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EX-3.1 - Skyline Medical Inc.v199262_ex3-1.htm
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EX-31.1 - Skyline Medical Inc.v199262_ex31-1.htm
EX-31.2 - Skyline Medical Inc.v199262_ex31-2.htm
 
FORM 10-Q
(Mark One)
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2010
or
¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from  _________________________  to
 
Commission File Number: Registration Statement No. 333-155299
 
BioDrain Medical, Inc.
(Exact name of registrant as specified in its charter)

Minnesota
 
33-1007393
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
     
2060 Centre Pointe Blvd., Suite 7,
 
Mendota Heights, MN 55120
(Address of principal executive offices)
 
(Zip Code)
 
651-389-4800
(Registrant’s telephone number, including area code)
 
 

(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes ¨ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
¨ Yes o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-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.
 
Large accelerated filer ¨
Accelerated filer ¨
   
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨ Yes x No
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 12, 2010, the registrant had 13,573,719 shares of common stock, par value $.01 per share, outstanding.
 

 
BIODRAIN MEDICAL, INC.
 
TABLE OF CONTENTS
 
   
Page No.
 
PART I. FINANCIAL INFORMATION
     
       
Item 1. Condensed Financial Statements
 
3
 
       
             Condensed Balance Sheets September 30, 2010 and December 31, 2009
 
3
 
 
     
             Condensed Statements of Operations for three-month and nine-month periods ended September 30, 2010 and September 30, 2009
 
4
 
       
             Statement of Stockholders Deficit from Inception to September 30, 2010  
5
 
       
             Condensed Statements of Cash Flows for the nine-month periods ended September 30, 2010 and September 30, 2009
 
6
 
       
             Notes to Condensed Financial Statements
 
7
 
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
16
 
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
21
 
       
Item 4. Controls and Procedures
 
21
 
       
PART II. OTHER INFORMATION
     
       
Item 1. Legal Proceedings
 
22
 
       
Item 1A. Risk Factors
 
22
 
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
23
 
       
Item 3. Defaults Upon Senior Securities
 
23
 
       
Item 4. [Removed and Reserved]
 
23
 
       
Item 5. Other Information
 
23
 
       
Item 6. Exhibits
 
23
 
       
Signatures
 
24
 
       
Exhibit Index
 
25
 
 
     
 
     
 
 
2

 
 
PART 1. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
BIODRAIN MEDICAL, INC. 
(A DEVELOPMENT STAGE COMPANY) 
CONDENSED BALANCE SHEETS 
(Unaudited)

   
September 30,
   
December 31,
 
   
2010
   
2009
 
ASSETS
           
Current Assets:
           
Cash
  $ 20,434     $ 16,632  
Accounts receivable
    -       15,737  
Prepaid expense and other assets
    10,494       3,801  
Restricted cash in escrow (See Note 4)
    -       103,333  
Total Current Assets
    30,928       139,503  
                 
Fixed assets, net
    7,438       9,260  
Intangibles, net
    141,532       141,532  
                 
Total Assets
  $ 179,899     $ 290,295  
                 
LIABILITIES AND SHAREHOLDERS' DEFICIT
               
Current Liabilities:
               
Current portion of long term debt (See Note 8)
  $ 13,925     $ 13,620  
Current portion of convertible debt
    50,000       50,000  
Accounts payable
    1,128,367       814,137  
Shares due investors under registration payment arrangement
    -       355,124  
Accrued expenses
    384,325       201,490  
Convertible debenture
    -       10,000  
Total Current Liabilites
    1,576,617       1,444,371  
                 
Long term debt and convertible debt, net of discounts of $123,628 and $44,873 (See Note 7 and 8)
    518,371       116,108  
                 
Liability for equity-linked financial instruments (See Note 10)
    134,943       1,071,847  
                 
Stockholders Deficit:
               
Common stock, $.01 par value, 80,000,000 authorized, 13,573,719 and 11,383,211 outstanding
    135,737       113,831  
Additional paid-in capital
    4,799,777       3,573,506  
Deficit accumulated during development stage
    (6,985,548 )     (6,029,368 )
Total Shareholder' Deficit
    (2,050,034 )     (2,342,031 )
                 
Total Liabilities and Shareholders' Deficit
  $ 179,899     $ 290,295  
 
See Notes to Condensed Financial Statements
 
3


BIODRAIN MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
 
                           
Period From
 
                           
April 23, 2002
 
                           
(Inception)
 
   
Three Months Ended September,
   
Nine Months Ended September,
   
To September 30,
 
   
2010
   
2009
   
2010
   
2009
   
2010
 
Revenue
  $ -    
 -
    $ 288     $ 15,737     $ 16,025  
                                       
Cost of goods sold
    -    
-
      140       7,450       7,140  
                                       
Gross margin
    -       -       148       8,287       8,885  
                                         
General and administrative expense
    381,053       521,532       1,531,669       1,393,072       5,560,096  
                                         
Operations expense
    55,649       156,523       165,308       351,449       1,066,182  
                                         
Sales and marketing expense
    36,415       136,220       177,065       344,723       633,241  
                                         
Interest expense
    33,873       24,689       107,580       64,009       397,220  
                                         
Loss (gain) on valuation of equity-linked financial instruments
    (348,880 )     (65,949 )     (1,025,294 )     370,474       (662,306 )
                                         
Total expense
    158,110       773,015       956,328       2,523,727       6,994,433  
                                         
Net income (loss) available to common shareholders
  $ (158,110 )   $ (773,015 )   $ (956,180 )   $ (2,515,440 )   $ (6,985,548 )
                                         
Loss per  common share basic and diluted
  $ (0.01 )   $ (0.08 )   $ (0.08 )   $ (0.28 )   $ (2.12 )
                                         
Weighted average shares used in computation, basic and diluted
    13,159,639       9,634,828       12,428,401       8,903,119       3,287,557  
 
See Notes to Condensed Financial Statements
 
4


BIODRAIN MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' DEFICIT
PERIOD FROM APRIL 23, 2002 (INCEPTION)
TO SEPTEMBER 30, 2010
 
   
Shares
   
Amount
   
Paid in Capital
   
Deficit
   
Total
 
Issuance of common stock 9/1/02, $.0167 (1)
    598,549     $ 5,985     $ 4,015     $ -     $ 10,000  
                                      -  
Issuance of common 10/23/02, $1.67/share
    2,993       30       4,970               5,000  
Net loss
                            (51,057 )     (51,057 )
Balance 12/31/02
    601,542     $ 6,015     $ 8,985     $ (51,057 )   $ (36,057 )
                                         
Issuance of common 2/12/03, $.0167 (2)
    23,942       239       161               400  
Issuance of common 6/11&12,$1.67 (3)
    21,548       216       34,784               35,000  
Net Loss
                            (90,461 )     (90,461 )
Balance 12/31/03
    647,032     $ 6,470     $ 43,930     $ (141,518 )   $ (91,118 )
                                         
Issuance of common 5/25/04, $.0167 (4)
    6,567       66       44               110  
Net Loss
                            (90,353 )     (90,353 )
Balance 12/31/04
    653,599     $ 6,536     $ 43,974     $ (231,871 )   $ (181,361 )
                                         
Issuance of common 12/14/05, $.0167 (5)
    14,964       150       100               250  
Vested stock options and warrants
                    2,793               2,793  
Net Loss
                            (123,852 )     (123,852 )
Balance 12/31/05
    668,563     $ 6,686     $ 46,867     $ (355,723 )   $ (302,170 )
                                         
Issuance of common 5/16 & 8/8, $.0167 (6)
    86,869       869       582               1,451  
Issuance of common 10/19 & 23, $.0167 (7)
    38,906       389       261               650  
Issuance of common 12/01, $1.67 (8)
    28,739       287       44,523               44,810  
Vested stock options and warrants
                    13,644               13,644  
Net Loss
                            (273,026 )     (273,026 )
Balance 12/31/06
    823,077     $ 8,231     $ 105,877     $ (628,749 )   $ (514,641 )
                                         
Issuance of common 1/30/07 @ 1.67 (9)
    599       6       994               1,000  
Value of equity instruments issued with debt
                    132,938               132,938  
Capital contributions resulting from waivers of debt
                    346,714               346,714  
Vested stock options and warrants
                    73,907               73,907  
Net loss
                            (752,415 )     (752,415 )
Balance 12/31/07
    823,676     $ 8,237     $ 660,430     $ (1,381,164 )   $ (712,497 )
                                         
Issuance of common 6/11 to 9/30, $.35 (10)
    4,552,862       45,528       1,547,974               1,593,502  
Shares issued to finders, agents
    2,012,690       20,127       (20,127 )             -  
Shares issued to pay direct legal fees
    285,714       2,857       (2,857 )                
Issuance of common due to antidilution provisions
    205,899       2,059       (2,059 )             -  
Shares issued to pay investor relations services  6/23/08, $.35
    250,000       2,500       85,000               87,500  
Vested stock options and warrants
                    354,994               354,994  
Capital contributions resulting from waivers of debt
                    129,684               129,684  
Net loss
                            (1,762,628 )     (1,762,628 )
Balance 12/31/08
    8,130,841     $ 81,308     $ 2,753,039     $ (3,143,792 )   $ (309,445 )
                                         
Cumulative effect of adoption of EITF 07-5
                    (486,564 )     6,654       (479,910 )
Vested stock options and warrants
                    111,835               111,835  
Shares issued 3/20/09 to pay for fund raising
    125,000       1,250       (1,250 )             -  
Shares issued under PMM in April 2009, $.50
    700,000       7,000       343,000               350,000  
Shares issued under PPM in May 2009, $.50
    220,000       2,200       107,800               110,000  
Shares issued under PPM in June 2009, $.50
    50,000       500       24,500               25,000  
Shares issued under PPM in August 2009, $.50
    80,000       800       39,200               40,000  
Shares issued under PPM in September 2009, $.50
    150,000       1,500       73,500               75,000  
Shares issued to directors, management and consultant in August 2009, $.50
    797,810       7,978       390,927               398,905  
Shares issued to finder in September 2009, $.50
    100,000       1,000       49,000               50,000  
Capital contributions resulting from waivers of debt
                    84,600               84,600  
Value of equity-linked financial instruments issued in connection with PPMs
                    (222,296 )             (222,296 )
Value of equity instruments issued with debt
                    30,150               30,150  
Shares issued to consultant for fund raising
    30,000       300       (300 )             -  
Shares issued under PPM in November 2009, $.50
    50,000       500       24,500               25,000  
Shares issued upon conversion of debt and interest, $.27
    935,446       9,354       247,100               256,454  
Shares issued upon conversion of shareholder note, $.35
    14,024       140       4,766               4,906  
Net Loss
                          $ (2,892,230 )     (2,892,230 )
Balance 12/31/09
    11,383,121       113,830       3,573,507       (6,029,368 )     (2,342,030 )
                                         
Shares issued in March 2010 under PPM, $.50
    174,550       1,746     $ 85,529             $ 87,275  
Shares issed to consultants for IR and consulting, $.50
    374,090       3,741     $ 183,304             $ 187,045  
Vested stock options and warrants
                  $ 11,382             $ 11,382  
Value of equity instruments issued for consulting services
                  $ 354,602             $ 354,602  
Value of equity-linked financial instruments issued
                                       
in connection with PPM in first quarter
                  $ (25,553 )           $ (25,553 )
Shares issued in April 2010 under PPM, $.50
    180,000       1,800     $ 88,200             $ 90,000  
Shares issed in May 2010 to consultant, $.50
    12,850       129     $ 6,296             $ 6,425  
Shares issued in May 2010 to 2008 investors as a penalty
                                       
for late registration of 4,552,862 shares, $.50
    710,248       7,102     $ 348,022             $ 355,124  
Value of equity instruments issued with debt in second quarter
            $ 96,613             $ 96,613  
Value of equity-linked financial instruments issued
                                       
in connection with PPM in second quarter
                  $ (31,332 )           $ (31,332 )
Value of equity-linked financial instruments issued
                                       
in connection with PPM in third quarter
                  $ (31,506 )           $ (31,506 )
Value of equity instruments issued with debt in third quarter
                  $ 15,553             $ 15,553  
Shares issued in September 2010 under PPM, $.10
    250,000       2,500     $ 22,500             $ 25,000  
Shares issued to consultants in third quarter at $.22 per share
    488,860       4,889     $ 102,660             $ 107,549  
Net Loss
                          $ (956,180 )   $ (956,180 )
Balance 9/30/2010
    13,573,719       135,737     $ 4,799,777     $ (6,985,548 )   $ (2,050,034 )

(1) Founders shares, 1,000,000 pre-split
(2) 23,492 (40,000 pre-split) shares valued at $.0167 per share as compensation for loan guarantees by management
(3) Investment including 670 shares issued as a 10% finders fee
(4) For payment of patent legal fees
(5) Compensation for loan guarantees by management
(6) For vendor contractual consideration
(7) Employment agreements
(8) Investment
(9) Conversion of convertible notes by management
 
See Notes to Condensed Financial Statements
 
5

 
BIODRAIN MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
                   
               
April 23,
 
               
2002
 
   
Nine Months
   
(Inception)
 
   
Ended September 30,
   
To September 30,
 
   
2010
   
2009
   
2010
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Cash flow from operating activities:
                 
Net loss
  $ (956,180 )   $ (2,515,440 )   $ (6,985,548 )
Adjustments to reconcile net loss to
                       
net cash used in operating activities:
                       
Depreciation
    1,822       2,434       5,783  
Vested stock options and warrants
    11,382       150,544       568,535  
Equity instruments issued for management and consulting
    655,621       398,905       1,192,026  
Stock based registration payments
    -       355,124       355,124  
Conversion of accrued liabilites to capital
    -       84,600       560,998  
Amortization of debt discount
    33,411       6,538       151,627  
(Gain)Loss on valuation of equity-linked instruments
    (1,025,294 )     370,474       (662,306 )
Changes in assets and liabilities:
                       
Accounts receivable
    15,737       (15,737 )     -  
Prepaid expense and other
    (6,692 )     (2,895 )     (10,493 )
Notes payable to shareholders
    -       -       (14,957 )
Accounts payable
    314,228       188,916       1,128,366  
Accrued expenses
    182,835       (8,980 )     384,326  
Net cash used in operating activities:
    (773,129 )     (985,517 )     (3,326,519 )
                         
Cash flow from investing activities:
                       
Purchase of fixed assets
    -       -       (12,258 )
Purchase of intangibles
    -       -       (142,495 )
Net cash used in investing activities
    -       -       (154,753 )
                         
Cash flow from financing activities:
                       
Proceeds from long term and convertible debt
    582,000       -       1,021,505  
Principal payments on long term debt and convertible debt
    (110,677 )     (10,124 )     (126,607 )
Restricted cash in escrow
    103,333               -  
Accrued interest converted to stock
    -        -       87,360  
Issuance of common stock
    202,275       600,000       2,519,448  
Net cash provided by financing activities
    776,931       589,876       3,501,706  
                         
Net increase (decrease) in cash
    3,802       (395,641 )     20,434  
Cash at beginning of period
    16,632       463,838       -  
Cash at end of period
  $ 20,434     $ 68,197     $ 20,434  

See Notes to Condensed Financial Statements
 
6

 
BIODRAIN MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Amounts presented at and for the three months and nine months ended September 30, 2010 and
September 30, 2009 are unaudited)
 
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Nature of Operations and Continuance of Operations
 
BioDrain Medical, Inc. (the "Company") was incorporated under the laws of the State of Minnesota in 2002. The Company is developing an environmentally safe system for the collection and disposal of infectious fluids that result from surgical procedures and post-operative care.
 
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has suffered recurring losses from operations and has a shareholders’ deficit. These factors raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
Management hired an investment banker in February 2010 to raise an additional $3-$5 million in new equity. The banker has been unable to raise the expected $500,000 by September 30, 2010, but the Company has raised approximately $202,000 in equity and $582,000 in convertible debt in 2010 and is planning to close on a larger round within the next 30 days. Although the Company's ability to raise this new capital is in substantial doubt it received $725,000 through private placements of equity and convertible debt in 2009, and the Company's April 1, 2009 510(k) clearance from the FDA to authorize the Company to market and sell its FMS products is being received very positively. If the Company is successful in raising at least $3 million in new equity, it will have sufficient capital to operate its business and execute its business plan for at least the next 12 months. If the Company raises the additional capital by issuing additional equity securities, its shareholders could experience substantial dilution.
 
Recent Accounting Developments
 
Issued in January 2010, ASU Update 2010-06, Fair Value Measures and Disclosures, provides amendments to Topic 820 that will provide more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in level 3 fair value measurements, and (4) the transfers between levels 1, 2, and 3. ASC Update 2010-06 is effective for fiscal years beginning after December 15, 2010. The Company does not expect adoption of ASU Update 2010-06 to have a material effect to its financial statements or its disclosures.
 
Issued in October 2009, ASU Update 2009-13, Revenue Recognition Topic 605 - Multiple-Deliverable Revenue Arrangements provides guidance for separating consideration in multiple-deliverable arrangements. ASC Number 2009-13 is effective for fiscal years beginning on or after June 15, 2010. The Company does not expect adoption of ASU Update 2009-13 to have a material effect on its financial statements.
 
Effective February 2010, the Company adopted ASU Update 20 10-09, Subsequent Events, which provides amendments to Topic 855 removing the requirement for SEC filers to disclose the date through which an entity has evaluated subsequent events. The adoption of ASU Update 20 10-09 did not have a significant impact on the Company's disclosures.
 
Valuation of Intangible Assets
 
We review identifiable intangible assets for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Our intangible assets are currently solely the costs of obtaining trademarks and patents. Events or changes in circumstances that indicate the carrying amount may not be recoverable include, but are not limited to, a significant change in the medical device marketplace and a significant adverse change in the business climate in which we operate. If such events or changes in circumstances are present, the undiscounted cash flows method is used to determine whether the intangible asset is impaired. Cash flows would include the estimated terminal value of the asset and exclude any interest charges. If the carrying value of the asset exceeds the undiscounted cash flows over the estimated remaining life of the asset, the asset is considered impaired, and the impairment is measured by reducing the carrying value of the asset to its fair value using the discounted cash flows method. The discount rate utilized is based on management's best estimate of the related risks and return at the time the impairment assessment is made.
 
Our accounting estimates and assumptions bear various risks of change, including the length of the current recession facing the United States, the expansion of the slowdown in consumer spending in the U.S. medical markets despite the early expressed opinions of financial experts that the medical market would not be as affected as other markets and failure to gain acceptance in the medical market.
 
 
7

 
 
The Company reviewed all other significant newly issued accounting pronouncements and determined they are either not applicable to its business or that no material effect is expected on its financial position and results of operations.
 
Accounting Policies and Estimates
 
The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Presentation of Taxes Collected from Customers
 
Sales taxes are imposed on the Company’s sales to nonexempt customers. The Company collects the taxes from customers and remits the entire amounts to the governmental authorities. The Company’s accounting policy is to exclude the taxes collected and remitted from revenues and expenses.
 
Shipping and Handling
 
Shipping and handling charges billed to customers are recorded as revenue. Shipping and handling costs are recorded within cost of goods sold on the statement of operations.
 
Advertising
 
Advertising costs are expensed as incurred. There were no advertising expenses in the three months ended September 30, 2010 and September 30, 2009 and zero and $1,600 in the nine months ended September 30, 2010 and 2009, respectively.
 
Research and Development
 
Research and development costs are charged to operations as incurred. Research and development costs were $10,000 and $34,000 in the three months and nine months ended September 30, 2010, respectively, and zero and $30,000 in the three months and nine months ended September 30, 2009, respectively.
 
Revenue Recognition
 
The Company recognizes revenue in accordance with the SEC’s Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, as amended by Staff Accounting Bulletin No. 104 (together, SAB 101), and ASC 605 Revenue Recognition.
 
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable and collectability is probable. Delivery is considered to have occurred upon either shipment of the product or arrival at its destination based on the shipping terms of the transaction. The Company standard terms specify that shipment is FOB BioDrain and the Company will, therefore recognize revenue upon shipment in most cases. This revenue recognition policy applies to shipments of the FMS units as well as shipments of cleaning solution kits. When these conditions are satisfied, the Company recognizes gross product revenue, which is the price it charges generally to its customers for a particular product. Under the Company’s standard terms and conditions there is no provision for installation or acceptance of the product to take place prior to the obligation of the customer. The customer’s right of return is limited only to the Company’s standard warranty whereby the Company replaces or repairs, at its option, and it would be very rare that the unit or significant quantities of cleaning solution kits may be returned. Additionally, since the Company buys both the FMS units and cleaning solution kits from “turnkey” suppliers the Company would have the right to replacements from the suppliers if this situation should occur.
 
Receivables
 
Receivables are reported at the amount the Company expects to collect on balances outstanding at fiscal year end. The Company has determined there will be no losses on balances outstanding at the nine months ended September 30, 2010.
 
Property and Equipment
 
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the respective assets. Estimated useful asset life by classification is as follows:
 
   
Years
Computers and office equipment
 
3
Furniture and fixtures
  
8
 
8

 
Upon retirement or sale, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in operations. Maintenance and repairs are charged to operations as incurred.
 
Intangible Assets
 
Intangible assets consist of patent costs. These assets are not subject to amortization until the property patented is in production. The assets are reviewed for impairment annually, and impairment losses, if any, are charged to operations when identified. No impairment losses have been identified by management.
 
Income Taxes
 
The Company accounts for income taxes in accordance with ASC 740- Income Taxes(“ASC 740”). Under ASC 740, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and net operating loss and credit carry forwards using enacted tax rates in effect for the year in which the differences are expected to impact taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. In June 2006, the FASB issued Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which became effective for the Company beginning January 1, 2007. FIN 48, now included within ASC 740, addresses how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the tax benefit from an uncertain tax position can be recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The Company has identified no income tax uncertainties.
 
Patents and Intellectual Property
 
The Company, in June 2008, completed and executed an agreement to secure exclusive ownership of the patent from an inventor, Marshall Ryan. Mr. Ryan received a combination of cash and warrants, and he will receive a 4% royalty on FMS (the Product) sales for the life of the patent. At the signing of the agreement, Mr. Ryan received $75,000 in exchange for the exclusive assignment of the patent. In addition, on June 30, 2009, Mr. Ryan, through his Mid-State Stainless, Inc. entity, was entitled to receive $100,000 as payment (currently recorded as an account payable with the Company) for past research and development activities. Should Mr. Ryan be utilized in the future for additional product development activities, he will be compensated at a rate of ninety five dollars ($95.00) per hour.
 
Mr. Ryan also received a warrant, with immediate vesting, to purchase 150,000 shares of the Company's common stock at a price of $.35 per share. The warrant has a term of five years, ending on June 30, 2013 and is assigned a value of $28,060 using a Black-Scholes formula and this amount was expensed as consulting expense in 2008 using a 5-year expected life, a 3.73% risk free interest rate, an expected 59% volatility and a zero dividend rate. Should there be a change in control of the Company (defined as greater than 50% of the Company’s outstanding stock or substantially all of its assets being transferred to one independent person or entity), Mr. Ryan will be owed a total of $2 million to be paid out over the life of the patent if the change in control occurs within 12 months of the first sale of the product; or $1 million to be paid out over the life of the patent if the change in control occurs between 12 and 24 months of the first sale of the product; or $500,000 to be paid out over the life of the patent if the change in control occurs between 24 and 36 months of the first sale of the product. There will be no additional payment if a change in control occurs more than 36 months after the first sale of the product.
 
Subsequent Events
 
The Company has evaluated any subsequent events through the date of this filing. The Company does not believe there are subsequent events that require disclosure.
 
Interim Financial Statements
 
The Company has prepared the unaudited interim financial statements and related unaudited financial information in the footnotes in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. These interim financial statements reflect all adjustments consisting of normal recurring accruals, which, in the opinion of management, are necessary to present fairly the Company’s financial position, the results of its operations and its cash flows for the interim periods. These interim financial statements should be read in conjunction with the annual financial statements and the notes thereto contained in the Form 10-K filed with the SEC on March 31, 2010. The nature of the Company’s business is such that the results of any interim period may not be indicative of the results to be expected for the entire year.
 
9

 
NOTE 2 – DEVELOPMENT STAGE OPERATIONS
 
The Company was formed April 23, 2002. Since inception to September 30, 2010, 13,573,719 shares of common stock have been issued between par value and $1.67. Operations since incorporation have been devoted to raising capital, obtaining financing, development of the Company’s product, and administrative services.
 
NOTE 3 – STOCKHOLDERS’ DEFICIT, STOCK OPTIONS AND WARRANTS
 
In connection with the financing completed in October 2008, the Company has effected two reverse stock splits, one on June 6, 2008 and another on October 20, 2008. In accordance with SAB Topic 4C, all stock options and warrants and their related exercise prices are stated at their post-reverse stock split values.
 
The Company has an equity incentive plan, which allows issuance of incentive and non-qualified stock options to employees, directors and consultants of the Company, where permitted under the plan. The exercise price for each stock option is determined by the board of directors. Vesting requirements are determined by the board of directors when granted and currently range from immediate to three years. Options under this plan have terms ranging from three to ten years.
 
Accounting for share-based payment
 
Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)) which replaced SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123) and superseded Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), all now codified under ASC 718- Compensation-Stock Compensation (“ASC 718). Under ASC 718 stock-based employee compensation cost is recognized using the fair value based method for all new awards granted after January 1, 2006 and unvested awards outstanding at January 1, 2006. Compensation costs for unvested stock options and non-vested awards that were outstanding at January 1, 2006, are being recognized over the requisite service period based on the grant-date fair value of those options and awards as previously calculated under SFAS 123 for pro forma disclosures, using a straight-line method. We elected the modified-prospective method under which prior periods are not retroactively restated.
 
ASC 718 requires companies to estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model or other acceptable means. The Company uses the Black-Scholes option valuation model which requires the input of significant assumptions including an estimate of the average period of time employees will retain vested stock options before exercising them, the estimated volatility of th Company's common stock price over the expected term, the number of options that will ultimately be forfeited before completing vesting requirements, the expected dividend rate and the risk-free interest rate. Changes in the assumptions can materially affect the estimate of fair value of stock-based compensation and, consequently, the related expense recognized. The assumptions the Company uses in calculating the fair value of stock-based payment awards represent the Company's best estimates, which involve inherent uncertainties and the application of management's judgment. As a result, if factors change and the Company uses different assumptions, the Company's equity-based compensation expense could be materially different in the future.
 
Since the Company's common stock has no significant public trading history, and the Company has experienced no option exercises in its history, the Company is  required to take an alternative approach to estimating future volatility and estimated life and the future results could vary significantly from the Company's estimates. The Company compiled historical volatilities over a period of 2-7 years of 15 small-cap medical companies traded on major exchanges and 10 mid-range medical companies on the OTC Bulletin Board and combined the results using a weighted average approach. In the case of ordinary options to employees the Company determined the expected life to be the midpoint between the vesting term and the legal term. In the case of options or warrants granted to non-employees the Company estimated the life to be the legal term unless there was a compelling reason to make it shorter.
 
When an option or warrant is granted in place of cash compensation for services the Company deems the value of the service rendered to be the value of the option or warrant. In most cases, however, an option or warrant is granted in addition to other forms of compensation and its separate value is difficult to determine without utilizing an option pricing model. For that reason the Company also uses the Black-Scholes-Merton option-pricing model to value options and warrants granted to non-employees, which requires the input of significant assumptions including an estimate of the average period the investors or consultants will retain vested stock options and warrants before exercising them, the estimated volatility of the Company's common stock price over the expected term, the number of options and warrants that will ultimately be forfeited before completing vesting requirements, the expected dividend rate and the risk-free interest rate. Changes in the assumptions can materially affect the estimate of fair value of stock-based consulting and/or compensation and, consequently, the related expense recognized.
 
Since the Company has limited trading history in its stock and no first-hand experience with how its investors and consultants have acted in similar circumstances, the assumptions the Company uses in calculating the fair value of stock-based payment awards represent its best estimates, which involve inherent uncertainties and the application of management's judgment. As a result, if factors change and the Company uses different assumptions, the Company's equity-based consulting and interest expense could be materially different in the future.
 
10

 
Valuation and accounting for options and warrants
 
The Company determines the grant date fair value of options and warrants using a Black-Scholes-Merton option valuation model based upon assumptions regarding risk-free interest rate, expected dividend rate, volatility and estimated term. For grants during 2008, the Company used a 2.0 to 4.5% risk-free interest rate, 0% dividend rate, 53-66% volatility and estimated term of 2.5 to 7.5 years. Values computed using these assumptions ranged from $.102 per share to $.336 per share. Warrants or options awarded for services rendered are expensed over the period of service (normally the vesting period) as compensation expense for employees or an appropriate consulting expense category for awards to consultants and directors. Warrants granted in connection with a common equity financing are included in shareholders’ equity, provided that there is no re-pricing provision that requires they be treated as a liability (See Note 10) and warrants granted in connection with a debt financing are treated as a debt discount and amortized using the interest method as interest expense over the term of the debt. Warrants issued in connection with the $100,000 convertible debt that closed March 1, 2007 created a debt discount of $40,242 that is being amortized as additional interest over its 5-year term.
 
Warrants issued in connection with the $170,000 in convertible “bridge” debt that closed in July 2007 created a calculated debt discount of $92,700 that was fully expensed over its loan term that matured April 30, 2008. The Company issued $100,000 in convertible debt in October 2009 and issued a warrant, in connection with the debt, for 200,000 shares of common stock at $.65 per share. The Company determined that the warrant had an initial value of $30,150 that was treated as a debt discount and is being amortized as additional interest expense over the 24-month term of the note. The Company also issued $200,000 in convertible debt in June 2010 and issued a warrant, in connection with the debt, to purchase 1,111,112 shares at $.46 per share.
 
The Company determined that the value of the June 2010 warrant is $96,613.This value is treated as a debt discount and amortized as additional interest expense over the 22-month term of the note. The Company also issued $32,000 in convertible debt in September, 2010 and issued a warrant to purchase 320,000 shares at $.46 per share.  The Company determined that this warrant has a value of $15,553 that was treated as a debt discount and amortized as additional interest expense over the 18 month term of the note.
 
The following summarizes transactions for stock options and warrants for the periods indicated:
 
   
Stock Options (1)
   
Warrants (1)
 
   
Number of
Shares
   
Average
Exercise
Price
   
Number of
Shares
   
Average
Exercise
Price
 
Outstanding at December 31, 2005
    17,956     $ 1.67       20,950     $ 2.62  
                                 
Issued
    23,942       1.67       71,826       0.85  
                                 
Outstanding at December 31, 2006
    41,898     $ 1.67       92,776     $ 1.25  
                                 
Issued
    5,984       1.67       28,502       0.35  
                                 
Outstanding at December 31, 2007
    47,882     $ 1.67       121,278     $ 1.04  
                                 
Issued
    1,243,292       0.20       5,075,204       0.45  
Expired
                    (11,971 )     3.76  
                                 
Outstanding at December 31, 2008
    1,291,174     $ 0.26       5,184,511       0.45  
                                 
Issued
    205,000       0.37       2,188,302       0.65  
                                 
Outstanding at December 31, 2009
    1,496,174       0.27       7,372,813       0.49  
                                 
Issued
    150,000       0.50       3,035,662       0.38  
Expired
    (17,956 )     1.67       (8,979 )     1.67  
                                 
Outstanding at September 30, 2010
    1,628,218       0.28       10,399,496       0.46  
  

(1) Adjusted for the reverse stock splits in total at June 6, 2008 and October 20, 2008. There were no options or warrants exercised in the periods.
 
 
11

 
 
At September 30, 2010, options to purchase 1,078,218 shares of common stock were fully vested and exercisable with a weighted average exercise price of $.28 and a weighted average remaining term of 4.7 years. There were also warrants to purchase 10,399,496 shares of common stock that were fully vested and exercisable. Stock-based compensation recognized in the nine months ended September 30, 2010 and 2009 were $667,000 and $549,000, respectively. The following summarizes the status of options and warrants outstanding at September 30, 2010.
 
Range of Exercise Prices
 
Shares
   
Weighted
Average
Remaining
Life
 
Options
           
$0.01
    543,292       7.68  
$0.35
    875,000       2.87  
$0.50
    180,000       8.14  
$1.67
    29,926       1.27  
Total
    1,628,218          
                 
Warrants
               
$0.02
    71,826       3.70  
$0.10
    800,000       2.42  
$0.17
    250,000       4.94  
$0.35
    798,597       2.18  
$0.46
    6,403,610       1.29  
$0.65
    2,039,550       1.93  
$1.67
    35,913       1.20  
Total
    10,399,496          
 
Stock options and warrants expire on various dates from June 2011 to February 2020.
 
Under the terms of the Company's agreement with investors in the October 2008 financing, 1,920,000 shares of common stock were the maximum number of shares allocated to the Company's existing shareholders at the time of the offering (also referred to as the original shareholders or the "Founders"). Since the total of the Company's fully-diluted shares of common stock was greater than 1,920,000 shares, in order for the Company to proceed with the offering, the board of directors approved a reverse stock split of 1-for-1.2545. After this split was approved, additional options and warrants were identified, requiring a second reverse stock split in order to reach the 1,920,000 shares. The second reverse stock split on the reduced 1-for-1.2545 balance was determined to be 1-for 1.33176963. Taken together, if only one reverse stock were performed, the number would have been a reverse stock split of 1-for 1.670705.
 
On June 6, 2008, the board of directors approved the first reverse stock split. The authorized number of common stock of 20,000,000 shares was proportionately divided by 1.2545 to 15,942,607.
 
On October 20, 2008, the board of directors (i) approved the second reverse stock split pursuant to which the authorized number of shares of common stock of 15,942,607 was proportionately divided by 1.33177 to 11,970,994 shares and (ii) approved a resolution to increase the number of authorized shares of the Company's common stock from 11,970,994 to 40,000,000, which was approved by the Company’s shareholders holding a majority of the shares entitled to vote thereon at a special meeting of shareholders held on December 3, 2008.
 
Stock, Stock Options and Warrants Granted by the Company
 
The following table is the listing of stock options and warrants as of September 30, 2010 by year of grant:
 
Stock Options:
 
 
Year   
Shares
   
Price
 
2006
    23,942       1.67  
2007
    5,984       1.67  
2008
    1,243,292       .01-.35  
2009
    205,000       .35-.50  
2010
    150,000       .50  
Total
    1,628,218     $ .01-$1.67  
 
 
12

 
 
Warrants:
 
Year
 
Shares
   
Price
 
2006
    71,826       .02-1.67  
2007
    28,502       .35  
2008
    5,075,204       .02-.46  
2009
    2,188,302       .35-.65  
2010
    3,035,662       .10-.65  
Total
    10,399,496     $ .02-$1.67  

NOTE 4 - RESTRICTED CASH IN ESCROW
 
Under the terms of the escrow agreement established in connection with the October 2008 financing, certain amounts were to be withheld to pay legal, accounting and placement agent fees as well as to pay for investor relations activities that commenced upon receiving an effective registration of the Company’s stock and an initial quotation on the OTC Bulletin Board.
 
During the fourth quarter of 2009, $60,000 was released to pay for investor relations activities. Additionally, $103,333 has been released in 2010 to pay for investor relations and accounting expenses. There is no balance in the escrow account as of September 30, 2010.
 
NOTE 5 - LOSS PER SHARE
 
The following table presents the shares used in the basic and diluted loss per common share computations:
 
                           
From
 
   
Three Months Ended
   
Nine Months Ended
   
April 23, 2002
 
   
September 30,
   
September 30,
   
(Inception) To
 
   
2010
   
2009
   
2010
   
2009
   
September 30, 2010
 
Numerator
                             
Net Loss available in basic and diluted calculation
  $ (158,110 )   $ (773,015 )   $ (956,180 )   $ (2,515,440 )   $ (6,985,548 )
                                         
Denominator
                                       
Weighted average common shares oustanding-basic
    13,159,639       9,634,828       12,428,401       8,903,119       3,287,557  
                                         
Effect of dilutive stock options and warrants (1)
    -       -       -       -       -  
                                         
Weighted average common shares outstanding-diluted
    13,159,639       9,634,828       12,428,401       8,903,119       3,287,557  
                                         
Loss per common share-basic and diluted
  $ (0.01 )   $ (0.08 )   $ (0.08 )   $ (0.28 )   $ (2.12 )
 

 
(1) The number of shares underlying options and warrants outstanding as of September 30, 2010 and September 30, 2009 are 12,027,714 and 8,595,958, respectively. The effect of the shares that would be issued upon exercise of such options and warrants has been excluded from the calculation of diluted loss per share because those shares are anti-dilutive.
 
NOTE 6 – INCOME TAXES
 
The provision for income taxes consists of an amount for taxes currently payable and a provision for tax consequences deferred to future periods. Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
 
There is no income tax provision in the accompanying statement of operations due to the cumulative operating losses that indicate a 100% valuation allowance for the deferred tax assets and state income taxes is appropriate.
 
Federal and state income tax return operating loss carryovers, as of December 31, 2009, were approximately $5,415,000 and will begin to expire between 2017 and 2019.
 
The valuation allowance has been recorded due to the uncertainty of realization of the benefits associated with the net operating losses. Future events and changes in circumstances could cause this valuation allowance to change.
 
The components of deferred income taxes at September 30, 2010 and December 31, 2009 are as follows:
 
   
September 30,
2010
   
December 31,
2009
 
   
(Unaudited)
       
Deferred Tax Asset:
           
Net Operating Loss
  $ 1,500,000     $ 1,278,000  
Total Deferred Tax Asset
    1,500,000       1,278,000  
Less Valuation Allowance
    1,500,000       1,278,000  
Net Deferred Income Taxes
  $     $  
 
13

 
NOTE 7- CONVERTIBLE DEBENTURE
 
The Company issued a convertible debenture to Andcor Companies, Inc. (“Andcor”) with principal of $10,000 and interest at 10.25% that originally matured in 2007. The debenture is convertible into shares of the Company’s common stock at the lower of $0.90 per share or the price per share at which the next equity financing agreement is completed, and is now re-set to $.35 per share. The convertible debenture has not yet been paid, but the maturity of the note was extended, in May 2010, to March 31, 2012.
 
NOTE 8 – LONG-TERM DEBT
 
Long-term debt is as follows:
   
September 30,
2010
   
December 31,
2009
 
Note payable to bank in monthly installments of $1,275/including variable interest at 2% above the prevailing prime rate (3.25% at September 30, 2010) to August 2011 when the remaining balance is payable. The note is personally guaranteed by former executives of the Company.
    13,925       24,601  
Notes payable to two individuals, net of discounts of $11,402 and $17,438 with interest only payments at 12% to March 2012 when the remaining balance is payable. The notes are convertible into 285,715 shares of common stock in the Company at $.35 per share.
    88,598       82,562  
Note payable issued on October 26, 2009 to the parents of one the Company's officers, net of a discount of $16,128 and $27,435 discount, with interest at 8% to March 31, 2012 and convertible into shares of common stock at $.50 per share.
    83,871       72,565  
Notes payable issued to two individuals in January, 2010. The notes bear interest at 8%, mature March 31, 2012 and are convertible into shares of common stock, at 50% of the weighted average closing bid price over any 10-consecutive days of trading.
    100,000       -  
Note payable issued on June 12, 2010 to the parents of one of the Company's officers, net of a discount of $80,803. The note bears interest at 12% to March 31, 2012, and is convertible into common stock at $.18 per share.
    119,197       -  
Note payable issued on August 2, 2010 to and institutional investor.  The note bears interest at 8%, matures May 4, 2011 and is convertible into common stock at 50% of the average of the three lowest closing prices in any 10 day trading period.
    50,000       -  
Note payable issued on September 16, 2010 to an institutional investor.  The note bears interest at 10%, matures March 15, 2012 and is convertible into common stock at $.18 per share.
    100,000       -  
Note payable issued on September 21, 2010 to the parents of one of our officers, net of a discount of $15,294.  The note bears interest at 12%, matures March 30, 2012 and is convertible into common stock at $.18 per shares
    16,706       -  
Total
    572,296       179,728  
Less amount due within one year
    63,925       63,620  
Long-Term Debt
  $ 508,371     $ 116,108  
 
Cash payments for interest were $1,351 for the nine months ended September 30, 2009 and $799 for the nine months ended September 30, 2010.
 
Principal payments required during the 12-month periods ended September 30:
 
       
2011
  $