Makers
of Drug Free, Anti-Inflammatory Patches
This
prospectus relates to the resale of up to 20,893,002 shares of common stock
(the
“Common Stock”), of which 3,000,000 shares are issuable upon the conversion of
promissory notes of BioElectronics Corporation (the “Company”) and the payment
of the principal amount of, and interest on, these notes to, or the exercise
of
outstanding warrants by, certain selling stockholders and 7,583,001 shares
of
Common Stock are issuable upon the exercise of warrants of the Company by
certain selling stockholders identified in this prospectus (the “Offering”). All
of these shares, when sold, will be sold by these selling stockholders. The
selling stockholders may sell their Common Stock from time to time at prevailing
market prices. We will not receive any proceeds from the sale of the shares
of
Common Stock by the selling stockholders.
In
addition to the Offering, this prospectus also relates to our direct
offering (the “Direct
Offering”) of up to 10,000,000 shares of our Common Stock in a best efforts,
self-underwritten, offering directly to the public. There is no minimum amount
of shares that we must sell in our Direct
Offering, and therefore no minimum amount of proceeds will be raised. While
no
plans are currently in place, in the future, we may sell these shares in
our
Direct
Offering through broker/dealers and may pay a commission of up to 10% of
the
gross proceeds of the number of shares of our Common Stock sold by them in
our
Direct
Offering. No arrangements have been made to place funds into escrow or any
similar account. Upon receipt, offering proceeds from the Direct
Offering will be deposited into our operating account and used to conduct
our
business and operations. Unless we use a broker/dealer, we will be offering
the
shares without any underwriting discounts or commissions. The purchase price
is
$.36 per share. If all of the shares offered by us are purchased, the gross
proceeds we receive will be $3,600,000. The Direct
Offering will terminate 12 months after this registration statement (the
“Registration Statement”) is declared effective by the Securities and Exchange
Commission (the ‘SEC”), unless all shares being registered for the Direct
Offering on this prospectus are sold earlier than that date. However, we
may
extend the offering for up to one year following the twelve-month offering
period. This is our initial public offering and no public market currently
exists for shares of our Common Stock.
Our
Common Stock is traded and prices are reported on the Pink Sheets under the
symbol “BIEL. OTC:PK.”
See
“Risk Factors” beginning on page 8 for risks of an investment in the securities
offered by this prospectus, which you should consider before you purchase
any
shares.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of the securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
The
date
of this prospectus is __________, 2006
This
prospectus is not an offer to sell any securities other than the shares of
Common Stock offered hereby. This prospectus is not an offer to sell securities
in any circumstances in which such an offer is unlawful.
We
have
not authorized anyone, including any salesperson or broker, to give oral
or
written information about this offering, the Company, or the shares of Common
Stock offered hereby that is different from the information included in this
prospectus. You should not assume that the information in this prospectus,
or
any supplement to this prospectus, is accurate at any date other than the
date
indicated on the cover page of this prospectus or any supplement to
it.
TABLE
OF CONTENTS
|
Page
|
PROSPECTUS
SUMMARY
|
4
|
OUR
COMPANY
|
4
|
RISK
FACTORS
|
8
|
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
|
16
|
USE
OF PROCEEDS
|
16
|
DILUTION
|
17
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
|
18
|
CONDITION
AND RESULTS OF OPERATIONS
|
18
|
BUSINESS
|
21
|
MANAGEMENT
|
31
|
PRINCIPAL
STOCKHOLDERS
|
36
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
38
|
DESCRIPTION
OF SECURITIES
|
39
|
SHARES
ELIGIBLE FOR FUTURE SALE
|
40
|
SELLING
STOCKHOLDERS
|
40
|
PLAN
OF DISTRIBUTION
|
42
|
LEGAL
MATTERS
|
44
|
EXPERTS
|
44
|
INTERESTS
OF NAMED EXPERTS AND COUNSEL
|
45
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
45
|
AVAILABLE
INFORMATION
|
45
|
INDEX
TO FINANCIAL STATEMENTS
|
F-1
|
PROSPECTUS
SUMMARY
This
summary highlights information contained elsewhere in this Prospectus and
may
not contain all of the information that you should consider before investing
in
the shares. You are urged to read this Prospectus in its entirety, including
the
information under “Risk Factors” and our consolidated financial statements and
related notes included elsewhere in this Prospectus.
OUR
COMPANY
The
Company designs, develops, manufactures and markets a variety of proprietary,
drug-free, anti-inflammatory patches for a broad range of medical indications.
The Company’s patch products, which are marketed under the trade name ActiPatch
Therapy™ (“ActiPatch Therapy”), deliver pulsed electromagnetic field therapy, a
clinically-proven and widely-accepted anti-inflammatory and pain relief therapy.
Prior to the introduction of the Company’s products, this therapy had only been
offered through large office or hospital-based equipment. The Company believes
pulsed electromagnetic energy therapy will increasingly be used as an
alternative or adjunct to many wound care procedures or therapies because
it
relieves pain and swelling, shortens or halts the inflammatory phase,
accelerates tissue healing, minimizes the appearance of scars and increases
the
strength of regenerated tissue. To date, the Company has focused its product
development efforts on the plastic surgery and podiatry markets, and has
established a new-product pipeline that includes products for the treatment
of
the following medical indications:
Repetitive
Stress Injuries
Plastic
and Cosmetic Surgery
Chronic
Wounds
Low
Back Pain
Surgery
· |
General
Surgical Proceedures
|
Other
Sprains and Strains
Pulsed
electromagnetic energy therapy is a proven and robust technology platform.
Physicians and therapists around the world have used pulsed electromagnetic
therapy successfully for approximately 70 years to effectively treat soft
tissue
injuries from surgical incisions and accidental wounds, sprains, strains
and
other inflammatory responses. The prohibitive costs of the cabinet-sized
pulsed
electromagnetic machines that are currently available and used in the
marketplace, coupled with the need for daily treatment administered by medical
professionals, has restricted the widespread adoption of pulsed electromagnetic
energy therapy. The Company believes its ActiPatch Therapy products, which
deliver a dosage of pulsed electromagnetic energy in dermal patches as small
as
a standard band-aid, is superior to the therapy delivered by the much larger
machines in use today.
The
Company’s products are designed to address the need for an effective,
inexpensive therapeutic agent for the estimated $10 billion, 400
million-case-per annum worldwide soft tissue injury market. The Company believes
its products offer the following competitive advantages:
· |
Non-invasive
relief of pain and swelling
|
· |
Drug-free
and clinically proven
|
· |
Inexpensive,
only a few dollars a day
|
· |
Therapeutically
beneficial, unlike Transcutaneous Electrical Nerve Stimulators
(TENS)
units or
painpatches,
each of which only mask the pain.
|
The
Company was incorporated under the laws of the State of Maryland on April
1,
2000. Since that date, the Company has, with only limited external funding,
reached a number of key milestones, including the following:
· |
Received
U.S. Food and Drug Administration (the “FDA”) market clearance to sell its
ActiPatch Therapy
device
for the treatment of edema (swelling) following blepharoplasty
(eye
surgery);
|
· |
Received
ISO Certification and CE Mark (European Common Market) Certification
for
the ActiPatch
Therapy
device;
|
· |
Received
Canadian approval to sell ActiPatch Therapy for the relief of pain
and
muscle skeletal complaints,
without
prescription. Initial Canadian reimbursement approvals are starting
to
come in;
|
· |
Executed
key international and domestic sales and distribution
agreements;
|
· |
Established
an internal direct response sales and marketing
operation;
|
· |
Executed
an agreement with a major over-the-counter foot
care manufacturer and distibutor to sell and market
our
retail foot care products;
|
· |
Initiated
the adoption of its ActiPatch Therapy products by a number of professional
sports teams;
|
· |
Established
and maintained an intellectual property portfolio covering both
the
product design, medical use and the
energy
signal; and
|
· |
Established
a 3-5 year pipeline of new products for the treatment of sports
injuries,
bone fractures, pain,
chronic
wounds, skin conditions and arthritis.
|
The
Company’s principal executive offices are located at 401 Rosemont Avenue, 3rd
Floor, Rosenstock Hall, Frederick, Maryland 21701, and the Company’s telephone
number at that address is (301) 644-3906. The Company has a corporate internet
website at http://www.bioelectronicscorp.com.
The
reference to this website address does not constitute incorporation by reference
of the information contained therein.
About
This Offering
This
prospectus relates to the resale of up to 20,893,002 shares of Common Stock,
of
which 3,000,000 shares are issuable upon the conversion of promissory notes
and the payment of the principal amount of, and interest on, these notes
to, or
the exercise of outstanding warrants by, certain selling stockholders identified
in this prospectus and 7,583,001 shares are issuable upon the exercise of
outstanding warrants of our Company by certain selling stockholders identified
in this prospectus. All of the 20,893,002 shares, when sold, will be sold
by
these selling stockholders. The selling stockholders may sell their Common
Stock
from time to time at prevailing market prices. We will not receive any proceeds
from the sale of the shares of Common Stock by the selling
stockholders.
In
addition to the Offering, this prospectus also relates to our Direct
Offering of up to 10,000,000 shares of our Common Stock in a best efforts,
self-underwritten, offering directly to the public. There is no minimum amount
of shares that we must sell in our Direct Offering, and therefore no minimum
amount of proceeds will be raised.
Common
Stock Offered |
30,893,002
shares
|
|
|
Common
Stock Offered by the Selling Stockholders |
20,893,002
shares. The 7,583,001 warrant shares included in such shares will
be
issued by the Company. Although the Company will not receive any
of the
proceeds from the sale of the shares, it will receive the proceeds
from
the exercise, if any, of the warrants included therein. |
|
|
Common
Stock Outstanding at December 31, 2005(1) |
62,484,892
shares
|
|
|
Use
of Proceeds of the Offering |
We
will not receive any of the proceeds from the sale of the shares
by the
Offering, except upon exercise of certain Common Stock purchase
warrants.
|
|
|
Use
of Proceeds of the Direct Offering |
We
will receive proceeds from the sale of the shares offered in the
Direct
Offering. |
|
|
Pink
Sheet Ticker Symbol |
BIEL |
_________________
(1)
|
Does
not include (i) 3,000,000 shares that are issuable upon the conversion
of
outstanding convertible notes with a conversion price of $0.25
per share,
(ii) 835,000 restricted compensatory shares that have not been
earned or
issued and 165,000 shares which have been earned and not issued
to certain
of our corporate officers (iii) 8,683,001 shares issuable upon
the
exercise of outstanding warrants with exercise prices ranging from
$.33 to
$.50 per share, subject to adjustment, or (iv) 5,685,000 shares
issuable
upon the exercise of outstanding options with exercise prices ranging
from
$.30 to $.50 per share, subject to adjustment granted under our
2005
Equity Incentive Plan.
|
Selected
Financial Information
The
selected financial information presented below is derived from and should
be
read in conjunction with our consolidated financial statements, including
notes
thereto, appearing elsewhere in this prospectus. See “Financial Statements.”
Summary
Operating Information
|
|
Fiscal
Year Ended
December
31,
|
|
Nine
Months Ended
September 30,
|
|
|
|
2003
|
|
2004
|
|
2004
|
|
2005
|
|
Net
revenues
|
|
$
|
30,497
|
|
$
|
302,002
|
|
$
|
300,112
|
|
$
|
551,611
|
|
Loss
from operations
|
|
$
|
549,209
|
|
$
|
771,127
|
|
$
|
379,790
|
|
$
|
785,556
|
|
Net
loss
|
|
$
|
568,087
|
|
$
|
792,799
|
|
$
|
388,195
|
|
$
|
815,646
|
|
Net
loss per common share
|
|
|
.02157
|
|
|
.017
|
|
|
.009
|
|
|
.015
|
|
Weighted
average number of common shares Outstanding
Basic
|
|
|
26,333,333
|
|
|
45,976,334
|
|
|
44,329,482
|
|
|
56,014,225
|
|
Diluted
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Summary
Balance Sheet Information
|
|
September
30, 2005
|
|
|
|
|
|
Working
capital
|
|
$
|
86,965
|
|
Total
assets
|
|
$
|
704,876
|
|
Total
liabilities
|
|
$
|
789,265
|
|
Stockholders’
deficiency
|
|
$
|
84,389
|
|
RISK
FACTORS
You
should carefully consider the risks described below before investing in the
Company. The risks and uncertainties described below are not the only risks
we
face. These risks are the ones we consider to be significant to your decision
whether to invest in our Common Stock at this time. We might be wrong. There
may
be risks that you in particular view differently than we do, and there are
other
risks and uncertainties that are not presently known to us or that we currently
deem immaterial, but that may in fact impair our business operations. If
any of
the following risks actually occur, our business, results of operations and
financial condition could be seriously harmed, the trading price of our Common
Stock could decline and you may lose all or part of your
investment.
Risks
Relating to Our Business
Development
Stage Company. The
Company is a development stage company, and the Company faces risks and
difficulties frequently encountered in connection with the operation and
development of a new and expanding business. The Company has a limited operating
history on which an evaluation of the Company and its business can be based.
The
likelihood of the Company’s future success must be considered in light of such
limited operating history, as well as the problems, expenses, difficulties,
complications and delays frequently encountered in connection with a new
business. There can be no assurance that the Company’s future revenues will ever
be significant or that the Company’s operations will ever be
profitable.
History
of Operating Losses.
The
Company was incorporated on April 1, 2000. Through September 30, 2005, the
Company recorded a cumulative operating loss of approximately $2.21
million. The
Company expects to incur additional losses until sufficient sales of its
ActiPatch Therapy products are achieved. The Company has not yet commenced
manufacturing and shipping of any products in substantial volumes. The Company’s
limited operating history makes the prediction of future operating results
difficult or impossible to make. There can be no assurance that the Company’s
future revenues will ever be significant or that the Company’s operations will
ever be profitable.
Need
for Additional Financing.
The
Company’s ability to satisfy its future capital requirements and implement its
expansion plans will depend upon many factors, including the financial resources
available to it, the expansion of the Company’s sales and marketing efforts and
the status of competition, if any. The Company believes that current and
future
available capital resources, including the net proceeds from sale of Company’s
products, will be sufficient to fund its operations at current levels for
twelve
(12) months. However, the exact amount of funds that the Company will require
will depend upon many factors, and it is possible that the Company will require
additional financing prior to such time. There can be no assurance that
additional financing will be available to the Company on acceptable terms,
or at
all. If additional funds are raised by issuing equity securities, further
dilution to the existing stockholders will result. If adequate funds are
not
available, the Company may be required to delay, reduce or eliminate its
programs or obtain funds through arrangements with partners or others that
may
require the Company to relinquish rights to certain of its products,
technologies or other assets. Accordingly, the inability to obtain such
financing could have a material adverse effect on the Company’s business,
financial condition and results of operations.
Dependence
on Limited Number of Products. Virtually all of the Company’s sales have been
derived from sales of the Company’s existing ActiPatch Therapy dermal patches.
Although
additional products are currently being developed, there can be no assurance
that these development efforts will be successful or, if successful, that
resulting products will receive market acceptance, generate significant sales
or
result in gross profits. The Company believes that success in the general
surgical market is somewhat dependent on product acceptance by plastic surgeons.
The Company’s future operating results, particularly in the near term, are
significantly dependent upon market acceptance of its ActiPatch Therapy product
line. Because virtually all of the Company’s sales are derived from its
ActiPatch Therapy product line, failure to achieve broader market acceptance
of
pulsed electromagnetic energy therapy as a result of competition, technological
change or other factors or the failure to successfully market any new or
enhanced versions of existing products would have a material adverse effect
on
the business, operating results and financial condition of the Company.
Acceptance
of Company’s Products Depends Upon Results of Clinical Studies for New
Applications. Clinical
studies of new applications of the Company’s ActiPatch Therapy products are in
various stages of completion, and further clinical studies of the Company’s
products are expected to be conducted in the future. Clinical studies of
the
Company’s products that result in unfavorable or inconclusive findings, or
significant delays in completing clinical studies, could have a material
adverse
effect on the Company’s business, financial condition and results of operations.
There can be no assurance that the findings derived from ongoing clinical
studies will be favorable or conclusive with regard to the Company’s products or
that the medical community will react positively to such findings as clinical
studies are completed.
Risk
of Technological Obsolescence. The
medical device market is characterized by rapid, technological innovation
and
change. Many companies are engaged in research and development of devices,
drugs
and alternative methods to reduce swelling, relieve pain and enhance the
healing
of surgical incisions, accidental wounds, sprains, strains and chronic wounds.
The Company’s products could be rendered obsolete as a result of future
innovations.
Competition. The
medical device market is very competitive and competition is likely to increase.
Increased competition may result in price cuts, reduced gross margins and
loss
of market share, any of which could seriously harm the Company’s business. Many
of the Company’s competitors have, and potential competitors may possess, longer
operating histories and significantly greater financial, technical, personnel
and other resources than the Company. Competitors and potential competitors
may
also have larger, more established research and development departments and
greater name and brand recognition than the Company possesses. These greater
resources may permit them to implement extensive advertising, sales, promotions
and programs that the Company may not be able to match. Better financed
competitors may also have greater success in future research and development
efforts. As these competitors enter the field, the Company’s sales growth may
fail to increase, despite its efforts to continue to design and manufacture
superior products. There can be no assurance that the Company will have the
ability to compete successfully in this environment. If the Company is unable
to
compete successfully, the Company’s business will be seriously
harmed.
Management
of Growth. The
Company may encounter significant strain and additional demands on its
manufacturing systems, infrastructure and resources as it expands its business.
The Company’s ability to compete effectively and to manage future expansion will
require it to continue to add to its infrastructure and management controls
and
to expand, train and manage its workforce. If the Company is unable to manage
its expansion, the Company’s level of service will decline, it may lose
customers and its revenues and growth will be limited.
Dependence
on Key Existing and Future Personnel. The
Company’s success will depend, to a large degree, upon the efforts and abilities
of its officers and key management employees, including, without limitation,
Andrew J. Whelan, the President and Chairman of the Board of Directors (the
“Board”) of the Company. The loss of the services of one or more of the
Company’s key employees could have a material adverse effect on its operations.
The Company has employment agreements with certain of its employees, but
does
not maintain a key man life insurance policy on any employee. In addition,
as
its business plan is implemented, the Company will need to recruit and retain
additional management and key employees in virtually all phases of its
operations. Key employees will require not only a strong background in the
medical device industry, but a familiarity with the markets in which the
Company
competes. The Company may not be able to attract successfully and retain
key
personnel.
Reliance
on Third Parties for Supply and Manufacture of
Products.
Third
parties manufacture all of the Company’s products. The Company does not
currently have manufacturing facilities or personnel to independently
manufacture its products. If for any reason the Company is unable to obtain
or
retain third party manufacturers on commercially acceptable terms, it may
not be
able to distribute its products as planned. If the Company encounters delays
or
difficulties with contract manufacturers in producing or packaging its products,
the distribution, marketing and subsequent sales of these products will be
adversely affected. The Company may have to seek alternative sources of supply
or abandon or sell product lines on unsatisfactory terms. The Company may
not be
able to enter into alternative supply arrangements on commercially acceptable
terms, if at all. There can be no assurance that the manufacturers the Company
has engaged will be able to provide sufficient quantities of these products
or
that the products supplied will meet the Company’s specifications. In addition,
production of the Company’s products may require raw materials for which the
sources and quantities are limited. An inability to obtain adequate supplies
of
raw materials could significantly delay development, regulatory approval
and
marketing of the Company’s products.
Dependence
on Third Party Distributors.
The
Company currently utilizes several third party medical device distributors
to
distribute its products. If for any reason the Company is unable to obtain
or
retain third party distributors on commercially acceptable terms, it may
not be
able to distribute its products as planned. If the Company encounters delays
or
difficulties with contract distributors, the distribution, marketing and
subsequent sales of these products would be adversely affected, and the Company
may have to seek alternative sources of distribution or abandon or sell product
lines on unsatisfactory terms. The Company may not be able to enter into
alternative distribution arrangements on commercially acceptable terms, if
at
all. There can be no assurance that the distributors the Company has engaged
will be able to provide sufficient distribution of the Company’s products in
order for the Company to meet its current or future obligations to its
customers.
Product
Liability Claims.
The
Company faces an inherent business risk of exposure to product liability
claims
in the event that the use of its products are alleged to have resulted in
adverse side effects, such as injury, illness or death. The Company also
may be
required to recall some of its products if they are damaged or mislabeled.
Such
events could result in product liability claims or adverse publicity. While
the
Company currently maintains product liability insurance, a significant product
liability judgment against the Company or a widespread product recall, to
the
extent either such event is in excess of the limits of its product liability
insurance, could substantially impair the Company’s business, financial
condition and results of operations.
Protection
of Intellectual Property. The
Company believes that its success depends to a significant degree upon its
ability to develop proprietary technology and its ability to protect the
proprietary aspects of its products. The Company acquired 44 patents that
have
now expired. Instead of filing for FDA regulatory delay patent extensions,
the
Company opted to file new patent applications to cover its technological
improvements, affixing and delivery methods and medical treatments. The Company
has approximately 150 new patent claims pending. We have filed in the United
Sates, the European Common Market, Canada, and the other major markets such
as
Japan, South Korea, Mexico, Australia, etc.
The
Company will continue to seek patent protection for its products. There can
be
no assurance that any patent that has been or may be issued will cover products
the Company intends to sell, or if it does, will not subsequently be invalidated
for any of a variety of reasons.
The
Company relies upon a combination of laws and contractual restrictions,
including restrictions contained in confidentiality agreements, to establish
and
protect its rights to any intellectual property that it creates. Any
infringement of the Company’s proprietary rights could result in significant
litigation costs, and any failure to adequately protect its proprietary rights
could result in the Company’s competitors offering similar products, potentially
resulting in loss of a competitive advantage and decreased revenues. Despite
the
Company’s efforts to protect its proprietary rights, existing patent laws afford
only limited protection. In addition, the laws of some foreign countries
do not
protect the Company’s proprietary rights to the same extent as do the laws of
the United States. Attempts may be made to copy or reverse engineer aspects
of
the Company’s products or to obtain and use information that the Company regards
as proprietary. Accordingly, the Company may not be able to prevent
misappropriation of its technology or deter others from developing similar
technology. Furthermore, policing the unauthorized use of the Company’s products
is difficult. Litigation may be necessary in the future to enforce the Company’s
intellectual property rights or to determine the validity and scope of the
proprietary rights of others. This litigation could result in substantial
costs
and diversion of resources and could significantly harm the Company’s
business.
Infringement
of Third-Party Rights. In
recent
years, there has been significant litigation in the United States and elsewhere
involving patents and other intellectual property rights. Third parties may
assert patent, copyright, trademark and other intellectual property rights
to
technologies used in the Company’s business. Any infringement claims, with or
without merit, could be time consuming, result in costly litigation, and
divert
the efforts of the Company’s technical and management personnel. If the Company
is unsuccessful in defending itself against these types of claims, it may
be
required to do one or more of the following:
· |
stop
selling those products that use or incorporate the challenged intellectual
property;
|
· |
attempt
to obtain a license to sell or use the relevant technology or substitute
technology, which license may not be available on reasonable terms
or at
all; or
|
· |
redesign
those products that use the relevant technology, which the Company
may not
be able to do on a timely or cost effective basis, or at
all.
|
In
the
event a claim against the Company is successful and the Company can not obtain
a
license to the relevant technology on acceptable terms or license a substitute
technology or redesign its products to avoid infringement, the Company’s
business will be significantly harmed, which would have a material adverse
effect on the Company’s financial condition and results of
operations.
Health
Care Reform; Market Acceptance. The
levels of revenues and profitability of pharmaceutical and medical device
companies may be affected by the continuing efforts of governmental and
third-party payers to contain or reduce the costs of health care through
various
means. In the United States there have been, and the Company expects that
there
will continue to be, a number of federal and state proposals to control health
care costs. There have been a number of proposals introduced to Congress
to
comprehensively reform the nation’s health care system. Some of the proposed
legislation has contained measures intended to control public and private
spending on health care as well as to provide universal public access to
the
health care system. In addition, some of the proposed legislation included
limitations on Medicare and Medicaid reimbursement for medical products and
services and called for the creation of a committee to monitor and evaluate
the
pricing of new medical products and services. Although no such legislation
has
been passed by Congress, federal, state and local officials and legislators
(and
certain foreign government officials and legislators) have proposed or are
reportedly considering proposing a variety of additional reforms to the health
care systems in their respective jurisdictions, including reforms that may
affect the pharmaceutical and medical device industries. It is uncertain
what
new legislative proposals, if any, might be adopted or what actions federal,
state or third-party payers may take in response to any health care reform
proposals or legislation. The Company cannot predict the effect health care
reforms may have on its business or the business of its
collaborators.
In
the
United States and elsewhere, sales of therapeutic products are dependent
in part
on the availability of reimbursement from third-party payers, such as government
and private insurance plans. These third-party payers are increasingly
challenging the prices charged for medical products and services. If the
Company
succeeds in bringing one or more products to the market, there can be no
assurance that these products will be considered cost effective and that
reimbursement to the consumer will be available or will be sufficient to
allow
the Company to sell its products on a profitable basis.
There
can
be no assurance that any product developed by the Company will gain market
acceptance among health care providers. Even if the Company’s proposed products
gain market acceptance, sales of such products may be dependent on the
availability of reimbursement from third-party health care payers, such as
government and private insurance plans. If adequate coverage and reimbursement
levels are not authorized by government and third-party payers for use of
the
Company’s products, market acceptance will be adversely affected.
Physicians
and Patients Acceptance of Our Device. Physicians
and patients may not accept and use our device. Acceptance and use of the
device
will depend upon a number of factors, including perceptions by members of
the
health care community, including physicians, about the safety and effectiveness
of the device; cost-effectiveness of the device relative to competing products;
availability of reimbursement for the products from government or other
healthcare payers; and effectiveness of marketing and distribution efforts
by us
and our licensees and distributors, if any. Because we expect sales of the
current product device to generate substantially all of our product revenues
for
the foreseeable future, the failure of the device to find market acceptance
would harm our business and could require us to seek additional
financing.
Compliance
with Regulatory Requirements. The
Company is subject to a variety of regulatory agency requirements in the
United
States and foreign countries relating to the products that the Company develops
and manufactures. The process of obtaining and maintaining required regulatory
approvals and otherwise remaining in regulatory compliance can be lengthy,
expensive and uncertain. The FDA inspects manufacturers of certain types
of
devices before providing a clearance to manufacture and sell such devices,
and
the failure to pass such an inspection could result in delay in moving ahead
with a product or project. The Company is required to comply with the FDA’s
quality system regulation for the manufacture of medical products. In addition,
in order for the devices that the Company designs or manufactures to be
exported, and for the Company and its customers to be qualified to use the
“CE”
mark in the European Union, the Company maintains EN International Standards
Organization (“ISO”) 13485:2003 certification. This certification, like the
quality system regulation, subjects the Company’s operations to periodic
surveillance audits. To ensure compliance with various regulatory and quality
requirements, the Company expends significant time, resources and effort
in the
areas of training, production and quality assurance. If the Company fails
to
comply with regulatory or quality regulations or other FDA or applicable
legal
requirements, the governing agencies can issue warning letters, impose
government sanctions and levy serious penalties. In addition, the continued
sale
of products manufactured by the Company may be halted or otherwise restricted.
Any such actions could have an adverse effect on the willingness of customers
and prospective customers to do business with the Company. In addition, any
such
noncompliance or increased cost of compliance could have a material adverse
effect on the Company’s business, results of operations and financial
condition.
Product
Revenues.
Our
ability to generate product revenues will be diminished if the devices sell
for inadequate prices or patients are unable to obtain adequate levels of
reimbursement. Our ability to commercialize the devices, alone or with
collaborators, will depend in part on the extent to which reimbursement will
be
available from government and health administration authorities; private
health
maintenance organizations and health insurers; and other healthcare payors.
Significant uncertainty exists as to the reimbursement status of newly approved
healthcare products. Healthcare payors, including Medicare, routinely challenge
the prices charged for medical products and services. Government and other
healthcare payers increasingly attempt to contain healthcare costs by limiting
both coverage and the level of reimbursement for patches. Even if the new
product candidates are approved by the FDA, insurance coverage may not be
available, and reimbursement levels may be inadequate to cover such patches.
If
government and other healthcare payors do not provide adequate coverage and
reimbursement levels for any of the products, the post-approval market
acceptance of its products could be diminished.
Risks
Relating to Our Common Stock
Disappointing
quarterly revenue or operating results could cause the price of our Common
Stock
to fall.
Our
quarterly revenue and operating results are difficult to predict and may
fluctuate significantly from quarter to quarter. If our quarterly revenue
or
operating results fall below the expectations of investors or security analysts,
the price of our Common Stock could fall substantially. Our quarterly revenue
and operating results may fluctuate as a result of a variety of factors,
many of
which are outside our control, including:
|
●
|
the
amount and timing of expenditures relating to the rollout of our
Actipatch
Therapy products
|
|
●
|
our
ability to obtain, and the timing of, additional regulatory
approvals;
|
|
●
|
the
rate at which we are able to attract customers within our target
markets
and our ability to retain these customers at sufficient aggregate
revenue
levels;
|
|
●
|
the
availability of financing to continue our
expansion; |
|
●
|
technical
difficulties in manufacturing the products or network
downtime;
|
|
●
|
the
introduction of new services, products or technologies by our competitors
and resulting pressures on the pricing of our
service.
|
We
do not intend to pay dividends on our Common Stock in the foreseeable future,
which could cause the market price of our Common Stock and the value of your
investment to decline.
We
expect
to retain earnings, if any, to finance the expansion and development of our
business. Our Board will decide whether to make future cash dividend payments.
Such decision will depend on, among other things, the following
factors:
● our
earnings;
● our
capital requirements;
● our
operating results and overall financial condition; and
● our
compliance with various financing covenants to which we are or may become
a
party.
The
market for our Common Stock is thinly traded, which could result in fluctuations
in the value of our Common Stock.
Although
there is a public market for our Common Stock, the market for our Common
Stock
is thinly traded. The trading prices of our Common Stock could be subject
to
wide fluctuations in response to, among other events and factors, the
following:
● variations
in our operating results;
● sales
of
a large number of shares by our existing stockholders;
● announcements
by us or others;
● developments
affecting us or our competitors; and
● extreme
price and volume fluctuations in the stock market.
Our
Common Stock price is likely to be highly volatile, which could cause the
value
of your investment to decline.
The
market price of our Common Stock may be highly volatile. Investors may not
be
able to resell their shares of our Common Stock following periods of volatility
because of the market’s adverse reaction to volatility. We cannot assure you
that our Common Stock will trade at the same levels of our stocks in our
industry or that our industry stocks in general will sustain their current
market prices. Factors that could cause such volatility may include, among
other
things:
● actual
or
anticipated fluctuations in our quarterly operating results;
● large
purchases or sales of our Common Stock;
● announcements
of technological innovations;
● changes
in financial estimates by securities analysts;
● investor
perception of our business prospects;
● conditions
or trends in the medical device industry;
● changes
in the market valuations of other industry-related companies;
● the
acceptance of market makers and institutional investors of our business
model
and our Common Stock; andhanges in the market valuations of other
industry-related companies;
● worldwide
economic and financial conditions.
The
Company’s Principal Shareholders Own a Majority of the Shares Outstanding and
May Control the Company. Andrew
J.
Whelan, the President and Chairman of the Board of the Company, owns, directly
or indirectly, approximately 49.5% of the outstanding shares of Common Stock.
Through his ownership of securities, Mr. Whelan will be able to substantially
impact any vote of the stockholders and exert considerable influence over
the
Company’s affairs.
No
Assurance of Liquidity. There
is
currently only a limited public market for the Company’s Common Stock and there
can be no assurance that a trading market will develop further or be maintained
in the future. One exemption that may be available is Rule 144 adopted under
the
Securities Act of 1933 (the “Securities Act”), provided the Company meets the
requirements of Rule 144 for available public information. Generally, under
Rule
144, any person holding restricted securities for at least one (1) year may
publicly sell in ordinary brokerage transactions, within a three (3) month
period, the greater of one percent (1%) of the total number of shares of
the
Company’s Common Stock outstanding or the average weekly reported volume during
the four (4) weeks preceding the sale, if certain conditions of Rule 144
are
satisfied by the Company and the seller. Furthermore, with respect to sellers
who are “non-affiliates” of the Company, as that term is defined in Rule 144 of
the Securities Act, the volume sale limitation does not apply, and an unlimited
number of shares may be sold, provided the seller meets certain other conditions
enumerated in Rule 144(k), including a holding period of two (2) years. Sales
under Rule 144 may have a depressive effect on the market price of the Company’s
securities and thereby impair the Company’s ability to raise capital through the
sale of its equity securities.
Investor
Warrants and Convertible Notes May Adversely Affect Shareholders and the
Company
in the Future. The
holders of the 3,520,000 investor warrants (the “Investor Warrants”) sold in the
Private Placement in April 2005 have three (3) years after the final closing
to
exercise their Investor Warrants, and the holders of the 513,000 agent’s
warrants (the “Agent’s Warrants”) issued in connection with the Offering will
have two (2) years or five (5) years, depending upon the type of Agent’s
Warrant. In December 2005, the Company issued senior secured convertible
24
month term notes in the aggregate amount of $750,000 to LH Financial (“the
Notes”). The Notes have an 8% coupon, payable on a monthly basis. The Notes
issued are convertible notes at the option of LH Financial, at a fixed price
of
$0.25. For every share of the Company’s Common Stock for which the Notes are
converted, LH Financial will receive one warrant, exercisable within a five-year
period from the conversion of the Notes. The
exercise of the Investor Warrants or the Agent’s Warrants may cause dilution in
the interests of other shareholders. Further, the terms on which the Company
may
obtain additional financing during the period any of such warrants remain
outstanding may be adversely affected by the existence of these warrants.
The
holders of the Investor Warrants, the Notes, or the Agent’s Warrants may
exercise their warrants at a time when the Company may wish to obtain additional
capital through a new offering of shares on terms more favorable.
We
do not have an underwriter for our Offering, which may make it more difficult
to
successfully complete this Offering. We
are
offering 10,000,000 shares of Common Stock on a direct placement basis under
the
provisions of Rule 3a4-1 of the Exchange Act. We have never engaged in the
public sale of our securities, and have no experience in conducting public
securities offerings. Accordingly, there is no prior experience from which
investors may judge our ability to consummate this offering. There can be
no
assurance that we will be successful in selling any shares of common stock
offered hereby, and as a result, we may not receive any proceeds from our
Direct
Offering.
Because
there is no minimum number of shares that must be sold in our Direct
Offering we
may not raise sufficient proceeds to commence significant
operations.
Under
the terms of our Direct Offering, there is no minimum number of shares that
must
be sold, or a minimum amount that will be raised, and we will not refund
any
funds to you. Upon receipt, offering proceeds will be deposited into our
operating account and used to conduct the business affairs of the Company.
Because there is no minimum number of shares that must be sold or a minimum
amount that will be raised, and because we will not refund any funds to you,
it
is possible that we may not raise enough funds to sustain operations. If
we are
unable to receive sufficient funds from our Direct Offering, we may have
to seek
other sources of financing. There is no assurance that additional sources
of
funding will be available at a reasonable cost. In the event that we are
unsuccessful in raising sufficient funds in this or any other offerings to
continue our operations, it is likely that purchasers of our Common Stock
will
own shares in a company that has an illiquid smaller market for its shares
or
will lose their investments.
“Penny
Stock” Rule Limitations. The
SEC
has adopted regulations that generally define a penny stock to be any equity
security that has a market price of less than $5.00 per share, subject to
certain exemptions. Such exemptions include an equity security listed on
a
national securities exchange or quoted on NASDAQ and an equity security issued
by an issuer that has net tangible assets of at least $2,000,000, if such
issuer
has been in continuous operation for more than three (3) years. Unless such
an
exemption is available, the regulations require the delivery of a disclosure
document to the investor explaining the penny stock market and the risks
associated therewith prior to any transaction involving a penny stock. In
addition, as long as the common stock is not listed on a national securities
exchange or quoted on NASDAQ or at any time that the company has less that
$2,000,000 in net tangible assets, trading in the common stock is covered
by
Rule 15g-9 under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), for non-NASDAQ and non-exchange listed securities. Under that rule,
broker-dealers who recommend such securities to persons other than established
customers and accredited investors must make a special written suitability
determination for the purchaser and receive the purchaser’s written agreement to
a transaction prior to sale. Securities are exempt from this rule if the
market
price is at least $5.00 per share. To the extent that the Company does not
meet
the exemptions under the Penny Stock Rule, there will be reduced liquidity
in
the market.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some
of
the statements under “Prospectus Summary,” “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,”
“Business,” and elsewhere in this prospectus constitute forward-looking
statements. These statements involve risks known to us, significant
uncertainties, and other factors which 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 those forward-looking statements.
You
can
identify forward-looking statements by the use of the words “may,” “will,”
“should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “intends,” “potential,” “proposed,” or “continue” or the negative of
those terms. These statements are only predictions. In evaluating these
statements, you should specifically consider various factors, including the
risks outlined above. These factors may cause our actual results to differ
materially from any forward-looking statement.
Although
we believe that the exceptions reflected in the forward-looking statements
are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements.
USE
OF PROCEEDS
We
will
not receive any proceeds from the sale of the shares of our Common Stock
by the
selling stockholders.
We
will
also receive proceeds of up to a maximum of $57,430.00 upon the due exercise,
if
any, of the two-year warrants granted by us exercisable for an aggregate
of
171,000 shares of Common Stock. We will receive proceeds up to a maximum
of
$1,635,001 upon the due exercise, if any, of the three-year warrants granted
by
us exercisable for an aggregate of 3,770,001 shares of Common Stock. We will
receive proceeds of up to a maximum of $1,681,200.00 upon the due exercise,
if
any, of the five-year warrants granted by us exercisable for an aggregate
of
3,642,000 shares of Common Stock. We expect to incur expenses in connection
with
this Offering of approximately $50,000 for our legal fees, accounting fees,
printing, Blue Sky legal and filing fees and other miscellaneous expenses.
We
intend to use any such proceeds for sales and marketing, working capital
and
general corporate purposes. Until utilized, the net proceeds of this Offering
will be invested in interest-bearing accounts, or invested in short-term
U.S.
government obligations, certificates of deposit or similar short-term, lower
risk investments.
The
Company currently anticipates applying the proceeds approximately as
follows:
Application
of Proceeds
|
|
Approximate
Dollar Amount
|
|
Approximate
Percentage of Net Proceeds
|
|
Sales
and Marketing
|
|
$
|
4,000,000
|
|
|
60.9
|
%
|
Working
capital and general corporate purposes
|
|
$
|
2,572,631
|
|
|
39.1
|
%
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,087,431
|
|
|
100
|
%
|
Further,
to the extent that any of our outstanding convertible promissory notes are
converted into, or paid in the form of, shares of our Common Stock, we will
be
relieved of such obligations to the extent of such conversion or payment.
We
will receive $1,591,200.00 upon the exercise, if any, of the five year warrants
granted with the convertible promissory note for an aggregate of 3,400,000
shares.
DILUTION
The
Company had a net tangible book value of $(117,181) or $.002 per share, as
of
September 30 2005, based upon 62,484,892 shares of Common Stock outstanding.
Net
tangible book value per share is equal to the Company’s total tangible assets
less its total liabilities, divided by the total number of shares of its
Common
Stock outstanding. After giving effect to the sale of the 10,000,000 shares
of
Common Stock offered hereby at an initial public offering price of $.36 per
share and the application of the net proceeds therefrom (after deducting
estimated expenses of the Offering), the net tangible book value of the Common
Stock as of September 30, 2005 would have been $3,082,819 or $.052 per share.
Dilution is determined by subtracting net tangible book value per share after
this Offering from the amount paid by new investors per share of Common
Stock.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Market
for Common Stock
Our
Common Stock is traded on the Pink Sheets under the symbol “BIEL.
OTC:PK.”
The
following table contains information about the range of high and low bid
prices
for our Common Stock for each full quarterly period from Q2 2004 through
Q4
2005, based upon reports of transactions on the OTC Pinksheets.
Fiscal
2004
|
|
Low
|
|
High
|
|
Second
Quarter (commencing April 12)
|
|
$
|
0.17
|
|
$
|
1.05
|
|
Third
Quarter
|
|
$
|
0.28
|
|
$
|
0.50
|
|
Fourth
Quarter
|
|
$
|
0.31
|
|
$
|
0.47
|
|
Fiscal
2005
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
0.30
|
|
$
|
0.60
|
|
Second
Quarter
|
|
$
|
0.28
|
|
$
|
0.55
|
|
Third
Quarter
|
|
$
|
0.35
|
|
$
|
0.41
|
|
Fourth
Quarter
|
|
$
|
0.23
|
|
$
|
0.52
|
|
These
quotations reflect inter-dealer prices, without retail mark-up, mark-down
or
commissions and may not represent actual transactions. The high and low prices
listed have been rounded up to the next highest two decimal places.
The
market price of our Common Stock is subject to significant fluctuations in
response to variations in our quarterly operating results, general trends
in the
market for the products we distribute, and other factors, over many of which
we
have little or no control. In addition, board market fluctuations, as well
as
general economic, business and political conditions, may adversely affect
the
market for our Common Stock, regardless of our actual or projected performance.
On February 8, 2006, the closing bid price of our Common Stock as reported
by
the Pink Sheets was $0.35 per share.
Holders
As
of
January 31, 2006, there were 202 holders of record of our Common
Stock.
Dividend
Policy
We
have
never declared dividends or paid cash dividends on our Common Stock. We intend
to retain and use any future earnings for the development and expansion of
our
business and do not anticipate paying any cash dividends in the foreseeable
future.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
General
This
discussion and analysis should be read in conjunction with our financial
statements and accompanying notes included elsewhere in this prospectus.
This
discussion includes forward-looking statements that involve risks and
uncertainties. Operating results are not necessarily indicative of results
that
may occur in future periods. When used in this discussion, the words “believes”,
“anticipates”, “expects” and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks
and
uncertainties that could cause actual results to differ materially from those
projected.
Our
business and results of operations are affected by a wide variety of factors,
including those we discuss under the caption “Risk Factors” and elsewhere in
this prospectus, that could materially and adversely affect us and our actual
results. As a result of these and other factors, we may experience material
fluctuations in future operating results on a quarterly or annual basis,
which
could materially and adversely affect our business, financial condition,
operating results and stock price.
Any
forward-looking statements herein speak only as of the date hereof. We undertake
no obligation to publicly release the results of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
Business
Outlook
Our
financial condition improved in December 2005, when we sold LH Financial
a fixed
rate senior secured convertible 24 month term note. A note for $750,000 was
issued and such promissory note bears interest at 8% with monthly payments
starting on the 6 (six) month anniversary in cash or at the option of the
Company. On the 9 (nine) month anniversary of the closing, the Company shall
be
required to make principal repayments.
Mentor
Corporation distributes the Company’s products to the plastic surgery market. It
is anticipated that they will begin international sales distribution in 2006,
and will also accelerate their domesticate sales and distribution with a
focused
direct response sales and marketing campaign.
We
have a
distribution agreement with MaxMed, Inc. (“MaxMed”) to embed ActiPatch Therapy
into their custom foot orthotic devices and to sell monthly replacement devices.
ActiPatch
Therapy has been approved for sale in Canada for the relief of pain in
muscosketal complaints. We have a retail foot care distribution agreement
with
Profoot, Inc. (“Profoot”) to resell ActiPatch Therapy in Canada under the
Profoot brand name. ProFoot anticipates that they will have the product on
the
shelves in Canada in the 2nd
quarter
of 2006. Profoot sells and distributes in 47 countries, including the
United States. International sales will be expanded predicated on Canadian
sales
results. United States retail distribution is predicated on obtaining a
specific heal pain market clearance from the United States
FDA.
We
have
initiated several orthopedic clinical studies to expand our United States
market
presence. The
studies will be used for additional United States FDA market clearances and
for
marketing.
In
2005,
we completed a 10 store market test with Dr. Scholl’s Foot Care Centers (“Dr.
Scholl’s”) in the United Kingdom. Dr. Scholl’s has given its approval to expand
product distribution to all 50 stores.
We
have
started shipping our new Slim Line products to the plastic surgery market.
They
are significantly lighter, more flexible and durable than the Company’s earlier
product models. The improved design also reduces, in certain applications,
the
number of units required, provides intuitive use guidance, improves patient
compliance and lowers the cost of care.
The
Slim
Line products flexibility, durability, and lower cost of manufacturing has
opened several significant marketing opportunities to embed ActiPatch Therapy
into chronic wound dressings, night splints, walkers, ankle braces and other
orthopedic devices. We are actively discussing such applications with the
market
leaders in each market segment.
In
the
last half of 2005, we initiated a direct response sales and marketing program
from our Westlake Villages, California offices. Initial sales indicate that
direct response marketing with follow on telemarketing is an effective sales
method for solo practice medical specialties such as podiatry, chiropractic,
and
oral surgery.
Results
of Operations
Nine
Months Ended September 30, 2005 Compared to Nine Months Ended September 30,
2004
Our
revenues for the nine months of 2005 increased by $251,499, or approximately
84%
to $551,611 as compared to $300,112 reported in the first nine months of
fiscal
2004. The growth in revenues was from the sales of units to MaxMed that are
to
be embedded into their custom foot orthotics. MaxMed’s embedding of our drug
free, anti-inflammatory patch into their custom foot orthotic has generated
significant physician interest in our products.
Our
gross margin for the first nine months of 2005 increased by $243,184 or
120% to $444,402 as compared to $201,218 for the first nine months of 2004.
The
increase in dollar amount of gross revenue reflects the increase in sales
and
the increased profit margin on the bulk sale of product to MaxMed.
General
and Administrative expenses increased by $176,607 to $648,785 as
compared to $472,178 for
the
nine months of 2004. The increase reflects the addition of a Chief Operating
Officer and administrative staff.
Selling
Expense increased by $409,087 to $517,917 from $108,830 in 2004 as a result
of
the formation of the orthopedic group and the sales and marketing operation
in
Westlake Village, California.
The
Net
Loss increased $427,451 to $815,646 in the first nine months of 2005 from
$388,195 reported in the first nine months of 2004. The increased lost was
the
result of the start up expense of the Orthopedic Sales Group, new product
design
and manufacturing improvements implemented.
Fiscal
Year 2004 Compared to Fiscal Year 2003
Sales
for
fiscal year ended December 31, 2004 increased by $271,505 or 890% to $302,002
as
compared to $30,497 reported in 2003. The growth in revenues was due to the
establishment of a distribution relationship with Mentor Corp for the world
wide
plastic surgery market and other sales.
Cost
of
Goods Sold for the Year Ending December 31, 2004 was $112,724 as compared
to the
$50,565 reported for fiscal 2003. The Cost of Goods Sold expense for 2003
consisted of tooling and other start up materials that were expensed.
Operating
expenses increased from $529,141 for the year ended December 31, 2003 to
$960,405 for the year ended December 31, 2004. Travel, professional services,
and selling expenses account for the majority of this increase. During this
time, the Company engaged an international and domestic sales consultant
and an
operation’s consultant.
Selling
expenses for the year ending December 31, 2003 were $64,916 consisting virtually
entirely of travel expenses. Expenses for the year ending December 31, 2004
were
$265,347 and were incurred in the training and sales suport for Mentor Corp.
sales representatives and other domestic and international distribution
channels.
General
and administrative expenses for the year ended December 31, 2004 were $695,058
compared to $464,225 during 2003. The increase resulted from the engagement
of
operations management and increased travel expenses.
Losses
from operations increased from $549,209 during 2003 to $771,127 during 2004.
Losses were minimized due to the significant increase in sales revenues.
Interest
expense on shareholder leans and equipment lease increased from $8,399
during 2003 to $19,920. The increase can be contributed to the accrued interest
on stockholder loans made during the latter half of 2003.
Net
losses increased from $568,087 during 2003 to $792,799 during 2004. Losses
were
minimized due to the significant increase in sales.
Liquidity
and Capital Resources
At
December 31, 2004 we had cash and cash equivalents of $50,709 and negative
working capital of $546,816 as
compared to cash and cash equivalents of $595 and negative working capital
of
$179,157 at December 31, 2003. The 2004 negative working capital was comprised
of bridge and shareholder loans of $642,000. The bridge loans were repaid
in
2005 and the shareholder loans were converted to equity subsequent to September
30, 2005.
Net
cash
used in operating activities aggregated $771,136 in fiscal year 2004 and
2003,
respectively. The principal use of cash from operating activities in fiscal
2004
was the increase in inventory of $50,115, and an increase in accounts receivable
of $8,786. These were offset by an increase in accounts payable and other
accrued liabilities of $56,897. Non-cash reconciling items include a $14,615
provision for bad debts and depreciation expense of $8,818.
The
Company purchased $53,045 in equipment in 2004 and $5,238
in
fiscal 2003. The Company’s capital equipment requirements are minimal. Most of
the Company's manufacturing is subcontracted or manufactured by others to
the
Company’s specifications. The principle purchase of machinery and equipment was
$40,039 was used to purchase a used encapsulating machine from Frain Industries.
The principal use of cash in 2003 was the purchase of laboratory testing
equipment.
Net
cash
provided by financing activities aggregated $874,295 in fiscal year 2004
and
2003, respectively. During 2003, the source of cash provided by financing
activities can be attributed to the issuance of capital stock, $169,750 and
the
proceeds from related party notes payable $224,200. During fiscal 2004, notes
payable proceeds totaled $370,000 and the issuance of capital stock resulted
in
proceeds of $491,482. The 2004 notes payable consisted of a $300,000 bridge
loan
that was repaid in 2005 and $70,000 in shareholder loans that were converted
to
equity in 2005.
Our
operating losses and development expenses have been funded though the issuance
of equity securities and shareholder loan borrowings.
BUSINESS
General
The
Company designs, develops, manufactures and markets a variety of proprietary,
drug-free, anti-inflammatory patches for a broad range of medical indications.
The Company’s patch products, which are marketed under the trade name ActiPatch
Therapy, deliver pulsed electromagnetic field therapy, a clinically-proven
and
widely-accepted anti-inflammatory and pain relief therapy. Prior to the
introduction of the Company’s products, this therapy had only been offered
through large office or hospital-based equipment. The Company believes pulsed
electromagnetic energy therapy will increasingly be used as an alternative
or
adjunct to many wound care therapies because it relieves pain and swelling,
shortens or halts the inflammatory phase, accelerates tissue healing, minimizes
the appearance of scars and increases the strength of regenerated tissue.
To
date, the Company has focused its product development efforts on the plastic
surgery and podiatry markets, and has established a new-product pipeline
that
includes products for the treatment of the following medical
indications:
Repetitive
Stress Injuries
Plastic
and Cosmetic Surgery
Chronic
Wounds
Surgery
· General
Surgical Procedures
Low
Back Pain
Other
Sprains and Strains
Pulsed
electromagnetic energy therapy is a proven and robust technology platform.
Physicians and therapists around the world have used pulsed electromagnetic
therapy successfully for approximately 70 years to effectively treat soft
tissue
injuries from surgical incisions and accidental wounds, sprains, strains
and
other inflammatory responses. The prohibitive costs of the cabinet-sized
pulsed
electromagnetic machines that are currently available and used in the
marketplace, coupled with the need for daily treatment administered by medical
professionals, have restricted widespread adoption of pulsed electromagnetic
energy therapy. The Company believes its ActiPatch Therapy products, which
deliver a dosage of pulsed electromagnetic energy in dermal patches as small
as
2.5 cm X 4.0 cm, is superior to the therapy delivered by the much larger
machines in use today.
The
Company’s products are designed to meet the market demand for an effective,
inexpensive therapeutic agent for the estimated $10 billion, 400
million-case-per annum soft tissue injury market. The Company believes its
products offer the following competitive advantages:
· |
Noninvasive
relief of pain and swelling
|
· |
Drug-free
and clinically proven
|
· |
Inexpensive,
only a few dollars a day
|
· |
Therapeutically
beneficial
|
The
Company was incorporated under the laws of the State of Maryland on April
1,
2000. Since that date, the Company has, with only limited external funding,
reached a number of key milestones, including the following:
· |
Received
U.S. Food and Drug Administration (the "FDA") market clearance
to sell its
ActiPatch Therapy device for the treatment of edema
(swelling) following blepharoplasty (eye
surgery);
|
· |
Received
ISO Certification and CE Mark (European Common Market) Certification
for
the ActiPatch Therapy device;
|
· |
Received
Canadian approval to sell ActiPatch Therapy for the relief of pain
and
muscle skeletal complaints, without prescription.
Initial
Canadian reimbursement approvals are starting to come
in;
|
· |
Executed
key international and domestic sales and distribution
agreements;
|
· |
Established
an internal direct response sales and marketing
operation;
|
· |
Executed
an agreement with a major over-the-counter foot
care manufacturer and distributor to sell and market our retail
foot care products;
|
· |
Initiated
the adoption of its ActiPatch Therapy products by a number of professional
sports teams;
|
· |
Established
and maintained an intellectual property portfolio covering both the
product design, medical use and the energy signal;
and
|
· |
Established
a 3-5 year pipeline of new products for the treatment of sports
injuries,
bone fractures, pain, chronic wounds, skin conditions and arthritis.
|
Strategy
The
Company’s long-term business strategy is to become a leader in accelerated wound
and soft tissue injury healing products used in a wide variety of medical
and
surgical specialties and procedures. The following are key elements of the
Company’s business strategy:
· |
Broaden
ActiPatch Therapy Product Line and Target Specific Product
Applications.
The Company will continue to expand its ActiPatch Therapy product
line by
leveraging its proprietary pulsed electromagnetic energy therapy
technologies to create new and unique product configurations for
specific
medical and surgical procedures in which soft tissue injuries must
be
treated or repaired. The Company believes, by developing products
to
address specific medical applications, its sales and marketing
processes
will be simplified, the levels of efficacy of its products will
be
increased and the Company will be able to include with its product
packaging more specific directions for usage and, if required,
an explicit
affixing accessory.
|
· |
Emphasize
Clinical Advantage.
The Company will focus on developing products that enable medical
or
surgical procedures to be more clinically effective by reducing
patient
risk and accelerating tissue
healing.
|
· |
Develop
Physician Relationships.
The Company’s marketing and sales strategy emphasizes the establishment of
strong working relationships with physicians, surgeons and other
medical
personnel in order to assess and satisfy their needs for products
and
services. The Company intends to sponsor both domestic and international
training sessions to educate physicians and surgeons in the use
of the
Company’s products. The Company expects that as these relationships
develop and as use of the Company’s ActiPatch Therapy products becomes
more widespread, surgeons will develop additional uses for the
products.
The Company is also thinking of developing relationships with one
or more
distributors to increase sales of the ActiPatch Therapy
products.
|
· |
Reduce
Product Costs.
The Company will seek to design and develop cost competitive products
that
have significant clinical advantages. In addition, the Company
will
continue to improve its manufacturing processes to achieve decreases
in
per-unit product cost while maintaining the highest level of quality
assurance and physician
satisfaction.
|
· |
Increase
International Market Presence.
The Company intends to expand and strengthen its distribution network
to
increase its international physician training and marketing activities
and
to promote the acceptance of the Company’s core technologies and products
in markets outside the United States. Initially, the Company will
seek to
accelerate its expansion into the European retail market as funding
and
new products become available.
|
· |
Direct
Consumer Marketing. The
Company intends to increase acceptance and demand for its ActiPatch
Therapy products in the United States by seeking increased physician
product acceptance and simplifying its product offerings through
the
development of disease-specific applications as discussed above,
seeking
product sponsorship or endorsements by leading professional sports
teams
and organizations, and through focused advertising to launch its
U.S.
retail operations.
|
Products
The
Company’s ActiPatch Therapy products are convenient and portable, and provide a
full course of anti-inflammatory therapy for generally less than $50.00.
The
ActiPatch Therapy products combine a miniaturized microchip, power source
and
antenna in a soft, flexible outer envelope. When applied to the body, these
devices deliver a pulsed radio frequency signal into the body on a 27 MHz
frequency wave that induces a low frequency electromagnetic field to damaged
cell tissue. The pulsating action increases fluid flow to the damaged cells
and
helps to restore the cell’s normal resting potential (-70mV), thereby minimizing
the production of chemical pain signals and inflammatory agents and reducing
swelling and its consequent pain. Optimum therapy is achieved by flexing
the
antenna in the device so that the device conforms to the contour of the injured
tissue and directs the energy directly into the damaged cells. The ActiPatch
Therapy products are designed to:
· |
Provide
portable, disposable and noninvasive relief of pain and
swelling;
|
· |
Shorten
or halt the inflammatory phase of an
injury;
|
· |
Reduce
edema (swelling) and pain;
|
· |
Restore
cell-to-cell communication and thus accelerate tissue
healing;
|
· |
Minimize
the appearance of scars;
|
· |
Increase
the strength of the regenerated tissue;
and
|
· |
Improve
lymphatic flow, thus resulting in the reduction of bruising and
the
improvement of the wound.
|
The
Company believes its ActiPatch Therapy products are well positioned to address
the need for an effective, low-cost, therapeutic agent that reduces pain,
swelling and recovery time in the more than 200 million soft tissue injuries
(including surgical incisions, dental incisions, sprains and strains) in
the
United States each year, and the numerous other soft tissue injuries annually
worldwide. Based upon various market studies, the Company estimates that
the
market for products to treat such injuries exceeds $5 billion domestically
and
$10 billion worldwide.
The
Company has developed, or is designing and/or developing, a full line of
bioelectrical products based upon the core electromagnetic technology contained
in its existing ActiPatch Therapy products. There are a substantial number
of
clinically-proven pulsed electromagnetic energy medical applications that
address specific diseases that the Company believes can be miniaturized and
optimized by modifying the following features of the ActiPatch Therapy device:
(a) size, shape, weight and color of the housing, (b) basic shape of the
antenna, (c) the area and depth of therapeutic coverage of the products,
(d)
treatment duration, (e) method of product attachment to the patient (i.e.
tape,
wraps, pads, neoprene braces, adhesives, etc.) and (g) price. New product
development and improvements will focus on product costs and effective marketing
and distribution strategies.
Technological
and Clinical Evidence of Effectiveness
It
is now
widely accepted in the fields of orthopedics, sports and physical medicine,
plastic surgery and chronic wound care, that pulsed electromagnetic therapy
exerts a wide range of beneficial effects. More recently, with the development
of inexpensive, self-administered micro technology, other branches of medicine
have begun to recognize and utilize the curative benefits of radio-frequency
therapy. More than 500,000 patients with chronically un-united fractures
have
benefited from this surgically non-invasive method without risk, discomfort
or
the high costs of operative repair. Many of the athermal bio-responses, at
the
cellular and sub-cellular levels, have been identified and found appropriate
to
correct or modify the pathologic processes for which pulsed electromagnetic
therapy is being used.
When
the
body receives an injury during surgery, or from trauma such as a sprain,
the
danger of infection is minimal. Nevertheless, the body will respond to the
injury to prevent an infection by swelling, which separates the cells to
prevent
the transmission of infection. This response is known as the “inflammatory
process” and consists of a rapid onset tissue destruction phase, followed by a
longer duration tissue repair phase. The initial destruction phase is evidenced
by redness, heat, swelling and pain in the tissue. To enhance the healing
of
non-infected injuries, the therapeutic goal of the ActiPatch Therapy products
is
to induce the tissue to rapidly pass through, or by-pass, the tissue-damaging
phase of the inflammatory process and move to the tissue repair mode.
Sales
and Marketing Strategy
The
Company believes its products represent a technical breakthrough at market
disruptive prices. Existing ActiPatch Therapy products generally costs less
than
$50, compared to costs that often exceed $3,000 for other treatment
alternatives. Given the diversity and size of the market opportunity, and
the
relatively high level of customer interaction that is typically required
in the
initial sales efforts to describe the benefits and proven success of pulsed
electromagnetic energy therapy, management believes it is beneficial to use
established, well-positioned sales organizations to sell its products. The
Company currently sells and markets its products primarily through third-party
distributors. The Company believes it will be able to expand its direct sales
and marketing efforts, which it will seek to coordinate with the efforts
of its
third-party distributors. The key markets that the Company has identified
for
its ActiPatch Therapy products are:
· |
Physicians’
specialties, including plastic surgery centers, orthopedics, general
surgery and other surgeons, podiatrists, chiropractor clinics and
oral
surgeons;
|
· |
Extended
care facilities (including nursing homes and rehabilitation centers);
and
|
· |
Home
health care providers.
|
Marketing
to Resellers. The
Company also solicits specialty medical device and pharmaceutical manufacturers
to market and sell its ActiPatch Therapy products. The Company believes
manufacturers with existing medical specialty product lines, and a trained
sales
force looking for new products, are ideal distributors. In addition to providing
credibility, rapid customer access and a low-cost sales force, existing
manufacturers have the potential to provide swift dominance in their market
segments and cross market fertilization. The Company anticipates that the
general and other surgery markets will develop as plastic surgeons increase
their use of its ActiPatch Therapy products and expose these products to
the
surgeons and other medical practitioners with whom they work.
In
the
second quarter of 2004, the Company entered into a three-year supply and
distribution agreement with Byron Medical, Inc. (“Byron Medical”), a subsidiary
of Mentor Corporation, pursuant to which Byron Medical has agreed to market
and
sell on an exclusive basis, the Company’s ActiPatch Therapy products worldwide,
through its sales representatives, to plastic surgeons. Mentor Corporation
is a
$600 million medical device company that includes among its customers the
leading suppliers of medical products and technology to plastic
surgeons.
The
Company trains and supports the sales representatives and international agents
of its distributors, including Byron Medical, in order to maximize market
penetration. The Company plans to design motivational incentives to assist
account managers in their efforts to maintain field attention, heighten
enthusiasm among representatives and agents regarding the success of the
product, and insure continued focus on the presentation and distribution
of the
Company’s products.
Marketing
Directly to Physicians’ Offices. The
Company plans to directly solicit targeted physicians and other medical care
providers by mail and to combine direct response marketing with print
advertising and active participation at medical shows and conferences. The
impact of these concurrent and consecutive promotional thrusts will be managed
and absorbed through a comprehensive Customer Relationship Management (CRM)
telemarketing strategy designed to yield the maximum return from the advertising
and promotional market blitz. The Company is negotiating with several
pharmaceutical direct marketing organizations to assist it in establishing
these
marketing efforts.
As
part
of its efforts to directly market its ActiPatch Therapy products to physicians
and other medical care providers, the Company plans to sell “Evaluation Orders”
consisting of six units and two or three free units for testing, in lieu
of
excessive and expensive sampling.
Marketing
to Hospitals. Management
believes the hospital market represents the broadest and deepest long-term
potential source of revenue for the Company’s ActiPatch Therapy products. The
Company believes the therapeutic properties intrinsic to an ActiPatch Therapy
device have application across multiple clinical departments throughout all
acute care institutions. The Company also believes the ability to accelerate
healing through the repair of damaged cells will be an invaluable asset within
the surgical suite because it will reduce pain and the incidence of
post-operative infections, minimize scarring and permit a safe, early discharge
of surgical patients. In addition, the financial implications of the adoption
of
ActiPatch Therapy within the operating room could have ramifications on the
escalating costs associated with surgery. The Company also anticipates that
its
ActiPatch Therapy products will have extensive application within the emergency
room and other institutional departments as a remedy for sprains, strains,
fractures and lacerations. The Company believes its ActiPatch Therapy products
for acute care as well as its planned new advanced wound care products, will
have universal appeal throughout the hospital environment, due to their ability
to combat the endemic and costly problem of pressure sores.
Marketing
to Extended Care Customers. Nursing
homes and home health care providers are separate markets that will ultimately
require distinct channels for the distribution of the Company’s ActiPatch
Therapy products. However, they share common tissue management characteristics
that, for strategic planning, align them for analysis, specific tactics and
coordinated implementation.
For
example, bedsores or pressure ulcers develop on patients who, due to illness
or
immobility, require prolonged bed or wheelchair restriction. The prevalence
of
the decubitus ulcer problem, along with its associated costs, is an ongoing
dilemma in both nursing homes and home health care that has not been solved
by
an inexpensive and effective therapy.
The
nursing home market in the United States is comprised of approximately 17,000
separate facilities. However, approximately 13% of those facilities are
hospital-based and approximately 52% of those facilities are owned and operated
by nursing home chains. It is the Company’s intention to market its products
directly to nursing homes. The Company anticipates that the adoption and
use of
its products by the large nursing home chains and hospital-based nursing
homes
will create an increased awareness of, and demand for, its products throughout
the independently owned nursing homes.
The
Company plans to channel the distribution of its ActiPatch Therapy products
in
the home health care segment through a regional network of dealers and
distributors in order to directly supply the user patient. The Company has
not
yet entered into any agreements with respect to the distribution of its products
to the home health care segment.
International
Marketing. On
September 29, 2004, TUV Rheinland, N.A., a recognized regulatory body for
ISO
Certification, notified the Company that it had successfully completed a
compliance audit for ISO 13485 Medical Devices, and that the CE Mark for
the
ActiPatch Therapy device has been recommended for approval. The Company
subsequently received the approval and began shipping ActiPatch Therapy products
to Byron Medical Inc.’s international distributors. The Company believes the
European Union is an open market for the Company’s innovative use of
electromagnetic therapy due in part to Europe’s classification of the device and
familiarity and extensive use of the traditional electromagnetic therapy
apparatus.
The
Company has also received regulatory approval under the Canadian Medical
Devices
Conformity Assessment System to sell its ActiPatch Therapy device in
Canada.
Manufacturing
Process
The
Company’s ActiPatch Therapy products currently are manufactured by third-party
subcontractors. Although a certain degree of control is sacrificed by
sub-contracting the manufacturing process, management believes it can adequately
control the quality and flow of the product.
The
ActiPatch Therapy products are manufactured in two stages:
· |
Surface
Mount Technology (SMT):
The central operating component of the devices is a small custom
microchip
that controls the timing functions and the pulsed, high frequency
electromagnetic field. Manufacturing of this microchip involves
the
computer automated assembly and testing of sub-miniature electronic
components on a circuit board. Many surface mount manufacturers
can
provide the electronic components necessary to manufacture the
microchip.
Batch production of the product takes approximately six to eight
weeks.
The Company anticipates it will develop a preferred vendor relationship
with a surface mount technology assembler to inventory
components.
|
· |
Encapsulation:
The second stage of the manufacturing process entails laminating
the
electronics board in plastic and onto a foam
backing.
|
Once
the
product is assembled, it is labeled and packaged at an FDA-approved facility
in
stackable cardboard boxes, together with the appropriate wipes and adhesive
pads. The Company manufactures its ActiPatch Therapy products in compliance
with
the FDA’s Good Manufacturing Procedures and ISO 13485 Medical Devices quality
standards. The Company’s Director of Engineering is responsible for overseeing
compliance with these standards. See “Regulatory Environment”
below.
The
Company believes it has made significant progress in improving its product
and
reducing the cost of manufacturing.
Patents
and Intellectual Property
Throughout
its existence, the Company has aggressively created and developed intellectual
property in the medical device field. The Company acquired 44 patents that
now
have expired. Instead of filing for FDA regulatory delay patent extensions,
the
Company opted to file new patent applications to cover its technological
improvements, fixing and delivery methods, and medical treatment procedures.
The
Company has approximately 150 new patent claims pending. We have filed in
the
United States, the European common market, Canada, and other major European
markets such as Japan, South Korea, Mexico, Australia, etc.
The
Company relies upon a combination of patent, copyright, trademark and trade
secret laws, as well as confidentiality agreements and licensing arrangements,
to establish and protect its rights to any intellectual property it creates.
Any
infringement of the Company’s proprietary rights could result in significant
litigation costs, and any failure to adequately protect the Company’s
proprietary rights could result in its competitors offering similar products,
potentially resulting in loss of a competitive advantage and decreased revenues.
Despite the Company’s efforts to protect its proprietary rights, existing
patent, copyright, trademark and trade secret laws afford only limited
protection. In addition, the laws of some foreign countries do not protect
the
Company’s proprietary rights to the same extent as do the laws of the United
States. Attempts may be made to copy or reverse engineer aspects of the
Company’s products or to obtain and use information that the Company regards as
proprietary. Accordingly, the Company may not be able to prevent
misappropriation of its technology or deter others from developing similar
technology. Furthermore, policing the unauthorized use of the Company’s products
is difficult. Litigation may be necessary in the future to enforce the Company’s
intellectual property rights or to determine the validity and scope of the
proprietary rights of others. This litigation could result in substantial
costs
and diversion of resources and could significantly harm the business of the
Company.
The
Company has filed new patent applications in the United States and with the
World Intellectual Property Organization for the Company’s recent product
improvements, and it intends to file additional patent applications on various
technologies in the United States and elsewhere. The Company cannot assure
you
that any patent will be issued from any pending application. Furthermore,
the
Company cannot assure you that any patent that has been, or may be issued,
covers or will cover its products or those it intends to sell. Moreover,
the
Company cannot assure you that any patent that has been issued, or will be
issued, will not be reexamined by the United States Patent and Trademark
Office
or held invalid for any of a variety of reasons.
The
medical device industry is characterized by the existence of a large number
of
patents and frequent litigation based on allegations of patent infringement.
From time to time, third parties may assert patent, copyright, trademark
and
other intellectual property rights to technologies and in various jurisdictions
that are important to the Company’s business. Any claims asserting that the
Company’s products infringe or may infringe proprietary rights of third parties,
if determined adversely to the Company, could significantly harm its business.
Any claims, with or without merit, could be time-consuming, result in costly
litigation, divert the efforts of the Company’s technical and management
personnel or cause product shipment delays, any of which could significantly
harm its business. The Company is not involved in litigation regarding any
of
its patents, nor is the Company aware of any third-party infringement of
any
patents or other intellectual property.
A
significant factor in the production and marketing of the Company’s ActiPatch
Therapy products, and in its research and development activities, is regulation
by the applicable governmental authorities in the United States, including
the
FDA, and those in other countries in which the Company distributes or intends
to
distribute its products. These regulatory agencies must approve the Company’s
products before the Company can market them in the applicable regions. Over
the
past few years,
the
FDA’s Center for Devices and Radiological Health (the division of the FDA that
regulates medical devices in the United States) has become more flexible
in the
approval process of medical devices. The FDA typically categorizes medical
devices into three regulatory classifications subject to varying degrees
of
regulatory control:
CLASS
I: Subject
to the least regulatory control. Requires compliance with labeling and record
keeping regulations.
CLASS
II: Subject
to performance standard and other general controls.
CLASS
III: Requires
clinical testing to assure safety and effectiveness. Subject to other general
controls.
The
Company’s ActiPatch Therapy products are Class III devices and are subject to a
pre-market notification process pursuant to Section 510(k) of the Federal
Food,
Drug and Cosmetic Act. This section requires that the introduction of new
products into the market, or the modification of existing products that could
significantly affect the safety or effectiveness of the device, be preceded
by a
510(k) notification to the FDA. The notification must contain information
that
establishes that the product is as safe and effective as an existing device
that
is legally marketed. The company that has filed the application will be granted
clearance to market the product once the FDA has made this determination.
The
FDA generally makes this determination within ninety (90) days after receipt
of
the notification
based on
the information submitted by the applicant.
The
FDA
also regulates the processes and facilities used to manufacture medical devices
and related products. In order to market devices and products that are approved
by the FDA, the manufacturer’s quality control and manufacturing procedures must
conform to the FDA’s Good Manufacturing Practice (GMP) regulations. The GMP
regulations cover
the
design, packaging, labeling and manufacturing of medical devices. The
Company must consistently spend the necessary time and resources in all areas
of
production and quality control to ensure full technical compliance with all
FDA
regulations.
The
Company’s ActiPatch Therapy products are also subject to foreign regulatory
approval before they may be marketed abroad.
Any
changes in the laws and regulations, or new interpretations of existing laws
and
regulations, may have a significant impact on the Company’s methods of operation
and its costs of doing business. There can be no assurance that future
regulatory, judicial and legislative changes in the United States or any
other
territory in which the Company’s ActiPatch Therapy products are marketed will
not have a material adverse effect on the Company. There can be no assurance
that regulators or third parties will not raise material issues with regard
to
the Company or its compliance or non-compliance with applicable regulations
or
that any changes in applicable laws or regulations will not have a material
adverse effect on the Company and its business.
Medicare
Reimbursement
The
Center for Medicare & Medicaid Services (CMS) recently approved
electromagnetic therapy for reimbursement under CIM 35-102 covering chronic
Stage III and Stage IV pressure ulcers (bedsores), arterial ulcers, diabetic
ulcers and venous stasis ulcers. Reimbursement is effective as of July 6,
2004
under the Health Care Procedural Coding System’s (HCPCS) code G0329, with
reimbursement levels dependent on geography and facility type.
The
Company believes that approval from the CMS provides:
· |
Financial
benefits to the users of its ActiPatch Therapy
products;
|
· |
Greater
likelihood of institutional acceptance of the use of electromagnetic
therapy in outpatient, hospital and skilled care (i.e. nursing
home)
facilities;
|
· |
Potential
inroads with commercial insurance carriers to approve reimbursement
for
non-Medicare/Medicaid insured programs;
and
|
· |
Increased
opportunity to petition CMS in the future for reimbursement approval
of
other electromagnetic therapies and
applications.
|
Competition
The
medical device industry is highly competitive. On a broad therapeutic scale,
the
Company’s ActiPatch Therapy products compete with pharmaceutical products and
other medical devices used or useful in the care and treatment of wounds
and
other soft tissue injuries. The intended use of the ActiPatch Therapy device
is
adjunctive to standard wound care treatments such as dressings, antibiotics
and
topical agents. In that sense, the ActiPatch Therapy device does not compete
directly with these existing products. However, companies that market complex
dressings (including the ConvaTec subsidiary of Bristol-Myers Squibb Co.,
which
sells DuoDerm; the 3M Company, which sells Tegader; and Smith & Nephew PLC,
which sells OP-Site) may view the Company’s ActiPatch Therapy product as a
competitor due to the fact that it is designed to shorten treatment time
for
wounds and reduce the use of complex dressings.
The
categories of existing electrotherapeutic products are as follows:
· |
Transcutaneous
Electrical Nerve Stimulators
(“TENS”);
|
· |
Muscle
Stimulators Microcurrent Stimulators
(“MENS”);
|
· |
Non-fusion
electromagnetic bone therapy
devices;
|
· |
Short-wave
diathermy; and
|
· |
Pulsed
short-wave diathermy.
|
These
devices are generally used to: (i) control acute and chronic pain; (ii) decrease
joint contracture; (iii) facilitate fracture healing, muscle re-education
and
tissue healing; (iv) minimize disuse atrophy; (v) reduce
edema and muscle spasm; and (vi) strengthen the muscle.
Manufacturers
of medical devices represent the most direct form of competition for the
Company
since these companies typically have established manufacturing and distribution
processes for their products. However, no single entity has established a
commanding market share position within the electromagnetic or electro
stimulation therapy markets. In addition, the technical nature of the ActiPatch
Therapy device presents a strong limitation for direct competition and entry
into the market.
Specific
medical device companies that provide electromagnetic therapies similar to
those
offered by the Company include DiaPulse Corporation of America, ADM Tronics,
Inc., Biomedical Design Instruments and CuraTronic, Ltd. However, these
companies offer larger, fixed facility-dependent devices rather than the
small,
portable devices offered by the Company. The Company believes the competitive
advantages of its ActiPatch Therapy products include their size, ease of
use,
the ability to self administer therapy, cost and distinct healing benefit,
combined with their ability to provide pain relief.
Employees
On
July
1, 2005, the Company entered into a co-employment agreement with Administaff,
Inc. Administaff, Inc. delivers personnel management services and assumes
or
shares many of the responsibilities of being an employer. In addition,
Administaff, Inc. provides our employees with a wide array of value-added
benefits and services. At December 31, 2005, the Company had an aggregate
of
three full-time employees at its headquarters in Frederick, Maryland, two
employees at its design and production office in Murrieta, California, and
eight
employees in its orthopedic sales group in Westlake, California. None of
the
Company’s employees is represented by a labor union and the Company considers
its relationships with its employees to be good.
Property
The
Company recently relocated its corporate headquarters to 401 Rosemont Avenue,
3rd
Floor
Rosenstock Hall, Frederick, Maryland 21701. The premises on which this office
is
located are owned by the Frederick Innovative Technology Center, Inc. The
term
of the lease expires on March 4, 2006 and the current rent is $900 per month.
The lease term will automatically be extended for six month periods unless
either party gives the other written notice of cancellation at least forty
five
(45) days prior to the expiration of any lease term.
The
Company maintains a design and production office located at 41120 Elm Street,
Building H, Murrieta, California 92562 pursuant to a lease agreement between
the
Company and Madison Commercenter, LLC. The term of the lease expires on March
30, 2006 and the current rent for the facilities is $550.00 per
month.
The
Company sub-leases office space at the facilities of Custom Converting, Inc.,
a
medical device manufacturer and assembler located at 2625 Temple Heights
Drive,
Oceanside, California 92056. The current rent for this space is $500.00 per
month and the sub-lease is terminable at will.
The
Company maintains a direct response orthopedic sales office at 31255 Cedar
Valley Drive, Westlake, California. pursuant to a lease agreement between
the
Company and Westlake Plaza Business Park, LLC. The term of the lease expires
on
March 14, 2007 and the current rent for the facilities is $3,430.80 per
month.
Legal
Proceedings
The
Company and Andrew Whelan, President & CEO, are defendants in a lawsuit
brought by a plaintiff who is seeking damages arising from a breach by the
Company of certain alleged oral contractual obligations. The plaintiff claims
that, pursuant to these alleged obligations, he would have been entitled
to
receive Common Stock and options to purchase Common Stock from the Company
as
compensation for rendering certain services to the company. Although this
legal
action is in its preliminary stages and the full amount of the plaintiff’s claim
has not been asserted, the Company believes the potential dollar amount of
the
claim will not have a material adverse effect on its operations or financial
condition. The Company believes the plaintiff’s claims are without merit and
intends to defend the lawsuit and pursue any counterclaims
vigorously.
MANAGEMENT
Directors
and Executive Officers
The
following table sets forth certain information with respect to each executive
officer and director of the Company as of December 31, 2005:
Name
|
Age
|
Position
|
Andrew
J. Whelan
|
64
|
Chairman
and President
|
Thomas
J. O’Connor
|
48
|
Chief
Operating Officer, Chief Financial Officer, Secretary,
Director
|
Todd
Kislak
|
49
|
President
Orthopedic Group
|
Joseph
Iglesias
|
39
|
Vice
President of Design and Engineering
|
Brian
M. Kinney, M.D.
|
50
|
Director
|
Ashton
Peery
|
54
|
Director
|
Douglas
Watson
|
60
|
Director
|
Mary
Whelan
|
55
|
Director
|
Richard
Staelin, Ph.D.
|
66
|
Director
|
Andrew
J. Whelan - President and Chairman: Mr.
Whelan is a founder of the Company and has served as the President and Chairman
of the Board since April 2000. From 1993 to April 2000, Mr. Whelan served
as the
President of P.A. Whelan & Company, Inc., a consulting firm owned by Mr.
Whelan and his wife that specialized in the health care industry. Mr. Whelan
was
also a founder of Drug Counters, Inc., a chain of managed care retail
pharmacies, where he served as President and Chief Executive Officer from
1992
until 1994. Drug Counters, Inc. was sold to Diagnostek, Inc. in 1994. From
1984
until 1992, Mr. Whelan served as Chairman of the Board of Directors and
President of Physicians’ Pharmaceutical Services, Inc., a public company of
which he was a founder.
Thomas
J. O’Connor - Executive Vice President, Chief Operating Officer, Secretary and
Director: Mr.
O’Connor has served as Chief Operating Officer, Chief Financial Officer,
Secretary and as a director of the Company since October 2004. Prior to joining
the Company, Mr. O’Connor served as Senior Vice President - Managed Care at SXC
Health Solutions, a prescription claims processing company, from October
2002
until October 2004. From February 2000 until October 2002, Mr. O’Connor served
as an independent consultant providing his e-health, e-marketing, product
development and marketing expertise to clients. Mr. O’Connor also served as a
member of the initial senior management team recruited in 1994 to develop
CVS
Corporation’s prescription benefits management subsidiary. While at CVS
Corporation, Mr. O’Connor served as Vice President - Operations/Information
Services from August 1994 until December 1998 and as Vice President - Sales
& Marketing from January 1999 until February 2000.
Todd
Kislak
- President,
Orthopedic Group:
Mr.
Kislak has served as President of the Company’s Orthopedic Group since January
3, 2005. Mr. Kislak served as Director of Marketing and Business
Development, as well as Director of International Sales at Royce Medical
from
December 1997 to March 2003, as Director of Marketing, Personal Products
Division and other sales and marketing positions at Sunrise Medical from
April
1989 to December 1997, and as Executive Vice President at Solana Medspas
from
September 2003 to April 2004. From April 2004 to December 2004, Mr. Kislak
was a self employed consultant and investor. Each position involved national
and
international responsibilities. In 2001, Mr. Kislak launched an OEM marketing
program with a major manufacturer of PEMF bone growth stimulators.
Joseph
Iglesias
- Vice
President of Design and Engineering:
Mr.
Iglesias has served as the Company’s Vice President of Design and Engineering
since June 1, 2005. Mr. Iglesias served as the Manager of Product Design
at
Royce Medical from May 1990 to April 2005.
Outside
Directors:
Brian
M. Kinney, M.D., F.A.C.S, M.S.M.E. - Director: Dr.
Kinney is the Chief of Plastic Surgery at Century City Hospital in California
and has served as a director of the Company since April 2000. He was the
Chairman of the New Technologies Committee of the American Society of Plastic
and Reconstructive Surgeons, which Committee has evaluated the use of pulsed
electromagnetic therapy. Throughout his career, Dr. Kinney has received numerous
honors, awards and scholarships for his research, including an award for
extraordinary service to the American Society of Plastic and Reconstructive
Surgeons. Over the past 20 years, Dr. Kinney has accepted many teaching
appointments, visiting professorships and hospital appointments, and is involved
in committee service at universities and hospitals throughout the country.
Dr.
Kinney serves on the faculty of the University of Southern California Medical
School, and is a visiting professor at New York University Medical School
and
the Vanderbilt Medical School. He has authored or co-authored over 31 books
and
articles, including several articles on the use of pulsed electromagnetic
field
therapy in surgery.
Ashton
Peery - Director: Mr.
Peery
has served as a director of the Company since February 2003. Mr. Peery served
as
General Partner at Lucent Venture Partners, Inc. from 2000 until 2002.
Before that, Mr. Peery served as Vice President - Corporate Strategy and
Business Development at Lucent Technologies, Inc. (“Lucent”) from 1998
until 2000. Prior to joining Lucent, Mr. Peery worked at the consulting
organization Geopartners Research, Inc., where he served as Managing Director
from 1995 until 1998, Principal from 1993 until 1995 and Senior Consultant
from
1991 until 1992. Mr. Peery is also a director of Viseon, Inc., a leading
developer and manufacturer of patented personal broadband communications
solutions.
Douglas
Watson - Director:
Mr.
Watson has served as a director of the Company since February 2003. Mr.
Watson
is the founder and Chief Executive Officer of Pittencrieff Glen Associates,
which was established in July 1999. Prior to this, Mr. Watson spent 33
years
working at Geigy / Ciba-Geigy / Novartis, during which time he held a variety
of
positions in the United Kingdom, Switzerland and the United States. Mr.
Watson
served as President of Ciba-Geigy’s U.S. Pharmaceuticals Division from April
1986 until March 1996, at which time he was appointed President and Chief
Executive Officer of Ciba-Geigy Corporation. From January 1997 until May
1999,
Mr. Watson served as President and Chief Executive Officer of Novartis
Corporation, the U.S. subsidiary of Novartis A.G. Mr. Watson is the Chairman
of
the Board of OraSure Technologies, Inc. and also of Javelin Pharmaceuticals,
Inc. Mr. Watson also currently serves as a member of the board of directors
of
Engelhard Corporation, Dendreon Corporation, Genta Incorporated, BioMimetic
Therapeutics, Inc., and InforMedix, Inc. He is also a member of the board
of
directors of the American Liver Foundation, and is Chairman of the Freedom
House
Foundation.
Mary
Whelan - Director: Ms.
Whelan has served as a director of the Company since April 2002. Ms. Whelan
also
served as Vice President - Marketing of the Company from September 2002
until
July 2003 and as Secretary from February 2002 until September 2004. Ms.
Whelan
currently serves as Executive Vice President - Marketing & Communications at
mPhase Technologies, Inc. Ms. Whelan served as Vice President - eBusiness
at
Lucent Technologies from January 1999 until August 2001. Prior to that,
Ms.
Whelan served as Lucent’s Vice President - Strategic Communications and Market
Operations, in which capacity she was responsible for Lucent’s global marketing
operations, including marketing communications and customer programs, and
for
the global sales support environment for the worldwide sales force. Ms.
Whelan
is the sister of Andrew Whelan, our President.
Richard
Staelin, Ph. D. - Director:
Dr.
Staelin, the Edward and Rose Donnell Professor of Business Administration
at The
Fuqua School of Business at Duke University, has served as a director of
the
Company since April 2005. Dr. Staelin served as the Executive Director of
the
Marketing Science Institute from 1991 to 1993, and has held numerous positions
at the American Marketing Association (AMA) from 1997 to 2005 and has held
numerous positions at Duke University including Deputy Dean, the initial
Managing Director of the Global MBA program, and the Associate Dean for
Executive Education. He is currently the President-elect for ISMS, an
international organization of marketing scientists. Dr. Staelin was Educator
award of the Year by the American Marketing Association and won the Converse
award for his cumulative impact on the marketing profession. He has consulted
for the FDA and the FTC in addition to a number of major corporations including
IBM and Ford Motor Company. In addition Dr. Staelin was an editor and/or
on
editorial board member of Marketing Science, Journal of Marketing Research,
the
Journal of Marketing, the Journal of Consumer Research and the Journal of
Consumer Psychology. He has served on the boards of Dispute Resolution Center
in
Chapel Hill, NC and the Drama Department at Duke University.
Executive
Compensation
The
following table sets forth, for the fiscal years indicated, all compensation
awarded to, earned by or paid to Mr. Andrew J. Whelan, our Chief Executive
Officer, and other executive officers of the Company (the “Named Executives”)
with total compensation in excess of $100,000 in compensation during the
three
fiscal years ended December 31, 2005.
Summary
Compensation Table
|
Annual
Compensation
|
|
Long-Term
Compensation
Awards
|
Name
and
Principal
Position
|
Fiscal
Year
|
Salary($)
|
Bonus($)
|
Other
Annual
Compensation
($)
|
Options(#)
|
All
Other
Compensation
|
Andrew
J. Whelan
Chief
Executive Officer
and
President
|
2005
2004
2003
|
$0
$0
$0
|
None
None
None
|
None
None
None
|
0
0
0
|
None
None
None
|
|
|
|
|
|
|
|
Thomas
J. O’Connor(1)
Vice
President - Operations and Chief Financial Officer
|
2005
2004
2003
|
$150,000
$0
$0
|
None
None
None
|
None
None
None
|
0
2,100,000
None
|
None
500,000
shares
None
|
|
|
|
|
|
|
|
Todd
Kislak(2)
President
- Orthopedic Group
|
2005
2004
2003
|
$150,000
$0
$0
|
None
None
None
|
None
None
None
|
2,100,000
0
0
|
500,000
shares
None
None
|
|
|
|
|
|
|
|
Joseph
Iglesias(3)
Vice
President - Design and Engineering
|
2005
2004
2003
|
$115,000
$0
$0
|
None
None
None
|
None
None
None
|
900,000
0
0
|
None
None
None
|
__________________
(1) Mr.
O’Connor became our Vice President - Operations and Chief Financial Officer
in
October 2004 and receives an annual salary of $150,000 for such services,
and he
did not draw a salary until 2005. In 2005, Mr. O’Connor was paid $68,750 for his
services rendered to the Company. In October of 2004, Mr. O’Connor was granted
500,000 shares of common stock and an option for 2,100,000 shares, both of
which
vest over three years. The shares underlying the options have an exercise
price
of $.30 per share with respect to the initial 700,000 shares under the option,
$.40 per share for the next 700,000 shares, and $.50 per share for the final
700,000 shares under the option.
(2) Mr.
Kislak became our President-Orthopedic Group in January 2005 and receives
a
salary of $150,000 for such services. In 2005, Mr. Kislak was paid 143,750.13
for his services rendered to the Company. In January 2005, Mr. Kislak was
granted 500,000 shares of common stock and an option for 2,100,000 shares,
both
of which vest over three years. The shares underlying the options have an
exercise price of $.30 per share with respect to the initial 700,000 shares
under the option, $.40 per share for the next 700,000 shares, and $.50 per
share
for the final 700,000 shares under the option.
(3) Mr.
Iglesias became our Vice President-Design & Manufacturing in June 2005 and
receives a salary of $115,000 for such services.
In 2005, Mr. Iglesias was paid $52,708.37 for his services rendered to the
Company. In June 2005, Mr. Iglesias was granted
an option for 900,000 shares which vests over three years.
Employment
Agreements
We
have
entered into employment agreements with three of our executive officers.
Thomas
J.
O’Connor’s employment agreement with the Company became effective as of October
1 2004. Mr. O’Connor was appointed as Vice President of Operations and Chief
Financial Officer of the Company. The term of the agreement is from October
1,
204 until December 31, 2007, unless terminated earlier. Mr. O’Connor is
receiving base compensation of $150,000 a year, plus an annual bonus of up
to
50% of the base compensation for the year, with such formula to be established
by the Compensation Committee of the Board of Directors. In addition, Mr.
O’Connor was granted 500,000 shares of restricted Common Stock of the Company
and an option (the “Option”) to purchase 2.1 million shares of the Common Stock
of the Company. The Option shall be granted subject to the following terms:
(i)
the exercise price with respect to the initial 700,000 shares under the Option
shall be $.30 per share (ii) an additional 700,000 shares at a grant price
of
$.40 per share; (iii) an additional 700,000 shares at a grant price of $.50
per
share; (iv) the Option and grant shall fully vest over a three-year period
the
Options are exercisable as follows: 33.3% shall be exercisable on each of
the
first, second and third anniversaries of the grant date; and (iv) the Option
shall be exercisable by Mr. O’Connor or his estate for a period of five years.
The
Company also entered into an employment agreement with Todd Kislak. Mr. Kislak’s
employment agreement with the Company became effective January 3, 2005. Mr.
Kislak was appointed as President of the Orthopedics Group of the Company.
The
term of his agreement is from January 3, 2005 until December 31, 2007, unless
terminated earlier. Mr. Kislak is receiving base compensation of $150,000
a
year, plus an annual bonus of up to 50% of the base compensation for the
year,
with such formula to be established by the Compensation Committee of the
Board
of Directors. In addition, Mr. Kislak was granted 500,000 shares of restricted
Common Stock of the Company and an option (the “Option”) to purchase 2.1 million
shares of the Common Stock of the Company. The Option shall be granted subject
to the following terms: (i) the exercise price with respect to the initial
700,000 shares under the Option shall be $.30 per share (ii) an additional
700,000 shares at a grant price of $.40 per share; (iii) an additional 700,000
shares at a grant price of $.50 per share; (iv) the Option and grant shall
fully
vest over a three-year period the Options are exercisable as follows: 33.3%
shall be exercisable on each of the first, second and third anniversaries
of the
grant date; and (iv) the Option shall be exercisable by Mr. Kislak or his
estate
for a period of five years.
The
Company also entered into an employment agreement with Joseph Iglesias. Mr.
Iglesias’s employment agreement with the Company became effective as of June 1,
2005. Mr. Iglesias was appointed as Vice President of Design and Engineering
of
the Company. The term of his agreement is from June 1, 2005 until May 31,
2008,
unless terminated earlier. Mr. Iglesias is receiving base compensation of
$115,000 a year, plus an annual bonus of up to 50% of the base compensation
for
the year, with such formula to be established by the Compensation Committee
of
the Board of Directors. Mr. Iglesias was granted an option (the “Option”) to
purchase 900,000 shares of Common Stock of the Company. The Option shall
be
granted subject to the following terms: (i) the exercise price with respect
to
the initial 300,000 shares under the Option shall be $.30 per share (ii)
an
additional 300,000 shares at a grant price of $.40 per share; (iii) an
additional 300,000 shares at a grant price of $.50 per share; (iv) the Option
and Grant shall fully vest over a three-year period based on continuous
employment of the Executive and the Options are exercisable as follows: 33.3%
shall be exercisable on each of the first year, second year and third year
anniversaries of the Grant Date; and v) the Option shall be exercisable by
Executive or his estate for a period of five years.
Stock
Option Grants
The
following table sets forth individual grants of stock options and stock
appreciation rights (“SARs”) made during fiscal 2005 to the Named
Executives.
Option/SAR
Grants In Last Fiscal Year
Name
|
|
Number
of Securities Underlying Options/SARs Granted(1)
|
|
Percent
of Total Options/SARs Granted to Employees in Fiscal
Year(2)
|
|
Exercise
or Base Price
($/Share)
|
|
Expiration
Date
|
|
Todd
Kislak (3)
|
|
|
2,100,000
|
|
|
70
|
%
|
|
$.30
to $.50
|
|
|
1/02/2010
|
|
Joseph
Iglesias (4)
|
|
|
900,000
|
|
|
30
|
%
|
|
$.30
to $.50
|
|
|
5/31/2010
|
|
_______________
(1)
|
No
SARs were granted in fiscal 2005.
|
(2)
|
In
fiscal 2005, we granted options to two employees to purchase an
aggregate
of 3,000,000 shares of our Common
Stock.
|
(3)
|
The
shares underlying the options have an exercise price of $.30 per
share
with respect to the initial 700,000 shares under the option, $.40
per
share for the next 700,000 shares, and $.50 per share of the final
700,000
shares under the option.
|
(4)
|
The
shares underlying the options have an exercise price of $.30 per
share
with respect to the initial 300,000 shares under the option, $.40
per
share for the next 300,000 shares, and $.50 per share of the final
300,000
shares under the option.
|
The
Company may grant stock appreciation rights to its management personnel for
up
to 10 million of shares of Common Stock. Shares are granted on the date of
the
Executive Employment Agreement. Upon exercise of a stock appreciation right,
the
holder may receive shares of Common Stock and cash equal to the excess of
the
fair market value of the Common Stock at the date of exercise over the option
price. Stock may be exercised five years from the date of granting.
Stock
Option Exercised
The
following table contains information relating to the exercise of our stock
options by the Named Executives in fiscal 2005, as well as the number and
value
of their unexercised options as of December 31, 2005.
Aggregated
Option Exercises in Last Fiscal Year
and
Fiscal Year-End Option Values
|
|
Shares
Acquired on
|
|
Value
|
|
Number
of Securities Underlying Unexercised Options
at Fiscal Year-End(#)(1)
|
|
Value
of Unexercised In-the-Money Options at Fiscal Year-End
($)(2)
|
|
Name
|
|
Exercise
(#)
|
|
Realized($)
|
|
Exercisable
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
|
Thomas
J. O’Connor
|
|
|
0
|
|
|
0
|
|
|
700,000
|
|
|
1,400,000
|
|
$
|
42,000
|
|
$
|
0
|
|
Todd
Kislak
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
2,100,000
|
|
|
N/A
|
|
$
|
42,000
|
|
Joseph
Iglesias
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
900,000
|
|
|
N/A
|
|
$
|
18,000
|
|
________________
The
Company has a nonqualified stock option plan for selected executives and
other
key employees under which options to purchase shares of the Company’s Common
Stock are granted at exercise prices ranging from $0.30 to $0.50 per share.
Options may be exercised over a five-year period and vest 33 1/3% each year
over
a three-year period. Options to purchase up to 5.685 million shares were
issued
during the nine months ended September 30, 2005, 3 million of which were
issued
to the Named Executives.
(1)
|
The
sum of the numbers under the Exercisable and Unexercisable column
of this
heading represents the Named Executives’ total outstanding options to
purchase shares of Common Stock.
|
(2)
|
The
dollar amounts shown under the Exercisable and Unexercisable columns
of
the heading represent the number of exercisable and unexercisable
options,
respectively, that were “In-the-Money” on December 31, 2005, multiplied by
the difference between the closing price of the Common Stock on
December
31, 2005, which was $0.36 per share, and the exercise price of
the
options. For purposes of these calculations, In-the-Money options
are
those with an exercise price below $0.36 per
share.
|
PRINCIPAL
STOCKHOLDERS
The
following table sets forth, as of December 31, 2005,
the
names, addresses and number of shares of our Common Stock beneficially owned
by
all persons known to us to be beneficial owners of more than 5% of the
outstanding shares of our Common Stock, and the names and number of shares
beneficially owned by all of our directors and all of our executive officers
and
directors as a group (except as indicated, each beneficial owner listed
exercises sole voting power and sole dispositive power over the shares
beneficially owned). As of December 31, 2005, we had a total of 62,484,892
shares of Common Stock outstanding:
Name
and Address
|
Number
of
Shares(1)
|
Percent
Prior
to Offering(1)
|
Andrew
J. Whelan
3612
Sprigg Street
Frederick,
Maryland 21704
|
30,912,964(2)
|
49.5%
|
|
|
|
Mary
Whelan(3)
23
Crest Drive
Basking
Ridge, New Jersey 07920
|
2,368,472
|
3.8%
|
|
|
|
Richard
Staelin, Ph.D.
5200
Pinney Creek Lane
Durham,
NC 27705
|
300,000
|
*
|
|
|
|
Thomas
J. O’Connor
1130
E. Missouri Ste 700
Phoenix,
Arizona 85014
|
492,072(4)
|
*
|
|
|
|
Todd
Kislak
5809
Middle Crest Drive
Agoura
Hills, CA 91301
|
25,000(5)
|
*
|
|
|
|
Brian
Maltbie Kinney, M.D.
2080
Century Park East
Los
Angeles, California 90067
|
513,694(6)
|
*
|
|
|
|
Ashton
Peery
50
Old Concord Road
Lincoln,
Massachusetts 01773
|
369,130(6)
|
*
|
|
|
|
Douglas
Watson
52
Liberty Corner Road
Far
Hills, New Jersey 07931
|
328,217(6)
|
*
|
|
|
|
Joseph
Iglesias
1930
Brush Oak Court
Thousand
Oaks, California 91320
|
100,000(7)
|
*
|
|
|
|
All
directors and officers as a group (9 persons)
|
35,409,549
|
56.7%
|
________________
*
Represents
the beneficial ownership of less than 1% of the Common Stock.
(1)
|
Beneficial
ownership is determined in accordance with the rules of the SEC
and
includes voting or investment power with respect to securities.
Shares of
Common Stock issuable upon the exercise of stock options or stock
warrants
currently exercisable or convertible, or exercisable or convertible
within
60 days, are deemed outstanding for computing the percentage ownership
of
the person holding such stock options or warrants, but are not
deemed
outstanding for computing the percentages ownership of any other
person.
Except as otherwise indicated, the Company believes that the beneficial
owners of the Common Stock listed in the table, based on information
furnished by such owners, have sole investments and voting powers
with
respect to such shares
|
(2)
|
Represents
shares owned by PAW, LLC, a limited liability company the members
of which
are the immediate family members of Mr. Whelan and of which Mr.
Whelan is
the manger.
|
(3)
|
Represents
shares owned by eMarkets Group, the President of which is Mary
Whelan and
the members of which are Mary Whelan and her immediate family,
other than
currently exercisable options to purchase up to 50,000 shares of
Common
Stock, which were issued directly to Ms.
Whelan.
|
(4)
|
Does
not include 500,000 shares of restricted Common Stock and options
to
purchase 2,100,000 shares of Common Stock issued to Mr. O’Connor pursuant
to his employment agreement, which restricted Common Stock and
options did
not begin to vest until October
2005.
|
(5)
|
Does
not include 500,000 shares of restricted Common Stock and options
to
purchase 2,100,000 shares of Common Stock issued to Mr. Kislak
pursuant to
his employment agreement, which restricted Common Stock and options
did
not begin to vest until January
2006.
|
(6)
|
Includes
currently exercisable options to purchase 50,000 shares of Common
Stock.
|
(7)
|
Includes
100,000 shares owned by Mr. Iglesias’ minor son. Does not include options
to purchase 900,000 shares of Common Stock issued to Mr. Iglesias
pursuant
to his employment agreement, which restricted Common Stock does
not begin
to vest until June 2006.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Mary
Whelan, a member of the Board, is the sister of Andrew J. Whelan, the President
and Chairman of the Board. Ms. Whelan also is the President of eMarkets Group,
a
shareholder of the Company. In July 2003, eMarkets Group, made a loan to
the
Company in the principal amount of $58,572.58. This loan is evidenced by
a
promissory note that bears interest at a rate per annum of nine percent (9%)
and
matures on June 1, 2008. At September 30, 2005, the entire principal amount
of,
and any accrued interest on, this loan, in the amount of $70,813.31 remained
outstanding. The note is scheduled for repayment in January 2007.
In
April
2000, the Company acquired from Patricia A. Whelan, the wife of Andrew J.
Whelan, the Chairman of the Board and President of the Company, certain patents
(including all 44 patents currently owned by the Company), technology, research,
trademarks and other assets relating to pulsed electromagnetic energy therapy
(the “Acquired Assets”). The Acquired Assets were acquired by Mrs. Whelan in
October 1994 from Shannon Investments, Inc. (“Shannon”) in a transaction in
which Mrs. Whelan agreed to pay to Shannon (i) 20% of any consideration received
by Mrs. Whelan, directly or indirectly, from the Acquired Assets, including
any
sales of products utilizing any of the Acquired Assets and (ii) a 2% royalty
payment on any sales by Mrs. Whelan of products utilizing the Acquired Assets.
In such transaction, Shannon acknowledged that Mrs. Whelan had the authority
to
dispose of or retain the Acquired Assets in her sole discretion. Prior owners
of
the Acquired Assets transferred the Acquired Assets under transfer and
assignment agreements that included similar 2% royalty payments. While the
Company believes it is not responsible for the payment of any royalty or
other
payments to any prior owner(s) of the Acquired Assets, there can be no assurance
that any of such prior owners will not claim that royalty or other payments
are
due and owing by the Company. Any such claims, with or without merit, could
be
time consuming, result in costly litigation, and divert the efforts of the
Company’s management personnel.
On
December 12, 2003, Robert Lorenz, the son-in-law of Andrew J. Whelan made
a loan
to the Company in the principal amount of $78,280.00. This loan is evidenced
by
a promissory note that bears interest at a rate per annum of nine percent
(9%)
and matures on January 1, 2012. At September 30, 2005, the entire principal
amount of, and any accrued interest on, this loan, in the amount of $91,495.52,
remained outstanding. The Company also issued 400,000 shares of Common Stock
to
Mr. Lorenz pursuant to a Note Purchase Agreement dated December 12, 2003,
executed in connection with this loan. The Lorenz note is scheduled to begin
repayment of 60 equal monthly installments, beginning in January
2007.
On
December 12, 2003, Betty Jean Rutkowski, the sister-in-law of Andrew J. Whelan,
made a loan to the Company in the principal amount of $86,000.00. This loan
is
evidenced by a promissory note that bears interest at a rate per annum of
nine
percent (9%) and matures on December 12, 2018. At September 30, 2005, the
balance on the note was $84,277.87. The Company also issued 400,000 shares
of
Common Stock to Ms. Rutowski pursuant to a Note Purchase Agreement dated
December 12, 2003, executed in connection with this loan. The Rutkowski note
is
scheduled for 12 monthly payments of $743 during 2006 and the balance remaining
plus accrued interest will be repaid over the next 12 years.
In
November 2005, the Company issued senior secured convertible 24 month term
notes
in the aggregate amount of $750,000 to LH Financial (“the Notes”). The Notes
have an 8% coupon, payable on a monthly basis. The Notes issued are convertible
notes at the option of LH Financial, at a fixed price of $0.25. For every
share
of the Company’s Common Stock for which the Notes are converted, LH Financial
will receive one warrant, exercisable within a five-year period from the
conversion of the Notes.
DESCRIPTION
OF SECURITIES
Our
authorized capital stock consists of 200,000,000 shares of Common Stock,
par
value $.001 per share. As of December 31, 2005, 62,484,892 shares of Common
Stock were issued and outstanding. In addition, at such date, 12,683,001
shares
of Common Stock were reserved for issuance upon the exercise of outstanding
options and warrants and the conversion of outstanding convertible
indebtedness.
Common
Stock
Voting,
Dividend and Other Rights.
Each
outstanding share of Common Stock will entitle the holder to one vote on
all
matters presented to the stockholders for a vote. Holders of shares of Common
Stock will have no preemptive, subscription or conversion rights. All shares
of
Common Stock to be outstanding following this offering will be duly authorized,
fully paid and non-assessable. Our Board will determine if and when
distributions may be paid out of legally available funds to the holders.
We have
not declared any cash dividends during the past fiscal year with respect
to the
Common Stock. Our declaration of any cash dividends in the future will depend
on
our Board’s determination as to whether, in light of our earnings, financial
position, cash requirements and other relevant factors existing at the time,
it
appears advisable to do so. In addition, the Company has not declared or
paid
any dividends and has no plans to pay any dividends to the
stockholders.
Rights
Upon Liquidation.
Upon
liquidation, subject to the right of any holders of the preferred stock to
receive preferential distributions, each outstanding share of Common Stock
may
participate pro rata in the assets remaining after payment of, or adequate
provision for, all our known debts and liabilities.
Majority
Voting.
The
holders of a majority of the outstanding shares of Common Stock constitute
a
quorum at any meeting of the stockholders. A plurality of the votes cast
at a
meeting of stockholders elects our directors. The Common Stock does not have
cumulative voting rights. Therefore, the holders of a majority of the
outstanding shares of Common Stock can elect all of our directors. In general,
a
majority of the votes cast at a meeting of stockholders must authorize
stockholder actions other than the election of directors. [However, the Business
Corporation Law of the State of New York provides that certain extraordinary
matters, such as a merger or consolidation in which we are a constituent
corporation, a sale or other disposition of all or substantially all of our
assets, and our dissolution, require the vote of the holders of two-thirds
of
all outstanding voting shares.] Most amendments to our Certificate of
Incorporation require the vote of the holders of a majority of all outstanding
voting shares.
Warrants
Each
warrant entitles the registered holder to purchase one share of Common Stock
at
a price of $.30 to $.50 per share, subject to adjustment. The warrants have
two
to five year terms. The three year term Investor Warrants, which are callable
by
the Company.
Each
Investor Warrant allows its holder to immediately purchase one share of Common
Stock for $0.50, subject to adjustment, until three (3) years after the date
of
this Offering. The Investor Warrants are redeemable by the Company, at a
price
of $.01 per Investor Warrant at any time prior to their exercise or expiration
upon 30 days’ prior written notice. The Investor Warrants remain exercisable
during the 30-day notice period. Any Investor Warrant holder who does not
exercise that holder’s Investor Warrants prior to their expiration or
redemption, as the case may be, forfeits that holder’s right to purchase the
shares of Common Stock underlying the Investor Warrants.
The
exercise price of the warrants and the number and kind of shares of Common
Stock
to be obtained upon exercise of the warrants are subject to adjustment in
certain circumstances, including a stock split of, or stock dividend on,
or a
subdivision, combination or recapitalization of, the Common Stock.
Transfer
Agent and Registrar
The
registrar and transfer agent for our Common Stock is Holladay Stock Transfer,
2939 North 67th
Place,
Scottsdale, Arizona, (480) 481-3940.
SHARES
ELIGIBLE FOR FUTURE SALE
We
had
outstanding 62,484,892 shares of Common Stock as of the date of this prospectus.
All of the shares registered pursuant to this prospectus will be freely tradable
without restriction or further registration under the Securities Act of 1933,
as
amended (the “Securities Act”). If shares are purchased by our “affiliates” as
that term is defined in Rule 144 under the Securities Act, their sales of
shares would be governed by the limitations and restrictions that are described
below.
In
general, under Rule 144 as currently in effect, a person who has
beneficially owned shares of a company’s common stock for at least one year is
entitled to sell within any three month period a number of shares that does
not
exceed the greater of:
(1) 1%
of the number of shares of our Common Stock then outstanding; or
(2) the
average weekly trading volume of the Company’s Common Stock during the four
calendar weeks preceding the filing of a notice on form 144 with respect
to the
sale.
Sales
under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about
the
Company. Under Rule 144, however, a person who is not, and for the three
months prior to the sale of such shares has not been, an affiliate of the
issuer
is free to sell shares that are “restricted securities” which have been held for
at least two years without regard to the limitations contained in
Rule 144.
Under
Rule 144(k), a person who is not deemed to have been one of our affiliates
at any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, including the
holding period of any prior owner other than an affiliate, is entitled to
sell
such shares without complying with the manner of sale, notice filing, volume
limitation or notice provisions of Rule 144.
SELLING
STOCKHOLDERS
The
following table sets forth information with respect to the maximum number
of
shares of Common Stock beneficially owned by the selling stockholders named
below and as adjusted to give effect to the sale of the shares offered hereby.
The shares beneficially owned have been determined in accordance with rules
promulgated by the SEC, and the information is not necessarily indicative
of
beneficial ownership for any other purpose. The information in the table
below
is current as of December 31, 2005. All information contained in the table
below is based upon information provided to us by the selling stockholders
and
we have not independently verified this information. The selling stockholders
are not making any representation that any shares covered by the prospectus
will
be offered for sale. The selling stockholders may from time to time offer
and
sell pursuant to this prospectus any or all of the Common Stock being
registered.
For
purposes of this table, beneficial ownership is determined in accordance
with
SEC rules, and includes voting power and investment power with respect to
shares
and shares owned pursuant to warrants exercisable within 60 days. The “Number of
Shares Beneficially Owned After Offering” column assumes the sale of all shares
offered.
As
explained below under “Plan of Distribution,” we have agreed with the selling
stockholders to bear certain expenses (other than broker discounts and
commissions, if any) in connection
with the Registration Statement, which includes this prospectus.
Selling
Stockholder
|
|
Number
of Shares Beneficially Owned Prior to Offering (*)
|
|
Number
of Shares Offered (**)
|
|
Number
of Shares Beneficially Owned After Offering
|
|
Brian
Arnott(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
Eileen
Baungarten(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
John
Bowers(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
NFS
LLC/FMTC(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
Concrete
Restoration System(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
Michael
Confusione(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
Christopher
Dedea(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
Jiohn
Doyle(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
Bonnie
Egan(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
Delaware
Charter(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
Solomon
Feffter(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
NFS
LLC/FMTC/FBO Giger(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
Cheryl
Gorman(2)
|
|
|
300,000
|
|
|
300,000
|
|
|
0
|
|
Thomas
Giuffrida(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
Thomas
& Ellie Hunter(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
Thomas
& Elllie Hunter(3)
|
|
|
80,000
|
|
|
80,000
|
|
|
0
|
|
Wilfred
Huse, MD(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
Arthur
& Margarate James(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
JDR
Consulting(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
JDR
Consulting(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
Andrew
Lenza(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
George
Maglaras(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
Joseph
Manzi(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
Alfred
Naftel(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
Bruce
Nlsen(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
Alfred
Pasi(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
B.
Michael Pisani(4)
|
|
|
260,000
|
|
|
260,000
|
|
|
0
|
|
Edward
Pomianoski(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
Antonio
Rizzo(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
Domenic
Santana(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
Alfred
Sferra(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
Jerome
Shinkay(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
Mark
Shoicket(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
Richard
Staelin(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
Jeffrey
Webber(1)
|
|
|
200,000
|
|
|
200,000
|
|
|
0
|
|
Craig
Hurst(5)
|
|
|
166,668
|
|
|
166,668
|
|
|
0
|
|
The
Bosphorous Group(6)
|
|
|
333,334
|
|
|
333,334
|
|
|
0
|
|
Buckman,
Buckman & Reid
|
|
|
125,000
|
|
|
125,000
|
|
|
0
|
|
Jack
Buckman
|
|
|
25,000
|
|
|
25,000
|
|
|
0
|
|
Buckman,
Buckman & Reid(7)
|
|
|
342,000
|
|
|
342,000
|
|
|
0
|
|
Representative
Warrants(8)
|
|
|
171,000
|
|
|
171,000
|
|
|
0
|
|
Ibex
|
|
|
3,750,000
|
|
|
3,750,000
|
|
|
0
|
|
Robert
& Kelly Lorenz
|
|
|
1,250,000
|
|
|
1,250,000
|
|
|
0
|
|
Robert
McGuire
|
|
|
1,150,000
|
|
|
1,150,000
|
|
|
0
|
|
Richard
Cowart
|
|
|
120,000
|
|
|
120,000
|
|
|
0
|
|
Jonathan
Muelners
|
|
|
120,000
|
|
|
120,000
|
|
|
0
|
|
LH
Financial(9)
|
|
|
6,000,000
|
|
|
6,000,000
|
|
|
0
|
|
Hunter
Wise(10)
|
|
|
300,000
|
|
|
300,000
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
20,893,002
|
|
|
20,893,002
|
|
|
0
|
|
* Unless
otherwise indicated, the selling stockholders have sole voting and investment
power with respect to its shares of Common Stock. The inclusion of any shares
in
this table does not constitute an admission of beneficial ownership for the
selling stockholders. The number of shares includes shares of Common Stock
that
the selling stockholder has the right to acquire beneficial ownership of
within
60days.
**
|
Assumes
the sale of all shares of Common Stock offered hereby and no other
transactions in the Common Stock by the selling stockholders of
their
affiliates. Stockholders are not required to sell their
shares.
|
(1)
|
Includes
100,000 shares of Common Stock issuable upon the exercise of warrants
of
the Company.
|
(2)
|
Includes
150,000 shares of Common Stock issuable upon the exercise of warrants
of
the Company.
|
(3)
|
Includes
40,000 shares of Common Stock issuable upon the exercise of warrants
of
the Company.
|
(4)
|
Includes
130,000 shares of Common Stock issuable upon the exercise of warrants
of
the Company.
|
(5)
|
Includes
83,334 shares of Common Stock issuable upon the exercise of warrants
of
the Company.
|
(6)
|
Includes
166,667 shares of Common Stock issuable upon the exercise of warrants
of
the Company.
|
(7)
|
Includes
342,000 shares of Common Stock issuable upon the exercise of warrants
of
the Company.
|
(8)
|
Includes
171,000 shares of Common Stock issuable upon the exercise of warrants
of
the Company.
|
(9)
|
Includes
3,000,000 shares of Common Stock issuable upon the exercise of
warrants of
the Company.
|
(10)
|
Includes
300,000 shares of Common Stock issuable upon the exercise of warrants
of
the Company.
|
Except
as
provided above, no affiliate of any of the selling stockholders has held
any
position or office with us or any of our affiliate and none of the selling
stockholders has had any other material relationship with us or any of our
affiliates within the past three years other than as a result of its ownership
of shares of equity securities.
We
are
offering for sale a maximum of 10,000,000 shares of our common stock in a
self-underwritten offering directly to the public at a price of $.36 per
share.
There is no minimum amount of shares that we must sell in our Direct
Offering,
and
therefore no minimum amount of proceeds will be raised. No arrangements have
been made to place funds into escrow or any similar account. Upon receipt,
offering proceeds will be deposited into our operating account and used to
conduct our business and operations. We are offering the shares without any
underwriting discounts or commissions. The purchase price is $.36 per share.
The
Registration Statement also includes an Offering of 20,893,002 shares of
Common
Stock owned by the selling stockholders. The Company will not receive any
proceeds from the sale of such shares. The selling stockholders will sell
their
Common Stock at the price of $.36 per share until our shares are quoted on
the
OTC Bulletin Board and thereafter, shares will be sold at the prevailing
market
prices or at privately negotiated prices. These shareholders may be underwriters
as defined by the Securities Act. The selling stockholders will not be permitted
to sell, directly or indirectly, including Common Stock or securities
convertible into or exchangeable for or evidencing any right to purchase
or
subscribe for any shares of Common Stock, until the Direct
Offering
is fully
sold or terminated by us.
The
selling stockholders have advised us that the sale or distribution of our
Common
Stock owned by the selling stockholders may be effected by the selling
stockholders as principals or through one or more underwriters, brokers,
dealers
or agents from time to time in one or more transactions (which may involve
crosses or block transactions) (i) on the over-the-counter market or on any
other market in which the price of our shares of Common Stock are quoted
or (ii)
in transactions otherwise than in the over-the-counter market or in any other
market on which the price of our shares of Common Stock are quoted. Any of
such
transactions may be effected at market prices prevailing at the time of sale,
at
prices related to such prevailing market prices, at varying prices determined
at
the time of sale or at negotiated or fixed prices, in each case as determined
by
the selling stockholders or by agreement between the selling stockholders
and
underwriters, brokers, dealers or agents, or purchasers. If the selling
stockholders effect such transactions by selling their shares of Common Stock
to
or through underwriters, brokers, dealers or agents, such underwriters, brokers,
dealers or agents may receive compensation in the form of discounts, concessions
or commissions from the selling stockholders or commissions from purchasers
of
Common Stock for whom they may act as agent (which discounts, concessions
or
commissions as to particular underwriters, brokers, dealers or agents may
be in
excess of those customary in the types of transactions involved).
The
selling stockholders may use any one or more of the following methods when
selling shares:
• ordinary
brokerage transactions and transactions in which the broker-dealer solicits
purchasers;
• block
trades in which the broker-dealer will attempt to sell the shares as agent
but
may position and resell a portion of the block as principal to facilitate
the
transaction;
• purchases
by a broker-dealer as principal and resale by the broker-dealer for its account;
• an
exchange distribution in accordance with the rules of the applicable exchange;
• privately
negotiated transactions;
• short
sales after this Registration Statement becomes effective;
• broker-dealers
may agree with the selling stockholders to sell a specified number of such
shares at a stipulated price per share;
• a
combination of any such methods of sale; and
• any
other
method permitted pursuant to applicable law.
The
selling stockholders
may also sell shares under Rule 144 under the Securities Act, if available,
rather than under this prospectus.
The
selling stockholders 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.
Broker-dealers
engaged by the selling stockholders may arrange for other broker-dealers
to
participate in sales. Broker-dealers may receive commissions or discounts
from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved. Any profits on the
resale of shares of Common Stock by a broker-dealer acting as principal might
be
deemed to be underwriting discounts or commissions under the Securities Act.
Discounts, concessions, commissions and similar selling expenses, if any,
attributable to the sale of shares will be borne by a selling stockholder.
The
selling stockholders 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.
The
selling stockholders may from time to time pledge or grant a security interest
in some or all of the shares of Common Stock owned by them and, if they default
in the performance of their secured obligations, the pledgees or secured
parties
may offer and 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 stockholders to include the pledgee, transferee or other
successors in interest as selling stockholders under this prospectus.
The
selling stockholders 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
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus.
We
are
required to pay all fees and expenses incident to the registration of the
shares
of Common Stock. We have agreed to indemnify the selling stockholders against
certain losses, claims, damages and liabilities, including liabilities under
the
Securities Act.
Each
of
the selling stockholders acquired the securities offered hereby in the ordinary
course of business and has advised us that they have not entered into any
agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their 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 any selling stockholder. If we are notified
by any
selling stockholder that any material arrangement has been entered into with
a
broker-dealer for the sale of shares of Common Stock, if required, we will
file
a supplement to this prospectus. If the selling stockholders use this prospectus
for any sale of the shares of Common Stock, they will be subject to the
prospectus delivery requirements of 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 the selling stockholders.
LEGAL
MATTERS
The
legality of the issuance of the shares offered in this prospectus will be
passed
upon for us by Kirkpatrick
& Lockhart Nicholson Graham LLP.
EXPERTS
The
consolidated financial statements as of September 30, 2005 and December 31,
2004
and for the years ended December 31, 2004 and 2003 and the nine-month periods
ended September 30, 2005 and 2004 included in this prospectus have been audited
by Berenfeld, Spritzer, Shechter & Sheer, independent certified public
accountants, as stated in its report appearing herein and elsewhere in this
Registration Statement, and have been so included in reliance upon the report
of
this firm given upon their authority as experts in auditing and accounting.
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, direct
or indirect, in the registrant or any of its parents or subsidiaries. Nor
was
any such person connected with the registrant or any of its parents or
subsidiaries as a promoter, managing or principal underwriter, voting trustee,
director, officer, or employee.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING
AND FINANCIAL DISCLOSURE
There
have been no disagreements regarding accounting and financial disclosure
matters
with our independent certified public accountants.
AVAILABLE
INFORMATION
We
have
filed with the SEC a Registration Statement on Form SB-2 (including exhibits)
under the Securities Act, with respect to the shares to be sold in this
Offering. This prospectus does not contain all the information set forth
in the
Registration Statement as some portions have been omitted in accordance with
the
rules and regulations of the SEC. For further information with respect to
our
Company and the Common Stock offered in this prospectus, reference is made
to
the Registration Statement, including the exhibits filed thereto, and the
financial statements and notes filed as a part thereof. With respect to each
such document filed with the SEC as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved.
We
are
obligated to file reports with the SEC pursuant to the Securities Act. The
public may read and copy any materials that we file with the SEC at the SEC’s
Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The
public
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC. The address of that site is
http://www.sec.gov.
BioElectronics
Corporation
INDEX
TO FINANCIAL STATEMENTS
|
|
Page
|
|
Reports
of Independent Certified Public Accountants
|
|
F-1
|
|
|
|
|
|
Balance
Sheets as of September 30, 2005 and December 31, 2004
|
|
F-2
|
|
|
|
|
|
Statements
of Operations for the years ended December 31, 2004 and 2003
and the nine
months ended September 30, 2005 and 2004
|
|
F-4
|
|
|
|
|
|
Statements
of Stockholders' Deficiency for the years ended December 31,
2004 and 2003
and the nine months ended September 30, 2005 and 2004
|
|
F-5
|
|
|
|
|
|
Statements
of Cash Flows for the years ended December 31, 2004 and 2003
and the nine
months ended September 30, 2005 and 2004
|
|
F-6
|
|
|
|
|
|
Notes
to Financial Statements for the years ended December, 2004 and
2003 and
the nine months ended September 30, 2005 and 2004
|
|
F-8
|
|
REPORT
OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To
the
Board of Directors and Stockholders
BioElectronics
Corporation
Frederick,
Maryland
We
have
audited the accompanying balance sheets of BioElectronics Corporation (A
Development Stage Company) as of September 30, 2005 and December 31, 2004
and
the related statements of operations, stockholders' deficiency and cash flows
for the nine months ended September 30, 2005 and 2004, the years ended December
31, 2004 and 2003, and for the period from April 10, 2000 (Inception) to
September 30, 2005. 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 required that
we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of BioElectronics Corporation as
of
September 30, 2005 and December 31, 2004 and the results of its operations
and
its cash flows for the nine months ended September 30, 2005 and 2004, the
years
ended December 31, 2004 and 2003, and for the period from April 10, 2000
(Inception) to September 30, 2005, in conformity with accounting principles
generally accepted in the United States of America.
Berenfeld
Spritzer Shechter & Sheer
Certified
Public Accountants
Sunrise,
Florida
January
11, 2006
BioElectronics
Corporation (A Development Stage Company)
|
Balance
Sheets
|
September
30, 2005 and December 31, 2004
|
ASSETS
|
|
|
|
|
|
|
|
|
|
September
30, 2005
|
|
December
31, 2004
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
|
|
$
|
86,517
|
|
$
|
50,709
|
|
Accounts
Receivable, net
|
|
|
10,000
|
|
|
-
|
|
Inventory
|
|
|
169,205
|
|
|
82,350
|
|
Note
Receivable
|
|
|
303,750
|
|
|
-
|
|
Prepaid
Expenses
|
|
|
11,633
|
|
|
967
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
581,105
|
|
|
134,026
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, net
|
|
|
83,217
|
|
|
66,881
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
Loan
Costs
|
|
|
32,792
|
|
|
-
|
|
Security
Deposits
|
|
|
7,762
|
|
|
-
|
|
|
|
|
40,554
|
|
|
-
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
704,876
|
|
$
|
200,907
|
|
|
Balance
Sheets
|
September
30, 2005 and December 31, 2004
|
LIABILITIES
AND STOCKHOLDERS' DEFICIENCY
|
|
|
|
|
|
|
|
|
|
September
30, 2005
|
|
December
31, 2004
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
Accounts
Payable
|
|
$
|
378,033
|
|
$
|
216,311
|
|
Accrued
Liabilities
|
|
|
78,641
|
|
|
58,849
|
|
Note
Payable
|
|
|
-
|
|
|
370,000
|
|
Current
Portion of Capital Lease Obligations
|
|
|
3,767
|
|
|
2,558
|
|
Related
Party Notes Payable
|
|
|
33,699
|
|
|
33,124
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
494,140
|
|
|
680,842
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES
|
|
|
|
|
|
|
|
Related
Party Notes Payable, Net of Current Portion
|
|
|
293,479
|
|
|
238,766
|
|
Capital
Lease Obligations, Net of Current Portion
|
|
|
1,646
|
|
|
6,077
|
|
|
|
|
|
|
|
|
|
TOTAL
LONG-TERM LIABILITES
|
|
|
295,125
|
|
|
244,843
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
789,265
|
|
|
925,685
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIENCY
|
|
|
|
|
|
|
|
Capital
Stock, Par Value $.001 Per Share, 200 Million Shares Authorized,
Issued
and Outstanding - 59,469,892 in 2005, 50,916,892 in 2004
|
|
|
21,529
|
|
|
12,976
|
|
Additional
Paid-In Capital
|
|
|
2,104,738
|
|
|
657,256
|
|
Accumulated
Deficit
|
|
|
(2,210,656
|
)
|
|
(1,395,010
|
)
|
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS' DEFICIENCY
|
|
|
(84,389
|
)
|
|
(724,778
|
)
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
|
|
$
|
704,876
|
|
$
|
200,907
|
|
BioElectronics
Corporation (A Development Stage Company)
|
Statements
of Operations
|
Nine
Months Ended September 30, 2005 and 2004 and Years Ended December
31, 2004
and December 31, 2003
|
And
for the Period from April 10, 2000 (Inception) to September 30,
2005
|
|
|
September
30, 2005
|
|
September
30, 2004
|
|
December
31, 2004
|
|
December
31, 2003
|
|
Period
fromApril 10, 2000 Inception)
to September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALES
|
|
$
|
551,611
|
|
$
|
300,112
|
|
$
|
302,002
|
|
$
|
30,497
|
|
$
|
884,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF GOODS SOLD
|
|
|
107,209
|
|
|
98,894
|
|
|
112,724
|
|
|
50,565
|
|
|
270,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT (LOSS)
|
|
|
444,402
|
|
|
201,218
|
|
|
189,278
|
|
|
(20,068
|
)
|
|
613,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and Administrative
|
|
|
648,785
|
|
|
472,178
|
|
|
695,058
|
|
|
464,225
|
|
|
1,842,192
|
|
Design
& Development
|
|
|
63,256
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
63,256
|
|
Selling
Expenses
|
|
|
517,917
|
|
|
108,830
|
|
|
265,347
|
|
|
64,916
|
|
|
848,180
|
|
|
|
|
1,229,958
|
|
|
581,008
|
|
|
960,405
|
|
|
529,141
|
|
|
2,753,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(785,556
|
)
|
|
(379,790
|
)
|
|
(771,127
|
)
|
|
(549,209
|
)
|
|
(2,140,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
3,750
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,750
|
|
Interest
Expense
|
|
|
(23,914
|
)
|
|
(7,369
|
)
|
|
(19,920
|
)
|
|
(8,399
|
)
|
|
(52,233
|
)
|
Miscellaneous
|
|
|
(536
|
)
|
|
(1,036
|
)
|
|
(1,196
|
)
|
|
-
|
|
|
(1,732
|
)
|
Penalties
|
|
|
(9,390
|
)
|
|
-
|
|
|
(556
|
)
|
|
(10,479
|
)
|
|
(20,425
|
)
|
|
|
|
(30,090
|
)
|
|
(8,405
|
)
|
|
(21,672
|
)
|
|
(18,878
|
)
|
|
(70,640
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(815,646
|
)
|
$
|
(388,195
|
)
|
$
|
(792,799
|
)
|
$
|
(568,087
|
)
|
$
|
(2,210,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER
SHARE DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE COMMON
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARES
OUTSTANDING - BASIC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AND
DILUTED
|
|
|
56,014,225
|
|
|
44,329,482
|
|
|
45,976,334
|
|
|
26,333,333
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED NET LOSS PER SHARE
|
|
|
($0.015
|
)
|
|
($0.009
|
)
|
|
($0.017
|
)
|
|
($0.022
|
)
|
|
N/A
|
|
BioElectronics
Corporation (A Development Stage Company)
|
Statements
of Changes in Stockholders' Deficiency
|
Nine
Months Ended September 30, 2005 and 2004 and Years Ended December
31, 2004
and December 31, 2003
|
And
for the Period from April 10, 2000 (Inception) to September 30,
2005
|
|
|
Capital
Stock
|
|
Additional
Paid-in Capital
|
|
Accumulated
deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at April 10, 2000 (Inception)
|
|
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Net
Loss
|
|
|
|
|
|
-
|
|
|
-
|
|
|
(34,124
|
)
|
|
(34,124
|
)
|
Contribution
of Assets
|
|
|
|
|
|
-
|
|
|
8,000
|
|
|
-
|
|
|
8,000
|
|
Issuance
of Common Stock for Services Rendered
|
|
|
22,150,000
|
|
|
10
|
|
|
990
|
|
|
-
|
|
|
1,000
|
|
Balance
at December 31, 2000
|
|
|
22,150,000
|
|
|
10
|
|
|
8,990
|
|
|
(34,124
|
)
|
|
(25,124
|
)
|
Net
Loss
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balance
at December 31, 2001
|
|
|
22,150,000
|
|
|
10
|
|
|
8,990
|
|
|
(34,124
|
)
|
|
(25,124
|
)
|
Net
Loss
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balance
at December 31, 2002
|
|
|
22,150,000
|
|
|
10
|
|
|
8,990
|
|
|
(34,124
|
)
|
|
(25,124
|
)
|
Net
Loss
|
|
|
|
|
|
-
|
|
|
-
|
|
|
(568,087
|
)
|
|
(568,087
|
)
|
Sale
of Common Stock at $.03 per share
|
|
|
3,950,000
|
|
|
3,950
|
|
|
112,100
|
|
|
|
|
|
116,050
|
|
Sale
of Common Stock at $.05 per share
|
|
|
800,000
|
|
|
800
|
|
|
38,900
|
|
|
|
|
|
39,700
|
|
Sale
of Common Stock at $.35 per share
|
|
|
40,000
|
|
|
40
|
|
|
13,960
|
|
|
|
|
|
14,000
|
|
Balance
at December 31, 2003
|
|
|
26,940,000
|
|
|
4,800
|
|
|
173,950
|
|
|
(602,211
|
)
|
|
(423,461
|
)
|
Net
loss
|
|
|
|
|
|
-
|
|
|
-
|
|
|
(792,799
|
)
|
|
(792,799
|
)
|
Common
Stock Dividend
|
|
|
15,800,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Common Stock for Services Rendered
|
|
|
2,328,982
|
|
|
2,329
|
|
|
134,953
|
|
|
-
|
|
|
137,282
|
|
Sale
of Common Stock at $.35 per share
|
|
|
678,000
|
|
|
678
|
|
|
239,322
|
|
|
|
|
|
240,000
|
|
Sale
of Common Stock at $.43 per share
|
|
|
149,333
|
|
|
149
|
|
|
63,851
|
|
|
|
|
|
64,000
|
|
Sale
of Common Stock at $.01 per share
|
|
|
5,020,000
|
|
|
5,020
|
|
|
45,180
|
|
|
|
|
|
50,200
|
|
Balance
at December 31, 2004
|
|
|
50,916,892
|
|
|
12,976
|
|
|
657,256
|
|
|
(1,395,010
|
)
|
|
(724,778
|
)
|
Net
loss
|
|
|
|
|
|
-
|
|
|
-
|
|
|
(815,646
|
)
|
|
(815,646
|
)
|
Issuance
of Common Stock for Services Rendered
|
|
|
553,000
|
|
|
533
|
|
|
46,117
|
|
|
-
|
|
|
46,650
|
|
Sale
of Common Stock at $.30 per share
|
|
|
3,420,000
|
|
|
3,420
|
|
|
1,022,580
|
|
|
|
|
|
1,026,000
|
|
Sale
of Common Stock at $.08 per share
|
|
|
4,600,000
|
|
|
4,600
|
|
|
378,785
|
|
|
|
|
|
383,385
|
|
Balance
at September 30, 2005
|
|
|
59,469,892
|
|
$
|
21,529
|
|
$
|
2,104,738
|
|
$
|
(2,210,656
|
)
|
$
|
(84,389
|
)
|
|
Statements
of Cash Flows
|
Nine
Months Ended September 30, 2005 and 2004 and Years Ended December
31, 2004
and December 31, 2003
|
And
for the Period from April 10, 2000 (Inception) to September 30,
2005
|
|
|
September
30, 2005
|
|
September
30, 2004
|
|
December
31, 2004
|
|
December
30, 2003
|
|
Period
from April 10, 2000 Inception) to September 30,
2005
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(815,646
|
)
|
$
|
(388,195
|
)
|
$
|
(792,799
|
)
|
$
|
(568,087
|
)
|
$
|
(2,210,656
|
)
|
Adjustments
to Reconcile Net Loss to Net Cash Used by Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
14,136
|
|
|
6,388
|
|
|
8,818
|
|
|
1,571
|
|
|
24,526
|
|
Provision
for Bad Debts
|
|
|
135,506
|
|
|
14,615
|
|
|
14,615
|
|
|
-
|
|
|
150,121
|
|
(Increase)
Decrease in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
(145,507
|
)
|
|
(13,224
|
)
|
|
(8,786
|
)
|
|
(5,829
|
)
|
|
(160,121
|
)
|
Inventory
|
|
|
(86,855
|
)
|
|
(38,660
|
)
|
|
(50,115
|
)
|
|
(32,235
|
)
|
|
(169,205
|
)
|
Notes
Receivable
|
|
|
(303,750
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(303,750
|
)
|
Prepaid
Expenses
|
|
|
(10,667
|
)
|
|
-
|
|
|
234
|
|
|
(1,200
|
)
|
|
(11,633
|
)
|
Increase
(Decrease) in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
|
161,723
|
|
|
(74,545
|
)
|
|
54,139
|
|
|
162,171
|
|
|
378,033
|
|
Accrued
Liabilities
|
|
|
19,792
|
|
|
-
|
|
|
2,758
|
|
|
56,091
|
|
|
78,641
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
|
|
(1,031,268
|
)
|
|
(493,621
|
)
|
|
(771,136
|
)
|
|
(387,519
|
)
|
|
(2,224,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
Deposits
|
|
|
(7,762
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(7,762
|
)
|
Loan
Costs
|
|
|
(32,792
|
)
|
|
|
|
|
|
|
|
|
|
|
(32,792
|
)
|
Purchase
of Equipment
|
|
|
(30,472
|
)
|
|
(16,192
|
)
|
|
(53,045
|
)
|
|
(5,238
|
)
|
|
(88,755
|
)
|
NET
CASH USED BY INVESTING ACTIVITIES
|
|
|
(71,026
|
)
|
|
(16,192
|
)
|
|
(53,045
|
)
|
|
(5,238
|
)
|
|
(129,309
|
)
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
on Note Payable
|
|
|
(370,000
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(370,000
|
)
|
Proceeds
on Note Payable
|
|
|
-
|
|
|
-
|
|
|
370,000
|
|
|
-
|
|
|
370,000
|
|
Proceeds
from Related Party Notes Payable
|
|
|
55,288
|
|
|
24,762
|
|
|
25,000
|
|
|
224,200
|
|
|
338,610
|
|
Payments
on Related Party Notes Payable
|
|
|
-
|
|
|
-
|
|
|
(11,434
|
)
|
|
-
|
|
|
(11,434
|
)
|
Payments
on Capital Lease Obligations
|
|
|
(3,221
|
)
|
|
(38
|
)
|
|
(753
|
)
|
|
(599
|
)
|
|
(4,573
|
)
|
Proceeds
from Issuance of Capital Stock
|
|
|
1,456,035
|
|
|
491,482
|
|
|
491,482
|
|
|
169,750
|
|
|
2,117,267
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
1,138,102
|
|
|
516,206
|
|
|
874,295
|
|
|
393,351
|
|
|
2,439,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH
|
|
|
35,808
|
|
|
6,393
|
|
|
50,114
|
|
|
595
|
|
|
86,517
|
|
CASH,
BEGINNING OF PERIOD
|
|
|
50,709
|
|
|
595
|
|
|
595
|
|
|
-
|
|
|
-
|
|
CASH,
END OF PERIOD
|
|
$
|
86,517
|
|
$
|
6,988
|
|
$
|
50,709
|
|
$
|
595
|
|
$
|
86,517
|
|
BioElectronics
Corporation (A Development Stage Company)
|
Statements
of Cash Flows
|
Nine
Months Ended September 30, 2005 and 2004 and Years Ended December
31, 2004
and December 31, 2003
|
And
for the Period from April 10, 2000 (Inception) to September 30,
2005
|
|
|
September
30, 2005
|
|
September
30, 2004
|
|
December
31, 2004
|
|
December
30, 2003
|
|
Period
from April 10, 2000 (Inception) to September 30,
2005
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Paid During the Period:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
41,055
|
|
$
|
10,076
|
|
$
|
20,343
|
|
$
|
(8,399
|
)
|
$
|
52,999
|
|
Income
taxes
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SCHEDULE
OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
purchases financed through capital leases and notes
payable
|
|
|
|
|
$
|
-
|
|
$
|
-
|
|
$
|
9,986
|
|
$
|
9,986
|
|
BioElectronics
Corporation (A Development Stage Company)
Notes
to Financial Statements
NOTE
A - ORGANIZATION AND NATURE OF ACTIVITIES
BioElectronics
Corporation was incorporated in April, 2000 and began employee-based operations
in 2003. BioElectronics Corporation (the “Company”) is a developer and marketer
of drug-free, anti-inflammatory patches. The Company has U.S., FDA, Health
Canada and European Union market clearance for its products.
The
Company’s first product, ActiPatch ® Therapy, is a dermal patch with an embedded
battery operated microchip that delivers weeks of continuous pulsed therapy
for
a few dollars a day. The patch delivery system and the Company’s patented
technology provides an inexpensive and self-administered equivalent of the
operator administered pulsed electromagnetic energy therapy used extensively
world-wide for decades to reduce swelling, relieve pain and enhance the healing
of post-surgical incisions, chronic wounds and orthopedic
conditions.
The
Company’s authorized capital stock consists of 200 million shares of common
stock, $.001 par value per share.
The
board
of directors has the authority, without action by the Company’s stockholders, to
provide for the issuance of preferred stock in one or more classes or series
and
to designate the rights, preferences and privileges of each class or series,
which may be greater than the rights of the common stock.
NOTE
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
Company has prepared the financial statements in accordance with accounting
principles generally accepted in the United States of America.
Cash
and Cash Equivalents
Cash
equivalents consist of highly liquid investments, which are readily convertible
into cash and have maturities of three months or less. The Company places
its
temporary cash investments with financial institutions and limits the amount
of
credit exposure to any one financial institution.
Accounts
Receivable
The
Company conducts business and extends credit based on the evaluation of its
customers’ financial condition, generally without requiring collateral. Exposure
to losses on receivables is expected to vary by customer due to the financial
condition of each customer. The Company monitors credit losses and maintains
allowances for anticipated losses considered necessary under the circumstances.
Recoveries of accounts previously written off are recognized as income in
the
periods in which the recoveries are made. Management recorded allowances
for
uncollectible accounts in the following amounts: $135,506 and $14,615 as
of
September 30, 2005 and 2004, and $14,615 and $0 as of December 31, 2004 and
2003, respectively.
NOTE
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Inventory
Inventories
consist of raw material, work-in-process and finished goods and are stated
at
the lower of cost or market using the first-in, first-out method. The Company
reviews its inventory for slow moving and obsolete items as changes in
circumstances indicate that the carrying value may have been
impaired.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation. The Company
uses the straight-line method in computing depreciation for financial reporting
purposes and generally uses accelerated methods for income tax purposes.
The
annual provisions for depreciation have been computed principally in accordance
with the following ranges of asset lives: machinery and equipment - 5 to
20
years.
Expenditures
for maintenance and repairs are charged to expense as incurred. Major
improvements that extend the lives of the respective assets are capitalized.
Any
gain or loss on disposition of assets is recognized currently. Depreciation
expense was $14,136 and $6,388 for the nine months ended September 30, 2005
and
2004, respectively, and $8,818 and $1,571 for the years ended December 31,
2004
and 2003, respectively.
Impairment
of Long-Lived Assets
The
Company reviews long-lived assets for impairments whenever events or changes
in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
a
comparison of the carrying amount of an asset to future undiscounted cash
flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the
asset exceeds the fair value. Assets to be disposed of are reported at the
lower
of the carrying amount or fair value less costs to sell.
Income
Taxes
The
Company accounts for income taxes in accordance with the provisions of Statement
of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income
Taxes.” Income tax expense is based on pretax financial accounting income.
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts using enacted rates in effect for
the
year in which the differences are expected to reverse. A valuation allowance
is
recorded for deferred tax assets if it is more likely than not that some
portion
or all of the deferred tax assets will not be realized.
NOTE
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Revenue
Recognition
The
Company recognizes revenues when a sales agreement has been executed, delivery
has occurred, and collectibility of the fixed or determinable sales price
is
reasonably assured.
Advertising
Advertising
costs are expensed as incurred and were $4,228 and $1,776 for the nine months
ended September 30, 2005 and 2004, and $1,776 and $18,394 for the years ended
December 31, 2004 and 2003, respectively.
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 amounts reported in its financial
statements and accompanying notes. Actual results could differ from those
estimates.
Loss
Per Share Calculations
Basic
net
loss per common share is determined by dividing earnings available to
stockholders by the weighted average number of shares of common stock. Diluted
net loss per share is determined by dividing earnings available to stockholders
by the weighted average number of shares of common stock and dilutive common
stock equivalents outstanding. The Company does not have any dilutive common
stock equivalents.
Fair
Value of Financial Instruments
The
Company’s financial instruments consist primarily of cash, accounts receivable,
accounts payable, accrued liabilities and loans and notes payable. The carrying
amounts of such financial instruments approximate their respective estimated
fair values due to the short-term maturities and approximate market interest
rates of these instruments. The estimated fair value is not necessarily
indicative of the amounts the Company would realize in a current market exchange
or from future earnings or cash flows.
Compensated
Absences
The
Company does not accrue for compensated absences and recognizes the costs
of
compensated absences when actually paid to employees. Accordingly, no liability
for such absences has been recorded in the accompanying financial statements.
Management believes the effect of this policy is not material to the
accompanying financial statements. As of July 1, 2005, the Company has engaged
Administaff to provide employee benefits and payroll services.
Stock-Based
Compensation
The
Company has elected to follow Accounting Principles Board (APB) Opinion No.
25,
“Accounting for Stock Issued to Employees” and related interpretations, in
accounting for its employee stock options rather than the alternative fair
value
accounting followed by Statement of Financial Accounting Standards (SFAS)
No.
123, “Accounting for Stock-Based Compensation.” APB No. 25 provides that the
compensation expense relative to the Company’s employee stock options is
measured based on the intrinsic value of the stock option. SFAS No. 123 requires
companies that continue to follow APB No. 25 to provide a pro-forma disclosure
of the impact of applying the fair value method of SFAS No. 123.
Equity
instruments issued to non-employees are accounted for at fair value. The
fair
value of the equity instrument is determined using either the fair value
of the
underlying stock or the Black-Scholes option-pricing model.
Recently
Issued Accounting Pronouncements
In
December 2002, the Financial Accounting Standards Board issued Statement
of
Financial Accounting Standards (SFAS) No. 148 “Accounting for Stock-Based
Compensation - Transition and Disclosure”. SFAS 148 provides alternative
transition methods to companies that elect to expense stock-based compensation
using the fair value approach under SFAS 123. While the Company has adopted
the
disclosure only provisions of SFAS 148, it will continue to account for
stock-based compensation in accordance with APB No. 25 through December 31,
2005. On January 1, 2006, the Company will adopt SFAS No. 123, “Accounting for
Stock-Based Compensation”. The Company will account for the fair value of its
grants and options and record a compensation cost against income.
In
January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest
Entities - an Interpretation of ARB No 51, Consolidated Financial Statements”.
This interpretation addresses consolidation by business enterprises of entities
in which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity
to
finance its activities without additional subordinated financial support
from
other parties. Variable interest entities are required to be consolidated
by
their primary beneficiaries if they do not effectively disperse risks among
the
parties involved. The primary beneficiary of a variable interest entity is
the
party that absorbs a majority of the entity’s expected losses or receives a
majority of its expected residual returns. In December 2003, the FASB amended
FIN 46, now known as FIN 46 Revised (“FIN 46R). The requirements of FIN 46R are
effective no later than the end of the first reporting period that ends after
March 15, 2004. A company that has applies FIN 46 to an entity prior to the
effective date of FIN 46R shall either continue to apply FIN 46 until the
effective date of FIN 46R at an earlier date. The adoption of this
interpretation did not have an impact on the Company’s financial
statements.
Recently
Issued Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets”,
and an amendment to Opinion No 29, “Accounting for Nonmonetary Transactions”.
SFAS No 153 eliminates certain differences in the guidance in Opinion No.
29 as
compared to the guidance contained in standards issued by the International
Accounting Standards Board. The amendment to Opinion No. 29 eliminates the
fair
value exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets
that do
not have commercial substance. Such an exchange has commercial substance
if the
future cash flows of the entity are expected to change significantly as a
result
of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges
occurring in periods beginning after June 15, 2002. Earlier application is
permitted for nonmonetary asset exchanges occurring in periods beginning
after
December 16, 2004. Management does not expect adoption of SFAS No. 153 to
have a
material impact, if any, on the Company’s financial position or results of
operations.
NOTE
C - INVENTORY
The
components of inventory as of September 30, 2005 and December 31, 2004 are
as
follows:
|
|
September
30, 2005
|
|
December
31, 2004
|
|
Raw
materials
|
|
$
|
97,904
|
|
$
|
17,621
|
|
Supplies
|
|
|
36,212
|
|
|
32,142
|
|
Finished
goods
|
|
|
35,089
|
|
|
32,587
|
|
|
|
$
|
169,205
|
|
$
|
82,350
|
|
NOTE
D - NOTES RECEIVABLE
In
June,
2005, the Company sold 15,000 pre-finished inventory parts to MaxMed
Technologies, Inc. for $300,000 and gave exclusive rights to the custom Foot
Orthotic industry. The note is due with interest at 5% on June 30, 2006.
Accrued
interest receivable of $3,750 was recorded on this note as of September 30,
2005.
NOTE
E - NOTE PAYABLE
In
November 2004, the Company borrowed an aggregate of $370,000 for working
capital
purposes, including $50,000 from H. John Buckman, President, Chairman of
the
Board and principal stockholder of the Placement Agent. Such loans were
evidenced by promissory notes that bear interest at the rate of 12% per annum.
In connection with such loans, the Company issued to each lender three-year
options to purchase for a purchase price of $.30 per share, subject to
adjustment, 25,000 shares of Common Stock for each $50,000 borrowed by the
Company. The loan was paid in full as of March 31, 2005.
NOTE
F - CAPITAL LEASE OBLIGATIONS
The
Company is the lessee of equipment under a capital lease expiring in March,
2007. The assets and liabilities under the capital lease are recorded at
the
lower of the present value of the minimum lease payments or the fair value
of
the asset. The asset is depreciated over the lower of their related lease
terms
or their estimated productive lives.
The
lease
provides for a purchase option. Generally, purchase options are at prices
representing the expected fair value of the property at the expiration of
the
lease term.
The
equipment capital lease agreement terms are as follows: annual interest rate
of
16.99%, monthly payments of $288, maturing in March, 2007, secured by equipment
with a book value of $4,993 at September 30, 2005.
Depreciation
of assets under capital leases is included in depreciation expense and amounted
to $1,413 and $1,884, for the nine months ended September 30, 2005 and the
year
ended December 31, 2004, respectively.
Minimum
future lease payments under capital leases as of September 30, 2005, for
each of
the next five years and in the aggregate are:
Year
Ended September 30,
|
|
Amount
|
|
|
|
|
|
2006
|
|
$
|
4,610
|
|
2007
|
|
|
1,729
|
|
Total
minimum lease payments
|
|
|
6,339
|
|
Less:
Implicit interest
|
|
|
926
|
|
Total
capital lease payable at September 30, 2005
|
|
$
|
5,413
|
|
NOTE
G - RELATED PARTY NOTES PAYABLE
In
2003
and 2004, four stockholders of the Company made loans to the Company in the
principal amounts of $58,573, $78,280, $47,500 and $86,000. The loans are
evidenced by promissory notes that bear interest at an annual rate of 9%
and
mature on various dates through December, 2018. The balances outstanding
on the
notes payable, including accrued interest, were $294,054 at September 30,
2005,
and $271,890 at December 31, 2004.
Related
party notes payable also includes temporary advances from stockholders totaling
$33,124 as of September 30, 2005 that are expected to be repaid in 2006.
As
such, the stockholder advance has been classified as a current
liability.
Following
are maturities of long-term debt for each of the next 5 years and
thereafter:
|
|
Amount
|
|
|
|
|
|
2006
|
|
$
|
33,699
|
|
2007
|
|
|
3,212
|
|
2008
|
|
|
165,822
|
|
2009
|
|
|
3,842
|
|
2010
|
|
|
4,203
|
|
Thereafter
|
|
|
116,400
|
|
|
|
|
|
|
|
|
$
|
327,178
|
|
NOTE
H - STOCK OPTION PLANS
In
November, 2004, the Company adopted the BioElectronics 2004 Equity Incentive
Plan (“the Incentive Plan”), for the purpose of providing incentives for
officers, directors, consultants and key employees to promote the success
of the
Company, and to enhance the Company’s ability to attract and retain the services
of such persons. The Company amended the Incentive Plan in March, 2005. An
aggregate of 10 million shares of common stock are reserved for issuance
under
the Incentive Plan, under two stock-based compensation components, which
are
described below.
Stock
Appreciation Rights
The
Company may grant stock appreciation rights to its management personnel for
up
to 10 million shares of common stock. Shares are granted on the date of the
Executive Employment Agreement (the “agreement”). Upon exercise of a stock
appreciation right, the holder may receive shares of common stock and cash
equal
to the excess of the fair market value of the common stock at the date of
exercise over the option price. Stock appreciation rights may be exercised
five
years from the time of granting. Stock appreciation rights representing one
million shares of stock were issued as of September 30, 2005.
Compensatory
Stock Option Plan
The
Company has a nonqualified stock option plan for selected executives and
other
key employees under which options to acquire 5,685,000 shares of the Company’s
common stock have been or are committed to be granted, at various rates ranging
from $0.30 to $0.50 per share. Options may be exercised over a five-year
period
and vest 33 1/3% each year over a three-year period.
The
following tables set forth options granted, canceled, forfeited, and
outstanding:
September
30, 2005
|
|
|
|
Number
of Shares
|
|
Weighted
Average Price Per Share
|
|
Weighted
Average Exercise Price
|
|
Outstanding,
beginning of period
|
|
-
|
|
|
|
|
|
Options
granted
|
|
|
5,685,000
|
|
$
|
0.30
|
|
$
|
0.30
|
|
Options
exercised
|
|
|
-
|
|
|
|
|
|
|
|
Options
forfeited
|
|
|
-
|
|
|
|
|
|
|
|
Outstanding,
end of period
|
|
|
5,685,000
|
|
$
|
0.30
|
|
$
|
0.30
|
|
Exercisable
at end of period
|
|
|
1,285,000
|
|
$
|
0.30
|
|
$
|
0.30
|
|
The
estimated fair value of options granted in 2005 and 2004 was $.30 per share
and
$.40 per share, respectively. The Company applies APB Opinion No. 25 and
related
Interpretations in accounting for its stock option plan. Accordingly, no
compensation cost has been recognized for the stock option plan. Had
compensation cost for the Company’s stock option plan been determined consistent
with SFAS No. 123, the Company’s net loss and net loss per share for the nine
months ended September 30, 2005 and 2004, and for the years ended December
31,
2004 and 2003 would have been increased to the pro forma amounts indicated
in
the following table:
|
|
September
30,
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
2004
|
|
2003
|
|
As
Reported
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
($815,646
|
)
|
|
($388,195
|
)
|
|
($792,799
|
)
|
|
($568,087
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
($815,646
|
)
|
|
($388,195
|
)
|
|
($792,799
|
)
|
|
($568,087
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted - As Reported
|
|
$
|
(0.015
|
)
|
$
|
(0.009
|
)
|
$
|
(0.017
|
)
|
$
|
(0.022
|
)
|
Basic
and Diluted - Pro Forma
|
|
$
|
(0.015
|
)
|
$
|
(0.009
|
)
|
$
|
(0.017
|
)
|
$
|
(0.022
|
)
|
The
fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for options granted in 2005 and 2004: risk-free interest
rates
of 7%; expected dividend yields of 0.0%; expected lives of 3 years; and expected
volatility of 0%.
NOTE
I - STOCK PURCHASE WARRANTS
In
2005,
the Company issued stock purchase warrants to investors (“investor warrants”).
At September 30, 2005, there were 4,033,000 warrants outstanding. Each investor
warrant represents the right to purchase one share of common stock at the
initial exercise price of $.50 per share for two to five years, depending
upon
the type of warrant issued. The exercise price of the investor warrants and
the
number of shares of common stock purchasable upon exercise of the investor
warrants are subject to adjustment upon the occurrence of certain events,
including split-ups or combinations of common stock, dividends payable in
common
stock, and the issuance of rights to purchase additional shares of common
stock
or to receive other securities or rights convertible into or entitling the
holder to receive additional shares of common stock with or without payment
of
any consideration.
The
investor warrants are redeemable by the Company at a price of $.01 per investor
warrant at any time prior to their exercise or expiration upon 30 days’ prior
written notice provided that the closing stock price for the Common stock
for at
least 30 days has been $1.00 per share and the shares underlying the warrants
have been registered.
NOTE
J - INCOME TAXES
At
September 30, 2005 and December 31, 2004, the Company had net operating loss
carry-forwards for federal income tax purposes of approximately $2,130,000
and
$1,361,000, respectively, which are subject to annual limitations, and are
available to offset future taxable income, if any, through 2021.
The
net
change in the valuation allowance for the nine months ended September 30,
2005
and the year ended December 31, 2004 was an increase of $277,000 and an increase
of $270,000, respectively. In assessing the amount of deferred tax assets
to be
recognized, management considers whether it is more likely than not that
some
portion or all of the deferred tax assets will not be realized. It is not
possible at this time to determine that the deferred tax assets are more
likely
to be realized than not. Accordingly, a full valuation allowance has been
established for all periods presented.
The
Tax
Reform Act of 1986 imposed substantial restrictions on the utilization of
net
operating losses and tax credits in the event of an “ownership change”, as
defined by the Internal Revenue Code. All federal and state net operating
loss
carry-forwards are subject to limitations as a result of these restrictions.
If
there should be a subsequent ownership change, as defined, the Company’s ability
to utilize its carry-forwards could be reduced.
NOTE
K - COMMITMENTS AND CONTINGENCIES
Operating
Lease Commitments
The
Company leases office space under operating leases expiring in various years
through 2007. In the normal course of business, operating leases are generally
renewed or replaced by other leases.
Minimum
future rental payments under non-cancelable operating leases having remaining
terms in excess of one year as of September 30, 2005, for each of the next
three
years and in the aggregate are:
Year
Ended September 30,
|
|
Amount
|
|
|
|
|
|
2006
|
|
$
|
44,620
|
|
2007
|
|
|
20,585
|
|
|
|
|
|
|
Total
minimum future rental payments
|
|
$
|
65,205
|
|
Rent
expense was $39,594 and $19,562 for the nine months ended September 30, 2005
and
2004, and $26,752 and $0 for the years ended December 31, 2004 and 2003,
respectively.
Employment
Agreements
The
Company has employment and compensation agreements with three key officers
of
the Company. One of the agreements provides for an officer to receive an
annual
base salary of $150,000 through December 31, 2007. In addition, for each
calendar year ending during the term of the agreement, the officer will be
entitled to receive bonus compensation in an amount up to 50% of his base
compensation, which amount is based on annual sales of the Company. The officer
also received on the effective date of the agreement (October 1, 2004) a
grant
of 500,000 shares of common stock, and an option to purchase 2.1 million
shares
of common stock, at an exercise price of $.30 per share with respect to the
initial 700,000 shares under the option, $.40 per share for the next 700,000
shares, and $.50 per share of the final 700,000 shares under the option.
The
option and the grant vest over a three-year period, beginning October, 2004,
and
the option is exercisable for five years.
A
second
agreement provides for an officer to receive an annual base salary of $150,000
through December 31, 2007. In all other respects, this officer’s employment
agreement contains similar bonus compensation, stock grant, and stock option
provisions to those described above in the first agreement.
A
third
agreement provides for an officer to receive an annual base salary of $110,000
through December 31, 2007. The agreement provides for a similar bonus
compensation provision to those described above in the first agreement. The
officer also received an option to purchase 900 thousand shares of common
stock,
at an exercise price of $.30 per share with respect to the initial 300,000
shares under the option, $.40 per share for the next 300,000 shares, and
$.50
per share for the final 300,000 shares under the option. The option vests
over a
three-year period beginning June, 2005, and the option is exercisable for
five
years.
Litigation
The
Company and Andrew Whelan, President & CEO, are defendants in a lawsuit
brought by a plaintiff who is seeking damages arising from a breach by the
Company of certain alleged oral contractual obligations. The plaintiff claims
that, pursuant to these alleged obligations, he would have been entitled
to
receive common stock and options to purchase common stock from the Company
as
compensation for rendering certain services to the Company. Although this
legal
action is in its preliminary stages and the full amount of the plaintiff’s claim
has not been asserted, the Company believes the potential dollar amount of
the
claim will not have a material adverse effect on its operations or financial
condition. The Company believes the plaintiff’s claims are without merit and
intends to defend the lawsuit and pursue any counterclaims
vigorously.
NOTE
L - STOCKHOLDERS’ EQUITY
In
2000,
the Company issued a total of 22,150,000 shares of common stock to individuals
for services rendered, with a total value of $1,000.
In
2003,
the Company issued a total of 4,790,000 shares of common stock for aggregate
consideration of $169,750.
In
2004,
the Company issued a total of 2,328,982 shares of common stock to individuals
for services rendered, with a total value of $137,282. The Company also declared
a stock dividend of 15,800,577 shares of common stock to existing stockholders
on March 15, 2004. Finally, the Company issued a total of 5,847,333 shares
of
common stock for aggregate consideration of $354,200.
In
2005,
the Company issued a total of 533,000 shares of common stock to individuals
for
services rendered, with a total value of $46,650. The Company also issued
a
total of 8,020,000 shares of common stock for aggregate consideration of
$1,409,385.
NOTE
M - SUBSEQUENT EVENT
In
December 2005, the Company issued senior secured convertible 24 month term
notes
in the aggregate amount of $750,000 to LH Financial (“the Notes”). The Notes
have an 8% coupon, payable on a monthly basis. The Notes issued are convertible
notes at the option of LH Financial, at a fixed price of $0.25. For every
share
of the Company’s Common Stock for which the Notes are converted, LH Financial
will receive one warrant, exercisable within a five-year period from the
conversion of the Notes.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
24. Indemnification
of Directors and Officers
Our
directors and officers are indemnified as provided by the Maryland General
Corporation Law and in our bylaws. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to our directors,
officers or persons controlling us pursuant to the foregoing provisions or
otherwise, we have bee ninformaed 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 liabiliites (other than the payment
by us
of expenses incurred or paid by a director, officer or controlling person
in the
successful defense or any action, suit or proceeding) is asserted by one
of
ourdirectors, officers or controlling persons in connection with any of our
securities that are being registered, we will, unless in the opinion of our
legal counsel that matter has been settled by controlling precedent, submit
to a
court of appropriate jurisdiction the question of whether such indemnification
by us is against public policy as expressed in the Securities Act and will
be
governed by the final adjuducation of such issue.
Item
25. Other
Expenses of Issuance and Distribution
The
following table sets forth the expenses expected to be incurred by us in
connection with the issuance and distribution of the Common Stock registered
hereby, all of which expenses, except for the SEC registration fee, are
estimates:
Description
|
|
Amount
|
|
Registration
Fee
|
|
$
|
1,190
|
|
*Accounting
fees and expenses
|
|
$
|
25,000
|
*
|
Legal
fees and expenses
|
|
$
|
35,000
|
|
*Printing
|
|
$
|
500
|
|
Miscellaneous
fees and expenses
|
|
$
|
15,000
|
|
Total
|
|
$
|
76,690
|
|
_____________
*
Estimated
Item
26. Recent
Sales of Unregistered Securities
In
January and February 2004, the Company issued an aggregate of
450,000 shares
of
Common Stock to three medical advisors to the Company for services rendered.
The
shares were issued pursuant to an exemption from registration under Rule
506 of
Regulation D promulgated under the Securities Act.
On
March
15, 2004, the Company issued 5,020,000 shares of Common Stock to Phalanx
Holding
Corp. for aggregate consideration of $50,200. The shares were issued pursuant
to
an exemption from registration under Rule 506 of Regulation D promulgated
under
the Securities Act.
Between
March 2004 and August 2004, the Company issued 1,505,714 shares of Common
Stock
to 11 investors for aggregate consideration of $329,000. The shares were
issued
pursuant to an exemption from registration under Rule 506 of Regulation D
promulgated under the Securities Act.
Between
November 15, 2004 and November 23, 2004, the Company borrowed an aggregate
of
$300,000 for working capital purposes. Such loans were evidenced by promissory
notes that bear interest at the rate of 12% per annum. The Company issued
to
each lender three-year options to purchase for an exercise price of $.30
per
share, subject to adjustment, 25,000 shares of Common Stock for each $50,000
borrowed by the Company. Buckman, Buckman & Reid, Inc., the Placement Agent
in this Offering, acted as placement agent for such loans, for which such
firm
received as compensation from the Company 150,000 shares of Common Stock.
The
loans have been repaid in full.
Between
December 2004 and April 2005, the Company issued an aggregate of 3,420,000
shares of Common Stock and warrants to purchase 3,420,000 shares of Common
Stock
for aggregate consideration of $816,949. The shares and warrants were issued
pursuant to an exemption from registration under Rule 506 of Regulation D
promulgated under the Securities Act.
During
the first six months of 2005, the Company issued 533,000 shares of Common
Stock
to medical, financial and market research advisors to the Company for services
rendered. The shares were issued pursuant to an exemption from registration
under Rule 506 of Regulation D promulgated under the Securities
Act.
In
December 2005, the Company issued senior secured convertible 24 month term
notes
in the aggregate amount of $750,000 to LH Financial (“the Notes”). The Notes
have an 8% coupon, payable on a monthly basis. The Notes issued are convertible
notes at the option of LH Financial, at a fixed price of $0.25. For every
share
of the Company’s Common Stock for which the Notes are converted, LH Financial
will receive one warrant, exercisable within a five-year period from the
conversion of the Notes.
Item
27. Exhibits
The
following exhibits are included as part of this Form SB-2.
Exhibit
No.
|
Description
|
3.1**
|
BioElectronics
Corporation Articles of Incorporation.
|
|
|
3.2**
|
BioElectronics
Corporation Bylaws.
|
|
|
5* |
Opinion
of Kirkpatrick & Lockhart Nicholson Graham LLP as to the legality of
the shares. |
|
|
10.1** |
Employment
Agreement between BioElectronics Corporation and Joseph M.
Iglesias, dated
June 2, 2005.
|
|
|
10.2**
|
Employment
Agreement between BioElectronics Corporation and Todd J. Kislak,
dated
January 3, 2005.
|
|
|
10.3**
|
Employment
Agreement between BioElectronics Corporation and Thomas O’Connor, dated
October 8, 2004.
|
|
|
10.4**
|
Lease
Agreement between BioElectronics Corporation and Madison Commerce
Center-A, LLC dated August 31, 2005.
|
|
|
10.5**
|
Lease
Agreement between BioElectronics Corporation and Westlake Plaza
Business
Park, LLC dated January 31, 2005.
|
|
|
10.6**
|
BioElectronics
Corporation 2004 Stock Incentive Plan, dated November 30,
2004.
|
|
|
10.7**
|
BioElectronics
Corporation 2004 Stock Incentive Plan, as amended, March 22,
2005.
|
|
|
23.1
|
Consent
of Berenfeld Spritzer Shechter & Sheer.
|
|
|
23.2
|
Consent
of Kirkpatrick & Lockhart Nicholson Graham, LLP.
|
|
|
24**
|
Powers
of Attorney (on signature
page)
|
*
To
be
filed by amendment.
**
Previously filed.
Item
28. Undertakings
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Company,
we have
been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company 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 it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
The
undersigned Company hereby undertakes that:
(1)
To
file, during any period in which it offers or sells securities, a post-effective
amendment to this Registration Statement to:
(i)
Include
any prospectus required by Section 10(a)(3) of the Securities Act;
(ii)
Reflect
in the prospectus any facts or events which, individually or together, represent
a fundamental change in the information 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 SEC pursuant to Rule 424(b) if, in the aggregate, the changes
in
volume and price represent no more than a 20% change in the maximum aggregate
offering price set forth in the “Calculation of Registration Fee” table in the
effective Registration Statement;
(iii)
Include
any additional or changed information on the plan of distribution.
(2)
For
determining liability under the Securities Act, the Company will treat each
such
post-effective amendment as a new Registration Statement of the securities
offered, and the offering of such securities at that time to be the initial
bona
fide offering.
(3)
To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(4)
For
determining any liability under the Securities Act, treat each post-effective
amendment
that
contains a form of prospectus as a new Registration Statement for the securities
offered in the Registration Statement, and that offering of the securities
at
that time as the initial bona fide offering of those securities.
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it met all the
requirements of filing on Form SB-2 and authorized this Registration Statement
to be signed on its behalf by the undersigned, in Frederick, Maryland on
February 16, 2006.
|
|
|
|
BioElectronics
Corporation
|
|
|
|
|
By: |
/s/ Andrew
J. Whelan |
|
Andrew
J. Whelan
|
|
President
|
In
accordance with the requirements of the Securities Act, this Registration
Statement was signed by the following persons in the capacities and on the
dates
stated.
Signature
|
|
Title
|
Date
|
|
|
|
|
/s/Andrew
J. Whelan
Andrew
J. Whelan
|
|
Chairman
and President
(principal
executive officer)
|
February
16, 2006
|
|
|
|
|
Thomas
O’Connor *
|
|
Director
and Chief Financial Officer
(principal
financial and accounting officer)
|
February
16, 2006
|
|
|
|
|
Brian
M. Kinney*
|
|
Director
|
February
16, 2006
|
|
|
|
|
*
By: /s/ Andrew J. Whelan
Attorney-in-fact
|
|
|
|
Signature
|
|
Title
|
Date
|
|
|
|
|
Ashton
Peery*
|
|
Director
|
February
16, 2006
|
|
|
|
|
Douglas
Watson*
|
|
Director
|
February
16, 2006
|
|
|
|
|
Mary
Whelan*
|
|
Director
|
February
16, 2006
|
|
|
|
|
Richard
Staelin*
|
|
Director
|
February
16, 2006
|
|
|
|
|
|
|
|
|
*
By: /s/ Andrew J. Whelan
Attorney-in-fact
|
|
|
|
EXHIBIT
INDEX
Exhibit
No.
|
Description
|
3.1**
|
BioElectronics
Corporation Articles of Incorporation.
|
|
|
3.2**
|
BioElectronics
Corporation Bylaws.
|
|
|
5* |
Opinion
of Kirkpatrick & Lockhart Nicholson Graham LLP as to the legality of
the shares. |
|
|
10.1** |
Employment
Agreement between BioElectronics Corporation and Joseph M. Iglesias,
dated
June 2, 2005.
|
|
|
10.2**
|
Employment
Agreement between BioElectronics Corporation and Todd J. Kislak,
dated
January 3, 2005.
|
|
|
10.3**
|
Employment
Agreement between BioElectronics Corporation and Thomas O’Connor, dated
October 8, 2004.
|
|
|
10.4**
|
Lease
Agreement between BioElectronics Corporation and Madison Commerce
Center-A, LLC dated August 31, 2005.
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10.5**
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Lease
Agreement between BioElectronics Corporation and Westlake Plaza
Business
Park, LLC dated January 31, 2005.
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10.6**
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BioElectronics
Corporation 2004 Stock Incentive Plan, dated November 30,
2004.
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10.7**
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BioElectronics
Corporation 2004 Stock Incentive Plan, as amended, March 22,
2005.
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23.1
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Consent
of Berenfeld Spritzer Shechter & Sheer.
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23.2
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Consent
of Kirkpatrick & Lockhart Nicholson Graham, LLP.
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24**
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Powers
of Attorney (on signature
page)
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