Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred significant recurring operating losses and negative cash flows from operations. The Company had a working capital deficiency of $157,397 and an accumulated deficit of $18,058,012 as of March 31, 2013. The Company also has no lending relationships with commercial banks and is dependent on the completion of financings involving the private placement of its securities in order to continue operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company does not anticipate establishing any lending relationships with commercial banks in the foreseeable future due to its limited operations and assets. The Company continues to execute its strategy of selling anolyte and catholyte solutions and leasing its EcaFlo™ equipment to fund its operations and is focused on obtaining additional capital through the private placement of its securities. The Company is continuing to pursue potential equity and/or debt investors and, from time to time, has engaged placement agents to assist it in this initiative. While the Company is pursuing the opportunities and actions described above, there can be no assurance that it will be successful in its efforts. If the Company is unable to secure additional capital, it will explore other strategic alternatives, including, but not limited to, the sale of the Company. Any additional equity financing may result in substantial dilution to the Company’s stockholders.
2. Inventory
As of March 31, 2013 and December 31, 2012, inventory consisted of parts and materials totaling $67,000 and $82,566, respectively.
During March 2013 and December 2012, the Company reclassified $17,487 and $138,336, respectively, of EcaFlo™ equipment from finished goods inventory to property and equipment. The Company no longer intends to sell the EcaFlo™ equipment but rather will either utilize the EcaFlo™ equipment to manufacture anolyte and catholyte solutions to be sold by the Company or lease the EcaFlo™ equipment to third parties.
3. Note Receivable
The Company has a note receivable with a customer relating to the sale of certain EcaFlo™ equipment. The note payments are $1,250 per month over a 34-month term which commenced on January 15, 2011. The Company imputed interest on this note receivable at a rate of 3% per annum.
During March 2013, the Company and the customer agreed to apply $2,094 of accounts payable due by the Company to the customer against the note receivable balance due from the customer to the Company. The accounts payable amount due by the Company to the customer related to the purchase of certain parts and materials by the Company from the customer. During the three months ended March 31, 2013 and 2012, the Company recognized $37 and $180, respectively, of interest income related to this note receivable. As of March 31, 2013 and December 31, 2012, the current portion of the note receivable was $5,705 and $7,762, respectively.
4. Property and Equipment
As of March 31, 2013 and December 31, 2012, property and equipment, on a net basis, consisted of the following:
|
|
March 31,
2013
|
|
|
December 31, 2012
|
|
Leasehold improvements
|
|
$
|
328,977
|
|
|
$
|
328,977
|
|
Equipment
|
|
|
239,031
|
|
|
|
203,368
|
|
|
|
|
568,008
|
|
|
|
532,345
|
|
Less: Accumulated depreciation
|
|
|
(287,200
|
)
|
|
|
(249,363
|
)
|
|
|
$
|
280,808
|
|
|
$
|
282,982
|
|
5. Accrued Expenses
As of March 31, 2013 and December 31, 2012, accrued expenses consisted of the following:
|
|
March 31,
2013
|
|
|
December 31, 2012
|
|
Accrued compensation
|
|
$
|
115,000
|
|
|
$
|
115,000
|
|
Accrued interest
|
|
|
31,592
|
|
|
|
21,330
|
|
Accrued auditing fees
|
|
|
2,800
|
|
|
|
22,000
|
|
Accrued other expenses
|
|
|
1,633
|
|
|
|
1,633
|
|
|
|
$
|
151,025
|
|
|
$
|
159,963
|
|
6. Customer Deposits
On March 29, 2011, the Company agreed to issue a credit to purchase equipment to a consultant in the amount of $36,109. This credit was issued as payment to the consultant for consulting services previously rendered to the Company. The Company has recorded this amount as a customer deposit.
7. Convertible Debentures
April 2007 Convertible Debenture
On April 26, 2007, in a private placement, the Company issued a convertible debenture to an individual accredited investor in the principal amount of $25,000. This convertible debenture matured on January 2, 2009 and remains unpaid. The convertible debenture accrues interest at a rate of 12% per annum and is convertible at any time into shares of the Company’s common stock at the option of the holder at a conversion price of $0.40 per share. An aggregate of 62,500 shares of the Company’s common stock can be issued pursuant to this convertible debenture at the current conversion price of $0.40 per share.
During the three months ended March 31, 2013 and 2012, the Company recorded a total of $740 and $748, respectively, of interest expense related to this convertible debenture. As of March 31, 2013, the outstanding principal on this convertible debenture was $25,000 and the accrued and unpaid interest was $8,189, which amount is included as a component of accrued expenses.
Zanett Convertible Debentures
On August 21, 2012, the Company issued to Zanett Opportunity Fund, Ltd. (“Zanett”) an 8% convertible debenture in the amount of $476,125 (the “Zanett August 2012 Debenture”). In connection with this private placement, the Company refinanced an 8% convertible debenture, in the principal amount of $376,125, issued to Zanett on July 7, 2011 (the “Zanett July 2011 Debenture”) and refinanced an 8% convertible secured promissory note, in the principal amount of $100,000, issued to Zanett on September 23, 2011 (the “Zanett September 2011 Note”). As a result of the issuance of the Zanett August 2012 Debenture, the Zanett July 2011 Debenture and the Zanett September 2011 Note were cancelled.
The Zanett August 2012 Debenture has a three-year term maturing on August 21, 2015 and bears interest at a rate of 8% per annum. Interest is payable in annual installments in cash or, at the option of the Company, in shares of the Company’s common stock. If the Company elects to pay the interest in shares of its common stock, the number of shares issued as payment will be equal to the quotient of the unpaid interest divided by the market price of the Company’s common stock, as defined in the Zanett August 2012 Debenture.
The entire principal amount of the Zanett August 2012 Debenture is convertible at any time into shares of the Company’s common stock at the option of the holder at a conversion price of $0.10 per share. In addition, at the option of the Company, the entire principal amount of the Zanett August 2012 Debenture is convertible into shares of the Company’s common stock at $0.10 per share upon the occurrence of the merger or acquisition of the Company or if the average closing price of the Company’s common stock for any period of ten consecutive trading days is greater than or equal to $0.15 per share. The quoted market price of the Company’s common stock on August 21, 2012 was $0.05 per share. An aggregate of 4,761,250 shares of the Company’s common stock can be issued pursuant to the Zanett August 2012 Debenture at the current conversion price of $0.10 per share.
For the three months ended March 31, 2013, the Company recorded $9,523 of interest expense related to the Zanett August 2012 Debenture. As of March 31, 2013, the outstanding principal on the Zanett August 2012 Debenture was $476,125 and the accrued and unpaid interest was $23,403, which is included as a component of accrued expenses.
8. Stockholders’ Deficiency
Common Stock
On February 12, 2013, the Company sold to E. Wayne Kinsey III, a member of the Company’s board of directors, 4,166,667 shares of the Company’s common stock for an aggregate purchase price of $125,000, or $0.03 per share. In addition, the Company sold 3,333,333 shares of its common stock to an institutional investor for an aggregate purchase price of $100,000, or $0.03 per share, and incurred offering costs of $7,000 in connection with this sale of common stock. The quoted market price of the Company’s common stock on the date of closing these transactions was $0.04 per share.
On February 28, 2013, the Company issued 250,000 shares of its common stock in connection with a consulting agreement with an unaffiliated third party for investor relations services. The total expense associated with the issuance of these shares was $9,125, representing the fair market value of the shares of common stock on the date of issuance ($0.0365 per share).
On March 1, 2013, the Company sold 2,500,000 shares of its common stock to an institutional investor for an aggregate purchase price of $75,000, or $0.03 per share. The quoted market price of the Company’s common stock on the date of closing this transaction was $0.04 per share. The Company incurred offering costs of $5,250 in connection with this sale of common stock.
On March 22, 2013, the Company sold 800,000 shares of its common stock to an individual investor for an aggregate purchase price of $24,000, or $0.03 per share. The quoted market price of the Company’s common stock on the date of closing this transaction was $0.04 per share.
On March 31, 2013, the Company issued 250,000 shares of its common stock in connection with a consulting agreement with an unaffiliated third party for investor relations services. The total expense associated with the issuance of these shares was $10,050, representing the fair market value of the shares of common stock on the date of issuance ($0.042 per share).
Stock Options
The Company currently has two stock option/stock compensation plans in place: the 2010 Stock Incentive Plan and the 2012 Equity Incentive Plan (collectively, the “Equity Incentive Plans”).
The 2010 Stock Incentive Plan was approved by the stockholders in September 2010. The Company had reserved for issuance an aggregate of 10,000,000 shares of common stock under the 2010 Stock Incentive Plan. As of March 31, 2013, stock options to purchase 5,813,587 shares of the Company’s common stock were outstanding under the 2010 Stock Incentive Plan and 90,500 shares of the Company’s common stock had been issued under the 2010 Stock Incentive Plan. As a result of the adoption of the Company’s 2012 Equity Incentive Plan, no further awards are permitted under the 2010 Stock Incentive Plan.
The 2012 Equity Incentive Plan was approved by the stockholders in May 2012. The Company has reserved for issuance an aggregate of 14,000,000 shares of common stock under the 2012 Stock Incentive Plan. The 2012 Equity Incentive Plan is designed to encourage and enable employees and directors of the Company to acquire or increase their holdings of common stock and other proprietary interests in the Company. It is intended to promote these individuals’ interests in the Company, thereby enhancing the efficiency, soundness, profitability, growth and stockholder value of the Company. The 2012 Equity Incentive Plan provides for grants and/or awards in the form of incentive and non-qualified stock option grants, stock appreciation rights, restricted stock awards, performance share awards, phantom stock awards and dividend equivalent awards. As of March 31, 2013, no grants or awards had been made under the 2012 Equity Incentive Plan.
Common stock grants and stock option awards under the Equity Incentive Plans were issued or granted at prices as determined by the Company’s compensation committee, but such prices were not less than the fair market value of the Company's common stock on the date of grant or issuance. Stock options granted and outstanding to date consist of both incentive stock options and non-qualified stock options.
A summary of stock option transactions under the Equity Incentive Plans during the three months ended March 31, 2013 is set forth below:
|
|
Stock
Option Shares
|
|
|
Weighted Average Exercise Price Per Common Share
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding at December 31, 2012
|
|
|
5,813,587
|
|
|
$
|
0.18
|
|
|
$
|
--
|
|
Granted during the period
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Exercised during the period
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Terminated during the period
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Outstanding at March 31, 2013
|
|
|
5,813,587
|
|
|
$
|
0.18
|
|
|
$
|
--
|
|
Available for purchase at March 31, 2013
|
|
|
1,806,793
|
|
|
$
|
0.10
|
|
|
$
|
--
|
|
Available for purchase at December 31, 2012
|
|
|
1,806,793
|
|
|
$
|
0.10
|
|
|
$
|
--
|
|
Information with respect to outstanding stock options and stock options exercisable as of March 31, 2013 is as follows:
|
|
|
Stock Options Outstanding
|
|
|
Stock Options Exercisable
|
|
|
|
|
Number of Shares Available Under Outstanding Stock
Options
|
|
|
Weighted Average Exercise Price Per Common Share
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
|
Number of Shares Available for Purchase Under Outstanding Stock
|
|
|
Weighted Average Exercise Price Per Common Share
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
$
|
0.08
|
|
|
|
300,000
|
|
|
$
|
0.08
|
|
|
|
1.0
|
|
|
|
300,000
|
|
|
$
|
0.08
|
|
|
|
1.0
|
|
$
|
0.10
|
|
|
|
2,180,253
|
|
|
$
|
0.10
|
|
|
|
5.9
|
|
|
|
1,506,793
|
|
|
$
|
0.10
|
|
|
|
6.8
|
|
$
|
0.20
|
|
|
|
1,666,666
|
|
|
$
|
0.20
|
|
|
|
9.0
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
$
|
0.30
|
|
|
|
1,666,668
|
|
|
$
|
0.30
|
|
|
|
9.0
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
5,813,587
|
|
|
$
|
0.18
|
|
|
|
7.4
|
|
|
|
1,806,793
|
|
|
$
|
0.10
|
|
|
|
5.8
|
|
A summary of the non-vested shares subject to stock options granted under the Equity Incentive Plans as of March 31, 2013 is as follows:
|
|
Stock
Option Shares
|
|
|
Weighted Average Grant Date Fair Value
Per Share
|
|
Non-vested at December 31, 2012
|
|
|
4,006,794
|
|
|
$
|
0.05
|
|
Granted during the period
|
|
|
--
|
|
|
|
--
|
|
Vested during the period
|
|
|
--
|
|
|
|
--
|
|
Terminated during the period
|
|
|
--
|
|
|
|
--
|
|
Non-vested at March 31, 2013
|
|
|
4,006,794
|
|
|
$
|
0.05
|
|
As of March 31, 2013, there was $69,073 of total unrecognized compensation cost related to non-vested share based compensation arrangements granted under the Equity Incentive Plans. That cost is expected to be recognized over a weighted average period of eighteen months.
Warrants to Purchase Common Stock
On February 4, 2013, the Company issued a warrant to purchase 250,000 shares of the Company’s common stock in connection with a consulting agreement with an unaffiliated third party for investor relations services. The warrant is exercisable at $0.035 per share and has a term of three years. The warrant vested upon issuance. The fair value of the warrant on the date of issuance as calculated using the Black-Scholes model was $4,072, using the following weighted average assumptions: exercise price of $0.035 per share; common stock price of $0.035 per share; volatility of 123%; term of three years; dividend yield of 0%; interest rate of 0.38%; and risk of forfeiture of 35%.
On March 4, 2013, the Company issued a warrant to purchase 250,000 shares of the Company’s common stock in connection with a consulting agreement with an unaffiliated third party for investor relations services. The warrant is exercisable at $0.04 per share and has a term of three years. The warrant vested upon issuance. The fair value of the warrant on the date of issuance as calculated using the Black-Scholes model was $4,644, using the following weighted average assumptions: exercise price of $0.04 per share; common stock price of $0.04 per share; volatility of 123%; term of three years; dividend yield of 0%; interest rate of 0.35%; and risk of forfeiture of 35%.
A summary of warrant transactions during the three months ended March 31, 2013 is as follows:
|
|
Warrant Shares
|
|
|
Weighted Average Exercise Price Per Common Share
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding at December 31, 2012
|
|
|
45,852,998
|
|
|
$
|
0.17
|
|
|
$
|
--
|
|
Issued during the period
|
|
|
500,000
|
|
|
$
|
0.04
|
|
|
|
--
|
|
Exercised during the period
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Terminated during the period
|
|
|
(225,000
|
)
|
|
$
|
0.28
|
|
|
|
--
|
|
Outstanding at March 31, 2013
|
|
|
46,127,998
|
|
|
$
|
0.17
|
|
|
$
|
--
|
|
Available for purchase at March 31, 2013
|
|
|
46,127,998
|
|
|
$
|
0.17
|
|
|
$
|
1,250
|
|
Available for purchase at December 31, 2012
|
|
|
45,852,998
|
|
|
$
|
0.17
|
|
|
$
|
--
|
|
Warrants issued by the Company contain exercise prices that were determined by the Company’s board of directors. Such exercise prices were not less than the quoted market price of the Company's common stock on the date of issuance. Warrants currently issued either vested immediately or over a period of up to three years and have a maximum term of ten years from the date of issuance.
Information with respect to outstanding warrants and warrants exercisable at March 31, 2013 is as follows:
|
|
|
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
|
|
|
Number of Shares Available Under Outstanding Warrants
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
|
Weighted Average Exercise Price Per Common Share
|
|
|
Number of Shares Available for Purchase Under Outstanding Warrants
|
|
|
Weighted Average Exercise Price Per Common Share
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
$
|
0.07 - 0.10
|
|
|
|
23,556,061
|
|
|
|
4.7
|
|
|
$
|
0.09
|
|
|
|
23,556,061
|
|
|
$
|
0.09
|
|
|
|
4.7
|
|
$
|
0.20 - 0.35
|
|
|
|
19,949,437
|
|
|
|
1.5
|
|
|
$
|
0.22
|
|
|
|
19,949,437
|
|
|
$
|
0.22
|
|
|
|
1.5
|
|
$
|
0.50
|
|
|
|
2,622,500
|
|
|
|
0.7
|
|
|
$
|
0.50
|
|
|
|
2,622,500
|
|
|
$
|
0.50
|
|
|
|
0.7
|
|
|
|
|
|
|
46,127,998
|
|
|
|
3.0
|
|
|
$
|
0.17
|
|
|
|
46,127,998
|
|
|
$
|
0.17
|
|
|
|
3.0
|
|
As of March 31, 2013, there were no non-vested shares subject to warrants and there was no unrecognized compensation cost.
9. Stock-Based Compensation
During the three months ended March 31, 2013 and 2012, the Company recorded stock-based compensation expense as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
General and administrative
|
|
$
|
36,276
|
|
|
$
|
15,230
|
|
Sales and marketing
|
|
|
2,520
|
|
|
|
23,791
|
|
Research and development
|
|
|
1,080
|
|
|
|
4,489
|
|
|
|
$
|
39,876
|
|
|
$
|
43,510
|
|
For the three months ended March 31, 2013 and 2012, the Company recorded stock-based compensation expense related to stock options granted to employees and directors of $11,985 and $30,193, respectively. For the three months ended March 31, 2013 and 2012, the Company recorded stock-based compensation expense related to common stock and warrants granted to non-employees of $27,891 and $13,317, respectively.
10. Net Loss Per Common Share
Basic net loss per share is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the impact of common shares issuable upon exercise of stock options and warrants and conversion of convertible debt that are not deemed to be anti-dilutive. The dilutive effect of the outstanding stock options and warrants is computed using the treasury stock method.
For the three months ended March 31, 2013, diluted net loss per share did not include the effect of 5,813,587 shares of common stock issuable upon the exercise of outstanding stock options, 46,127,998 shares of common stock issuable upon the exercise of outstanding warrants and 4,823,750 shares of common stock issuable upon the conversion of convertible debt, as their effect would be anti-dilutive.
For the three months ended March 31, 2012, diluted net loss per share did not include the effect of 6,646,920 shares of common stock issuable upon the exercise of outstanding stock options, 44,056,748 shares of common stock issuable upon the exercise of outstanding warrants and 10,323,750 shares of common stock issuable upon the conversion of convertible debt, as their effect would be anti-dilutive.
11. Related-Party Transactions
On February 12, 2013, the Company sold to E. Wayne Kinsey III, a member of the Company’s board of directors, 4,166,667 shares of the Company’s common stock for an aggregate purchase price of $125,000, or $0.03 per share (see Note 8).
12. Commitments and Contingencies
Lease Agreement – South Carolina
The Company entered into a lease agreement for its premises located in Little River, South Carolina on January 1, 2006. The lease agreement had an original term of three years. In January 2009, the Company agreed to renew the lease agreement for a term of five years at $71,291 per year. The renewal term contained the same covenants, conditions, and provisions as provided in the original lease agreement. The future minimum lease payments due under this lease for the year ending December 31, 2013 total $53,468.
Litigation with Crystal Enterprises
On January 12, 2012, a civil complaint was filed against the Company in the United States District Court for the Western District of Washington by Crystal Enterprises, Inc. (“Crystal”). In its complaint, Crystal alleges interference with prospective advantage or business expectancy, tortious interference with contract, breach of fiduciary duty, breach of non-disclosure agreement and breach of contact. Crystal’s allegations center on discussions among the Company, Crystal, Pendred, Inc. (an affiliate of Crystal’s) and Biolize Products, LLC, regarding the establishment of a business relationship involving the distribution of the Company’s anolyte and catholyte solutions. Crystal is seeking monetary damages as well as attorney fees.
This action is currently in its discovery stage. The Company does not believe there is any merit to Crystal’s allegations and will continue to vigorously defend this action.
13. Subsequent Events
On April 1, 2013, the Company issued a warrant to purchase 250,000 shares of the Company’s common stock in connection with a consulting agreement with an unaffiliated third party for investor relations services. The warrant is exercisable at $0.04 per share and has a term of three years. The warrant vested upon issuance. The fair value of the warrant on the date of issuance as calculated using the Black-Scholes model was $4,969, using the following weighted average assumptions: exercise price of $0.04 per share; common stock price of $0.04 per share; volatility of 125%; term of three years; dividend yield of 0%; interest rate of 0.36%; and risk of forfeiture of 35%.
On April 30, 2013, the Company sold 3,000,000 shares of its common stock to an individual investor for an aggregate purchase price of $90,000, or $0.03 per share. The quoted market price of the Company’s common stock on the date of closing this transaction was $0.0475 per share.
On April 30, 2013, the Company issued 250,000 shares of its common stock in connection with a consulting agreement with an unaffiliated third party for investor relations services. The total expense associated with the issuance of these shares was $11,875, representing the fair market value of the shares of common stock on the date of issuance ($0.0475 per share).
On May 2, 2013, the Company sold to E. Wayne Kinsey III, a member of the Company’s board of directors, 4,166,667 shares of the Company’s common stock for an aggregate purchase price of $125,000, or $0.03 per share. The quoted market price of the Company’s common stock on the date of closing this transaction was $0.051 per share.