In July 2009, Bruce Meyers and Dana Smith (jointly,
the “Lenders”) funded a total $120,000 loan to the Company. The Loan was in the nature of convertible debt and was
evidenced by an unsecured promissory note (the “Note”), that was convertible into common stock of the Company at a
price that was 22.5% less than the average of the closing bid prices for the Company’s shares for the five (5) days prior
to the Lenders’ election to exercise their conversion right under the Note. The Note was to bear interest at the rate of
10% per annum, with interest payable due at maturity. The terms sheet provides that all unpaid interest (and principal) will be
due and payable on the date that is the earlier to occur of the first anniversary of the closing date of the Loan or the closing
of a financing in an amount that is equal to or greater than $3.0 million that will satisfy the Company’s obligation under
its loan with BlueCrest. However, during the year ended December 31, 2009, the Lenders elected to convert the entire amount of
the Loan to shares of the Company’s common stock. Accordingly, the aggregate number of unregistered
and restricted shares of the Company’s common stock issued in connection with, and as a
result of the conversion of, the Loan was 355,294 shares. The Company will have no obligation to file any registration statement
with respect to the shares, except that the Lenders will have customary “piggyback” registration rights.
In February 2009, Bruce Meyers and Robert Seguso
(jointly, the “Lenders”) funded the remaining $100,000 of a total $200,000 loan to the Company. The funds were delivered,
net of original issue discount in the amount of $10,000, pursuant to a terms sheet provided by Bruce Meyers, for a convertible
debt financing to be provided to the Company (the “Loan”). Although the terms sheet provided that the Lenders would
be provided a complete set of loan documentation, the Lenders delivered to the Company the entire net proceeds of the Loan, in
the amount of $190,000, in advance of receiving any documentation. The initial funding of $100,000 was made to the Company on January
21, 2009. However, the Company determined that it would not proceed with the Loan unless and until the Lenders funded the balance
of the net proceeds which was completed on February 3, 2009 and provided that the Board of Directors of the Company approved the
Loan, which approval was obtained on February 11, 2009.
The above Loan was in the nature of convertible
debt and was evidenced by an unsecured promissory note (the “Note”), that was convertible into common stock of the
Company at a price that was 22.5% less than the average of the closing bid prices for the Company’s shares for the five (5)
days prior to the Lenders’ election to exercise their conversion right under the Note. The Note was to bear interest at the
rate of 10% per annum, with interest payable due at maturity. The terms sheet provides that all unpaid interest (and principal)
will be due and payable on the date that is the earlier to occur of the first anniversary of the closing date of the Loan or the
closing of a financing in an amount that is equal to or greater than $3 million that will satisfy the Company’s obligation
under its loan with BlueCrest. However, during the year ended December 31, 2009, the Lenders elected to convert the entire amount
of the Loan to shares of the Company’s common stock.
In addition to the Note, the Company issued
to the Lenders 200,000 unregistered and restricted shares of the Company’s common stock. We believe that the offer and sale
of the securities is made only to accredited investors and, accordingly, is exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended. The fair value of the issued shares were recorded as a debt discount and amortized ratably
over the term of the loan.
At December 31, 2010, the Company has outstanding
two notes payable with interest at 8% per annum due at maturity. The two notes, $61,150 and $323,822 are payable
in one balloon payment upon the date the Noteholder provides written demand, however the Company is not obligated to make payments
until the BlueCrest Loan is paid off.
Notes payable, related party
At December 31, 2010, the Company has outstanding
two related party notes payable with interest at 8% per annum due at maturity. The two notes, $125,000 and $100,000 are due on
October 22, 2012 and November 30, 2012, respectively, and are unsecured.
NOTE 10 -STOCKHOLDERS' EQUITY
On August 6, 2008, the Company amended its
Articles of Incorporation to increase the number of authorized shares of its common stock from 50 million to 75 million shares.
This amendment was approved by the Company’s shareholders at the Annual Meeting of Shareholders held on July 30, 2008.
In September 2007, by way of a written consent,
the Company’s shareholders holding a majority of its outstanding shares of common stock, the Company’s shareholders
approved an amendment to Bioheart’s Articles of Incorporation, increasing the number of authorized shares of capital stock
so that, following the reverse stock split that was effectuated on September 27, 2007, the Company had 50 million shares of common
stock authorized with a par value of $0.001 per share and five million shares of preferred stock authorized with a par value of
$0.001 per share.
On February 22, 2008 the Company completed
its initial public offering ("IPO") pursuant to which it sold 1,100,000 shares of common stock at a price per share of
$5.25 for net proceeds of approximately $1.45 million after deducting underwriter discounts of approximately $400,000 and offering
costs of approximately $3.92 million. The Consolidated Statement of Cash Flows for the year ended December 31, 2008 reflects the
Company’s receipt of approximately $4.24 million of “Proceeds from (payments for) initial public offering of common
stock, net”. The $4.24 million cash proceeds figure is approximately $2.79 million higher than the $1.45 million net proceeds
figure identified above due to payment of $2.79 million of various offering expenses prior to January 1, 2008.
In 2010, the Company also sold, in a private placement initiated in 2009, an aggregate of 1,512,890 shares of its common stock and warrants (the “Warrants”) to purchase 453,867 shares of its common stock for aggregate gross cash proceeds of approximately $852,964. The Warrants are (i) exercisable solely for cash at a weighted average exercise price of $0.68 per share, (ii) non-transferable for six months following issuance and (iii) exercisable, in whole or in part, at any time and from time to time during the period commencing on the date that is six months and one day following the date of issuance and ending on the third year anniversary of the date of issuance.
In 2010, the Company issued, in connection with the conversion of $1,121,195 of debt an aggregate of 7,459,720 shares of its common stock and warrants (the “Warrants”) to purchase 3,729,860 shares of its common stock. The Warrants are (i) exercisable solely for cash at an exercise price of $0.15 per share, (ii) non-transferable for six months following issuance and (iii) exercisable, in whole or in part, at any time and from time to time
during the period commencing on the date that is six months and one day following the date of issuance and ending on the third year anniversary of the date of issuance. The shares were issued under the same terms as the above mentioned private placement and therefore are included in issuance of common stock in the consolidated statement of shareholders deficit.
In 2010, the Company also sold, in a private placement, an aggregate of 1,553,885 shares of its common stock for aggregate gross cash proceeds of approximately $234,020.
In 2010, the Company also sold, in a private placement, an aggregate of 808,210 shares of its common stock and warrants (the “Warrants”) to purchase 404,105 shares of its common stock for aggregate gross cash proceeds of approximately $135,885. The Warrants are (i) exercisable solely for cash at a weighted average exercise price of $0.20 per share, (ii) non-transferable for six months following issuance and (iii) exercisable, in whole or in part, at any time and from time to time during the period commencing on the date that is six months and one day following the date of issuance and ending on the third year anniversary of the date of issuance.
As of December 31, 2010 the Company recorded a Subscription Receivable, under the above mentioned private placement, of 20,000 shares of its common stock and warrants (the “Warrants”) to purchase 10,000 shares of its common stock for aggregate gross cash proceeds of approximately $3,800. The Warrants are (i) exercisable solely for cash at a weighted average exercise price of $0.23 per share, (ii) non-transferable for six months following issuance and (iii) exercisable, in whole or in part, at any time and from time to time during the period commencing on the date that is six months and one day following the date of issuance and ending on the third year anniversary of the date of issuance.
In 2010, the Company issued, in connection with services, an aggregate of 529,520 shares of its common stock and warrants (the “Warrants”) to purchase 158,856 shares of its common stock. The Warrants are (i) exercisable solely for cash at a weighted average exercise price of $0.78 per share, (ii) non-transferable for six months following issuance and (iii) exercisable, in whole or in part, at any time and from time to time during the period commencing on the date that is six months and one day following the date of issuance and ending on the third year anniversary of the date of issuance.
In 2010, the Company issued, in connection with the exercise of Stock Options, issued for Accounts Payables, an aggregate of 831,526 shares of its common stock.
In 2010, the Company issued, in connection with the Bank of America guarantor’s liability of $2,172,000 principal along with accrued expenses, an aggregate of 4,794,430 shares of its common stock and warrants (the “Warrants”) to purchase 1,438,329 shares of its common stock. The Warrants are (i) exercisable solely for cash at an weighted average exercise price of $0.74 per share, (ii) non-transferable for six months following issuance and (iii) exercisable, in whole or in part, at any time and from time to time during the period commencing on the date that is six months and one day following the date of issuance and ending on the third year anniversary of the date of issuance.
In December 2009,
the Company also sold, in a private placement an aggregate of 255,830 shares of its common stock and warrants (the “Warrants”)
to purchase 76,749 shares of its common stock for aggregate gross cash proceeds of approximately $188,996. The Warrants are (i)
exercisable solely for cash at a weighted average exercise price of $0.89 per share, (ii) non-transferable for six months following
issuance and (iii) exercisable, in whole or in part, at any time and from time to time during the period commencing on the date
that is six months and one day
F-25
following the date of issuance and ending on
the third year anniversary of the date of issuance.
In 2009, the Company
also sold, in a private placement initiated in 2008, an aggregate of 2,509,480 shares of its common stock and warrants (the
“Warrants”) to purchase 752,844 shares of its common stock for aggregate gross cash proceeds of approximately $1.74
million. The Warrants are (i) exercisable solely for cash at a weighted average exercise price of $0.83 per share, (ii) non-transferable
for six months following issuance and (iii) exercisable, in whole or in part, at any time and from time to time during the period
commencing on the date that is six months and one day following the date of issuance and ending on the third year anniversary of
the date of issuance. In connection with the private placement, the Company paid to a finder who introduced certain investors
to the Company aggregate cash fees of $17,856 and warrants to purchase 26,592 shares of common stock at a weighted average exercise
price of $0.89 per share. The warrants issued to the finder have the same terms and conditions as the Warrants issued in the private
placement. The 2008 private placment was closed on October 31, 2009, with total capital raised of $3,887,032.
In 2008, the Company
also sold, in a private placement, an aggregate of 1,230,280 shares of its common stock and warrants (the “Warrants”)
to purchase 369,084 shares of its common stock for aggregate gross cash proceeds of approximately $2.14 million. The Warrants are
(i) exercisable solely for cash at a weighted average exercise price of $2.09 per share, (ii) non-transferable for six months following
issuance and (iii) exercisable, in whole or in part, at any time and from time to time during the period commencing on the date
that is six months and one day following the date of issuance and ending on the third year anniversary of the date of issuance.
In connection with the private placement, the Company paid to a finder who introduced certain investors to the Company aggregate
cash fees of $24,325 and warrants to purchase 24,325 shares of common stock at a weighted average exercise price of $1.95 per share.
The warrants issued to the finder have the same terms and conditions as the Warrants issued in the private placement.
In 2007, the Company sold 529,432 shares
of common stock at a price of $7.69 per share to various investors for net proceeds of approximately $3.9 million.
In 2006, the Company sold 1,069,699 shares
of common stock at a price of $7.69 per share to various investors. The Company also issued 63,566 shares in exchange for services
at a price ranging from $5.67 to $7.69 per share.
In 2005, the Company sold 1,994,556 shares
of common stock at a price of $5.67 per share to various investors. The Company also issued 1,210 shares in exchange for services
and issued 95,807 shares in exchange for debt at a price of $5.67 per share.
In 2004, the Company sold 808,570 shares of
common stock at a price of $5.67 per share to various investors. The Company also issued 1,854 shares to various vendors in exchange
for services valued at $10,500. The Company also issued 15,150 shares to the Company's Chairman of the Board as compensation for
services valued at $85,830.
In March 2003, the Company effected a recapitalization.
The recapitalization provided two shares of common stock for every one share issued as of that date. The Company's former Chairman
of the Board and founding shareholder, who owned 4,405,541 shares of common stock, did not participate in the recapitalization.
The number of shares and prices per share in the accompanying financial statements has been retroactively adjusted to reflect the
effect of the recapitalization.
After the 2003 recapitalization, the Company
sold 561,701 shares of common stock at a price of $5.67 per share to various investors. The Company issued 72,980 shares valued
at $416,383 to employees as compensation for services related to the closing of various locations. The Company also issued 4,248
shares to various vendors in exchange for services valued at $24,066 and issued 67,073 shares to the Company's former Chairman
of the Board as compensation for services provided to the Company during 2003 and 2002. The shares were valued based on the underlying
market price of the common stock and did not differ materially from the fair value of the common stock issued.
In 2002, the Company sold 1,092,883 shares
of common stock at a price of $6.47 per share to various investors. The
F-26
Company also issued 35,137 shares to various
vendors in exchange for services valued at $227,503.
In 2001, the Company sold 985,668 shares of
common stock at a price of $6.47 per share to various investors. The Company also issued 8,291 shares to various vendors in exchange
for services valued at $54,001 and issued 81,084 shares to the Company's Chairman of the Board as compensation for services provided
to the Company during 2001.
In 2000, the Company sold 1,493,575 shares
of common stock at a price of $6.47 per share to various investors. Of the 1,493,575 shares sold in 2000, payment on 77,222 of
these shares was not received until January 2001. The Company also issued 7,964 shares to various vendors in exchange for services
valued at $52,001.
In 1999, the Company's former Chairman of the
Board and founding shareholder contributed $400,000 to the Company in exchange for 4,324,458 shares of common stock.
Former Chairman of the Board Paid in
and Contributed Capital
In 2006, the Company's former Chairman of the
Board was issued 2,903 shares of the Company's common stock at a price of $5.67 per share in exchange for $16,443 of services provided
during the year.
In 2005, the Company's former Chairman of the
Board was issued 95,807 shares of the Company's common stock at a price of $5.67 per share in exchange for $542,787 of debt due
to travel and other related expenses advanced by the Company's Chairman of the Board during the previous three years.
The Company's former Chairman of the Board
elected not to receive salary payments of $85,830, $130,000 and $250,000 for services provided to the Company during 2004, 2003
and 2002, respectively. Such amounts were converted into 15,150, 22,946 and 44,127 shares of the Company's common stock at a price
of $5.67 per share on December 31, 2004 and 2003, respectively, where the 2003 and 2002 shares were both issued in 2003. The shares
were valued based on the underlying market price of the common stock and did not differ materially from the fair value of the common
stock issued.
In 2001, the Company's former Chairman of the
Board also elected not to receive a salary payment or a stock conversion of $250,000 for services provided during 2001.
In 2000, the Company's former Chairman of the
Board contributed $800,000 to the Company and elected not to receive payment for $250,000 of salary related to services provided
to the Company during 2000. Such amounts were recorded as contributed capital during 2000. On June 28, 2001, the Company's Board
of Directors approved the conversion of this contributed capital and salary deferral into 81,084 shares of the Company's common
stock at a price of $12.94 per share.
NOTE 11 - STOCK OPTIONS AND WARRANTS
Stock Options
In July 2008, the Board
of Directors approved, subject to shareholder approval, the establishment of the Bioheart Omnibus Equity Compensation Plan (the
“Omnibus Plan”). The establishment of the Omnibus Plan was approved by the Company’s shareholders at the Annual
Meeting of Shareholders held on July 30, 2008. Pursuant to the Omnibus Plan, the Company may grant restricted stock, incentive
stock options, non-statutory stock options, stock appreciation rights, deferred stock, stock awards, performance shares, and other
stock-based awards consisting of cash, restricted stock or unrestricted stock in various combinations to the Company’s employees,
directors and consultants. 5,000,000 shares of common stock have been reserved for issuance under the Omnibus Plan. As of December
31, 2010, 4,500,000 shares remain available for issuance under the Omnibus Plan.
In December 1999, the
Company adopted two stock option plans; an employee stock option plan and a directors and consultants stock option plan (collectively
referred to as the “Stock Option Plans”), under which a total of 1,235,559 shares of common stock were reserved for
issuance upon exercise of options granted by the Company. In
F-27
2001, the Company
amended the Stock Option Plans to increase the total shares of common stock reserved for issuance to 1,698,894. In 2003, the Company
approved an increase of 308,890 shares, making the total 2,007,784 shares available for issuance under the Stock Option Plans.
In 2006, the Company approved an increase of 1,081,114 shares, making the total 3,088,898 shares available for issuance under the
Stock Option Plans. The Stock Option Plans provide for the granting of incentive and non-qualified options. The terms of stock
options granted under the Stock Option Plans are determined by the Compensation Committee of the Board of Directors at the time
of grant, including the exercise price, vesting provisions and contractual term of such options. The exercise price of incentive
stock options must equal at least the fair value of the common stock on the date of grant, and the exercise price of non-qualified
stock options may be no less than the per share par value. The options have terms of up to ten years after the date of grant and
become exercisable as determined upon grant, typically over either three or four year periods from the date of grant. Certain outstanding
options vested over a one-year period and some vested immediately. On February 24, 2010, by way of a written consent, the Company’s
Board of Directors amended the Directors and Consultants 1999 Stock Option Plan to extend the termination date of the Plan
to December 1, 2011. As of December 31, 2010, 559,835 shares remain available for issuance under the
Stock Option Plans.
A summary of options at
December 31, 2010 and activity during the year then ended is presented below:
| | |
| Shares | | |
| Weighted-Average Exercise Price | | |
| Weighted-Average Remaining Contractual Term (in years) | | |
| Aggregate Intrinsic Value (1) | |
| Options outstanding at January 1, 2010 | |
| 2,119,431 | | |
$ | 3.28 | | |
| 5.4 | | |
| | |
| Granted | |
| 1,764,940 | | |
$ | 0.32 | | |
| | | |
| | |
| Exercised | |
| (831,526 | ) | |
$ | 0.001 | | |
| | | |
| | |
| Forfeited/Expired | |
| (1,027,301 | ) | |
$ | 2.62 | | |
| | | |
| | |
| Options outstanding at December 31, 2010 | |
| 2,025,544 | | |
$ | 2.79 | | |
| 6.8 | | |
| 0 | |
| Options exercisable at December 31, 2010 | |
| 1,538,995 | | |
$ | 3.48 | | |
| 5.9 | | |
| 0 | |
| Available for grant at December 31, 2010 | |
| 5,059,835 | | |
| | | |
| | | |
| | |
(1)
The aggregate intrinsic value represents the amount by which the fair market value of the
Company’s common stock exceeds the exercise price of options at December 31, 2010.
The weighted average fair
value of options granted in 2010 and 2009 was $0.46 and $0.66 per share, respectively. The total intrinsic value of options exercised
in 2010 and 2009 was $502,865 and $5,845, respectively.
For the twelve month period
ended December 31, 2010, the Company recognized a net $248,457 in expense. This amount consisted of $123,377 in stock-based compensation
that was included in research and development expenses, and $125,080 that was included in marketing, general and administrative
expenses. For the year ended December 31, 2009, the Company recognized $296,838 in stock-based compensation
costs which was offset by a net reversal of $21,079 of previously recognized stock-based compensation that was included
in marketing, general and administrative expenses. No tax benefits were attributed to the stock-based
compensation expense because a valuation allowance was maintained for all net deferred tax assets. The Company elected to adopt
the alternative method of calculating the historical pool of windfall tax benefits as permitted by ASC Topic 718, formerly FSP
No. SFAS 123R-c, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. This is a
simplified method to determine the pool of windfall tax benefits that is used in determining the tax effects of stock compensation
in the results of operations and cash flow reporting for awards that were outstanding as of the adoption of ASC Topic 718, formerly
SFAS No. 123R. At December 31, 2010, the Company had approximately $270,272 of unrecognized compensation costs related to non-vested
options that is expected to be recognized over the next three years.
The following information
applies to options outstanding and exercisable at December 31, 2010:
F-28
| |
Options Outstanding |
Options Exercisable |
| |
Shares |
Weighted-Average Remaining Contractual
Term |
Weighted-Average Exercise Price |
Shares |
Weighted-Average Exercise Price |
| $0.00 – $0.70 |
775,227 |
9.3 |
$0.56 |
327,190 |
$0.64 |
| $0.71 – $1.28 |
389,943 |
7.1 |
$0.76 |
355,283 |
$0.76 |
| $5.25 – $5.67 |
820,184 |
4.2 |
$5.60 |
816,332 |
$5.60 |
| $7.69 |
39,572 |
5.7 |
$7.69 |
39,572 |
$7.69 |
| $8.47 |
618 |
2.6 |
$8.47 |
618 |
$8.47 |
| |
2,025,544 |
6.8 |
$2.79 |
1,538,995 |
$3.85 |
The Company uses the Black-Scholes
valuation model to determine the fair value of options on the date of grant. This model derives the fair value of options based
on certain assumptions related to expected stock price volatility, expected option life, risk-free interest rates and dividend
yield. The Company’s expected volatility is based on the historical volatility of other publicly traded development stage
companies in the same industry. The risk-free interest rate assumption is based upon the U.S. Treasury yield curve appropriate
for the term of the expected life of the options.
For the years ended December
31, 2010 and 2009, the fair value of each option grant was estimated on the date of grant using the following weighted-average
assumptions.
| | |
|
| | |
For the year ended December 31, |
| | |
2010 | |
2009 |
| Expected dividend yield | |
| 0.0 | % | |
| 0.0 | % |
| Expected price volatility | |
| 128–148 | % | |
| 129–131 | % |
| Risk free interest rate | |
| 2.00 | % | |
| 2.00 | % |
| Expected life of options in years | |
| 5.0 | | |
| 5.0 | |
In its meeting of August
12, 2009, the Board of Directors approved the repricing of current employees’ stock options (other than Executive Officers).
In accordance with regulations concerning such a repricing and in conformance with generally accepted procedures, all options granted
before August 12, 2008, were repriced on the basis of the 5-day average closing price of BHRT, during the period of August 11 through
August 17, 2009.
The following information
applies to the repricing which occurred as of October 8, 2009.
| Original Exercise Price | |
| New Exercise Price | | |
| Number of shares underlying Options | |
| | |
| | | |
| | |
| $1.28 | |
$ | 0.71 | | |
| 61,778 | |
| $4.11 | |
$ | 0.71 | | |
| 10,000 | |
| $5.67 | |
$ | 0.71 | | |
| 409,144 | |
| $7.69 | |
$ | 0.71 | | |
| 12,851 | |
| $8.47 | |
$ | 0.71 | | |
| 38,163 | |
| | |
| | | |
| 531,936 | |
Of those options listed
above, 400,472 expired as of December 31, 2010 without having been exercised.
F-29
Warrants
The Company does not have
a formal plan in place for the issuance of stock warrants. However, at times, the Company will issue warrants to non-employees
or in connection with financing transactions. The exercise price, vesting period, and term of these warrants is determined by the
Company’s Board of Directors at the time of issuance. A summary of warrants at December 31, 2010 and activity during the
year then ended is presented below:
| | |
Shares | |
Weighted-Average Exercise Price | |
Weighted-Average Remaining Contractual Term (in years) | |
Aggregate Intrinsic Value |
| Outstanding at January 1, 2010 | |
| 7,355,057 | | |
$ | 3.06 | | |
| 9.4 | | |
| | |
| Issued | |
| 6,693,712 | | |
$ | 0.78 | | |
| | | |
| | |
| Exercised | |
| 0 | | |
$ | 0.00 | | |
| | | |
| | |
| Forfeited | |
| 128,040 | | |
$ | 0.74 | | |
| | | |
| | |
| Outstanding at December 31, 2010 | |
| 13,920,729 | | |
$ | 1.98 | | |
| 5.8 | | |
$ | 614,602 | |
| Exercisable at December 31, 2010 | |
| 8,232,314 | | |
$ | 1.82 | | |
| 5.4 | | |
$ | 0.00 | |
In 2010, the Company issued warrants
in a private placement to purchase an aggregate of 6,323,039 shares of its common stock. Excluding the aforementioned warrants,
the weighted average fair value of warrants recognized in 2010 was $7.69 per share. The weighted average fair value of warrants
issued in 2009 was $0.60 per share.
The Company uses the Black-Scholes
valuation model to determine the fair value of warrants on the date of issuance. The Company’s expected volatility is based
on the historical volatility of other publicly traded development stage companies in the same industry. The expected life of the
warrants is based primarily on the contractual life of the warrants. The risk-free interest rate assumption is based upon the U.S.
Treasury yield curve appropriate for the term of the expected life of the warrants.
For the years ended December
31, 2010 and 2009, the fair value of warrants issued in transaction was $185,307 and $1,913,487, respectively which, was estimated
on the date of issuance using the following weighted-average assumptions.
| | |
For the year ended December 31, |
| | |
2010 | |
2009 |
| Expected dividend yield | |
| 0.0 | % | |
| 00.0 | % |
| Expected price volatility | |
| 104%–152 | % | |
| 1.0 | % |
| Risk free interest rate | |
| 1.91%–2.43 | % | |
| 2.8 | % |
| Expected life of options in years | |
| 7–8 | | |
| 10.0 | |
The following information
applies to warrants outstanding and exercisable at December 31, 2010:
F-30
| |
Warrants Outstanding |
Warrants Exercisable |
| |
Shares |
Weighted-Average Remaining Contractual
Term |
Weighted-Average Exercise Price |
Shares |
Weighted-Average Exercise Price |
| $0.01 - $0.50 |
4,143,965 |
2.9 |
$0.18 |
- |
- |
| $0.52 - $0.68 |
3,776,909 |
6.5 |
$0.59 |
3,776,909 |
$0.59 |
| $0.70 - $1.62 |
2,649,454 |
4.3 |
$0.79 |
2,649,454 |
$0.79 |
| $1.81 – $2.61 |
427,119 |
0.9 |
$2.07 |
427,119 |
$2.07 |
| $3.60 – $4.93 |
105,000 |
2.7 |
$4.87 |
105,000 |
$4.87 |
| $5.67 – $7.69 |
2,818,282 |
11.5 |
$7.50 |
1,273,832 |
$7.26 |
| |
13,920,729 |
5.8 |
$1.98 |
8,232,314 |
$1.82 |
NOTE 12-RELATED PARTY TRANSACTIONS
Lease Guarantee
The
Company’s former Chairman of the Board, Chief Executive Officer and Chief Technology Officer has personally guaranteed
the Company’s obligations under its lease for its facilities in Sunrise, Florida and has provided a personal guarantee for
the Company credit card, which is for his own use only.
Cousin of former Chairman of the Board
A cousin of the Company’s former Chairman
of the Board, Chief Executive Officer and Chief Technology Officer was an officer of the Company from August 12, 1999 until December
11, 2009. The amounts paid to this individual as salary and bonus in 2009, 2008, 2007 and for the period from August 12, 1999 (date
of inception) to December 31, 2008 was $11,000, $130,000, $130,000 and $1,007,752, respectively. In addition, the Company utilized
a printing entity controlled by this individual and paid this entity $23,335, $18,230, $10,769 and $457,967, respectively, in 2009,
2008, 2007 and for the period from August 12, 1999 (date of inception) to December 31, 2009. The position occupied by this individual
was terminated.
On August 24, 2006, the Company entered
into an agreement, or the Settlement Agreement, with the same officer of the Company that is the cousin of the Company’s
former Chairman of the Board, Chief Executive Officer and Chief Technology Officer. Prior to entering into the Settlement Agreement,
certain disputes had arisen between the officer and the Company as to the number of stock options awarded to the officer and the
amount of unpaid salary and other compensation owed to the officer since he commenced his employment with the Company in December
1999. The shares, options and warrants granted to the officer pursuant to the Settlement Agreement were issued to settle the disputed
items and in consideration for the officer’s release of any claims he may have against the Company related to or arising
from his employment or any compensation owed to him.
Pursuant to the Settlement Agreement:
| |
· |
The Company issued to the officer 47,658 shares of its common stock and agreed to pay the officer’s income taxes related to the receipt of the shares of common stock, estimated to be approximately $153,000. The fair value of the shares of common stock was determined to be $7.69 per share, which was based on a current valuation of the Company. The aggregate fair value of the shares of common stock issued and the $153,000 in cash was approximately $500,000, which was recorded as compensation expense in August 2006. |
| |
|
|
| |
· |
The Company issued to the officer a warrant to purchase 188,423 shares of the Company’s common stock at an exercise price of $5.67 per share. This warrant is exercisable immediately and expires 10 years from the date of issuance. The approximate fair value of this warrant of $1,200,000 was recorded as compensation expense in August 2006.
|
F-31
| |
· |
The Company issued to the officer stock options to purchase up to 282,635 shares of the Company’s common stock at an exercise price of $5.67 per share. These stock options are exercisable immediately and expire 10 years from the date of grant. The fair value of these stock options of approximately $1,800,000 was recorded as compensation expense in August 2006. |
| |
|
|
| |
· |
As consideration for continued employment as an officer of the Company, the officer was eligible to receive an annual salary of $130,000 per year while employed by the Company. |
As indicated above, the Company recognized
various expenses upon the execution of the Settlement Agreement when the expense amounts were first known and quantifiable.
The fair value of the warrant and the stock
options was estimated at the date of grant by using the Black-Scholes valuation model with the following assumptions: risk-free
rate of 6%; volatility of 100%; and an expected holding period of 5 years.
Upon termination of his position, the officer
requested and received permission to sell the 47,658 shares of the company’s stock that had been awarded to him. On December
8, 2009, the company was informed by the officer that all of these shares had been sold. In addition, the officer elected not to
exercise certain of his options that expired on December 24, 2009. The officer, in accordance with Company policy, was required
to exercise his remaining options within 90 days of the termination of his position on December 11, 2009. The officer did not exercise
his remaining options by March 11, 2010 the 90th day.
Sister-in-Law of former Chairman of the
Board
The former sister-in-law of the Company’s
former Chairman is an officer of the Company. The amount paid to this individual as salary and bonus in 2010, 2009, 2008, 2007
and for the period from August 12, 1999 (date of inception) to December 31, 2010 was $106,000, $77,165, $86,209, $87,664 and $537,380,
respectively.
Research Agreement
In 2007, the Company entered into a
research agreement with an affiliate of two members of the Company’s Board of Directors., pursuant to which the Company agreed
to pay an aggregate fee of $150,000 for the research services contracted for. The Company paid $75,000 of this fee in
2007, $10,000 of this fee in 2008, and the balance was paid with options in 2009. In 2010, the Company entered into another
research agreement with this affiliate, with funding for the project emanating from venture capital funds controlled by the same
two board members. In connection with its funding of the REGEN trial, Ascent Medical Technology Fund II, LP, the Ascent Medical
Technology Fund, LP, and Ascent Medical Product Development Centre Inc. were to be issued a total of 1,044, 451 shares of the Company’s
common stock, and warrants to purchase 90,861 shares at exercise prices 20% above the price at which the related common will be
issued. As of December 31, 2010 a total of 837,212 shares of the Company’s common stock and warrants to purchase 158,856
were issued. Approvals for the REGEN Trial were not provided to the Company by Ascent and patient enrollment in the REGEN Trial
never began. The Company has suspended, indefinitely, all activity with Ascent Medical respective to the REGEN trial. On December
16, 2010, the Company received a written notice from Ascent terminating the Master Services Agreement. The Company disputes that
Ascent has grounds for terminating the Master Services Agreement or is entitled to further compensation thereunder. However, as
the REGEN Trial approvals were not provided to the Company and all activity with Ascent Medical respective to the trial has been
suspended indefinitely, the termination of the Master Services Agreement is not material to the Company
In
April and May 2009, the Company sold to two members of the Board of Directors, in a private placement, an aggregate of 965,570
shares of the Company’s common stock and warrants to purchase 289,671 shares of the Company’s common stock for aggregate
gross cash proceeds of $535,000.
F-32
In
July 2009, the Company sold to a member of the Board of Directors, in a private placement 140,850 shares of the Company’s
common stock and warrants to purchase 42,255 shares of the Company’s common stock for gross cash proceeds of $100,000 or
$2.36 per share.
NOTE 13-COMMITMENTS AND CONTINGENCIES
Leases
The Company entered into
several operating lease agreements for facilities and equipment. Terms of certain lease arrangements include renewal options, escalation
clauses, payment of executory costs such as real estate taxes, insurance and common area maintenance.
In November 2006, the
Company amended its facility lease to include additional space through 2010. The amendment for the additional space contains terms
similar to the terms of the existing facility lease, including escalation clauses.
In November 2009, the
Company amended its facility lease to eliminate excess space. The amendment for the additional space contains terms similar to
the terms of the existing facility lease, including escalation clauses.
In February 2010, the
Company amended its facility lease to extend the term of the lease until January 2013.
Approximate annual future
minimum lease obligations under noncancelable operating lease agreements as of December 31, 2010 are as follows:
| Year ending December 31, |
|
| 2011 |
$ 81,416 |
| 2012 |
83,853 |
| 2013 |
7,005 |
| Total |
$ 172,274 |
Rent expense was $139,160
and $178,487 for the years ended December 31, 2010 and 2009, respectively and $1,762,510 for the cumulative period from August 12,
1999 (date of inception) to December 31, 2010.
During 2005, the Company
was provided with a tenant improvement allowance of $60,150 towards its improvements. The Company has recorded the tenant-funded
improvements and the related deferred rent in its consolidated balance sheets. The deferred rent is being amortized as a reduction
to rent expense over the remaining life of the original lease.
Royalty Payments
The Company is obligated
to pay royalties on commercial sales of certain products that may be developed and sold under various licenses and agreements that
have been obtained by the Company.
The Company has entered
into various licensing agreements, which include the potential for royalty payments, as follows:
William Beaumont Hospital
In June 2000, the Company
entered into an exclusive license agreement to use certain patents for the life of the patents in future projects. The patents
expire in 2015. In addition to a payment of $55,000 the Company made to acquire the license,
the Company is required to pay an annual license fee of $10,000 and royalties ranging from 2% to 4% of net sales of products
that are covered by the patents. In order to maintain the exclusive license rights, the
agreement also calls for a minimum annual royalty threshold. The minimum royalty threshold
was $200,000 for
F-33
2010
and $200,000 for 2009. This minimum royalty threshold will remain $200,000 for 2011 and thereafter. As of December 31, 2010,
the Company has not made any payments other than the initial payment to acquire the license. At December 31, 2010 and
2009, the Company’s liability under this agreement was $1,090,000 and $880,000, respectively, which is reflected as a component
of accrued expenses on the consolidated balance sheets. In 2010, 2009 and for the cumulative period from August 12, 1999 (date
of inception) to December 31, 2010, the Company incurred expenses of $210,000, $210,000 and $1,090,000, respectively. The Company has accrued interest for the past due
commitment at 2% over the prime rate per the terms of the agreement. The Company has included $175,875 in accrued expenses as of December 31, 2010.
Approximate annual future
minimum obligations under this agreement as of December 31, 2010 are as follows:
| Year Ending December 31, | |
|
| | |
| | |
| 2011 | |
$ | 210,000 | |
| 2012 | |
| 210,000 | |
| 2013 | |
| 210,000 | |
| 2014 — 2015 | |
| 420,000 | |
| Total | |
$ | 1,050,000 | |
Contingency for Registration of the Company's
common stock
The Company believes that
it may have issued options to purchase common stock to certain of its employees, directors and consultants in California in violation
of the registration or qualification provisions of applicable California securities laws. As a result, the Company intends to make
a rescission offer to these persons. The Company will make this offer to all persons who have a continuing right to rescission,
which it believes to include two persons. In the rescission offer, in accordance with California law, the Company will offer to
repurchase all unexercised options issued to these persons at 77% of the option exercise price multiplied by the number of option
shares, plus interest at the rate of 7% from the date the options were granted. Based upon the number of options that were subject
to rescission as of December 31, 2009, assuming that all such options are tendered in the rescission offer, the Company estimated
that its total rescission liability would be up to approximately $371,000. However, as the Company believes there is only a remote
likelihood the rescission offer will be accepted by any of these persons in an amount that would result in a material expenditure
by the Company, no liability was recorded as of December 31, 2010 or 2009.
Litigation
On March 13, 2009, Judge
Bernice Bouie Donald of the United States District Court for the Western District of Tennessee issued a Memorandum Opinion and
Order in litigation brought against the Company by Dr. Peter K. Law and Cell Transplants Asia Limited (“CTAL”) (collectively,
the “Plaintiffs”), captioned Peter K. Law, et al. v. Bioheart, Inc., No. 2:07-cv-2177 (the “Action”). The
Action, which has been the subject of previous disclosures by the Company, was commenced on March 9, 2007, and asserted claims
against the Company and Howard J. Leonhardt, individually, with respect to a license agreement entered into between Bioheart, Inc.
and Cell Transplants International, LLC (“CTI”) on February 7, 2000 (the “Original License Agreement”).
Pursuant to the License Agreement, among other things, CTI granted the Company a license to certain patents “related to heart
muscle regeneration and angiogenesis for the life of the patents.” In July 2000, Bioheart and CTI, together with Dr. Law,
executed an addendum to the License Agreement, which amended or superseded a number of the terms of the License Agreement (the
“License Addendum”).
In their amended complaint,
Dr. Law and CTAL asserted 14 breach of contract and related claims pertaining to the Original License Agreement and License Addendum,
including, among others, claims that the Company had breached obligations to provide shares of Bioheart common stock to Dr. Law,
pay royalties on “gross sales” of MyoCell, pay a $3 million milestone payment due upon Bioheart’s “commencement
of a bona fide Phase II human clinical trial study that utilizes technology claimed under U.S. Patent No. 5,130,141 with F.D.A.
approval in the United States,” and to refrain from sublicensing Plaintiffs’ patents. Plaintiffs also sought a declaratory
judgment that the License Addendum was unenforceable due to a lack of consideration and/or economic duress. At the outset of the
Action, the individual claim against Mr. Leonhardt was dismissed along with Plaintiffs’ claim for civil conspiracy, leaving
12 claims to be adjudicated.
F-34
The Company denied the
material allegations of the amended complaint, denied it had any liability to Plaintiffs, and asserted a number of defenses to
Plaintiffs’ claims, as well as counterclaims seeking a declaration that the License Addendum was a legally valid and binding
agreement and asserting that Dr. Law and/or CTI had breached various obligations in the parties’ agreements.
Following the completion
of discovery, the Action was tried to the Court, without a jury, from September 22-25, 2008.
On March 13, 2009, the
Court rendered its decision in the Action, dismissing the amended complaint after finding that Plaintiffs had failed to establish
any of their 12 remaining claims. With respect to Plaintiffs’ claim for the $3 million milestone payment, the Court found
that the payment was “payable only to CTI,” not the Plaintiffs, and that CTI, a dissolved Tennessee limited liability
company, had never been made a party to the Action and therefore was “not properly before the Court.” The Court also
found that, even assuming Plaintiffs could assert a claim for the milestone payment on behalf of CTI, the payment was not due because
“Bioheart’s MyoCell process does not utilize technology claimed under the ‘141 patent.” In addition, the
Court found that Bioheart owed no royalties because it has not yet made any “gross sales” of MyoCell.
The Court found in Bioheart’s
favor on its counterclaim seeking a declaration that the License Addendum was a valid and enforceable agreement and its counterclaim
that Dr. Law breached his obligation under the License Addendum to provide Bioheart with “all pertinent and critical information”
related to Bioheart’s filing of an IND application with the FDA. The Court awarded Bioheart nominal damages of $1.00 on the
latter counterclaim, and dismissed Bioheart’s other counterclaims. Judgment upon the Memorandum Opinion and Order was entered
on March 18, 2009.
Subsequent
to the Court rendering its decision in the Action, the Plaintiffs filed a motion with the Court seeking reconsideration
of its decision. The Company’s response was filed on April 20, 2009,
and the Court’s response was received on October 15, 2009. The Plaintiffs’ motion to alter or amend was granted
in part to clarify that Plaintiff failed to prove that the MyoCath catheter reads upon the claims of a patent other than
the Schmidt catheter patent. Plaintiffs’ motion was otherwise denied.
A notice of appeal was
to have been filed by November 16, 2009, by Dr. Law. The appeal was not filed. The accrual made prior to November 16, 2009, to
accommodate a judgment in favor of Dr. Law has been reversed.
The Company is subject
to other legal proceedings that arise in the ordinary course of business. In the opinion of management, as of December 31, 2010,
the amount of ultimate liability with respect to such matters, if any, in excess of applicable insurance coverage, is not likely
to have a material impact on the Company's business, financial position, consolidated results of operations or liquidity. However,
as the outcome of litigation and other claims is difficult to predict significant changes in the estimated exposures could exist.
NOTE 14 -INCOME TAXES
The Company follows Accounting Standards Codification
subtopic 740-10, Income Taxes (“ASC 740-10”) which requires the recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax bases of
assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary
differences between taxable income reported for financial reporting purposes and income tax purposes include, but not limited to,
accounting for intangibles, debt discounts associated with convertible debt, equity based compensation and depreciation and amortization.
At December 31, 2010, the Company has available
for federal income tax purposes a net operating loss carryforward of approximately $93,295,351 which expires in the year 2030,
that may be used to offset future taxable income. The Company has provided a valuation reserve against the full amount of the net
operating loss benefit, since in the
F-35
opinion of management based upon the earnings
history of the Company; it is more likely than not that the benefits will not be realized. Based upon the change in ownership rules
under section 382 of the Internal Revenue Code of 1986, if in the future the Company issues common stock or additional equity instruments
convertible in common shares which result in an ownership change exceeding the 50% limitation threshold imposed by that section,
all of the Company’s net operating losses carryforwards may be significantly limited as to the amount of use in a particular
years. Components of deferred tax assets as of December 31, 2010 are as follows. All or portion of the remaining valuation allowance
may be reduced in future years based on an assessment of earnings sufficient to fully utilize these potential tax benefits.
At December 31, 2010, the significant
components of the deferred tax assets (liabilities) are summarized below:
| Net operating loss carry forwards expiring through 2030 |
|
$ |
93,295,351 |
|
| |
|
|
|
|
| Tax Asset |
|
|
39,888,456 |
|
| Less valuation allowance |
|
|
(39,888,456 |
) |
| Balance |
|
$ |
— |
|
The Company recognizes interest and penalties
related to uncertain tax positions in general and administrative expenses. As of December 31, 2010 and 2009, the Company has no
unrecognized tax benefit from uncertain tax positions, including interest and penalties.
The difference between income tax expense computed by applying the
federal statutory corporate tax rate and actual income tax expense is as follows:
| |
|
December 31, |
| |
|
2010 |
|
2009 |
| Statutory federal income tax rate |
|
|
35.0% |
|
35.0% |
| State income taxes and other |
|
|
0.0% |
|
0.0% |
| |
|
|
|
|
|
| Effective tax rate |
|
|
35.0% |
|
35.0% |
Deferred income taxes result from temporary differences in the recognition
of income and expenses for the financial reporting purposes and for tax purposes. The tax effect of these temporary differences
representing deferred tax asset and liabilities result principally from the following:
| |
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
| Deferred Tax Asset: (Liability) |
|
|
|
|
|
|
| |
|
|
|
|
|
|
| Net operating loss carry forward |
|
$ |
35,107,040 |
|
|
$ |
5,518,516 |
|
| Stock based compensation and others |
|
|
4,781,416 |
|
|
|
32,303,632 |
|
| Subtotal |
|
|
39,888,456 |
|
|
|
37,822,148 |
|
| Valuation allowance |
|
|
39,888,456 |
|
|
|
37,822,148 |
|
| |
|
|
|
|
|
|
|
|
| Net Deferred Tax Asset (Liability) |
|
$ |
— |
|
|
$ |
— |
|
Deferred income taxes
reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred income taxes
are as follows:
F-36
NOTE 15- SUPPLEMENTAL DISCLOSURES OF CASH
FLOW STATEMENTS
During the years ended December 31, 2010 and
2009, the Company issued warrants in connection with notes payable with an aggregate fair value of $185,306 and $1,913,487, respectively.
NOTE 16 -SUBSEQUENT EVENTS
Loan agreement amendment
On December 31, 2009, the
Company and BlueCrest Venture Finance Master Fund Limited (“BlueCrest”) entered into an Amendment to Loan and Security
Agreement, amending that certain loan from BlueCrest to the Company originated as of May 31, 2007 (the “Loan”). The
outstanding principal amount of the Loan as of December 31, 2010 was $2,276,543.03. On January 7, 2011, BlueCrest agreed with the
Company and Magna Group, LLC (“Magna”) to split the note evidencing the Loan into two notes aggregating the outstanding
principal balance, with the new note being in the principal amount of $139,729.82 (the “New Note”). The New Note was
assigned to Magna in consideration for a payment by them to BlueCrest of $139,729.82, and modified. Additionally, Magna purchased
a $25,000 convertible note from the Company (the “Convertible Note”).
The loans evidenced by
the New Note and Convertible Note are in the nature of convertible debt evidenced by two unsecured convertible promissory notes,
each bearing interest at the rate of 8% per annum, payable at maturity and each convertible into common stock of the Company at
a price that is 50% less than the average of the closing prices for the Company’s shares for the five (5) days prior to the
Lenders’ election to exercise its conversion right.
- In January 2011, we issued an aggregate of 538,542
shares of our common stock in connection with the conversion of $87,729 of the convertible note.
- In February 2011, we issued an aggregate of 421,392
shares of our common stock in connection with the conversion of the remaining balance of $52,000 of the convertible note.
Private Placement – Common Stock and
Warrants
In
January 2011, the Company sold, in a private placement, an aggregate of 102,780 shares of the Company’s common stock
and warrants to purchase 51,390 shares of the Company’s common stock for aggregate gross cash proceeds of $18,500. The warrants
are (i) exercisable solely for cash at an exercise price of $0.22 per share, (ii) non-transferable for six months following issuance
and (iii) exercisable, in whole or in part, at any time during the period commencing on the date that is six months and one day
following the date of issuance and ending on the third year anniversary of the date of issuance.
In
January 2011, the Company sold an aggregate of 318,750 shares of the Company’s common stock and warrants to purchase
159,375 shares of the Company’s common stock for aggregate gross cash proceeds of $51,000. The warrants are (i) exercisable
solely for cash at an exercise price of $0.19 per share, (ii) non-transferable for six months following issuance and (iii) exercisable,
in whole or in part, at any time during the period commencing on the date that is six months and one day following the date of
issuance and ending on the third year anniversary of the date of issuance.
In
March 2011, the Company sold an aggregate of 577,670 shares of the Company’s common stock and warrants to purchase
491,020 shares of the Company’s common stock for aggregate gross cash proceeds of $85,000. The warrants are (i) exercisable
solely for cash at an exercise price of $0.14 to $0.15 per share, (ii) non-transferable for six months following issuance and (iii)
exercisable, in whole or in part, at any time during the period commencing on the date that is six months and one day following
the date of issuance and ending on the third year anniversary of the date of issuance.
In
April 2011, the Company sold an aggregate of 97,400 shares of the Company’s common stock and warrants
F-37
to purchase 82,790 shares
of the Company’s common stock for aggregate gross cash proceeds of $15,000. The warrants are (i) exercisable solely for cash
at an exercise price of $0.15 per share, (ii) non-transferable for six months following issuance and (iii) exercisable, in whole
or in part, at any time during the period commencing on the date that is six months and one day following the date of issuance
and ending on the third year anniversary of the date of issuance.
Subscription agreement
On January 23, 2011, Bioheart,
Inc. (the “Company”) announced that it has entered into a subscription agreement with Anc Bio Holdings, Inc., a South
Korean biomedical company, and a subscription agreement with one of its U.S. agents, Bioheart Florida, LLC for a $4 million equity
investment, in the aggregate. Funding of the investment will be made ratably by them in installments with 10% immediately, followed
by 40% within 45 days and the remaining 50% subject to certain conditions which the Company expects to satisfy in the next 90 days.
The aggregate number of
shares of common stock anticipated to be issued in connection with the investment is 25,000,000 shares. The Company will also issue
to the purchasers of common stock, warrants to purchase, in the aggregate, up to 12,500,000 shares of common stock. In connection
with the common stock issuance, the subscribers received “piggyback” registration rights exercisable under certain
circumstances more particularly set forth in the Registration Rights Agreement entered into with each investor.
Under
the terms of the subscription agreements, the Company has agreed, among other things, that:
(a)
Until April 20, 2011, the Company shall not initiate or support any action to increase the number of directors serving on the
Company’s Board of Directors and, subject to unforeseen circumstances outside of the Company’s control (i.e., the death
or disability of a board member), the Company will not initiate or support any change to the composition of the Board of Directors’
Committees without the investors’ prior consent;
(b) The Company will provide the Investors
with an estimated use of proceeds prior to the first installment payment date and the Company will utilize not less than sixty
percent (60%) of such proceeds for research and development costs and clinical trial costs;
(c) The proceeds may be used to attract
and hire a new Company Chief Financial Officer and the Investors, or their designee(s) will have the right to participate in the
interviewing of, and the selection of, that new Chief Financial Officer; and
(d) Until
April 20, 2011, the Company shall not issue more than Two Hundred, Fifty Thousand (250,000) shares of the Company’s Common
Stock in connection with any single transaction (other than shares that may be issued in connection with the conversion of the
existing convertible promissory note into such shares of common stock by Magna Group, LLC).
(e)
the Company has agreed that, following its receipt of the first installment payment, the Company will cause a vacancy on
the Company’s Board of Directors to be filled by one person designated by ABH. Additionally, the Company agreed with ABH
that it shall not call a meeting nor schedule a meeting of its shareholders to be held prior to April 20, 2011.
On January 23, 2011 the Company issued an aggregate of 2,500,000 shares of the
Company’s common stock and warrants to purchase 1,250,000 shares of the Company’s common stock for aggregate gross cash proceeds of $400,000. The warrants are (i)
exercisable solely for cash at an exercise price of $0.19 per share, (ii) non-transferable for six months following issuance and (iii) exercisable, in whole or in part,
at any time during the period commencing on the date that is six months and one day following the date of issuance and ending on the third year anniversary of the date of
issuance.
Following receipt of the initial 10% the Company engaged in
discussions with the investors to determine new timing for the funding of the remaining installments. As of April 18, 2011, the second installment had not been received from
either ABH or BF.
Accordingly, on
April 18, 2011 the Company delivered a written notice of default and termination to each of ABH and BF, in respect of the Agreements.
The notice stated that it was being given as a result of the breach by each of ABH and BF of their respective payment obligations
under the Agreements. A copy of the notice of default was filed with the Company’s Current Report on Form 8-K
filed with the SEC on April 22, 2011.
F-38
Increase to Authorized Common Stock
As of December 31, 2010, our Articles of Incorporation
authorized us to issue up to 75,000,000 shares of common stock, par value $0.001 per share. The Board of Directors proposed, and
on January 13, 2011 (the “Record Date”) the holders of a majority of the Company’s issued and outstanding voting
common shares as of the Record Date approved, an increase in the number of authorized shares of the common stock from 75,000,000
shares to 195,000,000 shares. On January 21, 2011 the Company filed a 14C Information Statement with the Securities and Exchange
Commission. Following approval by the Securities and Exchange Commission and upon the filing of the Certificate of Amendment to
the Articles of Incorporation, the Company’s will be authorized to issue a total of 195,000,000 shares of common stock, par
value of $0.001 per share, and 5,000,000 shares of preferred stock, par value $0.001 per share.
Issuance of Options and Warrants
Between January 1, 2011
and May 4, 2011, the Company issued options to purchase an aggregate of 372,167 shares of its common stock at a weighted average
exercise price of $0.001 per share. These options consisted of the following:
| |
· |
stock options to purchase an aggregate of 372,167 shares of common stock at an exercise price of $0.001 per share.
The options vested immediately upon issuance and will expire on the tenth anniversary of the issuance date. As of May 4, 2011 an aggregate of 372,167 shares of common stock have been issued
upon the exercise of the aforementioned options. |
Between January 1, 2011
and May 4, 2011, the Company issued warrants to purchase an aggregate of 3,314,575 shares of its common stock at a weighted average
exercise price of $0.18 per share. These warrants consisted of the following:
| |
· |
Warrants to purchase 210,765 shares of common stock at an exercise price of $0.19 to $0.22. These warrants were issued in connection with private placement discussed above. The warrant vests six months following issuance and expires on the third year anniversary of the date of issuance. |
| |
|
|
| |
· |
Warrants to purchase 1,250,000 shares of common stock at an exercise price of $0.19. These warrants were issued in connection with Subscription agreement discussed above. The warrant vests six months following issuance and expires on the third year anniversary of the date of issuance. |
| |
|
|
| |
· |
Warrants to purchase 280,000 shares of common stock at an exercise price of $0.19 issued to Consultants. The warrant vests six months following issuance and expires on the fifth year anniversary of the date of issuance. |
| |
|
|
| |
· |
Warrants to purchase 573,810 shares of common stock at an exercise price of $0.14 to $0.15. These warrants were issued in connection with Subscription agreement discussed above. The warrant vests six months following issuance and expires on the third year anniversary of the date of issuance. |
Approval of Option Issuance
In February 2011, the Board of Directors approved the issuance of
stock options to purchase an aggregate of 210,000 shares of common stock at an exercise price of $0.21 per share issued to certain
members of the Company’s Board of Directors. The options will vest immediately upon issuance and will expire on the tenth
anniversary of the issuance date.
F-39
INDEX OF EXHIBITS
As required under Item 15. Exhibits, Financial
Statement Schedules, the exhibits filed as part of this report are provided in this separate section. The exhibits included in
this section are as follows:
| Exhibit No. |
|
Description |
| |
|
|
| 23.1 |
|
Consent of RBSM, LLP |
| 23.2 |
|
Consent of Jewett, Schwartz, Wolfe & Associates |
| 31.1 |
|
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 |
|
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
F-40
