VYCOR MEDICAL INC - Annual Report: 2008 (Form 10-K)
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington,
D.C. 20549
Form 10-K
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2008
Or
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ___________ to ___________
Commission
file number: 333-149782
VYCOR MEDICAL,
INC.
(Exact
name of registrant as specified in charter)
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Delaware
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20-3369218
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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80 Orville Drive, Suite 100,
Bohemia, New York 11716
(Address
of principal executive offices) (Zip Code)
Registrant's
telephone Number: (631) 244 1435
Securities
registered pursuant to section 12(g) of the Act: NONE
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. ¨ Yes x No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. ¨ Yes x No
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. x Yes ¨ No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer”,
“non-accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
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Large
Accelerated Filer o
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Accelerated
Filer
o
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Non-accelerated
Filer o (Do
not check if a smaller reporting company)
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Smaller
Reporting
Company x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). ¨ Yes x No
The
aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $3,052,951 based upon the closing sales price of
the registrant’s common stock on March 23, 2009 of $0.19 per share. At
March 23, 2009, 26,356,638 shares of the registrant’s common stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
TABLE OF
CONTENTS
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Page
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PART
I
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Item
1.
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Description
of Business
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1
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Item
1A
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Risk
Factors
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11
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Item
1B
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Unresolved
Staff Comments
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18
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Item
2.
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Properties
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18
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Item
3.
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Legal
Proceedings
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19
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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19
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchase of Equity Securities
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19
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Item
6
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Selected
Financial Data
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22
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Item
7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operation
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22
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Item
8.
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Financial
Statements and Supplementary Data
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28
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Item
9.
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Changes
In and Disagreements with Accountants on Accounting and Financial
Disclosure
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29
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Item
9A(T).
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Controls
and Procedures
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29
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Item
9B.
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Other
Information
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29
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PART
III
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Item
10.
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Directors,
Executive Officers, and Corporate Governance
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30
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Item
11.
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Executive
Compensation
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32
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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34
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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35
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Item
14.
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Principal
Accountant Fees and Services
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35
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Item
15.
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Exhibits
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36
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SIGNATURES
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37
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| FINANCIAL STATEMENTS |
F-1
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-i-
This Form
10-K contains some forward-looking statements. Forward-looking statements give
our current expectations or forecasts of future events. You can identify these
statements by the fact that they do not relate strictly to historical or current
facts. Forward-looking statements involve risks and uncertainties.
Forward-looking statements include statements regarding, among other things, (a)
our projected sales, profitability, and cash flows, (b) our growth strategies,
(c) anticipated trends in our industries, (d) our future financing plans and (e)
our anticipated needs for working capital. They are generally identifiable by
use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plans,”
“potential,” “projects,” “continuing,” “ongoing,” “expects,” “management
believes,” “we believe,” “we intend” or the negative of these words or other
variations on these words or comparable terminology. These statements may be
found under “Management's Discussion and Analysis of Financial Condition and
Results of Operations” and “Description of Business,” as well as in this Form
10-K generally. In particular, these include statements relating to future
actions, prospective products or product approvals, future performance or
results of current and anticipated products, sales efforts, expenses, the
outcome of contingencies such as legal proceedings, and financial
results.
Any or
all of our forward-looking statements in this report may turn out to be
inaccurate. They can be affected by inaccurate assumptions we might make or by
known or unknown risks or uncertainties. Consequently, no forward-looking
statement can be guaranteed. Actual future results may vary materially as a
result of various factors, including, without limitation, the risks outlined
under “Risk Factors” and matters described in this Form 10-K generally. In light
of these risks and uncertainties, there can be no assurance that the
forward-looking statements contained in this filing will in fact occur. You
should not place undue reliance on these forward-looking
statements.
The
forward-looking statements speak only as of the date on which they are made,
and, except to the extent required by federal securities laws, we undertake no
obligation to publicly update any forward-looking statements, whether as the
result of new information, future events, or otherwise.
ITEM
1. DESCRIPTION OF BUSINESS.
Organizational
History
We were
formed as a limited liability company under the laws of the State of New York on
June 17, 2005 as “Vycor Medical LLC”. On August 14, 2007, we converted into a
Delaware corporation and changed our name to “Vycor Medical, Inc.” (“Delaware
Corporation”). Our sole reason for conversion to the Delaware Corporation was to
facilitate the raising of additional capital, as prospective investors had
expressed resistance to investing in the Company as the NY LLC. At August 14,
2007, we had approximately 1,122 membership units of the NY LLC issued and
outstanding. The managing members of the NY LLC determined, in their reasonable
business judgment, that such units, in the aggregate, should convert to an
aggregate of 17,999,999 shares of common stock of the Delaware Corporation. On
this basis, we adopted a conversion ratio of 16,048 shares of common stock of
the Delaware Corporation for each former unit of the NY LLC. Likewise, all
conversion rights, options, warrants and any other rights to acquire units of
the NY LLC (including but not limited to units issuable pursuant to the terms of
the Fountainhead Bridge Loan Debenture, Fountainhead Warrant to purchase 50.22
units of the NY LLC, the Company’s Option Agreement with Fountainhead dated
December 14, 2006), were converted to conversion rights, options, warrants and
rights to acquire common shares of the Delaware Corporation, based on the same
conversion ratio. The action authorizing the conversion was adopted by the
unanimous consent of the Managing Members of the NY LLC pursuant to the terms of
the NY LLC Operating Agreement.
Overview
of Business
We are a
developer of neurosurgical medical devices. We have been conducting
research, developing, prototyping, and producing mold development work for the
Brain Access System. This product is designed to assist the neurosurgeon with
brain surgery. It allows the surgeon to gain access to various regions in the
brain through a working channel.
We are in
the process of marketing our first series of products to the
marketplace. Our first product line that we introduced to the market
is a new type of self retaining brain retractor called the ViewSite Brain Access
System. We started marketing the Brain Access System in September of
2008 and started shipping all sizes in November of 2008. The product
line consists of various port sizes and lengths to allow the surgeon to use the
device for various regions of the brain and different procedures.
The
second product in our pipeline is the Cervical Access System, which, pending
receipt of additional funding and successful market testing, is planned for
launch during 2010 pending funding. Like the Brain Access System, this product
is designed to assist the surgeon in cervical surgeries, allowing the surgeon to
gain access to the anterior cervical surgery site.
1
We have
received FDA 510(k) clearance for both our Brain Access System and Cervical
Access System products. Section 510(k) of the United States Food, Drug and
Cosmetic Act requires medical device manufacturers to register with the U.S.
Food and Drug Administration of their intent to market a medical device at least
90 days in advance. The 510(k) submission allows the U.S. Food and Drug
Administration to determine whether a device is generally equivalent to any
similar product already on the market. With the FDA 510(k) clearance, we are
authorized to take our products to market in the U.S. without further
approvals.
We have
also received CE Marking for our products in September 2006 and are able to sell
them in member countries of the European Union. The European Medical Device
Directive makes it mandatory to fulfill CE certification requirements in order
to export medical devices of Class I, IIa, IIb, and III to any country within
the European community.
We
believe that our Brain Access System and Cervical Access System products will
replace standard retraction devices to establish a new standard of care in
neurosurgery, leading to a broad and rapid adoption of
our products.
Our
Products
Our
initial product applications for the retractor technology will be in
neurological surgeries involving brain and spinal access.
We
believe our Brain Access System offers several advantages over the brain
retractor systems, commonly known as ribbon or blade retractors that are
metallic and non transparent. When designing the products, we felt that if we
can incorporate certain features into our products, the surgeon reaction and
acceptance would be favorable. We attempted to incorporate the following
features:
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gently
separate delicate tissue;
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improve
surgical outcomes (reducing potential surgeon and hospital liability), for
example, decreased insertion tissue trauma, less need for readjustment
during surgery and minimum interface surface pressures;
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increase
surgical site access;
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provide
superior field of vision and lighting;
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minimal
invasive surgery;
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The Brain
Access System and Cervical Access System were invented by Dr. John Mangiardi.
Dr. Mangiardi assigned the rights to the Brain Access System and Cervical Access
System to Sawmill Trust on September 17, 2005 pursuant to an assignment
agreement on the same date. Sawmill Trust then, in turn, assigned the same
rights to us on September 17, 2005 pursuant to another assignment agreement
dated the same date.
Brain
Access System Products
The Brain
Access System series of disposable products are used by the neurosurgeon to
access the surgical site. This is done by inserting the Brain Access System
through the brain tissue and then removing the Brain Access System introducer,
leaving the remaining hollow working channel in place to provide the surgeon
with access to the precise location desired for surgery.
The Brain
Access System is available in multiple sizes and is a single-use product. We
have designed multiple sizes and intend to add additional sizes in the future.
During our design process we listed what product benefits would be of value to
the neurosurgeons when using a retractor system. We then designed our product
with the following intent:
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To
minimize brain disruption during surgery by utilizing a tapered forward
edge;
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To
minimize venous pressure in the brain;
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To
reduce “target shift” to allow the surgeon to reach the site
accurately;
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To
minimize off site healthy tissue damage;
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To
allow for accurate neuronavigational image guidance systems (“IGS”)
performance;
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To
integrate with the leading surgical IGS systems such as Medtronics® and
BrainLab®
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To
allow for easier positioning during surgery;
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To
reduce damage to healthy brain tissue leading to shorter post-op recovery
and reduced hospital stay; and
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To
allow direct surgical visualization of brain tissue via optically
transparent construction;
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The
extent to which we are successful in achieving the above objectives will be
judged by the acceptance of the devices in the market.
2
The Brain
Access System products have the potential to significantly reduce brain tissue
trauma resulting from the currently used retractors and standard access
procedures. First, the unique design of the product minimizes the size of the
brain entry access necessary for surgical procedures, and in turn the amount of
brain tissue exposed. For instance, a typical brain procedure involving the
removal of a 7cm cystic astrocyctoma would result in an access site
(corticotomy) of approximately 20mm. However, the same procedure that was
performed utilizing the Company’s Brain Access System product required a
corticotomy of only 2mm.
Furthermore,
retractors that are currently in use are metallic and non-transparent. This
requires the surgical team to maintain the retracted surface, typically by
packing gauze around the access edges increasing movement and pressures over a
greater portion of the brain and extending overall elapsed surgery times. We
believe that the Brain Access System product eliminates this process, while
providing better visibility for the surgeon and lower pressures on the retracted
brain tissue.
Product
shortcomings
Our
products have a few shortcomings:
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One
of the shortcomings of our products as compared to existing blade
retractors is that our device diameter is fixed as opposed to variable.
This gives the surgeon less flexibility once he is at the location unless
he knows where he needs to go in the brain first.
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Another
shortcoming is that the diameters and lengths of our devices are set to
specific measurements, which limits the surgeon to these specific
sizes.
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Depending
on the case, usage of a disposable product may be viewed as costing more
over time and may not be accepted by our potential
customers.
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IGS Opportunity
for the Brain Access
System
The VBAS
product has the potential to significantly improve surgical acceptance and use
of IGS (Image Guidance Systems) used in many surgeries, by addressing the two
substantial IGS-related problems of target shifting and the lack of real-time
retractor positioning data during procedures:
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Target
Shifting
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The
normal surgical procedure utilizing standard retractors in brain surgery require
pulling away the healthy tissue to expose the targeted region of the brain
located underneath. However, in many cases, the amount of pulling required
causes the targeted area to shift away from what is shown on the IGS system.
This target shifting then requires the surgeon to cause additional trauma to
healthy tissue and spend additional time as the shifted target area is located
and the retractor is repositioned. The VBAS system is designed to minimize or
eliminate target shift, as the elliptical shape of the product distributes
relatively uniform pressure on the surrounding brain tissue.
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Real-Time
Retractor Positioning Data
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Current
retractor technology (commonly known as ribbon or blade retractors) is not well
integrated with IGS systems. During insertion, the surgeon typically does not
have real-time data to allow visualization of retractor insertion on the IGS
monitor. The VBAS product line has been designed to adapt entirely to IGS
systems, such that the use of a Brain Access System unit will allow the surgeon
to see on the surgical monitor, in real-time, exactly where the retractor is in
relation to critical brain structures and underlying pathologies. With the IGS
enabled unit, the tip of the introducer is literally the “pointer” on the IGS
system.
We plan
on offering a version of all Brain Access System models that are
IGS-friendly.
3
Brain
Access System Product Models
The Brain
Access System products consists of two models initially, namely, TC-VBAS and
EC-VBAS and any additional models in the future, each designed to allow the
surgeon the choice for specific brain surgeries for various procedures. Each of
these models will be manufactured in various lengths to accommodate different
depths for surgical access.
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TC-VBAS
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The
series consist of twelve disposable products, offered in four different port
diameters of 12mm, 17mm, 21mm, and 28mm and a choice of three lengths for each
of 3, 5, and 7cm.
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EC-VBAS
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At
present, this is available only in one size – 34mm x 5cm.
Cervical
Access Products
The
Cervical Access System products are to be used by the neurological surgeon to
access the anterior cervical surgical site (the uppermost vertebrae located in
the neck). This type of surgery is near very critical and delicate structures
such as the larynx, esophagus and carotid artery. The shape of the Cervical
Access System with the introducer lets the surgeon carefully place the device
and the unique anchor screws then safely hold the access channel in place during
the procedure. The clear body of the retractor allows the surgeon to see the
entire field both during the insertion process as well as throughout the
surgical procedure.
We have
designed the Cervical Access System to:
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reduce
the possibility of surrounding anatomic tissue damage, which include the
trachea, esophagus, carotid artery, recurrent laryngeal and sympathetic
nerve;
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minimize
skin disruption with the utilization of tapered outward
edges;
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eliminate
retractor induced electrocautery burn injuries because it is made with
surgical grade plastic materials;
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enable
stable fixation (directly to the spinal column) in order to avoid
accidental displacement and surrounding “tissue creep”
and
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allow
for direct visualization of underlying anatomic structures using optically
clear plastic.
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Because
our products have not been brought to market yet, there is no guarantee that any
of the abovementioned features would prove effective and even so, be welcomed by
the consumer.
Cervical Access
System Product Models
The plan
for the Cervical Access System series will consist of disposable products. The
widths are able to accommodate from one to three levels of the cervical spine,
from 26mm to 54mm. We are also evaluating a telescoping design that would reduce
the number of sizes necessary and a version that incorporates a distractor.
Further research and development is needed for a market-ready
product.
New
Products
Brain
Retractors
Future
plans include developing additional Brain Access System retractors to allow for
access to various regions of the brain. This allows us to target more diverse
neurosurgical specialties. We anticipate research and developing work starting
in 2009 and estimate a research and development budget of $1,000,000 for 2009
and 2010, pending future funding.
Our plans
are to eventually include retractor lines that are designed for the requirements
of specific surgical applications like aneurisms, tumors and endoscopic
work.
4
Sales
and Marketing
Education
We plan
to implement a two-prong grass-roots educational and marketing strategy
throughout the neurosurgeon community to accelerate product penetration and
brand awareness.
The first
is an individual outreach program targeting “thought leaders” surgeons by
visiting with them at their practices and during conferences and trade
shows.
The
second involves targeted neurosurgical “reference hospitals”.
Distribution
Partners
Domestic
Sales
For
distribution in the United States, we are already in commercialization using the
following distribution models:
● The
direct sales model (working with exclusive non-stocking distributors and selling
direct to the end user and
● Using
several stocking distributors through exclusive distribution agreements where
they handle their own accounts directly.
We
believe that the non-stocking distributor model in the United States will
ultimately be more profitable, allowing for higher margins for each device sold.
All of our distributors, whether stocking or non-stocking, already call on
the neurosurgical markets.
International
Sales
We
believe that our international sales will be optimized by using various
distribution partners who are focused in the neurosurgical sector and are well
respected. We have two signed distribution agreements abroad that represent some
of the leading medical device distributors in the neurosurgical arenas. We
intend to work out mutually beneficial distribution agreements that cover the
main points for distribution that include, but are not limited to, sales and
marketing in respective territories, regulatory compliance, shipping, and
guaranteed annual minimums. Our primary target markets were Europe and Canada
for fiscal year 2008 and will continue until a satisfactory distribution network
is in place. During fiscal 2009, we intend to commence the regulatory approval
process in the Japanese and Chinese markets as it is a lengthy
process.
Image-Guided
Surgery (IGS) Reference Hospitals
Following
the establishment of the initial Reference Hospitals, we will expand the
Reference Hospital Program to include additional hospitals with a focus on the
integration between our Brain Access System products and IGS
systems.
In
addition to the objectives of the initial reference hospitals, this effort will
attempt to document how the Brain Access System can provide superior results in
combination with IGS during neurosurgical procedures.
Individual
Outreach
We will
also reach out to individual neurosurgeons both through conferences/trade events
and by visiting surgeons, particularly influential leaders within various
geographies, directly at their practices.
At the
conferences and trade events, our plan will be to present reference hospital
data to distributors and neurosurgeons, and recruit additional facilities to
serve as future reference hospitals and IGS centers.
5
Manufacture
We have
executed an agreement with Lacey Manufacturing Company of Bridgeport,
Connecticut (“Lacey”) to provide a full range of engineering and contract
manufacturing.
As of
December 31, 2007, the amount payable to Lacey was $207,245. We have agreed to a
payment plan with Lacey, with no interest on the outstanding amount. Pursuant to
that payment plan, as of December 15, 2008, this past amount has been
satisfied.
We have
also contracted with C&J Industries, Meadville PA through purchase orders to
produce additional sizes of the Brain Access System.
Lacey and
C& J Industries are recognized leaders in the medical contract manufacturing
sector, providing vertically integrated full services. They are U.S. Food and
Drug Administration registered and meet ISO standards and certifications. We
have placed inventory orders with both manufacturers.
C&J
Industries have completed the design, molds and production of six sizes. As of
December 31, 2008 Lacey has delivered all products due to Vycor at the end of
the year.
There may
be certain limitations and risks to manufacturing:
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Both
Lacey and C&J Industries are responsible for sourcing and procuring
raw materials to manufacture our products. We believe that they will not
have any difficulty in sourcing for raw materials to manufacture our
products because they are readily available from variety of sources in the
medical devices marketplace;
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There
can be no assurances that future product pricing will be as favorable as
we anticipate;
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Continued
source of supply maybe limited if we do not raise additional
capital;
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If
either supplier was to not deliver or choose not to do business with us,
we could incur serious delays and increased costs. We would have to find
alternate qualified suppliers.
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We
are dependent upon their commencing manufacture of our products in
accordance with our specifications and delivering them on a timely basis
in order to realize our business plan. However there can be no assurances
that this will be the case.
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(See
“Risk Factors — “We
are dependent on two key vendors to manufacture our products”
)
Market
Analysis
The
market for our ViewSite Brain Access System and Cervical Access System product
lines will be the neurosurgical community.
As
practicing neurosurgeons become familiar with the benefits of our brain and
anterior cervical products, we believe that we will gain market share as these
surgeons utilize the ViewSite Brain Access System (VBAS) and ViewSite Cervical
Access System (VCAS) products in their surgeries.
According
to the American Association of Neurological Surgeons (AANS), in 2006 there were
approximately 592,443¹ cranial procedures performed in the United States of
America that resulted in 305,000 craniotomies performed. We estimate that the
VBAS device would be applicable for use in 70% or 213,500 craniotomy
procedures.
In the
field of spinal surgery, the AANS reported in 2006 that 1,345,167¹ spinal
procedures were performed in the United States of America. We estimate that the
VCAS device would be applicable for use in 22% or 295,000 spinal procedures. We
conservatively estimate the procedure growth rate to track the year-over-year
increase in population of approximately 3%. It would however be reasonable to
assume that with the aging baby boomer population cohort, the growth rate in
surgeries utilizing the VCAS would grow at a much higher rate.
To be
conservative, we have estimated that the addressable international market over
the next five years will be from 20% to 25% larger than the corresponding U.S.
market.
Source:
Vycor Medical Management
¹ Based
upon National Neurosurgical Procedural Statistics 2006 Survey published by the
American Association of Neurological
Surgeons
6
Competition
Based on
our internal research, web scans, and observance at trade shows, we have
determined the current major manufacturers of brain retractors, and
accordingly, some of our competitors are:
Cardinal
Health (V. Meuller line),
Aesculap,
Integra
Life Science,
Codman
(Division of Johnson & Johnson).
Brain
Retractors
We
believe that the current standard of care in brain retractors has not changed
much since their fundamental design from the 1920’s since ribbon type blades are
still used today.
Our
internal research shows that most of the more recent advancements have focused
on adding technology to this type of retractor such as pressure monitoring
devices and various types of plastic or silicone coating so that retraction
injury might be limited. Other advancements have included variations in the
metals of the retractors, some of these being relatively soft as compared to
previous iterations, in an attempt to limit retraction injury.
We
believe that the Vycor Brain Access System products represent an improvement
over existing products. Case experience, evaluations and independent clinical
studies may be necessary for wide adoption of our devices.
The
current major manufacturers of brain retractors, and accordingly, our
competitors are:
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Cardinal
Health (V. Mueller line)
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Aesculap
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Integra
Life Science
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Codman
(Division of Johnson & Johnson)
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Our
assessment of who will be our competitors is based upon our assumption that we
are and will be competing in the “retraction” technology market. The above list
of competitors is derived from our research over the internet and information
from the websites of our competitors like Cardinal Health V. Mueller
(www.cardinal.com) and Integra Life Science (www.integra-ls.com).
Cervical
Retractors
The
Cervical Access System is designed to provide superior visibility and we
believe, reduced chance for complications during surgery by eliminating the
sharp edges found in traditional retractors that often inadvertently
move during surgery. While there has been greater advancement in cervical
retractor technology compared to brain retractors, we believe that our Cervical
Access System products offer superior performance compared to our
competitors.
Our main
competitors are Medtronic’s MetRx system, Asculap/B. Braun and Cloward
Instruments’ Small and Large Cervical Retractor Systems. In addition to the
standard “blade retractors” distributed by the companies listed above, Medtronic
distributes the MetRx dilating retractor system for use in lower spinal
surgery.
In
addition, companies such as Endius and EBI have announced cervical retractor
systems.
7
Major
Customers
We have
started shipments in November of 2008. Our customers will be
hospitals that perform neurosurgery, independent distributors and distributors
in different countries.
Presently,
we are using a direct sales model which will use approximately 15
independent companies in the U.S. that specialize in neurosurgery. Each would
handle the direct distribution of our Brain Access System through their own
sales representatives which number approximately 70. Some of these distributors
will be stocking distributors, buying product from Vycor and selling it to
hospitals and some will be paid a commission and Vycor will be shipping and
billing the hospitals.
Intellectual
Property
Patent
Applications
Below is
a table setting out the status and particulars of our patent
applications:
|
Filing Date
|
Application No.
|
Country
|
Title
|
Status
|
||||
|
June 22, 2005
|
60/692,959
|
US — provisional
|
Surgical
Access
Instruments
for Use
with
Spinal or Orthopedic
Surgery
(Cervical)
|
Converted
to PCT
|
||||
|
June
22, 2006
|
PCT/US06/24243
|
PCT
|
Surgical
Access
Instruments
for Use with
Spinal
or Orthopedic
Surgery
(Cervical)
|
Entered
National Phase
|
||||
|
June
22, 2005
|
11/155,175
|
US — utility
|
Surgical
Access
Instruments
for Use with
Delicate
Tissues (Brain)
|
Pending
|
||||
|
November
27, 2006
|
PCT/US06/61246
|
PCT
|
Surgical
Access
Instruments
for Use with
Delicate
Tissues (Brain)
|
Pending — National
Phase Entry on May 27, 2009
|
||||
|
June
22, 2006
|
|
Canada
|
Surgical
Access
Instruments
for Use with
Spinal
or Orthopedic
Surgery
|
Pending
|
||||
|
June
22, 2006
|
06785312.7
|
Europe
|
Surgical
Access
Instruments
for Use with
Spinal
or Orthopedic
Surgery
|
Pending
|
||||
|
June
22, 2006
|
|
India
|
Surgical
Access
Instruments
for Use with
Spinal
or Orthopedic
Surgery
|
Pending
|
||||
|
June
22, 2006
|
|
Israel
|
Surgical
Access
Instruments
for Use with
Spinal
or Orthopedic
Surgery
|
Pending
|
||||
|
June
22, 2006
|
|
Japan
|
Surgical
Access
Instruments
for Use with
Spinal
or Orthopedic
Surgery
|
Pending
|
||||
|
December
20, 2007
|
11/993,280
|
US
|
Surgical
Access
Instruments
for Use with
Spinal
or Orthopedic
Surgery
|
Pending
|
The
above-indicated patent applications were invented by Dr. John Mangiardi, who
assigned the rights to the Sawmill Trust on September 17, 2005 under the terms
of an assignment agreement between the parties. The Sawmill Trust then, in turn,
assigned the same rights to us on September 17, 2005 pursuant to an assignment
agreement between the Sawmill Trust and the Company dated the same date. The
consideration for such assignment was the issuance of one-third of the initial
equity of our predecessor (Vycor Medical, LLC) and the inclusion of certain
rights in favor or the Sawmill Trust, including but not limited to certain
supermajority voting rights and the right to appoint members of the board of
managers, which were incorporated in the Operating Agreement of such entity. Dr.
Mangiardi’s wife, Pascale Mangiardi, who is a director of the Company, was the
Settlor of the Sawmill Trust and Dr and Mrs. Mangiardi are both beneficiaries of
the Sawmilll Trust. The Sawmill Trust is an irrevocable trust and A. Mitchell
Green is the sole Trustee and has sole voting power and investment power with
respect to the assets of the trust.
8
Trademarks
VYCOR
MEDICAL is a registered trademark and VYCOR VIEWSITE is both pending
registration as a trademark with the United States Patent Office.
Insurance
We
presently have Directors’ and Officers’ Liability Insurance and Product
Liability insurance.
Government
Regulations
We are
committed to an integrated total quality management system. We have completed
the necessary procedures and are certified to the ISO standards expected of
medical device manufacturers as follows:
ISO
13485:2003 Medical Devices — Quality Management Systems
The
certification of a quality management system to ISO 13485, specifically for
medical devices, is advantageous and often essential for medical companies to
export their products to the global market, as well as maintain and enter into
certain agreements and business growth opportunities within the U.S. For
example, Canada requires that medical device manufacturers marketing their
products in Canada must have a quality system certified to ISO 13485:2003. The
certification is also required for placement of branded devices into the
European Union.
We have
successfully passed our annual surveillance audit by Intertek and now possess
the following certifications, which allow for regulatory entry of our products
into the US, Canada, the European Union and other international
markets:
|
•
|
MDD
ANNEX V/ISO CMDCAS 13485:2003, CERTIFICATION AUDIT, MDD CERTIFICATION
AUDIT.
|
|
•
|
MDD
ANNEX V/ ISO 13485:2003 CERTIFICATION
|
|
•
|
CMDCAS
CERTIFICATION for Canada
|
|
•
|
EN
ISO 13485:2003 for the European
Union
|
Intertek
is the leading international provider of quality and safety services to a wide
range of global and local industries.
Continuing
Regulatory Requirements
Governmental
regulation in the United States and other countries is a significant factor
affecting the research and development, manufacture and marketing of medical
devices, including our products. In the United States, the FDA has broad
authority under the Federal Food, Drug and Cosmetic Act (the FD&C Act) to
regulate the development, distribution, manufacture, marketing and sale of
medical devices. Foreign sales of medical devices are subject to foreign
governmental regulation and restrictions that vary from country to
country.
Medical
devices intended for human use in the United States are classified into one of
three categories, depending upon the degree of regulatory control to which they
will be subject. Such devices are classified by regulation into either
Class I general controls, Class II special standards or Class III
pre-market approval (PMA), depending upon the level of regulatory control
required to provide reasonable assurance of the safety and effectiveness of the
device.
9
Our
products have been cleared for marketing through the 510(k)
process.
We can
provide no assurance that we will be able to obtain clearances or approvals
needed to introduce new products and technologies. After a device is placed on
the market, numerous regulatory requirements apply.
These
include:
|
•
|
quality
system regulation, which requires manufacturers to follow design, testing,
control, documentation and other quality assurance procedures during the
manufacturing process as well as surveillance audits each year to maintain
compliance of our ISO system;
|
|
•
|
labeling
regulations, which prohibit the promotion of products for unapproved or
“off-label” uses and impose other restrictions on
labeling; and
|
|
•
|
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 it were to
recur.
|
Failure
to comply with applicable regulatory requirements can result in enforcement
action by the FDA, MDD, and Health Canada which may include any of the
following sanctions:
|
•
|
fines,
injunctions, and civil penalties;
|
|
•
|
recall
or seizure of our products;
|
|
•
|
operating
restrictions, partial suspension or total shutdown of
production;
|
|
•
|
refusing
our request for 510(k) clearance or premarket approval of new
products;
|
|
•
|
withdrawing
510(k) clearance or premarket approvals that are already
granted; and
|
|
•
|
criminal
prosecution.
|
Medical
device laws are also in effect in many of the countries outside of the United
States in which we will do business. These laws range from comprehensive device
approval and quality system requirements for some or all of our medical device
products to simple requests for product data or certifications. The number and
scope of these requirements are increasing. In June 1998, the European Union
Medical Device Directive became effective, and all medical devices must meet the
Medical Device Directive standards and receive CE mark certification. CE mark
certification involves a comprehensive Quality System program, and submission of
data on a product to the Notified Body in Europe.
Health
Care Regulatory Issues
The
health care industry is highly regulated and the regulatory environment in which
we operate may change significantly in the future. In general, regulation of
health care-related companies is increasing. We anticipate that Congress and
state legislatures will continue to review and assess alternative health care
delivery and payment systems. We cannot predict what impact the adoption of any
federal or state health care reform measures may have on our
business.
We
regularly monitor developments in statutes and regulations relating to our
business. We may be required to modify our agreements, operations, marketing and
expansion strategies from time to time in response to changes in the statutory
and regulatory environment. We plan to structure all of our agreements,
operations, marketing and strategies in accordance with applicable law, although
we can provide no assurance that our arrangements will not be challenged
successfully or that required changes may not have a material adverse effect on
our business, financial condition, results of operations and cash
flows.
10
We
believe that the discussion above summarizes all of the material health care
regulatory requirements to which we currently are subject. Complying with these
regulatory requirements may involve expense to us, delay in our operations
and/or restructuring of our business relationships. Violations could potentially
result in the imposition of civil and/or criminal penalties.
Employees
We
currently have four full-time employees.
ITEM
1A. RISK FACTORS
Risks
Related to Our Financials
We
are a recently formed company that has not achieved profitable operations. If
our business plan fails, you may lose your entire investment.
Our
independent auditors, Paritz & Company, certified public accountants, have
expressed substantial doubt concerning our ability to continue as a going
concern. We have incurred losses since our inception, including a net
loss of $2,381,295 and $593,996 for the years ended December 31, 2008 and 2007
respectively, and we expect to incur substantial additional losses, including
additional development costs, costs related to clinical trials and manufacturing
expenses. We have incurred negative cash flows from operations since inception.
As of December 31, 2008 and 2007, we had a stockholders’ deficiencies of
$921,427 and $593,827, respectively, and a cash and cash equivalents balance of
$196,138 at December 31, 2008 and $15,739 at December 31, 2007. Since we have no
record of profitable operations, there is high a possibility that you may suffer
a complete loss of your investment.
We
were formed on June 17, 2005 and have a limited operating history and,
accordingly, you will not have any basis on which to evaluate our ability to
achieve our business objectives.
We have
limited operating results to date. Since we do not have an established operating
history or regular sales yet, you will have no basis upon which to evaluate our
ability to achieve our business objectives.
The
absence of any significant operating history for us makes forecasting our
revenue and expenses difficult, and we may be unable to adjust our spending in a
timely manner to compensate for unexpected revenue shortfalls or unexpected
expenses.
As a
result of the absence of any operating history for us, it is difficult to
accurately forecast our future revenue. In addition, we have limited meaningful
historical financial data upon which to base planned operating expenses. Current
and future expense levels are based on our operating plans and estimates of
future revenue. Revenue and operating results are difficult to forecast because
they generally depend on our ability to promote and sell our products. As a
result, we may be unable to adjust our spending in a timely manner to compensate
for any unexpected revenue shortfall, which would result in further substantial
losses. We may also be unable to expand our operations in a timely manner to
adequately meet demand to the extent it exceeds expectations.
Our
limited operating history does not afford investors a sufficient history on
which to base an investment decision.
We were
formed on June 17, 2005 and are currently developing and introducing new
products. There can be no assurance that at this time we will operate profitably
or that we will have adequate working capital to meet our obligations as they
become due. Investors must consider the risks and difficulties
frequently encountered by early stage companies, particularly in rapidly
evolving markets. Such risks include the following:
|
·
|
competition;
|
|
·
|
need
for acceptance of products — there can be no assured market for
our products and there is no guarantee of orders or surgeon
acceptance;
|
|
·
|
ability
to continue to develop and extend brand identity;
|
|
·
|
ability
to anticipate and adapt to a competitive market;
|
|
·
|
ability
to effectively manage rapidly expanding operations;
|
|
·
|
amount
and timing of operating costs and capital expenditures relating to
expansion of our business, operations, and infrastructure;
and
|
|
·
|
dependence
upon key personnel to market and sell our products and the loss of one of
our key managers may adversely affect the marketing of our
products.
|
11
We cannot
be certain that our business strategy will be successful or that we will
successfully address these risks. In the event that we do not successfully
address these risks, our business, prospects, financial condition, and results
of operations could be materially and adversely affected.
Our
independent auditors have expressed substantial doubt about our ability to
continue as a going concern, which may hinder our ability to continue as a going
concern and our ability to obtain future financing.
In their
report dated March 23, 2009, our independent auditors stated that our financial
statements for the period ended December 31, 2008 were prepared assuming that we
would continue as a going concern. Our ability to continue as a going concern is
an issue raised as a result of recurring losses from operations and cash flow
deficiencies since our inception. We continue to experience net losses. Our
ability to continue as a going concern is subject to our ability to generate a
profit and/or obtain necessary funding from outside sources, including obtaining
additional funding from the sale of our securities, increasing sales or
obtaining loans and grants from various financial institutions where possible.
If we are unable to continue as a going concern, you may lose your entire
investment.
Our
revenue will be dependent upon acceptance of our products by the market. The
failure of such acceptance will cause us to curtail or cease
operations.
We
believe that virtually all of our revenue will come from the sale of our
products. As a result, we will continue to incur substantial operating losses
until such time as we are able to generate revenue from the sale of our
products. There can be no assurance that businesses and customers will adopt our
technology and products, or that businesses and prospective customers will agree
to pay for our products. In the event that we are not able to significantly
increase the number of customers that purchase our products, or if we are unable
to charge the necessary prices, our financial condition and results of
operations will be materially and adversely affected.
Risks
Related to Our Business
We
cannot be certain that we will obtain patents for our devices or that such
patents will protect us from competitors
We
believe that our success and competitive position will depend in large part on
our ability to obtain and maintain patents for our devices. We have filed patent
applications for both the design of our Brain Access System and Cervical Access
System and the method of performing surgery with our devices. The U.S. Patent
and Trademark Office typically requires 24 months or more to process a patent
application. There can be no assurance that our patent applications will be
approved. However we do not intend to wait for the approval of the patent
applications before launching our devices. There can be no assurance regarding
how long it will take the U.S. Patent and Trademark Office to decide whether to
approve our patent applications or how long it will take foreign patent offices
to grant us patents. There can be no assurance that any patent issued or
licensed to us will provide us with protection against competitive products or
otherwise protect our commercial viability, or that challenges will not be
instituted against the validity or enforceability of any of our patents or, if
instituted, that such challenges will not be successful. The cost of litigation
to uphold the validity of a patent and enforce it against infringement can be
substantial. Even issued patents may later be modified or revoked by the Patent
and Trademark Office or in legal proceedings. Patent applications in the United
States are maintained in secrecy until the patent issues and, since publication
of discoveries in the scientific or patent literature tends to lag behind actual
discoveries, we cannot be certain that we were the first creator of the
inventions covered by our pending patent applications or the first to file
patent applications on such inventions.
We
are dependent on two key vendors to manufacture our products.
We are
dependent on Lacey Manufacturing Company (“Lacey”) of Bridgeport, Connecticut to
provide a full range of engineering, contract manufacturing and logistical
support to manufacture our products. The Company has now executed an agreement
with Lacey to provide manufacturing, engineering and design services, a copy of
which is attached as an exhibit. We are dependent upon their commencing
manufacture of our products in accordance with our specifications and delivering
them on a timely basis in order to realize our business plan. As of December 31,
2008 Lacey has delivered all products due to Vycor. They can however no
assurances that this will be the case in the future. As of December 31, 2007,
the amount payable to Lacey was $207,245. We have agreed to a payment plan with
Lacey for this amount, with no interest to accrue on the outstanding
amount. Pursuant to that payment plan, as of December 15, 2008, this past amount
was paid down completely.
We
recently engaged C&J Industries, Meadville PA, to design certain models of
the Brain Access System in addition to Lacey. We are dependent upon their
commencing manufacture of our products in accordance with our specifications and
delivering them on a timely basis in order to realize our business
plan. As of December 31,2008 C&J manufacturing delivered all the
products due to Vycor. They can however no assurances that this will be the case
in the future.
12
If either
supplier fails to manufacture and/or deliver our products as specified, we may
need to locate another manufacturer. We can offer no assurances that we will be
successful in finding an alternate manufacturer and negotiating acceptable terms
with them on a timely basis without impact on our manufacturing and delivery
schedule.
Both
manufactures are subject to regulatory requirements and certifications. Loss of
certification would affect our supply.
We
will need distribution and marketing partners to help us market our
products.
We do not
have established distribution and marketing channels. We will need to find means
of letting our potential users know about our products and find means of
distributing our products to them. We have contracted with independent medical
device distributors and representatives that collectively have approximately 70
field salespeople who call on neurosurgery departments. We are also in
discussions with other potential medical device distributors and sales agents.
There is no assurance that the contracted distributors or potential new
distributors will be successful in promoting and selling our
products.
We
will need to raise substantial additional funds to bring additional products to
market and operate.
Our
current funds are not sufficient to allow us to completely launch and market our
products. We will require substantial additional funds in order to bring our
products to market. Sufficient funds on terms acceptable to us may not be
available or may be available only on terms that are dilutive to investors. Our
inability to obtain additional funds might prevent us from launching the
products and continuing operations.
Our
development activities may be more expensive than anticipated and that we may
not have sufficient resources to realize our business plan.
There is
a possibility that the money and time required to obtain permits, to enter into
arrangements with manufacturers and distributors etc. may be excessive and more
than what we had anticipated. We may conclude that the expenses will make the
launch uneconomical. Therefore there is a risk that funds that we may not be
able to complete the development of and sale of our products.
Sales
may not produce profits.
We may be
forced to sell our products at a lower price than anticipated due to a variety
of reasons, including, without limitation, selling prices of comparable products
by our competitors and budget constraints of our customers. Further, we may sell
fewer products than anticipated, and the costs associated with each unit,
including costs of manufacturing and commissions, may be greater than
anticipated. As a result, there is a risk that the cost of the launch may be
greater than we anticipated and that the sale of devices may fail to yield
profitability.
Our
products may not be accepted in the marketplace.
Uncertainty
exists as to whether our products, once completely developed and available for
commercialization, will be accepted by the market without clinical evaluations.
A number of factors may limit the market acceptance of our products, including
the timing of regulatory approvals and market entry relative to competitive
products, the availability of alternative products and the price of the our
products relative to alternative products. There is a risk that surgeons will be
encouraged to use multiple use devices, such as retractors, instead of our
single use devices. Our device is designed to be used once and then discarded.
Our competitors market multiple use devices such as retractors. The multiple use
devices are not appreciably more expensive than our single use devices and
therefore they are significantly less expensive on a per use basis. We are
assuming that notwithstanding the difference in price, surgeons will elect to
use our devices because of their perception that our devices will permit safer
and less invasive surgery. However, hospitals, medical insurance providers,
health maintenance organizations and others approving surgical costs may decide
that the cost outweighs the benefit. In addition, surgeons may opt to use other
devices.
13
Even
if our products are approved by regulatory authorities, if we or our suppliers
fail to comply with ongoing regulatory requirements, or if we experience
unanticipated problems with our products, these products could be subject to
restrictions or withdrawal from the market.
Any
product for which we obtain marketing approval, along with the manufacturing
processes, post-approval clinical data and promotional activities for such
product, will be subject to continual review and periodic inspections by the FDA
and other regulatory bodies. In particular we and our suppliers are required to
comply with the Quality System Regulation, or QSR, for the manufacture of our
products which cover the methods and documentation of the design, testing,
production, control, quality assurance, labeling, packaging, storage and
shipping of any product for which we obtain marketing approval. The FDA enforces
the GMP and QSR through unannounced inspections. We and our third party
manufacturers and suppliers will have to successfully complete such inspections.
Failure by us or one of our suppliers, with statutes and regulations
administered by the FDA and other regulatory bodies, or failure to take adequate
response to any observations, could result in, among other things, any of the
following enforcement actions:
|
·
|
warning
letters or untitled letters;
|
|
·
|
fines
and civil penalties;
|
|
·
|
unanticipated
expenditures;
|
|
·
|
withdrawal
or suspension of approval by the FDA or other regulatory
bodies;
|
|
·
|
product
recall or seizure;
|
|
·
|
orders
for physician notification or device repair, replacement or
refund;
|
|
·
|
interruption
of production;
|
|
·
|
operating
restrictions;
|
|
·
|
injunctions;
and
|
|
·
|
criminal
prosecution.
|
If any of
these actions were to occur it would harm our reputation and cause our product
sales and profitability to suffer. Furthermore, our key component suppliers may
not currently be or may not continue to be in compliance with applicable
regulatory requirements.
If the
FDA determines that our promotional materials, training or other activities
constitutes promotion of an unapproved use, it could request that we cease or
modify our training or promotional materials or subject us to regulatory
enforcement actions. It is also possible that other federal, state or foreign
enforcement authorities might take action if they consider our training or other
promotional materials to constitute promotion of an unapproved use, which could
result in significant fines or penalties under other statutory authorities, such
as laws prohibiting false claims for reimbursement.
Moreover,
any modification to a device that has received FDA approval that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, design or manufacture, requires a new approval
from the FDA. If the FDA disagrees with any determination by us that new
approval is not required, we may be required to cease marketing or to recall the
modified product until we obtain approval. In addition, we could also be subject
to significant regulatory fines or penalties.
In
addition, we may be required to conduct costly post-market testing and
surveillance to monitor the safety or efficacy of our products, and we will be
required to report adverse events and malfunctions related to our products.
Later discovery of previously unknown problems with our products, including
unanticipated adverse events or adverse events of unanticipated severity or
frequency, manufacturing problems, or failure to comply with regulatory
requirements such as QSR or GMP, may result in restrictions on such products or
manufacturing processes, withdrawal of the products from the market, voluntary
or mandatory recalls, fines, suspension of regulatory approvals, product
seizures, injunctions or the imposition of civil or criminal
penalties.
Further,
healthcare laws and regulations may change significantly in the future. Any new
healthcare laws or regulations may adversely affect our business. A review of
our business by courts or regulatory authorities may result in a determination
that could adversely affect our operations. Also, the healthcare regulatory
environment may change in a way that restricts our operations.
Similarly,
in Canada, Health Canada could place a hold on imports from us and could revoke
any licenses held for violations of its rules and regulations. Health Canada
could issue a warning the first time around and we would be obligated to fix the
problem and follow up with Health Canada.
14
In
Europe, the relevant European authorities could hold imports from us and remove
CE marking for violating their rules and regulations. We could get a warning
from a European Competent Authority or its Notified Body and we would be
obligated to fix the problem and follow up with either the Notified Body or
Competent Authorities.
Because
product liability is inherent in the medical devices industry and insurance is
expensive and difficult to obtain, we may be exposed to large
lawsuits.
Our
business exposes us to potential product liability risks, which are inherent in
the manufacturing, marketing and sale of medical devices. While we will take
precautions we deem to be appropriate to avoid product liability suits against
us, there can be no assurance that we will be able to avoid significant product
liability exposure. Product liability insurance for the medical products
industry is generally expensive, to the extent it is available at all. While we
may obtain such coverage, there can be no assurance that we will be able to
obtain such coverage on acceptable terms, or that any insurance policy will
provide adequate protection against potential claims. A successful product
liability claim brought against us may exceed any insurance coverage secured by
us and could have a material adverse effect on our results or ability to
continue marketing our products.
Because
the healthcare industry is subject to changing policies and procedures, we may
find it difficult to continue to compete in an uncertain
environment.
The
healthcare industry is subject to changing political, economic and regulatory
influences that may affect the procurement practices and operations of
healthcare industry participants. During the past several years government
regulation of the healthcare industry has changed significantly in several
countries. Healthcare industry participants may react to new policies by
curtailing or deferring use of new treatments for disease, including treatments
that would use our devices. This could substantially impair our ability to
successfully marker our products, which would have a material adverse effect on
our performance.
The
market success of our product candidates will be dependent in part upon
third-party reimbursement policies that are often subject to
change.
Our
ability to successfully penetrate the market for our products may depend
significantly on the availability of reimbursement to hospitals for
neurosurgical procedures from third-party payers, such as governmental programs,
private insurance and private health plans. There is no guarantee that this will
not change in the future or that applicable levels of reimbursement to
hospitals, if any, will be high enough to allow us to generate a reasonable
profit margin. Our products are not specifically reimbursed by third
party payors, they are part of the overall procedure cost. If levels of
reimbursement are decreased in the future, the demand for our products could
diminish or our ability to sell our products on a profitable basis could be
adversely affected.
Some
of our competitors are more established and better capitalized than we are and
we may be unable to establish market share.
Some of
our competitors are well-known, more established and better capitalized than we
are. As such, they may have at their disposal greater marketing strength and
economies of scale. They may also have more resources to expend on research and
development to create more innovative products in competition with ours.
Accordingly, we may not be successful in competing with them for market
share.
We
will need to increase the size of our organization, and may experience
difficulties in managing growth.
We are a
small company with minimal employees. We expect to experience a period of
significant expansion in headcount, facilities, infrastructure and overhead and
anticipate that further expansion will be required to address potential growth
and market opportunities. Future growth will impose significant added
responsibilities on members of management, including the need to identify,
recruit, maintain and integrate managers. Our future financial performance and
its ability to compete effectively will depend, in part, on its ability to
manage any future growth effectively.
We
are subject to compliance with securities law, which exposes us to potential
liabilities, including potential rescission rights.
We have
offered and sold our common stock to investors pursuant to certain exemptions
from the registration requirements of the Securities Act of 1933, as well as
those of various state securities laws. The basis for relying on such exemptions
is factual; that is, the applicability of such exemptions depends upon our
conduct and that of those persons contacting prospective investors and making
the offering. We have not received a legal opinion to the effect that any of our
prior offerings were exempt from registration under any federal or state law.
Instead, we have relied upon the operative facts as the basis for such
exemptions, including information provided by investors
themselves.
15
If any
prior offering did not qualify for such exemption, an investor would have the
right to rescind its purchase of the securities if it so desired. It is possible
that if an investor should seek rescission, such investor would succeed. A
similar situation prevails under state law in those states where the securities
may be offered without registration in reliance on the partial preemption from
the registration or qualification provisions of such state statutes under the
National Securities Markets Improvement Act of 1996. If investors were
successful in seeking rescission, we would face severe financial demands that
could adversely affect our business and operations. Additionally, if we did not
in fact qualify for the exemptions upon which it has relied, we may become
subject to significant fines and penalties imposed by the SEC and state
securities agencies.
The
availability of a large number of authorized but unissued shares of common stock
may, upon their issuance, lead to dilution of existing
stockholders.
We are
authorized to issue 100,000,000 shares of common stock, $0.001 par value per
share, of which, as of March 23, 2009, 26,356,638 shares of
common stock were issued and outstanding. These shares may be issued by our
board of directors without further stockholder approval. The issuance of large
numbers of shares, possibly at below market prices, is likely to result in
substantial dilution to the interests of other stockholders. In addition,
issuances of large numbers of shares may adversely affect the market price of
our common stock.
Further,
our Certificate of Incorporation authorizes 10,000,000 shares of preferred
stock, $1 par value per share. The board of directors is authorized to provide
for the issuance of these unissued shares of preferred stock in one or more
series, and to fix the number of shares and to determine the rights, preferences
and privileges thereof. Accordingly, the board of directors may issue preferred
stock which convert into large numbers of shares of common stock and
consequently lead to further dilution of other shareholders.
We
may need additional capital that could dilute the ownership interest of
investors.
We
require substantial working capital to fund our business. If we raise additional
funds through the issuance of equity, equity-related or convertible debt
securities, these securities may have rights, preferences or privileges senior
to those of the rights of holders of our common stock and they may experience
additional dilution. We cannot predict whether additional financing will be
available to us on favorable terms when required, or at all. Since our
inception, we have experienced negative cash flow from operations and expect to
experience significant negative cash flow from operations in the future. The
issuance of additional common stock by our management, may have the effect of
further diluting the proportionate equity interest and voting power of holders
of our common stock.
We
rely on Mr. Kenneth T. Coviello, our Chief Executive Officer and Ms. Heather N.
Jensen, our President, for the management of our business, and the loss of their
services may significantly harm our business and prospects.
We
depend, to a large extent, on the abilities and participation of our current
management team, but have a particular reliance upon Mr. Kenneth T. Coviello,
our Chief Executive Officer and Ms. Heather N. Jensen, our President for the
direction of our business. The loss of the services of either Mr. Coviello or
Ms. Jensen, for any reason, may have a material adverse effect on our business
and prospects. We cannot assure you that the services of Mr. Coviello or Ms.
Jensen will continue to be available to us, or that we will be able to find a
suitable replacement for either of them. We do not have key man insurance on Mr.
Coviello or Ms. Jensen. If either or both of them were to die and we are unable
to replace either or both of them for a prolonged period of time, we may be
unable to carry out our long term business plan and our future prospect for
growth, and our business, may be harmed.
We
may not be able to hire and retain qualified personnel to support our growth and
if we are unable to retain or hire such personnel in the future, our ability to
improve our products and implement our business objectives could be adversely
affected.
Our
future success depends heavily upon the continuing services of the members of
our senior management team, in particular our Chief Executive Officer, Mr.
Kenneth T. Coviello and our President, Ms. Heather N. Jensen. If one or more of
our senior executives or other key personnel is/are unable or unwilling to
continue in his/her/their present positions, we may not be able to replace them
easily or at all, and our business may be disrupted and our financial condition
and results of operations may be materially and adversely affected. Competition
for senior management and personnel is intense, the pool of qualified candidates
in the medical device field is very limited, and we may not be able to retain
the services of our senior executives or senior personnel, or attract and retain
high-quality senior executives or senior personnel in the future. This failure
could materially and adversely affect our future growth and financial
condition.
We
may not have adequate internal accounting controls. While we have certain
internal procedures in our budgeting, forecasting and in the management and
allocation of funds, our internal controls may not be adequate.
16
We are
constantly striving to improve our internal accounting controls. We do not have
a dedicated Chief Financial Officer. We hope to develop an adequate internal
accounting control to budget, forecast, manage and allocate our funds and
account for them. There is no guarantee that such improvements will be adequate
or successful or that such improvements will be carried out on a timely basis.
If we do not have adequate internal accounting controls, we may not be able to
appropriately budget, forecast and manage our funds, we may also be unable to
prepare accurate accounts on a timely basis to meet our continuing financial
reporting obligations and we may not be able to satisfy our obligations under US
securities laws.
We
have inadequate insurance coverage
We only
have Directors and Officers Liability Insurance and Product Liability insurance
at present. We have exposure in the event of loss or damage to our
properties. We are seeking quotations for property and other
necessary insurances.
We cannot
assure you that we would not face liability in the event of the failure of any
of our products. This is particularly true given our plan to significantly
expand our sales into international markets, like Europe, where product
liability claims are more prevalent. Moreover, our insurance may not be adequate
to cover any such product liability damages.
We do not
maintain a reserve fund for warranty or defective products claims. Our costs
could substantially increase if we experience a significant number of warranty
claims. We have not established any reserve funds for potential warranty claims.
If we experience an increase in warranty claims or if our repair and replacement
costs associated with warranty claims increase significantly, it would have a
material adverse effect on our financial condition and results of
operations.
Risks
Related to an Investment in Our Common Stock
Our
Chief Executive Officer and President control us through their position and
stock ownership and their interests may differ from other
stockholders
Our Chief
Executive Officer and President beneficially own, in the aggregate,
approximately 38.8% of our common stock. As a result, while they individually
are not holders of a majority of the outstanding shares, collectively, they may
be able to influence the outcome of stockholder votes on various matters,
including the election of directors and extraordinary corporate transactions,
including business combinations. Their interests may differ from other
stockholders.
We
do not intend to pay cash dividends in the foreseeable future
We
currently intend to retain all future earnings for use in the operation and
expansion of our business. We do not intend to pay any cash dividends in the
foreseeable future but will review this policy as circumstances
dictate.
There
is currently no market for our securities and there can be no assurance that any
market will ever develop
Prior to
the date of this document, there has not been any established trading market for
our common stock and there is currently no market for our securities. We have
filed an application with the NASD on our behalf to list the shares of our
common stock on the NASD OTC Bulletin Board (“OTCBB”). There can be no assurance
as to the prices at which our common stock will trade if a trading market
develops. Until our common stock is fully distributed and an orderly market
develops, (if ever) in our common stock, the price at which it trades is likely
to fluctuate significantly. Prices for our common stock will be determined in
the marketplace and may be influenced by many factors, including the depth and
liquidity of the market for shares of our common stock, developments affecting
our business, including the impact of the factors referred to elsewhere in these
Risk Factors, investor perception of us and general economic and market
conditions. No assurances can be given that an orderly or liquid market will
ever develop for the shares of our common stock. Owing to the anticipated low
price of the securities, many brokerage firms may not be willing to effect
transactions in the securities.
17
Our
common stock is subject to the Penny Stock Regulations
Our
common stock and will likely be subject to the SEC's “penny stock” rules to the
extent that the price remains less than $5. Those rules, which require delivery
of a schedule explaining the penny stock market and the associated risks before
any sale, may further limit the ability to sell shares.
The SEC
has adopted regulations which generally define “penny stock” to be an equity
security that has a market price of less than $5 per share. Our common stock,
when and if a trading market develops, may fall within the definition of penny
stock and 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 incomes 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 prior written consent to the transaction. Additionally, for any
transaction, other than exempt transactions, involving a penny stock, the rules
require the delivery, prior to the transaction, of a risk disclosure document
mandated by the Commission relating to the penny stock market. The broker-dealer
also must disclose the commissions 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 their
common stock in the secondary market.
Our
common stock is illiquid and subject to price volatility unrelated to our
operations
The
market price of our common stock could fluctuate substantially due to a variety
of factors, including market perception of our ability to achieve our planned
growth, quarterly operating results of other companies in the same industry,
trading volume in our common stock, changes in general conditions in the economy
and the financial markets or other developments affecting our competitors or us.
In addition, the stock market is subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market price
of securities issued by many companies for reasons unrelated to their operating
performance and could have the same effect on our common stock.
Also, as
a result of the exercise or conversion of certain convertible securities by the
selling stockholders, there may be a significant number of new shares of common
stock on the market in addition to the current public float. Sales of
substantial amounts of common stock, or the perception that such sales could
occur, and the existence of convertible securities to purchase shares of common
stock at prices that may be below the then current market price of the common
stock, could adversely affect the market price of our common stock and could
impair our ability to raise capital through the sale of our equity
securities.
ITEM
1B. UNRESOLVED STAFF COMMENTS
N/A
We are
located at 80 Orville Dr., Suite 100, Bohemia, NY 11716. We occupy approximately
700 square ft. in a well maintained 2 story office building. The space is leased
on a short term arrangement for a 3 month period, which expires March 31,
2009. We have an option to extend through June 30, 2009. We can arrange for a
longer term lease if desired. The office management company, Regus HQ Global
Workplace, provides a receptionist and conference room on a shared basis with
other tenants in the building. The monthly cost of the current space is
approximately $2,750 plus administrative fees.
18
Over the
next 12 months, as we grow and add personnel, the current space will not be
adequate and we will have to arrange for additional space in the same building
or another. It is anticipated that we will lease approximately 2,000 square feet
in the near future and vacate the current office. Monthly lease expenses are
then expected to be approximately $4,000 per month.
Currently,
we own 5 personal computers, a copier and 2 laptops which are used in the office
or for business travel. We have molds, tools and dies to produce 12 sizes of our
Brain Access System. All molds, tools, dies, stamping equipment are maintained
at the Lacey or C&J facilities. This equipment is less than 2 years old and
in good condition.
ITEM
3. LEGAL PROCEEDINGS
We know
of no material, active, pending or threatened proceeding against us or our
subsidiaries, nor are we, or any subsidiary, involved as a plaintiff or
defendant in any material proceeding or pending litigation.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
PART II
ITEM 5. MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
MARKET
INFORMATION
Beginning
on March 3, 2009, our Common Stock was quoted on the OTC Bulletin Board, a
service provided by the Nasdaq Stock Market Inc., under the symbol
“VYCO”.
The
market price of our common stock, like that of other technology companies, is
highly volatile and is subject to fluctuations in response to variations in
operating results, announcements of technological innovations or new products,
or other events or factors. Our stock price may also be affected by broader
market trends unrelated to our performance.
Holders
As of
March 23, 2009 there were 26,356,638 shares of common stock outstanding and
approximately 55 stockholders of record.
Transfer
Agent and Registrar
Our
transfer agent is Corporate Stock Transfer, 3200 Cherry Creek Drive South ,
Suite 430, Denver, CO 80209 (303) 282-4800.
Dividend
Policy
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. We intend to
retain future earnings to fund ongoing operations and future capital
requirements of our business. Any future determination to pay cash dividends
will be at the discretion of the Board of Directors and will be dependent upon
our financial condition, results of operations, capital requirements and such
other factors as the Board of Directors deems relevant.
19
|
Name of Purchaser (Selling Stockholder)
|
Date of Sale
|
Title of
Security
|
Amount of Securities
Sold
|
Consideration
|
||||||||
|
Steven
Thuilot
|
February 3,
2006
March 1, 2006
April 13, 2006
|
Common
Stock
|
267,469
|
$
|
25,000
|
|||||||
|
Ed
and Joanne Minder
|
January
18, 2006
March
15, 2006
|
Common
Stock
|
160,481
|
$
|
15,000
|
|||||||
|
Larry
Coviello
|
January
18, 2006
March
19, 2006
|
Common
Stock
|
171,180
|
$
|
16,000
|
|||||||
|
Robert
Coviello
|
January
18, 2006
March
19, 2006
|
Common
Stock
|
117,686
|
$
|
11,000
|
|||||||
|
Neal
Clay
|
March
14, 2006
|
Common
Stock
|
107,041
|
$
|
10,000
|
|||||||
|
Joan
Pallateri
|
March
27, 2006
|
Common
Stock
|
107,041
|
$
|
10,000
|
|||||||
|
Edwin
Tironi
|
March
14, 2006
|
Common
Stock
|
160,482
|
$
|
15,000
|
|||||||
|
Susan
and Lambert Dahlin
|
March
24, 2006
|
Common
Stock
|
160,482
|
$
|
15,000
|
|||||||
|
Prateek
Parekh
|
April
10, 2006
|
Common
Stock
|
40,120
|
$
|
10,000
|
|||||||
|
Goran
Avdicevic
|
April
10, 2006
|
Common
Stock
|
100,301
|
$
|
25,000
|
|||||||
|
Harpreet
Anand
|
April
10, 2006
|
Common
Stock
|
64,193
|
$
|
16,000
|
|||||||
|
Anirban
Sen
|
April
10, 2006
|
Common
Stock
|
60,181
|
$
|
15,000
|
|||||||
|
Joel
R. Smart Living Trust
|
July
7, 2006
|
Common
Stock
|
50,151
|
$
|
12,500
|
|||||||
|
Clarence
A. Dahlin Living Trust
|
July
7, 2006
|
Common
Stock
|
50,151
|
$
|
12,500
|
|||||||
|
Joel
R. Smart Living Trust and Clarence A. Dahlin Living Trust
|
October 26, 2006
|
Common
Stock
|
100,301
|
$
|
25,000
|
|||||||
|
GC Advisors
|
September 20, 2006
January 20, 2007
|
Common Stock
|
80,241
|
Professional Services
|
||||||||
|
Kenneth
Olson
|
April
18, 2007
|
Common
Stock
|
100,301
|
$
|
25,000
|
|||||||
|
Feldstein
Management
|
August
14, 2007
|
Common
Stock
|
12,197
|
$
|
3,040
|
|||||||
|
Dr.
David Langer
|
August
14, 2007
|
Common
Stock
|
24,072
|
Professional
Services
|
||||||||
|
Vinas
& Company
|
August
14, 2007
|
Common
Stock
|
16,048
|
Professional
Services
|
||||||||
|
David
Salomon
|
August
15, 2007
February
13, 2008
|
Common
Stock
|
150,000
1,211,111
|
$
|
150,000
|
|||||||
|
MAC
Strategic Advisors
|
November 15, 2007
|
Common Stock
|
40,000
|
Professional Services
|
||||||||
|
George Kivotidis
|
November
15, 2007
|
Common
Stock
|
100,000
|
$
|
50,000
|
|||||||
|
March
10, 2008
|
Common
Stock
|
263,158
|
$
|
50,000
|
||||||||
|
Christopher
A. Vinas
|
January
23, 2008
February
26, 2008
|
Common
Stock
|
263,158
|
$
|
50,000
|
|||||||
|
RES
Holdings
|
February
26, 2008
|
Common
Stock
|
23,683
|
Professional
Services
|
||||||||
|
April
15, 2008
|
Common
Stock
|
23,683
|
Professional
Services
|
|||||||||
|
LFI
Investments Ltd
|
February
20, 2008
|
Common
Stock
|
78,947
|
$
|
10,000
|
|||||||
|
Jay
Berkow
|
February
20, 2008
|
Common
Stock
|
52,632
|
$
|
10,000
|
|||||||
|
Vivek
Bhaman
|
February
20, 2008
|
Common
Stock
|
26,316
|
$
|
5,000
|
|||||||
|
Robert
Braumann
|
February
20, 2008
|
Common
Stock
|
26,316
|
$
|
5,000
|
|||||||
|
John
A. Bown Jr.
|
February
20, 2008
|
Common
Stock
|
52,632
|
$
|
10,000
|
|||||||
|
Vincent
P. Carroll
|
February
20, 2008
|
Common
Stock
|
26,316
|
$
|
5,000
|
|||||||
|
Robert
A. Frazier
|
February
20, 2008
|
Common
Stock
|
26,316
|
$
|
5,000
|
|||||||
|
Martin
Keating
|
February
20, 2008
|
Common
Stock
|
26,316
|
$
|
5,000
|
|||||||
|
Vicor
F. Keen
|
February
20, 2008
|
Common
Stock
|
78,947
|
$
|
15,000
|
|||||||
|
Robert
M. Richards
|
February
20, 2008
|
Common
Stock
|
26,316
|
$
|
5,000
|
|||||||
|
Joseph
Roberts
|
February
20, 2008
|
Common
Stock
|
26,316
|
$
|
5,000
|
|||||||
|
Thomas
Romano
|
February
20, 2008
|
Common
Stock
|
26,316
|
$
|
5,000
|
|||||||
|
Edward
F. Sager, Jr.
|
February
20, 2008
|
Common
Stock
|
26,316
|
$
|
5,000
|
|||||||
|
Mark
Staples
|
February
20, 2008
|
Common
Stock
|
26,316
|
$
|
5,000
|
|||||||
|
Neil
Strauss
|
February
20, 2008
|
Common
Stock
|
52,632
|
$
|
10,000
|
|||||||
|
Terry
Tyson
|
February
20, 2008
|
Common
Stock
|
52,632
|
$
|
10,000
|
|||||||
|
Geoffrey
C Walker
|
February
20, 2008
|
Common
Stock
|
26,316
|
$
|
5,000
|
|||||||
|
James
Ward
|
February
20, 2008
|
Common
Stock
|
26,316
|
$
|
5,000
|
|||||||
|
Jay
S. Weiss
|
February
20, 2008
|
Common
Stock
|
52,632
|
$
|
10,000
|
|||||||
|
Concordia
Financial Group
|
February
20, 2008
|
Common
Stock
|
523,747
|
Professional
Services
|
||||||||
|
April
15, 2008
|
Common
Stock
|
523,747
|
Professional
Services
|
|||||||||
|
Sichenzia
Ross Friedman Ference, LLP
|
February
20, 2008
|
Common
Stock
|
523,747
|
Professional
Services
|
||||||||
|
September 1, 2008
|
Common Stock
|
26,000
|
Professional Services
|
|||||||||
|
Arthur
Shaw
|
September 26, 2008
|
Common Stock
|
131,578
|
$
|
25,000
|
|||||||
|
Dr.
Konstantin Slavin
|
October
21, 2008
|
Common Stock
|
21,875
|
Professional
Services
|
||||||||
|
William
Roberts
|
November
20, 2008
|
Common Stock
|
657,895
|
125,000
|
||||||||
|
The
Armentarium
|
November
20, 2008
|
Common Stock
|
131,579
|
25,000
|
||||||||
|
Troy
Leight
|
November
30, 2008
|
Common Stock
|
52,632
|
10,000
|
||||||||
|
Steve
Girgenti
|
November
19, 2008
|
Common Stock
|
26,316
|
Professional Services
|
||||||||
|
Derek
Johannson
|
December
2, 2008
|
Common Stock
|
2,032,520
|
$
|
*250,000
|
|||||||
| Altcar Investments Ltd. | March 23, 2009 |
Common
Stock
|
866,867 | $ | *106,625 |
Dr.
Ezriel E. Kornel entered into a consulting agreement with us on January 10,
2006. Pursuant to the consulting agreement, in consideration for acting as our
consultant, Dr. Kornel received options to acquire 240,720 shares of our common
stock at a price of $.24 per share. The term of the agreement is for three
years.
Dr. David
Langer entered into an amended and restated consulting agreement with the
Company on December 11, 2006. Pursuant to the agreement, Dr. Langer agreed to
provide us certain consulting services, which include the role of our Chief
Medical Advisor, assistance in the analysis, preparation, submission,
publication and presentation of scientific data in relation to our research
efforts and sales and marketing efforts. In consideration of such consulting
services, Dr. Langer received options to acquire 320,960 shares of the Company’s
common stock at a price of $.24 per share. The agreement will terminate April
15, 2009.
20
Dr.
Donald O’Rourke entered into a consulting agreement with us on January 18, 2008.
Pursuant to the consulting agreement, Dr. O’Rourke shall provide consulting or
advisory services on an as needed basis, to guide us in making important
strategic decisions and to evaluate our strategic plans and decisions, research
and/or development activities and results, competitive positions and/or other
scientific and/or technical issues. In consideration for providing such
services, Dr. O’Rourke was granted an option to purchase 50,000 shares of the
Company’s common stock at $.50 per share.
Dr.
Konstantin Slavin entered into a consulting agreement with us on September 1,
2008. Pursuant to the agreement, Dr. Slavin agreed to provide us certain
consulting services. In consideration of such consulting services, Dr. Slavin
received a one-time retainer of $5,000, which the Company has paid by the
issuance of 26,000 shares of the Company’s common stock to Dr. Slavin. On
October 21, 2008, Dr. Slavin was issued an additional 21,875 common shares for
professional services valued at $4,156.
In
consideration for providing consulting services to us, we granted to GC Advisors
LLC three warrants to purchase a total of 577,728 shares of our common stock,
each for a purchase price of $.135 per share. One warrant for 192,576 shares
expires on January 9, 2010, one warrant for 192,576 expired on January 9, 2008
and a second warrant to purchase 192,576 shares expired on January 9,
2009
In
consideration for being our strategic business advisor, we issued to Martin
Magida a warrant to purchase up to 160,480 shares of our common stock at $.24
per share. The warrant is valid from September 1, 2007 for a period of five
years.
In
consideration for purchasing our stock of common shares, we issued to George
Kivotidis a warrant to purchase up to 4,000 shares of our common stock at $.50
per share. The warrant is valid from November 6, 2007 for a period of three
years.
In
consideration for advisory services, we issued to Robert Guinta is a holder of a
warrant to purchase up to 160,480 shares of the Company’s common stock at $.24
per share. The warrant is valid from September 1, 2007 for a period of five
years.
Each of
Kenneth T. Coviello and Heather N. Jensen entered into a stock option agreement
with us dated February 15, 2008. Pursuant to the said stock option agreements,
each of Kenneth T. Coviello and Heather N. Jensen was granted an option to
purchase 500,000 shares of common stock of the Company at an exercise price of
$.135 per share. The option shall vest 33 1/3% on each of the first, second and
third anniversary of the grant and shall expire February 12, 2018.
On
December 14, 2006, we issued to Fountainhead Capital Partners Limited a Bridge
Loan Debenture for the original principal amount of $172,500, which may be
converted, at the option of Fountainhead Capital Partners Limited to 1,979,456
shares of our common stock. The Bridge Loan Debenture has a maturity date of
February 15, 2009.
On
February 15, 2008, we entered into a transaction with Regent Private Capital,
LLC, whereby Regent Private Capital, LLC agreed to invest $1,000,000 in the
purchase of our Convertible Debentures—such investment to be made in two
tranches of $500,000 each.
In
connection with the investment by Regent Private Capital, LLC, Fountainhead
Capital Partners Limited agreed to make additional investments totaling $300,000
in two tranches of $150,000 each concurrent with the Regent
investments.
These
Convertible Debentures have a term of one year and are convertible into shares
of the our common stock at a price of approximately $.123 per share. If fully
converted, the Convertible Debentures would result in the issuance of 8,129,529
shares to Regent Private Capital, LLC and 2,438,859 shares to Fountainhead
Capital Partners Limited.
As of the
date hereof, both tranches of investments by Regent Private Capital, LLC and
Fountainhead Capital Partners Limited have been completed.
Subsequently,
Fountainhead Capital Partners Limited assigned its entire interest to
Fountainhead Capital Management Limited and on April 22, 2008 Regent Private
Capital assigned $250,000 of the principal amount of the Convertible Debentures
representing the first tranche to Derek Johannson and $100,000 of the principal
amount of the Convertible Debentures to Altcar Investments
Ltd.
* On
December 2, 2008 Derek Johannson converted $250,000 of his debenture to
2,032,520 shares of common stock of the company. On March 23, 2009, Altcar
Investments converted $100,000 of the debenture plus accrued interest of $6,625
into 866,867 shares of common stock.
21
At the
same time, approximately twenty smaller investors agreed to invest an additional
approximately $140,000 in the purchase of shares of our common stock at
approximately $.19 per share. The investment closed on or about February 20,
2008.
In
connection with the investments by Regent Private Capital, LLC, Fountainhead
Capital Partners Limited and consultancy services provided, we issued a total of
1,047,494 shares of our common stock to The Concordia Financial Group and
523,747 shares of our common stock to Sichenzia, Ross Friedman and Ference,
LLP.
We issued
a warrant to Fountainhead Capital Partners Limited to purchase 50.22 Membership
Units of the Company (now 805,931 shares of our shares of common stock) dated
December 15, 2006 at $.50 per share.
On
December 14, 2006, we entered into an Option Agreement with Fountainhead Capital
Partners Limited which granted to Fountainhead Capital Partners Limited an
option to invest up to $1,850,000 within three years from December 14, 2006 in
exchange for up to 5,652,954 shares of our common stock and warrants to convert
to 3,017,409 shares of our common stock.
In
consideration of Regent Private Capital, LLC agreeing to invest $1,000,000 in
the purchase of our Convertible Debentures, Fountainhead Capital Partners
Limited executed an Assignment of Rights under Warrant and Under Option
Agreement to assign to Regent Private Capital, LLC 50% interest in Fountainhead
Capital Partners Limited’s rights, title and interest in the abovementioned
Option Agreement, the warrant to purchase shares at $.50 per share and the
warrant under the Option Agreement. By reason of this assignment, Fountainhead
Capital Partners Limited assigned to Regent Private Capital, LLC the rights
under the warrant to acquire 50% of the underlying securities issuable on
exercise of the warrant and 50% of the rights to make future investment in the
Company.
ITEM
6. SELECTED FINANCIAL DATA
N/A
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION.
Critical
Accounting Policies and Estimates
Uses
of estimates in the preparation of financial statements
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States (“GAAP”) requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Currently, the Company estimates
depreciation, amortization of intangible assets, and the fair values of options
and warrants.
The most
critical estimates that impact the financial position and results of operation
of the company have to do with the methodologies and assumptions used in
determining the fair value of various debt estimates. These include assumptions
associated with warrants, options and stock issued in conjunction with such
debt. Additionally, the Black-Scholes option pricing model and its related
assumptions of volatility, risk free interest, stock price also significantly
impacted share based compensation and the results of operations.
22
Going
Concern
Our
independent auditors have added an explanatory paragraph to their audit issued
in connection with the financial statements for the period ended December 31,
2008, relative to our ability to continue as a going concern. This means that
there is substantial doubt that we can continue as an ongoing business for the
next 12 months. The financial statements do not include any adjustments that
might result from the uncertainty about our ability to continue our business. We
have incurred losses since our inception, including net losses of $2,381,295 and
$593,996 for the years ended December 31, 2008 and 2007, respectively, and we
expect to incur substantial additional losses, including additional development
costs, costs related to clinical trials and manufacturing expenses. We have
incurred negative cash flows from operations since inception. As of December 31,
2008 and 2007, we had stockholders’ deficiencies of $921,427 and $593,827,
respectively, and a cash and cash equivalents balance of $ $196,138 and $15,739
at December 31, 2008 and 2007, respectively. The Company also has certain debt
obligations that were not paid by their respective due dates. Since we have no
record of profitable operations, there is high a possibility that you may suffer
a complete loss of your investment. Because our auditors have issued
a going concern opinion, there is substantial uncertainty we will continue
operations in which case you could lose your investment. In these
circumstances the Company believes it may not have enough cash to meet its
various cash needs through June 2009 unless the Company is able to obtain
additional cash from the issuance of debt or equity securities. There is
no assurance that additional funds from the issuance of equity will be available
for the Company to finance its operations on acceptable terms. These conditions
raise substantial doubt about the Company’s ability to continue as a going
concern. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
Research
and Development
The
Company expenses all research and development costs as incurred. For the years
ended December 31, 2008 and 2007, the amounts charged to research and
development expenses were $ 33,686 and $6,969, respectively.
Cash
and cash equivalents
The
Company considers all highly liquid debt investments with original maturities of
three months or less when purchased to be cash equivalents. The carrying amounts
approximate fair market value because of the short maturity. The Company
maintains cash balances at various financial institutions. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$250,000. The Company's accounts at these institutions may, at times, exceed the
federally insured limits. The Company has not experienced any losses in such
accounts.
Fair
Values of Financial Instruments
At
December 31, 2008 and 2007, fair values of cash and cash equivalents, accounts
payable, convertible promissory notes, and options and warrants approximate
their carrying amount due to the short period of time to maturity and various
fair value model calculations.
Property
and equipment
The
Company records property and equipment at cost and calculates depreciation using
the straight-line method over the estimated useful life of the assets, which is
estimated to be between three and ten years.
Income
taxes
The
Company accounts for income taxes in accordance with SFAS 109, Accounting for Income
Taxes. This statement prescribes the use of the liability
method whereby deferred tax assets and liability account balances are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. The Company provides a
valuation allowance, if necessary, to reduce deferred tax assets to their
estimated realizable value.
23
Patents
The
Company capitalizes legal and related costs associated with the establishment of
patents for its products. Costs associated with the development of the patented
item or process are charged to research and development costs as incurred. The
costs associated with the establishment of the patents are amortized over the
life of the patent.
The
Company reviews existing patents as well as those in the approval process for
impairment on an annual basis using a present value, cash flow method pursuant
to Statement of Financial Accounting Standards 142, Goodwill and Other
Intangible Assets. Since the Company’s patents are either very new or still in
the process of approval, the Company does not believe that any impairment of
these amounts exists.
Revenue
Recognition
The
Company records revenue at the time, pursuant to Staff Accounting Bulletin Topic
13(a), that a completed contract for the sale exists, title transfers to the
buyer and the product is invoiced and shipped to the customer. The Company
intends to sell a surgical access system which has already cleared the U.S. FDA
510(k) review process. It has been granted a 510(k) number to market
to hospitals and other medical professionals. The Company does not
expect the need to provide for product returns or warrantee costs but will
review such potential costs after the commencement of sales.
Educational
and marketing expenses
The
Company may incur costs for the education of customers on the uses and benefits
of its products. The Company will expense such costs as a component of selling,
general and administrative costs as such costs are incurred.
Recently
Issued Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
160, Interests in Consolidated
Financial Statements - an amendment of ARB No. 51, (“SFAS 160”), that
establishes and expands accounting and reporting standards for the
non-controlling interest in a subsidiary. SFAS 160 is effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. This
Statement is required to be adopted by us in the first quarter of our fiscal
year 2009. The effect the adoption of SFAS 160 will have on our financial
statements will depend on the nature and size of any acquisitions we complete in
the future.
In
December 2007, the FASB issued SFAS No. 141R, Business Combinations, (“SFAS
141R”), which impacts the accounting for business combinations. The statement
requires changes in the measurement of assets and liabilities required in favor
of a fair value method consistent with the guidance provided in SFAS 157.
Additionally, the statement requires a change in accounting for certain
acquisition related expenses and business adjustments which no longer are
considered part of the purchase price. Adoption of this standard is required for
fiscal years beginning after December 15, 2008. Early adoption of this standard
is not permitted. The statement requires prospective application for all
acquisitions after the date of adoption. The effect the adoption of SFAS 141R
will have on our financial statements will depend on the nature and size of any
acquisitions we complete in the future.
In March
2008, the FASB issued SFAS No. 161, Disclosures About Derivative
Instruments and Hedging Activities, (“SFAS 161”), which requires enhanced
disclosures about an entity’s derivative and hedging activities in order to
improve the transparency of financial reporting. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. The Company does not
anticipate the adoption of this statement to have a material effect on its
consolidated financial position and results of operations.
24
In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles, (“SFAS No. 162”), which identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements. SFAS No. 162 is effective 60 days following
the SEC’s approval of the Public Company Accounting Oversight Board (“PCAOB”)
amendments to AU Section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles. The Company
does not anticipate the adoption of this statement to have a material effect on
its consolidated financial position and results of operations.
In May
2008, the FASB issued FASB Staff Position (FSP) No. 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement), (“FSP 14-1”) which specifies that issuers of these
instruments should separately account for the liability and equity components in
a manner that reflects the entity’s nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. FSP 14-1 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. FSP 14-1 is also to be applied
retrospectively to all periods presented except if these instruments were not
outstanding during any of the periods that are presented in the annual financial
statements for the period of adoption but were outstanding during an earlier
period. The Company does not anticipate the adoption of this statement to have a
material effect on its consolidated financial position and results of
operations.
In June
2008, the FASB ratified EITF Issue 07-5, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock, (“EITF 07-5”).
Paragraph 11(a) of SFAS No 133, Accounting for Derivatives and
Hedging Activities, (“SFAS 133”) specifies that a contract that would
otherwise meet the definition of a derivative but is both (a) indexed to the
Company’s own stock and (b) classified in stockholders’ equity in the statement
of financial position would not be considered a derivative financial instrument.
EITF 07-5 provides a new two-step model to be applied in determining whether a
financial instrument or an embedded feature is indexed to an issuer’s own stock
and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. EITF
07-5 will be effective for the first annual reporting period beginning after
December 15, 2008, and early adoption is prohibited. While the Company is
currently still evaluating the effects of adoption of EITF 07-5, it is expected
that adoption may result in the reclassification of the Company’s warrants from
equity to liabilities recorded at fair value and additionally could result in
bifurcation and fair value accounting for the conversion rights embedded in the
Company’s Series A preferred stock.
Results
of Operations
The
following table presents the dollar amount and percentage of changes from period
to period of the line-items included in our Statements of Operations for the
years ended December 31, 2008 and 2007:
|
Year
Ended December 31,
|
||||||||||||||||
|
2008
|
2007
|
Increase/
(Decrease)
|
%
Change
|
|||||||||||||
|
Revenue:
|
||||||||||||||||
|
Sales
|
$
|
129,947
|
$
|
2,565
|
$
|
127,382
|
4,966.16
|
|||||||||
|
Cost
of Goods Sold
|
13,089
|
79
|
13,010
|
16,468.35
|
||||||||||||
|
Gross
Profit
|
116,858
|
2,486
|
114,372
|
4,600.64
|
||||||||||||
| Operating expenses: | ||||||||||||||||
|
Research
and development
|
33,686
|
6,969
|
26,717
|
383.37
|
||||||||||||
|
General
and administrative
|
1,554,242
|
481,845
|
1,072,022
|
222.48
|
||||||||||||
|
Operating
loss
|
(1,471,070
|
)
|
(486,328
|
)
|
(984,367
|
)
|
202.41
|
|||||||||
|
Other
Expenses
|
910,225
|
107,668
|
802,557
|
745.40
|
||||||||||||
|
Total
Expenses
|
2,497,778
|
596,482
|
1,901,296
|
318.75
|
||||||||||||
|
Net
loss
|
$
|
(2,381,295
|
)
|
$
|
(593,996
|
)
|
$
|
(1,786,924
|
)
|
300.83
|
||||||
Comparison of the Year Ended December 31, 2008 to the Year Ended December 31, 2007
Revenue:
The
company recorded revenue of $129,947, after posting nominal revenue from the
sale of our products in the year ended December 31, 2007 of $2,565. These are
the first revenues recorded by us since our inception. The company has acquired
sufficient inventory to affect a meaningful product launch, and has sold various
quantities of each of the twelve sizes of its Brain Access System product to
both domestic and international customers.
25
Research and Development Expenses:
Research
and development expenses increased by 383.37%, or $26,717 from $6,969 for the
fiscal year ended December 31, 2007 to $33,686 for the fiscal year ended
December 31, 2008. During 2008 the increase was primarily attributed to drawings
and potential modifications to product design.
General
and Administrative Expenses:
General
and administrative expenses increased by 222.48%, or $1,072,022 from $481,845
for the fiscal year ended December 31, 2007 to $1,554,242 for the fiscal year
ended December 31, 2008. The increase was attributable to increased costs
relating to raising additional capital, increase in salaries, rent and auto
expenses.
Other
Expense (Income):
We
recorded interest expense of $910,225 and $107,668 for years ended December 31,
2008 and 2007, respectively. The increase is due to the company entering into
convertible debt agreements. For the years ended December 31, 2008
and 2007, interest expense was offset with interest income of $6,479 and $560,
respectively.
The
following table sets forth our results of operations for the fiscal years ended
December 31, 2008, 2007, and 2006:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
(1)
|
||||||||||
|
Revenue:
|
||||||||||||
|
Sales
|
$
|
129,947
|
$
|
2.565
|
$
|
—
|
||||||
|
Cost
of Goods Sold
|
13,089
|
79
|
__
|
|||||||||
|
Gross
Profit
|
116,858
|
2,486
|
__
|
|||||||||
|
Operating
expenses:
|
||||||||||||
|
Research
and development
|
|
33,686
|
|
6,969
|
|
158,823
|
||||||
|
General
and administrative
|
|
1,554,242
|
|
481,845
|
|
409,432
|
||||||
|
Operating
loss
|
|
(1,471,070
|
)
|
|
(486,328
|
)
|
|
(568,255
|
)
|
|||
|
Other
Expenses
|
|
910,225
|
|
107,668
|
|
3,807
|
||||||
|
Total
Expenses
|
|
2,497,778
|
|
596,482
|
|
572,062
|
||||||
|
Net
loss
|
$
|
(2,381,295
|
)
|
$
|
(593,996
|
)
|
$
|
(572,062
|
)
|
|||
|
Loss
per common share - basic and diluted
|
$
|
(0.11
|
)
|
$ |
(0.03
|
)
|
$ |
(0.03
|
)
|
|||
|
Weighted
average shares outstanding
|
21,977,954
|
18,010,459
|
17,328,133
|
|||||||||
|
(1)
|
In
2006 the Company operated as a limited liability
company
|
26
Liquidity
and Capital Resources
Liquidity
On
December 14, 2006, we entered into Bridge Loan Facility (the “Bridge Loan
Facility”) with Fountainhead Capital Partners Limited. Pursuant to the terms of
the Bridge Loan Facility, Fountainhead Capital Partners Limited invested in the
purchase of $172,500 of Convertible Debentures. The Convertible Debentures bear
interest at the “Applicable Federal Rate” as defined in section 1274(d) of the
Internal Revenue Code and are convertible into a number of shares of the
Company’s common stock equal to ten percent (10%) of our issued and outstanding
shares of common stock based upon a post-money valuation of $1,500,000. The
Conversion Price is subject to adjustment based upon certain events which would
result in a dilution of the holder’s interest. The maturity date of the
convertible debentures has been extended to December 31, 2008. In connection
with the issuance of the Convertible Debentures, we issued a Warrant to
Fountainhead Capital Partners Limited to purchase 1,979,456 shares at $.50 per
share and entered into an Option Agreement whereby Fountainhead Capital Partners
Limited was given the option to purchase an additional 8,129,529 shares at
approximately $.33 per shares together with Warrants to purchase an additional
1,320,000 shares at approximately $.44 per share. In consideration of Regent
Private Capital, LLC agreeing to invest $1,000,000 in the purchase of our
Convertible Debentures, Fountainhead Capital Partners Limited executed an
Assignment of Rights Under Warrant and Under Option Agreement to assign to
Regent Private Capital, LLC 50% interest in Fountainhead Capital Partners
Limited’s rights, title and interest in the abovementioned Option Agreement, the
Warrant to purchase 1,979,456 shares at $.50 per share and Warrants to purchase
an additional 2,438,859 shares at approximately $.44 per share. By reason of
this assignment, Fountainhead Capital Partners Limited assigned to Regent
Private Capital, LLC the rights under the warrant acquire 50% of the underlying
securities issuable on exercise of the warrant and 50% of the rights to make
future investment in the Company.
On August
28, 2007, we entered into a Subscription and Investment Agreement with David
Salomon (“Salomon”). Under the terms of the Subscription and Investment
Agreement, in exchange for a loan of $150,000 from Salomon, we issued a
Convertible Promissory Note for $150,000, being the principal amount of the
loan, and 150,000 shares of our common stock. The Convertible Promissory Note
was due and payable twelve (12) months from the date of the note. On February
15, 2008, Salomon agreed to convert the Convertible Promissory Note to shares of
the Company’s common stock at a reduced conversion rate of $.135 per share. In
order to further induce Salomon into such conversion, we also issued Salomon an
additional 100,000 shares of our common stock at the time of the
conversion.
On April
13, 2007 and May 31, 2007, we entered into 6 month promissory notes with Optimus
Services, each having a principal amount of $50,000. On January 9,
2007, we entered into a promissory note with GC Advisors which has a principal
amount of $17,000 and matures on January 9, 2009.
On
January 23, 2008, we sold 263,158 shares of common stock to Christopher Vinas at
$0.19 per share or a total aggregate purchase price of $50,000.
On
February 15, 2008, we entered into a transaction with Regent Private Capital,
LLC, whereby Regent Private Capital, LLC agreed to invest $1,000,000 in the
purchase of our Convertible Debentures — such investment to be made in two
tranches of $500,000 each. In connection with the investment by Regent Private
Capital, LLC, Fountainhead Capital Partners Limited agreed to make additional
investments totaling $300,000 in two tranches of $150,000 each concurrent with
the Regent Private Capital, LLC investments. These Convertible Debentures have a
term of one year and are convertible into shares of our common stock at a price
of approximately $.123 per share. If fully converted, the Convertible Debentures
would result in the issuance of 8,129,529 shares to Regent Private Capital, LLC
and 2,438,859 shares to Fountainhead Capital Partners Limited. As of the date
hereof, both tranches of investments by Regent Private Capital, LLC and
Fountainhead Capital Partners Limited have been
completed. Subsequently, Regent assigned a portion of the principal
amount of each note to Altcar Investments and Derek Johansen. On
December 15, 2008, Johansen converted $250,000 of the debenture into 2,032,520
shares of common stock. On March 23, 2009, Altcar Investments
converted $100,000 of the debenture plus accrued interest of $6,625 into 866,867
shares of commons stock.
Also on
February 15, 2008, approximately 20 smaller investors agreed to invest
approximately $140,000 in aggregate for the purchase of shares of the Company’s
common stock at $.19 per share. The Bridge Loan Facility and the Regent and
subsequent Fountainhead Convertible Debentures are all secured by a first
security interest in all of the assets of the Company.
27
In
connection with the recent investments by Regent Private Capital, LLC,
Fountainhead Capital Partners Limited and consultancy services provided by the
Concordia Financial Group and Sichenzia Ross Friedman and Ference, LLP, we
issued a total of 1,047,494 shares of our common stock to The Concordia
Financial Group and 523,747 shares of our common stock to Sichenzia Ross
Friedman and Ference, LLP.
On March
10, 2008, we sold 263,158 shares of common stock to George Kivotidis at $0.19
per share or a total aggregate purchase price of $50,000.
On
September 26, 2008, we sold 131,578 shares of common stock to Arthur Shaw at
$0.19 per share or a total aggregate purchase price of $25,000.
On
November 20, 2008, we sold 657,895 shares of common stock to William Roberts at
$0.19 per share or a total aggregate purchase price of $125,000.
On
November 20, 2008, we sold 131,578 shares of common stock to The Armentarium at
$0.19 per share or a total aggregate purchase price of $25,000.
On
November 30, 2008, we sold 52,632 shares of common stock to Troy Leight at $0.19
per share or a total aggregate purchase price of $10,000.
We
believe that our existing cash, cash equivalents and available borrowings will
be sufficient to meet our anticipated cash needs for working capital and capital
expenditures for approximately 3 months. We cannot assure you that this will be
the case or that our assumptions regarding sales and expenses underlying this
belief will be accurate. We will need to seek additional funding through public
or private financings or other arrangements during this period and thereafter.
Adequate funds may not be available when needed or may not be available on terms
favorable to us. If additional funds are raised by issuing equity securities,
dilution to existing stockholders may result. If we raise additional funds by
obtaining loans from third parties, the terms of those financing arrangements
may include negative covenants or other restrictions on our business that could
impair our operational flexibility, and would also require us to fund additional
interest expense. If funding is insufficient at any time in the future, we may
be unable to develop or enhance our products, take advantage of business
opportunities or respond to competitive pressures, any of which could have a
material adverse effect on our business, financial condition and results of
operations.
Going
Concern
Our
independent auditors have added an explanatory paragraph to their audit issued
in connection with the financial statements for the period ended December 31,
2008, relative to our ability to continue as a going concern. This means that
there is substantial doubt that we can continue as an ongoing business for the
next 12 months. The financial statements do not include any adjustments that
might result from the uncertainty about our ability to continue our business. We
have incurred losses since our inception, including net losses of $2,380,920 and
$593,996 for the years ended December 31, 2008 and 2007, respectively, and we
expect to incur substantial additional losses, including additional development
costs, costs related to clinical trials and manufacturing expenses. We have
incurred negative cash flows from operations since inception. As of December 31,
2008 and 2007, we had stockholders’ deficiencies of $921,427 and $593,827,
respectively, and a cash and cash equivalents balance of $ $196,138 and $15,739
at December 31, 2008 and 2007, respectively. The Company also has certain debt
obligations that were not paid by their respective due dates. Since we have
no record of profitable operations, there is high a possibility that you may
suffer a complete loss of your investment. Because our auditors have
issued a going concern opinion, there is substantial uncertainty we will
continue operations in which case you could lose your
investment.
All
financial information required by this Item is attached hereto at the end of
this report beginning on page F-1 and is hereby incorporated by reference.
28
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None
ITEM
9A(T). CONTROLS AND PROCEDURES.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as such term is defined in Exchange Act Rule
13a - 15(f). Our internal control system was designed to provide reasonable
assurance to our management and the Board of Directors regarding the preparation
and fair presentation of published financial statements. All internal control
systems, no matter how well designed have inherent limitations. Therefore, even
those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentation. Our management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008. In making this assessment, our management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO") in Internal Control - Integrated Framework - Guidance for
Smaller Public Companies (the COSO criteria). Based on our assessment we believe
that, as of December 31, 2008, our internal control over financial reporting is
effective based on those criteria.
This
report does not include an attestation report by our independent registered
public accounting firm, regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s independent registered public accounting firm pursuant to temporary
rules of the SEC that permits the Company to only provide management’s report in
this Form 10-K.
Changes in Internal Control over
Financial Reporting
There
were no changes in our internal control over financial reporting that occurred
during the year ended December 31, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
None.
29
PART III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our
Directors and Executive Officers
Set forth
below is certain biographical information concerning our current executive
officers and directors. We currently have two executive officers as described
below.
|
Directors and Executive Officers
|
Position/Title
|
Age
|
||
|
Kenneth T. Coviello
|
Chief Executive Officer and
a director
|
58
|
||
|
Heather
N. Jensen
|
President
and a director
|
29
|
||
|
Pascale
Mangiardi
|
Director
|
36
|
||
|
Steven
Girgenti
|
Director
|
63
|
Kenneth T.
Coviello, 58, is our Chief Executive Officer and a director and will
oversee strategic planning as well as directing manufacturing, marketing and
product development. Mr. Coviello has more than 25 years of experience in
successfully developing, selling and marketing medical devices and managing
medical device and healthcare product companies. Mr. Coviello has held positions
of Vice President, Senior Vice President and President of medical device
companies, including Lumex and Graham Field. From 2000-2005, he was Senior Vice
President at Misonix Inc., a public NASDAQ-listed medical device company that
specializes in the design, manufacture and sale of ultrasonic surgical devices
for orthopedic, neurosurgical, wound and urological applications. Mr. Coviello
was responsible for Misonix medical device revenues and profitability,
distribution partner contracts and factory operations in Farmingdale, NY. During
his association with Misonix, Inc., Misonix increased its medical devices line
from a single product to nine, grew medical device revenue, acquired and
developed medical technology. While he was with Misonix, Inc, he was also
appointed by Misonix, Inc. to the position of Chief Executive Officer of Hearing
Innovations, Inc., holding that position from August 2002 – November 2005.
Misonix, Inc. was a senior debt holder at Hearing Innovation, Inc. Mr. Coviello
joined us on January 1, 2006 after leaving Misonix, Inc. in November 2005.
Previous associations were:
1999-2000
Vice President - FNC Medical- manufacturer and distributor of diabetic skin care
supplies,
1992-1998
Vice President - Graham Field- manufacturer and distributor of Medical devices,
equipment and supplies
1972-1991
President - Lumex Inc. - manufacturer of medical devices and healthcare
products
Heather N.
Jensen, 29, is our founder, our President and a director and is involved
in the strategic planning as well as directing Global Business Development and
Sales. Ms. Jensen has more than 10 years experience in the medical profession
ranging from hospitals to medical device manufacturing. Ms. Jensen joined us in
November 2005. Ms. Jensen’s most recent position from 2001-2005 was as Director
of Sales at Misonix, Inc., a public NASDAQ-listed medical device company that
specializes in ultrasonic surgical devices for orthopedic, neurosurgical, wound
and urological applications. Ms. Jensen’s responsibilities included
international and domestic business development, knowledge and certification in
export compliance, regulatory approval process and high-level executive contact
and negotiations at some of the largest device companies in the world such as
Tyco, Mentor, Aesculap, Richard Wolf and ACMI. She was also responsible for both
domestic and international sales development. Ms. Jensen belongs to the Brain
Injury Association, American Brain Tumor Association, and the National
Association for Female Executives. She holds an Associates Degree in Business
with a focus on Human Sciences and has additional credits in business
administration from Katharine Gibbs College.
Pascale
Mangiardi, 36, has been our director since October 30, 2007. She is
presently the founder and President of Rougemont Management Services LLC and
Chief Financial Officer of Optimus Services, LLC. From 2002-2006, she was a
financial officer for John R. Mangiardi, MD, PC and from 2001 - 2002,
she was the Assistant CEO at Hirslanden-Group Management AG, Zurich. Ms.
Mangiardi holds a Diploma from the Swiss Business Administration
School.
Steven
Girgenti, 63, has been a director since November 19, 2008. He is
President, CEO, Director and Co-Founder DermWorx, a specialty pharmaceutical
company dedicated to solutions for dermatological conditions. Mr.
Girgenti is also the Worldwide Chairman of Ogilvy Healthworld, a leading
global healthcare communications network with 55 offices in 36 countries.
The network has more than 1,000 brand assignments from nearly 200 clients
worldwide, providing strategic marketing and communications services to many of
the world's leading healthcare companies. Mr. Girgenti founded
Healthworld in 1986 and, under his leadership, the company has made numerous
acquisitions to expand and diversify the business. Healthworld went public
in 1997. In addition to Vycor Medical, Mr. Girgenti has served as a
director of Burren Pharmaceuticals and Pharmacon International, and is currently
a director of AVTV Networks. He is also Vice Chairman of the Board of
Governors for the Mt. Sinai Hospital Prostate Disease and Research Center in New
York City, and is on the Board of Directors for Jack Martin Fund, a Mt. Sinai
Hospital affiliated charitable organization devoted to pediatric oncology
research. He graduated from Columbia University and has worked in the
pharmaceutical industry since 1968 for companies such as Bristol-Myers Squibb,
Carter Wallace and DuPont, as well as advertising agencies that specialize in
healthcare. During his career, Mr. Girgenti has held positions in marketing
research, product management, new product planning and commercial
development.
30
All of
our directors hold office until the next annual meeting of stockholders and
until their respective successors have been elected or qualified. Officers serve
at the discretion of the Board of Directors. There are no family relationships
among our directors or executive officers. There is no arrangement or
understanding between or among our officers and directors pursuant to which any
director or officer was or is to be selected as a director or officer, and there
is no arrangement, plan or understanding as to whether non-management
stockholders will exercise their voting rights to continue to elect the current
board of directors.
Except
for Mr. Coviello, our directors and executive officers have not during the past
five years:
|
•
|
had
any bankruptcy petition filed by or against any business of which he was a
general partner or executive officer, either at the time of the bankruptcy
or within two years prior to that
time;
|
|
•
|
been
convicted in a criminal proceeding and is not subject to a pending
criminal proceeding;
|
|
•
|
been
subject to any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently
or temporarily enjoining, barring, suspending or otherwise limiting his
involvement in any type of business, securities, futures, commodities or
banking activities;
|
|
•
|
or
been found by a court of competent jurisdiction (in a civil action), the
Securities Exchange Commission or the Commodity Futures Trading Commission
to have violated a federal or state securities or commodities law, and the
judgment has not been reversed, suspended or
vacated.
|
Mr.
Coviello was Senior Vice President of Misonix Inc., a major funding entity and
senior debt holder for Hearing Innovations Inc. Mr. Coviello was appointed Chief
Executive Officer and an officer of Hearing Innovations after a resignation of
senior management at Hearing Innovations. He was Chief Executive Officer from
August 2002 – November 2005.
On July
14, 2004, Hearing Innovations Inc. sent all shareholders and creditors a plan
for reorganization and disclosure statement. Misonix Inc. was committed to fund
Hearing Innovations Inc. up to $150,000 for the reorganization plan. Hearing
Innovations Inc. filed for relief under Chapter 11 of the U.S. Bankruptcy Code
in September 2004. The Plan of Reorganization of Hearing Innovations Inc. was
confirmed by the court on January 13, 2005. Based upon the final decree, and the
approval by the court of the Bankruptcy Plan, Misonix Inc. became the sole
shareholder of Hearing Innovations Inc.
Committees
of the Board of Directors
Our Board
of Directors does not have any committees.
None of
our executive officers serves as a member of the Board of Directors or
compensation committee of any other entity that has one or more of its
executive officers serving as a member of our Board of Directors.
31
The following is a summary of the compensation
we paid for each of the last three years ended December 31, 2008, 2007 and 2006,
respectively (i) to the persons who acted as our principal executive officer
during our fiscal year ended December 31, 2008 and (ii) to the person who acted
as our next most highly compensated executive officer other than our principal
executive officer who was serving as our executive officer as of the end of our
last fiscal year.
|
Name and
Principal
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
|
Non-
Qualified
Deferred
Compensation
Earnings
($)
|
All other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||||||||
|
Kenneth
T. Coviello
|
2008
|
$ | 190,000 | — | — | 29,212 | — | — | $ | 18,150 | $ | 237,362 | ||||||||||||||||||||||
|
(Chief
Executive
|
2007
|
$ | 137,433 | — | — | — | — | — | $ | 17,302 | $ | 154,735 | ||||||||||||||||||||||
|
Officer)
|
2006
|
$ | 76,364 | — | — | — | — | — | $ | 8,768 | $ | 85,132 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||
|
Heather
N. Jensen
|
2008
|
$ | 190,000 | — | — | 29,212 | — | — | $ | 19,204 | $ | 238,416 | ||||||||||||||||||||||
|
(President)
|
2007
|
$ | 117,000 | — | — | — | — | — | $ | 17,302 | $ | 134,302 | ||||||||||||||||||||||
|
|
2006
|
$ | 89,843 | — | — | — | — | — | $ | 10,276 | $ | 100,120 | ||||||||||||||||||||||
OUTSTANDING
EQUITY AWARDS
|
Option
Awards
|
|||||||||||||||||||
|
Name
|
Grant
Date
|
Number
of Securities Underlying Unexercised Options (#)
Exercisable
|
Equity
Incentive
Plan Awards:
Number
of Securities Underlying Unexercised Unearned
Options
(#)
|
Number
of Securities Underlying Unexercised Options (#) Unexercisable
(1)
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
|||||||||||||
|
Kenneth
T. Coviello
|
2/15/2008
|
-
|
-
|
500,000
|
$
|
0.135
|
2/12/2018
|
||||||||||||
|
Heather
N. Jensen
|
2/15/2008
|
-
|
-
|
500,000
|
$
|
0.135
|
2/12/2018
|
||||||||||||
Grants
of Plan-Based Awards
Initial
grants under the 2008 Stock Plan were to Kenneth T. Coviello and Heather N.
Jensen of options to purchase 1,000,000 shares in the aggregate. There were no
option exercises by or stock vested in fiscal 2007 or 2008.
|
Equity
Compensation Plan Information
|
|||||||||
|
Plan
category
|
Number
of
securities
to
be issued
upon
exercise
of
outstanding
options,
warrants
and
rights
(a)
|
Weighted-
average
exercise
price of
outstanding
options,
warrants
and
rights
|
Number
of securities
remaining
available for
future
issuance under
equity
compensation
plans
(excluding securities
reflected
in column (a))
|
||||||
|
Equity
compensation plans approved by security holders
|
1,000,000
|
$
|
0.135
|
2,651,345
|
|||||
|
Equity
compensation plans not approved by security holders
|
50,000
|
0.19
|
–
|
||||||
|
Total
|
1,050,000
|
$
|
0.138
|
2,651,345
|
|||||
32
Employment Agreements
We have
employment agreements with our Chief Executive Officer, Mr. Kenneth T. Coviello
and with our President, Ms. Heather N. Jensen.
We had
previously entered into an employment agreement with Mr. Kenneth Coviello on
January 1, 2006. Pursuant to the agreement, Mr. Coviello was employed to be our
Chief Executive Officer for an annual salary of $190,000. In addition, Mr.
Coviello was entitled to monthly car allowances of $600, $750, $900 and $1,150
for his first, second, third and fourth and fifth years with us respectively.
Mr. Coviello is entitled to an annual bonus upon achieving certain milestones
and a commission every quarter from our gross profits for that period. The
employment agreement is for a five-year term, automatically renewable for
successive one year terms unless either party elects not to do so.
Despite
the employment agreement, Mr. Coviello only received a base salary of $137,433
and $76,364 and car allowances and health insurance coverage of $17,302 and
$8,767 for fiscal 2007 and 2006 respectively. We did not accrue or defer the
differences in actual amounts paid against the amounts provided for in the
employment contract and Mr. Coviello has agreed to waive such
amounts.
On
January 1, 2008, Mr. Coviello entered into a new employment agreement. Pursuant
to the new employment agreement, Mr. Coviello was employed as our Chief
Executive Officer for an annual salary of $190,000. He will also be paid a
monthly automobile allowance of $700 and be eligible to receive annual bonuses
of 20% of his base salary for calendar year 2008 and 40% of his base salary for
calendar year 2009, payable in cash or in stock based upon the achievement of
specific milestones to be determined by the Compensation Committee of our board
of directors. For the purposes of calendar years 2008 and 2009, these milestones
are defined as exceeding our budgeted income by an amount equal to the aggregate
amount of all bonuses to be paid. The term of the agreement is for one year, and
it will automatically be renewed for an additional one year term, unless either
party gives written notice to the other of its intention to terminate the
agreement at least 30 days prior to the automatic renewal date.
We
entered previously into an employment agreement with Ms. Jensen on October 31,
2005. Pursuant to the agreement, Ms. Jensen was employed to be our President for
an annual salary of $190,000. In addition, Ms. Jensen was entitled to monthly
car allowances and health insurance coverage of $600, $750, $900 and $1,150 for
her first, second, third and fourth and fifth years with us respectively. Ms.
Jensen is entitled to an annual bonus upon achieving certain milestones and a
commission every quarter from our gross profits for that period. The employment
agreement is for a five-year term, automatically renewable for successive one
year terms unless either party elects not to do so.
Despite
the employment agreement, Ms. Jensen only received a base salary of $117,000 and
$89,843 and car allowances of $17,302 and $10,276 for fiscal 2007 and 2006
respectively. We did not accrue or defer the differences in actual amounts paid
against the amounts provided for in the employment contract and Ms. Jensen has
agreed to waive such amounts.
On
January 1, 2008, Ms. Jensen entered into a new employment agreement. Pursuant to
the new employment agreement, Ms. Jensen was employed as our President for an
annual salary of $190,000. She will also be paid a monthly automobile allowance
of $700 and be eligible to receive annual bonuses of 20% of her base salary for
calendar year 2008 and 40% of her base salary for calendar year 2009, payable in
cash or in stock based upon the achievement of specific milestones to be
determined by the Compensation Committee of our board of directors. For the
purposes of calendar years 2008 and 2009, these milestones are defined as
exceeding our budgeted income by an amount equal to the aggregate amount of all
bonuses to be paid. The term of the agreement is for one year, and it will
automatically be renewed for an additional one year term, unless either party
gives written notice to the other of its intention to terminate the agreement at
least 30 days prior to the automatic renewal date.
Compensation
of Directors
For the
years ended December 31, 2007 and 2006, none of the members of our board of
directors received compensation for his or her service as a
director. In 2008, we granted Steven Girgenti 26,316 shares,
equivalent to $5,000 for Mr. Girgenti’s service to the Board of Directors in
2008. In 2009, Mr. Girgenti will be entitled to receive $5,000 in
cash or stock at the option of the company per quarter and $1,500 per board
meeting.
33
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The following table sets forth
certain information with respect to the beneficial ownership of our voting
securities by (i) any person or group owning more than 5% of any class of voting
securities, (ii) each director, (iii) our chief executive officer and president
and (iv) all executive officers and directors as a group as of March 23,
2009. Unless noted, the address for the following beneficial owners
and management is 80 Orville Drive, Suite 100, Bohemia, New York
11716.
|
Title of Class
|
Name and Address of Beneficial Owner
|
Amount and Nature of
Beneficial Owner (1)
|
Percent of
Class (2)
|
|||||
|
Common
Stock
|
Kenneth
Coviello (4)
|
5,284,587
|
19.92
|
%
|
||||
|
Common
Stock
|
Heather
N. Jensen (4)
|
5,284,587
|
19.92
|
%
|
||||
|
Common
Stock
|
Pascale
Mangiardi
|
—
|
*
|
|||||
|
Common
Stock
|
Steven
Girgenti
|
26,316
|
*
|
|||||
|
Common
Stock
|
All
executive officers and directors as a group
|
10,595,490
|
39.66
|
%
|
||||
|
Common
Stock
|
Regent
Private Capital, LLC
152
West 57th Street, 9th Floor,
New
York, NY 10019
|
10,022,341
|
(3)
|
27.55
|
%
|
|||
|
Common
Stock
|
Fountainhead
Capital Management
Limited
Portman House
Hue
Street, St,Helier, Jersey JB4 5RP
|
9,156,464
|
(3)
|
25.78
|
%
|
|||
|
Common
Stock
|
Sawmill
Trust c/o Mitchell Greene
Robinson
Brog Greene
1345
Avenue of the Americas
New
York, NY 10105
|
5,117,921
|
19.42
|
%
|
||||
|
Common
Stock
|
David
Salomon
15400
Knoll Trail, Suite 350
Dallas,
TX 75248
|
1,361,111
|
5.16
|
%
|
||||
|
Common
Stock
|
Derek
Johannson
|
2,032,520
|
7.71
|
%
|
||||
|
35
West Springs Cove
Winnipeg, Manitoba
Canada R2G 4B9
|
||||||||
*
Less than 1%
|
(1)
|
In
determining beneficial ownership of our common stock, the number of shares
shown includes shares which the beneficial owner may acquire upon exercise
of debentures, warrants and options which may be acquired within 60 days.
In determining the percent of common stock owned by a person or entity on
March 23, 2009, (a) the numerator is the number of shares of the class
beneficially owned by such person or entity, including shares which the
beneficial ownership may acquire within 60 days of exercise of debentures,
warrants and options, and (b) the denominator is the sum of (i) the total
shares of that class outstanding on March 23, 2009, (26,356,638 common
stock) and (ii) the total number of shares that the beneficial owner may
acquire upon exercise of the debentures, warrants and options. Unless
otherwise stated, each beneficial owner has sole power to vote and dispose
of its shares.
|
|
(2)
|
In
addition, in determining the percent of common stock owned by a person or
entity on March 23, 2009, (a) the numerator is the number of shares of the
class beneficially owned by such person and includes shares which the
beneficial owner may acquire within 60 days upon conversion or exercise of
a derivative security, and (b) the denominator is the sum of (i) the
shares of that class outstanding on March 23, 2009, (26,356,638
shares of common stock) and (ii) the total number of shares that the
beneficial owner may acquire upon conversion or exercise of a derivative
security within such 60 day period. Unless otherwise stated, each
beneficial owner has sole power to vote and dispose of the
shares.
|
|
(3)
|
The
following table shows the calculation of the beneficial ownership of
Regent Private Capital, LLC and Fountainhead Capital Management
Limited:
|
| Calculation of Fountainhead Capital Management Limited Holdings | |||||
|
Fountainhead
Bridge Loan Conversion
|
1,979,456
|
||||
|
Fountainhead
Bridge Loan Warrants
|
402,966
|
||||
|
Option
Agreement:
|
|||||
|
Shares
|
5,652,954
|
||||
|
Warrants
|
3,017,409
|
||||
|
(less
transferred to Regent)
|
-4,335,182
|
||||
|
Net
|
4,335,182
|
||||
|
Fountainhead
Convertible Debenture
|
|||||
|
Tranche
#1
|
1,219,430
|
||||
|
Tranche
#2
|
1,219,430
|
||||
|
Total
|
9,156,464
|
||||
|
Calculation
of Regent Private Capital, LLC Holdings
|
|||||
|
1/2
of Fountainhead Bridge Loan Warrants
|
402,966
|
||||
|
Option
Agreement:
|
|||||
|
Shares
|
5,652,954
|
||||
|
Warrants
|
3,017,409
|
||||
|
(less
retained by Fountainhead)
|
-4,335,182
|
||||
|
Net
|
4,335,182
|
||||
|
Regent
Convertible Debenture
|
|||||
|
Tranche
#1
|
1,219,430
|
||||
|
Tranche
#2
|
4,064,765
|
||||
|
Total
|
10,022,341
|
|
(4)
|
Includes
stock option to purchase 166,666 shares at
$0.135.
|
34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The
Company is currently not party to any related party transactions.
Audit
Fees
The
aggregate fees billed by our principal accountant for the audit of our annual
financial statements, review of financial statements included in the quarterly
reports and other fees that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements for the fiscal
years ended December 31, 2008 were $13,754.
Tax
Fees
The
aggregate fees billed for professional services rendered by our principal
accountant for tax compliance, tax advice and tax planning for the fiscal years
ended December 31, 2008 were $0. These fees related to the preparation of
federal income and state franchise tax returns.
All
Other Fees
There
were no other fees billed for products or services provided by our principal
accountant for the fiscal years ended December 31, 2008.
35
ITEM
15. EXHIBITS.
|
Exhibit No.
|
Description
|
|
|
3.
|
Certificate
of Incorporation*
|
|
|
3.2
|
Bylaws*
|
|
|
3.3
|
6%
Convertible Debenture No. 1 to Regent Private Capital,
LLC*
|
|
|
3.4
|
6%
Convertible Debenture to Fountainhead Capital Partners
Limited*
|
|
|
3.5
|
Fountainhead
Capital Partners Limited Warrant*
|
|
|
3.6
|
Fountainhead
Capital Partners Limited Bridge Loan Debenture*
|
|
|
3.7
|
GC
Advisors LLC Warrants*
|
|
|
3.8
|
George
Kivotidis Warrant dated November 6, 2007*
|
|
|
3.9
|
Martin
Magida Warrant dated September 1, 2007*
|
|
|
3.10
|
Robert
Guinta Warrant dated September 1, 2007*
|
|
|
5.1
|
Opinion
of Sichenzia Ross Friedman Ference LLC regarding legality of common stock
being registered.
|
|
|
10.1
|
Fountainhead
Capital Partners Limited Option Agreement*
|
|
|
10.2
|
Convertible
Debenture Purchase Agreement between Vycor Medical, Inc. and Regent
Private Capital, LLC dated February 14, 2008*
|
|
|
10.3
|
Convertible
Debenture Purchase Agreement between Vycor Medical, Inc. and Fountainhead
Capital Partners Limited*
|
|
|
10.4
|
Stock
Option Agreement with Heather N. Jensen dated February 15,
2008*
|
|
|
10.5
|
Stock
Option Agreement with Kenneth Coviello dated February 15,
2008*
|
|
|
10.6
|
Assignment
of Rights Under Warrant and Under Option Agreement dated February 14, 2008
between Fountainhead Capital Partners Limited, Regent Private Capital LLC
and Vycor Medical, Inc.*
|
|
|
10.7
|
Assignment
Agreement between John R. Mangiardi and The Sawmill Trust dated September
17, 2005.*
|
|
|
10.8
|
Assignment
Agreement between The Sawmill Trust and Vycor Medical LLC dated September
17, 2005.*
|
|
|
10.9
|
Lease
Agreement dated July 26, 2008.**
|
|
|
10.10
|
Business
Operating Agreement dated September 11, 2007 with Lacey Manufacturing
Company*.
|
|
|
10.11
|
Consulting
Agreement with Dr. Langer**
|
|
|
10.12
|
Consulting
Agreement with Dr. Kornel**
|
|
|
10.13
|
Consulting
Agreement with Dr. O’Rourke**
|
|
|
10.14
|
Retainer
Agreement with Sichenzia Ross Friedman Ference LLP**
|
|
|
10.15
|
Consulting
Agreement with Dr. Slavin***
|
|
|
10.16
|
2008
Employee, Director and Consultant Stock Plan****
|
|
| 31.1 | Certification of Chief Executive Officer (Principal Financial Officer) under Rule 13(a) - 14(a) of the Exchange Act. | |
| 31.2 | Certification of President and Principal Executive Officer under Rule 13(a) - 14(a) of the Exchange Act. | |
| 32.1 | Certification of CEO and President under 18 U.S.C. Section 1350 |
*
Incorporated by reference to the Company’s Registration Statement on Form S-1/A
filed with the SEC on June 3, 2008.
**
Incorporated by reference to the Company’s Registration Statement on Form S-1/A
filed with the SEC on August 25, 2008.
***
Incorporated by reference to the Company’s Registration Statement on Form S-1/A
filed with the SEC on September 25, 2008.
****
Incorporated by reference to the Company’s Registration Statement on Form S-1/A
filed with the SEC on January 21, 2009.
36
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on March 31, 2009.
| VYCOR MEDICAL, INC. | |||
|
|
By:
|
/s/ Kenneth T. Coviello | |
| Kenneth T. Coviello | |||
|
Chief
Executive Officer and Director (Principal Financial
Officer)
|
|||
| By: | /s/ Heather N. Jensen | ||
| Heather N. Jensen | |||
|
President,
Founder and Director (Principal Executive Officer)
|
|||
In
accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following person in the capacities and
date stated.
|
/s/
Kenneth T. Coviello
|
March
31, 2009
|
|
|
Kenneth
T. Coviello
Chief
Executive Officer and Director
|
||
|
/s/
Heather N. Jensen
|
March
31, 2009
|
|
|
Heather
N. Jensen
President
and Director
|
||
|
/s/
Pascale Mangiardi
|
March
31, 2009
|
|
|
Pascale
Mangiardi
Director
|
||
|
/s/
Steven Girgenti
|
March
31, 2009
|
|
|
Steven
Girgenti
Director
|
37
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of Vycor Medical, Inc.
We have
audited the accompanying balance sheets of Vycor Medical, Inc. as of December
31, 2008 and 2007 and the related statements of operations, stockholders’
deficit and cash flows for the years then ended. Vycor Medical, Inc.’s
management is responsible for these financial statements. 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 audits provide a
reasonable basis for our opinion.
As
discussed in Note 2 to the financial statements, the Company’s recurring
losses from operations, among other factors, raise substantial doubt about its
ability to continue as a going concern. Management’s plans regarding these
matters are also described in Note 2. The 2008 and 2007 financial statements do
not include any adjustments that might result from the outcome of this
uncertainty
As
described in Note 9, “Restatement of Financial Data as of December 31, 2007”,
the Company has restated previously issued financial statements as of December
31, 2007 and for the year then ended.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Vycor Medical, Inc. as of December
31, 2008 and 2007 and the results of its operations and its cash flows for each
the years then ended in conformity with accounting principles generally accepted
in the United States of America.
/s/ Paritz & Company,
P.A.
Hackensack,
New Jersey
March 23,
2009
F-1
|
VYCOR
MEDICAL, INC.
|
|||||||||
|
Balance
Sheet
|
|||||||||
|
December
31, 2008
|
|||||||||
|
December
31,
|
December
31,
|
||||||||
|
2008
|
2007
|
||||||||
|
ASSETS
|
|||||||||
|
Current
Assets
|
|||||||||
|
Cash
|
$ | 196,138 | $ | 15,739 | |||||
|
Accounts
receivable
|
89,765 | 2,565 | |||||||
|
Inventory
|
71,527 | - | |||||||
|
Prepaid
expenses
|
7,040 | - | |||||||
| 364,470 | 18,304 | ||||||||
|
Fixed
assets, net
|
213,958 | - | |||||||
|
Other
assets:
|
|||||||||
|
Patents,
net of accumulated amoritzation
|
42,507 | 22,559 | |||||||
|
Website,
net of accumulated amortization
|
10,152 | 6,214 | |||||||
|
Security
deposits
|
2,350 | - | |||||||
| 55,009 | 28,773 | ||||||||
|
TOTAL
ASSETS
|
$ | 633,437 | $ | 47,077 | |||||
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|||||||||
|
Current
Liabilities
|
|||||||||
|
Accounts
payable
|
$ | 313,611 | $ | 285,215 | |||||
|
Accrued
interest
|
88,588 | 24,726 | |||||||
|
Accrued
liabilities
|
75,468 | 264 | |||||||
|
Current
portion of long-term debt
|
1,077,197 | 227,449 | |||||||
| 1,554,864 | 537,654 | ||||||||
|
Long-term
debt less current portion
|
- | 103,250 | |||||||
|
TOTAL
LIABILITIES
|
1,554,864 | 640,904 | |||||||
|
STOCKHOLDERS'
DEFICIT
|
|||||||||
|
Preferred
stock, $1.00 par value, 10,000,000 shares authorized, none
|
|||||||||
|
issued
and outstanding
|
- | - | |||||||
|
Common
Stock, $0.001 par value,
|
|||||||||
|
100,000,000
shares authorized,
|
|||||||||
|
25,463,455
and 18,289,999 shares issued and outstanding
|
25,463 | 18,290 | |||||||
|
at
December 31, 2008 and 2007, respectively
|
|||||||||
|
Additional Paid-in
Capital
|
2,788,415 | 741,893 | |||||||
|
Accumulated
Deficit
|
(3,735,305 | ) | (1,354,010 | ) | |||||
| (921,427 | ) | (593,827 | ) | ||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$ | 633,437 | $ | 47,077 | |||||
|
See
accompanying notes to financial
statements
|
F-2
|
VYCOR
MEDICAL, INC.
|
||||
|
Statement
of Operations
|
|
For the year ended December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Revenue
|
$ | 129,947 | $ | 2,565 | ||||
|
Cost
of Goods Sold
|
||||||||
|
Beginning
Inventory
|
- | - | ||||||
|
Cost
of goods purchased
|
84,616 | 79 | ||||||
|
Goods
available for sale
|
84,616 | 79 | ||||||
|
Less: Ending
inventory
|
(71,527 | ) | - | |||||
|
Total
Cost of Goods Sold
|
13,089 | 79 | ||||||
|
Gross
Profit
|
116,858 | 2,486 | ||||||
|
Operating
expenses:
|
||||||||
|
Research
and development
|
33,686 | 6,969 | ||||||
|
General
and administrative
|
1,554,242 | 481,845 | ||||||
|
Total
Operating expenses
|
1,587,928 | 488,814 | ||||||
|
Operating
loss
|
(1,471,070 | ) | (486,328 | ) | ||||
|
Interest
expense
|
910,225 | 107,668 | ||||||
|
Net
Loss
|
$ | (2,381,295 | ) | $ | (593,996 | ) | ||
|
Loss
Per Share
|
||||||||
|
Basic
and diluted
|
$ | (0.11 | ) | $ | (0.03 | ) | ||
|
Weighted
Average Number of Shares Outstanding
|
21,977,954 | 18,010,459 | ||||||
See
accompanying notes to financial statements
F-3
|
VYCOR
MEDICAL, INC.
|
||||||||||||||||||||
|
Statement
of Stockholders' Deficiency
|
||||||||||||||||||||
|
Additional
|
|
|||||||||||||||||||
|
Common
|
Paid-in
|
Accumulated
|
||||||||||||||||||
|
Shares
|
Stock
|
Capital
|
Deficit
|
Total
|
||||||||||||||||
|
Balance
at January 1, 2006
|
16,049,878 | $ | 16,050 | $ | 85,640 | $ | (187,953 | ) | $ | (86,263 | ) | |||||||||
|
Purchases
of equity during
|
||||||||||||||||||||
|
year
ended December 31, 2006
|
1,717,262 | 1,717 | 231,283 | 233,000 | ||||||||||||||||
|
Share
based compensation for consulting services
|
82,914 | 82,914 | ||||||||||||||||||
|
warrants
and option issued pursant to
|
||||||||||||||||||||
|
Fountainhead
note payable
|
172,500 | 172,500 | ||||||||||||||||||
|
Stock
issued for consulting services
|
48,145 | 48 | 11,952 | 12,000 | ||||||||||||||||
|
Net
loss for year ended December 31, 2006
|
(572,062 | ) | (572,062 | ) | ||||||||||||||||
|
Balance
at December 31, 2006
|
17,815,285 | $ | 17,815 | $ | 584,289 | $ | (760,015 | ) | $ | (157,911 | ) | |||||||||
|
Purchases
of equity during
|
||||||||||||||||||||
|
year
ended December 31, 2007
|
200,301 | $ | 232 | $ | 82,768 | $ | 83,000 | |||||||||||||
|
Common
stock issued in conjunction with
|
||||||||||||||||||||
|
Salomon
note payable
|
150,000 | 150 | 23,800 | 23,950 | ||||||||||||||||
|
Issuance
of stock for consulting fees
|
124,413 | 93 | 22,547 | 22,640 | ||||||||||||||||
|
Share
base Compensation for consulting services.
|
28,489 | 28,489 | ||||||||||||||||||
|
Net
loss for year ended December 31, 2007
|
$ | (593,995 | ) | (593,995 | ) | |||||||||||||||
|
Balance
at December 31, 2007
|
18,289,999 | $ | 18,290 | $ | 741,893 | $ | (1,354,010 | ) | $ | (593,827 | ) | |||||||||
|
Purchases
of equity during
|
||||||||||||||||||||
|
period
ended December 31, 2008
|
2,237,027 | $ | 2,237 | $ | 422,798 | $ | 425,035 | |||||||||||||
|
Common
stock issued in conjunction with
|
||||||||||||||||||||
|
Salomon
note payable
|
1,111,111 | 1,111 | 148,889 | 150,000 | ||||||||||||||||
|
Inducement
to convert debt
|
100,000 | 100 | 173,011 | 173,111 | ||||||||||||||||
|
Issuance
of stock for consulting fees
|
1,692,798 | 1,693 | 319,936 | 321,629 | ||||||||||||||||
|
Share
base Compensation for consulting services.
|
25,789 | 25,789 | ||||||||||||||||||
|
Beneficial
conversion feature on Fountainhead and Regent debt
|
708,130 | 708,130 | ||||||||||||||||||
|
Issuance
for conversion of debt - Johannsen
|
2,032,520 | 2,033 | 247,967 | 250,000 | ||||||||||||||||
|
Net
loss for year ended December 31, 2008
|
$ | (2,381,295 | ) | (2,381,295 | ) | |||||||||||||||
|
Balance
at December 31, 2008
|
25,463,455 | $ | 25,464 | $ | 2,788,413 | $ | (3,735,305 | ) | $ | (921,428 | ) | |||||||||
See
accompanying notes to financial statements
F-4
|
VYCOR
MEDICAL, INC.
|
||||||||
|
Statement
of Cash Flows
|
||||||||
|
Year
ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (2,381,295 | ) | $ | (593,995 | ) | ||
|
Adjustments
to reconcile net loss to cash
|
||||||||
|
used
in operating activities:
|
||||||||
|
Amortization
of intangible assets
|
11,763 | 6,969 | ||||||
|
Depreciation
of fixed assets
|
6,407 | - | ||||||
|
Amortization
of debt discount expense
|
671,629 | 84,198 | ||||||
|
Share
based compensation
|
25,789 | 51,129 | ||||||
|
Shares
issued for consulting services
|
321,629 | - | ||||||
|
Inducement
for debt conversion
|
173,111 | - | ||||||
|
Changes
in assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(87,200 | ) | (2,565 | ) | ||||
|
Inventory
|
(71,527 | ) | - | |||||
|
Prepaid
expenses
|
(7,040 | ) | - | |||||
|
Security
deposit
|
(2,350 | ) | - | |||||
|
Accounts
payable
|
28,396 | 4,315 | ||||||
|
Accrued
interest
|
63,862 | 24,726 | ||||||
|
Accrued
liabilities
|
75,204 | (4,410 | ) | |||||
|
Cash
used in operating activities
|
(1,171,622 | ) | (429,633 | ) | ||||
|
Cash
flows used in investing activities:
|
||||||||
|
Purchase
of fixed assets
|
(220,365 | ) | - | |||||
|
Acquisition
of patents
|
(29,149 | ) | (6,320 | ) | ||||
|
Acquisition
of website
|
(6,500 | ) | (800 | ) | ||||
|
Cash
used in investing activities
|
(256,014 | ) | (7,120 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from/payment on Note Payable Officer
|
- | (10,500 | ) | |||||
|
Proceeds
from sale of equity
|
425,035 | 83,000 | ||||||
|
Proceeds
from Notes Payable-GC Advisors
|
(17,000 | ) | 17,000 | |||||
|
Proceeds
from Salomon Convertible Note Payable
|
- | 150,000 | ||||||
|
Proceeds
from Fountainhead Convertible Note Payable
|
300,000 | - | ||||||
|
Proceeds
from Fountainhead Convertible Note Payable
|
1,000,000 | - | ||||||
|
Proceeds
from Optimum Health Service Loan Payable
|
(100,000 | ) | 100,000 | |||||
|
Cash
provided by financing activities
|
1,608,035 | 339,500 | ||||||
|
Net
increase (decrease) in cash
|
180,399 | (97,253 | ) | |||||
|
Cash
at beginning of period
|
15,739 | 112,992 | ||||||
|
Cash
at end of period
|
$ | 196,138 | $ | 15,739 | ||||
|
Supplemental
Disclosures of Cash Flow information:
|
||||||||
|
Interest
paid:
|
$ | 7,638 | $ | - | ||||
|
Taxes
paid
|
$ | 375 | $ | - | ||||
|
Non-Cash
Tranactions:
|
||||||||
|
Warrants,
options and stock issued for debt financing
|
$ | - | $ | 23,950 | ||||
See
accompanying notes to financial statements
F-5
VYCOR
MEDICAL, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008
1. FORMATION
AND BUSINESS OF THE COMPANY
Business
description
Vycor
Medical, LLC, (the “Company”) was formed in June 17, 2005 under the laws of the
State of New York. The Company converted its entity form on August 14, 2007 from
a New York Limited Liability Company to a Delaware Corporation with 16,048 of
common stock exchange for each partnership unit with 1122 units outstanding at
date of conversion. The assets, liabilities and operations of the Company did
not change pursuant to this reorganization, and the accompanying financial
statements are presented as if the change occurred on the first day of the
earliest period presented; thus all are references to number of shares prior to
the date of conversion are based upon the common stock equivalent of the units.
The Company’s business plan is to develop and market a commercially feasible
surgical access system for sale to hospitals and medical
professionals.
2. ACCOUNTING
POLICIES
Research
and Development
The
Company expenses all research and development costs as incurred. For the years
ended December 31, 2008 and 2007, the amounts charged to research and
development expenses were $33,686 and $6,969, respectively.
Concentration
of Credit Risk
The
Company maintains cash balances at various financial institutions. Accounts at
each institution are insured by the Federal Deposit Insurance Corporation up to
$250,000. The Company's accounts at these institutions may, at times, exceed the
federally insured limits. The Company has not experienced any losses in such
accounts.
Fair
Values of Financial Instruments
At
December 31, 2008 and 2007, fair values of cash, accounts receivable, accounts
payable, and accrued expenses short term promissory notes, approximate their
carrying amount due to the short period of time to maturity. The fair value of
the Company’s long term debt is based on the present value using a discount rate
comparable with borrowing rates available to the Company along with various fair
value model calculations used to value certain debt related
securities.
Property
and equipment
The
Company records property and equipment at cost and calculates depreciation using
the straight-line method over the estimated useful life of the assets, which is
estimated to be between three and ten years.
Income
taxes
The
Company accounts for income taxes in accordance with SFAS 109, Accounting for Income Taxes.
This statement prescribes the use of the liability method whereby deferred tax
assets and liability account balances are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company provides a valuation allowance,
if necessary, to reduce deferred tax assets to their estimated realizable value.
The Company has provided a full valuation allowance against the gross deferred
tax asset as of December 31, 2008 and 2007 as it is more likely then not that
this deferred tax asset may not realized.
Uses
of estimates in the preparation of financial statements
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States (“GAAP”) requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Critical estimates include depreciation,
amortization of intangible assets, and the fair values of options and warrant
included in the determination of debt discounts and share based
compensation.
Patents
The
Company capitalizes legal and related costs associated with the establishment of
patents for its products. Costs associated with the development of the patented
item or processes are charged to research and development costs as incurred. The
costs associated with the establishment of the patents are amortized over the
life of the patent.
The
Company reviews existing patents as well as those in the approval process for
impairment on an annual basis using a present value, cash flow method pursuant
to Statement of Financial Accounting Standards 142, Goodwill and Other
Intangible Assets. Since the Company’s patents are either very new or still in
the process of approval, the Company does not believe that any impairment of
these amounts exists.
F-6
VYCOR
MEDICAL, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008
2. ACCOUNTING
POLICIES (continued)
Revenue
Recognition
The
Company records revenue, pursuant to Staff Accounting Bulletin Topic
13(a) when a completed contract for the sale exists, title transfers to the
buyer and the product is invoiced and shipped to the customer. The Company sells
a surgical access system which has already cleared the U.S. FDA 510(k) review
process. It has been granted a 510(k) number for marketing the system to
hospitals and other medical professionals. The Company does not expect the need
to provide for product returns or warrantee costs but will review such potential
costs after the commencement of sales.
Educational
and marketing expenses
The
Company may incur costs for the education of customers on the uses and benefits
of its products. The Company will expense such costs as a component of selling,
general and administrative costs as such costs are incurred.
Website
Costs
The
Company capitalizes the costs associated with the acquisition of hardware and
development tools as well as the creation of database tools in connection with
the Company’s website pursuant to Statement of Position 98-1 and Emerging Issues
Task Force 00-20. Other costs including the development of functionality and
identification of software tools are expensed as incurred.
Stock-Based
Compensation
Prior to
January 1, 2006, the Company accounted for stock-based compensation arrangements
in accordance with the provisions of Accounting Principles Board Opinion No. 25
(APB 25), Accounting for Stock
Issued to Employees, and related interpretations, and followed the
minimum value disclosure provisions of Statement of Financial Accounting
Standards NO. 123 (SFAS 123), Accounting for Stock-Based
Compensation. Under APB 25, compensation expense is based on
the difference, if any, on the date of the grant, between the fair value of the
Company’s stock and the exercise price. Stock-based compensation determined
under APB 25 is recognized over the option vesting period.
Prior to
the adoption of a stock option plan adopted on February 13, 2008, the Company
only issued share based compensation to consultants for goods or services. The
Company accounted for these transactions under guidance for Emerging Issues Task
Force Abstract No. 96-18, Accounting for Equity Instruments
that are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling Goods or Services. Under EITF 96-18, options, warrants, and stock
are recorded at their fair value on the measurement date. The Company remeasured
the fair value of such instruments granted at each reporting period until
performance under the consulting arrangements were completed and the measurement
date was reached. The Company records the expense of such services on the
estimate fair value of the equity instrument using the Black-Sholes pricing
model. The initial expense is recognized over the term of the service
agreement.
For
future awards to employees, the Company will adopt the fair value provisions of
the Statement of Financial Accounting Standards No. 123(R) (SFAS 123R), Share-Based Payment, which
supersedes its previous accounting under APB 25. SFAS 123(R) requires the
recognition of compensation expense for future stock-based compensation awards
to employees. Using a fair-value-based method, for costs related to all
share-based payments including stock options. SFAS 123R requires
companies to estimate the fair value of share-based payment awards on the date
of grant using an option-pricing model. All option grants valued after January
1, 2006 will be expensed on a straight-line basis over the vesting
period.
Fair
Values of Assets and Liabilities
Effective
January 1, 2008, the Company adopted Statement of Financial Accounting
Standards No. 157, Fair Value
Measurements (SFAS 157), which provides a framework for measuring fair
value under GAAP. SFAS 157 defines fair value as the exchange price that would
be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. SFAS 157
requires that valuation techniques maximize the use of observable inputs and
minimize the use of unobservable inputs. SFAS 157 also establishes a fair value
hierarchy, which prioritizes the valuation inputs into three broad
levels.
There are
three general valuation techniques that may be used to measure fair value, as
described below:
a) Market
approach – Uses prices and other relevant information generated by market
transactions involving identical or comparable assets or liabilities. Prices may
be indicated by pricing guides, sale transactions, market trades, or other
sources;
b) Cost approach
– Based on the amount that currently would be required to replace the service
capacity of an asset (replacement cost); and
c) Income
approach – Uses valuation techniques to convert future amounts to a single
present amount based on current market expectations about the future amounts
(includes present value techniques and option-pricing models). Net present value
is an income approach where a stream of expected cash flows is discounted at an
appropriate market interest rate.
F-7
VYCOR
MEDICAL, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008
2. ACCOUNTING
POLICIES (continued)
Financial
assets and liabilities are valued using either level 1 inputs based on
unadjusted quoted market prices within active markets or using level 2 inputs
based primarily on quoted prices for similar assets or liabilities in active or
inactive markets. For certain long-term debt, fair value is based on
present value techniques using inputs derived principally or corroborated from
market data. Using level 3 inputs using management’s assumptions about the
assumptions market participants would utilize in pricing the asset or liability.
In the Company’s case this entailed assumptions used in pricing models for
attached warrant calculations. Valuation techniques utilized to determine fair
value are consistently applied.
The
Company’s long-term debt is the only item that is subject to SFAS 157 as of
December 31, 2008 as follows:
|
Other
observable inputs (level 1)
|
$
|
908,147
|
||
|
Un-observable
inputs (level 3)
|
$
|
169,050
|
Net
Loss Per Share
Basic net
loss per share is computed by dividing net loss by the weighted-average number
of common shares outstanding during the period. Diluted net loss per share is
based on the weighted-average common shares outstanding during the period plus
dilutive potential common shares calculated using the treasury stock
method. Such potentially dilutive shares are excluded when the effect
would be to reduce a net loss per share. The Company’s potential dilutive
shares, which include outstanding common stock options, convertible notes
payable and warrants, have not been included in the computation of diluted net
loss per share for all periods as the result would be
anti-dilutive.
The
following table sets forth the potential shares of common stock that are not
included in the calculation of diluted net loss per share because to do so would
be anti-dilutive as of the end of each period presented:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Stock
options outstanding
|
1,707,894
|
-
|
||||||
|
Warrants
to purchase common stock
|
6,460,920
|
5,287,708
|
||||||
Recently
Issued Accounting Standards
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
160, Interests in Consolidated
Financial Statements - an amendment of ARB No. 51, (“SFAS 160”), that
establishes and expands accounting and reporting standards for the
non-controlling interest in a subsidiary. SFAS 160 is effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. This
Statement is required to be adopted by us in the first quarter of the
Company's fiscal year 2009. The effect the adoption of SFAS 160 will have
on the Company's financial statements will depend on the nature and size of
any acquisitions the Company completes in the future.
In
December 2007, the FASB issued SFAS No. 141R, Business Combinations, (“SFAS
141R”), which impacts the accounting for business combinations. The statement
requires changes in the measurement of assets and liabilities required in favor
of a fair value method consistent with the guidance provided in SFAS 157.
Additionally, the statement requires a change in accounting for certain
acquisition related expenses and business adjustments which no longer are
considered part of the purchase price. Adoption of this standard is required for
fiscal years beginning after December 15, 2008. Early adoption of this standard
is not permitted. The statement requires prospective application for all
acquisitions after the date of adoption. The effect the adoption of SFAS 141R
will have on the Company's financial statements will depend on the nature
and size of any acquisitions the Company completes in the
future.
In March
2008, the FASB issued SFAS No. 161, Disclosures About Derivative
Instruments and Hedging Activities, (“SFAS 161”), which requires enhanced
disclosures about an entity’s derivative and hedging activities in order to
improve the transparency of financial reporting. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. The Company does not
anticipate the adoption of this statement to have a material effect on its
consolidated financial position and results of operations.
F-8
VYCOR
MEDICAL, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008
2. ACCOUNTING
POLICIES (continued)
In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles, (“SFAS No. 162”), which identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements. SFAS No. 162 is effective 60 days following
the SEC’s approval of the Public Company Accounting Oversight Board (“PCAOB”)
amendments to AU Section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles. The Company
does not anticipate the adoption of this statement to have a material effect on
its consolidated financial position and results of operations.
In May
2008, the FASB issued FASB Staff Position (FSP) No. 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement), (“FSP 14-1”) which specifies that issuers of these
instruments should separately account for the liability and equity components in
a manner that reflects the entity’s nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. FSP 14-1 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. FSP 14-1 is also to be applied
retrospectively to all periods presented except if these instruments were not
outstanding during any of the periods that are presented in the annual financial
statements for the period of adoption but were outstanding during an earlier
period. The Company does not anticipate the adoption of this statement to have a
material effect on its consolidated financial position and results of
operations.
In June
2008, the FASB ratified EITF Issue 07-5, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock, (“EITF 07-5”).
Paragraph 11(a) of SFAS No 133, Accounting for Derivatives and
Hedging Activities, (“SFAS 133”) specifies that a contract that would
otherwise meet the definition of a derivative but is both (a) indexed to the
Company’s own stock and (b) classified in stockholders’ equity in the statement
of financial position would not be considered a derivative financial instrument.
EITF 07-5 provides a new two-step model to be applied in determining whether a
financial instrument or an embedded feature is indexed to an issuer’s own stock
and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. EITF
07-5 will be effective for the first annual reporting period beginning after
December 15, 2008, and early adoption is prohibited. While the Company is
currently still evaluating the effects of adoption of EITF 07-5, it is expected
that adoption may result in the reclassification of the Company’s warrants from
equity to liabilities recorded at fair value and additionally could result in
bifurcation and fair value accounting for the conversion rights embedded in the
Company’s Series A preferred stock.
Going
Concern
The
Company’s financial statements have been presented on a basis that contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business and assumes the Company will continue as a going concern. The
Company has incurred losses since its inception, including a net loss of
$2,381,295 for the year ended December 31, 2008, and the Company expects to
continue to incur substantial additional losses in the future, including
additional development costs, costs related to clinical trials and manufacturing
expenses. The Company has incurred negative cash flows from operations since
inception. As of December 31, 2008, the Company had a stockholders’ deficiency
of $921,427 and cash and cash equivalents balance of $196,138. The Company also
has certain debt obligations that were not paid by their respective due
dates. In these circumstances the Company believes it may not have enough
cash to meet its various cash needs into 2009 unless the Company is able to
obtain additional cash from the issuance of debt or equity securities.
There is no assurance that additional funds from the
issuance of equity will be available for the Company to finance its operations
on acceptable terms. If adequate funds are not available, the Company may have
to delay development or commercialization of products or technologies that the
Company would otherwise seek to commercialize. These conditions raise
substantial doubt about the Company’s ability to continue as a going concern.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
F-9
VYCOR
MEDICAL, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008
3. LONG-TERM
DEBT
As of
December 31, 2008 and 2007, long-term debt consists of:
|
|
December
31, 2008
|
December
31,
2007
|
||||||
|
On
January 9, 2007 the Company entered into a note payable to GC Advisors,
with interest at 12%, due earlier of January 9, 2009, or five business
days following the receipt of at least $500,000 in cash from any form of
equity or debt financing.
|
$
|
-
|
$
|
17,000
|
||||
|
On
April 18, 2007 the Company entered into a $50,000 note payable to Optimus
Service LLC. On May 31, 2007 the note holder advanced an additional
$50,000. The original loan was due six (6) months from the date of
issuance. The Company has agreed to monthly payments of $20,500 beginning
in March 2008 with interest at the Prime interest rate as reported in the
Wall Street Journal
|
-
|
100,000
|
||||||
|
On
August 28, 2007 the Company sold 10 units consisting of a combination of
150,000 shares of its common stock and a convertible promissory note to
David Salomon in the amount of $150,000. The debt was due and payable on
August 28, 2008 and was non interest bearing other than the stock unless
the note is in default; the interest then accrues at 13% per annum
commencing on the maturity date. The Company allocated the proceeds of
this investment between the relative fair values of the promissory note
and common stock using a share value of $0.19 per share (based upon
private placements originating near the date of the note) resulting in an
allocation of $126,050 to the promissory note and $23,950 to additional
paid in capital and capital stock attributed to debt discount. The holder
of this note had the right, at the holder’s option at any time prior to
the payment in full of the principal balance of this note, to convert all
of the principal amount of this Note into common shares of the company;
the conversion price was to be equal to the prevailing market price,
subject to a maximum conversion price of not more than $1.00 per common
share and a minimum conversion price of not less than $0.50 per common
share. The note may be converted, at the option of the Company, on the
same terms and conditions as the note holder in the event the
Company’s common shares are publicly quoted and the closing price of the
common shares on any securities quotation services or exchange exceeds
150% of the ceiling price for 30 consecutive trading days. The conversion
feature contains adjustments for stock splits and subdivisions so as to
insure the conversion rate does not unfairly impact the note holder. Since
the fair value of the stock is less than the minimum conversion price of
$0.50, there is no value attributable to any beneficial conversion
feature. The Company is using the effective interest method to
allocate the debt discount over its term; as of December 31, 2007, the
note is reflected net of the unamortized discount of $22,551. On February
15, 2008, the Company induced the note holders of the Salomon note to
convert the note based upon a by offering them a reduced conversion price
of $0.135 per common share and an additional 100,000 shares of common
stock. This resulted in debt conversion expense in accordance with
Statement of Financial Accounting Standards No.84 (As Amended) Induced
Conversions of Convertible Debt, which the company recognized as interest
expense in the statement of operations of $173,111 calculated using the
reduced conversion price of $0.135 per share and a market value of $0.19
per share (based upon private placements originating near the date of the
note). $154,311 of the interest expense is a result of the reduced
conversion price and $19,000 is as a result of the additional 100,000
shares of stock. As a result of the inducement, the holder converted all
into 1,111,111 shares of common stock and received an additional 100,000
shares of stock as part of the inducement.
|
-
|
127,449
|
||||||
|
|
||||||||
|
On
December 15, 2006 the Company entered into a Convertible debenture, in the
amount of $172,500 payable to Fountainhead Capital Partners Limited
(FCPL), with interest at the “Applicable Federal Rate” as defined in sec.
1274 (d) of the Internal Revenue Code, initially due June 21, 2007. The
Debenture may be transferred or exchanged only in compliance with the
Security Act of 1933, as amended and applicable state securities laws. The
Holder is entitled at its option to convert debenture into a number of
shares of common stock calculated to be equal to be ten percent of the
issued and outstanding aggregate shares of the Company on the date of
issuance of the Debenture. The following discloses the calculation the
conversion price and the 1,979,456 conversion
shares:
|
||||||||
F-10
VYCOR
MEDICAL, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008
3. LONG-TERM
DEBT (continued)
|
Number
of membership units outstanding at
12/21/2006
|
1,110.11
|
Units
|
||
|
The
note was for 10% of Units post-money
(1,110.11/90%):
|
1233.46
|
Units
|
||
|
Fountainhead
is entitled to 10% of the units equal
to
|
123.346
|
Units
|
||
|
Each
unit converted into 16,048 shares
|
1,979,456
|
Shares
|
||
|
The
conversion feature is subject to standard anti-dilution provisions. The
Company has computed a beneficial conversion feature of $111,099 which
resulted in a debt discount of such amount which is being amortized over
the life of the loan to interest expense. The Company had used $0.19 per
share in the computation of the beneficial conversion feature as it
represents sales of private placements of the Company’s securities at the
time of entering into the debenture. The Holder has the sole option to
extend the due date of this debenture and has extended principal and
interest payments until February 15, 2009. In conjunction with the
convertible debenture the Company issued a warrant to Fountainhead Capital
Partners Limited to purchase 50.22 Membership Units of the Company
(805,931 shares of common stock) at $.50 per share for five years. The
warrant’s fair value of $0.13 per share was calculated using the
Black-Scholes Valuation Model, using the following assumptions: volatility
of 99%, dividend rate of 0%, approximate risk free interest rate of 4.5%
and a five year warrant life. The warrant resulted in an additional debt
discount of $61,401 which is being amortized over the term of the debt. In
conjunction with this debt the Company also entered into an agreement with
Fountain Capital Partners Limited (FCPL) which granted to FCPL an option
to invest up to $1,850,000 for three years in exchange for issuing new
convertible debentures due two years from the issuance of these new notes
and included with the exercise of this option would be a warrant to
purchase up to 3,017,409 shares at a price of $0.44 per share. The
debenture is convertible up to 5,652,954 shares of common
stock. No value was assigned to the options as there was no
acquired beneficial conversion feature or acquisition of the
warrants The note reflects an unamortized discount of $3,450
and $86,250 as of December 31, 2008 and 2007,
respectively.
|
169,050
|
86,250
|
|
On
February 15, 2008 the Company entered into a $150,000 Convertible
Debenture payable to Fountainhead Capital Partners Limited, with interest
at 6% per annum, due but not paid, on or before February 15, 2009. The
Holder is entitled to convert all or any amount of the principal face
amount of the debenture then outstanding into shares of common stock of
the Company at the conversion price of $0.1230 per share, subject to
adjustment and does not require bifurcation. The Company has computed a
beneficial conversion feature debt discount of $81,707, which is being
amortized over the life of the loan.
|
139,787
|
-
|
||||||
|
|
||||||||
|
On
February 15, 2008 the Company entered into a $500,000 Convertible
Debenture, payable to Regent Private Capital, LLC, with Interest at 6% per
annum, due but not paid, on or before February 15, 2009. The Holder is
entitled to convert all or any amount of the principal face amount of the
debenture then outstanding into shares of common stock of the Company at
the Conversion price of $0.1230 per share, subject to adjustment and does
not require bifurcation. The Company has computed a beneficial conversion
feature debt discount of $272,358, which is being amortized over the life
of the loan. Subsequently, Regent assigned the principal amount of
each note to Altcar Investments and Derek Johansen. On
December 15, 2008, Johansen converted $250,000 of the debenture into
2,032,520 shares of common stock. This resulted in the
recognition of unamortized beneficial conversion feature debt discount
attributable to the debenture of $17,023.
|
232,977
|
-
|
||||||
|
On
April 15, 2008 the Company entered into a $150,000 Convertible Debenture
payable to Fountainhead Capital Partners Limited, with interest at 6% per
annum, due but not paid, on or before February 15, 2009. The Holder
is entitled to convert all or any amount of the principal face amount of
the debenture then outstanding into shares of common stock of the Company
at the conversion price of $0.1230 per share, subject to adjustment and
does not require bifurcation. The Company has computed a Beneficial
conversion feature debt discount of $81,707 which is being amortized over
the life of the loan
|
126,169
|
-
|
||||||
|
On
April 22, 2008 the Company entered into a $500,000 Convertible Debenture,
payable to Regent Private Capital, LLC, with interest at 6% per annum, due
on or before April 22, 2009. The Holder is entitled to convert all or any
amount of the principal face amount of the debenture then outstanding into
shares of common stock of the Company at the Conversion price of $0.1230
per share, subject to adjustment and does not require bifurcation. The
Company has computed a Beneficial conversion feature debt discount of
$272,358, which is being amortized over the life of the
loan.
|
345,108
|
-
|
||||||
|
All
discounts are being amortized on a straight line basis that approximates
effective yield method under EITF 98-5.
|
||||||||
|
Total
long-term debt:
|
1,077,197
|
330,699
|
||||||
|
Less
current portion of debt
|
1,077,197
|
227,449
|
||||||
|
Long-term
portion of debt
|
$
|
-
|
$
|
103,250
|
The
following is a schedule of future minimum loan payments:
|
Twelve
months ending December 31,
|
Amount
|
|||
|
2009
|
$
|
1,222,500
|
||
|
2010
|
-
|
|||
|
2011
|
-
|
|||
|
2012
|
-
|
|||
|
2013
|
-
|
|||
|
Thereafter
|
-
|
|||
|
Total
|
$
|
1,222,500
|
||
|
Less
debt discount
|
145,303
|
|||
|
$
|
1,077,197
|
|||
The Company's long-term
debt is all secured by a first security interest in all of the assets of the
Company.
F-11
VYCOR
MEDICAL, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008
4. EQUITY
Certain
Equity Transactions
In
consideration for purchasing 100,000 shares at $0.50 per share, the Company
issued to George Kivotidis a warrant to purchase up to an additional 4,000
shares of the Company's common stock at $.50 per share. The warrant is
valid from November 6, 2007 for a period of three years. This warrant was fair
valued under the Black-Scholes Model, using a volatility of 99%, dividend rate
of 0%, risk free interest rate of 4.5% and a three year life. The
proceeds from the sale of stock issued to Mr. Kivotidis were apportioned between
common stock and additional paid in capital due to the warrant.
During 2006 there were purchases of the Company equity of $233,000 representing common stock with prices ranging from $0.09 to $0.25 per share.
During
2007, there were purchases of the Company’s stock of $83,000 representing common
stock with prices ranging from $0.25 to $0.50 per share.
During
2008, there were purchases of the Company’s stock of $425,034 representing
common stock at the price of $0.19 per share.
In
connection with the recent investments by Regent Private Capital, LLC
Fountainhead Capital Partners Limited and consultancy services provided by the
Concordia Financial Group and Sichenzia Ross Friedman and Ference, LLP
(attorneys for the Company), the Company issued a total of 1,047,494 shares
of its common stock to The Concordia Financial Group and 523,747 shares of
common stock to Sichenzia Ross Friedman and Ference, LLP.
5. SHARE-BASED COMPENSATION
The
Company accounts for the following transactions under the guidance of Emerging
Issues Task Force Abstract No. 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling Goods or Services. Under EIFT 96-18, options are recorded at
their fair value on the measurement date. The Company remeasured the fair value
of the options or warrants granted at each reporting period until performance
under the consulting agreement was completed and the measurement date was
reached. The Company expensed the fair value of the instrument granted over the
requisite service period which was the term of the consulting agreement, or one
year.
For
employee based awards which consist only of awards made under the “Stock Option
Plan” described below, the company follows the provisions of Statement of
Financial Accounting Standards No. 123R (SFAS 123 R), Share –Based Payment which
requires companies to estimate the fair value of share-based payment awards on
the date of grant using an option-pricing model. Under SFAS 123 R, compensation
cost for employee cost for employee stock-based awards is based on the estimated
grant-date fair value and recognized over the vesting period of the applicable
award on a straight-line basis. The weighted average estimated fair
value of the employee stock options granted for the year ended December 31,
2008 was approximately $ 180,000.
Stock
Option Plan
The
Company has adopted the Vycor Medical, Inc Employee, Director, and Consultant
Stock Plan as of February 13, 2008, that includes both incentive stock options
and nonqualified stock options to be granted to employees, officers, and
consultants, independent contractors, directors and affiliates of the
Company. The board of directors establishes the terms and
conditions of all stock options grants, subject to the Plan and applicable
provisions of the Internal Revenue Code. Incentive stock options must
be granted at an exercise price not less than the fair market value of the
common stock on the grant date. The options granted to participants
owning more than 10% of the Company’s outstanding voting stock must be granted
at an exercise price not less than 110% of the fair market value of the common
stock on the grant date. The options expire on the date determined by
the board of directors, but may not extend mare than 10 years from the grant
date, while incentive stock options granted to participants owning more than 10%
of the Company’s outstanding voting stock expire five years from the grant date.
The vesting period for employees is generally over three years. The
vesting Period for nonemployees is determined based on the services being
provided.
Initial
grants totaling 500,000 shares each were issued on February 13, 2008 to Kenneth
T. Coviello, Chief Executive Officer and Heather N. Jensen, President at an
exercise price of $.135 per share. The options vest 33 1/3 % on each
of the first, second, and third anniversary of the grant and expire February 12,
2018.
The
maximum number of shares of stock which maybe delivered under the plan shall
automatically increase by a number sufficient to cause the number of shares
covered by the plan to equal 10% of the total number of shares of stock then
outstanding on a fully diluted basis.
Stock
appreciation rights may be granted either on a stand alone basis or in
conjunction with all or part of any other stock options granted under the
plan. As of December 31, 2008 there were no awards of any stock
appreciation rights.
F-12
VYCOR
MEDICAL, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008
5. SHARE-BASED
COMPENSATION (continued)
Consulting
Agreements
Dr.
Donald O’Rourke entered into a consulting agreement with the
Company on January 18, 2008. Pursuant to the consulting
agreement, Dr. O’Rourke will provide consulting or advisory services
on an as needed basis, to guide the Company in making important strategic
decisions and to evaluate the Company's strategic plans and decisions, research
and/or development activities and results, competitive positions and/or other
scientific and/or technical issues. In consideration for providing
such services, Dr. O’Rourke was also granted an option to purchase 50,000 shares
of the Company’s common stock at $.50 per share.
On
September 1, 2008 Dr. Konstantin Slavin entered into a consulting agreement with
the Company. Pursuant to the agreement, Dr. Slavin agreed to provide
the Company certain consulting services. In consideration of such consulting
services, Dr. Slavin received a one-time retainer of $5,000, which the Company
has paid by the issuance of 26,000 shares of the Company’s common stock to Dr.
Slavin. On October 21, 2008, Dr. Slavin is issued an additional
21,875 shares of the Company’s stock in lieu of services valued at approximately
$4,156.
The
details of the outstanding rights, options and warrants and value of such
rights, options and warrants are as follows:
|
STOCK
WARRANTS:
|
||||||||
|
Weighted
average
|
||||||||
|
Number
of shares
|
price
per share
|
|||||||
|
Balance,
January 1, 2006
|
||||||||
|
Granted
|
4,144,300
|
$
|
0.43
|
|||||
|
Exercised
|
||||||||
|
Cancelled
or expired
|
||||||||
|
Outstanding
at December 31, 2006
|
4,144,300
|
0.43
|
||||||
|
Granted
|
1,143,408
|
0.32
|
||||||
|
Exercised
|
||||||||
|
Cancelled
or expired
|
||||||||
|
Outstanding
at December 31, 2007
|
5,287,708
|
0.41
|
||||||
|
Granted
|
1,365,788
|
0.31
|
||||||
|
Exercised
|
||||||||
|
Cancelled
or expired
|
(192,576
|
)
|
0.24
|
|||||
|
Outstanding at
December 31, 2008
|
6,460,920
|
$
|
0.39
|
|||||
|
STOCK
OPTIONS:
|
||||||||
|
Weighted
average
|
||||||||
|
Number
of shares
|
exercise
price per share
|
|||||||
|
Balance,
January 1, 2006
|
||||||||
|
Granted
|
-
|
$
|
-
|
|||||
|
Exercised
|
||||||||
|
Cancelled
or expired
|
||||||||
|
Outstanding
at December 31, 2006
|
-
|
-
|
||||||
|
Granted
|
||||||||
|
Exercised
|
||||||||
|
Cancelled
or expired
|
||||||||
|
Outstanding
at December 31, 2007
|
-
|
-
|
||||||
|
Granted
|
1,050,000
|
0.14
|
||||||
|
Exercised
|
||||||||
|
Cancelled
or expired
|
||||||||
|
Outstanding
at December 31, 2008
|
1,050,000
|
$
|
0.14
|
|||||
F-13
VYCOR
MEDICAL, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008
5. SHARE-BASED
COMPENSATION (continued)
In
consideration for providing consulting services, the Company granted
to GC Advisors LLC three warrants, each to purchase of 192,576 shares of the
Company's common stock for a purchase price of $.24, .389, and .549 per
share, respectively. The warrants expire on January 9, 2008, 2009,
and 2010, respectively and were fair valued under the Black-Scholes
Model.
In
consideration for being the Company's strategic business advisor, in 2007
the Company issued a warrant to Martin Magida to purchase up to
160,480 shares of the Company's common stock at $.24 per share. The warrant
is valid from September 1, 2007 for a period of five years. This warrant was
fair valued under the Black-Scholes Model.
In
consideration for providing advisory services in 2007, the Company issued a
warrant to Robert Guinta to purchase up to 160,480 shares of the Company's
common stock at $.24 per share. The warrant is valid from September 1, 2007 for
a period of five years. This warrant was fair valued under the Black-Scholes
Model.
Dr.
Ezriel E. Kornel received a warrant to acquire 240,720 shares of the Company's
common stock at a price of $.24 per share. This warrant was fair valued under
the Black-Scholes Model and recognized as current compensation.
In 2006,
Dr. David Langer received a warrant to acquire 320,960 shares of the Company's
common stock at a price of $.24 per share. This warrant was fair valued under
the Black-Scholes Model and recognized as current
compensation. Additionally, on April 14, 2007 Dr. Langer received
24,072 common shares valued at $6,000.
As of
December 31, 2008, there was approximately $120,000 of total unrecognized
compensation costs related to non-vested stock options awards, which are
expected to be recognized over a weighted average period of 2
years.
Stock-based
compensation expenses related to stock options granted to non-employees is
recognized as the stock options are earned. The Company believes that the fair
value of the stock options is more reliably measured than the fair value of the
services received. The fair value of the stock options granted is
calculated at each reporting date, using the Black-Scholes option-pricing model,
until the award vests or there is substantial disincentive for the non-employee
not to perform the required services. The following assumptions were
used in calculations of the Black Scholes option pricing model:
|
Risk-free
interest rates
|
4 -
5 %
|
|
Expected
life
|
3
years
|
|
Expected
dividends
|
0%
|
|
Expected
volatility
|
99%
|
Stock-based
compensation expense charged to operations on options and warrants granted to
the above non-employees for the year ended December 31, 2008 and 2007 is $28,489
and $82,914, respectively.
Expected Life. The
expected life is based on the “simplified” method described in the SEC Staff
Accounting Bulletin, Topic 14: Share-Based
Payment.
Volatility. Since
the Company was a private entity for most of 2007 with no historical data
regarding the volatility of its common stock, the expected volatility used for
2006 and 2007 is based on volatility of similar entities, referred to as
“guideline” companies. In evaluation similarity, the Company
considered factors such as industry, stage of life cycle and size.
Risk-Free Interest Rate. The
risk-free rate is based on rates approximating U.S. Treasury zero-coupon issues
with remaining terms similar to the expected term on the options.
Dividend
Yield. The Company has never declared or paid any cash
dividends and does not plan to pay cash dividends in the foreseeable future, and
therefore, used an expected dividend yield of zero in the valuation
method.
Forfeitures. SFAS No. 123R
also requires the Company to estimate forfeitures at the time of grant, and
revise those estimates in subsequent periods if actual forfeitures differ from
those estimates. The Company uses historical data, however limited to
date, to estimate pre-vesting options forfeitures and record stock-based
compensation expense only for those awards that are expected to
vest. All stock-based payment awards are amortized on a straight-line
basis over the requisite service periods of awards, which are generally the
vesting periods. If the Company’s actual forfeiture rate is
materially different from its estimate, the stock-based compensation expense
could be significantly different from what the Company has recorded in the
current period.
The
weighted-average remaining contractual life of outstanding warrants and options
is two and two years, respectively. All of the warrants outstanding
are currently exercisable.
F-14
VYCOR
MEDICAL, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008
6. INCOME
TAXES
The
Company has incurred net operating losses since inception. The Company has not
reflected any benefit of such net operating loss carry forward in the financial
statements. Prior to August 15, 2007 the Company was a limited
liability company and losses were flowed through to the individual members,
therefore the Company only has potential tax benefits from the date it became a
‘C’ corporation.
In
assessing the realization 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.
Based on
the level of historical taxable losses and projections of future taxable income
(losses) over the periods in which the deferred tax assets can be realized,
management currently believes that it is more likely than not that the Company
will not realize the benefits of these deductible differences. Accordingly, the
Company has provided a valuation allowance against the gross deferred tax assets
as of December 31, 2008 as follows:
|
Gross
deferred tax assets
|
$
|
904,750
|
||
|
Valuation
allowance
|
(904,750
|
)
|
||
|
Net
deferred tax asset
|
$
|
-
|
As of
December 31, 2008, the Company has estimated U.S. federal net operating loss
carryforwards of approximately $2,585,000. The federal net operating
loss carryforwards expire in the years 2027 and 2028.
Federal
tax laws impose significant restrictions on the utilization of net operating
loss carryforwards and research and development credits in the event of a change
in ownership of the Company, as defined by the Internal Revenue Code Section
382. The Company’s net operating loss carryforwards and research and development
credits may be subject to the above limitations.
The
Company adopted the provisions of FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes, on January 1, 2007. Implementation of FIN 48 resulted
in no adjustments to the Company’s liability for unrecognized tax benefits. As
of both the date of adoption and as of December 31, 2008 there were no
unrecognizable tax benefits. Accordingly, a tabular reconciliation from
beginning to ending periods is not provided. The Company will classify any
future interest and penalties as a component of income tax expense if incurred.
To date, there have been no interest or penalties charged or accrued in relation
to unrecognized tax benefits.
The
Company is subject to federal and state examinations for the year 2006 forward.
There are no tax examinations currently in progress.
7. COMMITMENTS
AND CONTINGENCIES
Employment
Agreements
On
January 1, 2008 Heather N. Jensen entered into a new employment agreement.
Pursuant to the new employment agreement, Ms. Jensen was employed as the
Company's President for an annual salary of $190,000. She will
be paid a monthly automobile allowance of $700 and be eligible to receive annual
bonuses of 20% of her base salary for the calendar year 2008 and 40% of her base
salary for calendar year 2009, payable in cash or in stock based upon the
achievement of specific milestones to be determined by the Compensation
Committee of the Company's board of directors. For the purposes of calendar
years 2008 and 2009, these milestones are defined as exceeding the Company's
budgeted income by an amount equal to the aggregate amount of all bonuses to be
paid. The term of the agreement is for one year, and it will automatically be
renewed for an additional one year term, unless either party gives written
notice to the other of its intention to terminate the agreement at least 30 days
prior to the automatic renewal date.
On
January 1, 2008 Kenneth T. Coviello entered into a new employment agreement.
Pursuant to the new employment agreement, Mr. Coviello was employed as out Chief
Executive Officer for an annual salary of $190,000. He will be paid a monthly
automobile allowance of $700 and be eligible to receive annual bonuses of 20% of
his base salary for the calendar year 2008 and 40% of his base salary for
calendar year 2009, payable in cash or in stock based upon the achievement of
specific milestones to be determined by the Compensation Committee of the
Company's board of directors. For the purposes of calendar years 2008 and 2009,
these milestones are defined as exceeding the Company's budgeted income by an
amount equal to the aggregate amount of all bonuses to be paid. The term of the
agreement is for one year, and it will automatically be renewed for an
additional one year term, unless either party gives written notice to the other
of its intention to terminate the agreement at least 30 days prior to the
automatic renewal date.
Consulting
Agreements
Dr.
Kornel entered into a consulting agreement with the Company on January 10,
2006. Pursuant to the consulting agreement, Dr. Kornel would, in
consideration for acting as the Company's consultant, be entitled to (i) receive
clinical samples of the Brain Access System and Cervical Access System products
with a valued list price of $44,000 each, (ii) receive the first production
piece at no charge of every new product he assists in development from
feasibility to production release, (iii) have the option to have an idea
processed through the Company's “New Invention” procedure with no research and
development expenses, (iv) have the potential to earn a 20% royalty for each
part of a new product developed exclusively by him and launched for sale in the
worldwide market upon meeting certain mutually agreed sales objectives and (v)
be considered to provide to the Company special consulting or advisement
services for certain projects for a mutually agreed upon fee. The
term of the agreement is for three years.
F-15
VYCOR
MEDICAL, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008
7. COMMITMENTS
AND CONTINGENCIES (continued)
Dr.
Langer entered into an amended and restated consulting agreement with the
Company on April 15, 2006. Pursuant to the agreement, Dr. Langer
agreed to provide the Company certain consulting services, which include the
role of the Company's Chief Medical Advisor, assistance in the analysis,
preparation, submission, publication and presentation of scientific data in
relation to the Company's research efforts and sales and marketing
efforts. In consideration of such consulting services, Dr. Langer
will (i) receive clinical samples of the Brain Access System and Cervical Access
System products with a valued list price of $44,000 each, (ii) receive the first
production piece at no charge of every new product he assists in development
from feasibility to production release, (iii) have the option to have an idea
processed through the Company's “New Invention” procedure with no research or
development expenses, (iv) have the potential to earn a 20% royalty for each
part of a new product developed exclusively by him and launched for sale in the
worldwide market upon meeting certain mutually agreed sales objectives and (v)
be considered to provide to the Company special consulting or advisement
services for certain projects for a mutually agreed upon fee. The
agreement will terminate April 15, 2009.
Dr.
Donald O’Rourke entered into a consulting agreement with the Company on January
18, 2008. Pursuant to the consulting agreement, Dr. O’Rourke shall provide
consulting or advisory services on an as needed basis, to guide the Company in
making important strategic decisions and to evaluate the Company's strategic
plans and decisions, research and/or development activities and results,
competitive positions and/or other scientific and/or technical issues. In
consideration for providing such services, Dr. O’Rourke was also granted a
warrant to purchase 50,000 shares of the Company’s common stock at $.50 per
share.
On
September 1, 2008 Dr. Konstantin Slavin entered into a consulting agreement with
the Company. Pursuant to the agreement, Dr. Slavin agreed to provide the Company
certain consulting services. In consideration of such consulting services, Dr.
Slavin received a one-time retainer of $5,000, which the Company has paid by the
issuance of 26,000 shares of the Company’s common stock to Dr. Slavin. On
October 21, 2008, Dr. Slavin was issued an additional 21,875 shares of the
Company’s stock in lieu of services valued at approximately $4,156.
Lease
The
Company leases its office space on a month to month basis. Rental expense for
the year ended December 31, 2008 and 2007 were $28,076 and $13,847,
respectively.
8. SUBSEQUENT
EVENTS
Notes
Payable – Altcar Investments, Ltd. (assigned by Regent Private Capital,
LLC)
On March
23, 2009, Altcar Investments. Ltd., the holders of a convertible debenture in
the amount of $100,000, agreed to convert the debt and accrued interest of
$6,625 to 866,867 shares of the Company stock at the conversion rate of $.123
per share.
9. RESTATEMENT
OF FINANCIAL DATA AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2007
The
financial data as of December 31, 2007 and for the year then ended as presented
in the accompanying financial statements have been restated and corrected for
errors relating to the following: (a) capitalization of certain costs associated
with the organizing of the Corporation; (b) recording certain additional
compensation expense and (c) recording certain expenses associated with the
value of certain debenture conversion rights. These amounts have been included
in selling, general and administrative expenses in the accompanying financial
statements.
F-16
VYCOR
MEDICAL, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008
The
following tables present the impact of the additional stock-based compensation
expense-related adjustments on the Company's previously reported balance sheet,
statement of operations, statement of cash flows and statement of shareholders’
deficit as of and for the year ended December 31, 2007:
|
RECONCILIATION
OF BALANCE SHEET, DECEMBER 31, 2007
|
|||||||||||||
|
As
previously reported
|
Adjustments
|
Reference
|
As
restated
|
||||||||||
|
Assets:
|
|||||||||||||
|
Current
assets:
|
|||||||||||||
|
Cash
|
$
|
15,739
|
-
|
$
|
15,739
|
||||||||
|
Accounts
receviable
|
2,565
|
-
|
2,565
|
||||||||||
|
Total
current assets
|
18,304
|
-
|
18,304
|
||||||||||
|
Patents,
net
|
22,559
|
-
|
22,559
|
||||||||||
|
Website,
net
|
6,214
|
-
|
6,214
|
||||||||||
|
Total
assets
|
$
|
47,077
|
-
|
$
|
47,077
|
||||||||
|
Liabilities
and Stockholders' Equity (Deficit):
|
|||||||||||||
|
Current
liabilities:
|
|||||||||||||
|
Notes
payable - officer/stockholders
|
$
|
-
|
-
|
$
|
-
|
||||||||
|
Accounts
payable
|
285,216
|
(1
|
)
|
L
|
285,215
|
||||||||
|
Accrued
interest
|
15,778
|
8,948
|
L
|
24,726
|
|||||||||
|
Accrued
liabilities
|
264
|
-
|
264
|
||||||||||
|
Derivative
liability
|
51,391
|
(51,391
|
)
|
A
|
-
|
||||||||
|
Current
portion of long-term debt
|
248,261
|
(20,812
|
)
|
E
|
227,449
|
||||||||
|
Total
current liabilities
|
600,910
|
(63,256
|
)
|
537,654
|
|||||||||
|
Long term
debt
|
172,500
|
(69,250
|
)
|
B,D,E,F
|
103,250
|
||||||||
|
Total
liabilties:
|
773,410
|
(132,506
|
)
|
640,904
|
|||||||||
|
Stockholders'
deficit:
|
|||||||||||||
|
Common
stock
|
18,290
|
-
|
18,290
|
||||||||||
|
Additional
paid-in capital
|
485,580
|
256,313
|
A,B,C,G,H,I,K
|
741,893
|
|||||||||
|
Unearned
compensation
|
(9,522
|
)
|
9,522
|
G
|
-
|
||||||||
|
Accumulated
deficit
|
(1,220,681
|
)
|
(133,329
|
)
|
C,D,I,J
|
(1,354,010
|
)
|
||||||
|
Total
stockholders' deficit:
|
(726,333
|
)
|
132,506
|
(593,827
|
)
|
||||||||
|
Total
liabilities and stockholders' deficit:
|
$
|
47,077
|
-
|
$
|
47,077
|
||||||||
|
A -
The Company revised Note 4 of the financial statements which discloses the
components of the debt. As a result of the revisions, no derivative
liability is being recognized under SFAS 133. This resulted in
an increase in additional paid-in capital and a decrease to derivative
liability of $51,391.
|
|
Dr. Derivative
liability
|
$
|
51,391
|
||||||
|
Cr. Additional
paid-in capital
|
$
|
51,391
|
||||||
|
B -
The Company entered into a convertible debenture, in the amount of
$172,500 payable to Fountainhead Capital Partners Limited with a
beneficial conversion feature ("BCF") of
$172,500. This BCF was not previously
reported. The adjustment represents a decrease in long-term
debt of $172,500 and an increase in additional paid in capital of
$172,500.
|
|
Dr. Long-term
debt
|
$
|
172,500
|
||||||
|
Cr. Additional
paid-in capital
|
$
|
172,500
|
||||||
F-17
VYCOR
MEDICAL, INC.
NOTES TO
FINANCIAL STATEMENTS
DECEMBER
31, 2008
|
C -
In consideration for consulting and/or advisory services, GC Advisors LLC,
Martin Magida, and Robert Guinta were granted warrants to purchase shares
of our common stock. These compensatory amounts had not been
previously reported. The instruments were fair valued under the
Black-Scholes Model and compensation expense and additional paid-in
capital have been increased by the resulting aggregate amount of
$28,489.
|
|
Dr. Compensation
expense
|
$
|
28,489
|
||||||
|
Cr. Additional
paid-in capital
|
$
|
28,489
|
||||||
|
D -
In furtherance of the debenture discussed in adjustment B, the Company
recognized the portion of unamortized discount attributable to
2007. Accordingly, an adjustment of $82,800 has been reported
as an increase in long-term debt and interest
expense.
|
|
Dr. Interest
expense
|
$
|
82,800
|
||||||
|
Cr. Long-term
debt
|
$
|
82,800
|
||||||
|
E -
The company revised its reporting of the allocation between the current
portion of long-term debt and long-term debt. Accordingly, an
adjustment reducing current portion of long-term debt and increasing
long-term debt by $20,812 has been
reflected.
|
|
Dr. Current
portion - ltd
|
$
|
20,812
|
||||||
|
Cr. Long-term
debt
|
$
|
20,812
|
||||||
|
F-
In addition to adjustments to long-term debt in B, D, and E, representing
a change of ($172,500), $82,800 and $20,812, adjustments included a number
of additional immaterial adjustments
totaling ($362).
|
|
Adjustment reference
"B"
|
$
|
(172,500
|
)
|
|
|
Adjustment reference
"D"
|
$
|
82,800
|
||
|
Adjustment reference
"E"
|
$
|
20,812
|
||
|
Immaterial
adjustments
|
$
|
(362
|
)
|
|
|
Total
long-term debt adjustments:
|
$
|
(69,250
|
)
|
|
G -
Unearned compensation as a contra equity account has been eliminated in
accordance with SFAS 123R and appropriate authoritative
literature. This adjustment reflects an increase in unearned
compensation (contra equity) and a decrease to additional paid in capital
of $9,522.
|
|
Dr.
Additional paid-in capital
|
$
|
9,522
|
||||||
|
Cr. Unearned
compensation
|
$
|
9,522
|
||||||
|
H-
In addition to adjustments to additional paid-in capital in A, B, C, G, I
and K representing changes of $51,391, $172,500, $28,489 and
($9,522), $23,950, ($23,950) adjustments included a number of additional
immaterial adjustments totaling
$13,455.
|
|
Adjustment reference
"A"
|
$
|
51,391
|
||
|
Adjustment reference
"B"
|
$
|
172,500
|
||
|
Adjustment reference
"C"
|
$
|
28,489
|
||
|
Adjustment reference
"G"
|
$
|
(9,522
|
)
|
|
|
Adjustment
reference "I"
|
$
|
23,950
|
||
|
Adjustment
reference "K"
|
$
|
(23,950
|
)
|
|
|
Immaterial
adjustments
|
$
|
13,455
|
||
|
Total
additional paid-in capital adjustments:
|
$
|
256,313
|
|
I -
To correct reclassification error between additional paid in capital and
accumulated deficit.
|
|
Dr.
Accumulated deficit
|
$
|
23,950
|
||||||
|
Cr. Additional
paid-in-capital
|
$
|
23,950
|
||||||
F-18
VYCOR
MEDICAL, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008
|
J-
In addition to adjustments C, D, and I, representing
(increase)/decrease in accumulated deficit of ($28,489), ($82,800), and
($23,950), adjustments included a number of additional immaterial
adjustments totaling $1,910.
|
|
Adjustment reference
"C"
|
$
|
(28,489
|
)
|
|
|
Adjustment reference
"D"
|
$
|
(82,800
|
)
|
|
|
Adjustment reference
"I"
|
$
|
(23,950
|
)
|
|
|
Immaterial
adjustments
|
$
|
1,910
|
||
|
Total
accumulated deficit adjustments:
|
$
|
(133,329
|
)
|
K -
To correct prior year's share based compensation expense and non-cash interest
expense recognized.
|
Dr. Additional
paid-in capital
|
$
|
23,950
|
||||||
|
Cr. Interest
expense
|
$
|
13,266
|
||||||
|
Cr.
Selling, general and administrative
|
10,684
|
|||||||
|
L -
The company deems the adjustment referenced herein as
immaterial.
|
F-19
VYCOR
MEDICAL, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008
|
RECONCILIATION
OF STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,
2007
|
|||||||||||||
|
As
previously reported
|
Adjustments
|
As
restated
|
|||||||||||
|
Sales
|
$
|
2,565
|
-
|
$
|
2,565
|
||||||||
|
Costs
and expenses:
|
|||||||||||||
|
Research
and development
|
5,885
|
1,084
|
F
|
6,969
|
|||||||||
|
Selling,
general, and administrative
|
468,839
|
(182
|
)
|
A,D,E
|
468,657
|
||||||||
|
Compensatory
element of stock
|
20,839
|
(20,839
|
)
|
A
|
-
|
||||||||
|
Total
costs and expenses
|
495,563
|
(19,937
|
)
|
475,626
|
|||||||||
|
Operating
loss
|
(492,998
|
)
|
19,937
|
(473,061
|
)
|
||||||||
|
Other
expense:
|
|||||||||||||
|
Interest
expense, net
|
46,652
|
74,282
|
B,C,D
|
120,934
|
|||||||||
|
Total
other expenses
|
46,652
|
74,282
|
120,934
|
||||||||||
|
Net
Loss
|
$
|
(539,650
|
)
|
(54,345
|
)
|
$
|
(593,995
|
)
|
|||||
|
A -
The statement of operations has been revised to reflect share based
compensation on the same line as the cash base compensation paid to
employees consistent with SAB Topic 14.F resulting in a decrease in
accumulated deficit and compensatory element of stock of
($20,839).
|
|
Dr.
Selling, general and administrative
|
$
|
20,839
|
||||||
|
Cr.
Comp. element of stock
|
$
|
20,839
|
||||||
|
B -
The Company entered into a convertible debenture in the amount of $172,500
payable to Fountainhead Capital Partners Limited with a previously
unrecorded beneficial conversion feature of $172,000. The Company
recognized the portion of unamortized discount attributable to this
beneficial conversion feature in 2007. Accordingly, an
adjustment of $82,800 has been reported as an increase in long-term debt
and interest expense.
|
|
Dr. Interest
expense
|
$
|
82,800
|
||||||
|
Cr. Long-term
debt
|
$
|
82,800
|
||||||
|
C-
In addition to adjustments B and D to interest expense, the adjustments
included a number of additional immaterial adjustments totaling
$4,748.
|
|
Adjustment reference
"B"
|
$
|
82,800
|
||
|
Adjustment
reference "D"
|
$
|
(13,266
|
)
|
|
|
Immaterial
adjustments
|
$
|
4,748
|
||
|
Total
interest expense adjustments:
|
$
|
74,282
|
D - To
correct prior year's share based compensation expense and non-cash interest
expense recognized.
|
Dr. Additional
Paid-in-capital
|
$
|
23,950
|
||||||
|
Cr. Interest
expense
|
$
|
13,266
|
||||||
|
Cr.
Selling, general and administrative
|
10,684
|
|||||||
F-20
VYCOR
MEDICAL, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008
E - In
addition to adjustments A and D to selling, general and administrative, the
adjustments included a number of immaterial adjustments totaling
($10,337).
|
Adjustment "A"
|
$
|
20,839
|
||
|
Adjustment
"D"
|
$
|
(10,684
|
)
|
|
|
Immaterial
adjustments
|
$
|
(10,337
|
)
|
|
|
$
|
(182
|
)
|
|
F -
The company deems the adjustment(s) referenced herein as
immaterial.
|
F-21
VYCOR
MEDICAL, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008
|
RECONCILIATION
OF STATEMENT OF CASH FLOWS FOR YEAR ENDED DECEMBER 31,
2007
|
||||||||||||
|
As
previously
restated
|
Adjustments
|
As
restated
|
||||||||||
|
Cash
Flows from Operating Activities:
|
||||||||||||
|
Net
Loss
|
$
|
(539,650
|
)
|
$
|
(54,345
|
)
|
G
|
$
|
(593,995
|
)
|
||
|
Adjustments
to reconcile net loss to cash
|
||||||||||||
|
used
in operating activities:
|
||||||||||||
|
Amortization
of intangible assets
|
7,007
|
(38
|
)
|
H
|
6,969
|
|||||||
|
Amortization
of debt discount expense
|
-
|
84,198
|
A
|
84,198
|
||||||||
|
Share
based compensation
|
55,653
|
(4,524
|
)
|
51,129
|
B
|
|||||||
|
Compensatory
element of stock
|
20,839
|
(20,839
|
)
|
C
|
-
|
|||||||
|
Changes
in Assets and Liabilities:
|
||||||||||||
|
Accounts
Receivable
|
(2,565
|
)
|
-
|
(2,565
|
)
|
|||||||
|
Accounts
Payable
|
4,318
|
(3
|
)
|
H
|
4,315
|
|||||||
|
Accrued
interest
|
11,725
|
13,001
|
24,726
|
D
|
||||||||
|
Accrued
liabilities
|
-
|
(4,410
|
)
|
E
|
(4,410
|
)
|
||||||
|
Cash
Flows Used in Operating Activities
|
(442,673
|
)
|
13,040
|
(429,633
|
)
|
|||||||
|
Cash
Flows used in Investing activities:
|
||||||||||||
|
Acquisition
of patents
|
(6,311
|
)
|
(9
|
)
|
H
|
(6,320
|
)
|
|||||
|
Acquisition
of website
|
(809
|
)
|
9
|
H
|
(800
|
)
|
||||||
|
Cash
Flows used in Investing activities:
|
(7,120
|
)
|
-
|
(7,120
|
)
|
|||||||
|
Cash
Flows from Financing Activities:
|
||||||||||||
|
Proceeds
from/Payment on Note Payable Officer
|
(10,500
|
)
|
-
|
(10,500
|
)
|
|||||||
|
Proceeds
from sale of equity
|
96,040
|
(13,040
|
)
|
83,000
|
F
|
|||||||
|
Proceeds
from Notes Payable-GC Advisors
|
17,000
|
-
|
17,000
|
|||||||||
|
Proceeds
from Salomon Convertible Note Payable
|
150,000
|
-
|
150,000
|
|||||||||
|
Proceeds
from Fountainhead Convertible Note Payable
|
-
|
|||||||||||
|
Proceeds
from Optimum Health Service Loan Payable
|
100,000
|
-
|
100,000
|
|||||||||
|
Cash
Flows from Financing Activities:
|
352,540
|
(13,040
|
)
|
339,500
|
||||||||
|
Net
decrease in cash
|
(97,253
|
)
|
-
|
(97,253
|
)
|
|||||||
|
Cash
at beginning of period
|
112,992
|
-
|
112,992
|
|||||||||
|
Cash
at end of period
|
$
|
15,739
|
$
|
-
|
$
|
15,739
|
||||||
F-22
VYCOR
MEDICAL, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008
A - Amortization of debt
discount expense
|
Amortized
discount on warrants - FCPL (see note 4)
|
$
|
82,799
|
||
|
Amortized
discount on additional shares - Salomon (150,000 - 12/07)
|
1,399
|
|||
|
Total
amortization of debt discount expense
|
$
|
84,198
|
On
December 15, 2006 the Company entered into a Convertible debenture, in the
amount of $172,500 payable to Fountainhead Capital Partners
Limited. The note reflects an unamortized discount of $86,250 as of
December 31, 2007, $86,250 amortized in 2006 ($3,450) and 2007 ($82,800). This
debt discount was not previously recorded.
On August
28, 2007 the Company sold 10 units consisting of a combination of 150,000 shares
of its common stock and a convertible promissory note to David Salomon in the
amount of $150,000. The debt is due and payable on August 28, 2008 and is non
interest bearing other than the stock unless the note is in
default. Company allocated the proceeds of this investment between
the relative fair values of the promissory note and common stock resulting in an
allocation of $126,050 to the promissory note and $23,950 to additional paid in
capital attributed to debt discount (see Note 4). As of December 31,
2007, the note is reflected at $127,449, net of the unamortized discount of
$22,551. The total debt discount expense recognized for the period
ended December 31, 2007 is $1,399. This debt discount was not previously
recorded.
B - Share based
compensation
Share
based compensation needed to be adjusted by $4,524 to reflect the following from
previously incorrect share based compensation calculations:
|
Feldstein
Management (12,197 shares)
|
$
|
3,040
|
||
|
Dr.
David Langer (24,072 shares)
|
6,000
|
|||
|
Vinas
& Company (16,048 shares)
|
4,000
|
|||
|
MAC
Strategic Advisors (40,000 shares)
|
9,600
|
|||
|
GC
Advisors (amortization of 192,576 warrants)
|
12,219
|
|||
|
GC
Advisors (amortization of 192,576 warrants)
|
7,365
|
|||
|
GC
Advisors (amortization of 192,576 warrants)
|
5,725
|
|||
|
Martin
Magida (amortization of 160,480 warrants)
|
1,590
|
|||
|
Robert
Guinta (amortization of 160,480 warrants)
|
1,590
|
|||
|
Total
share based compenation
|
$
|
51,129
|
C - The
statement of operations has been revised to reflect share based compensation on
the same line as the cash base compensation paid to employees consistent with
SAB Topic 14.F. resulting in a decrease in the compensatory element of stock and
accumulated deficit of ($20,839).
D - Accrued interest
payable
|
As
previously reported
|
$
|
11,725
|
||
|
To
accrue interest on Fountainhead note payable ($172,500)
|
8,591
|
|||
|
To
correct reduction of accrued interest payable (see E
below)
|
4,410
|
|||
|
Total
changes in accrued interest payable
|
$
|
24,726
|
On
December 15, 2006 the Company entered into a Convertible debenture, in the
amount of $172,500 payable to Fountainhead Capital Partners Limited with
interest at the “Applicable Federal Rate” as defined in sec. 1274 (d) of the
Internal Revenue Code. Interest expense through December 31, 2007
totaled $8,591.
F-23
VYCOR
MEDICAL, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008
E - To
reflect actual change (reduction) in accrued liabilities of $4,410, previously
reflected as a reduction of accrued interest payable, (see D
above).
F - Proceeds from sale of
equity
Proceeds
from the sale of equity needed to be adjusted by $13,001 to reflect proceeds
from the following:
|
GC
Advisors (32,096 shares)
|
$
|
8,000
|
||
|
Kenneth
Olsen (100,301 shares)
|
25,000
|
|||
|
George
Kivotidis (100,000 shares)
|
50,000
|
|||
|
Total
proceeds from sale of equity
|
$
|
83,000
|
||
G - To
reflect the adjustments made to the statement of operations for the year ended
December 31, 2007.
H -
Adjustments to these line items reflect a number of immaterial
entries.
F-24
VYCOR
MEDICAL, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008
|
RECONCILIATION
OF SHAREHOLDERS' DEFICIT, DECEMBER 31, 2007
|
|||||||||||||
|
As
previously reported
|
Adjustments
|
As
restated
|
|||||||||||
|
Common
stock
|
18,290
|
-
|
18,290
|
||||||||||
|
Additional
paid-in capital
|
485,580
|
256,313
|
A,B,C,E,F
|
741,893
|
|||||||||
|
Unearned
compensation
|
(9,522
|
)
|
9,522
|
E
|
-
|
||||||||
|
Accumulated
deficit
|
(1,220,681
|
)
|
(133,329
|
)
|
C,D,G,H
|
(1,354,010
|
)
|
||||||
|
Total
shareholders' deficit
|
(726,333
|
)
|
132,506
|
(593,827
|
)
|
||||||||
|
A -
The Company revised Note 4 of the financial statements which discloses the
components of the debt. As a result of the revisions, no derivative
liability is being recognized under SFAS 133. This resulted in
an increase in additional paid-in capital and a decrease to derivative
liability of $51,391.
|
|
Dr. Derivative
liability
|
$
|
51,391
|
||||||
|
Cr. Additional
paid-in capital
|
$
|
51,391
|
||||||
|
B -
The Company entered into a Convertible debenture, in the amount of
$172,500 payable to Fountainhead Capital Partners Limited with a
beneficial conversion feature ("BCF") of
$172,500. This BCF was not previously
reported. The adjustment represents a decrease in long-term
debt of $172,500 and an increase in additional paid in capital of
$172,500.
|
|
Dr. Long-term
debt
|
$
|
172,500
|
||||||
|
Cr. Additional
paid-in capital
|
$
|
172,500
|
||||||
|
C -
In consideration for consulting and/or advisory services, GC Advisors LLC,
Martin Magida, and Robert Guinta were granted warrants to purchase shares
of our common stock. These compensatory amounts had not been
previously reported. The instruments were fair valued under the
Black-Scholes Model and compensation expense and additional paid-in
capital have been increased by the resulting aggregate amount of
$28,489.
|
|
Dr. Compensation
expense
|
$
|
28,489
|
||||||
|
Cr. Additional
paid-in capital
|
$
|
28,489
|
||||||
|
D -
In furtherance of the debenture discussed in adjustment B, the Company
recognized the portion of unamortized discount attributable to
2007. Accordingly, an adjustment of $82,800 has been reported
as an increase in long-term debt and interest
expense.
|
|
Dr. Interest
expense
|
$
|
82,800
|
||||||
|
Cr. Long-term
debt
|
$
|
82,800
|
||||||
|
E -
Unearned compensation as a contra equity account has been eliminated in
accordance with SFAS 123R and appropriate authoritative
literature. This adjustment reflects an increase in unearned
compensation (contra equity) and a decrease to additional paid in capital
of $9,522.
|
|
Dr.
Additional paid-in capital
|
$
|
9,522
|
||||||
|
Cr. Unearned
compensation
|
$
|
9,522
|
||||||
F-25
VYCOR
MEDICAL, INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008
|
F-
In addtion to adjustments to additional paid-in capital in A, B, C, and E,
representing changes of $51,391, $172,500, $28,489 and ($9,522),
additional paid-in-capital includes a number of immaterial adjustments
totaling $13,455.
|
|
Adjustment reference
"A"
|
$
|
51,391
|
||
|
Adjustment reference
"B"
|
$
|
172,500
|
||
|
Adjustment reference
"C"
|
$
|
28,489
|
||
|
Adjustment reference
"E"
|
$
|
(9,522
|
)
|
|
|
Immaterial
adjustments
|
$
|
13,455
|
||
|
Total
additional paid-in capital adjustments:
|
$
|
256,313
|
|
G -
The statement of operations has been revised to reflect share based
compensation on the same line as the cash base compensation paid to
employees consistent with SAB Topic 14.F resulting in a decrease in
accumulated deficit and compensatory element of stock of
($20,839).
|
|
Dr.
Accumulated deficit
|
$
|
20,839
|
||||||
|
Cr.
Comp. element of stock
|
$
|
20,839
|
||||||
|
H -
In addtion to adjustments C, D, and G, representing (increase) decrease in
accumulated deficit of ($28,489), ($82,800), $20,839, and ($78,984),
accumulated deficit includes a number of immaterial adjustments totaling
($1,201).
|
|
Adjustment reference
"C"
|
$
|
(28,489
|
)
|
|
|
Adjustment reference
"D"
|
$
|
(82,800
|
)
|
|
|
Adjustment reference
"G"
|
$
|
(20,839
|
)
|
|
|
Immaterial
adjustments
|
$
|
(1,201
|
)
|
|
|
Total
accumulated deficit adjustments:
|
$
|
(133,329
|
)
|
F-26