PROSPECTUS Pursuant to Rule 424(b)(3)
File N0. 333-122768
Dated July 25, 2007
PROSPECTUS
[IVIVI LOGO]
IVIVI TECHNOLOGIES, INC.
3,439,470 SHARES OF COMMON STOCK
This prospectus relates to 3,439,470 shares of the common stock of Ivivi
Technologies, Inc. for the sale from time to time by certain holders of our
securities, or by their pledgees, donees, transferees or other successors in
interests. 1,549,238 such shares were issued and outstanding on the date hereof,
and remaining 1,890,232 shares are issuable upon the exercise of warrants held
by the selling securityholders. We will not receive any of the proceeds from the
sale of our common stock by the selling securityholders. We will receive the
proceeds of any cash exercise of the warrants. We will pay the expenses of
registering the shares sold by the selling securityholders, which we estimate to
be approximately $15,000.
The distribution of securities offered hereby may be effected in one or
more transactions that may take place in the American Stock Exchange, including
ordinary brokers' transactions, privately negotiated transactions or through
sales to one or more dealers for resale of such securities as principals, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the selling
securityholders.
The selling securityholders and intermediaries through whom such
securities are sold may be deemed "underwriters" within the meaning of the
Securities Act of 1933, as amended, with respect to the securities offered
hereby, and any profits realized or commissions received may be deemed
underwriting compensation. We have agreed to indemnify the selling
securityholders against certain liabilities, including liabilities under the
Securities Act.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is July 25, 2007
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY.............................................................1
RISK FACTORS...................................................................5
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.............................21
USE OF PROCEEDS...............................................................22
DIVIDEND POLICY...............................................................22
SELECTED FINANCIAL INFORMATION................................................23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.........................................................24
BUSINESS......................................................................35
MANAGEMENT....................................................................65
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................82
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................85
DESCRIPTION OF CAPITAL STOCK..................................................89
SHARES ELIGIBLE FOR FUTURE SALE...............................................94
SELLING SECURITYHOLDERS.......................................................95
PLAN OF DISTRIBUTION..........................................................97
LEGAL MATTERS.................................................................99
EXPERTS.......................................................................99
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES....................................................99
WHERE YOU CAN FIND ADDITIONAL INFORMATION.....................................99
FINANCIAL STATEMENTS.........................................................F-1
|
This prospectus contains service marks, trademarks and tradenames of Ivivi
Technologies, Inc.
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS MATERIAL INFORMATION ABOUT US THAT IS DESCRIBED
MORE FULLY ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD CAREFULLY READ THIS ENTIRE
DOCUMENT, INCLUDING THE "RISK FACTORS" SECTION BEGINNING ON PAGE 5 AND OUR
FINANCIAL STATEMENTS AND THEIR RELATED NOTES BEFORE MAKING A DECISION TO INVEST
IN OUR COMMON STOCK.
OVERVIEW
Ivivi Technologies, Inc. is an early-stage medical technology company
focusing on designing, developing and commercializing proprietary
electrotherapeutic technologies. Electrotherapeutic technologies use electric or
electromagnetic signals to help relieve pain, swelling and inflammation and
promote healing processes and tissue regeneration. We have focused our research
and development activities on pulsed electromagnetic field, or PEMF, technology.
This technology utilizes a magnetic field that is turned on and off rapidly to
create a therapeutic electrical current in injured tissue, which then stimulates
biochemical and physiological processes to help repair injured soft tissue and
reduce related pain. We are currently marketing products utilizing our PEMF
technology to the chronic wound and plastic and reconstructive surgery markets.
We are developing proprietary technology for other therapeutic medical markets.
Based on mathematical modeling, we develop and design proprietary PEMF
signals, which we refer to as "electroceuticalsTM." These signals are intended
to improve specific physiological processes, including those that generate the
body's natural anti-inflammatory response. We are currently utilizing our PEMF
technology to address a wide array of pathological conditions, including acute
and chronic disorders in soft tissue such as chronic wounds, pain and edema,
acute injuries and chronic inflammatory disorders. Chronic wounds include
pressure ulcers, diabetic wounds and arterial and venous insufficiency wounds
(wounds resulting from poor blood flow in the arteries or veins). We are also
developing applications for increasing angiogenesis (new blood vessel growth), a
critical component for tissue regeneration.
Our SofPulse product, which utilizes our PEMF technology, has been cleared
by the United States Food and Drug Administration, the FDA, for the adjunctive
use in the palliative treatment of post-operative pain and edema in superficial
tissue. In July 2004, the Center for Medicare and Medicaid Services, or CMS,
issued a National Coverage Determination, or NCD, requiring reimbursement by
Medicare for the use of electromagnetic therapy for the treatment of chronic
wounds.
Our products consist of the following three components:
o the electroceutical signals;
o a signal generator; and
o an applicator.
The signal generator produces a specific electroceutical signal that is
pulsed through a cable and into the applicator. The applicator transmits the
electroceutical signal into the desired area, penetrating medical dressings,
casts, coverings, clothing and virtually all other non-metal materials. Our
products can be used immediately following acute injury, trauma and surgical
wounds, as well as in chronic conditions, and require no alteration of standard
clinical practices to accommodate the therapy provided by our products. We
continue to focus our research and development activities on optimizing the
signal parameters of our PEMF technology in order to produce improved clinical
outcomes and smaller more efficient products utilizing less power.
1
Since the mid-1990s, our products have been used in over 600,000
treatments by healthcare professionals on medical conditions, such as:
o acute or chronic wounds, including post surgical wounds;
o edema and pain following plastic and reconstructive surgery; and
o pain associated with the inflammatory phase of chronic conditions.
For such purpose, we regard each 15-minute application on a target area of a
patient as one treatment.
We are currently a party to, and intend to continue to seek, agreements
with distributors to assist us in the marketing and distribution of our
products. As of the date of this report, we have engaged six domestic
third-party distributors to assist us in marketing our products in the United
States chronic wound care market and one distributor in Canada to assist us in
marketing our products in the Canadian chronic wound care market. We are also
actively pursuing exclusive arrangements with strategic partners we believe have
leading positions in our target markets, in order to establish nationwide, and
in some cases worldwide, marketing and distribution channels for our products.
Generally, under these arrangements, the strategic partners would be responsible
for marketing, distributing and selling our products while we continue to
provide the related technology, products and technical support. Through this
approach, we expect to achieve broader marketing and distribution capabilities
in multiple target markets.
On November 9, 2006, we entered into an exclusive worldwide distribution
agreement with a wholly-owned subsidiary of Allergan, Inc., a global healthcare
company that discovers, develops and commercializes pharmaceutical and medical
device products in specialty markets. Pursuant to the agreement, we granted
Allergan's subsidiary, Inamed Medical Products Corporation, and its affiliates
the exclusive worldwide right to market, sell and distribute certain of our
products, including all improvements, line extensions and future generations
thereof in conjunction with any aesthetic or bariatric medical procedures in the
defined marketing territory. Under the agreement, we also granted Inamed the
right to rebrand such product, with Inamed owning all rights to such brands
developed by Inamed for such purpose.
COMPANY HISTORY
We were incorporated under the laws of the State of New Jersey in March
1989 under the name AA Northvale Medical Associates, Inc. as a subsidiary of ADM
Tronics Unlimited, Inc., or ADM (OTC BB: ADMT.OB), our largest shareholder
(which holds approximately 34% of the outstanding shares of our common stock).
From March 1989 until August 1998, we had very limited operations, which
included the operation of medical clinics for conducting clinical studies on
certain products of ADM. In August 1998, ADM purchased certain assets from
Electropharmacology, Inc. (formerly known as MRI, Inc.), or EPI, that were then
used by EPI in connection with its device business, including the right to use
the EPI patents, and immediately transferred all of those assets to us. The
assets included all of EPI's rights, title and interest in its device business
as well as certain rights related to three patents related to the PEMF
technology that were issued in 1994, 1996 and 1998. In January 2000, we acquired
all of the rights to the EPI patents. In April 2003, we acquired the operations
of five former subsidiaries of ADM, and in August 2004, we changed our name to
Ivivi Technologies, Inc. While we have conducted development and sales and
marketing activities, we have generated limited revenues and have incurred
significant losses to date. ADM is a technology-based developer and manufacturer
of the following product lines:
2
o environmentally safe chemical products;
o topical dermatological products; and
o therapeutic non-invasive electronic medical devices.
ADM currently derives most of its revenues from the development,
manufacture and sale of chemical products, and, to a lesser extent, from its
topical dermatological products and therapeutic non-invasive electronic medical
devices. ADM has developed a technology, known as the "Sonotron Technology," and
has utilized the Sonotron Technology to develop medical devices to treat
subjects suffering from the pain of inflammatory joint conditions. Although some
of the devices utilizing this technology are commercially available for the
treatment of animals, none of such devices have received FDA-clearance for human
application in the United States and do not compete with our technology or
products.
We believe that our focus, the commercialization of electrotherapeutic
technologies, specifically PEMF, for the treatment of acute and chronic
disorders, is distinct from and requires a different focus than ADM's business,
including the commercialization of its Sonotron Technology. As a result, we and
ADM believe that separating our business from the business of ADM Tronics will
allow each company to focus on its respective business and allow each company to
pursue different strategies and react quickly to changing market environments.
Pursuant to an agreement between us and ADM, all current and future technologies
and products utilizing non-invasive electrotherapeutic technologies will be
developed and commercialized by us and not ADM, unless we elect not to pursue
such technologies and products.
PRINCIPAL EXECUTIVE OFFICES
Our principal executive offices are located at 224-S Pegasus Avenue,
Northvale, New Jersey 07647. Our telephone number at that address is (201)
784-8168. Our principal corporate website is www.ivivitechnologies.com.
Information contained on our website does not constitute part of this
prospectus.
3
SUMMARY FINANCIAL INFORMATION
The summary financial data for the fiscal years ended March 31, 2007 and
2006 was derived from our financial statements that have been audited by Raich
Ende Malter & Co. LLP for the fiscal years then ended. The summary financial
information presented below should be read in conjunction with our audited
financial statements and related notes appearing in this prospectus beginning on
page F-1. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of our financial statements for the
fiscal years ended March 31, 2007 and 2006.
YEAR ENDED MARCH 31,
2007 2006
OPERATIONS STATEMENT DATA:
Revenue $ 1,182,340 $ 786,512
Cost of sales 87,040 52,790
Cost of rentals(1) 93,998 215,985
Depreciation and amortization 19,636 9,049
Research and development 1,610,232 1,334,637
Sales and marketing 1,098,266 1,152,947
Selling, general and administrative (1) 2,217,743 2,055,865
Share based compensation 2,142,448 656,848
-------------- --------------
Total operating expenses 7,269,363 5,478,121
-------------- --------------
Loss from operations (6,087,023) (4,691,609)
Change in fair value of warrant and registration rights liabilities (25,827) (4,658,537)
Interest and finance costs, net (1,665,761) (1,396,525)
-------------- --------------
Net loss $ (7,778,611) $ (10,746,671)
============== ==============
Net loss per share-basic and diluted $ (1.13) $ (2.26)
============== ==============
Weighted average shares used in computing net loss per share 6,875,028 4,745,000
============== ==============
BALANCE SHEET DATA:
AS OF MARCH 31, 2007
--------------------------------
Total current assets $ 8,926,511
Total current liabilities 1,042,632
Working capital 7,883,879
Total assets 9,303,473
Total liabilities 1,516,590
Stockholders' equity 7,786,883
Total liabilities and stockholders' equity 9,303,473
|
(1) Reflects (i) intercompany allocations of manufacturing charges by affiliate
of $75,584 and $72,417 for the years ended March 31, 2007 and 2006, respectively
and (ii) intercompany allocation of selling, general and administrative expenses
of $242,595 and $226,807 for the years ended March 31, 2007 and 2006,
respectively.
4
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK IS SPECULATIVE AND INVOLVES A HIGH
DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW,
TOGETHER WITH THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE BUYING
OUR COMMON STOCK. THESE RISKS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND THE VALUE OF OUR
COMMON STOCK
RISKS AFFECTING OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY ON WHICH TO EVALUATE OUR POTENTIAL FOR
FUTURE SUCCESS AND DETERMINE IF WE WILL BE ABLE TO EXECUTE OUR BUSINESS PLAN.
THIS MAKES IT DIFFICULT TO EVALUATE OUR FUTURE PROSPECTS AND THE RISK OF SUCCESS
OR FAILURE OF OUR BUSINESS.
We were formed in 1989, but had very limited operations until 1998 when we
acquired the assets utilized by EPI in connection with its medical device
business and your evaluation of our business and prospects will be based partly
on our limited operating history. While we have conducted development and sales
and marketing activities, we have generated limited revenues to date.
Consequently, our historical results of operations may not give you an accurate
indication of our future results of operations or prospects. You must consider
our business and prospects in light of the risks and difficulties we will
encounter as an early-stage company in a new and rapidly evolving market. These
risks include:
o our ability to effectively and efficiently market and distribute our
products through our sales force and third-party distributors;
o the ability of ADM or other manufacturers utilized by us to
effectively and efficiently manufacture our products;
o our ability to obtain market acceptance of our current products and
future products that may be developed by us;
o our ability to sell our products at competitive prices which exceed
our per unit costs; and
o our ability to obtain regulatory approval or clearance of our
products.
We may not be able to address these risks and difficulties, which could
materially and adversely affect our revenues, operating results and our ability
to continue to operate our business.
WE HAVE A HISTORY OF SIGNIFICANT AND CONTINUED OPERATING LOSSES AND A
SUBSTANTIAL ACCUMULATED EARNINGS DEFICIT AND WE MAY CONTINUE TO INCUR
SIGNIFICANT LOSSES.
We have generated only limited revenues from product sales and have
incurred net losses of approximately $7.8 and $10.7 million for the fiscal years
ended March 31, 2007 and 2006, respectively. At March 31, 2007, we had an
accumulated deficit of approximately $23.7 million. We expect to incur
additional operating losses, as well as negative cash flow from operations, for
the foreseeable future, as we continue to expand our marketing efforts with
respect to our products and to continue our research and development of
additional applications for our products as well as new products utilizing our
PEMF technology and other technologies that we may develop in the future. Our
ability to increase our revenues from sales of our current products and other
products developed by us will depend on:
o increased market acceptance and sales of our current products;
5
o commercialization and market acceptance of new technologies and
products under development; and
o medical community awareness.
WE HAVE HAD DIFFICULTIES WITH OUR FINANCIAL ACCOUNTING CONTROLS IN THE PAST. IF
WE ARE UNABLE TO ESTABLISH APPROPRIATE INTERNAL FINANCIAL REPORTING CONTROLS AND
PROCEDURES, IT COULD CAUSE US TO FAIL TO MEET OUR REPORTING OBLIGATIONS, RESULT
IN THE RESTATEMENT OF OUR FINANCIAL STATEMENTS, HARM OUR OPERATING RESULTS,
SUBJECT US TO REGULATORY SCRUTINY AND SANCTION, CAUSE INVESTORS TO LOSE
CONFIDENCE IN OUR REPORTED FINANCIAL INFORMATION AND HAVE A NEGATIVE EFFECT ON
THE MARKET PRICE FOR SHARES OF OUR COMMON STOCK.
Effective internal controls are necessary for us to provide reliable
financial reports and effectively prevent fraud. We maintain a system of
internal control over financial reporting, which is defined as a process
designed by, or under the supervision of, our principal executive officer and
principal financial officer, or persons performing similar functions, and
effected by our board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.
As noted below, we have had difficulties with our financial controls in
the past. As a public company, we have significant requirements for enhanced
financial reporting and internal controls. See discussion under "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure." We will be required to document and test our internal control
procedures in order to satisfy the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002, which requires annual management assessments of the
effectiveness of our internal controls over financial reporting and a report by
our independent registered public accounting firm addressing these assessments.
The process of designing and implementing effective internal controls is a
continuous effort that requires us to anticipate and react to changes in our
business and the economic and regulatory environments and to expend significant
resources to maintain a system of internal controls that is adequate to satisfy
our reporting obligations as a public company.
On or about March 28, 2006, Stonefield Josephson, Inc., our former
independent auditors, advised us in writing and discussed with us orally its
views regarding certain areas requiring improvement in our internal control over
financial reporting. The areas requiring improvement were generally: (i) lack of
staff with technical accounting expertise to independently apply our accounting
policies in accordance with accounting principles generally accepted in the
United States, (ii) improper cut off procedures and (iii) lack of adequate
back-up and documentation procedures with respect to our inventory prior to
March 31, 2005 and with respect to stock options previously granted by us. Our
management has determined that, due to the reasons described above, we had not
consistently followed established internal control over financial reporting
procedures related to the analysis, documentation and review of selection of the
appropriate accounting treatment for certain transactions.
Although we have assigned the highest priority to the improvement in our
internal control over financial reporting and have taken, and will continue to
take, action in furtherance of such improvement, we cannot assure you that the
above-mentioned areas will be fully remedied, if ever. Moreover, we cannot
assure you that we will not, in the future, identify further areas requiring
improvement in our internal control over financial reporting. We cannot assure
you that the measures we have taken or will take to remediate any areas in need
of improvement or that we will implement and maintain adequate controls over our
financial processes and reporting in the future as we continue our rapid growth.
If we are unable to establish appropriate internal financial reporting controls
and procedures, it could cause us to fail to meet our reporting obligations,
result in the restatement of our financial statements, harm our operating
results, subject us to regulatory scrutiny and sanction, cause investors to lose
confidence in our reported financial information and have a negative effect on
the market price for shares of our common stock. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure."
6
WE HAVE RESTATED OUR FINANCIAL STATEMENTS IN THE PAST TO REFLECT VARIOUS
CORRECTIONS. NO ASSURANCES CAN BE GIVEN THAT SIMILAR RESTATEMENTS WILL NOT BE
REQUIRED IN THE FUTURE.
We restated our financial statements in the past to reflect various
corrections of certain errors. The impact of the restatement of such financial
statements is included in our financial statements as of and for the year ended
March 31, 2006. In addition, we and our former auditors identified certain
errors requiring correction to our statement of operations for the year ended
March 31, 2005. While we believe we have put processes in place to begin to
remedy areas in our internal controls, no assurances can be given that we will
not be faced with situations which may require us to restate our financial
statements again. Any such restatements could adversely effect the credibility
of our reported financial results and the price of our common stock.
WE ARE CURRENTLY DEPENDENT ON OUR PRODUCTS WHICH UTILIZE OUR PEMF TECHNOLOGY,
AND INCREASING OUR REVENUES WILL DEPEND ON OUR ABILITY TO INCREASE MARKET
PENETRATION, AS WELL AS OUR ABILITY TO DEVELOP AND COMMERCIALIZE NEW PRODUCTS
AND TECHNOLOGIES.
Products based on non-invasive, electrotherapeutic technologies represent
known methods of treatment that we believe have been under-utilized clinically.
Physicians and other healthcare professionals may not use products and
technologies developed by us unless they determine that the clinical benefits to
the patient are greater than those available from competing products or
therapies or represent equal efficacy with lower cost. Even if the advantage of
our products and technologies is established as clinically and fiscally
significant, physicians and other healthcare professionals may not elect to use
such products and technologies. The rate of adoption and acceptance of our
products and technologies may also be affected adversely by unexpected side
effects or complications associated with our products, consumers' reluctance to
invest in new products and technologies, the level of third-party reimbursement
and widespread acceptance of other products and technologies. Consequently,
physicians and other healthcare professionals, healthcare payors and consumers
may not accept products or technologies developed by us. Broad market acceptance
of our current products and other products and technologies developed by us in
the future may require the education and training of numerous physicians and
other healthcare professionals, as well as conducting or sponsoring clinical and
fiscal studies to demonstrate the cost efficiency and other benefits of such
products and technologies. The amount of time required to complete such training
and studies could be costly and result in a delay or dampening of such market
acceptance. Moreover, healthcare payors' approval of use for our products and
technologies in development may be an important factor in establishing market
acceptance.
We may be required to undertake time-consuming and costly development
activities and seek regulatory clearance or approval for new products or
technologies. Although the FDA has cleared our products for the treatment of
edema and pain in soft tissue, we may not be able to obtain regulatory clearance
or approval of new products or technologies or new treatments through existing
products or maintain clearance of our existing products. In addition, we have
not demonstrated an ability to market and sell our products, much less multiple
products simultaneously. If we are unable to increase market acceptance of our
current products or develop and commercialize new products in the future, we
will not be able to increase our revenues. The completion of the development of
any new products or technologies or new uses of existing products will remain
subject to all the risks associated with the commercialization of new products
based on innovative technologies, including:
7
o our ability to fund and establish research that supports the
efficacy of new technologies and products;
o our ability to obtain regulatory approval or clearance of such
technologies and products, if needed;
o our ability to obtain market acceptance of such new technologies and
products;
o our ability to effectively and efficiently market and distribute
such new products;
o the ability of ADM or other manufacturers utilized by us to
effectively and efficiently manufacture such new products; and
o our ability to sell such new products at competitive prices that
exceed our per unit costs for such products.
IF OUR CUSTOMERS ARE UNABLE TO RECEIVE REIMBURSEMENT FROM THIRD PARTIES,
INCLUDING REIMBURSEMENT FROM MEDICARE, OUR GROWTH AND REVENUES WILL BE
MATERIALLY AND ADVERSELY AFFECTED IN MARKETS WHERE OUR CUSTOMERS RELY ON
INSURANCE COVERAGE FOR PAYMENT.
Some healthcare providers such as hospitals and physicians that purchase,
lease or rent medical devices in the United States generally rely on third-party
payors, principally Medicare and private health insurance plans, including
health maintenance organizations, to reimburse all or part of the cost of the
treatment for which the medical device is being used. Commercialization of our
products and technologies in the United States will depend in part upon the
availability of reimbursement for the cost of the treatment from third-party
healthcare payors such as Medicare and private health insurance plans, including
health maintenance organizations, in non-capitated markets, where we rely on
insurance coverage for payment. Such third-party payors are increasingly
challenging the cost of medical products and services, which have and could
continue to have a significant effect on the ratification of such technologies
and services by many healthcare providers. Several proposals have been made by
federal and state government officials that may lead to healthcare reforms,
including a government directed national healthcare system and healthcare
cost-containment measures. The effect of changes in the healthcare system or
method of reimbursement for our current products and any other products or
technologies that we may market in the United States cannot be determined.
While commercial insurance companies make their own decisions regarding
which medical procedures, technologies and services to cover, commercial payors
often apply standards similar to those used adopted by the Centers for Medicare
& Medicaid Services, or CMS, in determining Medicare coverage. The Medicare
statute prohibits payment for any medical procedures, technologies or services
that are not reasonable and necessary for the diagnosis or treatment of illness
or injury. In 1997, CMS, which is responsible for administering the Medicare
program, had interpreted this provision to deny Medicare coverage of procedures
that, among other things, are not deemed safe and effective treatments for the
conditions for which they are being used, or which are still investigational.
However, in July 2004, CMS reinstated Medicare reimbursement for the use of the
technology used in our products in the treatment of non-healing wounds under
certain conditions.
CMS has established a variety of conditions for Medicare coverage of the
technology used in our products. These conditions depend, in part, on the
setting in which the service is provided. For example, in 2004, CMS added
electromagnetic therapy as a type of service payable in the home health setting,
but subject to Medicare's consolidated home health billing provisions. Thus,
Medicare will not pay separately for electromagnetic therapy services if the
service is billed under a home health plan of care provided by a home health
agency. Rather, the home health agency must pay for the electromagnetic therapy
as part of the consolidated payment made to the home health agency for the
entire range of home health services under the patient's care plan.
8
In December of 2005, we retained a consulting company specializing in CMS
reimbursement and coverage matters to assist us in arranging and preparing for a
meeting with CMS to request that CMS cover electromagnetic therapy for wound
treatment separately in the home health setting. We continued to retain this
consulting company to assist us with CMS until our termination of the
relationship in July 2007. We intend to engage the services of a new consulting
company to assist us with CMS.
In May 2006, with the assistance of the consulting company, we held a
meeting with CMS and made a presentation in support of reimbursement for the
home health use of the technology used in our products. Even if CMS were to
approve separate reimbursement of electromagnetic therapy in the home health
setting, the regulatory environment could change and CMS might deny all coverage
for electromagnetic therapy as treatment of chronic wounds, whether for home
health use or otherwise, which could limit the amount of coverage patients or
providers are entitled to receive. Either of these events would materially and
adversely affect our revenues and operating results. See the discussion below
under the caption "Reimbursement." Medicare does not cover the cost of the
device used for the electromagnetic treatment of wounds.
We cannot predict when, if ever, CMS will allow for reimbursement for the
use of the technology in our products in the home, or what additional
legislation or regulations, if any, may be enacted or adopted in the future
relating to our business or the healthcare industry, including third-party
coverage and reimbursement, or what effect any such legislation or regulations
may have on us. Furthermore, significant uncertainty exists as to the coverage
status of newly approved healthcare products, and there can be no assurance that
adequate third-party coverage will be available with respect to any of our
future products or new applications for our present products. In currently
non-capitated markets, failure by physicians, hospitals, nursing homes and other
users of our products to obtain sufficient reimbursement for treatments using
our technologies would materially and adversely affect our revenues and
operating results. Alternatively, as the U.S. medical system moves to more
fixed-cost models, such as payment based on diagnosis related groups,
prospective payment systems or expanded forms of capitation, the market
landscape may be altered, and the amount we can charge for our products may be
limited and cause our revenues and operating results to be materially and
adversely affected.
WE WILL LIKELY NEED ADDITIONAL CAPITAL TO MARKET OUR PRODUCTS AND TO DEVELOP AND
COMMERCIALIZE NEW TECHNOLOGIES AND PRODUCTS AND IT IS UNCERTAIN WHETHER SUCH
CAPITAL WILL BE AVAILABLE.
Our business is capital intensive and we will likely require additional
financing in order to:
o fund research and development;
o expand sales and marketing activities;
o develop new or enhanced technologies or products;
o maintain and establish regulatory compliance;
o respond to competitive pressures; and
o acquire complementary technologies or take advantage of
unanticipated opportunities.
9
Our need for additional capital will depend on:
o the costs and progress of our research and development efforts;
o the preparation of pre-market application submissions to the FDA for
our new products and technologies and costs associated therewith;
o the number and types of product development programs undertaken;
o the number of products we have manufactured for sale or rental;
o the costs and timing of expansion of sales and marketing activities;
o the amount of revenues from sales of our existing and potentially
new products;
o the cost of obtaining and maintaining, enforcing and defending
patents and other intellectual property rights;
o competing technological and market developments; and
o developments related to regulatory and third-party coverage matters.
Although we expect that our available funds, along with funds generated from our
operations, will be sufficient to meet our anticipated needs for at least the
next 12 months, we will likely need to obtain additional capital to continue to
operate and grow our business. Our cash requirements may vary materially from
those currently anticipated due to changes in our operations, including our
marketing and distribution activities, product development, regulatory
requirements, expansion of our personnel and the timing of our receipt of
revenues. Our ability to obtain additional financing in the future will depend
in part upon the prevailing capital market conditions, as well as our business
performance. There can be no assurance that we will be successful in our efforts
to arrange additional financing on terms satisfactory to us or at all. If
additional financing is raised by the issuance of common stock you may suffer
additional dilution and if additional financing is raised through debt
financing, it may involve significant restrictive covenants which could affect
our ability to operate our business. If adequate funds are not available, or are
not available on acceptable terms, we may not be able to continue our
operations, grow our business or take advantage of opportunities or otherwise
respond to competitive pressures and remain in business.
WE OUTSOURCE THE MANUFACTURING OF OUR PRODUCTS TO ADM, OUR LARGEST SHAREHOLDER
AND EXCLUSIVE MANUFACTURER, AND IF THE OPERATIONS OF ADM ARE INTERRUPTED OR IF
OUR ORDERS EXCEED THE MANUFACTURING CAPABILITIES OF ADM, WE MAY NOT BE ABLE TO
DELIVER OUR PRODUCTS TO CUSTOMERS ON TIME.
Pursuant to a manufacturing agreement between us and ADM, our largest
shareholder, ADM is the exclusive manufacturer of our products, and we may rely
on ADM to manufacture other products that we may develop in the future. ADM
operates a single facility and has limited capacity that may be inadequate if
our customers place orders for unexpectedly large quantities of our products, or
if ADM's other customers place large orders of products, which could limit ADM's
ability to produce our products. In addition, if the operations of ADM were
halted or restricted, even temporarily, or they are unable to fulfill large
orders, we could experience business interruption, increased costs, damage to
our reputation and loss of our customers. Moreover, under our agreement, ADM may
terminate the agreement under certain circumstances. Although we have the right
to utilize other manufacturers if ADM is unable to perform under our agreement,
manufacturers of our products need to be licensed with the FDA, and identifying
and qualifying a new manufacturer to replace ADM as the manufacturer of our
products could take several months during which time, we would likely lose
customers and our revenues could be materially delayed and/or reduced.
10
BECAUSE OF OUR RELATIONSHIP WITH ADM AND OTHER AFFILIATES, WE MAY BECOME SUBJECT
TO CONFLICTS OF INTERESTS THAT MAY ADVERSELY AFFECT OUR ABILITY TO OPERATE OUR
BUSINESS.
Our Vice Chairman of the Board and Co-Chief Executive Officer, Andre'
DiMino, serves as the President and Chief Executive Officer of ADM; and our
President and Co-Chief Executive Officer, David Saloff, serves as a director of
ADM. This could create, or appear to create, potential conflicts of interest
when members of our senior management are faced with decisions that could have
different implications for us and for ADM. For example, conflicts of interest
could arise between us and ADM in various areas such as fundraising, competing
for new business opportunities, and other areas. In addition, ADM serves as the
exclusive manufacturer of our products and we utilize personnel at ADM to
provide administrative and other services to us. No assurance can be given as to
how potentially conflicted board members will evaluate their fiduciary duties to
us and ADM, respectively, or how such individuals will act under such
circumstances. Furthermore, the appearance of conflicts, even if such conflicts
do not materialize, might adversely affect the public's perception of us.
OUR ABILITY TO EXECUTE OUR BUSINESS PLAN DEPENDS ON THE SCOPE OF OUR
INTELLECTUAL PROPERTY RIGHTS AND NOT INFRINGING THE INTELLECTUAL PROPERTY RIGHTS
OF OTHERS. THE VALIDITY, ENFORCEABILITY AND COMMERCIAL VALUE OF THESE RIGHTS ARE
HIGHLY UNCERTAIN.
Our ability to compete effectively with other companies is materially
dependent upon the proprietary nature of our technologies. We rely primarily on
patents and trade secrets to protect our technologies.
We have:
o one patent on our device, which expires in 2019, as well as two
other patents for certain embodiments of PEMF and other aspects of
such device;
o eight U.S. non-provisional patent applications pending; and
o two provisional U.S. patents pending.
Third parties may seek to challenge, invalidate, circumvent or render
unenforceable any patents or proprietary rights owned by us based on, among
other things:
o subsequently discovered prior art;
o lack of entitlement to the priority of an earlier, related
application; or
o failure to comply with the written description, best mode,
enablement or other applicable requirements.
In general, the patent position of medical device companies is highly
uncertain, still evolving and involves complex legal, scientific and factual
questions. We are at risk that:
o other patents may be granted with respect to the patent applications
filed by us; and
o any patents issued to us may not provide commercial benefit to us or
will be infringed, invalidated or circumvented by others.
The United States Patent and Trademark Office currently has a significant
backlog of patent applications, and the approval or rejection of patents may
take several years. Prior to actual issuance, the contents of United States
patent applications are generally published 18 months after filing. Once issued,
such a patent would constitute prior art from its filing date, which might
predate the date of a patent application on which we rely. Conceivably, the
issuance of such a prior art patent, or the discovery of "prior art" of which we
are currently unaware, could invalidate a patent of ours or prevent
commercialization of a product claimed thereby.
11
Although we generally conduct a cursory review of issued patents prior to
engaging in research or development activities, we may be required to obtain a
license from others to commercialize any of our new products under development.
If patents that cover our existing or new products are issued to other
companies, there can be no assurance that any necessary license could be
obtained on favorable terms or at all.
There can be no assurance that we will not be required to resort to
litigation to protect our patented technologies and other proprietary rights or
that we will not be the subject of additional patent litigation to defend our
existing and proposed products and processes against claims of patent
infringement or any other intellectual property claims. Such litigation could
result in substantial costs, diversion of management's attention, and diversion
of our resources.
We also have applied for patent protection in several foreign countries.
Because of the differences in patent laws and laws concerning proprietary rights
between the United States and foreign countries, the extent of protection
provided by patents and proprietary rights granted to us by the United States
may differ from the protection provided by patents and proprietary rights
granted to us by foreign countries.
We attempt to protect our trade secrets, including the processes,
concepts, ideas and documentation associated with our technologies, through the
use of confidentiality agreements and non-competition agreements with our
current employees and with other parties to whom we have divulged such trade
secrets. If our employees or other parties breach our confidentiality agreements
and non-competition agreements or if these agreements are not sufficient to
protect our technology or are found to be unenforceable, our competitors could
acquire and use information that we consider to be our trade secrets and we may
not be able to compete effectively. Most of our competitors have substantially
greater financial, marketing, technical and manufacturing resources than we have
and we may not be profitable if our competitors are also able to take advantage
of our trade secrets.
We may decide for business reasons to retain certain knowledge that we
consider proprietary as confidential and elect to protect such information as a
trade secret, as business confidential information or as know-how. In that
event, we must rely upon trade secrets, know-how, confidentiality and
non-disclosure agreements and continuing technological innovation to maintain
our competitive position. There can be no assurance that others will not
independently develop substantially equivalent proprietary information or
otherwise gain access to or disclose such information.
THE LOSS OF ANY OF OUR EXECUTIVE OFFICERS OR KEY PERSONNEL OR CONSULTANTS MAY
MATERIALLY AND ADVERSELY AFFECT OUR OPERATIONS AND OUR ABILITY TO EXECUTE OUR
GROWTH STRATEGY.
Our ability to execute our business plan depends upon the continued
services of Andre' DiMino, our Vice Chairman of the Board and Co-Chief Executive
Officer and David Saloff, our President and Co-Chief Executive Officer, as well
as our key technology, marketing, sales, support and consulting personnel,
including Dr. Arthur Pilla, one of our consultants, our Science Director and the
Chairman of our Scientific Advisory Board. Although we have entered into
employment or consulting agreements containing non-compete agreements with
Messrs. DiMino and Saloff and certain of our key personnel, including Dr. Pilla,
we may not be able to retain these individuals or enforce such non-compete
agreements under applicable law. Further, our employment agreement with Mr.
DiMino requires him to devote at least a majority of his work-time toward Ivivi;
however, the remaining amount of his work-time may be devoted elsewhere,
including at ADM. As a result, Mr. DiMino's attention to our business and
operations may be diverted by his obligations elsewhere, including at ADM, and
we may not be able to have access to Mr. DiMino as needed by us. If we lost the
services of these executive officers or our key personnel, our business may be
materially and adversely affected and our stock price may decline. In addition,
our ability to execute our business plan is dependent on our ability to attract
and retain additional highly skilled personnel. We have key person life
insurance in the amount of $2 million for Mr. DiMino, but not for any of our
other executive officers or key employees.
12
WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS FOR OUR COMPONENTS AND RAW MATERIALS
AND ANY INTERRUPTION IN THE AVAILABILITY OF THESE COMPONENTS AND RAW MATERIALS
USED IN OUR PRODUCT COULD REDUCE OUR REVENUES AND MATERIALLY AND ADVERSELY
AFFECT OUR OPERATING RESULTS.
We rely on a limited number of suppliers for the components and raw
materials used in our products. Although there are many suppliers for each of
our component parts and raw materials, we are dependent on a single or limited
number of suppliers for many of the significant components and raw materials.
This reliance involves a number of significant risks, including:
o unavailability of materials and interruptions in delivery of
components and raw materials from our suppliers;
o manufacturing delays caused by such unavailability or interruptions
in delivery; and
o fluctuations in the quality and the price of components and raw
materials.
We do not have any long-term or exclusive purchase commitments with any of
our suppliers. Our failure to maintain existing relationships with our suppliers
or to establish new relationships in the future could also negatively affect our
ability to obtain our components and raw materials used in our products in a
timely manner. If we are unable to obtain ample supply of product from our
existing suppliers or alternative sources of supply, we may be unable to satisfy
our customers' orders which could reduce our revenues and adversely affect our
relationships with our customers and materially and adversely affect our
operating results.
RISKS RELATED TO OUR INDUSTRY
THE MEDICAL PRODUCTS MARKET IS HIGHLY COMPETITIVE AND SUSCEPTIBLE TO RAPID
CHANGE AND SUCH CHANGES COULD RENDER OUR EXISTING PRODUCTS AND ANY NEW PRODUCTS
DEVELOPED BY US UNECONOMICAL OR OBSOLETE.
The medical products market is characterized by extensive research and
development activities and significant technological change. Our ability to
execute our business strategy depends in part upon our ability to develop and
commercialize efficient and effective products based on our technologies. We
compete against established companies as well as numerous independently owned
small businesses, including Diapulse Corporation of America, Inc., which
manufactures and markets devices that are substantially equivalent to some of
our products; Regenesis Biomedical, which manufactures and markets devices that
are similar to our first generation device; BioElectronics Corporation, which
develops and markets the ActiPatchTM, a medical dermal patch that delivers PEMF
therapy to soft tissue injuries; and KCI Concepts, Inc., which manufactures and
markets negative pressure wound therapy devices in the wound care market. We
also face competition from companies that have developed other forms of
treatment, such as hyperbaric oxygen chambers, thermal therapies and
hydrotherapy. In addition, companies are developing or may, in the future,
engage in the development of products and/or technologies competitive with our
products. We expect that technological developments will occur and that
competition is likely to intensify as new technologies are employed. Many of our
competitors are capable of developing products based on similar technology, have
developed and are capable of continuing to develop products based on other
technologies, which are or may be competitive with our products and
technologies. Many of these companies are well-established, and have
13
substantially greater financial and other resources, research and development
capabilities and more experience in obtaining regulatory approvals,
manufacturing and marketing than we do. Our ability to execute our business
strategy and commercially exploit our technology must be considered in light of
the problems, expenses, difficulties, complications and delays frequently
encountered in connection with the development of new medical processes, devices
and products and their level of acceptance by the medical community. Our
competitors may succeed in developing competing products and technologies that
are more effective than our products and technologies, or that receive
government approvals more quickly than our new products and technologies, which
may render our existing and new products or technology uncompetitive,
uneconomical or obsolete.
WE MAY BE EXPOSED TO PRODUCT LIABILITY CLAIMS FOR WHICH OUR PRODUCT LIABILITY
INSURANCE MAY BE INADEQUATE.
Our business exposes us to potential product liability risks, which are
inherent in the testing, manufacturing and marketing of medical devices. While
we are not aware of any side-effects resulting from the use of our products,
there may be unknown long-term effects that may result in product liability
claims in the future. Although we maintain $1.0 million of product liability
insurance, we cannot provide any assurance that:
o our insurance will provide adequate coverage against potential
liabilities if a product causes harm or fails to perform as
promised;
o adequate product liability insurance will continue to be available
in the future; or
o our insurance can be maintained on acceptable terms.
The obligation to pay any product liability claim in excess of whatever
insurance we are able to obtain would increase our expenses and could greatly
reduce our assets.
IF THE FDA OR OTHER STATE OR FOREIGN AGENCIES IMPOSE REGULATIONS THAT AFFECT OUR
PRODUCTS, OUR DEVELOPMENT, MANUFACTURING AND MARKETING COSTS WILL BE INCREASED.
The development, testing, production and marketing of our current products
is, and other products developed by us may be, subject to regulation by the FDA
as devices under the 1976 Medical Device Amendments to the Federal Food, Drug
and Cosmetic Act. Although the FDA has cleared our SofPulse product for the
adjunctive use in the palliative treatment of post-operative pain and edema in
superficial tissue, use of our current products and any new products developed
by us will be subject to FDA regulation as well. Before a new medical device, or
a new use of, or claim for, an existing product can be marketed in the United
States, it must first receive either 510(k) clearance or pre-market approval
from the FDA, unless an exemption applies. Either process can be expensive and
lengthy. The FDA's 510(k) clearance process usually takes from three to twelve
months, but it can take longer and is unpredictable. The process of obtaining
pre-market approval is much more costly and uncertain than the 510(k) clearance
process and it generally takes from one to three years, or even longer, from the
time the application is filed with the FDA.
In the United States, medical devices must be:
o manufactured in establishments subject to FDA inspection to assess
compliance with the FDA Quality Systems Regulation, or QSR; and
14
o produced in accordance with the QSR for medical devices.
As a result, we, as well as ADM, the exclusive manufacturer of our products, are
required to comply with QSR requirements and if we fail to comply with these
requirements, we will need to find another company to manufacture our products
which could delay the shipment of our product to our customers. In addition,
ADM's manufacturing facility:
o is required to be registered as a medical device manufacturing site
with the FDA; and
o is subject to inspection by the FDA.
The FDA requires producers of medical devices to obtain FDA clearance and, in
some cases, approval prior to commercialization in the United States. Testing,
preparation of necessary applications and the processing of those applications
by the FDA is expensive and time consuming. We do not know if the FDA will act
favorably or quickly in making such reviews, and significant difficulties or
costs may be encountered by us in our efforts to obtain FDA clearance and
approval. The FDA may also place conditions on clearance and approvals that
could restrict commercial applications of such products. Product approvals may
be withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing. Delays imposed by the FDA clearance
and approval process may materially reduce the period during which we have the
exclusive right to commercialize patented products.
We have made modifications to our devices and may make additional
modifications in the future that we believe do not or will not require
additional clearances or approvals. Although we believe that our current
products are covered by the FDA clearance provided in 1991 with respect to the
original SofPulse product, in February 2007, in response to inquiries from the
FDA, we voluntarily submitted a 510(k) application for our current products,
which are modified versions of our SofPulse product. We have had discussions
with the FDA regarding our application and, in June 2007, we received a letter
from the FDA requesting additional information from us. If the FDA does not
grant the 510(k) clearance for the modifications, we may be required to stop
marketing and to recall the modified devices and could be subject to the other
sanctions described below. We also are subject to Medical Device Reporting
regulations, which require us to report to the FDA if our products cause or
contribute to a death or serious injury, or malfunction in a way that would
likely cause or contribute to a death or serious injury. We are not aware of any
death or serious injury caused by or contributed to by our products, however, we
cannot assure you that any such problems will not occur in the future with our
existing or future products.
Additionally, our existing and future products may be subject to
regulation by similar agencies in states and foreign countries. While we believe
that we have complied with all applicable laws and regulations, continued
compliance with such laws or regulations, including any new laws or regulations
in connection with our products or any new products developed by us, might
impose additional costs on us or marketing impediments on our products which
could adversely affect our revenues and increase our expenses. The FDA and state
authorities have broad enforcement powers. Our failure to comply with applicable
regulatory requirements could result in enforcement action by the FDA or state
agencies, which may include any of the following sanctions:
o warning letters, fines, injunctions and civil penalties;
o repair, replacement, refunds, recall or seizure of our products;
o operating restrictions or partial suspension or total shutdown of
production;
15
o refusing our requests for 510(k) clearance or premarket approval of
new products, new intended uses, or modifications to existing
products;
o withdrawing 510(k) clearance or premarket approvals that have
already been granted; and
o criminal prosecution.
If any of these events were to occur, it could harm our business and materially
and adversely affect our results of operations.
THE FDA CAN IMPOSE CIVIL AND CRIMINAL ENFORCEMENT ACTIONS AND OTHER PENALTIES ON
US IF WE OR OUR MANUFACTURER FAILS TO COMPLY WITH FDA REGULATIONS WHICH ARE
OFTEN DIFFICULT TO COMPLY WITH.
Medical device manufacturing facilities must maintain records, which are
available for FDA inspectors documenting that the appropriate manufacturing
procedures were followed. The FDA has authority to conduct inspections of our
facility, as well as the facility of our manufacturer. Labeling and promotional
activities are also subject to scrutiny by the FDA and, in certain instances, by
the Federal Trade Commission. If the FDA were to determine that the indication
for use of our products has a more narrow meaning than that which we have
historically deemed it to be, our ability to continue to market and sell our
products could be materially adversely affected. Any failure by us or the
manufacturer of our products to take satisfactory corrective action in response
to an adverse inspection or to comply with applicable FDA regulations could
result in enforcement action against us or our manufacturer, including a public
warning letter, a shutdown of manufacturing operations, a recall of our
products, civil or criminal penalties or other sanctions. From time to time, the
FDA may modify such requirements, imposing additional or different requirements
which may require us to alter our business methods which could result in
increased expenses and materially and adversely affect our results of
operations. In addition, if the Federal Trade Commission were to commence an
investigation concerning any of our claims about our products and conclude that
our claims were false, misleading or deceptive in violation of the Federal Trade
Commission Act, we could become subject to significant financial consequences
and compliance measures, including, the repayment of some or all of our gross
profits from such products and the compliance with various reporting
requirements imposed by the Federal Trade Commission.
RISKS RELATED TO OUR COMMON STOCK
EXECUTIVE OFFICERS, DIRECTORS AND ENTITIES AFFILIATED WITH THEM WILL CONTINUE TO
HAVE SUBSTANTIAL CONTROL OVER US, WHICH COULD DELAY OR PREVENT A CHANGE IN OUR
CORPORATE CONTROL FAVORED BY OUR OTHER SHAREHOLDERS.
As of June 30, 2007, our directors, executive officers and principal
shareholders (including ADM), together with their affiliates, beneficially own,
in the aggregate, approximately 62.4% of our outstanding common stock, assuming
the exercise of all outstanding options and warrants held by such persons that
are exercisable within 60 days of this prospectus. In particular, ADM, of which
Andre' DiMino, our Vice Chairman of the Board and Co-Chief Executive Officer, is
President and Chief Executive Officer, beneficially owns approximately 33.9% of
our outstanding shares of common stock, and Mr. DiMino, together with members of
the DiMino family, beneficially own approximately 17.5% of the outstanding
shares of ADM.
Under the terms of a voting agreement among Mr. DiMino, David Saloff, our
President and Co-Chief Executive Officer, Edward Hammel, our Executive Vice
President, Sean Hagberg, Ph.D., our Chief Science Officer, Arthur Pilla, Ph.D.,
one of our consultants, our Science Director and the Chairman of our Scientific
Advisory Board, Berish Strauch, M.D., one of our consultants and a member of our
Medical Advisory Board, and Fifth Avenue Capital Partners, one of our
shareholders, Mr. DiMino shall have the right to vote up to 1,527,825 additional
16
shares of our common stock (including shares underlying options held by such
shareholders that are exercisable within 60 days of the date of this
prospectus), representing approximately 16% of shares of our common stock
outstanding as of June 30, 2007. These figures do not reflect the increased
percentages that the officers and directors may have in the future in the event
that they exercise any additional options granted to them under the 2004 Amended
and Restated Stock Option Plan or if they otherwise acquire additional shares of
common stock. The interests of our current officer and director shareholders and
our largest shareholder may differ from the interests of other shareholders. As
a result, the current officer and director shareholders and ADM do and will
continue to have the ability to exercise substantial control over all corporate
actions requiring shareholder approval, irrespective of how our other
shareholders including purchasers in this offering may vote, including the
following actions:
o the election of directors;
o adoption of stock option plans;
o the amendment of charter documents; or
o the approval of certain mergers and other significant corporate
transactions, including a sale of substantially all of our assets.
FUTURE SALES OF OUR COMMON STOCK, INCLUDING SALES OF OUR COMMON STOCK ACQUIRED
UPON THE EXERCISE OF OUTSTANDING OPTIONS OR WARRANTS, MAY CAUSE THE MARKET PRICE
OF OUR COMMON STOCK TO DECLINE.
We had 9,596,908 shares of common stock outstanding as of June 30, 2007,
of which 4,850,908 shares are freely transferable without restriction and
4,746,000 shares are restricted as a result of securities laws and lock-up
agreements that have been executed by our officers and directors restricting
their ability to transfer our stock until October 18, 2007, without the consent
of the representatives of the underwriters of our initial public offering, or
IPO. In addition, as of June 30, 2007, options to purchase 2,654,975 shares of
our common stock were issued and outstanding, of which 1,255,684 were vested.
All remaining options will vest over various periods ranging up to a five-year
period measured from the date of grant. The weighted-average exercise price of
the vested stock options is $2.17, which is substantially lower than the current
market price of our common stock. As of June 30, 2007, warrants to purchase
2,609,691 shares of common stock were issued and outstanding. We also may issue
additional shares of stock in connection with our business, including in
connection with acquisitions, and may grant additional stock options to our
employees, officers, directors and consultants under our stock option plans or
warrants to third parties. If a significant portion of these shares were sold in
the public market, the market value of our common stock could be adversely
affected
WE HAVE IMPLEMENTED ANTI-TAKEOVER PROVISIONS WHICH COULD DISCOURAGE OR PREVENT A
TAKEOVER, EVEN IF SUCH TAKEOVER WOULD BE BENEFICIAL TO OUR SHAREHOLDERS.
Our amended and restated certificate of incorporation and by-laws include
provisions which could make it more difficult for a third-party to acquire us,
even if doing so would be beneficial to our shareholders. These provisions will
include:
o authorizing the issuance of "blank check" preferred stock that could
be issued by our board of directors to increase the number of
outstanding shares or change the balance of voting control and
resist a takeover attempt;
o limiting the ability of shareholders to call special meetings of
shareholders;
17
o requiring all shareholder actions to be taken at a meeting of our
shareholders or by the unanimous written consent of our
shareholders; and
o establishing advance notice requirements for nominations for
election to the board of directors and for proposing matters that
can be acted upon by shareholders at shareholder meetings.
In addition, provisions of the New Jersey Business Corporation Act, including
the New Jersey Shareholder Protection Act, and the terms of the employment
agreements with our executive officers may discourage, delay or prevent a change
in our control.
DUE TO PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS, A SHAREHOLDER
MAY BE PREVENTED FROM CALLING A SPECIAL MEETING FOR SHAREHOLDER CONSIDERATION OF
A PROPOSAL OVER THE OPPOSITION OF OUR BOARD OF DIRECTORS AND SHAREHOLDER
CONSIDERATION OF A PROPOSAL MAY BE DELAYED UNTIL OUR NEXT ANNUAL MEETING.
Our amended and restated certificate of incorporation and our by-laws
provide that any action required or permitted to be taken by our shareholders
must be effected at an annual or special meeting of shareholders or by the
unanimous written consent of our shareholders. Our amended and restated
certificate of incorporation provides that, subject to certain exceptions, only
our board of directors, the chairman or vice chairman of our board of directors,
a chief executive officer or a co-chief executive officer, as the case may be,
or our president or, at the direction of any of them, any vice president or
secretary may call special meetings of our shareholders. Our by-laws also
contain advance notice requirements for proposing matters that can be acted on
by the shareholders at a shareholder meeting. Accordingly, a shareholder may be
prevented from calling a special meeting for shareholder consideration of a
proposal over the opposition of our board of directors and shareholder
consideration of a proposal may be delayed until the next annual meeting. As
such, any time-sensitive proposals that a shareholder may have may not be
considered in a timely manner.
THE TRADING PRICE OF OUR COMMON STOCK IS HIGHLY VOLATILE, AND YOU MAY NOT BE
ABLE TO RESELL YOUR SHARES AT OR ABOVE THE PRICE AT WHICH YOU PURCHASED YOUR
SHARES, OR AT ALL.
The trading price of our common stock is highly volatile and subject to
wide fluctuations in price in response to various factors, some of which are
beyond our control. These factors include:
o quarterly variations in our results of operations or those of our
competitors;
o announcements by us or our competitors of acquisitions, new
products, significant contracts, commercial relationships or capital
commitments;
o disruption to our operations or those of ADM, our exclusive
manufacturer, or our suppliers;
o commencement of, or our involvement in, litigation;
o any major change in our board or management;
o changes in governmental regulations or in the status of our
regulatory approvals; and
o general market conditions and other factors, including factors
unrelated to our own operating performance.
18
In addition, the stock market in general, and the market for medical
device technology companies in particular, have experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the
operating performance of those companies. These broad market and industry
factors may seriously harm the market price of our common stock, regardless of
our actual operating performance. In addition, in the past, following periods of
volatility in the overall market and the market price of a company's securities,
securities class action litigation has often been instituted against these
companies. This litigation, if instituted against us, could result in
substantial costs and a diversion of our management's attention and resources.
IF OUR COMMON STOCK IS DELISTED FROM THE AMERICAN STOCK EXCHANGE, YOU MAY NOT BE
ABLE TO RESELL YOUR SHARES AT OR ABOVE THE PRICE AT WHICH YOU PURCHASED YOUR
SHARES, OR AT ALL.
In order for our common stock to continue to be listed on the American
Stock Exchange, we must meet the current American Stock Exchange listing
requirements. If we were unable to meet these requirements, our common stock
could be delisted from the American Stock Exchange. If our common stock were to
be delisted from the American Stock Exchange, our common stock could continue to
trade on the NASD's over-the-counter bulletin board following any delisting from
the American Stock Exchange, or on the Pink Sheets, as the case may be. Any such
delisting of our common stock could have an adverse effect on the market price
of, and the efficiency of the trading market for, our common stock, not only in
terms of the number of shares that can be bought and sold at a given price, but
also through delays in the timing of transactions and less coverage of us by
securities analysts, if any. Also, if in the future we were to determine that we
need to seek additional equity capital, it could have an adverse effect on our
ability to raise capital in the public or private equity markets.
PENNY STOCK REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKETABILITY OF OUR
SECURITIES.
If we fail to maintain listing for our securities on the American Stock
Exchange, and no other exclusion from the definition of a "penny stock" under
the Securities Exchange Act of 1934, as amended, is available, then our common
stock would be subject to "penny stock" regulations. The SEC has adopted
regulations which generally define a "penny stock" to be any equity security
that is not trading on the American Stock Exchange or an exchange that has a
market price (as defined) of less than $5.00 per share or an exercise price of
less than $5.00 per share, subject to certain exceptions. As a result, if our
common stock became subject to these regulations, it would be subject to rules
that impose additional sales practice requirements on broker-dealers who sell
such securities to persons other than established customers and accredited
investors (generally those with assets in excess of $1,000,000 or annual income
exceeding $200,000, or $300,000 together with their spouse). For transactions
covered by these rules, the broker-dealer must make a special suitability
determination for the purchase of such securities and have received the
purchaser's written consent to the transaction prior to the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
rules require the delivery, prior to the transaction, of a risk disclosure
document mandated by the Securities and Exchange Commission relating to the
penny stock market. The broker-dealer must also disclose the commission payable
to both the broker-dealer and the registered representative, current quotations
for the securities and, if the broker-dealer is the sole market maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Finally, monthly statements must be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell our common stock and may affect
the ability of investors to sell our common stock in the secondary market and
the price at which such purchasers can sell any such securities.
19
WE HAVE NOT PAID DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY DIVIDENDS IN THE
FUTURE, AND ANY RETURN ON INVESTMENT MAY BE LIMITED TO THE VALUE OF YOUR STOCK.
We have never paid any cash dividends on our common stock and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future and any return on investment may be limited to the value of your stock.
We plan to retain any future earnings to finance growth.
20
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business," and elsewhere in this prospectus contains
forward-looking statements. These statements relate to future events or our
future financial performance and involve known and unknown risks, uncertainties
and other factors that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things, those
listed under "Risk Factors" and elsewhere in this prospectus. In some cases, you
can identify forward-looking statements by terminology such as "indicates,"
"may," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," or "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We caution you not to place undue
reliance on these statements, which speak only as of the date of this
prospectus. We are under no duty to update any of the forward-looking statements
after the date of this prospectus to conform such statements to actual results.
21
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the common stock
by the selling securityholders named in this prospectus. All proceeds from the
sale of the common stock will be paid directly to the selling securityholders.
We may receive proceeds from the exercise of the warrants. If all of the
warrants exercisable for shares of common stock being registered in this
offering are exercised, we could receive net proceeds of up to approximately
$7.2 million. The holders of the warrants are not obligated to exercise the
warrants and we cannot assure that the holders of the warrants will choose to
exercise all or any of the warrants.
We intend to use the estimated net proceeds received upon exercise of the
warrants, if any, for working capital and general corporate purposes.
DIVIDEND POLICY
To date, we have not paid any dividends on our common stock and we do not
intend to pay dividends for the foreseeable future, but intend instead to retain
earnings, if any, for use in our business operations. The payment of dividends
in the future, if any, will be at the sole discretion of our board of directors
and will depend upon our debt and equity structure, earnings and financial
condition, need for capital in connection with possible future acquisitions and
other factors, including economic conditions, regulatory restrictions and tax
considerations. We cannot guarantee that we will pay dividends or, if we pay
dividends, the amount or frequency of these dividends.
22
SELECTED FINANCIAL INFORMATION
The selected financial data for the fiscal years ended March 31, 2007 and
2006 was derived from our financial statements that have been audited by Raich
Ende Malter & Co. LLP for the fiscal years then ended. The selected financial
information presented below should be read in conjunction with our audited
financial statements and related notes appearing in this prospectus beginning on
page F-1. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of our financial statements for the
fiscal years ended March 31, 2007 and 2006.
YEAR ENDED MARCH 31,
2007 2006
OPERATIONS STATEMENT DATA:
Revenue $ 1,182,340 $ 786,512
Cost of sales 87,040 52,790
Cost of rentals(1) 93,998 215,985
Depreciation and amortization 19,636 9,049
Research and development 1,610,232 1,334,637
Sales and marketing 1,098,266 1,152,947
Selling, general and administrative (1) 2,217,743 2,055,865
Share based compensation 2,142,448 656,848
-------------- --------------
Total operating expenses 7,269,363 5,478,121
-------------- --------------
Loss from operations (6,087,023) (4,691,609)
Change in fair value of warrant and registration rights liabilities (25,827) (4,658,537)
Interest and finance costs, net (1,665,761) (1,396,525)
============== ==============
Net loss $ (7,778,611) $ (10,746,671)
============== ==============
Net loss per share-basic and diluted $ (1.13) $ (2.26)
============== ==============
Weighted average shares used in computing net loss per share 6,875,028 4,745,000
BALANCE SHEET DATA:
AS OF MARCH 31, 2007
--------------------------------
Total current assets $ 8,926,511
Total current liabilities 1,042,632
Working capital 7,883,879
Total assets 9,303,473
Total liabilities 1,516,590
Stockholders' equity 7,786,883
Total liabilities and stockholders' equity 9,303,473
|
(1) Reflects (i) intercompany allocations of manufacturing charges by affiliate
of $75,584 and $72,417 for the years ended March 31, 2007 and 2006,
respectively, and (ii) intercompany allocation of selling, general and
administrative expenses of $242,595 and $226,807 for the years ended March 31,
2007 and 2006, respectively.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements and involves
numerous risks and uncertainties, including, but not limited to, those described
in the "Risk Factors" section of this prospectus. Actual results may differ
materially from those contained in any forward-looking statements. The following
discussion should be read in conjunction with "Selected Financial Data" and our
financial statements and notes thereto included elsewhere in this prospectus.
OVERVIEW
We are an early-stage medical technology company focusing on designing,
developing and commercializing proprietary electrotherapeutic technologies.
Electrotherapeutic technologies use electric or electromagnetic signals to help
relieve pain, swelling and inflammation and promote healing processes and tissue
regeneration. We have focused our research and development activities on pulsed
electromagnetic field, or PEMF technology. This technology utilizes a magnetic
field that is turned on and off rapidly to create a therapeutic electrical
current in injured tissue, which then stimulates biochemical and physiological
processes to help repair injured soft tissue and reduce related pain. We are
currently marketing products utilizing our PEMF technology to the chronic wound
and plastic and reconstructive surgery markets. We are developing proprietary
technology for other therapeutic medical markets.
While we have conducted research and development and sales and marketing
activities, we have generated limited revenues to date and have incurred
significant losses since our inception. At March 31, 2007, we had an accumulated
deficit of approximately $23.7 million. We expect to incur additional operating
losses, as well as negative cash flow from operations for the foreseeable future
as we continue to expand our marketing efforts with respect to our products and
to continue our research and development of additional applications for our
products, as well as new products utilizing our PEMF technology. We are focusing
our research and development activities on optimizing the signal parameters of
our PEMF technology, enabling us to produce improved clinical outcomes and
produce a smaller more efficient product utilizing less power.
Our revenues to date have been primarily generated through monthly or per
use rental programs and through the direct sale of our products. During the
fiscal year ended March 31, 2007, we began to sell certain of our units, through
distributors, in certain additional markets. We expect future revenues to be
generated through monthly or daily rental programs with, and the sale of our
products and related disposable products to long-term care nursing facilities,
long-term acute care hospitals, rehabilitation hospitals, acute care facilities,
home health users and individual patients. In addition, we expect revenues also
to be generated through the sale of certain of our products to plastic surgery
patients and physicians.
On October 24, 2006, we completed the IPO, pursuant to which we sold 2.5
million shares of our common stock at $6.00 per share and raised gross proceeds
of $15.0 million. We granted the underwriters of the IPO an option for a period
of 45 days following the consummation of the IPO to purchase from us up to an
aggregate of 375,000 additional shares of our common stock to cover
over-allotments, if any. Net proceeds to us were approximately $12.2 million
from the IPO after the payment of underwriting discounts and commissions and
expenses related to the IPO. On November 22, 2006, we received additional net
proceeds of approximately $1.4 million, after the payment of underwriting
commissions and expenses, from the partial exercise of the over-allotment option
to purchase 250,000 of the available 375,000 shares of our common stock.
24
On November 9, 2006, we entered into an exclusive worldwide distribution
agreement with a wholly-owned subsidiary of Allergan, Inc., a global healthcare
company that discovers, develops and commercializes pharmaceutical and medical
device products in specialty markets. Pursuant to the Agreement, we granted
Allergan's subsidiary, Inamed Medical Products Corporation, and its affiliates
the exclusive worldwide right to market, sell and distribute certain of our
products, including all improvements, line extensions and future generations
thereof in conjunction with any aesthetic or bariatric medical procedures in the
Marketing Territory. In November 2006, we received $500,000 under the terms of
this Agreement which has been recorded as deferred revenue in our balance sheet
and is being amortized over eight years. We anticipate receiving additional
revenues under this agreement.
Our ability to increase our revenues from rental and sales of our current
products and other products developed by us will depend on a number of factors,
including our ability to increase market penetration of our current products,
our ability to enter into marketing and distribution agreements in our target
markets with companies such as Allergan as well as our ability to develop and
commercialize new products and technologies. Physicians and other healthcare
professionals may not use our products or other potential products and
technologies developed by us unless they determine that the clinical benefits to
the patient are greater than those available from competing products or
therapies or represent equal efficacy with lower cost. Full enrollment of
patients in our cardiac clinical trial at The Cleveland Clinic Florida where we
are utilizing PEMF to treat patients with ischemic cardiomyopathy occurred
during June 2007. We believe that PEMF's effects of improving blood flow and
regeneration of new blood vessels could prove useful for these patients for
which there are no alternatives. Given the length of the trial, as well as the
post-trial review period, the earliest data could be analyzed and available is
four months after the final patient is enrolled. As a result, we would
anticipate results likely being available in December 2007, however, we cannot
assure when results of the trial will be available.
Even if the advantage of our products and technologies is established as
clinically and fiscally significant, physicians and other healthcare
professionals may not elect to use our products and technologies developed by us
for any number of reasons. The rate of adoption and acceptance of our products
and technologies may also be affected adversely by perceived issues relating to
quality and safety, consumers' reluctance to invest in new products and
technologies, the level of third-party reimbursement and widespread acceptance
of other products and technologies. Broad market acceptance of our current
products and other products and technologies developed by us in the future may
require the education and training of numerous physicians and other healthcare
professionals, as well as conducting or sponsoring clinical and cost-benefit
studies to demonstrate the effectiveness and efficiency of such products and
technologies. The amount of time required to complete such training and studies
could be costly and result in a delay or dampening of such market acceptance.
Moreover, healthcare payors' approval of use for our products and technologies
in development may be an important factor in establishing market acceptance.
While commercial insurance companies make their own decisions regarding
which medical procedures, technologies and services to cover, commercial payors
often apply standards similar to those adopted by the Centers for Medicare and
Medicaid Services, or CMS, in determining Medicare coverage. The Medicare
statute prohibits payment for any medical procedures, technologies or services
that are not reasonable and necessary for the diagnosis or treatment of illness
or injury. In 1997, CMS, which is responsible for administering the Medicare
program, had interpreted this provision to deny Medicare coverage of procedures
that, among other things, are not deemed safe and effective treatments for the
conditions for which they are being used, or which are still investigational.
However, in July 2004, CMS reinstated Medicare reimbursement for the use of the
technology used in our products in the treatment of non-healing wounds under
certain conditions.
CMS has established a variety of conditions for Medicare coverage of the
technology used in our products. These conditions depend, in part, on the
setting in which the service is provided. For example, in 2004, CMS added
electromagnetic therapy as a type of service payable in the home health setting,
but subject to Medicare's consolidated home health billing provisions. Thus,
Medicare will not pay separately for electromagnetic therapy services if the
service is billed under a home health plan of care provided by a home health
agency. Rather, the home health agency must pay for the electromagnetic therapy
as part of the consolidated payment made to the home health agency for the
entire range of home health services under the patient's care plan.
25
In December 2005, we retained a consulting company specializing in CMS
reimbursement and coverage matters to assist us in arranging and preparing for a
meeting with CMS to request that CMS cover electromagnetic therapy for wound
treatment separately in the home health setting. In May 2006, with the
assistance of this consulting company, we held a meeting with CMS and made a
presentation in support of reimbursement for the home health use of the
technology used in our products. We continued to retain this consulting company
to assist us with CMS until our termination of the relationship in July 2007. We
intend to engage the services of a new consulting company to assist us with CMS.
Even if CMS were to approve separate reimbursement of electromagnetic
therapy in the home health setting, the regulatory environment could change and
CMS might deny all coverage for electromagnetic therapy as treatment of chronic
wounds, whether for home health use or otherwise, which could limit the amount
of coverage patients or providers are entitled to receive. Either of these
events would materially and adversely affect our revenues and operating results.
See the discussion below under the caption "Reimbursement." Medicare does not
cover the cost of the device used for the electromagnetic treatment of wounds.
We cannot predict when, if ever, CMS will allow for reimbursement for the
use of the technology in our products in the home, or what additional
legislation or regulations, if any, may be enacted or adopted in the future
relating to our business or the healthcare industry, including third-party
coverage and reimbursement, or what effect any such legislation or regulations
may have on us. Furthermore, significant uncertainty exists as to the coverage
status of newly approved healthcare products, and there can be no assurance that
adequate third-party coverage will be available with respect to any of our
future products or new applications for our present products. In currently
non-capitated markets, failure by physicians, hospitals, nursing homes and other
users of our products to obtain sufficient reimbursement for treatments using
our technologies would materially and adversely affect our revenues and
operating results. Alternatively, as the U.S. medical system moves to more
fixed-cost models, such as payment based on diagnosis related groups,
prospective payment systems or expanded forms of capitation, the market
landscape may be altered, and the amount we can charge for our products may be
limited and cause our revenues and operating results to be materially and
adversely affected.
We may be required to undertake time-consuming and costly development
activities and seek regulatory clearance or approval for new products or
technologies. Although the FDA has cleared the use of our products for the
treatment of edema and pain in soft tissue, we may not be able to obtain
regulatory clearance or approval of new products or technologies or new
treatments through existing products. In addition, we have not demonstrated an
ability to market and sell our products. The completion of the development of
any new products or technologies or new uses of existing products will remain
subject to all the risks associated with the commercialization of new products
based on innovative technologies, including:
o our ability to fund and establish research that supports the
efficacy of new technologies and products;
o our ability to obtain regulatory approval or clearance of such
technologies and products, if needed;
o our ability to obtain market acceptance of such new technologies and
products;
26
o our ability to effectively and efficiently market and distribute
such new products;
o the ability of ADM or other manufacturers utilized by us to
effectively and efficiently manufacture such new products; and
o our ability to sell such new products at competitive prices that
exceed our per unit costs for such products.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Estimates are used
for, but not limited to, the accounting for the allowance for doubtful accounts,
inventories, income taxes and loss contingencies. Management bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances. Actual results could differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies, among others, may
be impacted significantly by judgment, assumptions and estimates used in the
preparation of our financial statements:
o We recognize revenue primarily from the rental and to a lesser
extent from the sale of our products.
Rental revenue is recognized as earned on either a monthly or
pay-per-use basis in accordance with individual customer agreements.
In most cases, we allow the rental end user to evaluate our
equipment on a 30-day trial basis, during which time we provide any
demonstration or education necessary for the use of our equipment.
Rental revenue recognition commences after the end of the trial
period. All of our rentals are terminable by either party at any
time. When we use a third party to bill insurance companies, we
still recognize revenue as our products are used. When certain of
our distributors bill end users, we recognize rental revenue when we
are paid by the distributor.
Sales are recognized when our products are shipped to end users
including medical facilities and distributors. Our products are
principally shipped on a "freight collect" basis. Shipping and
handling charges and costs are immaterial. We have no post shipment
obligations and sales returns have been immaterial.
We provide an allowance for doubtful accounts determined primarily
through specific identification and evaluation of significant past
due accounts, supplemented by an estimate applied to the remaining
balance of past due accounts.
o Our products held for sale are included in the balance sheet under
"Inventory." At March 31, 2007, we also had equipment held for
rental, which are our products that are rented to third parties,
used internally and loaned out for marketing and testing. The units
are depreciated over seven years commencing on the date placed in
service.
o We apply Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (FAS 128). Net loss per share is computed by
dividing net loss by the weighted average number of common shares
outstanding plus common stock equivalents representing shares
issuable upon the assumed exercise of stock options and warrants.
Common stock equivalents were not included for the reporting
periods, as their effect would be anti-dilutive.
27
o In April 2006, we adopted the fair value recognition provisions of
SFAS No. 123(R), Accounting for Stock-based Compensation, to account
for compensation costs under our stock option plans. We previously
utilized the intrinsic value method under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees (as
amended).
o We use the fair value method for equity instruments granted to
non-employees and use the Black Scholes option value model for
measuring the fair value of warrants and options. The stock based
fair value compensation is determined as of the date of the grant or
the date at which the performance of the services is completed
(measurement date) and is recognized over the periods in which the
related services are rendered.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES--AN
INTERPRETATION OF FASB STATEMENT NO. 109 (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with FASB Statement No. 109, ACCOUNTING FOR
INCOME TAXES (FASB No. 109). The interpretation prescribes a recognition
threshold and also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition. The
provisions of FIN 48 are effective for us on April 1, 2007. We do not believe
the application of FIN 48 will have a material effect on our financial position,
results from operations, or cash flows.
In September 2006, the FASB issued SFAS No. 157, FAIR VALUE MEASUREMENTS
(SFAS No. 157), which establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. Where applicable, this
accounting standard, which simplifies and codifies related guidance within GAAP,
is effective for us beginning April 1, 2008. We have not yet determined the
effect, if any, the adoption of SFAS No. 157 may have on our financial
statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and FINANCIAL LIABILITIES (SFAS No. 159). This statement
permits entities to choose to measure financial assets and liabilities, with
certain exceptions, at fair value at specified election dates. A business entity
shall report unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting date. This
statement is effective for us beginning April 1, 2008. We have not determined
the effect, if any, the adoption of SFAS No. 159 may have on our financial
statements.
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 2007 (FISCAL 2007) COMPARED TO YEAR ENDED MARCH
31, 2006 (FISCAL 2006)
NET LOSS. Net loss decreased $2,968,060 to $7,778,611, or $1.13 per share,
for fiscal 2007 compared to $10,746,671, or $2.26 per share, for fiscal 2006.
The decrease in net loss primarily resulted from (i) increases in revenues of
$395,828, or 50%, (ii) decreases in cost of rental revenue of $121,987, or 56%,
(iii) decreases in sales and marketing expenses of $54,681, or 5%, (iv)
decreases in the change in the fair value of warrant and registration rights
liabilities of $4,632,710, or 99%, offset by increases in cost of sales of
$34,250, or 65%, increases in depreciation and amortization of $10,587, or 117%,
increases in research and development of $275,595, or 21%, increases in general
and administrative expenses of $161,878, or 8%, increases in share based
compensation of $1,485,600, or 226%, and increases in net interest and finance
costs of $269,236, or 19% for fiscal 2007 as compared to fiscal 2006.
28
REVENUE. Total revenue increased $395,828, or 50%, to $1,182,340 for
fiscal 2007 as compared to $786,512 for fiscal 2006. The increase in revenue was
primarily the result of increased unit sales, increased marketing efforts and,
to a lesser extent, the recognition of licensing revenue from our Allergan
agreement.
COST OF SALES. Cost of goods sold increased $34,250, or 65%, to $87,040
for fiscal 2007 from $52,790 for fiscal 2006 due to the increase in unit sales.
COST OF RENTALS. Cost of rental revenue decreased $121,987, or 56%, to
$93,998 for fiscal 2007 from $215,985 for fiscal 2006 due to an inventory
write-off of obsolete inventory during the third quarter of fiscal 2006 in the
amount of $70,861 and a decrease in depreciation expense on rental equipment of
$46,328. Cost of rental revenue consists primarily of the cost of electronics
and other components including depreciation relating to the manufacture of our
products by third parties, including ADM. Cost of rental revenue for fiscal 2007
and fiscal 2006 included depreciation of $5,463 and $51,791 and inter-company
allocations of $75,584 and $72,417, respectively. Inter-company allocations for
fiscal 2007 and fiscal 2006 consisted of amounts payable to ADM under our
management services agreement.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$10,587, or 117%, to $19,636 for fiscal 2007 from $9,049 for fiscal 2006,
excluding depreciation on the cost of rental units. The increase was
attributable to amortizing deferred costs relating to our distribution agreement
with Allergan in the amount of $3,570 and increased depreciation of $2,583
relating to newly acquired fixed assets.
RESEARCH AND DEVELOPMENT COSTS. Research and development costs increased
$275,595, or 21%, to $1,610,232 for fiscal 2007 from $1,334,637 for fiscal 2006.
The increase was due to increased costs associated with existing clinical trials
and research studies which are ongoing by us.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses decreased
$54,681, or 5%, to $1,098,266 for fiscal 2007 as compared to $1,152,947 for
fiscal 2006. The overall decrease resulted from decreases in advertising costs
of $244,112 and consulting fees of $77,414, offset by increases in commissions
of $110,765 and increases in salaries of $156,079.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $161,878, or 8%, to $2,217,743 for fiscal 2007 as compared to
$2,055,865 for fiscal 2006. The increase resulted primarily from (i) increases
in salary expenses of $304,218, (ii) increases in payroll tax expenses of
$34,858, and (iii) insurance expenses of $80,775, partially offset by decreases
in office expenses of $85,376, decreases in professional fees of $147,410 and
decreases in consulting fees of $30,448. General and administrative expenses for
fiscal 2007 and fiscal 2006 reflect inter-company allocations of $242,595 and
$226,807, respectively. Inter-company allocations for fiscal 2007 and fiscal
2006 consisted of amounts payable to ADM under our management services
agreement.
SHARE BASED COMPENSATION EXPENSE. Shared based compensation expense
increased $1,485,600, or 226%, to $2,142,448 for fiscal 2007 as compared to
$656,848 for fiscal 2006 due to the adoption of FASB 123(R) for common stock
options issued by us during fiscal 2007.
WARRANTS AND REGISTRATION RIGHTS. The change in the fair value of warrant
and registration rights liabilities decreased $4,632,710, or 99%, to $25,827 for
fiscal 2007 as compared to $4,658,537 for fiscal 2006. The decrease resulted
from the reclassification of the warrant and registration rights liabilities to
equity, in the amount of $3,450,050, when the registration statement related to
our IPO became effective in October 2006.
29
NET INTEREST AND FINANCING COSTS. Net interest and financing costs
increased $269,236, or 19%, to $1,665,761 for fiscal 2007 from $1,396,525 for
fiscal 2006 due to the additional shares issued under the convertible notes for
failure by us to register our underlying securities (the IPO) in the amount of
$579,525, partially offset by (i) decreases in interest expense on the
convertible notes issued by us in the amount of $94,478, (ii) decreases in
amortized financing costs of $57,946 and (iii) increased interest earned of
$158,100 from amounts invested in money market funds.
LIQUIDITY AND CAPITAL RESOURCES
We have had significant operating losses for the fiscal years ended March
31, 2007 and 2006. As of March 31, 2007, we had an accumulated deficit of
approximately $23.7 million. Our continuing operating losses have been funded
principally through the proceeds of our private placement financings and our
IPO. We have only generated limited revenues of $1,182,340 and $786,512 for the
fiscal years ended March 31, 2007 and 2006, respectively, primarily from the
rental and sale of our products, and we expect to incur additional operating
losses, as well as negative cash flow from operations, for the foreseeable
future, as we continue to expand our marketing efforts with respect to our
products and continue our research and development of additional applications
for our technology and other technologies that we may develop in the future. We
do not expect to be able to generate sufficient cash flow from our operations
during the next twelve-month period; however, we believe that the proceeds from
our IPO, combined with our expected revenues, will be sufficient to fund our
operations for the next 12 months.
As of March 31, 2007, we had cash and cash equivalents of $8.3 million as
compared to cash and cash equivalents of $742,348 at March 31, 2006. The
increase in cash and cash equivalents during the fiscal year ended March 31,
2007 was due to funds received in connection with our IPO during October 2006
and partial exercise of the underwriters' over-allotment option in November 2006
as well as $500,000 received under our distribution agreement with Allergan.
Net cash used in operating activities was approximately $3.5 million
during the fiscal year ended March 31, 2007 compared to approximately $3.5
million during the fiscal year ended March 31, 2006. Net cash used in operating
activities for the fiscal year ended March 31, 2007 resulted primarily from our
net loss of approximately $7.8 million during the period, partially offset by
non-cash charges of approximately $3.7 million and an increase in accounts
payable and accrued expenses of approximately $160,000 during the period as well
as $500,000 received under our distribution agreement with Allergan.
Net cash used by investing activities was approximately $309,000 during
the fiscal year ended March 31, 2007 compared to $6,595 during the fiscal year
ended March 31, 2006, the increase of which was due to purchases of equipment of
approximately $34,000 and increases in intangible assets of $274,000.
Net cash provided by financing activities was approximately $11.4 million
during the fiscal year ended March 31, 2007 compared to net cash provided by
financing activities of approximately $1.8 million during the fiscal year ended
March 31, 2006. The increase in cash provided by financing activities for the
fiscal year ended March 31, 2007 was primarily related to the proceeds of our
IPO and the partial exercise of the underwriters' over-allotment option of
approximately $14.0 million, partially offset by repayments of advances from
affiliates of $2.6 million.
30
Our business is capital intensive and we will likely require additional
financing in order to:
o fund research and development;
o expand sales and marketing activities;
o develop new or enhanced technologies or products;
o maintain and establish regulatory compliance;
o respond to competitive pressures; and
o acquire complementary technologies or take advantage of
unanticipated opportunities.
Our need for additional capital will depend on:
o the costs and progress of our research and development efforts;
o the preparation of pre-market application submissions to the FDA for
our new products and technologies;
o the number and types of product development programs undertaken;
o the number of products to be manufactured for sale or rental;
o the costs and timing of expansion of sales and marketing activities;
o the amount of revenues from sales of our existing and potentially
new products;
o the cost of obtaining, maintaining, enforcing and defending patents
and other intellectual property rights;
o competing technological and market developments; and
o developments related to regulatory and third-party coverage matters.
In order to keep our operating expenses manageable, we entered into a
management services agreement, dated as of August 15, 2001, with ADM under which
ADM provides us and its other subsidiaries, with management services and
allocates portions of its real property facilities for use by us and the other
subsidiaries for the conduct of our respective businesses.
The management services provided by ADM under the management services
agreement include administrative, technical, engineering and regulatory services
with respect to our products. We pay ADM for such services on a monthly basis
pursuant to an allocation determined by ADM and us based on a portion of its
applicable costs plus any invoices it receives from third parties specific to
us. As we intend to add additional full and/or part-time employees to our
administrative staff during the fiscal year ending March 31, 2008, we expect our
reliance on the use of the management services of ADM to be reduced
significantly.
We also use office, manufacturing and storage space in a building located
in Northvale, New Jersey, currently leased by ADM, pursuant to the terms of the
management services agreement. ADM determines the portion of space allocated to
us and each other subsidiary on a monthly basis, and we and the other
subsidiaries are required to reimburse ADM for our respective portions of the
lease costs, real property taxes and related costs.
31
In addition, we are a party to a manufacturing agreement with ADM, dated
as of August 15, 2001, and as amended and restated in May 2006, under which we
utilize ADM as our exclusive manufacturer of all of our current and future
medical and non-medical electronic and other devices or products. For each
product that ADM manufactures for us, we pay ADM an amount equal to 120% of the
sum of (i) the actual, invoiced cost for raw materials, parts, components or
other physical items that are used in the manufacture of the product and
actually purchased for us by ADM, if any, plus (ii) a labor charge based on
ADM's standard hourly manufacturing labor rate, which we believe is more
favorable than could be attained from unaffiliated third-parties. We generally
purchase and provide ADM with all of the raw materials, parts and components
necessary to manufacture our products and, as a result, the manufacturing fee
paid to ADM is generally 120% of the labor rate charged by ADM. On April 1,
2007, we instituted a procedure whereby ADM invoices us for finished goods at
ADM's cost plus 20%.
We have incurred $75,584 and $72,417 for ADM's manufacture of our products
pursuant to the manufacturing agreement during the fiscal years ended March 31,
2007 and March 31, 2006, respectively.
The amount included in general and administrative expense representing
ADM's allocations for the fiscal year ended March 31, 2007 and 2006, was
$242,595 and $226,807, respectively, consisting of amounts payable under our
management services agreement with ADM.
During the twelve month period ended March 31, 2007, we purchased $59,789
of finished goods from ADM at contracted rates.
During October 2006, we completed our IPO, selling 2.5 million shares of
our common stock at $6.00 per share raising gross proceeds of $15.0 million. Net
proceeds to us were approximately $12.2 million from the IPO after the payment
of underwriting discounts and commissions and expenses related to the IPO.
During November 2006, we received additional net proceeds of approximately $1.4
million, after the payment of underwriting commissions and expenses, from the
partial exercise of the underwriters' over-allotment option to purchase 250,000
of the 375,000 available shares of our common stock at $6.00 per share.
Upon the consummation of the IPO, we paid approximately $2.6 million to
ADM representing the balance in inter-company accounts at October 24, 2006 due
to ADM from us, for product manufacturing and services provided by ADM to us
under our management services agreement for the period from March 1989 to
October 2006. Further, at the closing of our IPO, we repaid in full our notes
payable to Ajax on October 24, 2006 with a payment of $257,123, which
represented the outstanding principal and interest under the unsecured
subordinated loan.
Upon the consummation of the IPO, unsecured convertible notes in the
aggregate principal amount of $6.1 million issued in our December 2004 and
February 2005 joint private placement with ADM automatically converted into an
aggregate of 1,630,232 shares of our common stock. The notes bore interest at an
annual rate of 6%, which interest was payable at the direction of the holder in
cash, shares of ADM common stock or shares of our common stock. We issued 21,378
shares and 18,016 shares of common stock on December 27, 2006 and January 17,
2007, respectively, in lieu of cash for interest payments on the notes, which
concluded our obligation to such holders.
On the effective date of the Registration Statement, unsecured convertible
notes in the aggregate principal amount of $2,000,000 issued in connection with
our November 2005 and March 2006 private placements to four institutional
investors automatically converted into an aggregate of 392,157 shares of our
common stock. The notes bore interest at an annual rate of 8%, payable in cash.
Two of the institutional investors who purchased notes, Ajax Capital LLC and
Kenneth S. Abramowitz & Co., Inc., are investment funds wholly-owned by Steven
Gluckstern and Kenneth Abramowitz, respectively, each of whom began to serve as
a director of our company in connection with our IPO, waived their right to
receive interest payments on a quarterly basis through the consummation of the
IPO (approximately $25,000 per quarter). We used approximately $77,000 and
$19,000 of the net proceeds from our IPO to pay Ajax Capital LLC and Kenneth S.
Abramowitz, Co. Inc., respectively, and approximately $149,000 of the net
proceeds from the IPO to pay to the remaining such holders' any and all interest
with respect to such notes then due and payable.
32
As a result of the foregoing, we do not have any loans outstanding as of
the date of this report.
In November 2006, we received $500,000 under the terms of our agreement
with Allergan and its subsidiary, Inamed, and we anticipate receiving additional
revenues under this agreement.
Although we expect that the net proceeds of the IPO, together with our
available funds and funds generated from our operations, will be sufficient to
meet our anticipated needs for 12 months, we may need to obtain additional
capital to continue to operate and grow our business. Our cash requirements may
vary materially from those currently anticipated due to changes in our
operations, including our marketing and distribution activities, product
development, expansion of our personnel and the timing of our receipt of
revenues. Our ability to obtain additional financing in the future will depend
in part upon the prevailing capital market conditions, as well as our business
performance. There can be no assurance that we will be successful in our efforts
to arrange additional financing on terms satisfactory to us or at all.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On March 8, 2006, we appointed Raich Ende Malter & Co. LLP as our
independent registered public accounting firm to replace Stonefield Josephson,
Inc. following our dismissal of Stonefield Josephson on March 7, 2006. This
action was ratified by our board of directors on March 24, 2006. We appointed
Stonefield Josephson as our independent registered public accounting firm on
July 1, 2005. Stonefield Josephson did not issue any reports on our financial
statements as of any date or for any period.
During the period from July 1, 2005 through March 8, 2006, we had no
disagreements with Stonefield Josephson on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedures,
which disagreements, if not resolved to the satisfaction of Stonefield Josephson
would have caused it to make reference to the subject matter of the
disagreements in its report, except for the following matter. During the fiscal
years ended March 31, 2005 and March 31, 2004, we had initially improperly
accounted for certain stock-based compensation costs having to do with improper
classification of certain persons between consultants and employees and also
initially not properly accounting for the effect of changes in status of
optionees whose status changed from consultant to employee. After discussions
with Stonefield Josephson, we agreed to change the accounting treatment related
to these matters and have revised our financial statements as of March 31, 2005
and for the year then ended.
In a March 28, 2006 correspondence, and in oral discussions on or around
that date, Stonefield Josephson noted that as of March 31, 2005 and March 31,
2004 and during the years then ended, certain errors and omissions contained in
our financial statements were discovered which constituted deficiencies in our
internal control over financial reporting. Stonefield Josephson also advised us
of its view regarding areas deficiencies in our internal control over financial
reporting. The deficiencies were: (i) lack of staff with technical accounting
expertise to independently apply our accounting policies in accordance with
accounting principles generally accepted in the United States, (ii) improper cut
off procedures for the periods presented and (iii) lack of adequate back-up and
documentation procedures with respect to our inventory prior to March 31, 2005
and with respect to stock options previously granted by us. Our management has
determined that, due to the reasons described above, we had not consistently
followed established internal control over financial reporting procedures
related to the analysis, documentation and review of selection of the
appropriate accounting treatment for certain transactions.
33
The financial statements as of March 31, 2005 and for the year then ended
reflect all necessary adjustments, including those described above. The net
effect of these changes on our statements of operations for the fiscal year
ended March 31, 2005 was an increase of net loss for such year of $184,781.
We have assigned the highest priority to the improvement in our internal
control over financial reporting and have taken, and will continue to take,
action in furtherance of such improvement. Our management is committed to
implementing strong control policies and procedures and ensuring that our
financial reporting is accurate and complete. We have undertaken the following
initiatives with respect to our internal control and procedures that we believe
are reasonably likely to improve our internal control over financial reporting:
(i) we hired a certified public accountant with prior public company experience
to serve as our Corporate Controller; (ii) we hired Alan V. Gallantar, a
certified public accountant with prior public company experience, to begin to
serve as our Chief Financial Officer in connection with our IPO in October 2006;
(iii) in July 2005, we retained a certified public accountant as a consultant to
assist with our financial reporting obligations and improvement of our internal
controls over financial reporting and retained the services of this certified
public accountant until Mr. Gallantar commenced his service as our Chief
Financial Officer; and (iv) since August 2005, we have utilized a certified
public accountant as a consultant to assist management with internal control,
financial reporting and closing our books and records.
We anticipate that remediation efforts relating to our internal financial
controls will continue throughout fiscal 2008, during such time we expect to
continue pursuing, with the advice and experience of our independent auditors,
appropriate additional corrective actions, including the following:
o hiring additional accounting staff as necessary, as determined from
time to time by management;
o preparing appropriate written documentation of financial control
procedures;
o scheduling training for accounting staff to heighten awareness of
generally accepted accounting principles applicable to complex
transactions; and
o strengthening our internal review procedures in conjunction with our
ongoing work to enhance our internal controls so as to enable us to
identify and adjust items proactively.
Our management, including our Chief Financial Officer, together with our Audit
Committee, will closely monitor the implementation of our accounting remediation
plan. The effectiveness of the steps we intend to implement is subject to
continued management review, and we may make additional changes to our internal
control over financial reporting.
There can be no assurance that the above-mentioned areas will be fully
remedied, if ever. Moreover, we cannot assure you that we will not, in the
future, identify further areas requiring improvement in our internal control
over financial reporting. We presently anticipate that the need for improvement
in these areas will continue to exist until we have fully implemented our
remediation plan. Except as set forth above, there have been no changes in our
internal controls over financial reporting that occurred during our fiscal year
ended March 31, 2007 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
34
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to
investors.
BUSINESS
BUSINESS OVERVIEW
We are an early-stage medical technology company focusing on designing,
developing and commercializing proprietary electrotherapeutic technologies.
Electrotherapeutic technologies use electric or electromagnetic signals to help
relieve pain, swelling and inflammation and promote healing processes and tissue
regeneration. We have focused our research and development activities on pulsed
electromagnetic field, or PEMF, technology. This technology utilizes a magnetic
field that is turned on and off rapidly to create a therapeutic electrical
current in injured tissue, which then stimulates biochemical and physiological
processes to help repair injured soft tissue and reduce related pain. We are
currently marketing products utilizing our PEMF technology to the chronic wound
and plastic and reconstructive surgery markets. We are developing proprietary
technology for other therapeutic medical markets.
Based on mathematical modeling, we develop and design proprietary PEMF
signals, which we refer to as "electroceuticals(TM)." These signals are intended
to improve specific physiological processes, including those that generate the
body's natural anti-inflammatory response. We are currently utilizing our PEMF
technology to address a wide array of pathological conditions, including acute
and chronic disorders in soft tissue such as chronic wounds, pain and edema,
acute injuries and chronic inflammatory disorders. Chronic wounds include
pressure ulcers, diabetic wounds and arterial and venous insufficiency wounds
(wounds resulting from poor blood flow in the arteries or veins). We are also
developing applications for increasing angiogenesis (new blood vessel growth), a
critical component for tissue regeneration.
Our SofPulse product, which utilizes our PEMF technology, has been cleared
by the FDA for the adjunctive use in the palliative treatment of post-operative
pain and edema in superficial tissue. In July 2004, the Center for Medicare and
Medicaid Services, or CMS, issued a National Coverage Determination, or NCD,
requiring reimbursement by Medicare for the use of electromagnetic therapy for
the treatment of chronic wounds.
Our products consist of the following three components:
o the electroceutical signals;
o a signal generator; and
o an applicator.
The signal generator produces a specific electroceutical signal that is pulsed
through a cable and into the applicator. The applicator transmits the
electroceutical signal into the desired area, penetrating medical dressings,
casts, coverings, clothing and virtually all other non-metal materials. Our
products can be used immediately following acute injury, trauma and surgical
wounds, as well as in chronic conditions, and require no alteration of standard
clinical practices to accommodate the therapy provided by our products. We
continue to focus our research and development activities on optimizing the
signal parameters of our PEMF technology in order to produce improved clinical
outcomes and smaller more efficient products utilizing less power.
35
Since the mid-1990s, our products have been used in over 600,000
treatments by healthcare professionals on medical conditions, such as:
o acute or chronic wounds, including post surgical wounds;
o edema and pain following plastic and reconstructive surgery; and
o pain associated with the inflammatory phase of chronic conditions.
For such purpose, we regard each 15-minute application on a target area of a
patient as one treatment.
We are currently a party to, and intend to continue to seek, agreements
with distributors to assist us in the marketing and distribution of our
products. As of the date of this prospectus, we have engaged six domestic
third-party distributors to assist us in marketing our products in the United
States chronic wound care market and one distributor in Canada to assist us in
marketing our products in the Canadian chronic wound care market. We are also
actively pursuing exclusive arrangements with strategic partners we believe have
leading positions in our target markets, in order to establish nationwide, and
in some cases worldwide, marketing and distribution channels for our products.
Generally, under these arrangements, the strategic partners would be responsible
for marketing, distributing and selling our products while we continue to
provide the related technology, products and technical support. Although we have
not entered into any such exclusive arrangements with strategic partners to
date, through this approach, we expect to achieve broader marketing and
distribution capabilities in multiple target markets.
On November 9, 2006, we entered into an exclusive worldwide distribution
agreement with a wholly-owned subsidiary of Allergan, Inc., a global healthcare
company that discovers, develops and commercializes pharmaceutical and medical
device products in specialty markets. Pursuant to the agreement, we granted
Allergan's subsidiary, Inamed Medical Products Corporation, and its affiliates
the exclusive worldwide right to market, sell and distribute certain of our
products, including all improvements, line extensions and future generations
thereof in conjunction with any aesthetic or bariatric medical procedures in the
defined marketing territory. Under the agreement, we also granted Inamed the
right to rebrand such product, with Inamed owning all rights to such brands
developed by Inamed for such purpose.
MARKET OVERVIEW
Our products can be used for treating a broad spectrum of acute and
chronic disorders of soft tissue, including serious pressure skin ulcers (also
known as bedsores), failed surgical closures, diabetic ulcers, edema and pain
following plastic and reconstructive surgery procedures, as well as pain
associated with the inflammatory phase of chronic conditions. We are considering
additional applications of our products, as well as developing other products
using our PEMF technology. For example, we are currently researching and
clinically testing potential applications of our PEMF technology for therapeutic
angiogenesis (the regeneration of new blood vessels) and vascularization (the
creation of new blood vessels) for use in circulatory and cardiac impairment
conditions and for the proliferation of stem cells. We are also exploring the
possibility of utilizing our PEMF technology in an application to compete as a
non-invasive, non-pharmacologic alternative to other treatments which are used
for pain and edema, such as acetaminophen, without any of the potential known
side-effects or complications that are associated with such products.
36
WOUND CARE. According to market analysis published by MX (a trade journal
on business strategies for medical technology) in February 2006, wound care
costs the U.S. healthcare system more than $20 billion each year, including more
than $4 billion spent on wound management products. The MX publication further
states that chronic and severe wounds, the most difficult wounds to treat, have
been the focus of significant product innovation in recent years. According to
the MX publication, the market for active wound care products, or products that
contribute to wound repair by delivering bioactive compounds or utilizing
materials that facilitate the body's own ability to heal, is anticipated to grow
at 23% per year through 2009, while the market for traditional products, or
products that treat wounds with dry bandages and dressings, is expected to
decline by 2% per year over the same period. Based on the MX publication, it is
estimated that at currently anticipated growth rates, active wound care will
represent a more than $1 billion opportunity within the next five years in the
United States.
We anticipate that use of our products may be beneficial in a substantial
number of general post-surgery recovery plans in general hospitals, as well as
in long-term care nursing facilities and long-term acute care hospitals, or
LTACHs, rehabilitation hospitals, acute care facilities, and in the home. U.S.
Census Bureau statistics indicate that, as of March 2004, the 65-and-over age
group was one of the fastest growing population segments and was expected to
reach approximately 40 million by the year 2010. Management of wounds and
circulatory problems is crucial for the elderly. These patients frequently
suffer from deteriorating physical conditions and their wound problems are often
exacerbated by other disorders.
We expect this market to continue to grow as a result of several factors,
including the continued increase in the incidence of diabetes and the aging
population. Physicians and nurses look for therapies that can promote the
healing process and overcome the obstacles of the patients' compromised
conditions. They also prefer therapies that are non-invasive and are easy to
administer, especially in the home care setting, where full-time skilled care is
generally not available.
PLASTIC AND RECONSTRUCTIVE SURGERY. More than 11.5 million cosmetic
surgery procedures for a total cost in excess of $12.2 billion were performed in
2006, according to statistics released by the American Society of Plastic
Surgeons, or ASPS, up 55% from nearly 7.4 million procedures in 2000. According
to the ASPS, cosmetic procedures being conducted in an office-based surgical
facility rose to 46% in 2004, with only 25% of such procedures being conducted
in a hospital. We believe this trend reflects the safety of many procedures and
the expertise of board-certified plastic surgeons to conduct them in their
accredited office-based surgical facilities. We seek to leverage these trends by
marketing our PEMF technology in lightweight and disposable products, to
surgeons, who can then sell the products to their patients.
POTENTIAL ADDITIONAL MARKETS. We are pursuing development and
commercialization of new products as well as devoting resources to the testing,
validation, and compliance with FDA regulatory requirements of new applications
of our existing products and our PEMF technology to address the needs of the
following potential markets:
o ANGIOGENESIS AND VASCULARIZATION. According to the American Heart
Association, in 2007, the estimated cost of coronary heart disease
is $151.6 billion. We believe this market continues to grow, despite
effective procedures like coronary artery bypass grafting and
angioplasty and stenting (invasive procedures performed to reduce or
eliminate blockages in coronary arteries) and that procedure volumes
continue to increase in part because cardiovascular disease is
progressive and in part because the effects of cardiovascular
procedures are not permanent. We also believe that the biggest
market for products stimulating angiogenesis will be for treatment
of coronary artery disease and peripheral vascular disease. Based on
studies by Dr. Berish Strauch, Chairman of the Plastic and
Reconstructive Surgery Department of Montefiore Medical Center in
37
New York City and a member of our Medical Advisory Board, we believe
that the non-invasive application of our PEMF technology to
permanently improve cardiac circulation by creating new blood
vessels, known as "remodeling," could reduce the need for invasive
procedures such as angioplasty and bypass surgery and long-term
medication for atherosclerosis (the hardening of the arteries). An
Internal Review Board, or IRB, approved, a double-blind randomized
placebo-controlled clinical trial in patients who are not candidates
for angioplasty or cardiac bypass surgery. This trial has begun at
Cleveland Clinic Florida, a not-for-profit multispecialty medical
group practice. The trial is looking at the use of our PEMF
technology over a period of five months on patients with ischemic
cardiomyopathy (a heart condition resulting from decreased blood
flow to the heart), the primary endpoint of which will be the
improvement in regional myocardial perfusion (the flow of blood
through the heart) and function and the secondary endpoint of which
will be improvement in patient angina and exercise tolerance. Full
enrollment of patients in the clinical trial occurred during June
2007, and we expect the trial will be completed by the end of
December 2007, although there can be no assurance that the trial
will be completed within such time frame. Because the trial is
double-blinded and efficacy cannot be determined until the
conclusion of the trial when investigators are permitted to examine
the patients and compare those patients who received the actual
therapy with those patients who received the placebo therapy,
preliminary results of the trial will not be available prior to the
conclusion of the trial.
o PAIN MANAGEMENT. According to Medtech Insights, the total U.S.
market for pain management devices reached $1.2 billion in 2005.
Pain is generally divided into acute and chronic. Acute pain can be
modulated and removed by treating its cause. Chronic pain is
distinctly different and more complex. The source of the pain is
often known but cannot be eliminated. The urge to do something to
relieve the pain often makes some patients drug-dependent. Chronic
pain may be one of the most costly health problems in the United
States. According to the Centers for Disease Control, arthritic
conditions, the leading cause of disability in the U.S., afflicts at
least 46 million Americans, with a cost of $128 billion a year in
direct medical costs and indirect costs, such as lost productivity
and workers' compensation. We intend to market our future products
against other pain treatments. Now that such commonplace medications
have been required to carry warning labels due to potential
dangerous side-effects (and some drugs have been withdrawn
altogether), we believe that there is a significant opportunity for
a non-invasive, non-pharmacologic alternative that has efficacy and
no known side-effects. The February 2007 publication of treatment
guidelines by the American Heart Association in the journal,
CIRCULATION, advises that non-pharmacological alternatives to
non-steroidal anti-inflammatory drugs, or NSAID's, should be used
first in treating chronic pain in patients with risk factors for
heart disease.
o STEM CELL TECHNOLOGY AND TISSUE ENGINEERING. According to a
Visiongain report, the stem cell and tissue engineering market is
expected to reach $10.0 billion by 2013. Tissue engineering
technology is available with several types of replacement skin,
cartilage, regeneration of bone and other connective structural
substitutes. The flexibility and plasticity of stem cells has led
many researchers to believe that stem cells have tremendous promise
in the treatment of diseases other than those currently addressed by
stem cell procedures. Theoretically, to put stem cells into a
damaged heart may be simple but to persuade it to transform into
functioning heart muscle is more difficult because it can transform
itself into several organs or types of tissue. Some researchers have
reported progress in the development of new therapies utilizing stem
cells for the treatment of cancer, neurological, immunological,
genetic, cardiac, pancreatic, liver and degenerative diseases.
Tissue engineering and stem cell technology have had the capability
to reform the medical market and have been recognized for some time.
We plan to explore the opportunities for creating medical devices
based on our PEMF technology to address the needs of these markets.
38
o ORTHOPEDIC APPLICATIONS. We plan to explore opportunities to market
our products utilizing our PEMF technology for the pain and edema
associated with acute and chronic orthopedic conditions, including
fractures and joint replacements. The U.S. fracture market,
specifically fractures due to osteoporosis was estimated by the
American Society and Mineral Research in 2005 to include over 2
million fractures at an overall cost of $16.9 billion, growing by
50% in 20 years due to the aging population. The U.S. joint repair
and revision market included over 940,000 procedures. Costs in 2003
for all knee and joint replacement procedures was estimated at $24.8
billion.
For a discussion of the status of our research and development activities of
these potential new markets and applications, as well as the challenges in
developing and commercializing products in these markets, see "--Potential New
Markets and Applications."
OUR STRATEGY
Our goal is to become a leader in the development of products and
technologies in the field of non-invasive electrotherapeutic technologies. The
key elements of our strategy are the following:
CONTINUE TO EXPAND OUR TECHNOLOGY AND PRODUCT LINES.
We believe that we have assembled a management team with the experience
necessary to develop and create new applications of electrotherapeutic
technology. We also intend to leverage the extensive knowledge and experience of
the members of our Medical and Scientific Advisory Boards, as well as our
relationship with Montefiore Medical Center, where certain of our clinical
trials are being conducted, to assist us in expanding our research and
development of new technologies and products. The development of new
technologies, applications and products is a function of understanding how to
design electromagnetic signals that produce the optimal effects on a biological
target. We believe that we, along with our advisors, have developed the
knowledge and expertise to:
o create a proper PEMF signal for a desired physiologic effect;
o test those signals in multiple systems;
o engineer the devices necessary to implement our technology for
various treatments; and
o clinically validate the effects and produce the necessary devices at
the FDA-registered manufacturing facilities of ADM, our largest
shareholder.
LEVERAGE MARKET VALIDATION OF OUR PRODUCTS AND TECHNOLOGY TO COMMERCIALIZE
ADDITIONAL PRODUCTS TO GROW OUR MARKET SHARE AND CUSTOMER BASE.
We believe that growth opportunities exist through our continuing research
into signal optimization to market additional products using our PEMF technology
and expand our markets and customer base. Working with clinically validated
prototypes has enabled us to reduce:
o the size of the applicator used in the first generation of our
products from over twelve pounds to under one pound;
39
o the power output from the first generation of our products; and
o the costs associated with manufacturing the first generation of our
products.
Over the past year, we have developed two new products utilizing our PEMF
technology, the Roma(3) and the Torino II, both of which are currently being
marketed. In addition, the ability to decrease power output has significantly
reduced the serious problems of interference with medical monitoring equipment,
which has in the past, restricted where this technology could be utilized,
including hospital intensive care units. We expect that our additional products
and advancements will allow us to penetrate our current, as well as, new
markets.
CONTINUE TO SEEK COLLABORATIVE AND STRATEGIC AGREEMENTS TO ESTABLISH
BROADER MARKETING AND DISTRIBUTION CHANNELS FOR OUR PRODUCTS.
We continue to seek collaborative and strategic agreements to assist us in
the marketing and distribution of our products. We are actively pursuing
exclusive arrangements with strategic partners, having leading positions in our
target markets, in order to establish nationwide, and in some cases worldwide,
marketing and distribution channels for our products. Generally, under these
arrangements, the strategic partners would be responsible for marketing,
distributing and selling our products while we continue to provide the related
technology, products and technical support. Through this approach, we expect to
achieve broader marketing and distribution capabilities in multiple target
markets.
In order to attract the interest of qualified potential strategic
partners, we have initiated, and will continue to initiate, distribution and
sales of our products in target market areas. We expect to generate sales from
such efforts and demonstrate market acceptance of our products in order to
attract strategic partners to assume marketing, distribution and sales
responsibilities for our products. As of the date of this prospectus, we have
engaged six domestic third-party distributors to assist us in marketing our
products in the United States chronic wound care market and one distributor in
Canada to assist us in marketing our products in the Canadian wound care market.
Pursuant to these written agreements, we have granted the distributors exclusive
rights to distribute our products to LTACH's, acute care facilities,
rehabilitation/wound centers, nursing homes and skilled nursing facilities in
select markets within specified geographic areas. Under these agreements,
distributors are entitled to monthly commissions based on varying percentages of
the amount of the invoices we receive for products rented by such distributors
or products sold as a result of such distributors' efforts, during the preceding
calendar month. These agreements have two-year terms with automatic one-year
renewals, subject to earlier termination in the event of a breach by either
party. We intend to continue to generate revenues through the use of
distributors with the expectation of attracting strategic partners.
On November 9, 2006, we entered into an exclusive worldwide distribution
agreement with a wholly-owned subsidiary of Allergan, Inc., a global healthcare
company that discovers, develops and commercializes pharmaceutical and medical
device products in specialty markets. in principle with a prospective strategic
partner, a global healthcare company that discovers, develops and commercializes
pharmaceutical and medical device products in specialty markets, for the
distribution of our products used in plastic and reconstructive surgery.
Pursuant to the agreement, we granted Allergan's subsidiary, Inamed Medical
Products Corporation and its affiliates the exclusive worldwide right to market,
sell and distribute certain of our products, including all improvements, line
extensions and future generations thereof in conjunction with any aesthetic or
bariatric medical procedures in the defined marketing territory. Under the
agreement, we also granted Inamed the right to rebrand such product, with Inamed
owning all rights to such brands developed by Inamed for such purpose.
40
EXPAND THE USE OF OUR PEMF TECHNOLOGY FOR ANGIOGENESIS AND VASCULARIZATION
AND OTHER PROCEDURES.
We intend to pursue FDA clearance of our PEMF technology for angiogenesis
and vascularization, the creation and stimulation of growth of new blood
vessels. We have been, and intend to continue, devoting significant resources
for the testing, validation, FDA clearance and commercialization of our PEMF
technology for such applications. We are currently researching and clinically
testing the vascularization and angiogenic effects of our PEMF technology for
proposed use in certain circulatory and cardiac impairment conditions, as
alternatives to the following treatments:
o pharmacological interventions for impaired cardiovascular function
and coronary artery disease;
o balloon and laser angioplasty (an invasive procedure performed to
reduce or eliminate blockages in coronary arteries);
o arthrectomy (the removal of arterial plaque) and cardiac stenting
(the implantation of a small, metal scaffold after angioplasty to
keep the artery open and prevent regrowth of arterial plaque); and
o cardiac bypass surgery.
We believe that the effects of our PEMF technology on increasing blood
flow and angiogenesis (the regeneration of new blood vessels) in chronically
injured tissues, along with our non-invasive and non-pharmacological features,
could provide potential as a therapeutic alternative for revascularization (the
creation of new blood vessels), especially in patients for whom standard
angioplasty or cardiac bypass surgery is not suitable treatment.
MARKET PRODUCTS UTILIZING OUR PEMF TECHNOLOGY AS AN ALTERNATIVE TO
PHARMACEUTICALS AND INVASIVE SURGICAL PROCEDURES.
We believe that there is a growing desire among consumers of healthcare
products and services to find alternatives to pharmaceutical and invasive
surgical approaches to healthcare. We believe that continuing announcements
regarding the health problems associated with certain drugs and annual records
stating the number of patients who die from medical error are motivating factors
for people to seek alternative healthcare treatments and procedures, including
treatments like those offered by our products.
OUR PRODUCTS
We are currently focusing on the commercialization of products utilizing
our PEMF technology for the treatment of a wide array of acute and chronic
disorders. We are currently utilizing our PEMF technology, through the following
products, for the treatment of edema (swelling) and pain in soft tissue.
SOFPULSE M-10. The SofPulse M-10 utilizes a box-shaped signal generator
that weighs approximately seven pounds. The signal generator delivers the
proprietary electroceutical signals through a lightweight and conformable
applicator that ranges in diameter. The SofPulse M-10 is marketed for sale as
well as a rental product to the chronic wound care markets, particularly for use
in long-term acute care hospitals, as well as in long-term care nursing
facilities, rehabilitation hospitals, acute care hospitals and facilities and
home health systems.
41
ROMA(3). The Roma(3) utilizes a disk-shaped signal generator that is
approximately nine inches in diameter and weighs approximately two pounds. The
signal generator delivers the proprietary electroceutical signals simultaneously
through up to three lightweight and conformable applicators that range in
diameter, allowing multiple treatments on the same patient. The signal generator
contains a programmable microprocessor that can automatically activate and
deactivate the Roma(3) for ongoing, unattended treatment. The applicators
utilized by the Roma(3) are intended for single-patient use and are disposable.
The Roma(3) is primarily marketed as a rental product to the chronic wound care
markets, particularly for use in long-term acute care hospitals, as well as in
long-term care nursing facilities, rehabilitation hospitals, acute care
hospitals and facilities and home health care systems.
TORINO I. The Torino I utilizes a portable, battery powered disk-shaped
signal generator that is approximately two and a half inches in diameter and
weighs approximately four ounces. The signal generator delivers the proprietary
electroceutical signals through variable sized lightweight and conformable
applicators, depending on the application. The signal generator used in the
Torino I is pre-programmed to provide treatment at optimal intervals throughout
the course of therapy. The Torino I is primarily marketed in the plastic and
reconstructive surgery market, where the product is being sold to physicians who
then offer it to their patients.
TORINO II. The Torino II is a battery powered, disposable single unit
consisting of both the signal generator and applicator for ease of use. The
applicators that are incorporated into the Torino II are also lightweight and
conformable and come in varying sizes, depending on the application. The signal
generator used in the Torino II is also pre-programmed to provide therapy at
optimal intervals throughout the course of therapy. The Torino II is primarily
marketed in the plastic and reconstructive surgery market, where the product is
sold to physicians who then offer it to their patients.
CURRENT APPLICATIONS
We plan to continue marketing our products to the wound care and plastic
surgery markets, and we are expanding our marketing efforts in these areas.
WOUND CARE
In the acute care setting, serious trauma wounds, failed surgical
closures, amputations (especially those resulting from complications of
diabetes), bums covering a large portion of the body and serious pressure ulcers
present special challenges to the physician. These are often deep and/or large
wounds that are prone to serious infection and further complications due to the
extent of tissue damage or the compromised state of the patient's health. These
wounds are often difficult--or in the worst cases, impossible--to treat quickly
and successfully with more conventional products. Physicians and hospitals need
a therapy that addresses the special needs of these wounds with high levels of
clinical and cost effectiveness. Given the high cost and infection risk of
treating these patients in health care facilities, the ability to create healthy
wound beds and reduce bacterial levels in the wound is particularly important.
In the extended care and home care settings, different types of wounds
with different treatment implications, present the most significant challenges.
Although a substantial number of acute wounds require post-discharge treatment,
a majority of the challenging wounds in the home care setting are non-healing
chronic wounds. These wounds often involve physiologic and metabolic
complications such as reduced blood supply, compromised lymphatic system (the
circulatory vessels or ducts in which the fluid bathing the tissue cells is
collected and carried to join the bloodstream) or immune deficiencies that
interfere with the body's normal wound healing processes. Diabetic ulcers,
arterial and venous insufficiency wounds (wounds resulting from poor blood flow
in the arteries or veins) and pressure ulcers are often slow-to-heal wounds.
These wounds often develop due to a patient's impaired vascular and tissue
repair capabilities. These conditions can also inhibit the patient's healing
42
process, and wounds such as these often fail to heal for many months, and
sometimes for several years. Difficult-to-treat wounds do not always respond to
traditional therapies. Physicians and nurses look for therapies that can promote
the healing process and overcome the obstacles of the patients' compromised
conditions. They also prefer therapies that are easy to administer, especially
in the home care setting, where full-time skilled care is generally not
available. In addition, because many of these patients are not confined to bed,
they want therapies which are minimally disruptive to their lives. Our products
are designed to allow patients mobility to conduct normal lives while their
wounds heal.
The therapeutic value of our products utilizing our PEMF technology has
been demonstrated in the wound care market. In addition to the over 600,000
treatments since the mid-1990s, clinical research supports the efficacy of our
PEMF technology. Independent studies conducted by L.C. Kloth, et. al., in 1999
showed increased wound healing for pressure ulcers treated with one of the
SofPulse signals. In addition, studies conducted by Harvey N. Mayrovitz, Ph.D.,
et. al., in conjunction with Electropharmacology, Inc., or EPI, and published in
a peer-reviewed medical journal in 1995 determined, through measured blood flow,
that treatment with our technology improved blood flow in the extremities in
diabetic patients who were vascularly impaired with foot ulcers. This
physiological effect is important in the treatment of diabetic ulcers due to the
fact that such non-healing diabetic wounds are primarily the result of impaired
circulation in the area of the wounds. Most significantly, the CMS decision
creating a National Coverage Determination for the use of electromagnetic
therapy in chronic wound treatments found that electromagnetic therapy was
analogous to direct electrical stimulation delivered through methods that differ
from electromagnetic therapy. Although electrical stimulation, when properly
administered, has been shown to be effective in treating recalcitrant wounds, it
is much more labor intensive and difficult to apply effectively without direct
contact with the wound site, while our products are virtually labor free and
easy to operate without direct contact with the wound site as they are able to
treat the target area through wound dressings.
From 1991 to 1997, EPI marketed its products utilizing electrotherapeutic
technologies primarily for use in nursing homes for the Medicare reimbursable
treatment of chronic wounds, primarily pressure sores and diabetic leg ulcers,
through a rental program. During such time, the business grew at a rate of 12%
per month to a monthly rental-billing rate of almost $300,000. However, due to
changes in reimbursement policy made by CMS in 1997, which prohibited Medicare
coverage of the use of this technology in the treatment of non-healing wounds,
the nursing home revenue diminished significantly by 2001. As a result of the
reimbursement policy changes, we began to:
o market our products for use in nursing homes for the
non-reimbursable treatment of pain and edema associated with acute
and/or chronic wounds and for the non-reimbursable treatment of pain
and edema following reconstructive or plastic surgery, both of which
markets we continue to pursue today, and
o consider other applications for use of our PEMF technologies, such
as for therapeutic angiogenesis and vascularization for use in
circulatory and cardiac impairment conditions.
In December 2003, CMS reversed its policy and issued an NCD requiring
reimbursement by Medicare for electromagnetic therapies for non-healing wounds,
which became effective in July 2004. In response to this regulatory change, we
re-introduced our products into the chronic wound market, where we believe that
our products utilizing our PEMF technology have retained their reputation for
therapeutic effect. In addition, we have received authority from the U.S.
Department of Veterans Affairs, or VA, to market and sell and/or rent to VA
facilities nationwide our SofPulse M-10 for the treatment of wounds.
43
We continue to market our products for placement within surgical centers
for post-operative use immediate use to reduce edema at the target area and a
patient's pain, through a monthly and per-use rental program to physicians and
patients. We anticipate that use of our products may be beneficial in a
substantial number of general post-surgery recovery plans. We are seeking
opportunities to place on a metered, pay-per-use or rental basis, our products
in long-term care nursing facilities, long-term acute care hospitals,
rehabilitation hospitals, acute care facilities, and in the home, through
individual facilities, corporate nursing home and long-term acute care hospital
chains and through regional and national contract therapy service companies that
provide therapies to the nursing home industry, as well as through our own sales
personnel and third-party sales organizations and distributors.
Since 1997, a number of companies have entered into the wound care market
and have developed technologies and products that are used for the treatment of
chronic wounds, including those that are similar to our technologies and
products, and the existence of these technologies and products in the market may
make it more difficult for us to achieve widespread market acceptance of our
products for the treatment of chronic wounds. Among the companies against whom
we compete are Diapulse Corporation of America, Inc., which manufactures and
markets devices that are deemed by the FDA to be substantially equivalent to
certain of our products; Regenesis Biomedical, which manufactures and markets
devices that are similar to our first generation device; BioElectronics
Corporation, which develops and markets the ActiPatchTM, a medical dermal patch
that delivers PEMF therapy to soft tissue injuries; and Kinetics Concepts, Inc.,
which manufactures and markets negative pressure wound therapy devices in the
wound care market. We also face competition from companies that have developed
other forms of treatment, such as hyperbaric oxygen chambers, thermal therapies
and hydrotherapy. Many of our competitors are well-established, and have
substantially greater financial and other resources, research and development
capabilities and more experience in obtaining regulatory approvals,
manufacturing and marketing than we do. Our ability to commercially exploit our
products must be considered in light of the problems, expenses, difficulties,
complications and delays frequently encountered in connection with the
development of new medical processes, devices and products and their level of
acceptance by the medical community. Our competitors may succeed in developing
competing products and technologies that are more effective than our products
and technologies, or that receive government approvals more quickly than our new
products and technologies, which may render our existing and new products or
technology uncompetitive, uneconomical or obsolete. See "Business -
Competition."
PLASTIC AND RECONSTRUCTIVE SURGERY
We plan to increase marketing of our products utilizing our PEMF
technology to the plastic and reconstructive surgery market. Plastic surgery
patients are concerned about the length of post surgical recovery time and we
believe that use of our products can reduce the period of recovery in these
procedures. Further, plastic surgery procedures are primarily elective in nature
and expensive and are not dependent to the same extent on, nor as sensitive to,
cost and reimbursement issues as in many other fields of medicine.
A pilot clinical trial has also been conducted by the chairman of the
Innovative Procedure Committee of the American Society for Aesthetic Plastic
Surgery, or ASAPS. This randomized, prospective study examined the use of our
products post-surgically following laser facial resurfacing. This study, which
was a placebo-controlled clinical study, yielded the following conclusions:
o EDEMA AND PAIN TREATMENT DESIRABLE. The labeled indication of our
products, use in post-operative treatment of edema and pain, is
suitable for the needs of the plastic surgery market.
o ASAPS POSITION STATEMENT. The study provided the basis for an
official Position Statement being issued by ASAPS recognizing the
efficacy of our products utilizing our PEMF technology at reducing
edema and pain post-surgically.
44
We have received positive clinical observations by plastic surgeons, and
affirmative consumer acceptance by their patients who participated in our beta
test from 2001 to the present in the New York metro area and in Southern
California where patients rented our product for in-home use following plastic
surgery.
We are also marketing the use of our products in compression garments, to
the plastic surgery market. These "smart" compression garments will be activated
at the time the garments are placed on the patient. These smart compression
garments will cycle on and off automatically throughout the day for up to 30
days. We believe this automatic cycling will virtually eliminate issues related
to compliance by the patient with the physicians post-operative instructions
which are associated with nearly all other interventions, including
pharmaceuticals which require the patient to take medication at prescribed
times, and enhance the overall recovery for the patients.
POTENTIAL NEW MARKETS AND APPLICATIONS
We are pursuing development and commercialization of new products as well
as devoting resources to the testing, validation, and compliance with FDA
regulatory requirements of new applications of our technology to address the
needs of the angiogenesis and vascularization, stem cell, pain relief and hair
loss reduction markets. We cannot assure you that we will be able to develop new
products or expand the use of our PEMF technology for any of these additional
markets or applications. Our ability to successfully expand the use of our PEMF
technology for each of these applications will depend on a number of risks,
including:
o funding studies related to such applications through joint ventures
or other strategic alliances or otherwise;
o establishing the efficacy of such applications through our research
and development efforts;
o developing and commercializing new products utilizing our technology
for such applications;
o obtaining FDA clearance or approval for such technologies or
applications; and
o establishing market acceptance and reimbursement of our products for
such uses.
ANGIOGENESIS AND VASCULARIZATION MARKET
We are devoting significant resources into the testing, validation, FDA
regulatory requirements and commercialization of the angiogenic and vascular
applications of our PEMF technology. We believe that the non-invasive
application of a specific signal to improve cardiac circulation by creating new
blood vessels could reduce the need for invasive procedures such as angioplasty
and bypass surgery and long-term medication for atherosclerosis.
o EVIDENCE. Our PEMF technology has been shown, in published studies
in peer-reviewed journals, to enhance blood flow and appears to
confirm a significant portion of this effect as angiogenic, (i.e.,
the creation of new blood flow and vessels).
o MAYROVITZ FINDINGS. In published studies by Harvey N. Mayrovitz, et.
al., in a peer reviewed journal in 1995, our PEMF technology was
shown to have an immediate impact in significantly increasing
micro-vascular blood flow.
45
o STRAUCH FINDINGS. Recent research conducted by Dr. Berish Strauch,
Chairman of the Plastic and Reconstructive Surgery Department of
Montefiore Medical Center in New York City and a member of our
Medical Advisory Board, demonstrated that our PEMF technology
created a significant angiogenesis effect. These findings were
presented at an international symposium in late 2003 and have been
published in Plastic and Reconstructive Surgery, a respected
peer-reviewed medical journal.
o PATENTS. We have a patent pending that explicitly secures the
angiogenic effects of our PEMF technology.
o RESEARCH PROGRAM. We have developed a research program to more fully
document the effects and produce the data required to further
validate the current evidence that our PEMF in target areas is able
to promote angiogenesis within the body.
o PRE-MARKET APPROVAL. We are seeking to pursue the best regulatory
strategies for advancing our PEMF technology including the
possibility of commencing the filing of a pre-market approval
application with the FDA.
o OPPORTUNITY. We believe that the non-invasive application of our
PEMF technology to permanently improve cardiac circulation by
creating new blood vessels, known as "remodeling", could reduce the
need for invasive procedures such as angioplasty and bypass surgery
and long-term medication for atherosclerosis.
We have concluded and published controlled animal studies, under the
supervision of Dr. Berish Strauch, at the Montefiore Medical, which demonstrated
significant angiogenesis in peripheral tissues in standard models. Based, in
part on this initial information, an IRB-approved, double-blind randomized
placebo-controlled clinical trial in patients who are not candidates for
angioplasty or cardiac bypass surgery has commenced at The Cleveland Clinic
Florida, a not-for-profit multispecialty medical group practice.
The study, which will be the first controlled human clinical trial using
our PEMF technology for a cardiac indication, will have the following three
objectives:
o to establish the safety of our PEMF technology in treatment of
patients with ischemic cardiomyopathy;
o to evaluate the efficacy of our PEMF technology on myocardial
perfusion (the flow of blood through the heart), ventricular
function (the function performance of the ventricle of the heart),
clinical symptoms of angina (severe chest pains from the heart) and
exercise tolerance after one and three-month treatments in patients
with ischemic cardiomyopathy; and
o to assess the sustainability of our PEMF technology on ischemic
myocardium (the decrease in blood flow to the heart) two months
after completion of the therapy.
The primary endpoint of the study is improvement in regional myocardial
perfusion and function. The secondary endpoint of the study is improvement in
patient angina and exercise tolerance. We believe that the effects of our PEMF
technology on increasing blood flow and angiogenesis (the regeneration of new
blood vessels) in chronically injured tissues, along with our non-invasive and
non-pharmacological features, could provide potential as a therapeutic
alternative for revascularization (the creation of new blood vessels),
especially in patients for whom standard percutaneous or surgical
revascularization is not suitable treatment.
46
The human clinical trials are a pre-requisite to the filing of
applications to the FDA to market PEMF for the indications set forth above;
however, there can be no assurance that the results of such trials will be
positive or even if the results are positive, that we will receive the requisite
FDA clearance or approval for such indications. Full enrollment of patients in
our clinical trial occurred during June 2007 and we expect that the study will
be completed within such time frame. If we do not receive the requisite FDA
clearance or approval to market products utilizing our PEMF technology for those
indications, we will not be able to enter the angiogenesis and vascularization
markets.
STEM CELLS
Stem cell research has focused, at least in the public debate, on the
"kinds" of stem cells available for experimentation and eventual utilization.
However, we believe that the bulk of stem cell implantations are not effective
due to the lack of adequate blood supply. The body, especially in injured
tissues resulting from various heart conditions and neurological disorders, does
not provide nor produce sufficient new blood supply to support the introduction
of new cells. We are seeking to develop the specific signals to accelerate the
angiogenic process to enhance the body's ability to support the growth of these
new cells. We believe that this application could improve the stem cell
technologies that currently fail today. If we encounter delays in developing, or
are unable to develop, the specific signals to accelerate the angiogenic process
to enhance the body's ability to support the growth of these new cells, we may
be delayed in, or may be prevented from, entering the stem cell market.
PAIN RELIEF
We have developed a small, compact product utilizing our PEMF technology
that effectively reduces pain. We are preparing to market this product into the
consumer market, both at the prescription level and over-the-counter, or OTC. In
both cases, we intend to market the product against other pain treatments. Now
that such commonplace medications have been required to carry warning labels due
to potential dangerous side-effects (and some withdrawn altogether), we believe
that there is a significant opportunity for a non-invasive, non-pharmacologic
alternative that has efficacy and no known side-effects. We have also developed
prototypes of this product; however, we must obtain regulatory clearance before
marketing this product. We intend to file our clearance application with the FDA
to market this product for pain relief by the end of 2007, although there can be
no assurance that the application with the FDA will be filed within this time
frame. Although clearance could be granted to us by the FDA as early as 90 days
from the date of filing of the application, the FDA may request additional
information or require additional testing, which could prevent us from obtaining
such clearance within such 90-day period, if at all. We cannot assure you that
we will be successful in obtaining such clearance and without such clearance, we
will be unable to enter the pain relief market.
HAIR LOSS REDUCTION
We are exploring potential applications of our PEMF technology for the
reduction of hair loss resulting from certain medical treatments and in hair
transplant procedures. We have tested our technology in ergonomically configured
applicators for use post-hair transplant. Patients who have undergone hair
transplant procedures typically experience both pain and edema in the soft
tissue where such transplants have occurred. Since our products have been
cleared by the FDA for the adjunctive use in the palliative treatment of
post-operative pain and edema in superficial tissue, they may be used for the
treatment of pain and edema in soft tissue resulting from hair transplants. We
do expect, however, that FDA clearance of products using our PEMF technology for
hair loss reduction or hair rejuvenation will require specific studies and will
require us to file with the FDA a pre-market approval application.
47
RESEARCH STUDIES
During the fourth quarter of 2005, Dr. Diana Casper of Montefiore Medical
Center's Department of Neurosurgery received a grant in the amount of $270,000
from the National Institutes of Health, or NIH, to commence studies to examine
the effects of pulsed magnetic fields on neurons and vessels in cell culture and
intact brain and neural transplants, as well as to explore the potential of this
modality to lessen neurodegeneration (progressive damage or death of neurons
leading to a gradual deterioration of the bodily functions controlled by the
affected part of the nervous system) and increase vascular plasticity (the
lifelong ability of the brain to reorganize neural pathways based on new
experiences). We believe this modality could have applications in the treatment
of chronic and acute vascular and neurodegenerative diseases, including
Parkinson's disease. Although Dr. Casper is not required to do so pursuant to
the NIH grant, she has advised us in writing that she intends to use our PEMF
technology in connection with these studies. The term of the NIH grant expires
on May 31, 2008. Prior to receiving the NIH grant, we provided funding for Dr.
Casper's research in this field, as well as during and following the expiration
of the term of the NIH grant, we will fund Dr. Casper's continued research in
this field using our products.
We also expect to commence research studies with respect to pain relief at
Montefiore Medical Center and although we do not have any specific plans to
date, we are seeking opportunities to commence additional studies at other
research facilities. We believe that two studies to validate consumer pain
application for Federal Trade Commission purposes will be completed within four
to six months from commencement and estimate that the aggregate cost of such
studies will be approximately $200,000. However, there can be no assurance that
the studies will be completed within this time frame or within this cost.
In June of 2007, we entered into a Research Agreement with Indiana
University to conduct a randomized, double-blind animal wound study.
RESEARCH AND DEVELOPMENT
Our research and development efforts continue on several fronts directly
related to our technology, including our expansion into the angiogenesis and
vascularization market, as well as new technologies and products. Although we do
not have any specific plans to date, we intend to pursue entering into joint
ventures, license agreements or other relationships with third-parties to
commercialize any new technologies and products we develop in the future. Our
research and development expenditures were $2,191,944 and $1,813,598 (including
$581,712 and $478,961 of share-based compensation related to the grant of stock
options) for the fiscal years ended March 31, 2007 and 2006, respectively.
We are currently a party to a sponsored research agreement with Montefiore
Medical Center pursuant to which we fund research in the fields of pulsed
electro-magnetic frequencies under the supervision of Berish Strauch, M.D., of
Montefiore Medical Center's Department of Plastic Surgery, that commenced on
October 17, 2004 and expires on December 31, 2009, subject to renewal in
one-year increments by mutual agreement. We were notified prior to our fiscal
year ended March 31, 2007, that the research being conducted by Dr. Strauch has
concluded prior to our fiscal year end and this agreement will not be renewed.
We expect to receive the data from this study shortly. We also fund research in
the field of neurosurgery under the supervision of Diana Casper, Ph.D., of
Montefiore Medical Center's Department of Neurosurgery We have accrued $250,000
at March 31, 2007 for our research and development efforts performed by Dr.
Casper and Dr. Strauch.
48
Under our sponsored research agreement, Montefiore Medical Center is
required to use its reasonable efforts to complete the applicable research
project that is directed and controlled by the principal investigator, subject
to informal consultation with our technical representative, Arthur A. Pilla,
Ph.D. Under the agreement, Montefiore Medical Center is required to promptly
disclose any discovery or invention made by it, the principal investigator or
any other personnel in the performance of the research project, and title to any
and all of such discoveries or inventions and all other intellectual property
rights developed that relate to any of our products will be our sole and
exclusive property. We also have the first option to obtain a worldwide royalty
bearing license to all other inventions not owned by us that are conceived or
made during the performance of the research project. Although Montefiore Medical
Center and its employees have sole ownership of any copyrighted or copyrightable
works (including reports and publications) that are created by them in the
performance of the research project, we have an irrevocable royalty-free,
nontransferable, non-exclusive right to copy and distribute research reports
furnished to us under the agreement and to prepare, copy and distribute
derivative works based on these research reports. Further, subject to certain
limited exceptions, each of Montefiore Medical Center, the principal
investigator and us are required to keep all confidential information of the
other party in strict confidence for a period of five years after the end of the
term of the agreement.
In January 2006, we entered into a Master Clinical Trial Agreement with
Cleveland Clinic Florida, a not-for-profit multispecialty medical group
practice, to set forth the basic terms and conditions with respect to studies to
be conducted by Cleveland Clinic Florida thereunder from time to time during the
term of the agreement, which is from January 9, 2006 to January 9, 2009. At
March 31, 2007, we accrued $300,000 for work performed by the Cleveland Clinic
Florida under its agreement with us as well as additional fees, costs and
expenses to third parties for lab work to be handled by such third parties
during the term of the agreement. The IRB approved a double-blind randomized
placebo-controlled clinical trial in patients who are not candidates for
angioplasty or cardiac bypass surgery, which has begun at the Cleveland Clinic
Florida. The study is looking at the use of our PEMF technology on patients with
ischemic cardiomyopathy the primary endpoint of which will be the improvement in
regional myocardial perfusion and function and the secondary endpoint of which
will be improvement in patient angina and exercise tolerance. Full enrollment of
patients in the clinical trial occurred during June 2007, and we expect the
trial to be completed by December 2007, although there can be no assurance that
the trial will be completed within such time frame.
In June of 2007, we entered into a Research Agreement with Indiana
University to conduct a randomized, double-blind animal wound study.
INTELLECTUAL PROPERTY
PATENTS
We attempt to protect our technology and products through patents and
patent applications. We have built a portfolio of patents and applications
covering our technology and products, including its hardware design and methods.
As of the date of this prospectus, we have three issued U.S. patents, eight
non-provisional pending U.S. patent applications and two provisional U.S.
patents pending covering various embodiments and end use indications for PEMF
and related signals and configurations. The titles, patent numbers and normal
expiration dates (assuming all the U.S. Patent and Trademark Office fees are
paid) of our three issued U.S. patents are set forth in the chart below.
PATENT
TITLE NUMBER EXPIRATION DATE
---------------------------------------------------------- --------- -------------------
Apparatus and Method for Therapeutically Treating
Human Body Tissue with Electromagnetic Radiation 5723001 March 3, 2019
Pulsed Radio Frequency Electrotherapeutic System 5584863 December 17, 2013
Athermapeutic Apparatus Employing Electro-magnetic fields 5370680 December 6, 2011
|
49
One of the pending non-provisional U.S. Patent applications covers basic
signal configurations. We believe this to be a "seminal patent" as it describes
our proprietary methodology for testing signal components, i.e. frequency, pulse
rate, amplitude, etc. to achieve optimum biological responses for specific
conditions. Our other patents pending cover a range of technologies, including
specific embodiments and applications for treatment of various medical
indications, improved application methods and adjunctive utilization with other
therapeutic modalities.
We also have applied for patent protection in several foreign countries.
Because of the differences in patent laws and laws concerning proprietary
rights, the extent of protection provided by U.S. patents or proprietary rights
owned by us may differ from that of their foreign counterparts.
We acquired certain rights to our three patents in August 1998, in
connection with ADM's acquisition of certain assets then used by EPI in
connection with the PEMF device business. Immediately subsequent to the
acquisition, ADM transferred all of the assets acquired from EPI to us. The
assets included all of the rights, title and interest in the PEMF business as
well as the rights related to such three patents.
TRADEMARKS
As of the date of this prospectus, we have four registered
trademarks/servicemarks, "SofPulse", "Ivivi", "The Technology of Life", and our
stylized Ivivi logo. We currently have pending with the U.S. Patent & Trademark
Office, applications for trademark/servicemark registration for our "Roma3",
"Torino", "electroceutical", "electroceuticals", "Changing how you heal", and
"Changing the way you heal."
PROTECTION OF TRADE SECRETS
We attempt to protect our trade secrets, including the processes,
concepts, ideas and documentation associated with our technologies, through the
use of confidentiality agreements and non-competition agreements with our
current employees and with other parties to whom we have divulged such trade
secrets. If our employees or other parties breach our confidentiality agreements
and non-competition agreements or if these agreements are not sufficient to
protect our technology or are found to be unenforceable, our competitors could
acquire and use information that we consider to be our trade secrets and we may
not be able to compete effectively. Most of our competitors have substantially
greater financial, marketing, technical and manufacturing resources than we have
and we may not be profitable if our competitors are also able to take advantage
of our trade secrets.
SALES AND MARKETING
We are currently marketing and generating revenues in the wound care and
plastic surgery markets. In order to facilitate the marketing of our products,
we have developed and intend to further develop relationships with sales and
distribution companies currently operating in these markets. In the wound care
market, we are focusing our marketing efforts on the long-term acute care
hospitals because of the high concentration of wound care patients and fixed
reimbursements from Medicare. In the plastic surgery market, we are currently
focusing our efforts on surgical and minimally invasive procedures requiring
compression garments, by establishing relationships with garment manufacturers
and their principle distributors. We also intend to pursue additional markets
and applications, assuming we obtain FDA approval, such as angiogenesis and
vascularization for the treatment of certain circulatory impairment conditions
and pain relief. As we develop additional products and technologies, we intend
to develop the distribution arrangements for this market in concert with overall
regulatory and marketing approaches.
50
We seek collaborative and strategic agreements to assist us in the
marketing and distribution of our products. We are actively pursuing exclusive
arrangements with strategic partners, having leading positions in our target
markets, in order to establish nationwide, and in some cases worldwide,
marketing and distribution channels for our products. Generally, under these
arrangements, the strategic partners would be responsible for marketing,
distributing and selling our products while we continue to provide the related
technology, products and technical support. Through this approach, we expect to
achieve broader marketing and distribution capabilities in multiple target
markets.
In order to attract the interest of qualified potential strategic
partners, we have initiated, and will continue to initiate, distribution and
sales of our products in target market areas. We expect to generate sales from
such efforts and demonstrate market acceptance of our products in order to
attract strategic partners to assume marketing, distribution and sales
responsibilities for our products. As of the date of this prospectus, we have
engaged six domestic third-party distributors to assist us in marketing our
products in the United States and one distributor in Canada to assist us in
marketing our products in Canada. These distributors the exclusive right to
distribute our products in select markets to LTACH's, acute care facilities,
rehabilitation/wound centers, nursing homes and skilled nursing facilities. We
have also contracted with one distributor to help us penetrate the home health
care market. We intend to continue to generate revenues through the use of these
distributors with the expectation of attracting strategic partners.
On November 9, 2006, we entered into an exclusive worldwide distribution
agreement with a wholly-owned subsidiary of Allergan, Inc., a global healthcare
company that discovers, develops and commercializes pharmaceutical and medical
device products in specialty markets. Pursuant to the Agreement, we granted
Allergan's subsidiary, Inamed Medical Products Corporation, and its affiliates
the exclusive worldwide right to market, sell and distribute certain of our
products, including all improvements, line extensions and future generations
thereof in conjunction with any aesthetic or bariatric medical procedures in the
Marketing Territory. In November 2006, we received $500,000 under the terms of
this Agreement which has been recorded as deferred revenue in our balance sheet
and is being amortized over eight years. The agreement calls for certain
milestone payments of up to $1,000,000 in the aggregate upon the first
commercial sale (as defined in the agreement) of the product in the United
States and Europe. In addition, Inamed will purchase the product from us at a
pre-determined price and must meet certain minimum order requirements. Finally,
we will receive royalty payments based on Inamed's net sales and number of units
sold of the product, subject to certain annual minimum royalty payments to be
determined by the parties.
The agreement has an eight year initial term beginning at the product's
first commercial sale. The initial term may be extended for two additional years
without further payment at Inamed's option. Inamed may also pay us a $2,000,000
extension fee and extend the term of the agreement for up to eight additional
years, for a total term of up to 18 years.
Inamed may only market, sell and distribute the product under the
agreement in the "Marketing Territory," which is generally defined in the
agreement as the United States and such other jurisdictions for which all
requisite regulatory approval has been obtained. If the marketing, sale or
distribution of the product in a jurisdiction would infringe third-party
intellectual property rights and likely result in a lawsuit against us or
Inamed, Inamed could require us to use reasonable commercial efforts to obtain a
license for, or redesign, the product to be sold in that jurisdiction.
In the event we fail to supply Allergan or its subsidiaries certain
minimum amounts of the product and fail to procure alternate suppliers for such
products within certain timeframes, Inamed will have the right to use certain of
our intellectual property and/or other proprietary information to manufacture
the product until such time as we demonstrate to Inamed's reasonable
satisfaction that we are fully able to resume our supply obligations. During
such time as Inamed controls product manufacturing, our royalty rate would be
significantly reduced.
51
In the event Inamed is required to discontinue the marketing, sale or
distribution of the product in the United States and/or any country in the
European Union because of problems with regulatory approvals and/or other
reasons related to the product, we will be required to repay Inamed portions of
the milestone payments up to $1,000,000.
Inamed may terminate the agreement by giving us 90 to 180 days' prior
written notice. We may terminate the agreement by giving 12 months' prior
written notice if Inamed fails to timely pay the minimum royalty amounts for any
applicable year or fails to meet the minimum sales requirements set forth in the
agreement. A non-breaching party may terminate the agreement following a
material breach of the agreement and the breaching party's failure to cure such
breach during the applicable cure period by giving the breaching party proper
prior written notice. If we are in material breach, and fail to cure, Inamed may
have the right to use certain of our intellectual property and/or other
proprietary information to manufacture the product. Our royalty rate would
subsequently be significantly reduced.
Neither party may assign or otherwise transfer its right and obligations
under the Agreement, including upon a change of control of such party (as
defined in the agreement), without the prior written consent of the other party,
which consent shall not be unreasonably withheld, except that Inamed may assign
its rights and obligations without our prior written consent to Inamed's
affiliates and upon a sale of all or substantially all of the assets or equity
of the business entity, division or unit, as applicable, that markets,
distributes or sells the product.
The agreement includes other terms and conditions, including provisions
regarding regulatory responsibilities, audit rights, insurance, indemnification
and confidentiality.
We also believe that aiming messages directly to the public has been
effectively used by the pharmaceutical industry, and we intend to pursue this
approach as one of our marketing strategies. Additionally, we intend to market
our current products and other products we develop through active solicitation
of customers by exhibiting at trade shows, advertising in trade magazines and
contracting with a network of sales/distributor organizations to solicit
prospective customers. As of the date of this prospectus, we have nine full time
employees concentrating 100% of their efforts on sales, sales support and
marketing of our products. We also intend to utilize independent marketing
organizations and manufacturer's representatives to promote our products on a
commission basis.
MANUFACTURER AND SUPPLIERS
MANUFACTURER
We and ADM, our largest shareholder, are parties to a manufacturing
agreement, pursuant to which ADM serves as the exclusive manufacturer of all
current and future medical, non-medical electronic and other devices or products
to be produced by us. Pursuant to the terms of the manufacturing agreement, for
each product that ADM manufactures for us, we pay ADM an amount equal to 120% of
the sum of (i) the actual, invoiced cost for raw materials, parts, components or
other physical items that are used in the manufacture of the product and
actually purchased for us by ADM, if any, plus (ii) a labor charge based on
ADM's standard hourly manufacturing labor rate, which we believe is more
favorable then could be attained from unaffiliated third-parties. We generally
purchase and provide ADM with all of the raw materials, parts and components
necessary to manufacture our products and, as a result, the manufacturing fee
paid to ADM is generally 120% of the labor rate charged by ADM. On April 1,
2007, we instituted a procedure whereby ADM invoices us for finished goods at
ADM's cost plus 20 percent.
52
ADM warrants the products it manufactures for us against defects in
material and workmanship for a period of 90 days after the completion of
manufacture. After such 90-day period, ADM has agreed to provide repair services
for the products to us at its customary hourly repair rate plus the cost of any
parts, components or items necessary to repair the products unless we provide
such parts, components or items to ADM.
Under our manufacturing agreement, all inventions, patentable or
otherwise, trade secrets, discoveries, ideas, writings, technology, know-how,
improvements or other advances or findings relating to our products and
technologies shall be and become the exclusive proprietary and confidential
information of our company or any person to whom we may have assigned rights
therein. ADM has no rights in any such proprietary or confidential information
and is prohibited from using or disclosing any of our proprietary or
confidential information for its own benefit or purposes, or for the benefit or
purpose of any other person other than us without our prior written consent. ADM
has also agreed to cooperate with us in securing for us any patents, copyrights,
trademarks or the like which we may seek to obtain in connection therewith. If
ADM breaches any of the confidentiality agreements contained in our
manufacturing agreement, or if these agreements are not sufficient to protect
our technology or are found to be unenforceable, our competitors could acquire
and use information that we consider to be our trade secrets and we may not be
able to compete effectively. We and ADM have agreed that all future technologies
and products utilizing non-invasive electrotherapeutic technologies will be
developed and commercialized by us and not ADM, unless we elect not to pursue
such technologies and products.
Since ADM is the exclusive manufacturer of all of our current and future
products, if the operations of ADM are interrupted or if our orders or orders of
other ADM customers exceed the manufacturing capabilities of ADM, ADM may not be
able to deliver our products to us on time and we may not be able to deliver our
products to our customers on time. Under the terms of the agreement, if ADM is
unable to perform its obligations under our manufacturing agreement or is
otherwise in breach of any provision of our manufacturing agreement, we have the
right, without penalty, to engage third parties to manufacture some or all of
our products. In addition, if we elect to utilize a third-party manufacturer to
supplement the manufacturing being completed by ADM, we have the right to
require ADM to accept delivery of our products from these third-party
manufacturers, finalize the manufacture of the products to the extent necessary
for us to comply with FDA regulations and ensure that the design, testing,
control, documentation and other quality assurance procedures during all aspects
of the manufacturing process have been met.
As the exclusive manufacturer of our products, ADM is required to comply
with Quality System Regulation, or QSR, requirements, which require
manufacturers, including third-party manufacturers, to follow stringent design,
testing, control, documentation and other quality assurance procedures during
all aspects of the manufacturing process. In addition, ADM's manufacturing
facility is required to be registered as a medical device manufacturing site
with the FDA and is subject to inspection by the FDA. ADM has been registered by
the FDA as a Registered Medical Device Establishment since 1988, allowing it to
manufacture medical devices in accordance with procedures outlined in FDA
regulations, which include quality control and related activities. Such
registration is renewable annually and although we do not believe that the
registration will fail to be renewed by the FDA, there can be no assurance of
such renewal. The failure of ADM to obtain any annual renewal would have a
material adverse effect on us if we were not able to secure another manufacturer
of our product. If ADM fails to comply with these requirements, we will need to
find another company to manufacture our products, which could delay the shipment
of our product to our customers.
We believe that it could take approximately 30-45 days to secure a
third-party manufacturer to supplement ADM's manufacturing capabilities and
approximately 90-120 days to replace ADM as our sole manufacturer. However,
although we believe that there a number of third-party manufacturers, other than
ADM, available to us, we cannot assure that we would be able to secure another
manufacturer on terms favorable to us or at all or how long it will take us to
secure such manufacturing.
53
The initial term of the agreement expires on March 31, 2008, subject to
automatic renewals for additional one-year periods, unless either party provides
three months' prior written notice to the other prior to the end of the relevant
term of its desire to terminate the agreement.
SUPPLIERS
As of April 1, 2007, we purchase only finished products from ADM.
Previously, we purchased and provided ADM with the raw materials, parts,
components and other items that are required to manufacture our products. ADM
relies on a single or limited number of suppliers for such raw materials, parts,
components and other items. Although there are many suppliers for each of these
raw materials, parts, components and other items, ADM is dependent on a limited
number of suppliers for many of the significant raw materials and components.
ADM does not have any long-term or exclusive purchase commitments with any of
our suppliers. ADM's failure to maintain existing relationships with their
suppliers or to establish new relationships in the future could also negatively
affect their ability to obtain raw materials and components used in our products
in a timely manner. If ADM is unable to obtain ample supply of product from our
existing suppliers or alternative sources of supply, we may be unable to satisfy
our customers' orders which could reduce our revenues and adversely affect our
relationship with our customers.
COMPETITION
The manufacture, distribution and sale of medical devices and equipment
designed to relieve swelling and pain or to treat chronic wounds is highly
competitive and many of our competitors possess significant product sales, and
greater experience, financial resources, operating history and marketing
capabilities than us. For example, Diapulse Corporation of America, Inc.
manufactures and markets devices that are deemed by the FDA to be substantially
equivalent to some of our products, Regenisis Biomedical manufactures and
markets a device that is similar to our first generation device; BioElectronics
Corporation develops and markets the ActiPatchTM, a medical dermal patch that
delivers PEMF therapy to soft tissue injuries; and Kinetics Concepts, Inc.
manufactures and markets negative pressure wound therapy devices in the wound
care market. A number of other manufacturers, both domestic and foreign, and
distributors market shortwave diathermy devices that produce deep tissue heat
and that may be used for the treatment of certain of the medical conditions that
our products are used for. Our products may also compete with pain relief drugs
as well as pain relief medical devices, as well as other forms of treatment,
such as hyperbaric oxygen chambers, thermal therapies and hydrotherapy. Other
companies with substantially larger expertise and resources than ours may
develop or market new products and technologies that directly compete with our
current products or other products or technologies developed by us and which may
achieve more rapid acceptance in the medical community. Several other companies
manufacture medical devices based on the principle of electrotherapeutic
technologies for applications in bone healing and spinal fusion, and may adapt
their technologies or products to compete directly with us. Also, universities
and research organizations may actively engage in research and development to
develop technologies or products that will compete with our technologies and
products. Barriers to entry in our industry include (i) a large investment in
research and development; (ii) numerous costly and time-consuming regulatory
hurdles to overcome before any products can be marketed and sold; (iii) high
costs for marketing and for building an effective distribution network; and (iv)
the ability to obtain financing during the entire start up period.
54
We believe that in order to become, and continue to be, competitive, we
will need to develop and maintain competitive products and take and hold
sufficient market share. Our methods of competition include (i) continuing our
efforts to develop and sell products, which, when compared to existing products,
perform more efficiently and are available at prices that are acceptable to the
market; (ii) displaying our products and providing associated literature at
major industry trade shows; (iii) initiating discussions with and educating the
medical community to develop interest in our products; and (iv) pursuing
alliance opportunities for the distribution of our products. We further believe
that our competitive advantages with respect to our products include:
o the clinical efficacy of our technology and products, as documented
in publications regarding the efficacy of the technology underlying
our products and the clinical research and studies performed with
respect to our products, and as reinforced by the FDA clearance of
our products for the treatment of edema and pain in soft tissue and
Medicare's reimbursement for the use of electromagnetic therapy for
the treatment of chronic wounds;
o the benefits of treatments utilizing our products, which include
treatments that are non-invasive and painless, are free from known
side-effects and are not susceptible to overdose or abuse, do not
require special training to implement, may be applied to any part of
the body and do not require prescriptions;
o our continued efforts to protect the technology relating to our
products through patents and trade secrets, including three existing
patents, eight non-provisional U.S. patent applications and one
provisional U.S. patent pending; and
o the relevant experience of the members of our advisory boards, the
Medical Advisory Board, which includes, among others, Dr. Berish
Strauch, an internationally recognized surgeon, and the Scientific
Advisory Board, which is led by Dr. Arthur Pilla, a principal
innovator in PEMF technology.
MANAGEMENT SERVICES
In order to keep our operating expenses manageable, we and ADM are parties
to a management services agreement under which ADM provides us and its other
subsidiaries with management services and allocates portions of its real
property facilities for use by us and the other subsidiaries for the conduct of
our respective businesses. As we intend to add employees to our marketing and
sales staff and our administrative staff during our fiscal year ending March 31,
2008, we expect our reliance on the use of the management services of ADM to be
reduced significantly.
The management services provided by ADM under the management services
agreement include administrative, technical, engineering and regulatory services
with respect to our products. We pay ADM for such services on a monthly basis
pursuant to an allocation determined by ADM and us based on a portion of its
applicable costs plus any invoices it receives from third parties specific to
us.
We also use office, manufacturing and storage space in a building located
in Northvale, New Jersey, currently leased by ADM, pursuant to the terms of the
management services agreement. ADM determines the portion of space allocated to
us and each other subsidiary on a monthly basis, and we and the other
subsidiaries are required to reimburse ADM for our respective portions of the
lease costs, real property taxes and related costs.
GOVERNMENT REGULATION
Our product is a medical device subject to extensive and rigorous
regulation by the FDA, as well as other federal and state regulatory bodies. The
FDA regulations govern the following activities that we perform and will
continue to perform to help ensure that medical products distributed worldwide
are safe and effective for their intended uses, among others:
55
o product design and development;
o product testing;
o product manufacturing;
o product safety and effectiveness;
o product labeling;
o product storage;
o record keeping;
o pre-market clearance or approval;
o advertising and promotion;
o production;
o product sales and distribution; and
o adverse-event reporting.
In response to a 510(k) pre-market notification submitted by EPI to the
FDA in late 1990, on January 17, 1991, EPI received from the FDA clearance to
begin marketing its magnetic resonance therapy device, which we currently refer
to as the SofPulse. The FDA cleared the use of the SofPulse, which utilizes our
PEMF technology, for the adjunctive use in the palliative treatment of
post-operative pain and edema in superficial tissue. Since the date of the FDA
clearance with respect to the marketing of the SofPulse was granted in 1991, we
have made some modifications to the SofPulse, which resulted in the development
of our current products, including the SofPulse M-10, the Roma(3), the Torino I
and the Torino II. We believe based on guidance published by the FDA, that all
of our current products are covered by the FDA clearance provided in 1991.
Specifically, because we do not believe that any of the changes, or the sum of
the incremental changes made, to the SofPulse in our current products could
significantly affect the safety or effectiveness of the SofPulse, we believe
that the marketing of our current products is sufficiently covered by the FDA
clearance provided in 1991 and does not require a submission of another 510(k)
premarket notification. However, in February 2007, in response to inquires from
the FDA, we voluntarily submitted a 510(k) for our current products which is
currently under review at the FDA. We have had discussions with the FDA
regarding our application and, in June 2007, we received a letter from the FDA
requesting additional information from us. If the FDA does not grant the 510(k)
clearance for our current products, the FDA may require us to cease marketing
and /or recall current products already sold or rented until FDA clearance or
approval is obtained. In addition, the FDA could subject us to the other
sanctions described below under "Pervasive and Continuing Regulation."
FDA'S PRE-MARKET CLEARANCE AND APPROVAL REQUIREMENTS
Unless an exemption applies, each medical device we wish to commercially
distribute in the United States will require either prior 510 (k) clearance or
pre-market approval (PMA) from the FDA. The FDA classifies medical devices into
one of three classes. Devices deemed to pose lower risks are placed in either
class I or II, which in many cases requires the manufacturer to submit to the
FDA a pre-market notification requesting permission to commercially distribute
the device. This process is generally known as 510(k) submission and clearance.
Some low risk devices are exempt from this requirement. Devices deemed by the
FDA to pose the greatest risk, such as many life-sustaining, life-supporting or
implantable devices, or devices deemed not substantially equivalent to a
previously cleared 510(k) device, are placed in class III, requiring pre-market
approval.
56
510(K) CLEARANCE PATHWAY
When a 510(k) clearance is required, we must submit a pre-market
notification demonstrating that our proposed device is substantially equivalent
to a previously cleared 510(k) device or a device that was in commercial
distribution before May 28, 1976 for which the FDA has not yet called for the
submission of pre-market approval applications. By regulation, the FDA is
required to review a 510(k) pre-market notification within 90 days of submission
of the application. As a practical matter, clearance often takes significantly
longer. The FDA may require further information, including clinical data, to
make a determination regarding substantial equivalence.
PRE-MARKET APPROVAL PATHWAY
A pre-market approval application must be submitted to the FDA if the
device cannot be cleared through the 510(k) process or granted "DO NOVO"
classification. The process of submitting a satisfactory pre-market approval
application is significantly more expensive, complex and time consuming than the
process of establishing "substantial equivalence" pursuant to a pre-market
notification and requires extensive research and clinical studies. A pre-market
approval application must be supported by extensive data, including, but not
limited to, technical, preclinical, clinical trials, manufacturing and labeling
to demonstrate to the FDA's satisfaction the safety and effectiveness of the
device. Upon completion of these tasks, an applicant is required to submit to
the FDA all relevant clinical, animal testing, manufacturing, laboratory
specifications and other information. If accepted for filing, the application is
further reviewed by the FDA and subsequently may be reviewed by an FDA
scientific advisory panel comprised of physicians, statisticians and other
qualified personnel. A public meeting may be held before the advisory panel in
which the pre-market approval application is reviewed and discussed. Upon
completion of such process, the advisory panel issues a favorable or unfavorable
recommendation to the FDA or recommends approval with conditions. The FDA is not
bound by the opinion of the advisory panel. The FDA may conduct an inspection to
determine whether the applicant conforms with QSR requirements. If the FDA's
evaluation is favorable, the FDA will subsequently publish a letter approving
the pre-market approval application for the device for a particular indication
for use. Interested parties can file comments on the order and seek further FDA
review. The pre-market approval process may take several years and no assurance
can be given concerning the ultimate outcome of pre-market approval applications
submitted by an applicant.
No device that we have developed has required pre-market approval. In
January 1991, however, the FDA advised EPI of its determination to treat the
MRT100, the first product produced, as a class III device. The FDA retains the
right to require the manufacturers of certain Class III medical devices to
submit a pre-market approval application in order to sell such devices or to
promote such devices for specific indications. To date, we have not been asked
by the FDA to seek pre-market approval for our products; however, there can be
no assurance that we will not be required to do so in the future and that, if
required, we will be able to comply with such requirement.
57
PERVASIVE AND CONTINUING REGULATION
After a device is placed on the market, numerous regulatory requirements
apply. These include:
o Quality System Regulations, or QSR, which require finished device
manufacturers, including contract manufacturers, to follow stringent
design, testing, control, documentation and other quality assurance
procedures during all aspects of the manufacturing process;
o labeling regulations and FDA prohibitions against the promotion of
products for uncleared, unapproved or "off-label" uses;
o medical device reporting regulations, which require that
manufacturers report to the FDA if their device may have caused or
contributed to a death or serious injury or malfunctioned in a way
that would likely cause or contribute to a death or serious injury
if the malfunction of that or a similar company device were to
recur; and
o post-market surveillance regulations, which apply when necessary to
protect the public health or to provide additional safety and
effectiveness data for the device.
The FDA has broad post-market and regulatory enforcement powers. We are subject
to unannounced inspections by the FDA to determine our compliance with the QSR
and other regulations, and these inspections include the manufacturing
facilities of ADM, the exclusive manufacturer of our products, or any other
manufacturing subcontractors that we may engage. ADM has been registered with
the FDA as a Medical Device Establishment. Such registration is renewable
annually and although we do not believe that the registration will fail to be
renewed by the FDA, there can be no assurance of such renewal. The failure of
ADM to obtain any annual renewal would have a material adverse effect on us if
we were not able to secure another manufacturer of our product. If ADM fails to
comply with these requirements, we will need to find another company to
manufacture our products which could delay the shipment of our product to our
customers.
Failure to comply with applicable regulatory requirements can result in
enforcement action by the FDA or the Department of Justice, which may include
any of the following sanctions, among others:
o fines, injunctions and civil penalties;
o mandatory recall or seizure of our products;
o operating restrictions and partial suspension or total shutdown of
production;
o refusing our requests for 510(k) clearance or pre-market approval of
new products or new intended uses;
o withdrawing 510(k) clearance or pre-market approvals that are
already granted; and
o criminal prosecution.
The FDA also has the authority to require us to repair, replace or refund
the cost of any medical device that has been manufactured for us or distributed
by us. If any of these events were to occur, they could have a material adverse
effect on our business.
58
We also are subject to a wide range of federal, state and local laws and
regulations, including those related to the environment, health and safety, land
use and quality assurance. We believe that we and ADM are in substantial
compliance with these laws and regulations as currently in effect, and our
compliance with such laws will not have a material adverse effect on our capital
expenditures, earnings and competitive and financial position.
INTERNATIONAL REGULATIONS
International sales of medical devices are subject to foreign governmental
regulations, which vary substantially from country to country. The time required
to obtain clearance or approval by a foreign country may be longer or shorter
than that required for FDA clearance or approval, and the requirements may be
different. There can be no assurance that we will be successful in obtaining or
maintaining necessary approvals to market our products in certain foreign
markets, or obtain such approvals for additional products that may be developed
or acquired by us.
The primary regulatory environment in Europe is that of the European
Union, which consists of 25 countries encompassing most of the major countries
in Europe. Three member states of the European Free Trade Association have
voluntarily adopted laws and regulations that mirror those of the European Union
with respect to medical devices. Other countries, such as Switzerland, have
entered into Mutual Recognition Agreements and allow the marketing of medical
devices that meet European Union requirements.
The European Union has adopted numerous directives and European
Standardization Committees have promulgated voluntary standards regulating the
design, manufacture, clinical trials, labeling and adverse event reporting for
medical devices. Devices that comply with the requirements of a relevant
directive will be entitled to bear a CE conformity marking (which stands for
Conformite Europeenne), indicating that the device conforms with the essential
requirements of the applicable directives and, accordingly, can be commercially
distributed throughout the member states of the European Union, the member
states of the European Free Trade Association and countries which have entered
into a Mutual Recognition Agreement. The method of assessing conformity varies
depending on the type and class of the product, but normally involves a
combination of self-assessment by the manufacturer of the product and a
third-party assessment by a Notified Body, an independent and neutral
institution appointed by a country to conduct the conformity assessment. This
third-party assessment may consist of an audit of the manufacturer's quality
system and specific testing of the manufacturer's device. An assessment by a
Notified Body in one member state of the European Union, the European Free Trade
Association or one country which has entered into a Mutual Recognition Agreement
is required in order for a manufacturer to commercially distribute the product
throughout these countries. ISO 9001 and ISO 13845 certification are voluntary
harmonized standards. Compliance establishes the presumption of conformity with
the essential requirements for a CE Marking. In April 2007, we initiated our
application for CE Marking approval for our portable, battery operated products
and in June 2007, we received approval for CE Marking of such products.
REIMBURSEMENT
Our products are rented principally to nursing homes and extended care
facilities that receive payment coverage for products and services they utilize
from various public and private third-party payors, including the Medicare
program and private insurance plans. As a result, the demand and payment for our
products are dependent, in part, on the reimbursement policies of these payors.
The manner in which reimbursement is sought and obtained for any of our products
varies based upon the type of payor involved and the setting to which the
product is furnished and in which it is utilized by patients.
59
We cannot determine the effect of changes in the healthcare system or
method of reimbursement in the United States for our products or any other
products that may be produced by us in the United States. For example, from 1991
to 1997, products utilizing our technology were marketed primarily for use in
nursing homes for the Medicare reimbursable treatment of chronic wounds through
a rental program. Due to changes in reimbursement made by CMS, in 1997, which
prohibited Medicare coverage of the use of the technology used in our products
in the treatment of non-healing wounds, the nursing home revenue diminished
significantly by 2001 and we pursued alternative markets and applications for
use of our technology. In December 2003, CMS reversed its policy, clearing the
way for issuance of an NCD authorizing Medicare coverage of electromagnetic
therapy for wound treatment under the conditions described below. In response to
this significant regulatory change, we re-entered the wound care market.
CMS has not yet cleared separate reimbursement for the use of the
technology used in our products in the home health setting. Accordingly, in
December 2005, we retained a consulting company specializing in CMS
reimbursement and coverage matters to assist us in arranging and preparing for a
meeting with CMS to request such clearance. In May 2006, with the assistance of
this consulting company, we held a meeting with CMS and made a presentation in
support of separate reimbursement for the use of the technology used in our
products in the home health setting. We continue to retain a consulting company
to assist us with our efforts relating to CMS reimbursement. Even if we were to
obtain clearance from CMS for the separate reimbursement of the technology used
in our products in the home health setting, the regulatory environment could
again be changed to bar CMS coverage for treatment of chronic wounds utilizing
the technology used in our products, whether for home health use or otherwise,
which could limit the amount of coverage patients or providers are entitled to
receive for electromagnetic wound therapy.
We believe that government and private efforts to contain or reduce health
care costs are likely to continue. These trends may lead third-party payors to
deny or limit reimbursement for our products, which could negatively impact the
pricing and profitability of, or demand for, our products.
MEDICARE
Medicare is a federally funded program that provides health coverage
primarily to the elderly and disabled. Medicare is composed of four parts: Part
A, Part B, Part C and Part D. Medicare Part A (hospital insurance) covers, among
other things, inpatient hospital care, home health care and skilled nursing
facility services. Medicare Part B (supplementary medical insurance) covers
various services, including those services provided on an outpatient basis.
Medicare Part B also covers medically necessary durable medical equipment and
medical supplies. Medicare Part C, also known as "Medicare Advantage," offers
beneficiaries a choice of various types of health care plans, including several
managed care options. Medicare Part D is the new Voluntary Prescription Drug
Benefit Program, which became effective in 2006.
The Medicare program has established guidelines for the coverage and
reimbursement of certain equipment, supplies and support services. In general,
in order to be reimbursed by Medicare, a healthcare item or service furnished to
a Medicare beneficiary must be reasonable and necessary for the diagnosis or
treatment of an illness or injury or to improve the functioning of a malformed
body part and not otherwise excluded by statute.
CMS may adopt an NCD concerning items and services that will or will not
be covered. NCD's establish substantive legal standards for Medicare coverage of
specific items or services on a national basis to be followed by all Medicare
contracted intermediaries and carriers.
60
In 2004, CMS issued an NCD for Electrical Stimulation and Electromagnetic
Therapy for the Treatment of Wounds. Effective July 1, 2004, CMS covers
electromagnetic therapy for chronic stage III or stage IV pressure ulcers
(ulcers that have not healed within 30 days of occurrence), arterial ulcers,
diabetic ulcers, and venous stasis ulcers. Electromagnetic therapy services will
be covered only when performed by a physician, physical therapist, or incident
to a physician service. Unsupervised therapy for wound treatment will not be
covered, nor will the service be covered as an initial treatment modality.
Coverage begins only after appropriate standard would therapy has been tried for
at least 30 days and there are no measurable signs of improved healing. Medicare
does not cover the device used for electromagnetic treatment of wounds.
The NCD provides that electromagnetic therapy for wound treatment will be
covered only after appropriate standard wound treatment has been tried for at
least 30 days with no measurable signs of healing. Additionally, wounds
undergoing treatment by electromagnetic therapy must be evaluated at least
monthly by the treating physician. Medicare will not continue to cover the
treatment if the wound shows no measurable signs of improvement within any 30
day period of treatment or if certain other conditions exist following
treatment. Local Medicare contractors have some discretion to cover other uses
of electromagnetic therapy not specified in the NCD. Non-governmental payors
often adopt coverage conditions based on the NCD's issued for the applicable
therapy or service.
The methodology for determining the amount of Medicare reimbursement of
our products varies based upon, among other things, the setting in which a
Medicare beneficiary receives health care items and services. A discussion of
Medicare coverage for electromagnetic therapy for the treatment of wounds in
various settings is discussed below.
HOSPITAL SETTING
Since the establishment of the prospective payment system in 1983, acute
care hospitals are generally reimbursed for certain patients by Medicare for
inpatient operating costs based upon prospectively determined rates. Under the
prospective payment system, or PPS, acute care hospitals receive a predetermined
payment rate based upon the Diagnosis-Related Group, or DRG, which is assigned
to each Medicare beneficiary's stay, regardless of the actual cost of the
services provided. Certain additional or "outlier" payments may be made to a
hospital for cases involving unusually high costs or lengths of stay.
Accordingly, acute care hospitals generally do not receive direct Medicare
reimbursement under PPS for the distinct costs incurred in purchasing or renting
our products. Rather, reimbursement for these costs is included within the
DRG-based payments made to hospitals for the treatment of Medicare-eligible
inpatients who utilize the products. Long-term care and rehabilitation hospitals
also are now paid under a PPS rate that does not directly account for all actual
services rendered. Since PPS payments are based on predetermined rates, and may
be less than a hospital's actual costs in furnishing care, hospitals have
incentives to lower their inpatient operating costs by utilizing equipment and
supplies, such as our products, that are effective in treating patients more
quickly than traditional methods. The amount that the hospital receives under
PPS could limit the amount that we could charge a hospital for the use of our
products.
Certain specialty hospitals also use our products. Such specialty
hospitals are exempt from the PPS and, subject to certain cost ceilings, are
reimbursed by Medicare on a reasonable cost basis for inpatient operating and
capital costs incurred in treating Medicare beneficiaries. Such hospitals may
have additional Medicare reimbursement for reasonable costs incurred in the use
of our products.
SKILLED NURSING FACILITY SETTING
On July 1, 1998, reimbursement for SNFs under Medicare Part A changed from
a cost-based system to a prospective payment system which is based on resource
utilization groups, or RUGs. Under the RUGs system, a Medicare patient in a SNF
is assigned to a RUGs category upon admission to the facility. The RUGs category
to which the patient is assigned depends upon the medical services and
functional support the patient is expected to require. The SNF receives a
prospectively determined daily payment based upon the RUGs category assigned to
each Medicare patient. These payments are intended generally to cover all
inpatient services for Medicare patients, including routine nursing care,
61
capital-related costs associated with the inpatient stay and ancillary services.
Effective July 2002, the daily payments were based on the national average cost.
Effective January 1, 2006, refinements to the RUG's decreased reimbursement for
therapy services. Because SNF's are paid on a fixed daily cost reimbursement,
SNFs have become less inclined to use products which had previously been
reimbursed as variable ancillary costs.
HOME HEALTH SETTING
The Balanced Budget Act of 1997 requires consolidated Medicare billing on
a prospective payment basis of all home health services provided to a
beneficiary under a home health plan of care authorized by a physician. Only the
home health agency overseeing the beneficiary's plan of care may bill Medicare
for all such covered items and services falling under that plan of care.
In 2004, CMS added electromagnetic therapy as a type of service payable in
the home health setting, but subject to Medicare's consolidated home health
billing provisions. Thus, Medicare will not pay separately for electromagnetic
therapy services. In December 2005, we retained a consulting company
specializing in CMS reimbursement and coverage matters to assist us in arranging
and preparing for a meeting with CMS to request that CMS cover electromagnetic
therapy for wound treatment separately in the home health setting. In May 2006,
with the assistance of this consulting company, we held a meeting with CMS and
made a presentation in support of reimbursement for the home health use of the
technology used in our products. As of the date of this prospectus, we have not
received any feedback from CMS as to whether CMS intends to reimburse use of the
technology used in our products separately in the home health setting.
OTHER SETTINGS
Medicare will also reimburse electromagnetic therapy for wound treatment
under Medicare Parts A and B as appropriate by physicians and by therapists and
at federally qualified health centers, rural health clinics, and critical access
hospitals.
PRODUCT LIABILITY AND INSURANCE
We may be exposed to potential product liability claims by those who use
our products. Therefore, we maintain a general liability insurance policy, which
includes aggregate product liability coverage of $1,000,000 for products.
We believe that our present insurance coverage is adequate for the types
of products currently marketed. There can be no assurance, however, that such
insurance will be sufficient to cover potential claims or that the present level
of coverage, or increased coverage, will be available in the future at a
reasonable cost.
EMPLOYEES
At June 30, 2007, we had 19 full-time salaried employees, including 10 in
executive managerial and administrative positions and nine in sales and
marketing positions. ADM currently provides administrative, technical,
engineering and regulatory services with respect to our products pursuant to a
management services agreement.
We intend to add employees to our technical staff, sales and marketing
staff and administrative staff during the year ending March 31, 2008. We expect
to add additional employees for sales, laboratory and research/development
positions. We intend to utilize independent sales organizations and
manufacturer's representatives to promote our products on a commission basis and
thereby avoid the expense of creating an in-house sales capability.
62
None of our employees are represented by unions or collective bargaining
agreements. We believe that our relationships with our employees are good.
PROPERTIES
We are headquartered at 224-S Pegasus Avenue, Northvale, New Jersey. We
also have research facilities located at 3120 De La Cruz Boulevard, Santa Clara,
California. Our facilities located in Northvale, New Jersey consist of
approximately 6,000 square feet of space, approximately 1,500 square feet of
which is office space, 1,000 square feet of which is manufacturing space used by
ADM and 3,500 square feet of which is storage space. These facilities are housed
in part of 16,000 square feet of combined warehouse and office space currently
leased by ADM from 224 Pegasus Avenue Associates of Englewood, NJ, pursuant to a
lease that expires in June 2008. We and two other subsidiaries of ADM utilize
portions of the leased space. Pursuant to a management services agreement to
which we, ADM and ADM's other subsidiaries are parties, ADM determines, on a
monthly basis, the portion of space utilized by us during such month, which may
vary from month to month based upon the amount of inventory being stored by us
and areas used by us for research and development, and we reimburse ADM for our
portion of the lease costs, real property taxes and related costs based upon the
portion of space utilized by us. We have incurred $43,795 and $43,883 for the
use of such space during the fiscal years ended March 31, 2007 and 2006,
respectively. On July 23, 2004, we entered into a lease for our research
facilities located in Santa Clara, California. The lease provides for a month to
month rent of $400.
We are planning to move our headquarters to Montvale, New Jersey on or
about October 1, 2007. In June 2007, we entered into a lease pursuant to which,
subject to the satisfaction of certain conditions, including the receipt of
certain permits from local authorities, we will rent approximately 7,494 square
feet of office space located in Montvale, New Jersey. If such conditions are
satisfied, the term of the lease will begin on or about October 1, 2007 and
expire on our about November 1, 2014, subject to our option to renew the lease
for an additional five year period on terms and conditions set forth therein.
Pursuant to the lease, we will be required to pay rent in the amount of
$14,051.25 per month during the first two years of the term, with the exception
of month 13 at no cost, and $15,612.50 per month thereafter. This lease will
require us to add additional limits on our currently outstanding liability
insurance. Although we currently are unable to estimate the cost of moving into
this new office space, we do not anticipate such costs being material to our
results of operations. Following our move, we intend to retain certain of our
office and laboratory space.
We believe that our existing facilities are suitable as office, storage
and laboratory space, and are adequate to meet our current needs. We also
believe that our insurance coverage adequately covers our current interest in
our leased space. We do not own any real property for use in our operations or
otherwise.
LEGAL PROCEEDINGS
On August 17, 2005, we filed a complaint against Conva-Aids, Inc. t/a New
York Home Health Care Equipment, or NYHHC, and Harry Ruddy in the Superior Court
of New Jersey, Law Division, Docket No. BER-L-5792-05, alleging breach of
contract with respect to a distributor agreement that we and NYHHC entered into
on or about August 1, 2004, pursuant to which: (i) we appointed NYHHC as
exclusive distributor of our products in a defined market place for so long as
NYHHC secured a minimum number of placements of our products and (ii) NYHHC
agreed to pay us $2,500 per month for each product shipped to NYHHC. By letter,
dated August 9, 2005, we terminated the agreement due to NYHHC's failure to make
the payments required under the agreement and failure to achieve the minimum
63
number of placements required under the agreement. We are seeking various forms
of relief, including: (i) money damages, including amounts due under unpaid
invoices in an aggregate amount in excess of of $236,560, (ii) an accounting and
(iii) the return of our products. The defendants filed a motion to dismiss
alleging lack of jurisdiction and failure to state a claim with regard to Harry
Ruddy. We opposed the defendant's motion to dismiss. On November 18, 2005, the
Court denied the defendant's motion to dismiss, without prejudice, based upon
lack of jurisdiction. The complaint was dismissed against Harry Ruddy,
individually. The Court permitted a period of discovery to determine the
jurisdiction issue, which discovery is substantially complete. The defendants
filed another motion to dismiss based upon a claim of lack of jurisdiction,
which was heard and denied by the Court on June 9, 2006. On or about July 10,
2006, the defendants filed an answer and NYHHC filed counterclaims against us
for breach of contract, breach of the implied covenant of good faith and fair
dealing, restitution, unjust enrichment and fraudulent inducement. An answer to
the counterclaim was filed on August 9, 2006. Discovery is now continuing on the
merits of the claims in the complaint and counterclaim.
On October 10, 2006, we received a demand for arbitration by Stonefield
Josephson, Inc. with respect to a claim for fees for accounting services in the
amount of approximately $106,000, plus interest and attorney's fees. Stonefield
Josephson had previously invoiced Ivivi for fees for accounting services in an
amount which Ivivi has refuted. We responded to Stonefield Josephson's demand
for arbitration, which we believe was procedurally defective and premature due
to Stonefield Josephson's failure to participate in required mediation, and we
continue to defend against the claim vigorously, although provision has been
made for the amount of the claim in the financial statements. Moreover, we are
pursuing claims against Stonefield Josephson. On October 26, 2006, we sent a
letter requesting the required mediation before arbitration. On December 4,
2006, we received notification from the arbitration forum that the arbitration
was placed on hold until the mediation phase is completed.
Other than the foregoing, we are not a party to, and none of our property
is the subject of, any pending legal proceedings other than routine litigation
that is incidental to our business.
64
MANAGEMENT
DIRECTORS
Set forth below are the names, ages and titles of all of our directors as
of June 30, 2007, and the years in which such directors became directors. All
directors hold office until the next annual meeting of shareholders or until
their respective successors are elected and qualified.
NAME AGE TITLE DIRECTOR SINCE
Steven M. Gluckstern 56 Chairman of the Board and Director 2006
Andre' A. DiMino 51 Vice Chairman of the Board,
Co-Chief Executive Officer and Director 2004
David Saloff 54 President, Co-Chief Executive Officer
and Director 2004
Kenneth S. Abramowitz (1)(2)(4) 56 Director 2006
Louis J. Ignarro, Ph.D. (3)(4) 66 Director 2006
Pamela J. Newman, Ph.D. (1)(2)(3)(4) 59 Director 2006
Jeffrey A. Tischler (1)(2)(3)(4) 51 Director 2006
|
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
(3) Member of the Nominating Committee
(4) This director is an independent director as defined under the American Stock
Exchange listing standards.
The biographies of each of our directors are set forth below.
STEVEN M. GLUCKSTERN began to serve as our Chairman of the Board and a
director in October 2006. Mr. Gluckstern is an active private investor within
numerous areas including alternative healthcare and non-traditional healing
modalities. From March 2002 until February 2005, Mr. Gluckstern served as CEO of
Azimuth Trust Company, LLC, a specialized alternative asset management firm,
which he co-founded, offering asset allocation, portfolio construction, manager
selection and comprehensive risk management. From 1988 to 1998 and then from
2001 to 2002, Mr. Gluckstern held a range of entrepreneurial, executive and
financial positions within Zurich Financial Services including: Member of the
Executive Committee of its Group Management Board; CEO of Zurich Global Assets;
CEO of the then NYSE-traded Zurich Re (now Converium Holdings); and Chairman of
both Zurich Capital Markets (hedge funds and specialty finance) and Zurich
Scudder Investments (mutual funds). In 1998, Mr. Gluckstern co-founded Capital Z
Partners, an alternative asset management firm that managed over $4 billion in
two global funds. In 1988, Mr. Gluckstern and a partner co-founded Centre
Reinsurance, the first specialty financial reinsurer which was subsequently
acquired by the Zurich Group in 1993. Mr. Gluckstern served as general manager
of a unit of the Berkshire Hathaway Insurance Group from December 1985 to
December 1986. Prior to this, Mr. Gluckstern served as CFO of Healthco Inc., the
then largest distributor of dental products in the world and as an investment
banker at Lehman Brothers Kuhn Loeb. An Arjay Miller Scholar and 1982 M.B.A.
graduate of the Stanford Graduate School of Business, Mr. Gluckstern also holds
degrees from the University of Massachusetts at Amherst and Amherst College,
where he currently serves as a member of its Board of Trustees.
ANDRE' A. DIMINO has served as our Vice Chairman of the Board and Co-Chief
Executive Officer since October 2006 and as a director since January 2004. From
January 2004 until October 2006, Mr. DiMino served as our Chairman of the Board
and our Chief Financial Officer. Mr. DiMino served as our President from 1989
until December 2003. Mr. DiMino also serves as the President and Chief Financial
Officer of ADM Unlimited, Inc., a publicly traded technology-based developer and
manufacturer of a diversified line of products and our largest shareholder,
positions he has held since December 2001 after the passing of his father, Dr.
Alfonso DiMino - the founder of ADM. Mr. DiMino served as the Chief Operating
65
Officer and Chief Financial Officer of ADM from July 1991 to December 2001, and
served as the Technical Director of ADM from January 1982 to June 1991. In
addition to his finance and operating responsibilities, Mr. DiMino has been
involved in research and product development for us and ADM. He holds several
patents which have been assigned to us or ADM and has been responsible for the
commercialization of medical device products and for regulatory aspects related
to our business and the business of ADM. Mr. DiMino holds a Bachelor of Science
degree in engineering and an MBA in Finance both from Fairleigh Dickinson
University.
DAVID SALOFF has served as our Co-Chief Executive Officer since October
2006 and as our President and a director since July 2004. Mr. Saloff served as
our Chief Executive Officer from July 2004 until he resigned from such position
and began to serve as Co-Chief Executive Officer. Mr. Saloff has also served as
a director of ADM since December 2001. From September 2003 to December 2003, Mr.
Saloff was the President of Palisades Partners, a management consulting company.
From November 1999 to September 2003, Mr. Saloff was the President of LifeWaves
International, a health and wellness start-up company. In 1992, Mr. Saloff
founded Electropharmacology, Inc., and was responsible for the design,
development and subsequent FDA clearance of the original device (the MRT) for
the adjunctive use in the palliative treatment of post-operative pain and edema
in superficial tissue. Prior to starting EPI, Mr. Saloff served as a consultant
for DH Blair, Inc. in connection with the start up of Xsirius, Inc., a publicly
traded research and development company involved in researching and developing
advanced detection systems. In 1991, Mr. Saloff became the Chief Operating
Officer of Xsirius, and Executive Vice President and Director of Advanced
Photonix, Inc. (API), which was involved in the design and development of
advanced solid state light detection systems as well as the production and
marketing of conventional solid state detection components and a subsidiary of
Xsirius which commenced trading on the Nasdaq Capital Market (formerly known as
the Nasdaq SmallCap Market) in 1992. In 1982, Mr. Saloff joined Akros
Manufacturing as President and co-owner, a medical device company, which was
sold to Lumex (Cybex) Corp. in 1986. Mr. Saloff earned his Bachelor of Science
degree in business from Adelphi University.
KENNETH S. ABRAMOWITZ began to serve as a director of our company in
October 2006. Mr. Abramowitz is a Managing General Partner and a co-founder of
NGN Capital, a $250 million worldwide healthcare venture capital fund. In 2003,
he joined NGN from The Carlyle Group in New York where he was Managing Director
from 2001 to 2003, focusing on U.S. buyout opportunities in the healthcare
industry. In July 2003, he transitioned to Senior Advisor at The Carlyle Group
in order to devote the time necessary to create a dedicated healthcare fund on
behalf of The Carlyle Group. Prior to joining The Carlyle Group, Mr. Abramowitz
worked as an Analyst at Sanford C. Bernstein & Co., where he covered the
medical-supply, hospital-management and HMO industries for 23 years, after which
he was an EGS Securities Healthcare Fund Manager. Mr. Abramowitz has published
several notable studies on healthcare service companies, major medical mergers
and cardiovascular device innovation. Mr. Abramowitz currently sits on the Board
of Directors EKOS Corp., OptiScan Biomedical Corp., Power Medical Inventions,
Inc. and Small Bone Innovations LLC, each a privately held medical device
company, and Option Care, Inc., a provider of home infusion pharmacy services
and specialty pharmacy services that files reports pursuant to the Securities
Exchange Act of 1934. Mr. Abramowitz received a B.A. from Columbia University in
1972 and an M.B.A. from Harvard Business School in 1976.
LOUIS J. IGNARRO, PH.D., began to serve as a director of our company in
October 2006. Dr. Ignarro has been a Professor of Pharmacology at the UCLA
School of Medicine since 1985. His current endowed position is the Jerome J.
Belzer, MD, Distinguished Professor of Pharmacology. Dr. Ignarro's first
research position after training was with the CIBA-Geigy Pharmaceutical Company
and in 1973 took on his first academic position at Tulane Medical Center in the
Department of Pharmacology. Dr. Ignarro has received many awards, including: The
Basic Research Prize of the American Heart Association, Election into the
National Academy of Sciences, Election into the Academy of Arts and Sciences,
and the 1998 Nobel Prize in Physiology and Medicine. Dr. Ignarro received his
Bachelor of Science degree in Pharmacy/Chemistry from Columbia University in
1962, and a Doctorate degree in Pharmacology/Physiology from the University of
Minnesota in 1966. Dr. Ignarro did a postdoctoral fellowship at the N.I.H. in
the Laboratory of Chemical Pharmacology from 1966 to 1968.
66
PAMELA J. NEWMAN, PH.D. began to serve as a director of our company in
October 2006. Since 1979, Dr. Newman has served as an international insurance
broker, specializing in Fortune 500 clients worldwide, for AON Corporation, a
world leader in integrated risk management, insurance and reinsurance brokerage.
Before joining AON, Dr. Newman worked for Marsh & McLennan for 12 years and
before that she worked for Peat, Marwick, Mitchell & Co. Dr. Newman also serves
on the Board of Directors of each of RKO Pictures, an entertainment provider,
and Interactive Metronome, Inc., on the Medical Center Advisory Board of the New
York Hospital-Cornell Medical Center and on the Board of the McGowan Transplant
Center, the Brain Trauma Foundation and American ORT. Dr. Newman also serves on
the Board of Trustees of The American University of Paris, the Corporate Board
of Carnegie Hall and the Associate Committee of The Julliard School and is a
Fellow of the Foreign Policy Association. Dr. Newman earned her Bachelor of Arts
degree in English her Masters degree in English and her Doctorate degree in
Communications from the University of Michigan.
JEFFREY A. TISCHLER began to serve as a director of our company in October
2006. Since May 2005, Mr. Tischler has served as the Chief Financial Officer of
Acies Corporation, a provider of electronic payment processing solutions and a
corporation which files reports pursuant to the Securities Exchange Act of 1934,
and since May 2006 has also served as Executive Vice President, Treasurer and a
director of Acies Corporation. From 2000 to 2005, Mr. Tischler served as Vice
President of Asta Funding, Inc., a consumer receivables asset management
company, where his responsibilities included involvement in operational and
financial functions ranging from strategic planning to strengthening the
company's infrastructure. From 1993 to 2000, Mr. Tischler served as Executive
Vice President and Chief Financial Officer of LandAmerica Financial Group, Inc.,
including serving as Executive Vice President and Chief Financial and
Administrative Officer of LandAmerica's acquired predecessors, Commonwealth Land
Title Insurance Company and Transnation Title Insurance Company. From 1980 to
1993, Mr. Tischler was with Reliance Group Holdings, Inc., where he held the
position of Vice President of Financial Planning and Analysis. A certified
public accountant, Mr. Tischler was a senior accountant with KPMG Peat Marwick
from 1978 to 1980. Mr. Tischler received an M.B.A. degree in Finance and
Accounting from the University of Rochester's Simon School of Business in 1978,
and a B.A. in Economics from the University of Rochester in 1977.
There are no family relationships between any of our executive officers or
directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The standing committees of our Board of Directors include an Audit
Committee, a Compensation Committee and a Nominating and Corporate Governance
Committee.
AUDIT COMMITTEE. The Audit Committee, which is a separately designated
standing audit committee established in accordance with Section 3(a)(58)(A) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), oversees
and monitors our financial reporting process and internal control system,
reviews and evaluates the audit performed by our outside auditors and reports to
our Board of Directors any substantive issues found during the audit. The Audit
Committee is directly responsible for the appointment, compensation and
oversight of the work of our independent auditors. The Audit Committee also
reviews and approves all transactions with affiliated parties. All members of
the Audit Committee are independent directors as defined under the American
Stock Exchange listing standards. Each of Kenneth Abramowitz, Pamela Newman and
Jeffrey Tischler began to serve as members of the Audit Committee and Jeffrey
Tischler began to serve as the Chairman of the Audit Committee and our "audit
committee financial expert," as such term is defined by the Securities and
Exchange Commission, on October 18, 2006.
67
COMPENSATION COMMITTEE. The Compensation Committee provides advice and
recommendations to the Board of Directors in the areas of employee salaries and
benefit programs. The Compensation Committee also reviews the compensation of
our President and our Co-Chief Executive Officers and makes recommendations in
that regard to the Board of Directors as a whole. All members of the
Compensation Committee are independent directors as defined under the American
Stock Exchange listing standards. Each of Kenneth S. Abramowitz, Pamela J.
Newman, and Jeffrey A. Tischler began to serve as a member of the Compensation
Committee on October 18, 2006.
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE. The Nominating and
Corporate Governance Committee meets to recommend the nomination of directors to
the full Board of Directors to fill the terms for the upcoming year or to fill
vacancies during a term. All members of the Nominating and Corporate Governance
Committee are independent directors as defined under the American Stock Exchange
listing standards. Each of Pamela Newman, Louis Ignarro and Jeffrey Tischler
began to serve as a member of the Nominating and Corporate Governance Committee
on October 18, 2006.
The Nominating and Corporate Governance Committee will consider
recommendations for nominations from shareholders if submitted in a timely
manner in accordance with the procedures established in our bylaws and will
apply the same criteria to all persons being considered. Nominations must be
delivered to our Secretary at our principal executive offices not later than the
close of business on the ninetieth (90th) day nor earlier than the close of
business on the one hundred twentieth (120th) day prior to the first anniversary
of the preceding year's annual meeting; provided, however, that in the event
that the date of the annual meeting is advanced more than thirty (30) days prior
to or delayed by more than thirty (30) days after the anniversary of the
preceding year's annual meeting, notice by the shareholder to be timely must be
so delivered not earlier than the close of business on the one hundred twentieth
(120th) day prior to such annual meeting and not later than the close of
business on the later of the ninetieth (90th) day prior to such annual meeting
or the tenth (10th) day following the day on which public announcement of the
date of such meeting is first made. In no event shall the public announcement of
an adjournment of an annual meeting commence a new time period for the giving of
a shareholder's notice as described above. The nomination notice must set forth
as to each person whom the proponent proposes to nominate for election as a
director: (a) all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors in an election
contest, or is otherwise required, in each case pursuant to Regulation 14A under
the Exchange Act (including such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if elected) and (b) as
to the shareholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made, (1) the name and address of such
shareholder, as they appear on our books, and the name and address of such
beneficial owner, (2) the class and number of shares of common stock which are
owned beneficially and of record by such shareholder and such beneficial owner
and (3) whether either such shareholder or beneficial owner intends to deliver a
proxy statement and form of proxy to holders of a sufficient number of holders
of our voting shares to elect such nominee or nominees.
BOARD OBSERVER
We have agreed, for a period of at least three years following the
consummation of our initial public offering, to engage a designee of Maxim Group
LLC, one of the lead managing underwriters of our initial public offering, as an
observer to our Board of Directors, where the observer shall attend meetings of
our Board of Directors and receive all notices and other correspondence and
communications sent by us to members of our Board of Directors. In addition, the
observer is entitled to reimbursement for all costs incurred by it in attending
any meetings of our Board of Directors.
68
CODE OF ETHICS
We have a code of ethics that applies to our Co-Chief Executive Officers,
Chief Financial Officer and Controller and other persons who perform similar
functions. A copy of our code of ethics can be found on our website at
www.ivivitechnologies.com. Our code of ethics is intended to be a codification
of the business and ethical principles that guide it, and to deter wrongdoing,
to promote honest and ethical conduct, to avoid conflicts of interest, and to
foster full, fair, accurate, timely and understandable disclosures, compliance
with applicable governmental laws, rules and regulations, the prompt internal
reporting of violations and accountability for adherence to this code.
EXECUTIVE OFFICERS
Set forth below are the names, ages and titles of all of our executive
officers as of June 30, 2007, and the years in which such executive officers
became our executive officers. All executive officers serve at the discretion of
the Board of Directors with no fixed term.
EXECUTIVE
NAME AGE TITLE OFFICER SINCE
Andre' A. DiMino 51 Vice Chairman of the Board and
Co-Chief Executive Officer 2004
David Saloff 54 Co-Chief Executive Officer and
President 2004
Alan V. Gallantar 49 Chief Financial Officer 2006
Edward J. Hammel 57 Executive Vice President 2004
|
ANDRE' A. DIMINO, our Vice Chairman of the Board, has served as our
Co-Chief Executive Officer since October 2006. From July 2004 until October
2006, Mr. DiMino served as our Chief Financial Officer. See Mr. DiMino's
biographical information above.
DAVID SALOFF, one of our directors, has served as our Co-Chief Executive
Officer since October 2006 and as our President since July 2004. From July 2004
until October 2006, Mr. Saloff served as our Chief Executive Officer. See Mr.
Saloff's biographical information above.
ALAN V. GALLANTAR, CPA, began to serve as our Chief Financial Officer in
October 2006. From April 2004 until October 2006, Mr. Gallantar served as an
executive consultant to a variety of clients, providing management consulting
and chief financial officer services. From October 1999 until April 2004, Mr.
Gallantar served as Chief Financial Officer of Advanced Viral Research Corp., a
publicly traded corporation. Mr. Gallantar served as Treasurer and Controller of
AMBI, Inc. (currently Nutrition 21, Inc.), a nutraceutical company, from 1998 to
1999, and as Senior Vice President and Chief Financial Officer of Bradley
Pharmaceuticals, Inc., a pharmaceutical manufacturer, from 1992 to 1997. Mr.
Gallantar also served in senior financial positions at PaineWebber Incorporated
(currently UBS Paine Webber, Inc.), Chase Bank (currently JPMorgan Chase),
Phillip Morris, Inc. (currently Altria Group) and Deloitte & Touch LLP. Mr.
Gallantar is a Certified Public Accountant and received a B.A. in accounting
from Queens College in 1979.
EDWARD J. HAMMEL has served as our Executive Vice President since July
2004. From September 2003 to June 2004, Mr. Hammel was a partner in Palisades
Partners, a management consulting company. From March 2001 until September 2003,
Mr. Hammel served as the Chief Financial Officer of LifeWaves International, a
health and wellness start-up company. From 1999 to 2001, Mr. Hammel was the
managing director and founder of Hillcrest Consulting Services, Inc., a
healthcare consulting company. From 1997 to 1999, Mr. Hammel served as Senior
Vice President and Chief Financial Officer of WellMed Medical Management, a
physician practice management company. From 1993 to 1997, he served as Senior
Vice President and Chief Financial Officer of Riscorp, Inc., a worker's
compensation insurance company. From 1978 to 1993, he was employed by Reliance
Group Holdings, a diversified financial holding company eventually serving as
Vice President. Mr. Hammel received a B.A. from the University of Denver in 1972
and a Masters Degree in Management from Northwestern University in 1977.
69
KEY EMPLOYEES AND CONSULTANTS
Set forth below is information concerning our key employees and consultants.
NAME AGE POSITION
Arthur A. Pilla, Ph. D. 71 Science Director
Berish Strauch, M.D. 72 Consultant
Sean D. Hagberg, Ph. D. 48 Chief Science Officer
|
ARTHUR A. PILLA, PH. D. has served as our Science Director and Chairman of
our Scientific Advisory Board since April 2004. Dr. Pilla is a Professor in the
Department of Biomedical Engineering, Columbia University, NY and Professor
Emeritus of Orthopedic Research in the Department of Orthopedics at Mount Sinai
School of Medicine, NY. Dr. Pilla offered the first graduate course in
Bioelectromagnetics at Columbia University in 1973, currently still being
offered in the Department of Biomedical Engineering. Dr Pilla has published
nearly 200 peer-reviewed studies in Bioelectromagnetics. His early research led
to the invention of specially configured electromagnetic fields for clinical use
on recalcitrant bone fractures. Dr. Pilla is the inventor of the first
bone-growth electromagnetic stimulator device cleared by the FDA and the
cofounder of Electrobiology, Inc. (EBI), now part of Biomet, an orthopedic
device manufacturer. His patents with EBI were seminal, leading to devices
commercially available for clinical use. Dr. Pilla continues to make progress in
the understanding of the basic biophysical mechanisms involved in the bioeffects
of electromagnetic signals. Dr. Pilla received his PhD, cum laude, from the
University of Paris, France in 1965 and commenced studies of the bioeffects of
weak magnetic and electric fields in 1969.
DR. BERISH STRAUCH has served as Chairman of our Medical Advisory Board
since August 2004 and directs the "Center for Excellence in Bioelectromagnetic
Studies" we established at Montefiore Medical Center. Dr. Strauch is an
internationally known plastic surgeon, board certified in general surgery,
plastic and reconstructive surgery and hand surgery. Dr. Strauch has conducted
extensive clinical research using our technology and is the author of the 2000
study demonstrating the angiogenic properties of the technology. He has served
as the Chairman of the Department of Plastic Surgery at Montefiore Medical
Center and is a founder and first president of the American Society of
Reconstructive Microsurgery, and has been an officer and committee member in
numerous regional, national, and international professional organizations. Dr.
Strauch is the senior editor of the three-volume Encyclopedia of Flaps, the
senior author of the Atlas of Microsurgical Flaps, and co-author of the Atlas of
Hand Anatomy and is also the founder and ongoing Editor-in-Chief of the Journal
of Reconstructive Microsurgery. He received his medical degree form Columbia
University in 1959, completed a general surgery residency at Montefiore Medical
Center from 1960 to 1964, had a surgery fellowship at Roosevelt Hospital in 1961
and had a plastic and reconstruction surgery fellowship at Stanford University
Hospital from 1966 to 1968.
SEAN D. HAGBERG, PH. D. has served as our Chief Science Officer since July
2004. Prior to joining Ivivi, Dr. Hagberg served as the Chief Knowledge Officer
for LifeWaves International, a health and wellness startup company, from 2000 to
2004, where he oversaw knowledge based development, multiple clinical trials,
raising investment capital, hardware and software development, technical and
marketing writing, and FDA/FTC compliance. Prior to joining LifeWaves, Dr.
Hagberg was a post-doctoral fellow in community medicine at Brown University
medical school (1998-2000), served as technical analyst on the Rhode Island
state-wide TOPPS II behavioral health program (1998-2000), as well as a
consultant with the Decision Science Institute (1999-2001), and a principal in
70
Brewer's Heaven, a start-up brewing concern (1999-2004). From 1997-1998 Dr.
Hagberg served as associate administrator for Good Hope Hospital (owned by
publicly traded Pioneer HealthCare), where he was responsible for building a
successful adolescent behavior health program, outside marketing and contract
management to private payors, including unions and other organizations. Dr.
Hagberg has been responsible for building behavioral health triage systems for
Managed Behavioral Healthcare Organizations and written and testified on
significant healthcare legislation at the state level and co-authored
Congressional reports on behavioral healthcare. Dr. Hagberg has co-authored NIH,
SAMSHA and foundation grants and protocols. Dr. Hagberg received his Ph.D. in
cultural anthropology from SUNY-Buffalo, where he was a Fellow in cognitive
science. Dr. Hagberg completed a two-year NIH-funded post-doctoral training at
the Brown University Department of Community Medicine, 1998-2000 and on was on
the medical faculty from 1998-2004.
MEDICAL ADVISORY BOARD
We have established a panel of eight medical advisors to assist management
in its efforts with respect to clinical applications of our products. The
medical advisors are set forth below:
BARRY E. DIBERNARDO, M.D., FACS, is a board certified plastic surgeon with
a diversified private surgical practice in Montclair, New Jersey. He is a
Clinical Associate Professor in the Department of Surgery University of Medicine
and Dentistry of New Jersey. He received his M.D. from Cornell University
Medical College, New York in 1984 with general surgical training at Mt. Sinai
Medical Center, Miami Beach, Florida from 1984 to 1989 and plastic surgical
training at Montefiore Medical Center - Albert Einstein College, Bronx, NY from
1989 to 1991. He is a member of the American Society of Plastic Surgeons.
MEG JORDAN, PHD, RN, is a medical anthropologist, an international health
journalist, editor and founder of American Fitness Magazine, and a radio/TV
personality known as the Global Medicine Hunter(TM). Her syndicated columns,
television reports, and special media projects cover health, wellness,
integrative medicine, indigenous healing traditions and cultural trends. Dr.
Jordan is the CEO of Global Medicine Enterprises, Inc., a health communications
and research firm, which provide groundbreaking reports to television,
newspapers and magazines. Her syndicated columns on health and wellness are
distributed to over major newspapers and magazines worldwide. Dr. Jordan is a
national keynote speaker, author of five books, editor of American Fitness
magazine, and health talk radio host on Sirius Satellite and Health Radio
Networks. She has served on numerous advisory boards, including the National
Wellness Institute, California Association of Naturopathic Physicians, the
California Institute of Integral Studies, Health Medicine Institute, and
ValleyCare Health System. Dr. Jordan currently teaches holistic health at San
Francisco State University.
RICHARD LINCHITZ, MD, received his medical education at both the
University of Lusanne, Switzerland, and Cornell University, where he received
his M.D. in 1973. Dr. Linchitz is certified by the American Board of Psychiatry
and Neurology, Pain Medicine and Medical Acupuncture. For many years, Dr.
Linchitz served as medical director of his own pain clinic in New York, was a
regular speaker and media expert on the topic of chronic pain and served on
numerous committees for the American Academy of Pain Medicine, where he served
on the Board of Directors from 1995 to 1998. Dr. Linchitz has significant
experience in the clinical practice of pain medicine, was active in establishing
the field as a specialty and has been involved in the development of the field
for over 20 years. In addition to his expertise in pain medicine, Dr. Linchitz
has been studying alternative and complementary forms of therapy, and is writing
a book on this topic.
71
DR. COURTNEY H. LYDER, ND, GNP, FAAN, is Professor of Nursing, Internal
Medicine & Geriatrics and holds the first University of Virginia Medical Center
Professorship in Nursing. He is currently Chairman, Department of Acute and
Specialty Care at the University of Virginia. Dr. Lyder has received as a
Principal Investigator or Co-Investigator nearly $7 million in research and
training grants, published 2 books, 50 journal articles and book chapters. Dr.
Lyder is a Past President of the National Pressure Ulcer Advisory Panel. He is
also a senior consultant to the U.S. Department of Health and Human Services
Centers for Medicare and Medicaid Services where he has influenced the
development of wound care regulations.
DR. LEONARD MAKOWKA, M.D., PH.D., FRCS(C), FACS, has served as a
consultant to us since February 2004. Dr. Makowka received his M.D. degree from
the University of Toronto Medical School in 1977, and Ph.D. from the University
of Toronto's Department of Pathology in 1982. He has published over 400 articles
and chapters in both clinical and basic scientific research and has lectured
worldwide. Dr. Makowka is a distinguished clinical and transplantation surgeon
and medical researcher. Between 1989 and 1995, Dr. Makowka was the Chairman of
the Department of Surgery and Director of Transplantation Services at
Cedars-Sinai Medical Center in Los Angeles, California. He was also Professor of
Surgery at the UCLA School of Medicine. Dr. Makowka has retired from the active
practice of medicine to pursue investment strategies and business development in
healthcare, life sciences, finance and other industry sectors. Dr. Makowka was a
Founding Partner in the syndicated radio company After MidNite Entertainment,
Inc., which was purchased by Premiere Radio Networks in 1997 and now resides
within the Clear Channel portfolio of companies. He was a shareholder in Metro
Capital, Inc., a Canadian based company with significant real estate holdings in
the Toronto area. Dr. Makowka was a Managing Director of Innovative Technology
Partners LLC, a late stage technology venture fund. In 1999, Dr. Makowka founded
Drive Thru Technology, a national provider of wireless and surveillance
equipment for the restaurant and hospitality industries. He is currently a
Managing Director of ITF Global Partners, an international financial advisory,
strategic and a capital investment company. Dr. Makowka is actively involved as
an advisor to or member of the Board of Directors of several companies. He has
been a Corporate Member of Blue Shield of California since 1995. He served from
1998 until June 2003, on the Board of Directors of Hollis Eden Pharmaceuticals
(NASDAQ: HEPH). He is a member of the Board of Directors of Kinemed, Inc., a
biotech company. He is the Chief Scientific Advisor for Universal Detection
Systems, a publicly traded company developing environmental monitoring
technologies for bio-terrorism. Most recently, Dr. Makowka is a member of the
Advisory Board for the UCLA School of Public Affairs.
G. PATRICK MAXWELL, M.D., is a plastic surgeon and an assistant clinical
professor of surgery at Vanderbilt University. Dr. Maxwell received his M.D.
from Vanderbilt University, and subsequently trained in general and then plastic
surgery at the Johns Hopkins Medical Center in Baltimore, MD. He completed a
fellowship in microsurgery at the University of California, San Francisco and in
hand surgery at the Curtis Hand Center in Baltimore, MD. Dr. Maxwell was a
co-founder of, and currently serves as, Executive EVP for Diversified Specialty
Institutes, a healthcare and specialty hospital development company. He is also
a founder and board member of the non-profit Aspen Center for Integrative
Health.
ROBERT J. SNYDER, D.P.M., F.A.C.F.A.S., CWS, is nationally and
internationally recognized for his expertise in wound healing. In addition to
his many board certifications, honors and awards, he is a Diplomat, American
Academy of Wound Management; Diplomat, American Board of Podiatric Surgery;
Fellow, American College of Foot and Ankle Surgery; and a Certified Wound
Specialist. Dr. Snyder also published over 75 papers in the field of wound
healing and has conducted research for major wound care companies.
DR. BERISH STRAUCH, one of our key consultants, serves as the Chairman of
our Medical Advisory Board.
72
SCIENTIFIC ADVISORY BOARD
We have established a panel of two scientific advisors to assist
management in its efforts with respect to the physical parameters of the
technologies we use. The scientific advisors are set forth below:
DR. ARTHUR A. PILLA, one of our key consultants, serves as the Chairman of
our Scientific Advisory Board.
DAVID J. MUEHSAM is a research associate at the Bioelectrochemistry
Laboratory, Mt. Sinai School of Medicine in New York City, where he is involved
in, among other things, mathematical modeling of electromagnetic field
bioeffects, and design and biomedical applications of therapeutic
electromagnetic field signals. Mr. Muehsam received his B.A. degree in Physics,
Mathematics and Music from Hampshire College in 1987, and has published over 25
articles in both clinical and basic scientific research, with a primary emphasis
on mathematical modeling and interpretation.
COMPENSATION
EXECUTIVE COMPENSATION
The following table, which should be read in conjunction with the
explanations provided below, provides certain compensation information
concerning our Co-Chief Executive Officers, our Chief Financial Officer and our
Executive Vice President, who are sometimes referred to in this prospectus as
our "named executive officers."
SUMMARY COMPENSATION TABLE
Name and Option
Principal Position Year Salary Awards(1) Total ($)
------------------ ---- ------ ----------- ---------
Andre' A. DiMino (1) 2007 $ 185,731 $ 4,870 $ 188,729
Vice Chairman and 2006 84,500 84,500
Co-Chief Executive 2005 17,800 17,800
Officer
David Saloff (2)
President and 2007 $ 190,574 $ 31,283 $ 234,537
Co-Chief Executive 2006 152,300 164,292
Officer 2005 124,000 130,500
Alan V. Gallantar (2) 2007 $ 95,192 $ 51,579 $ 148,271
Chief Financial 2006 --
Officer 2005
Edward J. Hammel 2007 $ 139,593 $ 5,777 $ 157,870
Executive Vice President 2006 $ 107,000 118,992
2005 $ 117,000 123,500
----------------
|
(1) Represents the expense to us pursuant to FAS 123(R) for the respective
year for restricted stock or stock options granted as long-term incentives
pursuant to our 2004 Amended and Restated Stock Option Plan. See notes to
our Financial Statements for the fiscal years ended March 31, 2007 and
2006 for the assumptions used for valuing the expense under FAS 123(R).
(2) In October 2006, (i) Mr. DiMino resigned from his positions as Chairman of
the Board and Chief Financial Officer and began to serve as Vice Chairman
of the Board and Co-Chief Executive Officer, (ii) Mr. Saloff resigned from
his position as Chief Executive Officer and began to serve as President
and Co-Chief Executive Officer and (iii) Mr. Gallantar began to serve as
Chief Financial Officer.
73
GRANTS OF PLAN-BASED AWARDS FOR THE FISCAL YEAR END
The following table provides information concerning grants of stock
options to each of our named executive officers during the fiscal year ended
March 31, 2007.
---------------------------------------------------------------------------------
Number of Securities Exercise or Base Price of Grant Date Fair Value of
Name (1) Grant Date Underlying Options (#) Option Awards ($/share) Options Awards($)(1)
---------------------------------------------------------------------------------------------------------------------
Andre' A. DiMino - - - -
David Saloff - - - -
Alan V. Gallantar 10/18/06 140,000 6.00 337,613
Edward J. Hammel - - - -
|
(1) This column represents the fair value of the stock option awards granted
in the fiscal year, determined in accordance with SFAS No. 123R, based on
the assumptions set forth in Note 2 - "Significant Accounting Policies" to
the financial statements.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
The following table provides certain information concerning outstanding
equity awards held by each of our named executive officers at March 31, 2007.
Option Awards Stock Awards
----------------------------------------------------------------------------------------------------------------------------------
Number of Number of
Securities Securities
Underlying Underlying Number of Shares or Market Value of Shares
Unexercised Unexercised Option Option Units of Stock That or Units of Stock
Options (#) Options (#) Exercise Expiration Have Not Vested That Have Vested
Name (1) Exercisable Unexercisable Price ($) Date (#)(2) ($)(2)
----------------------------------------------------------------------------------------------------------------------------------
Andre' A. DiMino 165,750 78,000 0.06 1/13/2014 74,750 310,213
55,250 26,000 0.31 2/19/2014
David Saloff 165,750 78,000 0.06 1/13/2014 141,050 585,358
55,250 26,000 0.31 2/19/2014
Alan V. Gallantar - 140,000 6.00 10/18/2016 - -
Edward J. Hammel 22,100 10,400 0.06 1/13/2014 35,750 148,363
|
(1) In October 2006, (i) Mr. DiMino resigned from his positions as Chairman of
the Board and Chief Financial Officer and began to serve as Vice Chairman
of the Board and Co-Chief Executive Officer, (ii) Mr. Saloff resigned from
his position as Chief Executive Officer and began to serve as President
and Co-Chief Executive Officer and (iii) Mr. Gallantar began to serve as
Chief Financial Officer.
(2) Based upon the closing market price of our stock of $4.15 on March 31,
2007.
EMPLOYMENT AGREEMENTS
On October 18, 2006, we entered into employment agreements with David
Saloff to secure his continued service as President and his service as Co-Chief
Executive Officer, with Andre' DiMino to secure his service as Vice Chairman of
the Board (for so long as Mr. DiMino continues to be a member of the Board of
Directors) and as Co-Chief Executive Officer and with Edward Hammel to secure
his service as Executive Vice President. As of July 13, 2006, we entered into an
employment agreement with Alan Gallantar to secure his service as Chief
Financial Officer, effective as of October 18, 2006. Each of these employment
74
agreements has a five-year term except in the case of Mr. Gallantar's agreement,
a three-year term, which will be automatically extended prior to the end of then
current term for successive one-year periods until either we or the executive
notifies the other at least 120 days prior to the end of the term that such
party does not wish to further extend it. Each of these agreements provides for
a minimum annual salary of $240,000 and a fixed annual bonus equal to 10% of
such annual salary, in the case of Messrs. DiMino and Saloff, a minimum salary
of $225,000 in the case of Mr. Gallantar, and a minimum salary of $180,000, in
the case of Mr. Hammel, discretionary annual cash bonuses and participation on
generally applicable terms and conditions in other compensation and fringe
benefit plans. Mr. DiMino's employment agreement requires Mr. DiMino to devote
at least a majority of his work-time toward Ivivi.
The terms of the employment agreements provide that each executive will be
entitled to severance benefits in the amount of such executive's base salary for
a period of 12 months following the date of termination if his employment is
terminated without "cause" or if he resigns for "good reason" (as such terms are
defined below), or 18 months following the date of termination if his employment
is terminated without "cause" or if he resigns for "good reason" within 12
months following a "change in control" (as such terms are defined below), in
each case subject to the execution and delivery to us by the employee of a
general release.
For purposes of the employment agreements, the following terms have the
following meanings:
"CAUSE" means the executive's (i) conviction of, plea of guilty or nolo
contendre to, or confession of guilt of, a felony or criminal act involving
moral turpitude (ii) commission of a fraudulent, illegal or dishonest act (which
dishonest act results in material damage to us) in respect of us, (iii) willful
misconduct or gross negligence that reasonably could be expected to be injurious
in our reasonable discretion to our business, operations or reputation
(monetarily or otherwise), (iv) material violation of our policies or procedures
in effect from time to time, subject to applicable cure periods after written
notice thereof, (v) after a written warning and a reasonable opportunity to cure
non-performance, continued failure to perform the executive's duties as assigned
to the executive from time to time, or (vi) any other material breach of the
employment agreement.
"GOOD REASON" means, in the absence of the consent of the executive, (i)
our failure to pay any amounts due to the executive or to fulfill any other
material obligations thereunder, other than failures that are remedied by us
within 30 days after receipt of written notice thereof given by the executive;
(ii) action by us that results in a material diminution in the executive's
title, position, authority or duties from those contemplated in the employment
agreement, subject to certain exceptions; (iii) for purposes of the employment
agreements with Messrs. DiMino, Gallantar and Hammel, any move of our offices
that would require the executive to commute more than 10 miles more each way
than such executive commutes immediately prior to such move; or (iv) any
material reduction in the amount of our director and officer liability insurance
coverage in effect as of the consummation of our initial public offering.
"CHANGE IN CONTROL" means (i) any person becomes the "beneficial owner"
(as defined in Rule 13d-3 under said Act), directly or indirectly, of our
securities representing more than 50% of the total voting power represented by
the executive's then outstanding voting securities; provided, however, that the
consummation of our initial public offering in and/or the exercise or conversion
of any instruments as of the consummation of our initial public offering will
not be deemed a "change of control;" (ii) our merger or consolidation with any
other corporation, other than a merger or consolidation which would result in
our voting securities outstanding immediately prior thereto continuing to
represent at least fifty percent (50%) of the total voting power represented by
the voting securities of our company or such surviving entity outstanding
immediately after such merger or consolidation; or (iii) the sale or disposition
by us of all or substantially all of our assets.
75
During the term of the employment agreements and for a period of 18 months
thereafter, subject to applicable law, the executives will be subject to
restrictions on competition with us and restrictions on the solicitation of our
customers and executives. For all periods during and after the term, the
executives will be subject to nondisclosure and confidentiality restrictions
relating to our confidential information and trade secrets.
Section 280G of the Internal Revenue Code denies a corporation a deduction
for "excess parachute payments." Excess parachute payments generally consist of
payments to specified individuals that are contingent upon a change in ownership
or control of a corporation, or a change in a substantial portion of the
corporation's assets, and that exceed a statutorily determined base amount. In
the event that any payment, coverage or benefit provided under the employment
agreements would not be deemed to be deductible in whole or in part in the
calculation of the Federal income tax of the executive or any other person
making such payment or providing such coverage or benefit, by reason of Section
280G of the Internal Revenue Code, the aggregate payments, coverages or benefits
provided under the employment agreement will be reduced to the "safe harbor"
level under Section 280G of the Internal Revenue Code so that the entire amount
which is paid or provided to the executive will be deductible notwithstanding
the provisions of Section 280G of the Internal Revenue Code. As of June 30,
2007, the "safe harbor" level under Section 280G of the Internal Revenue Code is
2.99 times the average of five years of W-2 compensation.
2004 AMENDED AND RESTATED STOCK OPTION PLAN
In February 2005, our board of directors and shareholders adopted the 2004
Amended and Restated Stock Option Plan, which was amended and restated in
February 2005, November 2005 and May 2006. The purpose of the 2004 Amended and
Restated Stock Option Plan is to advance our interests by encouraging and
enabling the acquisition of a personal financial interest in us for those
employees and directors whose judgment and efforts we are largely dependent on
for the successful conduct of our operations, and by those consultants, agents,
independent contractors, advisors, professionals and other third parties whose
contributions to our welfare may be recompensed in a manner that provides an
ownership interest in us. An additional purpose of this Plan is to provide a
means by which our employees and directors can acquire and maintain ownership in
us, thereby strengthening their commitment to our success and their desire to
remain in our employ.
In furtherance of that purpose, the 2004 Amended and Restated Stock Option
Plan authorizes the grant to our directors, executives and other key employees
and consultants of incentive and/or non-qualified stock options.
The maximum number of shares of our common stock with respect to which
options may be granted pursuant to the 2004 Amended and Restated Stock Option
Plan is initially 2,437,500, 1,879,975 shares of which, as of June 30, 2007, had
been granted at per share exercise prices ranging from $.062 to $6.00. No
participant may be granted options that exceed the number of shares issuable
under the plan during any fiscal year.
Shares issuable under the 2004 Amended and Restated Stock Option Plan may
be either treasury shares or authorized but unissued shares. The number of
shares available for issuance will be subject to adjustment to prevent dilution
in the event of stock splits, stock dividends or other changes in our
capitalization. If an option is forfeited or expires without having been
exercised, the shares subject to such option will again be available for
issuance under the Plan.
The 2004 Amended and Restated Stock Option Plan will be administered by a
committee consisting of not less than two (2) members of the Board of Directors
who are directors who are not also employees of Ivivi, or in the absence of such
committee, the entire Board. The Board has designated its compensation committee
as administrator of the 2004 Amended and Restated Stock Option Plan. Except for
certain options granted to non-employee directors (see "Director Options" and
"Committee Chairman Options" below), the Committee will determine the persons to
whom options will be granted, the type of option and the number of shares to be
covered by the option.
76
TYPES OF OPTIONS
STOCK OPTIONS. Options granted under the 2004 Amended and Restated Stock
Option Plan may be "incentive stock options" ("Incentive Options") or stock
options which are not incentive stock options ("Non-Qualified Options" and,
collectively with Incentive Options, hereinafter referred to as "Options").
Incentive Options generally provide the employee with more effective tax
treatment if the requirements described in the 2004 Amended and Restated Stock
Option Plan are satisfied by the holder of the option. The Committee may
determine the number of shares subject to each Option and the prices at which
Options may be exercised (which, in the case of Incentive Options, shall not be
less than the Fair Market Value, as defined by the Plan, of our common stock on
the date of grant). Whether an Option will be an Incentive Option or a
Non-Qualified Option, the time or times and the extent to which Options may be
exercised and all other terms and conditions of Options, will be determined by
the Committee.
Each Incentive Option shall terminate no later than ten years from the
date of grant, (five years in the case of an Incentive Option granted to a
person possessing more than 10% of the total combined voting power of all shares
of our stock or of a parent or subsidiary of ours ("10% Stockholder")). The
exercise price at which the shares may be purchased with respect to Incentive
Options may not be less than the Fair Market Value of shares of our common stock
at the time the Option is granted (and not less than 110% of the Fair Market
Value at the time the Option is granted with respect to Incentive Options
granted to a 10% Stockholder. The exercise price at which the shares may be
purchased with respect to Non-Qualified Options may not be less than 85% of the
Fair Market Value of shares of our common stock at the time the Option is
granted. The exercise price of the shares to be purchased pursuant to each
Option shall be paid in full in cash, by tendering other shares of our common
stock owned by the optionee, or such other method as may be authorized by the
Committee.
DIRECTOR OPTIONS. Each non-employee director (other than Steven Gluckstern
in his capacity as Chairman of the Board) was automatically granted
Non-Qualified Options ("Director Options") to acquire 20,000 shares of our
common stock upon the consummation of our initial public offering and will be
granted an additional 20,000 shares of our common stock on the date of our
annual meeting of stockholders. The exercise price at which the shares may be
purchased with respect to Director Options may not be less than the Fair Market
Value of shares of our common stock at the time the Option is granted. Each
Director Option shall terminate ten years from the date of grant. Director
options shall vest as to one-third of the shares subject to the option upon the
date of grant, and one-third upon each of the first and second anniversaries of
the date of grant.
COMMITTEE CHAIRMAN OPTIONS. Options may be granted Non-Qualified Options
("Committee Chairman Options") from time to time to each non-employee director
that serves as a chairman of our audit committee, compensation committee or
nominating and corporate governance committee. The exercise price at which the
shares may be purchased with respect to Committee Chairman Options may not be
less than the Fair Market Value of shares of our common stock at the time the
Option is granted. Each Committee Chairman Option shall terminate ten years from
the date of grant. Committee Chairman options shall vest as to one-third of the
shares subject to the option upon the date of grant, and one-third upon each of
the first and second anniversaries of the date of grant.
CORPORATE TRANSACTIONS. Upon a Corporate Transaction (as defined), any
option carrying a right to exercise that was not previously exercisable shall
become fully exercisable, except in certain circumstances were the options are
assumed by the successor company.
TRANSFERS. Options granted under the 2004 Amended and Restated Stock
Option Plan may not be transferred, pledged, mortgaged, hypothecated or
otherwise encumbered other than by will or under the laws of descent and
distribution, except that the Committee may permit transfers of options for
estate planning purposes.
77
AMENDMENTS AND TERMINATIONS. The Board may amend, alter, suspend,
discontinue or terminate the 2004 Amended and Restated Stock Option Plan at any
time, except that any such action shall be subject to shareholder approval at
the annual meeting next following such Board action if such shareholder approval
is required by federal or state law or regulation or the rules of any exchange
or automated quotation system on which our common stock may then be listed or
quoted, or if the Board of Directors otherwise determines to submit such action
for shareholder approval. In addition, no amendment, alteration, suspension,
discontinuation or termination to the 2004 Amended and Restated Stock Option
Plan may materially impair the rights of any participant with respect to any
option without such participant's consent. Unless terminated earlier by action
of the Board of Directors, the 2004 Amended and Restated Stock Option Plan shall
terminate on January 5, 2014.
COMPENSATION OF DIRECTORS
Until October 18, 2006, our directors did not receive compensation for
serving on our Board of Directors, but were entitled receive reimbursement for
travel and related expenses. From and after October 18, 2006, for each year of
service as a director of our company, each non-employee director (other than
Steven Gluckstern in his capacity as our Chairman of the Board, as discussed
below) will receive $10,000 ($2,500 per fiscal quarter). In addition, each
non-employee director (other than Steven Gluckstern in his capacity as our
Chairman of the Board) will receive non-qualified options to purchase 20,000
shares of our common stock when such person is initially elected to our Board of
Directors, and for each year of service as a director of our company thereafter,
options to purchase 20,000 shares of our common stock, in each case at an
exercise price per share equal to the fair market value price per share of our
common stock on the grant date. Each of such options will fully vest one-third
on the date of grant and one-third upon each of the first and second
anniversaries of the date of grant.
On October 18, 2006, Steven Gluckstern, who began to serve as our Chairman
of the Board at such time, received options to purchase 775,000 shares of our
common stock at an exercise price equal to $5.11 per share, one-third of which
options vested upon the date of grant and one-third of which will vest on each
one-year anniversary thereafter. Such options will expire on the tenth
anniversary of the date of grant.
The following table provides certain information with respect to the
compensation paid to our non-employee directors during the fiscal year ended
March 31, 2007.
78
DIRECTOR COMPENSATION
Fees earned or
paid in Option Awards
Name(1) cash ($) ($)(2)(3) Total ($)
------------------------- -------------- --------------- --------------
Steven Gluckstern - 1,026,092 1,026,092
Kenneth S. Abramowitz 5,000 23,444 28,444
Louis J. Ignarro, Ph.D. 5,000 23,444 28,444
Pamela J. Newman, Ph.D. 5,000 23,444 28,444
Jeffrey A. Tischler 5,000 23,444 28,444
---------------
|
(1) Each of Kenneth S. Abramowitz, Louis J. Ignarro, Ph.D., Pamela J. Newman,
Ph.D. and Jeffrey A. Tischler began to serve as a director of our company
on October 18, 2006.
(2) Represents the expense to us pursuant to FAS 123(R) for the respective
year for stock options granted as long-term incentives pursuant to our
2004 Amended and Restated Stock Option Plan, other than Mr. Gluckstern's
options which were granted outside the plan. See Notes to our Financial
Statements for the fiscal years ended March 31, 2007 and 2006 for the
assumptions used for valuing the expense under FAS 123(R).
(3) At March 31, 2007, Steven Gluckstern had an option to purchase 775 000
shares of our common stock and each of Kenneth S. Abramowitz, Louis J.
Ignarro, Ph.D., Pamela J. Newman, Ph.D. and Jeffrey A. Tischler had an
option to purchase 20,000 shares of our common stock.
ADVISORY BOARD COMPENSATION
Other than reimbursement for their expenses incurred on our behalf,
members of our Medical Advisory Board and Scientific Advisory Board do not
receive any compensation for services in their capacities as such. From time to
time, members of our Medical Advisory Board and Scientific Advisory Board do
receive consulting fees for consulting services they provide to us in their
capacities as consultants.
CONSULTING AGREEMENTS
ARTHUR A. PILLA, PH.D.
On October 17, 2006 we entered into a consulting agreement with Dr. Arthur
A. Pilla, Ph.D. and Pilla Consulting, Inc., a corporation wholly-owned by Dr.
Pilla, pursuant to which we have engaged Pilla Consulting to render consulting
services to us for a term of five years, which will be automatically extended
prior to the end of then current term for successive one-year periods until
either we or Pilla Consulting notifies the other at least 90 days prior to the
end of the term that such party does not wish to further extend it. Pursuant to
the consulting agreement, Pilla Consulting agrees to cause Dr. Pilla, on its
behalf, to provide the consulting services thereunder, including, among other
things, serving as our Science Director and Chairman of the Scientific Advisory
Board and advising us on technological developments, future clinical and
research applications of our technology, technical and medical aspects of FDA
submissions and compliance and marketing, product development and efficacy in
the electromagnetic frequencies field.
79
In exchange for the consulting services provided under our consulting
agreement during the term, we will pay Pilla Consulting $6,300 per month fee
(prorated for partial months), which will increase to $20,000 per month
(prorated for partial months) upon the consummation of this offering and be
subject to periodic increases as our board of directors or compensation
committee deem appropriate. During the term, Pilla Consulting will be eligible
for an annual performance-based fee, in the amount, if any, to be determined by
our board of directors or compensation committee, based on, among other things,
our performance, our assessment of Pilla Consulting's contributions to our
performance, and the level of discretionary bonuses and/or fees to be awarded to
our executive level employees and agents. During the term, Pilla Consulting will
be eligible to receive stock option grants in amounts, if any, to be determined
by our board of directors or our compensation committee, which grants, if any,
will be subject the terms and conditions established within our 2004 Amended and
Restated Stock Option Plan or any successor stock option plan.
The consulting agreement provides that Pilla Consulting will be entitled
to monthly consulting fees for a period of 24 months following the date of
termination if the consulting agreement is terminated without "cause" or if for
"good reason" (as such terms are defined in the consulting agreement) prior to
the seventh anniversary of the date of the agreement, or 12 months following the
date of termination if the consulting agreement is terminated without "cause" or
for "good reason" after the seventh anniversary of the date of the agreement, in
each case subject to the execution and delivery to us by the Pilla Consulting
and Dr. Pilla of a general release. If the consulting agreement terminates upon
the expiration of the term as a result of our election not to renew it beyond
the initial five-year term or beyond the first one-year renewal of the term, we
will continue to pay to Pilla Consulting the monthly consulting fee for a period
of 24 months following such termination, subject to the execution and delivery
to us by Pilla Consulting and Dr. Pilla of a general release.
On January 5, 2004, we issued Dr. Pilla 227,500 shares of our common
stock, including 26,000 shares that were vested immediately upon issuance and
201,500 shares subject to forfeiture that vest in five equal yearly installments
on January 5 of each year following the year of the grant through and including
January 5, 2009. In the event of a termination without "cause" or a "good
reason," the shares of common stock issued to Dr. Pilla on January 5, 2004 will
continue to vest in accordance with the vesting schedule; provided, however,
that in the event of a termination without "cause" or "good reason" within 12
months following a "change of control" (as such term is defined in the
agreement), all such shares be deemed fully vested upon the date of termination.
During the term of the consulting agreement and thereafter for a period
equal to the longer of: (i) 18 months and (ii) the period, if any, following
termination that we continue to pay Pilla Consulting monthly consulting fees,
Pilla Consulting and Dr. Pilla shall be subject to restrictions on competition
with us and restrictions on the solicitation of our customers and employees. For
all periods during and after the term, Pilla Consulting and Dr. Pilla will be
subject to nondisclosure and confidentiality restrictions relating to our
confidential information and trade secrets.
BERISH STRAUCH, M.D.
On January 1, 2004, we entered into a consulting agreement with Dr. Berish
Strauch pursuant to which we engaged Dr. Strauch to render consulting services
to us for a term of six years with automatic one-year renewals. Pursuant to the
consulting agreement, Dr. Strauch serves on our Medical Advisory Board and
advises us on technological developments, future clinical and research
applications and product development and efficacy in the pulsed magnetic
frequencies field.
80
In exchange for Dr. Strauch's consulting services pursuant to our
consulting agreement, Dr. Strauch received 130,000 shares of our common stock,
16,250 of which vested immediately upon our entering into our consulting
agreement with him, 17.5% of which vested on January 5, 2005 and the remaining
70% of which shall vest in four equal yearly installments on January 5 of each
year from January 5, 2006 through January 1, 2009. In addition, if our annual
revenues exceed $20 million, we have agreed to pay Dr. Strauch an annual bonus
(not to exceed $500,000) equal to the sum of 0.5% of that portion of our annual
revenues in excess of $20 million, 0.25% of that portion of our annual revenues
in excess $80 million and 0.1% of that portion of our annual revenues in excess
of $120 million. We have also agreed to pay Dr. Strauch a royalty equal to 0.5%
of revenues we receive for practicing and/or commercializing any "new
inventions" (as such term is defined in the agreement) developed by Dr. Strauch
under our agreement. Bonuses and royalties payable for the fiscal years ended
March 31, 2006 and 2007 are subject to adjustment and a cap of 10% of our
pre-tax profit (after deduction of such bonuses and royalty payments) for such
fiscal years.
Dr. Strauch is entitled to benefits if our consulting agreement is
terminated without "cause" or if he resigns for "good reason" or following a
"change in control" (as such terms are defined in the consulting agreement). In
the event of a termination without "cause" or if Dr. Strauch resigns for "good
reason," the shares of common stock to which Dr. Strauch is entitled under the
consulting agreement shall continue to vest in accordance with the terms
thereof, and Dr. Strauch shall continue to receive royalties in accordance with
the terms of the agreement and any bonuses earned by him prior to the
termination or resignation. In the event of a termination following a change of
control, all of the shares issuable to Dr. Strauch under the consulting
agreement will automatically vest, and Dr. Strauch will continue to receive
royalties in accordance with the terms of the agreement and bonuses for the
remainder of the then-current term if we terminate Dr. Strauch, or bonuses
earned prior to such termination if Dr. Strauch resigns.
During the term of the consulting agreement and for a two-year period
thereafter, Dr. Strauch will be subject to (i) restrictions on competition with
us and (ii) restrictions on the solicitation of our customers and employees.
During the term and for a five-year period thereafter, Dr. Strauch shall be
subject to nondisclosure and confidentiality restrictions relating to our
confidential information and trade secrets.
81
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information regarding ownership of shares
of our common stock, as of June 30, 2007:
o by each person known by us to be the beneficial owner of 5% or more
of our common stock;
o by each of our directors and executive officers; and
o by all of our directors and executive officers as a group.
Except as otherwise indicated, each person and each group shown in the
table has sole voting and investment power with respect to the shares of common
stock indicated. For purposes of the table below, in accordance with Rule 13d-3
under the Securities Exchange Act of 1934, as amended, a person is deemed to be
the beneficial owner, of any shares of our common stock over which he or she has
or shares, directly or indirectly, voting or investment power or of which he or
she has the right to acquire beneficial ownership at any time within 60 days. As
used in this prospectus, "voting power" is the power to vote or direct the
voting of shares and "investment power" includes the power to dispose or direct
the disposition of shares. Common stock beneficially owned and percentage
ownership as of June 30, 2007 were based on 9,596,908 shares outstanding. Unless
otherwise indicated, the address of each beneficial owner is c/o Ivivi
Technologies, Inc., 224-S Pegasus Ave., Northvale, NJ 07647.
NUMBER OF
SHARES PERCENTAGE
NAME OF BENEFICIAL OWNERS, BENEFICIALLY BENEFICIALLY
OFFICERS AND DIRECTORS OWNED OWNED
---------------------------------------------- ------------ ------------
ADM Unlimited, Inc. (1) 3,250,000 33.9%
Andre' A. DiMino (1)(2) 1,716,000 17.5%
David Saloff (3) 619,125 6.3%
Alan V. Gallantar (4) 0 0%
Edward J. Hammel (5) 123,663 1.3%
Kenneth Abramowitz (6) 104,706 1.1%
Steven M. Gluckstern (7) 731,740 7.3%
Louis J. Ignarro (8) 6,666 *
Pamela J. Newman (9) 6,666 *
Jeffrey A. Tischler (10) 6,666 *
Sherleigh Associates Defined Benefit
Pension Plan (11) 1,058,665 9.9%
ProMed Partners, L.P. (12) 674,865 6.6%
All directors and executive officers
as a group (9 persons)(13) 2,734,294 25.8%
-----------------
|
* Less than 1%.
(1) Andre' DiMino, our Vice Chairman and Co-Chief Executive Officer, has the
right to vote approximately 26% of the outstanding common stock of ADM
Unlimited, Inc. In addition, Mr. DiMino, together with other members of
the DiMino family, has the right to vote approximately 29% of the
outstanding common stock of ADM Unlimited, Inc.
82
(2) Represents: (i) 221,000 shares of common stock issuable upon exercise of
options that are exercisable within 60 days of June 30, 2007; (ii) 16,250
shares of common stock subject to a share purchase right agreement among
Mr. DiMino, David Saloff, Edward Hammel, Sean Hagberg, Ph.D., Arthur
Pilla, Ph.D. and Steven Gluckstern pursuant to which Mr. Gluckstern has
the right to purchase such shares from Mr. DiMino during the period from
November 8, 2005 to November 8, 2010; (iii) 186,875 shares of common stock
beneficially owned of record by Mr. DiMino; and (iv) 1,308,125 shares of
common stock beneficially owned by David Saloff, Edward Hammel and certain
other of our shareholders (excluding shares underlying options held by
such shareholders) which are subject to a voting agreement under which Mr.
DiMino has the right to vote such shares. Mr. DiMino disclaims beneficial
ownership of the shares beneficially owned by David Saloff and Edward
Hammel and such other shareholders. The voting agreement, with respect to
shares held by, and shares underlying options held by, David Saloff and
Edward Hammel and the other shareholders party thereto, except for one
shareholder, shall terminate upon the earlier to occur of October 24, 2009
and the purchase of such shares by Mr. Gluckstern pursuant to the share
purchase right agreement. Mr. DiMino shall have the right to vote the
349,375 shares of common stock beneficially owned by the other shareholder
indefinitely unless and until such right is terminated by Mr. DiMino and
such other shareholder. Of the shares beneficially owned by Mr. DiMino,
94,750 shares are subject to forfeiture and vest in equal yearly
installments on January 5 of each year through January 5, 2009. Excludes
104,000 shares of common stock issuable upon exercise of options that are
not exercisable within 60 days of June 30, 2007.
(3) Includes: (i) 221,000 shares of common stock issuable upon exercise of
options that are exercisable within 60 days of June 30, 2007; (ii) 30,875
shares of common stock subject to a share purchase right agreement among
Mr. Saloff, Mr. DiMino, Mr. Hammel, Dr. Hagberg, Dr. Pilla and Mr.
Gluckstern pursuant to which Mr. Gluckstern has the right to purchase such
shares from Mr. Saloff during the period from November 8, 2005 to November
8, 2010; and (iii) 398,125 shares of common stock beneficially owned by
Mr. Saloff, all of which shares are subject to a voting agreement under
which Mr. DiMino has the right to vote such shares. The voting agreement,
with respect to 536,250 shares of our common stock (including 221,000
shares underlying options to purchase shares held by Mr. Saloff that are
exercisable within 60 days of the date of June 30, 2007), shall terminate
on October 24, 2009 and with respect to 30,875 shares of our common stock,
shall terminate upon the earlier to occur of October 24, 2009 and the
purchase of such shares by Mr. Gluckstern pursuant to the share purchase
right agreement. Of the shares beneficially owned by Mr. Saloff, 141,050
shares are subject to forfeiture and vest in equal yearly installments on
January 5 of each year through January 5, 2009. Excludes 104,000 shares of
common stock issuable upon exercise of options that are not exercisable
within 60 days of June 30, 2007.
(4) Excludes 140,000 shares of common stock issuable upon exercise of options
that are not exercisable within 60 days of June 30, 2007.
(5) Includes: (i) 22,100 shares of common stock issuable upon exercise of
options that are exercisable within 60 days of June 30, 2007; (ii) 8,125
shares of common stock subject to a share purchase right agreement among
Mr. Hammel, Mr. DiMino, Mr. Saloff, Dr. Hagberg, Dr. Pilla and Mr.
Gluckstern pursuant to which Mr. Gluckstern has the right to purchase such
shares from Mr. Hammel during the period from November 8, 2005 to November
8, 2010; and (iii) 101,563 shares of common stock beneficially owned by
Mr. Hammel, all of which shares are subject to a voting agreement under
which Mr. DiMino has the right to vote such shares. The voting agreement,
with respect to 110,338 shares of our common stock (including 22,100
shares underlying options to purchase shares held by Mr. Hammel that are
exercisable within 60 days of June 30, 2007) shall terminate on October
24, 2009 and with respect to 8,125 shares of our common stock, shall
terminate upon the earlier to occur of October 24, 2009 and the purchase
of such shares by Mr. Gluckstern pursuant to the share purchase right
agreement. Of the shares beneficially owned by Mr. Hammel, 35,750 shares
are subject to forfeiture and vest in equal yearly installments on January
5 of each year through January 5, 2009. Excludes 10,400 shares of common
stock issuable upon exercise of options that are not exercisable within 60
days of June 30, 2007.
83
(6) Includes: (i) 49,020 shares of common stock beneficially owned by Kenneth
S. Abramowitz & Co., Inc., an investment fund wholly-owned by Mr.
Abramowitz; (ii) 49,020 shares of common stock underlying warrants
beneficially owned by Kenneth S. Abramowitz & Co., Inc. that are
exercisable within 60 days of June 30, 2007; and (iii) 6,666 shares of
common stock issuable upon exercise of options to purchase shares of our
common stock that are exercisable within 60 days. Excludes 13,334 shares
of common stock issuable upon exercise of options that are not exercisable
within 60 days of June 30, 2007.
(7) Includes: (i) 196,078 shares of common beneficially owned by Ajax Capital
LLC, an investment fund wholly-owned by Mr. Gluckstern; (ii) 196,078
shares of common stock underlying warrants exercisable within 60 days of
June 30, 2007; (iii) 81,250 shares of common stock issuable upon exercise
of rights to purchase an aggregate of up to 81,250 shares of common stock
during the period from November 8, 2005 to November 8, 2010 granted by Mr.
DiMino, Mr. Saloff, Mr. Hammel, Dr. Hagberg and Dr. Pilla pursuant to a
share purchase right agreement, 65,000 shares of which are subject to a
voting agreement under which Mr. DiMino has the right to vote such shares;
provided, however, that the voting agreement with respect to such shares
shall terminate on October 24, 2009 and the purchase of such shares by Mr.
Gluckstern pursuant to the share purchase right agreement; and (iv)
258,334 shares of our common stock issuable upon exercise of options to
purchase shares of our common stock that are exercisable within 60 days of
June 30, 2007. Excludes 516,666 shares of common stock issuable upon
exercise of options that are not exercisable within 60 days of June 30,
2007. See footnote numbers (2) and (3).
(8) Represents 6,666 shares of our common stock issuable upon exercise of
options to purchase shares of our common stock that are exercisable within
60 days of June 30, 2007. Excludes 13,334 shares of common stock issuable
upon exercise of options that are not exercisable within 60 days of the
date of June 30, 2007.
(9) Represents 6,666 shares of our common stock issuable upon exercise of
options to purchase shares of our common stock that are exercisable within
60 days of June 30, 2007. Excludes 13,334 shares of common stock issuable
upon exercise of options that are not exercisable within 60 days of June
30, 2007.
(10) Represents 6,666 shares of our common stock issuable upon exercise of
options to purchase shares of our common stock that are exercisable within
60 days of June 30, 2007. Excludes 13,334 shares of common stock issuable
upon exercise of options that are not exercisable within 60 days of the
date of June 30, 2007.
(11) Includes: (i) 541,797 shares of common stock underlying warrants held by
Sherleigh Associates Defined Benefit Pension Plan and (ii) 516,869 shares
of common stock underlying warrants held by Sherleigh Associates Defined
Benefit Pension Plan. Jack Silver, trustee of Sherleigh Associates Defined
Benefit Pension Plan, has voting and investment control over such
securities. The address for Sherleigh Associates Defined Benefit Pension
Plan is SIAR Capital LLC, 660 Madison Avenue, New York, New York 10021.
The foregoing information is derived from a Schedule 13G/A filed on behalf
of the reporting person on February 13, 2007.
(12) Includes: (i) 41,353, 50, 8,400 and 242,795 shares of common stock held by
ProMed Partners, L.P., ProMed Partners II, L.P., ProMed Offshore Fund I,
Ltd. and ProMed Offshore Fund II, Ltd., respectively, and (ii) 193,421,
13,151, 26,521 and 149,177 shares of common stock underlying warrants held
by ProMed Partners, L.P., ProMed Partners II, L.P., ProMed Offshore Fund
I, Ltd. and ProMed Offshore Fund II, Ltd., respectively, that are
exercisable within 60 days of June 30, 2007. Barry Kurokawa and David B.
Musket, managing directors of each of such entities, have voting and
investment control over such securities. The address for each of such
entities is 237 Park Avenue, 9th Floor, New York, NY 10021. The foregoing
information is derived from a Schedule 13G/A filed on behalf of the
reporting persons on February 13, 2007 and additional information provided
to us by ProMed Partners, L.P., ProMed Partners II, L.P., ProMed Offshore
Fund I, Ltd. and ProMed Offshore Fund II, Ltd.
(13) See footnotes (1) through (10).
84
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have entered into a management service agreement and a manufacturing
agreement with ADM Unlimited, Inc., our largest shareholder, each of which is
described below. In addition, some of our officers and directors are also
officers and directors of ADM. These relationships may cause conflicts of
interests to arise between us and ADM.
REPAYMENT OF AMOUNTS TO ADM
In October 2006, we used approximately $2.6 million of the net proceeds of
our initial public offering to repay amounts payable to ADM, our largest
shareholder, that were incurred in connection with the funding of operations
under the terms of our management services agreement with ADM, as well as in
connection with the manufacturing of our products under the terms of our
manufacturing agreement with ADM since 1998. No interest was payable on this
amount. Mr. DiMino, our Vice Chairman and Co-Chief Executive Officer, together
with members of his family, own approximately 29% of the outstanding common
stock of ADM.
REPAYMENT OF AMOUNTS TO AJAX CAPITAL LLC
In October 2006, we used approximately $250,000 of the net proceeds of our
initial public offering to repay amounts payable to Ajax Capital LLC, an
investment fund wholly-owned by Steven Gluckstern, our Chairman of the Board. In
June 2006, Ajax Capital LLC loaned us $250,000, pursuant to an unsecured
promissory note. The principal amount of the unsecured promissory note accrued
interest at a rate of 8% per annum and the principal amount outstanding,
together with all accrued and unpaid interest, was due and payable upon the
consummation of our initial public offering. If the principal amount, together
with all accrued and unpaid interest, was not paid on or before the maturity
date, the interest rate would have increased by 1% every year after the maturity
date to a maximum of 13% per annum until all amounts due and payable under the
note were paid in full. The proceeds of this note were used for working capital
purposes.
SALE OF UNITS AND REVENUE SHARING AGREEMENT WITH AJAX CAPITAL LLC
On August 28, 2006, we sold to Ajax Capital LLC, an investment fund
wholly-owned by Steven Gluckstern, 15 units of the Roma3 and five units of the
SofPulse M-10 at a purchase price of $14,500 per unit, the then-published
wholesale unit price for the Roma3 and the SofPulse M-10, for an aggregate
purchase price of $290,000. In connection therewith, we entered into a revenue
sharing agreement with Ajax Capital LLC, which was subsequently terminated in
December 2006 (as described below). Pursuant to the revenue sharing agreement,
we had agreed to use our commercially reasonable efforts to rent to third
parties all of the units of the Roma3 and the SofPulse M-10 purchased by Ajax
Capital LLC. Ajax Capital LLC was entitled to receive revenues in respect of
rentals of the units of the Roma(3) purchased by it in an amount equal to 50% of
the aggregate of the gross proceeds from such rentals received by us during each
month of the term. Ajax Capital LLC was also entitled to receive revenues in
respect of rentals of the units of the SofPulse M-10 purchased by it in an
amount equal to the net proceeds from such rentals received by us during each
month of the term, reduced by (i) 11.5% of the gross proceeds for services
related to marketing, billing, collections and account maintenance to be
performed by us with respect to such units, received by us during such month,
and (ii) in the case of each of the first three months during the term, a set up
fee of $2,000. Ajax Capital LLC was also entitled to receive 50% of any and all
gross proceeds we received from our sale of applicators for use in connection
with the units of the Roma(3) rented to third parties during the term of the
agreement. The term of the agreement was to expire on August 28, 2011.
85
On December 22, 2006, our Audit Committee approved the termination of the
Revenue Sharing Agreement with Ajax Capital LLC. In connection with the
termination, Ajax Capital LLC transferred to us all of its rights, title and
interest in and to the units of the Roma(3) and the SofPulse M-10 purchased by
Ajax Capital LLC on the date of the revenue sharing agreement, and we paid Ajax
$296,136. As a result of the termination, we are entitled to all revenues
generated by the rental and sales of such units and the related applicators from
and after the termination date.
MANAGEMENT SERVICES AGREEMENT
In order to keep our operating expenses manageable, we entered into a
management services agreement, dated as of August 15, 2001, with ADM under which
ADM provides us and its other subsidiaries, Sonotron Medical Systems, Inc. and
Pegasus Laboratories, Inc., with management services and allocates portions of
its real property facilities for use by us and the other subsidiaries for the
conduct of our respective businesses.
The management services provided by ADM under the management services
agreement include administrative, technical, engineering and regulatory services
with respect to our products. We pay ADM for such services on a monthly basis
pursuant to an allocation determined by ADM and us based on a portion of its
applicable costs plus any invoices it receives from third parties specific to
us. As we have added employees to our marketing and sales staff and
administrative staff following the consummation of our initial public offering,
our reliance on the use of the management services of ADM has been reduced.
We also use office, manufacturing and storage space in a building located
in Northvale, NJ, currently leased by ADM, pursuant to the terms of the
management services agreement to which we, ADM and two of ADM's other
subsidiaries are parties. Pursuant to the management services agreement, ADM
determines, on a monthly basis, the portion of space utilized by us during such
month, which may vary from month to month based upon the amount of inventory
being stored by us and areas used by us for research and development, and we
reimburse ADM for our portion of the lease costs, real property taxes and
related costs based upon the portion of space utilized by us. We have incurred
$47,105 and $43,883 for the use of such space during the fiscal years ended
March 31, 2007 and 2006, respectively.
ADM determines the portion of space allocated to us and each other
subsidiary on a monthly basis, and we and the other subsidiaries are required to
reimburse ADM for our respective portions of the lease costs, real property
taxes and related costs.
We have incurred $242,595 and $226,807 for management services and the use
of real property provided to us by ADM pursuant to the management services
agreement during the fiscal years ended March 31, 2007 and March 31, 2006,
respectively.
MANUFACTURING AGREEMENT
We, ADM and one other subsidiary of ADM, Sonotron Medical Systems, Inc.,
are parties to a second amended and restated manufacturing agreement. Under the
terms of the agreement, ADM has agreed to serve as the exclusive manufacturer of
all current and future medical and non-medical electronic and other devices or
products to be sold or rented by us. For each product that ADM manufactures for
us, we pay ADM an amount equal to 120% of the sum of (i) the actual, invoiced
cost for raw materials, parts, components or other physical items that are used
in the manufacture of the product and actually purchased for us by ADM, if any,
plus (ii) a labor charge based on ADM's standard hourly manufacturing labor
rate, which we believe is more favorable than could be attained from
unaffiliated third-parties. We generally purchase and provide ADM with all of
the raw materials, parts and components necessary to manufacture our products
and, as a result, the manufacturing fee paid to ADM is generally 120% of the
labor rate charged by ADM. On April 1, 2007, we instituted a procedure whereby
ADM invoices us for finished goods at ADM's cost plus 20%.
86
Under the terms of the agreement, if ADM is unable to perform its
obligations under our manufacturing agreement or is otherwise in breach of any
provision of our manufacturing agreement, we have the right, without penalty, to
engage third parties to manufacture some or all of our products. In addition, if
we elect to utilize a third-party manufacturer to supplement the manufacturing
being completed by ADM, we have the right to require ADM to accept delivery of
our products from these third-party manufacturers, finalize the manufacture of
the products to the extent necessary and ensure that the design, testing,
control, documentation and other quality assurance procedures during all aspects
of the manufacturing process have been met. Although we believe that there are a
number of third-party manufacturers available to us, we cannot assure you that
we would be able to secure another manufacturer on terms favorable to us or at
all or how long it will take us to secure such manufacturing. The initial term
of the agreement expires on March 31, 2008, subject to automatic renewals for
additional one-year periods, unless either party provides three months' prior
written notice to the other prior to the end of the relevant term of its desire
to terminate the agreement.
We have incurred $75,584 and $62,656 for ADM's manufacture of our products
pursuant to the manufacturing agreement during the fiscal years ended March 31,
2007 and March 31, 2006, respectively.
STOCK ISSUANCES AND VOTING AGREEMENT
In January 2004, we issued an aggregate of 186,875 and 398,125 shares of
our common stock to Andre' DiMino, our Vice Chairman and Co-Chief Executive
Officer, and David Saloff, our President and Co-Chief Executive Officer,
respectively. Of the shares of our common stock issued to Mr. Saloff, 141,050 of
the shares are subject to forfeiture and vest in equal yearly installments on
January 5 of each year through January 5, 2009. In addition, all of the shares
issued to Mr. Saloff are subject to a voting agreement among Mr. DiMino, Mr.
Saloff, Edward Hammel, our Executive Vice President, Sean Hagberg, Ph.D., our
Chief Science Officer, Arthur Pilla, Ph.D., one of our consultants, our Science
Director and the Chairman of our Scientific Advisory Board, Berish Strauch,
M.D., one of our consultants and a member of our Medical Advisory Board, and
Fifth Avenue Capital Partners, one of our shareholders. Under the voting
agreement, in addition to the shares of common stock beneficially owned by Mr.
DiMino, Mr. DiMino has the right to vote the shares of common stock held by such
shareholders, representing, as of June 30, 2007, an aggregate of 1,772,225
additional shares of our common stock (including shares underlying options held
by such shareholders that are exercisable within 60 days of the date hereof).
The voting agreement, with respect to shares of common stock, and shares of
common stock underlying options, held by all of the shareholders party thereto,
will expire on October 24, 2009. Mr. DiMino shall continue to have the right to
vote an additional 349,375 shares of our common stock held by Fifth Avenue
Capital Partners indefinitely unless otherwise agreed to by Mr. DiMino and such
shareholder.
PRIVATE PLACEMENT
Pursuant to our private placement that was completed in November 2005, we
issued to Ajax Capital LLC, an investment fund wholly-owned by Steven
Gluckstern, our Chairman of the Board, and Kenneth S. Abramowitz & Co., Inc., a
director of our company, (i) unsecured convertible promissory notes in the
aggregate principal amount of $1,000,000 and $250,000, respectively, bearing
interest at a rate of 8% per annum payable in cash, increasing by 1% every 365
days from the date of issuance of the notes to a maximum of 12% per annum, which
automatically converted upon the consummation of our initial public offering
into shares of our common stock at a conversion price equal to $5.10 per share,
or 85% of the initial public offering price per share and (ii) warrants to
purchase up to the same number of shares of our common stock, subject to
87
adjustment, at a per share exercise price equal to $6.00 per share, or 100% of
the initial public offering price per share. The holders of these unsecured
convertible promissory notes waived their right to receive interest payments on
a quarterly basis through the consummation of our initial public offering
(approximately $25,000 per quarter), and in October 2006, we used $244,365 of
the proceeds from our initial public offering to pay to such holders any and all
interest with respect to such notes then due and payable. We also granted the
purchasers of the notes and warrants demand and piggy-back registration rights
with respect to the shares of common stock underlying the notes and warrants.
SHARE PURCHASE AGREEMENT
On November 8, 2005, each of Andre' DiMino, David Saloff, Edward Hammel,
Sean Hagberg, Ph.D. and Arthur Pilla, Ph.D., granted Steven Gluckstern, our
Chairman of the Board, the right to purchase up to 16,250, 30,875, 8,125, 8,125
and 17,875 shares of common stock, respectively, at an exercise price per share
equal to the lesser of (i) the initial public offering price per share and (ii)
$5.11 (subject to adjustment for any recapitalization, stock-split or other
similar event); provided, however, that if an initial public offering of our
common stock was not consummated on or before May 8, 2006, the exercise price
per share would be $4.31 and be decreased by $.31 each month after May 8, 2006
until the earlier to occur of (i) November 8, 2006 and (ii) the date a
registration statement with respect to an initial public offering of our common
stock was declared effective by the Securities and Exchange Commission; provided
further, however, that in no event would the exercise price be less than $1.00
per share. Since the consummation of our initial public offering occurred on
October 24, 2006, the exercise price is $2.76 per share. These purchase rights
are exercisable at any time and from time to time during the period from
November 8, 2005 to November 8, 2010.
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. At the time of the above referenced transactions, we did not have
sufficient disinterested directors to approve or ratify such transactions.
However, all such transactions have been reviewed by the audit committee of our
Board of Directors and ratified by them. All future transactions between us and
our officers, directors and principal shareholders and their affiliates will be
on terms no less favorable than could be obtained from unaffiliated third
parties and will be approved by our audit committee or another independent
committee of our Board of Directors.
DIRECTOR INDEPENDENCE
We have seven directors, Steven M. Gluckstern, Andre' A. DiMino, David
Saloff, Kenneth S. Abramowitz, Louis J. Ignarro, Ph.D., Pamela J. Newman, Ph.D.
and Jeffrey A. Tischler. Our Board of Directors has determined that each of
Kenneth S. Abramowitz, Louis J. Ignarro, Ph.D., Pamela J. Newman, Ph.D. and
Jeffrey A. Tischler are "independent" as defined under the American Stock
Exchange listing standards.
88
DESCRIPTION OF CAPITAL STOCK
GENERAL
The following description of our securities is a summary and is subject in
all respects to our amended and restated certificate of incorporation our bylaws
and New Jersey law.
Our authorized capital consists of 70,000,000 shares of common stock, no
par value, and 5,000,000 shares of preferred stock, no par value.
COMMON STOCK
As of the date of this prospectus, there were 9,596,908 shares of common
stock issued and outstanding. Holders of our common stock are entitled to one
vote per share on all matters to be voted upon by the shareholders, and there is
no cumulative voting for the election of our Board of Directors. Holders of our
common stock are entitled to receive ratably such dividends, if any, as may be
declared by our Board of Directors out of funds legally available therefore.
Upon our liquidation, dissolution, or winding up, the holders of our common
stock will be entitled to share ratably in our assets of which are legally
available for distribution, after payment of all debts and other liabilities.
Holders of our common stock have no preemptive, subscription, redemption or
conversion rights.
PREFERRED STOCK
We are authorized to issue up to 5,000,000 shares of preferred stock, none
of which will be outstanding, with the Board of Directors having the right to
determine the designations, rights, preferences and powers of each series of
preferred stock. Accordingly, the Board of Directors is empowered, without
shareholder approval, to issue preferred stock with voting, dividend,
conversion, redemption, liquidation or other rights which may be superior to the
rights of the holders of common stock and could adversely affect the voting
power and other equity interests of the holders of common stock.
PRIVATE PLACEMENTS
In December 2004 and February 2005, we completed a joint private placement
with ADM, our largest shareholder, which holds approximately 34% of the
outstanding shares of our common stock, pursuant to which we issued unsecured
convertible notes in the aggregate principal amount of $6,087,500, which
converted automatically into shares of common stock upon the consummation of our
initial public offering. The notes bore interest at an annual rate of 6%, which
was payable at the direction of the holder in cash, shares of ADM common stock
or shares of our common stock. In connection with the issuance of the notes, we
also issued to the investors warrants to purchase an aggregate of 1,191,852
shares of our common stock at $3.51 per share, as well as warrants (the "ADM
Warrants") to purchase an aggregate of 20,991,379 shares of the common stock of
ADM at $.41 per share, which ADM Warrants automatically expired upon the
consummation of our initial public offering. Under the terms of the notes sold
in the private placement that was completed in December 2004 and February 2005,
the number of shares of our common stock issuable upon conversion of the notes
and exercise of the warrants increased by 2% for each 30-day period, or portion
thereof, after March 1, 2005 and June 30, 2005, respectively, that the
registration statement in connection with our initial public offering was not
declared effective. As a result, the notes converted automatically upon the
consummation of our initial public offering into 1,630,232 shares of our common
stock, and we issued 21,378 shares and 18,016 shares of common stock on December
27, 2006 and January 17, 2007, respectively, in lieu of cash for interest
payments on the notes.
89
In November 2005 and March 2006, we completed a private offering to four
institutional investors of (i) unsecured convertible promissory notes in the
aggregate principal amount of $2,000,000 bearing interest at a rate of 8% per
annum, payable in cash, increasing by 1% every 365 days from the date of
issuance of the notes to a maximum of 12% per annum, which converted
automatically upon the consummation of our initial public offering into shares
of our common stock at a conversion price equal to $5.10 per share (85% of the
initial public offering price per share) and (ii) warrants to purchase up to an
aggregate the same number of shares of our common stock at $6.00 per share (100%
of the initial public offering price per share). Two of the institutional
investors who purchased notes are Ajax Capital LLC and Kenneth S. Abramowitz &
Co., Inc., investment funds wholly-owned by Steven Gluckstern and Kenneth
Abramowitz, respectively, each of whom began to serve as a director of our
company in October 2006.
WARRANTS
WARRANTS ISSUED IN DECEMBER 2004 AND FEBRUARY 2005 PRIVATE PLACEMENT
In connection with our joint private placement completed in December 2004
and February 2005, we issued warrants (the "2005 Warrants") to purchase an
aggregate of 1,191,852 shares of our common stock. Each 2005 Warrant entitles
the holder to purchase on share of our common stock at an exercise price of
$3.51 per share for a period of five (5) years commencing on the date of their
issuance. Under the terms of these 2005 Warrants, the number of shares issuable
upon exercise thereof increased by 2% for each 30-day period, or portion
thereof, after March 1, 2005 and June 30, 2005, respectively, that our
registration statement in connection with our initial public offering was not
declared effective. As a result, an additional 438,380 shares of common stock
underlying the 2005 Warrants became issuable by us, and as of the date of this
prospectus, we have outstanding 2005 Warrants to purchase an aggregate of
1,630,232 shares of our common stock.
Each 2005 Warrant may be exercised by surrendering the warrant
certificate, with the form of election to purchase on the reverse side of the
warrant certificate properly completed and executed, together with payment of
the exercise price, or $3.51 per share, to us. At the time of surrender of the
warrant certificate, the holder must also surrender the related ADM Warrant,
although upon consummation of our initial public offering the ADM Warrants were
deemed cancelled by its terms and expired worthless. The 2005 Warrants may be
exercised in whole or in part from time to time during the exercise period. The
2005 Warrants do not contain cashless exercise features. Notwithstanding the
foregoing, the 2005 Warrants may only be exercised in the event that our common
stock is listed on an approved market, which specifically does not include the
Pink Sheets, and the shares of our common stock underlying the 2005 Warrants
have been registered for resale with the SEC.
We have the option to call for the redemption of up to 50% of the then
outstanding 2005 Warrants by delivering a "Redemption Notice" to the holders
thereof, on a pro rata basis, so long as: (i) the market price of our common
stock is at or above $11.26 per share for twenty (20) consecutive trading days
ending on the day prior to the date on which we give notice that we are
requiring exercise of the 2005 Warrants, (ii) the average daily trading volume
of the our common stock during such twenty (20) day period is at least 30,000
shares per day; and (iii) the shares of our common stock issuable upon exercise
of the 2005 Warrants are registered with the SEC for resale to the public, or an
exemption to the registration requirements is available to the holders of the
2005 Warrants under Rule 144. In addition, we have the option to require the
conversion of up to 100% of the then outstanding 2005 Warrants, so long as: (i)
the market price of the our common stock is at or above $31.26 per share for
twenty (20) consecutive trading days ending on the day prior to the date on
which we give notice that we are requiring exercise of the 2005 Warrants, (ii)
the average daily trading volume of the our common stock during such twenty (20)
day period is at least 30,000 shares per day, and (iii) the shares of our common
stock issuable upon exercise of the 2005 Warrants are registered with the SEC
for resale to the public, or an exemption to the registration requirements is
available to the holders of the 2005 Warrants under Rule 144. The redemption
price to be paid by us shall be equal to $0.54 per 2005 Warrant.
90
Holders of the 2005 Warrants are protected against dilution of the equity
interest represented by the underlying shares of our common stock upon the
occurrence of certain events, including, but not limited to, issuance of stock
dividends or stock splits. If we merge, reorganize or are acquired in such a way
as to terminate the 2005 Warrants, the 2005 Warrants may be exercised
immediately prior to such action. In the event of our liquidation, dissolution
or winding up, holders of the 2005 Warrants are not entitled to participate in
our assets. In addition, the 2005 Warrants contain certain weighted average
anti-dilution protections in the event that in a capital raising transaction we
issue shares of common stock or securities convertible into common stock at less
than the then-current exercise price per share.
For the life of the 2005 Warrants, the holders thereof are given the
opportunity to profit from a rise in the market price of our common stock. The
exercise of the 2005 Warrants will result in the dilution of the then book value
of our common stock held by our other shareholders and would result in a
dilution of their percentage ownership in us.
WARRANTS ISSUED IN NOVEMBER 2005 AND MARCH 2006 PRIVATE PLACEMENT
We have outstanding warrants (the "2006 Warrants") to purchase an
aggregate of 392,157 shares of our common stock, which were issued in connection
with our private placement that was completed in November 2005 and March 2006.
Each 2006 Warrant entitles the holder to purchase one share of our common stock
at an exercise price equal to $6.00 per share for a period of five (5) years
commencing on the nine-month anniversary of their issuance. Each 2006 Warrant
may be exercised by surrendering the warrant certificate, with the form of
election to purchase on the reverse side of the warrant certificate properly
completed and executed, together with payment of the exercise price to us. The
2006 Warrants may be exercised in whole or in part from time to time during the
exercise period. The 2006 Warrants do not contain cashless exercise features.
Provided the shares of our common stock issuable upon exercise of the 2006
Warrants are registered with the SEC for resale to the public, or an exemption
to the registration requirements is available to the holder thereof under Rule
144, we have the option to call for the redemption of the then outstanding 2006
Warrants in the event that the market price of our common stock is at or above
$19.24 per share for twenty (20) consecutive trading days ending on the day
prior to the date on which we give notice that we are requiring exercise of the
2006 Warrants; provided, however, that the aggregate number of 2006 Warrants to
be redeemed shall not exceed the cumulative trading volume for the ten (10)
consecutive trading days prior to such redemption within any thirty (30) day
period. The number of 2006 Warrants to be redeemed shall be pro rata among each
holder of the then outstanding 2006 Warrants. The redemption price to be paid by
us shall be equal to $0.61 per 2006 Warrant.
Holders of these warrants are protected against dilution of the equity
interest represented by the underlying shares of our common stock upon the
occurrence of certain events, including, but not limited to, issuance of stock
dividends or stock splits.
OTHER WARRANTS
We also have outstanding warrants to purchase an aggregate of 260,000
shares of our common stock at an exercise price of $5.63 per share that we
issued to consultants in exchange for consulting services provided to us during
the fiscal years ended March 31, 2005 and March 31, 2006 and therafter until the
consummation of our initial public offering in October 2006. These warrants have
generally the same terms and conditions of the warrants issued in connection
with our private placements in December 2004 and February 2005.
91
REGISTRATION RIGHTS
In connection with the sale of the notes and warrants in our private
placements, we agreed to file a registration statement for the following
securities for resale: (i) all of the shares of our common stock issuable upon
the conversion of the notes and the exercise of the warrants, and (ii) all of
the shares of our common stock underlying the warrants issued to the placement
agent. We also agreed to file a registration statement for all of the shares of
common stock underlying all the warrants we issued to consultants. This
prospectus forms a part of the registration statement for the shares of common
stock issued upon the automatic conversion of the notes upon the consummation of
our initial public offering (other than shares issued upon conversion of accrued
interest on any of such notes) and warrants issued in connection with our
private placement completed in December 2004 and February 2005 and the warrants
issued to consultants, all of which will be registered for resale as of the date
of this prospectus. We have also agreed to use our commercially reasonable
efforts to file a registration statement for the resale of shares issuable upon
conversion of accrued interest on the notes issued in connection with our
private placement completed in December 2004 and February 2005 within 30 days of
the nine-month anniversary of the consummation of our initial public offering.
We have also granted piggy-back registration rights with respect to such shares.
In addition, we have also granted the purchasers of the notes and warrants
in connection with our private placement completed in November 2005 and March
2006 demand and piggy-back registration rights with respect to the shares of
common stock issued upon automatic conversion of the notes upon consummation of
our initial public offering and warrants that may be exercised following the
nine-month anniversary of the consummation of our initial public offering.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE NEW JERSEY BUSINESS CORPORATION
ACT AND OUR CHARTER DOCUMENTS.
Several provisions of the New Jersey Business Corporation Act and our
amended and restated certificate of incorporation and bylaws may have
anti-takeover effects. These provisions are intended to avoid costly takeover
battles, lessen our vulnerability to a hostile change of control and enhance the
ability of our board of directors to maximize shareholder value in connection
with any unsolicited offer to acquire us. However, these anti-takeover
provisions, which are summarized below, could also discourage, delay or prevent
(1) the merger or acquisition of our company by means of a tender offer, a proxy
contest or otherwise, that a shareholder may consider in its best interest and
(2) the removal of incumbent officers and directors.
BLANK CHECK PREFERRED STOCK
Under the terms of our amended and restated certificate or incorporation,
our board of directors has authority, without any further vote or action by our
shareholders, to issue up to 5,000,000 shares of blank check preferred stock.
Our board of directors may issue shares of preferred stock on terms calculated
to discourage, delay or prevent a change of control of our company or the
removal of our management.
BUSINESS COMBINATIONS
As a New Jersey corporation, we are subject to the New Jersey Shareholders
Protection Act, which contains specific provisions regarding "business
combinations" between corporations organized under the laws of the State of New
Jersey and "interested shareholder." These provisions prohibit certain New
Jersey corporations from engaging in business combinations (including mergers,
consolidations, significant asset dispositions and certain stock issuances) with
any interested shareholder (defined to include, among others, any person that
becomes a beneficial owner of 10% or more of the affected corporation's voting
92
power) for five years after such person becomes an interested shareholder,
unless the business combination is approved by the board of directors prior to
the date on which the shareholder became an interested shareholder. In addition,
the New Jersey Shareholders Protection Act prohibits any business combination at
any time with an interested shareholder other than a transaction that (i) is
approved by the board of directors prior to the date the interested shareholder
became an interested shareholder, or (ii) is approved by the affirmative vote of
the holders of two-thirds of the voting stock not beneficially owned by the
interested shareholder, or (iii) satisfies certain "fair price" and related
criteria.
ELECTION AND REMOVAL OF DIRECTORS
Our amended and restated certificate of incorporation does not provide for
cumulative voting in the election of directors. Our by-laws require parties
other than the board of directors to give advance written notice of nominations
for the election of directors. Our amended and restated certificate of
incorporation also provide that our directors may be removed only for cause and
only upon the affirmative vote of the holders of at least a majority of the
outstanding shares of our common stock entitled to vote for such directors.
These provisions may discourage, delay or prevent the removal of incumbent
officers and directors.
LIMITED ACTIONS BY SHAREHOLDERS
Our amended and restated certificate of incorporation and our by-laws
provide that any action required or permitted to be taken by our shareholders
must be effected at an annual or special meeting of shareholders or by the
unanimous written consent of our shareholders. Our amended and restated
certificate of incorporation will provide that, subject to certain exceptions,
only our board of directors, the chairman or vice chairman of our board of
directors, a chief executive officer or co-chief executive officer, as the case
may be, or our president or, at the direction of any of them, any vice president
or secretary may call special meetings of our shareholders. Our by-laws also
contain advance notice requirements for proposing matters that can be acted on
by the shareholders at a shareholder meeting. Accordingly, a shareholder may be
prevented from calling a special meeting for shareholder consideration of a
proposal over the opposition of our board of directors and shareholder
consideration of a proposal may be delayed until the next annual meeting.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Computershare
Trust Company, Inc. Its address is 350 Indiana Street, Suite 800, Golden,
Colorado 80401 and its telephone number is 303-262-0600.
93
SHARES ELIGIBLE FOR FUTURE SALE
We cannot predict the effect, if any, that market sales of shares of our
common stock or the availability of shares of our common stock for sale will
have on the market price of our common stock prevailing from time to time. Sales
of substantial amounts of our common stock, including shares issued upon
exercise of outstanding warrants, in the public market after this offering could
adversely affect market prices prevailing from time to time and could impair our
ability to raise capital through the sale of our equity securities.
As of June 30, 2007, 9,596,908 shares of our common stock were
outstanding. Of these shares, 2,867,212 are freely tradable without restriction
or further registration under the Securities Act, except for any shares held by
our affiliates, as that term in is defined in Rule 144 under the Securities Act
of 1933, as amended. Of the remaining 6,729,696 shares, 4,746,000 shares will be
held solely by our officers, directors and principal shareholders and the
remaining 1,983,696 shares are be held by investors that participated in our
private placements, of which 1,549,238 shares are being registered for resale
pursuant to the registration statement of which this prospectus forms a part,
excluding shares underlying warrants issued to such investors that will also be
registered for resale pursuant to the registration statement of which this
prospectus forms a part.
Restricted shares may be sold in the public market only if registered or
if they qualify for an exemption from registration under Rule 144 or 144(k)
promulgated under the Securities Act, which rules are summarized below. All of
the shares that are held by our officers and directors will be eligible for sale
under Rule 144 following the expiration date of the twelve month restriction on
sale under the lock-up agreements described below.
RULE 144
In general, under Rule 144 as currently in effect, a person, or group of
persons whose shares are required to be aggregated, who has beneficially owned
shares that are restricted securities as defined in Rule 144 for at least one
year is entitled to sell, within any three- month period commencing 90 days
after the date of this prospectus, a number of shares that does not exceed 1% of
the then outstanding shares of our common stock, which as of June 30, 2007, is
9,596,908 shares.
In addition, a person who is not deemed to have been an affiliate 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 would be entitled to sell
these shares under Rule 144(k) without regard to the requirements described
above. To the extent that shares were acquired from one of our affiliates, a
person's holding period for the purpose of effecting a sale under Rule 144 would
commence on the date of transfer from the affiliate.
LOCK-UP AGREEMENTS
Our directors, executive officers and certain of our shareholders,
representing approximately 4,746,000 shares of our common stock, have agreed
that, until October 18, 2007, they will not offer, issue, sell, contract to
sell, encumber, grant any option for the sale of or otherwise dispose of any of
our securities without the prior written consent of a representatives of the
underwriters of our initial public offering, including the issuance of shares of
our common stock upon the exercise of currently outstanding options and options
which may be issued pursuant to our 2004 Amended and Restated Stock Option Plan.
The terms of the lock-up agreements may be waived at the discretion of the
underwriters. In determining whether to waive the terms of the lock-up
agreements, underwriters may base their decision on their assessment of the
relative strengths of the securities markets and small capitalization companies
in general, and the trading pattern of, and demand for, our securities in
general.
94
SELLING SECURITYHOLDERS
The following table sets forth certain information with respect to each
selling securityholder for whom we are registering shares for resale to the
public. No material relationships exist between any of the selling
securityholders and us nor have any such material relationships existed within
the past three years, except that each of ProMed Partners, L.P., ProMed Partners
II, L.P., ProMed Offshore Fund, Ltd., ProMed Offshore Fund II, LTD, Guerilla
Capital L.P. and Kensington Capital L.P. provided consulting services to us
during the fiscal years ended March 31, 2005 and March 31, 2006, and thereafter
until the consummation of our initial public offering in October 2006, for which
we provided warrants to purchase 82,475, 2,616, 10,954, 25,830, 121,875 and
16,250 shares of common stock, respectively, at an exercise price of $5.62 per
share.
COMMON STOCK BENEFICIALLY
OWNED AFTER THIS OFFERING
NUMBER OF SHARES
OF COMMON STOCK SHARES NUMBER OF PERCENT
BENEFICIALLY BEING SHARES OF SHARES
SELLING SECURITYHOLDERS OWNED OFFERED OUTSTANDING OUTSTANDING
----------------------- ----- ------- ----------- -----------
Steven Berkowitz, M.D. 14,241 (28) 13,706 (1) 535 *
Natalie L. Kuhr Rev. Trust (2) 27,412 (1) 27,412 (1) 0 0
Pershing LLC Cust FBO Andrew Bellow Jr
Rollover IRA (3) 27,412 (4) 27,412 (4) 0 0
Andrew Bello, Jr. 8,666 6,528 2,138 *
John O. Johnston Trust (5) 13,706 (1) 13,706 (1) 0 0
Richard Kent & Laura Kent JTWROS 41,116 (1) 41,116 (1) 0 0
Richard Kent, IRA 13,706 (1) 13,706 (1) 0 0
Leo William Long 109,640 (1) 109,640 (1) 0 0
Roy G. Shaw, Jr. 27,412 (1) 27,412 (1) 0 0
Allen Coburn 13,706 (1) 13,706 (1) 0 0
Lee A. Pearlmutter Trust (6) 14,315 (7) 13,706 (1) 609 *
Alphonse D'Amato 54,822 (1) 54,822 (1) 0 0
Granite Sierra Company LLC (8) 54,822 (1) 54,822 (1) 0 0
Russell Realty Corp. Profit Sharing Plan
FBO John W. Russell (9) 50,822 (32) 50,822 (32) 0 0
Kerry Kent McKallip & George W.
McKallip, Jr. JT TEN 6,853 (4) 6,853 (4) 0 0
Ronald Marks 13,734 (10) 13,706 (1) 28 *
Lee Westerheide 17,812 (33) 17,812 (33) 0 0
Peter J. Van Emon 7,049 (1) 6,856 (1) 193 *
Joseph Zuckerman & Theda Zuckerman JTWROS 6,856 (1) 6,856 (1) 0 0
Aaron Weinberger 5,587 (29) 5,356 (1) 231 *
Richard Linchitz and Rita Linchitz 56,660 (30) 54,822 (1) 1,838 *
ProMed Partners, L.P. (11) +^ 234,771 (12) 193,421 (4) 41,350 0
ProMed Partners II, L.P. (11) +^ 13,201 (13) 13,151 (4) 50 0
ProMed Offshore Fund, LTD (11) +^ 34,921 (14) 26,521 (4) 8,400 0
ProMed Offshore Fund II, LTD (11) +^ 391,972 (15) 391,972 (15) 0 0
Jacobs Pond LLC and Paul Lodi (16) 27,412 (1) 27,412 (1) 0 0
Guerilla Partners, L.P. (17) 402,243 (18) 395,977 (18) 6,266 *
Bald Eagle Fund, LTD (19) 13,944 (1) 13,944 (1) 0 0
Kensington Partners, LP (20) 297,554 (21) 297,554 (21) 0 0
Daniel Silvershein 6,853 (4) 6,853 (4) 0 0
Platinum Partners Value Arbitrage Fund LP (22) 54,822 (1) 54,822 (1) 0 0
Gerald Garcia IRA^ 5,484 (1) 5,484 (1) 0 0
Gerald Garcia Roth IRA^ 8,224 (1) 8,224 (1) 0 0
Edgar and Kim Massabni JTWROS 28,334 (23) 27,412 (1) 922 *
Peter Brennan^^ 56,365 (24) 54,822 (1) 1,543 *
AFA Private Equity Fund 1 (25) 266,268 (1) 266,268 (1) 0 0
Stephen Cohen 13,943 (26) 13,706 (1) 237 *
Sherleigh Associates Defined Benefit Pension
Plan (27) + 1,058,666 (31) 1,033,738 (1) 24,928 *
Nicholas P. & Albert Carocci JRWROS 27,412 (1) 27,412 (1) 0 0
|
95
* Less than 1%
+ Except as indicated by a (+), no selling securityholder is an officer,
director, affiliate or 5% shareholder of ours.
^ Except as indicated by a (^), no selling securityholder is a broker dealer
or an affiliate of a broker-dealer. Gerald Garcia is a registered
representative with Maxim Group LLC, a broker-dealer; Peter Brennan is a
registered representative with Matrix Capital Market Groups, Inc., a
broker-dealer; and David Musket and Barry Kurokawa, each a partner or
director of ProMed Partners, L.P., ProMed Partners II, L.P., ProMed
Offshore Fund, Ltd. and ProMed Offshore Fund II, Ltd., is a principal and
registered representative, respectively, of Musket Research Associates,
Inc. a broker dealer.
(1) 50% of such shares are issuable upon exercise of outstanding warrants.
(2) Adam Kuhr and Lisa Lubchansky, co-trustees of the Natalie L. Kuhr Rev.
Trust, have voting and investment control over such securities.
(3) Andrew Bello, Jr., trustee of the Andrew Bello Jr. Rollover IRA, has
voting and investment control over such securities.
(4) All of such shares are issuable upon exercise of outstanding warrants.
(5) John O'Neal Johnston, trustee of the John O. Johnston Trust, has voting
and investment control over such securities.
(6) Lee A. Pearlmutter, trustee of the Lee A. Pearlmutter Trust, has voting
and investment control over such securities.
(7) Includes 6,853 shares issuable upon exercise of outstanding warrants.
(8) John W. Russell, manager of Granite Sierra Company LLC, has voting and
investment control over such securities.
(9) John W. Russel, trustee of the Russell Realty Corp. Profit Sharing Plan
FBO John W. Russel, has voting and investment control over such
securities.
(10) Includes 6,853 shares issuable upon exercise of outstanding warrants.
(11) Barry Kurokawa and David B. Musket, managing directors of each of ProMed
Partners, L.P., ProMed Partners II, L.P. and ProMed Offshore Fund I, Ltd.
and ProMed Offshore Fund II, Ltd., have voting and investment control over
such securities.
(12) Includes 193,421 shares issuable upon exercise of outstanding warrants.
(13) Includes 13,151 shares issuable upon exercise of outstanding warrants.
(14) Includes 26,521 shares issuable upon exercise of outstanding warrants.
(15) Includes 149,177 shares issuable upon exercise of outstanding warrants.
(16) Paul Lodi has voting and investment control over such securities.
(17) Peter Siris and Leigh Curry have voting and investment control over such
securities.
(18) Includes 258,926 shares issuable upon exercise of outstanding warrants.
(19) Richard Keim, managing partner of Bald Eagle Fund Ltd., has voting and
investment control over such securities.
(20) Richard Keim, managing partner of Kensington Partners, LP, has voting and
investment control over such securities.
(21) Includes 156,902 shares are issuable upon exercise of outstanding
warrants.
(22) Mark Nordlicht, general partner of Platinum Partners Value Arbitrage Fund
LP, has voting and investment control over such securities.
(23) Includes 13,706 shares are issuable upon exercise of outstanding warrants.
(24) Includes 27,411 shares are issuable upon exercise of outstanding warrants.
(25) Marc H. Klee, director of AFA Private Equity Fund I, has voting and
investment control over such securities.
(26) Includes 6,853 shares are issuable upon exercise of outstanding warrants.
(27) Jack Silver, trustee of the Sherleigh Associates Defined Benefit Pension
Plan, has voting and investment control over such securities.
(28) Includes 6,853 shares issuable upon exercise of outstanding warrants.
(29) Includes 3,428 shares issuable upon exercise of outstanding warrants.
(30) Includes 27,411 shares issuable upon exercise of outstanding warrants.
(31) Includes 516,869 shares issuable upon exercise of outstanding warrants.
(32) Includes 27,411 shares issuable upon exercise of outstanding warrants.
(33) Includes 13,706 shares issuable upon exercise of outstanding warrants.
Each of the selling securityholders that is an affiliate of a
broker-dealer has represented to us that it purchased the shares offered by this
prospectus in the ordinary course of business and, at the time of purchase of
those shares, did not have any agreements, understandings or other plans,
directly or indirectly, with any person to distribute those shares.
96
PLAN OF DISTRIBUTION
The selling securityholders, which as used herein includes donees,
pledgees, transferees or other successors-in-interest selling shares of common
stock or interests in shares of common stock received after the date of this
prospectus from a selling securityholder as a gift, pledge, partnership
distribution or other transfer, may, from time to time, sell, transfer or
otherwise dispose of any or all of their shares of common stock or interests in
shares of common stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions. These dispositions may
be at fixed prices, at prevailing market prices at the time of sale, at prices
related to the prevailing market price, at varying prices determined at the time
of sale, or at negotiated prices.
The selling securityholders may use any one or more of the following
methods when disposing of shares or interests therein:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o 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;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales;
o through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise;
broker-dealers may agree with the selling securityholders to sell a
specified number of such shares at a stipulated price per share; a
combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling securityholders 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, or under an amendment to this prospectus
under Rule 424(b)(3) or other applicable provision of the Securities Act
amending the list of selling securityholders to include the pledgee, transferee
or other successors in interest as selling securityholders under this
prospectus. The selling securityholders 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; provided, however, that prior to any such transfer the
following information (or such other information as may be required by the
federal securities laws from time to time) with respect to each such selling
beneficial owner must be added to the prospectus by way of a prospectus
supplement or post-effective amendment, as appropriate: (1) the name of the
selling beneficial owner; (2) any material relationship the selling beneficial
owner has had within the past three years with us or any of our predecessors or
affiliates; (3) the amount of securities of the class owned by such security
beneficial owner before the offering; (4) the amount to be offered for the
security beneficial owner's account; and (5) the amount and (if one percent or
more) the percentage of the class to be owned by such security beneficial owner
after the offering is complete.
97
In connection with the sale of our common stock or interests therein, the
selling securityholders may enter into hedging transactions with broker-dealers
or other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The selling
securityholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The selling
securityholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
The aggregate proceeds to the selling securityholders from the sale of the
common stock offered by them will be the purchase price of the common stock less
discounts or commissions, if any. Each of the selling securityholders reserves
the right to accept and, together with their agents from time to time, to
reject, in whole or in part, any proposed purchase of common stock to be made
directly or through agents. We will not receive any of the proceeds from this
offering. Upon any exercise of the warrants by payment of cash, however, we will
receive the exercise price of the warrants.
The selling securityholders also may resell all or a portion of the shares
in open market transactions in reliance upon Rule 144 under the Securities Act
of 1933, provided that they meet the criteria and conform to the requirements of
that rule.
The selling securityholders and any underwriters, broker-dealers or agents
that participate in the sale of the common stock or interests therein may be
"underwriters" within the meaning of Section 2(11) of the Securities Act. Any
discounts, commissions, concessions or profit they earn on any resale of the
shares may be underwriting discounts and commissions under the Securities Act.
Selling securityholders who are "underwriters" within the meaning of Section
2(11) of the Securities Act will be subject to the prospectus delivery
requirements of the Securities Act.
To the extent required, the shares of our common stock to be sold, the
names of the selling securityholders, the respective purchase prices and public
offering prices, the names of any agents, dealer or underwriter, any applicable
commissions or discounts with respect to a particular offer will be set forth in
an accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement that includes this prospectus.
The maximum amount of compensation to be received by any NASD member or
independent broker-dealer for the sale of any securities registered under this
prospectus will not be greater than 8.0% of the gross proceeds from the sale of
such securities.
In order to comply with the securities laws of some states, if applicable,
the common stock may be sold in these jurisdictions only through registered or
licensed brokers or dealers. In addition, in some states the common stock may
not be sold unless it has been registered or qualified for sale or an exemption
from registration or qualification requirements is available and is complied
with.
We have advised the selling securityholders that the anti-manipulation
rules of Regulation M under the Exchange Act may apply to sales of shares in the
market and to the activities of the selling securityholders and their
affiliates. In addition, we will make copies of this prospectus (as it may be
supplemented or amended from time to time) available to the selling
securityholders for the purpose of satisfying the prospectus delivery
requirements of the Securities Act. The selling securityholders may indemnify
any broker-dealer that participates in transactions involving the sale of the
shares against certain liabilities, including liabilities arising under the
Securities Act.
98
We have agreed to indemnify the selling securityholders against
liabilities, including liabilities under the Securities Act and state securities
laws, relating to the registration of the shares offered by this prospectus.
We have agreed with the selling securityholders to keep the registration
statement of which this prospectus constitutes a part effective until the
earlier of (1) such time as all of the shares covered by this prospectus have
been disposed of pursuant to and in accordance with the registration statement
or (2) the date on which the shares may be sold pursuant to Rule 144(k) of the
Securities Act.
LEGAL MATTERS
The legality of the securities offered in this prospectus has been passed
upon for us by Lowenstein Sandler PC, Roseland, New Jersey.
EXPERTS
The financial statements as of March 31, 2007 and March 31, 2006 and for
the years then ended, included in this prospectus have been audited by Raich
Ende Malter & Co. LLP, independent auditors, as stated in its report appearing
in this prospectus and elsewhere in the registration statement of which this
prospectus forms a part, and have been so included in reliance upon the reports
of such firm given upon its authority as experts in accounting and auditing.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, 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 us of expenses incurred or paid by one of our directors, officers or
controlling persons in the successful defense of any action, suit or proceeding)
is asserted by that 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 that indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of that issue.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement of Form SB-2 relating
to the securities being offered through this prospectus. As permitted by the
rules and regulations of the SEC, the prospectus does not contain all the
information described in the registration statement. For further information
about us and our securities, you should read our registration statement,
including the exhibits and schedules. In addition, we will be subject to the
requirements of the Securities Exchange Act of 1934, as amended, following the
offering and thus will file annual, quarterly and special reports, proxy
statements and other information with the SEC. These SEC filings and the
registration statement are available to you over the Internet at the SEC's web
site at http://www.sec.gov/. You may also read and copy any document we file
with the SEC at the SEC's public reference room in at 100 F. Street, N.E., Room
1580, Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further
information about the public reference room. Statements contained in this
prospectus as to the contents of any agreement or other document are not
necessarily complete and, in each instance, you should review the agreement or
document which has been filed as an exhibit to the registration statement.
99
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS AS OF MARCH 31, 2007 AND 2006
Report of Independent Registered Public Accounting Firm F-2
Balance Sheet as of March 31, 2007 F-3
Statements of Operations For the Years Ended March 31, 2007 and 2006 F-4
Statements of Stockholders' Equity For the Years Ended
March 31, 2007 and 2006 F-5
Statements of Cash Flows For the Years Ended March 31, 2007 and 2006 F-6
Notes to Financial Statements F-8
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Ivivi Technologies, Inc.
We have audited the accompanying balance sheet of Ivivi Technologies, Inc. as of
March 31, 2007, and the related statements of operations, stockholders' equity,
and cash flows for each of the two years then ended. These financial statements
are the responsibility of the company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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 Ivivi Technologies, Inc. as of
March 31, 2007, and the results of its operations and its cash flows for each of
the two years then ended in conformity with accounting principles generally
accepted in the United States of America.
/s/ Raich Ende Malter & Co. LLP
East Meadow, New York
June 28, 2007
|
F-2
IVIVI TECHNOLOGIES, INC.
BALANCE SHEET
AS OF MARCH 31,
ASSETS
2007
------------
Current assets:
Cash and cash equivalents $ 8,310,697
Accounts receivable, net of allowance for
doubtful accounts of $37,405 224,349
Inventory 236,735
Prepaid expenses 154,730
------------
8,926,511
Property and equipment, net 46,040
Equipment in use and under rental agreements, net 60,096
Intangible assets, net of accumulated amortization of $3,570 270,826
------------
$ 9,303,473
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,005,975
Advances payable - affiliates 36,657
------------
1,042,632
Deferred revenue 473,958
Stockholders' equity:
Preferred stock, no par value; 5,000,000 shares
authorized, no shares issued and outstanding -
Common stock, no par value; 70,000,000 shares
authorized, 9,556,783 shares issued
and outstanding 20,922,154
Additional paid-in capital 10,577,111
Accumulated deficit (23,712,382)
------------
7,786,883
------------
$ 9,303,473
============
|
The accompanying notes are an integral part of these financial statements.
F-3
IVIVI TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31,
2007 2006
------------ ------------
Revenue:
Sales $ 416,292 $ 147,949
Rentals 740,006 638,563
Licensing 26,042 -
------------ ------------
1,182,340 786,512
------------ ------------
Costs and expenses:
Cost of sales 87,040 52,790
Cost of rentals 93,998 215,985
Depreciation and amortization 19,636 9,049
Research and development 1,610,232 1,334,637
Sales and marketing 1,098,266 1,152,947
General and administrative 2,217,743 2,055,865
Share based compensation 2,142,448 656,848
------------ ------------
7,269,363 5,478,121
------------ ------------
(6,087,023) (4,691,609)
Change in fair value of
warrant and registration
rights liabilities (25,827) (4,658,537)
Interest and finance
costs, net (1,665,761) (1,396,525)
------------ ------------
Loss before provision
for income taxes (7,778,611) (10,746,671)
Provision for income taxes - -
------------ ------------
Net loss $ (7,778,611) $(10,746,671)
============ ============
Net loss per share, basic
and diluted $ (1.13) $ (2.26)
============ ============
Weighted average shares
outstanding 6,875,028 4,745,000
============ ============
|
The accompanying notes are an integral part of these financial statements.
F-4
IVIVI TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2007 AND 2006
Common Stock Additional Total
---------------------------- Paid-In Deferred Accumulated Stockholders'
Shares Amount Capital Compensation Deficit Equity
-------------------------------------------------------------------------------------------
Balance - April 1, 2005 4,745,000 $ 74,600 $ 768,689 $ (522,802) $ (5,187,100) $ (4,866,613)
Reclassification of deferred compensation (522,802) 522,802 -
Beneficial conversion feature 133,776 133,776
Share based compensation 653,047 653,047
Warrants issued without debt 242,780 242,780
Intrinsic value of options issued
to employees 11,424 11,424
Net loss (10,746,671) (10,746,671)
-------------------------------------------------------------------------------------------
Balance - March 31, 2006 4,745,000 74,600 1,286,914 - (15,933,771) (14,572,257)
Issuance of common stock in connection
with initial public offering, net 2,750,000 13,640,241 - - 13,640,241
Convertible debt converted 1,584,009 8,087,500 - - 8,087,500
Unamortized value of convertible debt
discount at time of conversion - (523,484) - - (523,484)
Issuance cost related to convertible
debt conversion - (568,864) - - (568,864)
Value of share based registration rights
liability at time of conversion 438,380 - 3,450,050 - 3,450,050
Value of warrants and beneficial
conversion feature at time of conversion - - 3,697,699 - 3,697,699
Accrued interest paid in stock 39,394 212,161 - - 212,161
Share based compensation - - 2,142,448 2,142,448
Net loss - - - (7,778,611) (7,778,611)
-------------------------------------------------------------------------------------------
Balance - March 31, 2007 9,556,783 $ 20,922,154 $ 10,577,111 $ - $(23,712,382) $ 7,786,883
===========================================================================================
The accompanying notes are an integral part of these financial statements.
F-5
|
IVIVI TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31,
2007 2006
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,778,611) $(10,746,671)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 25,099 60,840
Change in fair value of warrant and
registration rights liabilities 25,827 4,658,537
Share based financing penalties 1,350,278 770,752
Amortization of loan costs and discount 173,008 237,856
Share based compensation 2,142,448 664,471
Provision for doubtful accounts 30,608 19,665
Amortization of deferred revenue (26,042) -
Changes in operating assets and liabilities:
(Increase) decrease in:
Inventory 54,761 (19,760)
Accounts receivable (32,826) (240,665)
Prepaid expenses (144,144) 291,356
Increase in:
Accounts payable and accrued expenses 158,834 763,980
Deferred revenue 500,000 -
------------ ------------
(3,520,760) (3,539,639)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (34,344) (6,595)
Intangible assets (274,407) -
------------ ------------
(308,751) (6,595)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock in connection with
initial public offering 13,963,898 -
Proceeds from issuance of notes, net of
costs of $104,208 - 1,895,792
Affiliate advances (2,566,038) 70,207
Proceeds of notes 250,000 -
Repayment of notes (250,000) -
Deferred loan costs - -
Deferred offering costs - (183,062)
------------ ------------
11,397,860 1,782,937
------------ ------------
Net increase/(decrease) in cash and cash equivalents 7,568,349 (1,763,297)
Cash and cash equivalents, beginning of period 742,348 2,505,645
------------ ------------
Cash and cash equivalents, end of period $ 8,310,697 $ 742,348
============ ============
|
F-6
IVIVI TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31,
2007 2006
------------ ------------
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 417,662 $ 170,164
Income taxes - -
Non Cash Financing and Investing Activities:
Debt converted to equity $ 7,564,016 -
Warrant and registration rights liabilities
converted to equity $ 7,147,749 -
Shares issued for accrued interest $ 212,161 -
The accompanying notes are an integral part of these financial statements.
F-7
|
IVIVI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2007
1. ORGANIZATIONAL MATTERS
ORGANIZATION
Ivivi Technologies, Inc. ("we", "us", "the company" or "Ivivi"), formerly
AA Northvale Medical Associates, Inc., was incorporated under the laws of the
state of New Jersey on March 9, 1989. We are authorized under our Certificate of
Incorporation to issue 70,000,000 common shares, no par value and 5,000,000
preferred shares, no par value.
NATURE OF BUSINESS
We sell and rent non-invasive electro-therapeutic medical devices. These
products are sold or rented to customers located principally in the United
States.
Our medical devices are subject to extensive and rigorous regulation by the
FDA, as well as other federal and state regulatory bodies. We believe based upon
guidance published by the FDA that all of our current products are covered by
the FDA clearance provided in 1991 for our SofPulse product. In February, 2007,
in response to inquiries from the FDA, we voluntarily submitted a 510(k) for our
current products which is currently under review by the FDA. We have had
discussions with the FDA regarding our application and, in June 2007, we
received a letter from the FDA requesting additional information from us. If the
FDA does not grant a 510(k) clearance for our current products, the FDA may
require us to cease marketing and/or recall current products already sold or
rented until FDA clearance or approval is obtained.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES-- These financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
and, accordingly, require management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS-- For certain of our financial
instruments, including accounts receivable, accounts payable and accrued
expenses and advances payable-affiliates, the carrying amounts approximate fair
value due to their relatively short maturities.
CASH AND CASH EQUIVALENTS-- We consider all highly liquid investments with
maturities of three months or less at the time of purchase to be cash
equivalents. Cash equivalents consist primarily of money market funds and other
debt investments that are carried at cost, which approximate fair value.
REVENUE RECOGNITION-- We recognize revenue primarily from the sales and
rental of our products. In addition, we recognize revenue from companies that
are licensed to distribute our products in specific markets. Further, and to a
lesser extent, we recognize revenue from the amortization of licensing revenue
under our Revenue Sharing Agreement (See Note 7).
Sales are recognized when our products are shipped to end users including
medical facilities and distributors. Shipping and handling charges and costs are
immaterial. Except for warranties on our products, we have no post shipment
obligations and sales returns have been immaterial.
Rental revenue is recognized as earned on either a monthly or pay-per-use
basis in accordance with individual customer agreements. In most cases, we allow
the rental end user to evaluate our equipment on a trial basis, during which
time we provide any demonstration or education necessary for the use of our
equipment. Rental revenue recognition commences after the end of the trial
period. All of our rentals are terminable by either party at any time. When we
use a third party to bill insurance companies, we still recognize revenue as our
products are used. When certain of our distributors bill end users, we recognize
rental revenue when we are paid by the distributor.
F-8
We provide an allowance for doubtful accounts determined primarily through
specific identification and evaluation of significant past due accounts,
supplemented by an estimate applied to the remaining balance of past due
accounts.
INVENTORY-- Inventory consists of our electroceutical units and is stated
at the lower of cost or market.
PROPERTY & EQUIPMENT-- We record our equipment at historical cost. We
expense maintenance and repairs as incurred. Depreciation is provided for by the
straight-line method over three to seven years, the estimated useful lives of
the property and equipment.
RENTAL EQUIPMENT-- Rental equipment consists of our electroceutical units
and accessories leased to third parties, used internally and loaned out for
marketing and testing. It is depreciated on a straight-line basis over three to
seven years, the estimated useful lives of the units, commencing on the date
placed in service.
INTANGIBLE ASSETS--Intangible assets consist of patents and trademarks of
$198,862 and deferred licensing costs of $71,964, net of accumulated
amortization of $3,570. Amortization expense totalled $3,570 and $0.00 for the
fiscal years ended March 31, 2007 and 2006, respectively. Patents and trademarks
are amortized over their legal life and deferred licensing costs are amortized
over the life of the related Revenue Sharing agreement (See Note 7).
LONG-LIVED ASSETS-- We follow Statement of Financial Accounting Standards
(SFAS), No. 144, "ACCOUNTING FOR IMPAIRMENT OF DISPOSAL OF LONG-LIVED ASSETS,"
which established a "primary asset" approach to determine the cash flow
estimation period for a group of assets and liabilities that represents the unit
of accounting for a long lived asset to be held and used. Long-lived assets to
be held and used are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The carrying amount of a long-lived asset is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset. Long-lived assets to be disposed of are
reported at the lower of carrying amount or fair value less cost to sell. During
the years ended March 31, 2007 and 2006, no impairment loss was recognized.
ADVERTISING COSTS-- Advertising costs are expensed as incurred and amounted
to $81,832 and $325,944 for the fiscal years ended March 31, 2007 and 2006,
respectively.
RESEARCH AND DEVELOPMENT COSTS-- Our research and development costs consist
mainly of payments for third party research and development arrangements and
employee salaries. Research and development totalled $1,610,232 and $1,334,637,
before related charges of $581,712 and $478,961 for share-based compensation,
for the fiscal years ended March 31, 2007 and 2006, respectively.
SHARE-BASED COMPENSATION--We historically accounted for share-based
compensation to employees in accordance with Accounting Principles Board Opinion
No. 25 ("APB 25") "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," and its related
interpretations, as permitted by SFAS No. 123, "ACCOUNTING FOR STOCK BASED
COMPENSATION." APB 25 required the use of the intrinsic value method.
On April 1, 2006, we adopted the provisions of SFAS 123(R) "SHARE-BASED
PAYMENT," using the modified prospective method. Under this method, we
recognized compensation cost based on the grant date fair value, using the Black
Scholes option value model, for all share-based payments granted on or after
April 1, 2006 plus any awards granted to employees prior to April 1, 2006 that
remain unvested at that time.
F-9
We use the fair value method for equity instruments granted to nonemployees
and use the Black Scholes option value model for measuring the fair value of
warrants and options. The share-based fair value compensation is determined as
of the date of the grant or the date at which the performance of the services is
completed (measurement date) and is recognized over the periods in which the
related services are rendered.
Pro forma information regarding the effects on operations of employee and
director common share purchase options as required by SFAS No. 123 and SFAS No.
148 has been determined as if we had accounted for those options under the fair
value method. Pro forma information is computed using the Black Scholes method
at the date of grant of the options based on the following assumption ranges:
(1) risk free interest rate of 3.62% to 4.75%; (2) dividend yield of 0%; (3)
volatility factor of the expected market price of our common stock of 60% to
67%; and (4) an expected life of the options of 1.5 to 5 years. The foregoing
option valuation model requires input of highly subjective assumptions. Because
common share purchase options granted to employees and directors have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value of estimates, the existing model does not in the opinion of our
management necessarily provide a reliable single measure of the fair value of
common share purchase options we have granted to our employees and directors.
Pro forma information relating to employee and director common share purchase
options is as follows:
For the fiscal
year ended
March 31, 2006
----------------
Net loss as reported $ (10,746,671)
Add: share based compensation expense
calculated under APB 25 $ 11,424
Deduct: share based compensation expense
calculated under fair value method $ (46,511)
----------------
Pro forma net loss $ (10,781,758)
================
Basic and diluted net loss per share,
as reported $ (2.26)
================
Pro forma basic and diluted
net loss per share $ (2.27)
================
|
F-10
INCOME TAXES-- We reported the results of our operations for the year ended
March 31, 2006 and the results of our operations for the period April 1, 2006
through October 18, 2006, the IPO date (see Note 3) as part of a consolidated
tax return with ADM Unlimited, Inc., formerly a majority shareholder. We have
entered into a tax sharing arrangement where each of the members compensates
each other to the extent that their respective taxes are affected as a result of
this arrangement. We are filing separate corporate income tax returns for the
period October 19, 2006 through March 31, 2007. Deferred income taxes result
primarily from temporary differences between financial and tax reporting.
Deferred tax assets and liabilities are determined based on the difference
between the financial statement bases and tax bases of assets and liabilities
using enacted tax rates. A valuation allowance is recorded to reduce a deferred
tax asset to that portion that is expected to more likely than not be realized.
NET LOSS PER SHARE-- We use SFAS No. 128, "Earnings Per Share" for
calculating the basic and diluted loss per share. We compute basic loss per
share by dividing net loss and net loss attributable to common shareholders by
the weighted average number of common shares outstanding. Diluted loss per share
is computed similar to basic loss per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential shares had been issued and if the additional shares
were dilutive. Common equivalent shares are excluded from the computation of net
loss per share if their effect is antidilutive.
Per share basic and diluted net loss amounted to $1.13 for the fiscal year
ended March 31, 2007 and $2.26 for the fiscal year ended March 31, 2006. For the
years ended March 31, 2007 and 2006, 5,270,291 potential shares and 5,417,515
potential shares, respectively, were excluded from the shares used to calculate
diluted earnings per share as their inclusion would reduce net loss per share.
RECLASSIFICATIONS--Certain reclassifications have been made to the
consolidated financial statements for the prior period in order to have them
conform to the current period's classifications. These reclassifications have no
effect on previously reported net income.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued Interpretation No. 48, ACCOUNTING FOR
UNCERTAINTY IN INCOME TAXES--AN INTERPRETATION OF FASB STATEMENT NO. 109 (FIN
48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in an enterprise's financial statements in accordance with FASB Statement No.
109, ACCOUNTING FOR INCOME TAXES (FASB No. 109). The interpretation prescribes a
recognition threshold and also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. The provisions of FIN 48 are effective for us on
April 1, 2007. The application of FIN 48 will not have a material effect on our
financial position, results from operations, or cash flows.
In September 2006, the FASB issued SFAS No. 157, FAIR VALUE MEASUREMENTS
(SFAS No. 157), which establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. Where applicable, this
accounting standard, which simplifies and codifies related guidance within GAAP,
is effective for us beginning April 1, 2008. We have not yet determined the
effect, if any, the adoption of SFAS No. 157 may have on our financial
statements.
In February 2007, the FASB issued SFAS No. 159, THE FAIR VALUE OPTION FOR
FINANCIAL ASSETS AND FINANCIAL LIABILITIES (SFAS No. 159). This statement
permits entities to choose to measure financial assets and liabilities, with
certain exceptions, at fair value at specified election dates. A business entity
shall report unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting date. This
statement is effective for us beginning April 1, 2008. We have not determined
the effect, if any, the adoption of SFAS No. 159 may have on our financial
statements.
F-11
3. INITIAL PUBLIC OFFERING
During October 2006, we completed our initial public offering, the IPO,
selling 2.5 million shares of our common stock at $6.00 per share, raising gross
proceeds of $15.0 million. The underwriters of the offering were granted an
option for a period of 45 days to purchase up to an aggregate of 375,000
additional shares of common stock from us to cover over-allotments, if any. Net
proceeds to us from the IPO were approximately $12.2 million after the payment
of underwriting discounts and commissions and expenses related to the offering.
On November 22, 2006, we received additional net proceeds of approximately $1.4
million, after the payment of underwriting commissions and expenses, from the
underwriters who partially exercised their option to purchase 250,000 of the
available 375,000 shares of our common stock to cover over-allotments at $600
per share.
Upon the consummation of the IPO, unsecured convertible notes in the
aggregate principal amount of $6,087,500, issued in our December 2004 and
February 2005 joint private placements with ADM Unlimited, Inc., or ADM, the
owner of 33.9% of our outstanding common stock, automatically converted into an
aggregate of 1,630,232 shares of our common stock. The notes bore interest at an
annual rate of 6%, which interest was payable at the discretion of the holder in
cash, shares of ADM common stock or shares of our common stock.
Also, upon consummation of the IPO, unsecured convertible notes in the
aggregate principal amount of $2,000,000 issued in connection with our November
2005 and March 2006 private placements to four institutional investors
automatically converted into an aggregate of 392,157 shares of our common stock.
The notes bore interest at an annual rate of 8%, payable in cash. Two of the
institutional investors who purchased notes, Ajax Capital LLC and Kenneth S.
Abramowitz & Co., Inc., are investment funds wholly-owned by Steven Gluckstern
and Kenneth Abramowitz, respectively, each of whom began to serve as a director
of our company upon the effective date of the Registration Statement and waived
their right to receive interest payments on a quarterly basis through the
consummation of the IPO (approximately $25,000 per quarter). We used
approximately $77,000 and $19,000 of the net proceeds to pay Ajax Capital LLC
and Kenneth S. Abramowitz Co., Inc., respectively, and an additional $149,000 of
the proceeds from the IPO to pay the other holders, any and all interest with
respect to such notes then due and payable.
As a result of the foregoing, we do not have any loans outstanding as of
the date of this filing.
4. PROPERTY AND EQUIPMENT, NET
Our property and equipment as of March 31, 2007 is as follows:
Computer equipment $ 45,453
Leasehold improvements 3,401
Machinery & Equipment 206,853
----------
255,707
Accumulated depreciation (209,667)
----------
$ 46,040
==========
|
Depreciation and amortization expense related to property and equipment
amounted to $16,066 and $9,049 during the years ended March 31, 2007 and 2006,
respectively.
F-12
5. RENTAL EQUIPMENT
Equipment in use and under rental agreements consists of the following at
March 31, 2007:
Electroceutical units $ 940,139
Accumulated depreciation (880,043)
----------
$ 60,096
==========
|
Depreciation expense related to equipment in use and under rental
agreements, which is included in the cost of rentals on our Statements of
Operations, amounted to $5,463 and $51,791 during the years ended March 31, 2007
and 2006, respectively.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
At March 31, 2007, accounts payable and accrued expenses consisted of the
following:
Research and development $ 559,420
Professional fees 286,904
Sales commissions 24,562
Other 135,089
----------
$1,005,975
==========
7. DEFERRED REVENUE
|
In August, 2006, we sold to Ajax, 15 units of the Roma3 and 5 units of the
SofPulse M-10 at a purchase price of $14,500 per unit, the then published
wholesale unit price for the Roma3 and the SofPulse M-10, for an aggregate
purchase price of $290,000. In connection therewith, we entered into a Revenue
Sharing Agreement (the "Revenue Sharing Agreement") with Ajax, pursuant to which
we agreed to use our commercially reasonable efforts to rent to third parties
all of the units of the Roma3 and the SofPulse M-10 purchased by Ajax.
On December 22, 2006, our Audit Committee approved the termination of the
Revenue Sharing Agreement with Ajax. In connection with the termination, Ajax
transferred to us all of its rights, title and interest in and to the units of
the Roma3 and the SofPulse M-10 purchased by Ajax on the date of the Revenue
Sharing Agreement, and we paid Ajax $296,136. As a result of the termination, we
are entitled to all revenues generated by the rental and sales of such units and
the related applicators from and after the termination date.
F-13
On November 9, 2006, we entered into an exclusive worldwide distribution
agreement (the "Agreement") with a wholly-owned subsidiary of Allergan, Inc.
("Allergan"), a global healthcare company that discovers, develops and
commercializes pharmaceutical and medical device products in specialty markets.
Pursuant to the Agreement, we granted Allergan's subsidiary, Inamed Medical
Products Corporation and its affiliates ("Inamed") the exclusive worldwide right
to market, sell and distribute certain of our products, including all
improvements, line extensions and future generations thereof (collectively, the
"Product") in conjunction with any aesthetic or bariatric medical procedures
(the "Field") in the defined Marketing Territory.
Under the Agreement, we also granted Inamed the right to rebrand the
Product, with Inamed owning all rights to such brands developed by Inamed for
such purpose. Under the Agreement, we received an initial payment of $500,000
and will receive certain milestone payments of up to $1,000,000 in the aggregate
upon the Product's First Commercial Sale (as defined in the Agreement) in the
United States and Europe. In addition, Inamed will purchase the Product from us
at a predetermined price and must meet certain minimum order requirements.
Finally, we will receive royalty payments based on Inamed's net sales and number
of units sold of the Product, subject to certain annual minimum royalty payments
to be determined by the parties.
The Agreement has an eight year initial term beginning at the Product's
First Commercial Sale. The initial term may be extended for two additional years
without further payment at Inamed's option. Inamed may also pay us a $2,000,000
extension fee and extend the term of the Agreement for up to eight additional
years, for a total term of up to 18 years.
Inamed may market, sell and distribute the Product under the Agreement only
in the "Marketing Territory," which is generally defined in the Agreement as the
United States and such other jurisdictions for which all requisite regulatory
approval has been obtained. If the marketing, sale or distribution of the
Product in a jurisdiction would infringe third-party intellectual property
rights and likely result in a lawsuit against us or Inamed, Inamed could require
us to use reasonable commercial efforts to obtain a license for, or redesign,
the Product to be sold in that jurisdiction.
In the event we fail to supply Allergan or its subsidiaries certain minimum
amounts of the Product and fail to procure alternate suppliers for such Products
within certain timeframes, Inamed will have the right to use certain of our
intellectual property and/or other proprietary information to manufacture the
Product until such time as we demonstrate to Inamed's reasonable satisfaction
that we are fully able to resume our supply obligations. During such time as
Inamed controls Product manufacturing, our royalty rate would be significantly
reduced.
In the event Inamed is required to discontinue the marketing, sale or
distribution of the Product in the United States and/or any country in the
European Union because of problems with regulatory approvals and/or other
reasons related to the Product, we will be required to repay Inamed portions of
the milestone payments up to $1,000,000.
Inamed may terminate the Agreement by giving 90 to 180 days' prior written
notice to us. We may terminate the Agreement by giving 12 months' prior written
notice if Inamed fails to timely pay us minimum royalty amounts for any
applicable year or fails to meet the minimum sales requirements set forth in the
Agreement. A nonbreaching party may terminate the Agreement following a material
breach of the Agreement and the breaching party's failure to cure such breach
during the applicable cure period by giving the breaching party proper prior
written notice. If we are in material breach, and fail to cure, Inamed may have
the right to use certain of our intellectual property and/or other proprietary
information to manufacture the Product. Our royalty rate would subsequently be
significantly reduced.
F-14
Neither party may assign or otherwise transfer its right and obligations
under the Agreement, including upon a change of control of such party (as
defined in the Agreement), without the prior written consent of the other party,
which consent shall not be unreasonably withheld, except that Inamed may assign
its rights and obligations without the prior written consent of the company to
Inamed's affiliates and upon a sale of all or substantially all of the assets or
equity of the business entity, division or unit, as applicable, that markets,
distributes or sells the Product.
The Agreement includes other terms and conditions, including provisions
regarding regulatory responsibilities, audit rights, insurance, indemnification
and confidentiality.
In November 2006, we received $500,000 under the terms of this Agreement
which was recorded as deferred revenue and is being amortized over eight years,
the initial term of the agreement. During the fiscal year ended March 31, 2007,
we have recognized $26,042 in revenue from this agreement.
8. INCOME TAXES
Net operating losses for tax purposes of approximately $13,573,000 at March
31, 2007 are available for carryover. The net operating losses will expire from
2010 through 2027. We have provided a 100% valuation allowance for the deferred
tax benefit resulting from the net operating loss carryover due to our limited
operating history. In addressing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences are deductible. A
reconciliation of the statutory Federal income tax rate and the effective income
tax rate for the years ended March 31, 2007 and 2006 follows:
2007 2006
------------ ------------
Statutory federal income tax rate (34)% (34)%
State income taxes, net of federal taxes (6)% (6)%
Nondeductible items:
Share-based compensation 11% 2%
Share-based financing penalties 7% 3%
Change in fair value of derivative liabilities 0% 18%
Valuation allowance 22% 17%
------------ ------------
Effective income tax rate 0% 0%
============ ============
|
Significant components of deferred tax assets and liabilities are as
follows:
F-15
March 31, March 31,
2007 2006
------------ ------------
Deferred tax assets (liabilities):
Bad debts $ 15,000 $ 8,000
Net operating loss carryforwards 5,427,000 3,740,000
------------ ------------
Deferred tax assets, net 5,442,000 3,748,000
Valuation allowance (5,442,000) (3,748,000)
------------ ------------
Net deferred tax assets $ - $ -
============ ============
9. OPTIONS AND WARRANTS OUTSTANDING
|
We have instituted a stock option plan for the issuance of 2,437,500
shares. As of March 31, 2007 and 2006, 1,885,600 and 1,544,725 of options,
respectively, were awarded, with 551,900 reserved for future issuance as of
March 31, 2007. The weighted average fair value of options issued to employees
and directors during the years ended March 31, 2007 and 2006 is $2.63 and $1.82
per share, respectively.
Included in the table below are 775,000 of nonplan options to Steven
Gluckstern, our Chairman of the Board, that were granted during the fiscal year
ended March 31, 2007.
In connection with the private placements with ADM in December 2004 and
February 2005, we issued 1,191,827 Common Stock Purchase Warrants ("CSPW") and
an additional 438,380 CSPWs as a penalty due to our delayed IPO. In addition, we
issued 392,157 CSPWs in connection with our private placements completed in
November 2005 and March 2006. Further, we issued 260,000 CSPWs to our
consultants as well as 327,327 CSPWs issued to the Maxim Group, who acted as our
placement agent in connection with our private placement as well as acting as an
advisor to the company.
COMMON SHARE OPTIONS AND WARRANTS ISSUED
The following table summarizes information on all common share purchase
options and warrants issued by us for the periods ended March 31, 2007 and 2006,
including common share equivalents relating to the convertible debenture share
purchase warrants.
F-16
March 31, 2007 March 31, 2006
------------------------ -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Number Price Number Price
---------- ---------- ---------- ----------
Outstanding, beginning of the year 3,740,108 $ 3.50 3,003,105 $ 2.68
Granted 1,571,433 4.95 737,003 7.02
Exercised - - - -
Terminated (41,250) 5.73 - -
---------- ---------- ---------- ----------
Outstanding, end of the year 5,270,291 $ 3.81 3,740,108 $ 3.50
========== ========== ========== ==========
Exercisable, end of year 3,600,092 $ 3.68 876,627 $ 2.83
========== ========== ========== ==========
|
The number and weighted average exercise prices of all common shares and
common share equivalents issuable and stock purchase options and warrants
outstanding as of March 31, 2007 is as follows:
WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE
--------------------------------------------------------------------
$0.00 to $1.00 1,112,963 8.3 $0.23
$1.01 to $3.00 67,763 7.3 1.58
$3.01 to $4.00 1,722,421 6.8 3.51
$4.01 to $6.00 1,895,647 8.7 5.54
$6.01 to $9.00 471,497 8.1 6.73
-----------------------------------------------
5,270,291 7.9 $3.81
===============================================
|
F-17
SHARE BASED COMPENSATION
Share based compensation expense consists of the following components:
2007 2006
------------ ------------
Cost of rentals $ 45 $ 41
Research and development 581,712 478,961
Sales and marketing 176,691 112,337
General and administrative 1,384,000 65,509
------------ ------------
$ 2,142,448 $ 656,848
============ ============
|
10. COMMITMENTS AND CONTINGENCIES
In January 2006, we entered into a Master Clinical Trial Agreement with the
Cleveland Clinic Florida to perform a clinical trial of our device for a new
use. The estimated cost of the clinical trial is $300,000. The Cleveland Clinic
Florida is a not-for-profit multi-specialty medical group practice.
Our medical devices are sold under agreements providing for the repair or
replacement of any devices in need of repair, at our cost, for up to one year
from the date of delivery, unless such need was caused by misuse or abuse of the
device. Based on prior experience, at March 31, 2006 and 2005 no amounts have
been accrued for potential warranty costs and such costs are expected to be
nominal for the fiscal year ended March 31, 2007.
CONSULTING AGREEMENTS
We have entered into various consulting agreements in exchange for cash and
share based compensation. Certain of the agreements contain automatic renewal
provisions. Consulting expense totalled $1,509,493 and $1,427,844 for the years
ended March 31, 2007 and 2006, respectively.
11. RETIREMENT PLAN
We have a 401(k) profit-sharing plan that covers substantially all
employees. We will contribute up to 3% on each employee's salary at the end of
each fiscal year, beginning with fiscal 2008. Since the plan was adopted in
March 2007, we had no expense for the fiscal year ended March 31, 2007.
12. LEGAL PROCEEDINGS
On August 17, 2005, we filed a complaint against Conva-Aids, Inc. t/a New
York Home Health Care Equipment, or NYHHC, and Harry Ruddy in the Superior Court
of New Jersey, Law Division, Docket No. BER-L-5792-05, alleging breach of
contract with respect to a distributor agreement that we and NYHHC entered into
on or about August 1, 2004, pursuant to which: (i) we appointed NYHHC as
exclusive distributor of our products in a defined market place for so long as
NYHHC secured a minimum number of placements of our products and (ii) NYHHC
agreed to pay us $2,500 per month for each product shipped to NYHHC. By letter,
dated August 9, 2005, we terminated the agreement due to NYHHC's failure to make
the payments required under the agreement and failure to achieve the minimum
number of placements required under the agreement. We are seeking various forms
of relief, including: (i) money damages, including amounts due under unpaid
invoices in an aggregate amount in excess of $236,560, (ii) an accounting and
F-18
(iii) the return of our products. The defendants filed a motion to dismiss,
alleging lack of jurisdiction and failure to state a claim with regard to Harry
Ruddy. We opposed the defendant's motion to dismiss. On November 18, 2005, the
Court denied the defendant's motion to dismiss, without prejudice, based upon
lack of jurisdiction. The complaint was dismissed against Harry Ruddy,
individually The Court permitted a period of discovery to determine the
jurisdiction issue, which discovery is substantially complete. The defendants
filed another motion to dismiss based upon a claim of lack of jurisdiction,
which was heard and denied by the Court on June 9, 2006. On or about July 10,
2006, the defendants filed an answer, and NYHHC filed counterclaims against us
for breach of contract, breach of the implied covenant of good faith and fair
dealing, restitution, unjust enrichment and fraudulent inducement. An answer to
the counterclaim was filed on August 9, 2006. Discovery is now continuing on the
merits of the claims in the complaint and counterclaim.
On October 10, 2006, we received a demand for arbitration by Stonefield
Josephson, Inc. with respect to a claim for fees for accounting services in the
amount of approximately $106,000, plus interest and attorney's fees. Stonefield
Josephson had previously invoiced Ivivi for fees for accounting services in an
amount that Ivivi has refuted. We responded to Stonefield Josephson's demand for
arbitration, which we believe was procedurally defective and premature due to
Stonefield Josephson's failure to participate in required mediation, and we
continue to defend against the claim vigorously, although provision has been
made for the amount of the claim in the financial statements. Moreover, we are
pursuing claims against Stonefield Josephson. On October 26, 2006, we sent a
letter requesting the required mediation before arbitration. On December 4,
2006, we received notification from the arbitration forum that the arbitration
was placed on hold until the mediation phase is completed.
Other than the foregoing, we are not a party to, and none of our property
is the subject of, any pending legal proceedings other than routine litigation
that is incidental to our business.
13. CONCENTRATIONS
During the fiscal year ended March 31, 2007, three customers accounted for
80% of our sales revenue and two customers accounted for 44% of our rental
revenue. During the fiscal year ended March 31, 2006, one customer accounted for
11% of our revenue. At March 31, 2007, one customer accounted for 57% of our
accounts receivable. The loss of these major customers could have a material
adverse impact on our operations and cash flow.
14. RELATED PARTY TRANSACTIONS
As discussed in Note 3, we used approximately $77,000 and $19,000 of the
net proceeds from our IPO to pay Ajax Capital LLC and Kenneth S. Abramowitz Co.,
Inc., respectively, any and all interest with respect to the November 2005 and
March 2006 private placement notes.
In connection with the IPO, we repaid approximately $2.6 million to ADM,
representing the balance in our inter-company accounts at October 24, 2006 due
to ADM from us for product manufacturing and allocations of support services
provided by ADM to us for the period from March 1989 to October 2006.
In addition, we repaid our note payable to Ajax with a payment of $257,123,
which represented the outstanding principal and interest under the unsecured
subordinated loan. The note bore interest at an annual rate of 8%.
F-19
As discussed in Note 7, on December 22, 2006, our Audit Committee approved
the termination of the Revenue Sharing Agreement with Ajax dated, August 28,
2006. In connection with the termination, Ajax transferred to us all of its
rights, title and interest in and to the units of the Roma3 and the SofPulse
M-10 purchased by Ajax on the date of the Revenue Sharing Agreement, and we paid
Ajax $296,136.
Pursuant to a management services agreement, dated as of August 15, 2001,
ADM provides us with administrative, technical, engineering and regulatory
services and allocates portions of its real property facilities for use by us.
In addition, ADM serves as the exclusive manufacturer of medical and other
devices or products to be distributed by us.
The amount included in cost of rental revenue on our Statements of
Operations relating to these services provided by ADM was $75,584 and $72,417
for the fiscal years ended March 31, 2007 and 2006.
The amount included in general and administrative expense representing
ADM's allocations for the fiscal year ended March 31, 2007 and 2006, was
$242,595 and $226,807, respectively, consisting of amounts payable under our
management services agreement with ADM.
During the twelve month period ended March 31, 2007, we purchased $59,789
of finished goods from ADM at contracted rates.
Our activity in affiliates is summarized as follows:
Fiscal years ended March 31, 2007 2006
----------------------------------- ------------ ------------
Balance, beginning of year $ 2,602,695 $ 2,532,488
Advances 12,218 (785)
Purchases 59,789 -
Charges 318,179 299,224
Payments (2,956,224) (228,232)
------------ ------------
Balance, end of year $ 36,657 $ 2,602,695
============ ============
|
15. SUBSEQUENT EVENTS
We are planning to move our headquarters to Montvale, New Jersey on or
about October 1, 2007. In June 2007, we entered into a lease pursuant to which,
subject to the satisfaction of certain conditions, including the receipt of
certain permits from local authorities, we will rent approximately 7,494 square
feet of office space located in Montvale, New Jersey. If such conditions are
satisfied, the term of the lease will begin on or about October 1, 2007 and
expire on or about November 1, 2014, subject to our option to renew the lease
for an additional five year period on terms and conditions set forth therein.
Pursuant to the lease, we will be required to pay rent in the amount of
$14,051.25 per month during the first two years of the term, with the exception
of month 13 at no cost, and $15,612.50 per month thereafter. Although we
currently are unable to estimate the cost of moving into this new office space,
we do not anticipate such costs being material to our results of operations.
Following our move, we intend to retain certain of our current office and
laboratory space. This lease will require us to add additional limits to our
currently outstanding liability insurance.
F-20
IVIVI TECHNOLOGIES, INC.
3,439,470 SHARES
COMMON STOCK
July 25, 2007
Grafico Azioni Equifin (AMEX:II)
Storico
Da Mag 2024 a Giu 2024
Grafico Azioni Equifin (AMEX:II)
Storico
Da Giu 2023 a Giu 2024
