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EX-5.1 - EX-5.1 - AMERICAN SCIENTIFIC RESOURCES INC | v210934_ex5-1.htm |
EX-23.1 - EX-23.1 - AMERICAN SCIENTIFIC RESOURCES INC | v210934_ex23-1.htm |
AS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 14,
2011
REGISTRATION
NO. 333-
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
(Exact
name of registrant as specified in its charter)
Nevada
|
3841
|
14-1820954
|
||
(State
or jurisdiction of
|
(Primary
Standard Industrial
|
(I.R.S.
Employer
|
||
incorporation
or
organization)
|
Classification
Code Number)
|
Identification
No.)
|
1112
Weston Road, Unit 278
Weston,
FL 33326
(847)
386-1384
(Address
and telephone number of principal executive offices)
Christopher
F. Tirotta
President
1112
Weston Road, Unit 278
Weston,
FL 33326
(847)
386-1384
(Name,
address and telephone number of agent for service)
Copies
to:
David
Manno, Esq.
Jeff
Cahlon, Esq.
Sichenzia
Ross Friedman Ference LLP
61
Broadway, 32nd Floor
New York,
New York 10006
(212)
930-9700
(212)
930-9725 (fax)
Approximate date of commencement of
proposed sale to the public: From time to time 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. x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If 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. ¨
(COVER
CONTINUES ON FOLLOWING PAGE)
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):
¨ Large accelerated
filer
¨ Accelerated
filer
¨ Non-accelerated
filer
x Smaller reporting
company
CALCULATION
OF REGISTRATION FEE
Title of Class of Securities to be Registered
|
Amount To
be Registered (1)
|
Proposed
Maximum
Aggregate
Price
Per Share (2)
|
Proposed
Maximum
Aggregate
Offering
Price
|
Amount of
Registration
Fee
|
|||||||||||
Common
Stock, $0.0001 par value per share, issuable pursuant to the Purchase
Agreement
|
651,717,795
Shares
|
(1)
|
$
|
0.0043
|
$
|
2,802,386.52
|
$
|
325.36
|
|||||||
Total
number of securities to be registered
|
651,717,795 Shares
|
$
|
2,802,386.52
|
$
|
325.36
|
(1) We
are registering 651,717,795 shares of our common stock (the “Put Shares”) that
we will put to Southridge Partners II, LP (“Southridge” or “Selling Security
Holder”) pursuant to an equity purchase agreement (the “Purchase Agreement”)
between Selling Security Holder and the registrant entered into on February 3,
2011. In the event of stock splits, stock dividends, or similar transactions
involving the common stock, the number of common shares registered shall, unless
otherwise expressly provided, automatically be deemed to cover the additional
securities to be offered or issued pursuant to Rule 416 promulgated under the
Securities Act of 1933, as amended (the “Securities Act”). In the event that
adjustment provisions of the Purchase Agreement require the registrant to issue
more shares than are being registered in this registration statement, for
reasons other than those stated in Rule 416 of the Securities Act, the
registrant will file a new registration statement to register those additional
shares.
(2)
Estimated solely for purposes of calculating the registration fee pursuant to
Rule 457(c) under the Securities Act of 1933, as amended, using the average of
the high and low prices as reported on the OTCQB on February 7, 2011, which was
$0.0043 per share.
The
registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this 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 is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
PRELIMINARY
PROSPECTUS, SUBJECTTO COMPLETION, DATED FEBRUARY 14, 2011
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
OTCQB
trading symbol: ASFX.PK
651,717,795
Shares of Common Stock
This
prospectus relates to the resale of up to 651,717,795 shares of our common
stock, par value $0.0001 per share, by Southridge Partners II, LP (“Southridge”
or “Selling Security Holder”), which are Put Shares that we will put to
Southridge pursuant to the Purchase Agreement.
The
Purchase Agreement with Southridge provides that Southridge is committed to
purchase up to $10 million of our common stock. We may draw on the facility from
time to time, as and when we determine appropriate in accordance with the terms
and conditions of the Purchase Agreement.
The
651,717,795 shares included in this prospectus represent a portion of the shares
issuable to Selling Security Holder under the Purchase Agreement. This portion
was calculated as approximately 33% of the Company’s public float as of February
7, 2011.
Southridge
is an “underwriter” within the meaning of the Securities Act in connection with
the resale of our common stock under the PurchaseAgreement. No other underwriter
or person has been engaged to facilitate the sale of shares of our common stock
in this offering. This offering will terminate twenty-four (24) months after the
registration statement to which this prospectus is made a part is declared
effective by the SEC. Southridge will pay us 92% of the average of the lowest
closing price of our common stock for the five consecutive trading day period
commencing the date a put notice is delivered.
We will
not receive any proceeds from the sale of these shares of common stock offered
by Selling Security Holder. However, we will receive proceeds from the
sale of our Put Shares under the Purchase Agreement. The proceeds will be used
for working capital or general corporate purposes. We will bear all costs
associated with this registration.
Our
common stock is quoted on the OTCQB under the symbol “ASFX.PK .” The shares of
our common stock registered hereunder are being offered for sale by Selling
Security Holder at prices established on the OTCQB during the term of this
offering. On February 11, 2011 , the closing bid price of our common stock
was $0.005 per share. These prices will fluctuate based on the demand for our
common stock.
This
investment involves a high degree of risk. You should purchase shares only if
you can afford a complete loss. See “Risk Factors” beginning on
page 7.
Neither
the SEC nor any state securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The
date of this prospectus is_________, 2011.
2
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
TABLE
OF CONTENTS
Page
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|||
Prospectus
Summary
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4
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||
Risk
Factors
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7
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Forward-Looking
Statements
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13
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||
Use
of Proceeds
|
14
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||
Selling
Security Holders
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14
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Plan
of Distribution
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16
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Description
of Securities to be Registered
|
17
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||
Description
of Business
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18
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||
Description
of Property
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25
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||
Legal
Proceedings
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25
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Management’s
Discussion and Analysis or Plan of Operation
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26
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||
Market
Price of and Dividends on Registrant's Common Equity and Related
Stockholder Matters
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46
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Changes
in Accountants
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47
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Directors,
Executive Officers, Promoters and Control Persons
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47
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Executive
Compensation
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49
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Security
Ownership of Certain Beneficial Owners and Management
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51
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Certain
Relationships and Related Transactions, and Corporate
Governance
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52
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Additional
Information
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53
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||
Indemnification
for Securities Act Liabilities
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53
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Legal
Matters
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54
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||
Experts
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54
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||
Unaudited
Financial Statements - September 30, 2010
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1
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||
Audited
Financial Statements - December 31, 2009
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1
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You may
only rely on the information contained in this prospectus or that we have
referred you to. We have not authorized anyone to provide you with different
information. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the common stock
offered by this prospectus. This prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any common stock in any circumstances in
which such offer or solicitation is unlawful. Neither the delivery of this
prospectus nor any sale made in connection with this prospectus shall, under any
circumstances, create any implication that there has been no change in our
affairs since the date of this prospectus is correct as of any time after its
date.
3
Prospectus
Summary
This
summary highlights information contained elsewhere in this prospectus. You
should read the entire prospectus carefully, including, the section entitled
"Risk Factors" before deciding to invest in our common stock.
About
Us
We were
organized as a corporation in the State of Nevada as Woodie, I, Inc., on August
1, 1990. In March 1999, we changed our name to Vencap Capital Corporation. We
subsequently changed our name on December 30, 2003 to American Scientific
Resources, Incorporated.
We
distribute and manufacture healthcare and medical products primarily to retail
drug chains, retail stores and medical supply dealers. Our products are also
sold over the internet. Our manufacturing activities are limited to the
Disintegrator home needle destruction device. With respect to this product,
fulfillment of our first order was completed during the third quarter of 2010.
In addition, we produce and distribute instructional DVDs. We are based in South
Florida and our primary warehouse is located near Cleveland, Ohio.
We have
only conducted operations for six years. Our future operations are contingent
upon increasing revenues and raising capital for expansion of our product lines
and to advance research for new products. Because we have a limited operating
history, you will have difficulty evaluating our business and future
prospects.
We also
face the risk that we may not be able to effectively implement our business
plan. If we are not effective in addressing these risks, we may not operate
profitably and we may not have adequate working capital to meet our obligations
as they become due.
We have
incurred net losses since our inception. We have incurred net losses applicable
to common shareholders of $4,787,637 and $1,935,779 for the nine months ended
September 30, 2010 and 2009, respectively, and $3,424,851 and $6,406,954 for the
fiscal years ended December 31, 2009 and 2008, respectively. As of September 30,
2010, we have an accumulated deficit of $24,819,261 and a shareholders’ deficit
of $4,200,399. We currently have sufficient cash to sustain our operations for a
period of approximately one month. We will require additional funds through the
receipt of conventional sources of capital or through future sales of our common
stock, until such time as our revenues are sufficient to meet our cost
structure, and ultimately achieve profitable operations. Management estimates
that it will need $1,000,000 over the next twelve months, and $3,000,000 to fund
all of the Company’s current product development and marketing projects,
including $1,000,000 to fund marketing programs for the Kidz-Med VeraTemp
Non-contact thermometer. There is no assurance we will be successful in raising
additional capital or achieving profitable operations. Furthermore, the large
number of shares available from the selling stockholder pursuant to the
prospectus and the depressive effect of the availability of such shares could
make it difficult for us to raise funds from other sources. Wherever possible,
our board of directors will attempt to use non-cash consideration to satisfy
obligations. In many instances, we believe that the non-cash consideration will
consist of restricted shares of our common stock. These actions will result in
dilution of the ownership interests of existing stockholders and may further
dilute common stock book value, and that dilution may be material.
Our
capital requirements in connection with our development activities and
transition to commercial operations have been and will continue to be
significant. In order to sustain our operations we will need additional
capital. As of September 30, 2010, we were in default on some of our
promissory notes, in the aggregate principal amount of $1,860,039 (excluding
unpaid related party advances and notes payable of $159,430), On December 24,
2010, we did not meet an obligation to pay principal on a $44,000 short-term
note and entered into an additional default. We are currently negotiating with
this lender to modify the terms of default and extend term for payment. On
January 12, 2011, we did not meet obligations to pay principal and interest on
two short-term notes with an aggregate principal amount of $160,000. On February
1, 2011, we entered into an agreement to extend the payment due date for the
$160,000 of principal and interest to April 12, 2011 in exchange for our
issuance of 32,000,000 shares of our common stock. These shares were issued on
January 18, 2011. Such repeated defaults on our credit obligations may raise
serious concerns with potential lenders regarding our creditworthiness, which
may make it more difficult for us to obtain needed capital. There can be no
assurance that financing will be available in amounts or on terms acceptable to
us, or at all, or that we will remedy default provisions in our existing
debt.
As of the
date of this prospectus, we are in default on some of our promissory notes in
the aggregate principal amount of $1,757,447 (excluding unpaid related party
advances and notes payable of $159,430), and the noteholders may foreclose on
our assets and commence legal action against us to recover the amounts due which
ultimately could require the disposition of some or all of our assets. Any such
action may require us to curtail or cease operations.
In our
auditors' report dated April 15th, 2010, except for note 4 as to which the date
is July 6, 2010, they have expressed substantial doubt about our ability to
continue as a going concern.
4
Our
principal products include the Kidz-Med VeraTemp Non-Contact thermometer, which
is a non-contact clinical thermometer that uses infrared technology to read the
body temperature at the forehead, the Kidz-Med Scald Safe Water temperature
disc, which is a warning disc that helps to ensure that a baby’s bath water is
at an appropriate, safe temperature, the Kidz-Med WhistleWatch, which is a peak
flow monitoring device that allows parents to monitor and manage their child’s
asthma or other respiratory problems, the Kidz-Med Portable Ultrasonic
Nebulizer, which is used to treat asthma, bronchitis, bronchiolitis, allergies,
hay fever, sinusitis, and nasal congestion due to colds or allergies, the
Kidz-Med Medicine Dispenser, which consists of an orthodontic nipple attached to
a medication chamber, Dr. Bip DVD’s (developed by and licensed from
ConcettaTirotta, the wife of Dr. Christopher Tirotta, our chief executive
officer), which is a video series narrated by the fictional Dr. Bip, which aims
to help children understand and cope with life events such as, with respect to
the two DVD’s currently available, hospitalization and welcoming a new baby into
the family, the Kidz-Med Mommy Recorder, which is a unique voice-recording
device that allows a mother to easily record a 6-second message designed to calm
baby when he or she is upset, and the Wee Target, which is a unique toilet
training device for young boys.
We
designed the Kidz-Med VeraTemp, our own non-contact thermometer. The thermometer
which the Company has sold in the past, the Thermofocus, has been phased out as
the Company’s new unit has become available. In particular, the Company is no
longer selling the Thermofocus unit in the United States or internationally,
except that, the Company intends to sell any remaining Thermofocus units in
inventory to discount distributors in the Third World. There are no current
arrangements or agreements in effect with respect to such sales. All present and
future customers of the Company are now presented with the Kidz-Med VeraTemp
Non-Contact thermometer. The Company fulfilled its first orders for the Kidz-Med
VeraTemp Non-Contact thermometer in September 2010.
In
addition, we have acquired the intellectual property rights to the only FDA
approved home needle destruction device, the Disintegrator, the Disintegrator
Plus and Disintegrator Pro. The Disintegrator enables patients who give
themselves injections, including those suffering from multiple sclerosis or
diabetes, to properly and safely dispose of needles at home. Development of the
Disintegrator Plus product has been completed and the Company is currently
accepting orders for the product. There is currently no retail distribution of
the product. We delivered the first 2,000 unit order of the Disintegrator Plus
to a French pharmaceutical company in September 2010. The Company also
exclusively distributes the Mebby product line from the Medel Group SpA in the
United States and Canada. This product line includes breast pumps, bisphenol A
free baby bottles, baby monitors, digital scales, humidifiers, pacifiers, meal
sets, and sterilizers.
We
currently sell our available products directly to consumers through our website
at www.kidzmed.com. All of our Kidz-Med branded products are currently available
through www.kidzmed.com,
except that Kidz-Med Portable Ultrasonic Nebulizer is currently out of stock. We
also sell certain Kidz-Med products through major retailers.
We are
currently selling our products through Amazon.com, C&S Grocers, CVS
Pharmacy, CVS.com, Diapers.com, Duane Reade, Fred Meyer, Price Chopper and
through surgical supply dealers such as Cardinal Health, McKesson, and Henry
Schein. In addition, we actively sell to e-tailers, either directly at
wholesale, or as drop shippers of product.
Our
shares of common stock are traded on the OTCQB under the ticker symbol
“ASFX.PK.”
As used
in this prospectus and the registration statement of which it forms a part, the
terms the “Company”, “we”, “us”, or “our” refer to American Scientific
Resources, Incorporated and its subsidiaries, unless the context indicates
otherwise.
About
This Offering
This
offering relates to the resale of up to 651,717,795 shares of our common stock
by Selling Security Holder, which are the Put Shares that we will put to
Southridge pursuant to the Purchase Agreement. The 651,717,795 shares included
in this prospectus represent a portion of the aggregate shares issuable to
Selling Security Holder under the Purchase Agreement. This portion was
calculated as approximately 33% of the Company’s public float as of February 7,
2011.
On
February 3, 2011, the Company entered into an equity purchase agreement (the
“Purchase Agreement”) with Southridge Partners II, LP. (“Southridge” or “Selling
Security Holder”). Pursuant to the Purchase Agreement:
|
·
|
Southridge agreed to purchase
from the Company, from time to time in the Company’s discretion (subject
to the conditions set forth therein), for a period of up to 24 months
commencing on the effective date of the registration statement filed by
the Company for resale of the shares of common stock issuable under the
Purchase Agreement, up to $10,000,000 in the Company’s common stock (the
“Put Shares”).
|
|
·
|
Pursuant to a registration rights
agreement between the Company and Southridge entered into in connection
with the Purchase Agreement, the Company agreed to file a registration
statement for the resale of not less than the maximum number of shares of
common stock allowable pursuant to Rule 415 under the Securities Act of
1933, as amended, of shares of common stock issuable under the Purchase
Agreement, within 45 days of execution of the Purchase
Agreement.
|
5
|
·
|
The purchase price for the shares
of common stock sold under the Purchase Agreement will be equal to 92% of
the average of the lowest 2 daily closing prices for the 5 trading days
immediately following the date on which the Company is deemed to provide a
put notice under the Purchase
Agreement.
|
|
·
|
The maximum amount of common
stock that Southridge shall be obligated to purchase with respect to any
single closing under the Purchase Agreement will be the lesser of $500,000
or 250% of the average dollar trading volume of the Company’s common stock
for the 20 trading days immediately preceding the date on which the
Company provides a put notice under the Purchase
Agreement.
|
|
·
|
Upon execution of the Purchase
Agreement, the Company issued to Southridge a five-year warrant to
purchase 25,000,000 shares of common stock at an exercise price of
$0.00615, which may be exercised on a cashless basis if there is no
effective registration statement for the resale of shares of common stock
underlying the warrant six month following the
issuance.
|
|
·
|
The Company agreed to issue to
its management and directors a series of preferred stock with voting
rights sufficient to grant such holders the ability to vote in favor of an
increase in the Company’s authorized common stock and/or a reverse split
of the outstanding shares of common stock. Accordingly, on February 4,
2011, the Company issued to each of its four directors 12,500 shares of
Series A Preferred Stock.
|
Furthermore,
subject to the terms and conditions of the Purchase Agreement, at any time or
from time to time after the effectiveness of this registration statement, we can
notify Southridge in writing of the existence of a potential material event
based upon the good faith determination of our board of directors (the “Blackout
Notice”), and Southridge shall not offer or sell any of our securities acquired
under the Purchase Agreement from the time the Blackout Notice was provided to
Southridge until Southridge receives our written notice that such potential
material event has either been disclosed to the public or no longer constitutes
a potential material event (a “Blackout Period”). If we deliver a Blackout
Notice within fifteen trading days following a closing date under the Purchase
Agreement, and the closing price is on the trading date immediately preceding
the applicable Blackout Period ("Old Price") is greater than the closing price
on the first trading day following such Blackout Period that Southridge may sell
its shares pursuant to an effective registration statement ("New Price"), then
the Company shall issue to Southridge the number of additional shares of common
stock (the "Blackout Shares") equal to the excess of (x) the product of the
number of Put Shares held by Southridge immediately prior to the Blackout Period
that were issued on the most recent closing date (the "Remaining Put Shares")
multiplied by the Old Price, divided by the New Price, over (y) the Remaining
Put Shares.
Southridge Investment Group, LLC ( “SIG”) was retained as the
placement agent in connection with the Purchase Agreement. We agreed to pay SIG
a cash placement fee equal to 7% of the gross proceeds, a retainer fee of $5,000
(payable in the form of 1,000,000 shares of common stock) and $5,000 at the time
the transaction enters the market.
We relied
on an exemption from the registration requirements of the Securities Act of
1933, as amended (the “Securities Act”). The transaction does not does involve a
private offering, Southridge is an “accredited investor” and/or qualified
institutional buyer and Southridge has access to information about the Company
and its investment.
At an
assumed purchase price under the Purchase Agreement of $0.00368 (equal to 92% of
the closing price of our common stock of $0.004 on February 8, 2011), we will be
able to receive up to $2,398,321in gross proceeds, assuming the sale of the
entire 651,717,795 shares of our common stock being registered hereunder
pursuant to the Purchase Agreement. At an assumed purchase price of $0.00368
under the Purchase Agreement, we would be required to register additional shares to
obtain the balance of $10,000,000 under the Purchase Agreement.
There are
substantial risks to investors as a result of the issuance of shares of our
common stock under the Purchase Agreement. These risks include dilution of
stockholders, significant decline in our stock price and our inability to draw
sufficient funds when needed.
Southridge
will periodically purchase our common stock under the Purchase Agreement and
will, in turn, sell such shares to investors in the market at the market price.
This may cause our stock price to decline, which will require us to issue
increasing numbers of common shares to Southridge to raise the same amount of
funds, as our stock price declines.
6
Summary
of the Shares offered by the Selling Security Holder
Common
stock offered by Selling Security Holder
|
651,717,795
shares of common stock.
|
|
Common
stock outstanding before the offering
|
2,207,872,679
as of February 7, 2011
|
|
Common
stock outstanding after the offering
|
2,859,590,474
shares.
|
|
Terms
of the Offering
|
Selling
Security Holder will determine when and how it will sell the common stock
offered in this prospectus.
|
|
Termination
of the Offering
|
Pursuant
to the Purchase Agreement, this offering will terminate twenty-four (24)
months after the registration statement to which this prospectus is made a
part is declared effective by the SEC.
|
|
Use
of proceeds
|
We
will not receive any proceeds from the sale of the shares of common stock
offered by Selling Security Holder. However, we will receive proceeds from
sale of our common stock under the Purchase Agreement. The proceeds from
the offering will be used for working capital and general corporate
purpose. See “Use of Proceeds.”
|
|
Risk
Factors
|
The
common stock offered hereby involves a high degree of risk and should not
be purchased by investors who cannot afford the loss of their entire
investment. See “Risk Factors” beginning on page 7.
|
|
OTCQB
Symbol
|
ASFX.
PK
|
RISK
FACTORS
An
investment in the Company’s common stock involves a high degree of risk. You
should carefully consider the risks described below as well as other information
provided to you in this prospectus, including information in the section of this
document entitled “Information Regarding Forward Looking Statements.” If any of
the following risks actually occur, our business, financial condition or results
of operations could be materially adversely affected, the value of our common
stock could decline, and you may lose all or part of your
investment.
Risks
Related to our Business
We
have a limited operating history upon which an evaluation of our prospects can
be made.
American
Scientific Resources, Incorporated is a company that was incorporated in August
1990 but formed and/or acquired its three wholly owned subsidiaries, Kidz-Med,
Inc. (2004), HeartSmart, Inc. (2004) and Ulster Scientific, Inc. (2004). We have
only conducted operations for six years. Our future operations are contingent
upon increasing revenues and raising capital for expansion to advance research.
Because we have a limited operating history, you will have difficulty evaluating
our business and future prospects.
We also
face the risk that we may not be able to effectively implement our business
plan. If we are not effective in addressing these risks, we may not operate
profitably and we may not have adequate working capital to meet our obligations
as they become due.
We
have had limited operations, have incurred losses since inception, have
sufficient cash to sustain our operations for a period of approximately one
month, and we need additional capital to execute our business plan.
We have
had limited operations and have incurred net losses applicable to common
shareholders of $4,787,637 and $1,935,779, respectively, for the nine months
ended September 30, 2010 and 2009, and $3,424,851 and $6,406,954, respectively,
for the fiscal years ended December 31, 2009 and 2008. As of September 30, 2010,
we have an accumulated deficit of $24,819,261 and a shareholders’ deficit of
$4,200,399. We will require additional funds through the receipt of conventional
sources of capital or through future sales of our common stock, until such time
as our revenues are sufficient to meet our cost structure, and ultimately
achieve profitable operations. We currently have sufficient cash to sustain our
operations for a period of approximately one month. Management estimates that it
will need $1,000,000 over the next twelve months, and $3,000,000 to fund all of
the Company’s current product development and marketing projects, including
$1,000,000 to fund marketing programs for the Kidz-Med VeraTemp Non-contact
thermometer. There is no assurance we will be successful in raising additional
capital or achieving profitable operations. Furthermore, the large number of
shares available from the selling stockholder pursuant to the prospectus and the
depressive effect of the availability of such shares could make it difficult for
us to raise funds from other sources. Wherever possible, our board of directors
will attempt to use non-cash consideration to satisfy obligations. In many
instances, we believe that the non-cash consideration will consist of restricted
shares of our common stock. These actions will result in dilution of the
ownership interests of existing stockholders and may further dilute common stock
book value, and that dilution may be material.
7
Additional
financing will be necessary for the implementation of our strategy, which we may
be unable to obtain.
Our
capital requirements in connection with our development activities and
transition to commercial operations have been and will continue to be
significant. In order to sustain our operations we will need additional capital.
We are currently in default on some of our promissory notes, and such repeated
defaults on our credit obligations may raise serious concerns with potential
lenders regarding our creditworthiness, which may make it more difficult for us
to obtain needed capital. There can be no assurance that financing will be
available in amounts or on terms acceptable to us, or at all.
We
are in default on some of our secured and unsecured promissory notes. As a
result, the noteholders could foreclose on our assets, which ultimately could
require us to curtail or cease operations.
We are in
default on some of our secured and unsecured promissory notes. As of September
30, 2010, we were in default on $1,860,039 principal amount of notes (including
$1,360,000 in convertible notes noted under the risk factor below, but excluding
$159,430 of amounts unpaid to related parties). On December 24, 2010, we did not
meet an obligation to pay principal on a $44,000 short-term note and entered
into an additional default. We are currently negotiating with this lender to
modify the terms of default and extend term for payment. On January 12, 2011, we
did not meet obligations to pay principal and interest on two short-term notes
with an aggregate principal amount of $160,000. On February 1, 2011, we entered
into an agreement to extend the payment due date for the $160,000 of principal
and interest to April 12, 2011 in exchange for our issuance of 32,000,000 shares
of our common stock. These shares were issued on January 18, 2011. We have
generally been unable to meet payment terms when due of our debt obligations. We
have satisfied some of our debt obligations, in whole or in part, over the last
2 years. We have reached a settlement agreement with one of the noteholders
effective December 31, 2009, under which the noteholder has agreed to accept
88,000,000 previously issued shares of our common stock in satisfaction of the
note (subject to the terms and conditions of the agreement, including an
agreement by the Company to register such shares for resale-see “Promissory
Notes Payable”; this note is no longer in default). From time to time, we have
been paying down the principal on several of our notes in small increments with
excess available cash, or converting debt and accrued interest to common shares.
In order to continue to repay our remaining outstanding obligations, we may be
forced to scale back some of our planned operations, which could have a material
adverse effect on our growth. In addition, if we remain in default on some of
our notes, we may incur materially higher interest expenses, and the noteholders
could foreclose on their collateral and commence legal action against us to
recover the amounts due which ultimately could require the disposition of some
or all of our assets. Any such action would require us to curtail or cease
operations.
We
are in default on some of our convertible promissory notes. If we are unable to
reach an agreement with our convertible noteholders, the noteholders could
foreclose on our assets, which ultimately could require us to curtail or cease
operations.
We are in
default on certain promissory notes convertible into our common stock. As of
September 30, 2010, we were in default from the nonpayment of principal on our
2007 convertible promissory notes in the amount of $880,000, excluding amounts
due for interest. During June 2010, a noteholder converted principal due on the
2007 convertible promissory notes and accrued interest with an aggregate value
of $33,551 into 2,302,696 shares of our common stock. We also reached agreement
on the amount of principal, interest and shares of common stock due to another
noteholder (Lanktree). In July 2010, we settled on $580,000 as the
aggregate cash amount due for principal and interest, but remain in default for
such amount. We also agreed to defer the payments of principal and interest and
accrue interest for six months, to issue 63,013,452 shares of our common
stock, and to allow for conversion of the $580,000 plus any accrued interest
into shares of our common stock at the option of the noteholder after six
months. In September 2010, we amended our agreement to allow the holder the
right to convert at any time. In September and October 2010, the holder of the
$580,000 note converted $200,000 of the note at $0.004 per common share into
50,000,000 of our common shares leaving the principal balance due at
$380,000. As of the date of this prospectus, we have issued all of the
63,013,452 shares that we were obligated to issue. If we remain in default
on these notes, we may incur materially higher interest expenses, and the
noteholders could commence legal action against us to recover the amounts due
which ultimately could require the disposition of some or all of our assets. Any
such action would require us to curtail or cease operations.
Our
independent registered auditors have expressed substantial doubt about our
ability to continue as a going concern.
Our
audited financial statements for the fiscal year ended December 31, 2009,
included an explanatory paragraph that such financial statements were prepared
assuming that we would continue as a going concern. As discussed, in Note 2, to
the consolidated financial statements for the year ended December 31, 2009,
included with this prospectus, because we have had operating and liquidity
concerns, current liabilities exceeded current assets by $2,831,893 at December
31, 2009, have reported a net loss applicable to common shareholders of
$3,424,851 for the year ended December 31, 2009 and are in default with regard
to the payment of certain obligation, there is substantial doubt about our
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
8
Our
intellectual property rights are valuable, and any inability to protect them
could reduce the value of our services and brand.
Our
trademarks, trade secrets, and other intellectual property rights are important
assets for us. The ScaldSafe Temperature Ring, Kidz-Med Medicine Dispenser,
WhistleWatch Asthma Alert, and Kidz-Med Nebulizer are all registered with the US
Patent and Trademark Office under the Kidz-Med trademark. The Company has filed
a trademark registration for the names “Never Touch”, “VeraTemp”, and
“DuraSleeve”. The Disintegrator and Disintegrator Plus are also protected by US
patents and trademarks. Protecting our intellectual property rights is costly
and time consuming. Any unauthorized use of our intellectual property could make
it more expensive to do business and harm our operating results.
We
face patent protection risks that may negatively affect our brand name
reputation, revenues, and potential profitability.
We are
dependent upon a variety of methods and techniques that we regard as proprietary
trade secrets. We are also dependent upon a variety of trademarks, service marks
and designs to promote brand name development and recognition and we rely on a
combination of trade secrets, copyright, patent, trademark, unfair competition
and other intellectual property laws to protect our rights to such intellectual
property. However, to the extent that our products violate the proprietary
rights of others, we may be subject to damage awards or judgments prohibiting
the use of our technology. See – “Legal Proceedings” for a description of a
pending legal proceeding related to intellectual property. In addition, our
rights in any of our intellectual property may not be enforceable, even if
registered, against any prior users of similar intellectual property.
Furthermore, if we fail to provide adequate proprietary protection, our names,
brand name reputation, revenues and potential profitability may be negatively
affected.
If
our products are found to have defects or fail to meet industry standards, we
will incur substantial litigation, judgment, product liability and product
recall costs, which will increase our losses and negatively affect our brand
name reputation and product sales.
We may be
subject to liability for errors that occur with our technologies due to claims
of negligence or product malfunction. We have product liability insurance and,
pursuant to our manufacturing agreement with respect to the Kidz-Med VeraTemp
Non-Contact thermometer, the Company has the right to claim reimbursement for
damages due to manufacturing defects. This manufacturing agreement, which is
incorporated by reference as an exhibit to the registration statement of which
this prospectus forms a part, has a two year term commencing in November 2009,
subject to extension upon mutual agreement for successive one year terms.
Nonetheless, we can still suffer litigation as a result of perceived product
malfunctioning, adversely affecting our brand, revenue stream and company.
Despite the product liability insurance and protections noted above under our
manufacturing agreement, product liability claims could increase our costs and
adversely affect our brand name reputation, revenues and, ultimately, lead to
additional losses. In addition, product defects could result in product recalls
and warranty claims. A product/drug recall could delay or halt production of our
product until we are able to remedy the product defects. The occurrence of any
claims, judgments or product recalls will negatively affect our brand name image
and product sales, lead to additional costs, and adversely affect our financial
condition and results of operation.
9
Our
success depends upon our Chief Executive Officer and should we fail to retain
him, our operations will be adversely affected.
We
believe that our success will depend to a significant extent upon the efforts
and abilities of Dr. Christopher F. Tirotta, our Chairman and Chief Executive
Officer, due to his contacts in the medical and healthcare industries and his
overall insight into our business. Our failure to retain Dr. Tirotta or to
attract and retain additional qualified personnel, could adversely affect our
operations. We do not currently carry key-man life insurance on any of our
officers.
We
are reliant on a few customers for a significant portion of our revenues, our
agreements with these customers are terminable at-will, and a few of our large
sales thus far for2010 may be non-recurring.
In 2009,
49% of our revenue was derived from Walgreens and 16% was derived from Babies
“R”Us. Walgreens terminated its product purchase agreement with us in August
2009. A 2,000 unit sale of our Disintegrator Plus to Bayer Sante during 2010
accounted for approximately 26% of our revenue for the nine months ended
September 30, 2010. Cash collected from Walgreens accounted for 21% of our
revenues for the first nine months of 2010 (such revenues related to products
delivered by consignment to Walgreens prior to termination of the product
purchase agreement in August 2009). Presently, we do not have any other
significant customers which account for more than 10% of our sales. For the nine
months ended September 30, 2010, sales to Babies “R”Us accounted for
approximately 12% of our revenue. Our agreement with Babies “R” Us is terminable
at-will, such that Babies “R” Us may remove our products at any time in its
complete discretion. If Babies “R”Us were to terminate or materially reduce, for
any reason, its business relationship with us, or if we are unable to find new
customers and/or enter into new product sales agreements, our operating results
would be materially harmed, and the price of our common stock would likely
decline.
We
are party to pending litigation which may have a material adverse effect on the
Company.
On
September 21, 2010, Tecnimed, Srl filed a complaint against the Company and its
Kids-Med subsidiary alleging, among other things, that the Company’s Kidz-Med
VeraTemp Non-Contact Thermometer is sufficiently similar to
Tecnimed’sThermofocus Thermometer that the Company breached a non-compete
agreement and infringed on the Thermofocus trademark and trade dress. In
addition, on October 26, 2010, Sanomedics International Holdings filed a
complaint in District Court for the Southern District of Florida against the
Company alleging that the Company infringed on plaintiff’s thermometer design
patent, and upon an exclusive distribution and manufacturing agreement between
the plaintiff and the Chinese manufacturer of the Company’s Kidz-Med VeraTemp
Non-Contact thermometer (see “Legal Proceedings”). Although the Company believes
the plaintiffs’ allegations are without merit, we can provide no assurance as to
the outcome of the litigation. An adverse judgment or settlement in any pending
litigation would have a material adverse effect on the Company’s operating
results and financial condition. In addition, regardless of whether any claims
against us are valid or whether we are ultimately determined to be liable, we
could also be adversely affected by orders to recall our products, negative
publicity, litigation costs resulting from the defense of these claims and the
diversion of time and resources from our operations.
Risks Related to our Common
Stock:
We
are registering an aggregate of 651,717,795 shares of common stock to be issued
under the Purchase Agreement. The sale of such shares could depress the market
price of our common stock.
We are
registering an aggregate of 651,717,795 shares of common stock under the
registration statement of which this prospectus forms a part for issuance
pursuant to the Purchase Agreement. The 651,717,795 shares of our common stock
represents approximately 33% of our public float as of February 7, 2011. The
sale of these shares into the public market by Southridge could depress the
market price of our common stock.
Our
Common Stock is quoted on the OTCQB, which may limit the liquidity and price of
our Common Stock more than if our Common Stock were quoted or listed on the
Nasdaq Stock Market or a national exchange.
Our
securities are currently quoted on the OTCQB, an NASD-sponsored and operated
inter-dealer automated quotation system for equity securities not included in
the Nasdaq Stock Market. Quotation of our securities on the OTCQB may limit the
liquidity and price of our securities more than if our securities were quoted or
listed on The Nasdaq Stock Market or a national exchange. Some investors may
perceive our securities to be less attractive because they are traded in the
over-the-counter market. In addition, as an OTCQB listed company, we do not
attract the extensive analyst coverage that accompanies companies listed on
other exchanges. Further, institutional and other investors may have investment
guidelines that restrict or prohibit investing in securities traded on the
OTCQB. These factors may have an adverse impact on the trading and price of our
Common Stock.
10
The
Company may not have access to the full amount available under the Purchase
Agreement.
We have
not drawn down funds and have not issued shares of our common stock under the
Purchase Agreement with Southridge. Our ability to draw down funds and sell
shares under the Purchase Agreement requires that the registration statement, of
which this prospectus is a part, be declared effective by the SEC, and that this
registration statement continue to be effective. In addition, the registration
statement of which this prospectus is a part registers 651,717,795 total shares
of our common stock issuable under the Purchase Agreement, and our ability to
access the Purchase Agreement to sell any remaining shares issuable under the
Purchase Agreement is subject to our ability to prepare and file one or more
additional registration statements registering the resale of these shares, which
we may not file until the later of 60 days after Southridge and its affiliates
have resold substantially all of the common stock registered for resale under
the registration statement of which this prospectus is a part, or six months
after the effective date of the registration statement of which this prospectus
is a part. These subsequent registration statements may be subject to review and
comment by the Staff of the SEC, and will require the consent of our independent
registered public accounting firm. Therefore, the timing of effectiveness of
these subsequent registration statements cannot be assured. The effectiveness of
these subsequent registration statements is a condition precedent to our ability
to sell the shares of common stock subject to these subsequent registration
statements to Southridge under the Purchase Agreement. Even if we are successful
in causing one or more registration statements registering the resale of some or
all of the shares issuable under the Purchase Agreement to be declared effective
by the SEC in a timely manner, we will not be able to sell shares under the
Purchase Agreement unless certain other conditions are met. Accordingly, because
our ability to draw down amounts under the Purchase Agreement is subject to a
number of conditions, there is no guarantee that we will be able to draw down
any portion or all of the $10 million available to us under the Purchase
Agreement.
Because
Southridge will be paying less than the then-prevailing market price for our
common stock, your ownership interest may be diluted and the value of our common
stock may decline by exercising the put right pursuant to the Purchase
Agreement.
The
common stock to be issued to Southridge pursuant to the Purchase Agreement will
be purchased at an 8% discount to the average of the lowest 2 daily
closing prices for the 5 trading days immediately following the date on which
the Company is deemed to provide a put notice under the Purchase
Agreement.Because the put price is lower than the prevailing market price of our
common stock, to the extent that the put right is exercised, your ownership
interest may be diluted. Southridge has a financial incentive to sell our common
stock immediately upon receiving the shares to realize the profit equal to the
difference between the discounted price and the market price. If Southridge
sells the shares, the price of our common stock could decrease. If our stock
price decreases, Southridge may have a further incentive to sell the shares of
our common stock that it holds. These sales may have a further impact on our
stock price.
The
Purchase Agreement’s pricing structure may result in dilution to our
stockholders.
Pursuant
to the Purchase Agreement, Southridge committed to purchase, subject to certain
conditions, up to the $10 million of our common stock over a two-year period. If
we sell shares to Southridge under the Purchase Agreement, or issue shares in
lieu of any blackout payment (as described below), it will have a dilutive
effect on the holdings of our current stockholders, and may result in downward
pressure on the price of our common stock. If we draw down amounts under the
Purchase Agreement, we will issue shares to Southridge at a discount of 8% from
the average price of our common stock. If we draw down amounts under the
Purchase Agreement when our share price is decreasing, we will need to issue
more shares to raise the same amount than if our stock price was higher.
Issuances in the face of a declining share price will have an even greater
dilutive effect than if our share price were stable or increasing, and may
further decrease our share price. In addition, we are entitled in certain
circumstances to deliver a “blackout” notice to Southridge to suspend the use of
the registration statements that we have filed or may in the future file with
the SEC registering for resale the shares of common stock to be issued under the
Purchase Agreement. If we deliver a blackout notice in the fifteen trading days
following a settlement of a draw down, then we must issue Southridge additional
shares of our common stock.
The
application of the “penny stock” rules could adversely affect the market price
of our common shares and increase your transaction costs to sell those
shares.
The
Securities and Exchange Commission (the “SEC”) has adopted rule 3a51-1 which
establishes the definition of a “penny stock,” for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, Rule
15g-9 requires:
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that
a broker or dealer approve a person’s account for transactions in penny
stocks; and
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the broker or dealer receive from
the investor a written agreement to the transaction, setting forth the
identity and quantity of the penny stock to be
purchased.
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In order
to approve a person’s account for transactions in penny stocks, the broker or
dealer must:
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obtain financial information and
investment experience objectives of the person;
and
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make a reasonable determination
that the transactions in penny stocks are suitable for that person and the
person has sufficient knowledge and experience in financial matters to be
capable of evaluating the risks of transactions in penny
stocks.
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The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the SEC relating to the penny stock market,
which, in highlight form:
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sets forth the basis on which the
broker or dealer made the suitability determination;
and
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that the broker or dealer
received a signed, written agreement from the investor prior to the
transaction.
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Generally,
brokers may be less willing to execute transactions in securities subject to the
“penny stock” rules. This may make it more difficult for investors to dispose of
our common stock and cause a decline in the market value of our
stock.
As
an issuer of “penny stock,” the protection provided by the federal securities
laws relating to forward looking statements does not apply to us.
Although
federal securities laws provide a safe harbor for forward-looking statements
made by a public company that files reports under the federal securities laws,
this safe harbor is not available to issuers of penny stocks. As a result, the
Company will not have the benefit of this safe harbor protection in the event of
any legal action based upon a claim that the material provided by the Company
contained a material misstatement of fact or was misleading in any material
respect because of the Company’s failure to include any statements necessary to
make the statements not misleading. Such an action could hurt our financial
condition.
11
The
market price for our common shares is particularly volatile given our status as
a relatively unknown company with a small and thinly traded public float,
limited operating history and lack of profits which could lead to wide
fluctuations in our share price. You may be unable to sell your common shares at
or above your purchase price, which may result in substantial losses to
you.
The
market for our common shares is characterized by significant price volatility
when compared to the shares of larger, more established companies that trade on
a national securities exchange and have large public floats, and we expect that
our share price will continue to be more volatile than the shares of such
larger, more established companies for the indefinite future. The volatility in
our share price is attributable to a number of factors. First, as noted above,
our common shares are, compared to the shares of such larger, more established
companies, sporadically and thinly traded. As a consequence of this limited
liquidity, the trading of relatively small quantities of shares by our
shareholders may disproportionately influence the price of those shares in
either direction. The price for our shares could, for example, decline
precipitously in the event that a large number of our common shares are sold on
the market without commensurate demand. Secondly, we are a speculative or
“risky” investment due to our limited operating history and lack of profits to
date, and uncertainty of future market acceptance for our potential products. As
a consequence of this enhanced risk, more risk-adverse investors may, under the
fear of losing all or most of their investment in the event of negative news or
lack of progress, be more inclined to sell their shares on the market more
quickly and at greater discounts than would be the case with the stock of a
larger, more established company that trades on a national securities exchange
and has a large public float. Many of these factors are beyond our control and
may decrease the market price of our common shares, regardless of our operating
performance. We cannot make any predictions or projections as to what the
prevailing market price for our common shares will be at any time, including as
to whether our common shares will sustain their current market prices, or as to
what effect that the sale of shares or the availability of common shares for
sale at any time will have on the prevailing market price.
We
will incur increased costs as a result of being a public company, which could
affect our profitability and operating results.
On
January 13, 2011, the effective date of our registration statement on Form S-1
(SEC File No. 333-164517), we become obligated to file annual, quarterly and
current reports with the SEC pursuant to the Securities Exchange Act of 1934, as
amended. In addition, the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the
new rules subsequently implemented by the SEC and the Public Company Accounting
Oversight Board have imposed various new requirements on public companies,
including requiring changes in corporate governance practices. We expect these
rules and regulations to increase our legal and financial compliance costs and
to make some activities of our more time-consuming and costly. We expect to
spend between $50,000 and $100,000 in legal and accounting expenses annually to
comply with our reporting obligations and Sarbanes-Oxley. These costs could
affect profitability and our results of operations.
We
have not paid dividends in the past and do not expect to pay dividends for the
foreseeable future. Any return on investment may be limited to the value of our
common stock.
No cash
dividends have been paid on the Company’s common stock. We expect that any
income received from operations will be devoted to our future operations and
growth. The Company does not expect to pay cash dividends in the near future.
Payment of dividends would depend upon our profitability at the time, cash
available for those dividends, and other factors as the Company’s board of
directors may consider relevant. If the Company does not pay dividends, the
Company’s common stock may be less valuable because a return on an investor’s
investment will only occur if the Company’s stock price
appreciates.
Because
our common stock is not registered under the Exchange Act, we will not be
subject to the federal proxy rules and our directors, executive offices and 10%
beneficial holders will not be subject to Section 16 of the Exchange Act. In
addition, our reporting obligations under Section 15(d) of the Exchange Act may
be suspended automatically if we have fewer than 300 shareholders of record on
the first day of our fiscal year.
Our
common stock is not registered under the Securities Exchange Act of 1934, as
amended, (the “Exchange Act”), and we do not intend to register our common stock
under the Exchange Act for the foreseeable future (provided that, we will
register our common stock under the Exchange Act if we have, after the last day
of our fiscal year, more than 500 shareholders of record, in accordance with
Section 12(g) of the Exchange Act; as of February 7, 2011, we have 367
shareholders of record). As a result, although, since January 13, 2011, we have
been required to file annual, quarterly, and current reports pursuant to Section
15(d) of the Exchange Act, as long as our common stock is not registered under
the Exchange Act, we will not be subject to Section 14 of the Exchange Act,
which, among other things, prohibits companies that have securities registered
under the Exchange Act from soliciting proxies or consents from shareholders
without furnishing to shareholders and filing with the SEC a proxy statement and
form of proxy complying with the proxy rules. In addition, so long as our common
stock is not registered under the Exchange Act, our directors and executive
officers and beneficial holders of 10% or more of our outstanding common stock
will not be subject to Section 16 of the Exchange Act. Section 16(a) of the
Exchange Act requires executive officers and directors, and persons who
beneficially own more than 10% of a registered class of equity securities to
file with the SEC initial statements of beneficial ownership, reports of changes
in ownership and annual reports concerning their ownership of common shares and
other equity securities, on Forms 3, 4 and 5 respectively. Such information
about our directors, executive officers, and beneficial holders will only be
available through this (and any subsequent) registration statement, and periodic
reports we file thereafter. Furthermore, so long as our common stock is not
registered under the Exchange Act, our obligation to file reports under Section
15(d) of the Exchange Act will be automatically suspended if, on the first day
of any fiscal year (other than a fiscal year in which a registration statement
under the Securities Act has gone effective), we have fewer than 300
shareholders of record. This suspension is automatic and does not require any
filing with the SEC. In such an event, we may cease providing periodic reports
and current or periodic information, including operational and financial
information, may not be available with respect to our results of
operations.
12
If
we are unable to favorably assess the effectiveness of our internal control over
financial reporting, our stock price could be adversely affected.
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, our management
will be required to report on the effectiveness of our internal control over
financial reporting in each of our annual reports. Our management will need to
provide such a report commencing with our first annual report after we have been
required to file an annual report with the SEC pursuant to Section 13(a) or
15(d) of the Exchange Act for the prior fiscal year, which we anticipate will be
our annual report for the year ended December 31, 2012. As discussed in Note 4
to the audited financial statements included in this prospectus, the Company has
restated its previously issued audited financial statements as of and for the
years ended December 31, 2009 and 2008. We may not be able to favorably assess
the effectiveness of our internal controls over financial reporting as of
December 31, 2012 or beyond. If this occurs, investor confidence and our stock
price could be adversely affected.
FORWARD-LOOKING
STATEMENTS
Statements
in this prospectus may be “forward-looking statements.” Forward-looking
statements include, but are not limited to, statements that express our
intentions, beliefs, expectations, strategies, predictions or any other
statements relating to our future activities or other future events or
conditions. These statements are based on current expectations, estimates and
projections about our business based, in part, on assumptions made by
management. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions that are difficult to predict.
Therefore, actual outcomes and results may, and are likely to, differ materially
from what is expressed or forecasted in the forward-looking statements due to
numerous factors, including those described above and those risks discussed from
time to time in this prospectus, including the risks described under “Risk
Factors,” and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in this prospectus and in other documents which we file
with the Securities and Exchange Commission. In addition, such statements could
be affected by risks and uncertainties related to our ability to raise any
financing which we may require for our operations, competition, government
regulations and requirements, pricing and development difficulties, our ability
to make acquisitions and successfully integrate those acquisitions with our
business, as well as general industry and market conditions and growth rates,
and general economic conditions. Any forward-looking statements speak only as of
the date on which they are made, and we do not undertake any obligation to
update any forward-looking statement to reflect events or circumstances after
the date of this prospectus, except as may be required under applicable
securities laws.
13
USE
OF PROCEEDS
Selling
Security Holder is selling all of the shares of our common stock covered by this
prospectus for its own account. Accordingly, we will not receive any proceeds
from the resale of our common stock. However, we will receive proceeds from any
sale of the common stock to Southridge under the Purchase Agreement. We intend
to use the net proceeds received for working capital or general corporate
needs.
SELLING
SECURITY HOLDERS
We agreed
to register for resale 651,717,795 shares of our common stock (the “Put Shares”)
that we will put to Southridge Partners II, LP (“Southridge” or “Selling
Security Holder”) pursuant to an equity purchase agreement (the “Purchase
Agreement”) between Southridge and the registrant, dated February 3, 2011.
The Purchase Agreement with Southridge provides that Southridge is committed to
purchase up to $10,000,000 of our common stock. We may draw on the facility from
time to time, as and when we determine appropriate in accordance with the terms
and conditions of the Purchase Agreement. We will not receive any proceeds from
the sale of these shares of common stock offered by Selling Security Holder.
However, we will receive proceeds from the sale of our Put Shares under
the Purchase Agreement. The proceeds will be used for working capital or general
corporate purposes.
Security
Holder Pursuant to the Purchase Agreement
Southridge is the potential purchaser
of our common stock under the Purchase Agreement. The 651,717,795 Put Shares
offered in this prospectus are based on the Purchase Agreement between
Southridge and us. Southridge may from time to time offer and sell any or
all of the Put Shares that are registered under this prospectus. The put option
price is 92% of the average of the lowest 2 daily closing prices for the 5
trading days immediately following the date on which the Company is deemed to
provide a put notice under the Purchase Agreement.
We are
unable to determine the exact number of shares that will actually be sold by
Southridge according to this prospectus due to:
|
·
|
the
ability of Southridge to determine when and whether it will sell any of
the Put Shares under this prospectus;
and
|
|
·
|
the
uncertainty as to the number of Put Shares that will be issued upon
exercise of our put options under the Purchase
Agreement.
|
The
following information contains a description of how Southridge acquired (or
shall acquire) the shares to be sold in this offering. Southridge has not held a
position or office, or had any other material relationship with us, except as
follows.
Southridge
is a limited partnership organized and existing under the laws of the state of
Delaware. All investment decisions of, and control of, Southridge is held by its
general partner Southridge Advisors, LLC. Stephen M. Hicks is the manager of
Southridge Advisors, LLC, and he has voting and investment power over the shares
beneficially owned by Southridge Partners II, LP. Southridge acquired, or will
acquire, all shares being registered in this offering in the financing
transactions with us.
Southridge
intends to sell up to 651,717,795 shares of our common stock pursuant to the
Purchase Agreement under this prospectus. On February 3, 2011, the
Company and Southridge entered into the Purchase Agreement pursuant to
which we have the opportunity, for a two-year period beginning on the date on
which the SEC first declares effective this registration statement registering
the resale of our shares by Southridge, to sell shares of our common stock for a
total purchase price of $10,000,000. For each share of our common stock
purchased under the Purchase Agreement, Southridge will pay 92% of the average
of the lowest 2 daily closing prices for the 5 trading days immediately
following the date on which the Company is deemed to provide notice of a sale of
common stock under the Purchase Agreement.
Furthermore,
subject to the terms and conditions of the Purchase Agreement, at any time or
from time to time after the effectiveness of this registration statement, we can
notify Southridge in writing of the existence of a potential material event
based upon the good faith determination of our board of directors (the “Blackout
Notice”), and Southridge shall not offer or sell any of our securities acquired
under the Purchase Agreement from the time the Blackout Notice was provided to
Southridge until Southridge receives our written notice that such potential
material event has either been disclosed to the public or no longer constitutes
a potential material event (a “Blackout Period”). If we deliver a Blackout
Notice within fifteen trading days following a closing date under the Purchase
Agreement, and the closing price is on the trading date immediately preceding
the applicable Blackout Period ("Old Price") is greater than the closing price
on the first trading day following such Blackout Period that Southridge may sell
its shares pursuant to an effective registration statement ("New Price"), then
the Company shall issue to Southridge the number of additional shares of common
stock (the "Blackout Shares") equal to the excess of (x) the product of the
number of Put Shares held by Southridge immediately prior to the Blackout Period
that were issued on the most recent closing date (the "Remaining Put Shares")
multiplied by the Old Price, divided by the New Price, over (y) the Remaining
Put Shares.
We relied
on an exemption from the registration requirements of the Securities Act of
1933, as amended (the “Securities Act”). The transaction does not does involve a
private offering, Southridge is an “accredited investor” and/or qualified
institutional buyer and Southridge has access to information about the Company
and its investment.
14
At an
assumed purchase price under the Purchase Agreement of $0.00368 (equal to 92% of
the closing price of our common stock of $0.004 on February 8, 2011), we will be
able to receive up to $2,398,321 in gross proceeds, assuming the sale of the
entire 651,717,795 shares of our common stock being registered hereunder
pursuant to the Purchase Agreement. At an assumed purchase price of $0.00368
under the Purchase Agreement, we would be required to register additional shares to
obtain the balance of $10,000,000 under the Purchase Agreement.
There are
substantial risks to investors as a result of the issuance of shares of our
common stock under the Purchase Agreement. These risks include dilution of
stockholders and significant decline in our stock price.
Southridge
will periodically purchase shares of our common stock under the Purchase
Agreement and will in turn, sell such shares to investors in the market at the
prevailing market price. This may cause our stock price to decline, which will
require us to issue increasing numbers of shares to Southridge to raise the same
amount of funds, as our stock price declines.
Southridge
and any participating broker-dealers are “underwriters” within the meaning of
the Securities Act. All expenses incurred with respect to the registration of
the common stock will be borne by us, but we will not be obligated to pay any
underwriting fees, discounts, commission or other expenses incurred by Selling
Security Holder in connection with the sale of such shares.
Except as
indicated below, neither Selling Security Holder nor any of its associates or
affiliates has held any position, office, or other material relationship with us
in the past three years Chris/Jim please confirm or describe any material
relationship.
The
following table sets forth the name of Selling Security Holder, the number of
shares of common stock beneficially owned by Selling Security Holder as of
the date hereof and the number of share of common stock being offered by Selling
Security Holder. The shares being offered hereby are being registered to permit
public secondary trading, and Selling Security Holder may offer all or part of
the shares for resale from time to time. However, Selling Security Holder is
under no obligation to sell all or any portion of such shares nor is Selling
Security Holder obligated to sell any shares immediately upon effectiveness of
this prospectus. All information with respect to share ownership has been
furnished by Selling Security Holder. The column entitled “Number of Shares
Beneficially Owned After the Offering” assumes the sale of all shares
offered.
Name
|
Shares Beneficially
Owned Prior To
Offering
|
Shares to
be Offered
|
Amount Beneficially
Owned After
Offering (1)
|
Percent
Beneficially
Owned
After Offering
|
||||||||||
Southridge
Partners II, LP (2)
|
0
|
651,717,795
|
0
|
0
|
% |
|
(1)
|
The
number assumes Selling Security Holder sells all of its shares being
offering pursuant to this
prospectus.
|
(2)
|
Southridge
Partners II, LP is a limited partnership organized and existing under the
laws of the state of Delaware. Southridge Advisors, LLC is
the general partner of Southridge and has voting and investment power
over the shares beneficially owned by Southridge Partners II, LP. Stephen
M. Hicks is the manager of Southridge Advisors, LLC, and he
has voting and investment power over the shares beneficially owned by
Southridge Partners II, LP.
|
The table
assumes that Southridge purchases the maximum amount of registrable Put Shares
in this registration statement.
15
PLAN
OF DISTRIBUTION
This
prospectus relates to the resale of up to 651,717,795 shares issued pursuant to
the Purchase Agreement held by a certain Selling Security Holder.
Selling
Security Holder and any of its pledges, donees, assignees and other
successors-in-interest may, from time to time, sell any or all of their shares
of our common stock on any stock exchange, market or trading facility on which
the shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. Selling Security Holder may use any one or more of the
following methods when selling shares:
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·
|
ordinary brokerage transactions
and transactions in which the broker-dealer solicits
purchasers;
|
|
·
|
block trades in which the
broker-dealer will sell the shares as
agent;
|
|
·
|
purchases by a broker-dealer as
principal and resale by the broker-dealer for its
account;
|
|
·
|
privately negotiated
transactions;
|
|
·
|
settlement of short sales entered
into after the effective date of the registration statement of which this
prospectus is a part;
|
|
·
|
broker-dealers may agree with the
selling stockholder to sell a specified number of such shares at a
stipulated price per share;
|
|
·
|
through the writing or settlement
of options or other hedging transactions, whether through an options
exchange or otherwise;
|
|
·
|
a combination of any such methods
of sale; or
|
|
·
|
any other method permitted
pursuant to applicable law.
|
To the
extent permitted by law, Selling Security Holder may also engage in short sales
against the box after this registration statement becomes effective, puts and
calls and other transactions in our securities or derivatives of our securities
and may sell or deliver shares in connection with these trades.
Selling
Security Holder, or its pledges, donees, transferees or other successors in
interest, may also sell the shares directly to market makers acting as
principals and/or broker-dealers acting as agents for itself or its customers.
Such broker-dealers may receive compensation in the form of discounts,
concessions or commissions from Selling Security Holder and/or the purchasers of
shares for whom such broker-dealers may act as agents or to whom they sell as
principal or both, which compensation as to a particular broker-dealer might be
in excess of customary commissions. Market makers and block purchasers
purchasing the shares will do so for their own account and at their own risk. It
is possible that Selling Security Holder will attempt to sell shares of Common
Stock in block transactions to market makers or other purchasers at a price per
share which may be below the then market price. Selling Security Holder cannot
assure that all or any of the shares offered in this prospectus will be issued
to, or sold by, Selling Security Holder. In addition, any brokers, dealers or
agents, upon effecting the sale of any of the shares offered in this prospectus
are “underwriters” as that term is defined under the Securities Act or the
Exchange Act, or the rules and regulations under such acts. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
Discounts,
concessions, commissions and similar selling expenses, if any, attributable to
the sale of shares will be borne by Selling Security Holder. Selling Security
Holder may agree to indemnify any agent, dealer or broker-dealer that
participates in transactions involving sales of the shares if liabilities are
imposed on that person under the Securities Act.
Selling
Security Holder may from time to time pledge or grant a security interest in
some or all of the shares of our common stock owned by it and, if it defaults in
the performance of its secured obligations, the pledgee or secured parties may
offer and sell such the shares of common stock from time to time under this
prospectus after we have filed an amendment to this prospectus under Rule
424(b)(3) or any other applicable provision of the Securities Act amending the
list of selling security holders to include the pledgee, transferee or other
successors in interest as selling security holders under this
prospectus.
Selling
Security Holder also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this prospectus
and may sell the shares of common stock from time to time under this prospectus
after we have filed an amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act amending the list of selling
security holders to include the pledgee, transferee or other successors in
interest as selling security holders under this prospectus.
16
We are
required to pay all fees and expenses incident to the registration of the shares
of common stock. Otherwise, all discounts, commissions or fees incurred in
connection with the sale of our common stock offered hereby will be paid by
Selling Security Holder.
Selling
Security Holder acquired the securities offered hereby in the ordinary course of
business and has advised us that it has not entered into any agreements,
understandings or arrangements with any underwriters or broker-dealers regarding
the sale of its shares of common stock, nor is there an underwriter or
coordinating broker acting in connection with a proposed sale of shares of
common stock by Selling Security Holder. We will file a supplement to this
prospectus if Selling Security Holder enters into a material arrangement with a
broker-dealer for sale of common stock being registered. If Selling Security
Holder uses this prospectus for any sale of the shares of common stock, it will
be subject to the prospectus delivery requirements of the Securities
Act.
Pursuant
to a requirement by the Financial Industry Regulatory Authority, or FINRA, the
maximum commission or discount to be received by any FINRA member or independent
broker/dealer may not be greater than eight percent (8%) of the gross proceeds
received by us for the sale of any securities being registered pursuant to SEC
Rule 415 under the Securities Act.
The
anti-manipulation rules of Regulation M under the Exchange Act may apply to
sales of our common stock and activities of Selling Security Holder. Selling
Security Holder will act independently of us in making decisions with respect to
the timing, manner and size of each sale.
Southridge
is an “underwriter” within the meaning of the Securities Act in connection with
the sale of our common stock under the Purchase Agreement. In connection with
the Purchase Agreement, no fees were paid Southridge nor shares of our
restricted common stock issued as additional consideration.
We will
pay all expenses incident to the registration, offering and sale of the shares
of our common stock to the public hereunder other than commissions, fees and
discounts of underwriters, brokers, dealers and agents. If any of these other
expenses exists, we expect Southridge to pay these expenses. We have agreed to
indemnify Southridge and its controlling persons against certain liabilities,
including liabilities under the Securities Act. We estimate that the expenses of
the offering to be borne by us will be approximately $35,000. We will not receive any
proceeds from the resale of any of the shares of our common stock by Southridge.
We may, however, receive proceeds from the sale of our common stock under the
Purchase Agreement.
DESCRIPTION
OF SECURITIES TO BE REGISTERED
This
prospectus includes 651,717,795 shares of our Common Stock offered by Selling
Security Holder. The following description of our Common Stock is only a
summary. You should also refer to our certificate of incorporation and bylaws,
which have been filed as incorporated by reference as exhibits to the
registration statement of which this prospectus forms a part.
17
We are
authorized to issue 5,000,000,000 shares of Common Stock having a par value of
$0.0001 per share and 1,000,000 shares of preferred stock having a par value of
$0.0001 per share, of which 500,000 have been designated as Series A Preferred
Stock and 500,000 have been designated as Series B Preferred Stock. As of
February 7, 2011, 2,207,872,679 shares of the Company’s Common Stock are issued
and outstanding and 50,000 shares of the Series A Preferred and 0 shares of the
Series B Preferred Stock are issued and outstanding. The holders of common stock
are entitled to one vote per share for the election of directors and on all
other matters to be voted upon by the stockholders. The holders of Series A
Preferred Stock vote as a single class with the holders of Common Stock and are
entitled to 100,000 votes per share of Series A Preferred Stock.The Series A
Preferred Stock is not convertible into common stock, has a liquidation
preference of $1.00 per share, and entitles its holder to a dividends when and
as declared by the Board of Directors in its discretion.
There is
no cumulative voting. Subject to preferences that may be applicable to any
outstanding securities, the holders of common stock are entitled to receive,
when and if declared by the board of directors, out of funds legally available
for such purpose, any dividends on a pro rata basis. In the event of our
liquidation, dissolution or winding up, the holders of common stock are entitled
to share ratably in all assets remaining after payment of liabilities, subject
to prior distribution rights of preferred stock, if any, then outstanding. The
common stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
common stock.
INTERESTS
OF NAMED EXPERTS AND COUNSEL
No expert
or counsel named in this prospectus as having prepared or certified any part of
this prospectus or having given an opinion upon the validity of the securities
being registered or upon other legal matters in connection with the registration
or offering of the common stock was employed on a contingency basis or had, or
is to receive, in connection with the offering, a substantial interest, directly
or indirectly, in the registrant or any of its parents or subsidiaries, provided
that Sichenzia Ross Friedman Ference LLP or certain members or employees of
Sichenzia Ross Friedman Ference LLP own 11,000,000 shares of the Company’s
common stock.
DESCRIPTION
OF BUSINESS
Background
We were
organized as a corporation in the State of Nevada as Woodie, I, Inc., on August
1, 1990. In March 1999, we changed our name to Vencap Capital Corporation. We
subsequently changed our name on December 30, 2003 to American Scientific
Resources, Incorporated. On January 21, 2004, we effected a stock-swap for all
of the shares of Ulster Scientific, Incorporated, a New York corporation formed
in January 1974. On March 30, 2004, we acquired all of the outstanding shares of
Kidz-Med, Inc., a Florida corporation originally formed as Peds-Med, Inc. in
October 1993. In December 2004, we formed HeartSmart, Inc. in the State of
Nevada. HeartSmart, Inc. has been inactive since February 2008.
HeartSmart
was first launched via a long form infomercial in the summer of 2006. Gary
Collins and Mary Ann Mobley starred in that infomercial. The launch was not
successful due to the high cost of the product and that fact that the Company
did not have the financial resources to sustain the infomercial campaign. The
Company made a decision in April of 2007, to refocus its financial resources on
launching the Kidz-Med product line, namely the Thermofocus thermometer;
subsequent developments regarding the Thermofocus thermometer are discussed
below. HeartSmart was made inactive in February of 2008 when the last batch of
inventory expired.
Ulster
Scientific, Incorporated, which introduced many important diabetes products,
including insulin injection devices, disposable lancets, and clinical
blood-sampling devices, as well as many products for healthcare and laboratory
safety, has been inactive since 2005.
On
September 10, 2009, we purchased a patent for a needle destruction device known
as the Disintegrator® (including trademarks for the Disintegrator®,
Disintegrator Plus® and Disintegrator Pro®) and other assets from Safeguard
Medical Technologies, LLC (“Safeguard”) in exchange for 250,000,000 shares of
common stock and assumption of a contingent note payable up to $1,200,000.
Shortly after the acquisition date, 212,500,000 of such shares were issued to
Safeguard and 37,500,000 shares were issued to Concorde Capital as Safeguard’s
designee. The Disintegrator enables patients who give themselves injections,
including those suffering from multiple sclerosis or diabetes, to properly and
safely dispose of needles at home. Development of the Disintegrator Plus product
has been completed and the Company is currently accepting orders for the
product. Fulfillment of the first order was completed in September 2010. There
is currently no retail distribution of the product, but the Disintegrator has
been reviewed by the buyer of a major retail pharmacy chain. As of the date of
this prospectus, this buyer had not made a final decision whether to purchase
this product.
We are
based in South Florida, and Cleveland, Ohio, and provide healthcare and medical
products. We develop, manufacture and distribute healthcare and medical products
primarily to retail drug chains, retail stores specializing in sales of products
for babies and medical supply dealers. The Company does sub-component assembly
and packaging for the Disintegrator product line. All of our other products are
manufactured by third parties. We were comprised of three subsidiaries: (i)
Kidz-Med, Inc. (“Kidz-Med”), (ii) HeartSmart, Inc. (“HeartSmart”), and (iii)
Ulster Scientific, Inc. (“Ulster”), of which only Kidz-Med was active until
December 31, 2010. American Scientific has consolidated all operations into the
parent company and all subsidiaries are currently inactive. The parent
company will continue to use the Kidz-Med brand name, but will not operate
Kidz-Med as a separate business entity. The Company has not yet decided
what it will do with the inactive subsidiaries.
18
We
currently have sufficient cash to sustain our operations for a period of
approximately one month. Our projects that are planned for the future, as set
forth in this prospectus, including marketing activities and product
development, are subject to our obtaining needed funding, through the sale of
equity and debt securities. We anticipate that we will need to raise
approximately $3,000,000 in additional financing to fund such projects. We are
continually in contact which potential private investors with respect to such
funding. Such funding may not be available to the Company on acceptable terms,
or at all. The Company recently secured a $3.0 million financing
facility from Hartsko Financial Services, LLC to fund the purchase of inventory
against confirmed purchase orders. In addition, the Company secured a $1.0
million financing facility to factor accounts receivable from Charter Capital
Holding L.P.
Our
shares of common stock are traded on the OTCQB under the ticker symbol
“ASFX.PK.”
Principal Products Sold by
the Company
Kidz-Med,
Inc.
Kidz-Med,
Inc. started in 1993 as a producer and distributor of pediatric instructional
videotapes and books, but has since expanded into a distributor of medical
devices and products for children and their families. The Company uses the
Kidz-Med brand name for its pediatric products, but no longer operates Kidz-Med
as a separate business entity. Under the Kidz-Med brand, we purchase and
distribute medical products, and have also developed our own infrared
thermometer, the Kidz-Med VeraTemp Non-Contact thermometer. In addition,
under the Kidz-Med brand, we continue to produce and distribute instructional
DVDs, but are not currently producing and distributing any books. The
Company has not decided whether it will restart book sales. All Kidz-Med
products, other than the VeraTemp and the DVD’s, were developed and are
manufactured by third parties. We sell the following Kidz-Med line of
products:
Kidz-Med Thermofocus
5-in-1
The
Thermofocus 5-in-1 is a patented, non-contact clinical thermometer, which uses
infrared technology to read the core body temperature at the forehead. A 2004
study at the Paediatric Clinic De Marchi of the University of Milan (Osio, CE,
Carnelli, V. Comparative Study of Body Temperature Measured with a
Non-Contact Infrared Thermometer versus Conventional Devices, Minerva Pediatrica
2007 August;59(4):327-36), found that the Thermofocus 5-in-1’s forehead readings
are accurate. The Company believes, based on management’s knowledge of
standard practices with respect to medical trials, that this study was funded by
TecnimedSrl of Italy (“Tecnimed”), the producer of the Thermofocus 5-in-1.
The Company does not know whether Tecnimed was otherwise affiliated with this
study. Thermofocus 5-in-1 is non-invasive, hygienic, and non-irritating to
people with sensitive skin, including babies and hospital patients. Aiming
lights let the user know how far to hold the device from the forehead.
This distance is about one inch. The reading is obtained in less the two
seconds.
In March
2008, Kidz-Med renegotiated an indefinite agreement with Tecnimed to be the
exclusive retail distributor of the Thermofocus 5-in-1 in the United
States. However, the agreement was terminated by Tecnimed in June 2008 due
to an ongoing dispute over balances owed. In July 2008, we filed suit
against Tecnimed for breach of contract. See “Legal Proceedings.”
The Company continued to sell the Thermofocus to its existing customers from
June 2008 to March 2009 (when we reached a settlement with Tecnimed, as
discussed below), despite the absence of a distribution agreement. In
2006, Kidz-Med also entered an agreement with the Greenwood Group, a New York
based retail consulting firm, to get the Thermofocus 5-in-1 and other Kidz-Med
products into major pharmacy chains, supermarket chains and retail
super-centers. Under our agreement with the Greenwood Group, we agreed to pay
the Greenwood Group a $5,000 monthly retainer (subject to adjustment based on
the achievement of certain benchmarks), plus an 8% commission on US retail
sales, and 3% for other sales. In addition, we issued the Greenwood
Group 24,400,000 shares of common stock and warrants to purchase shares of
common stock based on the achievement of certain benchmarks. The agreement had
an initial term of two years (commencing on September 1, 2006) and renews
automatically annually, subject to prior termination upon 90 day’s written
notice. On
January 21, 2011, we entered into an agreement with the Greenwood Group to
settle monthly retainer fees, out or pocket expenses and commissions due through
December 31, 2010 and issued 12,000,0000 shares of our common stock to the
Greenwood Group in partial satisfaction of amounts due under the settlement
agreement. These shares were valued at $63,600 on the date of issuance.
The Greenwood Group secured Walgreens Drug Stores and Babies”R”Us (“BRU”)
as buyers of the Thermofocus thermometer. The Walgreens shelf placement
commenced in October 2007, but was terminated in August 2009. Walgreens
was undergoing a restructuring plan and several thousand products were
eliminated from their stores; the Thermofocus was one of them. BRU.com
first purchased the Thermofocus in June 2007; the Greenwood Group secured shelf
placement in the BRU stores in September 2008. Brandmakers Worldwide
secured BuyBuyBaby as a customer in July 2009. We were party to a series of
three-month agreements with Brandmakers Worldwide (the last of which terminated
in April 2010), under which we paid Brandmakers Worldwide a monthly fee of
$5,000 and an 8% commission.
On March
6, 2009, a settlement was entered into in US Federal Court with Tecnimed.
The settlement stipulates that Kidz-Med will be the exclusive seller of the
Thermofocus to Walgreens, BRU, CVS.com and any other retail chains approved by
Tecnimed (no other retail chains have currently been approved by
Tecnimed). Only BuyBuy Baby is currently selling the Thermofocus 5-in-1
purchased from us. All payments from such retailers are
currently evenly split between Tecnimed and Kidz-Med until the outstanding
debt is satisfied. The total amount for product purchased from Tecnimed was
$1,391,600. As a result of prepayments and the timing of product
deliveries, the maximum obligation to Tecnimed reached $838,800 on December 5,
2007 and partial payments toward this balance began in March 2008. In
October 2007 and April 2008, $350,000 and 258,800 of the then balance
outstanding was converted into notes payable, of which $210,539 of principal was
outstanding as of September 30, 2010. As of the date of this prospectus, the
Company owed, and was in default on the payment of, $163,947 of principal to
Tecnimed.
The
Company has phased out sales of the Thermofocus unit in favor of its own
Kidz-Med VeraTemp Non-Contact thermometer (discussed below). In particular, the
Company is no longer selling the Thermofocus unit in the United States or
internationally, except that, the Company intends to sell any remaining
Thermofocus units in inventory to discount distributors in the Third
World. There are no current arrangements or agreements in effect with
respect to such sales. All present and future customers of the Company are now
presented with the Kidz-Med VeraTemp Non-Contact thermometer.
19
Kidz-Med VeraTemp
Non-Contact Thermometer
The
Company has now completed designed of its own non-contact thermometers, which is
called the Kidz-Med VeraTemp Non-Contact thermometer and VeraTemp+ for the
professional market. The aggregate cost for design and prototype development of
the product was approximately $175,000. Prototypes were developed and a
Chinese factory identified for manufacturing all of the components; a contract
has been signed with this Chinese factory. Molds and tooling have been ordered
and paid for. The Company will purchase all the components and units from this
factory, but final packaging is done domestically at the Company’s Ohio
facility. Full-scale final assembly and production commenced in May 2010 on the
first 12,000 units; these units were fully delivered by early November
2010. We anticipate that the on going unit cost will be approximately
$12.50, although it could possibly be lower as volume increases. We
have filed trademark applications for the names “Never Touch” (the name the
Company previously intended to use for the product), “5-in-1”, “Vera Temp” and
“Dura Sleeve” (the brand name for the silicon glove that fits around the
thermometer to protect it from damage due to falls) with the US Patent and
Trademark Office, which are currently pending. The Company also plans to
file an application for both a design patent and a utility patent with the
USPTO. The first units off the tooling have been submitted for testing to ensure
they meet ASTM standards (American Society of Testing and Materials); the
Company received a passing grade from ASTM in May 2010 (when ASTM tests products
to ensure they meet ASTM’s standards, ASTM provides either a pass or fail
grade). Concurrently, a required premarket notification, known as a
510(k), was filed with the FDA. FDA approval was obtained in September
2010. Because the Kidz-Med VeraTemp unit does not incorporate any aiming lights
like the Thermofocus (the patents for which are on its aiming lights), it
will not infringe on the Thermofocus patent. The Company is no longer
bound by any non-compete agreement with Tecnimed, since the Settlement Agreement
completely superseded the Distribution Agreement. (Notwithstanding the
foregoing, on September 21, 2010, Tecnimed, Srl filed a complaint against the
Company and its Kids-Med subsidiary alleging, among other things, that the
Company’s Kidz-Med VeraTemp Non-Contact thermometer is sufficiently similar to
Tecnimed’s Thermofocus thermometer that the Company breached a non-compete
agreement (which the complaint alleges, contrary to the Company’s view,
survived) and infringed on the Thermofocus trademark and trade dress (see “Legal
Proceedings”)).
The
Company completed fulfillment of 12,000 units in November 2010, and is currently
marketing an additional 10,000 units of the VeraTemp and VeraTemp+,
Funding for additional purchases and assembly will come from purchase order
financing or additional sales of our securities. The Company recently
secured a $3.0 million financing facility to fund the purchase of inventory
against purchase orders from Hartsko Financial Services, LLC and a $1.0 million
accounts receivable factoring facility. Packaging components and equipment
have been secured and paid for. Additional funds will be needed to complete
marketing of the thermometer.
Kidz-Med Scald
Safe
The Scald
Safe Water temperature disc is a warning disc that helps to ensure that a baby’s
bath water is at an appropriate, safe temperature. When a baby is placed
into bath water that is too hot, the ring changes color from purple to a bright
pink. This is an indication that the water is too hot for the baby.
The Scald Safe was first introduced to Kidz-Med by the Scald Safe’s manufacturer
Insight Medical in June 2002, and Kidz-Med has a renewable yearly contract for
exclusive North American distribution. The product is manufactured in South
Africa.
Kidz-Med
WhistleWatchAsmalert (children) and Respalert (adults)
The
WhistleWatch is a peak flow monitoring device that allows parents to monitor and
manage their child’s asthma or other respiratory problems. Peak flow
refers to the maximum peak expiratory flow (PEF) a person can exhale, and
reflects the condition of air flow in the lung passages. Once the peak
flow drops, it may be indicative of increased airway resistance, which may lead
to an asthma attack. The device is preset by the parent or pediatrician based on
the size of the child; this corresponds to 80% of the expected peak flow.
The device is then given to the child and the child is asked to blow into it as
hard as the child can. If the child can make the device whistle, the
child’s peak flow is adequate. If the child cannot make the device
whistle, the child needs to be treated with an inhaled bronchodilator or taken
to the child’s doctor. This device is especially useful for young
children, who may not verbalize when they feel “tightness” in their chests. The
WhistleWatch was first introduced to American Scientific in June 2003 by
its-then manufacturer, Linmahoud Products from South Africa, but the current
manufacturer is Whistle Watch SA (Pty) Ltd. (South Africa) which initiated a new
agreement in July 2005 with Kidz-Med. The agreement is for exclusive North
American distribution of the WhistleWatch, and is for renewable 12 month
terms.
Kidz-Med Portable Ultrasonic
Nebulizer
The
Kidz-Med Portable Ultrasonic Nebulizer is used to treat asthma, bronchitis,
bronchiolitis, allergies, hay fever, sinusitis, and nasal congestion due to
colds or allergies. Nebulizers are devices that take liquid medication and
convert it into a mist so it can be inhaled into the lungs. Although the unit
was marketed in the past primarily to children’s providers, such as the One Step Ahead and Leaps and Bounds catalogs, we
subsequently found a strong senior market because of the small size, portability
and low price. The product is currently out of stock. When available, we
sell the product only on our web site, usually to individual users.
The product was obtained from the manufacturer, Guan Hong Enterprise Co., Ltd.
(“Guan Hong”) from Taiwan; we purchased this product from Guan Hong without a
distribution agreement. We are seeking a new manufacturer for this product due
to the unreliability, in our opinion, of Guan Hong.
Kidz-Med Medicine
Dispenser
The
Kidz-Med Dispenser was introduced by Kidz-Med in early 2004. The Kidz-Med
Dispenser consists of an orthodontic nipple attached to a medication
chamber. A manually-driven plunger drives medicine out of the chamber into
a hollow conduit within the nipple into the child’s mouth. Effective
January 2006, we negotiated a new distribution agreement with South African
manufacturer, Blue Dot Properties 557 (PTY) Ltd., which gives Kidz-Med the
rights for distribution in North America for a term of five years with a
five-year renewable clause.
Kidz-Med Mommy
Recorder
This
unique voice-recording device allows a mother to easily record a 6-second
message designed to calm baby when he or she is upset. The mobile device easily
mounts to the baby's crib and duals as a soft night-light. The device is sound
activated, for example the baby cries, and then the pre-recorded message
automatically plays. So the mother would record a message like, “It’s OK
baby Johnny, Mommy’s here, go back to sleep.” This message would then play
once the device is activated by the noise of the child crying. It is
purchased from JoyCare from Ancona Italy; the product is manufactured in China
by JoyCare. We do not have a distribution agreement with JoyCare, but simply
purchase the product for resale.
20
Dr. Bip
DVDs
This is a
video series narrated by the fictional Dr. Bip, which aims to help children
understand and cope with life events such as, with respect to the two DVD’s
currently available, hospitalization and welcoming a new baby into the
family. The Company plans to introduce DVD’s covering additional topics in
2011, subject to obtaining needed financing for the development of such DVD’s.
The Dr. Bip DVDs are reproduced from a master tape by Accord Productions in Fort
Lauderdale, FL. and sold through the Kidz-Med website. The Company has licensed
the rights to these DVDs from ConcettaTirotta, the wife of our CEO, Dr.
Christopher Tirotta, commencing on October 2, 2008 for one year terms that are
automatically renewable. We pay Ms. Tirotta royalties of 20% of revenue.
Sales to date have not been material.
Wee
Target
This is
a unique toilet training device for young boys. This item is affixed
to the side of the toilet bowl by a suction cup. It has a target for the
young boy to aim at when toilet training. Once the warm urine hits the
target, a picture appears. When the bowl is flushed, the cool water cleans
the item and causes the picture to disappear. We purchased the
product from its manufacturer Comnet Sales International (“Comnet”) from
Victoria, Australia. We do not have a distribution agreement with Comnet, but
simply purchase the product for resale.
Mebby Product
Line
The
Company also exclusively distributes the Mebby product line manufactured by the
Medel Group SpA in the United States and Canada. This product line
includes breast pumps, bisphenol A free baby bottles, baby monitors, digital
scales, humidifiers, pacifiers, meal sets, and sterilizers. We sell the
Mebby product line pursuant to an exclusive distribution agreement, dated
January 4, 2010, which had an initial three year term and renews automatically
for successive one year terms.
The
Disintegrator
Dr.
Christopher Tirotta, CEO of the Company, and Mr. Jason Roth, the principal owner
of Safeguard Medical Technologies, LLC (together with its affiliates,
“Safeguard”) concluded negotiations and executed agreements regarding purchase
and sale of the Disintegrator effective September 10, 2009 (the “Purchase
Date”). The Disintegrator and the improved versions thereof, the
Disintegrator Plus and Disintegrator Pro, are patented and trademarked home
needle and lancet destruction devices. These devices are used by persons
with diabetes and multiple sclerosis who self inject medications at home.
The Company received the assignment of the Disintegrator patent, assignment of
the three trademarks, inventory on-hand, tooling, dies, manufacturing jigs and
other rights in exchange for 250,000,000 shares of the Company’s common stock
and assumption of a $1.2 million contingent note (the
“Transaction”).
Development
of the Disintegrator was completed by Mr. Joe Adkins in 2002.
Safeguard acquired the rights to the Disintegrator in 2004.
Safeguard had sold 27,000 units prior to the Purchase Date, among other
Safeguard business. Prior to the transaction, the most recent sale was a
5,000 unit sale of the Disintegrator to Bayer Sante completed in March
2009. There were no other sales of the Disintegrator in 2008 or
2009. Post-transaction, Safeguard remains in the business of
developing medical products.
The
Disintegrator enables patients who give themselves injections, including those
suffering from multiple sclerosis or diabetes, to properly and safely dispose of
needles at home. The Disintegrator is the only FDA approved home needle
destruction device.
Development
of the Disintegrator Plus® has been completed, and the Company is currently
accepting orders for this product. There is currently no retail distribution of
the product. A Disintegrator web site has been created to sell the unit to the
end users (http://www.disintegratorplus.com
). This website is currently accepting pre-orders for the product. The
components are manufactured in China and sub-component assembly and
packaging are done at the Company’s Ohio facility. The Company received a
purchase order from Bayer France for 2,000 units valued at $155,420 during the
first quarter of 2010. Fulfillment of the first order was completed in
September 2010. Fulfillment of the order had been delayed due to delay in
receiving payment from the purchaser and delay in receiving final shipping
instructions from the purchaser. A total of an additional 3,000 units have
also been produced and received at the Company’s warehouse (not including the
2,000 units already completed for the Bayer order).
21
Ulster Scientific,
Inc..
Ulster
sold many important diabetes products, including insulin injection devices,
disposable lancets, and clinical blood-sampling devices, as well as many
products for healthcare and laboratory safety. For example, Ulster sold
the Autolet and Autojector products used to monitor diabetic blood sugar levels.
Ulster also sold a patented universal biohazard spill kit as well as several
mechanical micro liquid transfer devices, known as pipettes. Ulster has been
inactive since 2005 and there are no plans to resume regular operations. Ulster
was made inactive because management at the time wished to devote the Company’s
limited resources to other endeavors, notably HeartSmart.
Distribution
Methods
HeartSmart,
Inc.
HeartSmart’s
manufacturing supplier was the Tishcon Corporation of Westbury, New York, a
contract manufacturer of over-the-counter pharmaceuticals, vitamins, minerals,
and other nutraceuticals.
HeartSmart
was first launched via a long form infomercial in the summer of 2006. Gary
Collins and Mary Ann Mobley starred in that infomercial. The launch was
not successful due to the high cost of the product and that fact that the
company did not have the financial resources to sustain the infomercial
campaign. The company made a decision in April of 2007, to refocus its
financial resources on launching the Kidz-Med product line, namely the
Thermofocus thermometer. HeartSmart was made inactive in February of 2008
when the last batch of inventory expired.
At the
appropriate time, and subject to the Company obtaining needed financing,
HeartSmart may re- introduce its key product, Heart Smart Foundation
Supplement, via long-form television infomercials. However, the HeartSmart
product line will remain inactive until such time as we believe its launch will
be financially viable and until we identify a lower-cost supplier. We
eventually plan to make this product and others (such as Q-Force + Carnitine,
Osteo Complex, Seasential 3 Omega Complex, E-Peak, Carni-Max Release, Vita QB
Energy Complex, CinnaSupport, and Multi Complete) available through mass-market
retailers such as drug stores, supermarkets, and mass merchandisers. As
noted above, the Company will no longer market this or any other product through
a subsidiary. All products will be placed under the American Scientific
Resources umbrella, although the Company will utilize the Kidz-Med and
HeartSmart brand names.
Kidz-Med,
Inc.
Kidz-Med
currently sells all of its products directly to consumers through our website at
www.kidzmed.com. All of Kidz-Med’s products are currently available
through www.kidzmed.com ,
except the Kidz-Med Portable Ultrasonic Nebulizer which is currently out of
stock. Kidz-Med utilizes internet marketing through Google Adwords, Froogle,
Ebay Stores, Amazon Marketplace, Nextag, and Shopzilla in order to drive as many
sales directly to its website as possible. Kidz-Med also sells certain
products through major retailers.
Kidz-Med
currently is selling its products through retailers such as Amazon.com, C&S
Grocers, CVS Pharmacy, CVS.com, Diapers.com, Duane Reade, Fred Meyer, Price
Chopper, and through surgical supply dealers such as Cardinal Health, Henry
Schein and McKesson.
22
We
actively sell to e-tailers, either directly at wholesale, or as drop shippers of
product. Some of our online retailers carrying some or all of our Kidz-Med
product line are:
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Amazon.com
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BabiesRUs.com
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Comfort
1
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CVS.com
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EBay
Stores
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eGeneralMedical.com
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Emergency Medical Products
(BuyEMP.com)
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Neb
Doctors
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Shower Your
Baby
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Kidz-Med
arranged for Global Media Fund to produce professional-grade 30 and 60 second TV
commercials to advertise the Kidz-Med products; the 30 second version is
available for viewing on the Kidz-Med website. Kidz-Med contracted with
Michael Hirsch of Joseph Pedott Advertising & Marketing to do the media
buying and in late 2007 and early 2008, these commercials aired on the following
national cable channels: WGN, Bravo, Direct TV, Comcast, DISH, TBS, TNT, Comedy
Central, and the I Network. The commercials have also aired on the local
ABC, CBS, and NBC affiliates in the largest Walgreens markets: Chicago, Dallas,
Houston, Miami, Orlando, Philadelphia, St. Louis, Milwaukee and New York.
We have also placed featured editorials in trade publications and magazines, and
received some television exposure in September 2009.
Currently
we have no contractual relationships with any media relations firm, but plan to
engage one in the near future. The Company may reshoot the thermometer
commercial using its own non-contact thermometer.
Competition
There are
a number of similar products currently on the market that directly compete
with the following Kidz-Med’s products:
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Kidz-Med
VeraTemp Non-Contact thermometer A product made by Exergen
called the Comfort Scanner is widely sold at many major U.S. retailers,
but it requires making contact with the patient’s forehead. The
Comfort Scanner requires the operator to swipe the probe across the
patient’s forehead; it also requires a disposable probe cover. There is
another product, the prototype clinical infrared thermometer, the Braun
Thermoscan made by Procter & Gamble Co. This product requires
the user to put the probe in the patient’s ear; this also requires a probe
cover. We believe young children may find this very intrusive.
The Kidz-Med VeraTemp does not require any skin contact at all. To
use the Kidz-Med VeraTemp, the user needs only to aim the device about one
inch from the forehead or neck and a temperature reading is obtained in
less than one second. We plan to market the Kidz-Med VeraTemp
nationally and internationally in retail megastores where the Exergen is
currently sold (including Target, Wal-Mart, CVS, Babies R Us, Costco and
drugstore.com). We will also be competing with the Thermofocus made by
Tecnimed. The Kidz-Med VeraTemp Non-Contact thermometer will retail
for 40% less than the Thermofocus. The Thermofocus product has not
garnered any significant staying power in the retail sector in the United
States. However, competition from the Thermofocus may have the
effect of reducing sales of the Kidz-Med VeraTemp, resulting in lower
revenues.
|
The
Company would like to expend at least $1 million dollars on marketing the new
Kidz-Med VeraTemp Non-Contact thermometer. This campaign will include
print, TV, radio, and Internet advertising. The Company will also engage
in mandatory coop marketing (under which the Company and the retailer share
advertising and marketing expenses,) with the retail stores where shelf
placement is secured. The Company intends to raise this money through the
sales of equity and debt securities in private placements to investors.
There is no assurance we will be able to successfully secure this
financing. The usual retail price for both the Exergen product and the
Braun product is $49, depending on the retailer. The Thermofocus retailed
for $69-$99 in domestic retail stores. The Kidz-Med VeraTemp will retail
for $49 or less.
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Kidz-Med
Medicine Dispenser
The Numimed and Munchkinator pacifiers currently consist of
medication chambers attached to a nipple, but both lack the plunger to
administer the medicine if the child refuses to suck. The Numimed is
made by Sharn, Inc. from Tampa, FL and the Munchkinator is made by
Munchkin Inc. from North Hills,
CA.
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23
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WhistleWatchAsmalert TheWhistleWatch has three
main competitors, Medikrom, Vitalograph, and Clement-Clarke. Their
products are not intended for the home health care market. Other
competitors include Dey labs, Monaghan Medical Corporation, and Philips
Respironics (a division of Royal Philips Electronics) (through Philips
Respironics’s Assess and Personal Best lines of products) which all sell
quantitative monitors. Kidz-Med believes it has a competitive
advantage over its competitors because of the WhistleWatch’s simplicity,
reliability, and low cost.
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As noted
above, the Company was the exclusive supplier of the Thermofocus 5-in-1 to
Walgreens, BabiesRUs, CVS.com and any other retail chains approved by Tecnimed
(no other chains have been approved by Tecnimed). The Company does not compete
with Tecnimed in the distribution of the Thermofocus 5-in-1. The Company
has phased out the Thermofocus product with the introduction of its own
non-contact thermometer, the Kidz-Med VeraTemp Non-Contact thermomter.
However, the Thermofocus will now compete with the VeraTemp, potentially
resulting in lowered revenue.
Principal
Suppliers
We act as
both a manufacturer (with respect to the Disintegrator line) and distributor of
healthcare and medical products.With respect to products or components of
products that are manufactured by third parties, we rely on the timely
delivery of such products and components from the manufacturer, with which we
have an agreement.
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Thermofocus 5-in-1 is
manufactured by TecnimedSrl of Italy. This product has been phased
out as the company introduces its own non-contact thermometer, the
Kidz-Med Non-Contact 5-in-1. In particular, the Company is no longer
selling the Thermofocus unit in the United States or internationally,
except that, the Company intends to sell any remaining Thermofocus units
in inventory to discount distributors in the Third World. There are
no current arrangements or agreements in effect with respect to such
sales. All present and future customers of the Company are now
presented with the Kidz-Med VeraTemp Non-Contact thermometer. Components
will be manufactured in Shanghai, China with packaging done in the
Company’s Ohio facility.
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The Disintegrator: Components
will be manufactured in Shanghai, China, with sub-component assembly and
packaging done in the Company’s Ohio
facility.
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ScaldSafe Temperature Ring is
manufactured by Insight Medical,
Ltd.
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WhistleWatch Asthma Alert is
manufactured by Whistle Watch SA (Pty)
Ltd.
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Kidz-Med Nebulizer is
manufactured in China by JoyCare from Ancona,
Italy.
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Dependence on One or a Few
Major Customers
In 2009,
49% of our revenue was derived from Walgreens and 16% was derived from
BabiesRUs. Upon Walgreen’s termination of its sales of the Thermofocus in
August 2009, sales to BabiesRUs accounted for approximately 35% of our
revenue over the next six months.
We have
since secured a broader customer base consisting of e-tailers, retail pharmacies
and wholesalers. For the nine months ended September 30, 2010, sales of the
Disintegrator Plus to Bayer Sante accounted for approximately 26% of revenue and
sales of both the Thermofocus and Kidz-Med VeraTemp to Babies “R”Us accounted
for approximately 12% of our revenue. Cash collected from Walgreens for
deliveries of the Thermofocus in 2008 and 2009, for which revenue was not
previously recognized due to doubts as to ultimate collectability, was
approximately 21% of revenue recorded during nine months ended September 30,
2010.
24
Intellectual
Property
Trademarks
The
ScaldSafe Temperature Ring, Kidz-Med Medicine Dispenser, WhistleWatch Asthma
Alert, and Kidz-Med Nebulizer are all registered with the US Patent and
Trademark Office under the Kidz-Med trademark. The Thermofocus 5-in-1 is a
registered trademark of Tecnimed; Kidz-Med has filed for a registered trademark
of its own for the name “Never Touch 5-in-1” for its own non-contact thermometer
(the name we previously intended to use), which application is currently
pending. We have also filed for trademark registrations for the names 5-in-1,
VeraTemp (and DuraSleeve (the brand name for the silicon glove that fits around
the thermometer to protect it from damage due to falls). We have also
registered trademarks for the Disintegrator, Disintegrator Plus, and
Disintegrator Pro with the US Patent and Trademark Office.
Patents
The
Thermofocus 5-in1 is protected by four US patents (nos. 6,196,714 (expiring in
2021), 6,527,439 (expiring in 2023), 6,742,927 (expiring in 2024), and 7,001,066
(expiring in 2026)). The Medicine Dispenser is protected by one US patent
(no. 5,843,030) (expiring in 2018). The Disintegrator and the
Disintegrator plus are protected by US patent (no. 6,384,362) (expiring in
2022).
Government
Approval
The
Federal Drug Administration (“FDA”) has approved the Thermofocus 5-in-1,
Kidz-Med Medicine Dispenser, WhistleWatch Asthma Alert, and Kidz-Med Nebulizer
as medical products and devices. In addition, the Thermofocus 5-in-1 has
received FDA approval under Section 510(k) of the United States Food, Drug and
Cosmetic Act to market this device. The Kidz-Med VeraTemp product has also
received 510(k) clearance. Our only product that has not received FDA approval
is the ScaldSafe Temperature Ring because management believes that such approval
is not required. The Company plans to relocate its Ohio facility to South
Florida and have it become fully FDA compliant by summer 2011.
Employees
As of
February 10, 2011, we had five full-time employees. We believe that our
employee relations are good. None of our employees are represented by a
collective bargaining unit.
DESCRIPTION
OF PROPERTY
We
currently lease a 3,500 square foot facility at 9929 East Washington Street,
Unit C, Chagrin Falls Ohio on a month to month basis. Our monthly
rent is $3,000. We also rent a post office box in Weston, Florida at
a cost of $150 per year. In addition, pursuant to an agreement between the
Company and Alodote Pty Limited (“Alodote”), Alodote provides us sourcing,
manufacturing and logistical support, including use of office space in Shanghai,
and we pay Alodote a monthly fee of $1,500. Our agreement with Alodote has a two
year term commencing in August 2009.
LEGAL
PROCEEDINGS
On July
7, 2008, we filed a complaint in the United States District Court, Southern
District of New York against Tecnimed, Srl for breach of contract and tortuous
interference with the distribution contract between the parties. This
matter was settled on March 6, 2009. We will retain the right to sell
exclusively to Walgreens, BRU, CVS.com and any other retailers approved by
Tecnimed. All proceeds from the sales at these retailers will be split
evenly between Kidz-Med and Tecnimed. The Settlement Agreement completely
supersedes and replaces the previous distribution agreement dated March 31,
2008.
25
On August
15, 2008, Exergen Corporation filed suit with the United States District Court
for the District of Massachusetts against Kidz-Med, Inc., American Scientific
Resources, Incorporated and Tecnimed, Srl for patent infringement, seeking
unspecified damages and an injunction against future infringement. Exergen
claims that Tecnimed and Kidz-Med violated five of their US patents,
specifically regarding their algorithms for measuring temperature on the
forehead. We have hired legal counsel and intend to vigorously defend ourselves
in this matter. Tecnimed’s lawyers filed a brief for summary judgment to have
the case dismissed. A Markman hearing (a pretrial hearing during which a
judge examines evidence on the appropriate meanings of relevant key words used
in a patent claim) was held in July 2010, and we are currently awaiting results
of the motion for summary judgment.
On March
19, 2010, Exergen Corporation filed a Lanham act lawsuit with the United States
District Court for the District of Massachusetts against the Company and
Kidz-Med, Inc. alleging false advertising with regards to the Thermofocus
thermometer and the Kidz-Med Non-Contact 5-in-1, and seeking unspecified damages
and an injunction against future false advertising. The legal action
alleges false advertising by Kidz-Med regarding the site of the temperature
measurement, namely the forehead and how this relates to temporal artery blood
flow. In particular, the complaint alleges that the Company’s advertising
falsely claims that the Thermofocus takes the temperature of the skin over the
temporal artery; the Company maintains that its advertising does not make such a
claim. The Thermofocus device takes the temperature in the middle of the
forehead. This skin temperature at the middle of the forehead is affected
by the blood flow in the temporal artery. Neither device measures the
blood temperature in the temporal artery.The Company believes the plaintiff’s
allegations have no merit and plans to vigorously defend itself. The Company
filed a Motion to Dismiss the Complaint on May 25, 2010. Exergen filed a
Motion in Opposition to this motion on June 14, 2010. There has been no
further action to date.
On
September 21, 2010, Tecnimed, Srl filed a complaint against the Company and its
Kids-Med subsidiary with the United States District Court for the Southern
District of New York alleging that the Company’s Kidz-Med VeraTemp Non-Contact
Thermometer is sufficiently similar to Tecnimed’s Thermofocus Thermometer that
the Company breached a non-compete agreement and infringed on the Thermofocus
trademark and trade dress. In addition, the complaint alleges that the
Company sold Thermofocus units in an unauthorized manner resulting in a breach
of contract. Further, the complaint alleges that the Company is in default
on the payment of $209,802 of principal and $88,867 of interest under the notes
due Tecnimed. The complaint seeks a trial by jury, injunctions against
manufacturing and selling products that are in competition with the Thermofocus
and use similar trade dress, recall of the Company’s Kidz-Med 5-in-1 Non-Contact
thermometer, and payment of unspecified amounts for ill-gotten gains, treble
damages, punitive damages and attorneys’ fees. Subsequently, a hearing was
held on the plantiff ’s motion for a preliminary injunction. On January 18,
2011, the Court issued a preliminary injunction prohibiting the Company from
shipping product in the infringing packaging, and ordered a recall of the
product from customers contingent on Tecnimed posting a bond of $130,000. On
January 18, 2011, the Company filed an appeal of this order and a stay of this
decision pending appeal. Tecnimed posted the bond on February 3, 2011, but on
February 4, 2011, the Court issued a stay of the recall order pending an appeal
decision. The Court also approved the Company’s new package design for the
VeraTemp Non-Contact thermometer. On
February 11, 2011, the Court ordered a recall of the Company’s Kidz-Med 5-1
Non-Contact thermometer held by wholesalers for re-packaging and the Company
began mailing recall letters on February 11, 2011. It is currently not possible
to determine impact of the recall on the Company’s financial position or results
of operations. The Company will continue to pursue the appeal of the
preliminary injunction.
On
October 26, 2010, Sanomedics International Holdings filed a complaint in United
States District Court for the Southern District of Florida against the
Company alleging that the Company infringed on plaintiff’s thermometer design
patent, and upon an exclusive distribution and manufacturing agreement between
the plaintiff and the Chinese manufacturer of the Company’s Kidz-Med VeraTemp
Non-Contact thermometer. The complaint also alleges the Company wrongfully
asserted dominion over plaintiff’s Food and Drug Administration clearances
depriving plaintiff of its exclusive rights and interests. The complaint
seeks injunctive relief, recall and destruction of all the Company’s Kidz-Med
VeraTemp Non-Contact thermometer products and marketing materials, and
unspecified monetary damages, punitive damages and attorneys’ fees. The
Company believes the complaint is without merit and intends to pursue a vigorous
defense.
In
October 2009, Shrink Nanotechnologies, Inc. (formerly known as AudioStocks,
Inc.) (“Shrink”) filed suit against us and our officers and directors, among
others in the Superior Court of the State of California for the County of San
Diego, North County Division. The action alleges that the Company and Stalt,
Inc. (the Company’s former transfer agent) have refused to allow the plaintiff
to have the legend removed on 2,000,000 shares of the Company’s Common Stock
that were issued to the Plaintiff. The plaintiff alleges breach of
contract, anticipatory breach of contract, fraud and misrepresentation, breach
of covenant of implied good faith and fair dealing. The plaintiff sought
at least $1,428,000 and asks the court to compel the Company though Stalt,
Inc. (its former transfer agent) to issue shares of its Common Stock equal
to the damages determined at trial. The action also sought punitive damages in
excess of $4,248,000. This matter was settled completely in February 2010.
Under the terms of the settlement, the Company issued Shrink16 million new
shares of the Company’s common stock without legend, and Shrink relinquished all
outstanding warrants and an 8 million share certificate it already possessed.
The 16 million new shares were issued without legend on the basis of the
exemption from registration statement provided by Section 3(a)(10) of the
Securities Act of 1933, as amended, for securities issued in exchange for
outstanding securities, claims or property interests, where such exchange is
approved by a court authorized to grant such approval. None of the shares issued
in connection with settlement of litigation are included in this
prospectus.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward
Looking Statements
Some of
the statements contained in this prospectus that are not historical facts are
"forward-looking statements" which can be identified by the use of terminology
such as "estimates," "projects," "plans," "believes," "expects," "anticipates,"
"intends," or the negative or other variations, or by discussions of strategy
that involve risks and uncertainties. We urge you to be cautious of the
forward-looking statements, that such statements, which are contained in this
prospectus, reflect our current beliefs with respect to future events and
involve known and unknown risks, uncertainties and other factors affecting our
operations, market growth, services, products and licenses. No assurances can be
given regarding the achievement of future results, as actual results may differ
materially as a result of the risks we face, and actual events may differ from
the assumptions underlying the statements that have been made regarding
anticipated events. Factors that may cause actual results, our performance or
achievements, or industry results, to differ materially from those contemplated
by such forward-looking statements include without limitation:
26
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Our
ability to attract and retain management, and to integrate and maintain
technical information and management information
systems;
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Our
ability to raise capital when needed and on acceptable terms and
conditions;
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Our
ability to procure or produce products and sell them at a reasonable
profit;
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The
intensity of competition for products similar to ours;
and
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General
economic conditions.
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All
written and oral forward-looking statements made in connection with this
prospectus that are attributable to us or persons acting on our behalf are
expressly qualified in their entirety by these cautionary statements. Given the
uncertainties that surround such statements, you are cautioned not to place
undue reliance on such forward-looking statements.
Overview
We
provide healthcare and medical products distributed primarily to retail drug
chains, retail stores specializing in sales of products for babies and medical
supply dealers. We currently are comprised of three subsidiaries: (i) Kidz-Med,
Inc. (“Kidz-Med”), (ii) HeartSmart, Inc. (“HeartSmart”) and (iii) Ulster
Scientific Inc. (“Ulster”), all of which are now inactive. The Company plans to
sell all products through the parent company, American Scientific Resources,
Incorporated, utilizing the Kidz-Med and, should it become active again,
HeartSmart names as brand names only. Effective December 31, 2010, the
Company closed all the Kidz-Med accounts and made that subsidiary
inactive.
The
Company currently is selling its products through retailers such as Amazon.com,
C&S Grocers, CVS Pharmacy, CVS.com, Diapers.com, Duane Reade, Fred Meyer,
Price Chopper, and through surgical supply dealers such as Cardinal Health,
Henry Schien and McKesson. The Thermofocus 5-in-1 product, which the
Company sold until the second quarter of 2010, was also in over 6,500 Walgreens
Drug Stores until August 2009, when the product was removed due to a Walgreens
storewide reorganization that resulted in thousands of products being removed
from its shelves. We have now developed our own non-contact thermometer,
the Kidz-Med VeraTemp and VeraTemp+ Non-Contact thermometers. We decided to
develop the Kidz-Med VeraTemp Non-Contact thermometers because we believe
we can successfully compete in the thermometer arena. Development of the
Kidz-Med VeraTemp and VeraTemp+ will allow the Company to control the
manufacturing and international distribution process for its product, and will
also result in much lower costs (approximately 50% of the cost of the
Thermofocus) allowing the product to retail for under $50. The Company
attended the ECRM cough/cold convention in Dallas in early March 2010 and
the product was well received. ECRM is an organization dedicated to
assisting manufacturers and retailers with improving sales, reducing costs, and
moving products to market faster and more efficiently. The Company also
attended the National Association of Chain Drug Stores convention in San Diego,
CA in June of 2010. The Company is in discussions with several large retail
outlets, as well as many smaller chains, to carry the product. The Company
received and shipped the first 2,000 unit orders in September 2010 and received
and shipped another 10,000 units in October through early November 2010. The
Company is in possession and shipping to customers another 10,000 unit
shipment.
Sales of
the Thermofocus unit averaged about 900 units per month at Walgreens from
October of 2007 to August 2009. We have a more limited sales history with
Babies”R”Us, but the product has sold, on average, 80 units per week for the
first eight weeks beginning February 1, 2009, but sales have averaged 50 units
per week since. Product reviews of the Thermofocus unit have been very
favorable, but management believes that its sales growth has been limited due to
a lack of marketing and high price point ($69 suggested retail price). The
Thermofocus has been phased out as the Company’s Kidz-Med VeraTemp unit became
available during the third quarter of 2010. In particular, the Company is
no longer selling the Thermofocus unit in the United States or internationally,
except that, the Company intends to sell any remaining Thermofocus units in
inventory to discount distributors in the Third World. There are no current
arrangements or agreements in effect with respect to such sales. All present and
future customers of the Company are now presented with the Kidz-Med VeraTemp
Non-Contact thermometer.
Overall
sales in 2010 have been comparable to overall 2009 sales, with the launch of the
VeraTemp products in Septmeber 2010 and the sales of the Disintegrator to Bayer
Sante. The Company began ramping up sales with the introduction of
its own thermometer, the Kidz-Med VeraTemp Non-Contact thermometer and the
Disintegrator Plus during the third quarter of 2010.
Sales
from the Kidz-Med website averaged $2,000 to $3,000 per month during the year
ending December 31, 2007 and increased to over $8,000 per month in the year
ending December 31, 2008. Web sales in 2009 averaged over $10,000 per
month. We are currently selling seven products on the Internet. These
products include the Medicine pacifier, the ScaldSafe, the WhistleWatch, the
Ultrasonic Nebulizer, and the two Dr. Bip DVDs, a video series to help children
understand and cope with life events such as hospitalization and welcoming a new
baby into the family. Management believes that this channel needs to be
optimized and exploited to a much greater degree. The Company will promote the
Kidz-Med VeraTemp Non-Contact thermometer vigorously. The Company also
created a web site for the Disintegrator, www.disintegratorplus.com. The
Company has received exposure on Fox and Friends, Good Morning America, and the
Rachel Ray show and will continue to try to garner exposure through various
media outlets. Internet sales during the first three quarters of 2010 have
slowed due to reduced marketing efforts for the Thermofocus thermometer and the
phase out of this product. The Company does not plan to sell its
proprietary unit directly to consumers on its web site. Instead, all
internet sales will be directed to the e-commerce sites of our large retail
customers, like CVS.com, BRU.com and Amazon.com.
The
Company is fulfilling all retail and internet orders from its warehouse facility
located in Chagrin Falls (near Cleveland), Ohio.
27
Purchase
of Disintegrator Patent
On
September 10, 2009, we purchased a patent for a needle destruction device known
as the Disintegrator® (including trademarks for the Disintegrator®,
Disintegrator Plus® and Disintegrator Pro®) and other assets from Safeguard
Medical Technologies, LLC (“Safeguard” ) in exchange for 250,000,000 shares of
common stock and assumption of a contingent note payable up to $1,200,000.
We evaluated the acquisition to determine whether the purchase of the patent,
trademarks and other assets constituted the acquisition of a business.
After application of the various criteria, management determined that this
acquisition was in substance the purchase of an asset. While we acquired
certain spare part inventory on hand, rights to distribution, intellectual
property (including the patent and trademarks) and other assets, we determined
that only the patent for the Disintegrator® had value. Accordingly, we
recorded the patent at $2,652,272 equivalent to the trading value of the
250,000,000 shares of common stock at the closing bid price on September 10,
2009 in the amount of $1,875,000 and the discounted amount of a $1,200,000
contingent note payable assumed in the amount of $777,272.
The
patent is due to expire in May 2022. We estimate that market demand for
the Disintegrator as patented will exceed the patent life, and therefore have
chosen to amortize the patent over the remaining patent life on a straight-line
basis. Should the Company’s estimate of market demand for the
Disintegrator diminish, the Company will adjust its patent amortization schedule
accordingly.
The
assumed $1.2 million, non-interest bearing, contingent note is payable to Mr.
Jason M. Roth, an executive and the majority owner of Safeguard, in two
installments upon reaching certain targets. The first installment of
$600,000 is payable upon the Company reaching $6,000,000 in combined new sources
of capital and new sources of revenue from sales of the Disintegrator Plus®, the
Non-Contact 5-in-1 and any other product which the Company may sell as a result
of either Mr. Roth inventing the product or Mr. Roth’s contacts with the owner
of such products, within two years of September 10, 2009. No other such
products have yet been identified. The second installment of $600,000 is payable
upon the Company reaching an additional $4,000,000 of combined new sources of
capital and new sources of revenue within two years of the due date of the first
installment. At the Company’s option, the first and second installments
may each be paid over 12 months after achievement of the respective combined
capital and revenue targets. In connection with our agreements with Mr.
Roth and Safeguard as described above, the $1.2 million note obligation has been
recognized. The first installment of the note was discounted at 16% from
the end of a two year period and the second installment was discounted at 16%
from the end of a four year period, resulting in a present value of
$777,272. The 16% discount rate was determined as the weighted average
cost of capital for small companies in the Company’s industry from an
independent research service (Morningstar’s Ibbotson® Cost of Capital 2009
Yearbook, page 3-66). Subsequent changes to our estimate of the amount due
on this contingent note payable will be recorded in the Company’s consolidated
financial statements when known.
Simultaneous
with the patent acquisition, we agreed to hire Mr. Roth, to assist with
operations, sales and marketing, and entered into a ten year employment
agreement with the executive. We also agreed to retain Safeguard for
production, engineering and quality control services. Mr. Roth’s base
salary is $10,000 per month commencing upon receipt by the Company of $500,000
in the combined aggregate of new capital or sales revenue. We began paying
Mr. Roth’s base salary in December 2009. His base salary will increase to
$20,000 per month upon receipt by the Company of $2,500,000 in combined new
capital or sales revenue. In consideration for entering into the
employment agreement with Mr. Roth, we agreed to issue up to 250,000,000
warrants and pay up to $200,000 as a one-time cash bonus, both contingent upon
future sales of the Disintegrator Plus®, the Non-Contact 5-in-1, and any other
products which the Company may sell as a result of either Mr. Roth inventing the
product, Mr. Roth’s contacts with the owner of such product, or Mr. Roth’s sales
efforts for any Company product. The warrant revenue targets for each
tranche must be met, and the bonus is payable, within three years of September
10, 2009. We determined that the contingent warrants and contingent bonus
payable qualified for treatment as contingent compensation for accounting
purposes. As described in the next paragraphs, $823,991 was determined to
be the fair value of the contingent compensation on the date we entered into the
agreements. The fair value of the contingent compensation was obtained by
determining the likelihood that the contingency would be realized within the
applicable time period and applying the Black-Scholes pricing model to the
warrants and a discount to present value for the bonus. Subsequent changes
to our estimate of the total amount of compensation due will be recorded in the
Company’s consolidated financial statements when known.
We agreed
to issue the first 50,000,000 warrants to purchase an equivalent number of
shares of common stock immediately upon the collection of $2.0 million in
revenue from sales of the Disintegrator Plus®, the Non-Contact 5-in-1 and any
other products which the Company may sell as a result of either Mr. Roth
either inventing the product, as a result of Mr. Roth’s contacts with the owner
of such products, or Mr. Roth’s sales efforts for any of the Company’s products
within three years of September 10, 2009, at an exercise price is equal to the
closing bid price of the common shares on August 11, 2009, or $.002 per
share. With respect to determining whether Mr. Roth’s contact with a
product owner is made from his contacts, any introduction by Mr. Roth of a
product that the Company is not at the time of such introduction distributing
will qualify. Further, we agreed to issue Safeguard up to 200,000,000 warrants,
in 50,000,000 tranches, immediately upon collection of an additional $5.0
million, $10.0 million, $15.0 million and $20.0 million in revenue from sales of
the Disintegrator Plus®, the Non-Contact 5-in-1 and any other products which the
Company may sell as a result of either Mr. Roth either inventing the product or
as a result of Mr. Roth’s contacts with the owner of such products, or Mr.
Roth’s sales within three years of September 10, 2009, with an exercise price
equal to the lesser of the closing bid price on the day prior to achieving the
revenue target or the exercise price of the immediately preceding tranche.
Further, after three years, we agreed to pay a one-time cash bonus to Mr. Roth
of up to $200,000 based gross revenue generated from sales of the Disintegrator
Plus®, the Non-Contact 5-in-1 and any other products which the Company may sell
as a result of either Mr. Roth inventing the product or Mr. Roth’s contacts with
the owner of such products within three years of September 10, 2009.
Specifically, the revenue benchmarks for issuance of up to 250 million warrants
are as follows: 50 million warrants for $2 million in new sources of revenue
from sales of the Disintegrator Plus®, the Non-Contact 5-in-1 and any
other products which the Company may sell as a result of either Mr. Roth
either inventing the product or as a result of Mr. Roth’s contacts with the
owner of such products 50 million warrants for $5 million in new sources of
revenue; 50 million warrants for $10 million in new sources of revenue; 50
million warrants for $15 million in new sources of revenue; and 50 million
warrants for $20 million in new sources of revenue. The revenue benchmark
for the cash bonus is: $50,000 for $2 million in new sources of revenue from
sales of the Disintegrator Plus®, the Non-Contact 5-in-1 and any
other products which the Company may sell as a result of either Mr. Roth
either inventing the product or as a result of Mr. Roth’s contacts with the
owner of such products; $100,000 for $5 million in new sources of revenue;
$150,000 for $10 million in new sources of revenue; and $200,000 for $20 million
in new sources of revenue.
In
connection with our agreements with Mr. Roth and Safeguard as described above,
we currently anticipate the issuance of 100,000,000 warrants, which were
determined to have a fair value of $759,925 as of September 10, 2009. (The
Company has not prepared any future revenue or income projection in connection
with this determination, but merely made an accounting estimate which
management believes provides a reasonable basis for accrual of amounts likely
due Mr. Roth.) The fair value of these warrants was determined by using the
Black-Scholes pricing model with the following assumptions: no dividend yield,
expected volatility of 278.50%, risk-free interest rate of 2.29%, and an
estimated life of five years. In accordance with ASC No. 718-10, Compensation – Stock
Compensation , the Company is recording monthly compensation expense for
the fair value of the warrants payable. For the period ended
December 31, 2009, the Company recorded $77,400 as compensation expense with an
offset to additional paid-in capital. For the nine months ended September
30, 2010 and 2009, the Company recorded $189,981 and $14,073 as compensation
expense, respectively, with an offset to additional paid in capital. The Company
will adjust the total amount of compensation expense as recorded in the
consolidated financial statements upon the occurrence of an event which would
require such adjustment.
28
In
connection with our agreements with Mr. Roth and Safeguard as described above,
and based on management’s estimate, Safeguard is entitled to a $100,000 cash
bonus, which was deemed to have a fair value of $64,066 on September 10, 2009
determined as the present value of the probable amount of bonus payable
discounted at 16% from the end of a three year period. The Company is accruing
monthly compensation expense for the anticipated amount of the bonus payable on
a straight-line basis over the 3 year period that the services are being
performed. During the period from September 10, 2009 to December 31, 2009, the
Company recognized $10,186 as compensation expense related to this liability for
contingent compensation. During the nine months ended September 30, 2010, the
Company recognized $25,000 as compensation expense related to this liability for
contingent compensation, raising the balance to $35,185 as of September 30,
2010.
During
the year ended 2009, the Company paid $10,000 related to the employment
agreement. During the nine months ended September 30, 2010, the Company expensed
$90,000 of base salary related to this agreement. No amounts have been paid
for production, engineering and quality control services under this agreement to
date.
In March
2010, the Company received its first order for 2,000 units of the Disintegrator
Plus from Bayer Sante for distribution in France. Fulfillment of the first order
was completed in September 2010. This order generated approximately
$155,000 of revenue for the Company during 2010. The Company has ordered
the manufacture of components, and intends to assemble, an additional 3,000
Disintegrator Plus units for distribution during 2010 and 2011.
Results
of Operations
Results
of Operations for the Nine Months Ended September 30, 2010 compared to September
30, 2009
Net
revenues from product sales for the nine months ended September 30, 2010 were
$578,961, falling approximately $18,000 or 3% from $596,573 for the same nine
month period in 2009. A majority of our sales for the nine months ended
September 30, 2010 and for the same nine month period in the previous year
consisted of sales of the Thermofocus 5-in-1 thermometer. However,
quantities sold and average selling pricing for the Thermofocus fell
significantly during the first half of 2010 as the Company ceased actively
selling the Thermofocus. During the third quarter of 2010, the Company began
selling and distributing its new Kidz-Med VeraTemp Non-Contact thermometer and
its new Disintegrator Plus needle and lancet destruction device. For the nine
months ended September 30, 2010, sales of the Disintegrator Plus to Bayer Sante
accounted for approximately 26% of our revenue. For the first nine months of
2010, approximately 12% of the Company’s revenue was generated from sales of the
Thermofocus and Kidz-Med VeraTemp thermometers to Babies R Us. In addition,
internet sales through e-tailers such as Amazon and the Company’s website,
accounted approximately 10% of first nine month 2010 revenues. We also collected
cash and recorded revenue of approximately $129,000 during the first nine months
of 2010 from sales in a prior period, but for which revenue was not recorded due
to the then substantial doubt as to ultimate collectability. This cash collected
represents approximately 21% of our 2010 revenues through September 30, 2010.
For the first nine months of 2009, substantially all of our revenues were
generated from sales of the Thermofocus thermometer at Walgreens retail
pharmacies.
Gross
profit for the nine months ended September 30, 2010 was $76,675, up from $56,745
from the same nine month period a year earlier. During the second quarter of
2010, the Company began phasing out distribution of the Thermofocus thermometer
due in part to falling customer demand and high product costs, and began
accepting orders for the new Kidz-Med VeraTemp Non-Contact thermometer. On
June 30, 2010 and September 30, 2010, the Company determined that the estimated
market value of the remaining Thermofocusunits on-hand had progressively fallen
below recorded carrying cost. Therefore, on June 30, 2010, the Company
recorded a lower of cost or market adjustment of $63,194 to reduce the
thermometer inventory carrying value to estimated market value, and recorded a
similar adjustment to market value in the amount of $122,744 on September 30,
2010. The respective estimated market values were determined from then
recent selling prices of the product. During the first nine months of 2009, the
Company recorded inventory adjustments of $211,080, reducing gross profit and
establishing a balance sheet reserve against inventory. The 2009 inventory
adjustment represented our estimate of inventory lost, damaged or unaccounted
for after distribution to a customer on consignment. Had the Company not
recorded the lower of cost or market adjustments during 2010 and the inventory
adjustments during 2009, gross profit as a percent of sales was approximately45%
for both the nine months ended September 30, 2010 and the same nine month period
in 2009. However, as stated previously, the Company’s mix of product sales has
varied from predominately sales of the Thermofocus during the first nine months
of 2009, to various sales of the Therrnofocus, Kidz-Med VeraTemp and
Disintegator Plus during the nine months ended September 30 2010. During 2010,
gross margins on the Thermofocus thermometer have fallen significantly due to
discounted pricing for sales beginning in the second quarter of 2010 as the
Company attempted to dispose of remaining inventory in anticipation of beginning
sales of its new Kidz-Med VeraTemp Non-Contact thermometer.
29
Operating,
sales and administrative expenses amounted to $2,478,115 for the nine months
ended September 30, 2010 versus $1,470,591 for the same nine month period in
2009. The approximate $1,007,000, or 69%, increase resulted primarily from:
higher total compensation costs of $809,000 resulting primarily from (i)
amortization of contingent compensation expenses, (ii) awards of shares of our
common stock to members of our Board of Directors, (iii) base salaries and stock
awards to two executives and to two additional employees; an increase in
amortization expense related to the Disintegrator patent of $158,000 ( no such
amortization expense was incurred in the nine months of 2009); incurrence of
research and new product development costs of $178,000 (only $5,000 of such
research and development costs were incurred during the first nine months of
2009); and higher travel and entertainment expenses of $51,000. Offsetting these
increased expenses were reductions in professional fees of $59,000 and
advertising costs of $27,000. Professional fees for marketing, investor
relations, legal and accounting services amounted to $907,000 for the nine
months ended September 30, 2010 compared to $966,000 for the same nine month
period in 2009, and resulted primarily from the issuance of the Company’s common
stock in each period. Also offsetting the increases in expenses was the
reversal, in the second quarter of 2009, of approximately $66,000 of accounts
payable and accrued expenses for which the Company had over-estimated amounts
due in a prior period and subsequently settled in full.
During
the first nine months of 2010, we recorded $215,000 as compensation expense
related to the contingent warrants issuable and contingent bonus payable
resulting from agreement entered into with Mr. Jason Roth beginning in September
2009. We also accrued and paid $90,000 of salary due to Mr. Roth during the
first nine months of 2010. In addition, during the first nine months of 2010, we
issued shares of our common stock valued at $83,000 to a marketing executive
employed beginning March 1, 2010. During the first quarter of 2009, we
recognized $105,000 of compensation expense related to the issuance of
87,500,000 shares of our common stock to five members of our Board of Directors.
In July 2010, we issued 40,000,000 shares of our common stock to four members of
our Board of Directors valued at $400,000. As of September 30,
2010, we employed 6 persons compared to 2 persons as of September 30, 2009.
During the nine months ended September 30, 2010, we incurred $49,000 of
compensation expense for two warehouse employees where no such expense was
incurred during the first nine months of 2009. In addition, employee health
insurance, payroll tax expense and other payroll related costs are higher for
2010 due to the additional employees retained for most of 2010.
Interest
expense was $1,797,305 for the nine months ended September 30, 2010 versus
$429,361 for the same nine month period in 2009. This increase was due primarily
to the recording of interest expense related to the initial recording of
derivative liabilities due to certain of our warrants and embedded features of
our convertible debt. At issuance, we recognized approximately $1,433,000 of
interest expense related to these derivative liabilities. In addition, for the
first, second and third quarter 2010 issuances of convertible notes, we
recognized approximately $35,000 of interest expense for the periods from
issuance through September 30, 2010. Offsetting this increase, during 2009
and the first nine months of 2010, principal outstanding on various other notes
was reduced through cash payments, conversion to equity and conversion to other
non-interest bearing liability. As a result of these principal reductions,
interest expense for first nine months of 2010 related to these obligations was
either reduced or eliminated as compared to the same period in
2009.
During
the first nine months of 2010, we recognized various new derivative
liabilities in conjunction with embedded conversion features and warrants
related to the issuance of convertible notes, and commitments for contracts to
be settled with shares of our common stock in excess of amounts authorized. Due
to recent decreases in the trading price of our common stock, the mark to market
adjustments as of September 30, 2010 related to our derivative liabilities
resulted in a gain of $932,624 for the period ended September 30,
2010.
Effective
June 30, 2010, the Company agreed to settle a dispute with regard to principal
and interest due to Lanktree. As a result of the settlement, the Company
recorded a charge of $478,262. See Note 7 to our interim financial
statements for more information. On September 22, 2010, we entered into a letter
agreement with Lanktree to allow for conversion of $580,000 of the principal
outstanding into shares of our common stock at any time while the note is
outstanding. Based on the trading value of the common stock on that date, we
recognized a charge for beneficial conversion feature of $580,000 in our
Consolidated Statement of Operations.
Net loss
applicable to common shareholders was $4,787,637 for the nine months ended
September 30, 2010 compared to $1,935,779 for the same nine month period in
2009. As discussed above, the higher loss was primarily due to higher
interest expense, higher operating, sales and administrative expenses, and the
charges from the settlement of the Lanktree debt obligation, offset by the mark
to market gain for derivative instruments.
30
Results
of Operations for the Years Ended December 31, 2009 compared to December 31,
2008
Since the
fourth quarter of 2007, a majority of the Company’s revenue has been generated
from sales of the Thermofocus 5-in-1 thermometer. For the 2009
fiscal year, 65% of our revenue came from sales to two customers; Walgreens and
BabiesRUs. For the fiscal year ended December 31, 2009, we had total
product sales revenues of $734,495 compared to revenues of $910,577 for the
fiscal year ended December 31, 2008, a decrease of 19%. For the fiscal
year ended December 31, 2009, we had a gross profit of $307,198 compared to a
gross profit of $391,447 for the fiscal year ended December 31, 2008, a decrease
of 22%. The decreases were primarily due to the discontinuance of sales of the
Thermofocus thermometer by Walgreens and slightly higher sales discounts
generally, offset by increases in sales to other retailers and
higher internet sales. The Thermofocus was discontinued from
Walgreens due to slower than expected sales and a planogram reorganization that
resulted in several thousand products being discontinued from store shelves.
Also, primarily during 2009, the Company did not recognize revenue from sales of
product when ultimate cash collection was in doubt. As of December
31, 2009, the Company did not accrue revenues amounting to approximately $32,750
for product sold during 2009 as ultimate collectability remained in
doubt.
Sales
prices for the Company’s products vary based on quantities ordered,
transportation, discounts from prompt payment and other contractual terms and
conditions. Over the two year period, selling prices have remained
relatively consistent by customer type.
In August
2009, Walgreens ceased ordering the Thermofocus thermometer from the Company,
pulled the product from its store shelves and began returning unsold product to
the Company. During the fourth quarter of 2009 and first quarter 2010,
approximately 11,900 units were returned by Walgreens. The Company
believes that most, if not all, this product may be resold with only minimal
testing and re-packaging cost. Given there was a full year of sales in
2008 and only approximately seven months of sales during 2009, the number of
units sold by Walgreens decreased by approximately 2,800 units, or 26%,
from 2008 to 2009 accounting for a majority of the Company’s change in sales
year to year.
Costs for
sourcing products sold by the Company did not fluctuate significantly over the
two year period 2008 and 2009. The Company acquired the Thermofocus units
sold during 2008 and 2009 at a fixed price during the fourth quarter of
2007. Various delivery costs fell slightly year to
year.
In
addition to the above, gross profit was impacted during 2008 and 2009 by the
establishment of reserves for Thermofocus inventory placed on consignment that
has been lost or damaged by a customer. We set aside $58,773 during 2009
and $46,565 during 2008 representing our cost of Thermofocus product which has
not been accounted for by a consignment customer and for which our customer may
not pay us. As of December 31, 2009, our total reserves for such product
amounted to $166,808. We are currently attempting to recover product lost
by our customer. Ultimately, we will either collect cash for this product,
or after we have exhausted efforts to locate and obtain return of this product,
reverse this reserve against inventory considering it permanently lost.
During 2009, we reversed a portion of our previously established inventory
reserve amounting to $163,990 against inventory as this product was either sold
or deemed by us to be permanently lost, damaged or not recoverable. It is
possible that a portion of our consigned inventory will be returned in operable
condition and simply require re-packaging, or returned inoperable and no longer
sellable. To date, we have had very few products returned as
inoperable. We generally attempt to recover inoperable product from the
manufacturer under warranty provisions implicit in our contracts. However
there can be no assurance that we will recover any amounts due to manufacturer’s
defects.
Overall
gross profit as a percentage of sales fell slightly from 43% for 2008 to 42% for
2009 due to the higher inventory adjustment to establish reserves offset by
lower delivery costs.
For the
fiscal year ended December 31, 2009 our total operating expenses were $2,094,303
compared to operating expenses of $5,201,629 for the fiscal year ended December
31, 2008. This significant reduction was primarily due to the elimination
or expiration of consulting contracts for investor relations, financial,
marketing and other consulting services of approximately $1,675,000 many of
which were settled through stock based compensation; lower stock based
compensation awarded to member of our board of directors of $1,395,000; lower
legal fees of approximately $288,000; and lower advertising costs of
approximately $41,000. These reductions were offset by higher employee
compensation costs of approximately $169,000 and the patent amortization of
approximately $53,000. During 2008, directors were awarded 30,000,000
shares of common stock valued at the closing bid price on the day of issuance at
$1.5 million for services rendered during the prior three years.
Interest
expense was $656,450 and $1,592,838 for the years ended December 31, 2009 and
2008 respectively, a decrease of $936,388. The reduction is primarily due
to conversion of interest bearing debt to common stock during 2008 and 2009,
completion of amortization of debt discount during 2008 and cash payments to
reduce principal during 2008 and 2009.
On
December 31, 2009, we recognized a gain from the discharge of indebtedness of
$105,684 due to the release agreement signed with Gols Associates, Inc.
This agreement specifies the Company is obligated to repay up to $350,000 based
on the outcome of Gol’s trading of the Company’s common shares for an eleven
week period after the registration statement becomes effective.
In
October 2009, we recognized a deemed dividend on Series B preferred stock of
$985,000 as a result of the issuance of 500,000 shares of the Series B
convertible preferred stock.
We had a
net loss applicable to common shareholders of $3,424,851 and $6,406,954 for the
fiscal years ended December 31, 2009 and 2008 respectively. The decrease
was primarily due to the much lower operating expenses as discussed
above.
31
The
Company had very few sales to international customers to date. The
contract for the 2,000 unit sale of the Disintegrator Plus to a French company
was denominated in US dollars.
Liquidity
and Capital Resources
As
of September 30, 2010
As of
September 30, 2010, our current liabilities exceed our current assets by
$5,545,572, and for the nine months then ended, we incurred a net loss of
$4,787,637 and used cash of $653,737 in operations. We continue to be in
default with regard to the payment of certain of our obligations. At September
30, 2010, the amount of principal outstanding on notes payable for which the
Company was in default amounted to $1,860,039 (excluding $159,430 of unpaid
amounts due to related parties).
As of the
date of this prospectus, we are in default on some of our promissory notes in
the aggregate principal amount of $1,757,447 (excluding unpaid related party
advances and notes payable of $159,430), and the noteholders may foreclose on
our assets and commence legal action against us to recover the amounts due which
ultimately could require the disposition of some or all of our assets. Any such
action may require us to curtail or cease operations.
Our
auditors, in their report included with December 31, 2009 consolidated financial
statements, expressed substantial doubt about the Company’s ability to continue
as a going concern. Our September 30, 2010 condensed consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty. The Company’s continued existence is dependent upon its
ability to successfully execute its business plan, secure additional sources of
liquidity and obtain accommodating credit terms from vendors, noteholders and
other creditors. Should the Company be unable to renegotiate the terms and
conditions on its debt obligations or is otherwise unable to pay its accounts
payable when due, the Company may incur materially higher interest expenses, and
the debt holders could foreclose on their collateral and commence legal action
against the Company to recover amounts due which ultimately could require the
disposition of some or all of the Company’s assets. Any such action may require
us to curtail or cease operations.
Over the
last three years, operations have been funded primarily by sales and issuances
of the Company’s securities and revenue generated from sales of the Company’s
products. Current and future operations are expected to be funded
primarily throughnew sources of debt or equity financings and from sales of the
Company’s products. There is no assurance new sources of debt or equity
financings will be available on terms acceptable to the Company, or at all.To
the extent that any excess cash is generated from operations, it has been, and
will continue to be, used for the payment of debt and other obligations.
Management believes that, based on the anticipated level of sales, and continued
debt and equity financings and continued support through reasonable and
accommodating credit terms from vendors, debt holders and other creditors, the
Company can continue operating in the short-term. During 2009, the Company
used proceeds from the sale of shares of its common stock for the development of
the Company’s Kidz-Med VeraTemp Non-Contact Thermometer and the Disintegrator
Plus®. Proceeds from any future sales of the Company’s securities are also
expected to be used primarily for product development. The Company may
continue to offer its securities for payment of services and other
obligations.
As of the
date of this prospectus, we currently have sufficient cash to sustain our
operations for a period of approximately one month. Management estimates that it
will need $1,000,000 over the next twelve months, and $3,000,000 to fund all of
the Company’s current product development and marketing projects, including
$1,000,000 to fund marketing programs for the Kidz-Med VeraTemp Non-contact
thermometer. The Company expects to procure large purchase orders for its
non-contact thermometer by the end of 2010 from major retail customers; which,
if these orders occur will greatly improve cash flow and lessen the need for
outside financing. The Company is in constant discussion with private
investors and investment groups in an attempt to procure the necessary
funding. These efforts will proceed unabated. The Company can
provide no guarantee that this funding will be realized. The Company recently
secured a $3.0 million financing facility to fund the purchase of inventory
against purchase orders and a $1.0 million accounts receivable factoring
facility.
During
the nine months ended September 30, 2010, we received $670,000 from the issuance
of convertible debt and $78,200 from the issuance 12,686,567 shares of our
common stock. This cash was used primarily to fund our operations for the
nine month period.
During
the nine months ended September 30, 2010, we issued 40,000,000 shares of our
common stock valued at $400,000 to members of our Board of Directors, and
8,298,661 shares of our common stock valued at $83,000 as compensation to
employees. During the same nine month period, we issued 36,331,918 shares
of our common stock to various service providers as partial or complete payment
for services provided. In the future, we may issue additional shares of
our common stock in exchange for services.
32
Third quarter
2010 convertible debentures. On July 22, 2010, the Company
entered an agreement with Granite Financial Group, LLC to issue convertible
debentures in the amount of $100,000 and warrants to purchase 5,000,000 shares
of common stock for cash proceeds of $100,000 less a selling commission of
$8,000. The debentures mature two years from the date of issuance and are
convertible at any time within that period at a conversion price of $0.004 per
share. The warrants are exercisable over seven years at $0.0075 per share. These
convertible debentures accrue interest at 10% per annum if paid in cash, or 12%
per annum if paid in equivalent shares of common stock. For the period ended
September 30, 2010, the Company accrued interest expense at 10% in the amount of
$1,889 related to these convertible debentures. The conversion price is
adjustable in the event of any stock dividends, stock splits and subsequent
equity sales or grants of the Company’s common stock should the effective price
per share be lower than the conversion price at the time of such issuance. The
holders of these convertible debentures may participate in any rights offering
and shall participate in any distributions through adjustment of the conversion
price. The holders may also accelerate demand for outstanding principal and
interest upon any change in control, merger, consolidation, substantial asset
sale, tender offer or other fundamental transaction as defined in the
convertible debenture. The exercise price of the warrants is adjustable in the
event of payment of dividends or any distribution of common stock, any
reclassification or recapitalization, and any subsequent equity sales should the
effective price per share be lower than the exercise price at the time of such
issuance.
Second quarter
2010 convertible debentures. On May 13, 2010, the Company entered
into agreements with two investors, Granite Financial Group, LLC, and Daniel
Schreiber SEP IRA to issue convertible debentures in the aggregate amount of
$150,000 and warrants to purchase 7,500,000 shares of common stock for cash
proceeds of $150,000 less a selling commission of $12,000. The debentures
mature two years from the date of issuance and are convertible at any time
within that period at a conversion price equal to the lesser of $0.0066 per
share or 90% of the volume weighted average price of the Company’s common stock
for ten days immediately prior to conversion, but such conversion price shall
not be below $0.0015. The warrants are exercisable over seven years at
$0.01 per share. These convertible debentures accrue interest at 10% per
annum if paid in cash, or 12% per annum if paid in equivalent shares of common
stock. The conversion price is adjustable in the event of any stock
dividends, stock splits and subsequent equity sales or grants of the Company’s
common stock should the effective price per share be lower than the conversion
price at the time of such issuance. The holders of these convertible
debentures may participate in any rights offering and shall participate in any
distributions through adjustment of the conversion price. The holders may
also accelerate demand for outstanding principal and interest upon any change in
control, merger, consolidation, substantial asset sale, tender offer or other
fundamental transaction as defined in the convertible debenture. The exercise
price of the warrants is adjustable in the event of payment of dividends or any
distribution of common stock, any reclassification or recapitalization, and any
subsequent equity sales should the effective price per share be lower than the
exercise price at the time of such issuance.
First quarter
2010 convertible debentures. On February 16, 2010 and March 23,
2010, we entered into agreements with an investor to issue convertible
debentures in the aggregate amount of $400,000 and warrants to purchase
20,000,000 shares of common stock in exchange for return of 33,333,333 common
shares and cash proceeds of $200,000, less a selling commission of
$16,000. These debentures mature two years from the date of issuance and
were initially convertible at any time within that period at a conversion price
equal to the lesser of $0.0066 per share or 90% of the volume weighted average
price of the Company’s common stock for the ten days immediately prior to
conversion, but such conversion price would not be below $0.003 per share.
The warrants were initially exercisable over three years from the date of
issuance at $0.01 per share. On May 13, 2010, in conjunction with the
issuance of the second quarter 2010 convertible debentures, we amended the floor
price from $0.003 to $.0015 per share and extended the exercise period of the
warrants to seven years. These convertible debentures initially accrued
interest at 8% per annum, payable annually on or before December 31, beginning
on the first such date after the issue date. For the three months ended
March 31, 2010, the Company accrued interest expense of $1,500 related to these
convertible debentures. On May 13, 2010, in conjunction with the issuance
of the second quarter 2010 convertible debentures, we amended the interest rate
to 10% if paid in cash, or 12% if paid in equivalent shares of common
stock.
In
connection with the first and second quarter convertible debenture issuances,
the Company relied upon the exemption from securities registration afforded by
Rule 506 of Regulation D as promulgated by the SEC under the Securities Act of
1933, as amended (the “Securities Act”) and/or Section 4(2) of the Securities
Act. 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, and transfer was restricted by
the Company in accordance with the requirements of the Securities Act of
1933.
Purchase and sale
agreements. From time to time, the Company enters into
agreements to purchase components and finished products for
resale. The purchase agreements have various durations and require
the Company to purchase certain minimum quantities. As of September
30, 2010, the Company has advanced $37,500 to a vendor, and shall owe $87,500
upon product delivery. This amount was paid and product received in
October 2010.
As
of December 31, 2009
The
Company had current liabilities that exceed current assets by $2,831,893 at
December 31, 2009, and had reported a net loss applicable to common shareholders
of $3,424,851 and net cash used in operations of $948,388 for the year ended
December 31, 2009. In addition, the Company was in default with regard to
payment of certain of its obligations. At December 31, 2009, the amount of
principal outstanding on notes payable for which the Company is in default
amounted to $1,869,182.
33
Promissory
Notes Payable
On
September 28, 2007, the Company issued a promissory note to a lender Lanktree
Consulting Corporation (“Lanktree”) in the aggregate principal amount of
$267,500 (“Note 1”) and received cash proceeds in the sum of $250,000. In
conjunction with the issuance of Note 1, effective September 28, 2007, we issued
125,000 shares of our common stock to Lanktree valued at $0.18 per share, the
trading price on that day. We also issued 250,000 warrants to purchase an
equivalent number of shares of our common stock. These warrants are
exercisable over a three year period beginning September 28, 2007 at a price of
$0.25 per share. The value of the warrants was determined by using the
Black-Scholes pricing model with the following weighted average assumptions: no
dividend yield, expected volatility of 189%, risk-free interest rate of 4.03%,
and an expected life of three years. The value of the warrants issued
amounted to $34,744 and was amortized to interest expense over 6 months during
2007 and 2008. Interest accrued on Note 1 at a rate of 12.0% per
annum. All principal and interest accruing under Note 1 was due March 28,
2008. The Company did not meet its obligations under this note and as a
result entered into an event of default. For failure to pay principal or
interest on the due date or to perform on the conditions contained in Note 1,
Lanktree, at its option, may declare the entire unpaid balance of principal and
interest immediately due and payable. In the event of default, interest
accrued at the rate of 6.0% per month on any unpaid obligation and is payable in
cash and shares of our common stock. The Company disputed Lanktree’s
calculation of principal and interest, primarily with regard to the compounding
of interest and the monthly addition to principal for unpaid interest. On
July 13, 2010, the Company entered into an agreement with Lanktree whereby
Lanktree agreed to advance $300,000 to the Company in five consecutive monthly
installment of $60,000 each in exchange for convertible notes with one year
maturities bearing interest at 8% per annum, payable monthly. From July
13, 2010 to November 13, 2010, we entered into five convertible note
agreements. These convertible note agreements are convertible into our
common shares at any time at the option of the holder at a fixed conversion
price of $0.004 per share. As part of the agreement, the Company and
Lanktree settled on the principal and amount of cash interest due on Note 1 at
$580,000. In addition, the parties agreed that the amount of the Company’s
common stock for additional interest due on Note 1 was 63,013,452 shares.
As a result of the settlement of principal and cash interest due of
$580,000 and the common stock obligation of 63,013,452 shares, the Company
recorded a settlement expense of $478,262, consisting of $348,000 of additional
principal due and an increase to accrued interest payable of $130,262 as of June
30, 2010. Further, the settlement specifies that interest on new principal
amount shall cease to accrue for a period of 180 days from July 13, 2010.
As part of the settlement, at any time after 180 days, the holder of the note
now has the right, but not the obligation, to convert any portion of the
$580,000 principal, then accrued interest if any, and any fees which may become
the responsibility of the Company, into common stock at a fixed conversion price
of $0.004 per share. In September and October 2010, Lanktree converted
$200,000 of the $580,000 note at $0.004 per share into 50,000,000 common
shares. The 63,013,452 shares are issuable in five tranches of 12,602,690
shares in conjunction with issuance of each $60,000 convertible promissory
note. In anticipation of the first tranche of shares due, on July 7, 2010,
the Company issued 12,000,000 shares to Lanktree. The closing price of our
common stock on July 13, 2010 was $0.0073 per share, resulting in a valuation of
the 63,013,452 shares at $459,998. As of June 30, 2010, the Company
recognized as an obligation to issue these shares with a value of $459,998 and
reclassified this amount from accrued interest payable. As of September 30,
2010, the Company had issued 36,000,000 of its common shares to meet this
obligation. As of November 13, 2010, the Company had issued all of the
63,013,452 share commitment. On June 24, 2010, the Company issued a convertible
promissory note in the amount of $44,000 and received cash proceeds of $40,000
from Lanktree. This note matured on December 24, 2010 and bears interest
at 12% per annum payable monthly. On December 24, 2010, we did not meet our
obligation to pay principal on this $44,000 short-term note and entered into an
additional default. We are currently negotiating with this lender to modify the
terms of default and extend term for payment. After six months from the
date of issuance, the holder of the note has the right, but not the obligation,
to convert any portion of the $44,000 principal, with then accrued interest if
any, and any fees which may become the responsibility of the Company, into
common stock at a fixed conversion price of $0.005 per share. This fixed
conversion price represents a contingent beneficial conversion feature measured
at its intrinsic value of $26,400 at the commitment date and to be recorded when
the contingency is relieved.
In
October 2010, the Company received $90,000 of cash proceeds from Lanktree on the
fourth installment note representing an advance of $30,000 from the previous
schedule, and accordingly, on October 14, 2010 we issued 5,000,000 shares valued
at $43,000, in consideration for loan advance. The fifth and final loan
installment of $30,000 was received by the Company on November 13,
2010.
Currently,
total principal amount due Lanktree is $724,000 consisting of the remaining
principal obligation on Note 1of $380,000, the aggregate principal due on the
five installment notes of $300,000, and the principal due on the short-term note
of $44,000.
Despite
the settlement expense, agreement among the parties with regard to amounts due,
and the modifications, Lanktree has not specifically agreed to a waiver of the
technical default provisions with regard to Note 1.
34
In July
2010, the Company agreed to pay a fee to a party who assisted with the
negotiations to settle the dispute over amounts due Lanktree under Note 1and
obtain commitments for an additional $300,000 of convertible note financings and
$44,000 short term convertible financings from Lanktree. The Company and
Lanktree previously disputed the calculation of interest and the application of
payments to principal and interest. For securing the $44,000 short-term
note, the Company agreed to issue 728,277 shares of common stock. For
securing the first tranche of $60,000 on the $300,000 installment financing, and
each subsequent tranche, the Company agreed to pay cash of $4,500 in cash and
issue 372,414 shares of common stock valued at $2,700 and issue 37,214 warrants
with an exercise price of $0.01 per share and exercisable over three
years. For the four subsequent tranches of $60,000, the valuation of
shares of common stock and warrants (and the exercise price of the warrants)
issuable as fees will be equal to100% of the prior three day average of closing
prices of such stock. To date, we have issued 2,717,551 common shares,
paid $20,250 in cash and awarded warrants to purchase 168,151 common shares.
(Included as part of the 2,717,551 common shares issued under this agreement, in
November 2010, the Company issued 470,930 common shares in error; only 218,801
common shares should have been issued for a total of 2,465,422 common shares. On
January 17, 2011, the certificate issued in error was returned and cancelled,
and a certificate for the correct amount of 218,801 shares was issued.) As
of February 10, 2011, a cash payment of $2,250 remains to be paid under
this agreement.
On
October 22, 2007, the Company issued a promissory note to a lender Gols
Associates, Inc. (“Lender 2”) in the aggregate principal amount of $262,500
(“Note 2”) and received cash proceeds from Lender 2 in the sum of
$250,000. A current member of our Board of Directors is indirectly related
to Lender 2. In conjunction with the issuance of Note 2, effective October
22, 2007, we issued 125,000 shares of our common stock to Lender 2 valued at
$0.23 per share, the trading price on that day. We also issued 250,000
warrants to purchase an equivalent number of shares of our common stock.
These warrants are exercisable over a three year period beginning October 22,
2007 at a price of $0.25 per share. The value of these warrants was
determined by using the Black-Scholes pricing model with the following weighted
average assumptions: no dividend yield, expected volatility of 168%, risk-free
interest rate of 3.88%, and an expected life of three years. The value of
the warrants issued amounted to $41,477 and was amortized to interest expense
over 4 months during 2007 and 2008. Interest accrues on Note 2 at a rate
of 12.0% per annum. All principal and interest accruing under Note 2 was due
February 22, 2008. The Company did not meet its obligations under this
note and as a result entered into an event of default. During the years ended
December 31, 2009 and 2008, the Company issued 73,392,600 and 15,086,049 shares
of common stock to Lender 2 in satisfaction of, and in anticipation of, penalty
interest due on Note 2. Effective December 31, 2009, the Company entered
into an agreement whereby Lender 2 released the Company from all principal and
interest obligations under the note in exchange for the Company’s commitment to
file a registration statement with the SEC and to compensate Lender 2 should
Lender 2 be unable to sell up to 88,000,000 million of its shares above an
average price of $0.01 per share over an eleven week period after the
registration statement becomes effective. The maximum amount due by the
Company under the release agreement is $350,000. On January 26, 2010, the
Company filed a registration statement with the SEC. As a result, on
December 31, 2009, the Company recognized a gain from discharge of indebtedness
in the amount of $105,684 consisting of relief of principal of $227,375 and
accrued interest of $228,309 on the note less $350,000, and reclassified the
remaining principal and accrued interest in the amount of $350,000 to other
current liability. The other current liability in the amount of $350,000
remains outstanding at September 30, 2010 and the date of this
prospectus.
In
October 30, 2007 and April 1 2008, the Company issued two promissory notes to
Tecnimed, Slr (“Tecnimed” or the “Vendor”) in the aggregate principal amount of
$608,800. These notes accrued interest at 10% per annum and are secured by
a portion of the Company’s inventory received from the Vendor. In
conjunction with the issuance of the first of these notes, effective October 30,
2007, we issued 375,000 of our common stock valued at $0.26 per share, the
trading price at the end of that day. All principal and interest was due
during 2008. As of December 31, 2009 and 2008, the Company had $283,252
and $491,713 of principal outstanding on the two promissory notes. On
March 6, 2009, the Company entered into a Settlement Agreement with the Vendor
(the “Settlement Agreement”), whereby the parties agreed to termination of the
existing distribution agreement as amended, payment terms with regard to sold
and unsold product, new terms with regard to sales and distribution of existing
product, mutual releases of claims against one another, and modification to
certain indemnity provisions (see Note 10 – Commitment and Contingencies
regarding litigation between a competitor, Tecnimed and the Company), among
other provisions. As part of the Settlement Agreement, the Company agreed
not to make any cash distributions to shareholders, officers, directors and
employees (apart from ordinary salary), and pay the Vendor 30% of any of capital
raised (excluding any financing for working capital), until the obligation to
the Vendor has been fully satisfied. Further, the Company agreed to an
even split of cash received from customers until the debt is paid in full.
In addition, the Vendor agreed to waive all penalties, fees and interest above
6% compounded annually, with respect to the notes, and forbear collection
proceedings for 18 months from the date of the Settlement Agreement provided the
Company is in compliance with the obligations within the Settlement
Agreement. The Vendor also has a lien on product titled to the Company at
an independent warehouse location and requires specific authorization prior to
release of such product to the Company. As a result of the reduction of
the interest rate, the Company reduced previously recorded interest expense by
$27,464. During the year ended December 31, 2009, the Company paid
$208,461 of principal on the two promissory notes held by the Vendor.
Accrued interest payable at December 31, 2009 related to these two notes was
$61,698. As of September 30, 2010, the principal balance due Tecnimed was
$210,539 and accrued interest payable was $74,132. As fully discussed in
“Litigation” below, on September 21, 2010, Tecnimed filed a complaint against
the Company and its Kids-Med subsidiary alleging breach of non-compete agreement
and that the Company infringed on the Thermofocus trademark and trade dress. In
addition, the complaint alleges that the Company sold Thermofocus units in an
unauthorized manner resulting in a breach of contract. Further, the complaint
alleges that the Company is in default on the payment of $209,802 of principal
and $88,867 of interest under the notes due Tecnimed. During the fourth quarter
of 2010, additional remittances from a retail pharmacy chain allowed the Company
to further pay down the outstanding principal balance to $163,947 as of the date
of this prospectus.
35
On
November 5, 2005, the Company received $300,000 from Wrobel, a shareholder and
former service provider (“Service Provider 1”), as a short term cash
advance. No agreement was entered into regarding the payment of principal
and interest. During years ended December 31, 2009 and 2008, the Company
made $10,500 and $0 of principal payments towards this advance leaving $289,500
outstanding as of December 31, 2009. As of September 30, 2010 and the date
of this prospectus, $289,500 of principal remains outstanding on this
note.
On July
15, 2008, the Company issued an unsecured promissory note to SKI Holding, a
lender (“Lender 3”) in the aggregate principal amount of $25,000 for cash. The
principal amount of this note was due in full on September 16, 2008. The Company
did not meet its obligations under this note and as a result entered into an
event of default. In the event of default as defined in the promissory note, the
note shall be immediately due and payable, plus interest at 1.5% per month on
the balance outstanding, plus any fees incurred. As of December 31, 2008,
principal outstanding on this note was $23,500. During 2009, the Company paid
$23,500 of principal and $5,000 of interest to settle all obligations due under
this note.
As of
December 31, 2009 and 2008, the Company had outstanding principal balance due on
an unsecured installment note with Wachovia (“Commercial Bank”) in the amounts
of $23,568 and $44,634, respectively. This note called for monthly
payments of $2,057 with interest on the outstanding balance at prime plus
1.50%. The final maturity was December 14, 2010. This installment
note was personally guaranteed by our chief executive officer and another member
of our Board of Directors. As of September 30, 2010, $7,538 of principal
remained outstanding on this note. This loan was fully paid-off and cancelled in
December 2010.
On
February 25, 2008, the Company entered into an agreement with Future Now, Inc.,
a marketing consultant (“Service Provider 2”) which included a $70,000
unsecured, revolving line of credit with the consultant bearing interest at 10%
per annum. A portion of the credit line was used to pay outstanding Company
obligations in the amount of $41,750. The credit line was supported by a
convertible promissory note whereby the holder may, at any time, convert the
outstanding principal and interest to shares of common stock at a conversion
price of $0.05 per dollar outstanding. As consideration for services performed
under the consulting agreement, in March 2008, we issued 1,172,442 shares of our
common stock valued at $117,244, and in June 2008, we issued 7,991,902 shares of
common stock valued at $59,939. In addition, the Company granted the holder a
warrant to purchase up to 250,000 shares of our common stock exercisable over a
five year period at an initial exercise price of $0.25 per share. The line of
credit matured April 30, 2008. The note called for monthly payments of interest
until May 1, 2009, when all outstanding principal and interest was due and
payable. This note had an outstanding balance of $41,750 at December 31, 2008.
The Company did not meet its obligations under this note and as a result entered
into an event of default. In November 2009, the Company agreed to a settlement
whereby all principal and interest due in the amount of $55,486 was converted to
3,699,079 shares of common stock at an adjusted conversion price of $0.015 per
share.
Purchase
Order and Accounts Receivable Financing Arrangements
In July
2010, the Company entered into secured credit facilities to finance the purchase
of product and to factor accounts receivable. The Company may
request that a financing company, Hartsko Financial Services, LLC, fund the
purchase of inventory, directly or via letter of credit, up to $3.0 million
based on a confirmed purchase order accepted by the Company as buyer, the vendor
and the financing company. Fees for such financing are 3.25% of the
purchase order amount if paid in within 30 days of the advance date, plus any
transaction expenses. Any advances made under this financing arrangement
and fees incurred are due 10 days after receipt of goods by the Company or 90
days after the issuance of any letter of credit. The financing company
shall maintain a priority secured interest in all goods subject to the purchase
order until paid in full. As part of the purchase order financing
agreement, the Company and the financing company contracted with a third party
to oversee the Company’s inventory subject to this financing. Further, the
Company also entered into an agreement to sell its accounts receivable at
discounts up to 20% of the invoice amount, plus fees and expenses, to a
purchaser, Charter Capital Holdings L.P. This facility has a $1.0 million
limit. As part of this accounts receivable factoring agreement, the
Company agreed to request that customers directly deposit funds in an account
maintained by the purchaser. The purchaser maintains a priority
security interest in all accounts receivable purchased and may charge back the
Company for any accounts not collected. Further, the Company agreed to
indemnify the purchaser for any claims or losses incurred by the
purchaser. The purchaser is unrelated to the financing company. As of
December 31, 2010, $45,939 was due to Charter for accounts receivable factored
pending collection of these accounts receivable.
Related
Party Advances and Notes
On July
30, 2007, the Company received cash and issued a promissory note to a relative
of our chief executive officer in the principal amount of $125,000.
Interest accrued on this note at a rate of 24% per annum and was to be paid
monthly. All principal and accrued interest was due on or before October
30, 2007. The Company has not made the required principal and interest
payments and has been negotiating with the holder to amend the payment terms of
the note, which would include a waiver of default for the required payments that
have not been made. In the event of default, the note calls for interest
at 36% per annum. The loan is collateralized by 5,300 units of the
Company’s thermometer product held for resale. As of December 31, 2009 and
2008, the outstanding balance is $99,250 and 122,250, respectively. The
Company has recorded accrued interest payable amounting to $69,234 at December
31, 2009, at the rate of 24% per annum as the Company believes it will not be
obligated to pay the default rate of interest. Had the Company accrued at
the default rate of interest, accrued interest payable at December 31, 2009
would have been $92,216 and additional interest expense in the amount of $13,288
and $14,972 would have been recognized for the years ended December 31, 2009 and
2008, respectively. As of September 30, 2010 and the date of this
prospectus, $99,250 of principal remains outstanding on this note.
During
the years ended December 31, 2008 and 2007, two of the Company’s board members,
and ASR Realty Group, LLC (“ASR”), an entity affiliated with a former board
member, advanced funds to the Company for working capital on a non-interest
bearing basis. The principal balance due to the board members was $60,180
and $73,180 at December 31, 2009 and 2008, respectively. On September 30,
2010 and the date of this prospectus, $60,180 of principal remains outstanding
on these advances. One of these advances in the amount of $27,000 due to
ASR, is documented by a note and secured by accounts receivable, inventory and
other assets of the Company, and should the balance not be paid on demand,
interest shall accrue at 15% per annum. As of December 31, 2009, the
Company had accrued interest in the amount of $4,738 with regard to this
note.
36
Convertible
Promissory Notes
During
2007, the Company entered into four different subscription agreements with
various investors. The first agreement, agreement (A), dated January 31,
2007, was an offering of an aggregate $1,500,000 in 10% convertible promissory
notes, 750,000 shares of common stock and 1,500,000 warrants (the offering
consisted of 30 units, each unit consisted of $50,000 notes, 25,000 common
shares, and 50,000 warrants). The second agreement, Agreement (B),
dated June 25, 2007, was an offering of an aggregate $1,500,000 in 10%
convertible promissory notes, 1,500,000 shares of common stock and 3,000,000
warrants (the offering consisted of 30 units, each unit consisted of $50,000
notes, 50,000 common shares and 100,000 warrants). The third agreement,
Agreement (C), dated July 25, 2007, was an offering of an aggregate $1,500,000
in 10% convertible promissory notes, 1,500,000 shares of common stock and
3,000,000 warrants (the offering consisted of 30 units, each unit consisted of
$50,000 notes, 50,000 common shares and 100,000 warrants). This agreement
differed from the June 25, 2007 agreement by having a fixed conversion price of
$0.25 per share as on optional conversion price. The fourth agreement,
agreement (D), dated November 21, 2007, was an offering of an aggregate
$1,500,000 in 10% convertible promissory notes, 1,500,000 shares of common stock
and 3,000,000 warrants (the offering consisted of 30 units, each unit consisted
of $50,000 notes, 50,000 common shares and 100,000 warrants). The
difference with this agreement compared to the previous was the warrant
conversion price of $1.00 for all the warrants, instead of half being at
$1.50. The fifth agreement, agreement (E) dated April 15,2008, was an
offering of an aggregate $1,500,000 in 10% convertible promissory notes,
3,000,000 shares of common stock and 3,000,000 warrants (the offering consisted
of 30 units, each unit consisted of $50,000 notes, 100,000 common shares and
100,000 warrants). The Company sold 4.15 units of agreement (A), 0.75 units of
agreement (B), 8.25 units of agreement (C), and 5 units of agreement (D) for
$905,000 of proceeds; no units were sold under agreement (E). Subsequent
to the Company entering into any agreements with the investors under agreement
(E), the Company’s board of directors resolved to grant the investors under
agreements (A), (B), (C), and D the terms of agreement (E). By this
time, April, 2008, all the notes were in default due to the inability of the
Company to make the 1 st quarter
2008 interest payment; the notes executed prior to April 2007, were also in
default because the company was unable to pay back the principal. No
additional consideration was paid for these additional shares and warrants. The
Company’s board of directors made the decision to issue these additional shares
and warrants, and lower the conversion price for the principle and strike price
for the warrants, because all the notes under this offering were in
default. This was done in an attempt to assuage the lenders that the
company would honor their notes and to induce them to convert their notes into
equity. The Company also was making an attempt to attract potential future
investors, in light of the Company’s highly volatile stock price (the board of
directors believed that if prior investors were satisfied with their investment,
future potential investors would be more likely to invest in the Company). The
amount of additional securities issued, while arbitrary to some degree, was set
at a level that the board of directors believed would achieve these objectives.
The Company recorded $18,310 and $23,734 for the 102,500 common shares and
205,000 warrants, respectively as a financing cost (expensed to interest expense
immediately) based on their values at June 25, 2007, the date the Board of
Directors agreed to grant the additional shares and warrants.
The
convertible promissory notes accrue interest at 10% and were due on the first
anniversary of their issuance date. They were convertible into shares of our
common stock at the option of each holder at (1) $0.25 per share, or (2) a 20%
discount to the price per share issued in a financing transaction of at least
$2,000,000, or (3) in the event of default, the conversion price would be
adjusted to equal 80% of the Company’s average closing stock price during the
five trading days prior to default. The default date is April 30, 2008, thirty
days after the missed quarter one 2008 interest payment. That makes the
conversion price $0.0146, or 80% of the five day average closing price ($0.018)
preceding the default date. The Company may not have to honor any
conversion requests, in which case, the debt would then have to be paid
back.
37
At their
commitment date each convertible promissory note was tested for a beneficial
conversion feature by comparing the effective conversion price to the fair value
of the Company's stock. The Company recognized a beneficial conversion
feature of $187,183 which was recorded as a discount to the convertible
promissory notes with an offset to additional paid-in capital. Additionally, the
relative fair value of the warrants and common stock of $118,421 and $105,284,
respectively, was calculated and recorded as a further reduction to the carrying
amount of the convertible debt and as addition to paid-in capital. The
Company is amortizing the debt discount over the term of the debt.
Amortization of debt discount for the year ended December 31, 2008 was
$217,948. The fair value of the warrants was measured utilizing the
Black-Scholes fair value methodology using assumptions of 5 years for expected
term, volatility of 115%, no dividends and a risk free interest rate of
4.70%.
Each
convertible promissory note issued with the subscription agreements had a term
of one year and were not repaid. Due to the default and reset of the
conversion price to 80% of the fair value of the Company’s common stock five
days prior to the default, the Company tested each convertible promissory note
for an incremental beneficial conversion feature. As a resulted, the
Company recognized $438,365 of interest expense in 2008. The Company’s Board of
Directors has determined that the default date for each convertible promissory
note was April 30, 2008. The calculation of the conversion rate to common
shares on such date was $0.0146 of principal outstanding to one share of common
stock. Based on the default provisions, noteholders may convert their
principal balance into 62,156,593 common shares. Unless the Company
declares a stock dividend, or there is some other re-capitalization of the
Company, such as a stock split or reverse stock split, the conversion price
established at the default date will not change.
The
subscription agreements contained a registration rights penalty whereby,
commencing upon six months from an initial unit sale and, for each monthly
period thereafter that the common stock and the common stock underlying the
warrants are not registered, the Company will issue 4,167 warrants per unit as a
penalty to the subscription holder. The Company failed to file a
registration statement and consequently, beginning August 2007, the Company
began valuing 4,167 warrants per outstanding unit as a penalty. The penalty
warrants have been determined to be a derivative
instrument. For the year ended December 31, 2009, the value of
the penalty warrants has been determined by using the Black-Scholes pricing
model with the following weighted average assumptions: no dividend yield,
expected volatility of 333.68%, risk-free interest rate of 2.69%, and an
expected life of five years. The aggregate value of the penalty warrants
issued amounted to $19,499 and $9,525 for the year ended December 31, 2009 and
2008, respectively. The derivative liabilities were adjusted to their fair
values of $24,124 and $549 at December 31, 2009 and 2008,
respectively.
On June
28, 2010, a holder of 2007 subscription agreement debentures converted $25,000
of principal and $8,551 of accrued interest into 2,302,696 shares of common
stock at a conversion price of approximately $0.0146 per share. As of
September 30, 2010 and December 31, 2009, the Company had $880,000 and $905,000
of principal outstanding on these convertible promissory notes, respectively. As
of the date of this prospectus, $880,000 of principal was
outstanding.
Convertible
Redeemable Debentures. From March to November 2008, the Company issued
convertible redeemable debentures in the aggregate principal amount of $175,000,
consisting of the following: $50,000 on March 17, 2008, $25,000 on July 2, 2008,
$40,000 on September 29, 2008 (pursuant to a securities sales agreement, dated
September 29, 2008 with Blaydon Capital LLC), $10,000 on October 14, 2008,
$25,000 on October 27, 2008, and $25,000 on November 10, 2008. These convertible
debentures accrue interest at 8.0% per annum and, at the option of the holder,
are convertible to shares of our common stock at a conversion price of equal to
60% of the lowest closing bid price of the common stock as reported on the OTCQB
(or any exchange on which our shares may be traded in the future) on the day the
notice of conversion is received by the Company. The securities were
issued in reliance on the exemption from registration provided by Rule 504 of
Regulation D. The Company accounted for the conversion features of the
debentures in accordance with ASC No. 480, Distinguishing Liabilities from
Equity as the conversion feature embedded in the debenture could result
in the note principal being converted to a variable number of the Company’s
common shares. Based on the discount to market of 60%, the Company
determined the fair value of the conversion feature liability to be
$116,667. The Company recorded the $116,667 to interest expense as the
commitment dates. During 2008 a total of $105,400 of face amount of the
debentures were converted. As of December 31, 2008, the outstanding
principal balance of the convertible redeemable debentures was $69,600 and the
liability for conversion feature is $46,400. During the year ended
December 31, 2009, $69,600 of convertible redeemable debentures and $46,400 of
the related liability for the conversion feature was converted into 231,408,562
shares of common stock. In addition, 11,752,256 shares of common stock were
issued to pay interest on these debentures while outstanding in the amount of
$2,736. Therefore, during the second quarter of 2009, all principal
outstanding and accrued interest on these convertible debentures were satisfied
through conversion and issuance of shares of our common stock.
38
Stock buy-back
obligation. In October 2007, a demand letter was presented to the Company
under the terms of a stipulation of settlement, as amended, to purchase 175,000
shares of the Company’s stock held by an investor at the price of $1.24 per
share. A liability of $310,000 relating to this matter was recorded during
2007 with an offset to additional paid-in capital. In May 2008, the
investor filed suit against the Company in the United States District Court of
the Northern District of New York for failing to comply with the stipulation of
settlement, as amended, to purchase 250,000 shares of common stock. As of
December 31, 2008, the balance outstanding on this obligation amounted to
$261,000. The matter was subsequently referred to arbitration. On
October 16, 2009, the Company partially settled the complaint. As part of
the settlement, another investor agreed to purchase the settling investor’s
common shares in exchange for the receipt of 500,000 shares of the Company’s
Series B Preferred Stock. The Series B Preferred Stock issued was valued
at $275,000 on the date of issuance, and as a result, the Company recognized a
$14,000 loss on settlement of this litigation. The 250,000 common shares
were returned to the Company and cancelled. On October 30, 2009, the new
investor converted all of the Series B preferred shares into 50,000,000 shares
of common stock. Upon conversion, the common shares were valued at
$1,150,000, the closing bid price on the day of conversion. After reaching
a final settlement in January 2010, the arbitration proceeding was closed in
February 2010. At the time of issuance, the 500,000 shares of Series
B Preferred Stock was determined to have a deemed dividend of $985,000 based on
the closing value of the Company’s common stock on October 16, 2009. All
of the preferred stock then outstanding was converted to 50,000,000 shares of
our common stock on October 30, 2009. Subsequently, the Series B Preferred
Stock was cancelled and the preferred shares are currently available for
re-issuance.
Off-Balance
Sheet Arrangements
We have
not entered into any off-balance sheet arrangements.
Contracts
to be Settled with Company’s Own Equity
Effective
May 13, 2010, the Company committed to issue more common shares than authorized
by its Article of Incorporation at that time. If the Company would have
been required to settle all of its outstanding warrants and liabilities
(including contingent liabilities to be settled with equity not previously
recorded) with common shares as of May 13, 2010, the Company would have been
required to issue up to 377,460,076 common shares over its then authorized
amount of 2,500,000,000 common shares, assuming all targets and contingencies
were met, representing 1,200,000 shares for the settlement of warrants and
376,260,076 shares for the settlement of liabilities including contingent
liabilities not previously recorded (of which all but 26,978,022 shares have
been recorded as liabilities). Pursuant to ASC 815-40, Derivatives and
Hedging – Contracts in Entity’s Own Equity, the Company’s policy with regard to
settling outstanding financial instruments is to settle those with the latest
maturity date first, which essentially sets the order of preference for settling
the financial instruments. Therefore, on May 13, 2010, the Company
reclassified warrants to purchase 1,200,000 common shares with a fair value of
$3,862 and recognized contracts to be settled with common stock (previously
considered contingent liabilities not meeting recognition criteria) for
26,978,022 shares with a fair value of $337,225, from additional paid in capital
to derivative liabilities.
On
September 30, 2010, the fair value of derivative liabilities for contracts to be
settled with common shares in excess of common share capital authorized
aggregated $246,025. As of September 30, 2010, if the Company would be required
to settle all of its outstanding warrants and liabilities (including contingent
liabilities to be settled with equity) with common shares, the Company would be
required to issue up to 768,480,099 common shares beyond the amount currently
authorized of 2,500,000,000 common shares. As of September 30, 2010,
liabilities and derivative liabilities have been recorded for all 768,480,099
shares.
On February 11, 2011, the Company amended its Articles of
Incorporation to increase the number of authorized shares of common stock to 5
billion shares.
39
Subsequent
Events
Share
Issuances.
On
October 8 and November 13, 2010, the Company issued Lanktree 12,000,000 common
shares and 15,013,452 common shares, respectively. These shares represent the
remainder of the 63,013,452 penalty interest shares due on Note 1 as agreed to
in the July 2010 settlement agreement. The aggregate value of these shares,
which was previously accrued, amounted to $197,198.
On
October 11, 2010, the Company issued 5,000,000 shares to an entity that
manufactures components used in products sold by the Company. These shares
were valued at $42,000 based on the closing bid price of the Company’s common
stock on the date of issuance.
On
October 12, 2010, the Company entered into a $100,000 promissory note with an
investor, Granite Financial Group (“Granite”) and received proceeds of
$97,000. The promissory note bears interest at 12% per annum. The
full amount of principal and interest on the promissory note was initially due
on January 12, 2011. On February 1, 2011, the maturity date of the note
was extended to April 12, 2011. The promissory note may not be prepaid without
the prior written consent of the investor. As additional consideration for
entering into the note agreement, on October 15, 2010, the Company issued
20,000,000 shares of its common stock valued at $170,000 based on the closing
price for the Company’s common stock on the date of the agreement. The
promissory note is secured by the pledge of 98,500,000 shares of common stock
owned by an executive of the Company and the personal guarantee of the
executive. On November 5, 2010, the Company entered into a $60,000 promissory
note with Granite and received proceeds of $55,000. The note bears interest at
12% per annum and was initially due in full on January 12, 2011. On February 1,
2011 the maturity date of the note was extended to April 12, 2011. As additional
consideration for entering into this note agreement, the Company issued
12,000,000 common shares on November 11, 2010. In connection with the extension
of maturity date of the notes issued on October 12, 2010, and November 5, 2010,
the Company issued to Granite 32,000,000 shares of common stock on January 18,
2011. These shares were valued at $220,800 on the date of issuance.
As
described above, in October 2010, the Company received $90,000 of cash proceeds
from Lanktree on the fourth installment note representing an advance of $30,000
from the previous schedule, and accordingly, on October 14, 2010 we issued
5,000,000 shares valued at $43,000, in consideration for loan
advance.
Further,
on November 5, 2010, Lanktree converted $100,000 of principal due on Note 1 at
$0.004 per share into 25,000,000 common shares leaving $380,000 of principal
outstanding.
On
November 11 and 29, 2010, the Company issued an aggregate of 941,860 common
shares to a party who assisted with securing additional financing of $344,000
from Lanktree and with settlement of the dispute surrounding amounts due
Lanktree on Note 1. In
November 2010, the Company issued 470,930 common shares in error; only 218,801
common shares should have been issued. On January 17, 2011, the certificate
issued in error was returned and cancelled, and a certificate for the correct
amount of 218,801 shares was issued. The
shares were valued at $5,400 based on the closing bid price for the Company’s
common stock on the day of issuance.
On
November 17, 2010, we sold 15,000,000 of our common shares to an investor for
cash proceeds of $50,000, or $0.0033 per share. The closing bid price of our
common stock on that day was $0.0046 per share.
On
December 2, 2010, we issued 5,902,387 shares of our common stock to Marc
Massoglia, an employee, as compensation in the amount of $45,000 for September,
October, and November 2010 per our agreement with Mr.Massoglia. These shares
were valued at $37,185 based on the closing bid price for the Company’s common
stock on the day of issuance.
On
December 15, 2010, we issued 1,000,000 shares of our common stock to our CEO,
Dr. Christopher F. Tirotta as payment for $50,000 in deferred salary. These
shares were valued at $5,000 based on the closing bid price for the Company’s
common stock on the day of issuance.
On
January 19, 2011, we issued 240,000 shares of our common stock for package
design services valued at $1,200.
On
January 21, 2011, we entered into an agreement with the Greenwood Group to
settle monthly retainer fees, out or pocket expenses and commissions due through
December 31, 2010 issued 12,000,0000 shares of our common stock to the Greenwood
Group in partial satisfaction of amounts due under the settlement agreement.
These shares were valued at $63,600 on the date of issuance.
On
January 21, 2011, we issued 2,400,000 shares of our common stock to a public
relations firm for six months of services through June 2011. These shares were
valued at $12,720 on the date of issuance.
On
January 20, 2011, the Company registered up to 100,000,000 shares of common
stock issuable under the American Scientific Resources 2011 Incentive Stock Plan
(Form S-8, SEC File No. 333-171789). On January 21, 2011, we issued 16,000,000
shares of our common stock to Gregory Sichenzia, a partner in the law firm of
Sichenzia Ross Friedman Ference LLP as partial compensation for legal services
in accordance with the Incentive Stock Plan. These shares were valued at $84,800
on the date of issuance.
On
February 4, 2011, the Company issued 50,000 shares (12,500 shares to each of our
four directors) of its Series A Preferred Stock in accordance with the terms of
the Equity Purchase Agreement with Southridge Partners II. Valuation of these
shares has not been determined.
On February 4, 2011, we awarded 25,000,000 warrants to purchase an
equivalent number of our common shares. The warrants are exercisable over 5
years at an exercise price of $0.00615 per share. The warrants contain a
cashless exercise option and certain anti dilution provisions.
On February 11, 2011, the Company amended its Articles of
Incorporation to increase the number of authorized common shares from 2.5
billion to 5.0 billion.
40
A summary
of common share issuances since September 30, 2010 through the date of this
prospectus, is as follows:
Common
Shares
|
Valuation of
Shares Issued
|
|||||||
Common
shares issued and outstanding on September 30,
2010
|
2,028,627,109 | |||||||
Common
shares issued since September 30, 2010:
|
||||||||
Penalty
interest shares per settlement
|
27,013,452 | $ | 197,198 | |||||
Consideration
for secured promissory notes
|
32,000,000 | 260,000 | ||||||
Consideration
for extension of terms for payment of promissory
notes
|
32,000,000 | 220,800 | ||||||
Consideration
for advance on loan
|
5,000,000 | 43,000 | ||||||
Sale
of common shares
|
15,000,000 | 50,000 | ||||||
Fees
for settlement and new financing
|
689,731 | 5,400 | ||||||
Compensation
to component manufacturer
|
5,000,000 | 42,000 | ||||||
Compensation
to employee
|
5,902,387 | 45,000 | ||||||
Reduction
of CEO compensation payable
|
1,000,000 | 50,000 | ||||||
Satisfaction
of package design services payable
|
240,000 | 1,200 | ||||||
Settlement
of fees, expenses and commissions for marketing
services
|
12,000,000 | 63,600 | ||||||
Payment
for future public relations services
|
2,400,000 | 12,720 | ||||||
Partial
payment for legal services
|
16,000,000 | 84,800 | ||||||
Conversion
of debt to common equity
|
25,000,000 | 100,000 | ||||||
179,245,570 | $ | 1,175,718 | ||||||
Common
shares issued and outstanding on December 2,
2010
|
2,207,872,679 |
None of
the share issuances described under “Subsequent Events” are included in this
prospectus.
Litigation.
On September 21, 2010, Tecnimed, Srl filed a complaint in US District Court
Southern District of New York against the Company and its Kids-Med subsidiary
alleging that the Company’s Kidz-Med VeraTemp Non-Contact Thermometer is
sufficiently similar to Tecnimed’s Thermofocus Thermometer, the Company breached
a non-compete agreement and infringed on the Thermofocus trademark and trade
dress. In addition, the complaint alleges that the Company sold
Thermofocus units in an unauthorized manner resulting in a breach of
contract. Further, the complaint alleges that the Company is in default on
the payment of $209,802 of principal and $88,867 of interest under the notes due
Tecnimed. The complaint seeks a trial by jury, injunctions against
manufacturing and selling products that are in competition with the Thermofocus
and use similar trade dress, recall of the Company’s Kidz-Med VeraTemp
Non-Contact thermometer, and payment of unspecified amounts for ill-gotten
gains, treble damages, punitive damages and attorneys’ fees. Subsequently,
a hearing was held on the plaintiff ’s motion for a preliminary injunction. On
January 18, 2011, the court issued a preliminary injunction prohibiting the
Company from shipping product in the infringing packaging, and ordered a recall
of the product from customers contingent on Tecnimed posting a bond of $130,000.
On January 18, 2011 the Company filed an appeal of this order and a stay of this
decision pending appeal. Tecnimed posted the bond on February 3, 2011, but on
February 4, 2011, the Court issued a stay of the recall order pending an appeal
decision. The Court also approved the Company’s new package design for the
VeraTemp Non-Contact thermometer. On
February 11, 2011, the Court ordered a recall of the Company’s Kidz-Med 5-1
Non-Contact thermometer held by wholesalers for re-packaging and the Company
began mailing recall letters on February 11, 2011. It is currently not possible
to determine impact of the recall on the Company’s financial position or results
of operations. The Company will continue to pursue the appeal of the
preliminary injunction.
On
October 26, 2010, Sanomedics International Holdings filed a complaint in
District Court for the Southern District of Florida against the Company alleging
that the Company infringed on plaintiff’s thermometer design patent, and upon an
exclusive distribution and manufacturing agreement between the plaintiff and the
Chinese manufacturer of the Company’s Kidz-Med Non-Contact 5-in-1 thermomter.
The complaint also alleges the Company wrongfully asserted dominion over
plaintiff’s Food and Drug Administration clearances depriving plaintiff of its
exclusive rights and interests. The complaint seeks injunctive relief, recall
and destruction of all the Company’s Kidz-Med Non-Contact 5-in-1 thermometer
products and marketing materials, and unspecified monetary damages, punitive
damages and attorney’s fees. The Company believes the complaint is without merit
and intends to pursue a vigorous defense.
41
Recent
Accounting Pronouncements
Effective
July 1, 2009, the Company adopted the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) 105-10, Generally Accepted Accounting
Principles—Overall (“ASC 105-10”). ASC 105-10 establishes the FASB Accounting Standards
Codification (the “Codification”) as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with U.S.
GAAP. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative U.S. GAAP for SEC
registrants.
Effective
January 1, 2009, the Company adopted FASB ASC Topic 805, Business Combinations (“ASC
805”). ASC 805 establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree. ASC 805 also provides guidance for recognizing and measuring the
goodwill acquired in the business combination and determines what information to
disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. ASC 805 also provides guidance
for recognizing changes in an acquirer’s existing income tax valuation
allowances and tax uncertainty accruals that result from a business combination
transaction as adjustments to income tax expense.
In April
2009, the FASB issued updated guidance related to business combinations, which
is included in the Codification in ASC 805-20, Business Combinations—Identifiable
Assets, Liabilities and Any Noncontrolling Interest (“ASC 805-20”). ASC
805-20 amends and clarifies ASC 805 to address application issues regarding
initial recognition and measurement, subsequent measurement and accounting and
disclosure of assets and liabilities arising from contingencies in a business
combination. In circumstances where the acquisition-date fair value for a
contingency cannot be determined during the measurement period and it is
concluded that it is probable that an asset or liability exists as of the
acquisition date and the amount can be reasonably estimated, a contingency is
recognized as of the acquisition date based on the estimated amount. ASC 805-20
is effective for assets or liabilities arising from contingencies in business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. The
Company adopted this pronouncement in connection with the Disintegrator
acquisition.
Management
does not believe that any other recently issued, but yet effective, accounting
standards if currently adopted would have a material effect on September 30,
2010 and December 31, 2009 condensed consolidated financial
statements.
Summary
of Significant Accounting Policies
Principles of
Consolidation. For 2009, the accompanying consolidated financial
statements include the accounts of American Scientific Resources, Incorporated,
and its subsidiary, Kidz-Med, Inc. For 2008, these consolidated financial
statements include the accounts of American Scientific Resources, Incorporated,
and its subsidiaries, Kidz-Med, Inc., HeartSmart, Inc. and Ulster Scientific,
Inc. During the year ended December 31, 2008, HeartSmart and Ulster
Scientific had few insignificant transactions and their accounting records were
closed effective January 1, 2009. All significant inter-company
transactions have been eliminated.
Use of
Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue
Recognition. The Company sells or consigns its products on a
wholesale basis to retailers and medical suppliers, and on a retail basis direct
to customers usually via the internet. The Company recognizes revenues in
accordance with the guidance in the Securities and Exchange Commission (“SEC”)
Staff Accounting Bulletin No. 104. Accordingly, revenue is recognized when
persuasive evidence of an arrangement exists, when the selling price is fixed or
determinable, when shipment or delivery occurs, ownership has transferred, and
when collection is probable. For wholesale sales, the Company generally
negotiates an agreement which covers quantities, delivery, title transfer,
pricing, warranties, returns and other terms, which dictate revenue
recognition. Revenue from internet sales is recognized upon shipment of
the product to the customer. All sales are made at a quoted, fixed price
determined prior to completion of the sale.
Revenue
from product placed with customers on consignment is recognized when the
customer has confirmed sale of the product to third parties. The Company
receives periodic reports of consignment sales and inventory positions from
customers. In August 2009, a significant consignment arrangement with
Walgreens was terminated.
42
Revenues
in the consolidated statement of operations are shown net of any discounts and
actual returns for damaged product. In the Company’s experience, returns
for malfunctioning product resulting in warranty claims generally have been
insignificant, and as such, no provision for warranty claims is provided in
these consolidated financial statements. Returns of merchantable product
are reversed from revenue and returned to inventory for re-sale upon the
Company’s receipt of the product.
The
Company provides a one year limited warranty on most of its retail product
sales. Specific warranty and right of return arrangements are negotiated
with wholesalers. To the extent that the Company has negotiated warranty
and return arrangements with manufacturers and suppliers, the Company may put
any returns from sales back to such manufacturers and suppliers.
The
Company records shipping and handling charges billed to customers as revenue and
the related expense in cost of goods sold, in accordance with its revenue
recognition policy.
Cash and Cash
Equivalents. The Company considers all highly liquid investments
with original maturities of three months or less at the time of purchase to be
cash equivalents.
Accounts
Receivable. Accounts receivable are stated at net realizable
value. Management provides for uncollectible amounts through a charge to
earnings and a credit to an allowance for doubtful accounts based on its
assessment of the current status of individual accounts and historical
collection information. Balances that are deemed uncollectible after
management has used reasonable collection efforts are written off through a
charge to the allowance and a credit to accounts receivable.
Inventories.
The Company’s inventories consist of finished goods on-hand and consigned to
others, packaged and unpackaged product, packing supplies and spare parts.
As of December 31, 2009 and 2008, the net amount of inventory at cost consigned
to others amounted to $0 and $365,628, respectively. During the nine
months ended September 30, 2010, no amounts were distributed on
consignment.
Inventories
are stated at lower of cost or market using the first-in, first-out method and
consist primarily of finished product. Freight for components, labor and
warehouse overhead expenses related to assembly and packaging are allocated to
the cost of products. Initial packaging costs are added to the cost of the
product. Excess and unused packaging and re-packaging costs are expensed.
Advertising and promotional materials are expensed as operating, sales and
administrative expenses.
During
the second quarter of 2010, the Company began phasing out distribution of the
Thermofocus thermometer due in part to falling customer demand and high product
costs, and began accepting orders for the new Kidz-Med VeraTemoNon-Contact
thermometer. On June 30, 2010, the Company determined that the estimated market
value of the remaining thermometer units on-hand had fallen below their recorded
carrying cost. Therefore, the Company recorded a lower of cost or market
adjustment of $63,194 to reduce the thermometer inventory carrying value to
estimated market value. The estimated market value was determined from recent
selling prices of the product. On September 30, 2010, the Company further
reduced the carrying cost of its Thermofocus inventory and certain other
products by $122,744 due primarily to reduced demand for these
products.
The
Company reviews finished inventory on-hand and consigned to others, and provides
for missing, obsolete and damaged product periodically based on the results of
the review. The Company has a variety of spare parts, a portion of which are
deemed to have no value for accounting purposes as management has determined
that it is doubtful that any amounts will be realized from the ultimate
disposition of these spares parts.
Inventory
reserves are established to adjust inventory for product believed to be lost or
damaged, or unaccounted for after distribution on consignment, when known. It is
possible that a portion of amounts established for inventory reserves will
ultimately be collected in cash from vendors, product located, repaired and/or
re-packaged, and/or returned to the Company for resale. As of September 30, 2010
and December 31, 2009, inventory reserves for previously consigned product were
$102,761 and $166,808, respectively. During the first nine months of 2009, the
Company established additional reserves of $211,080 for product deemed lost or
damaged, or unaccounted for after distribution on consignment.
Fixed
Assets. Fixed assets are stated at cost and depreciated using the
straight-line method over the asset’s estimated useful life. Fixed assets, which
consist of packaging equipment and computer equipment and software, have been
deemed to have useful lives of approximately 3 to 5 years and are being
depreciated over this period. The Company records depreciation expense as a
component of operating, sales and administrative expenses.
Patent.
The Company’s patent for the Disintegrator® is being amortized on a
straight-line basis over the remaining life of the patent, a period of 151
months from acquisition to expiration. The Company records amortization expense
as a component of operating, sales and administrative expenses. For the nine
months ended September 30, 2010 and 2009, amortization expense amounted to
$158,0824 and $0, respectively. The Company estimates that market demand
for the Disintegrator as patented will exceed the patent life expiring in May
2022, and therefore has chosen to amortize the patent over the remaining patent
life. Should the Company’s estimate of market demand diminish, the Company
will adjust its patent amortization schedule accordingly.
Research and
development costs. Expenditures for research and development
of the Company’s products, consisting primarily of design, engineering,
consulting and testing costs, are expensed as operating expenses as incurred.
For the nine months ended September 30, 2010 and 2009, such expenses amounted to
$178,057 and $5,207, respectively.
43
Income
Taxes. The Company provides for income taxes in accordance with
Accounting Standards Codification (“ASC”) No. 740, Income Taxes (“ASC 740”)
using an asset and liability based approach. Deferred income tax assets
and liabilities are recorded to reflect the tax consequences on future years of
temporary differences of revenue and expense items for financial statement and
income tax purposes. ASC 740 requires the Company to recognize income tax
benefits for loss carry forwards that have not previously been recorded. The tax
benefits recognized must be reduced by a valuation allowance if it is more
likely than not that loss carry forwards will expire before the Company is able
to realize their benefit, or that future deductibility is uncertain. For
financial statement purposes, the deferred tax asset for loss carry forwards has
been fully offset by a valuation allowance since it is uncertain whether any
future benefit will be realized.
ASC 740
also provides guidance on recognition, classification and disclosure concerning
uncertain tax benefits and tax liabilities. The evaluation of a tax
position requires recognition of a tax benefit or liability if it is
‘more-likely-than-not’ that it will be sustained upon examination. For tax
positions meeting the ‘more-likely-than-not’ threshold, the amount recognized in
the financial statements is the largest benefit or liability that has a greater
than 50% likelihood of being realized upon ultimate settlement with the relevant
tax authority.
Stock Based
Compensation. The Company has exchanged its common stock for
services render by employees, directors, consultants and others. The
Company accounts for stock, stock options and stock warrants issued to employees
and non-employees for services and other compensation under the provisions of
ASC No. 718, Compensation –
Stock Compensation and ASC No. 505-50, Equity-Based Payments to
Non-Employees , which establish standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods and
services at fair value. These standards also address transactions in which
an entity incurs liabilities in exchange for goods and services that are based
on the fair value of the entity’s equity instruments or that may be settled by
the issuance of those equity instruments. For employees, stock awarded is
valued based on the closing bid price on the date of grant. For
non-employees, stock issued for services is valued at either the invoiced or
contracted value of services provided, or to be provided, or the fair value of
the stock at the due date per the service agreement, whichever is more readily
determinable. Warrants or options issued for services provided, or to be
provided, are valued at fair value at the date the agreement to award is
reached. Other than a stock option plan, the Company has no established
plans for the issuance of shares to employees and non-employees; shares awarded
during the years ended 2009 and 2008 have consisted of new shares.
Earnings (Loss)
Per Share. Basic net income (loss) per common share is computed
using the weighted average number of common shares outstanding during the
periods. Diluted net income (loss) per share is computed using the
weighted average number of common and dilutive common equivalent shares
outstanding during the year
Concentration of
Credit Risk. Financial instruments, which potentially subject the
Company to concentration of credit risk, consist principally of cash and trade
accounts receivable. The Company places its cash with high credit financial
institutions. The Company extends credit to its customers, all on an
unsecured basis, after performing certain credit analysis. The Company
continually performs credit evaluations of its customers and maintains an
allowance for doubtful accounts for potential credit losses.
Fair Value of
Financial Instruments. The carrying values of accounts receivable,
inventory, accounts payable and accrued expenses approximate their fair values
due to their short term maturities. The carrying values of the Company's
long-term debt approximate their fair values based upon a comparison of the
interest rate and terms of such debt to the rates and terms of debt currently
available to the Company. It was not practical to estimate the fair value of
certain notes payable, the convertible debt and the liability for contingent
compensation from acquisition. In order to do so, it would be necessary to
obtain an independent valuation of these unique instruments. The cost of that
valuation would not be justified in light of the materiality of the instruments
to the Company.
44
Fair Value
Measurements. Effective January, 2008, the Company adopted SFAS No.
157, “Fair Value Measurements” (“SFAS 157”). In February 2008, the FASB issued
FASB Staff Position No. 157-2, “Effective Date of FASB Statement 157”, which
provides a one year deferral of the effective date of SFAS 157 for non-financial
assets and non-financial liabilities, except those that are recognized or
disclosed in the financial statements at fair value at least annually.
Therefore, the Company has adopted the provision of SFAS 157 with respect to its
financial assets and liabilities only. SFAS 157 defines fair value, establishes
a framework for measuring fair value under generally accepted accounting
principles and enhances disclosures about fair value measurements. Fair value is
defined under SFAS 157 as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or the most
advantageous market for an asset or liability in an orderly transaction between
participants on the measurement date. Valuation techniques used to measure fair
value under SFAS 157 must maximize the use of observable inputs and minimize the
use of unobservable inputs. The standard describes a fair value hierarchy based
on the levels of inputs, of which the first two are considered observable and
the last unobservable, that may be used to measure fair value which are the
following:
|
•
|
Level 1 — Quoted prices in active
markets for identical assets or
liabilities
|
|
•
|
Level 2 — Inputs other than Level
1 that are observable, either directly or indirectly, such as quoted
prices for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or corroborated by
observable market data or substantially the full term of the assets or
liabilities
|
|
•
|
Level 3 — Unobservable inputs
that are supported by little or no market activity and that are
significant to the value of the assets or
liabilities
|
The
Company values its liability for contingent consideration and warrants in
accordance with the Level 3 guidelines.
Derivative
Instruments. Derivative instruments consist of certain common stock
warrants and certain conversion features applicable to certain convertible debt
issuances. These financial instruments are recorded in the balance sheets at
fair value as liabilities. Changes in fair value are recognized in earnings in
the period of change.
45
MARKET
PRICE OF AND DIVIDENDS ON REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The
Company’s Common Stock is listed on the OTCQB under the under the symbol
“ASFX.PK.” The following table sets forth the quarterly high and low
sale prices for our common shares for the last two completed fiscal years and
the subsequent interim periods. The prices set forth below represent interdealer
quotations, without retail markup, markdown or commission and may not be
reflective of actual transactions.
Sale Price
|
||||||||
Period
|
High
|
Low
|
||||||
Fiscal
year 2011:
|
||||||||
March
31, 2011 (as of February 10, 2011)
|
$
|
0.0077
|
$
|
0.0038
|
||||
Fiscal
year 2010:
|
||||||||
December
31, 2010
|
0.0095
|
0.004
|
||||||
September
30, 2010
|
0.0115
|
0.007
|
||||||
June
30, 2010
|
0.018
|
0.008
|
||||||
March
31, 2010
|
0.0297
|
0.0066
|
||||||
Fiscal
Year 2009:
|
||||||||
December
31, 2009
|
0.072
|
0.01
|
||||||
September
30, 2009
|
0.08
|
0.001
|
||||||
June
30, 2009
|
0.014
|
0.0002
|
||||||
March
31, 2009
|
0.005
|
0.0004
|
||||||
Fiscal
Year 2008:
|
||||||||
December
31, 2008
|
0.008
|
0.0015
|
||||||
September
30, 2008
|
0.021
|
0.0013
|
||||||
June
30, 2008
|
0.02
|
0.006
|
||||||
March
31, 2008
|
0.11
|
0.015
|
As of
February 11, 2011, the last sale price reported on the OTCQB for the Company’s
Common Stock was $0.005 per share.
We have
approximately 367 record holders of our common stock as of February 7,
2011. This number does not include stockholders for whom shares were held in a
"nominee" or "street" name.
Penny
Stock Rules
Our
shares of Common Stock are subject to the "penny stock" rules of the Securities
Exchange Act of 1934 and various rules under this Act. In general terms, "penny
stock" is defined as any equity security that has a market price less than $5.00
per share, subject to certain exceptions. The rules provide that any equity
security is considered to be a penny stock unless that security is registered
and traded on a national securities exchange meeting specified criteria set by
the SEC, authorized for quotation from the NASDAQ stock market, issued by a
registered investment company, and excluded from the definition on the basis of
price (at least $5.00 per share), or based on the issuer's net tangible assets
or revenues. In the last case, the issuer's net tangible assets must exceed
$3,000,000 if in continuous operation for at least three years or $5,000,000 if
in operation for less than three years, or the issuer's average revenues for
each of the past three years must exceed $6,000,000.
Trading
in shares of penny stock is subject to additional sales practice requirements
for broker-dealers who sell penny stocks to persons other than established
customers and accredited investors. Accredited investors, in general, include
individuals with assets in excess of $1,000,000 or annual income exceeding
$200,000 (or $300,000 together with their spouse), and certain institutional
investors. For transactions covered by these rules, broker-dealers must make a
special suitability determination for the purchase of the security and must have
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, the rules
require the delivery, prior to the first transaction, of a risk disclosure
document relating to the penny stock. A broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative,
and current quotations for the security. Finally, monthly statements must be
sent disclosing recent price information for the penny stocks. These rules may
restrict the ability of broker-dealers to trade or maintain a market in our
common stock, to the extent it is penny stock, and may affect the ability of
shareholders to sell their shares.
46
Dividends
We have
never paid any cash dividends on our common shares, and we do not anticipate
that we will pay any dividends with respect to those securities in the
foreseeable future. Our current business plan is to retain any future earnings
to finance the expansion development of our business.
Securities
Authorized for Issuance under Equity Compensation Plan
We have
an employee stock option plan under which 3,000,000, have been reserved for
issuance. The following table shows information with respect this
plan as of the fiscal year ended December 31, 2010.
Equity
Compensation Plan Information
Plan category
|
Number of securities to
be issued upon
exercise of outstanding
options, warrants and
rights
(a)
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
|
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)
|
|||||||||
Equity
compensation plans approved by security holders
|
0 | N/A | 3,000,000 | |||||||||
Equity
compensation plans not approved by security holders
|
— | — | — | |||||||||
Total
|
0 | N/A | 3,000,000 |
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL
DISCLOSURE
None.
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The
directors and executive officers of the Company are as follows:
Name
|
Age
|
Position
|
||
Christopher
F. Tirotta
|
51
|
Chief
Executive Officer and Chairman
|
||
Thomas
W. Materna
|
64
|
Director
|
||
Felix
B. Reznick
|
36
|
Director
|
||
Jason
M. Roth
|
38
|
Director,
Senior Vice President and Director
of Business Development
|
47
Background
of Executive Officers and Directors
Christopher F. Tirotta, MD,
MBA founded Kidz-Med, Inc. in 1993. He assumed his current
positions of CEO, Chairman of the Board and Secretary of American Scientific
Resources, Incorporated in April 2007. He has served as a director of the
Company since 2004. Dr. Tirotta oversees all operational aspects and strategic
initiatives of the Company, including the expansion of its leading Kidz-Med
brand. Dr. Tirotta is the Director of Cardiac Anesthesia of the Congenital Heart
Institute of Miami Children’s Hospital and Arnold Palmer Hospital for
Children. He is also a Clinical Assistant Professor of Anesthesiology at
the University Of Miami School Of Medicine. Dr. Tirotta received his BA in
biochemistry from Cornell University in 1982 and his MD from New York University
School of Medicine in 1986. He completed his internship in Internal
Medicine at SUNY at Stony Brook in 1987 and his residency in Anesthesiology at
the University of Miami/Jackson Memorial Medical Center in 1990; he
sub-specialized in pediatric and cardiovascular anesthesia. He received
his MBA from Columbia University in 1999. Dr. Tirotta was inducted into Phi Beta
Kappa in 1982, was inducted into Beta Gamma Sigma in 1999, graduated Cum Laude
from Cornell University and was the recipient of the Robert D. Dripps Memorial
Award for the outstanding graduate resident in anesthesiology in 1990. He
is a Diplomat of the American Board of Anesthesiology and a Diplomat of the
National Board of Medical Examiners. He is licensed to practice medicine
in the states of Florida and New York. Dr. Tirotta is a member of numerous
professional societies and has served on a number of hospital committees.
He is also responsible for giving numerous medical lectures and is actively
engaged in clinical research.
Thomas W. Materna, MD, MBA has
served as a director since 2004. Dr. Materna has been self-employed in the
practice of Ophthalmology in the state of New Jersey since 1978. He received a
BA Degree from the College of the Holy Cross, Worcester, Massachusetts in 1966.
Dr. Materna received his medical degree in 1971 from the State University of New
York’s Downstate Medical Center, in Brooklyn, NY. He did his surgical internship
at New York Hospital’s Cornell University Medical Center from 1971 through 1972.
He saw active duty as a general medical officer in the United States Navy. He
was stationed in both Southeast Asia at BUMED, and Washington, DC. He
participated in family practice residency from 1974 through 1975 at King’s
County Hospital, Brooklyn, NY and an ophthalmology residency from 1975 through
1978 at the New York Eye, Ear and Nose Hospital. He received his MBA from
Rutgers University in 1992. He is a member of a number of professional societies
including The Society of Medical Consultants for the Armed Forces. He has also
served on the Board of Directors at Dezomark, a medical company in Lviv,
Ukraine.
Felix B. Reznick Esq. has been
a director since December 2008. Mr. Reznick studied law at both Boston College
Law School and the New York University School of Law, receiving his law degree
from Boston College Law School (J.D. 1998), and was a University and Dean's
Scholar at the New York University Stern School of Business, receiving his
undergraduate degree in Accounting and Finance (B.S., cum laude, 1994). Since
then, Mr. Reznick has practiced law at Cadwalader, Wickersham & Taft and
Rosenman & Colin LLP. Since 2001, Mr. Reznick has been the managing
member of the Law Offices of Felix B. Reznick. Mr. Reznick is experienced
in various types of law including corporate, employment, trust and estates,
bankruptcy, real estate and general business. Having represented a diverse
array of clientele including companies in the areas of media, film, Internet,
software, cosmetic, food services, retail, and commercial real estate, he has
also worked with investment banks and funds and not-for-profit
foundations.
Jason M. Roth served as a
director since September 17, 2009, and Senior Vice President and Director of
Business Development of the Company since September 2009. In 2004, Mr. Roth
purchased Safeguard Medical Device Inc. and renamed the company Safeguard
Medical Technologies LLC, the only Class III FDA approved manufacturing facility
in North East Ohio. Mr. Roth served as the head of Safeguard Medical
Technologies LLC from 2004 until September 2009.
Board
of Directors
Directors
are elected at our annual meeting of shareholders and serve for one year until
the next annual meeting of shareholders or until their successors are elected
and qualified. We reimburse all directors for their expenses in connection
with their activities as directors of the Company.
Board
Committees and Independence
We
currently have four directors. Our Bylaws authorized the Board of Directors to
designate from among its members one or more committees and alternate members
thereof, as they deem desirable, each consisting of one or more members, with
such powers and authority (to the extent permitted by law and these Bylaws) as
may be provided in such resolution. No incumbent director attended fewer than
seventy-five percent (75%) of the total number of meetings of the Board of
Directors held during 2009. We do not currently have any
committees.
Family
Relationships
There are
no family relationships between any two or more of our directors or executive
officers. There is no arrangement or understanding between any of our directors
or executive officers and any other person pursuant to which any director or
officer was or is to be selected as a director or officer, and there is no
arrangement, plan or understanding as to whether non-management shareholders
will exercise their voting rights to continue to elect the current board of
directors. There are also no arrangements, agreements or understandings to our
knowledge between non-management shareholders that may directly or indirectly
participate in or influence the management of our affairs.
48
Involvement
in Certain Legal Proceedings
To the
best of our knowledge, during the past five years, none of the following
occurred with respect to a present or former director or executive officer of
the Company: (1) any bankruptcy petition filed by or against any business of
which such person was a general partner or executive officer either at the time
of the bankruptcy or within two years prior to that time; (2) any conviction in
a criminal proceeding or being subject to a pending criminal proceeding
(excluding traffic violations and other minor offenses); (3) being subject to
any order, judgment or decree, not subsequently reversed, suspended or vacated,
of any court of any competent jurisdiction, permanently or temporarily
enjoining, barring, suspending or otherwise limiting his involvement in any type
of business, securities or banking activities; and (4) being found by a court of
competent jurisdiction (in a civil action), the Securities and Exchange
Commission or the commodities futures trading commission to have violated a
Federal or state securities or commodities law, and the judgment has not been
reversed, suspended or vacated.
EXECUTIVE
COMPENSATION
Summary
Compensation Table
The
following table sets forth, for the last two fiscal years, certain compensation
paid by the Company, including salary, bonuses and certain other compensation,
to its Chief Executive Officer and Senior Vice President. There were no other
executive officers whose total annual compensation (including bonuses) exceeded
$100,000. The executive officers listed in the table below are sometimes
referred to as the “named executive officers” in this registration
statement.
Name and
Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-
Equity
Incentive
Plan
Compen-
sation
($)
|
Non-
qualified
Deferred
Compen-
sation
Earnings
($)
|
All Other
Compen-
sation
($)
|
Total
($)
|
||||||||||||||||||
Christopher F. Tirotta,
|
2010
|
120,000
|
(1)
|
25,000
|
100,000
|
(2)
|
-
|
245,000
|
|||||||||||||||||||
President,
CEO
|
2009
|
120,000
|
(1)
|
21,000
|
(3)
|
-
|
141,000
|
||||||||||||||||||||
and
Director
|
|||||||||||||||||||||||||||
JasonM.
Roth,
|
2010
|
120,000
|
(4)
|
—
|
100,000
|
(2)
|
14,406
|
(5)
|
234,406
|
||||||||||||||||||
Senior
Vice
President
and Director
|
2009
|
10,000
|
—
|
-
|
-
|
10,000
|
|
(1)
|
As of the date of this
prospectus, Dr. Tirotta has been paid his salary through June 30, 2008,
and is owed his salary and bonus which has accrued since June 30,
2008. On December 15, 2010, we issued 1,000,000 shares of our
common stock to Dr.Tirotta as payment for $50,000 in deferred salary.
These shares were valued at $5,000 based on the closing bid price for the
Company’s common stock on the day of issuance.As of December 31, 2010,
$340,000of salary and bonus had been accrued as payable to Dr.
Tirotta.
|
|
(2)
|
Consists of a grant of 10,000,000
shares of common stock valued at $100,000, based on the closing bid price
of $0.01 on the issuance date of August 4,
2010.
|
|
(3)
|
Consists of a grant of 17,500,000
shares of common stock valued at $21,000, based on the closing bid price
of $0.0012 on the issuance date of February 9,
2009.
|
|
(4)
|
As of the date of this
prospectus, Mr. Roth has been paid his salary through October 31, 2010,
and is owed his salary for the remaining two months of 2010 and 2011 to
date.
|
|
(5)
|
Consists of premiums paid by the
Company for health
insurance.
|
Employment
Agreements
Effective
April 5, 2007, we entered into an employment agreement, dated September 4, 2007,
with Dr. Tirotta, our President and Chief Executive Officer. Dr. Tirotta’s
employment agreement provides for a term to continue at the discretion of the
Board of Directors. Dr. Tirotta is entitled to an initial annual base
compensation of $120,000 per year ($10,000 per month). It was agreed that
Dr. Tirotta’s salary shall accrue and be payable to Dr. Tirotta once we either
generate positive revenue for one month above the baseline revenue existing as
of April 5, 2007 (On April 5, 2007, such revenue was $12,118.50), or raise in
excess of one million dollars ($1,000,000) commencing April 5, 2007, whichever
occurs first. We agreed to pay Dr. Tirotta his accrued salary in full at
that time. As revenues continue, Dr. Tirotta’s monthly salary will remain
current and payable on an ongoing basis. We also agreed to pay Dr. Tirotta a
bonus of up to ten percent (10%) of the net profits of the Company (with a
maximum bonus of one million dollars ($1,000,000) per year. He will also
be entitled to an additional bonus of $25,000 for the first $1 million worth of
revenue generated and $25,000 for the second $1 million worth of revenue
generated. As of the date of this prospectus, Dr. Tirotta has been paid his
salary through June 30, 2008, and is owed his salary and bonus which has accrued
since June 30,, 2008. Dr. Tirotta earned the first $25,000 bonus in
2008 and the second $25,000 bonus in 2010, neither of which has been paid to
date. No bonus was earned during 2009. Dr. Tirotta was granted the
right, but never received, 500,000 shares of common stock for his work in
rescuing the Company from near bankruptcy. The Company has recorded an
obligation to issue these 500,000 shares in the amount of $70,000 based on the
closing bid price of the Company’s common stock on the award date. Until
September 2010, Dr. Tirottawas also eligible to receive warrants to purchase up
to 500,000 shares of our common stock based on the achievement of certain
revenue targets. In September 2010, Dr. Tirotta’s right to earn
warrants expired; no warrants have been issued to Dr. Tirotta under his
employment agreement.
49
The
Company entered into an employment agreement with Mr. Jason M. Roth on September
13, 2009. Mr. Roth’s employment agreement calls for an annual salary of $120,000
that becomes payable when sales from the Disintegrator or other products
introduced by Mr. Roth reach $500,000 or the Company raises $500,000 in outside
capital or some combination thereof. When this same combination of sales or
outside capital reaches $2.5 million the salary becomes $240,000 annually.
Mr. Roth began earning base salary of $10,000 per month beginning in December
2009. Also in consideration for entering into the employment agreement with Mr.
Roth, we agreed to issue up to 250,000,000 warrants and pay up to $200,000 as a
cash bonus, both contingent upon future sales of the Disintegrator® and certain
other products by Mr. Roth. Within three years from the date of the
agreement, warrants issuable are determined as follows: upon the
achievement of $2.0 million in sales of the Disintegrator and other products,
50,000,000 warrants to purchase an equivalent number of shares of our common
stock at the closing bid price of our common stock on August 11, 2009; upon the
achievement of an additional $5.0 million and each subsequent $5.0 million up to
and additional $20.0 million in sales, an additional 50,000,000 warrants each at
the closing price on August 11, 2009 or the day prior to the date the additional
sales target is reach, whichever is lesser. These warrants are exercisable
over three years from the date of the award. The one-time cash bonus for
sales of the Disintegrator and other products introduced by Mr. Roth is
determined as follows: $50,000 for $2 million in sales, $100,000 for $5 million
in sales, $150,000 for $10 million in sales, and $200,000 for $20 million in
sale, measured three years after the patent acquisition.
We are
not a party to any other employment agreement with our named executive officers
or directors.
Effective
January 12, 2008, we entered into a consulting agreement with Teresa McWilliams,
our former acting CFO, pursuant to which she is to receive $95 for each hour of
financial consulting services rendered from January 1, 2008. The agreement
was for one year, renewable annually for successive one-year terms. This
agreement was terminated August 27, 2009, when Ms. McWilliams retention
ceased.
Other
than with respect to the employment agreement with Dr. Tirotta and Mr. Roth, our
Board of Directors has complete discretion as to the appropriateness of (a)
key-man life insurance, (b) obtaining officer and director liability insurance,
(c) employment contracts with and compensation of executive officers and
directors, (d) indemnification contracts, and (e) incentive plan to award
executive officers and key employees.
Other
than as provided in Dr. Tirotta’s and Mr. Roth’s employment agreements, our
Board of Directors is responsible for reviewing and determining the annual
salary and other compensation of the executive officers and key employees of the
Company. The goals of the Company are to align compensation with business
objectives and performance and to enable the Company to attract, retain and
reward executive officers and other key employees who contribute to the
long-term success of the Company. The Company intends to provide base salaries
to its executive officers and key employees sufficient to provide motivation to
achieve certain operating goals. Although salaries are not specifically tied
into performance, incentive bonuses may be available to certain executive
officers and key employees. In the future, executive compensation may include,
without limitation, cash bonuses, stock option grants and stock reward
grants.
Outstanding
Equity Awards at 2010 Fiscal Year-End
The
following table sets forth information relating to the vested and unvested
option awards, and stock awards that have not vested, held by the named
executive officers as of December 31, 2010. Each award to each named executive
is shown separately. All options shown vested immediately and are currently
exercisable.
Option Awards
|
Stock Awards
|
||||||||||||||||||||||||||||||||
Name
|
Number of
Securities
Underlying
Unexercised
Options
(#) Exercisable
|
Number of
Securities
Underlying
Unexercised
Options
(#)Unexercisable
|
Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
Number of
Shares or
Units of
Stock That
Have Not
Vested
(#)
|
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)
|
Equity
Incentive
Plan Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
(#)
|
Equity
Incentive
Plan
Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
($)
|
||||||||||||||||||||||||
Christopher
F. Tirotta,
President,
CEO and Director
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||||
Jason
M. Roth,
SeniorVicePresident
(1)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Director
Compensation for Year Ending December 31, 2010
Director
Compensation
The table
below lists compensation awarded to members of our board of directors for the
fiscal year ended December 31, 2010. The directors did not receive
any other compensation for serving as members of the board of directors except
that listed in the table below. The Board has not implemented a plan to award
stock options. There are no contractual arrangements with any member of the
board of directors and we do not intend to pay any cash compensation to our
directors in the future, but we may provide compensation in the form of shares
of common stock. Directors who are also executive officers of the Company
do not receive any additional cash compensation for their service on the Board,
but may be compensated for such services in the form of shares of common
stock. Directors are also reimbursed for their expenses in connection with
their activities as directors.
50
Name
|
Fees earned or
paid in cash ($)
|
Stock Awards ($)
|
Option Awards ($)
|
Total ($)
|
||||||||||||
Christopher
Tirotta
|
-
|
-
|
(1)
|
-
|
(1
|
)
|
||||||||||
Thomas
W. Materna
|
-
|
100,000
|
(2)
|
-
|
100,000
|
(2)
|
||||||||||
Felix
Reznick
|
-
|
100,000
|
(2)
|
-
|
100,000
|
(2)
|
||||||||||
Jason
Roth
|
-
|
-
|
(1)
|
-
|
(1
|
)
|
(1)
|
Dr. Tirotta and Mr. Roth each
received a stock award for services as a director valued at $100,000,
which amount was reflected in the Summary Compensation Table
above.
|
(2)
|
Consists of a grant in August
2010 of 10,000,000 shares of common stock valued at $100,000, for such
individual’s services as a director. This was valued at $0.01 per share,
based on the market price of the stock on the date of the stock
grant.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table lists ownership of our Common Stock as of February 7, 2011.
The information includes beneficial ownership by (i) holders of more than 5% of
our Common Stock, (ii) each of our three directors and executive officers and
(iii) all of our directors and executive officers as a group.
The
number and percentage of shares beneficially owned is determined in accordance
with Rules 13d-3 and 13d-5 of the Exchange Act, and the information is not
necessarily indicative of beneficial ownership for any other purpose. We believe
that each individual or entity named has sole investment and voting power with
respect to the securities indicated as beneficially owned by them, subject to
community property laws, where applicable, except where otherwise noted.
Percentage of beneficial ownership is based on 2,207,872,679 shares of common
stock outstanding as of February 7, 2011.
Name and Address of Beneficial Owner (1)
|
|
Amount and Nature
of Beneficial
Ownership of Stock
|
|
|
Percentage of Class
of Common Shares
Owned
|
|
||
Directors
and Officers:
|
||||||||
Christopher
F. Tirotta
|
40,203,310
|
(2)
|
1.82
|
%
|
||||
Chairman,
President, CEO, Secretary and Director
|
||||||||
Thomas
W. Materna
|
39,216,960
|
(3) |
1.78
|
%
|
||||
Director
|
||||||||
Felix
B. Reznick
|
33,364,286
|
(4)
|
1.51
|
%
|
||||
Director
|
||||||||
Jason
Roth
|
121,000,000
|
(5)
|
5.48
|
%
|
||||
Director
|
||||||||
All
directors and officers of the Company as a group (4
persons)
|
233,784,556
|
10.58
|
%
|
51
(1)
|
Unless otherwise indicated, the
address of each beneficial owner listed above is c/o Corporate Secretary,
American Scientific Resources, Incorporated, 1112 Weston Road, Unit 278,
Weston, FL 33326.
|
(2)
|
Includes
2,350 shares of common stock which are owned by Dr. Tirotta’s wife. Dr.
Tirotta also owns 12,500 shares of Series A Preferred Stock. The Series A
Preferred Stock are not convertible into Common Stock. The Series A
Preferred Stock vote as a single class with the Common Stock. Each share
of Series A Preferred Stock entitles the holder to 100,000
votes.
|
(3)
|
Mr.
Materna also owns 12,500 shares of Series A Preferred Stock. The Series A
Preferred Stock are not convertible into Common Stock. The Series A
Preferred Stock vote as a single class with the Common Stock. Each share
of Series A Preferred Stock entitles the holder to 100,000
votes.
|
(4)
|
Includes 714,286 shares issuable
upon conversion of convertible notes with a conversion price of $0.07 and
100,000 shares issuable upon exercise of warrants (including 50,000
warrants with an exercise price of $0.05 and 50,000 warrants with an
exercise price of $0.025). Mr. Reznick also owns 12,500 shares of Series A
Preferred Stock. The Series A Preferred Stock are not convertible into
Common Stock. The Series A Preferred Stock vote as a single class with the
Common Stock. Each share of Series A Preferred Stock entitles the holder
to 100,000 votes.
|
(5)
|
Includes
12,500,000 shares owned by Safeguard Medical Technologies, a company 65%
owned by Mr. Roth, and 108,500,000 shares owned directly by Mr.
Roth. Mr. Rothalso owns 12,500 shares of Series A Preferred Stock.
The Series A Preferred Stock are not convertible into Common Stock. The
Series A Preferred Stock vote as a single class with the Common Stock.
Each share of Series A Preferred Stock entitles the holder to 100,000
votes.
|
|
The
following table sets forth as of February 7, 2011, the number of shares of
Series A Preferred Stock held of record or beneficially (i) by each person
who held of record, or was known by the Company to own beneficially, more
than five percent of the outstanding shares of Common Stock, (ii) by each
director and (iii) by all officers and directors as a
group:
|
Name
of Beneficial Holder
|
Number
of
Shares
|
%
Beneficially
Owned
|
||||||
Christopher
F. Tirotta
|
12,500 | 25.0 | % | |||||
Thomas
W. Materna
|
12,500 | 25.0 | % | |||||
Felix
B. Reznick
|
12,500 | 25.0 | % | |||||
Jason
Roth
|
12,500 | 25.0 | % | |||||
All
directors and offices as a group
|
50,000 | 100 | % |
As of
February 7, 2011, there are 50,000 shares of Series A Preferred Stock issued and
outstanding.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND CORPORATE GOVERNANCE
Certain
Relationships and Related Transactions
There
have been no material transactions since the beginning of our last fiscal year,
between us and any officer, director or any stockholder owning greater than 5%
of our outstanding shares, nor any of their immediate family members, except as
described below.
On
September 10, 2009, we acquired a patent for a needle destruction device known
as the Disintegrator® (including trademarks for the Disintegrator®,
Disintegrator Plus® and Disintegrator Pro®) and other assets from Safeguard
Medical Technologies, LLC (“Safeguard”) in exchange for 250,000,000 shares of
common stock and assumption of a contingent note payable up to $1,200,000.
Jason Roth, a director of the Company, owns a 65% equity interest in Safeguard
Medical Technologies, LLC.
On July
30, 2007, the Company received cash and issued a promissory note to Connie
Tirotta, the wife of Dr. Christopher F. Tirotta, our chief executive
officer, in the principal amount of $125,000. Interest accrued on this
note at a rate of 24% per annum and was to be paid monthly. All principal
and accrued interest was due on or before October 30, 2007. The Company
has not made the required principal and interest payments and has been
negotiating with the holder to amend the payment terms of the note, which would
include a waiver of default for the required payments that have not been
made. In the event of default, the note calls for interest at 36% per
annum. The loan is collateralized by 5,300 units of the Company’s
thermometer product held for resale. As of December 31, 2009, the
outstanding balance is $99,250. The Company has recorded accrued interest
payable amounting to $69,234 at December 31, 2009, at the rate of 24% per annum
as the Company believes it will not be obligated to pay the default rate of
interest. Had the Company accrued at the default rate of interest, accrued
interest payable at December 31, 2009 would have been $92,216.
During
the years ended December 31, 2008 and 2007, two of the Company’s then-board
members, Donald Bennett and Thomas Materna and ASR Realty Group, LLC (“ASR”), an
entity affiliated with Donald Bennett, a former director of the Company,
advanced funds to the Company for working capital on a non-interest bearing
basis. The principal balance due to the board members was $60,180 at
December 31, 2009. One of these advances in the amount of $27,000 due to
ASR, is documented by a note and secured by accounts receivable, inventory and
other assets of the Company, and should the balance not be paid on demand,
interest shall accrue at 15% per annum. As of December 31, 2009, the
Company had accrued interest in the amount of $4,738 with regard to this
note.
Our chief
executive officer, Dr. Christopher F. Tirotta, periodically advances funds to
the Company on a short-term, non-interest bearing basis for working capital
purposes. As of December 31, 2009, $5,000 was due to Dr. Tirotta and such
amount was repaid on January 9, 2010. On December 15, 2010, we issued 1,000,000
shares of our common stock to Dr. Tirotta as payment for $50,000 of salary
payable to him under his employment agreement. These shares were valued at
$5,000 based on the closing bid price for the Company’s common stock on
the day of issuance.
The
Company has a license agreement with Connie Tirotta, the wife of Dr. Tirotta,
our chief executive officer. The license agreement calls for the payment
of royalties equal to 20% of revenues from the Company’s sales or permitted use
of certain copyrighted and trademarked, print and video material, consisting of
the two Dr. Bip videos, “A Hospital Trip with Dr. Bip” and ‘Dr. Bips New Baby
Tips”, and a coloring book relating to the videos. The Company does not sell or
market the coloring book at the present time. The license agreement began
in October 2008 and continues for successive one year terms unless terminated by
either party. To date, sales of the Dr. Bip material and the related
royalties have been insignificant.
52
Director
Independence
Thomas W.
Materna is independent as that term is defined under the Nasdaq Marketplace
Rules.
ADDITIONAL
INFORMATION
We have
filed a registration statement on Form S-1 under the Securities Act of 1933, as
amended, relating to the shares of common stock being offered by this
prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of American Scientific Resources,
Incorporated, filed as part of the registration statement, and it does not
contain all information in the registration statement, as certain portions have
been omitted in accordance with the rules and regulations of the Securities and
Exchange Commission.
In
addition, after the effective date of this prospectus, we will be required to
file annual, quarterly, and current reports, or other information with the SEC
as provided by the Securities Exchange Act. You may read and copy any reports,
statements or other information we file at the SEC's public reference facility
maintained by the SEC 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. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the public reference room. Our SEC filings are also available to
the public through the SEC's Internet website at http://www.sec.gov.
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Neither
our Articles of Incorporation nor Bylaws prevent us from indemnifying our
officers, directors and agents to the extent permitted under the Nevada Revised
Statute ("NRS"). NRS Section 78.7502, provides that a corporation shall
indemnify any director, officer, employee or agent of a corporation against
expenses, including attorneys' fees, actually and reasonably incurred by him in
connection with any the defense to the extent that a director, officer, employee
or agent of a corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to Section 78.7502(1) or
78.7502(2), or in defense of any claim, issue or matter
therein.
53
NRS
78.7502(1) provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, except an action by or in the right of the corporation, by reason
of the fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with the action, suit or proceeding if he: (a) is not
liable pursuant to NRS 78.138; or (b) acted in good faith and in a manner which
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
NRS
Section 78.7502(2) provides that a corporation may indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses, including amounts paid in settlement and attorneys' fees actually and
reasonably incurred by him in connection with the defense or settlement of the
action or suit if he: (a) is not liable pursuant to NRS 78.138; or (b) acted in
good faith and in a manner which he reasonably believed to be in or not opposed
to the best interests of the corporation. Indemnification may not be made for
any claim, issue or matter as to which such a person has been adjudged by a
court of competent jurisdiction, after exhaustion of all appeals there from, to
be liable to the corporation or for amounts paid in settlement to the
corporation, unless and only to the extent that the court in which the action or
suit was brought or other court of competent jurisdiction determines upon
application that in view of all the circumstances of the case, the person is
fairly and reasonably entitled to indemnity for such expenses as the court deems
proper.
NRS
Section 78.747 provides that except as otherwise provided by specific statute,
no director or officer of a corporation is individually liable for a debt or
liability of the corporation, unless the director or officer acts as the alter
ego of the corporation. The court as a matter of law must determine the question
of whether a director or officer acts as the alter ego of a
corporation.
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, we have been informed that, in the opinion of the
Securities and Exchange Commission, 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 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, we will, unless in the
opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by us is against public policy as expressed hereby in the
Securities Act and we will be governed by the final adjudication of such
issue.
LEGAL
MATTERS
The
validity of the shares offered hereby will be passed upon for us by Sichenzia
Ross Friedman Ference LLP, 61 Broadway, New York, New York 10006.
EXPERTS
The
consolidated balance sheets of the Company as of December 31, 2009
and December 31, 2008 and the related consolidated statements of
operations, consolidated statements of changes in shareholders’
deficit and the consolidated statements of cash flows for the years
ended December 31, 2009 and 2008, included in this registration statement on
Form S-1 have been so included in reliance on the consolidated report of
Rosenberg, Rich, Baker Berman & Co. an independent registered public
accounting firm, given upon their authority as experts in accounting and
auditing.
54
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2010
1
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2010
Table of
Contents
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
3
|
||
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
4
|
||
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’
DEFICIT
|
5
|
||
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
6
|
||
NOTES
TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
7
|
Except
for the historical information contained herein, some of the statements
contained herein contain forward-looking statements that involve risks and
uncertainties. They include statements concerning: our business strategy;
expectations of market and customer response; liquidity and capital
expenditures; future sources of revenues; expansion of our proposed product
line; and trends in industry activity generally. In some cases, you can identify
forward-looking statements by words such as "may," "will," "should," "expect,"
"plan," "could," "anticipate," "intend," "believe," "estimate," "predict,"
"potential," "goal," or "continue" or similar terminology. These statements are
only predictions and involve known and unknown risks, uncertainties and other
factors, that may cause our actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by such
forward-looking statements.
2
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
||||||||
|
September 30,
|
December 31,
|
||||||
2010
|
2009
|
|||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
|
$
|
945
|
$
|
11,357
|
||||
Accounts
receivable, net
|
96,875
|
61,963
|
||||||
Inventory,
net
|
247,414
|
520,339
|
||||||
Inventory
purchase deposits
|
37,500
|
53,800
|
||||||
Prepaid
expenses and other current assets
|
40,793
|
20,316
|
||||||
Total
current assets
|
423,527
|
667,775
|
||||||
Fixed
assets, net
|
14,648
|
4,517
|
||||||
Patent,
net
|
2,441,496
|
2,599,578
|
||||||
Total
Assets
|
$
|
2,879,671
|
$
|
3,271,870
|
||||
LIABILITIES
AND SHAREHOLDERS' DEFICIT
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable and accrued expenses
|
$
|
776,916
|
$
|
499,071
|
||||
Accrued
interest payable
|
481,403
|
588,932
|
||||||
Promissory
notes payable
|
507,577
|
828,320
|
||||||
Related
party advances and notes payable
|
165,430
|
161,221
|
||||||
Other
current liability
|
350,000
|
350,000
|
||||||
Obligation
to issue common stock
|
282,198
|
143,000
|
||||||
Derivative
liability resulting from commitments to issue common
|
||||||||
shares
in excess of amount authorized
|
246,025
|
-
|
||||||
Derivative
instruments
|
1,575,550
|
24,124
|
||||||
Convertible
promissory notes, net of discounts
|
1,584,000
|
905,000
|
||||||
Total
current liabilities
|
5,969,099
|
3,499,668
|
||||||
Contingent
note payable from patent purchase, net of discount
|
929,492
|
821,336
|
||||||
Convertible
promissory notes, net of discounts
|
146,293
|
-
|
||||||
Liability
for contingent compensation
|
35,186
|
10,186
|
||||||
Total
liabilities
|
7,080,070
|
4,331,190
|
||||||
Commitments
and contingencies
|
-
|
-
|
||||||
Shareholders'
deficit:
|
||||||||
Series
A preferred stock, $.0001 par value; 500,000 shares authorized at
September 30, 2010 and December 31, 2009; none outstanding
|
-
|
-
|
||||||
Series
B convertible preferred stock, $.0001 par value; 500,000 shares authorized
at September 30, 2010 and December 31, 2009; none
outstanding
|
-
|
-
|
||||||
Common
stock, $.0001 par value; 2,500,000,000 shares authorized; 2,028,627,109
and 1,893,340,600 shares issued and outstanding at September 30, 2010 and
December 31, 2009
|
202,863
|
189,334
|
||||||
Additional
paid-in capital
|
20,415,999
|
18,782,970
|
||||||
Accumulated
deficit
|
(24,819,261
|
)
|
(20,031,624
|
)
|
||||
Total
shareholders' deficit
|
(4,200,399
|
)
|
(1,059,320
|
)
|
||||
Total
liabilities and shareholders' deficit
|
$
|
2,879,671
|
$
|
3,271,870
|
See
accompanying Notes to Interim Condensed Consolidated Financial
Statements.
3
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the
Nine Months Ended September 30, 2010 and 2009
(Unaudited)
Nine Months Ended September 30,
|
||||||||
|
2010
|
2009
|
||||||
Product
sales, net
|
$
|
578,961
|
$
|
596,573
|
||||
Cost
of goods sold
|
(316,348
|
)
|
(328,748
|
)
|
||||
Inventory
adjustment
|
(185,938
|
)
|
(211,080
|
)
|
||||
Gross
profit
|
76,675
|
56,745
|
||||||
Operating,
sales and administrative expenses
|
(2,478,115
|
)
|
(1,470,591
|
)
|
||||
Net
loss from operations
|
(2,401,440
|
)
|
(1,413,846
|
)
|
||||
Other
income (expense):
|
||||||||
Interest
expense
|
(1,797,305
|
)
|
(429,361
|
)
|
||||
Change
in fair value of derivative instruments
|
932,624
|
(84,758
|
)
|
|||||
Debt
settlement charge
|
(478,262
|
)
|
-
|
|||||
Beneficial
conversion feature
|
(580,000
|
)
|
-
|
|||||
Charge
resulting from triggered anti-dilution
|
||||||||
provisions
within financial instruments
|
(416,794
|
)
|
-
|
|||||
Other
expenses
|
(46,500
|
)
|
(7,814
|
)
|
||||
Other
income
|
40
|
-
|
||||||
Total
other income (expense)
|
(2,386,197
|
)
|
(521,933
|
)
|
||||
Net
loss applicable to common shareholders
|
$
|
(4,787,637
|
)
|
$
|
(1,935,779
|
)
|
||
Weighted
average number of common shares outstanding, basic and
diluted
|
1,924,839,940
|
1,022,422,946
|
||||||
Basic
and diluted net loss common per share
|
$
|
(0.00
|
)
|
$
|
(0.00
|
)
|
See
accompanying Notes to Interim Condensed Consolidated Financial
Statements.
4
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT
For the
Nine Months Ended September 30, 2010
(Unaudited)
Common Stock
|
Additional Paid-in
|
Accumulated
|
||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
|||||||||||||||
Balance
at December 31, 2009
|
1,893,340,600
|
$
|
189,334
|
$
|
18,782,970
|
$
|
(20,031,624
|
)
|
$
|
(1,059,320
|
)
|
|||||||||
Cancellation
of common stock upon issuance of convertible notes
|
(33,333,333
|
)
|
(3,333
|
)
|
(196,667
|
)
|
-
|
(200,000
|
)
|
|||||||||||
Conversion
of convertible debentures and accrued interest into common
stock
|
27,302,696
|
2,730
|
130,820
|
-
|
133,550
|
|||||||||||||||
Common
stock issued for cash, net of fees
|
12,686,567
|
1,269
|
76,931
|
-
|
78,200
|
|||||||||||||||
Common
stock issued in settlement of debt obligation
|
36,000,000
|
3,600
|
259,200
|
-
|
262,800
|
|||||||||||||||
Warrants
recorded as contingent compensation
|
-
|
-
|
189,981
|
-
|
189,981
|
|||||||||||||||
Reclassification
of contracts to derivative liabilities due to commitment to issue shares
in excess of amount authorized
|
-
|
-
|
(356,806
|
)
|
-
|
(356,806
|
)
|
|||||||||||||
Beneficial
conversion feature
|
-
|
-
|
580,000
|
-
|
580,000
|
|||||||||||||||
Cancellation
of warrants and issuance of common stock in accordance with litigation
settlement
|
8,000,000
|
800
|
67,200
|
-
|
68,000
|
|||||||||||||||
Common
stock issued to directors as compensation
|
40,000,000
|
4,000
|
396,000
|
-
|
400,000
|
|||||||||||||||
Common
stock issued to employees as compensation and for reimbursable
expenses
|
8,298,661
|
830
|
82,170
|
-
|
83,000
|
|||||||||||||||
Common
stock and warrants issued for services
|
36,331,918
|
3,633
|
404,200
|
-
|
407,833
|
|||||||||||||||
Net
loss
|
-
|
-
|
-
|
(4,787,637
|
)
|
(4,787,637
|
)
|
|||||||||||||
Balance
at September 30, 2010
|
2,028,627,109
|
$
|
202,863
|
$
|
20,415,999
|
$
|
(24,819,261
|
)
|
$
|
(4,200,399
|
)
|
See
accompanying Notes to Interim Condensed Consolidated Financial
Statements.
5
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the
Nine Months September 30, 2010 and 2009
(Unaudited)
2010
|
2009
|
|||||||
Cash
flow from operating activities:
|
||||||||
Net
loss
|
$
|
(4,787,637
|
)
|
$
|
(1,935,779
|
)
|
||
Adjustments
to reconcile net loss to net cash provided by
|
||||||||
(used
in) operating activities:
|
||||||||
Amortization
of contingent note payable and note discounts
|
258,449
|
-
|
||||||
Depreciation
and patent amortization
|
160,083
|
-
|
||||||
Allowance
for doubtful accounts
|
(26,724
|
)
|
-
|
|||||
Reserve
for inventory
|
185,938
|
211,080
|
||||||
Debt
settlement charge and beneficial conversion features
granted
|
1,058,262
|
-
|
||||||
Change
in fair value of derivative instruments
|
(932,624
|
)
|
90,506
|
|||||
Incremental
derivative liabilities
|
1,723,269
|
-
|
||||||
Stock
based compensation
|
1,095,814
|
136,200
|
||||||
Contingent
compensation payable
|
25,000
|
-
|
||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(8,188
|
)
|
177,361
|
|||||
Inventory
and inventory deposit
|
103,287
|
276,619
|
||||||
Deferred
compensation
|
-
|
329,974
|
||||||
Prepaid
expenses and other assets
|
(20,477
|
)
|
(33,586
|
)
|
||||
Accounts
payable and accrued expenses
|
281,054
|
15,098
|
||||||
Accrued
interest payable
|
230,757
|
409,769
|
||||||
Net
cash used in operating activities
|
(653,737
|
)
|
(322,758
|
)
|
||||
Cash
flows from (used in) investing activities:
|
||||||||
Purchase
of fixed assets
|
(12,132
|
)
|
-
|
|||||
Net
cash used in investing activities
|
(12,132
|
)
|
-
|
|||||
Cash
flows from financing activities:
|
||||||||
Payments
on promissory notes payable
|
(88,743
|
)
|
(257,285
|
)
|
||||
Proceeds
from related party advances and notes payable
|
6,000
|
-
|
||||||
Payment
on related party notes payable
|
(5,000
|
)
|
(31,000
|
)
|
||||
Proceeds
from convertible promissory notes
|
670,000
|
-
|
||||||
Obligation
to issue common stock
|
(5,000
|
)
|
-
|
|||||
Proceeds
from issuance of common stock
|
78,200
|
835,650
|
||||||
Net
cash provided by financing activities
|
655,457
|
547,365
|
||||||
Net
increase (decrease) in cash
|
(10,412
|
)
|
224,607
|
|||||
Cash
and cash equivalents at beginning of period
|
11,357
|
8,133
|
||||||
Cash
and cash equivalents at end of period
|
$
|
945
|
$
|
232,740
|
||||
Supplemental
disclosures:
|
||||||||
Cash
paid for interest
|
$
|
3,196
|
$
|
1,050
|
||||
Cash
paid for income taxes
|
$
|
-
|
$
|
-
|
||||
Non-cash
financing activities:
|
||||||||
Common
stock issued upon cancellation of warrants
|
$
|
68,000
|
$
|
-
|
||||
Conversion
of convertible debentures to common stock
|
$
|
125,000
|
$
|
116,000
|
||||
Common
stock issued for interest
|
$
|
8,550
|
$
|
153,252
|
||||
Common
stock issued for Disintegrator patent
|
$
|
-
|
$
|
18,750,000
|
||||
Contingent
note assumed for patent purchased, net of discount
|
$
|
-
|
$
|
777,272
|
||||
Cancellation
of shares upon issuance of convertible notes
|
$
|
(200,000
|
)
|
$
|
-
|
See
accompanying Notes to Interim Condensed Consolidated Financial
Statements.
6
NOTES TO
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2010
1. ORGANIZATION
American
Scientific Resources, Incorporated, a Nevada corporation (“ASRI”, together with
its wholly-owned subsidiary, Kidz-Med, Inc., the “Company”), sources, assembles
and markets medical products sourced from around the globe. The
Company distributes a leading line of medical and medicine delivery devices for
children and sensitive adults including a clinical non-contact thermometer, the
Kidz-Med Non-Contact 5-in-1 Thermometer. Products are distributed
primarily through leading retail drug chains, worldwide medical suppliers, the
Company’s website and other on-line sites. The Company’s common stock
is listed on OTCQB, and
trades under the ticker symbol ASFX.PK.
In
September 2009, ASRI acquired a patent and other assets related to a home
medical device for the destruction of needles and lancets known as the
Disintegrator® from Safeguard Medical Technologies, LLC, which previously
assembled and distributed the device (see Note 5 – Acquisition of
Patent).
2. GOING
CONCERN
These
financial statements have been prepared assuming that the Company will continue
as a going concern. As of and for the nine months ended September 30,
2010, the Company had current liabilities that exceeded current assets by
$5,545,572, has incurred a net loss of $4,787,637, and used $653,737 of cash in
operating activities. As reported in the December 31, 2009 audited
financial statements, the Company had current liabilities that exceeded current
assets by $2,831,893 at December 31, 2009, and had reported a net loss of
$2,362,451 and net cash used in operations of $948,388 for the year ended
December 31, 2009. In addition, the Company remains in default with
regard to payment of certain of its obligations. At September 30,
2010, the amount of principal outstanding on notes payable for which the Company
was in default amounted to $2,026,819. These conditions raise
operating and liquidity concerns and substantial doubt about the Company's
ability to continue as a going concern. The financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty. The
Company’s continued existence is dependent upon its ability to successfully
execute its business plan, secure additional sources of liquidity and obtain
accommodating credit terms from vendors, noteholders and other
creditors. Should the Company be unable to renegotiate the terms and
conditions on its debt obligations or is otherwise unable to pay its accounts
payable when due, the Company may incur materially higher interest and other
expenses, and the debt holders could foreclose on their collateral and commence
legal action against the Company to recover amounts due which ultimately could
require the disposition of some or all of the Company’s assets. Any
such action may require the Company to curtail or cease operations.
Operations
have been funded primarily by sales and issuances of the Company’s securities
and revenue generated from sales of the Company’s products. Current
and future operations are expected to be funded from sales of the Company’s
products and new investment. To the extent that any excess cash is
generated from operations, it has been, and will continue to be, used for the
payment of debt and other trade obligations. Management believes
that, based on the anticipated level of sales, and continued support through
reasonable and accommodating credit terms from vendors, debt holders and other
creditors, the Company can continue operating in the
short-term. During second half of 2009 and 2010 to date, the Company
used proceeds from the sales of convertible notes and shares of its common stock
to develop the Company’s Kidz-Med Non-Contact 5-in-1 Thermometer and the
Disintegrator Plus®. Proceeds from any future sales of the Company’s
securities are also expected to be used primarily for product development and
operating expenses. In July 2010, the Company secured credit
facilities to finance purchases of product and to factor accounts
receivable. The Company may continue to offer its securities for
payment of services and other obligations.
3. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Interim
reporting. While the information presented in the
accompanying interim condensed consolidated financial statements is unaudited,
it includes all adjustments, which are, in the opinion of management, necessary
to present fairly the financial position, results of operations and cash flows
for the interim periods presented in accordance with accounting principles
generally accepted in the United States of America. These interim
financial statements follow the same accounting policies and methods of
application as used in the December 31, 2009 audited financial statements of the
Company. All adjustments are of a normal, recurring
nature. Interim financial statements and the notes thereto do not
contain all of the disclosures normally found in year-end audited financial
statements, and these Notes to Interim Condensed Consolidated Financial
Statements are abbreviated and contain only certain disclosures related to the
three and nine month periods ended September 30, 2010. It is
suggested that these interim financial statements be read in conjunction with
the Company’s year-end audited December 31, 2009 financial statements. Operating
results for the nine months ended September 30, 2010 are not necessarily
indicative of the results that can be expected for the year ending December 31,
2010.
Principles of
consolidation. The accompanying
consolidated financial statements include the accounts of American Scientific
Resources, Incorporated, and its wholly-owned subsidiary, Kidz-Med,
Inc. All significant inter-company transactions have been
eliminated.
Use of
estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Revenue
recognition. The Company sells
or consigns its products on a wholesale basis to retailers and medical
suppliers, and on a retail basis, direct to customers usually via the
internet. The Company recognizes revenues in accordance with the
guidance in the Securities and Exchange Commission (“SEC”) Staff Accounting
Bulletin No. 104. Accordingly, revenue is recognized when persuasive
evidence of a sales arrangement exists, when the selling price is fixed or
determinable, when shipment or delivery occurs, ownership has transferred, and
when collection is probable. For wholesale sales, the Company
generally negotiates an agreement which covers quantities, delivery, title
transfer, pricing, warranties, returns and other terms, which dictate revenue
recognition. Revenue from internet sales is recognized upon shipment
of the product to the customer. All sales are made at a quoted, fixed
price determined prior to completion of the sale.
Revenue
from product placed with customers on consignment is recognized when the
customer has confirmed sale of the product to third parties. The
Company received periodic reports of consignment sales and inventory positions
from customers. In August 2009, a significant consignment arrangement
was terminated.
The
Company provides a one year limited warranty on most of its retail product
sales. Specific warranty and right of return arrangements are
negotiated with wholesalers. Revenues in the consolidated statement
of operations are shown net of any discounts and actual returns of
product. In the Company’s experience, returns for malfunctioning
product resulting in warranty claims generally have been insignificant, and as
such, no provision for warranty claims is provided in these consolidated
financial statements. Returns of merchantable product are reversed
from revenue and returned to inventory for re-sale upon the Company’s receipt of
the product.
The
Company records shipping and handling charges billed to customers as revenue and
the related expense in cost of goods sold.
For the
nine months ended September 30, 2010 and 2009, a majority of the Company’s
revenues were generated from sales of the Disintegrator Plus® and the now
discontinued Thermofocus thermometer. It is impracticable to provide
additional product sales information.
8
During
the nine months ended September 30, 2010, $128,921 of revenue from sales related
to a prior period where collection was in doubt, was recognized upon the
collection of cash.
Inventory.
The Company’s inventories consist of finished goods on-hand and consigned to
others, packaged and unpackaged product, packing supplies and spare
parts. During the nine months ended September 30, 2010, no amounts
were distributed on consignment.
Inventories
are stated at lower of cost or market using the first-in, first-out method and
consist primarily of finished product. Freight for components, labor
and warehouse overhead expenses related to assembly and packaging are allocated
to the cost of products. Initial packaging costs are added to the
cost of the product. Excess and unused packaging and
re-packaging costs are expensed. Advertising and promotional
materials are expensed as operating, sales and administrative
expenses.
During
the second quarter of 2010, the Company began phasing out distribution of the
Thermofocus thermometer due in part to falling customer demand and high product
costs, and began accepting orders for the new Kidz-Med Non-Contact 5-in-1
thermometer. On June 30, 2010, the Company determined that the
estimated market value of the remaining thermometer units on-hand had fallen
below their recorded carrying cost. Therefore, the Company recorded a
lower of cost or market adjustment of $63,194 to reduce the thermometer
inventory carrying value to estimated market value. The estimated
market value was determined from recent selling prices of the
product. On September 30, 2010, the Company further reduced the
carrying cost of its Thermofocus inventory and certain other products by
$122,744 due primarily to reduced demand for these products.
The
Company reviews finished inventory on-hand and consigned to others, and provides
for missing, obsolete and damaged product periodically based on the results of
the review. The Company has a variety of spare parts, a portion of
which are deemed to have no value for accounting purposes as management has
determined that it is doubtful that any amounts will be realized from the
ultimate disposition of these spares parts.
Inventory
reserves are established to adjust inventory for product believed to be lost or
damaged, or unaccounted for after distribution on consignment, when
known. It is possible that a portion of amounts established for
inventory reserves will ultimately be collected in cash from vendors, product
located, repaired and/or re-packaged, and/or returned to the Company for
resale. As of September 30, 2010 and December 31, 2009, inventory
reserves for previously consigned product were $102,761 and $166,808,
respectively. During the first nine months of 2009, the Company
established additional reserves of $211,080 for product deemed lost or damaged,
or unaccounted for after distribution on consignment.
Fixed
assets. Fixed assets are stated at cost and depreciated using
the straight-line method over the asset’s estimated useful
life. Fixed assets, which consist of packaging equipment and computer
equipment and software, have been deemed to have useful lives of approximately 3
to 5 years and are being depreciated over this period. The Company
records depreciation expense as a component of operating, sales and
administrative expenses.
Patent. The
Company’s patent for the Disintegrator® is being amortized on a straight-line
basis over the remaining life of the patent, a period of 151 months from
acquisition to expiration. The Company records amortization expense as a
component of operating, sales and administrative expenses. The
Company estimates that market demand for the Disintegrator as patented will
exceed the patent life expiring in May 2022, and therefore has chosen to
amortize the patent over the remaining patent life. Should the
Company’s estimate of market demand change, the Company will adjust its patent
amortization schedule accordingly. For the nine months ended September 30, 2010
and 2009, amortization expense amounted to $158,082 and $0,
respectively.
Research and
development costs. Expenditures for research and development
of the Company’s products, consisting primarily of design, engineering,
consulting and testing costs, are expensed as operating expenses as
incurred. For the nine months ended September 30, 2010 and 2009, such
expenses amounted to $178,057 and $5,207, respectively.
Earnings (Loss)
per share. Basic net income (loss) per common share is
computed using the weighted average number of common shares outstanding during
the periods. Diluted net income (loss) per share is computed using
the weighted average number of common and dilutive common equivalent shares
outstanding during the period. Potentially dilutive common shares at
September 30, 2010 aggregate up to 1,239,852,990 shares, consisting of
95,793,864 shares issuable upon the exercise of outstanding warrants; 61,964
shares for warrants which have been committed but not yet
issued; 60,439,560 shares available upon conversion of the 2007
subscription agreement debentures; up to 17,600,890 shares issuable should all
of the 2007 convertible debt noteholders elect to convert accrued interest to
common shares; up to 391,666,667 shares available upon conversion of the 2010
convertible debentures; 173,800,000 shares issuable upon conversion of the notes
to Lanktree; 27,013,452 due to Lanktree as settlement of interest; and up to
473,476,593 shares committed as part of obligations to employees and service
providers upon reaching certain targets.
Concentration of
credit risk. Financial instruments, which potentially subject
the Company to concentration of credit risk, consist principally of cash and
trade accounts receivable. The Company places its cash with high credit
financial institutions. The Company extends credit to its customers,
all on an unsecured basis, after performing certain credit
analysis. The Company continually performs credit evaluations of its
customers and maintains an allowance for doubtful accounts for potential credit
losses.
Recent accounting
pronouncements. Management does not believe that any recently
issued, but yet effective, accounting standards if currently adopted would have
a material effect on accompanying condensed consolidated financial
statements.
Fair value of
financial instruments. The carrying values of accounts
receivable, inventory, accounts payable and accrued expenses approximate their
fair values due to their short term maturities. The carrying values
of certain of the Company’s notes payable approximate their fair values based
upon a comparison of the interest rate and terms of such debt given the level of
risk to the rates and terms of similar debt currently available to the Company
in the marketplace. It is not practical to estimate the fair value of
certain notes payable, the convertible debt and the liability for contingent
compensation from acquisition. In order to do so, it would be
necessary to obtain an independent valuation of these unique
instruments. The cost of that valuation would not be justified in
light of the circumstances.
Fair value
measurements. The FASB’s Accounting Standards Codification defines
fair value as the amount that would be received for selling an asset or paid to
transfer a liability in an orderly transaction between market participants and
requires that assets and liabilities carried at fair value are classified and
disclosed in the following three categories:
Level 1 –
Quoted prices for identical instruments in active markets.
Level 2 –
Quoted prices for similar instruments in active or inactive markets and
valuations derived from models where all significant inputs are observable in
active markets.
Level 3 –
Valuations derived from valuation techniques in which one or more significant
inputs are unobservable in any market.
10
Given the
conditions surrounding the trading of the Company’s debt and equity securities,
the Company values its derivative instruments related to embedded conversion
features and warrants from the issuance of convertible debentures in accordance
with the Level 3 guidelines. The following table reconciles, for the
first three quarters of 2010, the beginning and ending balances for financial
instruments that are recognized at fair value in these condensed consolidated
financial statements.
Re-
|
||||||||||||||||||||
|
Balance at
|
classifications
|
Balance at
|
|||||||||||||||||
|
December 31,
|
New
|
from Equity to
|
Change in
|
September 30,
|
|||||||||||||||
|
2009
|
Issuances
|
Liabilities
|
Fair Values
|
2010
|
|||||||||||||||
Level 3 -
|
||||||||||||||||||||
Derivative
liabilites from:
|
||||||||||||||||||||
Conversion
features
|
$
|
-
|
$
|
1,432,746
|
$
|
-
|
$
|
(542,259
|
)
|
$
|
890,487
|
|||||||||
Warrants
|
24,124
|
523,729
|
-
|
(256,902
|
)
|
290,951
|
||||||||||||||
Anti-dilution
provisions triggered by issuances of common stock
equivalents
|
-
|
416,794
|
-
|
(22,682
|
)
|
394,112
|
||||||||||||||
Derivative
instruments
|
24,124
|
2,373,269
|
-
|
(821,843
|
)
|
1,575,550
|
||||||||||||||
Contracts
to be settled with common shares in excess of share capital
authorized
|
-
|
-
|
356,806
|
(110,781
|
)
|
246,025
|
||||||||||||||
$
|
24,124
|
$
|
2,373,269
|
$
|
356,806
|
$
|
(932,624
|
)
|
$
|
1,821,575
|
Derivative
instruments. Derivative instruments consist of certain common stock
warrants and conversion features arising from issuance of convertible
notes. The derivative instruments are recorded in the balance sheets
at fair value as liabilities. Changes in fair value are recognized in
earnings in the period of change.
4. FIXED
ASSETS, NET
Fixed
assets, net of accumulated depreciation, consist of the following at September
30, 2010 and December 31, 2009:
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Equipment
and computers
|
$
|
81,546
|
$
|
69,414
|
||||
Less
accumulated depreciation
|
(66,898
|
)
|
(64,897
|
)
|
||||
$
|
14,648
|
$
|
4,517
|
Depreciation
expense was $2,001 and $0 during the nine months ended September 30, 2010 and
2009, respectively.
5. ACQUISITION
OF PATENT
On
September 10, 2009, ASRI purchased a patent for a needle destruction device
known as the Disintegrator® (including trademarks for the Disintegrator®,
Disintegrator Plus® and Disintegrator Pro®) and other assets from Safeguard
Medical Technologies, LLC (“Safeguard” or the “Seller”) in exchange for
250,000,000 shares of the Company’s common stock and assumption of a contingent
note payable up to $1,200,000.
11
The
assumed $1.2 million, non-interest bearing, contingent note is payable to a
party related to the Seller in two installments upon reaching certain
targets. The first installment of $600,000 is payable upon the
Company reaching $6,000,000 in combined new capital and revenue from sales of
the Disintegrator Plus® and certain other products introduced by the Seller
within two years of September 10, 2009. The second installment of
$600,000 is payable upon the Company reaching an additional $4,000,000 of
combined new capital and revenue within two years of the due date of the first
installment. At the Company’s option, the first and second
installments may each be paid over 12 months after achievement of the respective
combined capital and revenue targets. As it is probable that the
Company will reach the combined capital and revenue targets within four years,
the $1.2 million note obligation has been recognized at a
discount. Subsequent changes to the Company’s estimate of the amount
due on this contingent note payable will be recorded in the Company’s
consolidated financial statements. During the nine months ended
September 30, 2010, the Company recognized $108,156 of interest expense related
to amortization of the discount for the contingent note payable, raising the
balance of the contingent note payable to $929,492.
Simultaneous
with the patent acquisition, the Company agreed to hire an executive who was the
majority owner of the Seller to assist with operations, sales and marketing, and
entered into a ten year employment agreement with the executive (See Note 8 –
Commitments and Contingencies), and retain the Seller for production,
engineering and quality control services. In consideration for
entering into the employment agreement and other agreements with the Seller, the
Company agreed to issue up to 250,000,000 warrants and pay up to $200,000 as a
cash bonus, both contingent upon future sales of the Disintegrator® and certain
other products over three years, to the executive and majority owner of the
Seller. Management determined that the contingent warrants and
contingent bonus payable qualified for treatment as contingent compensation for
accounting purposes. Subsequent changes to the Company’s estimate of
the total amount of compensation due will be recorded in the Company’s
consolidated financial statements.
The
executive may earn up to 250,000,000 warrants. As it is probable that
the Company will reach $7.0 million in sales over the three year period from
September 10, 2009 through September 10, 2012, the Company currently anticipates
the issuance of 100,000,000 warrants, which were determined to have a fair value
of $759,925 as of September 10, 2009. In accordance with ASC No.
718-10, Compensation – Stock
Compensation , the Company is recording monthly compensation expense for
the fair value of the warrants payable over the 3 year period. For
the nine months ended September 30, 2010 and 2009, the Company recorded $189,981
and $14,073 as compensation expense with an offset to additional paid in
capital, respectively. Since inception, total charges to compensation
expense for this contingent compensation have amounted to
$267,382. The Company will adjust the total amount of recorded
compensation expense as recorded in the consolidated financial statements upon
the occurrence of an event which would indicate a change to the level of the
achievable sales.
The
executive may also earn a cash bonus of up to $200,000. As it is
probable that the Company will reach $7.0 million in sales over three year
period from September 10, 2009 through September 10, 2012, the Seller is
entitled to a $100,000 cash bonus, which was deemed to have a fair value of
$64,066 on September 10, 2009. The Company is accruing monthly
compensation expense for the anticipated full amount of the bonus payable on a
straight-line basis over the 3 year period that the services are to be
performed. During the nine months ended September 30, 2010, the
Company recognized $25,000 as compensation expense related to this liability for
contingent compensation, raising the balance to $35,185.
6. NOTES
PAYABLE
Promissory
notes payable
Lanktree – Note
1. On September 28, 2007, the Company issued a promissory
note to Lanktree Consulting Corp. (“Lanktree”) in the aggregate principal amount
of $267,500 (“Note 1”) and received cash proceeds in the sum of
$250,000. In conjunction with the issuance of Note 1, effective
September 28, 2007, we issued 125,000 shares of our common stock to Lanktree
valued at $0.18 per share, the trading price on that day. We also
issued 250,000 warrants to purchase an equivalent number of shares of our common
stock. These warrants were exercisable over a three year period
beginning September 28, 2007 at a price of $0.25 per share. The
warrants expired unexercised. Interest accrues on Note 1 at a rate of
12.0% per annum. All principal and interest accruing under Note 1 was
due March 28, 2008. The Company did not meet its obligations under
this note and as a result entered into an event of default. For
failure to pay principal or interest on the due date or to perform on the
conditions contained in Note 1, Lanktree, at its option, may declare the entire
unpaid balance of principal and interest immediately due and
payable. As a result of the event of default, interest was accruing
at the rate of 6.0% per month on the unpaid obligation and was payable in cash
and shares of our common stock. The Company disputed Lanktree’s
calculation of principal and interest, primarily with regard to the compounding
of interest and the monthly addition to principal for unpaid
interest.
Lanktree -
Installment notes. On July 13, 2010, the Company entered an
agreement with Lanktree whereby the Lanktree agreed to advance $300,000 to the
Company in five consecutive monthly installment of $60,000 each in exchange for
convertible notes with one year maturities bearing interest at 8% per annum,
payable monthly. During the third quarter of 2010, we entered into
three $60,000 convertible note agreements and received proceeds of
$180,000. Each $60,000 installment note is convertible at any time
after six months from the date of issuance until maturity of the installment
note at the option of the holder at a fixed conversion price of
$0.004. Subsequent installment notes are convertible at 50% of the
three day average closing price of the Company’s common stock prior to execution
of the installment note, but in no case shall the conversion price be less than
$0.0015. The Company determined the aggregate intrinsic values of the
contingent conversion features for each note issuance date to be
$169,500. The Company deferred recognition of these conversion
features until such time that the contingency is resolved.
In
October 2010, the Company received $90,000 of cash proceeds on the fourth
installment note and on October 14, 2010 issued 5,000,000 shares valued at
$43,000, in consideration for advance payment of $30,000 on the final
installment note due to the Company in November 2010.
Lanktree –
Settlement. As part of the installment note agreement, the
Company and Lanktree settled on the principal and amount of cash interest due on
Note 1 at $580,000. In addition, the parties agreed that the amount
of the Company’s common stock due for additional interest on Note 1 was
63,013,452 shares. As a result of the settlement of
principal and cash interest due of $580,000 and the common stock obligation of
63,013,452 shares, the Company recorded a settlement expense of $478,262,
consisting of $348,000 of additional principal due and an increase to accrued
interest payable of $130,262 as of June 30, 2010. Further, the
settlement specifies that interest on the new principal amount shall cease to
accrue for a period of 180 days from July 13, 2010. As part of the
settlement, the parties agreed that at any time after 180 days, the holder of
the note now had the right, but not the obligation, to convert any portion of
the $580,000 principal, then accrued interest if any, and any fees which may
become the responsibility of the Company, into common stock at a fixed
conversion price of $0.004 per share. On September 22, 2010, the
parties amended the agreement to allow for conversion of the $580,000 of
principal and interest at any time. In September 2010, Lanktree
converted $100,000 of the $580,000 obligation into 25,000,000 shares of common
stock at a conversion rate of $0.004 per share. In October 2010,
Lanktree converted another $100,000 of principal related to the original
$580,000 obligation into 25,000,000 shares of common stock at a conversion rate
of $0.004 per share leaving a balance due of $380,000.
The
63,013,452 shares are issuable in five tranches of 12,602,690 shares in
conjunction with issuance of each $60,000 convertible promissory
note. The closing price of our common stock on July 13, 2010 was
$0.0073 per share, resulting in a valuation of the 63,013,452 shares at
$459,998. As of June 30, 2010, the Company recognized as an
obligation to issue these shares with a value of $459,998 and reclassified this
amount from accrued interest payable. A summary of the principal,
accrued interest and obligation to issue shares account balances before and
after recording the above settlement expense is as follows:
13
As of June 30, 2010
|
||||||||||||||||
|
Before
|
After
|
As of
|
|||||||||||||
|
Settlement
|
Settlement
|
Settlement
|
September 30,
|
||||||||||||
|
Adjustment
|
Expense
|
Adjustment
|
2010
|
||||||||||||
Principal
|
$
|
232,000
|
$
|
348,000
|
$
|
580,000
|
$
|
480,000
|
||||||||
Accrued
interest
|
329,736
|
130,262
|
-
|
-
|
||||||||||||
Obligation
to issue shares
|
-
|
-
|
459,998
|
197,198
|
||||||||||||
$
|
561,736
|
$
|
478,262
|
$
|
1,039,998
|
$
|
677,198
|
During
the third quarter of 2010, the Company issued three tranches of common shares
amounting 36,000,000 shares to Lanktree valued at $262,800 thereby reducing the
obligation to issue shares as of September 30, 2010 to $197,198. On
October 8, 2010, the Company issued a fourth tranche of 12,000,000 common shares
valued $87,600.
The
addition of the conversion feature is considered a substantial modification of
the debt obligation. The Company recorded effect of the beneficial
conversion feature related to the $580,000 balance of Note 1 resulting from the
settlement as a non-operating charge to the statement of operations with an
offset to additional paid-in capital. The beneficial conversion
feature was determined to be difference between the closing bid price per share
of the Company’s common stock on September 16, 2010 and the conversion price of
$0.004 per share, times the number of shares available for conversion in the
amount of 145,000,000 shares, but limited to principal obligation, or
$580,000.
Despite
the settlement expense, agreement among the parties with regard to amounts due,
and the modifications, Lanktree has not specifically agreed to a waiver of the
technical default provisions with regard to Note 1. As of September
30, 2010, the amount of Note 1 in default is $480,000.
Lanktree –
Short-term note. On June 24, 2010, the Company issued a
convertible promissory note in the amount of $44,000 and received cash proceeds
of $40,000. This note matures on December 24, 2010 and bears interest
at 12% per annum payable monthly. For the three months ended
September 30, 2010, the Company paid $1,320 of interest related to this
short-term note. After six months from the date of issuance, the
holder of the note has the right, but not the obligation, to convert any portion
of the $44,000 principal, then accrued interest if any, and any fees which may
become the responsibility of the Company, into common stock at a fixed
conversion price of $0.005 per share. The Company determined the
intrinsic value of the contingent conversion feature on the note issuance date
to be $26,400. The Company deferred recognition of this conversion
feature until such time that the contingency is resolved.
Commissions due
on Installment notes and Short-term note. The Company agreed
to pay fees to a party who assisted with the settlement of the dispute
surrounding Note 1 and obtain the $300,000 installment note and $44,000
short-term note financings. The fees amount to a cash payment equal
to 7.5% of the each installment note advance received by the Company, shares of
our common stock equal to 4.5% of each installment note advance and warrants to
purchase common stock equal to 10% of the common shares issued. For
the period ended September 30, 2010, the Company paid $13,500 in cash, issued
1,775,691 shares of common stock valued at $12,900, and warrants to purchase
37,241 shares of common stock valued at $281. The warrants were
issued on July 16, 2010 and have an exercise price of $0.01 per share and may be
exercised at any time within three years of the date of issuance. In
addition, as of September 30, 2010, the Company is committed to issue warrants
to purchase 61,964 shares of common stock valued at $529. In November
2010, we issued an additional 470,930 common shares in accordance with this
agreement.
14
Lender
2. On October 22, 2007, the Company issued a promissory note
to a lender (“Lender 2”) in the aggregate principal amount of $262,500 (“Note
2”) and received cash proceeds from Lender 2 in the sum of
$250,000. A current member of our Board of Directors is indirectly
related to Lender 2. Effective December 31, 2009, the Company entered
into an agreement whereby Lender 2 released the Company from all principal and
interest obligations under the note in exchange for the Company’s commitment to
file a registration statement with the SEC and to compensate Lender 2 should
Lender 2 be unable to sell up to 88,000,000 million of its shares above an
average price of $0.01 per share over an eleven week period after the
registration statement becomes effective. The maximum amount due by
the Company under the release agreement is $350,000. On January 26,
2010, the Company filed a registration statement with the SEC. As a
result, on December 31, 2009, the Company recognized a gain from discharge of
indebtedness in the amount of $105,684 consisting of relief of principal of
$227,375 and accrued interest of $228,309 on the note less $350,000, and
reclassified the remaining principal and accrued interest in the amount of
$350,000 to other current liability.
Tecnimed. In
October 2007 and April 2008, the Company issued two promissory notes to
Tecnimed, SRL (“Tecnimed” or the “Vendor”) in the aggregate principal amount of
$608,800. These notes accrued interest at 10% per annum and are
secured by a portion of the Company’s inventory received from the
Vendor. In conjunction with the issuance of the first of these notes,
effective October 30, 2007, we issued 375,000 of our common stock valued at
$0.26 per share, the trading price at the end of that day. All
principal and interest was due during 2008. As of September 30, 2010
and December 31, 2009, the Company had $210,539 and $283,252 of principal
outstanding on the two promissory notes. On September 30, 2010, the
Company deemed principal in the amount of $210,539 plus accrued interest to be
in default.
On March
6, 2009, the Company entered into a Settlement Agreement with the Vendor (the
“Settlement Agreement”), whereby the parties agreed to termination of the
existing distribution agreement as amended, payment terms with regard to sold
and unsold product, new terms with regard to sales and distribution of existing
product, mutual releases of claims against one another, and modification to
certain indemnity provisions (see Note 8 – Commitment and Contingencies
regarding litigation between a competitor, Tecnimed and the Company), among
other provisions. As part of the Settlement Agreement, the Company
agreed not to make any cash distributions to shareholders, officers, directors
and employees (apart from ordinary salary), and pay the Vendor 30% of any of
capital raised (excluding any financing for working capital), until the
obligation to the Vendor has been fully satisfied. Further, the
Company agreed to an even split of cash received from customers until the debt
is paid in full. In addition, the Vendor agreed to waive all
penalties, fees and interest above 6% compounded annually, with respect to the
notes, and forbear collection proceedings for 18 months from the date of the
Settlement Agreement provided the Company is in compliance with the obligations
within the Settlement Agreement. The Vendor also has a lien on
product titled to the Company at an independent warehouse location and requires
specific authorization prior to release of such product to the
Company. During the nine months ended September 30, 2010, the Company
paid $65,363 of principal on the two promissory notes held by the Vendor, and
fully paid-off the principal on one promissory note. Accrued
interest payable at September 30, 2010 related to the notes was
$74,132.
As fully
discussed in Note 8 – Commitment and Contingencies, on September 21, 2010, the
vendor filed a complaint against the Company and its Kids-Med subsidiary
alleging breach of non-compete agreement and that the Company infringed on the
Thermofocus trademark and trade dress. In addition, the complaint
alleges that the Company sold Thermofocus units in an unauthorized manner
resulting in a breach of contract. Further, the complaint alleges
that the Company is in default on the payment of $209,802 of principal and
$88,867 of interest under the notes due Tecnimed.
Short-term
advance. On November 5, 2005, the Company received $300,000
from a shareholder and former service provider (“Service Provider 1”) as a short
term cash advance. No agreement was entered into regarding the
payment of principal and interest. As of September 30, 2010, the
principal due on this loan amounted to $289,500, and is deemed by the Company to
be in default.
Other promissory
note payable. As of September 30, 2010 and December 31, 2009,
the Company had outstanding principal balance due on an unsecured installment
note with a commercial bank (“Commercial Bank”) in the amounts of $7,543 and
$23,568, respectively. This note calls for monthly payments of $2,057
with interest on the outstanding balance at prime plus 1.50%. The
final maturity is December 14, 2010. This installment note is
personally guaranteed by our chief executive officer and another member of our
Board of Directors.
A summary
of principal due on promissory notes payable as of September 30, 2010 and
December 31, 2009 is as follows:
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Lanktree
1 - Note 1 reclassified as convertible note in
settlement
|
$
|
-
|
$
|
232,000
|
||||
Tecnimed,
in default
|
210,539
|
283,252
|
||||||
Service
Provider 1, in default
|
289,500
|
289,500
|
||||||
Commercial
Bank
|
7,538
|
23,568
|
||||||
$
|
507,577
|
$
|
828,320
|
Related
party advances and notes
On July
30, 2007, the Company received cash and issued a promissory note to a relative
of our chief executive officer in the principal amount of
$125,000. Interest accrued on this note at a rate of 24% per annum
and was to be paid monthly. All principal and accrued interest was
due on or before October 30, 2007. The Company has not made the
required principal and interest payments and has been negotiating with the
holder to amend the payment terms of the note, which would include a waiver of
default for the required payments that have not been made. In the
event of default, the note calls for interest at 36% per annum. The
loan is collateralized by 5,300 units of the Company’s thermometer product held
for resale. As of September 30, 2010 and December 31, 2009, the
outstanding balance is 99,250. The Company has recorded accrued
interest payable amounting to $87,050 at September 30, 2010, at the rate of 24%
per annum as the Company believes it will not be obligated to pay the default
rate of interest. Had the Company accrued interest at the default
rate, accrued interest payable at September 30, 2010 would have been $118,940
and additional interest expense in the amount of $8,908 would have been
recognized for the nine months ended September 30, 2010.
During
the years ended December 31, 2008 and 2007, two of the Company’s board members,
and ASR Realty Group, LLC (“ASR”), an entity affiliated with a former board
member, advanced funds to the Company for working capital on a non-interest
bearing basis. The principal balance due to the board members was
$60,180 at September 30, 2010 and December 31, 2009. One of these
advances in the amount of $27,000 due to ASR, is documented by a note and
secured by accounts receivable, inventory and other assets of the Company, and
should the balance not be paid on demand, interest shall accrue at 15% per
annum. As of September 30, 2010, the Company had accrued interest in
the amount of $7,767 with regard to this note.
As of
September 30, 2010, the Company deems principal due to related parties in the
amount of $159,430 to be in default. See Note 9 – Related Party
Transactions for additional information on related party advances.
16
Convertible
promissory notes
A summary
of principal due, unamortized discount and carrying values of convertible
promissory notes is as follows:
As of September 30, 2010
|
||||||||||||
|
Prinipal Due
|
Unamortized
|
Carrying
|
|||||||||
|
at Maturity
|
Discount
|
Value
|
|||||||||
Current:
|
||||||||||||
2007
issuance, in default
|
$
|
880,000
|
$
|
-
|
$
|
880,000
|
||||||
Lender
1 - Note 1, in default
|
480,000
|
-
|
480,000
|
|||||||||
Lender
1 - Installment notes
|
180,000
|
-
|
180,000
|
|||||||||
Lender
1 - Short-term note
|
44,000
|
-
|
44,000
|
|||||||||
Current
convertible notes
|
1,584,000
|
-
|
1,584,000
|
|||||||||
First
quarter 2010 issuance
|
400,000
|
290,625
|
109,375
|
|||||||||
Second
quarter 2010 issuance
|
150,000
|
121,301
|
28,699
|
|||||||||
Third
quarter 2010 issuance
|
100,000
|
91,781
|
8,219
|
|||||||||
Long-term
convertible notes
|
650,000
|
503,707
|
146,293
|
|||||||||
$
|
2,234,000
|
$
|
503,707
|
$
|
1,730,293
|
Third quarter
2010 convertible debentures. On July 22, 2010, the Company
entered an agreement with an investor to issue convertible debentures in the
amount of $100,000 and warrants to purchase 5,000,000 shares of common stock for
cash proceeds of $100,000 less a selling commission of $8,000. The
debentures mature two years from the date of issuance and are convertible at any
time within that period at a conversion price of $0.004 per
share. The warrants are exercisable over seven years at $0.0075 per
share. These convertible debentures accrue interest at 10% per annum
if paid in cash, or 12% per annum if paid in equivalent shares of common
stock. For the period ended September 30, 2010, the Company accrued
interest expense at 10% in the amount of $1,889 related to these convertible
debentures.
The
conversion price is adjustable in the event of any stock dividends, stock splits
and subsequent equity sales or grants of the Company’s common stock should the
effective price per share be lower than the conversion price at the time of such
issuance. The holders of these convertible debentures may participate
in any rights offering and shall participate in any distributions through
adjustment of the conversion price. The holders may also accelerate
demand for outstanding principal and interest upon any change in control,
merger, consolidation, substantial asset sale, tender offer or other fundamental
transaction as defined in the convertible debenture.
The
exercise price of the warrants is adjustable in the event of payment of
dividends or any distribution of common stock, any reclassification or
recapitalization, and any subsequent equity sales should the effective price per
share be lower than the exercise price at the time of such
issuance. See Note 7 – Warrants for common shares.
At the
commitment date, due to anti-dilution provisions in the convertible debentures,
the Company determined that the conversion feature contained an embedded
derivative. The Company determined the fair value of the conversion feature
related to the convertible debentures by applying the Black-Scholes pricing
model using the conversion price of $0.004, the closing price of the Company's
common stock on the date of issuance, 2 years for the expected term, weighted
average volatility of 331%, no dividends and weighted average risk free interest
rate of 0.60%. The Company recognized an aggregate conversion feature
of $271,894 which was recorded as a derivative liability with an offset to
discount on convertible notes and interest expense. After
consideration of the relative fair value of the warrants of $35,482, a discount
related to the conversion features was recorded as an offset to the carrying
amount of the convertible debentures and was limited to $64,518. The
remainder of $146,385 was charged to interest expense. The discount
will be amortized over the two year term of the debenture. For the
period from issuance to September 30, 2010, amortization of the discount related
to the conversion feature amounted to $5,303.
As of
July 22, 2010, the Company determined the relative fair value of the warrants to
be $35,482 and recorded this amount as a discount to the carrying amount of the
convertible debentures with an offset to derivative liability. The Company began
amortizing the debt discount over the two year term of the
debentures. Amortization of the debt discount related to the warrants
for the period ended September 30, 2010 was $2,916. Additionally, due
to anti-dilution provisions in the warrants, the Company determined that the
warrants contained an embedded derivative due to the possibility of issuance of
additional warrants. The Company determined the aggregate fair value
of the warrant derivative liability to be $54,996 and recorded $80,506 as
additional interest expense on the issuance date. The fair value of
the warrants was calculated by utilizing the Black-Scholes fair value
methodology using the closing price of the Company’s common stock on the dates
of issuance, 7 years for expected term, weighted average volatility of
296%, no dividends and weighted average risk free interest rate of
2.38%.
17
As
summary of the third quarter 2010 convertible debentures net of discounts at
their issuance date and as of September 30, 2010 are as follows:
September 30,
|
||||||||
|
At Issuance
|
2010
|
||||||
Face
value of third quarter 2010 convertible
debentures
|
$
|
100,000
|
$
|
100,000
|
||||
Discount
related to conversion feature
|
(64,518
|
)
|
(59,215
|
)
|
||||
Discount
related to warrants
|
(35,482
|
)
|
(32,566
|
)
|
||||
Convertible
promissory notes, net of discount
|
$
|
-
|
$
|
8,219
|
At
September 30, 2010, the Company determined the fair value of the conversion
feature derivative liability and the warrant derivative liability using the
Black-Scholes pricing model with the following assumptions: closing price of the
Company’s common stock at September 30, 2010, the anticipated exercise prices of
$0.004 for the conversion feature and $0.0075 for the warrants, a weighted
average of 1.80 years expected term for the conversion features and a weighted
average of 6.80 years expected term for the warrants, weighted average
volatility of 331% for the conversion feature and 295% for the warrants, and a
weighted average risk free rate of 0.64% for the conversion features and 1.91%
for the warrants. The Company recorded an aggregate debit adjustment
to fair value of these derivative liabilities of $75,666 resulting in aggregate
carrying values for the third quarter 2010 convertible debentures to be $251,225
as of September 30, 2010.
The fair
values of the derivative liability for the conversion features embedded within,
and the warrants issued with, the convertible notes related to the third quarter
2010 convertible debentures were as follows:
September 30,
|
||||||||
|
At Issuance
|
2010
|
||||||
Fair
value of conversion feature derivative
liability
|
$
|
210,902
|
$
|
208,729
|
||||
Fair
value of warrant derivative liability
|
115,989
|
42,496
|
||||||
Third
quarter 2010 debentures - derivative instruments at fair
value
|
$
|
326,891
|
$
|
251,225
|
Second quarter
2010 convertible debentures. On May 13, 2010, the Company
entered into agreements with two investors to issue convertible debentures in
the aggregate amount of $150,000 and warrants to purchase 7,500,000 shares of
common stock for cash proceeds of $150,000 less a selling commission of
$12,000. The debentures mature two years from the date of issuance
and are convertible at any time within that period at a conversion price equal
to the lesser of $0.0066 per share or 90% of the volume weighted average price
of the Company’s common stock for ten days immediately prior to conversion, but
such conversion price shall not be below $0.0015. The warrants are
exercisable over seven years at $0.01 per share. These convertible
debentures accrue interest at 10% per annum if paid in cash, or 12% per annum if
paid in equivalent shares of common stock. For the period ended
September 30, 2010, the Company accrued interest expense at 10% in the amount of
$5,708 related to these convertible debentures.
18
The
conversion price is adjustable in the event of any stock dividends, stock splits
and subsequent equity sales or grants of the Company’s common stock should the
effective price per share be lower than the conversion price at the time of such
issuance. The holders of these convertible debentures may participate
in any rights offering and shall participate in any distributions through
adjustment of the conversion price. The holders may also accelerate
demand for outstanding principal and interest upon any change in control,
merger, consolidation, substantial asset sale, tender offer or other fundamental
transaction as defined in the convertible debenture.
The
exercise price of the warrants is adjustable in the event of payment of
dividends or any distribution of common stock, any reclassification or
recapitalization, and any subsequent equity sales should the effective price per
share be lower than the exercise price at the time of such
issuance. See Note 7 – Warrants for common shares.
At the
commitment date, due to anti-dilution provisions in the convertible debentures,
the Company determined that the conversion feature contained an embedded
derivative. The Company determined the fair value of the conversion feature
related to the convertible debentures by applying the Black-Scholes pricing
model using the conversion price of $0.0066, the closing price of the Company's
common stock on the date of issuance, 2 years for the expected term, weighted
average volatility of 368%, no dividends and weighted average risk free interest
rate of 0.87%. The Company recognized an aggregate conversion feature
of $281,251 which was recorded as a derivative liability with an offset to
discount on convertible notes and interest expense. After
consideration of the relative fair value of the warrants of $57,691, a discount
related to the conversion features was recorded as an offset to the carrying
amount of the convertible debentures and was limited to $92,309. The
remainder of $138,462 was charged to interest expense. The discount
will be amortized over the two year term of the debenture. For the
period from issuance to September 30, 2010, amortization of the discount related
to the conversion feature amounted to $17,661.
As of May
13, 2010, the Company determined the relative fair value of the warrants to be
$57,691 and recorded this amount as a discount to the carrying amount of the
convertible debentures with an offset to derivative liability. The Company began
amortizing the debt discount over the two year term of the
debentures. Amortization of the debt discount related to the warrants
for the period ended September 30, 2010 was $11,038. Additionally,
due to anti-dilution provisions in the warrants, the Company determined that the
warrants contained an embedded derivative due to the possibility of issuance of
additional warrants. The Company determined the aggregate fair value
of the warrant derivative liability to be $93,746 and recorded $86,535 as
additional interest expense on the issuance date. The fair value of
the warrants was calculated by utilizing the Black-Scholes fair value
methodology using the closing price of the Company’s common stock on the dates
of issuance, 7 years for expected term, weighted average volatility of
305%, no dividends and weighted average risk free interest rate of
2.98%.
As
summary of the second quarter 2010 convertible debentures net of discounts at
their issuance dates and as of September 30, 2010 are as follows:
September 30,
|
||||||||
|
At Issuance
|
2010
|
||||||
Face
value of second quarter 2010 convertible
debentures
|
$
|
150,000
|
$
|
150,000
|
||||
Discount
related to conversion feature
|
(92,309
|
)
|
(74,648
|
)
|
||||
Discount
related to warrants
|
(57,691
|
)
|
(46,653
|
)
|
||||
Convertible
promissory notes, net of discount
|
$
|
-
|
$
|
28,699
|
19
At
September 30, 2010, the Company determined the fair value of the conversion
feature derivative liability and the warrant derivative liability using the
Black-Scholes pricing model with the following assumptions: closing price of the
Company’s common stock at September 30, 2010, the anticipated exercise prices of
$0.0066 for the conversion feature and $0.01 for the warrants, a weighted
average of 1.63 years expected term for the conversion features and a weighted
average of 6.63 years expected term for the warrants, weighted average
volatility of 331% for the conversion feature and 296% for the warrants, and a
weighted average risk free rate of 0.64% for the conversion features and 1.91%
for the warrants. The Company recorded an aggregate debit adjustment
to fair value of these derivative liabilities of $123,911 since issuance
resulting in aggregate carrying values for the second quarter 2010 convertible
debentures to be $251,086 as of September 30, 2010.
The fair
values of the derivative liability for the conversion features embedded within
the convertible notes and the warrants issued with the convertible notes related
to the second quarter 2010 convertible debentures were as follows :
September 30,
|
||||||||
|
At Issuance
|
2010
|
||||||
Fair
value of conversion feature derivative
liability
|
$
|
281,251
|
$
|
187,345
|
||||
Fair
value of warrant derivative liability
|
93,746
|
63,741
|
||||||
Second
quarter 2010 debentures - derivative instruments at fair
value
|
$
|
374,997
|
$
|
251,086
|
First quarter
2010 convertible debentures. On February 16, 2010 and March
23, 2010, the Company entered into agreements with an investor to issue
convertible debentures in the aggregate amount of $400,000 and warrants to
purchase 20,000,000 shares of common stock in exchange for return of 33,333,333
common shares and cash proceeds of $200,000, less a selling commission of
$16,000. The debentures mature two years from the date of issuance
and were initially convertible at any time within that period at a conversion
price equal to the lesser of $0.0066 per share or 90% of the volume weighted
average price of the Company’s common stock for the ten days immediately prior
to conversion, but such conversion price would not be below $0.003 per
share. The warrants were initially exercisable over three years from
the date of issuance at $0.01 per share. On May 13, 2010, in
conjunction with the issuance of the second quarter 2010 convertible debentures,
the Company exchanged the first quarter 2010 convertible debentures and warrants
effectively amending the floor price from $0.003 to $0.0015 per share and
extending the exercise period of the warrants to seven years from May 13,
2010.
These
convertible debentures initially accrued interest at 8% per annum, payable
annually on or before December 31, beginning on the first such date after the
issue date. On May 13, 2010, in conjunction with the issuance of the
second quarter 2010 convertible debentures, the Company exchanged the first
quarter 2010 convertible debentures amending the interest rate to 10% if paid in
cash, or 12% if paid in equivalent shares of common stock and extending the
maturity date to May 13, 2012. For the period ended September 30,
2010, the Company accrued interest expense at 10% in the amount of $23,667
related to these convertible debentures.
The
conversion price is adjustable in the event of any stock dividends, stock splits
and subsequent equity sales or grants of the Company’s common stock should the
effective price per share be lower than the conversion price at the time of such
issuance. The holders of these convertible debentures may participate
in any rights offering and shall participate in any distributions through
adjustment of the conversion price. The holders may also accelerate
demand for outstanding principal and interest upon any change in control,
merger, consolidation, substantial asset sale, tender offer or other fundamental
transaction as defined in the convertible debenture.
The
exercise price of the warrants is adjustable in the event of payment of
dividends or any distribution of common stock, any reclassification or
recapitalization, and any subsequent equity sales should the effective price per
share be lower than the exercise price at the time of such
issuance. See Note 7 – Warrants for common shares.
20
At each
commitment date, due to anti-dilution provisions in the convertible debentures,
the Company determined that the conversion feature contained an embedded
derivative. The Company determined the fair value of the conversion features
related to the convertible debentures by applying the Black-Scholes pricing
model using the conversion price of $0.0066, the closing price of the Company's
common stock on the dates of issuance, 2 years for the expected term, weighted
average volatility of 367%, no dividends and weighted average risk free interest
rate of 0.97%. The Company recognized an aggregate conversion feature
of $940,593 which was recorded as a derivative liability with an offset to
discount on convertible notes and interest expense. After
consideration of the relative fair value of the warrants, a discount related to
the conversion features was recorded as an offset to the carrying amount of the
convertible debentures and was limited to $228,392. The remainder of
$712,201 was charged to interest expense. The discount will be
amortized over the two year term of the debenture. For the period
from issuance to September 30, 2010, amortization of the discount related to the
conversion features amounted to $63,137.
The
Company determined the relative fair value of the warrants to be $171,608 and
recorded this amount as a discount to the carrying amount of the convertible
debentures with an offset to derivative liability. The Company began amortizing
the debt discount over the two year term of the
debentures. Amortization of the debt discount related to the warrants
for the period ended September 30, 2010 was $46,238. Additionally,
due to anti-dilution provisions in the warrants, the Company determined that the
warrants contained an embedded derivative due to the possibility of issuance of
additional warrants. The Company determined the aggregate fair value
of the warrant derivative liability to be $311,488 and recorded $139,880 as
additional interest expense on the issuance dates. The fair value of
the warrants was calculated by utilizing the Black-Scholes fair value methodology using the
closing price of the Company’s common stock on the dates of issuance,
3 years for expected term, weighted average volatility of 331%, no
dividends and weighted average risk free interest rate of 1.50%.
As
summary of the first quarter 2010 convertible debentures net of discounts at
their issuance dates and as of September 30, 2010 are as follows:
September 30,
|
||||||||
|
At Issuance
|
2010
|
||||||
Face
value of first quarter 2010 convertible
debentures
|
$
|
400,000
|
$
|
400,000
|
||||
Discount
related to conversion feature
|
(228,392
|
)
|
(165,255
|
)
|
||||
Discount
related to warrants
|
(171,608
|
)
|
(125,370
|
)
|
||||
Convertible
promissory notes, net of discount
|
$
|
-
|
$
|
109,375
|
At
September 30, 2010, the Company determined the fair value of the conversion
feature derivative liability and the warrant derivative liability using the
Black-Scholes pricing model with the following assumptions: closing price of the
Company’s common stock at September 30, 2010, the anticipated exercise prices of
$0.0066 for the conversion feature and $0.01 for the warrants, a weighted
average of 1.43 years expected term for the conversion features and a weighted
average of 6.43 years expected term for the warrants, weighted average
volatility of 331% for the conversion features and 296% for the warrants, and a
weighted average risk free rate of 0.48% for the conversion features and 1.91%
for the warrants. For the period ended September 30, 2010, the
Company recorded an aggregate debit adjustment to fair value these derivative
liabilities of $587,699. The resulting aggregate carrying value for
the first quarter 2010 convertible debentures was $644,382 as of September 30,
2010.
The fair
values of the derivative liability for the conversion features embedded within
the convertible notes and the warrants issued with convertible notes related to
the first quarter 2010 convertible debentures were as follows:
September 30,
|
||||||||
|
At Issuance
|
2010
|
||||||
|
||||||||
Fair
value of conversion feature derivative
liability
|
$
|
940,593
|
$
|
494,413
|
||||
Fair
value of warrant derivative liability
|
311,488
|
169,969
|
||||||
First
quarter 2010 debentures - derivative instruments at fair
value
|
$
|
1,252,081
|
$
|
664,382
|
The
exchange of the first quarter 2010 convertible debentures and warrants on May
13, 2010 was not deemed to be an extinguishment and reissuance of debt as the
difference between the present values of the expected cash flow streams before
and after the exchange did not exceed 10%. Accordingly, the Company
treated the exchange as a modification of terms. The incremental
difference in the expected cash flow immediately before and after the exchange
due to the change in valuation of the warrants of $1,336 was not
recorded. The Company began accruing interest at 10% on May 13, 2010
under the assumption that interest would be paid in cash.
2007 subscription
agreement debentures. During 2007, the Company entered into
subscription agreements with various investors issuing convertible promissory
notes, 905,000 common shares and 1,810,000 warrants to purchase an equivalent
number of common shares in exchange for proceeds of $905,000. The
warrants are exercisable at $1.00 per share over a five year period from
issuance. These convertible promissory notes matured one year from
the date of issuance.
The
convertible promissory notes accrue interest at 10%, and all principal and
interest was due on the first anniversary of their issuance
date. These notes were convertible into shares of our common stock at
the option of each holder at (1) $0.25 per share, or (2) a 20% discount to the
price per share issued in a financing transaction of at least $2,000,000, or (3)
in the event of default, the conversion price would be adjusted to equal 80% of
the Company’s average closing stock price during the five trading days prior to
default.
Each
convertible promissory note issued in the subscription agreements had a term of
one year and was not repaid. Due to the default and reset of the
conversion price to 80% of the fair value of the Company’s common stock five
days prior to the default, the Company tested each convertible promissory note
for an incremental beneficial conversion feature. The Company’s Board
of Directors has determined that the default date for each convertible
promissory note was April 30, 2008. The calculation of the conversion
rate to common shares on such date was $0.0146 of principal outstanding to one
share of common stock. Based on the default provisions, noteholders
may convert their principal balance into 62,156,593 common
shares. Unless the Company declares a stock dividend, or there is
some other re-capitalization of the Company, such as a stock split or reverse
stock split, the conversion price established at the default date will not
change.
On June
28, 2010, a holder of the 2007 subscription agreement debentures converted
$25,000 of principal and $8,551 of accrued interest into 2,302,696 shares of
common stock at a conversion price of approximately $0.0146 per
share. As of September 30, 2010 and December 31, 2009, the Company
had $880,000 and $905,000 of principal outstanding on these convertible
promissory notes, respectively.
The
subscription agreements for these debentures contain a registration rights
penalty whereby, commencing upon six months from an initial unit sale and, for
each monthly period thereafter that the common stock and the common stock
underlying the warrants are not registered, the Company will issue 4,167
warrants per unit as a penalty to the subscription holder. The
Company failed to file a registration statement and consequently, beginning
August 2007, the Company began valuing 4,167 warrants per outstanding unit as a
penalty each month. On January 26, 2010, the Company filed a
registration statement with the SEC and ceased accruing penalty warrants and
therefore the penalty warrants are no longer accruing. The penalty
warrants have been determined to be a derivative instrument. For
January 2010, 63,258 penalty warrants with an exercise price of $1.00 were
accrued. The aggregate value of the new penalty warrants issued in
January, 2010 amounted to $2,507. For the period ended September 30,
2010, the fair value of the new penalty warrants and the fair value of each
monthly issuance of warrants have been determined by using the Black-Scholes
pricing model with the following weighted average assumptions: no dividend
yield, expected volatility ranging from 296% to 331%, risk-free interest rate
ranging from 0.42% to1.27%, and an expected life ranging from 1.92 to 4.33
years. Based on the application of the Black-Scholes pricing model
applied to each issuance of the penalty warrants, a debit adjustment was
recorded to fair value of the warrant derivative liability of $9,379 for the
period ended September 30, 2010, resulting in these warrant derivative
liabilities to be carried at their fair values of $14,745 at September 30,
2010. During the nine months ended September 30, 2010, interest
expense accrued related to these convertible promissory notes was
$66,853. At September 30, 2010, total accrued interest expense
amounted to $279,153.
22
A current
member of our Board of Directors directly owns convertible promissory notes
which provide for conversion into 50,000 common shares, and 100,000 warrants to
purchase common shares. Parties directly and indirectly related to
this director, own convertible promissory notes convertible into 300,000 common
shares, and 600,000 warrants to purchase common shares.
7. EQUITY
Sale of common
shares. In January 2010, the Company sold 12,686,567 shares
of common stock for cash proceeds of $85,000 and paid a selling commission of
$6,800. Of the $85,000 total proceeds received from this issuance,
$5,000 was advanced to the Company in December 2009 and recorded as an
obligation to issue common stock.
Warrants for
common shares. During the nine months
ended September 30, 2010, the Company granted 98,225,472 warrants to purchase an
equivalent number of shares of common stock to investors and consultants in
connection with convertible debenture issuances. These warrants are
exercisable over three to seven year periods at exercise prices ranging from
$0.004 to $1.00 per share. A summary of the status of the
Company’s outstanding common stock warrants as of and for the nine months ended
September 30, 2010, excluding warrants issuable as contingent compensation, is
as follows:
Weighted
|
Proceeds
|
Weighted
|
||||||||||||||
|
Warrants
|
Avg. Exercise
|
Upon
|
Avg. Remaining
|
||||||||||||
|
Exercisable
|
Price
|
Exercise
|
Life in Years
|
||||||||||||
Balance
December 31, 2009
|
25,818,392
|
$
|
0.14
|
$
|
3,588,392
|
2.78
|
||||||||||
Granted
|
98,225,472
|
0.01
|
758,630
|
6.65
|
||||||||||||
Exercised
|
-
|
-
|
-
|
-
|
||||||||||||
Cancelled
|
(28,250,000
|
)
|
-
|
(274,500
|
)
|
-
|
||||||||||
Balance
September 30, 2010
|
95,793,864
|
0.04
|
$
|
4,072,522
|
5.83
|
As of
September 30, 2010, warrants to purchase 90,400,000 shares of the Company’s
common stock contain a cashless exercise option based on the fair market value
of the Company’s stock on the date of exercise. Warrants to purchase
78,125,000 shares of the Company’s common stock contain provisions whereby the
exercise price for the warrants adjusts proportionally with additional sales of
equity. All warrants outstanding at September 30, 2010 contain other
anti-dilution provisions should the Company become re-capitalized, incur
adjustments for any reorganization, consolidation or merger, and other rights
offering participation.
On
September 16, 2010, the Company granted Lanktree the right to convert the
principal balance outstanding on Note 1 in the amount of $580,000 into shares of
common stock at a conversion price of $0.004 per share. As a result
of anti-dilution provisions in various debentures and warrant agreements,
conversion prices related to the first and second quarter 2010 convertible
debentures adjusted to $0.004 per share, and exercise prices related to warrants
issued with the first, second and third quarter debentures adjusted to $0.004
per share. The anti-dilution provisions also triggered the issuance
of 45,625,000 warrants with an exercise price of $0.004. The Company
has assumed that these additional warrants will have approximately a six and
two-thirds year term to match the remaining term of the originally issued
warrants. On that date, the Company determined aggregate the fair
values of the conversion feature derivative liabilities and the warrant
derivative liabilities to be $416,794 using the Black-Scholes pricing model with
the following assumptions: closing price of the Company’s common stock at
September 16, 2010, the exercise prices of $0.004 for the conversion feature and
$0.004 for the warrants, 1.46 to 1.67 years expected term for the conversion
features and a weighted average of 6.67 to 6.83 years expected term for the
warrants, weighted average volatility of 331% for the conversion features and
296% for the warrants, and a weighted average risk free rate of 0.48% for the
conversion features and 2.71% for the warrants. Based on application
of the Black-Scholes pricing model on September 30, 2010, the aggregate fair
values of the derivative conversion feature and warrant derivative liabilities
related to the anti-dilution provisions was $394,112, resulting in a change in
the fair value of these derivatives in the amount of $22,682.
23
Options for
purchase of common stock. In May 2007, the Company adopted a
stock option plan which provides for the grant of options to officers,
consultants and employees to acquire shares of the Company’s common stock at a
purchase price equal to or greater than the fair market value as of the date of
the grant. Options are exercisable six months after the grant
date and expire five years from the grant date. The plan calls for a
total of 3,000,000 common shares to be held for grant. No options had
been granted under this plan.
Share
Based Compensation
Common stock
issued for services to non-employees. In June 2009, the
Company issued 8,000,000 restricted shares of its common stock and 8,000,000
warrants to purchase an equivalent number of common shares to an entity for
services rendered. These services were valued at $33,580 based on the
fair value of the common stock ($31,200) and warrants ($2,380) on the date of
issuance. In October 2009, the service provider filed suit against
the Company, its directors and other parties for failure to register and lift
trading restrictions on the common stock. The service provider
claimed damages arising from the alleged inability to sell the shares timely and
realize certain profits. Further, the service provider claimed
anticipatory damages from alleged anticipated inability to sell certain other
shares and the warrants. In February 2010, the Company settled this
litigation and issued 16,000,000 unrestricted shares of its common stock and
cancelled the originally issued shares and warrants. On December 31,
2009, the Company recognized an incremental expense from the settlement in the
amount of $68,000, based on the closing bid price of the common stock on the
date of settlement, and a corresponding obligation to issue common
stock. The Company also reversed the value of the warrants cancelled
in the amount of $2,380.
In
February 2010, the Company issued 1,000,000 restricted shares of common stock as
payment for consulting services. These shares were valued at the
closing bid price for the Company’s common stock on the date of issuance
amounting to $8,200, which was expensed.
In April
2010, the Company issued 10,000,000 restricted shares of common stock for
investor relations and other consulting services to be performed over a six
month period valued at $152,000 based on the closing bid price of our common
shares on the date of issuance. For the period ended September 30,
2010, the Company expensed $139,333 and carried $12,667 as a prepaid current
asset.
In June
2010, the Company issued 10,000,000 restricted shares of common stock to five
service providers for product development, legal, accounting and consulting
services. These shares valued at the closing bid price for our common
shares on the date of issuance amounting to $96,000, which was
expensed.
In
September 2010, the Company issued 6,000,000 shares to a law firm for legal
services rendered. These shares valued at the closing bid price for our common
shares on the date of issuance amounting to $54,000, which was
expensed.
Common stock
issued for services to employees. In June 2010, the Company issued
2,000,000 restricted shares of common stock to an employee for services
rendered. These shares valued at the closing bid price for our common
shares on the date of issuance amounting to $19,200, which was
expensed.
In August
2010, the Company issued 40,000,000 shares to four members of our Board of
Directors. These shares valued at the closing bid price for our common shares on
the date of issuance amounting to $400,000, which was expensed.
Obligation
to Issue Common Shares
At
September 30, 2010 and December 31, 2009, the Company’s obligation to issue
common shares consisted of the following:
September 30, 2010
|
December 31, 2009
|
|||||||||||||||
|
Common
|
Obligation Date
|
Common
|
Obligation Date
|
||||||||||||
|
Shares
|
Fair Value
|
Shares
|
Fair Value
|
||||||||||||
Incremental
shares and amount from settlement of litigation
|
-
|
$
|
-
|
8,000,000
|
$
|
68,000
|
||||||||||
Shares
issuable as compensation
|
2,264,706
|
85,000
|
500,000
|
70,000
|
||||||||||||
Lender
1 interest shares
|
27,013,452
|
197,198
|
-
|
-
|
||||||||||||
Advance
on sale of common shares
|
-
|
-
|
-
|
5,000
|
||||||||||||
29,278,158
|
$
|
282,198
|
8,500,000
|
$
|
143,000
|
8. COMMITMENTS
AND CONTINGENCIES
Litigation. On
August 15, 2008, a competitor filed suit in the United States District Court for
the District of Massachusetts against Kidz-Med, Inc., American Scientific
Resources, Incorporated and Tecnimed, Srl for patent infringement with regard to
the Thermofocus thermometer. Under the distribution agreement,
Tecnimed is obligated to indemnify the Company against certain actions including
this patent infringement action. However, as part of the Settlement
Agreement discussed in Note 7 – Notes Payable, the Company agreed to cover its
own fees and expenses in connection with this litigation and agreed to waive any
claim for lost profits that may arise within the indemnification
provision. The case is currently in pretrial
discovery. Tecnimed has provided the Company with a legal opinion
that the thermometer does not violate the competitor’s patents. The
Company is unable to make an independent assessment of this patent infringement
action and is relying on Tecnimed’s defense of this case. As the
Company believes that Tecnimed is capable and willing to defend the Company, and
that the Company’s defense costs if any will not be significant, no provision
for possible loss related to this litigation has been included in these
consolidated financial statements. In March 2010, the competitor
filed an additional complaint against American Scientific Resources,
Incorporated and Kidz-Med, Inc. in the United States District Court for the
District of Massachusetts alleging that false advertising damaged the
competitor. The competitor is seeking to enjoin the Company from
future false advertising and to recover unspecified monetary
damages. Based on the advice of counsel, the Company believes this
case is without merit. The Company intends to vigorously contest the
complaint.
On
September 21, 2010, Tecnimed, Srl filed a complaint against the Company and its
Kids-Med subsidiary in US District Court for the Southern District of New York
alleging breach of a non-compete agreement and infringement on the Thermofocus
trademark and trade dress. In addition, the complaint alleges that
the Company sold Thermofocus units in an unauthorized manner resulting in a
breach of contract. Further, the complaint alleges that the Company
is in default on the payment of $209,802 of principal and $88,867 of interest
under the notes due Tecnimed. The complaint seeks a trial by jury,
injunctions against manufacturing and selling products that are in competition
with the Thermofocus and use similar trade dress, and payment of unspecified
amounts for ill-gotten gains, treble damages, punitive damages and attorneys’
fees. The Company believes the complaint is without merit and intends
to pursue a vigorous defense.
25
The
Company has, and may in the future, become a party to various claims, complaints
and legal actions arising in the ordinary course of business. In the
opinion of management, there are currently no matters that would have a further
material adverse effect on the financial statements of the Company taken as
whole as of September 30, 2010.
Employment
agreements. In conjunction with the Disintegrator acquisition
(See Note 5 – Acquisition of Patent), the Company entered into a ten year
employment agreement with a former executive and majority owner of Safeguard in
addition to the contingent compensation per the asset purchase
agreement. The employment agreement calls for a base salary of
$10,000 per month beginning upon the receipt of $500,000 of combined new capital
and revenue, and $20,000 per month beginning upon the receipt of $2,500,000 of
combined new capital and revenue. The $10,000 in monthly salary shall
accrue for no longer than 6 months and be payable in full immediately upon
reaching $500,000 of combined new capital and revenue. The employment
agreement may be terminated by the executive in the event of default with prior
notice, and by the Company for cause, or death or permanent disability of the
executive. During the nine months ended September 30, 2010, the
Company expensed $90,000 of base salary related to this agreement.
Effective
April 5, 2007, the Company entered into an employment agreement with our chief
executive officer. This agreement continues until another chief
executive officer is appointed by a majority of our Board of Directors, either
party terminates in accordance with the provisions of the agreement, or his
death or permanent disability. The agreement calls for a minimum
salary of $10,000 per month plus additional cash and stock compensation upon the
achievement for various milestones. The Company has not made certain
cash payments due under the agreement. As of September 30, 2010,
$330,000 has been accrued as compensation payable. This agreement
also called for the issuance of 500,000 fully-vested, restricted shares of the
Company’s common stock upon execution. As of September 30, 2010, the
shares had not been issued, however the Company has accrued $70,000 as an
obligation to issue shares, based on the closing price on the date of
grant. In addition, the agreement called for the award of up to
500,000 warrants to purchase an equivalent number of common shares based on the
achievement of certain revenue targets. The warrants may be exercised
at $0.25 per share and over a period of three years from September 4,
2007. During the first quarter of 2010, our chief executive officer
was deemed to have earned 100,000 warrants to purchase equivalent shares of
common stock. However, these warrants were never issued and have been
deemed to have expired.
On March
1, 2010, the Company entered into a five year employment agreement with an
executive. The employment agreement calls for the monthly award of restricted
shares of our common stock equivalent to $15,000 per month based on the average
closing price for the month plus a 2% cash bonus for sales collected through
June 30, 2010. Beginning on the later of July 1, 2010, or date the
Company’s registration statement with the SEC becomes effective, the executive
shall be entitled to a base salary of $12,000 per month, plus a 2% cash bonus
for sales collected and a 2% common stock bonus for sales
collected. The shares issuable for the stock bonus shall be
determined based on the five day average closing price prior to the collection
of the sale. The agreement also calls for the reimbursement of
expenses including payment to the executive of up to $650 per month for office
space. For the period ended September 30, 2010, the Company issued
8,298,661 shares with a value of $83,000 to meet its obligation under this
employment agreement. At September 30, 2010, there were 1,764,706
shares issuable under the employment agreement with a value of
$15,000. Prior to March 1, 2010, this executive performed consulting
services for the Company. For the period ended February 28, 2010, the
Company issued 4,622,230 shares with a value of $49,050 for consulting
services.
Service
agreements. Beginning January 1, 2010, the Company and a
marketing consultant entered into an amended agreement whereby the consultant is
entitled to receive warrants valued up to $1,987,500 based upon the execution of
certain licensing agreements and upon the achievement of certain collected
revenue targets. Upon achievement of the targets, warrants equivalent
to the first $200,000 shall be issued based on the 30 day trailing weighted
average price of the Company’s common stock. The exercise price is to
be determined as 50% of the 30 day trailing weighted average
price. All warrants are exercisable over 5 years from the date of
issuance. Upon achievement of the targets, beginning at $2,000,000 of
revenues collected, warrants equivalent to $1,787,500 shall be issued based on
the 30 day trailing weighted average price and an exercise price equal to the 30
day trailing weighted average price. The Company will account for
warrants issuable when the targets are met. In addition, the
consultant is entitled to a cash fee of $5,000 per month, plus reimbursement of
out-of-pocket expenses, for services rendered through the conclusion of the
agreement in August 2019. The fee is subject to escalation up the
achievement collected revenue targets as a result of the consultant’s
efforts. For the nine months ended September 30, 2010, the Company
has accrued $111,771 for fees and expenses related to this amended agreement and
paid $61,159.
On May
23, 2010, the Company entered into a consulting agreement for general management
and financial advice effective January 1, 2010 and continuing through August 31,
2019. The agreement calls for compensation of $10,000 per month
effective January 2010 and shall increase to $20,000 per month upon receipt by
the Company of $2.5 million of the combined aggregate of new capital and revenue
commencing on May 23, 2010, plus reimbursement of certain
expenses. The agreement requires the consultant’s participation in
any incentive, profit sharing, bonus, stock option and other similar plan on an
equivalent basis to other senior managers of the Company. In
addition, the agreement calls for the issuance of 5,000,000 shares of our common
stock upon the listing of our common stock on the Over-the-Counter Bulletin
Board. For the period ended September 30, 2010, the Company paid
$57,176 related to the consulting agreement. In addition, for the
nine months ended September 30, 2010, the Company paid $42,880 of commissions to
an entity affiliated with the consultant for assisting the Company secure
$650,000 of convertible note financing. In October 2010, the Company
terminated this consulting agreement.
Effective
March 20, 2010, the Company entered into a one year consulting agreement for
sales and marketing services. This agreement entitles the consultant
to a commission of 10% of the gross sales generated by the consultant from new
customers, plus reimbursement of expenses. For the period ended
September 30, 2010, no commissions have been earned by this consultant; however,
$9,000 plus expenses has been drawn by the consultant as advances against
commissions to be earned. This agreement was terminated in September
2010.
Purchase and sale
agreements. From time to time, the Company enters into
agreements to purchase components and finished products for
resale. The purchase agreements have various durations and require
the Company to purchase certain minimum quantities. As of September
30, 2010, the Company has advanced $37,500 to a vendor, and shall owe $87,500
upon product delivery. This amount was paid and product received in
October 2010.
The
Company has also entered into various exclusive and non-exclusive agreements to
supply and distribute the Company’s products in various geographic
areas. Certain of these agreements require the Company to supply
certain minimum quantities and contain various warranty provisions upon
sale.
9. RELATED
PARTY TRANSACTIONS
Our chief
executive officer of the Company periodically advances funds to the Company on a
short-term, non-interest bearing basis for working capital
purposes. As of September 30, 2010, $6,000 was due to this executive
and such amount was repaid on October 13, 2010. As of December 31,
2009, $5,000 was due to this executive and such amount was repaid on January 9,
2010. See Note 6 – Notes Payable for additional information regarding
loans from related parties.
As
discussed in Note 6 – Notes Payable, a current member of our Board of Directors
directly owns notes convertible in common shares, and warrants to purchase
common shares. In addition, this director is indirectly related to
Lender 2 and other holders of convertible notes.
In
October 2008, the Company entered into a license agreement with a relative of
the chief executive officer. The license agreement calls for the
payment of royalties equal to 20% of revenues from the Company’s sales or
permitted use of certain copyrighted and trademarked, print and video
material. The license agreement continues for successive one year
terms unless terminated by either party. During the nine months ended
September 30, 2010, no amounts were paid or accrued under this license
agreement.
As
discussed in Note 5 – Acquisition of Patent and in Note 8 – Commitments and
Contingencies, the Company entered into an asset purchase agreement and an
employment agreement with a former executive and majority owner of the Seller of
the Disintegrator patent. These agreements call for additional
consideration and compensation payments based on the achievement of certain
targets.
27
10. SUBSEQUENT
EVENTS
On
October 12, 2010, the Company entered into a $100,000 promissory note with an
investor and received proceeds of $97,000. The promissory note bears
interest at 12% per annum. The full amount of principal and interest
on the promissory note is due on January 12, 2011. The promissory
note may not be prepaid without the prior written consent of the
investor. As additional consideration for entering into the note
agreement, the Company issued 20,000,000 shares of its common stock valued at
$170,000 based on the closing price for the Company’s common stock on the date
of the note. The promissory note is secured by the pledge of
98,500,000 shares of common stock owned by an executive of the Company and the
personal guarantee of the executive. In addition, on November 5,
2010, the Company issued a $60,000 promissory note with this investor and
received proceeds of $55,000. This promissory note also bears
interest at 12% per annum and all principal and interest shall be due on January
12, 2011. As additional consideration for entering into this note,
the Company issued 12,000,000 shares of its common stock valued at $90,000 based
on the closing price on the date of note issuance.
As
discussed in Note 6 – Notes Payable, in October 2010 the Company issued to
Lanktree, 5,000,000 common shares in consideration for advance payment of
$30,000 on the installment notes and issued 12,000,000 common shares under its
obligation to issue shares in connection with the additional interest settlement
with Lanktree.
On
October 27, 2010, Lanktree converted another $100,000 of principal related to
the original $580,000 obligation into 25,000,000 shares of common stock at a
conversion rate of $0.004 per share leaving a balance due on the note of
$380,000. These shares were issued on November 12, 2010.
On
October 11, 2010, the Company issued 5,000,000 shares to an entity that
manufactures components used in products sold by the Company. These
shares were valued at $42,000 based on the closing bid price of the Company’s
common stock on the date of issuance.
On
October 26, 2010, a complaint was filed in District Court for the Southern
District of Florida against the Company alleging that the Company infringed on
plaintiffs’ thermometer design patent, trade dress and upon an exclusive
distribution and manufacturing agreement between the plaintiffs’ and the Chinese
manufacturer of the Company’s Kidz-Med Non-Contact 5-in-1
thermometer. The complaint also alleges the Company wrongfully
asserted dominion over plaintiffs’ Food and Drug Administration clearances
depriving plaintiffs’ of their exclusive rights and interests. The
complaint seeks injunctive relief, recall and destruction of all the Company’s
Kidz-Med Non-Contact 5-in-1 thermometer products and marketing materials, and
unspecified monetary damages, punitive damages and attorneys’
fees. The Company believes the complaint is without merit and intends
to pursue a vigorous defense.
28
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
RESTATED
CONSOLIDATED FINANCIAL STATEMENTS
As
of and for the Years Ended December 31, 2009 and 2008
1
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
RESTATED
CONSOLIDATED FINANCIAL STATEMENTS
As of and
for the Years Ended December 31, 2009 and 2008
Table of
Contents
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
3 | |||
RESTATED
CONSOLIDATED BALANCE SHEETS
|
4 | |||
RESTATED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
5 | |||
RESTATED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’
DEFICIT
|
6 | |||
RESTATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
7 | |||
RESTATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
8 |
Except
for the historical information contained herein, some of the statements
contained herein contain forward-looking statements that involve risks and
uncertainties. They include statements concerning: our business strategy;
expectations of market and customer response; liquidity and capital
expenditures; future sources of revenues; expansion of our proposed product
line; and trends in industry activity generally. In some cases, you can identify
forward-looking statements by words such as "may," "will," "should," "expect,"
"plan," "could," "anticipate," "intend," "believe," "estimate," "predict,"
"potential," "goal," or "continue" or similar terminology. These statements are
only predictions and involve known and unknown risks, uncertainties and other
factors, that may cause our actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by such
forward-looking statements.
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Shareholders of
American
Scientific Resources, Incorporated
We have
audited the accompanying consolidated balance sheets of American Scientific
Resources, Incorporated (the “Company”) as of December 31, 2009 and 2008 and the
related consolidated statements of operations and shareholders’ deficit and cash
flows for the years ended December 31, 2009 and 2008. These financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provided a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of American Scientific
Resources, Incorporated as of December 31, 2009 and 2008, and the results of its
operations and cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
The
accompanying consolidated financial statements referred to above have been
prepared assuming that the Company will continue as a going concern. As more
fully described in Note 2, the Company’s need to seek new sources or methods of
financing or revenue to pursue its business strategy. These factors raise
substantial doubt about the Company’s ability to continue as a going concern.
Management’s plans as to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As
described in Note 4 to the financial statements, the Company has restated it
financial statements as of December 31, 2009 and 2008 and for the years then
ended.
/s/
Rosenberg Rich Baker Berman & Company
Somerset,
New Jersey
April 15,
2010, except for note 4
as to
which the date is July 6, 2010
3
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
RESTATED
CONSOLIDATED BALANCE SHEETS
As of
December 31, 2009 and 2008
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
|
$
|
11,357
|
$
|
8,133
|
||||
Accounts
receivable, net
|
61,963
|
197,470
|
||||||
Inventory,
net
|
520,339
|
784,278
|
||||||
Inventory
purchase deposit
|
53,800
|
-
|
||||||
Deferred
compensation expense
|
-
|
329,974
|
||||||
Prepaid
expenses and other current assets
|
20,316
|
30,841
|
||||||
Total
current assets
|
667,775
|
1,350,696
|
||||||
Fixed
assets, net
|
4,517
|
-
|
||||||
Patent,
net
|
2,599,578
|
-
|
||||||
Total
Assets
|
$
|
3,271,870
|
$
|
1,350,696
|
||||
LIABILITIES
AND SHAREHOLDERS' DEFICIT
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable and accrued expenses
|
$
|
499,071
|
$
|
714,966
|
||||
Accrued
interest payable
|
588,932
|
503,598
|
||||||
Stock
buy-back obligation
|
-
|
261,000
|
||||||
Promissory
notes payable
|
828,320
|
1,409,076
|
||||||
Related
party advances and notes payable
|
161,221
|
192,221
|
||||||
Other
current liability
|
350,000
|
-
|
||||||
Obligation
to issue common stock
|
143,000
|
-
|
||||||
Derivative
instruments
|
24,124
|
549
|
||||||
Liability
for conversion feature
|
-
|
46,400
|
||||||
Convertible
promissory notes
|
905,000
|
975,149
|
||||||
Total
current liabilities
|
3,499,668
|
4,102,959
|
||||||
Contingent
note payable from patent purchase, net
|
821,336
|
-
|
||||||
Liability
for contingent compensation
|
10,186
|
-
|
||||||
Total
liabilities
|
4,331,190
|
4,102,959
|
||||||
Commitments
and contingencies
|
-
|
-
|
||||||
Shareholders'
deficit:
|
||||||||
Series
A preferred stock, $.0001 par value; 500,000 and 1,000,000 shares
authorized at December 31, 2009 and 2008, respectively; none
outstanding
|
-
|
-
|
||||||
Series
B convertible preferred stock, $.0001 par value; 500,000 and zero
shares authorized at December 31, 2009 and 2008, respectively; none
outstanding
|
-
|
-
|
||||||
Common
stock, $.0001 par value; 2,500,000,000 and 500,000,000 shares
authorized; 1,893,340,600 and 333,783,072 shares issued and
outstanding at December 31, 2009 and 2008, respectively
|
189,334
|
33,378
|
||||||
Additional
paid-in capital
|
18,782,970
|
13,821,132
|
||||||
Accumulated
deficit
|
(20,031,624
|
)
|
(16,606,773
|
)
|
||||
Total
shareholders' deficit
|
(1,059,320
|
)
|
(2,752,263
|
)
|
||||
Total
liabilities and shareholders' deficit
|
$
|
3,271,870
|
$
|
1,350,696
|
See
accompanying Notes to Consolidated Financial Statements.
4
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
RESTATED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the
Years Ended December 31, 2009 and 2008
2009
|
2008
|
|||||||
Product
sales, net
|
$
|
734,495
|
$
|
910,577
|
||||
Cost
of goods sold
|
(368,524
|
)
|
(472,565
|
)
|
||||
Inventory
adjustment
|
(58,773
|
)
|
(46,565
|
)
|
||||
Gross
profit
|
307,198
|
391,447
|
||||||
Operating,
sales and administrative expenses
|
(2,094,303
|
)
|
(5,201,629
|
)
|
||||
Net
loss before Other income (expense)
|
(1,787,105
|
)
|
(4,810,182
|
)
|
||||
Other
income (expense):
|
||||||||
Interest
expense
|
(656,450
|
)
|
(1,592,838
|
)
|
||||
Change
in fair value of derivative instruments
|
(13,600
|
)
|
9,144
|
|||||
Gain
on discharge of indebtedness
|
105,684
|
-
|
||||||
Other
expense
|
(88,380
|
)
|
(37,095
|
)
|
||||
Other
income
|
-
|
24,017
|
||||||
Total
other income (expense)
|
(652,746
|
)
|
(1,596,772
|
)
|
||||
Net
loss
|
(2,439,851
|
)
|
(6,406,954
|
)
|
||||
Deemed
dividend on Series B Preferred Stock
|
(985,000
|
)
|
-
|
|||||
Net
loss applicable to common shareholders
|
$
|
(3,424,851
|
)
|
$
|
(6,406,954
|
)
|
||
Weighted
average number of shares outstanding, basic and
diluted
|
1,208,492,443
|
146,615,200
|
||||||
Basic
and diluted net loss per common share
|
$
|
(0.00
|
)
|
$
|
(0.04
|
)
|
See
accompanying Notes to Consolidated Financial Statements.
5
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
RESTATED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT
For the
Years Ended December 31, 2009 and 2008
Series B Preferred Stock
|
Common Stock
|
Additional
Paid-in
|
Accumulated
|
|||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
|||||||||||||||||||||
|
||||||||||||||||||||||||||||
Balance at
December 31, 2007 *
|
-
|
$
|
-
|
26,792,508
|
$
|
2,679
|
$
|
8,500,970
|
$
|
(10,199,819
|
)
|
$
|
(1,696,170
|
)
|
||||||||||||||
Common stock
issued for cash *
|
55,140,618
|
5,514
|
124,494
|
-
|
130,008
|
|||||||||||||||||||||||
Common stock
issued to board members for compensation
*
|
30,000,000
|
3,000
|
1,497,000
|
-
|
1,500,000
|
|||||||||||||||||||||||
Common stock
issued to employees as additional compensation *
|
1,260,000
|
126
|
26,464
|
-
|
26,590
|
|||||||||||||||||||||||
Common stock
issued for services *
|
103,222,993
|
10,322
|
2,940,450
|
-
|
2,950,772
|
|||||||||||||||||||||||
Common stock
issued for the conversion of debt *
|
100,540,000
|
10,054
|
95,346
|
-
|
105,400
|
|||||||||||||||||||||||
Common stock
issued as additional compensation to lenders *
|
18,586,953
|
1,859
|
127,600
|
-
|
129,459
|
|||||||||||||||||||||||
Common stock
returned by former board member and cancelled *
|
(1,760,000
|
)
|
(176
|
)
|
176
|
-
|
-
|
|||||||||||||||||||||
Incremental
beneficial conversion feature on convertible debt due to
default
|
-
|
-
|
438,365
|
-
|
438,365
|
|||||||||||||||||||||||
Write-off of
fair value of conversion feature due to conversions
|
-
|
-
|
70,267
|
-
|
70,267
|
|||||||||||||||||||||||
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(6,406,954
|
)
|
(6,406,954
|
)
|
|||||||||||||||||||
Balance at
December 31, 2008 *
|
-
|
-
|
333,783,072
|
33,378
|
13,821,132
|
(16,606,773
|
)
|
(2,752,263
|
)
|
|||||||||||||||||||
Issuance of
Series B Preferred Stock
|
500,000
|
50
|
-
|
-
|
274,950
|
-
|
275,000
|
|||||||||||||||||||||
Common stock
issued for cash, net of cash fees
|
714,673,394
|
71,467
|
994,533
|
-
|
1,066,000
|
|||||||||||||||||||||||
Common stock
issued for services related to sale of common stock
|
17,000,000
|
1,700
|
(1,700
|
)
|
-
|
-
|
||||||||||||||||||||||
Equity awarded
for compensation and contingent compensation
|
87,500,000
|
8,750
|
173,650
|
-
|
182,400
|
|||||||||||||||||||||||
Common stock
and warrants issued for services
|
31,900,000
|
3,190
|
287,010
|
-
|
290,200
|
|||||||||||||||||||||||
Common stock
issued for the conversion of debt
|
246,859,885
|
24,686
|
133,064
|
-
|
157,750
|
|||||||||||||||||||||||
Common stock
issued for the payment of interest
|
161,874,249
|
16,187
|
270,257
|
-
|
286,444
|
|||||||||||||||||||||||
Common stock
issued for acquisition of patent
|
250,000,000
|
25,000
|
1,850,000
|
-
|
1,875,000
|
|||||||||||||||||||||||
Common stock
issued for conversion of Series B Preferred Stock
|
(500,000
|
)
|
(50
|
)
|
50,000,000
|
5,000
|
(4,950
|
)
|
-
|
-
|
||||||||||||||||||
Deemed
dividend upon issuance of Series B Preferred Stock
|
-
|
-
|
-
|
-
|
985,000
|
(985,000
|
)
|
-
|
||||||||||||||||||||
Common stock
cancelled
|
(250,000
|
)
|
(25
|
)
|
25
|
-
|
-
|
|||||||||||||||||||||
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(2,439,851
|
)
|
(2,439,851
|
)
|
|||||||||||||||||||
Balance at
December 31, 2009
|
-
|
$
|
-
|
1,893,340,600
|
$
|
189,334
|
$
|
18,782,970
|
$
|
(20,031,624
|
)
|
$
|
(1,059,320
|
)
|
* -
restated due to change in par value of common stock - see Note 4.
See
accompanying Notes to Consolidated Financial Statements.
6
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
RESTATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the
Years Ended December 31, 2009 and 2008
2009
|
2008
|
|||||||
Cash
flow from operating activities:
|
||||||||
Net
loss
|
$
|
(2,439,851
|
)
|
$
|
(6,406,954
|
)
|
||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Amortization
of debt discount
|
44,064
|
265,118
|
||||||
Depreciation
and amortization
|
52,694
|
1,140
|
||||||
Allowance
for doubtful accounts
|
-
|
22,385
|
||||||
Reserve
for consigned inventory
|
58,773
|
46,565
|
||||||
Gain
from discharge of indebtedness
|
(105,684
|
)
|
-
|
|||||
Loss
on settlements from litigation
|
82,000
|
-
|
||||||
Change
in fair value of derivative instruments
|
23,575
|
(9,144
|
)
|
|||||
Interest
for fair value of conversion feature
|
-
|
116,667
|
||||||
Common
stock and warrants issued for interest
|
286,444
|
5,724
|
||||||
Stock
based compensation
|
542,600
|
4,276,847
|
||||||
Contingent
compensation payable
|
10,186
|
-
|
||||||
Liability
for conversion feature
|
-
|
438,365
|
||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
135,507
|
(72,175
|
)
|
|||||
Inventory
and inventory deposit
|
151,366
|
60,453
|
||||||
Deferred
compensation
|
329,974
|
-
|
||||||
Prepaid
expenses and other assets
|
10,525
|
101,932
|
||||||
Accounts
payable and accrued expenses
|
(215,895
|
)
|
514,357
|
|||||
Accrued
interest payable
|
85,334
|
498,334
|
||||||
Net
cash used in operating activities
|
(948,388
|
)
|
(140,386
|
)
|
||||
Cash
flows from investing activities:
|
||||||||
Purchase
of fixed assets
|
(4,517
|
)
|
-
|
|||||
Net
cash used in investing activities
|
(4,517
|
)
|
-
|
|||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from promissory notes payable
|
-
|
66,750
|
||||||
Payments
on promissory notes payable
|
(83,871
|
)
|
(230,312
|
)
|
||||
Proceeds
from related party advances and notes payable
|
5,000
|
51,810
|
||||||
Payment
on related party notes payable
|
(36,000
|
)
|
(4,250
|
)
|
||||
Payments
on stock buy-back obligation
|
-
|
(49,000
|
)
|
|||||
Proceeds
from convertible promissory notes
|
-
|
175,549
|
||||||
Obligation
to issue common stock
|
5,000
|
-
|
||||||
Proceeds
from issuance of common stock
|
1,066,000
|
130,008
|
||||||
Net
cash provided by financing activities
|
956,129
|
140,555
|
||||||
Net
increase (decrease) in cash
|
3,224
|
169
|
||||||
Cash
and cash equivalents at beginning of period
|
8,133
|
7,964
|
||||||
Cash
and cash equivalents at end of period
|
$
|
11,357
|
$
|
8,133
|
||||
Supplemental
disclosures:
|
||||||||
Cash
paid for interest
|
$
|
6,566
|
$
|
148,895
|
||||
Cash
paid for income taxes
|
$
|
-
|
$
|
-
|
||||
Non-cash
financing activities:
|
||||||||
Preferred
and common stock issued in settlement of debt
|
$
|
432,750
|
$
|
105,400
|
||||
Issuance
of common stock for deferred compensation
|
$
|
-
|
$
|
1,651,989
|
||||
Write-off
of fair value of conversion feature due to conversions
|
$
|
-
|
$
|
70,267
|
||||
Conversion
of trade payable and debt obligations
|
$
|
-
|
$
|
300,550
|
||||
Conversion
of debt and interest to other current liability
|
$
|
350,000
|
$
|
-
|
||||
Common
stock issued for Disintegrator patent
|
$
|
1,875,000
|
$
|
-
|
||||
Contingent
note assumed for patent purchased, net of discount
|
$
|
777,272
|
$
|
-
|
||||
Deemed
dividend from Series B Preferred Stock
|
$
|
985,000
|
$
|
-
|
See
accompanying Notes to Consolidated Financial Statements.
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
RESTATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2009 and 2008
1.
ORGANIZATION
American
Scientific Resources, Incorporated (“ASRI”, together with its subsidiaries, the
“Company”), a Nevada corporation provides next-generation medical products and
healthcare supplements sourced from around the globe. Products are distributed
primarily through leading retail drug chains, nationwide medical suppliers,
infomercials, the Company’s website and other on-line sites. It is listed on
OTCQB, and trades under the ticker symbol ASFX.PK.
The
Company has three wholly-owned subsidiaries: (1) Kidz-Med, Inc. which
distributes a leading line of medical and medicine delivery devices for children
and sensitive adults including the world's first clinical non-contact
thermometer, (2) HeartSmart, Inc. which supplied nutraceutical supplements
developed to aid in the prevention of cardiovascular disease, and (3) Ulster
Scientific, Inc. which introduced the very first mechanical blood-sampling
device, thereby making possible effective home blood glucose monitoring. Ulster
Scientific pioneered many diabetes products, including insulin injection
devices, disposable lancets, and clinical blood-sampling devices, as well as
many other important products for health care and laboratory safety. HeartSmart
and Ulster Scientific ceased operations in 2008 and 2005, respectively, and are
currently inactive with no immediate plans to resume regular operations. Both of
these subsidiaries ceased operations so that the Company could focus its
resources on the Kidz-Med product line. In September 2009, ASRI acquired a
patent from Safeguard Medical Technologies, LLC, which assembled and distributed
the Disintegrator®, a home medical device for the destruction of needles (see
Note 6 – Acquisition of Patent).
2.
GOING CONCERN
These
financial statements have been prepared assuming that the Company will continue
as a going concern. The Company has current liabilities that exceed current
assets by $2,831,893 at December 31, 2009, and has reported a net loss of
$2,439,851 and net cash used in operations of $948,388 for the year ended
December 31, 2009. In addition, the Company is in default with regard to payment
of certain of its obligations. At December 31, 2009, the amount of principal
outstanding on notes payable for which the Company is in default amounted to
$1,869,182. These conditions raise operating and liquidity concerns and
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty. The Company’s continued existence is dependent upon its ability to
successfully execute its business plan, secure additional sources of liquidity
and obtain accommodating credit terms from vendors, noteholders and other
creditors. Should the Company be unable to renegotiate the terms and conditions
on its debt obligations or is otherwise unable to pay its accounts payable when
due, the Company may incur materially higher interest expenses, and the debt
holders could foreclose on their collateral and commence legal action against
the Company to recover amounts due which ultimately could require the
disposition of some or all of the Company’s assets. Any such action may require
the Company to curtail or cease operations.
Over the
last two years, operations have been funded primarily by sales and issuances of
the Company’s securities and revenue generated from sales of the Company’s
products. Current and future operations are expected to be funded from sales of
the Company’s products and new investment. Many of the Company’s products
currently held in inventory have been paid for in full, thereby requiring only
small amounts of cash to fund cost of sales for the short-term. To the extent
that any excess cash is generated from operations, it has been, and will
continue to be, used for the payment of debt and other obligations. Management
believes that, based on the anticipated level of sales, and continued support
through reasonable and accommodating credit terms from vendors, debt holders and
other creditors, the Company can continue operating in the short-term. During
2009, the Company used proceeds from the sale of shares of its common stock for
the development of the Company’s Kidz-Med Non-Contact 5-in-1 Thermometer and the
Disintegrator Plus®. Proceeds from any future sales of the Company’s securities
are also expected to be used primarily for product development. The Company may
continue to offer its securities for payment of services and other
obligations.
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
RESTATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of
December 31, 2009 and 2008
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of
consolidation.
For 2009, the accompanying consolidated financial statements include the
accounts of American Scientific Resources, Incorporated, and its subsidiary,
Kidz-Med, Inc. For 2008, these consolidated financial statements include the
accounts of American Scientific Resources, Incorporated, and its subsidiaries,
Kidz-Med, Inc., HeartSmart, Inc. and Ulster Scientific, Inc. During the year
ended December 31, 2008, HeartSmart and Ulster Scientific had few insignificant
transactions and their accounting records were closed effective January 1, 2009.
All significant inter-company transactions have been eliminated.
Use of
estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue
recognition. The
Company sells or consigns its products on a wholesale basis to retailers and
medical suppliers, and on a retail basis direct to customers usually via the
internet. The Company recognizes revenues in accordance with the guidance in the
Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 104.
Accordingly, revenue is recognized when persuasive evidence of an arrangement
exists, when the selling price is fixed or determinable, when shipment or
delivery occurs, ownership has transferred, and when collection is probable. For
wholesale sales, the Company generally negotiates an agreement which covers
quantities, delivery, title transfer, pricing, warranties, returns and other
terms, which dictate revenue recognition. Revenue from internet sales is
recognized upon shipment of the product to the customer. All sales are made at a
quoted, fixed price determined prior to completion of the sale.
Revenue
from product placed with customers on consignment is recognized when the
customer has confirmed sale of the product to third parties. The Company
receives periodic reports of consignment sales and inventory positions from
customers. In August 2009, a significant consignment arrangement was
terminated.
Revenues
in the consolidated statement of operations are shown net of any discounts and
actual returns for damaged product. In the Company’s experience, returns for
malfunctioning product resulting in warranty claims generally have been
insignificant, and as such, no provision for warranty claims is provided in
these consolidated financial statements. Returns of merchantable product are
reversed from revenue and returned to inventory for re-sale upon the Company’s
receipt of the product.
The
Company provides a one year limited warranty on most of its retail product
sales. Specific warranty and right of return arrangements are negotiated with
wholesalers. To the extent that the Company has negotiated warranty and return
arrangements with manufacturers and suppliers, the Company may put any returns
from sales back to such manufacturers and suppliers.
The
Company records shipping and handling charges billed to customers as revenue and
the related expense in cost of goods sold, in accordance with its revenue
recognition policy.
For the
years ended December 31, 2009 and 2008, a majority of the Company’s revenues
were generated from sales of the non-contact thermometer to customers. It is
impracticable to provide additional product sales information.
Cash and cash
equivalents. The
Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash
equivalents.
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
RESTATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of
December 31, 2009 and 2008
Accounts
receivable. Accounts receivable are stated at net realizable value.
Management provides for uncollectible amounts through a charge to earnings and a
credit to an allowance for doubtful accounts based on its assessment of the
current status of individual accounts and historical collection information.
Balances that are deemed uncollectible after management has used reasonable
collection efforts are written off through a charge to the allowance and a
credit to accounts receivable. The allowance for doubtful accounts was $28,224
and $28,224 as of December 31, 2009 and 2008, respectively. A summary of changes
in this reserve account are as follows:
Additions
|
||||||||||||||||||||
|
Balance,
Beginning of
Year
|
Charged to
Cost or
Expense
|
Charged to
Other Accounts
|
Deductions
|
Balance,
End of
Year
|
|||||||||||||||
Accounts Receivable
|
||||||||||||||||||||
Allowance
for doubtful accounts
|
||||||||||||||||||||
2008
|
$
|
5,839
|
$
|
22,385
|
$
|
-
|
$
|
-
|
$
|
28,224
|
||||||||||
2009
|
28,224
|
-
|
-
|
-
|
28,224
|
Inventory.
The Company’s inventories consist of finished goods on-hand and consigned to
others, packaged and unpackaged product, packing supplies and spare parts. As of
December 31, 2009 and 2008, the net amount of inventory at cost consigned to
others amounted to $0 and $365,628, respectively.
Inventories
are stated at lower of cost or market using the first-in, first-out method and
consist primarily of finished product. Packaging costs are added to the cost of
the product. Excess and unused packaging and re-packaging costs are expensed.
Advertising and promotional materials are expensed as operating, sales and
administrative expenses.
The
Company has a variety of spare parts, which are deemed to have no value for
accounting purposes as of December 31, 2009, as management has determined that
it is doubtful that any amounts will be realized from the ultimate disposition
of these spares parts. The Company reviews finished inventory on-hand and
consigned to others, and provides for missing, obsolete and damaged product
periodically based on the results of the review.
As of
December 31, 2009 and 2008, inventory reserves amounted to $166,808 and
$272,025. For the years ended December 31, 2009 and 2008, the inventory
adjustment to write-down inventory due to product believed to be lost or
damaged, or unaccounted for after distribution on consignment, amounted to
$58,773 and $46,565, respectively, and charged to cost of sales. It is possible
that a portion of amounts established for inventory reserves will ultimately be
collected in cash from vendors, product located, repaired and/or re-packaged,
and/or returned to the Company for resale. During 2009, the Company reversed
$163,990 of its reserve against inventory as this product was either sold or
deemed by management to be permanently lost, damaged or not recoverable. A
summary of changes to the inventory reserve account is as follows:
Additions
|
||||||||||||||||||||
Balance,
Beginning of
Year
|
Charged to
Cost or
Expense
|
Charged to
Other Accounts
|
Deductions
|
Balance,
End of
Year
|
||||||||||||||||
Inventory
|
||||||||||||||||||||
Reserve
for inventory lost or damaged
|
||||||||||||||||||||
2008
|
$
|
225,460
|
$
|
46,565
|
$
|
-
|
$
|
-
|
$
|
272,025
|
||||||||||
2009
|
272,025
|
58,773
|
-
|
(163,990
|
)
|
166,808
|
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
RESTATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of
December 31, 2009 and 2008
Fixed
assets. Fixed assets are comprised of computer equipment and are stated
at cost and depreciated using the straight-line method, over the asset’s
estimated useful life. Computer equipment and software, which currently comprise
substantially all of the Company’s assets, have been deemed to have useful lives
of approximately 3 years and are being depreciated over this period. The Company
records depreciation expense as a component of operating, sales and
administrative expenses.
Patent.
The Company’s patent for the Disintegrator® is being amortized on a
straight-line basis over the remaining life of the patent of 151 months. The
Company records amortization expense as a component of operating, sales and
administrative expenses.
Income
taxes. The Company provides for income taxes in accordance with
Accounting Standards Codification (“ASC”) No. 740, Income Taxes (“ASC 740”)
using an asset and liability based approach. Deferred income tax assets and
liabilities are recorded to reflect the tax consequences on future years of
temporary differences of revenue and expense items for financial statement and
income tax purposes. ASC 740 requires the Company to recognize income tax
benefits for loss carry forwards that have not previously been recorded. The tax
benefits recognized must be reduced by a valuation allowance if it is more
likely than not that loss carry forwards will expire before the Company is able
to realize their benefit, or that future deductibility is uncertain. For
financial statement purposes, the deferred tax asset for loss carry forwards has
been fully offset by a valuation allowance since it is uncertain whether any
future benefit will be realized.
ASC 740
also provides guidance on recognition, classification and disclosure concerning
uncertain tax benefits and tax liabilities. The evaluation of a tax position
requires recognition of a tax benefit or liability if it is
‘more-likely-than-not’ that it will be sustained upon examination. For tax
positions meeting the ‘more-likely-than-not’ threshold, the amount recognized in
the financial statements is the largest benefit or liability that has a greater
than 50% likelihood of being realized upon ultimate settlement with the relevant
tax authority.
Advertising
costs. Advertising and cooperative marketing costs in the amounts of
$110,445 and $162,039 were expensed as operating, sales and administrative
expenses as incurred, for the years ending December 31, 2009 and 2008,
respectively.
Stock based
compensation. The Company has exchanged its common stock for services
render by employees, directors, consultants and others. The Company accounts for
stock and stock options issued to employees and non-employees for services and
other compensation under the provisions of ASC No. 718, Compensation – Stock
Compensation and ASC No. 505-50, Equity-Based Payments to
Non-Employees , which establish standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods and
services at fair value. These standards also address transactions in which an
entity incurs liabilities in exchange for goods and services that are based on
the fair value of the entity’s equity instruments or that may be settled by the
issuance of those equity instruments. For employees, stock awarded is valued
based on the closing bid price on the date of grant. For non-employees, stock
issued for services is valued at either the invoiced or contracted value of
services provided, or to be provided, or the fair value of the stock at the due
date per the service agreement, whichever is more readily determinable. Warrants
or options issued for services provided, or to be provided, are valued at fair
value at the date the agreement to award is reached. Other than a stock option
plan, the Company has no established plans for the issuance of shares to
employees and non-employees; shares awarded during the years ended 2009 and 2008
have consisted of new shares.
Earnings (Loss)
per share. Basic net income (loss) per common share is computed using the
weighted average number of common shares outstanding during the periods. Diluted
net income (loss) per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the year.
Potentially dilutive shares at December 31, 2009 aggregate of up to 103,863,546
common shares consisting of 25,818,392 share issuable upon exercise of
outstanding warrants, up to 62,156,593 shares issuable in accordance with
default provisions of outstanding convertible debt and up to 15,888,561 shares
issuable should all of the convertible debt noteholders elect to convert accrued
interest to common shares.
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
RESTATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of
December 31, 2009 and 2008
Concentration of
credit risk. Financial instruments, which potentially subject the Company
to concentration of credit risk, consist principally of cash and trade accounts
receivable. The Company places its cash with high credit financial institutions.
The Company extends credit to its customers, all on an unsecured basis, after
performing certain credit analysis. The Company continually performs credit
evaluations of its customers and maintains an allowance for doubtful accounts
for potential credit losses.
For the
year ended December 31, 2009, sales to our two largest customers amounted 49%
and 16% of our total revenue. As of December 31, 2009, accounts receivable from
these two customers amounted to $392 and $54,522, respectively. For the year
ended December 31, 2008, sales to the same two customers amounted to 72% and 18%
of our total revenue. Also, sales of one of our products accounted for a
majority of our sales.
Loss of a
major vendor may significantly impact future results of operations. For the
years ended December 31, 2009 and 2008, one vendor, Tecnimed, provided
substantially all of product for resale. See Note 7 – Notes Payable. The Company
did not purchase any product from Tecnimed during 2009.
Recent accounting
pronouncements. Effective July 1, 2009, the Company adopted the Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
105-10, Generally Accepted
Accounting Principles — Overall (“ASC 105-10”). ASC 105-10 establishes
the FASB Accounting Standards
Codification (the “Codification”) as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with U.S.
generally accepted accounting principles (“GAAP”). Rules and interpretive
releases of the SEC under authority of federal securities laws are also sources
of authoritative U.S. GAAP for SEC registrants.
Effective
January 1, 2009, the Company adopted FASB ASC Topic 805, Business Combinations (“ASC
805”). ASC 805 establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree. ASC 805 also provides guidance for recognizing and measuring the
goodwill acquired in the business combination and determines what information to
disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. ASC 805 also provides guidance
for recognizing changes in an acquirer’s existing income tax valuation
allowances and tax uncertainty accruals that result from a business combination
transaction as adjustments to income tax expense.
In April
2009, the FASB issued updated guidance related to business combinations, which
is included in the Codification in ASC 805-20, Business Combinations — Identifiable
Assets, Liabilities and Any Non-controlling Interest (“ASC 805-20”). ASC
805-20 amends and clarifies ASC 805 to address application issues regarding
initial recognition and measurement, subsequent measurement and accounting and
disclosure of assets and liabilities arising from contingencies in a business
combination. In circumstances where the acquisition date fair value for a
contingency cannot be determined during the measurement period and it is
concluded that it is probable that an asset or liability exists as of the
acquisition date and the amount can be reasonably estimated, a contingency is
recognized as of the acquisition date based on the estimated amount. ASC 805-20
is effective for assets or liabilities arising from contingencies in business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. The
Company adopted this pronouncement in connection with the Disintegrator
acquisition.
In May
2009, the FASB issued general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or available to be issued. The Company adopted these standards as of
and for the year ending December 31, 2009. In February 2010, the FASB amended
ASC 855-10, Subsequent
Events requiring an entity that is an SEC filer to evaluate subsequent
events through the date the financial statements are issued. This amended
standard is effective for interim or annual periods ending after June 15,
2010.
12
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
RESTATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of
December 31, 2009 and 2008
Fair value of
financial instruments. The carrying values of accounts receivable,
inventory, accounts payable and accrued expenses approximate their fair values
due to their short term maturities. The carrying values of certain of the
Company’s notes payable approximate their fair values based upon a comparison of
the interest rate and terms of such debt given the level of risk to the rates
and terms of similar debt currently available to the Company in the marketplace.
It is not practical to estimate the fair value of certain notes payable, the
convertible debt and the liability for contingent compensation from acquisition.
In order to do so, it would be necessary to obtain an independent valuation of
these unique instruments. The cost of that valuation would not be justified in
light of the circumstances.
Fair value
measurements. The FASB’s Accounting Standards Codification defines fair
value as the amount that would be received for selling an asset or paid to
transfer a liability in an orderly transaction between market participants and
requires that assets and liabilities carried at fair value are classified and
disclosed in the following three categories:
Level 1 –
Quoted prices for identical instruments in active markets.
Level 2 –
Quoted prices for similar instruments in active or inactive markets and
valuations derived from models where all significant inputs are observable in
active markets.
Level 3 –
Valuations derived from valuation techniques in which one or more significant
inputs are unobservable in any market.
The
Company values its liability for contingent consideration and warrants in
accordance with the Level 3 guidelines. See Note 6 – Acquisition of Patent, Note
7 – Notes Payable, and Note 9 – Equity, for fair value measurements as of
December 31, 2009.
Derivative
instruments. Derivative instruments consist of certain common stock
warrants. The derivative instruments are recorded in the balance sheets at fair
value as liabilities. Changes in fair value are recognized in earnings in the
period of change.
4.
RESTATEMENTS AND RECLASSIFICATION
The
Company has restated its previously issued audited financial statements as of
and for the year ended December 31, 2008. During 2009, after issuance of the
2008 audited financial statements, the Company determined that, effective
December 31, 2007, the correct par value for the Company’s common shares was
$0.0001 per share and not $0.001 per share as previously reported. Accordingly,
for these financial statements, the Company’s common stock and additional paid
in capital accounts were adjusted by an aggregate amount of $300,405 on December
31, 2008.
In June
2010, the Company’s Board of Directors determined that the default date for all
of the noteholders participating in the 2007 subscription agreement debentures
was April 30, 2008. Pursuant to the terms of the convertible promissory notes,
interest is payable quarterly. The Company made all of its interest payments
through December 31, 2007. The Company did not make its March 31, 2008 interest
payment, and thus per the terms of the convertible promissory notes, the Company
was declared in default on April 30, 2008. Previously, the default date was
determined to be the maturity date of each promissory note which was one year
from the date the noteholder committed to subscribe to the offering. The effect
of the change was to correct the default conversion price to one share of common
stock per $0.0146 of principal outstanding consequently reducing the total
number of shares issuable upon full conversion of the notes from 311,821,337 to
62,156,593.
In
addition, the Company corrected its accounting for contingent compensation
related to warrants issuable to an officer of the Company pursuant to his
employment agreement. As discussed in Note 6 – Acquisition of Patent, the
Company recorded $77,400 as compensation expense with an offset to additional
paid-in capital for the period ended December 31, 2009 as it is probable that
the $7.0 million revenue target will be met. Compensation expense for this item
had not been recorded in the previously issued 2009 consolidated financial
statements.
13
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
RESTATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of
December 31, 2009 and 2008
The
Company amended its footnote disclosures related to warrants outstanding to
summarize warrants subject to a cashless exercise, anti-dilution and adjustment
for subsequent issuances of equity provisions, and to disclose rent expense of
$13,741 and $0 for 2009 and 2008, respectively.
A summary
of the consolidated balance sheet and consolidated statement of operations as
originally reported and as restated, as of December 31, 2009 and the year then
ended, is as follows:
As
|
As Originally
|
|||||||
|
Restated
|
Reported
|
||||||
Current
assets
|
$
|
667,775
|
$
|
667,775
|
||||
Total
assets
|
3,271,870
|
3,271,870
|
||||||
Current
liabilities
|
3,499,668
|
3,499,668
|
||||||
Total
liabilities
|
4,331,190
|
4,331,190
|
||||||
Total
shareholders' deficit
|
(1,059,320
|
)
|
(1,059,320
|
)
|
||||
Net
loss applicable to common shareholders
|
3,424,851
|
3,347,451
|
||||||
Basic
and diluted net loss per common share
|
(0.00
|
)
|
(0.00
|
)
|
Certain
amounts in the consolidated financial statements as of and for the year ended
December 31, 2008 have been reclassified for comparative purposes to conform to
the presentation in the consolidated financial statements as of and for the year
ended December 31, 2009.
5.
FIXED ASSETS, NET
Fixed
assets, net of accumulated depreciation, consist of the following at December
31, 2009 and 2008, respectively:
2009
|
2008
|
|||||||
Computer
equipment and software
|
$
|
69,414
|
$
|
64,897
|
||||
Less
accumulated depreciation
|
(64,897
|
)
|
(64,897
|
)
|
||||
$
|
4,517
|
$
|
-
|
Depreciation
expense was $0 and $1,140 during the fiscal years ended December 31, 2009 and
2008, respectively.
14
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
RESTATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of
December 31, 2009 and 2008
6.
ACQUISITION OF PATENT
On
September 10, 2009, ASRI purchased a patent for a needle destruction device
known as the Disintegrator® (including trademarks for the Disintegrator®,
Disintegrator Plus® and Disintegrator Pro®) and other assets from Safeguard
Medical Technologies, LLC (“Safeguard” or the “Seller”) in exchange for
250,000,000 shares of common stock and assumption of a contingent note payable
up to $1,200,000. The Company evaluated the acquisition to determine whether the
purchase of the patent, trademarks and other assets constituted the acquisition
of a business in accordance with ASC 805, Business Combinations and the
definition of a business per rules promulgated by the SEC. After application of
the various criteria, management determined that this acquisition was in
substance the purchase of an asset. While the Company acquired certain spare
part inventory on hand, rights to distribution, intellectual property (including
the patent and trademarks) and other assets, management determined that only the
patent for the Disintegrator® had value. Accordingly, the Company recorded the
patent at $2,652,272 equivalent the trading value of the 250,000,000 shares of
common stock at the closing bid price on September 10, 2009 in the amount of
$1,875,000 and the discounted amount of a $1,200,000 contingent note payable
assumed in the amount of $777,272.
The
patent is due to expire in May 2022. The Company determined that the remaining
useful life of the patent to be 12 years and 7 months, and is amortizing the
patent accordingly. For the year ended December 31, 2009, amortization expense
related to the patent amounted to $52,694.
The
assumed $1.2 million, non-interest bearing, contingent note is payable to a
party related to the Seller in two installments upon reaching certain targets.
The first installment of $600,000 is payable upon the Company reaching
$6,000,000 in combined new capital and revenue from sales of the Disintegrator
Plus® and certain other products introduced by the Seller within two years of
September 10, 2009. The second installment of $600,000 is payable upon the
Company reaching an additional $4,000,000 of combined new capital and revenue
within two years of the due date of the first installment. At the Company’s
option, the first and second installments may each be paid over 12 months after
achievement of the respective combined capital and revenue targets. As it is
probable that the Company will reach the combined capital and revenue targets
within four years, the $1.2 million note obligation has been recognized. The
first installment of the note was discounted at 16% from the end of a two year
period and the second installment was discounted at 16% from the end of a four
year period, resulting in a present value of $777,272. The 16% discount rate was
determined as the weighted average cost of capital for small companies in the
Company’s industry from an independent research service (Morningstar’s Ibbotson®
Cost of Capital 2009 Yearbook, page 3-66). Subsequent changes to the Company’s
estimate of the amount due on this contingent note payable will be recorded in
the Company’s consolidated financial statements when known. During the period
from September 10, 2009 to December 31, 2009, the Company recognized $44,064 of
interest expense related to amortization of this contingent note
payable.
Simultaneous
with the patent acquisition, the Company agreed to hire an executive and
majority owner of the Seller to assist with operations, sales and marketing, and
entered into a ten year employment agreement with the executive (See Note 10 –
Commitments and Contingencies), and retain the Seller for production,
engineering and quality control services. In consideration for entering into the
employment agreement and other agreements with the Seller, the Company agreed to
issue up to 250,000,000 warrants and pay up to $200,000 as a cash bonus, both
contingent upon future sales of the Disintegrator® and certain other products,
to the executive and majority owner of the Seller. Management determined that
the contingent warrants and contingent bonus payable qualified for treatment as
contingent compensation for accounting purposes. As described in the next
paragraph, $823,991 was determined to be the fair value of the contingent
compensation at the acquisition date. The fair value of the contingent
compensation was obtained by determining the likelihood that the contingency
would be realized within the applicable time period and applying the
Black-Scholes pricing model to the warrants and a discount to present value for
the bonus. Subsequent changes to the Company’s estimate of the total amount of
compensation due will be recorded in the Company’s consolidated financial
statements when known.
15
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
RESTATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of
December 31, 2009 and 2008
The
Company agreed to issue Safeguard 50,000,000 warrants to purchase an equivalent
number of shares of common stock immediately upon the collection of $2.0 million
in revenue from sales of the Disintegrator Plus® and certain other products. The
exercise price is equal to the closing bid price of the common shares on August
11, 2009, or $.002 per share. Further, the Company agreed to issue the Seller up
to 200,000,000 warrants, in 50,000,000 tranches, immediately upon collection of
an additional $5.0 million, $10.0 million, $15.0 million and $20.0 million in
revenue from sales of the Disintegrator Plus® and certain other products
introduced by the executive and majority owner of the Seller with an exercise
price equal to the lesser of the closing bid price on the day prior to achieving
the revenue target or the exercise price of the immediately preceding tranche.
Further, after three years, the Company agreed to pay a one-time cash bonus to
the executive and majority owner of the Seller of up to $200,000 based gross
revenue generated from sales of the Disintegrator Plus® and certain other
products. The warrant revenue targets for each tranche must be met, and the
bonus is payable, within three years of September 10, 2009.
As it is
probable that the Company will reach $7.0 million in sales over the next three
years, the Company currently anticipates the issuance of 100,000,000 warrants,
which have been determined to have a fair value of $759,925 as of September 10,
2009. The fair value of these warrants has been determined by using the
Black-Scholes pricing model with the following assumptions: no dividend yield,
expected volatility of 278.50%, risk-free interest rate of 2.29%, and an
estimated life of five years. In accordance with ASC No. 718-10, Compensation – Stock
Compensation , the Company is recording monthly compensation expense for
the fair value of the warrants payable. For the period ended December 31, 2009,
the Company recording $77,400 as compensation expense with an offset to
additional paid-in capital. The Company will adjust the total amount of recorded
compensation expense as recorded in the consolidated financial statements upon
the occurrence of an event which would indicate a change to the level of the
achievable sales.
As it is
probable that the Company will reach $7.0 million in sales over three years, the
Seller is entitled to a $100,000 cash bonus, which was deemed to have a fair
value of $64,066 on September 10, 2009 determined as the present value of the
probable amount of bonus payable discounted at 16% from the end of a three year
period. The Company is accruing monthly compensation expense for the anticipated
full amount of the bonus payable on a straight-line basis over the 3 year period
that the services are to be performed. During the period from September 10, 2009
to December 31, 2009, the Company recognized $10,186 as compensation expense
related to this liability for contingent compensation.
During
the year ended 2009, the Company paid $10,000 related to the employment
agreement. No amounts were paid for production, engineering and quality control
services.
7.
NOTES PAYABLE
Stock buy-back
obligation. In October 2007, a demand letter was presented to the Company
under the terms of a stipulation of settlement, as amended, to purchase 250,000
shares of the Company’s stock held by an investor at the price of $1.24 per
share. A liability of $310,000 relating to this matter was recorded during 2007
with an offset to additional paid-in capital. In May 2008, the investor filed
suit against the Company in the United States District Court of the Northern
District of New York for failing to comply with the stipulation of settlement,
as amended, to purchase 250,000 shares of common stock. As of December 31, 2008,
the balance outstanding on this obligation amounted to $261,000. The matter was
subsequently referred to arbitration. On October 16, 2009, the Company partially
settled the complaint. As part of the settlement, another investor agreed to
purchase the settling investor’s common shares in exchange for the receipt of
500,000 shares of the Company’s Series B Preferred Stock. The Series B Preferred
Stock issued was valued at $275,000 on the date of issuance, and as a result,
the Company recognized a $14,000 loss on settlement of this litigation. The
250,000 common shares were returned to the Company and cancelled. On October 30,
2009, the new investor converted all of the Series B preferred shares into
50,000,000 shares of common stock. Upon conversion, the common shares were
valued at $1,150,000, the closing bid price on the day of conversion. After
reaching a final settlement in January 2010, the arbitration proceeding was
closed in February 2010.
16
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
RESTATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of
December 31, 2009 and 2008
Promissory
notes payable
On
September 28, 2007, the Company issued a promissory note to a lender (“Lender
1”) in the aggregate principal amount of $267,500 (“Note 1”) and received cash
proceeds in the sum of $250,000. In conjunction with the issuance of Note 1,
effective September 28, 2007, we issued 125,000 shares of our common stock to
Lender 1 valued at $0.18 per share, the trading price on that day. We also
issued 250,000 warrants to purchase an equivalent number of shares of our common
stock. These warrants are exercisable over a three year period beginning
September 28, 2007 at a price of $0.25 per share. The value of the warrants was
determined by using the Black-Scholes pricing model with the following weighted
average assumptions: no dividend yield, expected volatility of 189%, risk-free
interest rate of 4.03%, and an expected life of three years. The value of the
warrants issued amounted to $34,744 and was amortized to interest expense over 6
months during 2007 and 2008. Interest accrues on Note 1 at a rate of 12.0% per
annum. All principal and interest accruing under Note 1 was due March 28, 2008.
The Company did not meet its obligations under this note and as a result entered
into an event of default. For failure to pay principal or interest on the due
date or to perform on the conditions contained in Note 1, Lender 1, at its
option, may declare the entire unpaid balance of principal and interest
immediately due and payable. In the event of default, interest accrues at the
rate of 6.0% per month on any unpaid obligation and is payable in cash and
shares of our common stock. Lender 1 disputes the Company’s calculation of
principal and interest, primarily with regard to the compounding of interest.
The Company has been negotiating with Lender 1 to clarify and amend payment and
other terms of the note, which would include a waiver of default for the
required payments that have not been made. As of April 15, 2010, no agreement
has been reached with Lender 1 to modify the loan terms. As of December 31, 2009
and 2008, the outstanding principal balance on Note 1 was $232,000 and $249,104.
Accrued interest payable amounted to $232,411 as of December 31, 2009, including
interest accrued at the default rate. During the years ended December 31, 2009
and 2008, the Company issued 73,392,600 and 14,920,049 shares of common stock to
Lender 1 in satisfaction of, and in anticipation of, a portion of the penalty
interest due on Note 1. As of December 31, 2009, 1,068,018 shares were deemed to
have been issued for prepaid interest and were valued at the closing bid price
at the time of issuance or $427.
On
October 22, 2007, the Company issued a promissory note to a lender (“Lender 2”)
in the aggregate principal amount of $262,500 (“Note 2”) and received cash
proceeds from Lender 2 in the sum of $250,000. A current member of our Board of
Directors is indirectly related to Lender 2. In conjunction with the issuance of
Note 2, effective October 22, 2007, we issued 125,000 shares of our common stock
to Lender 2 valued at $0.23 per share, the trading price on that day. We also
issued 250,000 warrants to purchase an equivalent number of shares of our common
stock. These warrants are exercisable over a three year period beginning October
22, 2007 at a price of $0.25 per share. The value of these warrants was
determined by using the Black-Scholes pricing model with the following weighted
average assumptions: no dividend yield, expected volatility of 168%, risk-free
interest rate of 3.88%, and an expected life of three years. The value of the
warrants issued amounted to $41,477 and was amortized to interest expense over 4
months during 2007 and 2008. Interest accrues on Note 2 at a rate of 12.0% per
annum. All principal and interest accruing under Note 2 was due February 22,
2008. The Company did not meet its obligations under this note and as a result
entered into an event of default. During the years ended December 31, 2009 and
2008, the Company issued 73,392,600 and 15,086,049 shares of common stock to
Lender 2 in satisfaction of, and in anticipation of, penalty interest due on
Note 2. Effective December 31, 2009, the Company entered into an agreement
whereby Lender 2 released the Company from all principal and interest
obligations under the note in exchange for the Company’s commitment to file a
registration statement with the SEC and to compensate Lender 2 should Lender 2
be unable to sell up to 88,000,000 million of its shares above an average price
of $0.01 per share over an eleven week period after the registration statement
becomes effective. The maximum amount due by the Company under the release
agreement is $350,000. On January 21, 2010, the Company filed a registration
statement with the SEC. As a result, on December 31, 2009, the Company
recognized a gain from discharge of indebtedness in the amount of $105,684
consisting of relief of principal of $227,375 and accrued interest of $228,309
on the note less $350,000, and reclassified the remaining principal and accrued
interest in the amount of $350,000 to other current liability.
17
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
RESTATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of
December 31, 2009 and 2008
In
October 2007 and April 2008, the Company issued two promissory notes to
Tecnimed, SLR (“Tecnimed” or the “Vendor”) in the aggregate principal amount of
$608,800. These notes accrued interest at 10% per annum and are secured by a
portion of the Company’s inventory received from the Vendor. In conjunction with
the issuance of the first of these notes, effective October 30, 2007, we issued
375,000 of our common stock valued at $0.26 per share, the trading price at the
end of that day. All principal and interest was due during 2008. As of December
31, 2009 and 2008, the Company had $283,252 and $491,713 of principal
outstanding on the two promissory notes. On March 6, 2009, the Company entered
into a Settlement Agreement with the Vendor (the “Settlement Agreement”),
whereby the parties agreed to termination of the existing distribution agreement
as amended, payment terms with regard to sold and unsold product, new terms with
regard to sales and distribution of existing product, mutual releases of claims
against one another, and modification to certain indemnity provisions (see Note
10 – Commitment and Contingencies regarding litigation between a competitor,
Tecnimed and the Company), among other provisions. As part of the Settlement
Agreement, the Company agreed not to make any cash distributions to
shareholders, officers, directors and employees (apart from ordinary salary),
and pay the Vendor 30% of any of capital raised (excluding any financing for
working capital), until the obligation to the Vendor has been fully satisfied.
Further, the Company agreed to an even split of cash received from customers
until the debt is paid in full. In addition, the Vendor agreed to waive all
penalties, fees and interest above 6% compounded annually, with respect to the
notes, and forbear collection proceedings for 18 months from the date of the
Settlement Agreement provided the Company is in compliance with the obligations
within the Settlement Agreement. The Vendor also has a lien on product titled to
the Company at an independent warehouse location and requires specific
authorization prior to release of such product to the Company. As a result of
the reduction of the interest rate, the Company reduced previously recorded
interest expense by $27,464. During the year ended December 31, 2009, the
Company paid $208,461 of principal on the two promissory notes held by the
Vendor. Accrued interest payable at December 31, 2009 related to these two notes
was $61,698.
On
November 5, 2005, the Company received $300,000 from a shareholder and former
service provider (“Service Provider 1”) as a short term cash advance. No
agreement was entered into regarding the payment of principal and interest.
During years ended December 31, 2009 and 2008, the Company made $10,500 and $0
of principal payments towards this advance leaving $289,500 outstanding as of
December 31, 2009.
On July
15, 2008, the Company issued an unsecured promissory note to a lender (“Lender
3”) in the aggregate principal amount of $25,000 for cash. The principal amount
of this note was due in full on September 16, 2008. The Company did not meet its
obligations under this note and as a result entered into an event of default. In
the event of default as defined in the promissory note, the note shall be
immediately due and payable, plus interest at 1.5% per month on the balance
outstanding, plus any fees incurred. As of December 31, 2008, principal
outstanding on this note was $23,500. During 2009, the Company paid $23,500 of
principal and $5,000 of interest to settle all obligations due under this
note.
As of
December 31, 2009 and 2008, the Company had outstanding principal balance due on
an unsecured installment note with a commercial bank (“Commercial Bank”) in the
amounts of $23,568 and $44,634, respectively. This note calls for monthly
payments of $2,057 with interest on the outstanding balance at prime plus 1.50%.
The final maturity is December 14, 2010. This installment note is personally
guaranteed by our chief executive officer and another member of our Board of
Directors.
On
February 25, 2008, the Company entered into an agreement with a marketing
consultant (“Service Provider 2”) which included a $70,000 unsecured, revolving
line of credit with the consultant bearing interest at 10% per annum. A portion
of the credit line was used to pay outstanding Company obligations in the amount
of $41,750. The credit line was supported by a convertible promissory note
whereby the holder may, at any time, convert the outstanding principal and
interest to shares of common stock at a conversion price of $0.05 per dollar
outstanding. As consideration for services performed under the consulting
agreement, in March 2008, we issued 1,172,442 shares of our common stock valued
at $117,244, and in June 2008, we issued 7,991,902 shares of common stock valued
at $59,939. In addition, the Company granted the holder a warrant to purchase up
to 250,000 shares of our common stock exercisable over a five year period at an
initial exercise price of $0.25 per share. The line of credit matured April 30,
2008. The note called for monthly payments of interest until May 1, 2009, when
all outstanding principal and interest was due and payable. This note had an
outstanding balance of $41,750 at December 31, 2008. The Company did not meet
its obligations under this note and as a result entered into an event of
default. In November 2009, the Company agreed to a settlement whereby all
principal and interest due in the amount of $55,486 was converted to 3,699,079
shares of common stock at an adjusted conversion price of $0.015 per
share.
RESTATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of
December 31, 2009 and 2008
A summary
of principal due on promissory notes payable as of December 31, 2009 and 2008 is
as follows:
2009
|
2008
|
|||||||
Lender
1
|
$
|
232,000
|
$
|
249,104
|
||||
Lender
2
|
-
|
258,375
|
||||||
Tecnimed
|
283,252
|
491,713
|
||||||
Service
Provider 1
|
289,500
|
300,000
|
||||||
Lender
3
|
-
|
23,500
|
||||||
Commercial
Bank
|
23,568
|
44,634
|
||||||
Service
Provider 2
|
-
|
41,750
|
||||||
$
|
828,320
|
$
|
1,409,076
|
Related
party advances and notes
On July
30, 2007, the Company received cash and issued a promissory note to a relative
of our chief executive officer in the principal amount of $125,000. Interest
accrued on this note at a rate of 24% per annum and was to be paid monthly. All
principal and accrued interest was due on or before October 30, 2007. The
Company has not made the required principal and interest payments and has been
negotiating with the holder to amend the payment terms of the note, which would
include a waiver of default for the required payments that have not been made.
In the event of default, the note calls for interest at 36% per annum. The loan
is collateralized by 5,300 units of the Company’s thermometer product held for
resale. As of December 31, 2009 and 2008, the outstanding balance is $99,250 and
122,250, respectively. The Company has recorded accrued interest payable
amounting to $69,234 at December 31, 2009, at the rate of 24% per annum as the
Company believes it will not be obligated to pay the default rate of interest.
Had the Company accrued at the default rate of interest, accrued interest
payable at December 31, 2009 would have been $92,216 and additional interest
expense in the amount of $13,288 and $14,972 would have been recognized for the
years ended December 31, 2009 and 2008, respectively.
During
the years ended December 31, 2008 and 2007, two of the Company’s board members,
and ASR Realty Group, LLC (“ASR”), an entity affiliated with a former board
member, advanced funds to the Company for working capital on a non-interest
bearing basis. The principal balance due to the board members was $60,180 and
$73,180 at December 31, 2009 and 2008, respectively. One of these advances in
the amount of $27,000 due to ASR, is documented by a note and secured by
accounts receivable, inventory and other assets of the Company, and should the
balance not be paid on demand, interest shall accrue at 15% per annum. As of
December 31, 2009, the Company had accrued interest in the amount of $4,738 with
regard to this note.
See Note
11 – Related Party Transactions for additional information on related party
advances.
Convertible
promissory notes
Subscription
agreement debentures. During 2007, the Company entered into subscription
agreements with various investors issuing convertible promissory notes, 905,000
common shares and 1,810,000 warrants to purchase an equivalent number of common
shares in exchange for proceeds of $905,000. The warrants are exercisable at
$1.00 per share over a five year period from issuance. As of December 31, 2009
and 2008, the Company had $905,000 of principal outstanding on these
debentures.
19
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
RESTATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of
December 31, 2009 and 2008
The
convertible promissory notes accrue interest at 10%, and all principal and
interest was due on the first anniversary of their issuance date. These notes
were convertible into shares of our common stock at the option of each holder at
(1) $0.25 per share, or (2) a 20% discount to the price per share issued in a
financing transaction of at least $2,000,000, or (3) in the event of default,
the conversion price would be adjusted to equal 80% of the Company’s average
closing stock price during the five trading days prior to default.
At their
commitment date each convertible promissory note was tested for a beneficial
conversion feature by comparing the effective conversion price to the fair value
of the Company's stock. The Company recognized a beneficial conversion feature
of $187,183 which was recorded as a discount to the convertible promissory notes
with an offset to additional paid-in capital. Additionally, the relative fair
value of the warrants and common stock of $118,421 and $105,284, respectively,
was calculated and recorded as a further reduction to the carrying amount of the
convertible debt and as addition to paid-in capital. The Company amortized the
debt discount over the term of the debt. Amortization of debt discount for the
year ended December 31, 2008 was $217,948. The fair value of the warrants was
measured utilizing the Black-Scholes fair value methodology using assumptions of
5 years for expected term, volatility of 115%, no dividends and a risk free
interest rate of 4.70%.
Each
convertible promissory note issued with the subscription agreements had a term
of one year and was not repaid. Due to the default and reset of the conversion
price to 80% of the fair value of the Company’s common stock five days prior to
the default, the Company tested each convertible promissory note for an
incremental beneficial conversion feature. As a resulted, the Company recognized
$438,365 of interest expense during 2008. The Company’s Board of Directors has
determined that the default date for each convertible promissory note was April
30, 2008. The calculation of the conversion rate to common shares on such date
was $0.0146 of principal outstanding to one share of common stock. Based on the
default provisions, noteholders may convert their principal balance into
62,156,593 common shares. Unless the Company declares a stock dividend, or there
is some other re-capitalization of the Company, such as a stock split or reverse
stock split, the conversion price established at the default date will not
change.
The
subscription agreements for these debentures contain a registration rights
penalty whereby, commencing upon six months from an initial unit sale and, for
each monthly period thereafter that the common stock and the common stock
underlying the warrants are not registered, the Company will issue 4,167
warrants per unit as a penalty to the subscription holder. The Company failed to
file a registration statement and consequently, beginning August 2007, the
Company began valuing 4,167 warrants per outstanding unit as a penalty. The
penalty warrants have been determined to be a derivative instrument. For the
year ended December 31, 2009, the value of the penalty warrants has been
determined by using the Black-Scholes pricing model with the following weighted
average assumptions: no dividend yield, expected volatility of 333.68%,
risk-free interest rate of 2.69%, and an expected life of five years. The
aggregate value of the penalty warrants issued amounted to $19,499 and $9,525
for the year ended December 31, 2009 and 2008, respectively. The derivative
liabilities were adjusted to their fair values of $24,124 and $549 at December
31, 2009 and 2008, respectively. On January 21, 2010, the Company filed a
registration statement with the SEC. The Company will continue to accrue penalty
warrants until the registration statement becomes effective.
For the
year ended December 31, 2009, the Company recognized interest expense of $90,748
and had $220,851 of accrued interest payable at December 31, 2009 related to
these convertible promissory notes. The convertible promissory notes also
contain a provision whereby the noteholder may elect to convert accrued interest
payable into shares of our common stock. As of December 31, 2009, based on the
closing price of the Company’s common stock on that date, accrued interest
payable may be converted into 15,888,561 shares of common stock should all
noteholders elect to do so.
A current
member of our Board of Directors directly owns convertible promissory notes
which provide for conversion into 50,000 common shares, and 100,000 warrants to
purchase common shares. Parties directly and indirectly related to this
director, own convertible promissory notes convertible into 300,000 common
shares, and 600,000 warrants to purchase common shares.
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
RESTATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of
December 31, 2009 and 2008
Convertible
redeemable debentures. From September to November 2008, the Company
issued convertible redeemable debentures in the aggregate principal amount of
$175,000. These convertible debentures accrue interest at 8.0% per annum and, at
the option of the holder, are convertible to shares of our common stock at a
conversion price of equal to 60% of the lowest closing bid price of the common
stock as reported on the Pink Sheets (or any exchange on which our shares may be
traded in the future) on the day the notice of conversion is received by the
Company. The securities were issued in reliance on the exemption from
registration provided by Rule 504 of Regulation D. In addition, 11,752,256
shares of common stock were issued to pay interest on these debentures while
outstanding in the amount of $2,736.
8.
INCOME TAXES
As a
result of the Company incurring net losses, an income tax benefit in the form of
net operating loss carry–backs and carry-forwards have been generated. Since the
Company has not had taxable income for the last five years, utilization of net
operating loss carry-backs is not possible. The potential future benefit from
income taxes from continuing operations for the years ended December 31, 2009
and 2008 consist of the following:
2009
|
2008
|
|||||||
Current:
|
||||||||
Federal
|
$
|
-
|
$
|
-
|
||||
State
|
-
|
-
|
||||||
Deferred:
|
||||||||
Federal
|
522,500
|
737,100
|
||||||
State
|
-
|
-
|
||||||
522,500
|
737,100
|
|||||||
Increase
in valuation allowance
|
(522,500
|
)
|
(737,100
|
)
|
||||
Income
tax benefit
|
$
|
-
|
$
|
-
|
The
potential benefits for 2009 and 2008 were computed by applying the federal and
state statutory corporate tax rates as follows:
Statutory
federal income tax rate
|
34.0
|
%
|
||
Sate
income tax rates
|
0.0
|
%
|
||
Less
valuation allowance
|
-34.0
|
%
|
||
Effective
tax rate
|
0.0
|
%
|
The net
deferred tax assets and liabilities are comprised of the following:
2009
|
2008
|
|||||||
Deferred
tax assets:
|
||||||||
Current
|
$
|
-
|
$
|
-
|
||||
Non-current
|
4,432,900
|
3,910,400
|
||||||
Less
valuation allowance
|
(4,432,900
|
)
|
(3,910,400
|
)
|
||||
Net
deferred tax assets
|
$
|
-
|
$
|
-
|
21
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
RESTATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of
December 31, 2009 and 2008
At
December 31, 2009, assuming no net operating losses are carried back, the
Company had federal net operating loss carry-forwards totaling approximately
$12,630,500 which expire in various years through 2023.
9.
EQUITY
Increase in
common shares authorized and restatement of par value. In January 2009,
the Company increased its common stock authorized from 500 million to 2.5
billion. As discussed in Note 4 – Restatement and Reclassification, the Company
restated its par value per common share from $.001 to $.0001 effective December
31, 2007.
Modification of
Series A preferred stock and authorization of Series B convertible preferred
stock. During 2009, the Company amended its Articles of Incorporation to
(i) reduce the number of authorized Series A Preferred Stock, $.0001 par value,
to 500,000 shares from 1,000,000 shares, (ii) modify the voting rights of the
Series A Preferred Stock, and (iii) authorize 500,000 Series B Convertible
Preferred Stock, $.0001 par value (“Series B Preferred Stock”). The modified
Series A Preferred Stock has voting rights equal to 100,000 common shares for
each Series A Preferred Share. The Series B Preferred Stock (i) has voting
rights equal to that of 100 shares of the Company’s common stock, (ii) is
convertible into common shares at the ratio of 100 common shares for each
preferred shares, (iii) is entitled to a liquidation preference upon the
voluntary or involuntary liquidation, dissolution or wind-up of the Company
prior to any distribution of any of the assets of the Company to the holders of
common stock and any other preferred stock. The Series A Preferred Stock is
senior to the Series B Preferred Stock. The Company does not have any Series A
or B Preferred Stock shares outstanding as of December 31, 2009 and
2008.
As
discussed in Note 7 – Notes Payable, 500,000 shares of Series B Preferred Stock
was issued on October 16, 2009. At the time of issuance, the Series B Preferred
Stock was determined to have a deemed dividend of $985,000 based on the closing
value of the Company’s common stock on October 16, 2009. All of the preferred
stock then outstanding was converted to 50,000,000 shares of our common stock on
October 30, 2009. Subsequently, the Series B Preferred Stock was cancelled and
the preferred shares are currently available for re-issuance.
Sales of common
shares. During the year ended December 31, 2009, the Company received
$1,115,000 from the sale of 714,673,394 shares of common stock and paid sales
commissions of $49,000 for these sales.
In
October 2009, the Company issued 17,000,000 shares of common stock valued at
$127,500 as compensation to a financial advisor for services rendered in
connection with the sale of the Company’s common stock. The shares were valued
at the closing bid price for the Company’s common stock on September 11, 2009,
the date of issuance of the shares sold and the incurrence of the liability to
the financial advisor per agreement. This amount was recorded as an offset to
additional paid in capital.
Issuance of
common shares for asset purchase. On September 10, 2009, the Company
issued 250,000,000 shares of its common stock for the purchase of a patent. See
Note 6 – Acquisition of Patent.
Conversion of
notes payable to common shares. During 2009, the Company issued
246,859,885 shares of its common stock in accordance with provisions of
convertible debt and as settlement of amounts due on notes payable. See Note 7 –
Notes Payable.
Warrants for
common shares. During the years ended December 31, 2009, and 2008, the
Company granted various warrants to purchase common stock to the Seller of an
asset to the Company, to non-employee consultants and to investors in connection
with subscription offerings. In addition, to settle an obligation due to one
consultant in the amount of $15,000, in December 2009, the Company issued
warrants to purchase 11,525,000 common shares exercisable over a three year
period at $0.02 per share. A summary of the status of the Company’s outstanding
common stock warrants as of December 31, 2009 and 2008, excluding warrants
issuable as contingent compensation, is as follows:
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
RESTATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of
December 31, 2009 and 2008
Weighted
|
Weighted
|
|||||||||||
|
Avg. Exercise
|
Avg. Remaining
|
||||||||||
|
Warrants
|
Price
|
Life in Years
|
|||||||||
|
||||||||||||
Balance
December 31, 2007
|
3,675,657
|
$
|
0.87
|
2.09
|
||||||||
Granted
|
1,695,912
|
0.89
|
3.45
|
|||||||||
Exercised
|
-
|
-
|
-
|
|||||||||
Forfeited
|
-
|
-
|
-
|
|||||||||
Balance
December 31, 2008
|
5,371,569
|
0.88
|
2.52
|
|||||||||
Granted
|
20,446,823
|
0.06
|
2.84
|
|||||||||
Exercised
|
-
|
-
|
-
|
|||||||||
Forfeited
|
-
|
-
|
-
|
|||||||||
Balance
December 31, 2009
|
25,818,392
|
$
|
0.23
|
2.78
|
As of
December 31, 2009, warrants to purchase 12,275,000 shares of the Company’s
common stock contain a cashless exercise option based on the fair market value
of the Company’s stock on the date of exercise. All warrants outstanding at
December 31, 2009 contain certain anti-dilution provisions should the Company
become re-capitalized, adjustments for any reorganization, consolidation or
merger, and other rights offering participation. None of the warrants
outstanding at December 31, 2009, contained provisions whereby the exercise
price would be adjusted for subsequent sales of equity, however 20,000,000
warrants issued subsequent to December 31, 2009, do contain such provisions –
See Note 12 – Subsequent Events.
The
warrants with the cashless exercise feature may be exercised in accordance with
the following formula: X = (Y(A-B))/A, where X equals the number of shares of
common stock to be issued to the holder; Y equals the number of shares of common
stock purchasable under the warrant agreement in whole or in part; A equals the
fair market value of the common stock on the date of exercise; and B equals the
exercise price.
Options for
purchase of common stock. In May 2007, the Company adopted a stock option
plan which provides for the grant of options to officers, consultants and
employees to acquire shares of the Company’s common stock at a purchase price
equal to or greater than the fair market value as of the date of the grant.
Options are exercisable six months after the grant date and expire five years
from the grant date. The plan calls for a total of 3,000,000 common shares to be
held for grant. For the years ended December 31, 2009 and 2008, no options had
been granted under this plan.
Share
Based Compensation
Common stock
issued for services to non-employees. In June 2009, the Company issued
8,000,000 restricted shares of its common stock and 8,000,000 warrants to
purchase an equivalent number of common shares to an entity for services
rendered. These services were valued at $33,580 based on the fair value of the
common stock ($31,200) and warrants ($2,380) on the date of issuance. The
warrants were exercisable over 3 years at $.0015 per share and were valued using
the Black-Scholes pricing model with the following assumptions: no dividend
yield, expected volatility of 331.88%, risk-free interest rate of 2.00%, and an
estimated life of three years. In October 2009, the service provider filed suit
against the Company, its directors and other parties for failure to register and
lift trading restrictions on the common stock. The service provider claimed
damages arising from the alleged inability to sell the shares timely and realize
certain profits. Further, the service provider claimed anticipatory damages from
alleged anticipated inability to sell certain other shares and the warrants. In
February, 2010, the Company settled this litigation by agreeing to issue
16,000,000 unrestricted shares of common stock in exchange for cancelling the
8,000,000 restricted shares and 8,000,000 million warrants previously issued. On
December 31, 2009, the Company recognized an incremental expense from the
settlement in the amount of $68,000, based on the closing bid price of the
common stock on the date of settlement, and a corresponding obligation to issue
common stock. The Company also reversed the value of the warrants cancelled in
the amount of $2,380.
23
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
RESTATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of
December 31, 2009 and 2008
In
December 2009, the Company issued 5,000,000 shares of common stock as payment
for legal fees amounting to $35,000 per a retainer agreement, and expensed this
amount. The value of these shares on the date of issuance, based on closing bid
price for the Company’s common stock, was $96,500.
In
December 2009, the Company issued 2,000,000 restricted shares of common stock as
payment for consulting services. These shares were valued at the closing bid
price for the Company’s common stock on the date of issuance amounting to
$40,000, which was expensed.
As of
December 31, 2009, the Company agreed to settle all obligations due a consultant
through such date for services rendered amounting to $169,000, as specified in
the amendment to the original agreement, by issuing 16,900,000 shares of common
stock. The value of these shares on the date of issuance, based on the closing
bid price for the Company’s common stock, was $202,800. The Company valued the
stock at $169,000; the amount for the services contracted, and had expensed this
amount over 2008 and 2009. Beginning January 1, 2010, the Company and the
consultant entered into an amended agreement whereby the consultant is entitled
to receive warrants valued up to $1,987,500 based upon the execution of certain
licensing agreements and upon the achievement of certain collected revenue
targets. Upon achievement of the targets, warrants equivalent to the first
$200,000 shall be issued based on the 30 day trailing weighted average price of
the Company’s common stock. The exercise price is to be determined as 50% of the
30 day trailing weighted average price. All warrants are exercisable over 5
years from the date of issuance. Upon achievement of the targets, beginning at
$2,000,000 of revenues collected, warrants equivalent to $1,787,500 shall be
issued based on the 30 day trailing weighted average price and an exercise price
equal to the 30 day trailing weighted average price. The Company will account
for warrants issuable when the targets are met.
Common stock
issued for services to directors and an independent consultant. The
Company issued an aggregate 87,500,000, restricted shares of common stock to
four board members and an independent consultant during 2009. The shares were
valued at $105,000 based on the date of issue and recorded as operating, sales
and administrative expenses in the consolidated statement of operations for the
year ended December 31, 2009.
Obligation to
issue common shares. At December 31, 2009, the Company had the following
obligations to issue shares of its common stock:
Common
|
Obligation
Date
|
|||||||
|
Shares
|
Fair Value
|
||||||
Incremental
shares and amount from settlement of litigation
|
8,000,000
|
$
|
68,000
|
|||||
Shares
issuable as compensation
|
500,000
|
70,000
|
||||||
Advance
on sale of common shares
|
-
|
5,000
|
||||||
8,500,000
|
$
|
143,000
|
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
RESTATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of
December 31, 2009 and 2008
10.
COMMITMENTS AND CONTINGENCIES
Litigation.
On August 15, 2008, a competitor filed suit in the United States District Court
for the District of Massachusetts against Kidz-Med, Inc., American Scientific
Resources, Incorporated and Tecnimed, SLR for patent infringement with regard to
the Thermofocus thermometer. Under the distribution agreement, Tecnimed is
obligated to indemnify the Company against certain actions including this patent
infringement action. However, as part of the Settlement Agreement discussed in
Note 7 – Notes Payable, the Company agreed to cover its own fees and expenses in
connection with this litigation and agreed to waive any claim for lost profits
that may arise within the indemnification provision. The case is currently in
pretrial discovery. Tecnimed has provided the Company with a legal opinion that
the thermometer does not violate the competitor’s patents. The Company is unable
to make an independent assessment of this patent infringement action and is
relying on Tecnimed’s defense of this case. As the Company believes that
Tecnimed is capable and willing to defend the Company, and that the Company’s
defense costs if any will not be significant, no provision for possible loss
related to this litigation has been included in these consolidated financial
statements. In March 2010, the competitor filed an additional complaint against
American Scientific Resources, Incorporated and Kidz-Med, Inc. in the United
States District Court for the District of Massachusetts alleging that false
advertising damaged the competitor. The competitor is seeking to enjoin the
Company from future false advertising and to recover unspecified monetary
damages. Based on the advice of counsel, the Company believes this case is
without merit. The Company intends to vigorously contest the
complaint.
The
Company has, and may in the future, become a party to various claims, complaints
and legal actions arising in the ordinary course of business. In the opinion of
management, there are currently no matters that would have a further material
adverse effect on the Company’s consolidated financial statements taken as a
whole as of December 31, 2009.
Employment
agreements. In conjunction with the Disintegrator acquisition (See Note 6
– Acquisition of Patent), the Company entered into a ten year employment
agreement with a former executive and majority owner of Safeguard in addition to
the contingent compensation per the asset purchase agreement. The employment
agreement calls for a base salary of $10,000 per month beginning upon the
receipt of $500,000 of combined new capital and revenue, and $20,000 per month
beginning upon the receipt of $2,500,000 of combined new capital and revenue.
The $10,000 in monthly salary shall accrue for no longer than 6 months and be
payable in full immediately upon reaching $500,000 of combined new capital and
revenue. The employment agreement may be terminated by the executive in the
event of default with prior notice, and by the Company for cause, or death or
permanent disability of the executive. As of December 31, 2009, the Company had
paid $10,000 of base salary related to this agreement.
Effective
April 5, 2007, the Company entered into an employment agreement with our chief
executive officer. This agreement continues until another chief executive
officer is appointed by a majority of our Board of Directors, either party
terminates in accordance with the provisions of the agreement, or his death or
permanent disability. The agreement calls for a minimum salary of $10,000 per
month plus additional cash and stock compensation upon the achievement for
various milestones. The Company has not made certain cash payments due under the
agreement. As of December 31, 2009, $255,000 has been accrued as compensation
payable. This agreement also called for the issuance of 500,000 fully-vested,
restricted shares of the Company’s common stock upon execution. As of December
31, 2009, the shares had not been issued, however the Company has accrued
$70,000 as an obligation to issue shares, based on the closing price on the date
of grant. In addition, the agreement calls for the award of up to 500,000
warrants to purchase an equivalent number of common shares based on the
achievement of certain revenue targets. The warrants may be exercised at $0.25
per share and over a period of three years from September 4, 2007. The Company
will account for these warrants when the targets are achieved.
Operating
leases. The Company currently leases office space and has entered into
agreements with service providers which call for monthly payments. Minimum
obligations under these agreements are as follows:
Year Ending
|
||||
2010
|
$
|
36,000
|
||
2011
|
10,500
|
|||
$
|
46,500
|
25
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
RESTATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of
December 31, 2009 and 2008
Rent
expense, including the Company’s portion of utilities, amounted to $13,741 for
the year ended December 31, 2009. The Company had no rent expense for
2008.
Purchase and sale
agreements. The Company has entered into various agreements to purchase
components and finished products for resale. The purchase agreements have
various durations and require the Company to purchase certain minimum
quantities. As of December 31, 2009, the Company has advanced $53,800 to
vendors, and shall owe $40,510 upon delivery.
The
Company has also entered into various exclusive and non-exclusive agreements to
supply and distribute the Company’s products in various geographic areas.
Certain of these agreements require the Company to supply certain minimum
quantities and contain various warranty provisions upon sale.
11.
RELATED PARTY TRANSACTIONS
Our chief
executive officer of the Company periodically advances funds to the Company on a
short-term, non-interest bearing basis for working capital purposes. As of
December 31, 2009, $5,000 was due to this executive and such amount was repaid
on January 9, 2010. See Note 7 – Notes Payable for additional information
regarding loans from related parties.
As
discussed in Note 7 – Notes Payable, a current member of our Board of Directors
directly owns notes convertible in common shares and warrants to purchase common
shares. In addition, this director is indirectly related to Lender 2 and other
holders of convertible notes.
Our
non-employee directors provide services to the Company, personally or through
entities they influence, from time to time. Cash compensation paid to
non-employee directors, or entities related to such directors, for services
rendered amounted to $4,831 and $0 for the years ending December 31, 2009 and
2008.
In
addition to various loans from related parties and subsequent repayments
thereof, the Company has a license agreement with a relative of the chief
executive officer. The license agreement calls for the payment of royalties
equal to 20% of revenues from the Company’s sales or permitted use of certain
copyrighted and trademarked, print and video material. The license agreement
began in October 2008 and continues for successive one year terms unless
terminated by either party. For the year ended December 31, 2009, sales of the
material and the related royalties have been insignificant.
As
discussed in Note 6 – Acquisition of Patent and in Note 10 – Commitments and
Contingencies, the Company entered into an asset purchase agreement and an
employment agreement with a former executive and majority owner of the Seller of
the Disintegrator patent. These agreements call for additional consideration and
compensation payments based on the achievement of certain targets.
12.
SUBSEQUENT EVENTS
Litigation.
As discussed in Note 9 – Equity – Stock Based Compensation, in June 2009, the
Company issued 8,000,000 restricted common shares and 8,000,000 warrants to
purchase common shares to a service provider. In October 2009, the service
provider filed suit against the Company, its directors and other parties for
failure to lift trading restrictions on the common stock. In February 2010, the
parties agreed to settle this litigation. As a result, in February 2010, the
Company issued 16,000,000 unrestricted shares of its common stock in exchange
for cancelling the originally issued shares and warrants. The 8,000,000 shares
have been cancelled and are now available for re-issuance.
26
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
RESTATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of
December 31, 2009 and 2008
Sale of common
shares. In January 2010, the Company sold 12,686,567 shares of common
stock for cash proceeds of $85,000 and paid a selling commission of $6,800. Of
the $85,000 total proceeds received from this issuance, $5,000 was advanced to
the Company in December 2009 and recorded as an obligation to issue common
stock.
Issuance of
convertible debentures. In February and March 2010, the Company entered
into agreements to issue up to $400,000 of 8% convertible debentures and
warrants to purchase up to 20,000,000 shares of common stock in exchange for
return of 33,333,333 common shares and cash proceeds of $200,000, less a selling
commission of $16,000. The debentures mature two years from the date of issuance
and are convertible at any time within that period at a conversion price equal
to the lesser of $0.0066 per share or 90% of the volume weighted average price
of the Company’s common stock for the ten days immediately prior to conversion,
but such conversion price shall not be below $0.003 per share. The warrants are
exercisable over three years at $0.01 per share.
Common stock
issued to non-employees for services. In February and April 2010, the
Company issued 1,000,000 and 4,122,230 shares of common stock, for services
rendered valued at $8,200 and $45,000, respectively. In April 2010, the Company
agreed to issue 10,000,000 shares of common stock for consulting services to be
performed over a six month period.
* * *
*
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution
We will
pay all expenses in connection with the registration and sale of the common
stock by the selling shareholder. The estimated expenses of issuance and
distribution are set forth below.
SEC
filing fee
|
$
|
325.36
|
||
Legal
expenses
|
$
|
30,000
|
*
|
|
Accounting
expenses
|
$
|
20,000
|
*
|
|
Miscellaneous
|
$
|
5,000
|
*
|
|
Total
|
$
|
55,325.36
|
*
|
*
Estimate
Item
14. Indemnification of Directors and Officers
Neither
our Articles of Incorporation nor Bylaws prevent us from indemnifying our
officers, directors and agents to the extent permitted under the Nevada Revised
Statute ("NRS"). NRS Section 78.7502, provides that a corporation shall
indemnify any director, officer, employee or agent of a corporation against
expenses, including attorneys' fees, actually and reasonably incurred by him in
connection with any the defense to the extent that a director, officer, employee
or agent of a corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to Section 78.7502(1) or
78.7502(2), or in defense of any claim, issue or matter therein.
NRS
78.7502(1) provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, except an action by or in the right of the corporation, by reason
of the fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with the action, suit or proceeding if he: (a) is not
liable pursuant to NRS 78.138; or (b) acted in good faith and in a manner which
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
NRS
Section 78.7502(2) provides that a corporation may indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses, including amounts paid in settlement and attorneys' fees actually and
reasonably incurred by him in connection with the defense or settlement of the
action or suit if he: (a) is not liable pursuant to NRS 78.138; or (b) acted in
good faith and in a manner which he reasonably believed to be in or not opposed
to the best interests of the corporation. Indemnification may not be made for
any claim, issue or matter as to which such a person has been adjudged by a
court of competent jurisdiction, after exhaustion of all appeals there from, to
be liable to the corporation or for amounts paid in settlement to the
corporation, unless and only to the extent that the court in which the action or
suit was brought or other court of competent jurisdiction determines upon
application that in view of all the circumstances of the case, the person is
fairly and reasonably entitled to indemnity for such expenses as the court deems
proper.
NRS
Section 78.747 provides that except as otherwise provided by specific statute,
no director or officer of a corporation is individually liable for a debt or
liability of the corporation, unless the director or officer acts as the alter
ego of the corporation. The court as a matter of law must determine the question
of whether a director or officer acts as the alter ego of a
corporation.
28
Insofar
as indemnification for liabilities arising under the Securities Act of 1933, as
amended the (“Securities Act”) may be permitted to directors, officers or
persons controlling us pursuant to the foregoing provisions, we have been
informed that, in the opinion of the Securities and Exchange Commission, 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 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, we will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by us is against public policy as
expressed hereby in the Securities Act and we will be governed by the final
adjudication of such issue.
Item 15.Recent Sales of Unregistered
Securities
During
the past three years, we have issued the following securities which were not
registered under the Securities Act of 1933, as amended (“Securities Act”).
Unless otherwise indicated, all of the share issuances described below were made
in reliance on the exemption from registration provided by Section 4(2) of the
Securities Act for transactions not involving a public offering.
On
February 15, 2008, we issued 28,000,000 shares of common stock for services
valued at $1,400,000.
In
February 2008, we issued an aggregate of 30,000,000 shares of our common stock
valued at an aggregate of $30,000 to our three board members for director fees.
We also issued an aggregate of 35,290,315 shares of common stock to five
consultants for services rendered valued at $35,290. We also issued 250,000
shares of common stock to an employee for compensation.
On
February 25, 2008, we issued 2,000,000 shares of common stock in exchange for
$1,000 and certain consulting services valued at $22,000.
On
February 26, 2008, we issued 5,290,315 shares of common stock for services
valued at $341,666.63.
On
February 27, 2008, we sold 414,594 shares of our common stock for
$12,500.
On
February 28, 2008, we sold 414,594 shares of common stock for
$12,500.
On March
4, 2008, we sold 571,430 shares of common stock for $20,000.
29
On March
7, 2008, we issued 1,172,442 for shares of common stock for services valued at
$11,724.42.
On March
17, 2008, we issued 233,334 shares of common stock for services valued at
$7,000.02.
On March
19, 2008, we issued 10,000,000 shares of common stock for a purchase price of
$50,000.
On March
26, 2008, we issued 4,000,000 shares of common stock in exchange for certain
consulting services valued at $40,000.
On March
28, 2008, we issued 1,000,000 shares of common stock in exchange for certain
consulting services valued at $10,000.
On March
31, 2008, we issued 2,000,000 shares of common stock for services valued at
$40,000.
On March
31, 2008, we issued 3,300,000 shares of common stock in exchange for certain
consulting services valued at $3,300. The issuance was cancelled on April 24,
2008.
On April
2, 2008, we issued 761,904 shares of common stock for services valued at
$83,809.44.
On April
15 and 21, 2008, we issued 3,000,000 and 1,000,000 shares of common stock,
respectively, to in exchange for certain consulting services. The consulting
agreement was canceled and the shares were returned to the Company.
On April
16, 2008, we issued 740,000 shares of common stock for a purchase price of
$7,400.
On April
28, 2008, we issued 5,000,000 shares of common stock for services valued at
$122,500.
On May
27, 2008, we issued 1,000,000 shares of common stock for a purchase price of
$7,000.
On June
16, 2008, we issued 500,000 shares of common stock for services valued at
$5,000.
On June
30, 2008, we issued 4,010,000 shares of common stock for services valued at
$4,100.
On July
1, 2008, we issued 18,000,000 shares of common stock for a purchase price of
$18,000.
30
On August
5, 2008, we sold 20,000,000 shares of common stock for $10,000.
On August
20, 2008, we sold 15,000,000 shares of common stock for $15,000.
On
September 7, 2008, we sold 5,000,000 shares of common stock for
$12,500.
On
September 28, 2008, we issued 22,000,000 shares of common stock for a purchase
price of $22,000.
From
March to July 2008, we issued convertible redeemable debentures in the aggregate
principal amount of $75,000. These convertible debentures accrue interest at 8%
and, at the option of the such holder, are convertible to shares of our common
stock at a conversion price of equal to 60% of the lowest closing bid price of
the common stock as reported on the OTC Pink Sheets (or any exchange on which
our shares may be traded in the future) on the day the notice of conversion is
received by us. The securities were issued in reliance on the exemption from
registration provided by Rule 504 of Regulation D.
On June
6, 2008, we sold 2,000,000 shares of our common stock for $20,000.
From
September to November 2008, we issued convertible redeemable debentures in the
aggregate principal amount of $100,000. These convertible debentures accrue
interest at 8% and, at the option of such holder, are convertible to shares of
our common stock at a conversion price of equal to 60% of the lowest closing bid
price of the common stock as reported on the OTC Pink Sheets (or any exchange on
which our shares may be traded in the future) on the day the notice of
conversion is received by us. The securities were issued in reliance on the
exemption from registration provided by Rule 504 of Regulation D.
On
October 14, 2008, we issued 5,270,000 shares of common stock for a purchase
price of $527.
On
October 15, 2008, we issued 27,270,000 shares of common stock for a purchase
price of $2,727.
On
November 6, 2008, we issued 4,800,000 shares of common stock for a purchase
price of $10,560.
On
November 10, 2008, we issued 18,000,000 shares of common stock for a purchase
price of $1,800.
On
November 11, 2008, we issued 2,000,000 shares of common stock for services
valued at $200.
On
December 2, 2009, we issued 5,559,001 shares of common stock for interest
expense of $24,845.02.
On
December 22, 2008, we issued 22,000,000 shares of common stock for services
valued at $132,000.
In
December 2008, we issued an additional 22,000,000 shares of common stock for
$105,000 in services. The securities were issued in reliance on the exemption
from registration provided by Rule 504 of Regulation D.
On
January 20 and 26, 2009, we issued, respectively, 23,000,000 shares of common
stock to for $30,000 and 25,000,000 shares of common stock for $30,000. The
securities were issued in reliance on the exemption from registration provided
by Rule 504 of Regulation D.
In
January 2009, we issued 14,792,899 shares of common stock for $25,000. The
securities were issued in reliance on the exemption from registration provided
by Rule 504 of Regulation D.
In
January 2009, we issued 16,666,666 shares of common stock $25,000. The
securities were issued in reliance on the exemption from registration provided
by Rule 504 of Regulation D.
In
February 2009, we issued 53,274,320 shares of common to the holder of a
convertible debenture issued in November 2008, pursuant to terms of the
convertible debenture which required the Company to issue such shares as a
result of a drop in the price of the Company’s common stock. The securities were
issued in reliance on the exemption from registration provided by Rule 504 of
Regulation D.
In
February 2009, we issued 42,735,043 shares of common stock for $25,000. The
securities were issued in reliance on the exemption from registration provided
by Rule 504 of Regulation D.
In
February 2009, we issued, respectively, 45,000,000 shares of common stock for
$22,500. The securities were issued in reliance on the exemption from
registration provided by Rule 504 of Regulation D.
In
February 2009, we issued 15,089,049 shares of common stock for interest valued
at $75,750.
In
February 2009, we issued 87,500,000 shares of common stock to our directors for
services valued at $105,000.
In March
2009, we issued 64,102,564 shares of common stock for $25,000. The securities
were issued in reliance on the exemption from registration provided by Rule 504
of Regulation D.
On April
14, 2009, we issued 66,666,666 shares of common stock for a purchase price of
$20,000.
On April
26, 2009, we issued 76,463,534 shares of common stock for services valued at
$45,013.
In April
and May 2009, we issued 217,056,498 shares of common stock to an investor
pursuant to a clause in the subscription agreement between the Company and the
investor which required the Company to issue such shares due to the price of the
Company’s common stock. The securities were issued in reliance on the exemption
from registration provided by Rule 504 of Regulation D.
On June
1, 2009, we issued 70,321,666 shares of common stock for services valued at
$29,469.
On June
17, 2009, we issued 8,000,000 shares of common stock for services value at
$31,200.
32
In July
2009 we issued 122,333,333 shares of common stock for a purchase price of
$150,000. The securities were issued in reliance on the exemption from
registration provided by Rule 504 of Regulation D.
In August
2009 we issued 10,416,667 shares of common stock for a purchase price of
$50,000. . The securities were issued in reliance on the exemption from
registration provided by Rule 504 of Regulation D.
In
September 2009 we issued 50,335,623 shares of common stock for a purchase price
of $327,500. The securities were issued in reliance on the exemption from
registration provided by Rule 504 of Regulation D.
On
September 28, 2009, we issued 250,000,000 shares of common stock in connection
with an asset acquisition.
In
October 2009 we issued 5,000,000 shares of common stock for a purchase price of
$35,000. The securities were issued in reliance on the exemption from
registration provided by Rule 504 of Regulation D.
In
January 2010 we issued 12,686,567 for a purchase price of $85,000. The
securities were issued in reliance on the exemption from registration provided
by Rule 504 of Regulation D.
In
February 2010 we issued a convertible debenture in the principal amount of
$100,000, convertible into common stock at a conversion price equal to the
lesser of (i) $.0066 per share, or (b) .90 multiplied by the volume weighted
average for the common stock for the ten trading days immediately prior to the
conversion date provided, however, that conversion price shall not be below
$.003. In connection with the sale of the debenture, we issued also issued
three-year warrants to purchase 5,000,000 shares of common stock at an exercise
price of $0.01.
In
February 2010, we issued 16,000,000 shares of common stock to Shrink
Nanotechnologies, in connection with the settlement of litigation, on the basis
of the exemption from registration statement provided by Section 3(a)(10) of the
Securities Act of 1933, as amended, for securities issued in exchange for
outstanding securities, claims or property interests, where such exchange is
approved by a court authorized to grant such approval.
In March
2010 we issued a convertible debenture in the principal amount of $300,000 (of
which $200,000 was issued in exchange for the return to treasury and
cancellation of 33,333,333 shares of common stock), convertible into common
stock at a conversion price equal to the lesser of (i) $.0066 per share, or (b)
.90 multiplied by the volume weighted average for the common stock for the ten
trading days immediately prior to the conversion date provided, however, that
conversion price shall not be below $.003. In connection with the sale of the
debenture, we issued also issued three-year warrants to purchase 15,000,000
shares of common stock at an exercise price of $0.01. The offering was made in
reliance on the exemption from registration provided by Rule 506 of Regulation
D.
33
In
February and April 2010, the Company issued 1,000,000 and 4,122,230 shares of
common stock, for services rendered valued at $8,200 and $45,000, respectively.
In April 2010, the Company agreed to issue 10,000,000 shares of common stock for
consulting services to be performed over a six month period.
On May
13, 2010, we issued Granite Financial Group, LLC, convertible debentures in the
principal amount of $501,000, including a debenture in the principal amount of
$400,000 issued in exchange for cancellation of (i) a debenture in the principal
amount of $100,000 , issued on February 16, 2010, and (ii) a debenture in the
principal amount of $300,000 issued on March 23, 2010 ($200,000 of which was
issued in exchange for the return to treasury and cancellation of 33,333,333
shares of common stock, issued to Granite Financial Group, LLC, on December 4,
2009, for a purchase price of $200,000). The debentures have a conversion price
that is the lower of (A) $.0066 per share, or (B) .90 multiplied by the volume
weighted average price of the Company’s common stock for the ten trading days
immediately prior to the conversion date provided, however, that the conversion
price shall not be below $.0015. We also issued Granite Financial Group
three-year warrants to purchase 25,050,000 shares of common stock at an exercise
price of $0.01 in connection with the issuance of the debentures. The offering
was made in reliance on the exemption from registration provided by Rule 506 of
Regulation D.
On May
13, 2010, we issued Daniel Schreiber SEP IRA a convertible debenture in the
principal amount of $49,000, and three-year warrants to purchase 2,450,000
shares of common stock with an exercise price of $0.01. The debentures have a
conversion price that is the lower of (A) $.0066 per share, or (B) .90
multiplied by the volume weighted average price of the Company’s common stock
for the ten trading days immediately prior to the conversion date provided,
however, that the conversion price shall not be below $.0015. The offering was
made in reliance on the exemption from registration provided by Rule 506 of
Regulation D.
On June
24, 2010, the Company issued to Lanktree Consulting Corp. a convertible
promissory note in the amount of $44,000 and received cash proceeds of
$40,000.
On July
7, 2010, we issued Michael Pisani 2,302,696 shares of common stock upon
conversion of a convertible note, convertible into common stock at a conversion
price of $0.004.
On July
7, 2010, we issued Lanktree Consulting Corp. 12,000,000 shares of common stock
as penalty interest on a note.
On July
13, 2010, we issued Lanktree Consulting Corp. a convertible debenture in the
principal amount of $60,000.
On July
22, 2010, we issued Granite Financial Group, LLC a convertible debenture in the
principal amount of $100,000, convertible into common stockat a conversion price
of $0.004, and issued seven-year warrants to purchase up to 5,000,000 shares of
common stock at an exercise price of $0.0075. The offering was made in reliance
on the exemption from registration provided by Rule 506 of Regulation
D.
On July
29, 2010, we issued Lanktree Consulting Corp. 12,000,000 shares of common stock
as penalty interest on a note.
On August
10, 2010, we issued Lanktree Consulting Corp. a convertible debenture in the
principal amount of $60,000.
On August
27, 2010, we issued Lanktree Consulting Corp. 12,000,000 shares of common stock
as penalty interest on a note.
On August
27, 2010, we issued Conrad Huss 337,500 shares of common stock for services in
connection with arranging the financing transaction with Lanktree Consulting
Corp.
On August
4, 2010, we issued our directors and officers an aggregate of 40,000,000 shares
of common stock for services.
On
September 13, 2010, we issued Lanktree Consulting Corp. a convertible debenture
in the principal amount of $60,000.
On
September 14, 2010, we issued Sichenzia Ross Friedman Ference LLP 6,000,000
shares of common stock for legal services.
On
September 21, 2010, we issued an employee, Marc Massoglia, 5,956,702 shares of
common stock for services.
On
September 29, 2010, we issued Lanktree Consulting Corp. 25,000,000 shares of
common stock upon conversion of $100,000 in principal amount of convertible
debentures.
On
September 29, 2010, we issued Conrad Huss 337,500 shares of common stock for
services in connection with arranging the financing transaction with Lanktree
Consulting Corp.
On
October 8, 2010, we issued Lanktree Consulting Corp. 12,000,000 shares of common
stock as penalty interest on a note.
34
On
October 11, 2010, we issued a supplier of components, GuaZhicao, 5,000,000
shares of common stock in consideration for supplying components.
On
October 13, 2010, we issued Lanktree Consulting Corp. a convertible debenture in
the principal amount of $90,000.
On
October 14, 2010, we issued Lanktree Consulting Corp. 5,000,000 shares of common
stock in consideration for accelerating the purchase of a convertible
debenture.
On
October 15, 2010, we issued Granite Financial Group, LLC 20,000,000 shares of
common stock as additional consideration for the purchase of a $100,000
promissory note.
On
November 5, 2010, we issued Lanktree Consulting Corp. 25,000,000
shares of common stock upon conversion of $100,000 principal amount of a
note.
On
November 5, 2010, we issued Conrad Huss 470,930 shares of common stock in
connection with arranging the financing transaction with Lanktree Consulting
Corp.
On
November 11, 2010, we issued 12,000,000 share of common stock as additional
consideration for the purchase of a $60,000 promissory note.
On
November 13, 2010, we issued Lanktree Consulting Corp. 15,013,452 shares of
common stock as penalty interest on a note.
On
November 17, 2010, we issued an investor, Justin DiRezze, 15,000,000 shares of
common stock for an aggregate purchase price of $50,000.
On
November 17, 2010, we issued Conrad Huss 470,930 shares of common stock in
connection with arranging the financing transaction with Lanktree Consulting
Corp. (On January 17, 2011, this certificate was issued to the Company for
cancellation and a certificate for the correct amount of 218,801 shares was
issued).
On
December 2, 2010, we issued 5,902,387 shares of our common stock to Marc
Massoglia, an employee, as compensation for September, October, and November
2010.
On
December 15, 2010, we issued 1,000,000 shares of our common stock to our CEO,
Dr. Christopher F. Tirotta as payment for $50,000 in deferred
salary.
On
January 19, 2011, we issued Peyton Sherwood 240,000 shares of common stock
forpackage design services.
On
January 21, 2011, we issued Equity Groups Inc. 2,400,000 shares of common stock
for public relation services.
On
February 2, 2011, we issued Granite Financial Group, LLC 32,000,000 as
consideration for extending the maturity date on outstanding promissory
notes.
On
February 3, 2011, we issued Southridge Partners II, LP, warrants to purchase
25,000,000 shares of common stock at an exercise price of $0.00615 as
consideration for entering into the Purchase Agreement.
On
February 4, 2011, we issued to each of our four directors 12,500 shares of
Series A Preferred Stock, for services.
Item
16. Exhibits
Exhibit
Number
|
Description
|
|
3.1.
|
Articles
of Incorporation of the Registrant (filed as exhibit to S-1 (File No.
333-164517) filed on January 26, 2010 and incorporated herein by
reference)
|
|
3.2
|
Certificate
of Amendment to Articles of Incorporation (filed as exhibit to 8-K (File
No. 333-171789) filed on February 14, 2011 and incorporated herein by
reference)
|
|
3.3
|
Bylaws
of the Registrant (filed as exhibit to S-1 (File No. 333-164517) filed on
January 26, 2010 and incorporated herein by reference)
|
|
4.1
|
Specimen
common stock certificate (filed as exhibit to S-1 (File No. 333-164517)
filed on January 26, 2010 and incorporated herein by
reference)
|
|
4.2
|
Promissory
Note dated July 30, 2007 (filed as exhibit to S-1 (File No. 333-164517)
filed on January 26, 2010 and incorporated herein by
reference)
|
|
4.3
|
Promissory
Note dated September 28, 2007 (filed as exhibit to S-1 (File No.
333-164517) filed on January 26, 2010 and incorporated herein by
reference)
|
|
4.4
|
Warrant
issued September 28, 2007 (filed as exhibit to S-1 (File No. 333-164517)
filed on January 26, 2010 and incorporated herein by
reference)
|
|
4.5
|
Promissory
Note dated October 22, 2007 (filed as exhibit to S-1 (File No. 333-164517)
filed on January 26, 2010 and incorporated herein by
reference)
|
|
4.6
|
Promissory
Note dated October 30, 2007 (filed as exhibit to S-1 (File No. 333-164517)
filed on January 26, 2010 and incorporated herein by
reference)
|
|
4.7
|
Promissory
Note dated April 1, 2008 (filed as exhibit to S-1 (File No. 333-164517)
filed on January 26, 2010 and incorporated herein by
reference)
|
|
4.8
|
Reserved
|
35
4.9
|
Form
of Convertible Note relating to the 2007 Notes Private Placement (filed as
exhibit to S-1 (File No. 333-164517) filed on January 26, 2010 and
incorporated herein by reference)
|
|
4.10
|
Form
of Warrant Agreement relating to the 2007 Notes Private Placement (filed
as exhibit to S-1 (File No. 333-164517) filed on January 26, 2010 and
incorporated herein by reference)
|
|
4.11
|
8%
Convertible Redeemable Debenture issued July 3, 2008 (filed as exhibit to
Amendment No. 1 to S-1 (File No. 333-164517) filed on May 10, 2010 and
incorporated herein by reference)
|
|
4.12
|
8%
Convertible Redeemable Debenture issued September 29, 2008 (filed as
exhibit to S-1 (File No. 333-164517) filed on January 26, 2010 and
incorporated herein by reference)
|
|
4.13
|
Securities
Sale Agreement dated September 29, 2008 (filed as exhibit to S-1 (File No.
333-164517) filed on January 26, 2010 and incorporated herein by
reference)
|
|
4.14
|
8%
Convertible Redeemable Debenture issued October 10, 2008 (filed as exhibit
to S-1 (File No. 333-164517) filed on January 26, 2010 and incorporated
herein by reference)
|
|
4.15
|
8%
Convertible Redeemable Debenture issued October 24, 2008 (filed as exhibit
to S-1 (File No. 333-164517) filed on January 26, 2010 and incorporated
herein by reference)
|
|
4.16
|
Amended
And Restated 8% Convertible Redeemable Debenture issued November 7, 2008
(filed as exhibit to S-1 (File No. 333-164517) filed on January 26, 2010
and incorporated herein by reference)
|
|
4.17
|
8%
Convertible Redeemable Debenture issued March 17, 2008 (filed as exhibit
to S-1 (File No. 333-164517) filed on January 26, 2010 and incorporated
herein by reference)
|
|
4.18
|
Form
of Director Note (filed as exhibit to S-1 (File No. 333-164517) filed on
January 26, 2010 and incorporated herein by reference)
|
|
5.1
|
Opinion
of Sichenzia Ross Friedman Ference LLP
|
|
10.1
|
Employment
Agreement and Compensation Package for Christopher F. Tirotta, dated
September 4, 2007 (filed as exhibit to S-1 (File No. 333-164517) filed on
January 26, 2010 and incorporated herein by reference)
|
|
10.2
|
Consulting
Services Agreement dated January 12, 2008, by and between the Registrant
and Teresa McWilliams (filed as exhibit to S-1 (File No. 333-164517) filed
on January 26, 2010 and incorporated herein by
reference)
|
|
10.3
|
2006
Stock Option Plan (filed as exhibit to S-1 (File No. 333-164517) filed on
January 26, 2010 and incorporated herein by reference)
|
|
10.4
|
Escrow
Agreement dated as of July 3, 2008 by and between the Registrant and The
Tripod Group, LLC, relating to the Convertible Debentures issued on March
17, 2008 and July 3, 2008 (filed as exhibit to S-1 (File No. 333-164517)
filed on January 26, 2010 and incorporated herein by
reference)
|
|
10.5
|
Escrow
Agreement dated as of September 29, 2008 by and between the Registrant and
Blaydon Capital LLC, relating to the debenture issued on the same date
(filed as exhibit to S-1 (File No. 333-164517) filed on January 26, 2010
and incorporated herein by reference)
|
|
Escrow
Agreement dated as of October 24, 2008 by and Between the Registrant and
Blaydon Capital LLC, relating to the debenture issued on the same date
(filed as exhibit to S-1 (File No. 333-164517) filed on January 26, 2010
and incorporated herein by reference)
|
||
10.7
|
Escrow
Agreement dated as of November 7, 2008 by and Between the Registrant and
Blaydon Capital LLC, relating to the debenture issued on the same date
(filed as exhibit to S-1 (File No. 333-164517) filed on January 26, 2010
and incorporated herein by reference)
|
|
10.8
|
Management
Agreement between Kidz-Med, Inc. and Greenwood Group LLC dated September
1, 2006 (filed as exhibit to S-1 (File No. 333-164517) filed on January
26, 2010 and incorporated herein by reference)
|
|
10.9
|
Distributor
Agreement between Insight Medical Ltd and Kidz-Med Inc. (filed as exhibit
to S-1 (File No. 333-164517) filed on January 26, 2010 and incorporated
herein by reference)
|
|
10.10
|
Exclusive
Distribution Agreement between Kidz-Med Inc. and Blue Dot Properties 557
(PTY) Ltd. (filed as exhibit to S-1 (File No. 333-164517) filed on January
26, 2010 and incorporated herein by reference)
|
|
10.11
|
International
Distribution Agreement entered between Kidz-Med, Inc. and TecnimedSrl
dated January 2006 (filed as exhibit to S-1 (File No. 333-164517) filed on
January 26, 2010 and incorporated herein by reference)
|
|
10.12
|
International
Distribution Agreement entered between Kidz-Med, Inc. and TecnimedSrl
dated August 27, 2007 (filed as exhibit to S-1 (File No. 333-164517) filed
on January 26, 2010 and incorporated herein by
reference)
|
|
10.13
|
International
Distribution Agreement entered between Kidz-Med, Inc. and TecnimedSrl
dated March 31, 2008 (filed as exhibit to Amendment No.1 to S-1 (File No.
333-164517) filed on May 10, 2010 and incorporated herein by
reference)
|
|
10.14
|
Addendum
to International Distribution Agreement entered between Kidz-Med, Inc. and
TecnimedSrl dated March 31, 2008 (filed as exhibit to S-1 (File No.
333-164517) filed on January 26, 2010 and incorporated herein by
reference)
|
|
10.15
|
Letter
agreement, dated August 7, 2009, between the Company and Knightsbridge
Advisers, LLC (filed as exhibit to Amendment No. 1 to S-1 (File No.
333-164517) filed on May 10, 2010 and incorporated herein by
reference)
|
|
10.16
|
Project
Agreement, dated October 5, 2007, between the Company and Future Now, Inc.
(filed as exhibit to S-1 (File No. 333-164517) filed on January 26, 2010
and incorporated herein by reference)
|
|
10.17
|
Media
Production and Placement Services Agreement, dated April 16, 2008, between
the Company and Media4Equity LLC (filed as exhibit to S-1 (File No.
333-164517) filed on January 26, 2010 and incorporated herein by
reference)
|
|
10.18
|
Letter
agreement, dated February 12, 2008, between the Company and The Kauderer
Group, Inc. (filed as exhibit to S-1 (File No. 333-164517) filed on
January 26, 2010 and incorporated herein by
reference)
|
36
10.19
|
Proposal/Memorandum
of Understanding, dated April 26, 2007, between the Company and Global
Media Fund, Inc. (filed as exhibit to S-1 (File No. 333-164517) filed on
January 26, 2010 and incorporated herein by reference)
|
|
10.20
|
Reserved.
|
|
10.21
|
Letter
agreement, dated June 25, 2007, between the Company and Elizabeth Bayles
Associates (filed as exhibit to S-1 (File No. 333-164517) filed on January
26, 2010 and incorporated herein by reference)
|
|
10.22
|
Letter
agreement, dated September 11, 2007, between the Company and Elizabeth
Bayles Associates (filed as exhibit to S-1 (File No. 333-164517) filed on
January 26, 2010 and incorporated herein by reference)
|
|
10.23
|
Letter
agreement, dated September 10, 2007, between the Company and Eileen
Wilkinson (filed as exhibit to Amendment No. 1 to S-1 (File No.
333-164517) filed on May 10, 2010 and incorporated herein by
reference)
|
|
10.24
|
Letter
agreement, dated August 27, 2007, between the Company and Christian
Zechner Associates, Inc. (filed as exhibit to S-1 (File No. 333-164517)
filed on January 26, 2010 and incorporated herein by
reference)
|
|
10.25
|
Letter
agreement, dated October 31, 2008, between the Company and Independent
Services International (filed as exhibit to Amendment No. 2 to S-1 (File
No. 333-164517) filed on July 6, 2010 and incorporated herein by
reference)
|
|
10.26
|
Letter
agreement, dated May 31, 2008, between the Company and Independent
Services International (filed as exhibit to S-1 (File No. 333-164517)
filed on January 26, 2010 and incorporated herein by
reference)
|
|
10.27
|
Promissory
Note, dated October 22, 2007, issued to Gols Associates, Inc. (filed as
exhibit to Amendment No. 1 to S-1 (File No. 333-164517) filed on May 10,
2010 and incorporated herein by reference)
|
|
10.28
|
Common
Stock Purchase Warrant, dated October 22, 2007, issued to Gols Associates,
Inc. (filed as exhibit to Amendment No. 1 to S-1 (File No. 333-164517)
filed on May 10, 2010 and incorporated herein by
reference)
|
|
10.29
|
Stock
Pledge Agreement, dated October 22, 2007, between the Company and Gols
Associates, Inc. (filed as exhibit to Amendment No. 1 to S-1 (File No.
333-164517) filed on May 10, 2010 and incorporated herein by
reference)
|
|
10.30
|
Letter
Agreement, dated August 4, 2009, between the Company and Knightsbridge
Advisors, LLC (filed as exhibit to Amendment No. 1 to S-1 (File No.
333-164517) filed on May 10, 2010 and incorporated herein by
reference)
|
|
10.31
|
Project
Agreement, dated October 5, 2007, between the Company and Future Now, Inc.
(filed as exhibit to Amendment No. 1 to S-1 (File No. 333-164517) filed on
May 10, 2010 and incorporated herein by reference)
|
|
10.32
|
Revolving
Line of Credit Agreement, dated February 25, 2008, between the Company and
Future Now, Inc. (filed as exhibit to Amendment No. 1 to S-1 (File No.
333-164517) filed on May 10, 2010 and incorporated herein by
reference)
|
|
10.33
|
Services
Agreement, dated March 10, 2008, between the Company and AudioStocks, Inc.
(filed as exhibit to Amendment No. 1 to S-1 (File No. 333-164517) filed on
May 10, 2010 and incorporated herein by reference)
|
|
10.34
|
Common
Stock Purchase Warrant, dated June 9, 2009, issued to AudioStock.com
(filed as exhibit to Amendment No. 1 to S-1 (File No. 333-164517) filed on
May 10, 2010 and incorporated herein by reference)
|
|
10.35
|
Services
Agreement, dated June 1, 2009, between the Company and Ronald Garner
(filed as exhibit to Amendment No. 1 to S-1 (File No. 333-164517) filed on
May 10, 2010 and incorporated herein by reference)
|
|
10.36
|
Service
Agreement, dated December 7, 2006, between the Company and ROI Group
Associates, Inc. (filed as exhibit to Amendment No. 1 to S-1 (File No.
333-164517) filed on May 10, 2010 and incorporated herein by
reference)
|
|
10.37
|
Common
Stock Purchase Warrant, dated December 7, 2006, issued to ROI Group
Associates, Inc. (filed as exhibit to Amendment No. 1 to S-1 (File No.
333-164517) filed on May 10, 2010 and incorporated herein by
reference)
|
|
10.38
|
Letter
Agreement, dated August 30, 2007, between the Company and ROI Group
Associates, Inc. (filed as exhibit to Amendment No. 1 to S-1 (File No.
333-164517) filed on May 10, 2010 and incorporated herein by
reference)
|
|
10.39
|
Letter
Agreement, dated October 31, 2008, between the Company and Independent
Investment Services International (filed as exhibit to Amendment No. 1 to
S-1 (File No. 333-164517) filed on May 10, 2010 and incorporated herein by
reference)
|
|
10.40
|
Independent
Consulting Agreement, dated April 8, 2008, between the Company and Joseph
I. Emas (filed as exhibit to Amendment No. 1 to S-1 (File No. 333-164517)
filed on May 10, 2010 and incorporated herein by
reference)
|
|
10.41
|
Letter
Agreement, dated January 1, 2009, between the Company and Joseph I. Emas
(filed as exhibit to Amendment No. 1 to S-1 (File No. 333-164517) filed on
May 10, 2010 and incorporated herein by reference)
|
|
10.42
|
Letter
Agreement, dated April 1, 2006, between the Company and Joseph I. Emas
(filed as exhibit to Amendment No. 1 to S-1 (File No. 333-164517) filed on
May 10, 2010 and incorporated herein by reference)
|
|
10.43
|
Management
Agreement, dated September 1, 2006, between the Company and Greenwood
Group LLC (filed as exhibit to Amendment No. 1 to S-1 (File No.
333-164517) filed on May 10, 2010 and incorporated herein by
reference)
|
|
10.44
|
Management
Agreement, dated September 1, 2006 (as renegotiated and executed September
18, 2007), between the Company and Greenwood Group LLC (filed as exhibit
to Amendment No. 1 to S-1 (File No. 333-164517) filed on May 10, 2010 and
incorporated herein by reference)
|
|
10.45
|
Greenwood
Group Addendum, dated April 7, 2008 (filed as exhibit to Amendment No. 1
to S-1 (File No. 333-164517) filed on May 10, 2010 and incorporated herein
by reference)
|
|
10.46
|
Amendment,
dated December 19, 2009, between the Company and Greenwood Group (filed as
exhibit to Amendment No. 1 to S-1 (File No. 333-164517) filed on May 10,
2010 and incorporated herein by reference)
|
|
10.47
|
Consulting
Agreement, dated December 2, 2009, between the Company and Compass Trade
& Distribution dba Pointe Resources (filed as exhibit to Amendment No.
1 to S-1 (File No. 333-164517) filed on May 10, 2010 and incorporated
herein by reference)
|
37
10.48
|
Subscription
Agreement, dated December 2, 2009, between the Company and Granite
Financial Group, LLC (filed as exhibit to Amendment No. 1 to S-1 (File No.
333-164517) filed on May 10, 2010 and incorporated herein by
reference)
|
|
10.49
|
Letter
Agreement, dated October 30, 2009, between the Company and Sichenzia Ross
Friedman Ference LLP (filed as exhibit to Amendment No. 1 to S-1 (File No.
333-164517) filed on May 10, 2010 and incorporated herein by
reference)
|
|
10.50
|
Letter
of Engagement, dated July 19, 2009, between the Company and Concorde
Capital (filed as exhibit to Amendment No. 1 to S-1 (File No. 333-164517)
filed on May 10, 2010 and incorporated herein by
reference)
|
|
10.51
|
Asset
Purchase Agreement, dated September 10, 2009, between the Company and
Safeguard Medical Technologies, LLC (filed as exhibit to Amendment No. 1
to S-1 (File No. 333-164517) filed on May 10, 2010 and incorporated herein
by reference)
|
|
10.52
|
Employment
Agreement, dated September 10, 2009, between the Company and Jason Roth
(filed as exhibit to Amendment No. 1 to S-1 (File No. 333-164517) filed on
May 10, 2010 and incorporated herein by reference)
|
|
10.53
|
Settlement
Agreement, dated March 6, 2009, between the Company and TecnimedSlr (filed
as exhibit to Amendment No. 1 to S-1 (File No. 333-164517) filed on May
10, 2010 and incorporated herein by reference)
|
|
10.54
|
Agreement
of Grant Exclusive Rights, dated July 1, 2005, between the Company and
Whistle Watch SA (PTY) LTD (filed as exhibit to Amendment No. 1 to S-1
(File No. 333-164517) filed on May 10, 2010 and incorporated herein by
reference)
|
|
10.55
|
Revolving
Line of Credit Agreement, dated February 25, 2008, between the Company
Future Now, Inc. (filed as exhibit to Amendment No. 1 to S-1 (File No.
333-164517) filed on May 10, 2010 and incorporated herein by
reference)
|
|
10.56
|
Form
of Warrant Agreement for 2007 notes offerings (filed as exhibit to
Amendment No. 1 to S-1 (File No. 333-164517) filed on May 10, 2010 and
incorporated herein by reference)
|
|
10.57
|
Promissory
Note, dated December 6, 2001 (assumed by Company) (filed as exhibit to
Amendment No. 1 to S-1 (File No. 333-164517) filed on May 10, 2010 and
incorporated herein by reference)
|
|
10.58
|
Form
of Convertible Note for 2007 notes offerings (filed as exhibit to
Amendment No. 1 to S-1 (File No. 333-164517) filed on May 10, 2010 and
incorporated herein by reference)
|
|
10.59
|
Intellectual
Property License Agreement, dated October 2, 2008, between ConcettaTirotta
and the Company (filed as exhibit to Amendment No. 1 to S-1 (File No.
333-164517) filed on May 10, 2010 and incorporated herein by
reference)
|
|
10.60
|
Stock
Purchase Agreement, dated February 16, 2010, between the Company and
Granite Financial Group, LLC (filed as exhibit to Amendment No. 1 to S-1
(File No. 333-164517) filed on May 10, 2010 and incorporated herein by
reference)
|
|
10.61
|
Debenture,
dated February 16, 2010, issued to Granite Financial Group, LLC (filed as
exhibit to Amendment No. 1 to S-1 (File No. 333-164517) filed on May 10,
2010 and incorporated herein by reference)
|
|
10.62
|
Debenture,
dated March 23, 2010, issued to Granite Financial Group, LLC (filed as
exhibit to Amendment No. 1 to S-1 (File No. 333-164517) filed on May 10,
2010 and incorporated herein by reference)
|
|
10.63
|
Common
Stock Warrant, dated February 16, 2010, issued to Granite Financial Group,
LLC (filed as exhibit to Amendment No. 1 to S-1 (File No. 333-164517)
filed on May 10, 2010 and incorporated herein by
reference)
|
|
10.64
|
Common
Stock Warrant, dated March 23, 2010, issued to Granite Financial Group,
LLC (filed as exhibit to Amendment No. 1 to S-1 (File No. 333-164517)
filed on May 10, 2010 and incorporated herein by
reference)
|
|
10.65
|
Sourcing
Agreement, dated August 1, 2009, between the Company and Alodote Pty
Limited (filed as exhibit to Amendment No. 1 to S-1 (File No. 333-164517)
filed on May 10, 2010 and incorporated herein by
reference)
|
|
10.66
|
Stock
Purchase Agreement, dated May 13, 2010, between the Company and the
purchasers identified on the signature pages thereto (filed as exhibit to
Amendment No. 2 to S-1 (File No. 333-164517) filed on July 6, 2010 and
incorporated herein by reference)
|
|
10.67
|
Debenture,
dated May 13, 2010, issued to Granite Financial Group, LLC (filed as
exhibit to Amendment No. 2 to S-1 (File No. 333-164517) filed on July 6,
2010 and incorporated herein by reference)
|
|
10.68
|
Debenture,
dated May 13, 2010, issued to Daniel Schreiber SEP IRA (filed as exhibit
to Amendment No. 2 to S-1 (File No. 333-164517) filed on July 6, 2010 and
incorporated herein by reference)
|
|
10.69
|
Common
Stock Warrant, dated May 13, 2010, issued to Granite Financial Group, LLC,
for 5,050,000 shares (previously filed)
|
|
10.70
|
Common
Stock Warrant, dated May 13, 2010, issued to Daniel Schreiber SEP IRA
(filed as exhibit to Amendment No. 2 to S-1 (File No. 333-164517) filed on
July 6, 2010 and incorporated herein by reference)
|
|
10.71
|
Common
Stock Warrant, dated May 13, 2010, issued to Granite Financial Group, for
20,000,000 shares (filed as exhibit to Amendment No. 2 to S-1 (File No.
333-164517) filed on July 6, 2010 and incorporated herein by
reference)
|
|
10.72
|
Debenture,
dated May 13, 2010, issued to Granite Financial Group, in principal amount
of $400,000 (filed as exhibit to Amendment No. 2 to S-1 (File No.
333-164517) filed on July 6, 2010 and incorporated herein by
reference)
|
|
10.73
|
Reserved.
|
|
10.74
|
Reserved.
|
|
10.75
|
Reserved.
|
|
10.76
|
Reserved.
|
|
10.77
|
Reserved.
|
|
10.78
|
Reserved.
|
|
10.79
|
Consulting
Agreement, dated December 2, 2009, between the Company and Compass Trade
& Distribution dba Pointe Resources (filed as exhibit to Amendment No.
2 to S-1 (File No. 333-164517) filed on July 6, 2010 and incorporated
herein by reference)
|
|
10.80
|
Manufacturing
Agreement, dated November 2009, between the Company and Huang Zhou JXB
Electronic Company & Iesky Hong Kong Limited (filed as exhibit to
Amendment No. 2 to S-1 (File No. 333-164517) filed on July 6, 2010 and
incorporated herein by reference)
|
|
10.81
|
Brandmakers
Worldwide Marketing Services Agreement, dated November 1, 2008 (filed as
exhibit to Amendment No. 2 to S-1 (File No. 333-164517) filed on July 6,
2010 and incorporated herein by
reference)
|
38
Brandmakers
Worldwide Marketing Services Agreement, dated March 1, 2009 (filed as
exhibit to Amendment No. 2 to S-1 (File No. 333-164517) filed on July 6,
2010 and incorporated herein by reference)
|
||
10.83
|
Brandmakers
Worldwide Marketing Services Agreement, dated June 1, 2009 (filed as
exhibit to Amendment No. 2 to S-1 (File No. 333-164517) filed on July 6,
2010 and incorporated herein by reference)
|
|
10.84
|
Brandmakers
Worldwide Marketing Services Agreement, dated September 1, 2009 (filed as
exhibit to Amendment No. 2 to S-1 (File No. 333-164517) filed on July 6,
2010 and incorporated herein by reference)
|
|
10.85
|
Brandmakers
Worldwide Marketing Services Agreement, dated April 1, 2010 (filed as
exhibit to Amendment No. 2 to S-1 (File No. 333-164517) filed on July 6,
2010 and incorporated herein by reference)
|
|
10.86
|
Warrant,
dated December 11, 2009, issued to Conrad R. Huss (filed as exhibit to
Amendment No. 2 to S-1 (File No. 333-164517) filed on July 6, 2010 and
incorporated herein by reference)
|
|
10.87
|
Warrant,
dated December 11, 2009, issued to Eloise Linda Carlsen (filed as exhibit
to Amendment No. 2 to S-1 (File No. 333-164517) filed on July 6, 2010 and
incorporated herein by reference)
|
|
10.88
|
Warrant,
dated December 11, 2009, issued to Henry Howard, II (filed as exhibit to
Amendment No. 2 to S-1 (File No. 333-164517) filed on July 6, 2010 and
incorporated herein by reference)
|
|
10.89
|
Warrant,
dated December 11, 2009, issued to Michael George (filed as exhibit to
Amendment No. 2 to S-1 (File No. 333-164517) filed on July 6, 2010 and
incorporated herein by reference)
|
|
10.90
|
Warrant,
dated December 11, 2009, issued to Renee Reyes (filed as exhibit to
Amendment No. 2 to S-1 (File No. 333-164517) filed on July 6, 2010 and
incorporated herein by reference)
|
|
10.91
|
Warrant,
dated December 11, 2009, issued to CFO Managed Fund LLC (filed as exhibit
to Amendment No. 2 to S-1 (File No. 333-164517) filed on July 6, 2010 and
incorporated herein by reference)
|
|
10.92
|
Warrant,
dated December 11, 2009, issued to Southridge Investment Group LLC (filed
as exhibit to Amendment No. 2 to S-1 (File No. 333-164517) filed on July
6, 2010 and incorporated herein by reference)
|
|
10.93
|
Letter
Agreement, dated May 31, 2008 between the Company and Independent
Investment Services International (filed as exhibit to Amendment No. 2 to
S-1 (File No. 333-164517) filed on July 6, 2010 and incorporated herein by
reference)
|
|
10.94
|
Letter
Agreement, dated October 31, 2008 between the Company and Independent
Investment Services International (filed as exhibit to Amendment No. 2 to
S-1 (File No. 333-164517) filed on July 6, 2010 and incorporated herein by
reference)
|
|
10.95
|
Exclusive
Distribution Agreement, dated January 4, 2002, between the Company and
Medel Group Spa (filed as exhibit to Amendment No. 2 to S-1 (File No.
333-164517) filed on July 6, 2010 and incorporated herein by
reference)
|
|
10.96
|
Securities
Purchase Agreement, dated July 13, 2010, between the Company and Lanktree
Consulting Corp. (filed as exhibit to Amendment No. 3 to S-1 (File No.
333-164517) filed on August 13, 2010 and incorporated herein by
reference)
|
|
10.97
|
Convertible
Debenture, dated July 13, 2010, issued by the Company to Lanktree
Consulting Corp. (filed as exhibit to Amendment No. 3 to S-1 (File No.
333-164517) filed on August 13, 2010 and incorporated herein by
reference)
|
|
10.98
|
Stock
Purchase Agreement, dated July 22, 2010, between the Company and Granite
Financial Group, LLC (filed as exhibit to Amendment No. 3 to S-1 (File No.
333-164517) filed on August 13, 2010 and incorporated herein by
reference)
|
|
10.99
|
12%
Convertible Debenture, dated July 22, 2010, issued by the Company to
Granite Financial Group, LLC (filed as exhibit to Amendment No. 3 to S-1
(File No. 333-164517) filed on August 13, 2010 and incorporated herein by
reference)
|
|
10.100
|
Master
Agreement, dated July 7, 2010, between the Company and Hartsko Financial
Funding, LLC (filed as exhibit to Amendment No. 3 to S-1 (File No.
333-164517) filed on August 13, 2010 and incorporated herein by
reference)
|
|
10.101
|
Validity
Indemnification, dated July 9, 2010, between the Company and Hartsko
Financial Funding, LLC (filed as exhibit to Amendment No. 3 to S-1 (File
No. 333-164517) filed on August 13, 2010 and incorporated herein by
reference)
|
|
10.102
|
Warehouse
Agreement, dated July 7, 2010, between the Company, Clark Family
Properties, LLC and Hartsko Financial Funding, LLC (filed as exhibit to
Amendment No. 3 to S-1 (File No. 333-164517) filed on August 13, 2010 and
incorporated herein by reference)
|
|
10.103
|
Letter
agreement, dated July 9, 2010, between the Company, Hartsko Financial
Funding, LLC and Charter Capital Holdings, LP (filed as exhibit to
Amendment No. 3 to S-1 (File No. 333-164517) filed on August 13, 2010 and
incorporated herein by reference)
|
|
10.104
|
Purchase
and Sale Agreement/Security Agreement, dated July 21, 2010, between the
Company and Charter Capital Holdings, LP (filed as exhibit to Amendment
No. 3 to S-1 (File No. 333-164517) filed on August 13, 2010 and
incorporated herein by reference)
|
|
10.105
|
Settlement
Agreement and Release, dated as of January 28, 2010, among the Company,
Shrink Nanotechnologies, Inc., and Christopher Tirotta (filed as exhibit
to Amendment No. 5 to S-1 (File No. 333-164517) filed on October 14, 2010
and incorporated herein by reference)
|
|
10.106
|
Convertible
Debenture, dated August 10, 2010, issued by the Company to Lanktree
Consulting Corp. (filed as exhibit to Amendment No. 4 to S-1 (File No.
333-164517) filed on September 16, 2010 and incorporated herein by
reference)
|
|
10.107
|
Promissory
Note, dated June 24, 2010, issued to Lanktree Consulting Corporation
(filed as exhibit to Amendment No. 4 to S-1 (File No. 333-164517) filed on
September 16, 2010 and incorporated herein by
reference)
|
|
10.108
|
Convertible
Debenture, dated September 13, 2010, issued by the Company to Lanktree
Consulting Corp. (filed as exhibit to Amendment No. 5 to S-1 (File No.
333-164517) filed on October 14, 2010 and incorporated herein by
reference)
|
|
10.109
|
Release
Agreement, dated December 31, 2009, between the Company and Gols
Associates, Inc. (filed as exhibit to Amendment No. 5 to S-1 (File No.
333-164517) filed on October 14, 2010 and incorporated herein by
reference)
|
|
10.110
|
Employment
Agreement, dated March 1, 2010, between the Company and Marc Massoglia
(filed as exhibit to Amendment No. 5 to S-1 (File No. 333-164517) filed on
October 14, 2010 and incorporated herein by
reference)
|
39
10.111
|
Amendment
No. 1, dated September 22, 2010, to Securities Purchase Agreement, dated
July 13, 2010, between the Company and Lanktree (filed as exhibit to
Amendment No. 6 to S-1 (File No. 333-164517) filed on November 12, 2010
and incorporated herein by reference)
|
|
10.112
|
Amendment
No. 2, dated October 13, 2010, to Securities Purchase Agreement, dated
July 13, 2010, between the Company and Lanktree (filed as exhibit to
Amendment No. 6 to S-1 (File No. 333-164517) filed on November 12, 2010
and incorporated herein by reference)
|
|
10.113
|
Convertible
Debenture, dated October 13, 2010, issued by the Company to Lanktree
Consulting Corp. (filed as exhibit to Amendment No. 6 to S-1 (File No.
333-164517) filed on November 12, 2010 and incorporated herein by
reference)
|
|
10.114
|
Promissory
Note, dated October 12, 2010, issued by the Company to Granite Financial
Group (filed as exhibit to Amendment No. 6 to S-1 (File No. 333-164517)
filed on November 12, 2010 and incorporated herein by
reference)
|
|
10.115
|
Promissory
Note, dated November 5, 2010, issued by the Company to Granite Financial
Group (filed as exhibit to Amendment No. 6 to S-1 (File No. 333-164517)
filed on November 12, 2010 and incorporated herein by
reference)
|
|
10.116
|
Reserved.
|
|
Reserved.
|
||
10.118
|
Promissory
Note, dated November 5, 2010, issued by the Company to Granite Financial
Group, LLC (filed as exhibit to Amendment No. 7 to S-1 (File No.
333-164517) filed on December 8, 2010 and incorporated herein by
reference)
|
|
10.119
|
Convertible
Debenture, dated November 13, 2010, issued by the Company to Lanktree
Consulting Corp. (filed as exhibit to Amendment No. 7 to S-1 (File No.
333-164517) filed on December 8, 2010 and incorporated herein by
reference)
|
|
10.120
|
Securities
Purchase Agreement, dated November 16, 2010, between the Company and
Justin DiRezze (filed as exhibit to Amendment No. 7 to S-1 (File No.
333-164517) filed on December 8, 2010 and incorporated herein by
reference)
|
|
10.121
|
Supply
Agreement between Safeguard Manufacturing & Development and BayerSante
(filed as exhibit to Amendment No. 8 to S-1 (File No. 333-164517) filed on
December 30, 2010 and incorporated herein by reference)
|
|
10.122
|
Subscription
Agreement between the Company and Michael Gangadeen (filed as exhibit to
Amendment No. 8 to S-1 (File No. 333-164517) filed on December 30, 2010
and incorporated herein by reference)
|
|
10.123
|
Convertible
Note issued to Michael Gangadeen (filed as exhibit to Amendment No. 8 to
S-1 (File No. 333-164517) filed on December 30, 2010 and incorporated
herein by reference)
|
|
10.124
|
Subscription
Agreement between the Company and Michael M. George Pension Plan (filed as
exhibit to Amendment No. 8 to S-1 (File No. 333-164517) filed on December
30, 2010 and incorporated herein by reference)
|
|
10.125
|
Convertible
Note issued to Michael M. George (filed as exhibit to Amendment No. 8 to
S-1 (File No. 333-164517) filed on December 30, 2010 and incorporated
herein by reference)
|
|
10.126
|
Subscription
Agreement between the Company and Schaffner Family Foundation (filed as
exhibit to Amendment No. 8 to S-1 (File No. 333-164517) filed on December
30, 2010 and incorporated herein by reference)
|
|
10.127
|
Convertible
Note issued to Schaffner Family Foundation (filed as exhibit to Amendment
No. 8 to S-1 (File No. 333-164517) filed on December 30, 2010 and
incorporated herein by reference)
|
|
10.128
|
Subscription
Agreement between the Company and Trust U/W James T. Pyle F/B/O Ann F.
Pyle (filed as exhibit to Amendment No. 8 to S-1 (File No. 333-164517)
filed on December 30, 2010 and incorporated herein by
reference)
|
|
10.129
|
Convertible
Note issued to Trust U/W James T. Pyle F/B/O Ann F. Pyle (filed as exhibit
to Amendment No. 8 to S-1 (File No. 333-164517) filed on December 30, 2010
and incorporated herein by reference)
|
|
10.130
|
Convertible
Note issued to Allan Leung (filed as exhibit to Amendment No. 8 to S-1
(File No. 333-164517) filed on December 30, 2010 and incorporated herein
by reference)
|
|
10.131
|
Subscription
Agreement between the Company and Mark Miller (filed as exhibit to
Amendment No. 8 to S-1 (File No. 333-164517) filed on December 30, 2010
and incorporated herein by reference)
|
|
10.132
|
Convertible
Note issued to Mark Miller (filed as exhibit to Amendment No. 8 to S-1
(File No. 333-164517) filed on December 30, 2010 and incorporated herein
by reference)
|
|
10.133
|
Subscription
Agreement between the Company and Michael Pisani (filed as exhibit to
Amendment No. 8 to S-1 (File No. 333-164517) filed on December 30, 2010
and incorporated herein by reference)
|
|
10.134
|
Convertible
Note issued to Michael Pisani (filed as exhibit to Amendment No. 8 to S-1
(File No. 333-164517) filed on December 30, 2010 and incorporated herein
by reference)
|
|
10.135
|
Subscription
Agreement between the Company and Martha Taylor (filed as exhibit to
Amendment No. 8 to S-1 (File No. 333-164517) filed on December 30, 2010
and incorporated herein by reference)
|
|
10.136
|
Convertible
Note issued to Martha Taylor (filed as exhibit to Amendment No. 8 to S-1
(File No. 333-164517) filed on December 30, 2010 and incorporated herein
by reference)
|
|
10.137
|
Subscription
Agreement between the Company and Felix Reznick (filed as exhibit to
Amendment No. 8 to S-1 (File No. 333-164517) filed on December 30, 2010
and incorporated herein by reference)
|
|
10.138
|
Convertible
Note issued to Felix Reznick (filed as exhibit to Amendment No. 8 to S-1
(File No. 333-164517) filed on December 30, 2010 and incorporated herein
by reference)
|
|
10.139
|
Subscription
Agreement between the Company and Omrani& Taub, P.C. (filed as exhibit
to Amendment No. 8 to S-1 (File No. 333-164517) filed on December 30, 2010
and incorporated herein by reference)
|
|
10.140
|
Convertible
Note issued to Taub & Omrani (filed as exhibit to Amendment No. 8 to
S-1 (File No. 333-164517) filed on December 30, 2010 and incorporated
herein by reference)
|
|
10.141
|
Subscription
Agreement between the Company and Andrew Goldin (filed as exhibit to
Amendment No. 8 to S-1 (File No. 333-164517) filed on December 30, 2010
and incorporated herein by reference)
|
|
10.142
|
Convertible
Note issued to Andrew Goldin (filed as exhibit to Amendment No. 8 to S-1
(File No. 333-164517) filed on December 30, 2010 and incorporated herein
by reference)
|
|
10.143
|
Subscription
Agreement between the Company and David Goldin (filed as exhibit to
Amendment No. 8 to S-1 (File No. 333-164517) filed on December 30, 2010
and incorporated herein by
reference)
|
40
10.144
|
Convertible
Note issued to David Goldin (filed as exhibit to Amendment No. 8 to S-1
(File No. 333-164517) filed on December 30, 2010 and incorporated herein
by reference)
|
|
10.145
|
Subscription
Agreement between the Company and Mira and Alex Goldin (filed as exhibit
to Amendment No. 8 to S-1 (File No. 333-164517) filed on December 30, 2010
and incorporated herein by reference)
|
|
10.146
|
Convertible
Note issued to Mira and Alex Goldin (filed as exhibit to Amendment No. 8
to S-1 (File No. 333-164517) filed on December 30, 2010 and incorporated
herein by reference)
|
|
10.147
|
Subscription
Agreement between the Company and Adina Schecter (filed as exhibit to
Amendment No. 8 to S-1 (File No. 333-164517) filed on December 30, 2010
and incorporated herein by reference)
|
|
10.148
|
Convertible
Note issued to Adina Schecter (filed as exhibit to Amendment No. 8 to S-1
(File No. 333-164517) filed on December 30, 2010 and incorporated herein
by reference)
|
|
10.149
|
Subscription
Agreement between the Company and Boris and Svetlana Reznick (filed as
exhibit to Amendment No. 8 to S-1 (File No. 333-164517) filed on December
30, 2010 and incorporated herein by reference)
|
|
10.150
|
Convertible
Note issued to Boris and Svetlana Reznick (filed as exhibit to Amendment
No. 8 to S-1 (File No. 333-164517) filed on December 30, 2010 and
incorporated herein by reference)
|
|
10.151
|
Subscription
Agreement between the Company and John Madril (filed as exhibit to
Amendment No. 8 to S-1 (File No. 333-164517) filed on December 30, 2010
and incorporated herein by reference)
|
|
10.152
|
Convertible
Note issued to John Madril (filed as exhibit to Amendment No. 8 to S-1
(File No. 333-164517) filed on December 30, 2010 and incorporated herein
by reference)
|
|
10.153
|
Subscription
Agreement between the Company and Leonard Ludwig (filed as exhibit to
Amendment No. 8 to S-1 (File No. 333-164517) filed on December 30, 2010
and incorporated herein by reference)
|
|
10.154
|
Convertible
Note issued to Leonard Ludwig (filed as exhibit to Amendment No. 8 to S-1
(File No. 333-164517) filed on December 30, 2010 and incorporated herein
by reference)
|
|
10.155
|
Subscription
Agreement between the Company and ParvineSadeghi (filed as exhibit to
Amendment No. 8 to S-1 (File No. 333-164517) filed on December 30, 2010
and incorporated herein by reference)
|
|
10.156
|
Convertible
Note issued to ParvineSadeghi (filed as exhibit to Amendment No. 8 to S-1
(File No. 333-164517) filed on December 30, 2010 and incorporated herein
by reference)
|
|
10.157
|
Subscription
Agreement between the Company and Hal Howard (filed as exhibit to
Amendment No. 8 to S-1 (File No. 333-164517) filed on December 30, 2010
and incorporated herein by reference)
|
|
10.158
|
Convertible
Note issued to Hal Howard (filed as exhibit to Amendment No. 8 to S-1
(File No. 333-164517) filed on December 30, 2010 and incorporated herein
by reference)
|
|
10.160
|
American
Scientific Resources 2011 Incentive Stock Plan (filed as exhibit to S-8
(File No. 333-171789) filed on January 20, 2011 and incorporated herein by
reference)
|
|
10.161
|
Letter
agreement, dated February 7, 2011, between the Company and Granite
Financial Group, LLC (filed as exhibit to 8-K (File No. 333-171789) filed
on February 1, 2011 and incorporated herein by
reference)
|
|
10.162
|
Equity
Purchase Agreement, dated February 3, 2011, between the Company and
Southridge Partners II, LP (filed as exhibit to 8-K (File No. 333-171789)
filed on February 1, 2011 and incorporated herein by
reference)
|
|
10.163
|
Registration
Rights Agreement, dated February 3, 2011, between the Company and
Southridge Partners II, LP filed as exhibit to 8-K (File No. 333-171789)
filed on February 1, 2011 and incorporated herein by
reference)
|
|
10.164
|
Warrant,
dated February 3, 2011, issued by the Company to Southridge Partners II,
LP (filed as exhibit to 8-K (File No. 333-171789) filed on February 1,
2011 and incorporated herein by reference)
|
|
List
of subsidiaries (filed as exhibit to S-1 (File No. 333-164517) filed on
January 26, 2010 and incorporated herein by reference)
|
||
23.1
|
Consent
of Rosenberg, Rich Baker Berman & Co.
|
|
23.2
|
Consent
of Sichenzia Ross Friedman Ference LLP (included in Exhibit
5.1)
|
|
99.1
|
Assignment
of Contract, between Safeguard Manufacturing & Development and
Safeguard Medical Technologies, LLC (filed as exhibit to Amendment No. 8
to S-1 (File No. 333-164517) filed on December 30, 2010 and incorporated
herein by reference)
|
41
ITEM 17.
UNDERTAKINGS
1.
The undersigned registrant hereby undertakes 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)
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.
(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.
Provided,
however, that paragraphs (B)(1)(i) and (B)(1)(ii) of this section do not apply
if the registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Exchange Act that are incorporated by reference in the registration
statement.
2.
The undersigned registrant hereby undertakes that, for the purpose
of determining any liability under the Securities Act of 1933, as amended, 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.
The undersigned registrant hereby undertakes to remove from
registration by means of a post-effective amendment any of the securities being
registered that remain unsold at the termination of the offering.
4.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant’s annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan’s
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement 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.
5.
The undersigned registrant hereby undertakes that, for
the purposes of determining liability to any purchaser:
(i) If
the registrant is relying on Rule 430B:
(A) For
purposes of determining liability under the Securities Act of 1933, each
prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to
be part of the registration statement as of the date the filed prospectus was
deemed part of and included in the registration statement; and
(B) Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as
part of a registration statement in reliance on Rule 430B relating to an
offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of
providing the information required by section 10(a) of the Securities Act of
1933 shall be deemed to be part of and included in the registration statement as
of the earlier of the date such form of prospectus is first used after
effectiveness or the date of the first contract of sale of securities in the
offering described in the prospectus. As provided in Rule 430B, for liability
purposes of the issuer and any person that is at that date an underwriter, such
date shall be deemed to be a new effective date of the registration statement
relating to the securities in the registration statement to which that
prospectus relates, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof. Provided, however, that no
statement made in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of contract of sale
prior to such effective date, 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 effective date;
or
42
(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 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.
The registrant hereby undertakes
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
(iv)
Any other communication that is an offer in the offering made by the undersigned
registrant to the purchaser.
7. Insofar
as indemnification for liabilities arising under the Securities Act of 1933, as
amended, may be permitted to directors, officers and controlling persons of the
undersigned registrant according the foregoing provisions, or otherwise, the
undersigned 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 Securities
Act of 1933, as amended, and will be governed by the final adjudication of such
issue.
43
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Weston,State of Florida,
on February 14, 2011.
AMERICAN
SCIENTIFIC RESOURCES, INCORPORATED
|
||
A
Nevada corporation
|
||
By:
|
/s/
Christopher F. Tirotta
|
|
Christopher
F. Tirotta
|
||
Its:
|
Chief
Executive Officer
|
|
(Principal
Executive Officer, Principal
Financial
Officer and Principal
Accounting
Officer)
|
Each
person whose signature appears below constitutes and appoints Christopher F.
Tirotta his true and lawful attorney in fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments (including post effective
amendments) to the Registration Statement, and to sign any registration
statement for the same offering covered by this Registration Statement that is
to be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933, as amended, and all post effective amendments thereto, and to file the
same, with all exhibits thereto, and all documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, each acting alone, or
his or her substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
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.
/s/
Christopher F. Tirotta
|
February
14, 2011
|
|
Dr.
Christopher F. Tirotta
|
||
Chief
Executive Officer
|
||
(Principal
Executive Officer, Principal
|
||
Financial
and Accounting Officer )
|
||
/s/
Thomas W. Materna
|
February
14, 2011
|
|
Dr.
Thomas W. Materna
|
||
Director
|
||
/s/
Jason Roth
|
February
14, 2011
|
|
Jason
Roth
|
||
Director
|
||
/s/
Felix Reznick
|
February
14, 2011
|
|
Felix
Reznick
|
||
Director
|
44