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 working capital of $559,446 and an accumulated deficit of $19,997,851 as of March 31, 2014. 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 pursuing 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, 2014 and December 31, 2013, inventory consisted of parts and materials totaling $131,051 and $126,952, respectively.
3. Property and Equipment
As of March 31, 2014 and December 31, 2013, property and equipment, on a net basis, consisted of the following (see note 7):
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
Leasehold improvements
|
|
$
|
328,977
|
|
|
$
|
328,977
|
|
Equipment
|
|
|
437,504
|
|
|
|
437,504
|
|
|
|
|
766,481
|
|
|
|
766,481
|
|
Less: Accumulated depreciation
|
|
|
(442,951
|
)
|
|
|
(421,597
|
)
|
|
|
$
|
323,530
|
|
|
$
|
344,884
|
|
4. Accrued Expenses
As of March 31, 2014 and December 31, 2013, accrued expenses consisted of the following:
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
Accrued interest
|
|
$
|
34,453
|
|
|
$
|
24,321
|
|
Accrued auditing fees
|
|
|
2,750
|
|
|
|
22,000
|
|
Accrued other expenses
|
|
|
1,633
|
|
|
|
1,633
|
|
|
|
$
|
38,836
|
|
|
$
|
47,954
|
|
5. Customer Deposits
On March 29, 2011, the Company issued a credit to purchase equipment to a consultant in the amount of $36,109 as payment to the consultant for consulting services rendered to the Company. The Company has recorded this amount as a customer deposit.
Effective January 1, 2013, the Company entered into a license agreement with a third party related to the use by the third party of the Company’s United States Environmental Protection Agency (the “EPA”) registration for its anolyte solution. The Company received a deposit of $2,000 pursuant to the terms of this agreement.
6. 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 upon the conversion of the outstanding principal amount due on this convertible debenture at the current conversion price of $0.40 per share.
During each of the three months ended March 31, 2014 and 2013, the Company recorded a total of $740 of interest expense related to this convertible debenture. As of March 31, 2014 and December 31, 2013, the outstanding principal on this convertible debenture was $25,000 and the accrued and unpaid interest was $11,181 and $10,441, respectively. The accrued and unpaid interest 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 upon the conversion of the outstanding principal amount due on the Zanett August 2012 Debenture at the current conversion price of $0.10 per share.
On August 22, 2013, the Company issued 400,947 shares of the Company’s common stock to Zanett as payment of $38,090 of accrued interest due on the Zanett August 2012 Debenture for the period commencing August 21, 2012 through August 20, 2013. The number of shares of the Company’s common stock issued as payment of the accrued interest was calculated based on the market price of the Company’s common stock ($0.095 per share) as defined in the Zanett August 2012 Debenture.
During the three months ended March 31, 2014 and 2013, the Company recorded $9,392 and $9,523, respectively, of interest expense related to the Zanett August 2012 Debenture. As of March 31, 2014 and December 31, 2013, the outstanding principal on the Zanett August 2012 Debenture was $476,125 and the accrued and unpaid interest was $23,272 and $13,880, respectively. The accrued and unpaid interest is included as a component of accrued expenses.
7. Note Payable
On June 17, 2013, the Company and Benchmark Performance Group, Inc. (“Benchmark”) entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”), whereby the Company purchased nineteen EcaFlo™ machines owned by Benchmark as well as the rights to the Excelyte™ trademark and certain other intangible assets. The purchase price for the nineteen EcaFlo™ machines, the Excelyte™ trademark and other intangible assets was $190,000.
The Company paid $38,000 in conjunction with the closing of the Asset Purchase Agreement and issued a promissory note with a principal balance of $152,000 (the “Benchmark Note”). The Benchmark Note bears interest at a rate of 7% per annum and requires the Company to make twenty-four monthly payments of $6,805 commencing August 1, 2013. The Benchmark Note is secured by the nineteen EcaFlo™ machines.
For the three months ended March 31, 2014, the Company recorded $2,029 of interest expense related to the Benchmark Note. As of March 31, 2014 and December 31, 2013, the outstanding principal on the Benchmark Note was $103,671 (current portion $76,842; long-term portion $26,829) and $122,059 (current portion $75,513; long-term portion $46,546), respectively.
8. Stockholders’ Equity
Common Stock
On January 8, 2014, the Company sold 350,000 shares of its common stock to an individual investor for an aggregate purchase price of $25,200, or $0.072 per share.
On February 25, 2014, the Company issued an aggregate of 206,250 shares of its common stock, at a per share price of $0.08, as settlement of $16,500 of director fees due certain members of the Company’s board of directors for services rendered for the period commencing September 1, 2013 through December 31, 2013. The quoted market price of the Company’s common stock on the date the issuance was approved by the Company’s board of directors was $0.08 per share.
On March 14, 2014, the Company issued 250,000 shares of its common stock in connection with a consulting agreement with an unaffiliated third party for marketing services. The total expense associated with the issuance of these shares was $20,000, representing the fair market value of the shares on the date of issuance ($0.08 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, 2014, stock options to purchase 4,980,254 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, 2014, 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 granted or issued at prices as determined by the Company’s compensation committee; provided, however, that 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, 2014 is set forth below:
|
|
Stock
Option
Shares
|
|
|
Weighted
Average
Exercise
Price Per
Common
Share
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2013
|
|
|
4,980,254
|
|
|
$
|
0.18
|
|
|
$
|
--
|
|
Granted during the period
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Exercised during the period
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Terminated during the period
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Outstanding at March 31, 2014
|
|
|
4,980,254
|
|
|
$
|
0.18
|
|
|
$
|
--
|
|
Available for purchase at March 31, 2014
|
|
|
3,313,586
|
|
|
$
|
0.12
|
|
|
$
|
--
|
|
Available for purchase at December 31, 2013
|
|
|
3,313,586
|
|
|
$
|
0.12
|
|
|
$
|
--
|
|
Information with respect to stock options outstanding and stock options exercisable as of March 31, 2014 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
|
|
|
|
0.1
|
|
|
|
300,000
|
|
|
$
|
0.08
|
|
|
|
0.0
|
|
$
|
0.10
|
|
|
|
2,180,253
|
|
|
$
|
0.10
|
|
|
|
4.9
|
|
|
|
2,180,253
|
|
|
$
|
0.10
|
|
|
|
4.9
|
|
$
|
0.20
|
|
|
|
833,333
|
|
|
$
|
0.20
|
|
|
|
8.0
|
|
|
|
833,333
|
|
|
$
|
0.20
|
|
|
|
8.0
|
|
$
|
0.30
|
|
|
|
1,666,668
|
|
|
$
|
0.30
|
|
|
|
8.0
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
4,980,254
|
|
|
$
|
0.18
|
|
|
|
6.2
|
|
|
|
3,313,586
|
|
|
$
|
0.12
|
|
|
|
5.2
|
|
A summary of the non-vested shares subject to stock options granted under the Equity Incentive Plans as of March 31, 2014 is as follows:
|
|
Stock
Option
Shares
|
|
|
Weighted
Average
Grant
Date Fair
Value
Per Share
|
|
Non-vested at December 31, 2013
|
|
|
1,666,668
|
|
|
$
|
0.05
|
|
Granted during the period
|
|
|
--
|
|
|
|
--
|
|
Vested during the period
|
|
|
--
|
|
|
|
--
|
|
Terminated during the period
|
|
|
--
|
|
|
|
--
|
|
Non-vested at March 31, 2014
|
|
|
1,666,668
|
|
|
$
|
0.05
|
|
As of March 31, 2014, there was $22,014 of total unrecognized compensation cost related to non-vested, stock-based compensation arrangements granted under the Equity Incentive Plans. That cost is expected to be recognized over a weighted average period of nine months.
Warrants to Purchase Common Stock
A summary of warrant transactions during the three months ended March 31, 2014 is as follows:
|
|
Warrant
Shares
|
|
|
Weighted
Average
Exercise
Price Per
Common
Share
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2013
|
|
|
36,844,565
|
|
|
$
|
0.12
|
|
|
$
|
--
|
|
Issued during the period
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Exercised during the period
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Terminated during the period
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Outstanding at March 31, 2014
|
|
|
36,844,565
|
|
|
$
|
0.12
|
|
|
$
|
--
|
|
Available for purchase at March 31, 2014
|
|
|
36,844,565
|
|
|
$
|
0.12
|
|
|
$
|
--
|
|
Available for purchase at December 31, 2013
|
|
|
36,844,565
|
|
|
$
|
0.12
|
|
|
$
|
--
|
|
Warrants issued by the Company contain exercise prices that were approved by the Company’s board of directors. Such exercise prices are generally 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 warrants outstanding and warrants exercisable at March 31, 2014 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
Remaining
Contractual
Life (Years)
|
|
|
Weighted
Average
Exercise
Price Per
Common
Share
|
|
$
|
0.03 - 0.04
|
|
|
|
1,151,567
|
|
|
|
2.8
|
|
|
$
|
0.04
|
|
|
|
1,151,567
|
|
|
|
2.8
|
|
|
$
|
0.04
|
|
$
|
0.07 - 0.10
|
|
|
|
23,056,061
|
|
|
|
3.7
|
|
|
$
|
0.09
|
|
|
|
23,056,061
|
|
|
|
3.7
|
|
|
$
|
0.09
|
|
$
|
0.20
|
|
|
|
12,636,937
|
|
|
|
1.0
|
|
|
$
|
0.20
|
|
|
|
12,636,937
|
|
|
|
1.0
|
|
|
$
|
0.20
|
|
|
|
|
|
|
36,844,565
|
|
|
|
2.7
|
|
|
$
|
0.13
|
|
|
|
36,844,565
|
|
|
|
2.7
|
|
|
$
|
0.13
|
|
As of March 31, 2014, there were no non-vested shares subject to warrants and no unrecognized compensation cost related to warrants.
9. Stock-Based Compensation
During the three months ended March 31, 2014 and 2013, the Company recorded stock-based compensation expense as follows:
|
|
Three
Months Ended
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
General and administrative
|
|
$
|
26,837
|
|
|
$
|
36,276
|
|
Sales and marketing
|
|
|
2,520
|
|
|
|
2,520
|
|
Research and development
|
|
|
1,080
|
|
|
|
1,080
|
|
Total
|
|
$
|
30,437
|
|
|
$
|
39,876
|
|
For the three months ended March 31, 2014 and 2013, the Company recorded stock-based compensation expense related to stock options granted to employees and directors of $10,437 and $11,985, respectively. For the three months ended March 31, 2014 and 2013, the Company recorded stock-based compensation expense related to common stock and warrants granted to non-employees of $20,000 and $27,891, 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, 2014, diluted net loss per share did not include the effect of 4,980,254 shares of common stock issuable upon the exercise of outstanding stock options, 36,844,565 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, 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.
11. Commitments and Contingencies
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, ending on December 31, 2013, at $71,291 per year. The renewal term contained the same covenants, conditions, and provisions as provided in the original lease agreement. The Company is currently leasing the premises on a month-to-month basis.