, 2008 Sale of $310,000 in
Callable Secured Convertible Notes:
To obtain additional
funding for the Company's ongoing operations, the Company entered into a fifth
securities purchase agreement on June 16, 2008 with three accredited investors
for the sale of (i) $310,000 in convertible notes and (ii) warrants to purchase
100,000 shares of its common stock. The sale of the convertible notes
and warrants is to occur in three traunches and the investors are obligated to
provide the Company with an aggregate of $310,000 as follows:
|
•
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$110,000
were disbursed on June 16, 2008;
|
|
•
|
$100,000
were disbursed on July 14, 2008 after the Company filed a Schedule 14A
preliminary proxy statement for a reverse stock split with the Securities
and Exchange Commission; and
|
|
•
|
$100,000
will be disbursed on January 20,
2009.
|
Under the
terms of the June 16, 2008 securities purchase agreement, the Company agreed
that it would not, without the prior written consent of a majority-in-interest
of the investors, negotiate or contract with any party to obtain additional
equity financing (including debt financing with an equity component) that
involves (i) the issuance of common stock at a discount to the market price of
the common stock on the date of issuance (taking into account the value of any
warrants or options to acquire common stock in connection therewith), (ii) the
issuance of convertible securities that are convertible into an indeterminate
number of shares of common stock, or (iii) the issuance of warrants during the
lock-up period beginning June 16, 2008 and ending on the later of (a) 270
days from June 16, 2008, or (b) 180 days from the date the registration
statement is declared effective.
In
addition, the Company agreed not to conduct any equity financing (including debt
financing with an equity component) during the period beginning June 16, 2008
and ending two years after the end of the above lock-up period unless it first
provided each investor an option to purchase its pro-rata share (based on the
ratio of each investor's purchase under the securities purchase agreement) of
the securities being offered in any proposed equity financing. Each
investor must be provided written notice describing any proposed equity
financing at least 20 business days prior to the closing of such proposed equity
financing and the option must be extended to each investor during the 15-day
period following delivery of such notice.
The
$310,000 in convertible notes bear interest at 8% per annum from the date of
issuance. Interest is computed on the basis of a 365-day year and is
payable quarterly in cash, with six months of interest payable up
front. The interest rate resets to zero percent for any month in
which the stock price is greater than 125% of the initial market price, or
$2.75, for each trading day during that month. Any amount of
principal or interest on the callable secured convertible notes that is not paid
when due will bear interest at the rate of 15% per annum from the date due
thereof until such amount is paid. The convertible notes mature in
three years from the date of issuance, and are convertible into the Company's
common stock at the noteholders' option, at the lower of (i) $2.00 or (ii) 45%
of the average of the three lowest intraday trading prices for the common stock
on the OTC Bulletin Board for the 20 trading days before but not including the
conversion date. Accordingly, there is no limit on the number of
shares into which the notes may be converted.
The
$310,000 in convertible notes are secured by the Company's assets, including the
Company's inventory, accounts receivable and intellectual
property. Moreover, the Company has a call option under the
terms of the notes. The call option provides the Company with the
right to prepay all of the outstanding convertible notes at any time, provided
there is no event of default by the Company and its stock is trading at or below
$2.00 per share. An event of default includes the failure by the
Company to pay the principal or interest on the convertible notes when due or to
timely file a registration statement as required by the Company or obtain
effectiveness with the Securities and Exchange Commission of the registration
statement. Prepayment of the convertible notes is to be made in cash
equal to either (a) 125% of the outstanding principal and accrued interest for
prepayments occurring within 30 days following the issue date of the notes; (b)
130% of the outstanding principal and accrued interest for prepayments occurring
between 31 and 60 days following the issue date of the notes; or (c) 145% of the
outstanding principal and accrued interest for prepayments occurring after the
60
th
day following the issue date of the notes.
The
warrants are exercisable until seven years from the date of issuance at a
purchase price of $.10 per share. The investors may exercise the
warrants on a cashless basis if the shares of common stock underlying the
warrants are not then registered pursuant to an effective registration
statement. In the event the investors exercise the warrants on a
cashless basis, the Company will not receive any proceeds
therefrom. In addition, the exercise price of the warrants will be
adjusted in the event the Company issues common stock at a price below market,
with the exception of any securities issued as of the date of the warrants or
issued in connection with the convertible notes issued pursuant to the
securities purchase agreement.
The
noteholders have agreed to restrict their ability to convert their convertible
notes or exercise their warrants and receive shares of the Company's common
stock such that the number of shares of common stock held by them in the
aggregate and their affiliates after such conversion or exercise does not exceed
4.99% of the then issued and outstanding shares of common
stock. However, the noteholders may repeatedly sell shares of common
stock in order to reduce their ownership percentage, and subsequently convert
additional convertible notes, provided, however, that such conversions do not
exceed $75,000 per calendar month, or the average daily dollar volume calculated
during the ten business days prior to conversion multiplied by the number of
trading days of that calendar month, per calendar month.
The
Company is required to register the shares of its common stock issuable upon the
conversion of the convertible notes and the exercise of the warrants that were
issued to the noteholders pursuant to the securities purchase agreement the
Company entered in to on June 16, 2008. The registration statement
must be filed with the Securities and Exchange Commission within 60 days of the
June 16, 2008 closing date and the effectiveness of the registration is to be
within 135 days of such closing date. Penalties of 2% of the
outstanding principal balance of the convertible notes plus accrued interest are
to be applied for each month the registration is not effective within the
required time. The penalty may be paid in cash or stock at the
Company's option.
As of
March 31, 2009, there have been no conversions of these convertible
notes. Upon conversion of the convertible notes, the Company
extinguishes the convertible debt and related embedded derivatives and no gain
or loss is recorded on the Company's statements of operations as a result of
said conversion.
August 29, 2008 Issuance of $191,913
in Callable Convertible Notes:
On August 29, 2008, the Company was
notified by the holders of the convertible notes that there was a past due
interest owing on the outstanding convertible notes. The total amount of
interest owed was $191,913. To pay this interest, the noteholders were willing
to accept $191,913 in additional convertible notes due on August 29,
2011. Accordingly, on August 29, 2008, the Company issued $191,913 in
convertible notes to the noteholders as full payment of the past due
interest.
The
$191,913 in convertible notes bear interest at 2% per annum from August 29,
2008. Interest is computed on the basis of a 365-day year and is payable
quarterly in cash. Any amount of principal or interest on the callable secured
convertible notes that is not paid when due will bear interest at the rate of
15% per annum from the date due thereof until such amount is paid. The
convertible notes mature on August 29, 2011, and are convertible into the
Company's common stock at the noteholders' option, at the lower of (i) $2.00 or
(ii) 45% of the average of the three lowest intraday trading prices for the
common stock on the OTC Bulletin Board for the 20 trading days before but not
including the conversion date. Accordingly, there is no limit on the number of
shares into which the notes may be converted.
The
$191,913 in convertible notes have a call option under the terms of the notes.
The call option provides the Company with the right to prepay all of the
outstanding convertible notes at any time, provided there is no event of default
by the Company and its stock is trading at or below $.431 per share. An event of
default includes the failure by the Company to pay the principal or interest on
the convertible notes when due. Prepayment of the convertible notes is to be
made in cash equal to either (a) 135% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issue date of
the notes; (b) 145% of the outstanding principal and accrued interest for
prepayments occurring between 31 and 90 days following the issue date of the
notes; or (c) 150% of the outstanding principal and accrued interest for
prepayments occurring after the 90
th
day
following the issue date of the notes.
The
noteholders have agreed to restrict their ability to convert their convertible
notes and receive shares of the Company's common stock such that the number of
shares of common stock held by them in the aggregate and their affiliates after
such conversion does not exceed 4.9% of the then issued and outstanding shares
of common stock. However, the noteholders may repeatedly sell shares of common
stock in order to reduce their ownership percentage, and subsequently convert
additional convertible notes, provided, however, that such conversions do not
exceed the average daily dollar volume calculated during the ten business days
prior to conversion multiplied by the number of trading days of that calendar
month, per calendar month.
As of
March 31, 2009, there have been no conversions of these convertible
notes. Upon conversion of the convertible notes, the Company
extinguishes the convertible debt and related embedded derivatives and no gain
or loss is recorded on the Company's statements of operations as a result of
said conversion.
The
convertible notes include certain features that are considered embedded
derivative financial instruments. These features are described as
follows:
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•
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The
fixed conversion feature that allows the investor to convert the notes at
a fixed price per share;
|
|
•
|
The
variable conversion feature that allows the investor to convert the notes
at a specified percentage of the market price at the time of
conversion;
|
|
•
|
The
variable interest rate provision that calls for no interest to be paid if
the stock price exceeds a predetermined amount for a given number of
months; and
|
|
•
|
The
contingent put feature, which upon the occurrence of certain events of
default, including (i) the Company's failure to pay the principle and
interest thereon when due on the notes; (ii) bankruptcy, insolvency,
reorganization, liquidation proceedings instituted by or against the
Company; (iii) any money judgment is entered against the Company for more
than $50,000, which remains unvacated, unbonded, or unstayed for more than
twenty days; and (iv) the delisting of the Company's common stock, allows
the investor to require the Company to redeem the convertible notes at
130% of the principal amount. Although the
put feature was determined to be an embedded derivative which
requires bifurcation, the Company believes the likelihood of this feature
being exercised is remote and accordingly no value was ascribed to this
particular put feature. The Company is required to continue to
evaluate our accounting and valuation for this put feature. The
Company will continue to monitor the probability of this particular put
feature being exercised and its impact to the Company's valuation of
embedded derivatives in future
periods.
|
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•
|
The
value of the warrants issued in conjunction with each
funding.
|
The
initial fair value assigned to the embedded derivatives and warrants was
$4,169,000, which consisted of the fair value of the embedded derivatives of
$2,588,000 and the fair value of the warrants of $1,582,000. The
Company recorded the first $2,500,000 of fair value of the derivatives and
warrants to debt discount (equal to the total proceeds received as of June 30,
2005), which will be amortized to interest expense over the term of the
notes. The remaining balance of $1,669,000 was recorded as loss of
derivative valuation for the period ended June 30, 2005.
As of
December 31, 2005, the carrying amount on the notes was $340,000, net of the
unamortized debt discount of $1,698,000. Interest expense on the
notes totaled $739,000 for the period ended December 31, 2005, which consisted
of $369,000 of normal accretion of the note discount and $370,000 of accrued
interest on the outstanding note balance for the period. The fair
value of the embedded derivatives and warrants decreased to $195,000 during the
year ended December 31, 2005, which consisted of a fair value of the embedded
derivatives of $137,000 and the fair value of the warrants of
$58,000. The corresponding decrease in derivative value was reflected
as a gain on derivative valuation on the statements of operations in the amount
of $3,975,000.
During
2006, the Company entered into another securities purchase agreement in the
amount $1,000,000. The initial fair value assigned to the embedded
derivatives and warrants was $541,000 for this note, which consisted of the fair
value of the embedded derivatives of $464,000 and the fair value of the warrants
of $77,000. The Company recorded the $541,000 of fair value of the
derivatives and warrants to debt discount, which will be amortized to interest
expense over the term of the notes.
As of
December 31, 2006, the carrying amount on the notes was $1,421,000, net of the
unamortized debt discount of $1,235,000. Interest expense on the
notes totaled $935,000 for the period ended December 31, 2006, which consisted
of $721,000 of normal accretion of the note discount and $214,000 of accrued
interest on the outstanding note balance for the
period. The fair value of the embedded derivatives and warrants
decreased by a total of $536,000 during the year ended December 31, 2006, which
consisted of a decrease in the fair value of the embedded derivatives of
$451,000 and the fair value of the warrants of $85,000. Accordingly,
the Company recorded a gain on derivative valuation to the statement of
operations of $536,000 for the year ended December 31, 2006.
During
2007, the Company entered into four securities purchase agreements in the
aggregate amount of $1,639,000. The initial fair value assigned to
the embedded derivatives and warrants was $466,000 for these notes, which
consisted of the fair value of the embedded derivatives of $344,000 and the fair
value of the warrants of $122,000. The Company recorded $466,000 of
fair value of the derivatives and warrants to debt discount, which will be
amortized to interest expense over the term of the notes.
At
December 31, 2007, the carrying amount on the notes was $3,100,000, net of the
unamortized debt discount of $828,000. Interest expense on the notes
totaled $992,000 for the period ended December 31, 2007, which consisted of
$771,000 of normal accretion of the note discount and $221,000 of accrued
interest on the outstanding note balance for the period. The fair
value of the embedded derivatives and warrants decreased by a total of $413,000
during the year ended December 31, 2007, which consisted of a decrease in the
fair value of the embedded derivatives of $391,000 and the fair value of the
warrants of $22,000. Accordingly, the Company recorded a gain on
derivative valuation to the statement of operations of $413,000 for the year
ended December 31, 2007.
At
December 31, 2008, the carrying amount on the notes was $3,854,000, net of the
unamortized debt discount of $278,000. Interest expense on the notes
totaled $827,000 for the period ended December 31, 2008, which consisted of
$515,000 of normal accretion of the note discount and $312,000 of accrued
interest on the outstanding note balance for the period. The fair
value of the embedded derivatives and warrants decreased by a total of $207,000
during the twelve months ended December 31, 2008, which consisted of a decrease
in the fair value of the embedded derivatives of $139,000 and the fair value of
the warrants of $68,000. Accordingly, the Company recorded a gain on
derivative valuation to the statement of operations of $207,000 for the twelve
months ended December 31, 2008.
At March
31, 2009, the carrying amount on the notes was $3,574,000, net of the
unamortized debt discount of $200,000. Interest expense on the notes
totaled $134,000 for the period ended March 31, 2009, which consisted of $62,000
of normal accretion of the note discount and $72,000 of accrued interest on the
outstanding note balance for the period. The fair value of the
embedded derivatives and warrants decreased by a total of $8,000 during the
quarter ended March 31, 2009, which consisted of a decrease in the fair
value of the embedded derivatives of $4,000 and the fair value of the warrants
of $4,000. Accordingly, the Company recorded a gain on derivative
valuation to the statement of operations of $8,000 for the year ended March 31,
2009.
The
market price of the Company’s common stock significantly impacts the extent to
which the Company may be required or may be permitted to convert the
unrestricted and restricted portion of the notes into shares of the Company's
common stock. The lower the market price of the Company's common stock at the
respective times of conversion, the more shares the Company will need to issue
to convert the principal and interest payments then due on the notes. If the
market price of the Company's common stock falls below certain thresholds, the
Company will be unable to convert any such repayments of principal and interest
into equity, and the Company will be forced to make such repayments in cash. The
Company's operations could be materially impacted, in an adverse way, if the
Company is forced to make repeated cash payments on the notes.
The
Company received notice from the accredited investors holding convertible notes
dated June 28, 2006 and convertible notes dated April 30, 2007, that on January
22, 2009, E-Lionheart, LLC and other third parties purchased $500,000 of the
convertible notes dated June 28, 2006 and the $500,000 of convertible notes
dated April 30, 2007. The total purchase price of these convertible
notes was $1,514,444. Between February 18, 2009 and March 27, 2009, the third
parties converted a total $452,406 of the June 28, 2006 convertible notes at
conversion prices ranging from $.0009 to .00105 per share and received a total
of 500,511,410 shares of the Company's common stock pursuant to said
conversions. As of March 31, 2009, the Company had outstanding
517,901,448 shares of common stock.
Simple
Conversion Calculation
The
number of shares of common stock issuable upon conversion of the convertible
notes issued on April 27, 2005, February 28, 2006, June 11, 2007, December 19,
2007, December 23, 2007, June 16, 2008, and August 29, 2008 is determined by
dividing that portion of the principal of the notes to be converted and interest
by the conversion price. For example, assuming conversion of $3,774,197
principal amount of the convertible notes on March 31, 2009 (consisting of
$5,060,000 in convertible notes that were sold to the four investors pursuant to
securities purchase agreements dated April 27, 2005, February 28, 2006,
June 11, 2007, December 24, 2007, and June 16, 2008, plus $389,010 in
convertible notes issued on December 19, 2007, and $191,913 in convertible notes
issued on August 29, 2008, in payment of past due interest on the notes, less
$1,866,726 in notes converted during the period from June 12, 2005 to March 31,
2009) and a conversion price of $.0012 per share with a 55% discount, the number
of shares issuable upon conversion would be:
$3,774,197/$.0012
x 45% = 6,290,328,333 shares.
The
Company's obligation to issue shares upon conversion of the convertible notes
issued on April 27, 2005, February 28, 2006, June 11, 2007, December 19, 2007,
December 24, 2007, June 16, 2008, and August 29, 2008 is essentially limitless.
The following is an example of the amount of shares of common stock that are
issuable upon conversion of $3,774,197 principal amount of the convertible notes
(including accrued interest), based on market prices 25%, 50%, and 75% below the
market price, as of March 31, 2009 of $.0012 with a 55% discount:
|
%
Below
Market
|
Price
Per
Share
|
With
55%
Discount
|
Number
of
Shares
Issuable
|
%
of Outstanding
Shares
*
|
|
25%
50%
75%
|
.0009
.0006
.0003
|
.000405
.00027
.000135
|
9,319,004,938
13,978,507,407
27,957,014,815
|
1,799%
2,699%
5,398%
|
*Based on
517,901,448 shares outstanding.
As
illustrated, the number of shares of common stock issuable upon conversion of
the Company's callable secured convertible notes will increase if the market
price of the Company's common stock declines, which will cause dilution to
existing stockholders.
Adjustable Conversion Price
of Convertible Notes
The
convertible notes are convertible into shares of the Company's common stock at a
55% discount to the trading price of the common stock prior to the
conversion. The significant downward pressure on the price of the
common stock as the noteholders convert and sell material amounts of common
stock could encourage short sales by investors. This could place
further downward pressure on the price of the common stock. The
noteholders could sell common stock into the market in anticipation of covering
the short sale by converting their securities, which could cause further
downward pressure on the stock price. In addition, not only the sale
of shares issued upon conversion or exercise of notes, warrants and options, but
also the mere perception that these sales could occur, may have a depressive
effect on the market price of the common stock.
Possible Dilution to
Stockholders
The
issuance of shares upon conversion of convertible notes and exercise of warrants
may result in substantial dissolution to the interests of other stockholders
since the holders of the convertible notes may ultimately convert and sell the
full amount issuable upon conversion. Although the noteholders may
not convert their convertible notes and/or exercise their warrants if such
conversion or exercise price would cause them to own more than 4.99% of the
Company's outstanding common stock, this restriction does not prevent the
noteholders from converting and/or exercising some of their holdings and then
converting the rest of their holdings. In this way, the noteholders
could sell more than this limit while never holding more than this
limit. There is no upper limit on the number of shares that may be
issued, which will have the effect of further diluting the proportionate equity
interest and voting power of holders of the Company's common stock.
Failure to Repay Convertible
Notes May Require Company Operations to Cease
On April
27, 2005, the Company entered into a securities purchase agreement for the sale
of an aggregate of $2,500,000 principal amount of convertible
notes. On February 28, 2006, the Company entered into another
securities purchase agreement for the sale of an aggregate of $1,500,000
principal amount of convertible notes. On June 11, 2007, and December
24, 2007, the Company entered into third and fourth securities purchase
agreements for the sale of an aggregate of $750,000 principal amount of
convertible notes. On December 19, 2007, the Company issued an
additional $389,010 in convertible notes as payment of past due interest owing
on the outstanding convertible notes. On June 16, 2008, the Company
entered into a fifth securities purchase agreement for the sale of an aggregate
of $310,000 principal amount of convertible notes. On August 29,
2008, the Company issued an additional $191,913 in convertible notes as payment
of past due interest owing on the outstanding convertible
notes. These convertible notes are all due and payable, with 8%
interest, three years from the date of issuance, unless sooner converted into
shares of the Company's common stock. On March 31, 2009, the
Company had $3,774,197 in convertible notes outstanding. Any event of
default such as the Company's failure to repay the principal or interest when
due on the notes, the Company's failure to issue shares of common stock upon
conversion by the noteholders, the Company's breach of any covenant,
representation or warranty in the securities purchase agreement or related
convertible notes, the assignment or appointment of a receiver to control a
substantial part of the Company's property or business, the filing of a money
judgment, writ or similar process against the Company in excess of $50,000, the
commencement of a bankruptcy, insolvency, reorganization or liquidation
proceeding against the Company, and the delisting of the Company's common stock
could require the early repayment of the convertible notes, including a default
interest rate of 15% on the outstanding principal balance of the notes if the
default is not cured within the specified grace period.
The
Company anticipates that the full amount of convertible notes will be converted
into shares of its common stock, in accordance with the terms of the convertible
notes. If the Company is required to repay the convertible notes, it
would be required to use its limited working capital and raise additional
funds. If the Company were unable to repay the notes when required,
the noteholders could commence legal action against the Company and foreclose on
all of its assets to recover the amounts due. Any such action would
require the Company to curtail or cease operations.
Preferred Stock
Conversions
Under the
Company's Certificate of Incorporation, holders of the Company's Class A and
Class B preferred stock have the right to convert such stock into shares of the
Company's common stock at the rate of 1.2 shares of common stock for each share
of preferred stock. During the three months ended March 31, 2009, no shares of
Series A preferred stock and no shares of Series B preferred stock were
converted to the Company's common stock.
Holders
of Series D preferred have the right to convert such stock into shares of the
Company's common stock at the rate of one share of common stock for each share
of preferred stock. During the three months ended March 31, 2009, no shares of
Series D preferred stock were converted to the Company's common
stock.
Holders
of Series E preferred have the right to convert such stock into shares of the
Company's common stock at the rate of 53.3 shares of common stock for each share
of preferred stock. During the three months ended March 31, 2009, no shares of
Series E preferred stock were converted to the Company's common
stock.
Holders
of Series F preferred have the right to convert such stock into shares of the
Company's common stock at the rate of 53.3 shares of common stock for
each share of preferred stock. During the three months ended March 31, 2009, no
shares of Series F preferred stock were converted to the Company's common
stock.
Holders
of Series G preferred have the right to convert such stock into shares of the
Company's common stock at the rate of one share of common stock for each share
of preferred stock. During the three months ended March 31, 2009, no shares of
Series G preferred stock were converted to shares of the Company's common
stock.
Warrants
The fair
value of warrants granted as described herein is estimated at the date of grant
using the Black-Scholes option pricing model. The exercise price per share is
reflective of the then current market value of the stock. No grant exercise
price was established at a discount to market. All warrants are fully vested,
exercisable and nonforfeitable as of the grant date. As a result of
the financing the Company completed on April 27, 2005 involving the sale of
$2,500,000 in convertible notes, the Company granted warrants to the noteholders
to purchase 165,344 shares of its common stock. The
warrants have an exercise price of $20.00 per share and expire on April 27,
2010. As a result of the financing the Company completed on
February 28, 2006, involving the sale of $1,500,000 in convertible notes,
the Company granted that warrants to the noteholders to purchase 120,000 shares
of its common stock. The warrants have an exercise price of $10.00
per share and expire on February 27, 2011. As a result of the
financing the Company completed on June 11, 2007, involving the sale of $500,000
in convertible notes, the Company granted warrants to the noteholders to
purchase 100,000 shares of its common stock. The warrants have an
exercise price of $.50 per share and expire on June 11, 2014. As a
result of the financing the Company completed on December 23, 2007, involving
the sale of $250,000 in convertible notes, the Company granted warrants to the
noteholders to purchase 150,000 shares of its common stock. The
warrants have an exercise price of $.10 per share and expire on December 23,
2014. As a result of the financing that the Company completed on June
16, 2008, involving the sale of $110,000 in convertible notes, the Company
granted warrants to the noteholders to purchase 100,000 shares of its common
stock. The warrants have an exercise price of $.10 per share and
expire on June 16, 2015.
Related Party
Transactions
Payments
for legal services to the firm of which the Company's Chairman of the Board is a
partner were $10,000 and $30,000 for the three months ended March 31, 2009 and
2008, respectively.
Accrued
Expenses
Accrued
expenses consist of the following at March 31, 2009:
|
Litigation
reserve
|
|
$
|
236,000
|
|
|
Consulting
and service reserve
|
|
|
28,000
|
|
|
Interest
expense on notes payable
|
|
|
188,000
|
|
|
Payroll
and employee benefits
|
|
|
15,000
|
|
|
Sales
tax payable
|
|
|
5,000
|
|
|
Customer
deposits
|
|
|
44,000
|
|
|
Accrued
royalties
|
|
|
1,000
|
|
|
Warranty
and return allowance
|
|
|
64,000
|
|
|
Other
accrued expenses
|
|
|
27,000
|
|
|
Total
|
|
$
|
608,000
|
|
Subsequent
Events
On April
7, 2009, the Company signed a letter of intent with Fairhills Capital Offshore,
LLC in which Fairhills Capital committed to finance up to $1,800,000 through the
purchase of promissory notes from the Company. The
letter of intent provides that $600,000 in notes will be purchased
every three months over a nine month period, with the first purchase of $300,000
to be made at closing and the remainder to be purchased upon the satisfaction of
financial objectives to be mutually determined between the Company and Fairhills
Capital. The convertible notes will bear interest at 6% per
annum. In addition, Fairhills Capital will have a right of first
refusal on future financing transactions by the Company for as long as the notes
remain outstanding.
On April
15, 2009, the Company entered into a Letter of Understanding with Costrugione
Srumenti Oftalmici srl ("CSO"), an Italian company, to distribute and sell
certain products manufactured by CSO. The products to be distributed
and sold by the Company include the Retimax, the next generation of standard
ocular electrophysiology. The Retimax performs innovative tests for
the early screening and follow up of pathologies such as glaucoma, age related
maculopaty, vascular retinal degeneration, and other optic nerve
diseases. Other CSO products to be sold by the Company include the
Sirius Advanced Topographer and the Endothelium Microscope.
Under the
terms of the Letter of Understanding, CSO will manufacture and supply products
to be sold by the Company. The products will have the Company's logo
and markings. The Company is granted the exclusive right to sell the
products on an exclusive basis in North America for a period of twelve
months. The twelve month period will begin 60 days after the Retimax
is approved by the FDA. The exclusive right to sell the CSO products
in North America is conditioned upon the Company selling an average of five
Retimax units per month. The exclusive right to sell the CSO products will be
reviewed every six months for the first two years and every year
thereafter. The Company and CSO may end their relationship at any
time upon six months' prior written notice to the other party.