As filed
with the U.S. Securities and Exchange Commission on
August 20, 2010
Registration
No. 333-163046
U.S. SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Amendment No. 9
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
XStream Systems, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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3844
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201180466
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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10305 102nd Terrace
Suite 101
Sebastian, FL 32958
Tel:
(772) 646-6201
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
James J. Lowrey
Chairman and Co-Chief Executive
Officer
XStream Systems, Inc.
10305 102nd Terrace
Suite 101
Sebastian, FL 32958
Tel:
(772) 646-6201
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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Bruce C. Rosetto, Esq.
Rebecca G. DiStefano, Esq.
Greenberg Traurig, P.A.
5100 Town Center Circle
Suite 400
Boca Raton, FL 33486
Tel:
(561) 955-7600;
Fax:
(561) 367-6254
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David A. Pentlow, Esq.
Katten Muchin Rosenman LLP
575 Madison Avenue
New York, NY 10022
Tel: (212) 940-6412; Fax (212) 894-5912
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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, check the
following
box. o
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. o
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. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) 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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
company þ
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(Do not check if a smaller
reporting company)
CALCULATION
OF REGISTRATION FEE
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Proposed Maximum
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Proposed Maximum
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Amount of
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Title of Each Class of
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Offering
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Aggregate
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Registration
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Securities to be Registered
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Price per Unit(1)
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Offering Price(1)
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Fee(2)
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Common Stock, $0.0001 par value
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$8.00 per Share
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$40,000,000
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$2,852.00
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(1)
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Estimated in accordance with
Rule 457 (o) solely for the purpose of calculating the
registration fee.
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(2)
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Registration fee of $2,852.00
previously paid.
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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, as amended, or until the
Registration Statement shall become effective on such date as
the Commission, acting pursuant to said Section 8(a), may
determine.
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 offers to buy these
securities in any state where the offer or sale is not
permitted.
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Subject
to Completion, Dated August 20, 2010
PROSPECTUS
A
Minimum of 3,333,334 shares
A
Maximum of 5,000,000 shares
This is our initial
public offering. No public market currently exists for our
common stock. We are offering shares of our common stock on a
best efforts basis as to a minimum offering of
3,333,334 shares generating gross proceeds of $20,000,000
and as to a maximum offering of 5,000,000 shares generating
gross proceeds of $30,000,000. We have assumed a midpoint of
$6.00 for the per share offering price in this prospectus. No
closing will occur unless we raise at least $20,000,000 in gross
proceeds. We expect that the offering price will be between
$4.00 and $8.00 per share of common stock. All funds received
from investors will be deposited into a non-interest bearing
escrow account with our escrow agent, JPMorgan Chase Bank, N.A.
We have applied for the listing of our common stock on the NYSE
Amex. The listing of our common stock on the NYSE Amex is a
condition to the completion of the offering. If the conditions
to closing are met, this offering will price and close on a T+3
basis (three trading days after pricing) on or
about ,
2010.
Proposed NYSE Amex
Symbol: XTRM
OpenIPO®
and Best Efforts Offering: The method of distribution being used
by the underwriter in this offering differs somewhat from that
traditionally employed in firm commitment underwritten public
offerings. In particular, the public offering price and
allocation of shares were determined primarily by an auction
process conducted by the underwriter and other securities
dealers participating in this offering. The minimum size for any
bid in the auction is 100 shares. The underwriter is
required to use its best efforts to sell a minimum of 3,333,334
in shares of common stock and to sell 5,000,000 shares, the
maximum number of securities offered hereby so long as
$20,000,000 in gross proceeds are raised.
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Price to
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Underwriting
Discounts
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Proceeds to
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Public
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and Commissions
(1)(2)
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Company
(3)
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Per Share(1)
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$
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6.00
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$
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0.30
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$
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5.70
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Minimum of 3,333,334 shares
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$
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20,000,004
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$
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1,000,000
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$
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19,000,004
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Maximum of 5,000,000 shares
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$
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30,000,000
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$
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1,500,000
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$
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28,500,000
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(1)
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Our
minimum offering requires us to raise $20,000,000 in gross
proceeds. References to a minimum of 3,333,334 shares
assumes the midpoint of $6.00 for the initial public offering
price generating gross proceeds of $20,000,004. The sale of the
minimum of 3,333,334 shares at the bottom of our price
range, or $4.00, will not generate sufficient proceeds to close
the offering. We have agreed to pay the underwriter a commission
of five percent (5%) of the price of each share sold in the
offering. Such commission does not include an expense allowance
of $50,000 of the gross offering proceeds, which we have also
agreed to pay the underwriter. See Plan of
Distribution.
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(2)
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The
funds we raise from the bids for shares will be deposited in the
escrow account with the escrow agent until the minimum offering
is sold, where the funds will be held for the benefit of the
investors. All payments for the shares of common stock are
payable by wire transfer to JPMorgan Chase Bank, N.A. , as
Escrow Agent for XStream Systems, Inc. We expect that our shares
of common stock will be ready for delivery in book-entry form
through The Depository Trust Company after the sale of the
minimum offering and the fulfillment of all other conditions
necessary for release of the funds from the escrow account. If
we do not raise a minimum of $20,000,000 in gross proceeds or do
not receive approval for listing of our shares on NYSE Amex
within three business days following the closing of the auction
and pricing, all money paid for the shares will be promptly
returned to the investors without interest and without deduction
for expenses. There can be no assurance that any or all of the
shares being offered will be sold. See Plan of
Distribution.
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(3)
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Before
deducting expenses of this offering payable by us estimated to
be $ , excluding the
underwriters unaccountable expense allowance referred to
in footnote (1). See Use of Proceeds.
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This offering
involves a high degree of risk. You should purchase shares only
if you can afford a complete loss of your investment. See
Risk Factors beginning on page 8.
Neither the
Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
passed on the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
The date of this
prospectus
is ,
2010
You should rely only on the information contained in this
prospectus. We have not authorized any other person to provide
you with different information. If anyone provides you with
different or inconsistent information, you should not rely on
it. We are not making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You
should assume that the information appearing in this prospectus
is accurate as of the date on the front cover of this prospectus
only. Our business, financial condition, results of operations
and prospects may have changed since that date.
TABLE OF
CONTENTS
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Page
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1
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8
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21
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22
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23
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23
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24
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25
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25
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27
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43
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53
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72
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76
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79
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92
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92
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103
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103
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104
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104
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F-1
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PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus. You should read the entire prospectus
carefully. All references to we, us, the
company and XStream Systems mean XStream
Systems, Inc. Unless otherwise indicated, all information
contained in this prospectus assumes that no outstanding stock
options or warrants will be exercised. This prospectus contains
forward-looking statements, which involve risks and
uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under
Risk Factors and elsewhere in this prospectus.
References in this prospectus to the securities to
be sold in the offering mean shares of common stock.
Our
Company
We design and develop material authentication and verification
solutions. Our business strategy is to provide these solutions
to US and non-US businesses in pharmaceutical supply chains. The
core of our products and services is the
XT250tm
Material Identification System
(XT250tm).
We have the ability to offer standardized or customized
configurations of the
XT250tm
based services.
Our
XT250tm
system uses Energy Dispersive X-Ray Diffraction
(EDXRD) technology licensed from Rutgers, the State
University of New Jersey through an exclusive worldwide
licensing agreement. The technology has the ability to penetrate
virtually any material (glass, wood, and metal), and extract a
molecular structure fingerprint of the materials
inside without opening material casing or packaging. The
XT250tm
system then compares the fingerprint to our fingerprint library
to authenticate and verify materials of interest for which the
XT250tm
has been programmed.
The
XT250tm
system enables forensic analysis to take place where it is
needed, by anyone who needs to authenticate or verify materials.
Forensic analysis techniques had previously been performed in
laboratories by trained technical personnel, required
significant time, and was often destructive to the test sample
itself. The
XT250tm
system permits material analysis to be performed outside of the
laboratory by non-technical personnel, such as warehouse
workers, to rapidly authenticate pharmaceutical inventories,
even when sealed in their original packaging.
We have generated revenues historically as a direct seller of
our countertop
XT250tm
which is placed
on-site with
our customers. We have sold seven
XT250tm
systems to date. We did not generate any revenues during the six
months ended June 30, 2010.
Revenue
Model
We market our product offerings to businesses and government
agencies in the US and in overseas markets. Our future success
will be driven primarily by our ability to attract new
customers, develop sustainable revenues and to continue to
develop our service and product range. Our current target
customers are seeking identification solutions for counterfeit
pharmaceuticals as well as validation of their pharmaceutical
inventory.
Our revenue model currently consists of:
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service agreements for placement of our
XT250tm
system
on-site with
our customers. These generate usage-based income from an
arrangement which minimizes our customers up-front capital
expenditures;
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service agreements for customized authentication solutions
utilizing the EDXRD technology developed to meet the specific
requirements of a customer including multi-layer
anti-counterfeiting solutions which incorporate molecular
screening, pedigree, serialization and sealant;
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direct sales of our
XT250tm
system to customers; and
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PILOT programs whereby potential customers will host our system
for use on a trial basis, providing our potential customers with
an option to enter into a multi-year service agreement following
PILOT testing.
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We have had direct sales of our
XT250tm
systems to six customers and one sale of the
XT250tm
system generated from the PILOT program.
1
Our development of the customized EDXRD products and the
multi-layer solutions and our future generation of revenues in
connection with these products is dependent on our completion of
the offering. We have not generated service agreement sales of
customized services or the multi-layer solution to date. We
anticipate finalizing the development of our multi-layer
solution following the offering during the fourth quarter of
2010.
Our
Industry
We believe we are well positioned to take advantage of
anticipated growth within an emerging authentication and
verification industry. Our industrys growth globally is
expected to be driven by:
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the increase in counterfeiting and adulteration in the drug and
pharmaceutical industry;
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indicators of growing corporate demand for counterfeit drug
identification solutions;
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the proliferation of pharmaceutical product sales from internet
sources;
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indications of demand for diagnostic detection solutions in the
medical industry;
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terrorist activities around the globe;
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indications of demand for quality control in the cosmetics
industry;
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industry indicators for demand in raw ore, mineral, and metal
detection;
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indications of demand for quality control in the cement
industry; and
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indications of demand for quality control in the veterinarian
industry.
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Our
Growth Strategy
Our objective is to become the leading provider of material
authentication and verification solutions. Key elements of our
growth strategy include:
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scale the technology, in terms of speed and test volume size, to
produce products that meet varying customer applications,
including real-time testing, as well as large volume screening;
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expand our recognition and branding in our industry in
identification of counterfeit and adulterated drugs and
pharmaceuticals;
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pursue new customers and territories we are
aggressively targeting potential customers, primarily through
our direct sales force, and believe that there are substantial
market opportunities for our solutions in the Americas, Asia,
Africa, and Europe;
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strategic PILOT programs whereby third parties host our
XT250tm
system;
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enhance our product offering we intend to further
develop our
XT250tm
platforms capabilities and features;
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expand our product offering we intend to customize
other products to meet customer demands beyond the
XT250tm
platform;
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expand our target markets we intend to leverage our
products by offering them to new markets; and
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build and leverage awareness of the XStream molecular screening
brand.
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Our
Strategic Relationships
We are working on several strategic projects with recognized
companies and intend to develop applications for our molecular
authentication and verification technology in connection with
these relationships. Our initial target market has been the
pharmaceutical distribution market, including major
pharmaceutical manufacturers, drug
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distributors and automated drug dispensing logistics (assembly
line efficiencies) companies. Our current teaming relationships
include the following:
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Swisslog Healthcare Solutions, a global provider of integrated
logistics solutions for warehouses, distribution centers and
hospitals has executed a Letter of Intent with us to jointly
collaborate and investigate the development of customized
screening solutions; and
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Eastman Kodak, a corporation utilizing technology to combine
imaging and information, has agreed in a Letter of Intent to
explore with us strategic opportunities for joint design,
development, cross-licensing, and co-marketing of security
solutions. We believe that some of Kodaks technologies
would be complementary to our customized authentication
solutions.
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We are negotiating strategic relationships with other
pharmaceutical distributors, manufacturers and logistic
companies. We are directing our strategic efforts to produce
applications which we anticipate will combine non-destructive
penetrating capability with forensic analysis. To date, we have
not generated revenues from the relationships listed above.
In addition to the relationships listed above, we have initiated
and conducted several PILOT programs in a number of different
pharmaceutical markets, at one U.S. government entity and
in several university research settings. Not all of our PILOT
programs were specifically designed for a unit sale and,
therefore, some of our PILOT programs will not generate
revenues. Our PILOT programs generally have a duration of two
months to one year. One of the primary goals of these PILOT
programs is to help us identify areas for improvement and
development in our technology and products. Some of our PILOT
programs were designed for research purposes to test the
capabilities of the technology, data collection, process
improvement, throughput, and concept/ industry viability. For
example, we have determined from some of our PILOT participants
that the processing speed or the testing output of a single
system is more limited than those participants would have
desired. These results have helped us in our product and
technology development efforts and the findings of these PILOT
programs have helped us identify areas for future development
and improvement.
One of our PILOT program relationships with a specialty
pharmaceutical distribution company resulted in an
XT250tm
sale. We currently have one PILOT program participant.
Prior
Line of Business
We previously entered into a contract with the Transportation
Services Administration (TSA) to perform research to
test the viability of TSAs own explosive detection
systems. The equipment used by TSA in such tests was its own
equipment and not our
XT250tm.
Under the agreement, we designed simulant formulas (or blends of
benign materials that would mimic each particular explosive) to
test these detection systems. We generated revenues of $101,606
during 2005, $107,567 during 2006 and $150,000 during 2008 from
our contract with TSA. The TSA agreement has terminated and we
do not currently have a contract with other government agencies.
Furthermore, we are not conducting business operations in the
field of simulants research at the present and do not anticipate
any recurring revenues related to our prior simulants research.
Corporate
Information
We were organized as a corporation under the laws of the State
of Delaware in May 2004, and commenced operations in our current
line of business at that time. Our principal executive offices
are located at 10305 102nd Terrace, Suite 101,
Sebastian, FL 32958, and our telephone number is +1(772)
646-6200. We
maintain a corporate website at www.securepharmachain.net, and
an electronic brochure of our
XT250tm
product offering can be downloaded at
http://xstreamsystems.net/XT250SpecSheet-200807.pdf.
Neither the contents of our website nor our brochure are part of
this prospectus and should not be relied upon with respect to
this offering.
3
The
Offering Common Stock
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Common stock offered |
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Minimum offering |
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3,333,334 on a best efforts basis |
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Maximum offering |
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5,000,000 on a best efforts basis |
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Our minimum offering requires us to raise at least $20,000,000
in gross proceeds, which would require either the price per
share or the number of shares sold to be above their respective
minimum thresholds. The sale of the minimum of
3,333,334 shares at the bottom of our price range, or
$4.00, will not generate sufficient proceeds to close the
offering. |
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Proposed NYSE Amex Symbol for the common stock |
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XTRM |
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Common stock outstanding prior to this offering |
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2,865,044 shares |
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Common stock to be outstanding after this offering(1) |
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Minimum offering |
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10,388,545 shares |
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Maximum offering |
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12,055,211 shares |
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OpenIPO Process |
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This offering will be made through the OpenIPO process, in which
the allocation of shares and the public offering price are
primarily based on an auction in which prospective purchasers
are required to bid for the shares. The OpenIPO process is
described in full under Plan of Distribution
beginning on page 92. |
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Use of proceeds |
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In the event of either of the minimum offering or the maximum
offering, we will use a portion of the net proceeds of this
offering, first, in the repayment of our indebtedness through
August 15, 2010, in the aggregate amount of $7,357,222 as
follows: |
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$2,560,278 to discharge the Kimball judgment against
us, plus accounts payable;
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$287,260 to repay principal and accrued interest due
to our two debenture holders;
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$1,103,350 to discharge amounts we are in arrears
under our license agreement with Rutgers University;
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$741,472 to be paid to affiliates for deferred
salary; and
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$366,589 to repay principal and accrued interest due
to officers, directors and shareholders for promissory notes
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$2,298,272 in professional fees and miscellaneous
expenses.
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The amount to be repaid to Kimball above was derived by
deducting $39,722 in funds which are subject to a writ of
garnishment from the filed judgment of $2,600,000. We will use
the remainder of the net proceeds following repayment of our
indebtedness for research and product development and general
corporate purposes including salaries, professional fees, public
reporting costs and office-related expenses. |
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Proposed Listing |
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We have applied for the listing of our common stock on the NYSE
Amex. Assuming that we raise at least $20,000,000 in gross
proceeds, we believe that we will be accepted for listing on the
NYSE Amex at the time of the offering. The listing of our common
stock on the NYSE Amex is a condition to the completion of the
offering. The sale of the minimum of 3,333,334 shares at
the bottom of our price range, or $4.00, will not generate
sufficient proceeds to permit our initial listing on the NYSE
Amex. In the event that we were to price the offering below the
price range after the auction is closed, we would file a
post-effective amendment to reflect the lower price and a higher
number of shares. However, in no event would the actual offering
price be less than $3.00 as that is the minimum price required
to satisfy NYSE Amex listing requirements. |
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Escrow account |
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All payments for shares under this prospectus should be made
payable to JPMorgan Chase Bank, N.A. as escrow agent
for the escrow account. If at least an aggregate of $20,000,000
in funds are not received in the escrow account or the NYSE Amex
does not confirm the listing of the shares on the exchange
within three business days following the closing of the auction
and pricing, the offering will terminate and funds deposited
with the escrow agent will be returned to investors promptly
without interest. |
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Ownership after this offering |
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Our executive officers and directors will beneficially own
approximately 29.3% of our outstanding common stock if the
minimum offering is completed and 25.5% if the maximum offering
is completed. |
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(1) |
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Based on 2,865,044 shares outstanding on August 15,
2010, and assuming the conversion of shares of our
Series A, B, C, and D preferred stock and accrued dividends
through August 15, 2010 into 4,190,167 shares of our
common stock on the effective date of the registration statement
for this offering. The number of shares to be outstanding after
this offering excludes the following: |
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2,033,117 shares of common stock reserved for issuance upon
the exercise of outstanding stock options under our Amended and
Restated 2004 Stock Option Plan and 2009 Long Term Incentive
Compensation Plan;
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13,078,685 shares of common stock reserved for issuance
upon the exercise of outstanding warrants (for which cash would
need to be remitted to us for exercise) at a weighted average
exercise price of $2.99 and 5,203,480 shares of which are
held by executive officers and directors and their affiliates;
and
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3,848,769 additional shares of common stock reserved for
issuance under the 2009 Long Term Incentive Compensation Plan.
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Unless we specifically state otherwise, all information in this
prospectus:
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assumes the sale of shares of our common stock at the $6.00
midpoint of our estimated price range set forth on the cover of
our prospectus.
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Risk
Factors
This offering and our business is subject to numerous risks, as
discussed more fully in the section entitled Risk
Factors immediately following this prospectus summary.
Some of the risks include without limitation:
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our history of annual net losses which may continue and which
may negatively affect our ability to achieve our business
objectives, and the going concern qualification in our 2008 and
2009 audits;
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5
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we are currently a defendant in a lawsuit with the manufacturer
of the
XT250tm
system, Kimball Electronics, Inc., in connection with funds we
currently owe to its parent corporation, Kimball International,
Inc., under a promissory note and, on February 8, 2010,
Kimball entered an Agreed Judgment against us for $3,200,000;
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|
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|
on June 11, 2010, Kimball issued writs of garnishment to
SunTrust Bank and Wachovia Bank to locate assets to satisfy the
outstanding judgment, which resulted in a freeze on those bank
accounts; we do not have access to the cash funds deposited with
the two banks subject to the writs, and Kimball may request an
order from the court at any time entitling Kimball to the
transfer of $39,722.33 in funds from those accounts in partial
satisfaction of the outstanding $2,600,000 judgment;
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we can provide no assurances that Kimball will not file writs of
garnishment against our escrow agent seeking to attach the
$2,600,000 balance due; in the event that Kimball serves a writ
of garnishment on our escrow agent, the offering may not close
and, in that case, we and the underwriter will instruct the
escrow agent to return your escrowed funds to you by the end of
the T + 3 period (the third trading day after pricing);
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until such time as we repay Kimball the $2.6 million of
indebtedness under the settlement agreement and we reach a new
agreement with Kimball for the manufacturing of our product, we
have uncertainty as to whether Kimball will continue to
manufacture our
XT250tm
system or whether we will be required to identify a new
manufacturer to build our system, which would likely lead to
significant timing delays in the production of our system;
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we do not own the patented technology which we utilize in
connection with our
XT250tm
system, which patent rights are licensed from Rutgers and
furthermore, we are currently in default under our agreement
with Rutgers; if we are unable to maintain this license, our
operations and financial condition will be negatively affected;
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we have identified material weaknesses in our internal controls
over financial reporting resulting in a restatement of our
financial statements;
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an active trading market for our securities may not develop on
the NYSE Amex or any other trading market or facility, and we
expect that our stock price will be volatile and could decline
following this offering, resulting in a substantial loss in your
investment; and
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assuming we satisfy the eligibility criteria for listing our
common stock on NYSE Amex, we can provide no assurances that if
we are listed, we will continue to meet the continued listing
standards.
|
See additional Risk Factors beginning on page 8
and the other information included in this prospectus for a
discussion of factors you should carefully consider before
deciding to invest in our securities.
6
Summary
Financial Data
The summary financial data below should be read in conjunction
with Managements Discussion and Analysis of
Financial Condition and Results of Operations and the
financial statements and the related notes included elsewhere in
this prospectus.
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Six Months
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Year Ended December 31,
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Ended June 30,
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2008
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2009
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2009
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2010
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(Unaudited)
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Statement of Operations Data:
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Revenue
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$
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439,000
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$
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271,520
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$
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179,000
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$
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Gross profit (loss)
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309,964
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137,677
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112,435
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Total general and administrative expenses(1)
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3,430,966
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6,019,668
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1,500,520
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1,948,159
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Research and development
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635,531
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581,547
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288,186
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280,084
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Loss from operations
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(3,756,533
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)
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(6,463,538
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)
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(1,676,271
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)
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(2,228,243
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)
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Net (loss) available to common stockholders
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(8,430,795
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)
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(12,900,440
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)
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(5,352,126
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)
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(31,018,793
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)
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Net (loss) per share:
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Basic and diluted
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$
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(4.95
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)
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$
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(6.73
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)
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$
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(3.12
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)
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$
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(11.01
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)
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Weighted average number of shares outstanding:
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Basic and diluted
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1,702,156
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1,917,157
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1,714,725
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2,817,688
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As of
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June 30, 2010
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Actual
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(Unaudited)
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Balance Sheet Data:
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Cash and cash equivalents
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$
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159
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Working capital (deficiency)
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(6,701,288
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)
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Total assets
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1,386,443
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Total liabilities
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47,985,000
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Total stockholders deficit
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(59,849,576
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)
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(1) |
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Total general and administrative expenses, represents total
operating expenses less research and development. |
7
RISK
FACTORS
A purchase of our securities involves a high degree of risk.
You should consider carefully the following risk factors, in
addition to the other information contained in this prospectus
and the documents incorporated by reference into this
prospectus, before purchasing any securities in this
offering.
Risks
Related to Our Business
We have a history of annual net losses which may continue
and which may negatively affect our ability to achieve our
business objectives, and we received a going concern
qualification in our 2009 audit.
For the year ended December 31, 2009 and the six months
ended June 30, 2010, we had revenue of $271,520 and $-0-
and a net loss of $(9,395,261) and $(30,581,149). At
December 31, 2009, we had a stockholders deficit of
$(29,006,573), as compared with $(11,852,015) from
December 31, 2008. Our stockholders deficit was
$(59,849,576) as of June 30, 2010. For the year ended
December 31, 2008, we had revenue of $439,000 and a net
loss of $(3,889,806). We had a net loss of $(30,581,149) for the
six months ended June 30, 2010 compared to a net loss of
$(4,386,692) for the comparable 2009 period. Our independent
auditors, in their report dated March 12, 2010 for the
related audit of our financial statements for the years ended
December 31, 2009 and December 31, 2008, expressed
doubt about our ability to continue as a going concern. There
can be no assurance that our future operations will result in
net income. Our failure to increase our revenues or improve our
gross margins will harm our business. We may not be able to
sustain or increase profitability on a quarterly or annual basis
in the future. If our revenues grow more slowly than we
anticipate, our gross margins fail to improve, or our operating
expenses exceed our expectations, our operating results will
suffer. The prices we charge for our
XT250tm
system may decrease, which would potentially reduce our
revenues. If we are unable to sell our solutions at acceptable
prices relative to our costs, or if we fail to develop and
introduce on a timely basis new products from which we can
derive additional revenues, our financial results will suffer.
We currently are experiencing uncertain economic
conditions, which makes it difficult to estimate growth in our
markets and, as a result, future income and expenditures.
Current conditions in the domestic and global economies are
extremely uncertain. As a result, it is difficult to estimate
the level of growth for the economy as a whole. It is even more
difficult to estimate growth in various parts of the economy,
including some of the markets in which we participate. Because
all components of our budgeting and forecasting are dependent
upon estimates of growth in the markets we serve, the prevailing
economic uncertainty renders estimates of future income and
expenditures even more difficult than usual. As a result, we may
make significant investments and expenditures but never realize
the anticipated benefits, which could adversely affect our
results of operations. The future direction of the overall
domestic and global economies will have a significant impact on
our overall performance.
Our resources may not be sufficient to manage our expected
growth; failure to properly manage our potential growth would be
detrimental to our business.
We may fail to adequately manage our anticipated future growth.
Any growth in our operations will place a significant strain on
our administrative, financial and operational resources, and
increase demands on our management and on our operational and
administrative systems, controls and other resources. We cannot
assure you that our existing personnel, systems, procedures or
controls will be adequate to support our operations in the
future or that we will be able to successfully implement
appropriate measures consistent with our growth strategy. As
part of this growth, we may have to implement new operational
and financial systems, procedures and controls to expand, train
and manage our employee base, and maintain close coordination
among our technical, accounting, finance, marketing, and sales
staff. We cannot guarantee that we will be able to do so, or
that if we are able to do so, we will be able to effectively
integrate them into our existing staff and systems. If we are
unable to manage growth effectively, such as if our sales and
marketing efforts exceed our capacity to manufacture our
XT250tm
systems or if new employees are unable to achieve performance
levels, our business, operating results and financial condition
could be materially and adversely affected.
8
We are currently a defendant in a lawsuit with the
manufacturer of the XT250 system, Kimball Electronics, Inc. in
connection with funds we currently owe to its parent
corporation, Kimball International, Inc., under a promissory
note and on February 8, 2010, Kimball entered an Agreed
Judgment against us for $3,200,000.
We face significant risk relating to a lawsuit in which we are
the defendant with the manufacturer of the XT250, Kimball
International, Inc. and Kimball Electronics, Inc.
(Kimball). There is significant uncertainty whether
we will reach a compromise with Kimball to continue to
manufacture our XT250 units. During September 2008, Kimball
filed suit against us, including claims alleging we defaulted on
a $2,000,000 loan provided by Kimball in favor of us, breach of
a reserve capacity agreement and breach of a supplier agreement.
We asserted counterclaims against Kimball for conversion, breach
of contract and tortious interference with business
relationship. On June 30, 2009, the District Court granted
partial judgment in favor of Kimball in the amount of $2,000,000
against us. On December 23, 2009, we and Kimball entered
into a settlement agreement (the Agreement). In
connection with the Agreement we provided to Kimball an executed
Agreed Judgment in favor of Kimball in the amount of $3,200,000
(the Agreed Judgment). We agreed to make payments to
Kimball via wire transfer or certified funds as follows:
(i) one payment of $600,000 to be made on or before
December 31, 2009; and (ii) one final payment of
$2,600,000 to be made on or before January 31, 2010. On
December 29, 2009, we made the initial payment of $600,000
to Kimball under the Agreement. Because we failed to make the
$2,600,000 payment to Kimball according to the terms of the
Agreement, Kimball entered the Agreed Judgment against us in the
amount of $3,200,000. On February 10, 2010, Kimball filed a
motion for proceedings supplemental to collect the remaining
$2,600,000 balance due on the $3,200,000 judgment. On
June 11, 2010, Kimball issued writs of garnishment to
SunTrust Bank and Wachovia Bank to locate assets to satisfy the
outstanding judgment, which resulted in a freeze on those bank
accounts. On June 23, 2010, Kimball filed notice of the
writs in the United States District Court for the Southern
District of Florida (Case
No. 10-MC-14066-JEM).
The deadline to dissolve the writs was July 13, 2010, and
Kimball chose not to attempt to dissolve the writs. We do not
have access to the cash funds deposited with the two banks
subject to the writs. Kimball may request an order from the
court at any time entitling Kimball to the transfer of
$39,722.33 in funds from those accounts in partial satisfaction
of the outstanding $2,600,000 Agreed Judgment. As of the date of
this prospectus, a motion requesting a court order to transfer
these funds to Kimball has not been filed. We anticipate that if
this offering does not close for any reason, Kimball will move
forward in its collection efforts to transfer our cash funds
under the writs of garnishment. A portion of the proceeds of the
offering will be utilized to discharge the $2,600,000 balance
due on the Agreed Judgment. We can provide no assurances that
Kimball will not file writs of garnishment against our offering
escrow agent seeking to attach the $2,600,000 balance due. In
the event that Kimball serves a writ of garnishment on our
escrow agent, the initial public offering may not close, and in
that case we and the underwriter will instruct the escrow agent
to return your escrowed funds to you by the end of the T + 3
period (the third trading day after pricing).
We may be required to identify a new manufacturer for the
XT250tm
system.
Until such time as we repay Kimball the $2.6 million of
indebtedness under the settlement agreement and we reach a new
agreement with Kimball for the manufacturing of our product, we
have uncertainty as to whether Kimball will continue to
manufacture our
XT250tm
system or whether we will be required to identify a new
manufacturer, which would likely lead to significant timing
delays in the production of our system. Although we currently
have four
XT250tm
systems at our facility available for immediate sale, to the
extent we receive purchase orders for additional units now, we
believe two months would be required to train any new
manufacturer of the
XT250tm
system and it would likely take a new manufacturer six months
to acquire all the needed materials to produce the
XT250tm
system. These timing delays would adversely affect our ability
to provide new units to our customers and could adversely affect
our result of operations.
Although we believe that other manufacturers may be able to
acquire the expertise to assemble and produce the hardware a
significant investment in parts and scientific labor would
likely be required on the part of the manufacturer and us to
engage in a new manufacturing relationship. Since it appears
unlikely that Kimball will voluntarily release the inventory to
us, if we work with a new manufacturer, we will be required to
replace these parts and components in the manufacture of our
units. These additional capital expenditures to purchase parts
and manufacture new units will additionally adversely affect our
results of operations and financial performance.
9
We have identified material weaknesses in our internal
controls over financial reporting.
We identified control deficiencies that have been classified as
material weaknesses in our internal controls over financial
reporting. A material weakness is a control deficiency that
results in a more than remote likelihood that a material
misstatement of the annual or interim financial statements will
not be prevented or detected on a timely basis by employees in
the normal course of their assigned functions. The control
deficiencies identified include inadequate segregation of duties
over financial reporting as well as improper reporting of
certain financial instruments, income taxes, loss contingencies
and share-based compensation which resulted in restatement of
our financial statements for 2009, 2008 and 2007. The
identification of these material weaknesses may cause investors
to lose confidence in us and our stock may be negatively
affected.
To address the control deficiencies, we have hired a new member
of management with experience in complex accounting and we plan
to hire additional accounting staff in order to implement an
appropriate level of segregation of duties. In addition, we plan
to hire additional qualified financial reporting personnel and
engage outside consultants to assist in accurate financial
reporting to ensure our financial statements are in accordance
with generally accepted accounting principles.
The standards that must be met for management to assess the
internal control over financial reporting are relatively new and
complex, and require significant documentation, testing and
possible remediation to meet the detailed standards. We may
encounter problems or delays in completing the activities
necessary to make future assessments of our internal control
over financial reporting and completing the implementation of
any necessary improvements. Future assessments may require us to
incur substantial costs and may require a significant amount of
time and attention of management, which could seriously harm our
business, financial condition and results of operations. If we
are unable to assess our internal control over financial
reporting as effective in the future, investors may lose
confidence in us and our stock may be negatively affected.
If we do not successfully develop new products and
solutions, our business may be harmed.
Our business and operating results may be harmed if we fail to
expand our products (either through internal product or
capability development initiatives or through partnerships and
acquisitions) beyond our current
XT250tm
system in such a way that achieves market acceptance or that
generates significant revenue and gross profits to offset our
operating and other costs. We may not successfully identify,
develop and market new product and service opportunities in a
timely manner. If we introduce new products and services, they
may not attain broad market acceptance or contribute
meaningfully to our revenue or profitability. Competitive or
technological developments may require us to make substantial,
unanticipated investments in new products and technologies or in
new strategic partnerships, and we may not have sufficient
resources to make these investments. Because the markets for our
solutions are subject to rapid change, we may need to expand
and/or
evolve our product and service offerings quickly. Delays and
cost overruns could affect our ability to respond to
technological changes, evolving industry standards, competitive
developments or customer requirements and harm our business and
operating results.
We do not own the technology which we utilize in
connection with our
XT250tm
system which patent rights are licensed from Rutgers University.
We are currently in default under our agreement with Rutgers and
if we are unable to maintain this license, we anticipate our
operations and financial condition will be negatively
affected.
We do not own all of the software, other technologies and
content used in our products and services. We license the
technology utilized in connection with our
XT250tm
system from Rutgers, The State University of New Jersey
(Rutgers) pursuant to an exclusive license agreement
for the patent rights to registered patent U.S. Patent
No. 6,118,850 and U.S. Patent application Serial
No. 60/352,952 (WO 03/065077). A disagreement between
Rutgers and us could have a very negative effect on our ability
to operate our business effectively. In addition, we could learn
that the technologies we have licensed from Rutgers do not
perform as purported, are not effective, or are not the property
of Rutgers, or some similar problem with the license any of
which would have an immediate and negative effect on our
business. The technology is licensed under the agreement from
the effective date of December 13, 2004 and remains in
effect in each country of the world until the later of
(i) expiration in a country of the
last-to-expire
of issued patents within the Rutgers patent rights licensed
under the agreement, or (ii) 15 years from the first
commercial sale of the licensed products in that country. As of
August 15, 2010, we are currently in arrears with respect
to payment of $1,103,350, which equals the minimum annual
royalty payment due under the
10
agreement and accrued interest. The licensing agreement provides
that if either party breaches or fails to perform any provision
of the agreement, the other party may give written notice of the
default to the breaching party. The agreement further provides
if we fail to cure the default within sixty days of receipt of
the notice of default, Rutgers has the right to terminate the
agreement and the license by sending a notice of termination to
us. The agreement will automatically terminate on the effective
date of the notice of termination. Representatives of the
company have recently met with Rutgers to discuss the licensing
agreement between the university and the company. The parties
have mutually agreed and acknowledged verbally that we will
require capital financing to repay Rutgers amounts due under the
licensing agreement and that the agreement requires
restructuring in connection with royalty fees owed in the
future. The parties have verbally agreed to postpone
restructuring of the license agreement until subsequent to the
public offering. We believe that we and Rutgers are both using
good faith efforts to maintain the business relationship and
restructure the parties contractual obligations going
forward. The loss of, or our inability to maintain, this license
could result in our inability to sell our products including the
XT250tm
systems without liability exposure including claims of
infringement from other parties.
If we do not adequately protect our intellectual property
rights, we may experience a loss of revenue and our operations
may be materially harmed.
We have not received registered patents or copyrights on any of
the software or technology we have developed and are relying on
the patented technology owned by Rutgers which we license to
produce the
XT250tm
units. We additionally rely upon confidentiality agreements
signed by our employees, consultants and third parties, and
trade secret laws of general applicability, to safeguard our
software and technology. We cannot assure you that we can
adequately protect our intellectual property or successfully
prosecute potential infringement of our intellectual property
rights. Also, we cannot assure you that others will not assert
rights in, or ownership of, trademarks and other proprietary
rights of ours or that we will be able to successfully resolve
these types of conflicts to our satisfaction. Our failure to
protect our intellectual property rights may result in a loss of
revenue and could materially harm our operations and financial
condition.
Our lengthy sales cycle may increase our exposure to
customer cancellations and other risks.
Our product sales cycle has been and is expected to continue to
be lengthy and variable. We generally expect the need to educate
our potential customers about the use and benefits of the
XT250tm
system, which can require the investment of significant time and
resources. This lengthy sales cycle creates risks related to
customer decisions to cancel or change product plans, which
could result in the loss of anticipated sales. We may incur
significant research and development, selling and general and
administrative expenses as part of this process before it
generates the related revenues from any such customer.
We may not be able to secure all rights to our
intellectual property; our rights may be subject to claims of
infringement by others, and other issues affecting
production.
We are relying on a combination of our patent licensing rights,
as well as employee and third party non-disclosure agreements to
protect intellectual property rights pertaining to our products
and technologies. There can be no assurance, however, that these
measures will provide meaningful protection of the technology,
trade secrets, know-how, or other intellectual property in the
event of any unauthorized use, misappropriation, or disclosure.
There can also be no assurance that others will not
independently develop similar technologies or duplicate any
technology we develop or have developed without violating our
intellectual property rights. In addition, there can be no
assurance our intellectual property rights will be held to be
valid, will not be successfully challenged or will otherwise be
of value.
Our patent applications which may be submitted in the future may
be subject to a charging and retaining lien held by our counsel
that prepare and file such applications. Failure to repay
outstanding debts to such counsel could prevent us from fully
commercially exploiting the technology. In addition to
developing and seeking patent and other intellectual property
protection for the technology, we do not currently, but may in
the future, rely on licenses from third parties for material
components of the technology embodied in our products. A dispute
with a licensor of such products, or claims for infringement
against the licensor by third parties with respect to the
technology licensed to us, could materially adversely affect our
business.
11
Any of our future patent applications may not be approved or may
be successfully challenged by others or invalidated through
administrative processes or litigation. If our applications are
not approved, we may not be able to enter into arrangements to
allow us to continue to use our technology on commercially
reasonable terms.
While we do not believe that our licensed technology infringes
on any existing patents or intellectual property rights of third
parties, there can be no assurance that such infringement has
not occurred or will not occur. The costs of defending an
intellectual property claim could be substantial and could
adversely affect our business, even if we were ultimately
successful in defending any such claims. If our licensed
technology were found to infringe the rights of a third party,
we would be required to pay significant damages or license fees
or cease production, any of which could have a material adverse
effect on our business.
We depend on the patent we license from Rutgers and other
means to protect our intellectual property which may not be
adequate.
The law of patents and trade secrets is constantly evolving and
often involves complex legal and factual questions. The coverage
under the Rutgers patent and any additional coverage we may seek
in our patent applications can either be denied or significantly
reduced before or after a patent is issued. Consequently, we
cannot be sure that any particular patent we apply for will be
issued, that the scope of the patent protection will exclude our
competitors, that interference proceedings regarding any of our
patent applications will not be filed, or that a patent will
provide any other competitive advantage to us. In addition, we
cannot be sure that the patented technology we license from
Rutgers will be held valid if challenged or that others will not
claim rights in or ownership of the patents and other
proprietary rights held by us.
Because patent applications may be secret until patents are
filed with the USPTO and the publication of discoveries in the
scientific or patent literature lags behind actual discoveries,
we cannot be certain if our patent application was the first
application filed covering a particular invention. If another
partys rights to an invention are superior to ours, we may
not be able to obtain a license to use that partys
invention on commercially reasonable terms, if at all. In
addition, our competitors, many of which have greater resources
than we do, could seek to apply for and obtain patents that will
prevent, limit or interfere with our ability to make use of our
inventions either in the U.S. or in international markets.
Further, the laws of some foreign countries do not always
protect intellectual property rights to the same extent as do
the laws of the U.S. Litigation or regulatory proceedings
in the U.S. or foreign countries also may be necessary to
enforce our patent or other intellectual property rights or to
determine the scope and validity of our competitors
proprietary rights. These proceedings can be costly, result in
product development delays, and divert our managements
attention from our business.
We may also rely upon unpatented proprietary technology, and we
cannot assure you that others will not independently develop
substantially equivalent technology or otherwise gain access to
or disclose our proprietary technology. We may not be able to
meaningfully protect our rights in this proprietary technology,
which would reduce our ability to compete in the market.
Although we have confidentiality agreements in place with
our employees, these agreements may not adequately prevent
disclosure of proprietary information.
Our policy is to execute confidentiality agreements with our
employees and consultants upon the commencement of their
employment or consulting arrangement with us. These agreements
generally require that all confidential information developed by
an individual or to which the individual is exposed during the
course of his or her relationship with us must be kept
confidential even after the individual has left our employment.
These agreements also generally provide that inventions
conceived by the individual in the course of rendering services
to us shall be our exclusive property. We cannot be sure that
these agreements will provide meaningful protection of our
proprietary and other confidential information. In addition, in
some situations, these agreements may conflict with, or be
subject to, the rights of third parties with whom our employees
or consultants have prior employment or consulting
relationships. We may be forced to engage in costly and
time-consuming litigation to determine the scope of and to
enforce our proprietary rights. Even if successful, any
litigation could divert our managements attention from our
business.
12
We have been subject to informal questioning and an
informal inquiry from federal and state regulatory agencies
recently related to an unidentified investigation and you should
be aware that if we become a target or defendant in an
investigation, litigation or other governmental proceeding our
business prospects may potentially be adversely affected.
On August 6, 2009, the company was unexpectedly visited by
special agents from the Office of Criminal Investigations of the
federal Food and Drug Administration (FDA) and the
Florida Department of Law Enforcement who informed our
management that there was an investigation being conducted into
two of our customers. The agents proceeded to ask a series of
general questions based on which our management believes that
the investigation involves the diversion of drugs. The agents
made an inquiry as to the capabilities of our
XT250tm
machine and whether it can be used to aid in diverting drugs.
Our management explained that our equipment cannot be used in
such a fashion as to aid in the diversion of drugs and that the
company has at no time had any part in the diversion of drugs.
Diversion of drugs most frequently occurs when a patient
receives a legitimate prescription for an actual or feigned
illness and sells the procured drugs on the black market. The
black market may then distribute or divert the prescription
drugs, which are likely not counterfeit drugs, into the legal
supply chain. Our system as currently designed does not identify
that these were diverted (or not diverted) drugs but rather is
used to determine whether molecular structures of drugs are
valid. At this time, we have no reasonable basis to believe that
we are a target of the investigation against our customers and
will fully cooperate with the investigation. To date, we have
not received any formal or informal written correspondence from
either regulatory agency relating to the investigation nor are
we a party to any legal
and/or
regulatory proceeding related to this matter.
We will need to operate without infringing the proprietary
rights of others.
We cannot be certain that U.S. or foreign patents or patent
applications of other companies do not exist or will not be
issued that would materially and adversely affect our ability to
commercialize our products. We may be sued for infringing or
misappropriating the patent or other intellectual property
rights of others. Intellectual property litigation is costly
and, even if we prevail, the cost of this litigation could
negatively affect our business. If we do not prevail in
litigation, in addition to any damages we might have to pay, we
could be required to stop the infringing activity or obtain a
license requiring us to make royalty payments. Any license we
are required to obtain may not be available to us on
commercially acceptable terms, if at all. In addition, any
license we are required to obtain may be non-exclusive, and
therefore our competitors may have access to the same technology
licensed to us. If we fail to obtain a required license or are
unable to design around another companys patent, we may be
unable to make use of some of our technologies or distribute our
products.
We may be liable for use of information we provide to
third party customers.
Incorrect information that results from the use of our systems
could cause the end-user either to take an action or fail to
take an action which could have a detrimental effect, and we
could be liable for the damages resulting from the incorrect
information. While we maintain product liability insurance
coverage in an amount that we currently believe is sufficient
for our business, we cannot assure you that this coverage will
prove to be adequate or will continue to be available on
acceptable terms, if at all. A claim brought against us
regarding injuries related to the use of our system that is
uninsured or under-insured could materially harm our business,
financial condition, results of operations and prospects in the
future. A claim could also result in negative publicity.
Our failure to comply with certain local, state and
federal government regulations could negatively affect our
operating results and future prospects.
Certain computer applications, software and systems, such as
ours, involving the use of X-ray technologies are subject to
regulation by numerous local, state and federal governments,
including the Department of Defense, the Drug Enforcement
Agency, and various other law enforcement agencies. As such, our
products and operations are subject to various local, state and
federal regulations and oversight. Compliance with such current
and future regulations could have a material adverse effect on
our business, results of operations, financial conditions and
prospects in the future.
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Our failure to comply with federal FDA regulations could
negatively affect our operating results.
The FDA is responsible for, among other things, assuring the
safety and effectiveness of medical devices. Certain computer
applications, software and systems are considered medical
devices, and therefore subject to regulation by the FDA. We do
not believe that our system currently is subject to FDA
oversight. Nevertheless, if the FDA were to determine that our
system is subject to FDA jurisdiction, or in the event we expand
our product line into medical diagnostics, we may become subject
to FDA jurisdiction, as such compliance with FDA requirements
could have a material adverse effect on our business, results of
operations, financial conditions and prospects in the future.
Product liability claims may exceed our insurance
coverage.
The manufacture and sale of our products carries the risk of
product liability claims. Any error, no matter how unlikely, may
cost lives and significant property damage. While we intend to
maintain a prudent level of product liability insurance and
errors and omissions coverage, there can be no assurance that
our coverage limits will be adequate to protect us from any
liabilities we might incur in connection with the sale of our
products or that we will be able to maintain this level of
coverage in the future. Because we plan to market and sell
anti-terrorism technology to the U.S. government, however,
damages paid resulting from lawsuits related to these activities
may be limited or otherwise covered under the federal Support
Anti-Terrorism by Fostering Effective Technologies (SAFETY) Act
of 2002, a part of the Homeland Security Act of 2002.
In addition, in order to maintain our competitive position, we
will likely need to maintain a steady pace of new products and
updates or enhancements of our existing product, the
XT250tm
system. Accordingly, we may require increased product liability
coverage as additional products and updates come to the market
place. Such insurance is expensive and in the future may not be
available on acceptable terms, if at all. A successful product
liability claim or series of such claims in excess of our
insurance coverage could have a material adverse effect on our
business.
We depend on certain key executive officers and the loss
of such key employees could materially adversely affect our
business.
We are dependent on our executive officers, the loss of any one
of whom could have an adverse effect on our business if we could
not promptly secure a replacement with equivalent expertise and
experience. We will rely on the management expertise and
experience of, among others, Mr. James Lowery and
Mr. Anthony Chidoni, our co-chief executive officers.
While we believe that our management possesses the necessary
experience to successfully manage our operations, there can be
no guarantee that they will perform adequately or that our
operations will be successful. In addition, our future success
may depend in large part upon our ability to attract and retain
additional highly skilled managerial and other personnel. We may
not be successful in hiring or retaining the personnel we need
and this could have a material adverse effect our business.
Our ability to use net operating loss carryforwards in the
U.S. may be limited.
As of December 31, 2009, we had net operating losses of
approximately $18.6 million for federal income tax
purposes, which expire at various dates through 2029. To the
extent available and not otherwise utilized, we intend to use
any net operating loss carryforwards to reduce the
U.S. corporate income tax liability associated with our
operations. Section 382 of the Internal Revenue Code of
1986, as amended, generally imposes an annual limitation on the
amount of net operating loss carryforwards that may be used to
offset taxable income when a corporation has undergone certain
changes in stock ownership. Our ability to utilize net operating
loss carryforwards may be limited, under this section or
otherwise, by the issuance of common stock in this offering. To
the extent our use of net operating loss carryforwards is
significantly limited, our income could be subject to
U.S. corporate income tax earlier than it would if we were
able to use net operating loss carryforwards, which could result
in lower profits.
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Risks
Related to the Auction Process for this Offering
Potential investors should not expect to sell our shares
for a profit shortly after our common stock begins
trading.
A principal factor in determining the initial public offering
price for the shares sold in this offering will be the clearing
price resulting from an auction conducted by us and our
underwriter. The clearing price is the highest price at which
all of the shares offered may be sold to potential investors.
Although we and our underwriter may elect to set the initial
public offering price below the clearing price, the public
offering price may be at or near the clearing price. If there is
little to no demand for our shares at or above the initial
public offering price once trading begins, the price of our
shares could decline following our initial public offering. If
your objective is to make a short-term profit by selling the
shares you purchase in the offering shortly after trading
begins, you should not submit a bid in the auction.
Some bids made at or above the initial public offering
price may not receive an allocation of shares.
Our underwriter may require that bidders confirm their bids
before the auction for our initial public offering closes. If a
bidder is requested to confirm a bid and fails to do so within a
required time frame, that bid will be rejected and will not
receive an allocation of shares even if the bid is at or above
the initial public offering price. In addition, we, in
consultation with our underwriter, may determine, in our sole
discretion, that some bids that are at or above the initial
public offering price are manipulative or disruptive to the
bidding process or are not creditworthy, in which case such bids
will be reduced or rejected.
Potential investors may receive a full allocation of the
shares they bid for if their bids are successful and should not
bid for more shares than they are prepared to purchase.
If the public offering price is at or near the clearing price
for the shares offered in this offering, the number of shares
represented by successful bids will equal or nearly equal the
number of shares offered by this prospectus. As a result,
successful bidders may be allocated all or nearly all of the
shares that they bid for in the auction. Therefore, we caution
investors against submitting a bid that does not accurately
represent the number of shares of our common stock they are
willing and prepared to purchase.
Risks
Related to Our Securities and this Offering
Because of the structure of the minimum/maximum offering
which requires us to raise at least $20,000,000 in the auction
to consummate a closing, during the offering period investor
funds will be placed in escrow and investors will not have use
of their funds during this period.
We are offering shares of our common stock on a best efforts
basis. Based on the minimum/maximum structure of this offering
no commitment by anyone exists to purchase all or any part of
the shares offered hereby. Consequently, there is no assurance
that the shares being offered will be sold in the auction and an
auction bidders funds may be escrowed for as long as three
business days following pricing, and then returned without
interest if within such time an aggregate of $20,000,000 of
funds are not received in the escrow account or NYSE Amex has
not confirmed that the shares offered hereby will be listed on
NYSE Amex. Investors will not have use of any funds paid for the
shares of common stock during the time the investors funds
are held in the escrow account. Prior to the auction and during
the bidding process the bidders will not know what amount of
proceeds will be raised, the number of shares to be sold, the
price of the shares or whether the transaction will close.
Furthermore, during the period while a bidders funds are
held in the escrow account, the bidder will not have use of its
funds and will not definitively know whether the offering will
close.
An active trading market for our securities may not
develop and we expect that our stock price will be volatile and
could decline following this offering, resulting in a
substantial loss in your investment.
Prior to this offering, there has not been a public market for
our securities. An active trading market for our securities may
never develop or if it develops it may not be sustained, which
could affect your ability to sell your securities and could
depress the market price of your securities. In addition, the
initial public offering price of the securities has been
determined by the board of directors and management in
conjunction with the underwriter and
15
may bear no relationship to the price at which the securities
will trade upon completion of this offering. The offering price
does not necessarily indicate the current value of the
securities offered hereby and should not be regarded as an
indicator of any future market performance or value thereof.
In addition, the stock market can be highly volatile. As a
result, the market price of our securities can be similarly
volatile, and investors in our securities may experience a
decrease in the value of their securities, including decreases
unrelated to our operating performance or prospects. The market
price of our securities after the offering will likely vary from
the initial offering price and is likely to be highly
unpredictable and subject to wide fluctuations in response to
various factors, many of which are beyond our control. These
factors include:
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variations in our operating results;
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changes in the general economy and in the local economies in
which we operate;
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the departure of any of our key executive officers and directors;
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the level and quality of securities analysts coverage for
our securities;
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announcements by us or our competitors of significant
acquisitions, strategic partnerships, joint ventures or capital
commitments;
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changes in the federal, state, and local laws and regulations to
which we are subject; and
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future sales of our securities.
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You will experience immediate and substantial dilution
when you purchase securities in this offering.
Upon the closing of this offering, investors will incur
immediate and substantial dilution in the per share net tangible
book value of their shares of common stock. At June 30,
2010, after giving pro forma effect to our receipt of the net
proceeds of this offering, we would have had a pro forma net
tangible book value of $6,208,200, or $0.60 per share in a
minimum offering and $15,708,196 or $1.30 per share in a maximum
offering per share. Net tangible book value is the amount of our
total assets minus intangible assets and liabilities. This
represents a gain in our net tangible book value of $6.51 in a
minimum offering and $8.81 in a maximum offering per share for
the benefit of our current stockholders, and dilution of
$8,357,222 or 41.79% in a minimum offering and $8,857,222 or
29.52% in a maximum offering of the public offering price, for
investors in this offering. Investors in this offering will be
subject to increased dilution upon the exercise of existing
outstanding stock options and warrants. These stock options and
warrants, for which cash would need to be remitted to us for
exercise, represent an additional 15,111,802 shares of
common stock that could be issued in the future. However, each
of our warrantholders has agreed not to exercise the warrants
for three years subsequent to the effective date of the
registration statement in this offering.
Shares of stock issuable pursuant to our stock options,
warrants, and convertible preferred stock may adversely affect
the market price of our common stock.
As of August 15, 2010, we have outstanding under our 2004
Stock Option Plan, stock options to purchase an aggregate of
1,879,386 shares of common stock at a weighted average
exercise price of $2.13 per share and outstanding warrants to
purchase 13,078,685 shares of common stock (for which cash
would need to be remitted for us to exercise) at a weighted
average exercise price of $2.99 per share. In addition, as of
August 15, 2010, we have outstanding shares of preferred
stock as follows: Series A preferred stock
962,101 shares convertible at $3.80 per share;
Series B preferred stock 1,619,127 at $3.00 per
share; and Series C preferred stock 365,996 at
$3.00 per share; and Series D preferred stock
563,414 at $3.00 per share, all of which are immediately
convertible into shares of our common stock on a
one-for-one
basis on the effective date of this registration statement. We
are also obligated to issue approximately 679,529 shares of
common stock upon conversion of accrued dividends on such
preferred stock as of August 15, 2010. In addition,
1,153,731 share based incentive grants are outstanding,
including stock options to purchase an aggregate of 153,731
shares of common stock at a weighted average exercise price of
$0.69 per share, and 3,846,269 shares of our common stock
are reserved for issuance under our 2009 Long Term Incentive
Compensation Plan. The exercise of the stock options, preferred
stock and warrants and the sales of stock issuable pursuant to
them, would further reduce a stockholders percentage
voting and ownership interest. However,
16
each of our warrantholders has agreed not to exercise the
warrants for three years subsequent to the closing of this
offering.
The stock options and warrants are likely to be exercised when
our common stock is trading at a price that is higher than the
exercise price of these options and warrants, and we would be
able to obtain a higher price for our common stock than we will
receive under such options and warrants. The exercise, or
potential exercise, of these options and warrants could
adversely affect the market price of our common stock and
adversely affect the terms on which we could obtain additional
financing.
The large number of shares eligible for future sale may
adversely affect the market price of our common stock.
The sale, or availability for sale, of a substantial number of
shares of common stock in the public market could materially
adversely affect the market price of our common stock and could
impair our ability to raise additional capital through the sale
of our equity securities. At the completion of this offering,
assuming the sale of 5,000,000 shares of common stock there
will be approximately 12,055,211 shares of common stock
issued and outstanding. Of these shares, approximately 5,000,000
will be freely transferable, and approximately
7,055,211 shares will be eligible for resale under
Rule 144 following the expiration of our
lock-up
agreements on the one year anniversary of the effective date of
this registration statement, subject to exceptions for holders
of 2,500 shares or less who have six-month
lock-up
agreements with us. Our executive officers and directors
beneficially own 3,227,604 shares of common stock and
shares of common stock issuable upon conversion of preferred
stock and accrued dividends and exercise of certain options and
warrants, which would be eligible for resale subject to the
volume and manner of sale limitations of Rule 144 of the
Securities Act of 1933, as amended (Securities Act),
following expiration of any applicable lock-ups. Upon the
conversion of our outstanding preferred stock and accrued
dividends through August 15, 2010 into shares of common
stock, an additional 4,190,167 shares are restricted
securities, as that term is defined in Rule 144, and
will be eligible for sale under the provision of Rule 144
following expiration of any applicable
lock-ups.
For additional information, see Shares Eligible for
Future Sale.
We have provisions in our certificate of incorporation
that substantially eliminate the personal liability of members
of our board of directors for violations of their fiduciary duty
of care as a director and that allow us to indemnify our
officers and directors.
Certain provisions in our certificate of incorporation could
make it very difficult for you to bring any legal actions
against our directors for such violations or could require us to
pay any amounts incurred by our directors in any such actions.
Pursuant to our certificate of incorporation and amended and
restated by-laws, members of our board of directors will have no
liability for violations of their fiduciary duty of care as a
director, except in limited circumstances. This means that you
may be unable to prevail in a legal action against our directors
even if you believe they have breached their fiduciary duty of
care. In addition, our certificate of incorporation and amended
and restated by-laws allows us to indemnify our directors from
and against any and all expenses or liabilities arising from or
in connection with their serving in such capacities with us.
This means that if you were able to enforce an action against
our directors or officers, in all likelihood we would be
required to pay any expenses they incurred in defending the
lawsuit and any judgment or settlement they otherwise would be
required to pay.
Our officers and directors have significant voting power
and may take actions that may not be in the best interests of
other stockholders.
Our executive officers and directors currently beneficially own
or control 65.2% of our common stock. Upon the completion of
this offering our executive officers and directors will
beneficially own or control approximately 29.3% of our
outstanding common stock if the minimum offering is completed
and 25.5% if the maximum offering is completed. If these
stockholders act together, they will be able to exert
significant control over our management and affairs requiring
stockholder approval, including approval of significant
corporate transactions. This concentration of ownership may have
the effect of delaying or preventing a change in control and
might adversely affect the market price of our common stock. As
a result, these stockholders could together influence all
matters presented to our stockholders for approval, including
election and removal of our directors and change of control
transactions. The interests of these stockholders may not always
coincide with the interests of the other holders of our common
stock.
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We are restricted from paying dividends under the terms of
our preferred stock designations and you should not buy our
stock if you expect dividends.
We currently intend to retain our future earnings to support
operations and to finance expansion and, therefore, we do not
anticipate paying any cash dividends on our capital stock in the
foreseeable future. Furthermore, the terms of our preferred
stock designations restrict the payment of dividends and provide
that except for the ratable payment of dividends on the
Series A, B, C and D preferred stock, we may not directly
or indirectly declare or pay any cash or property dividends or
make any cash or property distributions upon any of our capital
stock or other equity securities. You should not buy our stock
if you are expecting to receive cash dividends.
As a public company we will incur additional cost and face
increased demands on our management and key employees.
We have never operated as a public company. As a public company,
we will incur significant legal, accounting and other expenses
that we did not incur as a private company. In addition, the
Sarbanes-Oxley Act of 2002, as well as rules implemented by the
Securities and Exchange Commission, or SEC, and the exchange
where we propose to trade our securities, impose various
requirements on public companies. Our management and other
personnel will devote substantial amounts of time to these
requirements. We expect these requirements to significantly
increase our legal and financial compliance costs and to make
some activities more time-consuming and costly. In addition, we
will incur additional costs associated with our public company
reporting requirements. These rules and regulations also make it
more difficult and more expensive for us to obtain director and
officer liability insurance. We cannot predict or estimate the
amount of additional costs we may incur or the timing of such
costs. If our profitability is harmed by these additional costs,
it could have a negative effect on the trading price of our
common stock.
We will retain broad discretion in using the net proceeds
from this offering and may spend a substantial portion in ways
with which you do not agree.
Our management will retain broad discretion to allocate the net
proceeds of this offering. The net proceeds may be applied in
ways with which you and other investors in the offering may not
agree, or which do not increase the value of your investment. We
intend to use a portion of our net proceeds from this offering
to repay the outstanding indebtedness, which was $7,357,222 as
of August 15, 2010. After repayment of indebtedness, we
anticipate that we will use the remainder of the net proceeds
for working capital and other general corporate purposes, which
may include the acquisition of other businesses, products or
technologies. We have not allocated these remaining net proceeds
for any specific purposes except that we intend to use
approximately $2,000,000 of the proceeds allocated for working
capital and general corporate purposes for the construction and
installation of new
XT250TM
systems. Our management might not be able to yield a significant
return, if any, on any investment of these net proceeds.
We do not know whether a market will develop for our
common stock or what the market price of our common stock will
be and as a result it may be difficult for you to sell your
shares of our common stock.
Before this offering, there was no public trading market for our
common stock. If a market for our common stock does not develop
or is not sustained, it may be difficult for you to sell your
shares of common stock at an attractive price or at all. We
cannot predict the prices at which our common stock will trade.
The initial public offering price for our common stock was
determined by the board of directors and management in
conjunction with the underwriter and may not bear any
relationship to the market price at which the common stock will
trade after this offering or to any other established criteria
regarding our value. It is possible that in one or more future
periods our results of operations may be below the expectations
of public market analysts and investors and, as a result of
these and other factors, the price of our common stock may fall.
If securities analysts do not publish research or reports
about our business or if they publish negative evaluations of
our stock, the price of our stock could decline.
The trading market for our common stock will rely in part on the
research and reports that industry or financial analysts publish
about us or our business. We do not currently have and may never
obtain research coverage by industry or financial analysts. If
no or few analysts commence coverage of us, the trading price of
our stock would
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likely decrease. Even if we do obtain analyst coverage, if one
or more of the analysts covering our business downgrade their
evaluations of our stock, the price of our stock could decline.
If one or more of these analysts cease to cover our stock, we
could lose visibility in the market for our stock, which in turn
could cause our stock price to decline.
Provisions in our organizational documents and in the
Delaware General Corporation Law may prevent takeover attempts
that could be beneficial to our stockholders.
Provisions in our certificate of incorporation and amended and
restated by-laws, both of which will be effective upon the
closing of this offering, and in the Delaware General
Corporation Law, may make it difficult and expensive for a third
party to pursue a takeover attempt we oppose even if a change in
control of our company would be beneficial to the interests of
our stockholders. Any provision of our certificate of
incorporation or amended and restated by-laws or Delaware law
that has the effect of delaying or deterring a change in control
could limit the opportunity for our stockholders to receive a
premium for their shares of our common stock, and could also
affect the price that some investors are willing to pay for our
common stock. Our board of directors has the authority to issue
up to 6,000,000 shares of preferred stock in one or more
series and to fix the powers, preferences and rights of each
series without stockholder approval. The ability to issue
preferred stock could discourage unsolicited acquisition
proposals or make it more difficult for a third party to gain
control of our company, or otherwise could adversely affect the
market price of our common stock. Further, as a Delaware
corporation, we are subject to Section 203 of the Delaware
General Corporation Law. This section generally prohibits us
from engaging in mergers and other business combinations with
stockholders that beneficially own 15% or more of our voting
stock, or with their affiliates, unless our directors or
stockholders approve the business combination in the prescribed
manner.
State Blue Sky laws may limit resale of the shares of
common stock.
Although we assume that, as part of this offering, we will raise
$20.0 million in gross proceeds and that we will have a
minimum of 400 round lot holders to be accepted for listing on
the NYSE Amex, we cannot guarantee that we will maintain our
listing on such market. As such, investors should consider the
possibility that any secondary market for our securities could
be a limited one including a trading market on the
over-the-counter bulletin board. The holders of our shares of
common stock and persons who desire to purchase them in any
trading market that might develop in the future should be aware
that there may be significant state law restrictions upon the
ability of investors to resell our shares. If the securities are
traded on the over-the-counter bulletin board, we intend to seek
coverage and publication of information regarding the company in
an accepted publication which permits a manual
exemption. This manual exemption permits a security to be
distributed in a particular state without being registered if
the company issuing the security has a listing for that security
in a securities manual recognized by the state. However, it is
not enough for the security to be listed in a recognized manual.
The listing entry must contain (i) the names of issuers,
officers, and directors, (ii) an issuers balance
sheet, and (iii) a profit and loss statement for either the
fiscal year preceding the balance sheet or for the most recent
fiscal year of operations. Furthermore, the manual exemption is
a non-issuer exemption restricted to secondary trading
transactions, making it unavailable for issuers selling
newly-issued securities. Most of the accepted manuals are those
published in Standard and Poors, Moodys Investor
Service, Fitchs Investment Service, and Bests
Insurance Reports, and many states expressly recognize these
manuals. A smaller number of states declare that they
recognize securities manuals but do not specify the
recognized manuals. The following states do not have any
provisions and therefore do not expressly recognize the manual
exemption: Alabama, Georgia, Illinois, Kentucky, Louisiana,
Montana, South Dakota, Tennessee, Vermont and Wisconsin.
We may not be able to maintain our anticipated listing on
the NYSE Amex, which may limit the ability of purchasers in this
offering to resell their common stock in the secondary
market.
Assuming that we raise $20.0 million in proceeds and have
a minimum of 400 round lot holders, we believe that we will be
accepted for listing on the NYSE Amex at the time of the
offering. If our anticipated offering size decreases such that
we do not anticipate raising such $20.0 million in gross
proceeds, we will be required to delay this offering.
Furthermore, the sale of the minimum of 3,333,334 shares at
the bottom of our price range, or $4.00, will not generate
sufficient proceeds to permit our initial listing on the NYSE
Amex. In the event that we were to price the offering below the
price range after the auction is closed, we would file a
post-effective amendment to reflect the lower price and a higher
number of shares. In no event would the actual offering price be
less than $3.00
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as that is the minimum price required to satisfy NYSE Amex
initial listing requirements. Following our initial listing, we
might not meet the criteria for continued listing in the future.
A company having a security listed on NYSE Amex must make all
required filings on a timely basis with the Securities and
Exchange Commission. If we are unable to meet the qualitative
and quantitative continued listing criteria of the NYSE Amex and
became delisted, quotations for trading of our securities could
be conducted in the
over-the-counter
bulletin board, or the Pink Sheets, LLC (if we are not
current in our reporting obligations with the SEC). In such
case, an investor would likely find it more difficult to dispose
of our securities or to obtain accurate market quotations for
it. If our securities were delisted from the NYSE Amex, they
could become subject to the Securities and Exchange
Commissions penny stock rules, which impose
sales practice requirements on broker-dealers that sell
securities to persons other than established customers and
accredited investors. Application of this rule could
make broker-dealers unable or unwilling to sell our securities
and limit the ability of purchasers in this offering to resell
their securities in the secondary market.
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CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Included in this prospectus are forward-looking
statements, as well as historical information. Although we
believe that the expectations reflected in these forward-looking
statements are reasonable, we cannot assure you that the
expectations reflected in these forward-looking statements will
prove to be correct. Our actual results could differ materially
from those anticipated in forward-looking statements as a result
of certain factors, including matters described in the section
titled Risk Factors. Forward-looking statements
include those that use forward-looking terminology, such as the
words anticipate, believe,
estimate, expect, intend,
may, project, plan,
will, shall, should and
similar expressions, including when used in the negative.
Although we believe that the expectations reflected in these
forward-looking statements are reasonable and achievable, these
statements involve risks and uncertainties and no assurance can
be given that actual results will be consistent with these
forward-looking statements. Actual results may be materially
different than those described herein. Important factors that
could cause our actual results, performance or achievements to
differ from these forward-looking statements include the factors
described in the Risk Factors section and elsewhere
in this prospectus.
All forward-looking statements attributable to us are expressly
qualified in their entirety by these and other factors. We
undertake no obligation to update or revise these
forward-looking statements, whether to reflect events or
circumstances after the date initially filed or published, to
reflect the occurrence of unanticipated events or otherwise,
except to the extent required by federal securities laws.
21
USE OF
PROCEEDS
The net proceeds from the sale of the shares of common stock
offered hereby are estimated to be approximately $18,950,003 if
the minimum offering is sold and $28,450,000 if the maximum
offering is sold based on an assumed public offering price of
$6.00 per share which is the midpoint of the range included on
the cover page of this prospectus, and after deducting our 5%
underwriter commission and $50,000 expense allowance.
We intend to use the net proceeds from this offering for the
following purposes and in the following order of priority:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Offering
|
|
|
Maximum Offering
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
Estimated
|
|
|
Percentage of
|
|
|
Estimated
|
|
|
Percentage of
|
|
Purpose
|
|
Amount
|
|
|
Net Proceeds
|
|
|
Amount
|
|
|
Net Proceeds
|
|
|
Repayment of indebtedness
|
|
$
|
7,357,222
|
|
|
|
38.82
|
%
|
|
$
|
7,357,222
|
|
|
|
25.86
|
%
|
Working capital and general corporate purposes
|
|
$
|
8,750,281
|
|
|
|
46.18
|
%
|
|
$
|
16,825,278
|
|
|
|
59.14
|
%
|
Funding of research and development
|
|
$
|
2,842,501
|
|
|
|
15.00
|
%
|
|
$
|
4,267,500
|
|
|
|
15.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,950,004
|
|
|
|
100.0
|
%
|
|
$
|
28,450,000
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We intend to use approximately $7,357,222 of the proceeds to
discharge our indebtedness through August 15, 2010, in the
following order of priority and amounts: $2,560,278 to discharge
the Kimball judgment against us for manufacturing of
XT250tm
units, repayment of promissory notes, plus accounts payable
(derived from the judgment of $2,600,000 less $39,722 in funds
which are subject to the writ of garnishment); $287,260 to repay
principal and accrued interest due to our two debenture holders,
John F. Huseman and the R. David Collin Trust, who are unrelated
to the company other than through ownership of these debentures;
$1,103,350 to discharge amounts we are in arrears under our
license agreement with Rutgers University; $741,472 to be paid
to affiliates for deferred salary; $366,589 to repay principal
and accrued interest due to officers, directors and certain
shareholders for non-convertible promissory notes; and
$2,298,272 in professional fees incurred in the offering and
miscellaneous expenses. Of the $741,472 to be paid to affiliates
for deferred salary, $480,792 will be paid to Mr. Brian T.
Mayo, our president and chief technology officer, $135,980 will
be paid to Mr. Alan Clock, our senior vice president of sales
and marketing, $62,856 will be paid to Ms. Patricia Ann Earl,
our senior vice president of business development and $44,470
will be paid to Mr. Paul Micciche, our senior vice
president of engineering. The balance of $17,373 will be paid to
two former employees. Of the $366,589 to be repaid in promissory
notes, $365,000 in aggregate principal amount, plus accrued
interest, will be repaid to the following directors: James J.
Lowrey - $35,000; Anthony R. Chidoni - $35,000; Simon Irish -
$35,000; Joseph J. Melone - $25,000; Robert E. Kennedy -
$25,000; and Philip A. Odeen - $25,000; our chief financial
officer, Dennis K. Cummings -$35,000; and $25,000 to each of the
following securityholders who have no affiliation with us except
through their ownership of securities and loans to us under the
promissory notes: Thomas Cook, Walter Lovejoy, Geoffrey
Stringer, William Jennings, Robert Girling, and Michael Haley.
We will use the remainder of the net proceeds for research and
product development and general corporate purposes including
salaries, professional fees, public reporting costs and
office-related expenses. We intend to use approximately
$2,000,000 of the proceeds allocated for working capital and
general corporate purposes for the construction and installation
of new
XT250tm
systems.
Of the portion of the proceeds to be used to discharge
indebtedness under our outstanding debt instruments, $325,000 in
principal outstanding to certain lenders is accruing interest at
a rate of 10% per annum and matures on the closing date of the
initial public offering. Additionally, our loans totaling
$40,000 in outstanding principal mature on the closing date of
our initial public offering and bear interest at a fixed rate
equal to the one-month LIBOR rate on the date of the loans,
equal to thirty-five hundredths of one percent (0.35%), plus two
percent (2%), until all sums due are paid in full. Further,
$250,000 in aggregate principal outstanding to our two debenture
holders accrues interest at a rate of 8% per annum and matured
on December 31, 2009.
In the event the price range or offering size described above
changes prior to the effectiveness of the registration statement
of which this prospectus forms a part, we will file a
pre-effective amendment to this registration statement to
reflect a revised use of proceeds. See Plan of
Distribution Changes in the Price Range or Offering
Size Before the Auction is Closed.
22
DETERMINATION
OF OFFERING PRICE
The initial public offering price of shares of our common stock
will be determined by our board of directors and management in
conjunction with the underwriter. Among the factors considered
in determining the initial public offering price were our future
prospects and those of our industry in general, and certain
other financial and operating information in recent periods, and
other financial and operating information of companies engaged
in activities similar to ours. We cannot assure you, however,
that the prices at which the shares will sell in the public
market after this offering will not be lower than the initial
public offering price or that an active trading market in our
common stock will develop and continue after this offering.
This offering will be made through the OpenIPO process, in which
the allocation of shares and the public offering price are
primarily based on an auction in which prospective purchasers
are required to bid for the shares. The OpenIPO process allows
all qualified investors, whether individuals or institutions, to
bid for shares. All successful bidders in the auction will pay
the same price per share.
Potential investors in this offering may submit bids through the
underwriter or participating dealers. Bids for the shares may
be made at any price, including a price above or below the
projected price range set forth on the cover of this prospectus.
Once the auction closes, the underwriter will determine the
highest price that will sell all of the shares offered. This is
the clearing price and is the maximum price at which the shares
will be sold. The company may choose to sell shares at the
auction-set clearing price or it may choose to sell the shares
at a lower offering price, taking into account additional
factors. Bidders that submit valid bids at or above the offering
price will receive, at a minimum, a pro-rated amount of shares
for which they bid. See Plan of Distribution
Determination of Initial Public Offering Price below on
page 96.
DIVIDEND
POLICY
We have never paid any cash dividends on our capital stock and
do not anticipate paying any cash dividends in the foreseeable
future. We currently intend to retain any future earnings to
fund the development and growth of our business. Furthermore,
the terms of our preferred stock designations restrict the
payment of dividends and provide that except for the ratable
payment of dividends on the Series A, B, C and D preferred
stock, we may not directly or indirectly declare or pay any cash
or property dividends or make any cash or property distributions
upon any of our capital stock or other equity securities. You
should not buy our stock if you are expecting to receive cash
dividends.
23
CAPITALIZATION
The following table summarizes our short-term debt and
capitalization as of June 30, 2010, giving effect to either
a minimum offering of 3,333,334 shares or a maximum
offering of 5,000,000 shares (a) on an actual basis,
and (b) on a pro forma basis after giving effect to the
conversion of all outstanding shares of our Series A, B, C,
and D preferred stock and accrued dividends through
August 15, 2010 into 4,190,167 shares of our common
stock which will occur automatically on the effective date of
the registration statement for this offering, and (c) on a
pro forma as adjusted basis to reflect the estimated net
proceeds we will receive from the sale of the minimum and
maximum shares of common stock offered by this prospectus
at an assumed public offering price of $6.00 per share after
deducting repayment of our indebtedness as of August 15,
2010, in the aggregate amount of $7,357,222 as follows:
$2,560,278 to discharge the Kimball judgment against us, plus
accounts payable (derived from the judgment of $2,600,000 less
$39,722 in funds which are subject to the writ of garnishment);
$287,260 to repay principal and accrued interest due to our two
debenture holders; $1,103,350 to discharge amounts we are in
arrears under our license agreement with Rutgers University;
$741,472 to be paid to affiliates for deferred salary; $366,589
to repay principal and accrued interest due to officers,
directors and stockholders for promissory notes; and $2,298,272
in professional fees and miscellaneous expenses.
If our anticipated offering size or price changes from the
amounts described above, we will file a pre-effective amendment
to this registration statement describing such changes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010
|
|
|
|
Minimum Offering
|
|
|
Maximum Offering
|
|
|
|
|
|
|
Pro Forma Basis
|
|
|
Pro Forma
|
|
|
|
|
|
Pro Forma Basis
|
|
|
Pro Forma
|
|
|
|
|
|
|
After Giving Effect
|
|
|
as Adjusted for
|
|
|
|
|
|
After Giving Effect
|
|
|
as Adjusted for
|
|
|
|
|
|
|
to Conversion of
|
|
|
Extinguishment
|
|
|
|
|
|
to Conversion of
|
|
|
Extinguishment
|
|
|
|
|
|
|
all Preferred Stock
|
|
|
of Indebtedness
|
|
|
|
|
|
all Preferred Stock
|
|
|
of Indebtedness
|
|
|
|
Actual
|
|
|
and Accrued Dividends
|
|
|
and this Offering
|
|
|
Actual
|
|
|
and Accrued Dividends
|
|
|
and this Offering
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Short-term debt
|
|
$
|
2,817,438
|
|
|
$
|
2,817,438
|
|
|
|
|
|
|
$
|
2,817,438
|
|
|
$
|
2,817,438
|
|
|
|
|
|
Series A Preferred stock, $.0001 par value, 7%
cumulative dividend, 962,101 shares authorized, issued and
outstanding
|
|
|
4,569,068
|
|
|
|
|
|
|
|
|
|
|
|
4,569,068
|
|
|
|
|
|
|
|
|
|
Series B Preferred stock, $.0001 par value, 7%
cumulative dividend, 1,800,000 shares authorized and
1,619,127 issued and outstanding
|
|
|
5,729,919
|
|
|
|
|
|
|
|
|
|
|
|
5,729,919
|
|
|
|
|
|
|
|
|
|
Series C Preferred stock, $.0001 par value, 7%
cumulative dividend, 1,350,000 shares authorized, 365,996
issued and outstanding
|
|
|
1,183,020
|
|
|
|
|
|
|
|
|
|
|
|
1,183,020
|
|
|
|
|
|
|
|
|
|
Series D Preferred stock, $.0001 par value, 7% cumulative
dividend, 700,000 shares authorized, 563,414 issued and
outstanding
|
|
|
1,769,012
|
|
|
|
|
|
|
|
|
|
|
|
1,769,012
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock, $0.0001 par value: authorized
60,000,000 shares; issued and outstanding
2,865,044 shares, actual; issued and outstanding, pro forma
as adjusted for this
offering, shares(1)
|
|
|
287
|
|
|
|
706
|
|
|
|
1,039
|
|
|
|
287
|
|
|
|
706
|
|
|
|
1,206
|
|
Additional paid in capital
|
|
|
|
|
|
|
13,250,600
|
|
|
|
33,250,270
|
|
|
|
|
|
|
|
13,250,600
|
|
|
|
43,250,100
|
|
Accumulated deficit
|
|
|
(59,849,863
|
)
|
|
|
(59,849,863
|
)
|
|
|
(59,849,863
|
)
|
|
|
(59,849,863
|
)
|
|
|
(59,849,863
|
)
|
|
|
(59,849,863
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(59,849,576
|
)
|
|
|
(46,598,557
|
)
|
|
|
(26,598,554
|
)
|
|
|
(59,849,576
|
)
|
|
|
(46,598,557
|
)
|
|
|
(16,598,557
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
(43,781,119
|
)
|
|
$
|
(43,781,119
|
)
|
|
$
|
(26,598,554
|
)
|
|
$
|
(43,781,119
|
)
|
|
$
|
(43,781,119
|
)
|
|
$
|
(16,598,557
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The number of shares issued and
outstanding and the additional paid-in capital exclude
(a) 2,033,117 shares of common stock reserved for
issuance upon the exercise of stock options outstanding under
our Amended and Restated 2004 Stock Option Plan and our 2009
Long Term Incentive Compensation Plan, (b) 3,846,269 shares
of common stock reserved for issuance upon the grant of
share-based incentives under our 2009 Long Term Incentive
Compensation Plan, and (c) 13,078,685 shares of common
stock reserved for issuance upon the exercise of outstanding
warrants (for which cash would need to be remitted to us for
exercise).
|
24
PRICE
RANGE OF COMMON STOCK
Our common stock is not currently traded on any market or
exchange. We have applied to list our common stock on the NYSE
Amex under the symbol XTRM. There can be no
assurance that we will continue to satisfy the eligibility
criteria to be listed on NYSE Amex.
As of August 15, 2010, we had 59 stockholders of record of
our common stock.
DILUTION
Purchasers of securities in this offering will be diluted to the
extent of the difference between the public offering price per
share and the net tangible book value per share of our common
stock immediately after this offering. Net tangible book value
dilution per share represents the difference between the amount
per share paid by purchasers of common stock in this offering
and the net tangible book value per share of common stock
immediately after completion of this offering.
Our net tangible book value (deficit) as of June 30, 2010,
was $(59,849,863) or $(20.89) per share of common stock. Net
tangible book value (deficit) per share as of a specified date
is determined by dividing our tangible book value (deficit) by
the number of outstanding shares of common stock at such date.
After giving effect to our sale of common stock offered by this
prospectus (based upon an assumed public offering price of $6.00
per share, the midpoint of the range set forth on the cover page
of this prospectus) after deducting our estimated offering
expenses, underwriting commissions and expenses, and following
extinguishment of our indebtedness as described in the section
Use of Proceeds, our pro forma net tangible book
value as of June 30, 2010 would have been $6,208,200 or
$0.60 per share, if the minimum offering is sold, and
$15,708,196 or $1.30 per share, if the Maximum Offering is sold.
This means that if you buy stock in this offering at $6.00 per
share, you will pay substantially more than our current common
stockholders paid for their shares. The following represents
your dilution:
|
|
|
|
|
If the minimum offering is sold, an immediate decrease in net
tangible book value to our new stockholders from $6.00 to $0.60
per share and an immediate dilution to the new stockholders of
$5.40 per share.
|
|
|
|
|
|
If the maximum offering is sold, an immediate decrease in net
tangible book value to our new stockholders from $6.00 to $1.30
per share and an immediate dilution to the new stockholders of
$4.70 per share.
|
The following table illustrates this per share dilution, based
on the net tangible book value and the fully diluted number of
common shares outstanding as of June 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
Maximum
|
|
|
|
Offering
|
|
|
Offering
|
|
|
Offering price per share of common stock
|
|
$
|
6.00
|
|
|
$
|
6.00
|
|
Net tangible book value per share as of June 30, 2010
|
|
|
(11.15
|
)
|
|
|
(11.15
|
)
|
Net tangible book value per share after this offering
|
|
|
0.60
|
|
|
|
1.30
|
|
Increase attributable to sale of shares to new investors in this
offering
|
|
|
6.51
|
|
|
|
8.81
|
|
Projected net tangible book value per share after this offering
|
|
|
0.60
|
|
|
|
1.30
|
|
|
|
|
|
|
|
|
|
|
Dilution per share to new investors
|
|
$
|
5.40
|
|
|
$
|
4.70
|
|
|
|
|
|
|
|
|
|
|
Percentage dilution per share to new investors
|
|
|
90
|
%
|
|
|
78
|
%
|
The following table shows as of June 30, 2010, the
difference between the number of shares of common stock
purchased from us (including shares of preferred stock and
accrued dividends through August 15, 2010 which will
convert into approximately 4,190,167 common stock on the
effective date of this registration statement), the total
25
consideration paid to us and the average price paid per share by
our existing stockholders and by new investors purchasing common
stock in this offering:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Offering
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Average Price
|
|
|
|
Number
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
|
per Share
|
|
|
Existing stockholders
|
|
|
7,055,211
|
|
|
|
67.91
|
%
|
|
$
|
15,815,594
|
|
|
|
44.16
|
%
|
|
$
|
2.24
|
|
New investors
|
|
|
3,333,334
|
|
|
|
32.09
|
%
|
|
$
|
20,000,004
|
|
|
|
55.84
|
%
|
|
$
|
6.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,388,545
|
|
|
|
100.00
|
%
|
|
$
|
35,815,598
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Offering
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Average Price
|
|
|
|
Number
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
|
per Share
|
|
|
Existing stockholders
|
|
|
7,055,211
|
|
|
|
58.52
|
%
|
|
$
|
15,815,594
|
|
|
|
34.52
|
%
|
|
$
|
2.24
|
|
New investors
|
|
|
5,000,000
|
|
|
|
41.48
|
%
|
|
$
|
30,000,000
|
|
|
|
65.48
|
%
|
|
$
|
6.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,055,211
|
|
|
|
100.00
|
%
|
|
$
|
45,815,594
|
|
|
|
100.00
|
%
|
|
|
|
|
Investors in this offering will be subject to increased dilution
upon the exercise of outstanding stock options and warrants.
However, each of our Series B, C and D warrantholders has
agreed not to exercise these warrants until the three year
anniversary of the effective date of this registration
statement. As of August 15, 2010, these stock options and
warrants represent an additional 15,111,802 shares that
could be issued (for which cash would need to be remitted to us
for exercise) in the future, of which 2,033,117 are outstanding
options with a weighted average exercise price of $2.13 and
13,078,685 are outstanding warrants with a weighted average
exercise price of $2.99. Of our outstanding options and
warrants, 965,285 options and 5,203,480 warrants are held by our
executive officers, directors and their affiliates. The
following table shows how the numbers and percentages for
shares purchased and total consideration
change, assuming exercise of all outstanding options and
warrants by existing securityholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Offering
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Average Price
|
|
|
|
Number
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
|
per Share
|
|
|
Existing securityholders
|
|
|
22,167,013
|
|
|
|
86.93
|
%
|
|
$
|
59,248,538
|
|
|
|
74.76
|
%
|
|
$
|
2.67
|
|
New investors
|
|
|
3,333,334
|
|
|
|
13.07
|
%
|
|
$
|
20,000,004
|
|
|
|
25.24
|
%
|
|
$
|
6.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
25,500,347
|
|
|
|
100.00
|
%
|
|
$
|
79,248,542
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Offering
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Average Price
|
|
|
|
Number
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
|
per Share
|
|
|
Existing securityholders
|
|
|
22,167,013
|
|
|
|
81.60
|
%
|
|
$
|
59,248,538
|
|
|
|
66.39
|
%
|
|
$
|
2.67
|
|
New investors
|
|
|
5,000,000
|
|
|
|
18.40
|
%
|
|
$
|
30,000,000
|
|
|
|
33.61
|
%
|
|
$
|
6.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
27,167,013
|
|
|
|
100.00
|
%
|
|
$
|
89,248,538
|
|
|
|
100.00
|
%
|
|
|
|
|
26
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Managements Discussion and Analysis of
Financial Condition and Results of Operations contains
forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of
various factors, including those set forth under Risk
Factors and elsewhere in this prospectus. The following
discussion should be read in conjunction with our financial
statements and related notes thereto included elsewhere in this
prospectus.
Overview
We design and develop material authentication and verification
solutions that allow molecular structure analysis on hidden
materials. Our license of patented technology owned by Rutgers
University combines penetrating X-rays, forensic analysis, and
automated software algorithms that allow non-technical personnel
to rapidly validate products even when sealed within their
original packaging. The initial focus for our product, the
XT250tm
Material Identification System, has been molecular screening to
protect the distribution supply chain from counterfeits,
adulterations, and contamination of pharmaceuticals.
XT250tm
System
The technology we license from Rutgers allows inventory that is
packaged and sealed to be non-intrusively verified. Deviations,
that may be harmful to the public, are identified by our
XT250tm
system and removed from the supply chain. We believe our company
has raised the level of awareness of the dangers of counterfeits
via our advertising, speaking engagements, websites, and
internet blog activities. We have educated our potential
customers on our product offerings and worked with them to
develop processes to better protect their inventories.
The
XT250tm
system can be programmed for different materials. In addition to
the pharmaceutical distribution market that is already
established, management hopes to target other markets with the
XT250tm
system. Some industries that perform visual inspections today,
like customs inspections and cosmetics distribution, could
enhance their verification process with the
XT250tm
system. Field related industries that rely upon sending samples
to forensic laboratories, such as mining and cement industries,
could analyze samples themselves with the
XT250tm
system. These are just some of the large markets that provide
opportunity for our
XT250tm
system to verify or identify materials. In markets where the
XT250tm
system may not meet the needs for the particular application,
the technology is scalable in terms of speed, portability, and
test sample size so that future products may be developed to
meet those needs.
Management has succeeded in developing strategic relationships
in key market segments. PILOT programs with major pharmaceutical
manufacturers have allowed us to program the
XT250tm
system for their specific needs. PILOT programs with major
distributors helped us to develop processes and procedures to
maximize value for all of our customers. PILOT programs with
major returns logistics companies provided exposure and insight
into the dispensing segment of the pharmaceutical market,
resulting in enhanced capabilities of the
XT250tm
that were developed. Each of the PILOT programs provided us with
an opportunity to further validate the technology and
demonstrate value for a particular market segment.
XT250tm
units were discounted to early adopters, who agreed to PILOT
programs, to provide an additional incentive for the customer.
As the PILOT programs complete, management expects to return to
significantly reduced discounts off the retail purchase price
for future sales of
XT250tm
systems.
PILOT
Programs
Our PILOT programs have occurred in several different
pharmaceutical markets, at one U.S. government entity and
in several university research settings as follows:
|
|
|
|
|
Three programs were conducted in national pharmaceutical
distributors two for durations of one year and five
months and one program is continuing into its fourth month;
|
|
|
|
|
|
One program has been conducted with an international
pharmaceutical manufacturer for a duration of six months;
|
27
|
|
|
|
|
One program was conducted in a national pharmaceutical reverse
logistics company which lasted for approximately six months;
|
|
|
|
One program was conducted with a U.S. government entity for
three months;
|
|
|
|
Two programs were conducted in university research settings,
each of which lasted for approximately six months; and
|
|
|
|
One program was conducted in a specialty pharmaceutical
distribution company for two months, which resulted in an
XT250tm
unit sale.
|
To date, we have sold one
XT250tm
unit resulting from a PILOT program. Although most of our PILOT
programs have been designed for eventual sales of the
XT250tm
our PILOT programs in academic institutions and with the
government were designed primarily for research purposes to test
the operational limits and effectiveness of the technology and
to gather molecular fingerprint data. Our PILOT programs
designed solely for research purposes are not expected to
generate revenues for the company. We have received feedback
from some of our PILOT participants that the processing speed or
the testing output of a single system is more limited than those
participants would have desired. Additionally, we have received
unfavorable feedback from our PILOT participants related to the
pricing of the unit. We believe the PILOT programs with our
pharmaceutical distributors have assisted us in proving the
technology, increasing the development of the system and
identifying multiple counterfeit or fraudulent medications.
Additionally, we believe our PILOT program conducted with
universities was beneficial in testing the validity of the
technology and in its efficacy in forensic and defense related
academic research. We currently have one PILOT program
participant.
The energy dispersive X-ray diffraction (EDXRD)
technology licensed by the company was developed and tested by
Rutgers for detection of hidden explosives, under the guidance
of the Federal Aviation Administration (and Transportation
Security Laboratory/TSL). TSL also performed testing of the
EDXRD technology for explosives detection. A university
performed a PILOT program, which enabled them to analyze newly
developed nanotechnology materials. The PILOT program was
beneficial in providing researchers molecular level information,
but their need was short lived and a lack of capital budget did
not allow them to purchase the
XT250tm unit.
A second university PILOT program was to determine whether the
XT250tm
could be used for the detection of illicit drugs. The PILOT
program showed a wide variation of formulations for street
drugs, and therefore no standard molecular fingerprints could be
effectively developed for the
XT250tm.
A PILOT was performed at a local South Florida county
sheriffs office for the detection of illicit drugs. While
detection of crack cocaine was highly successful, other drugs
could not be properly tested due to lack of standards for street
drugs. The PILOT program at Pfizer was to determine if the
XT250tm
could be effectively deployed in a Returns area,
where pharmaceuticals are returned from hospitals, pharmacies,
and clinics. These returns may be expired drugs, partially
opened bottles, or overstock items, each being returned for cash
credits. The Pfizer PILOT was a stepping stone to further refine
the companys business model. The PILOT program at a
pharmaceutical distribution services company was to determine if
the
XT250tm
could be used for screening returned pharmaceutical products.
Pfizer discontinued using the system after a period of months as
this company found the
XT250tm
did not meet its business needs. Representatives of Pfizer
relayed to us the project had worked well from a technical
standpoint.
Secure
Pharma Network
Management believes that our Secure Pharma Network
(SPN) may provide significant growth opportunities.
SPN is a software product that allows customers to access via
the Internet all of their systems purchased from XStream
Systems. Customers may remotely manage their systems,
downloading new material fingerprints or software updates,
uploading results, and operating their systems remotely.
Detailed reports can be generated, as well as customized and
aggregated reporting across multiple systems. The ability to
collect test results from multiple systems from our customers,
process that data, and provide meaningful information across the
industry provides significant value to our customers, which
management believes can produce revenue in the future. We
believe that integrating SPN into our customers inventory
management systems provides additional value to our customers.
Since SPN is software based, revenues we anticipate to generate
from SPN in the future are expected to increase our profit
margins. To date, no revenues have been earned from SPN.
28
Sales
Our initial net sales consist of
XT250tm
units sold to equipment distributors at a significant discount
off the retail purchase price as well as direct retail sales to
pharmaceutical distributors and manufacturers. We have sold one
unit at the retail price of $179,000 and we are currently
offering the
XT250tm
at discounts below this retail price.
Sales to equipment distributors represented approximately 38%
and 0% of our net sales during 2008 and 2009, respectively, with
the remaining sales in 2008 and all sales in 2009 directly to
pharmaceutical distributors. We sold two
XT250tm
systems in each of the fiscal years ended December 31, 2008
and 2009. Gross profit consists of net sales less product,
packaging and freight, field service, warranty, and financing
costs. Selling and advertising costs consist of sales person
expenses, advertising and marketing expenses, as well as royalty
fees. Research and development expenses consist primarily of
engineering personnel expenses, engineering consulting and
prototype expenditures. General and administrative expenses
include administrative salaries and payroll related expenses,
stock-based compensation expenses, depreciation, rent and
general overhead expenses.
Performance
Indicators
The management team reviews our performance on a regular basis
using a variety of financial and non-financial metrics. These
metrics include, but are not limited to, net sales, gross
margin, sales and marketing expenses, personnel costs, accounts
receivable and accounts payable aging, liquidity and cash
resources. Management compares actual results against goals and
budgets to take appropriate actions in order to improve
performance.
Employees
At August 15, 2010, we had 12 employees in our
operations, two of whom were sales and business development
executives. Nine members of our staff are employed at our
corporate headquarters in Sebastian, Florida.
Critical
Accounting Policies
Our discussion and analysis of our financial condition and
results of operations are based on our consolidated financial
statements, which have been prepared in accordance with
generally accepted accounting principles in the U.S. These
accounting principles require management to make use of certain
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reported
periods. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for
making judgments about carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
could differ from those estimates, and revisions to estimates
are included from the period in which the actual amounts become
known.
We believe the following critical accounting policies affect our
more significant judgments and estimates used in our preparation
of our consolidated financial statements, and therefore should
be read in conjunction with our summary of significant
accounting policies (see Note 2 of our Notes to
Consolidated Financial Statements). Our critical accounting
policies are as follows:
Revenue
Recognition
Our
XT250tm
systems include software embedded in the tangible product that
is essential to its functionality. The software does not require
significant production, modification or customization.
Revenue from the sale of our
XT250tm
systems is recognized when all of the following criteria have
been met:
a. persuasive evidence of an arrangement exists,
b. delivery has occurred,
c. the vendors fee is fixed or determinable, and
d. collectibility is probable.
29
While we engage in strategic PILOT programs with pharmaceutical
manufacturers and distributors, revenue is not recognized until
the unit is sold, delivered, installed and accepted, and
collection of the sales price is probable.
We have two pricing models including wholesale pricing for
distributors who are authorized sales agents and retail pricing
to third party end-users.
Prior to installation, deposits are ordinarily required from
customers before manufacturing commences. These amounts are
recorded as customer deposits in current liabilities on the
accompanying balance sheets.
There are no post-installation obligations other than warranty
of the equipment for one year after installation. Warranty
expense is estimated based on historical results and is accrued
at the time the revenue is recognized.
We also anticipate generating revenues in the future from the
sale of our SPN software. The sale of SPN would be commensurate
with the sale of one or more
XT250tm
units as a separate and optional purchase of an annual software
license. If the customer chooses to purchase SPN, revenue from
the license would be recognized ratably over the term of the
license in accordance with FASB guidance.
Inventories
We state inventories at the lower of cost, determined using the
average cost method, or net realizable value. We review
inventory for excess quantities and obsolescence based on our
best estimates of future demand, product lifecycle status and
product development plans. We use historical information along
with these future estimates to reserve for obsolete and
potentially obsolete inventory.
Share-based
Payments
We record all stock-based awards, including employee stock
option grants, at fair value as of the grant date and recognize
these awards as expenses in our statement of operations over the
vesting period of the award in accordance with FASB issued
guidance on share-based payments.
We estimate the fair value of each option grant on the date of
grant using the Black-Scholes option pricing model. The weighted
average assumptions utilized for our valuation analysis, for the
years ended December 31, 2008 and 2009 are as follows:
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2008
|
|
2009
|
|
Risk-free interest rate
|
|
1.55% 3.34%
|
|
1.36% 2.56%
|
Expected dividend yield
|
|
0%
|
|
0%
|
Expected volatility
|
|
86.08% 164.77%
|
|
74.93% 160.33%
|
Expected life in years
|
|
5 7
|
|
5 7
|
Service period in years
|
|
0 4
|
|
0 4
|
Weighted average fair value of options granted
|
|
$1.55
|
|
$1.56
|
The risk-free interest rate is derived from the Daily
U.S. Treasury Yield Curve Rate in effect as of the
valuation date of each grant. The dividend yield of zero is
based on the fact that our present intention is not to pay cash
dividends.
Volatility
Since our common stock is not traded on any public market, we
have used the historical volatility of select comparable
publicly traded companies over a period equivalent to the
expected life, which is the expected time from grant date until
exercise. For purposes of identifying otherwise similar
entities, we selected Schmitt Industries, Inc.
(Schmitt) and Arrowhead Research Corp.
(Arrowhead). We believe these companies are similar
to us in terms of industry, stage of life cycle, and size in the
following ways:
Schmitt designs, manufactures and markets computer-controlled
vibration detection and balancing equipment primarily to the
machine tool industry, as well as precision laser-based surface
measurement products for the disk drive, silicon wafer and
optics industries and laser-based distance measurement products
for a wide variety of
30
industrial applications. Schmitt was founded in 1993 and has
approximate market capitalization, annual revenues, and net loss
of $11,320,000, $9,500,000 and ($2,100,000), respectively. These
amounts are based on Schmitts most recent annual report
for the fiscal year ended May 31, 2009.
Arrowhead is a development stage nanotechnology holding company
whose subsidiaries commercialize nanotechnologies in the
electronics and biotech industries. One of its subsidiaries is
focused on the commercialization of carbon nanotube products for
the electronics industry and another is focused on exploring
nanotechnology-based energy storage devices for hybrid electric
vehicles and other large format applications. Arrowhead was
founded in 2003 and has approximate market capitalization,
annual revenues, and net loss of $75,350,000, $3,700,000 and
($19,300,000), respectively. These amounts are based on
Arrowheads most recent annual report for the fiscal year
ended September 31, 2009.
Fair
Value of Common Stock
We determined the fair value of our common stock through
retrospective valuations on each of March 14, 2007,
December 31, 2007, December 31, 2008, August 14,
2009, December 31, 2009 and April 30, 2010. We did not
obtain contemporaneous valuations by an unrelated valuation
specialist at the time of the issuance of the stock options and
grants during these periods primarily because our efforts were
focused on product and business development and the financial
and managerial resources for doing so were limited.
Determining the fair value of our stock requires making complex
and subjective judgments. In conducting our retrospective
valuations, we considered numerous objective and subjective
factors in valuing our common stock at each valuation date in
accordance with the guidance in the AICPA Practice Aid
Valuation of Privately-Held-Company Equity Securities
Issued as Compensation. We, with the aid of an
unrelated valuation specialist, determined the fair value of our
common stock as of each of the valuation dates to be:
|
|
|
|
|
Valuation Date
|
|
Fair Value
|
|
|
March 14, 2007
|
|
$
|
3.16
|
|
December 31, 2007
|
|
$
|
2.15
|
|
December 31, 2008
|
|
$
|
2.03
|
|
August 14, 2009
|
|
$
|
2.22
|
|
December 31, 2009
|
|
$
|
1.34
|
|
April 30, 2010
|
|
$
|
4.65
|
|
A key driver behind the decline in fair value for each of the
valuation dates through December 31, 2009 was as a result
of the additional dilution provided by each of the preferred
stock financings conducted subsequent to March 14, 2007.
One of the drivers behind the increase in fair value from
December 31, 2009 and April 30, 2010 was due in part
to the forecasted performance of the Company used in the
April 30, 2010 valuation as a result of the improvements in
the Companys business plan and implementation of changes
to our strategy, including deferring approximately
$14.5 million in anticipated research and development
expenditures on projects unrelated to the
XT250tm
until such time as these projects can be financed by the Company
at appropriate WACC levels. These expenditures had been included
in the Companys projections used for the December 31,
2009 valuation date. Improvements to our business plan and
strategy have included (i) strengthening our management
ranks through the addition of our co-chief executive officer and
our chief financial officer, (ii) changes to our pricing model
enabling our independent distributors to pay for the use of the
XT250tmin
a variable manner and without significant upfront capital
expenditures, and (iii) our incorporation of a
pedigree-based inventory tracking system into our existing
XT250tmsystem
capabilities.
We believe the continued increase in fair value of our common
stock, as evidenced by the estimated midpoint price to the
public of $6.00, is primarily attributable to improvements in
the recent events and developments of our business, including,
among others (i) we moved ahead in negotiations with a
manufacturer looking to incorporate our technology into an
automated module based at various dispensers around the world;
(ii) we made further progress in our relations with our
manufacturer, Kimball, who verbally agreed that following the
closing of the offering and upon the repayment of indebtedness
to Kimball under the settlement agreement, Kimball will submit
bids to us to continue the manufacturing and servicing of our
product in the future; (iii) on May 28, 2010, GenMark
Diagnostics, Inc. commenced its initial public offering, which
we believe demonstrates a significant improvement in the market
for initial public offerings in the U.S. in the medical
instruments industry. Our May 2010 discussions
31
with our underwriter took into account our and the
underwriters perceptions of significantly increased
optimism regarding the market for initial public offerings, and
confirmed our and our underwriters expectations that we
would complete our initial public offering. Finally, the
retrospective valuation of our common stock on April 30,
2010 contained two scenarios with a 90% probability of
successful completion of an IPO, as described in greater detail
below. If we had considered a 100% probability that the IPO
would be completed, the retrospective valuation would have
resulted in a fair value determination of $5.16 per share.
Determination
of Fair Value
In determining the fair value of our common stock, we used the
option pricing method for the valuations through August 14,
2009 and the probability weighted expected returns method
(PWERM) for the December 31, 2009 and
April 30, 2010 valuations in order to distribute the
enterprise value for each of those dates. At the time of the
valuation dates prior to December 31, 2009, the type and
timing of the potential exit events for the Company were
uncertain. The AICPA Practice Aid Valuation of
Privately-Held-Company Equity Securities Issued as
Compensation (AICPA Aid) provides that the
option-pricing method is appropriate to use when the range of
possible future outcomes is difficult to predict such that
forecasts would be highly speculative. Furthermore,
retrospective valuations were performed for each of the
valuation dates prior to December 31, 2009 as opposed to
contemporaneous valuations. The AICPA Aid indicates that the
assumptions and estimates underlying the valuation should
reflect only the business conditions, enterprise developments,
and expectations that existed as of the valuation date. We were
not certain of when there would be a future liquidity event
(such as an initial public offering of our common stock) on the
valuation dates prior to December 31, 2009.
In addition, reliable cash flow projections as of each of the
valuation dates prior to December 31, 2009 were not
available at the time of the retrospective valuations due to the
fact that the Company had been in an early stage of development
and management had not prepared extensive projections as of
those specific dates. Therefore, a discounted cash flow analysis
would not have been reliable for use in determining the
enterprise value for the valuation dates prior to
December 31, 2009 since under the PWERM, share value is
based upon the probability-weighted present value of expected
future net cash flows (distributions to stockholders),
considering each of the possible future events, as well as the
rights and preferences of each share class. The PWERM estimates
the value of an enterprises common stock based upon an
analysis of future values for the Company assuming various
possible future liquidity events (such as an IPO, strategic sale
or merger, dissolution, and private enterprise (no liquidity
event)). Therefore, since the range of possible future outcomes
was difficult for us to predict prior to December 31, 2009
(thereby making any forecasts speculative) and the inherent lack
of reliable projections as of those dates, we believe that the
option pricing method was the most appropriate method to use in
valuing the Companys common stock prior to
December 31, 2009.
We contemplated using either the guideline comparable company
method or the guideline comparable transaction method for
estimating the fair value of our common stock, however, we
concluded that neither method would be useful given that we
earned a negative EBITDA during each of the respective fiscal
years and therefore using a comparable companys EBITDA
multiple and applying it to a negative EBITDA would result in a
negative enterprise value.
Fair
Value as of March 14, 2007, December 31, 2007,
December 31, 2008, and August 14, 2009
We determined the fair value of our common stock on each of
March 14, 2007, December 31, 2007, December 31,
2008, and August 14, 2009 by initially calculating the
post-money indication implied by the Series A preferred
stock financing for the March 14, 2007 valuation, the
Series B preferred stock financing for the
December 31, 2007 valuation and the pre-money indication
implied by the Series C preferred stock financing for the
December 31, 2008 valuation and the Series D preferred
financing for the August 14, 2009 valuation. The
in-the-money option cash proceeds were then added and the net
debt and accumulated preferred dividend for each financing were
then subtracted to find the total distributable equity value at
each of the respective valuation dates. We then allocated the
total equity value between the preferred and common equity
classes using the option pricing method, where certain inputs
were applied to the Black-Scholes model. The key inputs which
affected the fair value included the life of the option and
volatility. Finally, we applied a lack of control discount to
determine the per share value of our common stock on a
non-marketable, minority interest basis.
32
Fair
Value as of December 31, 2009 and April 30,
2010
We determined the fair value of our common stock as of
December 31, 2009 and April 30, 2010 through the
income approach using the discounted cash flow (DCF)
method and applying it to our managements estimates of the
annual cash flows that our business is anticipated to generate
through a projection period ending in 2012 for the
December 31, 2009 valuation date and through the period
ending in 2014 for the April 30, 2010 valuation date. The
significant variables utilized in the discounted cash flow
method for each valuation date were:
|
|
|
|
|
our expected revenue, operating performance, cash flow and
EBITDA for the current and future years, determined as of the
valuation date based on our estimates;
|
|
|
|
a discount rate, which was applied to discretely forecasted
future cash flows in order to calculate the present value of
those cash flows; and
|
|
|
|
a terminal value multiple, which was applied to our last year of
discretely forecasted EBITDA to calculate the residual value of
our future cash flows.
|
We converted the estimated free cash flows for the period to
their present value equivalent by applying a discount rate
calculated using the weighted average cost of capital
(WACC) for our company. We determined the WACC, in
part, using the inputs and assumptions Cost of
Equity and Cost of Debt as well as an
examination of the returns of early-stage companies in general.
We estimated the terminal value of the Company using the EBITDA
Exit Method, where terminal value is calculated as the product
of our EBITDA in the last year of the discrete projection period
(2012 and 2014) and an EBITDA multiple based upon the
EBITDA multiples observed in the comparable companies and taking
into consideration other Company specific factors. The present
value of the estimated cash flows were then added to the present
value equivalent of the residual value of our business at the
end of the projection period to arrive at an estimate of the
fair value of the enterprise. Such an approach necessarily
relies on estimations of future cash flows that are inherently
uncertain, as well as a determination of an appropriate rate of
return in order to derive present value equivalents of both the
projected cash flows and the residual value of the business at
the end of the period. The use of different estimations of
future cash flows or a different rate of return could result in
a different indication of fair value.
We next calculated a weighted enterprise value by
considering two possible scenarios for the Company, either an
initial public offering or bankruptcy. As of each of the
valuation dates, our management was 90% confident that we would
successfully execute an initial public offering. If we are not
able to successfully complete our initial public offering, as an
alternative we may be required to seek bankruptcy/dissolution in
the future, so the remaining 10% was applied to the bankruptcy
scenario. Additionally, because the enterprise values of certain
exit events were calculated at the projected future dates in
which these exit events were to occur, discount factors were
added to derive the present value of the common stock as of the
date of valuation.
Finally, the per share value under each scenario was probability
weighted and the resulting weighted values per share were summed
to determine the fair value per share of our common stock on
each of December 31, 2009 and April 30, 2010. In the
initial public offering scenario, the per share value was
allocated taking into account the liquidation preferences and
other rights of our convertible preferred stock. The resulting
indication of value represents the estimated fair value of our
common stock, on a per-share basis, as of December 31, 2009
and April 30, 2010, which included a lack of control
discount.
Application
of Valuation for Each Grant Date
In order to determine the fair value of our common stock on the
date of grant for purposes of calculating the fair value of our
grants of stock options and common stock during the fiscal years
ended December 31, 2008 and 2009 and the six months ended
June 30, 2010, we utilized the valuation most closely
related to the common stock as a starting point for determining
the grant date fair value. We then considered the factors
described below for the relevant periods to determine whether
the fair value on the date of the grant had changed from the
fair value on the particular valuation date. Due to the various
offsetting positive and negative factors occurring during the
relevant periods our management determined that the fair value
on the specific grant date falling during the periods described
below remained unchanged from the valuation date fair value used.
(1) Period 1: For all stock options granted between
January 1, 2007 and August 7, 2007, we used the
March 14, 2007 estimated fair value of $3.16 per share of
common stock due to the closing of the Series A
33
preferred stock financing. Our primary considerations in using
this value for each grant date during the period included: the
proximity in time between the valuation date and the grant date;
and an improvement in financial performance during the period as
a result of the recognition of revenues from the sale of one
XT250tm
machine.
(2) Period 2: For all stock options granted between
August 8, 2007 and June 30, 2008 (the closing of the
Series B preferred stock financing), we used the
December 31, 2007 estimated fair value of $2.15 per share
of common stock. Our primary considerations in using this value
for each grant date during the period included: the proximity in
time between the valuation date and the grant date; an
improvement in financial performance during the period as a
result of the recognition of revenues from our contract with TSA
for the production of simulants and the sale of two
XT250tm
machines; our entry into agreements with our first authorized
sales agents and field service representatives (Remetronix and
Compass Engineering) to sell and service our products; and a
decline in the general economic conditions and outlook over this
period.
(3) Period 3: For all stock options granted between
July 1, 2008 and April 22, 2009 (the closing of the
Series C preferred stock financing), we used the
December 31, 2008 estimated fair value of $2.03 per share
of common stock. Our primary considerations in using this value
for each grant date during the period included: we introduced
our first network product, Secure Pharma Network, to provide an
integrated system wide solution for purchasers of the
XT250tm;
we developed a new management team headed by Messrs. James
Lowrey and Anthony Chidoni; six new members were appointed to
the board of directors who have extensive industry knowledge,
backgrounds and qualifications necessary for us to continue
developing our business; the lawsuit with our
XT250tm
manufacturer; the general deterioration of the domestic and
international economies during the second half of 2008 and into
2009; and a lessened demand by private equity investors for
early stage capital investments.
(4) Period 4: For all stock options and common stock
granted between April 23, 2009 and October 22, 2009,
we used the August 14, 2009 estimated fair value of $2.22
per share of common stock. Our primary considerations in using
this value for each grant date during the period included: the
proximity in time between the valuation date and the grant date;
we entered into a letter of intent with Swisslog Healthcare
Solutions and entered into Pilot Program agreements with
AmerisourceBergen and Pfizer, Inc.; continued business
uncertainty, including the expectation that the full impact of
the new leadership team and their business initiatives would
take time to implement; the continuing lawsuit with our
XT250tm
manufacturer; and the continued general economic crisis
experienced both domestically and globally causing a decrease in
various forms of spending by consumers.
(5) Period 5: For all stock options and common stock
granted between October 23, 2009 and December 31,
2009, we used the December 31, 2009 estimated fair value of
$1.34 per share of common stock due to the Series D
preferred stock financing occurring on October 31, 2009.
Our primary considerations in using this value for each grant
date during the period included: the proximity in time between
the valuation date and the grant date; we entered into a letter
of intent with Eastman Kodak Company; we entered into a
settlement agreement with our
XT250tm
manufacturer; continued business uncertainty, including the
expectation that the full impact of the new leadership team and
their business initiatives would take time to implement; and the
continued general economic crisis experienced both domestically
and globally causing a decrease in various forms of spending by
consumers.
We did not grant any stock options or common stock as
share-based payments during the six months ended June 30,
2010.
Intangible
Assets
Intangible assets are accounted for at cost and are amortized
over the estimated useful life of the asset on a straight-line
basis, which is generally three to 15 years. In 2005, we
purchased a license from a university for the exclusive right to
produce and sell products which utilize the universitys
patented X-ray defraction technology. In exchange for this
license, the university was issued 73,500 shares of our
common stock and we agreed to pay royalty fees during the term
of the agreement. The initial license fee is stated at cost and
amortized using the straight-line method over 15 years
beginning in the year it was acquired.
34
Income
Taxes
We account for income taxes in accordance with FASB guidance,
relating to determining our effective tax rate, provision for
tax expense, deferred tax assets and liabilities and the related
valuation allowance. Our provision for income taxes is
determined using the asset and liability method, which involves
significant judgments and estimates. Under this method, deferred
income tax assets and liabilities are calculated based upon the
temporary differences between the financial statement and income
tax bases of assets and liabilities using the combined federal
and state effective tax rates that are applicable to us in a
given year.
The deferred income tax assets are recorded net of a valuation
allowance when, based on the weight of available evidence; we
believe it is more likely than not that some portion or all of
the recorded deferred tax assets will not be realized in future
periods. For the years ended December 31, 2008 and 2009, we
have recorded a valuation allowance against the full amount of
our net deferred tax asset, because in our opinion, it is more
likely than not that these deferred tax assets will not be
realized through future taxable earnings or implementation of
tax planning strategies. A change in our estimate of future
taxable income may require a change to the valuation allowance.
We adopted the FASB issued guidance surrounding uncertain tax
positions on January 1, 2007. As a result of the
implementation, we determined that no material adjustment was
required; there were no tax benefits that should not have been
recognized, and accordingly no associated penalties and interest
were required to be accrued as of December 31, 2009 or 2008.
Contingent
Liabilities and Off-Balance Sheet Arrangements
We are contingently liable for certain payments related to sales
of our
XT250tm
units. We signed recourse agreements whereby we guarantee the
payment of the unamortized principle balance of certain capital
lease agreements in the event the customer defaults on the
payments for the units. As of December 31, 2008 and 2009,
the unamortized principle balance of these leases was
approximately $135,000 and $0, respectively. Other than these
arrangements, we do not have any off-balance sheet arrangements
that have or are reasonably likely to have a current or future
effect on our financial condition, changes in financial
condition, revenues or expenses, results in operations,
liquidity, capital expenditures or capital resources that is
material to investors.
Results
of Operations
Results
of Operations for the Years Ended December 31, 2009 and
2008
The following table summarizes certain selected items from the
statement of operations for the year ended December 31,
2009 compared to the year ended December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase/(Decrease)
|
|
|
|
2008
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
Revenues
|
|
$
|
439,000
|
|
|
$
|
271,520
|
|
|
$
|
(167,480
|
)
|
|
|
(38
|
)%
|
Cost of Sales
|
|
|
129,036
|
|
|
|
133,843
|
|
|
|
4,807
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss)
|
|
$
|
309,964
|
|
|
$
|
137,677
|
|
|
$
|
(172,287
|
)
|
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss) Percentage of Revenue
|
|
|
71%
|
|
|
|
51%
|
|
|
|
|
|
|
|
|
|
Comparison
of Year Ended December 31, 2009 to Year Ended
December 31, 2008
Revenues
Revenues for the year ended December 31, 2009 amounted to
$271,520 as compared to $439,000 for the year ended
December 31, 2008, a decrease of $167,480 or 38%. This
decrease is primarily due to revenue of $150,000 during 2008
from a contract with the TSA for the production of explosive
simulants to be used in testing commercial X-ray equipment not
repeated in 2009. We sold two
XT250tm
systems in each of the fiscal years ended December 31, 2008
and 2009.
35
Cost
of Sales
Cost of sales for the year ended December 31, 2009 totaled
$133,843 as compared to $129,036 for the year ended
December 31, 2008, an increase of $4,807 or 4%. This
increase is due primarily to commissions of $13,878 on units
sold in 2009, there were no commissions paid in 2008, offset by
cost reductions related to installing the machines.
Gross
Profit
Gross profit for the year ended December 31, 2009 amounted
to $137,677 as compared to $309,964 for the year ended
December 31, 2008, a decrease of $172,287. Overall gross
profit as a percentage of revenue decreased to 51% for the year
ended December 31, 2009 from 71% during the year ended
December 31, 2008. The decrease in gross profit is due to
the aforementioned payment of commissions on sales and loss of
revenues from a contract modification with the TSA for the
production of explosive simulants which had no costs associated
with it in 2008. Revenues from the TSA contract and the cost of
performing the contract were recognized in previous years. While
the company believed all requirements had been completed in the
years the revenue and costs were recognized, the TSA indicated,
that in their opinion, certain requirements had not been met. As
a result, in 2006 the company wrote off a portion of the
revenues previously recognized. In 2008, the company was able to
renegotiate the contract terms to exclude the specific
requirements which were not achievable. The revenue was
originally recorded and recognized in 2005 when the work was
performed. In 2006, the company wrote-off the disputed amount as
a reversal of the income during 2005 due to the fact that the
criteria for recognition had not been met in that period.
Subsequently, in 2008, as a result of the contract modification,
the criteria for recognition were met and accordingly the income
was properly recorded in that period. The TSA decommissioned a
portion of the contract and remitted the agreed upon balance of
$150,000.
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase/(Decrease)
|
|
|
|
2008
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
$
|
2,061,731
|
|
|
$
|
3,707,208
|
|
|
$
|
1,645,477
|
|
|
|
80
|
%
|
General and administrative
|
|
|
455,996
|
|
|
|
598,899
|
|
|
|
142,903
|
|
|
|
31
|
|
Selling and advertising
|
|
|
613,239
|
|
|
|
432,371
|
|
|
|
(180,868
|
)
|
|
|
(29
|
)
|
Research and development
|
|
|
635,531
|
|
|
|
581,547
|
|
|
|
(53,984
|
)
|
|
|
(8
|
)
|
Royalty fees
|
|
|
300,000
|
|
|
|
500,000
|
|
|
|
200,000
|
|
|
|
67
|
|
Legal settlement
|
|
|
|
|
|
|
781,190
|
|
|
|
781,190
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,066,497
|
|
|
|
6,601,215
|
|
|
|
2,534,718
|
|
|
|
62
|
|
Loss from operations
|
|
|
3,756,533
|
|
|
|
6,463,538
|
|
|
|
2,707,005
|
|
|
|
72
|
|
FINANCIAL INCOME AND EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant expense
|
|
|
|
|
|
|
2,769,083
|
|
|
|
2,769,083
|
|
|
|
100
|
|
Interest expense
|
|
|
159,429
|
|
|
|
164,956
|
|
|
|
5,527
|
|
|
|
3
|
|
Interest income
|
|
|
(26,156
|
)
|
|
|
(2,316
|
)
|
|
|
23,840
|
|
|
|
(91
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(3,889,806
|
)
|
|
$
|
(9,395,261
|
)
|
|
$
|
(5,505,455
|
)
|
|
|
142
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and wages
Salaries and wages for the year ended December 31, 2009
totaled $3,707,208 as compared to $2,061,731 for the year ended
December 31, 2008, an increase of $1,645,477 or 80%. This
increase is predominately due to the issuance of stock in lieu
of compensation to a member of the board of directors for
services rendered, offset by reductions in administrative
personnel headcount and related cost saving measures.
36
General
and administrative expenses
General and administrative expenses for the year ended
December 31, 2009 amounted to $598,899 as compared to
$455,996 for the year ended December 31, 2008, an increase
of $142,903 or 31%. This increase is due primarily to increased
professional fees.
Selling
and advertising expenses
Selling and advertising expenses for the year ended
December 31, 2009 totaled $432,371 as compared to $613,239
for the year ended December 31, 2008, a decrease of
$180,868 or 29%. This decrease is due primarily to reductions in
sales and marketing personnel headcount and related cost saving
measures.
Research
and development expenses
Research and development expenses for the year ended
December 31, 2009 amounted to $581,547 as compared to
$635,531 for the year ended December 31, 2008, a decrease
of $53,984 or 8%. This decrease is due primarily to reductions
in engineering headcount and related costs implemented as cost
saving measures.
Royalty
Fees
Royalty fees for the year ended December 31, 2009 totaled
$500,000 as compared to $300,000 for the year ended
December 31, 2008, an increase of $200,000 or 67%. This
increase is due to a change in the royalty agreement.
Legal
Settlement
Legal settlement for the year ended December 31, 2009
totaled $781,190 as compared to none for the year ended
December 31, 2008, an increase of $781,190 or 100%. This
increase is due to the agreed judgment in the lawsuit with
Kimball Electronics, Inc.
Results
of Operations for the Six Months Ended June 30, 2010 and
2009
The following table summarizes certain selected items from the
statement of operations for the six months ended June 30,
2010 compared to the six months ended June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Increase/(Decrease)
|
|
|
|
2009
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
Revenue
|
|
$
|
179,000
|
|
|
$
|
|
|
|
$
|
(179,000
|
)
|
|
|
100
|
|
Cost of Sales
|
|
|
66,565
|
|
|
|
|
|
|
|
(66,565
|
)
|
|
|
100
|
|
Gross Profit
|
|
$
|
112,435
|
|
|
$
|
|
|
|
$
|
(112,435
|
)
|
|
|
100
|
|
Gross Profit Percentage of Revenue
|
|
|
62.81
|
%
|
|
|
0
|
%
|
|
|
(62.81
|
)%
|
|
|
|
|
Comparison
of Six Months Ended June 30, 2010 to Six Months Ended
June 30, 2009
Revenues
Revenues for the six months ended June 30, 2009 amounted to
$179,000 as compared to $0 for the six months ended
June 30, 2010, a decrease of $179,000 or 100%. This
decrease is primarily due to no sales during the six months
ended June 30, 2010.
Cost
of Sales
Cost of sales for the six months ended June 30, 2009
totaled $66,565 as compared to $0 for the six months ended
June 30, 2010, a decrease of $66,565 or 100%. This decrease
is due primarily to no sales during the six months ended
June 30, 2010.
37
Gross
Profit
Gross profit for the six months ended June 30, 2009
amounted to $112,435 as compared to $0 for the six months ended
June 30, 2010, a decrease of $112,435. Overall gross profit
as a percentage of revenue decreased to 0% for the six months
ended June 30, 2010 from 62.81% during the six months ended
June 30, 2009. The decrease in gross profit is due to no
sales during the six months ended June 30, 2010.
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Increase/(Decrease)
|
|
|
|
2009
|
|
|
2010
|
|
|
$
|
|
|
%
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
$
|
913,801
|
|
|
$
|
398,614
|
|
|
$
|
(515,187
|
)
|
|
|
(56
|
)%
|
Selling, general and administrative
|
|
|
336,719
|
|
|
|
1,299,545
|
|
|
|
962,826
|
|
|
|
286
|
%
|
Research and development
|
|
|
288,186
|
|
|
|
280,084
|
|
|
|
(8,102
|
)
|
|
|
(3
|
)%
|
Royalty fees
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
0
|
%
|
Total operating expenses
|
|
|
1,788,706
|
|
|
|
2,228,243
|
|
|
|
439,537
|
|
|
|
25
|
%
|
Loss from operations
|
|
|
1,676,271
|
|
|
|
2,228,243
|
|
|
|
551,972
|
|
|
|
33
|
%
|
FINANCIAL INCOME AND EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant expense
|
|
|
2,602,837
|
|
|
|
28,343,122
|
|
|
|
25,740,285
|
|
|
|
989
|
%
|
Interest expense
|
|
|
107,810
|
|
|
|
10,317
|
|
|
|
(97,493
|
)
|
|
|
(90
|
)%
|
Interest income
|
|
|
(226
|
)
|
|
|
(533
|
)
|
|
|
307
|
|
|
|
136
|
%
|
NET LOSS
|
|
$
|
(4,386,692
|
)
|
|
|
(30,581,149
|
)
|
|
|
26,194,457
|
|
|
|
597
|
%
|
Salaries and wages for the six months ended June 30, 2009
totaled $913,801 as compared to $398,614 for the six months
ended June 30, 2010, a decrease of $515,187 or 56%. This
decrease is predominately due to the reduction in stock
compensation expenses for the six months ended June 30,
2010.
Selling,
general and administrative expenses
Selling, general and administrative expenses for the six months
ended June 30, 2009 amounted to $336,719 as compared to
$1,299,545 for the six months ended June 30, 2010, an
increase of $962,826 or 286%. This increase is due primarily to
increased professional fees associated with our initial public
offering.
Research
and development expenses
Research and development expenses for the six months ended
June 30, 2009 amounted to $288,186 as compared to $280,084
for the six months ended June 30, 2010, a decrease of
$8,102 or 3%. This decrease is due primarily to decreased
payments to outside contractors implemented as cost savings
measures.
Royalty
Fees
Royalty fees for the six months ended June 30, 2009 totaled
$250,000 as compared to $250,000 for the six months ended
June 30, 2010, an increase of $0 or 0.00%.
Warrant
Expense
Warrant expense for the six months ended June 30, 2010
increased due to the increase in the warrant liability. The
warrant liability increased primarily due to a $3.31 increase in
the fair value of our common stock to $4.65 on June 30,
2010 (See discussion of the fair value of our common stock under
Critical Accounting Policies). The increase in the fair value of
the warrant liability at June 30, 2009 was primarily
attributable to an increase in the number of warrants
outstanding issued in connection with our Series C
preferred stock.
38
Liquidity
and Capital Resources
We incurred a net loss of $(9,395,261) including $842,892 of
stock compensation expense, for the year ended December 31,
2009. Our accumulated deficit since inception amounted to
$29,006,852 as of December 31, 2009, including $3,387,384
of cumulative stock-based compensation expense.
Our primary source of liquidity since inception has been cash
generated from private equity and convertible debt transactions
totaling approximately $15,400,000, net of offering costs,
through August 15, 2010. Our primary operating cash
requirements include the payment of salaries, employee benefits
and other personnel-related costs, as well as costs of our sales
and marketing efforts and our office facilities. We believe our
existing cash on hand, the net proceeds from this offering, and
cash generated from operating activities will be sufficient to
service our existing debt, finance internal growth, and invest
in research and development of the technology. If we do not
complete the initial public offering to which this prospectus
relates or raise the minimum amount of funds contemplated in
this prospectus, we cannot provide assurances that we will be
able to find alternative financing on terms favorable to us or
at all.
We had cash of $159 as of June 30, 2010 which is being used
to fund current operations. Until the closing of the offering,
we are funding our operations through loans from our officers,
directors and stockholder lenders.
On June 11, 2010, each of Messrs. James J. Lowrey,
Anthony R. Chidoni, Simon Irish and Dennis K. Cummings loaned us
$10,000, totaling $40,000 in aggregate principal amount. The
loans mature on the closing date of our initial public offering
and bear interest at a fixed rate equal to the one-month LIBOR
rate on the date of the loans, equal to thirty-five hundredths
of one percent (0.35%), plus two percent (2%), until all sums
due are paid in full. The loans are represented by four
non-convertible promissory notes executed by us in favor of each
lender. Principal and interest due on the loans will be repaid
from the proceeds of the offering.
On various dates during July 2010, 13 individuals including
certain officers, directors and stockholders loaned us $25,000,
totaling $325,000 in the aggregate principal amount. The loans
mature on the closing date of our initial public offering and
bear interest at a fixed rate equal to ten percent (10%) until
all sums due are paid in full. The loans are represented by
13 non-convertible promissory notes executed by us in favor
of each lender. Principal and interest due on the loans will be
repaid from the proceeds of the offering.
We estimate that approximately $2,000,000 in proceeds from the
offering will be utilized to meet our expected peak financing
needs for the construction and installation of the
XT250tm
systems to be placed with our customers pursuant to a service
agreement. Each service agreement is expected to generate
adequate monthly cash flow to allow the large majority of our
forecasted
XT250tm
capital expenditures to be financed organically.
We were unable to comply with the final payment terms of our
settlement agreement with Kimball and Kimball entered the Agreed
Judgment against us in the United States District Court of the
Southern District of Indiana on February 8, 2010 in the
amount of $3,200,000. On February 10, 2010, Kimball filed a
motion for proceedings supplemental to collect the remaining
$2.6 million balance due on the $3.2 million judgment.
On June 11, 2010, Kimball issued writs of garnishment to
SunTrust Bank and Wachovia Bank to locate assets to satisfy the
outstanding judgment, which resulted in a freeze on those bank
accounts. We do not have access to the cash funds deposited with
the two banks subject to the writs. Kimball may request an order
from the court at any time entitling Kimball to the transfer of
$39,722.33 in funds from those accounts in partial satisfaction
of the outstanding $2,600,000 judgment. We anticipate that if
this offering does not close for any reason, Kimball will move
forward in its collection efforts to transfer our cash funds
under the writs of garnishment. Until such time as we repay
Kimball the $2.6 million of indebtedness under the
settlement agreement, there remains uncertainty whether Kimball
will continue to manufacture the
XT250tm
systems. At the same time, our management has continued
discussions with representatives from Kimball concerning our
business relationship with Kimball following the initial public
offering. Although no written agreement or memorandum of
understanding has been executed by the parties at this time,
Kimball and the Company have verbally agreed that following the
closing of the offering and upon the repayment of indebtedness
to Kimball under the settlement agreement, Kimball will submit
bids to us to continue the manufacturing and servicing of our
product in the future.
We are currently in arrears with respect to payments required
under our licensing agreement with Rutgers University totaling
$797,871 as of December 31, 2009. The loss of, or our
inability to maintain, this license could
39
result in our inability to sell our products including the
XT250tm
systems without liability exposure including claims of
infringement from other parties. The licensing agreement
provides that if either party breaches or fails to perform any
provision of the agreement, the other party may give written
notice of the default to the breaching party. Representatives of
the company have recently met with Rutgers to discuss the
licensing agreement between Rutgers and the company. The parties
have mutually agreed and acknowledged verbally that the company
will require capital financing to repay Rutgers amounts due
under the licensing agreement and that the agreement requires
restructuring in connection with royalty fees owed in the
future. The parties have verbally agreed to postpone
restructuring of the license agreement until completion of the
public offering. We believe that we and Rutgers are both using
good faith efforts to maintain the business relationship and
restructure the parties contractual obligations going
forward.
In addition, as of August 15, 2010, we are currently in
default with respect to $287,260 in principal amount of
debentures and accrued interest with respect to two of our
debenture holders. The debentures matured on December 31,
2009. We have not amended the terms of the debentures to provide
for extended maturity dates for these instruments. We have
verbally agreed with the holders that we will repay the
principal and accrued interest due under the debentures from the
proceeds of the offering.
Mr. Brian T. Mayo delivered a demand letter to our
management, dated November 16, 2009, alleging the
companys breach of his executive employment agreement.
Mr. Mayo claims in the demand letter his base salary was
reduced in breach of his executive employment agreement from
$255,000 per year to approximately $63,750. Mr. Mayo
requested restoration of his salary to $255,000 per year and
payment of his base salary since the date his salary was
reduced. Mr. Mayos base salary was temporarily
reduced to $63,750 from its previous $127,500 level during the
fourth quarter of 2009 in connection with salary reductions
implemented for certain executive officers and key employees.
Previously during 2006, Mr. Mayos salary was reduced
from a base salary agreed to in his executive employment of
$255,000 to $127,500. We have accrued for the difference of
Mr. Mayos $255,000 salary level and the salary
reduction to $63,750. At present the accrual through
June 30, 2010 is approximately $449,000. As of the date of
this registration statement, a litigation proceeding has not
been filed with respect to this matter. Mr. Mayos
salary reduction was related to general salary reductions
affecting four key employees of the company which reductions
were implemented to address budgeting and cash flow concerns. As
of January 1, 2010, Mr. Mayos annual base salary
has been restored to $127, 500 and we paid Mr. Mayo a cash
payment of $14,711 on January 14, 2010, which included all
deferred amounts since the reduction of Mr. Mayos
salary in October 2009. The company and Mr. Mayo have
verbally agreed that Mr. Mayo will be paid all additional
deferred amounts under Mr. Mayos agreement following
completion of the offering. No written release of the demand
letter claims has been executed by the parties at this time and
the company and Mr. Mayo have been unable to amicably
resolve the issues raised by Mr. Mayo in his demand letter.
Accordingly, we notified Mr. Mayo on March 4, 2010
that we will not renew or otherwise extend the employment
agreement with Mr. Mayo after it expires on
October 31, 2010. We will continue to pay all sums due
under Mr. Mayos employment agreement until the
expiration date, in accordance with our current payroll
practices.
We did not have material commitments for capital expenditures as
of June 30, 2010. Until such time as we repay Kimball the
amounts we owe under the settlement agreement and reach a new
agreement with Kimball for supply and manufacturing of the
XT250tm
systems there is uncertainty whether we will be required to
incur capital expenditures for inventory to build new machines.
Recent
Securities Offerings
On various dates from December 14, 2006 through
February 14, 2007, we issued convertible promissory notes
in the principal amount of $325,000, payable on demand at any
time on or after February 28, 2007. In accordance with the
terms of the notes, on March 14, 2007, all of the principal
and interest due on the notes was converted into
87,094 shares of Series A preferred stock.
On various dates from August 31, 2005 to March 14,
2006, we sold debentures in the aggregate principal amount of
$1,525,000 to accredited investors. In connection with such
sale, each investor received a ten-year warrant to purchase
5,000 shares of common stock at a price of $2.34 per share
for each $25,000 in principal amount of debentures. As a result,
we issued warrants to purchase an aggregate of
305,000 shares of common stock. On
40
December 21, 2007, a portion of these debentures in the
principal amount of $1,000,000 and the related accumulated
interest on that date, was exchanged for 336,248 shares of
Series B preferred stock.
On various dates from September 14, 2007 through
December 4, 2007, we sold convertible debentures in the
aggregate principal amount of $886,000 to accredited investors.
On December 21, 2007, all of the principal and interest due
on the debentures was converted into 298,116 shares of
Series B preferred stock.
In connection with a secured, revolving, demand promissory note
dated November 16, 2006, we issued the holder of the note a
warrant to purchase an aggregate of 21,000 shares of common
stock at an exercise price of $3.80 per share on
January 25, 2008.
By stock purchase agreement dated March 14, 2007, as
amended from time to time, we sold an aggregate of
962,101 shares of Series A preferred stock to
accredited investors. Of those shares, 87,094 were issued in
exchange for convertible promissory notes in the principal
amount of $325,000 and the related accrued interest. The
remaining 875,007 share of Series A preferred stock
were issued at a purchase price of $3.80 per share, resulting in
$3,325,000 of gross proceeds.
On various dates from December 2007 through June 2008, we sold
an aggregate of 1,585,795 shares of Series B preferred
stock to accredited investors. The shares of Series B
preferred stock were issued at a purchase price of $3.00 per
share, resulting in $4,757,385 of gross proceeds. In addition,
during this time period, we issued 33,332 shares of
Series B preferred stock to the interim chief executive
officer as compensation for services performed. Each investor
received for each share of Series B preferred stock
purchased, one ten-year warrant to purchase five shares of our
common stock at an exercise price of $3.00 per share.
On various dates from March 2009 through August 2009, we sold an
aggregate of 365,996 shares of Series C preferred
stock, to accredited investors. The shares of Series C
preferred stock were issued at a purchase price of $3.00 per
share, resulting in $1,097,988 of gross proceeds. In addition,
each investor received for each share of Series C preferred
stock purchased, one ten-year warrant to purchase five shares of
our common stock at an exercise price of $3.00 per share.
During October 2009, we sold an aggregate of 563,414 shares
of Series D preferred stock, to accredited investors. The
shares of Series D preferred stock were sold at a price of
$3.00 per share, resulting in $1,690,242 of gross proceeds. In
addition, each investor received for each share of Series D
preferred stock purchased, one ten-year warrant to purchase five
shares of our common stock at an exercise price of $3.00 per
share.
Impact of
Inflation
We believe that inflation has not had a material impact on our
results of operations for the years ended December 31, 2008
and 2009. We cannot assure you that future inflation will not
have an adverse impact on our operating results and financial
condition.
Recently-Issued
Accounting Standards
In June 2008, the FASB issued guidance in determining whether an
instrument (or an embedded feature) is indexed to an
Entitys Own Stock. This guidance provides that an entity
should use a two step approach to evaluate whether an
equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the
instruments contingent exercise and settlement provisions.
It also clarifies on the impact of foreign currency denominated
strike prices and market based employee stock option valuation
instruments on the evaluation. The guidance is effective for
fiscal years beginning after December 15, 2008. As of
January 1, 2009, the adoption of this guidance resulted in
a reclassification of the fair value of certain outstanding
warrants from stockholders equity to liability. The fair
value of the warrants was determined by using the Black-Scholes
option pricing model. The initial value of the warrants at
adoption was approximately $7,263,825. Additionally, we note
that upon adoption of guidance, the warrants will be marked to
market at each reporting period. For the year ended
December 31, 2009, we recorded warrant expense of
$2,769,083. (See Note 3, Fair Value
Measurements, for additional disclosures.)
41
In October 2009, the FASB issued guidance on Certain Revenue
Arrangements that include Software Elements. The amendments in
the update clarify the applicability of the FASB guidance on
Software Revenue Recognition that affect vendors that sell
tangible products in an arrangement containing software that is
more than incidental to the tangible product being sold, and
clarifies what guidance should be used in allocating and
measuring revenue. The update excludes tangible products
containing software and non-software components that function
together to deliver the tangible products essential
functionality from FASB guidance on Software Revenue
Recognition. The guidance is effective prospectively for fiscal
years beginning on or after June 15, 2010. This guidance
does not impact our current financial statements and is not
expected to have an impact on our financial position, results of
operations and cash flows.
Quantitative
and Qualitative Disclosures about Market Risk
This disclosure is not required for smaller reporting companies.
Restatement
of Historical Financial Statements
We restated our 2009, 2008 and 2007 financial statements and had
previously restated our 2007 financial statements after certain
accounting errors were identified that we determined to be
material. A material weakness is a control deficiency, or
combination of control deficiencies, that results in more than a
remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected
on a timely basis by employees in the normal course of their
assigned functions. We identified control deficiencies that have
been classified as material weaknesses in our internal controls
over financial reporting. The control deficiencies identified
include inadequate segregation of duties over financial
reporting as well as improper reporting of certain financial
instruments, income taxes, loss contingencies and share-based
compensation. To address the control deficiencies, we have hired
a new member of management with experience in complex accounting
and we plan to hire additional accounting staff in order to
implement an appropriate level of segregation of duties. In
addition, we plan to hire additional qualified financial
reporting personnel and engage outside consultants to assist in
accurate financial reporting to ensure our financial statements
are in accordance with generally accepted accounting principles.
If we fail to fully remediate these material weaknesses or fail
to maintain effective internal controls in the future, it could
result in a material misstatement of our financial statements
that would not be prevented or detected on a timely basis, which
could cause investors to lose confidence in our financial
information or cause our stock price to decline.
42
BUSINESS
Company
Overview
XStream Systems, Inc. designs and develops material
authentication and verification solutions that allow molecular
structure analysis on hidden materials. The patented technology
which we license exclusively from Rutgers, the State University
of New Jersey (Rutgers) combines penetrating x-rays,
forensic analysis, and automated software algorithms that allow
non-technical personnel to rapidly validate products even when
sealed within their original packaging.
We are a direct seller of hardware and software products and
services. Our
XT250tm
unit is based upon Energy Dispersive X-Ray Diffraction
technology (EDXRD), which combines the penetrating
power of X-rays with forensic analysis of materials tested. Our
customers may use our unit to identify the molecular composition
and authenticity of products and materials tested with the unit.
In pharmaceutical products, EDXRD technology allows our system
to collect the molecular fingerprint of the medicine inside
without ever breaking any seals or opening the packaging. The
molecular fingerprint is compared against the standard for the
medicine, and deviations such as contamination, dosage changes,
counterfeiting, or adulterations can be discovered. We have
licensed from Rutgers the worldwide exclusive rights for all
applications of this patented technology. The
XT250tm
product is currently our primary source of revenue.
Our customers place sales orders by calling one of our internal
sales representatives via our toll-free phone number. We also
sell indirectly through contracted authorized sales agents.
History
of the Business
XStream Systems, Inc. was formed as a Delaware corporation in
May, 2004. We first generated revenue through a contract in 2005
with the Transportation Security Administration, an agency under
the Department of Homeland Security under which we created
recipes and provided samples of Simulants for explosive testing.
We launched our website and developed our first prototype system
in 2006. Significant changes to the product design were
incorporated and our first
XT250tm
Material Identification System
(XT250tm)
shipped in 2007. Some PILOT programs for the
XT250tm
were held at Pfizer, McKesson, Massachusetts Institute of
Technology, Pharmaceutical Dimensions, AmerisourceBergen, Henry
Lee Institute of Forensic Science at University of New Haven, RX
Reverse Distributors, and Stericycle. In 2006, we entered into
Distributor Agreements and in 2008 we entered into sales
agreements with our first authorized sales agents and field
service representatives (Remetronix and Compass Engineering) to
sell and service our products. In 2008, we focused exclusively
on the pharmaceutical industry, hired an experienced sales force
from that industry, and added Eastern Applied Research as an
additional authorized sales agent and field service
representative. We introduced our first network product, Secure
Pharma Network (SPN), which is described more fully in this
section, in 2008 to provide a truly integrated system wide
solution.
During 2010 we adjusted our sales strategy to focus on deploying
the
XT250tm
to independent pharmaceutical distributors in the United States.
This is in contrast to our efforts prior to December 31,
2009, which incorporated a significant focus on a limited number
of wholesalers and manufacturers. Furthermore, our business
strategy has changed during 2010 to offer customers the option
of paying for the
XT250tm
services on the basis of its use rather than as an upfront
charge for the purchase of the actual machine.
Industry
Background
According to IMS Health, Inc., pharmaceutical sales grew to
$773.0 billion in
2008,1
and sales in the
1 Source:
IMS Health Market Prognosis, March 2009. Total Unaudited and
Audited Global Pharmaceutical Market by Region
http://www.imshealth.com/deployedfiles/imshealth/Global/Content/StaticFile/Top_Line_Data/Global_Pharm_Mar-ket_by_Region.pdf
accessed 6/10/09.
43
U.S. reached
$291.0 billion,2
while
non-U.S. sales
reached
$482.0 billion.3
Although precise and detailed data on counterfeit
pharmaceuticals is difficult to obtain, estimates range from 1%
of sales in developed countries such as the U.S. to over
10% in developing countries, depending on the geographic
area.4
Overall, counterfeit pharmaceuticals were estimated to exceed
$40.0 billion in 2005, and the Center for Medicines in the
Public Interest projects worldwide counterfeits to increase to
over $75.0 billion by
2010.5
Our initial market focus has been on the pharmaceutical
distribution industry. Until recently the pharmaceutical
industry has focused a significant amount of its attention on
good manufacturing
practices.6
Various federal, state, and local government agencies have
regulated the manufacturing process of pharmaceuticals as well.
While there has been focus on the manufacturing side, we believe
there remain opportunities for illegal and dangerous activities,
such as counterfeiting, diversions, adulterations, and dosage
substitutions.
Industry efforts to combat counterfeiting pharmaceuticals
include the use of scales to weigh products, visual inspections,
documentation of transfers, use of forensic laboratories, and
tagging products. We believe that each of these methods has
limited success. State legislation, in form of pedigree laws,
has been adopted in a number of states; yet, the amount of
counterfeiting continues to
increase.7
Forensic laboratories have the analytical capabilities to verify
pharmaceuticals, but take a significant amount of time to
provide test
results.8
The high volumes shipped
2 Source:
IMS National Sales
Perspectivestm
2008 U.S. Sales and Prescription Information. Top Therapeutic
Classes by U.S. Sales.
http://www.imshealth.com/deployedfiles/imshealth/Global/Content/StaticFile/Top_Line_Data/2008_TopTherapy_Classes_
by_U.S._Sales.pdf.
3 Figure
derived from subtracting U.S. market from total global market.
Source: IMS Health Market Prognosis, March 2009. Total Unaudited
and Audited Global Pharmaceutical Market by Region.&
Source: IMS National Sales
Perspectivestm.
2008 U.S. Sales and Prescription Information.
4 World
Health Organization. Counterfeit Medicine Fact Sheet revised
November 2006.
http://www.who.int/medicines/services/counterfeit/impact/ImpactF_S/en/index.html
Last accessed 6/10/09.
5 Center
for Medicines in the Public Interest. 21st Century Healthcare
Terrorism: The Perils of International Drug Counterfeiting.
September 20, 2005 by Peter Pitts, page 3.
6 Food
and Drug Administration (FDA). Facts About Current Good
Manufacturing Practices (cGMPs), last updated July 10,
2009.
http://www.fda.gov/Drugs/DevelopmentApprovalProcess/Manufacturing/ucm169105.htm;
FDA Recall Firm Press Release Barr Laboratories,
Inc., Issues a Voluntary Nationwide Recall of Dextroamphetamine
/Amphetamine 20mg Tablets, Lot Number 311756, August 13,
2009.
http://www.fda.gov/Safety/Recalls/ucm177321.htm;
FDA Recall Firm Press Release Hi-Tech
Pharmaceuticals, Inc., Issues Nationwide Recall of All Lots of
Stamina-Rx Dietary Supplement Products, June 15, 2009.
http://www.fda.gov/Safety/Recalls/ucm167139.htm;
FDA Recall Firm Press Release AS Medications
Solution LLC Announces a Nationwide Recall of All Lots of
Digoxin Tablets 0.25mg Due to Size Variability, May 11,
2009.
http://www.fda.gov/Safety/Recalls/ArchiveRecalls/ucm150734.htm.
7 The
American Council on Science and Health Presents, Counterfeit
Drugs: Coming to a Pharmacy Near You, January 2009; CSO Security
and Risk, Case Study, Drug Busters: Tracking Down
Counterfeiters, November 1, 2005.
http://www.csoonline.com/article/220663/Drug_Busters_Tracking_Down_Counterfeiters.
8 United
States Pharmacopeia (USP) establishes standards for
manufacturing testing using analytical procedures. These tests
are reactive (created in relation to a specific problem observed
with a particular element rather than a proactive screening
overall). The recent increase in substandard drugs due to
adulterated raw materials has prompted several updates to
specific test of a material to include testing for that specific
adulteration. In 2009 alone, USP has updated or is in the
process of updating the following guidelines: USP
Propylene Glycol Identification Test, Heparin Sodium
Monograph Testing, and USP Sorbitol Solution
Identification Test. USP Propylene Glycol
Identification Test United States Pharmacopeia (USP) Draft
of Propylene Glycol Proposed Method for Informal Public Comment
due August 14, 2009. The FDA requested USP revise the
monograph since diethylene glycol and ethylene glycol are
considered unacceptable toxic substances and Propylene Glycol
has been identified as a material which is at risk for
diethylene glycol or ethylene glycol adulteration. Testing time
is around 4 to 10 minutes per test plus the preparation time.
Heparin Sodium Monograph Testing United States
Pharmacopeia (USP), Pharmacopeial Forum, Vol. 35(5) [Sept.-Oct.
2009], INTERIM REVISION ANNOUNCEMENT for Heparin Sodium. U.S.
scientists proposed new standards for testing the blood-thinner
heparin after hundreds of deaths last year were linked to
tainted Chinese ingredients. The tests require destruction of
the sample, multiple samples and or tests, and some require
either multiple tests of the sample (Nuclear Magnetic Resonance
Spectrum method) or multiple test samples at different dilutions
(ANTI-FACTOR Xa TO ANTI-FACTOR IIa RATIO Anti-factor Xa activity
pH 8.4 buffer method which requires 5 solutions
dilutions) and lengthy testing times (CHROMATOGRAPHIC IDENTITY
Method which requires hours of testing). USP
Sorbitol Solution Identification Test United States
Pharmacopeia (USP), Sorbitol Solution Proposed Method for
Informal Public Comment. Informal comments are due on
August 14, 2009. Because of the serious hazards associated
with the use of diethylene glycol-contaminated materials, and in
response to recommendations set forth by the FDA in
communication with USP dated January 12, 2009, USP is
proposing to revise the USP Sorbitol Solution identification
test. Test uses gas chromatography procedure. Sample preparation
time would be 12 mins and testing time would be 2-5
mins.
44
through pharmaceutical distribution points require rapid
testing. Forensic testing at laboratories also requires
destructive testing, where the product is removed from its
packaging and the contents are destroyed while being tested.
Combating counterfeiting of pharmaceuticals has become a major
initiative for some manufacturing companies. These companies
each have dedicated personnel and departments to try and
eliminate counterfeits. When harm comes from counterfeits, not
only are manufacturing companies affected, but distribution
companies may be held liable and some litigation has moved in
that direction. Therefore, we believe the entire pharmaceutical
supply chain has significant risk of negative consequences that
could result from counterfeiting of pharmaceuticals.
Key
Target Markets
Within the pharmaceutical distribution market, management
believes we can most effectively add value to our customers when
serving pharmaceutical distributors, re-packagers, mail order
companies, government agencies, and return logistics companies.
We believe there are a multitude of sites worldwide that could
potentially utilize our technology. To date, we have focused on
the U.S. segments of the market. Europe, Middle East,
Africa, and Southeast Asia are the primary expansion areas
outside the U.S. that management anticipates would be most
effectively served by our products and services.
Business
Strategy
Our business strategy is to become the primary source for
technology, products, and services for applications requiring
material analysis of hidden objects. Managements intention
is to brand XStream Systems as the leading industry expert in
molecular screening, providing trusted solutions in counterfeit
identification and material verification. We believe our
experience and innovative technology should allow us to solve
some of the industries most demanding problems.
We utilize a multi-pronged strategy to provide wide market
exposure and capture early adaptors. We have a direct sales
force, with extensive pharmaceutical experience, concentrating
on early adaptors, market development, and large enterprise
prospects. Meanwhile, authorized sales representatives promote
sales to smaller local customers.
We believe technology spending will need to increase throughout
the pharmaceutical distribution chain to block the increasing
threat of counterfeits. We believe no single competitor is
effectively meeting the counterfeit challenge. Management
believes it is imperative to verify the contents inside the
package to truly authenticate the product.
Growth
Strategy
We plan to grow organically and externally through the pursuit
of strategic relationships. We have and continue to provide
PILOT programs with larger corporations, which over time could
develop into significant growth opportunities as these
corporations expand the PILOT program into other locations
within their organization. We also signed group purchasing and
marketing agreements with several major pharmaceutical
purchasing organizations, including National Coalition of
Pharmaceutical Distributors (NCPD), Armada Health
Care, and PDM Healthcare. These agreements provide access to
potential customers, market exposure for us on their web sites,
and speaking opportunities at conferences. See section below
entitled Strategic Relationships.
While past efforts have focused on the U.S. domestic
markets, the
non-U.S. markets
represent a large growth opportunity for XStream Systems. We
anticipate using some of the funds raised through this public
offering to pursue
non-U.S. opportunities.
Management believes that increased marketing efforts, including
advertising, publications, speaking opportunities, and attending
conferences are critical for growth. We also believe that
increased networking through association membership and
participation is critical for our growth. We believe that these
increased marketing activities will lead to new customers for
our products and services.
Management believes that our SPN may provide significant growth
opportunities. The ability to collect test results from multiple
customers, process that data, and provide meaningful information
across the industry provides significant value to our customers.
We believe that integrating SPN into our customers
inventory management
45
systems provides additional value to our customers. Since SPN is
software based, revenues we anticipate to generate from SPN in
the future are expected to increase our profit margins.
Management believes that expansion into markets beyond the
pharmaceutical industry should open new opportunities for
XStream Systems. We hope to scale the technology we license and
develop products that meet the varying needs of our customers.
We expect to develop marketing processes and recruit marketing
professionals with pertinent industry expertise to maximize
customer value.
Strategic
Relationships
We are working on specific projects with recognized companies
and intend to develop applications for our molecular screening
technology in connection with these relationships. Our initial
target market has been the pharmaceutical distribution market,
including major pharmaceutical manufacturers, drug distributors
and automated drug dispensing logistics (assembly line
efficiencies) companies. Our teaming relationships include the
following:
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Swisslog Healthcare Solutions, a global provider of integrated
logistics solutions for warehouses, distribution centers and
hospitals has executed a Letter of Intent with us to jointly
collaborate and investigate the development of customized
screening solutions; and
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Eastman Kodak, a corporation utilizing technology to combine
imaging and information, has agreed in a Letter of Intent to
explore with us strategic opportunities for joint design,
development, cross-licensing, and co-marketing of security
solutions. We believe that some of Kodaks technologies
would be complementary to our customized authentication
solutions.
|
Swisslog and Kodak have not purchased a
XT250tm
system. Our strategic associations have not participated in our
PILOT programs but have familiarity with the
XT250tm
system technology through numerous interactions between both
sales and engineering teams to demonstrate how our two
organizations can work together.
We are negotiating strategic relationships with other
pharmaceutical distributors, manufacturers and logistic
companies. We are directing our specific strategic efforts to
produce applications which require a combination of
non-destructive penetrating capability with forensic analysis.
Sales and
Marketing
In 2008 we created a new sales and marketing organization
specializing in pharmaceutical distribution. We believe that our
pharmaceutical based website (www.securepharmachain.com),
anti-counterfeiting blog (www.securepharmachain.blogspot.com)
and professional networking at major pharmaceutical events have
raised the level of awareness throughout the industry.
Additionally, we believe that we are viewed as an industry
innovator in addressing pharmaceutical counterfeiting and have
received free publicity via television, major publications, and
on-line articles.
Within the pharmaceutical distribution market, there are a
number of submarkets that XStream Systems is targeting. We
market to pharmaceutical manufacturers, including brand,
generic, and contract manufacturers. We also market our products
and services to pharmaceutical distributors, including large
international wholesalers, regional wholesalers, secondary
distributors, specialty distributors, and reverse logistics
companies. There is a wide range of pharmaceutical dispensers to
which we market as well, including mail order pharmacies,
central fill pharmacies, buying group cooperatives, and
warehousing groups. There are government regulatory agencies,
such as the Food and Drug Administration, and international
ministries of health to which we also market. Our company is
also engaging various non-government organizations, such as the
Family Health International.
Our
Technology, Products and Solutions
XT250tm
Product
We offer material identification solutions to our customers
through our
XT250tm
product. Utilizing technology we license from Rutgers, network
expertise, material science experience, and software knowledge
base, management believes the
XT250tm
product offers unique
end-to-end
solutions to companies of all sizes. Our
XT250tm
unit is based upon EDXRD, which combines the penetrating power
of X-rays with forensic analysis of materials tested. Our
customers may use our unit to identify the molecular composition
and authenticity of products and materials tested with the unit.
46
With the addition of our automated software, any person, even
non-technical personnel, can rapidly and easily identify,
authenticate, and verify hidden materials. EDXRD penetrates
through all pharmaceutical packaging, including plastics, glass,
cardboard, and even aluminum foils. In pharmaceutical products,
EDXRD technology allows our system to collect the molecular
fingerprint of the medicine inside without ever breaking any
seals or opening the packaging. The molecular fingerprint is
compared against the standard for the medicine, and deviations
such as contamination, dosage changes, counterfeiting, or
adulterations can be discovered. All of our current customers
use the
XT250tm
for verification purposes only.
We have licensed from Rutgers the worldwide exclusive rights for
all applications of this patented technology. The
XT250tm
product is currently our primary source of revenue.
Manufacturing end users may use the
XT250tm
as a high speed, laboratory grade testing device to test the
quality of raw materials or end of production goods without
sending samples to laboratories and expediting production.
Distribution end users may utilize the
XT250tm
unit to non-destructively verify and authenticate their
inventories within their
unit-of-sale
packaging, in real time and
on-site,
ensuring quality and protecting the users supply chain partners
from fraudulent transactions, adulteration and counterfeiting.
End users of products may utilize the
XT250tm
unit to verify the quality, safety, efficacy and accuracy of
products by screening products prior to the administration to
consumers and patients, protecting them from medication errors,
adulterated or fraudulent materials or substandard or degraded
products.
The
XT250tm
system verifies materials for which the unit has been
programmed. For verification, the
XT250tm
machine is programmed for a standard molecular fingerprint, then
tests samples for any deviation from it, due to contamination,
counterfeit, or dosage changes. As of August 15, 2010, our
molecular fingerprint library consists of 202 prescription and
over-the-counter medications ranging from over-the-counter
aspirin to prescription antidepressants, antipsychotics,
anti-HIV and erectile dysfunction medications, among others.
The verification mode of the
XT250tm
has been independently evaluated by the Florida Technical
Division of the Midwest Research Institute (MRI),
which conducted two studies to determine how well the
XT250tm
verified pharmaceutical products. We paid MRI $3,394 for the
phase 1 testing conducted in October 2006 and $5,785 for the
phase 2 testing conducted in July 2007.
The phase 1 study performed by MRI tested the sensitivity and
specificity of the
XT250tm
in identifying known over-the-counter medicines. The evaluation
consisted of 20 independent runs performed on each of eight
samples, totaling 160 measurements. The results showed that the
XT250tm
accurately identified 98% of the samples (n=60). Only one
compound was misidentified in one out of 20 replicates. The
XT250tm
accurately identified all negative samples (n=100),
demonstrating a specificity of 100%. The overall efficiency
(accuracy) of the diagnostic test, defined as the percentage of
samples correctly classified, was 99.38%; 159 out of 160 samples.
The phase 2 study tested the sensitivity and specificity of the
XT250tm
in identifying known prescription medicines. The evaluation
consisted of 50 independent runs performed on each of the five
samples used in the analysis with the
XT250tm
programmed for positive identification and 50 independent runs
on each of the five samples with the machine programmed for
misidentification for a total of 500 measurements. The results
showed that the
XT250tm
accurately identified 97.2% of the positive samples (n=250). The
instrument accurately identified 249 out of 250 negative
samples, demonstrating a specificity of 99.6%. The overall
efficiency (accuracy) of the diagnostic test, defined as the
percentage of samples correctly classified, was 98.4%; 492 out
of the 500 samples.
Product
Development
The technology we license from Rutgers can scale to meet
additional customer needs. Our goal is to develop a range of
products that operate rapidly to match customer demand, as well
as scale to test any sample size to meet customer requirements.
Management also hopes to develop products that scale down and
that are smaller, more portable, and more cost effective.
Customer requirements will drive the directions that our future
products take.
Multi-Layer
Solution
We are currently developing a multi-layer or
quad-layer anti-counterfeiting solution
XStreamChecktm,
which we anticipate will provide four layers of protection
against pharmaceutical counterfeiting. The first layer is
molecular screening, which is performed by our
XT250tm
system to verify the contents of a bottle or package. The second
layer is attachment of a sealant in order to be able to identify
whether the package has been tampered with in the distribution
chain. The third layer is serialization, whereby each product is
provided a unique number, to identify
47
a particular product/package, and no other. The fourth layer is
identification of the pedigree of the product, which contains
the tracking history of the product, the attachment of a unique
serial number, as well as any molecular screening results that
may have been done on the product.
Custom
Solutions
We expect to customize the EDXRD technology for specific use by
our customers. The objectives of customization of the technology
include applications for medication error protection, automation
of the technology for new users and retrofitting for existing
users. We anticipate that revenue would be generated in the form
of direct sales to the end user.
Future
Revenues
Our ability to develop the customized EDXRD products and the
multi-layer solutions and generate revenues from these future
generation products and services is dependent on our completion
of the offering.
We have not generated sales of customized EDXRD products or the
quad-layer solution to date. We anticipate finalizing the
development of the multi-layer solution following the offering
during the fourth quarter of 2010.
Prior
Line of Business
Under our prior contract with the TSA, we were contracted to
develop Simulants (described below) to ensure that
the equipment used by TSA could detect explosives properly.
Prior to this, TSA used actual explosives to determine if
explosive detection equipment was functional. The equipment used
by TSA in such tests was its own equipment and not our
XT250tm.
Our method for testing the equipment, called
Simulants, required our research to determine
recipes of materials that would closely simulate explosive
materials safely. We created recipes and provided samples of
Simulants for 11 explosives under the contract with TSA. The TSA
contract has terminated. We do not anticipate at this time
additional revenues based on our prior relationship with TSA.
Furthermore, we are not conducting business operations in the
field of Simulants research at the present time and do not
anticipate any recurring revenues related to our prior Simulants
research.
Secure
Pharma Network
Management believes that our Secure Pharma Network
(SPN) may provide significant growth opportunities.
SPN is a software product that allows customers to access via
the Internet their
XT250tm
system purchased from XStream Systems. Customers may remotely
manage the system, downloading new material fingerprints or
software updates, uploading results, and operating the system
remotely. Detailed reports can be generated, as well as
customized and aggregated reporting across multiple systems. The
ability to collect test results from multiple
XT250tm
units purchased by our customers, process that data, and provide
meaningful information across the industry provides significant
value to our customers, which management believes can produce
revenue in the future. We believe that integrating SPN into our
customers inventory management systems provides additional
value to our customers. To date, we have not generated revenue
from SPN.
Manufacturing
To date, our hardware products have been manufactured by a
U.S. contract manufacturer. This allows us to scale as our
demands change. It also allows us to leverage the purchasing
power of a larger organization. We place orders for hardware
products with our contract manufacturer and those products are
shipped directly to our customer sites. We are currently a
defendant in a lawsuit with our manufacturer Kimball
Electronics, Inc. Until such time as we repay Kimball the
amounts we owe under our settlement agreement with Kimball,
there is uncertainty whether we will be required to identify a
new manufacturer of our
XT250tm
to build our system which would lead to significant timing
delays in the production of our system. Our management has
continued discussions with representatives from Kimball
concerning our business relationship with Kimball following the
initial public offering. Although no written agreement or
memorandum of understanding has been executed by the parties at
this time, Kimball and the Company have verbally agreed that
following the closing of the offering and upon the repayment of
indebtedness to Kimball under the settlement agreement, Kimball
will submit bids to us to continue the manufacturing and
servicing of our product in the future. Although we currently
have four
XT250tm
systems at our facility available for immediate sale, to the
extent we receive purchase orders for additional units now, we
believe two months would be required to train any new
manufacturer of the
XT250tm
system and it would likely take
48
a new manufacturer six months to acquire all the needed
materials to produce the
XT250tm
system. For more information, see Legal
Proceedings, Risk Factors We are
currently a defendant in a lawsuit with the manufacturer of the
XT250tm
system, Kimball Electronics, Inc. and We may
be required to identify a new manufacturer for the
XT250tm
system.
Our company provides all software products and services. The
operating system and library of materials are provided for each
system. Customers can contract for customized configurations,
which are developed by us.
Field
Service
Hardware and software support services are provided by
contracted field service companies. Each authorized field
service company is trained and certified by our company. Each of
our customers has a designated field service representative that
provides support services. Our company also provides an
escalation process to support those field service companies.
Customers
Our current customer base consists primarily of pharmaceutical
distribution companies. These companies purchase pharmaceutical
products from a variety of sources, and wish to authenticate
their inventories to protect the public and their reputation. We
have also sold systems to equipment distributors, who then
resell the equipment as authorized sales agents on our behalf.
One
XT250tm
sales transaction with one customer during the year ended
December 31, 2008 accounted for more than 10% of our 2008
revenues. Two
XT250tm
sales transactions with two customers during the period ended
December 31, 2009 accounted for more than 10% of our 2009
revenues. Our customers purchasing units to date have included
Altec Medical, Med-Health Pharmaceutical Products, Eastern
Applied Research, Compass Engineering, Remetronix, RX Reverse
Distributor, and Cumberland Distribution. Each of these
customers have accounted for more than 10% of our sales during
the respective year the sale was made.
Our target customers range in size from small, privately owned
distributorships with estimated revenues of less than
$50,000,000 to large multinational distribution corporations
with estimated revenues of more than $10.0 billion.
Management believes these organizations have a need for a
material identification and authentication system in order to
protect their brands in the marketplace and reduce risk and
potential litigation should they distribute a counterfeit
product.
A number of organizations set up PILOT programs before they
commit to purchasing our product. We have generated one sale of
an
XT250tm
system as a result of the PILOT program. Some of our PILOT
programs have been designed to test the capabilities of the
technology, data collection, materal recognition software engine
generation, process improvement, throughput, and
concept/industry viability. In most cases, PILOT program
feedback proved the technology was viable, could verify
materials and allowed for system enhancements. Some negative
feedback for the system was the initial pricing and cost of the
unit and limitation of the testing output of a single system
(i.e., number of samples that can be tested per hour/shift).
Some of our PILOT participants found that the system did not fit
their business needs or criteria. We believe that the PILOT
program process has been valuable in assisting us in further
refining our revenue model to incorporate usage-based service
agreements for placement of our
XT250tm
system on-site with our customers.
In furtherance of our refined strategy, we recently entered into
two usage-based
XT250tm
service agreements with pharmaceutical distributors, and we are
currently negotiating agreements with additional customers which
we expect to execute during the third and fourth quarters of
2010. We believe these agreements represent our progress in
implementing our new strategy; however, revenues have not yet
been generated under the agreements and these two agreements, by
themselves, are not expected to generate material cash flows
from revenues over the term of the agreements.
All our shipments to date have been to sites within the
U.S. Management believes that shipments outside the
U.S. will represent a significant portion of sales in the
future. We believe
non-U.S. shipments
should begin in the fourth quarter of 2010.
49
Research
and Development
We spent $581,547 and $635,531 in research and development
during the fiscal years ended December 31, 2009 and 2008,
respectively. This included hardware and software development
and enhancements of the
XT250tm
and SPN products. These funds were also used in the development
of a molecular library generation laboratory. Multiple companies
contributed pharmaceutical products to this facility to aid in
the research and development of molecular fingerprints.
Following the offering, we anticipate incurring approximately
$14.5 million in anticipated research and development
expenditures on projects unrelated to the
XT250tm
at such time as these expenditures can be funded from cash flows
from revenues. We are currently developing a
quad-layer anti-counterfeiting product
XStreamChecktm
which is intended to provide four layers of protection against
pharmaceutical counterfeiting. The development of the product
XStreamChecktm
will not be complete nor available for distribution prior to the
closing of the offering and will not become available prior to
the fourth quarter of 2010. We cannot provide any assurances
that this product under development will generate revenues for
the company in the future.
Competition
We operate in an unusually competitive market. In many cases,
our customers have non-technical personnel operating in a
warehouse environment. Counterfeit identification is sometimes
performed by weighing the product with a simple scale. Other
times counterfeit identification is done by track and trace
methods, which tracks the transfers of the drugs, and on rare
occasions by visual inspection. Our research has shown that some
counterfeit drugs have weighed the same as valid drugs, some
even come with falsified tracking documents, and many have
passed visual inspection. Track and trace methods, which include
pedigree laws, radio frequency inventory devices, bar codes, and
taggants, have been deployed for a number of years and in some
cases legislated for pharmaceuticals. We face a competitive
environment of selling into end users and are either competing
against them for capital expense or in integrating with
solutions for limited supply chain security budgets. As it
relates to material screening, the
XT250tm
competes against laboratory testing services such as Angular
Dispersive X-Ray Diffraction (ADXRD) and other
laboratory grade equipment and
on-site
testing processes technologies such as Raman, Spectroscopy and
Near Infrared Technologies (NIR). If there is a
reason to suspect a drug is counterfeit, the sample may be
shipped to a forensic laboratory for analysis. Highly trained
personnel typically open and destructively test the suspect drug
with one or more analytical instruments.
Our
XT250tm
unit relies on Energy Dispersive X-Ray Diffraction
(EDXRD) technology. ADXRD and EDXRD both use a
specific X-ray wavelength, and rotates that X-ray source through
many different angles to analyze materials. EDXRD, which is
rarely used in the industry, but is the core of our solutions,
uses the entire X-ray range of wavelengths, and only one
specific angle to analyze materials. ADXRD technology utilizes
low energy X-rays, which means ADXRD does not penetrate very
well compared to EDXRD. Penetration of the
X-rays is
critical for our applications.
Raman, Spectroscopy, and NIR technologies are competitor
technologies which are not very penetrating and cannot penetrate
a thin piece of paper, for example. Because the Raman,
Spectroscopy, and Near Infrared (NIR) energies are absorbed they
can affect materials, like drugs. We believe this is a negative
effect of our competitor technologies.
In terms of limitations of the EDXRD technology utilized by us,
this technology requires shielding of X-rays from humans. Other
technologies such as Raman, Spectroscopy and NIR technology, do
not require shielding because they do not penetrate. EDXRD
technology is not suited for gases, which do not have a
crystalline structure, while some of the competitive
technologies, like RAMAN, Spectroscopy, and NIR, may be suitable
for gases.
We are not aware of true competitors as it relates to the EDXRD
technology we license from Rutgers which allows for the real
time,
on-site
molecular screening of materials and the authentication of
products inside a
unit-of-sale
packaging without destruction or degradation of the tested
material, however, there is market competition as it relates to
other technologies for material screening and
anti-counterfeiting that prospective end users would utilize.
Some of the companies that have employed these technologies
include Siemens, Centice, Ahura and Valimed. These technologies
either are limited to laboratories or do not utilize the
penetration of EDXRD and are limited to visual inspection of the
material and destroying the testing sample. Because these
solutions require access to the materials, it limits their
deployment to either the manufacturing or the product dispensing
process and makes them inferior within a comprehensive supply
chain setting.
50
As it relates to anti-counterfeiting technologies, the
XT250tm
can in some cases compete against, end user budgets; RFID,
material serialization, pedigree, marker or what is known as
track and trace solutions. Some of the companies that market
these solutions include Axway, SupplyScape and Aegate. These
technologies basically are inventory management technologies
that track products by overt or covert markers or transactional
recording of the packaging on products. These technologies are
very specific to a process and require all members of the supply
chain to participate. There is usually high infrastructure, set
up and ongoing supply costs to each member of the supply chain
to remain effective. Track and trace solutions are primarily
inventory management tools that do not assure material safety or
fraudulent acts from occurring.
Regulation
In addition to federal, state, and local laws applicable to all
corporations and employers in general, each state has its own
requirements and registration process for X-ray equipment. Our
organization is also governed by the FDA, Drug Enforcement
Agency, Environmental Protection Agency, and Department of
Homeland Security regulations for handling and disposing of
special materials. Our facility received a facility security
clearance from the Department of Defense. Our company possesses
Drug Enforcement Agency Researcher licenses for
Schedule I-V
drugs. Our company has received exemption letters for drug
research purposes from the Florida Department of Health. In
addition, each country also has its own requirements for our
type of equipment, which our company must abide by in order to
ship into those countries.
The Federal Communications Commission, Underwriters
Laboratories, and Canadian Standards Association have certified
that the
XT250tm
product meets safety, health, environmental, and radiated
emissions requirements. The costs for these certifications were
included in the research and development spending for 2007 and
2008. Management believes that the
XT250tm
will be required to pass Restriction of Hazardous Substances
(RoHS) directives required by the European Community before the
XT250tm
is allowed to ship into those countries.
To date we have not incurred any costs associated with disposal
of any hazardous materials. We continue to make efforts to
recycle all hazardous materials and management hopes to continue
this in the future. When and if disposal of hazardous materials
is necessary, management anticipates that disposal companies
specializing in the materials will be hired.
Employees
As of August 15, 2010, we had 12 full-time employees,
nine of which are located at our Sebastian, Florida corporate
office. Two employees in our sales and marketing department are
located outside of Florida. We have five employees in management
and six employees are in our operations and engineering
departments. None of our employees is covered by a collective
bargaining agreement. We believe we have a good relationship
with our employees.
Property
Our operations are currently located at 10305
102nd Terrace, Suite 101, Sebastian, Florida 32958. We
lease real property at this location, which is part of an
industrial park, Liberty Office Park. Our lease commenced in
2007 and expires in 2012. We lease approximately
8,000 square feet, and currently utilize approximately
5,000 square feet. We share a 40,000 square foot
facility with two other companies. We believe our current office
space provides more than adequate space for our offices,
engineering development area, demonstration area, and Drug
Enforcement Agency secured laboratory. We believe our current
8,000 square feet is adequate for our current needs and
provides expansion room for engineering to develop the next
generation of systems. The adjacent 10,000 square feet will
allow for long term expansion if we need additional engineering
and operations space. Rent expense under our office lease for
2009 totaled $106,659.
Intellectual
Property
XStream Systems has worldwide, exclusive licensing rights to
U.S. Patent #6118850 (granted Sept. 12, 2000),
Analysis Methods for Energy Dispersive X-Ray Diffraction
Patterns pursuant to a licensing agreement with Rutgers.
Under the terms of the License Agreement, the minimum royalty
payment for 2008 of $300,000 became due January 31, 2009.
In addition, certain other payments became payable in 2009 under
the License Agreement. We were unable to pay the required
minimum royalty and have requested a modification to the License
Agreement. While Rutgers has the right to terminate the License
Agreement after certain notifications and cure periods have
51
expired, Rutgers has indicated an interest in modifying the
License Agreement and continuing the licensing arrangement.
Final terms of the contract modifications are under review by
Rutgers and will be presented to our board of directors for
approval. The total amount due under the License Agreement as of
June 30, 2010 was approximately $1,103,350.
We conduct business with trademarks of our XStream Systems logo,
XT250tm
Material Identification System, XStream
Checktm,
SECUREPHARMACHAINtm,
and Beyond
Pedigreetm.
At this time, we have not applied for registration of these
marks. Dr. William Mayo, the brother of our president
Mr. Brian Mayo is a co-inventor of the patent.
Dr. Mayo retired from a teaching position at Rutgers
University in 2009.
Legal
Proceedings
Other than as set forth below, we are not a party to any pending
legal proceeding nor is our property the subject of a pending
legal proceeding that is not in the ordinary course of business
or otherwise material to the financial condition of our business.
On or about September 16, 2008, Kimball International, Inc.
and Kimball Electronics, Inc. (Kimball) filed suit
against us in U.S. District Court in Evansville, Indiana.
Kimball filed three claims against us including a claim alleging
we defaulted on a $2,000,000 loan provided by Kimball in favor
of the company, breach of a reserve capacity agreement and
breach of a supplier agreement. We asserted counterclaims
against Kimball for conversion, breach of contract and tortious
interference with business relationship. On June 30, 2009,
the District Court granted partial judgment in favor of Kimball
in the amount of $2,000,000 against us. On December 23,
2009, we and Kimball entered into a settlement agreement (the
Agreement). In connection with the Agreement, we
provided to Kimball an executed Agreed Judgment in favor of
Kimball in the amount of $3,200,000 (the Agreed
Judgment). We agreed to make payments to Kimball via wire
transfer or certified funds as follows: (i) one
(1) payment of $600,000 to be made on or before
December 31, 2009; and (ii) one (1) final payment
of $2,600,000 to be made on or before January 31, 2010. On
or about the date of the Agreement, we provided to Kimball an
executed Stipulation of Dismissal of our counterclaims against
Kimball, with prejudice. In the event that we timely remitted
payments as set forth in the Agreement, Kimball was required to
destroy the Agreed Judgment. On December 29, 2009, we made
the initial payment of $600,000 to Kimball under the Agreement.
We were unable to comply with the final payment terms of the
Agreement, and Kimball entered the Agreed Judgment against us in
the United States District Court of the Southern District of
Indiana on February 8, 2010 in the amount of $3,200,000. On
February 10, 2010, Kimball filed a motion for proceedings
supplemental to collect the remaining $2,600,000 balance due on
the $3,200,000 judgment. On June 11, 2010, Kimball issued
writs of garnishment to SunTrust Bank and Wachovia Bank to
locate assets to satisfy the outstanding judgment, which
resulted in a freeze on our bank accounts. On June 23,
2010, Kimball filed notice of the writs in the United States
District Court for the Southern District of Florida (Case
No. 10-MC-14066-JEM).
The deadline to dissolve the writ was July 13, 2010, and
Kimball chose not to attempt to dissolve the writ. We anticipate
that if this offering does not close for any reason, Kimball
will move forward in its collection efforts to transfer our cash
funds under the writs of garnishment. As a result of the filing
of the Agreed Judgment and writ of garnishment, we anticipate
that our results of operations could be adversely affected.
Until such time as we repay Kimball the $2.6 million of
indebtedness under the settlement agreement, there is
uncertainty whether we will reach a compromise with Kimball to
continue to manufacture the
XT250tm
units.
52
MANAGEMENT
Directors
and Executive Officers
The following table sets forth the names and ages of our
directors and executive officers, and their positions with us,
as of August 15, 2010:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
James J. Lowrey(1)
|
|
|
71
|
|
|
Chairman of the Board and Co-Chief Executive Officer
|
Joseph J. Melone(4)(8)
|
|
|
79
|
|
|
Vice Chairman
|
Brian T. Mayo
|
|
|
53
|
|
|
President and Chief Technology Officer
|
Ash K. Chawla(7)
|
|
|
54
|
|
|
Director
|
Anthony Chidoni(1)(2)(3)(8)
|
|
|
58
|
|
|
Director, Co-Chief Executive Officer, Chief Operating Officer
and Secretary
|
Dennis H. Ferro(1)(5)
|
|
|
65
|
|
|
Director
|
Simon Irish(5)(8)
|
|
|
41
|
|
|
Director
|
Robert E. Kennedy(2)(3)
|
|
|
68
|
|
|
Director
|
John R. (Reg) Murphy(9)
|
|
|
76
|
|
|
Director
|
Philip A. Odeen(2)
|
|
|
74
|
|
|
Director
|
Dr. E. Darracott Vaughan, Jr.(6)
|
|
|
71
|
|
|
Director
|
Dr. Stuart L. Weinstein(6)
|
|
|
63
|
|
|
Director
|
Dennis K. Cummings
|
|
|
55
|
|
|
Chief Financial Officer, Executive Vice President and Treasurer
|
Alan Clock
|
|
|
47
|
|
|
Senior Vice President, Sales and Marketing
|
|
|
|
(1) |
|
Member of our finance committee |
|
(2) |
|
Member of our audit committee |
|
(3) |
|
Member of our compensation committee |
|
(4) |
|
Member of our nominating and corporate governance committee |
|
(5) |
|
Member of our investor relations committee |
|
(6) |
|
Member of our medical advisory committee |
|
(7) |
|
Member of our global business development committee |
|
(8) |
|
Member of our executive committee |
|
(9) |
|
Member of our communications committee |
The principal occupations for the past five years (and, in some
instances, for prior years) of each of our directors and
executive officers are as follows:
James
J. Lowrey, Chairman of the Board and Co-Chief Executive
Officer
Mr. James J. Lowrey has served as chairman of the
board of directors and chief executive officer since August
2009. Since March 2010, Mr. Lowrey has managed us as co-chief
executive officer with Mr. Anthony Chidoni. Mr. Lowrey
served as the co-chairman of the board from March 2009 through
August 2009 and as chairman of the finance committee from March
2009 to October 2009. He has been a significant investor in
XStream since 2007. From 1964 to 1978, Mr. Lowrey was
employed with Salomon Brothers in New York, New York where he
served as the
partner-in-charge
of banking, sales and trading of government and corporate tax
exempt securities, and as a general partner at the time of his
retirement in October 1978. During March 1979 he formed James J.
Lowrey & Company, Inc. a financial advisory firm to
corporations, governments and governmental entities. In 1980,
Mr. Lowrey initiated the independent power industry through
his formation of Catalyst Energy (Catalyst).
Mr. Lowrey was instrumental in leading Catalyst through a
number of purchases of developing projects and non-
53
nuclear energy companies and served Catalyst as its chairman of
the board and its chief executive officer. Catalyst became a
public company in 1984, was listed on the New York Stock
Exchange and later taken private in 1988. Mr. Lowrey
retired again in 1989. In 1993 he co-founded Navarro Lowrey,
Inc. a Palm Beach County, Florida based real estate development
firm dealing in real estate in Colorado, Texas and Florida. The
firm is managed by Mr. Frank Navarro and Ms. Jessica
Lee Lowrey, Mr. Lowreys daughter. Ms. Lowrey
earned her J.D./LL.M. and M.B.A. degrees from New York
University and Columbia University, respectively. The particular
experience, qualifications, attributes or skills that led the
board to conclude that Mr. Lowrey should serve as a member
of the board of directors included his knowledge of the company,
his investment banking background, and his previous executive
management experience at Salomon Brothers and Catalyst.
Joseph
J. Melone, Vice-Chairman
Mr. Joseph J. Melone has served on our board of
directors since August 2009 and as our vice-chairman since
October 2009. Mr. Melone has served as the chairman of our
nominating and corporate governance committee since October
2009. He is the former president and chief executive officer of
Equitable Companies (now part of the AXA Group) and served in
those positions from February 1996 to September 1997.
Additionally, he served as chairman and chief executive officer
of its principal insurance subsidiary, The Equitable Life
Assurance Society of the United States from September 1992 to
July 1997. Mr. Melone joined The Equitable Life Assurance
Society of the United States in November 1990 as president and
chief operating officer and served in those positions until
September 1992. Prior to that, he had been president of The
Prudential Insurance Company of America from March 1984 to
November 1990. Upon the formation of The Equitable Companies in
1992, Mr. Melone was elected president and chief operating
officer and served in those positions until February 1996. Also,
from September 1992 to July 1997, he served as chief executive
officer of Equitable Life, and two years later he was elected
chairman. In February 1996, Mr. Melone was named chief
executive officer of The Equitable Companies and served in that
position until July 1997. Mr. Melone co-authored the book
Retirement Plans: 401(k)s, IRAs and Other Deferred
Compensation Approaches (Pension Planning) which is
currently in its 10th edition of publication. He is a
former Huebner Foundation Fellow and was an Associate Professor
of Insurance at The Wharton School of the University of
Pennsylvania. He also served as Research Director at The
American College before joining The Prudential. He is a
Chartered Life Underwriter (CLU) and Chartered Financial
Consultant (ChFC) from The American College, as well as
Chartered Property and Casualty Underwriter (CPCU) from the
American Institute of Chartered Property and Liability
Underwriters. The particular experience, qualifications,
attributes or skills that led the board to conclude that
Mr. Melone should serve as a member of the board of
directors included his knowledge of the company and his previous
executive management experience while at Equitable Companies and
The Prudential Insurance Company of America.
Ash K.
Chawla, Director
Mr. Ash K. Chawla has served on our board of
directors since August 2009. Mr. Chawla has served as the
chairman of our global business development committee since
October 2009. Mr. Chawla has served as the founder and
chief executive officer of PDM Healthcare from 1991 to the
present. PDM Healthcare is a resource management company
providing group purchasing, supply chain management and
delivery, business and clinical consulting, and educational
services to healthcare facilities in the U.S. Under his
leadership, PDM Healthcare has maintained its position as a
major buying groups/supply chain management in the U.S. PDM
Healthcare currently has business trading relationships with
over multiple pharmaceutical, medical surgical supply, and
ancillary product manufacturers that are listed in Fortune 1000.
Additionally, from January 2004 to the present he has served as
the chairman and chief executive officer of Avani International,
which specializes in business development, product launches and
marketing, consulting, distribution, and global conferencing for
the bio-technology, life sciences, pharmaceutical, medical
device, and cosmetic markets. Avani is instrumental in creating
relations and distribution channels between manufacturers abroad
with customers in the U.S. as well as introducing products
from the U.S. to international markets, including India.
The particular experience, qualifications, attributes or skills
that led the board to conclude that Mr. Chawla should serve
as a member of the board of directors included his independence
and his leadership experience at companies operating in a
similar industry as ours where he is currently serving as chief
executive officer of PDM Healthcare and as chairman and chief
executive officer of Avani International as more fully detailed
above.
54
Anthony
Chidoni, Director, Co-Chief Executive Officer, Chief Operating
Officer and Secretary
Mr. Anthony Chidoni has served on our board of
directors since April 2009. He commenced service as a member of
our audit committee, as chairman of our compensation committee
and as our corporate secretary in August 2009 and as our chief
operating officer in October 2009. In addition, since October
2009, he has served as chairman of our executive committee and
as a member of our finance committee. Mr. Chidoni was elevated
to co-chief executive officer in March 2010. Mr. Chidoni
has been the principal and owner of Lorelle Capital, a private
hedge fund, since January 2004. From January 1990 to January
2004, he was the Managing Director of Private Client Business in
the Los Angeles office of investment bank Credit Suisse First
Boston, and its predecessor Donaldson Lufkin &
Jenrette, where he had served in various positions for
21 years. Mr. Chidoni has served as a director of the
public company Guess?, Inc. since November 2002 for which he
also currently serves as the chairman of the audit committee.
The particular experience, qualifications, attributes or skills
that led the board to conclude that Mr. Chidoni should
serve as a member of the board of directors included his finance
background and leadership experience as managing director of
private client business in the Los Angeles office of Credit
Suisse First Boston and his experience serving as a director and
chairman of the audit committee of the public company, Guess?,
Inc.
Dennis
H. Ferro, Director
Mr. Dennis H. Ferro has served on our board of
directors since August 2009 and as chairman of our finance
committee and co-chairman of our investor relations committee
since October 2009. Mr. Ferro was president and chief
executive officer of Evergreen Investment Management Company
from September 2003 through December 2008. Mr. Ferro joined
Evergreen Investments as its chief investment officer in 1999.
Mr. Ferro has also served as a director of New York
Marine & General Insurance Company and as chairman of
their finance committee from March 2009 to the present. From
1999 through 2003, he also served as their chief investment
officer. From 1994 through 1999, Mr. Ferro was executive
vice president of Zurich Investment Management Ltd. and head of
international equity investments based in London. In 1995,
Mr. Ferro was named as one of the top 100 mutual fund
portfolio managers by Barrons magazine. From 1991 through
1994, he was senior managing director of CIGNA International
Investments and also served as chief investment officer for all
non-U.S. investments.
From 1988 through 1991, he served as the managing director for
Asia for CIGNA Corporation based in Tokyo, Japan. From 1985
through 1988, Mr. Ferro served as president and managing
director of Japan Bankers Trust Company Ltd based in Tokyo,
Japan. From 1978 to 1985, he served as a founding director,
president and chief investment officer for Bankers
Trust Company of Florida. From 1970 to 1978, he served as
vice president and portfolio manager of Bankers
Trust Company based in New York. The particular experience,
qualifications, attributes or skills that led the board to
conclude that Mr. Ferro should serve as a member of the
board of directors included his independence and his previous
leadership experience as president and chief executive officer
of Evergreen Investment Management Company and finance
experience as chief investment officer for the New York
Marine & General Insurance Company.
Simon
Irish, Director
Mr. Simon Irish has served on our board of directors
since August 2009 and as a co-chairman of our investor relations
committee since October 2009. Mr. Irish is the former head
of Man Global Strategies (MGS) in North America, an
investment division of Man Group PLC where he provided services
from October 2002 through January 2009. Man Group PLC is an
investment business headquartered in the United Kingdom. At MGS,
Mr. Irish established and grew a strategic investment
program in hedge funds, which he operated for over six years.
From October 2001 through October 2002, he held the position of
director of U.S. business with FRM (Research) LLC, New York
and held the position of senior vice president of FRM London
from September 1999 through September 2001. From October 1995
through April 1999, Mr. Irish was a vice president of
Credit Suisse Financial Products in London where he served as a
quantitative analyst and as a trader in their Equity Derivatives
Structuring and Trading Group. The particular experience,
qualifications, attributes or skills that led the board to
conclude that Mr. Irish should serve as a member of the
board of directors included his independence, his finance
background and his previous leadership experience as the former
head of MGS and vice president of Credit Suisse Financial
Products in London.
55
Robert
E. Kennedy, Director
Mr. Robert E. Kennedy has served on our board of
directors since April 2007 and as a member of our audit
committee since May 2007 and co-chairman of our audit committee
since October 2009. In addition, Mr. Kennedy has served as
the co-chairman of our audit committee since October 2009.
Mr. Kennedy is a retired advertising industry executive
with 33 years of experience. At the time of his retirement,
Mr. Kennedy was the president and chief operating officer
of Saatchi and Saatchi Advertising worldwide. Mr. Kennedy
directed all of the companys communications operations,
notably the advertising subsidiaries and marketing services
groups. Mr. Kennedy was also a member of Saatchi and
Saatchi, Inc.s board of directors. Mr. Kennedy joined
Dancer-Fitzgerald-Sample in 1961 and spent most of his career in
agency finances. He served as controller and became chief
financial officer in 1980. When Saatchi and Saatchi and DFS
merged in 1987, Mr. Kennedy became its vice-chairman and
chief financial officer. Mr. Kennedy served on numerous
industry committees during his working career. In retirement, he
has been active in community organizations, most notably the
VNA/Hospice of Vero Beach, the Environmental Learning Center of
Vero Beach and Habitat for Humanity. The particular experience,
qualifications, attributes or skills that led the board to
conclude that Mr. Kennedy should serve as a member of the
board of directors included his independence, his knowledge of
the company, and his previous executive managerial experience as
more fully detailed above.
John
R. (Reg) Murphy, Director
Mr. John R. (Reg) Murphy has served on our board of
directors since November 2009 and chairman of our communications
committee since March 2010. Mr. Murphy is Vice Chairman of
National Geographic Society, a position he has held since March
1998. From May 1996 until March 1998, Mr. Murphy was
President and Chief Executive Officer of National Geographic
Society. He is a trustee of Mercer University, a trustee and
Chairman of the Board of the PNC Mutual Funds and Chairman of
the Board of the PNC Alternative Fund. He currently serves as
chairman of the audit committee of the Omnicom Group.
Mr. Murphy is also a past president of the U.S. Golf
Association. Mr. Murphy served as political editor and then
editor of The Atlanta Constitution in
1960-75, and
later joined The San Francisco Examiner as publisher and
editor from 1975 to 1981. Mr. Murphy joined The Baltimore
Sun as publisher and chief executive officer and served in these
positions from 1981 to 1988 and later served as chairman from
1988 to 1991. Mr. Murphy has authored or co-authored a
number of books including Uncommon Sense, The
Accomplishments of Griffin Bell; The Southern
Strategy; and The Greatest Game. He has been awarded
honorary doctorates by several universities, including Mercer,
Utah State, Towson State and Loyola College, among others. The
particular experience, qualifications, attributes or skills that
led the board to conclude that Mr. Murphy should serve as a
member of the board of directors included his executive
management experience as president and chief executive officer
of the National Geographic Society, his knowledge of the mass
communications industry, and his experience serving as a
director and chairman of the audit committee of a public company.
Philip
A. Odeen, Director
Mr. Philip A. Odeen has served on our board of
directors since July 2008 and as the chairman or co-chairman of
our audit committee since August 2009. Mr. Odeen served as
the chairman of AES Corporation since January 2008 and as
non-executive chairman of Convergys Corporation since December
2007. He served as chairman of AVAYA from October 2006 to
October 2007. He was chairman and acting chief executive officer
of the Reynolds and Reynolds Company from July 2004 to February
2005 at which time he became non-executive chairman serving in
that role until October 2006. He was also named chief executive
officer of QinetiQ North America in October 2005 serving
until June 2006. Previously, he had served as non-employee
chairman and a director of TRW Inc. from February 2002 until
December 2002. From 1998 to 2002, he held various leadership
positions at TRW. Mr. Odeen joined TRW in 1997 when it
acquired BDM International, Inc. where he had served as
president, chief executive officer and director since 1992.
Previously, Mr. Odeen was vice chairman, Management
Consulting Services at Coopers & Lybrand after serving
13 years as managing partner of the firms public
sector practice. Mr. Odeen served as a director of Northrop
Grumman from May 2003 and May 2008. Mr. Odeen was appointed
a member of the Defense Business Board in 2008. The particular
experience, qualifications, attributes or skills that led the
board
56
to conclude that Mr. Odeen should serve as a member of the
board of directors included his independence and his executive
management experience as chairman
and/or chief
executive officer of various companies.
Dr. E.
Darracott Vaughan, Jr., Director
Dr. E. Darracott Vaughan, Jr. has served on our
board of directors since August 2009 and as co-chairman of our
medical advisory committee since October 2009. Dr. Vaughan
is a physician and surgeon specializing in urology. Since 2001,
he has served as the James J. Colt Professor, Chairman Emeritus
Weill Cornell University Medical Center in the Department of
Urology. From 1993 through 2001, Dr. Vaughan served as the
James J. Colt Professor of Urology, Chairman, at Cornell
University Medical Center. He was the executive vice dean and
senior associate dean for Clinical Affairs until 2009. He now
holds the position of Emeritus Professor in the Department of
Urology. Dr. Vaughan was president of the American
Urological Association in 2001. Dr. Vaughan is the
recipient of numerous academic awards and honors which includes
most recently the 2008 John Coleman Award, Department of Urology
Weill Cornell University Medical Center. Dr. Vaughans
research interests include obstructive uropathy, prostaglandins,
renal hemodynamics, benign prostatic hyperplasia, hypertension
and adrenal disorders. Dr. Vaughan has authored and
co-authored over 350 publications in the field of renal and
urological medicine. The particular experience, qualifications,
attributes or skills that led the board to conclude that
Dr. Vaughan should serve as a member of the board of
directors included his independence, as well as his knowledge of
the health care and pharmaceutical industries as more fully
detailed above.
Stuart
L. Weinstein, M.D., Director
Dr. Stuart L. Weinstein, has served on our board of
directors since August 2009 and as co-chairman of our medical
advisory committee since October 2009. Dr. Weinstein is the
Ignacio V. Ponseti Chair and Professor of Orthopedic Surgery at
The University of Iowa. He served as the president of the
American Orthopaedic Association from 1997 to 1998; the American
Board of Orthopaedic Surgery from
2000-2001
and The American Academy of Orthpaedic Surgeons from
2005-2006.
He is a National Institutes of Health funded researcher. He has
published more than 180 scientific articles in peer review
journals on a wide variety of pediatric orthopaedic conditions.
His research work has focused on spinal deformity in children,
childrens hip and foot problems, and the natural history
and long-term outcome of pediatric musculoskeletal conditions.
He has edited three major textbooks including The Pediatric
Spine: Principles and Practice; Lovell and Winters
Pediatric Orthopaedics and Tureks
Orthopaedics. He has served as an Associate
Editor and a member of the Board of Trustees of the Journal of
Bone and Joint Surgery. Dr. Weinstein currently serves as
chairman of doctors for Medical Liability Reform, a Washington,
DC based advocacy group, and chairman of the American
Association of Orthopaedic Surgeons Political Action Committee.
After interning in Internal Medicine at The University of
California San Francisco, he returned to the University of
Iowa for a residency in Orthopaedic Surgery. In 1976 he joined
the faculty of the Department of Orthopaedic Surgery at The
University of Iowa. The particular experience, qualifications,
attributes or skills that led the board to conclude that
Dr. Weinstein should serve as a member of the board of
directors included his independence, his knowledge of the health
care and pharmaceutical industries, as well as his being a
publisher of numerous scientific articles and the editor of
various medical textbooks.
Executive
Management
The following individuals serve as our executive officers.
Brian
T. Mayo, President and Chief Technology Officer
Mr. Brian T. Mayo founded the company in 2004. He is
currently our president. Since July 2009, Mr. Mayo has also
served as our chief technology officer. He served as our chief
executive officer from May 2004 to October 2007, as president
from October 2007 to the present, and as our chief executive
officer again from July 2008 to July 2009. Mr. Mayo was
chairman of the board of directors from May 2004 to October 2007
and served as our director until November 2009. Mr. Mayo
has 30 years experience in the electronics industry.
Mr. Mayo was instrumental in several startup ventures
including: Ardent Communications, which pioneered voice over the
Internet and where he was the director of engineering from
January 1997 to August 1997; and Ingenuity Designs, a company
specializing in airport security solutions where he was founder,
president and chief executive officer from September 2001 to
57
May 2004. During his career, he enjoyed technical and management
success at the following companies: Cisco Systems, where he was
the director of engineering from August 1997 to September 2001;
Nortel Networks (formerly Bay Networks) where he was the
engineering director from July 1995 to January 1997;
Ungermann-Bass Networks, where he was a corporate consulting
engineer from May 1993 to July 1995; Digital Equipment
Corporation, where he was the engineering manager from July 1987
to May 1993; Gould-Modicon, where he was program manager from
April 1985 to July 1987; Teradyne, where he was hardware
engineer from September 1978 to December 1980 and operations
manager from December 1980 to April 1985; and Texas Instruments,
where he was hardware engineer June 1977 to September 1977.
Mr. Mayo has had involvement in the development of the
communications industrys first data network switch.
Mr. Mayo has authored and co-authored a number of patents.
Dennis
K. Cummings, Chief Financial Officer, Executive Vice President
and Treasurer
Mr. Dennis K. Cummings has served as our chief
financial officer and treasurer since February 2010 and our
executive vice president since March 2010. He is a Certified
Public Accountant and the principal and owner of
Cummings & Associates, a private accounting practice
he founded in February 1992. He has over 30 years
experience in all aspects of management, financial reporting and
controls for both publicly and privately held companies.
Mr. Cummings began his professional career in private
business prior to serving ten years with the public accounting
firm of KPMG Peat Marwick in New York. Mr. Cummings is an
EMT-I and former Director of Emergency Medical
Services Post 53 for the town of Darien, Connecticut.
Alan
Clock, Senior Vice President of Sales and
Marketing
Mr. Alan Clock joined us in 2007 and has served as
our senior vice president of sales and marketing since October
2007. Mr. Clock has 23 years experience in the
healthcare and pharmaceuticals industry. Mr. Clock has held
senior level sales positions at: Active Health Management, an
early pioneer in evidenced based disease management programs
where he was senior vice president of sales from July 2006 to
August 2007; nuvado, LLC, a pharmaceutical software and
consulting company where he was executive vice president of
business development and sales from July 2005 to July 2006; and
AmerisourceBergen, one of the worlds largest
pharmaceutical services companies where he was the corporate
vice president of alternate care from November 1998 to July
2005. During his career, he enjoyed sales, business development
and management success at the following companies: McKesson
Corporation, where he was the vice president of national
accounts from October 1995 to November 1998 and Cardinal Health
(formerly Whitmire Distribution/Amfac Healthcare) where he
served and was promoted through a variety of local, regional and
national sales positions, eventually becoming corporate director
of Hospital Services from May 1987 to October 1995.
Mr. Clock was instrumental in the creation, development and
success of the pharmaceutical distribution and service
industrys first alternate care vertical.
Other Key
Employees
The following individuals are our key employees.
Patricia
Ann Earl, Senior Vice President of Business
Development
Mrs. Patricia Ann Earl has served as our executive
strategic consultant and vice president of business development
since May 2008 and was elevated to senior vice president of
business development during March 2010. Mrs. Earl is a long
time pharmaceutical industry veteran and has been actively
involved in the pharmaceutical wholesale distribution industry
since joining AmerisourceBergen Corporation
(Bergen), one of the nations largest
pharmaceutical services companies serving the U.S., Canada and
selected global markets in 1986. She held a variety of executive
management positions at Bergen including vice president general
manager from February 1998 to December 2000 and corporate vice
president of strategic development from January 2001 to May
2005. While at Bergen, she directed the strategic and marketing
initiatives for U.S. health systems, the largest Pharmacy
Benefit Management organizations, and alternate care providers.
She played a significant role in the acquisition, strategic
positioning, and implementation of the companys pharmacy
technologies, packaging and service offerings that enhanced
medication safety in the pharmaceutical supply chain.
Mrs. Earl was one of the founding members and was elected
the co-chairman of the first Healthcare Distribution Management
Association (HDMA) Collaborative Commerce Committee
that promoted the advancement of collaborative
e-commerce
business solutions
58
between the nations largest pharmaceutical distributors
and manufacturers. HDMA is the national association representing
primary, full-service healthcare distributors and is the vital
link in the healthcare system, working to provide value, remove
costs and develop innovative solutions. During her tenure, the
technological solutions investigated by the group and
recommended to the industry included various bar code track and
trace technologies, radio-frequency identification devices in
cooperation with the MIT Auto-ID center, and
e-pedigree
solutions that met the requirements of Prescription Drug
Marketing Act of 1987. From May 2005 until March 2008, she was
vice president institutional marketing at H.D. Smith. Prior to
her career in pharmaceutical distribution, Mrs. Earl had a
successful career as an owner/principal, member of board of
directors and served as chief operating officer from April 1978
to December 1986 for TP Communications, a privately-held
corporation that acquired several broadcast radio stations.
Subsequently those stations were acquired by Clear Channel
Broadcasting Network. As a board member and corporate officer,
she provided executive leadership, management oversight, and
strategic direction to the sales, operations and financial
functional areas.
Paul
J. Micciche, Senior Vice President of Engineering
Mr. Paul J. Micciche has served as our vice
president of engineering since November 2004 and was elevated to
our senior vice president of engineering during March 2010.
Mr. Micciche has over 24 years of experience in the
high technology industry. Prior to his position at XStream
Systems he was principal member of Technical Staff at Lucent
Technologies from June 2000 through October 2004 where he
managed development teams in the architecture, design,
development and deployment of high throughput multi-service IP
edge router platforms. At Ascend Communications, from 1999 to
2000, Mr. Micciche served as technical manager where he
oversaw the architecture, design and development teams for high
performance central processing units, internet physical layer
cards and high speed backplanes. Ascend Communications was
acquired by Lucent Technologies for $22.0 billion in 1999.
From 1996 to 1999, Mr. Micciche served as an engineering
manager for BayNetworks Inc. and was responsible for the
architecture and design for data compression cards, FPGA control
units and overall Ethernet router systems. BayNetworks was
acquired by Nortel Networks in 1998 for over $9.0 billion.
As a Senior Engineering at UB Networks from 1993 to 1996,
Mr. Micciche was part of the development team that
architected and designed several products including one of the
industrys first Ethernet concentration platforms, ATM
Universal Network Interfaces and desk top switch products. Prior
to these roles, Mr. Micciche worked for Draper Laboratories
from 1985 to 1993 on U.S. Navy related defense programs and
held a secret security clearance.
Advisory
Board
Our advisory board offers counsel to our management on an
informal basis concerning development of new technology, and
strategic planning and partnering. We have also specifically
designated one member of the advisory board to act as advisor to
the co-chief executive officers. We do not have contractual
relationships with the members of our advisory board. Each
member of our advisory board is eligible to receive an annual
grant of 2,500 share-based incentive awards for advisory
service.
Mark S. Butler. Mr. Butler is the former
executive vice president, chief administrative officer and
general counsel to the public company Indevus Pharmaceuticals,
Inc. which was acquired in March 2009 by Endo Pharmaceuticals,
Inc.
Dr. Ronald B. Gaeta. Dr. Gaeta is a
veterinarian and a partner in Patterson Veterinary MRI an equine
exclusive imaging center located in Patterson, New York and an
owner of Dunbarton Equine, a three doctor equine exclusive sport
horse medicine practice located in Brookfield, Connecticut.
Dr. Gaeta serves as the equine consultant to the Bronx Zoo.
Dr. William Hamilton. Dr. Hamilton
is an orthopedic surgeon specializing in the foot and ankle
related medical conditions of athletes and performing artists
including ballet dancers. He has served as a clinical professor
of orthopedic surgery at the College of Physicians &
Surgeons, at Columbia University from July 1995 to the present.
Dr. James D. Henry. Dr. Henry is a
urologic surgeon and has served as the Chief of Urologic Surgery
at Good Samaritan Hospital and Saint Marys Hospital in
West Palm Beach, Florida. Dr. Henry is a co-founder of
Jupiter Hospital in Jupiter, Florida.
59
John R. Kennedy. Mr. Kennedy is the
former president and chief executive officer of Federal Paper
Board Company, Inc. He was employed with Federal Paper Board
Company from 1952 in various management positions until his
retirement in April 1996. Mr. Kennedy is past chairman of
Georgetown University and is currently chairman emeritus. As
past chairman for The East Hampton Healthcare Foundation, Inc.,
Mr. Kennedy now serves as one of its trustees. He is also
vice chairman of the Indian River Memorial Hospital Foundation
and a board member of the Riverside Theater.
Frank Navarro. Mr. Navarro is the
managing principal of Navarro Lowrey, Inc., an owner, developer
and manager of commercial real estate founded in 1993.
Mr. Navarro leads the companys business ventures
while also developing and executing new business strategies such
as the creation and development of
EcoPlex®,
the Companys trademarked, sustainability brand. He began
his career as an architect, spending 10 years leading
projects and advising clients in Florida, Virginia and Colorado
then went on to earn his MBA in Finance and Real Estate Finance
from Columbia University. Upon graduation, Mr. Navarro
co-founded Navarro Lowrey, Inc. along with Mr. James J.
Lowrey. Mr. Navarro is a LEED Accredited
Professional.
James A. Wilcox. Mr. Wilcox is the Lowrey
Professor of Financial Institutions at the Haas School of
Business at the University of California, Berkley where he
teaches courses on macroeconomics, financial markets and
institutions and risk management at financial institutions.
Mr. Wilcox was the Chief Economist at the Office of the
Comptroller of the Currency in Washington, D.C. from 1999 to
2001. He has also served as the senior economist for monetary
policy and macroeconomics for the Presidents council of
economic advisors under first President Bush and as an economist
for the Board of Governors of the Federal Reserve System.
Board of
Directors and Corporate Governance
Our board of directors is responsible for establishing broad
corporate policies and for overseeing our overall management. In
addition to considering various matters which require board
approval, the board provides advice and counsel to, and
ultimately monitors the performance of, our senior management.
We established an Audit Committee and Compensation Committee in
January 2005. In March 2009, we established a Finance Committee.
In October 2009, we established a Nominating and Corporate
Governance Committee. The charters for the Audit Committee,
Compensation Committee and Nominating and Corporate Governance
Committee are available at our website, www.xstreamsystems.com.
We believe Messrs. Kennedy, Murphy, Odeen, Chawla, Ferro,
Irish, Vaughan, and Weinstein are independent members of our
board of directors, under NYSE Amexs independence
standards. The Audit, Compensation and Nominating and Corporate
Governance Committees are composed of at least one of these
independent members. In accordance with NYSE Amex phase-in rules
for initial public offerings, we anticipate that within one year
of our expected listing on NYSE Amex, each of the directors on
the committees will be determined by the board to be
independent.
The board, its committees and our management strive to perform
and fulfill their respective duties and obligations in a
responsible and ethical manner. We have adopted a Code of Ethics
for Senior Financial Officers that applies to our co-chief
executive officers, president, and chief financial officer, as
well as a chief accounting officer and controller if we employ
persons in these positions in the future. In addition, we have
adopted a Code of Conduct generally applicable to all of our
employees. Upon request, we will provide to any person without
charge a copy of our Code of Ethics or Code of Conduct. Any such
request should be made to Dennis K. Cummings, Chief Financial
Officer, XStream Systems, Inc., 10305 102nd Terrace,
Suite 101, Sebastian, FL 32958.
Committees
of the Board
Audit Committee. The board has an Audit
Committee comprised of three directors, Messrs. Philip A.
Odeen (Co-Chairman), Anthony Chidoni and Robert E. Kennedy
(Co-Chairman). Each member of the Audit Committee is independent
as defined under NYSE Amexs listing standards, other than
Mr. Chidoni. The board of directors has determined that
Mr. Kennedy and Mr. Chidoni each qualify as an
audit committee financial expert. The Audit
Committee functions pursuant to a written charter, under which
the committee has such powers as may be assigned
60
to it by the board from time to time. The Audit Committee was
established in January 2005. The Audit Committee is currently
charged with, among other things:
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discuss with management and our independent public accountants
our annual audited financial statements, quarterly financial
statements, earnings press releases, and financial information
and earnings guidance provided to analysts and rating agencies,
if any;
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discuss with management and our independent public accountants
our major financial risk exposures, the guidelines and policies
by which risk assessment and management is undertaken, and the
steps management has taken to monitor and control risk exposure;
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appoint, retain, compensate, evaluate, and terminate our
independent public accountants for the purpose of preparing or
issuing an audit report or performing other audit, review, or
attest services for us and oversight of such work;
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pre-approve, or adopt procedures to pre-approve, all audit,
audit related, tax, and other services permitted by law or
applicable SEC regulations (including fee and cost ranges) to be
performed by our independent public accountants;
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review, at least annually, the qualifications, performance, and
independence of our independent public accountants, including to
ensure the rotation of the lead audit partner at least every
five years;
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reviewing the integrity of our financial reporting process with
our independent auditors and with our management and internal
auditor, if any;
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review the effect of regulatory and accounting initiatives, as
well as off-balance sheet structures, on our financial
statements;
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review with our independent auditors any audit problems or
difficulties encountered and managements response thereto;
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discuss the scope of the annual audit and review the form of the
opinion the independent auditor proposes to issue;
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establish procedures for the receipt, retention, and treatment
of complaints received by us regarding accounting, internal
accounting controls, or auditing matters and the confidential,
anonymous submission by our employees of concerns regarding
questionable accounting or auditing matters;
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review and approve all related party transactions and review and
make recommendations to the board of directors, or approve, any
contracts or other transactions with our current or former
executive officers, including consulting arrangements,
employment agreements,
change-in-control
agreements, termination arrangements, and loans to employees
made or guaranteed by us; and
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review and reassess the adequacy of the Audit Committee Charter
on an annual basis and recommend any changes to the board of
directors.
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Compensation Committee. The board has a
Compensation Committee comprised of two directors,
Messrs. Anthony Chidoni (Chairman) and Robert E. Kennedy.
Mr. Kennedy is independent as defined under NYSE
Amexs listing standards. The Compensation Committee
functions pursuant to a written charter, under which the
committee has such powers as may be assigned to it by the board
from time to time. The Compensation Committee was established in
January 2005. The Compensation Committee is currently charged
with, among other things, assisting the board to:
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review and recommend for approval by the independent directors
of the board of directors, the total compensation package of the
co-chief executive officers and other members of senior
management and key employees for the upcoming year, at least on
an annual basis;
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discuss performance evaluation of the co-chief executive
officers and recommend approval by the independent board of
directors of bonus compensation and develop performance goals
for the co-chief executive officers and other members of senior
management for purposes of determining bonus compensation;
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61
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review market data to assess our competitive position for all
components of compensation for the co-chief executive officers
and senior management to ensure we are competitive with
comparable public companies;
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administer any plan, recommend to the board of directors the
adoption of any amendments to a plan or modifying or canceling
any existing grants under such plans; and review the sufficiency
of the shares available for grant under the plans;
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review and recommend director compensation, including cash
payments, equity awards and other benefits;
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retain consultants of its selection to advise it with respect to
our salary and incentive compensation and benefits programs, and
approve the consultants fees and other retention terms;
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review and reassess the adequacy of the Compensation Committee
Charter annually and recommend any proposed changes to the board
of directors for approval; and
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perform such other functions as necessary and appropriate under
law, the rules of NASDAQ (or other exchange or interdealer
electronic quotation service which rules may be applicable to
us), our certificate of incorporation or amended and restated
by-laws and the resolutions and other directives of the board of
directors.
|
In general, the Compensation Committee formulates and recommends
compensation policies for board approval, oversees and
implements these board-approved policies, and keeps the board
apprised of its activities on a regular basis. In addition, the
Compensation Committee develops criteria to assist the
boards assessment of the co-chief executive officers
leadership of our company.
Nominating and Corporate Governance
Committee. The board has a Nominating and
Corporate Governance Committee comprised of two directors,
Messrs. Robert E. Kennedy (Chairman) and Mr. James J.
Lowrey. Mr. Kennedy is independent as defined under NYSE
Amexs listing standards. The Nominating and Corporate
Governance Committee functions pursuant to a written charter,
under which the committee has such powers as may be assigned to
it by the board from time to time. The Nominating and Corporate
Governance Committee was established in October 2009. The
Nominating and Corporate Governance Committee is currently
charged with, among other things, assisting the board in:
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selecting or recommending to the board for selection, the
individuals to stand for election as directors at the annual
meeting of stockholders;
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overseeing the selection and composition of committees of the
board and, as applicable, oversee management continuity planning
processes;
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identifying individuals believed to be qualified as candidates
to serve on the board and select, or recommend that the board
select, the candidates for all directorships to be filled by the
board or by the stockholders at an annual or special meeting;
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reviewing and making recommendations to the full board, or
determine, whether members of the board should stand for
re-election and consider matters relating to the retirement of
board members, including term limits or age caps;
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if applicable, in the case of a director nominated to fill a
vacancy on the board due to an increase in the size of the
board, recommending to the board the class of directors in which
the director-nominee should serve;
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conducting all necessary and appropriate inquiries into the
backgrounds and qualifications of possible candidates;
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considering questions of independence and possible conflicts of
interest of members of the board and executive officers;
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reviewing and making recommendations, as the committee deems
appropriate, regarding the composition and size of the board in
order to ensure the board has the requisite expertise and its
membership consists of persons with sufficiently diverse and
independent backgrounds; and
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62
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overseeing the evaluation, at least annually, and as
circumstances otherwise dictate, of the board and management.
|
Finance Committee. The board has a Finance
Committee comprised of Messrs. Dennis H. Ferro (Chairman)
and James J. Lowrey. The Finance Committee does not have a
written charter. The Finance Committee was established in March
2009. This committee is currently charged with, among other
things, assisting the board in:
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|
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formulation of policies relating to the our cash flow, cash
management and working capital, stockholder dividends and
distributions, share repurchases and investments;
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adjustments to our capital structure;
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capital and debt issuances;
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financial strategies;
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working capital and cash flow management;
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policies for managing interest rate and investment risk;
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the financial aspects of insurance and risk management;
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|
tax planning and compliance;
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|
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proposed mergers, acquisitions, divestitures and strategic
investments; and
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|
other transactions or financial issues that management desires
to have reviewed by the Finance Committee.
|
Additionally, the Finance Committee reports periodically to the
full board on our insurance and risk management programs.
The board of directors has additional standing committees
including the executive committee, the investor relations
committee, the medical advisory committee, the communications
committee and the global business development committee.
Director
Compensation for the Year Ended December 31, 2009
All directors are entitled to receive compensation for their
services. In February 2008, a resolution was passed by the
Compensation Committee granting directors the following annual
compensation package:
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|
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Grant of stock options to purchase 7,500 shares of our
common stock pursuant to our Amended and Restated 2004 Stock
Option Plan; and
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Grant of stock options to purchase 1,875 shares of our
common stock for committee service.
|
In addition, in October 2009, the board of directors determined
that the chairs of each of the board committees would receive
stock options to purchase 2,500 shares of our common stock
for their service.
63
The following table summarizes the compensation of each member
of our board of directors for their service in 2009.
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Option
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|
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Awards
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|
|
Total
|
|
Name(1)
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|
Year
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|
|
($)(2)
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|
|
($)
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|
Joseph J. Melone(3)
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2009
|
|
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$
|
10,000
|
|
|
$
|
10,000
|
|
Anthony Chidoni(4)
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2009
|
|
|
$
|
10,000
|
|
|
$
|
10,000
|
|
Robert E. Kennedy(5)
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2009
|
|
|
$
|
10,000
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|
|
$
|
10,000
|
|
Phillip A. Odeen(6)
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|
|
2009
|
|
|
$
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10,000
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|
|
$
|
10,000
|
|
Ash K. Chawla(7)
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|
2009
|
|
|
$
|
10,000
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|
|
$
|
10,000
|
|
Simon Irish(8)
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|
2009
|
|
|
$
|
10,000
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|
|
$
|
10,000
|
|
Dennis H. Ferro(9)
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2009
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|
|
$
|
10,000
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|
|
$
|
10,000
|
|
Dr. E. Darracott Vaughan, Jr.(10)
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|
|
2009
|
|
|
$
|
10,000
|
|
|
$
|
10,000
|
|
Dr. Stuart Weinstein(11)
|
|
|
2009
|
|
|
$
|
10,000
|
|
|
$
|
10,000
|
|
John R. (Reg) Murphy(12)
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|
|
2009
|
|
|
$
|
7,500
|
|
|
$
|
7,500
|
|
Thomas W. Cook, Former Director (13)
|
|
|
2009
|
|
|
$
|
10,000
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|
|
$
|
10,000
|
|
Walter Lovejoy, Former Director (14)
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|
|
2009
|
|
|
$
|
7,500
|
|
|
$
|
7,500
|
|
|
|
|
(1) |
|
Brian T. Mayo, our president and chief technology officer, is a
named executive officer and did not receive any compensation
during the fiscal year ended December 31, 2009 for serving
on our board of directors. Mr. James J. Lowrey, our
chairman and co-chief executive officer is a named executive
officer and received an option to purchase 10,000 shares of
common stock at an exercise price of $0.69 per share for serving
on our board of directors during the fiscal year ended
December 31, 2009. The value of Mr. Lowreys
option award is fully reflected in the 2009 Summary Compensation
Table appearing elsewhere in this prospectus and is therefore
not included in this table. As of December 31, 2009,
Mr. Lowrey did not individually hold any option awards,
however, he had transferred all of his option awards in the
aggregate amount of 423,316 to the James J. Lowrey 2009
Irrevocable Trust. |
|
(2) |
|
The determination of value of option awards is based upon the
Black-Scholes Option pricing model the details and assumptions
of which are set out in our financial statements included in
this prospectus. The amount reported above is the aggregate
grant date fair value of the option awards computed in
accordance with FASB ASC Topic 718. |
|
(3) |
|
As of December 31, 2009, Mr. Melone held an aggregate
of 10,000 option awards. |
|
(4) |
|
As of December 31, 2009, Mr. Chidoni held an aggregate
of 10,000 option awards. |
|
(5) |
|
As of December 31, 2009, Mr. Kennedy held an aggregate
of 23,500 option awards. |
|
(6) |
|
As of December 31, 2009, Mr. Odeen held an aggregate
of 13,280 option awards. |
|
(7) |
|
As of December 31, 2009, Mr. Chawla held an aggregate
of 10,000 option awards. |
|
(8) |
|
As of December 31, 2009, Mr. Irish held an aggregate
of 10,000 option awards. |
|
(9) |
|
As of December 31, 2009, Mr. Ferro held an aggregate
of 10,000 option awards. |
|
(10) |
|
As of December 31, 2009, Dr. Vaughan held an aggregate
of 10,000 option awards. |
|
(11) |
|
As of December 31, 2009, Dr. Weinstein held an
aggregate of 10,000 option awards. |
|
(12) |
|
As of December 31, 2009, Mr. Murphy held an aggregate
of 7,500 option awards. |
|
(13) |
|
As of December 31, 2009, Mr. Cook held an aggregate of
24,250 option awards. Mr. Cook resigned from the board of
directors on August 14, 2009. |
|
(14) |
|
As of December 31, 2009, Mr. Lovejoy held an aggregate
of 18,180 option awards. Mr. Lovejoy resigned from the
board of directors on August 14, 2009. |
64
Executive
Compensation
Compensation
Discussion and Analysis
Compensation Philosophy and Design: Our compensation philosophy
is to provide our executive officers listed in the summary
compensation table with compensation packages that attract,
retain, reward and motivate them. Therefore, our board of
directors and our Compensation Committee generally construct
compensation packages that take into account those of executive
officers with similar positions in comparable companies, linking
the performance of the company and individual performance and
designed to align the interests of the executive officers with
those of our stockholders. Our compensation philosophy is also
designed to reinforce a sense of ownership in the company,
urgency with respect to meeting deadlines and overall
entrepreneurial spirit and to link rewards to measurable
corporate performance metrics.
While the board of directors and Compensation Committee seek to
provide compensation packages that are competitive within our
markets and the technology industry, in general, it does not
utilize an established peer group in our industry and does not
set compensation levels based on any predetermined benchmarks
for total compensation or any individual element of
compensation. The Compensation Committee reviews our performance
on a regular basis using a variety of financial and
non-financial metrics. These metrics include, but are not
limited to, net sales, gross margin, sales and marketing
expenses, personnel costs, accounts receivable and accounts
payable aging, liquidity and cash resources. Management compares
actual results against goals and budgets to take appropriate
actions in order to improve performance.
Certain compensation adjustments are made pursuant to each
executive officers employment terms established at the
time he or she is hired. Executive officer Brian T. Mayo is the
only named executive officer with whom we have an employment
agreement. We established the salary levels included in the
employment agreements by surveying companies within the
technology industry including current compensation data based
upon organization size, industry and geographic location.
The terms of such employment agreements are described in the
Employment Agreements section below.
Elements of Compensation: Our compensation packages for
executive officers consist of cash salaries, long-term incentive
awards in the form of stock option and restricted stock grants.
Salary: Base salaries are set initially upon
hire based predominantly on available market data and are
adjusted based on market trends, our overall performance,
individual contributions to our performance, and our available
cash to a lesser extent. We also take into consideration the
scope of our officers respective responsibilities. In
reviewing base salaries, we also consider several other factors,
including cost of living increases, and levels of responsibility.
Long-term Incentives: Executive officers may
be granted stock options and other awards to purchase our common
stock under our Amended and Restated 2004 Stock Option Plan and
2009 Long Term Incentive Compensation Plan, typically with time
vesting requirements, as a way to align the interests of the
executive officers with those of our stockholders. We believe
that our long-term performance is aided by a culture that
encourages superior performance by our executive officers, and
that equity awards encourage and will appropriately reward such
superior performance.
The following table sets forth information concerning the annual
and long-term compensation of our chief executive officer and
the other named executive officers, for services as executive
officers for the last two fiscal years.
2009
Summary Compensation Table
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|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
All Other
|
|
|
|
|
|
|
Fiscal
|
|
|
Salary
|
|
|
Award(s)
|
|
|
Award(s)
|
|
|
Compensation
|
|
|
Total
|
|
Name and Principal Position
|
|
Year
|
|
|
($)
|
|
|
($)(10)
|
|
|
($)(13)
|
|
|
($)
|
|
|
($)
|
|
|
James J. Lowrey(1)(2)(3)
|
|
|
2009
|
|
|
|
|
|
|
$
|
2,220,000
|
(2)
|
|
$
|
10,000
|
(3)
|
|
|
|
|
|
$
|
2,230,000
|
|
Chairman of the Board and
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Co-Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
All Other
|
|
|
|
|
|
|
Fiscal
|
|
|
Salary
|
|
|
Award(s)
|
|
|
Award(s)
|
|
|
Compensation
|
|
|
Total
|
|
Name and Principal Position
|
|
Year
|
|
|
($)
|
|
|
($)(10)
|
|
|
($)(13)
|
|
|
($)
|
|
|
($)
|
|
|
Brian T. Mayo(4)(5)(6)(7)(12)
|
|
|
2009
|
|
|
$
|
254,570
|
(4)
|
|
|
|
|
|
$
|
130,803
|
(5)
|
|
$
|
120
|
(12)
|
|
$
|
385,493
|
|
President and Chief
|
|
|
2008
|
|
|
$
|
253,950
|
(6)
|
|
|
|
|
|
$
|
158,528
|
(7)
|
|
$
|
120
|
(12)
|
|
$
|
412,598
|
|
Technology Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dennis K. Cummings(8)
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Financial Officer
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Executive Vice President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alan D. Clock(9)(10)(11)(12)
|
|
|
2009
|
|
|
$
|
175,871
|
(9)
|
|
|
|
|
|
$
|
176,305
|
(10)
|
|
$
|
120
|
(12)
|
|
$
|
352,296
|
|
Senior Vice President of
|
|
|
2008
|
|
|
$
|
168,009
|
|
|
|
|
|
|
$
|
3,626
|
(11)
|
|
$
|
120
|
(12)
|
|
$
|
171,755
|
|
Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Mr. Lowrey was appointed chief executive officer in August
2009 and did not receive any compensation as our executive
officer during the fiscal year ended December 31, 2008. |
|
(2) |
|
Includes a stock grant on August 14, 2009 of
1,000,000 shares of common stock for his services as chief
executive officer of the company. |
|
(3) |
|
Includes an incentive stock option granted on December 31,
2009 for 10,000 shares of common stock at an exercise price
of $0.69 per share, which were awarded to Mr. Lowrey for
his services on the board of directors of the company. |
|
|
|
(4) |
|
Includes deferred compensation in the aggregate amount of
$142,212, of which as of August 15, 2010, $127,500 has not
been paid. A payment in the amount of $14,712 was made on
January 14, 2010. |
|
|
|
(5) |
|
Includes an incentive stock option granted on January 15,
2009 for 41,000 shares of common stock at an exercise price
of $0.69 per share, as a merit award in exchange for services
rendered; an incentive stock option granted on March 31,
2009 for 11,769 shares of common stock at an exercise price
of $0.69 per share, as compensation in exchange for deferring a
portion of his salary in the amount of $29,423; an incentive
stock option granted on June 30, 2009 for
11,769 shares of common stock at an exercise price of $0.69
per share, as compensation in exchange for deferring a portion
of his salary in the amount of $29,423; an incentive stock
option granted on September 30, 2009 for 13,731 shares
of common stock at an exercise price of $0.69 per share, as
compensation in exchange for deferring a portion of his salary
in the amount of $34,327; and an incentive stock option granted
on December 31, 2009 for 13,731 shares of common stock
at an exercise price of $0.69 per share, as compensation in
exchange for deferring a portion of his salary in the amount of
$34,327. |
|
|
|
(6) |
|
Includes deferred compensation in the aggregate amount of
$132,404, of which as of August 15, 2010, $32,404 has not
been paid. On February 28, 2009, $100,000 of the accrued
compensation was used as partial payment to acquire
30,116 shares of Series B preferred stock and 150,580
Series B warrants. |
|
|
|
(7) |
|
Includes an incentive stock option granted on February 7,
2008 for 3,500 shares of common stock at an exercise price
of $0.69 per share, as a merit award in exchange for services
rendered; an incentive stock option granted on March 12,
2008 for 45,115 shares of common stock at an exercise price
of $0.69 per share, as compensation in exchange for deferring a
portion of his salary in the amount of $112,789; an incentive
stock option granted on March 31, 2008 for
13,730 shares of common stock at an exercise price of $0.69
per share, as compensation in exchange for deferring a portion
of his salary in the amount of $34,327; and an incentive stock
option granted on June 30, 2008 for 7,846 shares of
common stock, on September 30, 2008 for 17,653 shares
of common stock, and on December 31, 2008 for
11,769 shares of common stock, all at an exercise price of
$0.69 per share, as compensation in exchange for deferring a
portion of his salary in the aggregate amount of $93,173. |
|
(8) |
|
Mr. Cummings was appointed chief financial officer in
February 2010 and did not receive any compensation as our
executive officer during the fiscal years ended
December 31, 2008 and December 31, 2009. |
|
|
|
(9) |
|
Includes deferred compensation in the aggregate amount of
$20,192, which as of August 15, 2010, has not been paid. |
|
|
|
(10) |
|
Includes an incentive stock option granted on January 15,
2009 for 122,000 shares of common stock at an exercise
price of $0.69 per share in connection with his employment with
us as senior vice president of sales and marketing. |
66
|
|
|
(11) |
|
Includes an incentive stock option granted on October 8,
2007 for 16,000 shares of common stock at an exercise price
of $3.80 per share in connection with his employment with us as
senior vice president of sales and marketing. |
|
(12) |
|
This amount includes a premium payment of $120 for a life
insurance policy with payable benefits of $25,000. |
|
(13) |
|
The amounts in this column reflect the amounts we recorded in
accordance with FASB ASC Topic 718 as stock-based compensation
in our financial statements for the applicable year in
connection with options we granted in that year and in prior
years, adjusted to disregard the effects of any estimate of
forfeitures related to service-based vesting but assuming,
instead, that the executive will perform the requisite service
for the award to vest in full. The assumptions we used in
valuing options are described under the caption
Share-Based Payments in Note 8 to our financial
statements included in this prospectus and in the section
entitled Managements Discussion and Analysis of
Financial Condition and Results of Operations. |
Employment
and Severance Agreements
We have entered into the agreements set forth below with the
following executive officer, Mr. Brian T. Mayo and key
employee Mr. Paul J. Micciche.
Brian T.
Mayo Employment Agreement
We entered into an employment agreement with Mr. Mayo on
November 1, 2006 whereby Mr. Mayo agreed to serve as
our president and chief executive officer. The agreement terms
provide for automatic annual renewal. Under the terms of the
agreement, Mr. Mayos base annual salary is $255,000
and he is entitled to receive an annual performance bonus in
accordance with our annual bonus program. The base salary is
reviewed each year by the board and it may in its discretion
elect to increase the base salary at any time. Subject to
certain conditions, Mr. Mayo is entitled to receive certain
benefits under the agreement including health insurance,
disability insurance, life insurance and paid vacation of not
less than four weeks per year. The terms of the agreement
additionally provide that we will maintain a directors and
officers liability insurance policy covering Mr. Mayo
in an amount of no less than $1,000,000. If Mr. Mayos
employment is terminated by us without cause or by Mr. Mayo
for good reason, Mr. Mayo will be entitled to receive a
severance payment equal to all of the base salary, annual bonus,
stock options, business expenses and benefits which are due,
have accrued, or will otherwise become due or accrue through the
end of the term of the agreement, or six months, whichever is
the greater amount of time. If Mr. Mayos employment
is terminated by Mr. Mayo without good reason,
Mr. Mayo will be entitled to receive a severance payment of
all base salary, annual bonus (if already awarded), stock
options, business expenses and benefits which are due and
accrued through the date of termination. If Mr. Mayos
employment is terminated by us for cause, Mr. Mayo will be
entitled to receive a severance payment of all base salary,
annual bonus (if already awarded), stock options, business
expenses and benefits which are due and accrued through the
effective date of termination. For purposes of the agreement,
cause is defined as Mr. Mayos conviction of a felony
or of any crime involving moral turpitude,
and/or being
found guilty or otherwise pleading guilty to willful gross
neglect or willful gross misconduct in performing his duties. If
Mr. Mayos employment is terminated by Mr. Mayo
by reason of Mr. Mayos death, his estate shall be
entitled to receive all base salary, annual bonus (if already
awarded), stock options, business expenses and benefits which
are due and accrued through the date of death.
In the event of Mr. Mayos termination upon a change
of control as defined in the agreement, subject to certain
conditions, he will be entitled to receive all base salary,
annual bonus (if already awarded), stock options, business
expenses and benefits which are due or otherwise become due or
accrue for a period of six months. Prior to the effective date
of the change of control, 25% of the stock options granted to
Mr. Mayo will vest and be exercisable by Mr. Mayo for
a period of one year following the effective date of termination
of his employment.
The agreement provides that Mr. Mayo is not permitted
during the term and for 12 months after the effective date
of the expiration or termination of the term of the agreement,
to solicit any employees, agents and other business contacts of
ours to terminate or modify their relationship with or compete
against us or conduct business activities in competition with us.
67
The agreement provides that the results of Mr. Mayos
employment under the agreement, including any works of
authorship resulting from the performance of his duties during
his employment with us and any works in progress are
works-made-for-hire for the benefit of us and we are the sole
owner of the work.
Nonrenewal
of Employment Agreement
During October 2009, we entered into a verbal agreement with
Mr. Mayo to temporarily reduce his salary to approximately
$63,750 in connection with salary reductions implemented for
certain executive officers and key employees of the company.
Mr. Mayo delivered a demand letter to our management, dated
November 16, 2009, alleging our breach of his executive
employment agreement. Mr. Mayo claims in the demand letter
his base salary was reduced in violation of his executive
employment agreement from $255,000 per year to approximately
$63,750. Mr. Mayo requested restoration of his salary to
$255,000 per year and payment of his base salary since the date
his salary was reduced. Mr. Mayos salary reduction
was related to general salary reductions affecting four key
employees of the company which reductions were implemented to
address budgeting and cash flow concerns. As of January 1,
2010, Mr. Mayos annual base salary has been restored
to $127,500 and we paid Mr. Mayo a cash payment of $14,711
on January 14, 2010, which included all deferred amounts
since the reduction of Mr. Mayos salary in October
2009. The company and Mr. Mayo have verbally agreed that
Mr. Mayo will be paid all additional deferred amounts under
Mr. Mayos agreement following completion of the
offering. No written release of the demand letter claims has
been executed by the parties at this time and the company and
Mr. Mayo have been unable to amicably resolve the issues
raised by Mr. Mayo in his demand letter. Accordingly, we
notified Mr. Mayo on March 4, 2010 that we will not
renew or otherwise extend the employment agreement with
Mr. Mayo after it expires on October 31, 2010. We will
continue to pay all sums due under Mr. Mayos
employment agreement until the expiration date, in accordance
with our current payroll practices.
Transition
of Executive Leadership
Our executive leadership has been in a period of transition
since 2009. Mr. James J. Lowrey and Mr. Anthony R.
Chidoni, our current co-chief executive officers, commenced
executive management services to the Company during August 2009
and March 2010, respectively. Further, since October 2009,
Mr. Chidoni has assumed the responsibilities and duties
associated with daily operational management of the Company as
the current chief operating officer. In addition, our succession
plan for the role of chief technology officer includes an
existing key employee of ours, Mr. Paul Micciche.
Mr. Micciche has performed the duties required of our chief
technology officer for the past six months in addition to
serving as our senior engineer. Our board of directors has
determined that Mr. Miccichie meets the qualifications and
criteria for the Companys successor chief technology
officer, and Mr. Miccichie has indicated to our management that
he will accept the position. We expect the transition to occur
following Brian Mayos completion of the remaining term of
his employment agreement which expires on October 31, 2010.
From both a quantitative and qualitative perspective the
firms structure and reporting will not change materially
following the expiration of Mr. Mayos employment
agreement.
Paul J.
Micciche Employment Agreement
We entered into an employment agreement with Mr. Micciche
on November 1, 2006 whereby Mr. Micciche agreed to
serve as our vice president of engineering. The agreement terms
provide for automatic annual renewal. Under the terms of the
agreement Mr. Micciches base annual salary is
currently $125,640, and he is entitled to receive an annual
performance bonus in accordance with our annual bonus program.
The base salary is reviewed each year by the board and it may in
its discretion elect to increase the base salary at any time.
Subject to certain conditions, Mr. Micciche is entitled to
receive certain benefits under the agreement including health
insurance, disability insurance, life insurance and paid
vacation of not less than four weeks per year. If
Mr. Micciches employment is terminated by us without
cause or by Mr. Micciche for good reason, Mr. Micciche
will be entitled to receive a severance payment equal to all of
the base salary, annual bonus, stock options, business expenses
and benefits which are due, have accrued, or will otherwise
become due or accrue through the end of the term of the
agreement, or six months, whichever is the greater amount of
time. If Mr. Micciches employment is terminated by
Mr. Micciche without good reason, he will be
entitled to receive a severance payment of all base salary,
annual bonus (if already awarded), stock options, business
expenses and benefits which are due and accrued through the
68
date of termination. If Mr. Micciches employment is
terminated by us for cause, Mr. Micciche will be entitled
to receive a severance payment of all base salary, annual bonus
(if already awarded), stock options, business expenses and
benefits which are due and accrued through the effective date of
termination. If Mr. Micciches employment is
terminated by Mr. Micciche by reason of
Mr. Micciches death, his estate shall be entitled to
receive all base salary, annual bonus (if already awarded),
stock options, business expenses and benefits which are due and
accrued through the date of death.
In the event of Mr. Micciches termination upon a
change of control as defined in the agreement and subject to
certain conditions, he will be entitled to receive all base
salary, annual bonus (if already awarded), stock options,
business expenses and benefits which are due or otherwise become
due or accrue for a period of six months. Prior to the effective
date of the change of control, 25% of the stock options granted
to Mr. Micciche will vest and be exercisable by
Mr. Micciche for a period of one year following the
effective date of termination of his employment.
The agreement provides that Mr. Micciche is not permitted
during the term and for 12 months after the effective date
of the expiration or termination of the term of the agreement,
to solicit any employees, agents and other business contacts of
ours to terminate or modify their relationship with or compete
against us or conduct business activities in competition with us.
The agreement provides that the results of
Mr. Micciches employment under the agreement,
including any works of authorship resulting from the performance
of his duties during his employment with us and any works in
progress are works-made-for-hire for the benefit of us and we
are the sole owner of the work.
69
Outstanding
Equity Awards at 2009 Fiscal Year End
The following table lists all outstanding equity awards held by
our named executive officers as of December 31, 2009.
|
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Equity Incentive
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Number of
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Plan Awards:
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Securities
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Number of
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Underlying
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Securities
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Unexercised
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Underlying
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Options
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Unexercised
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Exercise
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Option
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Name
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Exercisable(1)
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|
Unearned Options(1)
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|
Price Option
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Expiration Date
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James J. Lowrey(2)
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26,316
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0
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$
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3.80
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7/14/2016
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45,000
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0
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$
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3.80
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5/1/2017
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342,000
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0
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$
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3.00
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8/14/2018
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0
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10,000
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(3)
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$
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0.69
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12/31/2019
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Brian T. Mayo
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350
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0
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$
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2.57
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4/26/2010
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1
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0
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$
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2.57
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3/3/2011
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18,824
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0
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$
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2.34
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4/22/2016
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6,093
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|
|
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1,407
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$
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2.57
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|
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9/7/2011
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|
|
|
18,859
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|
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0
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|
|
$
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3.80
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|
|
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1/30/2017
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|
|
|
|
2
|
|
|
|
0
|
|
|
$
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4.18
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|
|
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3/3/2012
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|
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3,333
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|
|
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1,667
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|
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$
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4.18
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|
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4/3/2012
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|
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18,912
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0
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$
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4.18
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6/7/2012
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21,088
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0
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$
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4.18
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6/7/2012
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1,000
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0
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$
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4.18
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6/13/2012
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1,604
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|
|
|
1,896
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$
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0.69
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2/7/2018
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|
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|
45,115
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|
|
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0
|
|
|
$
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0.69
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3/12/2018
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|
|
|
|
13,730
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|
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0
|
|
|
$
|
0.69
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|
|
|
3/31/2018
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7,846
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0
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|
$
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0.69
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6/30/2018
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17,653
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0
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$
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0.69
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9/30/2018
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11,769
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|
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0
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|
$
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0.69
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|
|
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12/31/2018
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|
|
|
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20,500
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20,500
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(4)
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$
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0.69
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1/15/2019
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11,769
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0
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|
$
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0.69
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|
3/31/2019
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11,769
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0
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|
$
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0.69
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6/30/2019
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|
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|
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13,731
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0
|
|
|
$
|
0.69
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|
|
|
9/30/2019
|
|
|
|
|
13,731
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|
|
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0
|
|
|
$
|
0.69
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|
|
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12/31/2019
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|
Alan D. Clock
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|
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8,666
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7,334
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|
$
|
3.80
|
|
|
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10/7/2017
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|
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|
61,000
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|
|
|
61,000
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(5)
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|
$
|
0.69
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1/15/2019
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(1) |
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Except as noted above, all un-exercisable options vest in the
following manner: 25% on the first anniversary of the grant date
and monthly thereafter at the rate of 1/36 per month on the
monthly anniversary of the grant date for a period of three
years. |
|
(2) |
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Mr. Lowrey transferred these option awards to the James J.
Lowrey 2009 Irrevocable Trust. |
|
(3) |
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10,000 options vest on December 31, 2010. |
|
(4) |
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20,500 options vest on January 15, 2010. |
|
(5) |
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61,000 options vest on January 15, 2010. |
2004
Stock Option Plan
On May 27, 2004, our board of directors and sole
stockholder as of that date adopted a stock option plan (the
2004 Stock Option Plan). Pursuant to this plan,
which expires on May 27, 2014, incentive stock options or
non-
70
qualified options to purchase an aggregate of
2,600,000 shares of common stock may be issued, as
adjusted. The plan may be administered by our board of directors
or by a committee to which administration of the plan, or part
of the plan, may be delegated by our board of directors. Options
granted under this plan are not generally transferable by the
optionee except by the optionees will or by the laws of
descent and distribution or to optionees Immediate Family
(as defined hereafter) or a trust for the benefit of
optionees Immediate Family. Immediate Family
as used in the 2004 Stock Option Plan means spouse, lineal
descendant or antecedent, father, mother, brother or sister. In
such case, the transferee or other recipient will receive and
hold the option so transferred subject to the provisions of the
2004 Stock Option Plan and the respective optionees option
agreement, except that the permitted transferee of the option
will not be subject to the requirement of the original optionee
to provide services to us. All options granted under the 2004
Stock Option Plan become exercisable at such times and in such
installments (which may be cumulative) as the committee shall
provide in the terms of each individual option agreement. All
vested options and options that have become exercisable from
time to time may be exercised in whole or in part in accordance
with the terms of the applicable option agreement; provided,
however, that the committee shall be authorized to require that
any partial exercise be with respect to a minimum number of
shares of common stock. Subject to the provision for permitted
transferees of the options, to the extent that options are
vested, they must be exercised within a maximum of three months
of the end of the optionees status as an employee,
director or consultant, or within a maximum of 12 months
after such optionees termination or by death or
disability, but in no event later than the expiration of the
option term. The exercise price of all stock options granted
under the plan will be determined by our board of directors or
designated committee. No options may be granted under the 2004
Stock Option Plan after March 1, 2014, but options granted
on or before that date may be exercised according to the terms
of their respective option agreements and shall continue to be
governed by and interpreted consistent with the terms of the
2004 Stock Option Plan. As of August 15, 2010, we have
1,879,386 options outstanding under the 2004 Stock Option Plan.
The following grants to executive officers under the 2004 Stock
Option Plan were outstanding on August 15, 2010: James J.
Lowrey 413,316 options at a weighted average
exercise price of $3.14; Brian Mayo 283,149 options
at a weighted average exercise price of $1.67; and Alan
Clock 138,000 options at a weighted average exercise
price of $1.05.
2009 Long
Term Incentive Compensation Plan
On August 14, 2009, our board of directors adopted a stock
incentive plan (the 2009 Incentive Compensation Plan
or 2009 Plan). Pursuant to this plan, incentive
stock options, non-qualified options, restricted stock awards,
deferred stock awards, bonus stock and awards in lieu of
obligations, dividends equivalents, performance awards and other
stock based awards to purchase an aggregate of
5,000,000 shares of common stock may be issued, as
adjusted. The 2009 Plan will be administered by a committee
designated by the board of directors to administer the 2009 Plan
except to the extent that our board of directors elects to
administer the plan, in which case the 2009 Plan shall be
administered by only those members of the board of directors who
are independent members of the board.
The 2009 Incentive Compensation Plan became effective upon the
approval by the board of directors and by our stockholders
eligible to vote in the election of directors, by a vote
sufficient to meet the requirements of Code Sections 162(m)
(if applicable) and 422,
Rule 16b-3
under the Exchange Act of 1934, as amended (Exchange
Act) (if applicable), applicable requirements under the
rules of any stock exchange or automated quotation system on
which the shares may be listed or quoted, and other laws,
regulations, and obligations of the company applicable to the
plan, and the subsequent approval by any other securityholders
of the company which may be required to approve the plan. The
2009 Incentive Compensation Plan will terminate at the earliest
of (i) such time as no shares remain available for issuance
under the plan, (ii) termination of the plan by the board
of directors, or (iii) the tenth anniversary of the
Stockholder Approval Date. Awards outstanding upon expiration of
the 2009 Plan shall remain in effect until they have been
exercised or terminated, or have expired.
No award or other right or interest granted under the 2009 Plan
may be pledged, hypothecated or otherwise encumbered or subject
to any lien, obligation or liability of such participant to any
party, or assigned or transferred by such participant otherwise
than by will or the laws of descent and distribution or to a
beneficiary upon the death of a participant, and such awards or
rights that may be exercisable shall be exercised during the
lifetime of the participant only by the participant or his or
her guardian or legal representative, except that awards and
other rights may be transferred to one or more beneficiaries or
other transferees during the lifetime of the participant, and
may
71
be exercised by such transferees in accordance with the terms of
the award, but only if and to the extent such transfers are
permitted by the committee pursuant to the express terms of an
award agreement (subject to any terms and conditions which the
committee may impose thereon). A beneficiary, transferee, or
other person claiming any rights under the 2009 Plan from or
through any participant will be subject to all terms and
conditions of the 2009 Plan and any award agreement applicable
to such participant, except as otherwise determined by the
committee, and to any additional terms and conditions deemed
necessary or appropriate by the committee.
The exercise price per share purchasable under an option granted
under the 2009 Plan will be determined by the committee,
provided that an exercise price may not be less than 100% of the
fair market value of a share on the date of grant of the option
and shall not, in any event, be less than the par value of a
share on the date of grant of the option. The committee may
impose on any award or the exercise thereof, at the date of
grant or thereafter, additional terms and conditions, not
inconsistent with the provisions of the 2009 Plan, as the
committee may determine, including terms requiring forfeiture of
awards in the event of termination of the participants
continuous service and terms permitting a participant to make
elections relating to his or her award.
As of August 15, 2010, there are 1,153,731 incentive awards
outstanding under the 2009 Plan. On August 14, 2009, the
board approved the issuance to our chairman and
co-chief
executive officer, James J. Lowrey, of 1,000,000 shares of
vested common stock at a fair value of $2.22 per share for
services rendered to the company. In addition, the following
stock option grants to executive officers under the 2009 Plan
were outstanding on August 15, 2010: James J.
Lowrey 10,000 options at a weighted average exercise
price of $0.69; Anthony Chidoni 10,000 options at a
weighted average exercise price of $0.69; and Brian
Mayo 13,731 options at a weighted average exercise
price of $0.69.
PRINCIPAL
STOCKHOLDERS
The following table sets forth information regarding the number
of shares of our common stock beneficially owned on
August 15, 2010, except as otherwise set forth below, and
as adjusted to reflect the sale of the shares of common stock
offered by this prospectus, by:
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each of our executive officers,
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each of our directors,
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all of our directors and executive officers as a group, and
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|
each person who is known by us to beneficially own 5% or more of
our common stock.
|
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 our common stock which may
be acquired upon conversion of preferred stock or exercise of
stock options or warrants which are currently exercisable or
convertible or which become exercisable or convertible within
60 days after the date indicated in the table are deemed
beneficially owned by the optionees or warrant holders. Subject
to any applicable community property laws, the persons or
entities named in the table below have sole voting and
investment power with respect to all shares indicated as
beneficially owned by them.
72
Unless otherwise indicated, the persons named in the table below
have sole voting and investment power with respect to the number
of shares indicated as beneficially owned by them. Unless
otherwise indicated, the address of the beneficial owner is
c/o XStream
Systems, Inc., 10305 102nd Terrace, Suite 101,
Sebastian, FL 32958.
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Number of
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|
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|
Shares
|
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|
Percentage of Shares Beneficially Owned(1)
|
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|
|
Beneficially
|
|
|
Before this
|
|
|
After Minimum
|
|
|
After Maximum
|
|
Name and Address of Beneficial Owner
|
|
Owned
|
|
|
Offering (%)
|
|
|
Offering (%)
|
|
|
Offering (%)
|
|
|
Principal Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marianne B. Lowrey Trust dated Nov. 29, 2007(2)
|
|
|
1,180,339
|
|
|
|
35.3
|
%
|
|
|
11.4
|
%
|
|
|
9.8
|
%
|
Mayo Family Revocable Trust(3)
|
|
|
380,574
|
|
|
|
12.8
|
%
|
|
|
3.6
|
%
|
|
|
3.1
|
%
|
Dr. William E. Mayo(4)
|
|
|
496,000
|
|
|
|
17.3
|
%
|
|
|
4.8
|
%
|
|
|
4.1
|
%
|
James J. Lowrey 2009 Irrevocable Trust(5)
|
|
|
413,316
|
|
|
|
12.6
|
%
|
|
|
3.8
|
%
|
|
|
3.3
|
%
|
HLG, LLC(6)
|
|
|
320,191
|
|
|
|
10.1
|
%
|
|
|
3.1
|
%
|
|
|
2.7
|
%
|
Thomas W. Cook(7)
|
|
|
240,699
|
|
|
|
8.0
|
%
|
|
|
2.3
|
%
|
|
|
2.0
|
%
|
Walter R. Lovejoy(8)
|
|
|
191,678
|
|
|
|
6.3
|
%
|
|
|
1.8
|
%
|
|
|
1.6
|
%
|
JTW Partners(9)
|
|
|
160,146
|
|
|
|
5.6
|
%
|
|
|
1.5
|
%
|
|
|
1.3
|
%
|
Lovejoy Family Limited Partnership(10)
|
|
|
156,946
|
|
|
|
5.2
|
%
|
|
|
1.5
|
%
|
|
|
1.3
|
%
|
Management:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James J. Lowrey(11)
|
|
|
1,760,676
|
|
|
|
46.0
|
%
|
|
|
16.9
|
%
|
|
|
14.6
|
%
|
Joseph Melone(12)
|
|
|
112,676
|
|
|
|
3.8
|
%
|
|
|
1.1
|
%
|
|
|
|
*
|
Anthony Chidoni(13)
|
|
|
160,255
|
|
|
|
5.3
|
%
|
|
|
1.5
|
%
|
|
|
1.3
|
%
|
Robert E. Kennedy(14)
|
|
|
79,318
|
|
|
|
2.7
|
%
|
|
|
|
*
|
|
|
|
*
|
Brian T. Mayo(15)
|
|
|
749,120
|
|
|
|
22.9
|
%
|
|
|
7.0
|
%
|
|
|
6.0
|
%
|
Philip A. Odeen(16)
|
|
|
60,554
|
|
|
|
2.1
|
%
|
|
|
|
*
|
|
|
|
*
|
Ash K. Chawla(17)
|
|
|
0
|
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
Simon Irish(18)
|
|
|
105,542
|
|
|
|
3.6
|
%
|
|
|
1.0
|
%
|
|
|
|
*
|
Dennis H. Ferro(19)
|
|
|
17,590
|
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
Dr. E. Darracott Vaughan, Jr.(20)
|
|
|
10,554
|
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
Dr. Stuart Weinstein(21)
|
|
|
0
|
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
John R. Murphy(22)
|
|
|
0
|
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
Dennis Cummings(23)
|
|
|
37,319
|
|
|
|
1.3
|
%
|
|
|
|
*
|
|
|
|
*
|
Alan Clock(24)
|
|
|
133,999
|
|
|
|
4.5
|
%
|
|
|
1.3
|
%
|
|
|
1.1
|
%
|
All directors and executive officers as a group
(14 persons)
|
|
|
3,227,604
|
|
|
|
65.2
|
%
|
|
|
29.3
|
%
|
|
|
25.5
|
%
|
|
|
|
* |
|
Represents less than 1% of outstanding common stock or voting
power. |
|
|
|
(1) |
|
Applicable percentage ownership is based on
2,865,044 shares of common stock outstanding as of
August 15, 2010 and assumes 3,333,334 shares of common
stock issued in the minimum offering and 5,000,000 shares
of common stock issued in the case of the maximum offering. Also
includes shares of common stock issuable upon conversion of
accrued dividends on the outstanding preferred stock as of
August 15, 2010 in the aggregate amount of $2,038,586,
which are convertible at a price of $3.00 into approximately
679,529 shares of common stock. The shares of Series A
preferred stock, Series B preferred stock, Series C
preferred stock and Series D preferred stock are all
convertible on the effective date of the registration statement
into shares of common stock on a
one-for-one
basis. |
|
|
|
(2) |
|
Includes 131,580 shares of Series A preferred stock;
100,001 shares of Series B preferred stock;
75,000 shares of Series C preferred stock;
100,000 shares of Series D preferred stock; and
73,758 shares of common stock issuable upon conversion of
accrued dividends on such preferred stock as of August 15,
2010. Marianne Lowrey is the trustee of the Marianne B. Lowrey
Trust and the wife of our co-chief executive officer,
Mr. James J. |
73
|
|
|
|
|
Lowrey. Mr. Lowrey disclaims beneficial ownership of the
shares of common stock and preferred stock owned by
Mrs. Lowreys trust. |
|
|
|
(3) |
|
The securities are also included in the beneficial ownership
calculation for Mr. Brian T. Mayo. Mr. Mayo and his
spouse are each trustees of the trust and each may exercise
voting and dispositive power over the securities held in the
trust. Includes 46,782 shares of Series B preferred
stock; 8,333 shares of Series C preferred stock;
9,043 shares of common stock issuable upon conversion of
accrued dividends on such preferred stock as of August 15,
2010; warrants to purchase 40,000 shares of common stock at
an exercise price of $2.34 per share; and 276,416 shares of
common stock. Excludes warrants to purchase 275,575 shares
of common stock at an exercise price of $3.00 per share, which
are not exercisable within 60 days of August 15, 2010 |
|
|
|
(4) |
|
Includes 100,000 shares of common stock owned by William E.
Mayo, as Trustee of The Mayo Childrens 2000 Irrevocable
Trust dated July 13, 2000; 195,000 shares of common
stock and options to purchase 5,000 shares of common stock
at an exercise price of $0.11 per share, which are exercisable
within 60 days of August 15, 2010. Includes the
following securities owned by Dr. Mayos spouse:
195,000 shares of common stock and options to purchase
1,000 shares of common stock at an exercise price of $0.10
per share, which are exercisable within 60 days of
August 15, 2010. Dr. William E. Mayo is the brother of
our president and chief technical officer, Mr. Brian T.
Mayo. Brian Mayo disclaims beneficial ownership of the shares
and options owned by Dr. Mayo and his spouse. |
|
|
|
(5) |
|
Includes options to purchase 413,316 shares of common stock
at exercise prices ranging from $3.00 to $3.80 per share, which
are exercisable within 60 days of August 15, 2010.
Excludes options to purchase 10,000 shares of common stock
at an exercise price of $0.69 per share, which are not
exercisable within 60 days of August 15, 2010.
Mr. Lowreys three daughters Jessica Lee Lowrey, Tracy
Lowrey Lenehan and Whitney Lowrey Gaeta have the right to
exercise shared voting and dispositive power with respect to the
securities in trust for Mr. Lowreys grandchildren.
Mr. Lowrey disclaims beneficial ownership of the securities
held in the trust. |
|
|
|
(6) |
|
Includes 87,711 shares of Series A preferred stock;
66,660 shares of Series B preferred stock;
49,993 shares of Series C preferred stock;
66,660 shares of Series D preferred stock; and
49,176 shares of common stock issuable upon conversion of
accrued dividends on such preferred stock as of August 15,
2010. Mr. Lowrey is the manager of the limited liability
company and has the sole right to exercise voting and
dispositive power with respect to the securities. |
|
|
|
(7) |
|
Includes 13,450 shares of Series A preferred stock;
100,519 shares of Series B preferred stock;
22,826 shares of common stock issuable upon conversion of
accrued dividends on such preferred stock as of August 15,
2010; warrants to purchase 10,000 shares of common stock at
an exercise price of $2.34 per share, which are exercisable
within 60 days of August 15, 2010; options to purchase
14,250 shares of common stock at exercise prices ranging
from $0.69 to $3.80 per share, which are exercisable within
60 days of August 15, 2010; and 79,654 shares of
common stock. Excludes warrants to purchase 502,595 shares
of common stock at an exercise price of $3.00 per share and
options to purchase 10,000 shares of common stock at an
exercise price of $0.69 per share, which are not exercisable
within 60 days of August 15, 2010. |
|
|
|
(8) |
|
Includes the following securities owned by the Lovejoy Family
Limited Partnership: 100,386 shares of Series B
preferred stock; 24,999 shares of Series C preferred
stock; 20,881 shares of common stock issuable upon
conversion of accrued dividends on such preferred stock as of
August 15, 2010; and options to purchase 10,680 shares
of common stock at exercise prices ranging from $3.80 to $0.69
per share, which are exercisable within 60 days of
August 15, 2010. Excludes options to purchase
7,500 shares of common stock at an exercise price of $0.69
per share, which are not exercisable within 60 days of
August 15, 2010. Includes the following securities owned by
Mr. Lovejoy: 26,316 shares of Series A preferred
stock and 8,416 shares of common stock issuable upon
conversion of accrued dividends on such preferred stock as of
August 15, 2010. |
|
|
|
(9) |
|
Includes 43,869 shares of Series A preferred stock;
33,340 shares of Series B preferred stock;
25,006 shares of Series C preferred stock;
33,340 shares of Series D preferred stock; and
24,591 shares of common stock issuable upon conversion of
accrued dividends on such preferred stock as of August 15,
2010. Mr. Lowrey is the managing partner of the general
partnership and has the sole right to exercise voting and
dispositive power with respect to the securities. |
74
|
|
|
(10) |
|
The securities are also included in the beneficial ownership
calculation for Mr. Walter R. Lovejoy. Includes
100,386 shares of Series B preferred stock;
24,999 shares of Series C preferred stock;
20,881 shares of common stock issuable upon conversion of
accrued dividends on such preferred stock as of August 15,
2010; and options to purchase 10,680 shares of common stock
at exercise prices ranging from $3.80 to $0.69 per share, which
are exercisable within 60 days of August 15, 2010.
Excludes options to purchase 7,500 shares of common stock
at an exercise price of $0.69 per share, which are not
exercisable within 60 days of August 15, 2010.
Mr. Walter R. Lovejoy, a former member of our board of
directors, is the trustee of the Walter R. Lovejoy Declaration
of Trust Dtd. 9/24/85, the general partner of the limited
partnership, and has the right to exercise voting and
dispositive power with respect to the securities. |
|
|
|
(11) |
|
Includes the following securities owned by the Marianne B.
Lowrey Trust, JTW Partners, and HLG, LLC: 131,580, 43,869, and
87,711 shares of Series A preferred stock,
respectively; 100,001, 33,340, and 66,660 shares of
Series B preferred stock, respectively; 75,000, 25,006 and
49,993 shares of Series C preferred stock,
respectively; 100,000, 33,340 and 66,660 shares of
Series D preferred stock, respectively; and 73,758, 24,591,
and 49,167 shares of common stock, respectively, issuable
upon conversion of accrued dividends on such preferred stock as
of August 15, 2010. Includes 700,000 shares of common
stock owned by the Marianne B. Lowrey Trust directly. Excludes
warrants owned by Lowrey Family Investments, LLC to purchase
2,750,000 shares of common stock at an exercise price of
$3.00 per share, which are not exercisable within 60 days
of August 15, 2010. Excludes options to purchase
413,316 shares of common stock at exercise prices ranging
from $3.00 to $3.80 per share, which are exercisable within
60 days of August 15, 2010, as well as options to
purchase 10,000 shares of common stock at an exercise price
of $0.69 per share, which are not exercisable within
60 days of August 15, 2010, because these options are
owned by the James J. Lowrey 2009 Irrevocable Trust and
Mr. Lowrey is not deemed to be the beneficial owner of such
options in accordance with
Rule 13d-3(d)(1)
of the Securities Exchange Act of 1934, as amended.
Mr. Lowrey disclaims beneficial ownership of the shares of
common stock and preferred stock owned by
Mrs. Lowreys trust. |
|
|
|
(12) |
|
Includes 32,895 shares of Series A preferred stock;
58,332 shares of Series B preferred stock; and
21,449 shares of common stock issuable upon conversion of
accrued dividends on such preferred stock as of August 15,
2010. Excludes warrants to purchase 291,660 shares of
common stock at an exercise price of $3.00 per share and options
to purchase 10,000 shares of common stock at an exercise
price of $0.69 per share, which are not exercisable within
60 days of August 15, 2010. |
|
|
|
(13) |
|
Includes 99,999 shares of Series B preferred stock;
24,999 shares of Series C preferred stock;
13,333 shares of Series D preferred stock; and
21,924 shares of common stock issuable upon conversion of
accrued dividends on such preferred stock as of August 15,
2010. Excludes warrants to purchase 691,655 shares of
common stock at an exercise price of $3.00 per share and options
to purchase 10,000 shares of common stock at an exercise
price of $0.69 per share, which are not exercisable within
60 days of August 15, 2010. |
|
|
|
(14) |
|
Includes 6,579 shares of Series A preferred stock;
33,387 shares of Series B preferred stock;
8,333 shares of Series C preferred stock;
8,333 shares of Series D preferred stock;
9,186 shares of common stock issuable upon conversion of
accrued dividends on such preferred stock as of August 15,
2010; and options to purchase 13,500 shares of common stock
at exercise prices ranging from $0.69 to $3.80 per share, which
are exercisable within 60 days of August 15, 2010.
Excludes warrants to purchase 250,265 shares of common
stock at an exercise price of $3.00 per share and options to
purchase 10,000 shares of common stock at an exercise price
of $0.69 per share, which are not exercisable within
60 days of August 15, 2010. |
|
|
|
(15) |
|
Includes the following securities owned by The Mayo Family
Revocable Trust: 46,782 shares of Series B preferred
stock; 8,333 shares of Series C preferred stock;
9,043 shares of common stock issuable upon conversion of
accrued dividends on such preferred stock as of August 15,
2010; warrants to purchase 40,000 shares of common stock at
an exercise price of $2.34 per share; and 276,416 shares of
common stock. Excludes warrants to purchase 275,575 shares
of common stock at an exercise price of $3.00 per share, which
are not exercisable within 60 days of August 15, 2010.
Includes the following securities owned by Mr. Mayo:
warrants to purchase 21,000 shares of common stock at an
exercise price of $3.80 per share, which are exercisable within
60 days of August 15, 2010; options to purchase
281,006 shares of common stock at exercise prices ranging
from $0.69 to $4.18 per share, which are exercisable within
60 days of August 15, 2010; and 65,000 shares of
common stock. Also includes options to purchase
1,540 shares of common stock at exercise prices ranging
from $0.10 to $3.80 per share, which are owned by
Mr. Mayos spouse and are |
75
|
|
|
|
|
exercisable within 60 days of August 15, 2010.
Excludes options to purchase 1,793 shares of common stock
at exercise prices ranging from $0.69 to $4.18, which are not
exercisable within 60 days of August 15, 2010. |
|
|
|
(16) |
|
Includes 13,158 shares of Series A preferred stock;
33,333 shares of Series B preferred stock;
10,783 shares of common stock issuable upon conversion of
accrued dividends on such preferred stock as of August 15,
2010; and options to purchase 3,280 shares of common stock
at an exercise price of $0.69 per share, which are exercisable
within 60 days of August 15, 2010. Excludes warrants
to purchase 166,665 shares of common stock at an exercise
price of $3.00 per share and options to purchase
10,000 shares of common stock at an exercise price of $0.69
per share, which are not exercisable within 60 days of
August 15, 2010. |
|
|
|
(17) |
|
Excludes options to purchase 10,000 shares of common stock
at an exercise price of $0.69 per share, which are not
exercisable within 60 days of August 15, 2010. |
|
|
|
(18) |
|
Includes 100,000 shares of Series D preferred stock;
and 5,542 shares of common stock issuable upon conversion
of accrued dividends on such preferred stock as of
August 15, 2010. Excludes warrants to purchase
500,000 shares of common stock at an exercise price of
$3.00 per share and options to purchase 10,000 shares of
common stock at an exercise price of $0.69 per share, which are
not exercisable within 60 days of August 15, 2010. |
|
|
|
(19) |
|
Includes 16,666 shares of Series D preferred stock;
and 924 shares of common stock issuable upon conversion of
accrued dividends on such preferred stock as of August 15,
2010. Excludes warrants to purchase 83,330 shares of common
stock at an exercise price of $3.00 per share and options to
purchase 10,000 shares of common stock at an exercise price
of $0.69 per share, which are not exercisable within
60 days of August 15, 2010. |
|
|
|
(20) |
|
Includes 10,000 shares of Series D preferred stock;
and 554 shares of common stock issuable upon conversion of
accrued dividends on such preferred stock as of August 15,
2010. Excludes warrants to purchase 50,000 shares of common
stock at an exercise price of $3.00 per share and options to
purchase 10,000 shares of common stock at an exercise price
of $0.69 per share which are not exercisable within 60 days
of August 15, 2010. |
|
|
|
(21) |
|
Excludes options to purchase 10,000 shares of common stock
at an exercise price of $0.69 per share, which are not
exercisable within 60 days of August 15, 2010. |
|
|
|
(22) |
|
Excludes options to purchase 7,500 shares of common stock
at an exercise price of $0.69 per share, which are not
exercisable within 60 days of August 15, 2010. |
|
|
|
(23) |
|
Includes 13,158 shares of Series A preferred stock;
16,666 shares of Series B preferred stock; and
7,495 shares of common stock issuable upon conversion of
accrued dividends on such preferred stock as of August 15,
2010. Excludes warrants to purchase 83,330 shares of common
stock at an exercise price of $3.00 per share, which are not
exercisable within 60 days of August 15, 2010. |
|
|
|
(24) |
|
Includes options to purchase 133,999 shares of common stock
at exercise prices ranging from $0.69 to $3.80 per share, which
are exercisable within 60 days of August 15, 2010.
Excludes options to purchase 4,001 shares of common stock
at an exercise price of $3.80 per share, which are not
exercisable within 60 days of August 15, 2010. |
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We engage a significant stockholder, Dr. William Mayo,
under a consulting agreement to serve as chairman of our
scientific advisory board. Dr. Mayo is also the brother of
Brian T. Mayo, our president and chief technical officer. This
agreement provides for an hourly fee for work performed under
the agreement as well as 25,000 options, which vest over a
period of four years. We have paid Dr. Mayo approximately
$3,800 under the contract from the time period beginning October
2004 and ending June 2009.
We periodically engage H&M Analytical Services, Inc.
(H&M) to provide material analysis services and
execution of the
2005/2006
Department of Homeland Security Simulants contract. H&M is
owned by Dr. William Mayo, shareholder and brother of Brian
T. Mayo, and Walter Helfrecht, shareholder and
brother-in-law
of Brian T. Mayo. As of the date of this prospectus, the total
amount paid to H&M under this arrangement was approximately
$69,000.
76
We engaged a consulting firm Catalyst Capital Investment, LLC
(Catalyst), by written consulting agreement, dated
May 1, 2007, to perform certain exclusive consulting
services related to our capital structure, budgeting and
financial planning. In addition, we had consulting agreements to
provide introductions to potential new customers and suppliers
with Catalyst, each agreement dated May 31, 2006 (the
Prospective Customer Agreement and the
Prospective Supplier Agreement). Mr. James J.
Lowrey, our co-chief executive officer is a member of the
consulting firm. A former director of the company is also a
managing member of Catalyst. As compensation to the consulting
firm for services rendered under these consulting agreements, we
issued fully vested options to purchase 180,000 shares of
our common stock exercisable for a ten-year period at an
exercise price of $3.80 per share. Effective August 14,
2008, the agreement was supplemented and amended to cancel
90,000 of the vested options granted under the original
agreement and issue fully vested options to purchase
578,000 shares of our common stock exercisable for a
ten-year period at an exercise price of $3.00 per share. During
July 2009, we and Catalyst agreed to terminate the Catalyst
Consulting agreement dated May 1, 2007, the Prospective
Customer Agreement and the Prospective Supplier Agreement.
On November 16, 2006, we executed a secured revolving
demand promissory note in principal amount not to exceed
$400,000 in favor of Mr. Brian T. Mayo. The note was
amended in February 2007 to increase the amount not to exceed
$450,000. Under the terms of the note, Mr. Mayo agreed to
make revolving loans to the company from time to time with 9%
interest accruing from the date the amount of the borrowing is
received from the lender. All outstanding amounts of $465,938
including principal and interest were repaid under the note in
March 2007.
On March 12, 2009, we entered into a marketing agreement
with Avani International (Avani) which is owned by
Mr. Ash Chawla, a member of our board of directors. The
marketing agreement seeks to engage Mr. Chawla to market
our
XT250tm
product in exchange for commissions at 15% of the actual
purchase price of any
XT250tm
system sold by Avani. As of August 15, 2010, we have paid
Avani $13,878 under this arrangement.
On October 7, 2009, Mr. James J. Lowrey loaned us
$39,660 for general operating expenses. We executed a promissory
note in principal amount of $39,660, bearing interest at 5% per
year, in favor of Mr. Lowrey. All outstanding amounts of
$39,763 including principal and interest were repaid to
Mr. Lowrey under the note in October 2009.
On August 14, 2009, the board approved the issuance to our
chairman and co-chief executive officer, James J. Lowrey, of
1,000,000 shares of common stock for services rendered to
the company. The shares were issued under the 2009 Long Term
Incentive Compensation Plan.
During the years ended December 31, 2007 and 2008 and the
subsequent period through August 15, 2010, Mr. Lowrey
purchased the following securities in an exempt private
placement transaction for aggregate cash consideration of
$2,650,000 as follows: 263,160 shares of Series A
convertible preferred stock for cash consideration of
$1,000,000; 200,001 shares of Series B convertible
preferred stock and 1,000,005 Series B warrants, each
warrant exercisable for five shares of common stock for cash
consideration of $600,003; 149,999 shares of Series C
convertible preferred stock and 749,995 Series C warrants,
each warrant exercisable for five shares of common stock for
cash consideration of $449,997; and 200,000 shares of
Series D convertible preferred stock and 1,000,000
Series D warrants, each warrant exercisable for five shares
of common stock, for cash consideration of $600,000.
During the year ended December 31, 2008 and the subsequent
period through August 15, 2010, our co-chief executive
officer, chief operating officer, secretary and director,
Mr. Anthony Chidoni, purchased the following securities in
an exempt private placement transaction for aggregate cash
consideration of $414,993 as follows: 99,999 shares of
Series B convertible preferred stock and 499,995
Series B warrants, each warrant exercisable for five shares
of common stock for cash consideration of $299,997;
24,999 shares of Series C convertible preferred stock
and 124,995 Series C warrants, each warrant exercisable for
five shares of common stock for cash consideration of $74,997;
and 13,333 shares of Series D convertible preferred
stock and 66,665 Series D warrants, each warrant
exercisable for five shares of common stock, for cash
consideration of $39,999.
During 2009, our director Mr. Simon Irish purchased the
following securities for aggregate cash consideration of
$300,000 as follows: 100,000 shares of Series D
convertible preferred stock and 500,000 Series D warrants,
each warrant exercisable for five shares of common stock.
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During 2009, our director Dr. E. Darracott Vaughan
purchased the following securities in an exempt private
placement transaction for aggregate cash consideration of
$30,000 as follows: 10,000 shares of Series D
convertible preferred stock and 50,000 Series D warrants,
each warrant exercisable for five shares of common stock.
During 2009, our director Mr. Dennis Ferro purchased the
following securities in an exempt private placement transaction
for aggregate cash consideration of $49,998 as follows:
16,666 shares of Series D convertible preferred stock
and 83,330 Series D warrants, each warrant exercisable for
five shares of common stock.
During the years ended December 31, 2007 and 2008 and the
subsequent period through August 15, 2010, our director
Mr. Joseph Melone purchased the following securities in an
exempt private placement transaction for aggregate cash
consideration of $299,996 as follows: 32,895 shares of
Series A convertible preferred stock for $125,000 in cash
consideration; 58,332 shares of Series B convertible
preferred stock and 291,660 Series B warrants, each warrant
exercisable for five shares of common stock, for cash
consideration of $174,996.
During the years ended December 31, 2007 and 2008 and the
subsequent period through August 15, 2010, our director
Mr. Robert Kennedy purchased the following securities in an
exempt private placement transaction for aggregate cash
consideration of $175,159 as follows: 6,579 shares of
Series A convertible preferred stock for $25,000 in cash
consideration; 33,387 shares of Series B convertible
preferred stock and 166,935 Series B warrants, each warrant
exercisable for five shares of common stock, for cash
consideration of $100,161; 8,333 shares of Series C
convertible preferred stock and 41,665 Series C warrants,
each warrant exercisable for five shares of common stock, for
cash consideration of $24,999; and 8,333 shares of
Series D convertible preferred stock and 41,665
Series D warrants, each warrant exercisable for five shares
of common stock, for cash consideration of $24,999.
During the years ended December 31, 2007 and 2008, our
director Mr. Philip Odeen purchased the following
securities in an exempt private placement transaction for
aggregate cash consideration of $99,999 as follows:
13,158 shares of Series A convertible preferred stock
for $50,000 in cash consideration; 33,333 shares of
Series B convertible preferred stock and 166,665
Series B warrants, each warrant exercisable for five shares
of common stock, for cash consideration of $99,999.
During the year ended December 31, 2007, Mr. Lowrey
purchased a demand promissory note in the principal amount of
$50,000 and debentures for $150,000 and our director
Mr. Robert Kennedy purchased a demand promissory note in
the principal amount of $50,000. Outstanding amounts repaid to
Mr. Lowrey under the promissory note was $50,074 including
and principal and interest and was repaid on March 14,
2007. Mr. Lowreys $150,000 debentures were converted
into Series B units on December 21, 2007. The amount
converted included $1,067 of interest. Mr. Kennedy
converted the demand promissory note in the principal amount of
$50,000 and $183 of interest into Series B units on
December 21, 2007.
During the year ended December 31, 2007, our chief
financial officer, executive vice president and treasurer,
Mr. Dennis Cummings, purchased the following securities in
an exempt private placement transaction for aggregate cash
consideration of $99,998 as follows: 13,158 shares of
Series A convertible preferred stock for cash consideration
of $50,000; 16,666 shares of Series B convertible
preferred stock and 83,330 Series B warrants, each warrant
exercisable for five shares of common stock for cash
consideration of $49,998.
On June 11, 2010, each of the following directors
Messrs. James J. Lowrey, Anthony R. Chidoni, Simon Irish
and our chief financial officer Mr. Dennis K. Cummings
loaned us $10,000, totaling $40,000 in aggregate principal
amount. The loans mature on the closing date of our initial
public offering and bear interest at a fixed rate equal to the
one-month LIBOR rate on the date of the loans, equal to
thirty-five hundredths of one percent (0.35%), plus two percent
(2%), until all sums due are paid in full. The loans are
represented by four promissory notes executed by the Company in
favor of each lender.
On various dates during July 2010, each of the following
directors Messrs. James J. Lowrey, Anthony R. Chidoni,
Simon Irish, Joseph J. Melone, Robert E. Kennedy and Philip A.
Odeen, our chief financial officer Mr. Dennis K. Cummings,
and each of the following security holders covered by
Item 403(a) of
Regulation S-K,
Messrs. Thomas Cook and Walter Lovejoy, loaned us $25,000,
totaling $225,000 in aggregate principal amount. The loans
mature on the closing date of our initial public offering and
bear interest at a fixed rate equal to ten percent
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(10%) until all sums due are paid in full. Principal and
interest due on the loans will be repaid from the proceeds of
the offering. The loans are represented by nine promissory notes
executed by the Company in favor of each lender.
Board of
Directors
Our preferred stock investors have the right to appoint three of
our directors while shares of our preferred stock are
outstanding. Upon the conversion of outstanding shares of our
preferred stock into common stock on the effective date of this
registration statement, the preferred stock investors
right to appoint board members will terminate. We anticipate
each of the preferred stock appointees will remain on our board
following this offering.
Stock and
Stock Options Granted to and Employment Arrangements with
Directors and Executive Officers
For more information regarding the grant of stock options to
directors and executive officers and employment arrangements
with our executive officers, please see Director
Compensation for the Year Ended December 31, 2009 and
Executive Compensation.
In October 2009, a resolution was passed by the Compensation
Committee providing for the following annual compensation
package to members of the board of directors:
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chairpersons of a committee will receive a share-based incentive
grant to purchase 2,500 shares of our common stock pursuant
to our 2009 Long Term Incentive Compensation Plan; and
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board members will receive a share-based incentive award to
purchase 7,500 shares of our common stock for full board
service.
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Indemnification
Agreements
We have entered into indemnification agreements with each of our
current directors. These agreements require us to indemnify
these individuals to the fullest extent permitted under Delaware
law against liabilities that may arise by reason of their
service to us, and to advance expenses incurred as a result of
any proceeding against them as to which they could be
indemnified. We also intend to enter into indemnification
agreements with our future directors and executive officers.
Procedures
for Related Party Transactions
Under our Code of Conduct, our employees, officers and directors
are discouraged from entering into any transaction that may
cause a conflict of interest for us. In addition, they must
report any potential conflict of interest, including related
party transactions, to their managers or our general counsel who
then reviews and summarizes the proposed transaction for our
Audit Committee. Pursuant to its charter, our Audit Committee
must then approve any related-party transactions, including
those transactions involving our directors. In approving or
rejecting such proposed transactions, the Audit Committee
considers the relevant facts and circumstances available and
deemed relevant to the Audit Committee, including the material
terms of the transactions, risks, benefits, costs, availability
of other comparable services or products and, if applicable, the
impact on a directors independence. Our Audit Committee
will approve only those transactions that, in light of known
circumstances, are in, or are not inconsistent with, our best
interests, as our Audit Committee determines in the good faith
exercise of its discretion. A copy of our Code of Conduct
generally applicable to all employees, our Code of Ethics for
senior financial officers, and Audit Committee Charter may be
found at our corporate website at: www.xstreamsystems.com.
DESCRIPTION
OF CAPITAL STOCK
General
Our authorized capital stock as of August 15, 2010 consists
of 60,000,000 shares of common stock, $.0001 par value
per share, and 6,000,000 shares of preferred stock, par
value $.0001 per share. The preferred stock authorized may be
issued from time to time in one or more series with the rights,
preferences and designations for each such
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series of preferred stock to be determined by the
companys board of directors. As of August 15, 2010,
there were issued and outstanding:
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2,865,044 shares of common stock;
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stock options to purchase 2,033,117 shares of common stock
at an average weighted price of $2.08 per share;
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warrants to purchase 336,000 shares of common stock in
connection with our debentures (for which cash would need to be
remitted to us for exercise), at an average exercise price of
$2.48 per share;
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962,101 shares of Series A Redeemable Convertible
Preferred Stock;
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1,619,127 shares of Series B Redeemable Convertible
Preferred Stock;
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365,996 shares of Series C Redeemable Convertible
Preferred Stock;
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563,414 shares of Series D Redeemable Convertible
Preferred Stock;
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Series B and Series C warrants to purchase
9,925,615 shares of common stock (for which cash would need
to be remitted to us for exercise), at an average exercise price
of $3.00 per share; and
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Series D warrants to purchase 2,817,070 shares of
common stock (for which cash would need to be remitted to us for
exercise), at an average exercise price of $3.00 per share.
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The following summary of the material provisions of our common
stock, certificate of incorporation and by-laws is qualified by
reference to the provisions of our certificate of incorporation
and by-laws incorporated by reference as exhibits to the
registration statement of which this prospectus is a part.
Common
Stock
Holders of common stock are entitled to one vote for each share
held of record on each matter submitted to a vote of
stockholders. There is no cumulative voting for election of
directors. Accordingly, the holders of a majority of our
outstanding shares of common stock entitled to vote in any
election of directors can elect all of the directors standing
for election, if they should so choose. Holders of common stock
are entitled to receive dividends ratably when, as, and if
declared by the board of directors out of funds legally
available therefor and, upon our liquidation, dissolution or
winding up are entitled to share ratably in all assets remaining
after payment of liabilities. Holders of common stock have no
preemptive rights and have no rights to convert their common
stock into any other securities. There are no redemption or
sinking fund provisions applicable to our common stock.
Series A
Redeemable Convertible Preferred Stock
General. We have designated
962,101 shares as our Series A Redeemable Convertible
Preferred Stock, of which, as of August 15, 2010, there
were 962,101 shares issued and outstanding.
Series B
Redeemable Convertible Preferred Stock
General. We have designated
1,800,000 shares as our Series B Redeemable
Convertible Preferred Stock, of which, as of August 15,
2010, there were 1,619,127 shares issued and outstanding.
Series C
Redeemable Convertible Preferred Stock
General. We have designated
1,350,000 shares as our Series C Redeemable
Convertible Preferred Stock, of which, as of August 15,
2010, there were 365,996 shares issued and outstanding.
Series D
Redeemable Convertible Preferred Stock
General. We have designated
700,000 shares as our Series D Redeemable Convertible
Preferred Stock, of which, as of August 15, 2010, there
were 563,414 shares issued and outstanding.
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Rights
and Preferences of the Series A, B, C and D Preferred
Stock
The rights and preferences of the holders of Series A,
Series B, Series C and Series D Preferred Stock
are substantially identical except as set forth below. Except
where the reference may indicate otherwise, the Series A,
B, C and D are referred to collectively as our Preferred
Stock or the Pari Passu Preferred. Shares of
our Preferred Stock will convert to shares of common stock on a
one-for-one
basis on the effective date of this registration statement.
Dividends. The holders of the Preferred Stock
are entitled to receive dividends as follows: when and as
declared by the board of directors, and to the fullest extent
permitted under the General Corporation Law of the State of
Delaware, we will pay preferential dividends on each issued and
outstanding share of the Preferred Stock; provided however, that
no dividend will be declared on a series of preferred stock
unless a pro rata amount (based upon relative liquidation value)
is declared on each of the other series of pari passu preferred.
Subject to certain provisions, dividends on each issued and
outstanding share of the Preferred Stock will be cumulative and
accrue on a daily basis at a rate of 5% per annum of the
Preferred Stock liquidation value thereof (with such accrued and
unpaid dividends compounding on each annual anniversary of the
Preferred Stock original issuance date) from and including the
Preferred Stock original issuance date to and including the
first to occur of (i) the date on which the Preferred Stock
liquidation value of such share (plus all accrued and unpaid
dividends thereon) is paid to the holder thereof in connection
with our liquidation, (ii) the date on which such share is
converted into shares of common stock hereunder or
(iii) the date on which such share is otherwise acquired by
us. Such dividends will accrue whether or not they been declared
and whether or not there are profits, surplus or other funds of
the company legally available for the payment of dividends, and
such dividends will be cumulative such that all accrued and
unpaid dividends will be fully paid or declared with funds
irrevocably set apart for payment before any dividends,
distributions, redemptions or other payments may be made with
respect to any Preferred Stock junior securities.
Voting Rights Generally. The holders of the
Preferred Stock will be entitled to notice of all meetings of
stockholders in accordance with our amended and restated
by-laws, and except as otherwise provided or required by
applicable law, the holders of the Preferred Stock will be
entitled to vote on all matters submitted to the stockholders
for a vote, voting as a single class with the common stock and
other securities that vote with the common stock, with the
holder of Preferred Stock entitled to one vote for each share of
common stock issuable upon conversion of the Preferred Stock
held as of the record date for such vote or, if no record date
is specified, as of the date of such vote.
Actions requiring the consent of the holders of the Preferred
Stock. So long as any shares of a respective
series of Preferred Stock are outstanding, without the approval
of at least a majority of the shares of that respective series
of Preferred Stock then outstanding, we are not permitted to
file any resolution of the board with the Delaware Secretary of
State that contains any provisions, or take any other action,
that would amend the terms of the series of preferred stock in
question, increase the number of authorized preferred stock in
that respective series, approve a reverse stock split or
adversely affect or otherwise impair the rights or the relative
preferences or priorities of the holders of the Preferred Stock
under its respective certificate of designation or the amended
and restated by-laws.
Actions requiring the consent of the holders of the
Series A, Series B, Series C and Series D
Preferred Stock and the holders of common stock issued or
issuable upon conversion of the Preferred Stock.
So long as any shares of Pari Passu Preferred are outstanding,
we are not permitted to take any of the following actions
without the approval of the holders of at least a majority of
the shares of all of the Pari Passu Preferred, voting as a
single class on a common equivalent basis, then outstanding:
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amend our certificates of designation or the amended and
restated by-laws;
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except for permitted issuances, authorize, issue or enter into
any agreement providing for the issuance (contingent or
otherwise) of any capital stock or other equity securities of
the company ranking pari passu or senior to the Preferred Stock
(or any securities convertible into or exchangeable for any
capital stock or other equity securities of the company ranking
pari passu or senior to the Preferred Stock);
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except for the ratable payment of dividends on the Pari Passu
Preferred, directly or indirectly declare or pay any cash or
property dividends or make any cash or property distributions
upon any of its capital stock or other equity securities;
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directly or indirectly redeem, purchase or otherwise acquire any
of our capital stock or other equity securities (including,
without limitation, options) other than (i) the Pari Passu
Preferred pursuant to the terms of the respective Certificate of
Designation, (ii) repurchases of our securities from
employees upon termination of an employees employment with
the company pursuant to terms approved by the Board,
(iii) certain repurchases of options outstanding as of
March 14, 2007, and (iv) pursuant to the terms of the
securityholders agreement;
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merge or consolidate with any person or entity (other than a
wholly owned subsidiary) or take any action which results in a
change in ownership as defined in the applicable Preferred Stock
instrument;
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sell, license, lease or otherwise transfer all or substantially
all of its assets to any person or entity (other than to a
wholly owned subsidiary of ours) in any transaction or series of
related transactions;
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liquidate, dissolve or effect a recapitalization, bankruptcy or
reincorporation in any form of transaction (including, without
limitation, any reincorporation into a limited liability
company, a partnership or any other non-corporate entity that is
treated as a partnership for federal income tax purposes);
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make any loans or advances to, guarantees for the benefit of, or
investments in, any person or entity (other than a wholly owned
subsidiary established under the laws of a jurisdiction of the
U.S. or any of its territorial possessions), except for
(i) reasonable advances to employees in the ordinary course
of business consistent with past practice and (ii) advances
to newly-hired employees in order to cover such employees
relocation expenses;
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except as provided in the current budget or incurred in
connection with a public offering, including the issuance of
debt securities in a public offering, create, incur, assume or
suffer to exist any indebtedness;
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create, incur, assume or suffer to exist any liens other than
(i) permitted liens and (ii) liens incurred in
connection with the incurrence of indebtedness not prohibited by
the preceding clause above;
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acquire any interest in any company or business (whether by a
purchase of assets, purchase of stock, merger or otherwise), or
enter into any joint venture, in either case, that is material
to the business of the company and its subsidiaries, taken as a
whole (each, an Acquisition), other than
Acquisitions the aggregate value of which (after taking into
account the assumption of any indebtedness or other liabilities
in connection therewith) do not exceed $300,000 in any
12 month period, measured after giving effect to any
purchase price adjustments relating thereto;
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become subject to (including, without limitation, by way of
amendment to or modification of) any agreement or instrument
that by its terms would (under any circumstances) restrict our
right to perform the provisions of the Preferred Stock
transactions documents and the our certificates of designation
or our amended and restated by-laws;
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except as provided in the current budget, make or commit to make
capital expenditures for any fiscal year;
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except as required under the Preferred Stock transaction
documents, increase the size of the board to a number greater
than 11;
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enter into or become a party to any license, agreement or other
arrangement after March 14, 2007 with respect to
intellectual property rights licensed to, or owned or developed
by us except that the foregoing shall not prevent us from
entering into, or becoming a party to, any such license,
agreement or other arrangement that (i) has a term of one
year or less, (ii) is non-exclusive and would be customary
in connection with the sale of our products or services,
(iii) relates to off the shelf software
licenses to us by a third party or (iv) is approved by a
majority of the board (including at least one of the investor
appointed directors); or
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change our primary line of business from materials
identification, verification and analysis, and any related
field, or enter into any material new line of business.
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Liquidation Rights. Upon any liquidation,
fundamental change, change in ownership, dissolution or winding
up of the company (whether voluntary or involuntary) (each, a
Significant Event) each holder of Preferred Stock
may be entitled to receive, prior and in preference to any
distribution or payment made upon any Preferred Stock
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junior securities, an amount equal to (i) the aggregate
Preferred Stock liquidation value of all shares of Preferred
Stock held by such holder plus (ii) all accrued and unpaid
dividends on such shares of Preferred Stock. If, upon any
Significant Event, our assets to be distributed among the
holders of the Pari Passu Preferred are insufficient to permit
payment to such holders of the aggregate amount to which they
are entitled to be paid under the applicable provisions of the
Preferred Stock certificates of designation and the equivalent
provisions of the other series of Pari Passu Preferred, then the
entire assets available to be distributed to the stockholders
shall be distributed pro rata among such holders of the Pari
Passu Preferred based upon the aggregate liquidation value (plus
all accrued and unpaid dividends) of the shares of Pari Passu
Preferred held by each such holder. After payment to the holders
of the Preferred Stock of the amounts set forth in above, the
entire remaining assets and funds of the company legally
available for distribution, if any, shall be distributed pro
rata among the holders of the common stock and the holders of
the Pari Passu Preferred (on a common equivalent basis). The
liquidation values of the Series A preferred, Series B
preferred, the Series C preferred and the Series D
preferred are $3.80 per share, $3.00 per share, $3.00 per share
and $3.00 per share, respectively.
Redemption. At any time on or after
March 14, 2012, upon the request of the holders of at least
a majority of the then outstanding shares of each series of
Preferred Stock, each of the holders of the then outstanding
preferred shares shall have the right (a
Redemption Right) to require us to redeem all
or any of their shares of Preferred Stock at a price per share
equal to the Preferred Stock liquidation value plus a rate of
return on such amount (after taking into account all dividends
paid by us under certain provisions of the certificates of
designation equal to 7% per annum, compounded annually. Any
holder of the Preferred Stock may exercise his, her or its
Redemption Right by delivering to us a redemption notice on
or after March 14, 2012, provided that holders of at least
a majority of the then outstanding shares of Pari Passu
Preferred have requested a redemption pursuant to the provisions
of the respective series of Preferred Stock certificate of
designation and the equivalent provisions of the other series of
Pari Passu Preferred. Within ten days after the date of a
redemption notice delivered by any holder of Preferred Stock, we
are required to notify all other holders of Pari Passu Preferred
that the Redemption Right has been exercised, and each
other holder of Pari Passu Preferred shall have the right,
exercisable by written notice delivered to us within
30 days after receipt of such notice from us, to request
that all or a portion of such other holders shares of Pari
Passu Preferred be redeemed on the redemption date together with
the shares of Preferred Stock of the holder who delivered the
redemption notice. We will be obligated to redeem the total
number of shares of Preferred Stock requested to be redeemed on
the redemption date. For each share of Preferred Stock which is
to be redeemed on a particular redemption date, we will be
obligated on the date specified for redemption thereof in the
written notice with respect thereto, to pay to the holder
thereof (upon surrender by such holder at our principal office
of the certificate representing such share) such amount
specified in the applicable provision of the certificate of
designation in immediately available funds. If the funds of the
company legally available for redemption of Preferred Stock on
any redemption date are insufficient to redeem the total number
of shares of that respective series of Preferred Stock and all
other shares of Pari Passu Preferred to be redeemed on such
date: (i) those funds which are legally available shall be
used to redeem the maximum possible number of shares of Pari
Passu Preferred ratably among the holders of such shares to be
redeemed based upon the aggregate amount to which they are
entitled to be paid and the equivalent provisions of the other
series of Pari Passu Preferred; and (ii) with respect to
those shares of Pari Passu Preferred requested to be redeemed
but for which funds are not legally available (the
Non-Funded Shares), we are entitled to issue and
deliver to each holder of Non-Funded Shares a promissory note
(each a Redemption Note). Each
Redemption Note will be payable one year from date of
issuance and will bear interest at the rate of 8% per annum,
compounded quarterly, and shall have an aggregate principal
amount per Non-Funded Share equal to the liquidation value of
that series of Preferred Stock plus a rate of return on such
amount (after taking into account all dividends paid by us)
equal to 7% per annum, compounded annually. A
Redemption Note may be prepaid by us at any time without
penalty. The issuance of Redemption Notes will be made
without charge to the holders of the Non-Funded Shares receiving
such Redemption Notes for any issuance tax in respect
thereof or other cost incurred by us in connection with the
issuance thereof, and we will pay the fees and expenses of each
holder of Non-Funded Shares in connection with the issuance of
Redemption Notes, including reasonable attorneys fees
and expense. Subject to the terms of any then existing senior
debt or credit facility, the terms and documentation relating to
each Redemption Note will provide that the debt obligation
evidenced thereby will at all times be pari passu with the most
senior debt or credit facility of our outstanding at any time
during the term of the Redemption Note.
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Conversion Rights. At any time and from time
to time, a holder of Preferred Stock will have the right to
convert all or any portion of its shares of Preferred Stock into
the number of shares of common stock computed by dividing
(i) the aggregate liquidation value of the shares of that
respective series of preferred stock to be converted by
(ii) the conversion price of that series of Preferred Stock
then in effect.
All shares of Preferred Stock automatically convert into common
stock upon (A) the affirmative written consent of the
holders of at least a majority of the outstanding shares of Pari
Passu Preferred or (B) any offering by us of debt or equity
securities to the public pursuant to an effective registration
statement under the Securities Act, as then in effect, or any
comparable statement under any similar federal statute then in
force.
If any fractional interest in a share of common stock would be
delivered upon any conversion of the Preferred Stock, the
company, in lieu of delivering the fractional share therefor,
may pay an amount to the holder thereof equal to the fair market
value per share of common stock as of the date of conversion as
determined in good faith by the board of directors, including a
majority of the directors appointed by the investor group,
multiplied by such fractional interest; provided, however, that
in the case of a public offering the fair market value per share
of common stock shall be the gross price per share of common
stock in such public offering. The determination as to whether
or not to make any cash payment in lieu of the issuance of
fractional shares shall be based upon the total number of shares
of Preferred Stock being converted at any one time by the holder
thereof, not upon each share of Preferred Stock being converted.
Conversion Price. The conversion price is
$3.80 per share of common stock (subject to adjustment in the
event of stock splits, stock dividends, stock combinations,
recapitalizations and like occurrences) with respect to the
Series A preferred stock, and $3.00 with respect to the
Series B, Series C and Series D preferred stock.
If and whenever on or after the Preferred Stock original
issuance date we issue or sell or are deemed to have issued or
sold, any shares of our common stock for a consideration per
share less than the Preferred Stock conversion price in effect
immediately prior to the time of such issuance, then immediately
upon such issuance or sale or deemed issuance or sale the
Preferred Stock conversion price shall be reduced to the
conversion price determined by dividing (i) the sum of
(A) the product derived by multiplying the Preferred Stock
conversion price in effect immediately prior to such issuance or
sale by the number of shares of common stock deemed outstanding
immediately prior to such issuance or sale, plus (B) the
consideration, if any, received by us upon such issuance or
sale, by (ii) the number of shares of common stock deemed
outstanding immediately after such issue or sale.
Notwithstanding the foregoing, there will be no adjustment in
the Preferred Stock conversion price as a result of any issuance
or sale (or deemed issuance or sale) of:
(i) shares of common stock issued upon conversion of the
Pari Passu Preferred;
(ii) shares of common stock issued upon the exercise of
warrants;
(iii) shares of common stock issued upon the exercise of
options or other convertible securities outstanding as of the
first closing date of the Preferred Stock;
(iv) securities issued pursuant to a board-approved
(including at least one of the investor appointed directors)
bona fide acquisition of an entity by merger, purchase of
substantially all of the assets or other reorganization;
(v) shares of common stock issued to Catalyst Capital
Investments, LLC, a Delaware limited liability company
(Catalyst) pursuant to the options granted under the
Catalyst letter agreements;
(vi) shares of common stock or other securities issued as a
dividend or distribution on, or in connection with a split of or
recapitalization of, any of our capital stock;
(vii) up to an aggregate of 800,000 shares of common
stock reserved for issuance per year pursuant to an option plan
(subject to adjustment in the event of stock splits, stock
dividends, stock combinations, recapitalizations and like
occurrences) and shares of common stock reserved for issuance
pursuant to an option plan in lieu of the repayment of certain
salary deferrals as approved by a majority of the board
(including at least one of the investor appointed directors),
which foregoing shares may be subject to options or restricted
stock awards granted under an option plan; provided that any
options that expire or terminate unexercised or any
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restricted stock awards that are repurchased by us pursuant to
the terms of such award shall not be counted toward the maximum
number set forth in this subparagraph (vi) unless and until
such shares are subject to new restricted stock awards (or new
options) pursuant to the terms of an option plan;
(viii) shares of common stock issued or issuable (including
options to acquire such shares of common stock) to suppliers or
third party service providers in connection with the provision
of goods or services pursuant to transactions in the ordinary
course of business and approved by a majority of the board of
directors, including at least one of the investor appointed
directors;
(ix) shares of common stock issued or issuable in
connection with bona-fide sponsored research, collaboration,
technology license, development, OEM, marketing or other similar
agreements or strategic partnerships or joint ventures entered
into in the ordinary course of business and approved by a
majority of the board, including at least one of the investor
appointed directors (and by at least a majority of the
outstanding shares of Pari Passu Preferred voting as a single
class on a common equivalent basis, then outstanding, if
required under the provisions of the certificate of
designation; or
(x) securities issued in connection with a public offering;
(xi) 1,000,000 incentive stock options or other share-based
award in such amount to Mr. James Lowrey, our chairman and
co-chief executive officer, approved at the August 14, 2009
meeting of the board in consideration for services rendered to
us;
(xii) permitted issuances; or
(xiii) options (covering up to an aggregate of
330,000 shares of common stock) issued in substitution for
outstanding options;
provided that the aggregate number of shares of common stock
issued or issuable pursuant to clauses (viii) and
(ix) above will not exceed 350,000 (or such greater or
lesser number of shares as may be approved by a majority of the
board of directors (including at least one of the directors
appointed by the investors)) in any 12 month period.
Election of Directors. For so long as any
shares of Pari Passu Preferred remain outstanding, the holders
of the Pari Passu Preferred, voting together as a single class
on a common equivalent basis, are entitled to elect three
members of our board of directors at each meeting or pursuant to
each consent of our stockholders for the election of directors,
and to remove from office any such director and to fill any
vacancy caused by the resignation, death or removal of any such
director. Upon the conversion of outstanding shares of our
Preferred Stock into common stock on the effective date of this
registration statement, the Preferred Stock investors
right to appoint board members will terminate.
Series B
and Series C Warrants
In connection with the Series B and Series C preferred
stock financing, we entered into Series B and Series C
warrant agreements on December 19, 2007 and March 6,
2009, respectively, as amended from time to time, with certain
investors whereby we agreed to issue and deliver warrant
certificates evidencing warrants to purchase up to an aggregate
of 9,000,000 and 6,750,000 shares of common stock at the
per share exercise price of $3.00. The Series B warrants
and Series C warrants expire on December 19, 2017 and
March 6, 2019, respectively. The warrants are subject to a
three year lock-up period beginning on the effective date of
this registration statement and ending on the third anniversary
of the effective date. During the lock-up period the warrants
may not be exercised for shares of common stock. As of
August 15, 2010, 9,925,615 Series B and Series C
warrants are outstanding.
If and whenever on or after the original issue date, we issue or
sell or are deemed to have issued or sold any shares of our
common stock for a consideration per share less than the
exercise price of the Series B or Series C warrant
agreement in effect immediately prior to the time of such
issuance, then immediately upon such issuance or sale or deemed
issuance or sale the exercise price will be reduced to the
exercise price determined by dividing (i) the sum of
(A) the product derived by multiplying the exercise price
in effect immediately prior to such issuance or sale by the
number of shares of common stock deemed outstanding immediately
prior to such issuance or sale, plus (B) the consideration,
if any, received by us upon such issuance or sale, by
(ii) the number of shares of common stock deemed
outstanding immediately after such issue or sale.
Notwithstanding the foregoing, there is not required
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to be an adjustment in the exercise price of the Series B
or Series C warrants as a result of any issuance or sale
(or deemed issuance or sale) of:
(i) shares of common stock issued upon conversion of the
Preferred Stock;
(ii) shares of common stock issued upon the exercise of the
Series B Warrants or the Series C Warrants;
(iii) shares of common stock issued upon the exercise of
options or other convertible securities outstanding as of
March 14, 2007;
(iv) securities issued pursuant to a board-approved
(including at least one of the directors appointed by the
investors) bona fide acquisition of an entity by merger,
purchase of substantially all of the assets or other
reorganization;
(v) shares of common stock issued to Catalyst pursuant to
the options granted under the Catalyst letter agreements;
(vi) shares of common stock or other securities issued as a
dividend or distribution on, or in connection with a split of or
recapitalization of, any of our capital stock;
(vii) up to an aggregate of 800,000 shares of common
stock reserved for issuance per year pursuant to an option plan
(subject to adjustment in the event of stock splits, stock
dividends, stock combinations, recapitalizations and like
occurrences) and shares of common stock reserved for issuance
pursuant to an option plan in lieu of the repayment of certain
salary deferrals as approved by a majority of the board of
director (including at least one of the investor appointed
directors), which foregoing shares may be subject to options or
restricted stock awards granted under an option plan; provided
that any options that expire or terminate unexercised or any
restricted stock awards that are repurchased by us pursuant to
the terms of such award will not be counted toward the maximum
number set forth in this subparagraph (vii) unless and
until such shares are subject to new restricted stock awards (or
new options) pursuant to the terms of an option plan;
(viii) shares of common stock issued or issuable (including
options to acquire such shares of common stock) to suppliers or
third party service providers in connection with the provision
of goods or services pursuant to transactions in the ordinary
course of business and approved by a majority of the board of
directors, including at least one of the investor appointed
directors;
(ix) shares of common stock issued or issuable in
connection with bona-fide sponsored research, collaboration,
technology license, development, OEM, marketing or other similar
agreements or strategic partnerships or joint ventures entered
into in the ordinary course of business and approved by a
majority of the board of directors, including at least one of
the investor appointed directors (and by at least a majority of
the shares of Preferred Stock voting as a single class on a
common equivalent basis, then outstanding, if required pursuant
to the Preferred Stock certificates of designation);
(x) securities issued in connection with a public offering;
(xi) 1,000,000 incentive stock options or other share-based
award in such amount to Mr. James Lowrey, our chairman and
co-chief executive officer, approved at the August 14, 2009
meeting of the board in consideration for services rendered to
us;
(xii) permitted issuances; or
(xiii) options (covering up to an aggregate of
330,000 shares of common stock) issued in substitution for
outstanding options.
provided that the aggregate number of shares of common stock
issued or issuable pursuant to clauses (viii) and
(ix) above shall not exceed 350,000 (or such greater or
lesser number of shares as may be approved by a majority of the
board of directors (including at least one of the
investor-appointed directors) in any 12 month period.
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Series D
Warrants
In connection with the Series D preferred stock financing,
we entered into Series D warrant agreements on
October 30, 2009, with certain investors agreeing to issue
and deliver warrant certificates evidencing warrants to purchase
an aggregate of 2,817,070 shares of common stock at the per
share exercise price of $3.00.
The Series D warrants expire on August 27, 2019. The
warrants are subject to a three year lock-up period beginning on
the effective date of this registration statement and ending on
the third anniversary of the effective date. During the lock-up
period the warrants may not be exercised for shares of common
stock. As of August 15, 2010, 2,817,070 Series D
warrants are outstanding.
If and whenever on or after the original issue date we issue or
sell or are deemed to have issued or sold any shares of our
common stock for a consideration per share less than the
exercise price of the Series D warrant agreement in effect
immediately prior to the time of such issuance, then immediately
upon such issuance or sale or deemed issuance or sale the
exercise price shall be reduced to the exercise price determined
by dividing (i) the sum of (A) the product derived by
multiplying the exercise price in effect immediately prior to
such issuance or sale by the number of shares of common stock
deemed outstanding immediately prior to such issuance or sale,
plus (B) the consideration, if any, received by us upon
such issuance or sale, by (ii) the number of shares of
common stock deemed outstanding immediately after such issue or
sale. Notwithstanding the foregoing, there is not required to be
an adjustment in the exercise price of the Series D
warrants as a result of any issuance or sale (or deemed issuance
or sale) of:
(i) shares of common stock issued upon conversion of the
Preferred Stock;
(ii) shares of common stock issued upon the exercise of the
Series D warrants;
(iii) shares of common stock issued upon the exercise of
options or other convertible securities outstanding as of
March 14, 2007;
(iv) securities issued pursuant to a board-approved
(including at least one of the directors appointed by the
investors) bona fide acquisition of an entity by merger,
purchase of substantially all of the assets or other
reorganization;
(v) shares of common stock issued to Catalyst pursuant to
the options granted under the Catalyst letter agreements;
(vi) shares of common stock or other securities issued as a
dividend or distribution on, or in connection with a split of or
recapitalization of, any of our capital stock;
(vii) up to an aggregate of 800,000 shares of common
stock reserved for issuance per year pursuant to an option plan
(subject to adjustment in the event of stock splits, stock
dividends, stock combinations, recapitalizations and like
occurrences) and shares of common stock reserved for issuance
pursuant to an option plan in lieu of the repayment of certain
salary deferrals as approved by a majority of the board of
director (including at least one of the investor appointed
directors), which foregoing shares may be subject to options or
restricted stock awards granted under an option plan; provided
that any options that expire or terminate unexercised or any
restricted stock awards that are repurchased by us pursuant to
the terms of such award shall not be counted toward the maximum
number set forth in this subparagraph (vii) unless and
until such shares are subject to new restricted stock awards (or
new options) pursuant to the terms of an option plan;
(viii) shares of common stock issued or issuable (including
options to acquire such shares of common stock) to suppliers or
third party service providers in connection with the provision
of goods or services pursuant to transactions in the ordinary
course of business and approved by a majority of the board of
directors, including at least one of the investor appointed
directors;
(ix) shares of common stock issued or issuable in
connection with bona-fide sponsored research, collaboration,
technology license, development, OEM, marketing or other similar
agreements or strategic partnerships or joint ventures entered
into in the ordinary course of business and approved by a
majority of the board of directors, including at least one of
the investor appointed directors (and by at least a majority of
the
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shares of Preferred Stock voting as a single class on a common
equivalent basis, then outstanding, if required pursuant to the
Preferred Stock certificates of designation);
(x) securities issued in connection with a public offering;
(xi) 1,000,000 incentive stock options or other share-based
award in such amount to Mr. James Lowrey, our chairman and
co-chief executive officer, approved at the August 14, 2009
meeting of the board in consideration for services rendered to
us;
(xii) permitted issuances; or
(xiii) options (covering up to an aggregate of
330,000 shares of common stock) issued in substitution for
outstanding options.
provided that the aggregate number of shares of common stock
issued or issuable pursuant to clauses (viii) and
(ix) above shall not exceed 350,000 (or such greater or
lesser number of shares as may be approved by a majority of the
board of directors (including at least one of the
investor-appointed directors) in any 12 month period.
Registration
Rights
According to the terms of a registration rights agreement, dated
March 14, 2007, as amended from time to time (the
Registration Rights Agreement), our holders of
Series A, Series B, Series C and Series D
preferred stock, and the Series B, Series C and
Series D warrants are entitled to demand, piggyback, and
Form S-3
registration rights. The stockholders who are a party to the
Registration Rights Agreement, from time to time (the
Securityholders) will hold an aggregate of
4,190,167 shares of our common stock upon completion of
this offering and the conversion of all existing series of our
Preferred Stock and accrued dividends through August 15,
2010, excluding exercise of warrants into shares of our common
stock that are subject to the registration rights under that
Registration Rights Agreement.
Demand
Registration Rights
At any time following the earlier of the fifth anniversary of
the date of the agreement and six months after we have completed
our initial public offering of common stock pursuant to a
registration statement declared effective under the Securities
Act, the holders holding at least 30% of the registrable
securities have the right, under our Registration Rights
Agreement, to require that we register all or a portion of their
registrable securities (provided that the aggregate offering
price of the registrable securities to be registered is at least
$30,000,000) on
Form S-1
or any similar long-form registration or, if available, holders
holding at least 50% of the registrable securities may, request
registration under the Securities Act of all or a portion of
their registrable securities on
Form S-3
or any similar short form registration. The underwriter of any
underwritten offering has the right to limit the number of
shares to be included in a registration statement filed in
response to the exercise of these demand registration rights. We
must pay all expenses, except for underwriters discounts
and commissions, incurred in connection with these demand
registration rights.
Piggyback
Registration Rights
If we register any securities for public sale after this
offering, our Securityholders have piggyback registration rights
under our Registration Rights Agreement and the right to include
their shares in the registration, subject to specified
exceptions. Our board of directors or the underwriter of any
underwritten offering have the right to limit the number of
shares registered by these holders. We must pay all expenses,
except for underwriters discounts and commissions,
incurred in connection with these piggyback registration rights.
Form S-3
Registration Right
Our Securityholders have the right, under our Registration
Rights Agreement, to require that we register all or a portion
of their shares of common stock on
Form S-3
if we are eligible to file a registration statement on that form
provided that the aggregate offering price of the registrable
securities to be registered is at least $1,000,000 for each
registration and the company will not be required to cause more
than three such short-form registrations to become effective in
any 12 month period. The other stockholders who are a party
to the Registration Rights Agreement may
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also include their shares in any such registration. We must pay
all registration expenses, as defined in the agreement, for all
registrations on
Form S-3
which are demand registrations under the terms of
the agreement.
Investor
Rights Agreement with Rutgers University
Pursuant to a registration rights agreement with Rutgers, The
State University of New Jersey (Rutgers), dated
December 13, 2004, if we propose to register any shares of
our common stock, excluding (i) an initial public offering
of the common stock resulting in net proceeds to us of at least
$10,000,000, (ii) a registration on
Form S-8
or S-4 or
any successor or similar form which includes substantially the
same information as would be required to be included in a
registration statement covering the sale of the common stock, or
(iii) a registration statement related to common stock
issuable upon exercise of employee stock options or with any
employee benefit or similar plan of ours) Rutgers will have the
right to include their shares in the registration, subject to
specified exceptions. If the piggyback registration involves an
underwritten public offering of the common stock, the number of
shares requested to be included in such an underwriting by
Rutgers may be reduced if and to the extent that the managing
underwriter is of the opinion that such inclusion would
adversely affect the marketing of the securities to be sold by
us or the holders of securities exercising demand registration
rights.
Securityholders
Agreement
Our investors under each of the Series A, B, C and D
preferred stock financings (together, the Preferred Stock
Investors) have agreed to abide by certain agreements
providing rights and restrictions related to our securities
pursuant to a Securityholders Agreement originally
executed on March 14, 2007, as amended from time to time,
and most recently amended on November 9, 2009 (the
Second Amended and Restated Securityholders
Agreement). The Second Amended and Restated
Securityholders Agreement will terminate, and all rights
and obligations under the agreement will terminate on the
effective date of this registration statement, except for the
holdback provisions described below, drag-along obligations and
other certain provisions more particularly described in our
First Amendment to the Second Amended and Restated
Securityholders Agreement with our securityholders,
included as an exhibit to this registration statement.
Restrictions
on transfer
The Second Amended and Restated Securityholders Agreement
provides no Securityholder is permitted to transfer any of the
Securityholders securities except (i) in accordance
with the terms and conditions of the agreement or (ii) to
any permitted transferee. The agreement provides neither
Messrs. Brian Mayo, William Mayo nor Walter Helfrecht are
permitted to transfer any of management Securityholders
securities other than to a permitted transferee until
March 14, 2012.
Each Securityholder agrees not to, directly or indirectly,
transfer any of such Securityholders Securities (as
defined in the Securityholders Agreement) to any person
whose activities, products or services directly compete with the
activities, products or services of the company as reasonably
determined in good faith by the board as of the date of such
proposed transfer; provided that the foregoing limitation shall
not apply to transfers registered under the Securities Act or
Rule 144 promulgated thereunder. We may impose stop
transfer instructions with our transfer agent in order to
enforce the foregoing limitation.
Holdback
Each Securityholder has agreed not to effect any public sale or
distribution (including sales pursuant to Rule 144
promulgated under the Securities Act (as such rule may be
amended from time to time)) of common stock, or to lend, offer,
pledge, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any common stock, or enter
into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences associated
with ownership of the common stock, during the period beginning
on the effective date of the registration statement relating to
the initial public offering and ending on the following dates:
(i) for holders of an aggregate of 2,500 or greater shares
of common stock and preferred stock (on an as-converted basis),
the date that is one (1) year after the public offering
effective date; and
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(ii) for holders of less than an aggregate of
2,500 shares of common stock and preferred stock (on an
as-converted basis), the date that is 180 days after the
public offering effective date.
Each Securityholder has agreed to execute a standard
lock-up
agreement reflecting the foregoing. In order to enforce the
foregoing, we may impose stop-transfer instructions with respect
to the securities of each Securityholder until the end of such
period.
Right
Of First Refusal And Co-Sale Right
Each Preferred Stock Investor has agreed to provide
(i) each holder of Preferred Stock and (ii) the
company a right of first refusal to purchase any or all
Securities which such securityholder may, from time to time,
propose to transfer (other than with respect to a transfer to a
permitted transferee).
Voting
Agreement
The Preferred Stock Investors have agreed to vote all of their
shares of Preferred Stock and common stock and any other voting
securities of the company over which such securityholder has
voting control and to take all other necessary or desirable
actions within its control (whether in its capacity as a
stockholder, director, member of a committee of the board or
otherwise, and including, without limitation, attendance at
meetings in person or by proxy for purposes of obtaining a
quorum and execution of written consents in lieu of meetings),
and we will take all necessary or desirable actions within our
control (including, without limitation, calling special board
and stockholder meetings), so that:
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the authorized number of directors on the board will be
established at, and remain during the term of the agreement
fixed at, 11 directors, except for any increases in the
size of the board provided for upon the occurrence of certain
events set forth in our certificate of incorporation;
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for so long as any shares of Preferred Stock remain outstanding,
three persons nominated by the holders of a majority of shares
of common stock (on a fully-diluted basis) held by the Preferred
Stock Investors will be elected to the board;
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if any investor appointed director ceases to serve as a member
of the board during his or her term of office, whether due to
such directors death, resignation or removal then the
resulting vacancy shall be filled by a representative designated
by the holders of a majority of shares of Preferred Stock held
by the Preferred Stock Investors; and
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no investor appointed director will be removed from the board
without the written consent of the holders of a majority of
shares of Preferred Stock (voting on a common stock equivalent
basis) held by the Preferred Stockholders.
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Miscellaneous
Registration Rights
We granted our former consultant Catalyst piggyback registration
rights in connection with the shares underlying the option
received by Catalyst or its assigns under the consulting
agreement with Catalyst dated May 31, 2007. The
registration rights agreement provides if we determine to
register any of our common stock other than a registration
relating solely to employee benefit plans or s registration on
Form S-4
relating solely to a Rule 145 transaction, we will promptly
give Catalyst written notice thereof and Catalyst will have the
right to include its shares in the registration statement and
sell its shares of common stock in the offering at no additional
cost to Catalyst. The registration rights are subject to
limitation or elimination if a representative of the underwriter
of an offering advises us in writing that marketing factors
require a limitation or elimination on the number of shares to
be included in the registration statement.
Market
Information
Our common stock is not presently quoted or traded on an
exchange. We have applied for the listing of our common stock on
the NYSE Amex under the symbol XTRM. There can be no
assurance that we will continue to satisfy the eligibility
criteria to be listed on NYSE Amex.
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Transfer
Agent
We have engaged BNY Mellon Shareholder Services as our transfer
agent and registrar for our common stock.
Anti-Takeover
Law, Limitations of Liability and Indemnification
Delaware Anti-Takeover Law. We are subject to
the provisions of Section 203 of the Delaware General
Corporation Law concerning corporate takeovers. This section
prevents many Delaware corporations from engaging in a business
combination with any interested stockholder, under specified
circumstances. For these purposes, a business combination
includes a merger or sale of more than 10% of our assets, and an
interested stockholder includes a stockholder who owns 15% or
more of our outstanding voting stock, as well as affiliates and
associates of these persons. Under these provisions, this type
of business combination is prohibited for three years following
the date that the stockholder became an interested stockholder
unless:
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the transaction in which the stockholder became an interested
stockholder is approved by the board of directors prior to the
date the interested stockholder attained that status;
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upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction was
commenced, excluding those shares owned by persons who are
directors and also officers; or
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on or subsequent to that date, the business combination is
approved by the board of directors and authorized at an annual
or special meeting of stockholders by the affirmative vote of at
least two-thirds of the outstanding voting stock that is not
owned by the interested stockholder.
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This statute could prohibit or delay mergers or other takeover
or change in control attempts and, accordingly, may discourage
attempts to acquire us.
Limited Liability and Indemnification. Our
certificate of incorporation and amended and restated by-laws
eliminate the personal liability of our directors for monetary
damages arising from a breach of their fiduciary duty as
directors to the fullest extent permitted by Delaware law. This
limitation does not affect the availability of equitable
remedies, such as injunctive relief or rescission. Our
certificate of incorporation requires us to indemnify our
directors and officers to the fullest extent permitted by
Delaware law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law.
Under Delaware law, we may indemnify our directors or officers
or other persons who were, are or are threatened to be made a
named defendant or respondent in a proceeding because the person
is or was our director, officer, employee or agent, if we
determine that the person:
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conducted himself or herself in good faith;
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reasonably believed, in the case of conduct in his or her
official capacity as our director or officer, that his or her
conduct was in our best interests, and, in all other cases, that
his or her conduct was at least not opposed to our best
interests; and
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in the case of any criminal proceeding, had no reasonable cause
to believe that his or her conduct was unlawful.
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These persons may be indemnified against expenses, including
attorneys fees, judgments, fines, including excise taxes, and
amounts paid in settlement, actually and reasonably incurred, by
the person in connection with the proceeding. If the person is
found liable to the corporation, no indemnification shall be
made unless the court in which the action was brought determines
that the person is fairly and reasonably entitled to indemnity
in an amount that the court will establish.
Insofar as indemnification for liabilities under the Securities
Act may be permitted to directors, officers or persons
controlling us pursuant to the above provisions, we have been
informed that, in the opinion of the SEC, such indemnification
is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
of expenses incurred or paid by a director, officer or
controlling person in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a
court of appropriate
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jurisdiction the question whether such indemnification by us is
against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
SHARES ELIGIBLE
FOR FUTURE SALE
The sale, or availability for sale, of a substantial number of
shares of common stock in the public market subsequent to this
offering pursuant to Rule 144 of the Securities Act or
otherwise could materially adversely affect the market price of
our common stock and could impair our ability to raise
additional capital through the sale of equity securities or debt
financing. If the minimum offering is completed there will be
approximately 10,388,545 shares of common stock issued and
outstanding and if the maximum offering is completed there will
be approximately 12,055,211 shares of common stock issued
and outstanding. Of these shares, 3,333,334 shares in the event
of a minimum offering, and 5,000,000 shares in the event of a
maximum offering, would be freely transferable immediately. Our
executive officers and directors beneficially own
3,227,604 shares of common stock and shares of common stock
issuable upon conversion of preferred stock and accrued
dividends through August 15, 2010 and exercise of certain
options and warrants, which would be eligible for resale subject
to the volume and manner of sale limitations of Rule 144 of
the Securities Act following expiration of any applicable
lock-ups. Upon the conversion of our outstanding preferred stock
and accrued dividends through August 15, 2010 into shares
of common stock, an additional 4,190,167 shares are
restricted securities, as that term is defined in
Rule 144, and will be eligible for sale under the provision
of Rule 144 following expiration of any applicable
lock-ups.
Stock options to purchase an aggregate of 1,879,386 and
153,731 shares of common stock were outstanding under our
2004 Stock Option Plan and 2009 Plan, respectively, as of
August 15, 2010. Warrants to purchase an aggregate of
13,078,685 shares of common stock (for which cash would
need to be remitted to us for exercise) were outstanding as of
August 15, 2010.
The shares of common stock outstanding that are deemed to be
restricted securities (as that term is defined under
Rule 144) or that are owned by our affiliates may only
be sold pursuant to an effective registration statement under
the Securities Act, in compliance with the exemption provisions
of Rule 144 or pursuant to another exemption under the
Securities Act. Restricted shares and shares of common stock
held by our affiliates that are not restricted will
be eligible for sale, under Rule 144, subject to certain
volume and manner of sale limitations prescribed by
Rule 144. In general, under Rule 144 as currently in
effect, a person (or persons whose shares are required to be
aggregated), including a person who may be deemed an
affiliate of the company, who has beneficially owned
restricted securities for at least six months may sell, within
any three-month period, a number of shares that does not exceed
the greater of: (i) 1% of the then outstanding shares of
common stock or (ii) the average weekly trading volume of
the common stock during the four calendar weeks preceding the
date on which notice of such sale was filed under Rule 144.
Sales of shares held by our affiliates that are not
restricted are subject to such volume limitations,
but are not subject to the holding period requirement. Sales
under Rule 144 are also subject to certain requirements as
to the manner of sale, notice and availability of current public
information about our company. A person who is not deemed to
have been an affiliate of our company at any time during the
90 days preceding a sale by such person, and who has
beneficially owned the restricted shares for at least six
months, is entitled to sell such shares under Rule 144
without regard to any of the restrictions described above.
Following this offering, we cannot predict the effect, if any,
that the availability for sale of shares held by our current
stockholders will have on the market price of our securities
from time to time. Nevertheless, sales by our current
stockholders of a substantial number of shares of common stock
in the public market could materially and adversely affect the
market price for our common stock. In addition, the availability
for sale of a substantial number of shares of our common stock
acquired through the exercise of outstanding stock options or
warrants could materially adversely affect the market price of
our common stock.
PLAN OF
DISTRIBUTION
In accordance with the terms of the underwriting agreement
between W.R. Hambrecht + Co., LLC and us, W.R. Hambrecht + Co
has agreed to use its best efforts to procure potential
purchasers for the shares of common stock offered hereby. The
underwriter has made no commitment to purchase all or any part
of the shares of common stock offered pursuant to this
prospectus but has agreed to use its best efforts to sell the
minimum offering of 3,333,334 shares of common stock and to
sell the maximum offering of 5,000,000 shares of common
stock
92
generating gross proceeds of at least $20,000,000. All funds
received in connection with the sale of the shares will be
promptly transmitted to the escrow agent JPMorgan Chase Bank,
N.A., pursuant to the terms of an escrow agreement among us, the
escrow agent and the underwriter. Any collection of funds prior
to effectiveness will only be made in accordance with the
standard minimum account funding requirements not based on this
offering employed by the underwriter or applicable dealer.
The underwriting agreement provides that the obligations of the
underwriter are subject to various conditions, principally the
declaration of effectiveness by the SEC of the registration
statement of which this prospectus forms a part, the receipt of
an aggregate of at least $20,000,000 in funds in the escrow
account prior to the closing, the absence of any material
adverse change in our business, and the receipt of certificates,
opinions and letters from us and counsel. The underwriter is not
purchasing or selling any of the shares being sold pursuant to
this prospectus and it is not required to arrange the purchase
or sale of any specific number or dollar amount of shares.
However, in the event the anticipated offering size or price
changes prior to the effective date of this registration
statement, we will file a pre-effective amendment to this
registration statement.
All payments for shares hereunder should be made payable to
JPMorgan Chase Bank, N.A. as escrow agent for our
escrow account. Under the escrow agreement, the escrow agent is
required to promptly inform us and the underwriter when a
minimum amount of $20,000,000 has been deposited in the escrow
agents account. Upon receipt of written instructions
received from us and the underwriter in a form and substance
satisfactory to the escrow agent, the escrow agent is required
to pay us the funds in accordance with such written instructions
as soon as practicable after receipt of such written
instructions. If at least an aggregate of $20,000,000 in funds
are not received in the escrow account following the closing of
the auction and by the end of the T+3 period (the third trading
day after pricing) or the NYSE Amex does not confirm the listing
of the shares on the NYSE Amex, the offering will terminate and
funds deposited with the escrow agent will be returned to
investors promptly without interest.
Underwriting
Fees and Concessions
The underwriter proposes to procure potential purchasers to
purchase shares of our common stock at the offering price set
forth on the cover page of this prospectus, as this price is
determined by the OpenIPO process described below, and to
certain dealers at this price less a concession not in excess of
$ per share. The underwriter may
allow, and dealers may reallow, a concession not to exceed
$ per share on sales to other
dealers. The underwriter as well as any dealers that participate
in the distribution of our common stock may be deemed to be
underwriters within the meaning of the Securities Act, and any
discount, commission or concession received by them and any
provided by the sale of the shares by them may be deemed to be
underwriting discounts and commissions under the Securities Act.
The following table shows the per share and total underwriting
fee (rounded to the nearest cent for the purposes of this table)
to be paid to the underwriter by us in connection with this
offering in the event of a minimum offering and a maximum
offering. The underwriting fee has been determined through
negotiations between us and the underwriter, and has been
calculated as a percentage of the offering price.
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Per Share
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Minimum
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Maximum
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Offering
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Offering
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Initial public offering price
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$
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$
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Underwriting fee
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$
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$
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Proceeds, before expenses, to us
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$
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$
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We estimate that the costs of this offering, exclusive of the
underwriting fee, will be approximately
$ million, including fees and
expenses of the underwriter as described below. These fees and
expenses are payable entirely by us. An electronic prospectus is
available on the website maintained by W.R. Hambrecht + Co and
may also be made available on websites maintained by selected
dealers and selling group members participating in this offering.
93
The
OpenIPO Auction Process
The distribution method being used in this offering is known as
the OpenIPO auction, which differs from methods traditionally
used in public offerings. In particular, as described under the
captions Determination of Public Offering
Price and Allocation of Shares below,
the public offering price and the allocation of shares are
determined by an auction conducted by the underwriter and other
factors as described below. All qualified individual and
institutional investors may place bids in an OpenIPO auction and
investors submitting valid bids have an equal opportunity to
receive an allocation of shares. Requirements for valid bids are
discussed below in the section titled Requirements for
Valid Bids.
The following describes how the underwriter and some selected
dealers conduct the auction process and, on our behalf, confirm
bids from prospective investors:
Prior
to Effectiveness of the Registration Statement
Before the registration statement relating to this offering
becomes effective, but after a preliminary prospectus is
available, the auction will open and the underwriter and
participating dealers will solicit bids from prospective
investors through individual meetings, the Internet and by
telephone and facsimile. The bids specify the number of shares
of our common stock the potential investor proposes to purchase
and the price the potential investor is willing to pay for the
shares. These bids may be above or below the range set forth on
the cover page of the prospectus. The minimum size of any bid is
100 shares. Bidders may submit multiple bids in the auction.
The shares offered by this prospectus may not be sold, nor may
offers to buy be accepted, prior to the time that the
registration statement filed with the SEC becomes effective. A
bid received by the underwriter or a dealer involves no
obligation or commitment of any kind prior to the notice of
acceptance being sent, which will occur after effectiveness of
the registration statement and closing of the auction. Bids can
be modified at any time prior to the closing of the auction.
Potential investors may contact the underwriter or dealers
through which they submitted their bid to discuss general
auction trends or to consult on bidding strategy. The current
clearing price is at all times kept confidential and will not be
disclosed during the OpenIPO auction to any bidder; however, the
underwriter or participating dealers may discuss general auction
trends with potential investors. General auction trends may
include a general description of the bidding trends or the
anticipated timing of the offering. In all cases, any oral
information provided with respect to general auction trends by
the underwriter or dealer is subject to change. Any general
auction trend information that is provided orally by the
underwriter or participating dealer is necessarily accurate only
as of the time of inquiry and may change significantly prior to
the auction closing. Therefore, bidders should not assume that
any particular bid will receive an allocation of shares in the
auction based on any auction trend information provided to them
orally by the underwriter or participating dealer.
Approximately two business days prior to the registration
statement being declared effective, prospective investors will
receive, by e-mail, telephone or facsimile, a notice indicating
the proposed effective date. Potential investors may at any time
expressly request that all, or any specific, communications
between them and the underwriter and participating dealers be
made by specific means of communication, including e-mail,
telephone and facsimile. The underwriter and participating
dealers will contact the potential investors in the manner they
request.
Effectiveness
of the Registration Statement
After the registration statement relating to this offering has
become effective, potential investors who have submitted bids to
the underwriter or a dealer will be contacted by e-mail,
telephone or facsimile. Potential investors will be advised that
the registration statement has been declared effective and that
the auction may close in as little as one hour following
effectiveness. Bids will continue to be accepted in the time
period after the registration statement is declared effective
but before the auction closes. Bidders may also withdraw their
bids in the time period following effectiveness, including after
the closing of the auction but before the notice of acceptance
of their bid is sent.
94
Reconfirmation
of Bids
The underwriter will require that bidders reconfirm the bids
that they have submitted in the offering if any of the following
events occur:
more than 15 business days have elapsed since the
bidder submitted its bid in the offering; or
there is a material change in the prospectus that
requires that the underwriter and we convey the material change
to bidders in the offering and file an amended registration
statement.
If a reconfirmation of bids is required, the underwriter and
participating brokers will send an electronic notice (or
communicate in an alternative manner as requested by a bidder)
to everyone who has submitted a bid notifying them that they
must reconfirm their bids by contacting the underwriter or
participating dealers with which they have their brokerage
accounts. Bidders will have a minimum of four hours to reconfirm
their bids from the time they receive the notice requesting
reconfirmation. Bidders will have the ability to modify or
reconfirm their bids at any time until the auction closes. If
bidders do not reconfirm their bids before the auction is closed
(which will be no sooner than four hours after the request for
reconfirmation is sent), we and the underwriter will disregard
their bids in the auction, and they will be deemed to have been
withdrawn. If appropriate, the underwriter may include the
request for reconfirmation in a notice of effectiveness of the
registration statement.
Changes
in the Price Range or Offering Size Before the Auction is
Closed
Based on the auction demand, we and the underwriter may elect to
change the price range or the number of shares being sold in the
offering either before or after the SEC declares the
registration statement effective. If, prior to effectiveness of
the registration statement, we and the underwriter elect to
change the price range or the offering size we will file a
pre-effective amendment to the registration statement and we
will reconfirm all bids that have been submitted in the auction
after notifying bidders of the new auction terms. If we and the
underwriter change the price range after the SEC declares the
registration statement effective, we will file a post-effective
amendment to the registration statement containing the new
auction terms and reconfirm all bids prior to accepting any
offers.
Changes
in the Price Range or Offering Size After the Auction is Closed
and Pricing Outside the Price Range
If we determine after the auction is closed that the initial
public offering price will be above the stated price range in
the auction but that it will not result in any material change
to the previously provided disclosure, the underwriter and
participating dealers may accept all successful bids without
reconfirmation. If we determine after the auction is closed that
the initial public offering price will be below the stated price
range in the auction, we will reconfirm all bids. Any such
decrease in the public offering price would need to be preceded
or accompanied by a post-effective amendment increasing the
maximum number of shares above the current maximum of 5,000,000
shares, such that we would still raise at least $20,000,000 in
proceeds. In no event would the initial offering price be less
than $3.00 due to NYSE Amex minimum bid requirements. We will
not increase or decrease the minimum or maximum number of shares
to be sold without filing a post-effective amendment.
If we determine, after the auction is closed, that the initial
public offering price will be outside of the price range or we
elect to change the size of the offering, and the public
offering price
and/or
change in the offering size, alone or in the aggregate,
constitute material changes to the previously provided
disclosure, then we may convey the final price and offering size
to all bidders in the auction, file a post-effective amendment
to the registration statement with the final price and offering
size, reconfirm all bids and accept offers after the
post-effective amendment has been declared effective by the SEC.
In the alternative, we may re-open the auction pursuant to the
following procedures:
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W.R. Hambrecht + Co will provide notice on the W.R. Hambrecht +
Co OpenIPO website that the auction has re-opened with a revised
price range or offering size, as the case may be;
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we and the underwriter and participating dealers will issue a
press release announcing the new auction terms;
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the underwriter and participating dealers will send an
electronic notice (or communicate in an alternative manner as
requested by a bidder) to everyone who has submitted a bid
notifying them that the auction has re-opened with a revised
price range or offering size, as the case may be;
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95
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the underwriter and participating dealers will reconfirm all
bids in the auction; and
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we will file a post-effective amendment to the registration
statement containing the new auction terms and have the
post-effective amendment declared effective prior to the
acceptance of any offers by the underwriter or participating
dealers.
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We will generally not consider any increase in the initial
public offering price or offering size to be material unless
such increase represents more than a 20% change in the maximum
aggregate offering price of the shares.
However we will not reduce the minimum proceeds to be raised
without filing a post-effective amendment and recommencing the
offering.
Closing
of the Auction and Pricing
The auction will close and a public offering price will be
determined after the registration statement becomes effective at
a time agreed to by us and W.R. Hambrecht + Co, which we
anticipate will be after the close of trading on the NYSE Amex
on the same day on which the registration statement is declared
effective. The auction may close in as little as one hour
following effectiveness of the registration statement. However,
the date and time at which the auction will close and a public
offering price will be determined cannot currently be predicted
and will be determined by us and W.R. Hambrecht + Co based on
general market conditions during the period after the
registration statement is declared effective. If we are unable
to close the auction, determine a public offering price and file
a final prospectus with the SEC within 15 days after the
registration statement is initially declared effective, we will
be required to file with the SEC and have declared effective a
post- effective amendment to the registration statement before
the auction may be closed and before any bids may be accepted.
We presently anticipate that the auction will commence
on ,
2010 the auction will close
on ,
2010, and that the offering will close three trading days,
thereafter on or
about ,
2010.
Once a potential investor submits a bid, the bid remains valid
unless subsequently withdrawn by the potential investor.
Potential investors are able to withdraw their bids at any time
before the notice of acceptance is sent by notifying the
underwriter or a participating dealer through which they
submitted their bids. The auction website will not permit
modification or cancellation of bids after the auction closes.
Therefore, if a potential investor that bid through the Internet
wishes to cancel a bid after the auction closes, the investor
may have to contact the underwriter (or the participating dealer
through which the investor submitted the bid) by telephone,
facsimile or e-mail (or as specified by the underwriter or
participating dealer through which the bidder submitted the bid).
Following the closing of the auction, the underwriter determines
the highest price at which all of the shares offered may be sold
to potential investors. This price, which is called the
clearing price, is determined based on the results
of all valid bids at the time the auction is closed. The
clearing price is not necessarily the public offering price,
which is set as described in Determination of Public
Offering Price below. The public offering price determines
the allocation of shares to potential investors, with all valid
bids submitted at or above the public offering price receiving a
pro rata portion of the shares bid for.
You will have the ability to withdraw your bid at any time until
the notice of acceptance is sent. The underwriter will notify
successful bidders that we have accepted their bids by sending
notice of acceptance after the auction closes and a public
offering price has been determined, and bidders who submitted
successful bids will be obligated to purchase the shares
allocated to them regardless of (1) whether such bidders
are aware that the registration statement has been declared
effective and that the auction has closed or (2) whether
they are aware that the notice of acceptance of that bid has
been sent. The underwriter will not cancel or reject a valid bid
after the notices of acceptance have been sent.
Once the auction closes and a clearing price is set as described
below, the underwriter or a participating dealer accepts on our
behalf the bids that are at or above the public offering price,
but may allocate to a prospective investor fewer shares than the
number included in the investors bid, as described in
Allocation of Shares below.
Determination
of Initial Public Offering Price
The public offering price for this offering is ultimately
determined by negotiation between the underwriter and us after
the auction closes and does not necessarily bear any direct
relationship to our assets, current earnings or
96
book value or to any other established criteria of value,
although these factors are considered in establishing the
initial public offering price. Prior to this offering, there has
been no public market for our common stock. The principal factor
in establishing the public offering price is the clearing price
resulting from the auction, although other factors are
considered as described below. The clearing price is used by the
underwriter and us as the principal benchmark, among other
considerations described below, in determining the public
offering price for the stock that will be sold in this offering.
The bids received in the auction and the resulting clearing
price are the principal factors used to determine the public
offering price of the stock that will be sold in this offering.
The clearing price is the highest price at which we can meet our
stated minimum gross proceeds requirement, based on the valid
bids at the time the auction is closed.
We may elect to offer shares at a lower price than the clearing
price if we can still equal or exceed the minimum gross proceeds
requirements and remain within our stated minimum and maximum
share levels. We and the underwriter would consider a variety of
factors in deciding whether or not to offer shares at a price
below the clearing price. These factors include but are not
limited to:
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the stated minimum and maximum share price and share number
ranges of the offering;
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the composition and distribution among various price points of
the set of bids in the auction and the related, resulting
changes in pro-rata allocations resulting from any particular
public offering price;
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the intent to create a more stable post-offering trading market
for our shares;
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the underwriters assessment of our management, operating
results, capital structure and business potential;
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the demand and price of similar securities of comparable
companies; and
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general market trends and conditions.
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For example, if the clearing price occurs at a price above the
maximum price range, we would offer shares at a discount to the
clearing price so that the price and number of shares being sold
falls within the stated minimum and maximum levels.
Additionally, if the clearing price occurs within the specified
minimum / maximum per share price range, then we may
also elect to offer shares at a discount to the clearing price
as long as the offer price and number of shares sold remains
within the specified minimum / maximum ranges.
The underwriter and we may also agree to a public offering price
that is lower than the clearing price in order to facilitate a
wider distribution of the stock to be sold in this offering. For
example, the underwriter and we may elect to lower the public
offering price to include certain institutional or retail
bidders in this offering. The underwriter and we may also lower
the public offering price to create a more stable post-offering
trading price for our shares. The public offering price will not
be higher than the clearing price.
The public offering price always determines the allocation of
shares to potential investors. Therefore, if the public offering
price is below the clearing price, all valid bids that are at or
above the public offering price receive a pro rata portion of
the shares bid for. If sufficient bids are not received, or if
we do not consider the clearing price to be adequate, or if the
underwriter and we are not able to reach agreement on the public
offering price, then the underwriter and we will either postpone
or cancel this offering. Alternatively, we may file with the SEC
a post-effective amendment to the registration statement in
order to conduct a new auction.
The following simplified examples illustrate how the public
offering price will be determined through the auction process.
In each case, Company X offers to sell a minimum of
3,333 shares in its public offering and a maximum of
5,000 shares, with minimum proceeds of $20,000 required to
be raised. Company X has disclosed an anticipated price
range of between $4.00 and $8.00 per share for its offering.
1) The underwriter, on behalf of Company X, receives five
bids to purchase, all of which are kept confidential until the
auction closes.
The first bid is to pay $10.00 per share for 1,000 shares.
The second bid is to pay $9.00 per share for 2,500 shares.
The third bid is to pay $8.00 per share for 3,400 shares.
The fourth bid is to pay $7.00 per share for 4,000 shares.
The fifth bid is to pay $5.50 per share for 5,000 shares.
97
Assuming that none of these bids are withdrawn or modified
before the auction closes, and assuming that no additional bids
are received, the clearing price used to determine the public
offering price would be $9.00 per share, which is the highest
price at which Company X may raise at least its minimum proceeds
of $20,000 by selling to potential investors who have submitted
valid bids. However, the shares may be sold at a price below
$9.00 per share based on negotiations between Company X and the
underwriter, and because the clearing price is above the stated
maximum price per share, the Company will elect to take a
discount to at least $8.00 per share so that the clearing price
is not greater than the previously disclosed maximum price.
If the public offering price is $8.00 per share, the underwriter
would accept bids on behalf of Company X at or above $8.00 per
share. No bids made at a price of less than $8.00 per share
would be accepted. Because 6,900 shares were bid for at or
above the public offering price, up to the maximum number of
shares, 5,000, could be offered, and the three potential
investors with the highest bids would receive a pro rata portion
of the shares offered. If Company X elected to sell the maximum
number of shares, based on the 6,900 shares they requested,
or 72.5% (5,000 divided by 6,900) of the shares for which bids
were made at or above $8.00. If the Company elected to sell less
than the maximum number of shares, for example
4,500 shares, each investor would receive 65.2% (4,500
divided by 6,900) of the shares for which bids were made at or
above $8.00. The two potential investors with the lowest bids
would not receive any shares in this example.
2) The underwriter, on behalf of Company X, receives five
bids to purchase, all of which are kept confidential until the
auction closes.
The first bid is to pay $8.00 per share for 1,000 shares.
The second bid is to pay $7.00 per share for 1,000 shares.
The third bid is to pay $6.00 per share for 1,500 shares.
The fourth bid is to pay $5.00 per share for 500 shares.
The fifth bid is to pay $4.00 per share for 500 shares.
Assuming that none of these bids are withdrawn or modified
before the auction closes, and assuming that no additional bids
are received, the clearing price used to determine the public
offering price would be $6.00 per share, which is the highest
price at which Company X may raise at least its minimum proceeds
of $20,000 (here, $6.00 per share multiplied by
3,500 shares, or $21,000) by selling to potential investors
who have submitted valid bids, and offered at least the minimum
number of shares of 3,333. However, the Company could elect to
sell less than the number of shares bid for at $6.00 as long as
it sells enough shares to meet the minimum proceeds requirement.
For example, the Company could sell 3,333 shares and, in
this case, each investor would receive 95.2% (3,333 divided by
3,500) of the shares for which bids were made at or above $6.00.
If the Company elected to sell 3,500 shares, each investor
would receive 100.0% (3,500 divided by 3,500) of the shares for
which bids were made at or above $6.00.
If the public offering price is the same as the $6.00 per share
clearing price, the underwriter would accept bids on behalf of
Company X at or above $6.00 per share. No bids made at a price
of less than $6.00 per share would be accepted.
The Company and the underwriter would consider a variety of
factors in deciding whether or not to offer shares at a price
below the clearing price, including but not limited to the
stated minimum and maximum price and share number and minimum
proceeds, the need to comply with NYSE Amex minimum bid price
rules, the set of bids in the auction and the related, resulting
changes in pro-rata allocations resulting from any particular
public offering price, the intent to create a more stable
post-offering trading market for the Companys shares, the
demand and price of similar securities of comparable companies,
and general market trends and conditions. In this example, given
the composition of the set of bids, the Company could offer
shares at a price as low as $5.00 (issuing 4,000 shares for
proceeds of $20,000), but no lower, as it would be unable to
raise the requisite minimum proceeds.
As described in Allocation of Shares below,
because bids that are reduced on a pro rata basis may be rounded
down to round lots, a potential investor may be allocated less
than the pro rata percentage of the shares bid for. Thus, if the
pro rata percentage was 75%, the potential investor who bids for
200 shares may receive a pro rata allocation of
100 shares (50% of the shares bid for), rather than
receiving a pro rata allocation of 150 shares (75% of the
shares bid for).
98
The following table illustrates the first example described
above and assumes the Company elects to issue the maximum number
of shares, after rounding down any bids to the nearest round lot
in accordance with the allocation rules described below and
assuming that the initial public offering price is set at $8.00
per share. The table also assumes that these bids are the final
bids, and that they reflect any modifications that have been
made to reflect any prior changes to the offering range, and to
avoid the issuance of fractional shares.
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Bid Information
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Initial Public Offering
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of Company X
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Auction Results
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Approximate
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Cumulative
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Allocated
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Shares
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Shares
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Bid
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Shares
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Requested
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Clearing
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Amount
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Requested
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Requested
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Price
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Allocated
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Shares
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Price
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Raised
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1,000
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1,000
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$
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10.00
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700
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72.5
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%
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$
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8.00
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$
|
5,600
|
|
|
|
|
2,500
|
|
|
|
3,500
|
|
|
$
|
9.00
|
|
|
|
1,800
|
|
|
|
72.5
|
%
|
|
$
|
8.00
|
|
|
$
|
14,400
|
|
Clearing price
|
|
|
3,400
|
|
|
|
6,900
|
|
|
$
|
8.00
|
|
|
|
2,500
|
|
|
|
72.5
|
%
|
|
$
|
8.00
|
|
|
$
|
20,000
|
|
|
|
|
4,000
|
|
|
|
10,900
|
|
|
$
|
7.00
|
|
|
|
0
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
|
15,900
|
|
|
$
|
5.50
|
|
|
|
0
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
$
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation
of Shares
Bidders receiving a pro rata portion of the shares they bid for
generally receive an allocation of shares on a round-lot basis,
rounded to multiples of 100 (for bids below approximately 10,000
shares) or 1,000 shares (for bids equal to or above
approximately 10,000 shares), depending on the size of the bid.
No bids are rounded to a round lot higher than the original bid
size. Because bids may be rounded down to round lots in
multiples of 100 or 1,000 shares, some bidders may receive
allocations of shares that reflect a greater percentage decrease
in their original bid than the average pro rata decrease. Thus,
for example, if a bidder has submitted a bid for
200 shares, and there is an average pro rata decrease of
all bids of 30%, the bidder may receive an allocation of
100 shares (a 50% decrease from 200 shares) rather
than receiving an allocation of 140 shares (a 30% decrease
from 200 shares). In addition, some bidders may receive
allocations of shares that reflect a lesser percentage decrease
in their original bid than the average pro rata decrease. For
example, if a bidder has submitted a bid for 100 shares,
and there is an average pro rata decrease of all bids of 30%,
the bidder may receive an allocation of all 100 shares to
avoid having the bid rounded down to zero.
Generally the allocation of shares in this offering will be
determined in the following manner, continuing the first example
above:
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|
|
|
|
Any bid with a price below the public offering price is
allocated no shares.
|
|
|
|
The pro rata percentage is determined by dividing the number of
shares offered by the total number of shares bid at or above the
public offering price. In our example, if there are
6,900 shares bid for at or above the public offering price,
and 5,000 shares offered in the offering, then the pro rata
percentage is 72.5%.
|
|
|
|
All of the successful bids are then multiplied by the pro rata
percentage to determine the allocations before rounding. For
example, the three winning bids for 1,000 shares (Bid 1),
2,500 shares (Bid 2) and 3,400 shares (Bid
3) would initially be allocated 725 shares,
1,811 shares and 2,464 shares, respectively, based on
the pro rata percentage.
|
|
|
|
The bids are then rounded down to the nearest 100 share
round lot, so the bids would be rounded to 700, 1,800 and
2,400 shares respectively. This creates a stub of 100
unallocated shares.
|
|
|
|
The 100 stub shares are then allocated to the bids. Because Bid
3 for 3,400 shares was reduced, as a result of rounding, by
more total shares than Bid 1 for 1,000 shares or Bid 2
for 2,500 shares, Bid 3 would then be allocated the remaining
100 stub shares up to the nearest 100 round lot (from
2,400 shares to 2,500 shares).
|
99
If there are not sufficient remaining stub shares to enable a
bid to be rounded up to a round lot of 100 shares the
remaining unallocated stub shares would be allocated to smaller
orders that are below their bid amounts. The table below
illustrates the allocations in the example above.
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro-rata
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(72.5% of
|
|
|
Initial
|
|
|
Allocation of
|
|
|
Final
|
|
|
|
Initial Bid
|
|
|
Initial Bid)
|
|
|
Rounding
|
|
|
Stub Shares
|
|
|
Allocation
|
|
|
Bid 1
|
|
|
1,000
|
|
|
|
725
|
|
|
|
700
|
|
|
|
0
|
|
|
|
700
|
|
Bid 2
|
|
|
2,500
|
|
|
|
1,811
|
|
|
|
1,800
|
|
|
|
0
|
|
|
|
1,800
|
|
Bid 3
|
|
|
3,400
|
|
|
|
2,464
|
|
|
|
2,400
|
|
|
|
100
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,900
|
|
|
|
5,000
|
|
|
|
4,900
|
|
|
|
100
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Requirements
for Valid Bids
In order to participate in an OpenIPO offering, all bidders must
have an account with W.R. Hambrecht + Co., LLC or one of the
participating dealers. Valid bids are those that meet the
requirements, including eligibility, account status and size,
established by the underwriter or participating dealers. In
order to open a brokerage account with W.R. Hambrecht + Co, a
potential investor must deposit $2,000 in its account. This
brokerage account will be a general account subject to W.R.
Hambrecht + Cos customary rules, and will not be limited
to this offering. Bidders will be required to have sufficient
funds in their account to pay for the shares they are allocated
in the auction at the closing of the offering, which is
generally on the third business day following the pricing of the
offering. The underwriter reserves the right, in its discretion
and on our behalf, to reject or reduce any bids that they deem
manipulative or disruptive or not creditworthy in order to
facilitate the orderly completion of the offering. For example,
in previous transactions for other issuers in which the auction
process was used, W.R. Hambrecht + Co has rejected or reduced
bids when, in its sole discretion, it deems the bids not
creditworthy or had reason to question the bidders intent
or means to fund its bid. In the absence of other information,
we and the underwriter or participating dealer may assess a
bidders creditworthiness based solely on the bidders
history with the underwriter or participating dealer. W.R.
Hambrecht + Co has also rejected or reduced bids in past OpenIPO
offerings that it deemed, in its sole discretion, to be
potentially manipulative or disruptive or because the bidder had
a history of alleged securities law violations. Suitability and
eligibility standards of participating dealers may vary. As a
result of these varying requirements, a bidder may have its bid
rejected by the underwriter or a participating dealer while
another bidders identical bid is accepted.
The
Closing of the Auction and Allocation of Shares
The auction will close on a date and at a time estimated and
publicly disclosed in advance by the underwriter on the websites
of W.R. Hambrecht + Co at www.wrhambrecht.com and
www.openipo.com which we currently anticipate to
be ,
2010. The auction may close in as little as one hour following
effectiveness of the registration statement. The shares offered
by this prospectus will be sold to investors who have submitted
valid bids at or higher than the public offering price through
the underwriter or participating dealers.
The underwriter or a participating dealer will notify successful
bidders that we have accepted their bid by sending a notice of
acceptance by e-mail, telephone, facsimile or mail (according to
any preference indicated by a bidder) informing bidders that the
auction has closed and that their bids have been accepted. The
notice will indicate the price and number of shares that have
been allocated to the successful bidder. Other bidders will be
notified that their bids have not been accepted.
Each participating dealer has agreed with the underwriter to
conduct its solicitation efforts in accordance with the auction
process described above, unless the underwriter otherwise
consents. The underwriter does not intend to consent to the sale
of any shares in this offering outside of the auction process.
The underwriter reserves the right, in its sole discretion, to
reject or reduce any bids that it deems manipulative or
disruptive in order to facilitate the orderly completion of this
offering, and it reserves the right, in exceptional
circumstances, to alter this method of allocation as it deems
necessary to ensure a fair and orderly distribution of the
shares of our common stock. For example, large orders may be
reduced to ensure a public distribution and bids may be rejected
or reduced based on
100
eligibility or creditworthiness criteria. Once the underwriter
has closed the auction and we have accepted a bid, the
allocation of shares sold in this offering will be made
according to the process described in
Allocation of Shares above, and no
shares sold in this offering will be allocated on a preferential
basis or outside of the allocation rules to any institutional or
retail bidders. In addition, the underwriter or the
participating dealers may reject or reduce a bid by a
prospective investor who has engaged in practices that could
have a manipulative, disruptive or otherwise adverse effect on
this offering.
Investors who receive notice of acceptance of their bids must
make payment for the applicable number of shares by the close of
business on the third business day (the closing
date) following notice of acceptance of their bids. We
will have the option to cancel any bids that are not funded by
the close of business on the closing date without any obligation
to the bidder and may reallocate the unpaid for shares to other
successful bidders on a case by case basis or determine not to
issue all or any portion of the unpaid for shares. We will still
close this offering within three business days of pricing.
The underwriter and some dealers participating in the selling
group may submit firm bids that reflect indications of interest
from their customers that they have received at prices within
the initial public offering price range. Some participating
dealers or the underwriter may also manage bids on behalf of
their bidding customers. In these cases, the dealer submitting
the bid is treated as the bidder for the purposes of determining
the clearing price and allocation of shares.
Price and volume volatility in the market for our common stock
may result from the somewhat unique nature of the proposed plan
of distribution. Price and volume volatility in the market for
our common stock after the completion of this offering may
adversely affect the market price of our common stock.
Lock-Up
Agreements
We have agreed not to offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to
purchase, lend, or otherwise transfer or dispose of any shares
of our common stock or any securities convertible into or
exercisable or exchangeable for shares of our common stock for a
period of 180 days after the date of this prospectus
without the prior written consent of W.R. Hambrecht + Co, other
than the shares of common stock or options to acquire common
stock issued under our equity incentive plans.
Notwithstanding the foregoing, if (a) during the last
17 days of the
180-day
period after the date of this prospectus, we issue an earnings
release or publicly announce material news or if a material
event relating to us occurs or (b) prior to the expiration
of the 180-day period after the date of this prospectus, we
announce that we will release earnings during the 16-day period
beginning on the last day of the 180-day period, the above
restrictions will continue to apply until the expiration of the
18-day period beginning on the issuance of the earnings release
or the occurrence of the material news or material event.
We anticipate that the holders of nearly 100% of our outstanding
capital stock prior to this offering, including our directors
and executive officers, will agree not to (1) offer,
pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend, or otherwise
transfer or dispose of, directly or indirectly, any shares of
our common stock or any securities convertible into or
exercisable or exchangeable for shares of our common stock or
(2) enter into any swap or other arrangement that transfers
to another, in whole or in part, any of the economic
consequences of ownership of our common stock for a period of
180 days after the date of this prospectus without the
prior written consent of W.R. Hambrecht + Co, other than
(a) transfers or distributions of shares of our common
stock acquired from the underwriter in this offering;
(b) transfers or distributions of shares of our common
stock acquired in open market transactions after the completion
of this offering; (c) transfers of shares of common stock
or any security convertible into our common stock as a bona fide
gift or gifts; (d) transfers to any trust for the direct or
indirect benefit of the persons bound by the foregoing terms or
the immediate family of the persons bound by the foregoing
terms; or (e) distributions of shares of our common stock
or any security convertible into our common stock to the
partners, members or stockholders of the persons bound by the
foregoing terms, provided that in the case of any transfer or
distribution described in (c) through (e) above, the
transferees, donees or distributees agree to be bound by the
foregoing terms and the transferor, donor or distributor would
not be required to, or voluntarily, file a report under
Section 16(a) of the
101
Exchange Act. These restrictions will remain in effect beyond
the 180-day period under the same circumstances described in the
immediately preceding paragraph.
There are no specific criteria that W.R. Hambrecht + Co requires
for an early release of shares subject to lock-up agreements.
The release of any lock-up will be on a case-by-case basis.
Factors in deciding whether to release shares may include the
length of time before the lock-up expires, the number of shares
involved, the reason for release, including financial hardship,
market conditions and the trading price of the common stock.
W.R. Hambrecht + Co has no present intention or understanding,
implicit or explicit, to release any of the shares subject to
the lock-up agreements prior to the expiration of the 180-day
period.
Short
Sales, Stabilizing Transactions and Penalty Bids
In connection with this offering, the underwriter may purchase
and sell shares of common stock in the open market. These
transactions may include short sales, stabilizing transactions
and purchases to cover positions created by short sales. Any
short sales made by the underwriter would be naked short sales.
Naked short sales are any sales made by the
underwriter that the underwriter cannot cover through exercise
of any option. The underwriter must close out any naked short
position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriter are
concerned that there may be downward pressure on the price of
the common stock in the open market after pricing that could
adversely affect investors who purchase in this offering.
Stabilizing transactions consist of various bids for or
purchases of common stock made by the underwriter in the open
market for the purpose of pegging, fixing or maintaining the
price of the common stock.
These activities by the underwriter may stabilize, maintain or
otherwise affect the market price of the common stock. As a
result, the price of the common stock may be higher than the
price that otherwise might exist in the open market. If these
activities are commenced, the underwriter may discontinue them
at any time. These transactions may be effected on the NYSE
Amex, in the over-the-counter market or otherwise.
WR Hambrecht + Co currently intends to act as a market maker for
the common stock following this offering. However, it is not
obligated to do so and may discontinue any market making at any
time.
Indemnity
The underwriting agreement provides that we and the underwriter
have agreed to indemnify each other against specified
liabilities, including liabilities under the Securities Act, and
contribute to payments that each other may be required to make
relating to these liabilities.
Foreign
Jurisdictions
United Kingdom. The underwriter has
represented and agreed that:
|
|
|
|
|
it has not offered or sold and will not offer or sell any shares
to persons in the United Kingdom except to persons who are
qualified investors within the meaning of Article 2(1)(e)
of the Prospectus Directive that also are persons whose ordinary
activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the
purposes of their business or otherwise in circumstances which
have not resulted and which will not result in an offer to the
public in the United Kingdom within the meaning of
section 85(1) of the Financial Services and Markets Act
2000 (FSMA);
|
|
|
|
it has only communicated or caused to be communicated and will
only communicate or cause to be communicated an invitation or
inducement to engage in investment activity (within the meaning
of Section 21 of the FSMA) received by it in connection
with the issue or sale of any shares in circumstances in which
Section 21(1) of the FSMA does not apply to us; and
|
|
|
|
it has complied with, and will comply with all applicable
provisions of the FSMA with respect to anything done by it in
relation to the shares in, from or otherwise involving the
United Kingdom.
|
European Economic Area. In relation to each
Member State of the European Economic Area which has implemented
the Prospectus Directive, each a Relevant Member State, no offer
to the public of any shares which are the subject of the
offering contemplated by this prospectus, may be made in that
Relevant Member State other than
102
the offers contemplated in this prospectus in that Relevant
Member State once this prospectus has been approved by the
competent authority of the Relevant Member State and published
and passported in accordance with the Prospectus Directive as
implemented in that Relevant Member State except that an offer
to the public in any Relevant Member State of any shares may be
made at any time under the following exemptions if they have
been implemented in that Relevant Member State:
|
|
|
|
|
to legal entities which are authorized or regulated to operate
in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities;
|
|
|
|
to any legal entity which has two or more of (1) an average
of at least 250 employees during the last financial year;
(2) a total balance sheet of more than 43,000,000 and
(3) an annual net turnover of more than 50,000,000,
as shown in its last annual or consolidated accounts;
|
|
|
|
to fewer than 100 natural or legal persons (other than qualified
investors as defined in the Prospectus Directive) in the
Relevant Member State subject to obtaining the prior consent of
the lead underwriter; or
|
|
|
|
in any other circumstances falling within article 3(2) of the
Prospective Directive,
|
provided that no such offer of shares shall result in a
requirement for the publication by us or any underwriter of a
prospectus pursuant to article 3 of the Prospectus
Directive and each person who initially acquires any shares to
whom any offer is made under this prospectus will be deemed to
have represented, acknowledged and agreed that it is a
qualified investor within the meaning of
Article 2(1)(e) of the Prospectus Directive.
For the purposes of this provision, the expression an
offer to the public in relation to any shares in any
Relevant Member State means the communication in any form and by
any means of sufficient information on the terms of the offer
and any shares to be offered so as to enable an investor to
decide to purchase any shares, as the same may be varied in that
member state by any measure implementing the prospectus
directive in that member state and the expression
Prospective Directive means European Union Directive
2003//71/EC and includes any relevant implementing measure in
each Relevant Member State.
Switzerland. This prospectus does not
constitute an issue prospectus pursuant to Art 652a of the Swiss
code of obligations. The shares will not be listed on the SWX
Swiss Exchange and, therefore, the prospectus may not comply
with the disclosure standards of the listing rules of the SWX
Swiss Exchange.
Accordingly, the shares may not be offered to the public in or
from Switzerland, but only to a selected and limited circle of
investors, which do not subscribe the shares with a view to
distribution. The investors will be individually approached by
the underwriter from time to time.
This prospectus is personal to each offeree and does not
constitute an offer to any person. The prospectus may only be
used by those persons to whom it has been handed out in
connection with the offer described therein and may neither
directly nor indirectly be distributed or made available to
other persons without express consent of the issuer. It may not
be used in connection with any other offer and shall in
particular not be copied
and/or
distributed to the public in Switzerland.
LEGAL
MATTERS
Greenberg Traurig, P.A., Boca Raton, Florida, will pass upon the
validity of the securities offered by this prospectus as our
counsel. Certain legal matters in connection with this offering
will be passed on for the underwriter by Katten Muchin Rosenman
LLP, New York, New York.
EXPERTS
The financial statements for the years ended December 31,
2008 and December 31, 2009 included in this prospectus have
been audited by McGladrey & Pullen, LLP, independent
registered public accountants, to the extent and for the periods
set forth in its report appearing elsewhere herein and are
included in reliance upon such report given upon the authority
of that firm as experts in auditing and accounting.
103
WHERE YOU
CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on
Form S-1,
including exhibits, under the Securities Act with respect to the
common stock to be sold in this offering. This prospectus, which
constitutes a part of the registration statement, does not
contain all of the information in the registration statement or
the exhibits. Statements made in this prospectus regarding the
contents of any contract, agreement or other document are only
summaries. With respect to each contract, agreement or other
document filed as an exhibit to the registration statement, we
refer you to the exhibit for a more complete description of the
matter involved.
We are not currently subject to the informational requirements
of the Securities Exchange Act of 1934. As a result of the
offering of the shares of our common stock, we will become
subject to the informational requirements of the Exchange Act
and, in accordance therewith, will file reports and other
information with the SEC. You may read and copy all or any
portion of the registration statement or any reports, statements
or other information in the files at the public reference room
of the SEC located at 100 F Street, N.E.,
Washington, D.C. 20549.
You can request copies of these documents upon payment of a
duplicating fee by writing to the SEC. You may call the SEC at
1-800-SEC-0330
for further information on the operation of its public reference
room. Our filings, including the registration statement, will
also be available to you on the web site maintained by the SEC
at http://www.sec.gov.
We intend to furnish our stockholders with annual reports
containing financial statements audited by our independent
auditors, and to make available to our stockholders quarterly
reports for the first three quarters of each year containing
unaudited interim financial statements.
INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Section 145 of the Delaware General Corporation Law, as
amended, authorizes us to indemnify any director or officer
under certain prescribed circumstances and subject to certain
limitations against certain costs and expenses, including
attorneys fees actually and reasonably incurred in
connection with any action, suit or proceeding, whether civil,
criminal, administrative or investigative, to which a person is
a party by reason of being one of our directors or officers if
it is determined that such person acted in accordance with the
applicable standard of conduct set forth in such statutory
provisions. Our certificate of incorporation contains provisions
relating to the indemnification of director and officers and our
amended and restated by-laws extend such indemnities to the full
extent permitted by Delaware law. We may also purchase and
maintain insurance for the benefit of any director or officer,
which may cover claims for which we could not indemnify such
persons.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or
persons controlling us pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the SEC,
such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
There are not and have not been any disagreements between us and
our accountants on any matter of accounting principles,
practices or financial statement disclosure during our two most
recent fiscal years and subsequent interim period.
104
INDEX TO
FINANCIAL STATEMENTS
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F-2
|
|
Annual Financial Statements
|
|
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|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
Quarterly Condensed Financial Statements
|
|
|
|
|
|
|
|
F-31
|
|
|
|
|
F-32
|
|
|
|
|
F-33
|
|
|
|
|
F-34
|
|
|
|
|
F-35
|
|
F-1
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
XStream Systems, Inc.
We have audited the accompanying balance sheets of XStream
Systems, Inc. as of December 31, 2009 and 2008, and the
related statements of operations, stockholders deficit,
and cash flows for each of the two years in the period ended
December 31, 2009. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit 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 XStream Systems, Inc. as of December 31, 2009 and 2008,
and the results of its operations and its cash flows for each of
the two years in the period ended December 31, 2009, in
conformity with U.S. generally accepted accounting
principles.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 1 to the financial statements, the
Company has suffered recurring losses from operations, has a
working capital deficiency, negative cash flows from operations
and its total liabilities exceed its total assets. This raises
substantial doubt about the Companys ability to continue
as a going concern. Managements plans in regard to these
matters are also described in Note 1. The financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
As described in Note 15 to the financial statements, the
2009 and 2008 financial statements have been restated to correct
misstatements.
/s/ McGladrey
& Pullen, LLP
Orlando, Florida
March 12, 2010, except for notes 7 and 13 as to which the
date is April 21, 2010 and notes 4, 5, 8, 9, and 15 as
to which the date is June 21, 2010
F-2
XStream
Systems, Inc.
December 31,
2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
516,849
|
|
|
$
|
120,478
|
|
Inventory
|
|
|
104,999
|
|
|
|
175,721
|
|
Prepaid expenses
|
|
|
24,322
|
|
|
|
31,802
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
646,170
|
|
|
|
328,001
|
|
Deferred offering costs
|
|
|
380,224
|
|
|
|
|
|
Property and equipment, net
|
|
|
176,727
|
|
|
|
282,616
|
|
Intangible assets, net
|
|
|
114,629
|
|
|
|
126,095
|
|
Deposits
|
|
|
18,919
|
|
|
|
18,919
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,336,669
|
|
|
$
|
755,631
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,335,884
|
|
|
$
|
366,853
|
|
Accrued compensation
|
|
|
423,990
|
|
|
|
253,871
|
|
Accrued expenses
|
|
|
62,017
|
|
|
|
72,041
|
|
Customer deposits
|
|
|
10,000
|
|
|
|
10,000
|
|
Notes payable stockholders
|
|
|
26,835
|
|
|
|
89,185
|
|
Notes payable
|
|
|
2,850,000
|
|
|
|
2,507,500
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,708,726
|
|
|
|
3,299,450
|
|
Warrant liability
|
|
|
12,821,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
17,529,867
|
|
|
|
3,299,450
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred stock, $.0001 par value, 7%
cumulative dividend, 962,101 shares authorized, issued and
outstanding
|
|
|
4,419,094
|
|
|
|
4,130,897
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred stock, $.0001 par value, 7%
cumulative dividend 1,800,000 shares authorized and
1,619,127 shares issued and outstanding
|
|
|
5,539,656
|
|
|
|
5,177,299
|
|
|
|
|
|
|
|
|
|
|
Series C Preferred stock, $.0001 par value, 7%
cumulative dividend 1,350,000 shares authorized and 365,996
and 0 shares issued and outstanding 2009 and 2008,
respectively
|
|
|
1,144,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series D Preferred stock, $.0001 par value, 7%
cumulative dividend 700,000 shares authorized and 563,414
and 0 shares issued and outstanding 2009 and 2008,
respectively
|
|
|
1,710,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Deficit
|
|
|
|
|
|
|
|
|
Common stock, $.0001 par value, 60,000,000 and
30,000,000 shares authorized, 2,792,404 and
1,702,156 shares issued and outstanding, at
December 31, 2009 and 2008, respectively
|
|
|
279
|
|
|
|
170
|
|
Additional paid-in capital
|
|
|
|
|
|
|
4,451,000
|
|
Accumulated deficit
|
|
|
(29,006,852
|
)
|
|
|
(16,303,185
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(29,006,573
|
)
|
|
|
(11,852,015
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
1,336,669
|
|
|
$
|
755,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
F-3
XStream
Systems, Inc.
Years
Ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
Revenues
|
|
$
|
271,520
|
|
|
$
|
439,000
|
|
Cost of revenues
|
|
|
133,843
|
|
|
|
129,036
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
137,677
|
|
|
|
309,964
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
|
3,707,208
|
|
|
|
2,061,731
|
|
General and administrative
|
|
|
598,899
|
|
|
|
455,996
|
|
Selling and advertising
|
|
|
432,371
|
|
|
|
613,239
|
|
Research and development
|
|
|
581,547
|
|
|
|
635,531
|
|
Royalty fees
|
|
|
500,000
|
|
|
|
300,000
|
|
Legal settlement
|
|
|
781,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
6,601,215
|
|
|
|
4,066,497
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(6,463,538
|
)
|
|
|
(3,756,533
|
)
|
|
|
|
|
|
|
|
|
|
Financial income (expense):
|
|
|
|
|
|
|
|
|
Warrant expense
|
|
|
(2,769,083
|
)
|
|
|
|
|
Interest income
|
|
|
2,316
|
|
|
|
26,156
|
|
Interest expense
|
|
|
(164,956
|
)
|
|
|
(159,429
|
)
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(2,931,723
|
)
|
|
|
(133,273
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(9,395,261
|
)
|
|
|
(3,889,806
|
)
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(9,395,261
|
)
|
|
|
(3,889,806
|
)
|
Preferred stock dividend and accretion
|
|
|
(3,505,179
|
)
|
|
|
(4,540,989
|
)
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(12,900,440
|
)
|
|
$
|
(8,430,795
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(6.73
|
)
|
|
$
|
(4.95
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
1,917,157
|
|
|
|
1,702,156
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
F-4
XStream
Systems, Inc.
Years
Ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Additional
|
|
|
Accumulated
|
|
|
|
|
|
|
Stock
|
|
|
Paid-In Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
Balance (deficit) at December 31, 2007 (Restated)
|
|
$
|
170
|
|
|
$
|
6,754,056
|
|
|
$
|
(12,413,379
|
)
|
|
$
|
(5,659,153
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
1,264,878
|
|
|
|
|
|
|
|
1,264,878
|
|
Warrants issued in connection with Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
998,974
|
|
|
|
|
|
|
|
998,974
|
|
Accretion of redemption value of preferred stock
|
|
|
|
|
|
|
(4,540,989
|
)
|
|
|
|
|
|
|
(4,540,989
|
)
|
Syndication costs
|
|
|
|
|
|
|
(25,919
|
)
|
|
|
|
|
|
|
(25,919
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(3,889,806
|
)
|
|
|
(3,889,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance (deficit) at December 31, 2008 (Restated)
|
|
|
170
|
|
|
|
4,451,000
|
|
|
|
(16,303,185
|
)
|
|
|
(11,852,015
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
842,892
|
|
|
|
|
|
|
|
842,892
|
|
Exercise of options
|
|
|
9
|
|
|
|
12,615
|
|
|
|
|
|
|
|
12,624
|
|
Issuance of stock in lieu of compensation
|
|
|
100
|
|
|
|
2,219,900
|
|
|
|
|
|
|
|
2,220,000
|
|
Impact of initial adoption of recent accounting pronouncement
(Note 1)
|
|
|
|
|
|
|
(3,955,419
|
)
|
|
|
(3,308,406
|
)
|
|
|
(7,263,825
|
)
|
Accretion of redemption value of preferred stock
|
|
|
|
|
|
|
(3,505,179
|
)
|
|
|
|
|
|
|
(3,505,179
|
)
|
Syndication Costs
|
|
|
|
|
|
|
(65,809
|
)
|
|
|
|
|
|
|
(65,809
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(9,395,261
|
)
|
|
|
(9,395,261
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance (deficit) at December 31, 2009 (Restated)
|
|
$
|
279
|
|
|
$
|
|
|
|
$
|
(29,006,852
|
)
|
|
$
|
(29,006,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
F-5
Xstream
Systems, Inc.
Years
Ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,395,261
|
)
|
|
$
|
(3,889,806
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
842,892
|
|
|
|
1,264,878
|
|
Depreciation and amortization
|
|
|
117,355
|
|
|
|
129,485
|
|
Loss on disposal of property and equipment
|
|
|
|
|
|
|
9,247
|
|
Accrued interest on notes payable
|
|
|
134,504
|
|
|
|
125,556
|
|
Non-cash legal settlement
|
|
|
781,190
|
|
|
|
|
|
Non-cash issuance of common stock and preferred stock in lieu of
compensation
|
|
|
2,220,000
|
|
|
|
115,347
|
|
Change in fair value of warrants
|
|
|
2,769,083
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
70,722
|
|
|
|
46,174
|
|
Prepaid expenses
|
|
|
7,480
|
|
|
|
(13,129
|
)
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
603,807
|
|
|
|
(52,758
|
)
|
Accrued compensation
|
|
|
170,119
|
|
|
|
(34,603
|
)
|
Accrued expenses
|
|
|
(10,024
|
)
|
|
|
16,474
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,688,133
|
)
|
|
|
(2,283,135
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
|
|
|
|
(2,999
|
)
|
Proceeds from disposal of property and equipment
|
|
|
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
|
|
|
|
(2,799
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Principal payments on stockholder loans
|
|
|
(62,350
|
)
|
|
|
(301,095
|
)
|
Principal payments on notes payable
|
|
|
(588,190
|
)
|
|
|
(50,000
|
)
|
Proceeds from the exercise of options
|
|
|
12,624
|
|
|
|
|
|
Proceeds from the issuance of preferred stock
|
|
|
2,788,230
|
|
|
|
998,974
|
|
Payments for syndication costs
|
|
|
(65,810
|
)
|
|
|
(25,919
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
2,084,504
|
|
|
|
621,960
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
396,371
|
|
|
|
(1,663,974
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
120,478
|
|
|
|
1,784,452
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
$
|
516,849
|
|
|
$
|
120,478
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
Cash payments for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
10,181
|
|
|
$
|
23,103
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Schedule of Noncash Investing and Financing
Activities
|
|
|
|
|
|
|
|
|
Reclassification of deferred salary to notes payable stockholders
|
|
$
|
|
|
|
$
|
35,831
|
|
|
|
|
|
|
|
|
|
|
Deferred offering costs
|
|
$
|
380,224
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
F-6
XStream
Systems, Inc.
|
|
Note 1.
|
Nature of
Operations and Significant Accounting Policies
|
Nature of operations: XStream Systems,
Inc. (the Company) produces next generation X-ray
systems for material authentication and verification markets.
The Companys patented systems are based on
energy-dispersive
X-ray
diffraction (EDXRD). The Companys products enable
on-site,
real-time material identification to the pharmaceutical markets.
The Company has its corporate and financial offices in
Sebastian, Florida. Manufacturing of the systems is completed by
the Companys contract manufacturer. The Company was
founded in 2004.
Managements plans, liquidity and
profitability: As shown in the accompanying
financial statements, the Company incurred net losses for the
years ended December 31, 2009 and 2008 of $9,395,261 and
$3,889,806, respectively, and cumulative losses since inception
of $29,006,852. The Company has consistently generated negative
cash flows from operations and as of December 31, 2009, the
Companys current liabilities exceeded its current assets
by $4,062,556. Those factors, as well as the uncertainty
regarding the ability to obtain additional working capital and
the uncertainty regarding market acceptance of the
XT250tm
product, create overall uncertainty about the Companys
ability to continue as a going concern.
Management of the Company has raised additional working capital
in 2009 through issuance of Series C Redeemable Convertible
Preferred Stock and Series D Redeemable Convertible
Preferred Stock (see Note 9), and is actively seeking
additional funding for working capital. The Company does not
currently maintain a line of credit or term loan with any
commercial bank or other financial institution and has not made
any other arrangements to obtain additional financing. The
Company can provide no assurance that it will not require
additional financing. Likewise, the Company can provide no
assurance that, if additional financing is needed that it will
be available in an amount or on terms acceptable to the Company,
if at all. If the Company is unable to obtain additional funds
when they are needed or if such funds cannot be obtained on
favorable terms, the Company may be unable to execute upon its
business plan or pay its costs and expenses as they are
incurred, which could have a material adverse effect on the
Companys business, financial condition and results of
operations. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
A summary of the Companys significant accounting policies
follows:
Revenue recognition: The Companys
XT250tm
systems include software embedded in the tangible product that
is essential to its functionality. The software does not require
significant production, modification or customization.
Revenue from the sale of our
XT250tm
systems is recognized when all of the following criteria have
been met:
a. persuasive evidence of an arrangement exists,
b. delivery has occurred,
c. the vendors fee is fixed or determinable, and
d. collectability is probable.
While the Company engages in strategic pilot programs with
pharmaceutical manufacturers and distributors, revenue is not
recognized until the unit is sold, delivered, installed and
accepted, and collection of the sales price is probable.
The Company has two pricing models including wholesale pricing
for distributors who are authorized sales agents and retail
pricing to third party end-users.
Prior to installation, deposits are ordinarily required from
customers before manufacturing commences. These amounts are
recorded as customer deposits in current liabilities on the
accompanying balance sheets.
There are no post-installation obligations other than warranty
of the equipment for one year after installation. Warranty
expense is estimated based on historical results and is accrued
at the time the revenue is recognized.
F-7
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
Use of estimates: The preparation of
financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and cash equivalents: For purposes
of the statements of cash flows, cash includes cash on hand and
amounts on deposit at federally-insured financial institutions.
Cash equivalents include cash in money market accounts that are
convertible to a known amount of cash.
Inventories: Inventories consist of
finished goods and are valued at lower of cost or market using
the average cost method.
Property and equipment: Property and
equipment are recorded at cost. Major additions and improvements
are capitalized, and routine expenditures for repairs and
maintenance are charged to expense as incurred.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets as follows:
|
|
|
|
|
Years
|
|
Machinery and equipment
|
|
3 - 7
|
Computer equipment
|
|
3 - 5
|
Furniture and fixtures
|
|
7
|
Website
|
|
3
|
Intangible assets: Intangible assets
consist of license for the use of patents and are stated at
amortized cost. The license is amortized on a straight-line
basis over their estimated useful lives of fifteen years.
Product warranty: The Company offers
warranties to its customers depending on the specific product
and the terms of the customer agreement. The average length of
the warranty period is one year. The Companys warranties
require it to repair or replace defective products during the
warranty period at no cost to the customer. At the time product
revenue is recognized, the Company records a liability for
estimated costs that may be incurred under the related
warranties. The Company periodically assesses the adequacy of
its recorded warranty liability and adjusts the balance as
necessary.
Advertising costs: Advertising costs
are charged to operations when incurred and are not significant.
Income taxes: Deferred taxes are
provided on a liability method whereby deferred tax assets are
recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities
are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of
assets and liabilities and their tax basis. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes
in tax laws and rates on the date of enactment.
On January 1, 2007, the Company adopted the Financial
Accounting Standards Boards (FASB) guidance on
accounting for uncertainty in income taxes. The guidance
clarified the accounting for uncertainty in an enterprises
financial statements by prescribing a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. It requires management to evaluate its open tax
positions that exist on the date of initial adoption in each
jurisdiction.
When tax returns are filed, it is highly certain that some
positions taken would be sustained upon examination by the
taxing authorities, while others are subject to uncertainty
about the merits of the position taken or the amount of the
position that would be ultimately sustained. The benefit of a
tax position is recognized in the financial statements in the
period during which, based on all available evidence, management
believes it is more likely than not that the position will be
sustained upon examination, including the resolution of appeals
or litigation processes, if any. Tax positions taken are not
offset or aggregated with other positions. Tax positions that
meet the more-likely-
F-8
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
than-not recognition threshold are measured as the largest
amount of tax benefit that is more than 50 percent likely
of being realized upon settlement with the applicable taxing
authority.
Fair value measurement: The FASB issued
accounting guidance fair value measurements. Assets and
liabilities recorded at fair value in the balance sheets are
categorized based upon the level of judgment associated with the
inputs used to measure their fair value.
Fair value represents the exchange price that would be received
for an asset or paid to transfer a liability in the principal or
most advantageous market for the asset or liability in an
orderly transaction between market participants on the
measurement date. The FASB specifies a hierarchy of valuation
techniques based on whether the inputs to those valuation
techniques are observable or unobservable. In accordance with
the FASB, these inputs are summarized in the three broad levels
listed below:
|
|
|
|
|
Level 1 Quoted prices in active markets for
identical securities;
|
|
|
|
Level 2 Other significant observable
inputs that are observable through corroboration with market
data (including quoted prices in active markets for similar
securities);
|
|
|
|
Level 3 Significant unobservable inputs
that reflect managements best estimate of what market
participants would use in pricing the asset or liability.
|
Preferred stock and warrants: The
Company has issued redeemable convertible preferred stock with
detachable warrants for the purchase of common stock. The
Company reviews the conversion terms for indications requiring
bifurcation and separate accounting for the embedded conversion
feature. Generally, embedded conversion features where the
ability to physical or net-share settle the conversion option is
not within the control of the Company are bifurcated and
accounted for as derivative financial instruments. Other
convertible instruments that are not derivative financial
instruments are accounted for by recording the intrinsic value,
if any, of the embedded conversion feature as a discount from
the initial value of the instrument and accreting such discount
back to face value over the term of the instrument using the
effective interest rate method.
Detachable warrants are evaluated to determine if they are
liability instruments or equity instruments. Warrants determined
to be liability instruments at carried at fair value. For
warrants determined to be equity instruments, the issuance price
of the stock and warrants is allocated between the stock and the
warrants based on the relative fair value of those instruments
at the date of issuance. The amount allocated to the warrants is
recognized as additional paid in capital and is not adjusted
subsequent to issuance.
Redeemable preferred stock that is redeemable at the option of
the holder is not reported as permanent equity, but rather as
mezzanine equity and is initially carried at fair value at the
date of issuance. Subsequent to issuance, stock that is
redeemable currently is adjusted to its maximum redemption
amount at each balance sheet date. Stock that is not redeemable
currently is accounted for by accreting changes in the
redemption value and discounts over the period from the date of
issuance to the earliest redemption date of the security using
the interest method.
Stock-based compensation: The Company
measures and recognizes stock-based compensation expense at the
fair value of the awards. Compensation expense for awards and
related tax effects are recognized as the awards vest. The
Company uses the Black-Scholes Option Pricing Model to determine
the fair value of options issued.
Segment reporting: The Company offers
direct sales of our
XT250tm
systems to customers, three-way revenue sharing arrangements
between us, pharmaceutical manufacturers/distributors/chain
retailers, and a return goods processing center, with payments
to us based on a
pay-per-scan
service fee on returns, recalls and suspected diverted
products; and PILOT programs whereby manufacturers will host our
system for use on a trial basis, providing our host manufacturer
with an option to purchase the system following PILOT testing.
To date, the Company has not generated revenues from a three-way
revenue sharing arrangement. The Company has sold one unit
resulting from a PILOT program. The Company operates in one
operating segment as no discrete financial information other
than Company-wide information is available or utilized by the
Company.
F-9
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
Earnings per share: Basic earnings per
share are computed by dividing the net loss available to common
stockholders by the weighted-average number of common shares
outstanding during the period. The diluted earnings per share is
computed by giving effect to all potentially dilutive common
shares, including stock options. At December 31, 2009 and
2008, we reported a net loss; therefore, common stock
equivalents were excluded in the computation of diluted earnings
per share as the effect was anti-dilutive.
Common stock: On November 6, 2009,
the Companys shareholders approved an increase in the
authorized common stock by 30,000,000 shares. As a result,
the total number of shares of Common Stock that the Company is
authorized to issue is 60,000,000 shares, each with a par
value of $.0001 per share.
Royalty fees: Royalty fees relating to
actual sales are recorded as a component of cost of sales while
minimum royalty fees are recorded in operating expenses. Royalty
fees related to actual sales for the periods presented are not
material and are included in operating expenses.
Recent accounting pronouncements: In
June 2008, the FASB issued guidance in determining whether an
instrument (or an embedded feature) is indexed to an
entitys own stock. This guidance provides that an entity
should use a two step approach to evaluate whether an
equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the
instruments contingent exercise and settlement provisions.
It also clarifies on the impact of foreign currency denominated
strike prices and market based employee stock option valuation
instruments on the evaluation. The guidance is effective for
fiscal years beginning after December 15, 2008. As of
January 1, 2009, the adoption of this guidance resulted in
a reclassification of the fair value of certain outstanding
warrants from stockholders equity to liability. The fair
value of the warrants was determined by using the Black-Scholes
option pricing model. The initial value of the warrants at
adoption was approximately $7,263,825. The warrants will be
marked to market at each reporting period. For the year ended
December 31, 2009, the Company recorded loss from the
change in fair value of the warrants of $2,769,083 for the
increase in the fair value related to the warrants.
In May 2009, the FASB issued guidance on subsequent events. This
guidance requires an entity to recognize in the financial
statements the effects of all subsequent events that provide
additional evidence about conditions that existed at the date of
the balance sheet. For unrecognized subsequent events that must
be disclosed to keep the financial statements from being
misleading, an entity will be required to disclose the nature of
the event as well as an estimate of its financial effect or a
statement that such an estimate cannot be made. It is effective
for interim and annual periods ending after June 15, 2009
and is to be applied prospectively. The Companys adoption
of this guidance did not have a material impact on the
Companys financial position, results of operations and
cash flows.
In February 2010, the FASB issued an update on the
aforementioned accounting standard on subsequent events that
amends certain recognition and disclosure requirements. The
amendments remove the requirement for an SEC filer to disclose a
date through which subsequent events have been evaluated in both
issued and revised financial statements. The FASB believes these
amendments remove potential conflicts with the SECs
literature. All of the amendments in the update were effective
upon issuance.
In July 2009, the FASB Accounting Standards Codification
(Codification) became the single source
authoritative generally accepted accounting principles
(GAAP) in the United States. The previously existing
GAAP hierarchy consisted of four levels of authoritative
accounting and reporting guidance (levels A through D),
including original pronouncements of the FASB, Emerging Issues
Task Force abstracts and other accounting literature. The
Codification eliminates this hierarchy and replaced the
previously existing GAAP (other than rules and interpretive
releases of the SEC) with just two levels of literature:
authoritative and nonauthoritative.
In October 2009, the FASB issued guidance on certain revenue
arrangements that include software elements. The amendments in
the update clarify the applicability of the FASB guidance on
software revenue recognition that affect vendors that sell
tangible products in an arrangement containing software that is
more than incidental to the tangible product being sold, and
clarifies what guidance should be used in allocating and
measuring revenue. The update excludes tangible products
containing software and non-software components that function
together to
F-10
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
deliver the tangible products essential functionality from
FASB guidance on software revenue recognition. The guidance is
effective prospectively for fiscal years beginning on or after
June 15, 2010. This guidance does not impact our current
financial statements and is not expected to have an impact on
the Companys financial position, results of operations and
cash flows.
The FASB issued guidance improving disclosures about fair value.
This guidance affects all entities that are required to make
disclosures about recurring and nonrecurring fair value
measurements. The guidance requires certain new disclosures and
clarifies two existing disclosure requirements. The new
disclosures and clarifications of existing disclosures are
effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about
purchases, sales, issuances, and settlements in the roll forward
of activity in Level 3 fair value measurements. Those
disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those
fiscal years.
|
|
Note 2.
|
Property
and Equipment
|
At December 31, 2009 and 2008, the major classes of
property and equipment and the aggregate accumulated
depreciation consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Machinery and equipment
|
|
$
|
359,013
|
|
|
$
|
359,013
|
|
Computer equipment
|
|
|
151,449
|
|
|
|
151,449
|
|
Furniture and fixtures
|
|
|
72,035
|
|
|
|
72,035
|
|
Website
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
632,497
|
|
|
|
632,497
|
|
Less accumulated depreciation
|
|
|
(455,770
|
)
|
|
|
(349,881
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
176,727
|
|
|
$
|
282,616
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2009
and 2008 was $105,889 and $118,019, respectively.
|
|
Note 3.
|
Intangible
Assets
|
At December 31, 2009 and 2008, intangible assets and their
accumulated amortization consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
Gross Carrying
|
|
Accumulated
|
|
Net Carrying
|
|
Gross Carrying
|
|
Accumulated
|
|
Net Carrying
|
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
License
|
|
$
|
171,990
|
|
|
$
|
57,361
|
|
|
$
|
114,629
|
|
|
$
|
171,990
|
|
|
$
|
45,895
|
|
|
$
|
126,095
|
|
Amortization expense for the years ended December 31, 2009
and 2008 was $11,466.
F-11
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
Future amortization expense as of December 31, 2009 is as
follows:
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
2010
|
|
$
|
11,466
|
|
2011
|
|
|
11,466
|
|
2012
|
|
|
11,466
|
|
2013
|
|
|
11,466
|
|
2014
|
|
|
11,466
|
|
Thereafter
|
|
|
57,299
|
|
|
|
|
|
|
|
|
$
|
114,629
|
|
|
|
|
|
|
The weighted-average remaining amortization period for the
license is 10 years.
For certain of the Companys financial instruments
including cash and cash equivalents, accounts payable, accrued
expenses, notes payables to stockholders and notes payable the
carrying values approximate fair value due to their short-term
nature.
The Company uses level 3 inputs to determine the fair value
of its warrant liability.
A summary of the analysis of the Companys warrant
liability at fair value is as follows:
|
|
|
|
|
|
|
Warrant
|
|
|
|
Liability
|
|
|
Fair value of warrants, January 1, 2009 (initial adoption)
|
|
$
|
7,263,825
|
|
New warrant issuances
|
|
|
|
|
Series C Preferred Stock
|
|
|
2,324,017
|
|
Series D Preferred Stock
|
|
|
1,757,663
|
|
Change in fair value
|
|
|
1,475,636
|
|
|
|
|
|
|
Warrant liability, December 31, 2009
|
|
$
|
12,821,141
|
|
|
|
|
|
|
New warrant expense at issuance
|
|
|
|
|
Series C
|
|
|
1,226,026
|
|
Series D
|
|
|
67,421
|
|
Change in fair value
|
|
|
1,475,636
|
|
|
|
|
|
|
Warrant expense December 31, 2009
|
|
$
|
2,769,083
|
|
|
|
|
|
|
The fair value of the warrants was determined by using the
Black-Scholes option pricing model. The Company identified two
public companies similar in nature. Historical prices were
obtained to calculate estimated volatility for the period
consistent with the expected term set forth. The assumptions
used to value the warrants on the date of adoption and
December 31, 2009 are as follows:
|
|
|
|
|
|
|
January 1,
|
|
December 31,
|
|
|
2009
|
|
2009
|
|
Exercise price of warrants
|
|
$3.00
|
|
$3.00
|
Risk-free interest rate
|
|
1.55%
|
|
2.69%
|
Expected dividend yield
|
|
0%
|
|
0%
|
Expected volatility
|
|
65.40%
|
|
74.93% - 77.25%
|
Weighted average expected life to maturity
|
|
4 years
|
|
4 - 5 years
|
F-12
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
The
risk-free
interest rate was based on the yield of a US treasury note with
a similar period term of the warrant.
Temporary differences between the financial statement carrying
amounts and tax basis of assets and liabilities and operating
loss carryforwards that give rise to significant portions of the
deferred tax assets and liabilities relate to the following as
of December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
147,690
|
|
|
$
|
91,677
|
|
Stock compensation costs
|
|
|
709,220
|
|
|
|
696,846
|
|
Discount on debentures
|
|
|
81,702
|
|
|
|
81,701
|
|
Warrant reserve
|
|
|
16,934
|
|
|
|
13,171
|
|
Warrant liability expense
|
|
|
1,042,006
|
|
|
|
|
|
Other
|
|
|
3,563
|
|
|
|
3,563
|
|
Net operating loss carryforward
|
|
|
6,993,831
|
|
|
|
4,922,116
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
8,994,946
|
|
|
|
5,809,074
|
|
Less valuation allowance
|
|
|
(8,989,983
|
)
|
|
|
(5,788,960
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
|
4,963
|
|
|
|
20,114
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment, principally due to differences in
depreciation
|
|
|
(4,963
|
)
|
|
|
(20,114
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
(4,963
|
)
|
|
|
(20,114
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income taxes
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
A valuation allowance is required to reduce the deferred tax
assets reported if, based on the weight of the evidence, it is
more likely than not that some portion or all of the deferred
tax assets will not be realized. After consideration of all the
evidence, both positive and negative, management has determined
that a $8,989,983 and $5,788,960 valuation allowance at
December 31, 2009 and 2008, respectively, is necessary to
reduce the deferred tax assets to the amount that will more
likely than not be realized. The change in the valuation
allowance for the current year is $3,201,023.
The Company determined that no there were no tax benefits that
should not have been recognized, and accordingly no associated
interest and penalties were required to be accrued at
December 31, 2009 and 2008, respectively. The
Companys policy is to record interest and penalties as a
component of income tax expense. The Company does not believe
that there are any tax positions for which a material change in
unrecognized tax benefit or liability is reasonably possible in
the next twelve months. The Company believes that there are no
unrecognized tax benefits which, if recognized, would impact the
effective tax rate.
The Company has evaluated its open tax years by major
jurisdiction, and concluded that the tax years 2006 through 2009
remain open to examination by federal and state taxing
authorities.
F-13
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
Loss carryforwards for tax purposes as of December 31, 2009
have the following expiration dates:
|
|
|
|
|
Expiration Date December 31,
|
|
Amount
|
|
|
2024
|
|
$
|
425,415
|
|
2025
|
|
|
1,700,772
|
|
2026
|
|
|
2,897,580
|
|
2027
|
|
|
5,487,894
|
|
2028
|
|
|
2,568,637
|
|
2029
|
|
|
5,505,488
|
|
|
|
|
|
|
|
|
$
|
18,585,786
|
|
|
|
|
|
|
The Companys ability to utilize these net operating losses
to offset future taxable income of the Company may be limited
under the Internal Revenue Code Section 382 Change in
Ownership Rules. Management is in the process of evaluating if a
change in ownership has occurred to limit the utilization of the
net operating losses.
The following table presents the principal reasons for the
difference between the effective tax rate and the
U.S. federal statutory income tax rate for the year ended
December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Book Income at U.S. federal statutory income tax rate
|
|
$
|
(3,182,149
|
)
|
|
|
(34.00
|
)%
|
|
$
|
(1,322,534
|
)
|
|
|
(34.00
|
)%
|
State taxes, net of federal income tax effect
|
|
|
(308,788
|
)
|
|
|
(3.30
|
)%
|
|
|
(96,296
|
)
|
|
|
(2.47
|
)%
|
Change in valuation allowance
|
|
|
3,201,023
|
|
|
|
34.20
|
%
|
|
|
998,246
|
|
|
|
25.66
|
%
|
Permanent differences
|
|
|
289,914
|
|
|
|
3.10
|
%
|
|
|
420,584
|
|
|
|
10.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6.
|
Notes
Payable Stockholders
|
At December 31, 2009 and 2008, notes payable
stockholders were all classified as current liabilities and
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Unsecured promissory note to a stockholder, with interest at a
rate of 12%. Monthly principal and interest of $7,228 are due
beginning on January 18, 2008, with a final maturity on
December 1, 2008. The balance was paid in full on
March 10, 2009.(i)
|
|
$
|
|
|
|
$
|
21,400
|
|
Unsecured promissory note to a stockholder, with interest at a
rate of 12%. Monthly principal and interest of $6,508 are due
beginning on June 15, 2008 with final maturity on
December 15, 2008(i). These notes have not been
extended.
|
|
|
6,839
|
|
|
|
43,070
|
|
Unsecured promissory note to a stockholder, with interest at a
rate of 12%. Monthly principal and interest of $3,183 are due
beginning on July 15, 2008 with final maturity on
May 15, 2009.(i) These notes have not been
extended.
|
|
|
19,996
|
|
|
|
24,715
|
|
|
|
|
|
|
|
|
|
|
Total notes payable stockholders
|
|
$
|
26,835
|
|
|
$
|
89,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) |
|
The Company was in default of these promissory notes as of
December 31, 2009 and 2008. In connection with the default,
the interest rate increased from 8% to 12%. |
F-14
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
At December 31, 2009 and 2008, notes payable consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Unsecured note payable to the contract manufacturer (including
accrued interest of $134,500)(i). Principal and interest, which
accrues at a rate of 5%, is due at maturity, September 5,
2008. The Company was in default on this note as of the maturity
date. See Note 13 for terms of tentative settlement
agreement.
|
|
$
|
2,600,000
|
|
|
$
|
2,257,500
|
|
Unsecured subordinated debentures, which accrue interest at a
rate of 8% and mature through December 31, 2009. The
Company was in default on interest payments as of
December 31, 2009 and 2008.
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
$
|
2,850,000
|
|
|
$
|
2,507,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) |
|
In connection with the note payable, the Company entered into a
supply agreement with its contract manufacturer. In accordance
with the agreement, the Company commits to purchase from this
manufacturer 100% of the Companys total demand for the
initial twenty-four months of volume production. |
|
|
Note 8.
|
Share-Based
Payments
|
On November 6, 2009, the Company adopted 2009 Long Term
Compensation Plan. Pursuant to this plan, incentive stock
options, non-qualified options, restricted stock awards,
deferred stock awards, bonus stock and awards in lieu of
obligations, dividends equivalents, performance awards and other
stock based awards to purchase an aggregate of
5,000,000 shares of common stock may be issued, as
adjusted. As of December 31, 2009, there are 1,000,000
incentive awards outstanding under the Plan. The Plan authorized
the issuance of incentive stock options (ISOs), as
defined in the Internal Revenue Code of 1986, as amended, and
non-qualified stock options (NQSOs).
Consultants and directors who are not also employees of the
Company are eligible for grants of only NQSOs. The exercise
price of each ISO may not be less than 100% of the fair market
value of the common stock at the time of grant, except that in
the case of a grant to an employee who owns 10% or more of the
outstanding stock of the Company, the exercise price may not be
less than 110% of the fair market value on the date of grant.
Generally, unless fully vested at the time of grant, options
shall be exercisable at 25% per year, and shall be outstanding
for ten years.
During the year ended December 31, 2009, the Company
granted 1,000,000 shares of vested common stock to its chairman
at a fair value of $2.22 per share for total compensation of
$2,220,000. The grant was for services previously rendered and
was recognized in its entirety during 2009.
In 2004, the Company adopted a Stock Incentive Plan (the
Plan). The Plan is administered by the Board of Directors
or a committee thereof and provides for options to purchase
2,600,000 shares of common stock to be granted under the
Plan to officers, directors, independent contractors and
consultants of the Company. The Plan authorized the issuance of
ISOs, as defined in the Internal Revenue Code of 1986, as
amended, and NQSOs. Consultants and directors who are not also
employees of the Company are eligible for grants of only NQSOs.
The exercise price of each ISO may not be less than 100% of the
fair market value of the common stock at the time of grant,
except that in the case of a grant to an employee who owns 10%
or more of the outstanding stock of the Company, the exercise
price may not be less than 110% of the fair market value on the
date of grant. Generally, unless fully vested at the time of
grant, options shall be exercisable at 25% per year, and shall
be outstanding for ten years.
The fair value of each option award is estimated on the date of
grant using the Black-Scholes Option Pricing Model that uses the
assumptions noted in the following table. Expected volatility is
based on the historical volatility
F-15
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
of similar companies stock. The risk-free rate for periods
within the contractual life of the option is based on the
U.S. treasury strip yield curve in effect at the time of
grant.
The assumptions used and the weighted average fair value of
options granted are as follows for the years ended
December 31, 2009 and 2008:
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Risk-free interest rate
|
|
1.36%-2.56%
|
|
1.55% - 3.34%
|
Expected dividend yield
|
|
0%
|
|
0%
|
Expected volatility
|
|
74.93% - 160.33%
|
|
86.08% - 164.77%
|
Expected life in years
|
|
5 - 7
|
|
5 - 7
|
Service period in years
|
|
0 - 4
|
|
0 - 4
|
Weighted average fair value of options granted
|
|
$1.56
|
|
$1.55
|
Compensation cost recognized on options granted in 2009 and 2008
was $227,006 and $235,326, respectively.
The following is an analysis of options to purchase shares of
the Companys common stock issued and outstanding as of
December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Outstanding at beginning of year
|
|
|
1,539,760
|
|
|
$
|
2.57
|
|
|
|
901,991
|
|
|
$
|
2.80
|
|
Granted
|
|
|
670,500
|
|
|
|
0.69
|
|
|
|
799,044
|
|
|
|
2.39
|
|
Exercised
|
|
|
(90,248
|
)
|
|
|
0.14
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(14,255
|
)
|
|
|
0.90
|
|
|
|
(161,275
|
)
|
|
|
3.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at year-end
|
|
|
2,105,757
|
|
|
$
|
2.09
|
|
|
|
1,539,760
|
|
|
$
|
2.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at year-end
|
|
|
1,678,679
|
|
|
$
|
2.40
|
|
|
|
1,440,541
|
|
|
$
|
2.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining term of outstanding options
|
|
|
|
|
|
|
7.96
|
|
|
|
|
|
|
|
8.04 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining term of vested options
|
|
|
|
|
|
|
7.67
|
|
|
|
|
|
|
|
8.04 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the status of the Companys nonvested shares
as of December 31, 2009 and 2008 and changes during the
years ended December 31, 2009 and 2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at beginning of year
|
|
|
99,219
|
|
|
$
|
1.50
|
|
|
|
176,119
|
|
|
$
|
1.41
|
|
Granted
|
|
|
670,500
|
|
|
|
1.55
|
|
|
|
799,044
|
|
|
|
1.59
|
|
Vested
|
|
|
(328,386
|
)
|
|
|
1.56
|
|
|
|
(806,189
|
)
|
|
|
1.55
|
|
Forfeited
|
|
|
(14,255
|
)
|
|
|
1.76
|
|
|
|
(69,755
|
)
|
|
|
1.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at year-end
|
|
|
427,078
|
|
|
$
|
1.48
|
|
|
|
99,219
|
|
|
$
|
1.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 and 2008, there was $281,519 and
$235,953, respectively, of total unrecognized compensation cost
related to nonvested share-based compensation arrangements
granted. That cost is expected to be recognized over a weighted
average remaining term of 1.39 years.
F-16
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
|
|
Note 9.
|
Preferred
Stock and Warrants
|
Series A Redeemable Convertible Preferred
Stock: On March 14, 2007, the Company
issued 962,101 shares of redeemable convertible preferred
stock. This preferred stock was designated Series A
Redeemable Convertible Preferred Stock (Series A
Preferred). The Series A Preferred has a par value of
$.0001 and has a liquidation value of $3.80 plus a rate of
return equal to 5% per annum, compounded annually, per share.
The Series A Preferred is convertible into shares of the
Companys common stock at a conversion rate of one for one
at the request of the holders of Series A Preferred. The
Series A Preferred is redeemable at any time on or after
March 14, 2012, upon the request of the holders of at least
a majority of the then outstanding shares of Series A
Preferred. Upon such request, each of the holders of the then
outstanding Series A Preferred shall have the right to
require the Company to redeem all or any of their shares of
Series A Preferred at a price per share equal to the
Series A Liquidation Value plus a rate of return on such
amount equal to 7% per annum, compounded annually. The issuance
of the Series A Preferred generated net cash proceeds of
$3,280,984, after transaction fees, expenses and noncash items.
The Company used the net cash proceeds for operational purposes.
Dividends on the Series A Preferred accrue daily at 5% per
annum except upon an event of noncompliance including; failure
to make any redemption payment under the Preferred Stock
Purchase Agreement (the Agreement), a breach of any
covenant or agreement included in the Agreement, any realization
that any of the representations or warranties under the
agreement are untrue or incorrect, the Company entering into
liquidation or bankruptcy, the Company defaulting on one or more
indentures, agreements or other instruments under which
Indebtedness amounts to at least $100,000, and any judgment
rendered against the Company in excess of $500,000, after which
the dividend rate shall be increased to 7% per annum. On
September 16, 2008, the Company was in default of a loan
agreement with its contract manufacturer and as the default was
greater than $100,000 the dividend rate increased to 7% on such
date, and will continue until the default is cured. In addition,
the above noted event of noncompliance results in the
Series A Preferred being immediately redeemable upon
request of the holders of a majority of the outstanding shares
of Series A Preferred at a price per share of $3.80 per
share plus a rate of return equal to 7% per annum.
Series B Redeemable Convertible Preferred
Stock: On December 21, 2007, the Company
issued 1,264,353 shares of redeemable convertible preferred
stock and 6,321,756 warrants to purchase shares of common stock
at a strike price of $3.00 per share, which expire 10 years
after the date of issuance. This preferred stock was designated
Series B Redeemable Convertible Preferred Stock. The
Series B Preferred has a par value of $.0001 and has a
liquidation value of $3.00 plus a rate of return currently equal
to 5% per annum, compounded annually, per share. The
Series B Preferred is convertible into shares of the
Companys common stock at a conversion rate of one for one
at the request of the holders of Series B Preferred. The
Series B Preferred is redeemable at any time on or after
March 14, 2012, upon the request of the holders of at least
a majority of the then outstanding shares of Series B
Preferred, each of the holders of the then outstanding
Series B Preferred shall have the right to require the
Company to redeem all or any of their shares of Series B
Preferred at a price per share equal to the Series B
Liquidation Value plus a rate of return on such amount equal to
7% per annum, compounded annually.
Dividends on the Series B Preferred will accrue daily at 5%
per annum except upon an event of noncompliance, as described
above, after which the dividend rate shall be increased to 7%
per annum. On September 16, 2008, the Company was in
default of a loan agreement with its contract manufacturer and
as the default was greater than $100,000 the dividend rate
increased to 7% on such date.
In addition, the above noted event of noncompliance results in
the Series B Preferred being immediately redeemable upon
request of the holders of a majority of the outstanding shares
of Series B Preferred at a price per share of $3.00 per
share plus a rate of return equal to 7% per annum.
In connection with the Series B preferred stock financing,
the Company entered into Series B warrant agreements, which
stipulate if and whenever on or after the original issue date,
the Company issues or sells or are deemed to have issued or sold
any shares of the Companys common stock for a
consideration per share less than the
F-17
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
exercise price of the Series B warrant agreement in effect
immediately prior to the time of such issuance, then immediately
upon such issuance or sale or deemed issuance or sale the
exercise price will be reduced to the exercise price determined
by dividing (i) the sum of (A) the product derived by
multiplying the exercise price in effect immediately prior to
such issuance or sale by the number of shares of common stock
deemed outstanding immediately prior to such issuance or sale,
plus (B) the consideration, if any, received by us upon
such issuance or sale, by (ii) the number of shares of
common stock deemed outstanding immediately after such issue or
sale. As a result of this provision, warrants are classified as
liabilities in the accompanying financial statements.
The Company issued shares of Series B Preferred and
warrants during the years ended December 31, 2008 as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B
|
|
|
Series B
|
|
|
|
|
|
Noncash
|
|
|
|
Preferred
|
|
|
Warrants for
|
|
|
Cash
|
|
|
Conversion of
|
|
Date
|
|
Shares
|
|
|
Common Stock
|
|
|
Proceeds
|
|
|
Compensation
|
|
|
February 28, 2008
|
|
|
30,116
|
|
|
|
150,580
|
|
|
$
|
25,000
|
|
|
$
|
65,349
|
|
May 30, 2008
|
|
|
291,326
|
|
|
|
1,456,630
|
|
|
|
873,974
|
|
|
|
|
|
June 30, 2008
|
|
|
16,666
|
|
|
|
83,330
|
|
|
|
|
|
|
|
49,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
338,108
|
|
|
|
1,690,540
|
|
|
$
|
898,974
|
|
|
$
|
115,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2008 issuances of the Series B Preferred generated net
cash proceeds of $873,055, after transaction fees, expenses and
noncash items for the year ended December 31, 2008. The
Company used the net cash proceeds for operational purposes.
The Company issued Series B Preferred shares and warrants
to its interim CEO in exchange for services rendered.
Compensation to the CEO in the amount of $49,998 for the year
ended December 31, 2008 was exchanged for shares and
warrants at the same price as those purchased for cash. The
CEOs total compensation of $99,996 for the period of
service was determined by the Companys board of directors
and was recorded as compensation expense in the period earned.
The Company also issued Series A Preferred shares and
warrants to its President in exchange for deferred salary on
February 28, 2008. The President recognized as compensation
$100,000 of deferred salary on that date and exchanged the net
pay amount of $65,348 to purchase Series B Preferred Units
at the same price as those purchased for cash.
The purchase price allocated between the Series B
Redeemable Preferred Stock and the Series B warrants
(Series B Units) was determined using the
Black-Scholes Option Pricing model using the following
assumptions:
|
|
|
|
|
Exercise price of warrants
|
|
$
|
3.00
|
|
Value of common stock
|
|
$
|
2.15
|
|
Risk-free interest rate
|
|
|
2.73% 3.41%
|
|
Dividend yield
|
|
|
0.00%
|
|
Expected volatility
|
|
|
106.11% 115.23%
|
|
Weighted average expected life to maturity
|
|
|
5 years
|
|
In connection with the issuance of warrants associated with the
Series B Preferred, the Company allocated the proceeds
received from the sale of the convertible preferred stock
between the Series B Preferred and warrants based on their
relative fair values. The amount allocated to the warrants was
approximately $800,000 and the amount allocated to the
Series B Preferred was approximately $214,000. This
allocation resulted in a beneficial conversion feature for the
Series B Preferred with an intrinsic value in excess of the
amounts allocated to the Series B Preferred. Accordingly,
the Series B Preferred was further discounted by
approximately $214,000. The discount associated with the
beneficial conversion feature was immediately accreted as the
Series B Preferred is convertible at any time upon request
of the Series B Preferred holders. The balance of the
discount associated with the warrants was fully accreted in 2008
due to the event of noncompliance that resulted in the
Series B Preferred becoming immediately redeemable, as
discussed above.
F-18
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
Series C Redeemable Convertible Preferred
Stock: During 2009 the Company issued a total
of 365,996 shares designated Series C Redeemable
Preferred Stock and 1,829,980 warrants to purchase shares of
common stock at a price of $3.00 per share, which expire ten
years after the date of issuance. The Series C Redeemable
Convertible Preferred Stock has a par value of $.0001 and has a
liquidation value of $3.00 plus a rate of return equal to 5% per
annum, compounded annually, per share. The Series C
Redeemable Convertible Preferred Stock is convertible at the
request of the holders of Series C Preferred Stock. The
Series C Preferred Stock is redeemable at any time on or
after March 14, 2012, upon the request of the holders of at
least a majority of the then outstanding shares of Series C
Preferred. The holders of the then outstanding Series C
Preferred shall have the right to require the Company to redeem
all or any of their shares of Series C preferred at a price
per share equal to the Series C Liquidation Value plus a
rate of return on such amount equal to 5% per annum, compounded
annually. Additionally, if an Event of Noncompliance occurs, as
described above under the caption Series A Redeemable
Convertible Preferred Stock:, the dividend rate increases
from 5% per annum to 7% per annum and the preferred stock
becomes immediately redeemable upon the request of the holders
of at least a majority of the then outstanding shares of the
preferred stock.
The Company was in default on a loan agreement with its contract
manufacturer and the default was greater than $100,000. Due to
this Event of Noncompliance, the dividend rate was 7% upon
issuance and the Series C Preferred is immediately
redeemable upon request of the holders of a majority of the
outstanding share of Series C Preferred at a price per
share of $3.00 per share plus a rate of return equal to 7% per
annum.
The issuance of the Series C Redeemable Convertible
Preferred Stock and warrants generated net cash proceeds of
$1,093,647, after transaction fees and expenses. The Company
used the net cash proceeds for operational purposes.
In connection with the Series C preferred stock financing,
the Company entered into Series C warrant agreements, which
stipulate if and whenever on or after the original issue date,
the Company issues or sells or are deemed to have issued or sold
any shares of our common stock for a consideration per share
less than the exercise price of the Series C warrant
agreement in effect immediately prior to the time of such
issuance, then immediately upon such issuance or sale or deemed
issuance or sale the exercise price will be reduced to the
exercise price determined by dividing (i) the sum of
(A) the product derived by multiplying the exercise price
in effect immediately prior to such issuance or sale by the
number of shares of common stock deemed outstanding immediately
prior to such issuance or sale, plus (B) the consideration,
if any, received by us upon such issuance or sale, by
(ii) the number of shares of common stock deemed
outstanding immediately after such issue or sale. As a result of
this provision, warrants are classified as liabilities in the
accompanying financial statements.
Series D Redeemable Convertible Preferred
Stock: On October 30, 2009, the Company
issued 563,414 shares of Series D Redeemable
Convertible Preferred Stock and 2,817,070 warrants to purchase
shares of common stock at a price of $3.00 per share, which
expire ten years after the date of issuance. The Series D
Redeemable Convertible Preferred Stock has a par value of $.0001
and has a liquidation value of $3.00 plus a rate of return equal
to 5% per annum, compounded annually, per share. The
Series D Redeemable Convertible Preferred Stock is
convertible at the request of the holders of Series D
Preferred Stock.
The issuance of the Series D Redeemable Convertible
Preferred Stock generated net cash proceeds of $1,628,773, after
transaction fees and expenses. The Company used the net cash
proceeds for operational purposes.
The Series D Preferred Stock is redeemable at any time on
or after March 14, 2012, upon the request of the holders of
at least a majority of the then outstanding shares of
Series D Preferred, at a price per share equal to the
Series D Liquidation Value plus a rate of return on such
amount equal to 5% per annum, compounded annually. Additionally,
if an Event of Noncompliance occurs, as described above under
the caption Series A Redeemable Convertible Preferred
Stock:, the dividend rate increases from 5% per annum to 7%
per annum and the preferred stock becomes immediately redeemable
upon the request of the holders of at least a majority of the
then outstanding shares of the preferred stock.
F-19
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
The Company was in default on a loan agreement with its contract
manufacturer and the default was greater than $100,000. Due to
this Event of Noncompliance, the dividend rate was 7% upon
issuance and the Series D Preferred is immediately
redeemable upon request of the holders of a majority of the
outstanding share of Series D Preferred at a price per
share of $3.00 per share plus a rate of return equal to 7% per
annum.
In connection with the Series D preferred stock financing,
the Company entered into Series D warrant agreements, which
stipulate if and whenever on or after the original issue date we
issue or sell or are deemed to have issued or sold any shares of
our common stock for a consideration per share less than the
exercise price of the Series D warrant agreement in effect
immediately prior to the time of such issuance, then immediately
upon such issuance or sale or deemed issuance or sale the
exercise price shall be reduced to the exercise price determined
by dividing (i) the sum of (A) the product derived by
multiplying the exercise price in effect immediately prior to
such issuance or sale by the number of shares of common stock
deemed outstanding immediately prior to such issuance or sale,
plus (B) the consideration, if any, received by us upon
such issuance or sale, by (ii) the number of shares of
common stock deemed outstanding immediately after such issue or
sale. As a result of this provision, warrants are classified as
liabilities in the accompanying financial statements.
The purchase price allocated between the Series C and D
Redeemable Preferred Stock and the Series C and D warrants
was determined using the Black-Scholes Option Pricing Model. The
Series C warrants were valued at the date of issuances at
amounts ranging from $1.1403$1.3337, per share of common
stock to be issued. The Series D warrants were valued at
the date of issuance at $.6239 per share of common stock to be
issued. The value of the warrants was determined using the
Black-Scholes Option Pricing Model using the following
assumptions:
|
|
|
|
|
|
|
|
|
|
|
Series C
|
|
Series D
|
|
Exercise price of warrants
|
|
|
$ 3.00
|
|
|
$
|
3.00
|
|
Value of common stock
|
|
|
$ 2.032.22
|
|
|
$
|
1.34
|
|
Risk-free interest rate
|
|
|
1.83%2.84%
|
|
|
|
2.31%
|
|
Dividend yield
|
|
|
0.00%
|
|
|
|
0.00%
|
|
Expected volatility
|
|
|
78.40%80.93%
|
|
|
|
76.36%
|
|
Weighted average expected life to maturity
|
|
|
5 years
|
|
|
|
5 years
|
|
The fair value at the issuance dates of the warrant liabilities
associated with Series C Preferred and Series D
Preferred was in excess of the proceeds received resulting in
warrant expenses of $1,226,026 and $67,421, respectively.
Under the terms of the agreements, the Series A Preferred,
Series B Preferred, Series C Preferred and
Series D Preferred have no preference over one another.
At any time, holders of Preferred Stock have the right to
convert all or any portion of their shares of Preferred Stock
into shares of common stock. All shares of Preferred Stock
automatically convert into common stock upon (A) the
affirmative written consent of the holders of at least a
majority of the outstanding shares of Preferred Stock or
(B) any offering by the Company of debt or equity
securities to the public pursuant to an effective registration
statement under the Securities Act of 1933.
All outstanding shares of our Series A, B, C, and D
preferred stock will automatically convert into
3,510,638 shares of our common stock on the effective date
of the registration statement for the Companys initial
public offering.
Warrants: During the years ended
December 31, 2009 and 2008, the Company issued warrants to
purchase approximately 4,647,050 and 1,712,540 shares of
common stock respectively. Under the terms of the warrant
agreements, the warrants are exercisable for shares of the
companys $.0001 par value common stock with a strike
price of $3.00 per share and are exercisable for a period of ten
years.
F-20
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
A summary of the status of the Companys warrants related
to the issuance of debentures and preferred stock, which are
classified as equity on the balance sheet is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Term
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Term
|
|
|
Beginning balance of warrants
|
|
|
8,431,635
|
|
|
|
2.98
|
|
|
|
|
|
|
|
6,720,095
|
|
|
|
2.97
|
|
|
|
|
|
Warrants issued
|
|
|
4,647,050
|
|
|
|
3.00
|
|
|
|
|
|
|
|
1,711,540
|
|
|
|
3.00
|
|
|
|
|
|
Warrants exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding and exercisable, year end
|
|
|
13,078,685
|
|
|
|
2.99
|
|
|
|
8.49
|
|
|
|
8,431,635
|
|
|
|
2.98
|
|
|
|
9.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10.
|
Commitments
and Contingency
|
Operating lease: The Company leases its
main office and engineering facility under operating leases
through February 28, 2012. Lease expense for the years
ended December 31, 2009 and 2008 is $106,659 and $136,836,
respectively, which includes expenses related to common area
maintenance. Future minimum lease payments under the operating
leases are as follows for the years ending December 31:
|
|
|
|
|
2010
|
|
$
|
119,771
|
|
2011
|
|
|
124,562
|
|
2012
|
|
|
20,894
|
|
|
|
|
|
|
Total minimum future lease payments
|
|
$
|
265,227
|
|
|
|
|
|
|
Royalty payments: As required under the
license agreement entered into by the Company with a university
for exclusive rights to produce and sell products which utilize
the universitys patented X-ray diffraction technology, the
Company has agreed to pay the university a minimum annual
royalty for a term of 15 years, which was the remaining
life of the patent at the inception of the agreement. Minimum
annual royalty payments under the license agreement are as
follows for the years ending December 31:
|
|
|
|
|
2010
|
|
$
|
500,000
|
|
2011
|
|
|
500,000
|
|
2012
|
|
|
500,000
|
|
2013
|
|
|
500,000
|
|
2014
|
|
|
500,000
|
|
Thereafter
|
|
|
2,500,000
|
|
|
|
|
|
|
Total minimum royalty payments
|
|
$
|
5,000,000
|
|
|
|
|
|
|
Royalty expense for the years ended December 31, 2009 and
2008 was $500,000 and $300,000. Under the terms of the agreement
those were the minimum payments due for the years ended
December 31, 2009 and 2008, respectively. At
December 31, 2009 and 2008 accounts payable includes
$797,871 and $296,336 amount of accrued royalties, respectively.
The Company is currently in arrears with respect to payment of
accrued royalty fees. The licensing agreement provides that if
either party breaches or fails to perform any provision of the
Agreement, the other party may give written notice of the
default to the breaching party. The Company has received an
offer from Rutgers University to settle the outstanding amounts
under the license agreement including payment of an additional
3.5% of each sale of
F-21
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
an
XT250tm
unit and issuance of shares of common stock in the Company. To
date, however, a forbearance agreement has not been executed and
the default under the agreement has not been cured. The loss of,
or our inability to maintain, this license could result in our
inability to sell our products including the
XT250tm
systems without liability exposure. As a general matter, we
anticipate that we will continue to license technology from
third parties in the future. This technology may not continue to
be available on commercially reasonable terms, if at all. Other
than the licensed technology from Rutgers University, we do not
believe that we are substantially dependent on any individual
licensed technology. However, some of the software that we
license from third parties could be difficult for us to replace.
The loss of any of these technology licenses could result in
delays in the license of our products until equivalent
technology, if available, is developed or identified, licensed
and integrated.
The use of additional third-party software would require us to
negotiate license agreements with other parties, which could
result in higher royalty payments and a loss of product
differentiation, which could negatively impact our operating
results and financial condition.
Product warranty: The Company estimated
its product warranty liability as of December 31, 2009 and
2008 of approximately $35,000, which is included in accrued
expenses.
Cash and cash equivalents, at times, may exceed
federally-insured limits. Accounts are guaranteed by the Federal
Deposit Insurance Corporation (FDIC) up to $250,000
as of December 31, 2008. However, this financial
institution is participating in the FDICs Transaction
Accounts Guarantee Program (TAGP) through
December 31, 2009, whereby all noninterest bearing
transaction accounts, including business checking accounts, are
fully guaranteed by the FDIC for the entire amount in each
account. Coverage under the TAGP is in addition to and separate
from the $250,000 of coverage available under general deposit
insurance rules. The Company has not experienced any losses in
such accounts.
The Company engages a stockholder under a consulting agreement
to serve as Chairman of the Companys Scientific Advisory
Board. This arrangement provides for an hourly fee for work
performed under the agreement as well as 25,000 options, which
vest over a period of four years. During 2009 and 2008, payments
of $0 and $200, respectively, were paid to the stockholder under
the consulting agreement.
On March 12, 2009, the Company entered into a marketing
agreement with a company which is owned by a member of the
Companys board of directors. The marketing agreement
engages them to market the Companys
XT250tm
product in exchange for commissions at fifteen percent of the
actual purchase price of any
XT250tm
system sold by them. During the year ended December 31,
2009 payments of $13,878 were paid to the director under the
marketing agreement.
The Company has engaged a consulting firm to perform certain
consulting services related to the Companys capital
structure, budgeting and financial planning. In addition, the
Company has consulting agreements to provide introductions to
potential new customers and suppliers. The principals of the
consulting firm are stockholders, one of whom was a board member
during 2007. As compensation to the consulting firm for services
rendered during 2008 under these consulting agreements, the
Company issued options for 578,000 shares of the
Companys common stock, respectively.
The Companys President, Mr. Brian T. Mayo delivered a
demand letter to our management, dated November 16, 2009,
alleging the Companys breach of his executive employment
agreement. Mr. Mayo claims in the demand letter that, among
other breaches regarding his position and the corporate
reporting structure his base salary was reduced in breach of his
executive employment agreement. Mr. Mayo requested
restoration of his salary to the amounts set forth by his
executive employment agreement and payment of his base salary
since the date his salary was reduced.
F-22
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
Beginning in 2006, a portion of Mr. Mayos salary was
deferred. Through December 31, 2009 and 2008 the Company
has accrued the deferred portion of approximately $371,012 and
$228,800, respectively for the difference between
Mr. Mayos salary level, as set forth in his executive
employment agreement, and amounts paid to him. As of
March 12, 2010, a litigation proceeding has not been filed
with respect to this matter. Management of the Company believes
the claims in the demand letter are without merit and is
attempting to resolve the matter amicably with Mr. Mayo
(see Note 14).
|
|
Note 13.
|
Subsequent
Events
|
On September 16, 2008, Kimball International, Inc. and
Kimball Electronics, Inc. (Kimball) filed suit
against the Company. Kimball filed three claims against the
Company including a claim alleging the Company defaulted on a
$2,000,000 loan provided by Kimball to the Company, breach of a
reserve capacity agreement and breach of a supplier agreement.
On June 30, 2009, the District Court ordered a partial
judgment in favor of Kimball in the amount of $2,000,000 against
the Company, which was recorded in the accompanying balance
sheet as of December 31, 2008. On December 23, 2009,
the Company and Kimball entered into a settlement agreement (the
Agreement). In connection with the Agreement the
Company provided to Kimball an executed Agreed Judgment in favor
of Kimball in the amount of $3,200,000 (the Agreed
Judgment). We agreed to make payments to Kimball via wire
transfer or certified funds as follows: (i) one
(1) payment of $600,000 to be made on or before
December 31, 2009; and (ii) one (1) final payment
$2,600,000 to be made on or before January 31, 2010. Upon
remittance of the final payment, the Company will take ownership
of any remaining inventory, as well as any machinery, equipment,
designs and tooling developed or purchased with the proceeds of
the term loan at Kimballs plant in Jasper, Indiana. The
Company intends to vigorously pursue the settlement which will
include terms under which Kimball will continue to supply
XT250tm
units and allocate a portion of the payments to be made by us
under the settlement agreement to
XT250tm
component parts inventory in Kimballs possession. On
February 2, 2010 Kimball filed the Agreed Judgment after
the Company did not make the payment due on January 31,
2010. On February 10, 2010, Kimball filed a motion for
proceedings supplemental to collect the remaining $2,600,000
balance due on the $3,200,000 judgment. Until such time as we
repay Kimball the $2.6 million of indebtedness under the
settlement agreement, there is uncertainty whether the Company
will reach a compromise with Kimball to continue to manufacture
the
XT250tm
units. At the same time, the Companys management has
continued discussions with representatives from Kimball
concerning its business relationship with Kimball following the
initial public offering. Although no written agreement or
memorandum of understanding has been executed by the parties at
this time, Kimball and the Company have verbally agreed that
following the closing of the offering and upon the repayment of
indebtedness to Kimball under the settlement agreement, Kimball
will submit bids to the Company to continue the manufacturing
and servicing of the Companys product in the future. The
entire outstanding judgment of $2,600,000 is recorded as a
component of notes payable (see note 7) as of
December 31, 2009.
The Company initiated the process of going public through an
initial public offering. The Company is offering
5,000,000 shares of its common stock. The Company has
engaged an underwriter for its offering of securities.
|
|
Note 14.
|
Subsequent
Events (unaudited)
|
The Company and Mr. Mayo have been unable to amicably
resolve the issues raised by Mr. Mayo in his demand letter.
Accordingly, the Company notified Mr. Mayo on March 4,
2010 that it will not renew or otherwise extend the employment
agreement with Mr. Mayo after it expires on
October 31, 2010. The Company will continue to pay all sums
due under Mr. Mayos employment agreement until the
expiration date, in accordance with its current payroll
practices.
F-23
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
During 2008 and 2009, the Company recognized the fair value of
stock-based compensation and measured the fair value of warrants
attached to Series B, Series C and Series D
preferred stock using common stock fair value and volatility
assumptions that were not estimated in accordance with
accounting principles generally accepted in the United States of
America (US GAAP). This resulted in a misstatement of
stock-based compensation expense, warrant liability, warrant
expense and additional paid in capital. The 2008 and 2009
financial statements have been restated to properly recognize
compensation expense and additional paid-in capital related to
the stock options granted and warrant liability, warrant
expense, additional paid in capital and preferred stock dividend
and accretion related to the warrants attached to Series B,
Series C and Series D preferred stock using common
stock prices and volatility assumptions determined in accordance
with US GAAP.
During 2009, the Company entered into a settlement agreement
with the manufacturer of its XT250 units. As a component of
the settlement agreement, at the time the Company makes the
final payment of $2,600,000 the manufacturer is to deliver to
the Company any remaining inventory related to the
XT250 units, as well as machinery, equipment, designs and
tooling developed or purchased with the proceeds of the term
loan (see note 7). Management previously recorded its
liability associated with this settlement agreement net of the
estimated value of the inventory, machinery, equipment, designs
and tooling of approximately $781,000. It was later determined
that the inventory may not be recoverable and as a result the
settlement liability should have been recorded at its gross
amount of $2,600,000. The 2009 financial statements have been
restated to accrue the additional liability of $781,000 and to
recognize a loss related to the settlement.
The restatements discussed above had the following effects on
the balance sheet and statements of operations,
stockholders deficit and cash flows as of and for the year
ended December 31, 2008 and 2009, as compared to the
amounts previously reported. The restatements also had effects
on amounts and disclosure in notes 4, 5, 7, 8, 9, 10 and 13.
|
|
|
|
(1)
|
Reclassification of $15,000 relating to the settlement agreement
with the manufacturer of the XT250 units from accounts payable
to notes payable.
|
|
|
(2)
|
To reflect the settlement with the manufacturer of the XT250 at
its gross amount of $2,600,000 an additional liability of
$781,190 and recognition of a loss was recorded.
|
|
|
(3)
|
To adjust stock based compensation and additional paid in
capital of $2,095,022 and $1,029,552 using the revised common
stock fair values and volatilities for the years ended
December 31, 2009 and 2008, respectively. To adjust
December 31, 2008 beginning accumulated deficit and
additional paid in capital by $399,454 using the revised common
stock fair values and volatilities for the year ended
December 31, 2007.
|
|
|
(4)
|
To adjust the fair value of the warrants attached to
Series B, Series C, and Series D preferred stock
using the revised common stock fair values and volatilities
resulting in an increase in warrant liability of $12,315,943,
additional paid in capital of $6,860,176 accretion of redemption
value of preferred stock $2,450,032 and warrant expense of
$2,532,431.
|
|
|
(5)
|
To adjust the allocation of Series B preferred stock
proceeds in connection with the revised common stock fair values.
|
F-24
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
2008
|
|
|
Effect of
|
|
|
|
Reported
|
|
|
As Restated
|
|
|
Change
|
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
120,478
|
|
|
$
|
120,478
|
|
|
$
|
|
|
Inventory
|
|
|
175,721
|
|
|
|
175,721
|
|
|
|
|
|
Prepaid expenses
|
|
|
31,802
|
|
|
|
31,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
328,001
|
|
|
|
328,001
|
|
|
|
|
|
Deferred Offering Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
282,616
|
|
|
|
282,616
|
|
|
|
|
|
Intangible assets, net
|
|
|
126,095
|
|
|
|
126,095
|
|
|
|
|
|
Deposits
|
|
|
18,919
|
|
|
|
18,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
755,631
|
|
|
$
|
755,631
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
366,853
|
|
|
$
|
366,853
|
|
|
$
|
|
|
Accrued compensation
|
|
|
253,871
|
|
|
|
253,871
|
|
|
|
|
|
Accrued expenses
|
|
|
72,041
|
|
|
|
72,041
|
|
|
|
|
|
Customer deposits
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
Notes payable stockholders
|
|
|
89,185
|
|
|
|
89,185
|
|
|
|
|
|
Notes payable
|
|
|
2,507,500
|
|
|
|
2,507,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,299,450
|
|
|
|
3,299,450
|
|
|
|
|
|
Warrant liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,299,450
|
|
|
|
3,299,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred stock, $.0001 par value, 7%
cumulative dividend, 962,101 shares authorized, issued and
outstanding
|
|
|
4,130,897
|
|
|
|
4,130,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred stock, $.0001 par value, 7%
cumulative dividend 1,800,000 shares authorized and
1,619,127 shares issued and outstanding
|
|
|
5,177,299
|
|
|
|
5,177,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $.0001 par value, 60,000,000 and
30,000,000 shares authorized, 2,792,404 and
1,702,156 shares issued and outstanding, at
December 31, 2009 and 2008, respectively
|
|
|
170
|
|
|
|
170
|
|
|
|
|
|
Additional paid-in capital
|
|
|
3,021,994
|
|
|
|
4,451,000
|
|
|
|
1,429,006
|
(3)
|
Accumulated deficit
|
|
|
(14,874,179
|
)
|
|
|
(16,303,185
|
)
|
|
|
(1,429,006
|
)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(11,852,015
|
)
|
|
|
(11,852,015
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
755,631
|
|
|
$
|
755,631
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
2008
|
|
|
Effect of
|
|
|
|
Reported
|
|
|
As Restated
|
|
|
Change
|
|
|
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
439,000
|
|
|
$
|
439,000
|
|
|
$
|
|
|
Cost of revenues
|
|
|
129,036
|
|
|
|
129,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
309,964
|
|
|
|
309,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
|
1,032,179
|
|
|
|
2,061,731
|
|
|
|
1,029,552
|
(3)
|
General and administrative
|
|
|
455,996
|
|
|
|
455,996
|
|
|
|
|
|
Selling and advertising
|
|
|
613,239
|
|
|
|
613,239
|
|
|
|
|
|
Research and development
|
|
|
635,531
|
|
|
|
635,531
|
|
|
|
|
|
Royalty fees
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,036,945
|
|
|
|
4,066,497
|
|
|
|
1,029,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,726,981
|
)
|
|
|
(3,756,533
|
)
|
|
|
(1,029,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
26,156
|
|
|
|
26,156
|
|
|
|
|
|
Interest expense
|
|
|
(159,429
|
)
|
|
|
(159,429
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(133,273
|
)
|
|
|
(133,273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(2,860,254
|
)
|
|
|
(3,889,806
|
)
|
|
|
(1,029,552
|
)
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,860,254
|
)
|
|
|
(3,889,806
|
)
|
|
|
(1,029,552
|
)
|
Preferred stock dividend and accretion
|
|
|
(4,323,044
|
)
|
|
|
(5,332,166
|
)
|
|
|
(1,009,122
|
)(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(7,183,298
|
)
|
|
$
|
(9,221,972
|
)
|
|
$
|
(2,038,674
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
1,702,156
|
|
|
|
1,702,156
|
|
|
|
1,702,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(4.22
|
)
|
|
$
|
(5.42
|
)
|
|
$
|
(1.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
2008
|
|
|
Effect of
|
|
|
|
Reported
|
|
|
As Restated
|
|
|
Change
|
|
|
Statement of Stockholders Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance (deficit) at December 31, 2007 (Restated)
|
|
$
|
(5,659,153
|
)
|
|
$
|
(5,659,153
|
)
|
|
$
|
|
|
Stock-based compensation expense
|
|
|
235,326
|
|
|
|
1,264,878
|
|
|
|
1,029,552
|
(3)
|
Warrants issued and Beneficial Conversion feature in connection
with Series B Preferred Stock
|
|
|
781,029
|
|
|
|
998,974
|
|
|
|
217,945
|
(5)
|
Accretion of redemption value of preferred stock
|
|
|
(4,323,044
|
)
|
|
|
(4,540,989
|
)
|
|
|
(217,945
|
)(5)
|
Syndication Costs
|
|
|
(25,919
|
)
|
|
|
(25,919
|
)
|
|
|
|
|
Net loss
|
|
|
(2,860,254
|
)
|
|
|
(3,889,806
|
)
|
|
|
(1,029,552
|
)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance (deficit) at December 31, 2008
|
|
$
|
(11,852,015
|
)
|
|
$
|
(11,852,015
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
2008
|
|
|
Effect of
|
|
|
|
Reported
|
|
|
As Restated
|
|
|
Change
|
|
|
Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,860,254
|
)
|
|
$
|
(3,889,806
|
)
|
|
$
|
(1,029,552
|
)(3)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
235,326
|
|
|
|
1,264,878
|
|
|
|
1,029,552
|
(3)
|
Depreciation and amortization
|
|
|
129,485
|
|
|
|
129,485
|
|
|
|
|
|
Loss on disposal of property and equipment
|
|
|
9,247
|
|
|
|
9,247
|
|
|
|
|
|
Accrued interest on notes payable
|
|
|
125,556
|
|
|
|
125,556
|
|
|
|
|
|
Non-cash issuance of common stock and preferred stock in lieu of
compensation
|
|
|
115,347
|
|
|
|
115,347
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
46,174
|
|
|
|
46,174
|
|
|
|
|
|
Prepaid expenses
|
|
|
(13,129
|
)
|
|
|
(13,129
|
)
|
|
|
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(52,758
|
)
|
|
|
(52,758
|
)
|
|
|
|
|
Accrued compensation
|
|
|
(34,603
|
)
|
|
|
(34,603
|
)
|
|
|
|
|
Accrued expenses
|
|
|
16,474
|
|
|
|
16,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(2,283,135
|
)
|
|
|
(2,283,135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(2,999
|
)
|
|
|
(2,999
|
)
|
|
|
|
|
Proceeds from disposal of property and equipment
|
|
|
200
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,799
|
)
|
|
|
(2,799
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on stockholder loans
|
|
|
(301,095
|
)
|
|
|
(301,095
|
)
|
|
|
|
|
Principal payments on notes payable
|
|
|
(50,000
|
)
|
|
|
(50,000
|
)
|
|
|
|
|
Proceeds from the issuance of preferred stock
|
|
|
998,974
|
|
|
|
998,974
|
|
|
|
|
|
Payments for syndication costs
|
|
|
(25,919
|
)
|
|
|
(25,919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
621,960
|
|
|
|
621,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
(1,663,974
|
)
|
|
|
(1,663,974
|
)
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
1,784,452
|
|
|
|
1,784,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
$
|
120,478
|
|
|
$
|
120,478
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-27
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
As Originally
|
|
|
2009
|
|
|
Effect of
|
|
|
|
Reported
|
|
|
As Restated
|
|
|
Change
|
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
516,849
|
|
|
$
|
516,849
|
|
|
$
|
|
|
Inventory
|
|
|
104,999
|
|
|
|
104,999
|
|
|
|
|
|
Prepaid expenses
|
|
|
24,322
|
|
|
|
24,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
646,170
|
|
|
|
646,170
|
|
|
|
|
|
Deferred Offering Costs
|
|
|
380,224
|
|
|
|
380,224
|
|
|
|
|
|
Property and equipment, net
|
|
|
176,727
|
|
|
|
176,727
|
|
|
|
|
|
Intangible assets, net
|
|
|
114,629
|
|
|
|
114,629
|
|
|
|
|
|
Deposits
|
|
|
18,919
|
|
|
|
18,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,336,669
|
|
|
$
|
1,336,669
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
1,350,884
|
|
|
|
1,335,884
|
|
|
|
(15,000
|
)(1)
|
Accrued compensation
|
|
|
423,990
|
|
|
|
423,990
|
|
|
|
|
|
Accrued expenses
|
|
|
62,017
|
|
|
|
62,017
|
|
|
|
|
|
Customer deposits
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
Notes payable stockholders
|
|
|
26,835
|
|
|
|
26,835
|
|
|
|
|
|
Notes payable
|
|
|
2,053,810
|
|
|
|
2,850,000
|
|
|
|
796,190
|
(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,927,536
|
|
|
|
4,708,726
|
|
|
|
781,190
|
(1)(2)
|
Warrant liability
|
|
|
505,198
|
|
|
|
12,821,141
|
|
|
|
12,315,943
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
4,432,734
|
|
|
|
17,529,867
|
|
|
|
13,097,133
|
(1)(2)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred stock, $.0001 par value, 7%
cumulative dividend, 962,101 shares authorized, issued and
outstanding
|
|
|
4,419,094
|
|
|
|
4,419,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred stock, $.0001 par value, 7%
cumulative dividend 1,800,000 shares authorized and
1,619,127 shares issued and outstanding
|
|
|
5,539,656
|
|
|
|
5,539,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C Preferred stock, $.0001 par value, 7%
cumulative dividend 1,350,000 shares authorized and 365,996
and 0 shares issued and outstanding 2009 and 2008,
respectively
|
|
|
1,144,285
|
|
|
|
1,144,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series D Preferred stock, $.0001 par value, 7%
cumulative dividend 700,000 shares authorized and 563,414
and 0 shares issued and outstanding 2009 and 2008,
respectively
|
|
|
1,710,340
|
|
|
|
1,710,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $.0001 par value, 60,000,000 and
30,000,000 shares authorized, 2,792,404 and
1,702,156 shares issued and outstanding, at
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 and 2008, respectively
|
|
|
279
|
|
|
|
279
|
|
|
|
|
|
Additional paid-in capital
|
|
|
2,477,774
|
|
|
|
|
|
|
|
(2,477,774
|
)(3)(4)
|
Accumulated deficit
|
|
|
(18,387,493
|
)
|
|
|
(29,006,852
|
)
|
|
|
(10,619,359
|
)(2)(3)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(15,909,440
|
)
|
|
|
(29,006,573
|
)
|
|
|
(13,097,133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
1,336,669
|
|
|
$
|
1,336,669
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-28
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
As Originally
|
|
|
2009
|
|
|
Effect of
|
|
|
|
Reported
|
|
|
As Restated
|
|
|
Change
|
|
|
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
271,520
|
|
|
$
|
271,520
|
|
|
$
|
|
|
Cost of revenues
|
|
|
133,843
|
|
|
|
133,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
137,677
|
|
|
|
137,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
|
1,612,186
|
|
|
|
3,707,208
|
|
|
|
2,095,022
|
(3)
|
General and administrative
|
|
|
598,899
|
|
|
|
598,899
|
|
|
|
|
|
Selling and advertising
|
|
|
432,371
|
|
|
|
432,371
|
|
|
|
|
|
Research and development
|
|
|
581,547
|
|
|
|
581,547
|
|
|
|
|
|
Royalty fees
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
Legal settlement
|
|
|
|
|
|
|
781,190
|
|
|
|
781,190
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,725,003
|
|
|
|
6,601,215
|
|
|
|
2,876,212
|
(2)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,587,326
|
)
|
|
|
(6,463,538
|
)
|
|
|
(2,876,212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant income/(expense)
|
|
|
236,652
|
|
|
|
(2,769,083
|
)
|
|
|
(3,005,735
|
)(4)
|
Interest income
|
|
|
2,316
|
|
|
|
2,316
|
|
|
|
|
|
Interest expense
|
|
|
(164,956
|
)
|
|
|
(164,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
74,012
|
|
|
|
(2,931,723
|
)
|
|
|
(3,005,735
|
)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(3,513,314
|
)
|
|
|
(9,395,261
|
)
|
|
|
(5,881,947
|
)(2)(3)(4)
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(3,513,314
|
)
|
|
|
(9,395,261
|
)
|
|
|
(5,881,947
|
)
|
Preferred stock dividend and accretion
|
|
|
(1,055,147
|
)
|
|
|
(3,505,179
|
)
|
|
|
(2,450,032
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(4,568,461
|
)
|
|
$
|
(12,900,440
|
)
|
|
$
|
(8,331,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
1,917,157
|
|
|
|
1,917,157
|
|
|
|
1,917,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(2.38
|
)
|
|
$
|
(6.73
|
)
|
|
$
|
(4.34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
Effect of
|
|
|
|
Reported
|
|
|
As Restated
|
|
|
Change
|
|
|
Statement of Stockholders Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance (deficit) at December 31, 2008 (Restated)
|
|
$
|
(11,852,015
|
)
|
|
$
|
(11,852,015
|
)
|
|
$
|
|
|
Stock-based compensation expense
|
|
|
277,870
|
|
|
|
842,892
|
(3)
|
|
|
565,022
|
(3)
|
Exercise of Options
|
|
|
12,624
|
|
|
|
12,624
|
|
|
|
|
|
Issuance of stock in lieu of compensation
|
|
|
690,000
|
|
|
|
2,220,000
|
|
|
|
1,530,000
|
(3)
|
Impact of initial adoption of recent accounting pronouncement
(Note 1)
|
|
|
(403,649
|
)
|
|
|
(7,263,825
|
)
|
|
|
(6,860,176
|
)(4)
|
Accretion of redemption value of preferred stock
|
|
|
(1,055,147
|
)
|
|
|
(3,505,179
|
)
|
|
|
(2,450,032
|
)(4)
|
Syndication Costs
|
|
|
(65,809
|
)
|
|
|
(65,809
|
)
|
|
|
|
|
Net loss
|
|
|
(3,513,314
|
)
|
|
|
(9,395,261
|
)
|
|
|
(5,881,947
|
)(2)(3)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance (deficit) at December 31, 2009
|
|
$
|
(15,909,440
|
)
|
|
$
|
(29,006,573
|
)
|
|
$
|
(13,097,133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-29
XStream
Systems, Inc.
Notes to
Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
As Originally
|
|
|
2009
|
|
|
Effect of
|
|
|
|
Reported
|
|
|
As Restated
|
|
|
Change
|
|
|
Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,513,314
|
)
|
|
$
|
(9,395,261
|
)
|
|
$
|
(5,881,947
|
)(2)(3)(4)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
277,870
|
|
|
|
842,892
|
|
|
|
565,022
|
(3)
|
Depreciation and amortization
|
|
|
117,355
|
|
|
|
117,355
|
|
|
|
|
|
Loss on disposal of property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest on notes payable
|
|
|
134,504
|
|
|
|
134,504
|
|
|
|
|
|
Non-cash legal settlement
|
|
|
|
|
|
|
781,190
|
(2)
|
|
|
781,190
|
(2)
|
Non-cash issuance of common stock and preferred stock in lieu of
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation
|
|
|
690,000
|
|
|
|
2,220,000
|
|
|
|
1,530,000
|
(3)
|
Change in fair value of warrants
|
|
|
(236,652
|
)
|
|
|
2,769,083
|
|
|
|
3,005,735
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
70,722
|
|
|
|
70,722
|
|
|
|
|
|
Prepaid expenses
|
|
|
7,480
|
|
|
|
7,480
|
|
|
|
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
603,807
|
|
|
|
603,807
|
|
|
|
|
|
Accrued compensation
|
|
|
170,119
|
|
|
|
170,119
|
|
|
|
|
|
Accrued expenses
|
|
|
(10,024
|
)
|
|
|
(10,024
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,688,133
|
)
|
|
|
(1,688,133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from disposal of property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on stockholder loans
|
|
|
(62,350
|
)
|
|
|
(62,350
|
)
|
|
|
|
|
Principal payments on notes payable
|
|
|
(588,190
|
)
|
|
|
(588,190
|
)
|
|
|
|
|
Proceeds from the exercise of options
|
|
|
12,624
|
|
|
|
12,624
|
|
|
|
|
|
Proceeds from the issuance of preferred stock
|
|
|
2,788,229
|
|
|
|
2,788,229
|
|
|
|
|
|
Payments for syndication costs
|
|
|
(65,809
|
)
|
|
|
(65,809
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
2,084,504
|
|
|
|
2,084,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
396,371
|
|
|
|
396,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
120,478
|
|
|
|
120,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
$
|
516,849
|
|
|
$
|
516,849
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-30
XStream
Systems, Inc.
June 30, 2010 (unaudited) and December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
159
|
|
|
$
|
516,849
|
|
Inventory
|
|
|
94,009
|
|
|
|
104,999
|
|
Prepaid expenses
|
|
|
25,281
|
|
|
|
24,322
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
119,449
|
|
|
|
646,170
|
|
Deferred offering costs
|
|
|
992,369
|
|
|
|
380,224
|
|
Property and equipment, net
|
|
|
146,763
|
|
|
|
176,727
|
|
Intangible assets, net
|
|
|
108,943
|
|
|
|
114,629
|
|
Deposits
|
|
|
18,919
|
|
|
|
18,919
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,386,443
|
|
|
$
|
1,336,669
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,231,287
|
|
|
$
|
1,335,884
|
|
Accrued compensation
|
|
|
638,970
|
|
|
|
423,990
|
|
Accrued expenses
|
|
|
82,997
|
|
|
|
62,017
|
|
Customer deposits
|
|
|
10,000
|
|
|
|
10,000
|
|
Notes payable stockholders
|
|
|
47,205
|
|
|
|
26,835
|
|
Current portion of notes payable, net of discount
|
|
|
2,810,278
|
|
|
|
2,850,000
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
6,820,737
|
|
|
|
4,708,726
|
|
Warrant liability
|
|
|
41,164,263
|
|
|
|
12,821,141
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
47,985,000
|
|
|
|
17,529,867
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred stock, $.0001 par value, 7.0%
cumulative dividend 962,101 shares authorized, issued and
outstanding
|
|
|
4,569,068
|
|
|
|
4,419,094
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred stock, $.0001 par value, 7.0%
cumulative dividend 1,800,000 shares authorized and
1,619,127 shares issued and outstanding
|
|
|
5,729,919
|
|
|
|
5,539,656
|
|
|
|
|
|
|
|
|
|
|
Series C Preferred stock, $.0001 par value, 7.0%
cumulative dividend 1,350,000 shares authorized and
365,996 shares issued and outstanding
|
|
|
1,183,020
|
|
|
|
1,144,285
|
|
|
|
|
|
|
|
|
|
|
Series D Preferred stock, $.0001 par value, 7.0%
cumulative dividend 700,000 shares authorized and
563,414 shares issued and outstanding
|
|
|
1,769,012
|
|
|
|
1,710,340
|
|
|
|
|
|
|
|
|
|
|
Stockholders Deficit Common stock, $.0001 par value,
60,000,000 shares authorized, 2,865,044 and
2,792,404 shares issued and outstanding at June 30,
2010 and December 31, 2009, respectively
|
|
|
287
|
|
|
|
279
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(59,849,863
|
)
|
|
|
(29,006,852
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(59,849,576
|
)
|
|
|
(29,006,573
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
1,386,443
|
|
|
$
|
1,336,669
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Financial Statements.
F-31
XStream
Systems, Inc.
For the Six Months Ended June 30, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
179,000
|
|
Cost of revenues
|
|
|
|
|
|
|
66,565
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
112,435
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
|
398,614
|
|
|
|
913,801
|
|
Selling, general and administrative
|
|
|
1,299,545
|
|
|
|
336,719
|
|
Research and development
|
|
|
280,084
|
|
|
|
288,186
|
|
Royalty fees
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,228,243
|
|
|
|
1,788,706
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,228,243
|
)
|
|
|
(1,676,271
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
533
|
|
|
|
226
|
|
Interest expense
|
|
|
(10,317
|
)
|
|
|
(107,810
|
)
|
Warrant expense
|
|
|
(28,343,122
|
)
|
|
|
(2,602,837
|
)
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(28,352,906
|
)
|
|
|
(2,710,421
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(30,581,149
|
)
|
|
|
(4,386,692
|
)
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(30,581,149
|
)
|
|
|
(4,386,692
|
)
|
Preferred stock dividend and accretion
|
|
|
(437,644
|
)
|
|
|
(965,434
|
)
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(31,018,793
|
)
|
|
$
|
(5,352,126
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(11.01
|
)
|
|
$
|
(3.12
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
2,817,688
|
|
|
|
1,714,725
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Financial Statements.
F-32
For the Six Months Ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Paid-In Capital
|
|
|
Accumulated
|
|
|
|
|
|
|
Stock
|
|
|
Common Stock
|
|
|
Deficit
|
|
|
Total
|
|
|
|
(Unaudited)
|
|
|
Balance (deficit) at December 31, 2009
|
|
$
|
279
|
|
|
$
|
|
|
|
$
|
(29,006,852
|
)
|
|
$
|
(29,006,573
|
)
|
Exercise of stock options
|
|
|
8
|
|
|
|
52,291
|
|
|
|
|
|
|
|
52,299
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
123,491
|
|
|
|
|
|
|
|
123,491
|
|
Accretion of redemption value of preferred stock
|
|
|
|
|
|
|
(175,782
|
)
|
|
|
(261,862
|
)
|
|
|
(437,644
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(30,581,149
|
)
|
|
|
(30,581,149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance (deficit) at June 30, 2010
|
|
$
|
287
|
|
|
$
|
|
|
|
$
|
(59,849,863
|
)
|
|
$
|
(59,849,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Financial Statements.
F-33
XStream
Systems, Inc.
For the
Six Months Ended June 30, 2010 and 2009
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(30,581,149
|
)
|
|
$
|
(4,386,692
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
123,491
|
|
|
|
578,487
|
|
Depreciation and amortization
|
|
|
46,640
|
|
|
|
60,020
|
|
Increase in fair value of warrants
|
|
|
28,343,122
|
|
|
|
2,602,836
|
|
Accrued interest on notes payable
|
|
|
|
|
|
|
99,418
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease in:
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
|
|
|
|
43,630
|
|
Prepaid expenses
|
|
|
(959
|
)
|
|
|
(20,564
|
)
|
Increase in:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
1,283,258
|
|
|
|
45,811
|
|
Accrued compensation
|
|
|
214,980
|
|
|
|
94,631
|
|
Accrued expenses
|
|
|
20,980
|
|
|
|
246,747
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(549,637
|
)
|
|
|
(725,175
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Principal payments on stockholder loans
|
|
|
(19,630
|
)
|
|
|
(24,110
|
)
|
Proceeds from borrowings
|
|
|
40,000
|
|
|
|
|
|
Principal payments on notes payable
|
|
|
(39,722
|
)
|
|
|
|
|
Proceeds from the issuance of common stock
|
|
|
52,299
|
|
|
|
11,245
|
|
Proceeds from the issuance of preferred stock
|
|
|
|
|
|
|
636,993
|
|
Payments for syndication costs
|
|
|
|
|
|
|
(4,341
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
32,947
|
|
|
|
709,287
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(516,690
|
)
|
|
|
(15,889
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
516,849
|
|
|
|
120,478
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
$
|
159
|
|
|
$
|
104,589
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
Cash payments for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
289
|
|
|
$
|
6,663
|
|
|
|
|
|
|
|
|
|
|
Supplemental Schedule of Noncash Investing and Financing
Activities
|
|
|
|
|
|
|
|
|
Deferred offering costs
|
|
$
|
612,145
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Inventory used in demo equipment
|
|
$
|
10,990
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Financial Statements.
F-34
XStream
Systems, Inc.
|
|
Note 1.
|
Nature of
Operations and Significant Accounting Policies
|
Nature of operations: XStream Systems,
Inc. (the Company) produces next generation X-ray
systems for material authentication and verification markets.
The Companys patented systems are based on energy
dispersive X-ray diffraction (EDXRD). The Companys
products enable
on-site,
real-time material identification to the pharmaceutical markets.
The Company has its corporate and financial offices in
Sebastian, Florida. Manufacturing of the systems is completed by
the Companys contract manufacturer. The Company was
founded in 2004.
Basis of Presentation: The accompanying
unaudited financial statements have been prepared by the Company
in accordance with accounting principles generally accepted in
the United States of America for interim financial reporting.
Accordingly, they do not include all of the information and
related footnotes that would normally be required by accounting
principles generally accepted in the United States of America
for complete financial reporting. These unaudited condensed
financial statements should be read in conjunction with the
Companys audited financial statements for the year ended
December 31, 2009.
The accompanying unaudited condensed financial statements
include all adjustments (consisting of a normal and recurring
nature) that management considers necessary for a fair statement
of financial information for the interim periods. Interim
results are not necessarily indicative of the results that may
be expected for the remainder of the year ending
December 31, 2010.
Managements plans, liquidity and
profitability: As shown in the accompanying
financial statements, the Company incurred net losses for the
six months ending June 30, 2010 and 2009 of $30,581,149 and
$4,386,692, respectively, and cumulative losses since inception
of $59,849,863, of which $41,164,263 relates to non-cash
expenses associated with the Companys warrants accounted
for as liabilities. The Company has consistently generated
negative cash flows from operations and as of June 30,
2010, the Companys current liabilities exceeded its
current assets by $6,701,288. Those factors, as well as the
uncertainty regarding the ability to obtain additional working
capital and the uncertainty regarding market acceptance of the
XT250tm
product, create overall uncertainty about the Companys
ability to continue as a going concern.
Management of the Company has raised additional working capital
in 2009 through issuance of Series C Redeemable Convertible
Preferred Stock and Series D Redeemable Convertible
Preferred Stock, and is actively seeking additional funding for
working capital. The Company does not currently maintain a line
of credit or term loan with any commercial bank or other
financial institution and has not made any other arrangements to
obtain additional financing. The Company can provide no
assurance that it will not require additional financing.
Likewise, the Company can provide no assurance that, if
additional financing is needed that it will be available in an
amount or on terms acceptable to the Company, if at all. If the
Company is unable to obtain additional funds when they are
needed or if such funds cannot be obtained on favorable terms,
the Company may be unable to execute upon its business plan or
pay its costs and expenses as they are incurred, which could
have a material adverse effect on the Companys business,
financial condition and results of operations. The financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
A summary of the Companys significant accounting policies
follows:
Revenue recognition: The Companys
XT250tm
systems include software embedded in the tangible product that
is essential to its functionality. The software does not require
significant production, modification or customization.
Revenue from the sale of our
XT250tm
systems is recognized when all of the following criteria have
been met:
a. persuasive evidence of an arrangement exists,
b. delivery has occurred,
c. the vendors fee is fixed or determinable, and
F-35
XStream
Systems, Inc.
Notes to
Condensed Financial
Statements (Continued)
d. collectability is probable.
While the Company engages in strategic pilot programs with
pharmaceutical manufacturers and distributors, revenue is not
recognized until the unit is sold, delivered, installed and
accepted, and collection of the sales price is probable.
The Company has two pricing models including wholesale pricing
for distributors who are authorized sales agents and retail
pricing to third party end-users.
Prior to installation, deposits are ordinarily required from
customers before manufacturing commences. These amounts are
recorded as customer deposits in current liabilities on the
accompanying balance sheets.
There are no post-installation obligations other than warranty
of the equipment for one year after installation. Warranty
expense is estimated based on historical results and is accrued
at the time the revenue is recognized.
Fair value measurement: The FASB issued
accounting guidance fair value measurements. Assets and
liabilities recorded at fair value in the balance sheets are
categorized based upon the level of judgment associated with the
inputs used to measure their fair value.
Fair value represents the exchange price that would be received
for an asset or paid to transfer a liability in the principal or
most advantageous market for the asset or liability in an
orderly transaction between market participants on the
measurement date. The FASB specifies a hierarchy of valuation
techniques based on whether the inputs to those valuation
techniques are observable or unobservable. In accordance with
the FASB, these inputs are summarized in the three broad levels
listed below:
|
|
|
|
|
Level 1 Quoted prices in active markets for
identical securities;
|
|
|
|
|
|
Level 2 Other significant observable inputs
that are observable through corroboration with market data
(including quoted prices in active markets for similar
securities);
|
|
|
|
|
|
Level 3 Significant unobservable inputs that
reflect managements best estimate of what market
participants would use in pricing the asset or liability.
|
Preferred stock and warrants: The
Company has issued redeemable convertible preferred stock with
detachable warrants for the purchase of common stock. The
Company reviews the conversion terms for indications requiring
bifurcation and separate accounting for the embedded conversion
feature. Generally, embedded conversion features where the
ability to physical or net-share settle the conversion option is
not within the control of the Company are bifurcated and
accounted for as derivative financial instruments. Other
convertible instruments that are not derivative financial
instruments are accounted for by recording the intrinsic value,
if any, of the embedded conversion feature as a discount from
the initial value of the instrument and accreting such discount
back to face value over the term of the instrument using the
effective interest rate method.
Detachable warrants are evaluated to determine if they are
liability instruments or equity instruments. Warrants determined
to be liability instruments at carried at fair value. For
warrants determined to be equity instruments, the issuance price
of the stock and warrants is allocated between the stock and the
warrants based on the relative fair value of those instruments
at the date of issuance. The amount allocated to the warrants is
recognized as additional paid in capital and is not adjusted
subsequent to issuance.
Redeemable preferred stock that is redeemable at the option of
the holder is not reported as permanent equity, but rather as
mezzanine equity and is initially carried at fair value at the
date of issuance. Subsequent to issuance, stock that is
redeemable currently is adjusted to its maximum redemption
amount at each balance sheet date. Stock that is not redeemable
currently is accounted for by accreting changes in the
redemption value and discounts over the period from the date of
issuance to the earliest redemption date of the security using
the interest method.
In June 2008, the FASB issued guidance in determining whether an
instrument (or an embedded feature) is indexed to an
entitys own stock. This guidance provides that an entity
should use a two step approach to evaluate
F-36
XStream
Systems, Inc.
Notes to
Condensed Financial
Statements (Continued)
whether an equity-linked financial instrument (or embedded
feature) is indexed to its own stock, including evaluating the
instruments contingent exercise and settlement provisions.
As of January 1, 2009, the adoption of this guidance
resulted in a reclassification of the fair value of certain
outstanding warrants from stockholders equity to
liability. The fair value of the warrants was determined by
using the Black-Scholes option pricing model. The initial value
of the warrants at adoption was approximately $7,263,825. The
warrants will be marked to market at each reporting period. For
the six months ended June 30, 2010 and 2009, the Company
recorded loss from the change in fair value of the warrants of
$28,343,122 and $2,602,837 for the increase in the fair value
related to the warrants.
Stock-based compensation: The Company
measures and recognizes stock-based compensation expense at the
fair value of the awards. Compensation expense for awards and
related tax effects are recognized as the awards vest. The
Company uses the Black-Scholes Option Pricing Model to determine
the fair value of options issued.
Segment reporting: The Company offers
direct sales of our
XT250tm
systems to customers, three-way revenue sharing arrangements
between us, pharmaceutical manufacturers/distributors/chain
retailers, and a return goods processing center, with payments
to us based on a
pay-per-scan
service fee on returns, recalls and suspected diverted
products; and PILOT programs whereby manufacturers will host our
system for use on a trial basis, providing our host manufacturer
with an option to purchase the system following PILOT testing.
To date, the Company has not generated revenues from a three-way
revenue sharing arrangement. The Company has sold one unit
resulting from a PILOT program. The Company operates in one
operating segment as no discrete financial information other
than Company-wide information is available or utilized by the
Company.
Earnings per share: Basic earnings per
share are computed by dividing the net loss available to common
stockholders by the weighted-average number of common shares
outstanding during the period. The diluted earnings per share is
computed by giving effect to all potentially dilutive common
shares, including stock options. For the six months ended
June 30, 2010 and 2009, we reported a net loss; therefore,
common stock equivalents were excluded in the computation of
diluted earnings per share as the effect was anti-dilutive.
Recent accounting pronouncements: In February 2010, the
FASB issued FASB Accounting Standards Update
2010-09,
Subsequent Events (Topic 855): Amendments to Certain
Recognition and Disclosure Requirements. Topic 855 removes
the requirement for a U.S. Securities and Exchange
Commission (SEC) filer to disclose a date in both
issued and revised financial statements. Revised financial
statements include financial statements revised as a result of
either correction of an error or retrospective application of
U.S. GAAP. This update was effective upon issuance for the
Company. Our adoption of this update did not have a significant
impact upon our financial statements.
In January 2010, the FASB issued FASB Accounting Standards
Update
2010-06,
Fair Value Measurements and Disclosures (Topic 820):
Improving Disclosures about Fair Value Measurements. This
update provides amendments to Topic 820 that will provide for
more robust disclosures about the (1) different classes of
assets and liabilities measured at fair value,
(2) valuation techniques and inputs used, (3) activity
in Level 3 fair value measurements, and (4) transfers
between Levels 1, 2, and 3. This update is effective for
interim and annual reporting periods beginning after
December 15, 2009 and we adopted this update on
January 1, 2010. Our adoption of this update did not have a
significant impact upon our financial statements.
The Company adopted the FASB issued guidance surrounding
uncertain tax positions on January 1, 2007. As a result of
the implementation, the Company determined that no material
adjustment was required; there were no unrecognized tax
benefits, and accordingly no associated interest and penalties
were required to be accrued at December 31, 2009 and 2008,
respectively. At June 30, 2010 there has been no material
change in unrecognized tax benefits or associated interest and
penalties.
F-37
XStream
Systems, Inc.
Notes to
Condensed Financial
Statements (Continued)
A valuation allowance is required to reduce the deferred tax
assets reported if, based on the weight of the evidence, it is
more likely than not that some portion or all of the deferred
tax assets will not be realized. After consideration of all the
evidence, both positive and negative, management has determined
that a $20,459,846 and $8,989,983 valuation allowance at
June 30, 2010 and December 31, 2009, respectively, is
necessary to reduce the deferred tax assets to the amount that
will more likely than not be realized. The change in the
valuation allowance for the current period is $11,469,863.
At June 30, 2010 and December 31, 2009, the Company
has available net operating loss carryforwards of $20,462,304
and $18,585,786, respectively, which will expire in the years
2024-2029.
The Companys ability to utilize these net operating losses
to offset future taxable income of the Company may be limited
under the Internal Revenue Code Section 382 Change in
Ownership Rules. Management is in the process of evaluating if a
change in ownership has occurred to limit the net operating
losses.
|
|
Note 3.
|
Fair
Value Measurements
|
For certain of the Companys financial instruments
including cash and cash equivalents, accounts payable, accrued
expenses, notes payables to stockholders and notes payable the
carrying values approximate fair value due to their short-term
nature.
The Company uses level 3 inputs to determine the fair value
of its warrant liability.
A summary of the analysis of the Companys warrant
liability at fair value is as follows:
|
|
|
|
|
|
|
Warrant
|
|
|
|
Liability
|
|
|
Fair value of warrants, December 31, 2009
|
|
$
|
12,821,141
|
|
Change in fair value
|
|
|
28,343,122
|
|
|
|
|
|
|
Warrant liability, June 30, 2010
|
|
$
|
41,164,263
|
|
|
|
|
|
|
The fair value of the warrants was determined by using the
Black-Scholes option pricing model. The Company identified two
public companies similar in nature. Historical prices were
obtained to calculate estimated volatility for the period
consistent with the expected term set forth. The assumptions
used to value the warrants on June 30, 2010 and
December 31, 2009 are as follows:
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
Exercise price of warrants
|
|
$3.00
|
|
$3.00
|
Risk-free interest rate
|
|
1.79%
|
|
2.69%
|
Dividend yield
|
|
0.00%
|
|
0.00%
|
Expected volatility
|
|
78.68% - 82.31%
|
|
74.93% - 77.25%
|
Weighted average expected life to maturity
|
|
4 - 5 years
|
|
4 - 5 years
|
The risk-free interest rate was based on the yield of a US
treasury note with a similar period term of the warrant.
F-38
XStream
Systems, Inc.
Notes to
Condensed Financial
Statements (Continued)
|
|
Note 4.
|
Share-Based
Payments
|
The assumptions used and the weighted average fair value of
options granted are as follows for the period ended
June 30, 2009. There were no options granted during the
period ended June 30, 2010.
|
|
|
|
|
2009
|
|
Risk-free interest rate
|
|
1.36% - 2.56%
|
Expected dividend yield
|
|
0%
|
Expected volatility
|
|
78.27% - 160.33%
|
Expected life in years
|
|
5 - 7
|
Service period in years
|
|
0 - 4
|
Weighted average fair value of options granted
|
|
$1.72
|
Compensation cost recognized on options outstanding as of
June 30, 2010 and 2009 was $123,491 and $578,487,
respectively.
The following is an analysis of options to purchase shares of
the Companys stock issued and outstanding as of
June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Outstanding at beginning of period
|
|
|
2,105,757
|
|
|
$
|
2.08
|
|
|
|
1,539,760
|
|
|
$
|
2.57
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
500,038
|
|
|
|
0.69
|
|
Exercised
|
|
|
(72,640
|
)
|
|
|
0.72
|
|
|
|
(65,000
|
)
|
|
|
0.11
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at period-end
|
|
|
2,033,117
|
|
|
$
|
2.13
|
|
|
|
1,974,798
|
|
|
$
|
2.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at period-end
|
|
|
1,843,087
|
|
|
$
|
2.25
|
|
|
|
1,657,283
|
|
|
$
|
2.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining term of outstanding options
|
|
|
|
|
|
|
7.43
|
|
|
|
|
|
|
|
8.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining term of vested options
|
|
|
|
|
|
|
7.28
|
|
|
|
|
|
|
|
8.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the status of the Companys nonvested shares
as of June 30, 2010 and 2009 and changes during the periods
ended June 30, 2010 and 2009 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at beginning of period
|
|
|
426,521
|
|
|
$
|
1.48
|
|
|
|
99,219
|
|
|
$
|
1.73
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
500,038
|
|
|
|
1.72
|
|
Vested
|
|
|
(236,491
|
)
|
|
|
1.70
|
|
|
|
(281,742
|
)
|
|
|
1.72
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at period-end
|
|
|
190,030
|
|
|
$
|
1.21
|
|
|
|
317,515
|
|
|
$
|
1.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-39
XStream
Systems, Inc.
Notes to
Condensed Financial
Statements (Continued)
As of June 30, 2010 and 2009, there was $158,773 and
$226,137 respectively, of total unrecognized compensation cost
related to nonvested share-based compensation arrangements
granted. That cost is expected to be recognized over a weighted
average period of 1.13 years.
|
|
Note 5.
|
Commitments
and Contingency
|
Operating lease: The Company leases its
main office and engineering facility under operating leases
through February 28, 2012. Lease expense for the six months
ended June 30, 2010 and 2009 is $53,331 which includes
expenses related to common area maintenance. Future minimum
lease payments under the operating leases are as follows for the
years ending December 31:
|
|
|
|
|
2010 (six months remaining)
|
|
|
66,440
|
|
2011
|
|
|
124,562
|
|
2012
|
|
|
20,894
|
|
|
|
|
|
|
Total minimum future lease payments
|
|
$
|
211,896
|
|
|
|
|
|
|
Royalty payments: As required under the
license agreement entered into by the Company with a university
for exclusive rights to produce and sell products which utilize
the universitys patented X-ray diffraction technology, the
Company has agreed to pay the university a minimum annual
royalty for a term of 15 years, which was the remaining
life of the patent at the inception of the agreement. Minimum
annual royalty payments under the license agreement are as
follows for the years ending December 31:
|
|
|
|
|
2010 (six months remaining)
|
|
$
|
250,000
|
|
2011
|
|
|
500,000
|
|
2012
|
|
|
500,000
|
|
2013
|
|
|
500,000
|
|
2014
|
|
|
500,000
|
|
Thereafter
|
|
|
2,500,000
|
|
|
|
|
|
|
Total minimum royalty payments
|
|
$
|
4,750,000
|
|
|
|
|
|
|
Royalty expense for the six months ended June 30, 2010 and
2009 was $250,000. Under the terms of the agreement those were
the minimum payments due for the six months ended June 30,
2010 and 2009. At June 30, 2010 and 2009 accounts payable
includes $250,000 and $250,000 of accrued royalties,
respectively.
The Company is currently in arrears with respect to payment of
accrued royalty fees. The licensing agreement provides that if
either party breaches or fails to perform any provision of the
Agreement, the other party may give written notice of the
default to the breaching party. The Company has received an
offer from Rutgers University to settle the outstanding amounts
under the license agreement including payment of an additional
3.5% of each sale of an
XT250tm
unit and issuance of shares of common stock in the Company. To
date, however, a forbearance agreement has not been executed and
the default under the agreement has not been cured. The loss of,
or our inability to maintain, this license could result in our
inability to sell our products including the
XT250tm
systems without liability exposure. As a general matter, we
anticipate that we will continue to license technology from
third parties in the future. This technology may not continue to
be available on commercially reasonable terms, if at all. Other
than the licensed technology from Rutgers University, we do not
believe that we are substantially dependent on any individual
licensed technology. However, some of the software that we
license from third parties could be difficult for us to replace.
The loss of any of these technology licenses could result in
delays in the license of our products until equivalent
technology, if available, is developed or identified, licensed
and integrated.
F-40
XStream
Systems, Inc.
Notes to
Condensed Financial
Statements (Continued)
The use of additional third-party software would require us to
negotiate license agreements with other parties, which could
result in higher royalty payments and a loss of product
differentiation, which could negatively impact our operating
results and financial condition.
Litigation: On September 16, 2008,
Kimball International, Inc. and Kimball Electronics, Inc.
(Kimball) filed suit against the Company. Kimball
filed three claims against the Company including a claim
alleging the Company defaulted on a $2,000,000 loan provided by
Kimball to the Company, breach of a reserve capacity agreement
and breach of a supplier agreement. On June 30, 2009, the
District Court ordered a partial judgment in favor of Kimball in
the amount of $2,000,000 against the Company, which was recorded
in the accompanying balance sheet as of December 31, 2008.
On December 23, 2009, the Company and Kimball entered into
a settlement agreement (the Agreement). In
connection with the Agreement the Company provided to Kimball an
executed Agreed Judgment in favor of Kimball in the amount of
$3,200,000 (the Agreed Judgment). We agreed to make
payments to Kimball via wire transfer or certified funds as
follows: (i) one (1) payment of $600,000 to be made on
or before December 31, 2009; and (ii) one
(1) final payment $2,600,000 to be made on or before
January 31, 2010. Upon remittance of the final payment, the
Company will take ownership of any remaining inventory, as well
as any machinery, equipment, designs and tooling developed or
purchased with the proceeds of the term loan at Kimballs
plant in Jasper, Indiana. The Company intends to vigorously
pursue the settlement which will include terms under which
Kimball will continue to supply
XT250tm
units and allocate a portion of the payments to be made by us
under the settlement agreement to
XT250tm
component parts inventory in Kimballs possession. On
February 2, 2010 Kimball filed the Agreed Judgment after
the Company did not make the payment due on January 31,
2010. On February 10, 2010, Kimball filed a motion for
proceedings supplemental to collect the remaining $2,600,000
balance due on the $3,200,000 judgment. Until such time as we
repay Kimball the $2.6 million of indebtedness under the
settlement agreement, there is uncertainty whether the Company
will reach a compromise with Kimball to continue to manufacture
the
XT250tm
units. At the same time, the Companys management has
continued discussions with representatives from Kimball
concerning its business relationship with Kimball following the
initial public offering. Although no written agreement or
memorandum of understanding has been executed by the parties at
this time, Kimball and the Company have verbally agreed that
following the closing of the offering and upon the repayment of
indebtedness to Kimball under the settlement agreement, Kimball
will submit bids to the Company to continue the manufacturing
and servicing of the Companys product in the future. The
entire outstanding judgment of $2,600,000 is recorded as a
component of notes payable as of June 30, 2010 and
December 31, 2009.
On June 11, 2010, Kimball issued writs of garnishment to
SunTrust Bank and Wachovia Bank to locate assets to satisfy the
outstanding judgment, which resulted in a freeze on two of the
Companys bank accounts. On June 23, 2010, Kimball
filed notice of the writs in the United States District Court
for the Southern District of Florida (Case
No. 10-MC-14066-JEM).
The deadline to dissolve the writ was July 13, 2010, and
Kimball chose not to attempt to dissolve the writ. The Company
anticipates that if the initial public offering does not close
for any reason, Kimball will move forward in its collection
efforts to transfer the Companys cash funds under the
writs of garnishment. A portion of the proceeds of the offering
will be utilized to discharge the $2,600,000 balance due on the
Agreed Judgment.
Employment Contract: Mr. Brian T. Mayo
delivered a demand letter to our management, dated
November 16, 2009, alleging the Companys breach of
his executive employment agreement. The Company and
Mr. Mayo have been unable to amicably resolve the issues
raised by Mr. Mayo in his demand letter. Accordingly, the
Company notified Mr. Mayo on March 4, 2010 that it
will not renew or otherwise extend the employment agreement with
Mr. Mayo after it expires on October 31, 2010. The
Company will continue to pay all sums due under
Mr. Mayos employment agreement until the expiration
date, in accordance with its current payroll practices.
F-41
XStream
Systems, Inc.
Notes to
Condensed Financial
Statements (Continued)
On June 11, 2010, each of the following directors
Messrs. James J. Lowrey, Anthony R. Chidoni, Simon Irish
and our chief financial officer Mr. Dennis K. Cummings
loaned us $10,000, totaling $40,000 in aggregate principal
amount. The loans mature on the closing date of our initial
public offering and bear interest at a fixed rate equal to the
one-month LIBOR rate on the date of the loans, equal to
thirty-five hundredths of one percent (0.35%), plus two percent
(2%), until all sums due are paid in full. The loans are
represented by four promissory notes executed by the Company in
favor of each lender.
|
|
Note 7.
|
Subsequent
Events
|
The Company initiated the process of going public through an
initial public offering. The Company is offering
5,000,000 shares of its common stock. The Company has
engaged an underwriter for its offering of securities.
On various dates during July 2010, thirteen individuals loaned
us $25,000 each, totaling $325,000 in the aggregate principal
amount. The loans mature on the closing date of our initial
public offering and bear interest at a fixed rate equal to ten
percent (10%) until all sums due are paid in full. The loans are
represented by 13 promissory notes executed by us in favor of
each lender. Principal and interest due on the loans will be
repaid from the proceeds of the offering.
F-42
A Minimum of 3,333,334
shares*
A Maximum of
5,000,000 shares
*Our minimum offering requires
us
to raise at least $20,000,000
in gross
proceeds.
PROSPECTUS
Until ,
2010 ( days after the commencement of this offering), all
dealers that buy, sell or trade shares of our common stock,
whether or not participating in this offering, may be required
to deliver a prospectus. This delivery requirement is in
addition to the obligation of dealers to deliver a prospectus
when acting as underwriters and with respect to their unsold
allotments or subscriptions.
, 2010
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution.
|
|
|
|
|
|
Registration fees
|
|
$
|
2,852.00
|
|
NYSE Amex listing
|
|
$
|
40,000.00
|
|
Legal fees and expenses
|
|
|
*
|
|
Printing and engraving expenses
|
|
|
*
|
|
Acounting fees and expenses
|
|
|
*
|
|
Miscellaneous
|
|
|
*
|
|
|
|
|
|
|
Total
|
|
$
|
*
|
|
|
|
|
|
|
|
|
|
* |
|
To be included by amendment |
|
|
Item 14.
|
Indemnification
of Directors and Officers.
|
Under the General Corporation Law of the State of Delaware, we
can indemnify our directors and officers against liabilities
they may incur in such capacities, including liabilities under
the Securities Act of 1933, as amended (the Securities
Act). Our certificate of incorporation provides that,
pursuant to Delaware law, our directors shall not be liable for
monetary damages for breach of the directors fiduciary
duty of care to us and our stockholders. This provision in the
certificate of incorporation does not eliminate the duty of
care, and in appropriate circumstances equitable remedies such
as injunctive or other forms of non-monetary relief will remain
available under Delaware law. In addition, each director will
continue to be subject to liability for breach of the
directors duty of loyalty to us or our stockholders, for
acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law, for any transaction
from which the director directly or indirectly derived an
improper personal benefit, and for payment of dividends or
approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a
directors responsibilities under any other law, such as
the federal securities laws or state or federal environmental
laws.
Our amended and restated by-laws provide for the indemnification
of our directors and officers to the fullest extent permitted by
the Delaware General Corporation Law. We are not, however,
required to indemnify any director or officer in connection with
any (i) willful misconduct, (ii) willful neglect, or
(iii) gross negligence toward or on behalf of us in the
performance of his or her duties as a director or officer. We
are required to advance, prior to the final disposition of any
proceeding, promptly on request, all expenses incurred by any
director or officer in connection with that proceeding on
receipt of any undertaking by or on behalf of that director or
officer to repay those amounts if it should be determined
ultimately that he or she is not entitled to be indemnified
under our amended and restated by-laws or otherwise.
We have entered into indemnification agreements with our
directors providing that in consideration of the director
rendering valuable services to us, we agree that in the event an
indemnitee is or becomes a party to or witness or other
participant in, or is threatened to be made a party to or
witness or other participant in, a claim by reason of an
indemnifiable event, we will indemnify an indemnitee to the
fullest extent authorized by law, against any and all losses and
expenses, including all interest, assessments and other charges
paid or payable in connection with or in respect of such losses
and expenses of such claim, whether or not such claim proceeds
to judgment or is settled or otherwise is brought to a final
disposition, subject in each case, to the further provisions of
the agreement. The indemnity agreement provides certain
limitations on indemnification, including that the indemnitee
will not be indemnified and held harmless from any losses or
expenses which have been determined to constitute an excluded
claim, or that the indemnitee is indemnified by us and has
actually received payment pursuant to the certificate of
incorporation, D&O insurance or otherwise, or in connection
with any claim initiated by indemnitee unless we have joined in
or the board of directors has authorized such claim.
We have been advised that, in the opinion of the SEC, any
indemnification for liabilities arising under the Securities Act
is against public policy, as expressed in the Securities Act,
and is, therefore, unenforceable.
II-1
|
|
Item 15.
|
Recent
Sales of Unregistered Securities.
|
XStream Systems, Inc. sold the following securities within the
past three years without registering the securities under the
Securities Act.
Sales of
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No. of Shares of
|
|
|
|
|
Date
|
|
Purchaser
|
|
Price
|
|
Common Stock
|
|
|
Proceeds
|
|
|
5/17/2007
|
|
Director of the Company
|
|
$3.80
(compensation for
services performed
other than board services)
|
|
|
2,500
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5/17/2007
|
|
An employee with access to Company management and information
|
|
$3.80
|
|
|
72
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/11/2007
|
|
A sophisticated investor which was provided access to Company
management and information
|
|
$2.34
(exercise of warrants)
|
|
|
2,500
|
|
|
$
|
5,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5/26/2009
|
|
Director and executive officer of the Company
|
|
$.11
(exercise of option granted in 2004)
|
|
|
65,000
|
|
|
$
|
7,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8/14/2009
|
|
Director and executive officer of the Company
|
|
$0
(compensation for
services performed
as chief executive officer)
|
|
|
1,000,000
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/9/2009
|
|
Executive officer of the Company at the time of purchase
|
|
$0.69
(exercise of option
granted in 2008)
|
|
|
2,499
|
|
|
$
|
1,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/24/2009
|
|
An employee with access to Company management and information
|
|
$0.10
(exercise of option
granted in 2004)
|
|
|
20,250
|
|
|
$
|
2,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/1/2009
|
|
An employee with access to Company management and information
|
|
$0.69
(exercise of option
granted in 2009)
|
|
|
2,499
|
|
|
$
|
1,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/28/10
|
|
A former employee and executive officer of the Company
|
|
$0.69
(exercise of option
granted in 2008 and 2009
|
|
|
71,940
|
|
|
$
|
41,631
|
|
|
|
|
|
$3.80
(exercise of option
granted in 2007)
|
|
|
700
|
|
|
$
|
2,660
|
|
Sales of
Convertible Securities
On December 19, 2006, we issued a convertible promissory
note in the principal amount of $100,000, payable on demand at
any time on or after February 28, 2007. In accordance with
the terms of the note, on March 14, 2007, all of the
principal and interest due on the note was converted into
26,867 shares of Series A preferred stock.
On various dates from August 31, 2005 to March 14,
2006, we sold debentures in the aggregate principal amount of
$1,525,000 to accredited investors. In connection with such
sale, each investor received a ten-year warrant to purchase
5,000 shares of common stock at a price of $2.34 per share
for each $25,000 in principal amount of debentures. As a result,
we issued warrants to purchase an aggregate of
305,000 shares of common stock. On December 19, 2007,
in connection with an amendment to two of the debentures in the
aggregate amount of $250,000, the investors received additional
ten-year warrants to purchase an aggregate of 25,000 shares
of common
II-2
stock at a price of $3.00 per share. On December 21, 2007,
an aggregate of $1,008,744 in principal amount and accrued but
unpaid interest due on certain debentures was converted into an
aggregate of 336,248 shares of Series B preferred
stock.
In connection with a secured, revolving, demand promissory note
dated November 16, 2006, we issued the holder of the note a
warrant to purchase an aggregate of 21,000 shares of common
stock at an exercise price of $3.80 per share on
January 25, 2008.
On various dates from December 14, 2006 to December 4,
2007, we sold short term convertible promissory notes to
accredited investors in the aggregate principal amount of
$1,211,000. On March 14, 2007, $330,955 in principal amount
and accrued but unpaid interest due on the notes was
subsequently converted into an aggregate of 87,094 shares
of Series A preferred stock. On December 21, 2007,
$894,348 in principal amount and accrued but unpaid interest due
on the notes was converted into an aggregate of
298,116 shares of Series B preferred stock. These
securities were sold pursuant to the exemption from registration
requirements provided by Section 4(2) of the Securities Act
and Rule 506 promulgated thereunder.
By stock purchase agreement dated March 14, 2007, as
amended from time to time, we issued an aggregate of
962,101 shares of Series A preferred stock to
accredited investors. The shares of Series A preferred
stock were issued at a purchase price of $3.80 per share,
resulting in $3,655,983 of gross proceeds, part of which
consisted of conversion of outstanding debt in the aggregate
amount of $330,955 including accrued but unpaid interest. These
securities were sold pursuant to the exemption from registration
requirements provided by Section 4(2) of the Securities Act
and Rule 506 promulgated thereunder.
On various dates from December 2007 through June 2008, we issued
an aggregate of 1,619,127 shares of Series B preferred
stock to accredited investors. The shares of Series B
preferred stock were issued at a purchase price of $3.00 per
share, resulting in $4,857,381 of gross proceeds, part of which
consisted of the conversion of outstanding debt in the aggregate
amount of $1,903,092 including accrued but unpaid interest and
services valued at approximately $100,000. In addition, each
investor received for each share of Series B preferred
stock purchased, one ten-year warrant to purchase five shares of
the Companys common stock at an exercise price of $3.00
per share. These securities were sold pursuant to the exemption
from registration requirements provided by Section 4(2) of
the Securities Act and Rule 506 promulgated thereunder.
On various dates from March 2009 through August 2009, we issued
an aggregate of 365,996 shares of Series C preferred
stock to accredited investors. The shares of Series C
preferred stock were issued at a purchase price of $3.00 per
share, resulting in $1,097,988 of gross proceeds. In addition,
each investor received for each share of Series C preferred
stock purchased, one ten-year warrant to purchase five shares of
the Companys common stock at an exercise price of $3.00
per share. These securities were sold pursuant to the exemption
from registration requirements provided by Section 4(2) of
the Securities Act and Rule 506 promulgated thereunder.
During October 2009, we issued an aggregate of
563,414 shares of Series D preferred stock to
accredited investors. The shares of Series D preferred
stock were issued at a price of $3.00 per share, resulting in
$1,690,242 of gross proceeds. In addition, each investor
received for each share of Series D preferred stock
purchased, one ten-year warrant to purchase five shares of the
Companys common stock at an exercise price of $3.00 per
share. These securities were sold pursuant to the exemption from
registration requirements provided by Section 4(2) of the
Securities Act and Rule 506 promulgated thereunder.
For each of the above transactions exempt from registration
requirements under Rule 506, the individuals purchasing our
securities had access to management and information concerning
the company. For each of such sales, no advertising or general
solicitation was employed in offering the securities. The
offerings and sales were made to a limited number of persons,
all of whom were accredited investors, business associates of
ours or our executive officers, and transfer was restricted by
us in accordance with the requirements of the Securities Act.
Each of such persons represented to us that they were accredited
or sophisticated investors, that they were capable of analyzing
the merits and risks of their investment, and that they
understood the speculative nature of their investment.
II-3
|
|
Item 16.
|
Exhibits
and Financial Statement Schedules.
|
(a) The exhibits listed in the following Exhibit Index
are filed as part of this registration statement.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
***1
|
.1
|
|
Form of Underwriter Agreement
|
|
***3
|
.1
|
|
Certificate of Incorporation of Xstream Systems, Inc. filed with
the State of Delaware on May 27, 2004
|
|
***3
|
.2
|
|
Certificate of Amendment of Certificate of Incorporation of
Xstream Systems, Inc. filed with the State of Delaware on
January 4, 2005
|
|
***3
|
.3
|
|
Certificate of Amendment of Certificate of Incorporation of
XStream Systems, Inc. filed with the State of Delaware on
December 17, 2007
|
|
***3
|
.4
|
|
Second Amended Certificate of Designation of Series A
Redeemable Convertible Preferred Stock of XStream Systems, Inc.
filed with the State of Delaware on August 24, 2009
|
|
***3
|
.5
|
|
Amended Certificate of Designation of the Series B
Redeemable Convertible Preferred Stock of XStream Systems, Inc.
filed with the State of Delaware on August 24, 2009
|
|
***3
|
.6
|
|
Amended Certificate of Designation of the Series C
Redeemable Convertible Preferred Stock of XStream Systems, Inc.
filed with the State of Delaware on August 24, 2009
|
|
***3
|
.7
|
|
Amended Certificate of Designation of the Series D
Redeemable Convertible Preferred Stock of XStream Systems, Inc.
filed with the State of Delaware on August 24, 2009
|
|
***3
|
.8
|
|
Amended and Restated By-laws of XStream Systems, Inc. dated
March 14, 2007
|
|
***3
|
.9
|
|
First Amendment to the Second Amended Certificate of Designation
of the Series A Redeemable Convertible Preferred Stock of
XStream Systems, Inc. filed with the State of Delaware on
November 9, 2009
|
|
***3
|
.10
|
|
First Amendment to the Amended Certificate of Designation of the
Series B Redeemable Convertible Preferred Stock of XStream
Systems, Inc. filed with the State of Delaware on
November 9, 2009
|
|
***3
|
.11
|
|
First Amendment to the Amended Certificate of Designation of the
Series C Redeemable Convertible Preferred Stock of XStream
Systems, Inc. filed with the State of Delaware on
November 9, 2009
|
|
***3
|
.12
|
|
First Amendment to the Amended Certificate of Designation of the
Series D Redeemable Convertible Preferred Stock of XStream
Systems, Inc. filed with the State of Delaware on
November 9, 2009
|
|
***3
|
.13
|
|
Certificate of Amendment to the Certificate of Incorporation of
XStream Systems, Inc. filed with the State of Delaware on
November 9, 2009
|
|
***3
|
.14
|
|
Second Amended and Restated By-Laws of XStream Systems, Inc.
dated April 14, 2010
|
|
***4
|
.1
|
|
Form of Unsecured Subordinated Debenture dated from time to time
between September 2005 and March 2006, by and among XStream
Systems, Inc. and the subscribers identified on the signature
pages thereto
|
|
***4
|
.2
|
|
Investor Rights Agreement among Rutgers, The State University of
New Jersey, XStream Systems, Inc., Brian Mayo, Dr. William
Mayo, Dr. William Mayo, as trustee of the Irrevocable Trust
f/b/o Zachary Mayo and Walter Helfrecht
|
|
***4
|
.3
|
|
Amended and Restated Registration Rights Agreement dated as of
August 27, 2009 by and among XStream Systems, Inc. and the
Investors named therein
|
|
***4
|
.4
|
|
Amended and Restated Series B Warrant Agreement dated
August 27, 2009 between XStream Systems, Inc. and the
holders from time to time of the Warrants created thereunder
|
|
***4
|
.5
|
|
Amended and Restated Series C Warrant Agreement dated
August 27, 2009 between XStream Systems, Inc. and the
holders from time to time of the Warrants created thereunder
|
|
***4
|
.6
|
|
Series D Warrant Agreement dated August 27, 2009
between XStream Systems, Inc. and the holders from time to time
of the Warrants created thereunder
|
|
***4
|
.7
|
|
Second Amended and Restated Securityholders Agreement,
dated as of August 27, 2009, among XStream Systems, Inc.
and each of the securityholders named
therein
|
II-4
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
***4
|
.8
|
|
First Amendment to the Amended and Restated Series B
Warrant Agreement dated November 9, 2009 between XStream
Systems, Inc. and the holders from time to time of the Warrants
created thereunder
|
|
***4
|
.9
|
|
First Amendment to the Amended and Restated Series C
Warrant Agreement dated November 9, 2009 between XStream
Systems, Inc. and the holders from time to time of the Warrants
created thereunder
|
|
***4
|
.10
|
|
First Amendment to the Series D Warrant Agreement dated
November 9, 2009 between XStream Systems, Inc. and the
holders from time to time of the Warrants created thereunder
|
|
***4
|
.11
|
|
First Amendment to the Second Amended and Restated
Securityholders Agreement dated November 9, 2009
between XStream Systems, Inc. and each of the securityholders
named therein
|
|
***4
|
.12
|
|
First Amendment to the Amended and Restated Registration Rights
Agreement dated as of November 9, 2009 by and among XStream
Systems, Inc. and the Investors named therein
|
|
***4
|
.13
|
|
Specimen Common Stock Certificate
|
|
***5
|
.1
|
|
Opinion of Greenberg Traurig, P.A.
|
|
***10
|
.1.1
|
|
Amended and Restated 2004 Stock Option Incentive Plan
|
|
***10
|
.1.2
|
|
Amendment No. 1 to the Amended and Restated 2004 Stock
Option Incentive Plan
|
|
***10
|
.2
|
|
2009 Long Term Incentive Compensation Plan
|
|
***10
|
.3
|
|
Series A Preferred Stock Purchase Agreement dated as of
March 14, 2007 by and among XStream Systems, Inc. and the
Investors named therein
|
|
***10
|
.4
|
|
First Amendment dated as of December 19, 2007 to the
Series A Preferred Stock Purchase Agreement dated as of
March 14, 2007
|
|
***10
|
.5
|
|
Second Amendment to Series A Preferred Stock Purchase
Agreement, dated as of May 30, 2008 among Xstream Systems,
Inc., and the investors identified as Third Closing
Investors on
Appendix I-C
thereto
|
|
***10
|
.6
|
|
Series D Preferred Stock Purchase Agreement dated as of
August 27, 2009 by and among XStream Systems, Inc. and the
Investors named therein
|
|
***10
|
.7
|
|
Employment Agreement with Brian T. Mayo dated November 1,
2006
|
|
***10
|
.8
|
|
Employment Agreement with Paul J. Micciche, dated
November 1, 2006
|
|
***10
|
.9
|
|
Supplier Agreement between XStream Systems, Inc. and Kimball
Electronics, Inc. dated September 6, 2006
|
|
***10
|
.10
|
|
Term Loan Agreement between XStream Systems, Inc. and Kimball
International, Inc. dated September 6, 2006
|
|
***10
|
.11
|
|
Commercial Lease by and between Waldo Development, Inc. and
XStream Systems, Inc. dated March 15, 2007
|
|
***10
|
.12
|
|
Lease, by and between J.P.H. Development Corp. and Xstream
Systems, Inc. dated October 25, 2004
|
|
***10
|
.13
|
|
License Agreement between Rutgers, The State University of New
Jersey and XStream Systems, Inc., dated December 13, 2004
|
|
***10
|
.14
|
|
Consulting Agreement by and between XStream Systems, Inc. and
Dr. William Mayo, dated November 3, 2005
|
|
***10
|
.15
|
|
Unsecured Promissory Note, dated February 11, 2008,
executed by Xstream Systems, Inc. in favor of Darren Sylvia, in
the principal amount of $35,831
|
|
***10
|
.16
|
|
Unsecured Promissory Note, dated December 31, 2007,
executed by Xstream Systems, Inc. in favor of Vince DeTurris, in
the principal amount of $43,069
|
|
***10
|
.17
|
|
XT250tm
Pilot Program Agreement between AmerisourceBergen and XStream
Systems, Inc., dated July 18, 2009
|
|
***10
|
.18
|
|
Letter of Intent between Swisslog Healthcare Solutions and
XStream Systems, Inc., dated August 13, 2009
|
|
***10
|
.19
|
|
XT250tm
Pilot Program Agreement between Pfizer, Inc. and XStream
Systems, Inc., dated August 24, 2009
|
II-5
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
***10
|
.20
|
|
Letter of Intent between Eastman Kodak Company and XStream
Systems, Inc., dated September 23, 2009
|
|
***10
|
.21
|
|
Agreement between Remetronix, Inc. and XStream Systems, dated
January 9, 2008
|
|
***10
|
.22
|
|
Agreement between Compass, Engineering Inc. and XStream Systems,
Inc., dated January 9, 2008
|
|
***10
|
.23
|
|
Settlement Agreement between XStream Systems, Inc., Kimball
International, Inc. and Kimball Electronics, Inc., dated
December 23, 2009
|
|
***10
|
.24
|
|
XStream Systems, Inc. Unsecured Subordinated Debenture in favor
of John F. Hulseman, as amended
|
|
***10
|
.25
|
|
XStream Systems, Inc. Unsecured Subordinated Debenture in favor
of R. David Collin Trust, as amended
|
|
***10
|
.26
|
|
Purchasing Agreement for the
XT250tm
System by and between XStream Systems, Inc. and Altec Medical,
Inc.
|
|
***10
|
.27
|
|
Form of Escrow Agreement by and among XStream Systems, Inc.,
W.R. Hambrecht & Co., LLC and JP Morgan Chase Bank,
National Association,
dated , 2010
|
|
***10
|
.28
|
|
Promissory Note in the principal amount of $10,000 executed by
XStream Systems, Inc. in favor of James J. Lowrey
|
|
***10
|
.29
|
|
Promissory Note in the principal amount of $10,000 executed by
XStream Systems, Inc. in favor of Anthony R. Chidoni, Jr.
|
|
***10
|
.30
|
|
Promissory Note in the principal amount of $10,000 executed by
XStream Systems, Inc. in favor of Dennis K. Cummings
|
|
***10
|
.31
|
|
Promissory Note in the principal amount of $10,000 executed by
XStream Systems, Inc. in favor of Simon Irish
|
|
*10
|
.32
|
|
Form of Promissory Note in the principal amount of $25,000
executed by XStream Systems, Inc. in favor of 13 individual
persons on various dates during July 2010
|
|
***14
|
.1
|
|
Code of Ethics for Senior Financial Officers
|
|
***14
|
.2
|
|
Code of Conduct for Employees
|
|
*23
|
.1
|
|
Consent of McGladrey & Pullen, LLP.
|
|
23
|
.3
|
|
Consent of Greenberg Traurig, P.A. (included in the opinion
filed as Exhibit 5.1).
|
|
*24
|
|
|
Power of Attorney Certified Board Resolutions
|
|
***25
|
.1
|
|
Power of Attorney (set forth on signature page of the
Registration Statement).
|
|
|
|
* |
|
Filed herewith. |
|
** |
|
To be filed by amendment. |
|
*** |
|
Previously filed. |
|
|
|
|
|
The 13 promissory notes have not been filed because they
are substantially identical in all material respects to the form
of promissory note that is being filed except for the names of
the lenders and the dates of execution. The registrant has
provided a schedule annexed to the exhibit setting forth the
details in which the omitted notes differ from the note being
filed. |
(b) The financial statement schedules are either not
applicable or the required information is included in the
financial statements and footnotes related thereto.
A. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
II-6
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth 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 volume and
price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the
Calculation of Registration Fee table in the
effective registration statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(4) Intentionally omitted.
(5) That, for the purpose of determining liability under
the Securities Act of 1933 to any purchaser:
(i) Intentionally omitted.
(ii) If the registrant is subject to Rule 430C, 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 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.
(6) That, for the purpose of determining liability of the
registrant under the Securities Act of 1933 to any purchaser in
the initial distribution of the securities:
The undersigned registrant undertakes that in a primary offering
of securities of the undersigned registrant pursuant to this
registration statement, regardless of the underwriting method
used to sell the securities to the purchaser, if the securities
are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a
seller to the purchaser and will be considered to offer or sell
such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the
undersigned registrant relating to the offering required to be
filed pursuant to Rule 424.
(ii) Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned registrant or used
or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus
relating to the offering containing material information about
the undersigned registrant or its securities provided by or on
behalf of the undersigned registrant; and
II-7
(iv) Any other communication that is an offer in the
offering made by the undersigned registrant to the purchaser.
B. Insofar as indemnification for liabilities arising under
the Securities Act of 1933 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. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment No. 9 to the
registration statement to be signed on its behalf by the
undersigned, in the City of Sebastian, State of Florida, on
August 20, 2010.
XSTREAM SYSTEMS, INC.
James J. Lowrey
Chairman of the Board and Co-Chief
Executive Officer
(co-principal executive officer)
Anthony Chidoni
Co-Chief Executive Officer, Chief Operating
Officer, Secretary and Director
(co-principal executive officer)
|
|
|
|
By:
|
/s/ Dennis
K. Cummings
|
Dennis K. Cummings
Chief Financial Officer, Executive Vice President and Treasurer
(principal financial and accounting officer)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
*
James
J. Lowrey
|
|
Chairman of the Board and
Co-Chief Executive Officer
(co-principal executive officer)
|
|
August 20, 2010
|
|
|
|
|
|
/s/ Anthony
Chidoni
Anthony
Chidoni
|
|
Co-Chief Executive Officer,
Chief Operating Officer,
Secretary and Director
(co-principal executive officer)
|
|
August 20, 2010
|
|
|
|
|
|
/s/ Dennis
K. Cummings
Dennis
K. Cummings
|
|
Chief Financial Officer
(principal financial and
accounting officer)
|
|
August 20, 2010
|
|
|
|
|
|
*
Robert
E. Kennedy
|
|
Director
|
|
August 20, 2010
|
|
|
|
|
|
*
Philip
A. Odeen
|
|
Director
|
|
August 20, 2010
|
II-9
|
|
|
|
|
|
|
|
|
|
|
|
*
Ash
K. Chawla
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Director
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August 20, 2010
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*
Simon
Irish
|
|
Director
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|
August 20, 2010
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*
Dennis
H. Ferro
|
|
Director
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|
August 20, 2010
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*
Joseph
J. Melone
|
|
Director
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|
August 20, 2010
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*
John
R. Murphy
|
|
Director
|
|
August 20, 2010
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*
Dr. E.
Darracott Vaughan, Jr.
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Director
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|
August 20, 2010
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*
Dr. Stuart
Weinstein
|
|
Director
|
|
August 20, 2010
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* |
Executed pursuant to a power-of-attorney granted in the
Form S-1 registration statement filed July 22, 2010.
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By:
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/s/ Dennis
K. Cummings
Dennis
K. Cummings
Attorney-in-Fact
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II-10