If our stockholders approve the Plan of Liquidation, but the Asset
Sale is not approved or is not consummated, we will not present the Liquidating
Trust Agreement Proposal for a vote of our stockholders at the Special Meeting
and will move forward with our dissolution. If this occurs, our Board of
Directors will be authorized to sell and liquidate our Assets, on such terms and
to such parties as the Board of Directors determines in its sole discretion
without requiring further stockholder approval. We do not have any agreement or
understanding with any party with respect to the sale of any or all of our
assets if the Asset Sale is not approved or if the Asset Sale is not
consummated.
(e) the
(i) payment or making reasonable provision to pay all claims and obligations of
the Company, including all contingent, conditional or unmatured claims known to
the Company; and (ii) making of such provision as will be reasonably likely to
be sufficient to provide compensation for any claim against the Company which is
the subject of a pending action, suit or proceeding to which the Company is a
party; and (iii) making of such provision as shall be reasonably likely to be
sufficient to provide compensation for claims that have not been made known to
the Company or that have not arisen but that, based on facts known to the
Company, are likely to arise or to become known to the Company within ten years
after the date of dissolution. Provided that (x) the Stockholder Approval
shall have been obtained, the Approval Date shall have occurred and a
Certificate of Dissolution shall have been filed with respect to the Company as
provided in Section 275(d) of the DGCL, the Remaining Assets and all Remaining
Liabilities and any unexpended amounts remaining in the Contingency Reserve (as
defined below) shall be transferred to the Liquidating Trust described in
Section 8 below no later than 90 calendar days of the Approval Date for purposes
of satisfying such Remaining Liabilities and the distribution of the funds and
assets of the Company, if any, to its stockholders pursuant to the terms of the
Liquidating Trust, this Plan and the DGCL or (y) if the Stockholder Approval is
not obtained, the Approval Date shall have occurred and a Certificate of
Dissolution shall have been filed with respect to the Company as provided in
Section 275(d) of the DGCL, any unexpended amounts remaining in the Contingency
Reserve (defined below) and the distribution of the remaining funds, assets and
properties of the Company, if any, to its stockholders no later than the tenth
anniversary of the Approval Date (the “
Final Distribution Date
”).
Without
limiting the generality of the foregoing, the Board may instruct the officers of
the Company to delay the taking of any of the foregoing steps until the Company
has performed such actions as the Board or such officers determine to be
necessary, appropriate or advisable for the Company to maximize the value of the
Company’s assets upon liquidation; provided, that such steps may not be delayed
longer than is permitted by applicable law.
In
addition, notwithstanding the foregoing, the Company shall not be required to
follow the procedures described in Section 281(b) of the DGCL, and the adoption
of the Plan by the stockholder of the Company as provided in Section 1 above
shall constitute full and complete authority for the Board and the officers of
the Company, without further stockholder action, to proceed with the dissolution
and liquidation of the Company in accordance with any applicable provision of
the DGCL, including, without limitation, Sections 280 and 281(a)
thereof.
3. Authority
of Officers and Directors.
After the
Effective Date, the Board and the officers of the Company shall continue in
their positions for the purpose of winding up the affairs of the Company as
contemplated by Delaware law. The Board may appoint officers, hire employees and
retain independent contractors and advisors in connection with the winding up
process, and is authorized to pay to the Company’s officers, directors and
employees, or any of them, compensation or additional compensation above their
regular compensation, in money or other property, in recognition of the
extraordinary efforts they, or any of them, shall be required to undertake, or
actually undertake, in connection with the successful implementation of this
Plan. Adoption of this Plan by the stockholders of the Company as provided in
Section 1 above shall constitute the approval by the Company’s stockholders of
the Board’s authorization of the payment of any such compensation.
The
adoption of the Plan by the stockholders of the Company as provided in Section 1
above shall constitute full and complete authority for the Board and the
officers of the Company, without further stockholder action, to do and perform
any and all acts and to make, execute and deliver any and all agreements,
conveyances, assignments, transfers, certificates and other documents of any
kind and character that the Board or such officers deem necessary, appropriate
or advisable: (i) to dissolve the Company in accordance with the laws of the
State of Delaware and cause its withdrawal from all jurisdictions in which it is
authorized to do business; (ii) (x) subject to Stockholder Approval, to proceed
with the Asset Sale and to transfer the Remaining Assets and Remaining
Liabilities to the Liquidating Trust or (y) otherwise to sell, dispose, convey,
transfer and deliver all of the assets and properties of the Company; (iii) to
satisfy or provide for the satisfaction of the Company’s obligations in
accordance with Sections 280 and 281 of the DGCL; and (iv) (x) for the Trustee
or for the Board, as applicable, to distribute any properties and assets of the
Company and all remaining funds
pro
rata
to the stockholders of the Company’s common stock in
accordance with the respective number of shares then held of record as of
Effective Date.
4. Conversion
of Assets Into Cash and/or Other Distributable Form.
Subject
to approval by the Board and the consummation of the Asset Sale, the officers,
employees and agents of the Company shall, as promptly as feasible, proceed to
(i) collect all sums due or owing to the Company, (ii) sell and convert into
cash and/or other distributable form of all the remaining assets and properties
of the Company, if any, and (iii) out of the assets and properties of the
Company, pay, satisfy and discharge or make adequate provision for the payment,
satisfaction and discharge of all debts and liabilities of the Company pursuant
to Section 2 above, including all expenses of the sales of assets and of the
dissolution and liquidation provided for by the Plan.
The
adoption of the Plan by the stockholders of the Company as provided in Section 1
above shall constitute full and complete authority for the Asset Sale, subject
to Stockholder Approval, or for any sale, exchange or other disposition of the
properties and assets of the Company contemplated by the Plan, whether such
sale, exchange or other disposition occurs in one transaction or a series of
transactions, and shall constitute ratification of all such contracts for sale,
exchange or other disposition. The Company may invest in such interim assets as
determined by the Board in its discretion, pending conversion to cash or other
distributable forms.
5. Professional
Fees and Expenses.
It is
specifically contemplated that the Board may authorize the payment of a retainer
fee to a law firm or law firms selected by the Board for legal fees and expenses
of the Company, including, among other things, to cover any costs payable
pursuant to the indemnification of the Company’s officers or members of the
Board provided by the Company pursuant to its Certificate of Incorporation and
Bylaws, as amended and/or restated, or the DGCL or otherwise.
In
addition, in connection with and for the purpose of implementing and assuring
completion of this Plan, the Company may, in the sole and absolute discretion of
the Board, pay any brokerage, agency and other fees and expenses of persons
rendering services, including accountants and tax advisors, to the Company in
connection with the Asset Sale, subject to Stockholder Approval, and the
collection, sale, exchange or other disposition of the Company’s property and
assets and the implementation of this Plan.
6. Indemnification.
The
Company shall continue to indemnify its officers, directors, employees and
agents in accordance with its Certificate of Incorporation and Amended and
Restated Bylaws and any contractual arrangements, for actions taken in
connection with this Plan and the winding up of the affairs of the Company. The
Board, in its sole and absolute discretion, is authorized to obtain and maintain
insurance as may be necessary, appropriate or advisable to cover the Company’s
obligations hereunder, including without limitation directors’ and officers’
liability coverage.
7. Liquidating
Distributions.
Subject
to the terms of Section 8 of this Plan in the event Stockholder Approval is
obtained and the Asset Sale is consummated, liquidating distributions, if any,
shall be made from time to time after the filing of the Certificate of
Dissolution as provided in Section 2 above and adoption of this Plan by the
stockholders to the stockholders of record, at the close of business on such
date (or pursuant to the terms of the Liquidating Trust, to the stockholders of
record as of the close of business on the Effective Date),
pro rata
to stockholders of
the Company’s common stock in accordance with the respective number of shares
then held of record; provided that in the opinion of the Board or the Trustee,
as applicable, adequate provision has been made for the payment, satisfaction
and discharge of all known, unascertained or contingent debts, obligations and
liabilities of the Company (including costs and expenses incurred and
anticipated to be incurred in connection with the sale and distribution of
assets and liquidation of the Company). Liquidation distributions shall be made
in cash or in kind, including in stock of, or ownership interests in,
subsidiaries of the Company and remaining assets of the Company, if any. Such
distributions may occur in a single distribution or in a series of
distributions, in such amounts and at such time or times as the Board or the
Trustee, as applicable, in its absolute discretion, and in accordance with
Section 281 of the DGCL, may determine; provided, however, that the Company
shall complete the distribution of all its properties and assets to its
stockholders as provided in this Section 7 or to the Liquidating Trust as
provided in Section 8 below as soon as practicable following the filing of its
Certificate of Dissolution with the Secretary of State of the State of Delaware
and in any event on or prior to the Final Distribution Date.
If and to
the extent deemed necessary, appropriate or desirable by the Board or the
Trustee, as applicable, in its absolute discretion, the Company may establish
and set aside a reasonable amount of cash and/or property to satisfy claims
against the Company and other obligations of the Company (a “Contingency
Reserve”), including, without limitations, (i) tax obligations, (ii) all
expenses of the sale of the Company’s property and assets, if any, (iii) the
salary, fees and expenses of members of the Board, management and employees,
(iv) expenses for the collection and defense of the Company’s property and
assets, (v) the expenses described in Sections 3, 5 and 6 above and (vi) all
other expenses related to the dissolution and liquidation of the Company and the
winding-up of its affairs. Any unexpended amounts remaining in a Contingency
Reserve shall be transferred to the Liquidating Trust described in Section 8
below or distributed to the Company’s stockholders no later than the Final
Distribution Date.
As
provided in Section 12 below, distributions made pursuant to this Plan shall be
treated as made in complete liquidation of the Company within the meaning of the
Internal Revenue Code of 1986, as amended (the “Code”) and the regulations
promulgated thereunder. Subject to Stockholder Approval, the adoption of the
Plan by the stockholders of the Company as provided in Section 1 above
shall constitute full and complete authority for the making by the Board of all
distributions contemplated in this Section 7.
8. Liquidating
Trusts.
Subject
to Stockholder Approval and the consummation of the Asset Sale, the Company will
transfer the Remaining Assets and all Remaining Liabilities to a
liquidating trust established for the benefit of the Company’s stockholders (the
“Liquidating Trust”), which assets, subject to the satisfaction of all Remaining
Liabilities, would thereafter be sold or distributed on terms approved by the
Trustee (as defined below). In addition, in the event the Company has not
completed the distribution of its assets and properties to stockholders as
provided in Section 7 above on or prior to the Final Distribution Date, all the
remaining funds, properties, and assets of the Company and all interests therein
including any Contingency Reserve shall be distributed pro rata to the Company’s
stockholders of record as of the close of business on the Effective Date. Any
liquidating trusts established pursuant to this Section 8 shall exist for the
principal purpose of liquidating and distributing the assets and properties
transferred to them, and for the sole benefit of the Company’s stockholders.
Notwithstanding the foregoing, to the extent that a distribution or transfer of
any asset or property cannot be effected without the consent of a governmental
authority or third party, no such distribution or transfer shall be effected
without such consent.
The
Liquidating Trust shall be established pursuant to the liquidating trust
agreement to be entered into with one or more directors, officers or third party
individuals or entities appointed by the Board on behalf of the stockholders to
act as trustees thereunder (the “Trustee”) in a form approved by the Board and
compliant in all material respects with applicable Internal Revenue Service
guidelines treating such liquidating trusts as liquidating trusts for U.S.
federal income tax purposes. Any Trustee so appointed, in its capacity as
trustee, shall assume all of the obligations and liabilities of the Company with
respect to the transferred assets, including, without limitation, any
unsatisfied claims and unascertained or contingent liabilities relating to these
transferred assets, and any such conveyances to the Trustee shall be in trust
for the stockholders of the Company. Further, any conveyance of assets to the
Liquidating Trust established pursuant to this Section 8 shall be deemed to be a
distribution of property and assets by the Company to the stockholders holding a
beneficial interest in the Liquidating Trust for the purposes of Section 7 of
this Plan. Any such conveyance to the Liquidating Trust shall be in trust for
the stockholders of the Company holding a beneficial interest in the Liquidating
Trust. Upon a determination by the Trustee of the Liquidating Trust that all of
the trust’s liabilities have been satisfied, but in any event, not more than
three years from the date of the transfer of the Remaining Assets to the
Liquidating Trust (subject to an extension only under certain circumstances),
the Liquidating Trust shall, to the fullest extent permitted by law, make a
final distribution of any remaining assets to the holders of the beneficial
interests of the trust.
(x) With
the exception of the Company having not completed the distribution of its assets
and properties to stockholders as provided in Section 7 above on or prior to the
Final Distribution Date, in which case the adoption of the Plan by approval of
the stockholders of the Company as provided in Section 1 above, or (y) the
adoption of the Plan, the Asset Sale and the Liquidating Trust Agreement by
approval of the stockholders of the Company as provided in Section 1
above, if applicable, shall constitute full and complete appointment of the
Trustee and the transfer of any assets by the Company to the Liquidating Trust
as contemplated in this Section 8.
9. Unallocated
Stockholders.
Any cash
or other property held for distribution to stockholders of the Company who have
not, at the time of the final liquidation distribution, whether made to
stockholders pursuant to Section 7 above or to the Liquidating Trustees pursuant
to Section 8 above, been located shall be transferred to the official of
such state or other jurisdiction authorized by applicable law to receive the
proceeds of such distribution. Such cash or other property shall thereafter be
held by such person(s) solely for the benefit of and ultimate distribution, but
without interest thereon, to such former stockholder or stockholders
entitled to receive such assets, who shall constitute the sole equitable owners
thereof, subject only to such escheat or other laws as may be applicable to
unclaimed funds or property, and thereupon all responsibilities and liabilities
of the Company or any Trustee with respect thereto shall be satisfied and
exhausted. In no event shall any of such assets revert to or become the property
of the Company.
10. Amendment,
Modification or Abandonment of Plan.
If for
any reason the Board determines that such action would be in the best interests
of the Company, it may amend, modify or abandon the Plan and all actions
contemplated thereunder, including the Asset Sale or the proposed dissolution of
the Company, notwithstanding stockholder approval of the Asset Sale or the Plan,
to the extent permitted by the DGCL; provided, however, that the Board shall not
abandon the Plan following the filing of the Certificate of Dissolution without
first obtaining stockholder consent. Upon the abandonment of the Plan, the Plan
shall be void.
11. Cancellation
of Stock and Stock Certificates.
At the
time of the final liquidating distribution, whether made to stockholders of the
Company pursuant to Section 7 above or to the Trustees pursuant to Section 8
above, the Company may call upon the stockholders to surrender to the Company
the certificates that represented their shares of stock. In the event that the
final liquidating distribution is made to a Trustee pursuant to Section 8 above,
at the time of such final liquidating distribution, the Trustee shall generally
notify the record holders of shares of stock on the Effective Date of their
respective percentage beneficial interests in the assets held by the Trustee.
Following the Effective Date, the Company shall no longer permit or effect
transfers of any of its stock.
12. Liquidation
under Code Sections 331 and 336.
It is
intended that this Plan shall be a plan of complete liquidation of the Company
in accordance with the terms of Sections 331 and 336 of the Code. The Plan shall
be deemed to authorize the taking of such action as, in the opinion of counsel
to the Company, may be necessary to conform with the provisions of said Sections
331 and 336 and the regulations promulgated thereunder.
13. Filing
of Tax Forms.
The
appropriate officers of the Company are authorized and directed, within thirty
(30) days after the effective date of the Plan, to execute and file a United
States Treasury Form 966 pursuant to Section 6043 of the Code and such
additional forms and reports with the Internal Revenue Service as may be
necessary or appropriate in connection with this Plan and the carrying out
thereof.
ANNEX C
LIQUIDATING
TRUST AGREEMENT
LIQUIDATING
TRUST AGREEMENT, dated as of _________, 2010, by and among Xcorporeal, Inc., a
Delaware corporation (“Xcorporeal”), Xcorporeal Operations, Inc., a Delaware
corporation and a wholly-owned subsidiary of the Company (“Operations”, and
together with Xcorporeal, the “Company”), and _____________, a California
limited liability company (the “Trustee”).
WHEREAS,
on _________, 2010, each of Xcorporeal’s and Operations’ stockholders approved a
plan of complete liquidation and dissolution of the Company (the “Plan”),
including creation of the Trust (as defined below) pursuant to Section 275 of
the General Corporation Law of the State of Delaware (the “DGCL”).
WHEREAS,
the Company’s Board of Directors (the “Board”) has approved the dissolution of
the Company pursuant to the Plan;
WHEREAS,
pursuant to the Plan, each of Xcorporeal and Operations has filed a Certificate
of Dissolution, effective as of ________, 2010 (the “Final Record Date”),
with the Delaware Secretary of State;
WHEREAS,
the Plan provides, among other things, that the Board will cause the Company to
dispose of all of its Retained Assets, wind up its affairs, pay or adequately
provide for the payment of all of its liabilities and distribute to or for the
benefit of Xcorporeal’s stockholders all of the Company’s assets, including
interests in any liquidating trust established in connection with the complete
liquidation of the Company;
WHEREAS,
the Board believes it to be in the best interest of the Company to complete the
liquidation of the Company by transferring all Retained Assets of the
Company to a liquidating trust (the “Trust”), to be held, administered and
distributed by the Trustee in accordance with the provisions of this Agreement
for the benefit of the stockholders of record of the Company as of the close of
business on the Final Record Date; and
WHEREAS,
the Trust is intended and shall be deemed to be a “successor entity” as defined
in Section 280(e) of the DGCL, and the assignment of the Retained Assets to the
Trust shall not be subject to the consent of any third party, unless otherwise
required by applicable law.
NOW,
THEREFORE, in consideration of these premises and other valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE
I
NAMES
AND DEFINITIONS
1.1 Name.
The Trust shall be known as the Xcorporeal, Inc. Liquidating
Trust.
1.2 Defined
Terms. For all purposes of this Agreement, unless the context
otherwise requires, the following defined terms shall have the meanings as
follows:
(a) “Affiliate”
of any Person means any entity that controls, is controlled by, or is under
common control with such Person. As used herein, “control” means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of such entity, whether through ownership of voting
securities or other interests, by contract or otherwise.
(b) “Agreement”
shall mean this agreement as originally executed or as it may from time to time
be amended pursuant to the terms hereof.
(c) “Asset
Purchase Agreement” shall mean that certain Asset Purchase Agreement, dated as
of December 14, 2009, by and among Fresenius, the Company, Operations and
NQCI, as it may from time to time be amended pursuant to the terms
thereof.
(d) “Beneficial
Interest” shall mean each Beneficiary’s proportionate share of the Trust Assets
initially determined by the ratio of the number of Shares held of record by the
Initial Beneficiary as of the close of business on the Final Record Date over
the total number of Shares issued and outstanding on such Final Record Date and
thereafter shall be determined by the ratio of the number of Units held by such
Beneficiary to the total number of Units held by all Beneficiaries.
(e) “Beneficiary”
shall mean, initially, each Initial Beneficiary and, thereafter, each Initial
Beneficiary who holds Units and each transferee of Units initially held by an
Initial Beneficiary and subsequently transferred to such transferee pursuant to
and in accordance with the terms and conditions of this Agreement.
(f)
“Initial Beneficiary” shall mean each of the
Stockholders.
(g) “Liabilities”
shall mean all of the Company’s unsatisfied debts, claims, liabilities,
commitments, suits and other obligations, whether contingent, fixed or
otherwise, known or unknown arising out of or in connection with the business or
affairs of the Company (including, without limitation, any costs and
expenses incurred or to be incurred in connection with the liquidation of the
Company).
(h) “NQCI”
shall mean National Quality Care, Inc., a
Delaware corporation.
(i) “Person”
shall mean an individual, a corporation, a partnership, an association, a joint
stock company, a limited liability company, a trust, a joint venture, any
unincorporated organization, or a government or political subdivision
thereof.
(j)
“Retained Assets” shall mean all of the Company’s right, title and
interest in, to and under, all of the Company’s assets remaining after the sale
of substantially all of the Company’s assets to Fresenius USA, Inc.
(“Fresenius”) pursuant to the Asset Purchase Agreement, including, without
limitation, its cash and cash equivalents, marketable and other securities, the
Company’s rights under the Asset Purchase Agreement, claims, causes of action,
contingent claims and reserves distributed to the Trustee.
(k) “Shares”
shall mean the shares of common stock of Xcorporeal, $0.0001 par value
per share.
(l)
“Stockholders” shall mean the holders of record of the outstanding Shares
of Xcorporeal at the close of business on the Final Record
Date.
(m) “Transfer
Date” shall mean [__________], 2010.
(n) “Trust”
shall mean the liquidating trust created by this Agreement.
(o) “Trust
Assets” shall mean all the property held from time to time by the Trust under
this Agreement, which initially shall consist of the Retained Assets (excluding
any liquidating distributions declared, but unpaid, having a record date prior
to the Transfer Date), and in addition, shall thereafter include all dividends,
distributions, rents, royalties, income, payments and recoveries of claims,
proceeds and other receipts of, from, or attributable to any assets held by the
Trust, less any of the foregoing utilized by the Trustee to pay expenses of the
Trust, satisfy Liabilities or to make distributions to the Beneficiaries
pursuant to the terms and conditions hereof.
(p) “Trustee”
shall mean the original Trustee under this Agreement and any successors thereto,
pursuant to and in accordance with the terms of this Agreement.
(q) “Units”
shall have the meaning given to such term in Section 3.1(a).
ARTICLE
II
GRANT
TO TRUST AND NATURE OF TRANSFER
2.1 Grant.
Effective on and as of the Transfer Date, the Company grants, delivers,
releases, assigns and conveys to the Trust (as a “successor entity” as defined
in Section 280(e) of the DGCL), to be held in trust and administered and
distributed by the Trustee for the benefit of the Beneficiaries, all of the
Company’s right, title, interest in, to and under, the Retained Assets, for the
uses and purposes stated herein, subject to the terms and provisions set out
below, and the Trust hereby accepts such Retained Assets, subject to the
following terms and provisions.
2.2 Purpose
of Trust.
(a) The
primary purpose of this Agreement and of the appointment of the Trustee
hereunder is to facilitate the dissolution and termination of the Company and
the disposition of the Retained Assets. Nothing contained herein shall be
construed as to constitute the Beneficiaries or their successors in interest as
members of an association. The purposes of the Trust are to hold, manage,
administer and liquidate the Trust Assets, and to collect and distribute to the
Beneficiaries the income and the proceeds of the disposition of the Trust
Assets, to collect amounts owed to the Company, and to pay any Liabilities
of the Company.
(b) The
Trust is established for the sole purpose of winding up the Company’s affairs
and the liquidation of the Retained Assets with no objective to continue the
business of the Company or engage in the conduct of a trade or business, except
as necessary for the orderly liquidation of the Trust Assets.
(c)
It is expected that the Company shall liquidate and dissolve prior
to fully winding up its affairs, including, but not limited to, the collection
of its receivables and payments under the Asset Purchase Agreement and the
payment of any unsatisfied Liabilities of the Company.
(d) The
Retained Assets granted, assigned and conveyed to the Trust shall be held in the
Trust, and the Trustee will (i) further liquidate the Trust Assets to carry out
the purpose of the Trust and facilitate distribution of the Trust Assets, (ii)
allocate, protect, conserve and manage the Trust Assets in accordance with the
terms and conditions hereof, (iii) complete the winding up of the Company’s
affairs, (iv) act for the benefit of the Beneficiaries and (v) distribute the
Trust Assets in accordance with the terms and conditions hereof.
(e) It
is intended that the granting, assignment and conveyance of the Retained Assets
by the Company to the Trust pursuant to the terms hereof shall be treated for
all tax purposes as if the Company made such distributions directly to the
Stockholders who then transferred the Retained Assets to the Trust
pursuant to the terms herein. It is further intended that for Federal,
state and local income tax purposes the Trust shall be treated as a liquidating
trust under Treasury Regulation Section 301.7701-4(d) and any analogous
provision of state or local law, and the Beneficiaries shall be treated as the
owners of their respective share of the Trust pursuant to Sections 671 through
677 of the Internal Revenue Code of 1986, as amended (the “Code”), and any
analogous provision of state or local law, and shall be taxed on their
respective share of the Trust’s taxable income (including both ordinary income
and capital gains) pursuant to Section 671 of the Code and any analogous
provision of state or local law. The Trustee shall file all tax returns required
to be filed with any governmental agency consistent with this position,
including, but not limited to, any returns required of grantor trusts pursuant
to Section 1.671-4(b) of the Income Tax Regulations.
2.3 No
Reversion to the Company. In no event shall any part of the Trust Assets revert
to or be distributed to the Company.
2.4 Instruments
of Further Assurance. Prior to the dissolution of the Company, such Person as
shall have the right and power to so act, will, upon reasonable request of the
Trustee, execute, acknowledge, and deliver such further instruments and do such
further acts as may be necessary or proper to carry out effectively the purposes
of this Agreement, to confirm or effectuate the transfer to the Trust of any
property intended to be held, administered and distributed in accordance with
the provisions of this Agreement, and to vest in the Trustee and its successors
and assigns, the estate, powers, instruments or funds in trust hereunder. Title
to Trust assets may be held in the name of the Trust.
2.5 Payment
of Liabilities. Effective on and as of the Transfer Date, the Trust assumes all
Liabilities and agrees hereafter to pay, discharge and perform when due all of
the Liabilities. Should any Liability be asserted against the Trust as the
transferee of the Trust Assets or as a result of the assumption made in this
Section 2.5, the Trustee may use such part of the Trust Assets as may be
necessary in contesting any such Liability or in payment thereof, but in
no event shall the Trustee, Beneficiaries or employees, agents or
representatives of the Trust be personally liable, nor shall resort be had to
the private property of such Persons, in the event that the Trust Assets are not
sufficient to satisfy the Liabilities.
2.6 Notice
to Unlocated Stockholders. If the Trust holds Trust Assets for unlocated
Stockholders, due notice shall be given to such Stockholders in accordance with
Delaware law.
ARTICLE
III
BENEFICIARIES
3.1 Beneficial
Interests.
(a) The
Beneficial Interest of each Initial Beneficiary shall be determined
in accordance with a certified copy of the Company’s stockholder list as of
the Final Record Date, to be attached as Exhibit B hereto. The
Company’s transfer agent will deliver such a certified copy of the Company’s
stockholder list to the Trustee within a reasonable time after such date. For
ease of administration, the Trustee shall express the Beneficial Interest of
each Beneficiary in terms of units (“Units”). Each record owner of Shares as of
the close of business on the Final Record Date shall receive one Unit for each
Share then held of record. Each record owner of Shares shall have the same pro
rata interest in the Trust Assets as such holder’s pro rata interest in the
aggregate outstanding Shares on the Final Record Date.
(b) All
outstanding Shares shall be deemed cancelled as of the close of business on the
Transfer Date. The rights of Beneficiaries in, to and under the Trust Assets and
the Trust shall not be represented by any form of certificate or other
instrument, and no Beneficiary shall be entitled to such a certificate. The
Trustee shall maintain at its place of business, or at the office of a transfer
agent retained for such purpose, a record of the name and address of each
Beneficiary and such Beneficiary’s aggregate Units in the Trust.
(c) If
any conflicting claims or demands are made or asserted with respect to the
ownership of any Units, or if there is any disagreement between the transferees,
assignees, heirs, representatives or legatees succeeding to all or part of the
interest of any Beneficiary resulting in adverse claims or demands being made in
connection with such Units, then, in any of such events, the Trustee shall be
entitled, at its sole election, to refuse to comply with any such conflicting
claims or demands. In so refusing, the Trustee may elect to make no payment or
distribution with respect to such Units, or to make such payment to a court of
competent jurisdiction or an escrow agent, and in so doing, the Trustee shall
not be or become liable to any of such parties for their failure or refusal
to comply with any of such conflicting claims or demands or to take any other
action with respect thereto, nor shall the Trustee be liable for interest on any
funds which it may so withhold. Notwithstanding anything to the contrary set
forth in this Section 3.1(c), the Trustee shall be entitled to refrain and
refuse to act until either (i) the rights of the adverse claimants have been
adjudicated by a final judgment of a court of competent jurisdiction, (ii) all
differences have been settled by a valid written agreement among all of such
parties, and the Trustee shall have been furnished with an executed counterpart
of such agreement, or (iii) there is furnished to the Trustee a surety bond or
other security satisfactory to the Trustee, as it shall deem appropriate, to
fully indemnify it and the Trust from all such conflicting claims or
demands.
3.2 Rights
of Beneficiaries. Each Beneficiary shall be entitled to participate in the
rights and benefits due to a Beneficiary hereunder according to the
Beneficiary’s Beneficial Interest. Each Beneficiary shall take and hold the
same subject to all the terms and provisions of this Agreement. The interest of
each Beneficiary hereunder is declared, and shall be in all respects, personal
property and upon the death of an individual Beneficiary, the Beneficiary’s
Beneficial Interest shall pass as personal property to the Beneficiary’s legal
representative and such death shall in no way terminate or affect the validity
of this Agreement. A Beneficiary shall have no title to, right to, possession
of, management of, or control of, the Trust Assets except as expressly provided
herein. No widower, widow, heir or devisee of any individual who may be a
Beneficiary shall have any right of dower, homestead, or inheritance, or of
partition, marital property right or any other right, statutory or otherwise, in
any property forming a part of the Trust Assets but the whole title to all
the Trust Assets shall be vested in the Trustee and the sole interest of the
Beneficiaries shall be the rights and benefits given to such Persons under this
Agreement.
3.3 Limitations
on Transfer of Interests of Beneficiaries.
(a) THE
BENEFICIAL INTEREST OF A BENEFICIARY MAY NOT BE TRANSFERRED; PROVIDED THAT (i)
THE BENEFICIAL INTERESTS SHALL BE ASSIGNABLE OR TRANSFERABLE BY WILL, INTESTATE
SUCCESSION, OR OPERATION OF LAW AND (ii) THE EXECUTOR OR ADMINISTRATOR OF THE
ESTATE OF A BENEFICIARY MAY MORTGAGE, PLEDGE, GRANT A SECURITY INTEREST IN,
HYPOTHECATE OR OTHERWISE ENCUMBER, THE BENEFICIAL INTEREST HELD BY THE ESTATE OF
SUCH BENEFICIARY IF NECESSARY IN ORDER TO BORROW MONEY TO PAY ESTATE, SUCCESSION
OR INHERITANCE TAXES OR THE EXPENSES OF ADMINISTERING THE ESTATE OF THE
BENEFICIARY, UPON WRITTEN NOTICE TO, AND WRITTEN CONSENT OF, THE TRUSTEE, WHICH
CONSENT MAY NOT BE UNREASONABLY WITHHELD.
(b) Except
as may be otherwise required by law, the Beneficial Interests of the
Beneficiaries hereunder shall not be subject to attachment, execution,
sequestration or any order of a court, nor shall such interests be subject to
the contracts, debts, obligations, engagements or liabilities of any
Beneficiary, but the interest of a Beneficiary shall be paid by the Trustee to
the Beneficiary free and clear of all assignments, attachments, anticipations,
levies, executions, decrees and sequestrations and shall become the property of
the Beneficiary only when actually distributed by the Trustee to, and received
by such Beneficiary.
3.4 Trustee
as a Beneficiary. The Trustee or successor Trustee may be a Beneficiary or
hold a Beneficial Interest.
ARTICLE
IV
DURATION
AND TERMINATION OF THE TRUST
4.1 Duration.
The Trust shall terminate upon the earliest of (i) the final distribution of all
the Trust Assets as provided in Section 5.9, and (ii) the expiration of a period
of three (3) years from the Transfer Date; provided that the Trustee, in its
discretion, may extend the termination of the Trust pursuant to this
subparagraph (ii) of this Section 4.1 to such later date as it may designate, if
it determines that an extension is reasonably necessary to fulfill the purpose
of the Trust, as specified in this Agreement, and, prior to such extension,
the Trustee shall have requested and received no-action assurance from the
Securities and Exchange Commission regarding the registration and reporting
requirements of the Trust under the Securities Act of 1933, as amended, the
Securities Exchange Act of 1934, as amended, and any other applicable Federal
securities act. The Trust shall not in any event terminate pursuant to
subparagraph (ii) of this Section 4.1 prior to the date on which the Trustee is
permitted to make a final distribution in accordance with Section
5.8.
4.2 Other
Obligations of Trustee upon Termination. Upon termination of the Trust, the
Trustee shall provide for the retention of the books, records, lists of
Beneficiaries, certificates for Shares and files which shall have been delivered
to or created by the Trustee. At the Trustee’s discretion, all of such records
and documents may be destroyed at any time after seven years from the
distribution of all the Trust Assets. Except as otherwise specifically provided
herein, upon the distribution of all the Trust Assets, the Trustee shall have no
further duties or obligations hereunder.
ARTICLE
V
ADMINISTRATION
AND DISTRIBUTION OF TRUST ASSETS
5.1 Sale
of Trust Assets. Subject to the terms and conditions of this Agreement, the
Trustee may, at such times as the Trustee deems appropriate, collect, liquidate,
reduce to cash, transfer, assign, or otherwise dispose of all or any part
of the Trust Assets as it deems appropriate at public auction or at private sale
for cash, securities or other property, or upon credit (either secured or
unsecured as the Trustee shall determine).
5.2 Efforts
to Resolve Claims and Liabilities. Subject to the terms and conditions of this
Agreement, the Trustee will make appropriate efforts to resolve any contingent
or unliquidated claims and outstanding contingent Liabilities for which the
Trust may be responsible, dispose of the Trust Assets, make timely distributions
and not unduly prolong the administration of the Trust.
5.3 Continued
Collection of Property of Trust Assets. All property that is determined to be a
part of the Trust Assets shall continue to be collected by the Trustee and held,
administered and distributed as a part of the Trust, without obligations to
provide for or pay any interest thereon to any Beneficiary, except to the extent
of such Beneficiary’s share of interest actually earned by the Trust after
payment of the Trust’s liabilities and expenses as provided in Section
5.6.
5.4 Transactions
with Related Persons. Notwithstanding any other provision of this Agreement,
other than distributions to the Beneficiaries in accordance with the terms of
this Agreement, the Trustee shall not knowingly, directly or indirectly, sell or
otherwise transfer all or any part of the Trust Assets to, or contract with, (i)
any Trustee, agent or employee (acting in their individual capacities) of the
Trust or the Trustee; or (ii) any Person of which any Trustee, agent or employee
of the Trust or the Trustee is an Affiliate by reason of being a trustee,
director, officer, partner or direct or indirect beneficial owner of 5% or more
of the outstanding capital stock, shares or other equity interest of such Person
unless in each such case, after disclosure of such interest or affiliation such
transaction is approved by the Trustee, if any, who is not interested in the
transaction and the Trustee determines that such transaction is on its terms
fair and reasonable to, and in the best interests of the Beneficiaries, and in
no event less favorable to the Beneficiaries than terms available for a
comparable transaction with unrelated Persons.
5.5 Restriction
on Trust Assets. The Trust shall not receive transfers of any assets prohibited
by Revenue Procedure 82-58, as the same has been and may be amended,
supplemented, or modified (“Revenue Procedure 82-58”), including, but not
limited to, any listed stocks or securities, any readily-marketable assets, any
operating assets of a going business, any unlisted stock of a single issuer
that represents 80% or more of the stock of such issuer or any general or
limited partnership interest. The Trustee shall not retain cash in excess of a
reasonable amount to meet expenses, charges and obligations of the Trust, the
Trust Assets and all Liabilities.
5.6 Payment
of Expenses and Liabilities. The Trustee shall pay from the Trust Assets all
expenses, charges, and obligations of the Trust and of the Trust Assets and all
Liabilities and obligations which the Trust specifically assumes and agrees to
pay pursuant to this Agreement and such transferee liabilities which the Trust
may be obligated to pay as transferee of the Trust Assets, including, but not
limited to, interest, penalties, taxes, assessments and public charges of any
kind or nature and the costs, charges and expenses related to the execution or
administration of the Trust and such other payments and disbursements as are
provided in this Agreement or which may be determined to be a proper charge
against the Trust Assets by the Trustee.
5.7 Interim
Distributions. At such time as may be determined by it in its sole discretion,
the Trustee shall distribute, or cause to be distributed to the Beneficiaries,
in proportion to the number of Units held by each Beneficiary on the record date
for such distribution as determined by the Trustee in its sole discretion, such
cash or other property comprising a portion of the Trust Assets as the Trustee
in its sole discretion determines may be distributed without detriment to the
conservation and protection of the Trust Assets. Consistent with Revenue
Procedure 82-58, the Trustee shall distribute to the Beneficiaries during each
calendar year, in proportion to the number of Units held by each Beneficiary on
the record date(s) for such distribution(s), any proceeds from the sale of
assets and income from investments not needed to be retained to meet claims and
contingent liabilities.
5.8 Final
Distribution. If the Trustee determines that the Liabilities and all other
claims, expenses, charges, and obligations of the Trust have been paid or
discharged or if the Trust shall terminate pursuant to Section 4.1, the
Trustee shall, as expeditiously as is consistent with the conservation and
protection of the Trust Assets, distribute the remaining Trust Assets, if any,
to the Beneficiaries in proportion to the number of Units held by each
Beneficiary. The Trustee shall hold in the Trust and thereafter make disposition
of all liquidating distributions and other payments due any Beneficiaries who
have not been located, in accordance with Delaware law, subject to applicable
state laws regarding escheat and abandoned property.
5.9 Reports
to Beneficiaries and Others.
(a) As
soon as practicable after the Transfer Date, the Trustee shall mail to each
Beneficiary a notice indicating how many Units such Person beneficially owns and
the contact details of the Trustee. As soon as practicable after the end of each
calendar year and after termination of the Trust, but in any event within 90
days after each such event, the Trustee shall submit a written report and
account to the Beneficiaries showing (i) the assets and liabilities of the Trust
at the end of such calendar year or upon termination and the receipts and
disbursements of the Trustee for such calendar year or period, (ii) any
changes in the Trust Assets and Liabilities that it has not previously reported,
and (iii) any action taken by the Trustee in the performance of its duties under
this Agreement that it has not previously reported, and which, in its opinion,
materially affects the Trust Assets or Liabilities.
(b) The
fiscal year of the Trust shall end on December 31 of each year unless the
Trustee deems it advisable to establish some other date as the date on which the
fiscal year of the Trust shall end.
(c) Whenever
a material event relating to the Trust’s Assets occurs, the Trustee shall,
within a reasonable period of time after such occurrence, prepare and mail to
the Beneficiaries an interim report describing such event; provided, that the
Trustee may alternatively use any other means reasonably calculated to
disseminate such interim report to the Beneficiaries, including, without
limitation, use of the Trust’s website. The occurrence of a material event need
not be reported on an interim report if an annual report pursuant to Section
5.9(a) will be issued at approximately the same time that such interim report
would be issued and such annual report describes the material event as it would
be discussed in an interim report. The occurrence of a material event will be
determined solely by the Trustee.
5.10 Federal
Income Tax Information. As soon as practicable after the close of each calendar
year, the Trustee shall mail to each Person who was a Beneficiary at the close
of the year, a statement showing, on a per Unit basis the dates and amount of
all distributions made by the Trustee, income earned on assets held by the
Trust, if any, such other information as is reasonably available to the Trustee
which may be helpful in determining the amount of gross income and expenses
attributable to the Trust that such Beneficiary should include in such Person’s
Federal income tax return, if any, for such year and any other information as
may be required to be furnished under applicable law. In addition, after receipt
of a request in good faith, the Trustee shall furnish to any Person who has been
a Beneficiary at any time during the current or preceding year, at the expense
of such Person and at no cost to the Trust, a statement containing such further
information as is reasonably available to the Trustee which shall be helpful in
determining the amount of taxable income which such Person should include in
such Person’s Federal income tax return.
5.11 Books
and Records. The Trustee shall maintain in respect of the Trust and the holders
of Units books and records relating to the Trust Assets, income and liabilities
of the Trust in such detail and for such period of time as may be necessary to
enable it to make full and proper accounting in respect thereof in accordance
with this Article V and to comply with applicable law. Such books and records
shall be maintained on a basis or bases of accounting necessary to facilitate
compliance with the tax reporting requirements of the Trust and the reporting
obligations of the Trustee under Section 5.9. Except as provided in Section 5.9,
nothing in this Agreement requires the Trustee to file any accounting or seek
approval of any court with respect to the administration of the Trust or as a
condition for managing any payment or distribution out of the Trust Assets.
Beneficiaries shall have the right upon 30 days’ prior written notice delivered
to the Trustee to inspect during normal business hours such books and records
(including financial statements) for a reasonable length of time; provided that,
if so requested, such Beneficiaries shall have entered into a
confidentiality agreement satisfactory in form and substance to the Trustee. For
the avoidance of doubt, nothing in this Agreement shall be interpreted to
require the Trustee to mail or otherwise periodically provide audited financial
statements of the Trust to the Beneficiaries.
5.12 Employment
of Agents, etc.
(a) The
Trustee shall be responsible for the general administration of the Trust
and for the general supervision of the activities conducted by all agents,
representatives, employees, advisors or managers of the Trust. The Trustee shall
have the power to appoint, employ or contract with any Person or Persons as the
Trustee may deem necessary or proper for the administration of the
Trust.
(b) The
Trustee shall have the power to determine the terms and compensation of any
Person whom it may employ or with whom it may contract pursuant to Section
5.12(a), subject to the provisions of Section 5.4.
(c) The
Trustee shall not be required to administer the Trust as its sole and exclusive
function and the Trustee may have other business interests and may engage in
other activities similar or in addition to those relating to the Trust,
including the rendering of advice or services of any kind to investors or any
other Persons and the management of other investments, subject to such Trustee’s
obligations under this Agreement and applicable law.
ARTICLE
VI
POWERS
OF AND LIMITATIONS ON THE TRUSTEE
6.1 Limitations
on Trustee. The Trustee shall not at any time, on behalf of the Trust or
Beneficiaries enter into or engage in any trade or business except as necessary
for the orderly liquidation of the Trust Assets. The Trustee shall be restricted
to the holding, collection and sale of the Trust Assets and the payment and
distribution thereof for the purposes set forth in this Agreement and to the
conservation and protection of the Trust Assets and the administration thereof
in accordance with the provisions of this Agreement. In no event shall the
Trustee take any action which would jeopardize the status of the Trust as a
“liquidating trust” for Federal income tax purposes within the meaning of
Treasury Regulation Section 301.7701-4(d). The Trustee shall not invest any of
the cash held as Trust Assets, except that the Trustee may invest in (i) direct
obligations of the United States of America or obligations of any agency or
instrumentality thereof which mature not later than one year from the date
of acquisition thereof, (ii) money market deposit accounts, checking accounts,
savings accounts, or certificates of deposit, or other time deposit accounts
which mature not later than one year from the date of acquisition thereof which
are issued by a commercial bank or savings institution organized under the laws
of the United States of America or any state thereof, or (iii) other temporary
investments not inconsistent with the Trust’s status as a liquidating trust for
tax purposes. Neither the Trustee nor any Affiliate of the Trustee shall take
any action to facilitate or encourage trading in the Beneficial Interests or in
any instrument tied to the value of the Beneficial Interests such as due bill
trading.
6.2 Specific
Powers of Trustee. Subject to the provisions of the terms and conditions of this
Agreement, the Trustee shall have the following specific powers in addition to
any powers conferred upon it by any other Section or provision of this Agreement
or any statutory laws of the State of Delaware; provided that the enumeration of
the following powers shall not be considered in any way to limit or control the
power of the Trustee to act as specifically authorized by any other Section or
provision of this Agreement and to act in such a manner as the Trustee may deem
necessary or appropriate to conserve and protect the Trust Assets or to confer
on the Beneficiaries the benefits intended to be conferred upon them by this
Agreement:
(a) to
determine the nature and amount of the consideration to be received with respect
to the sale or other disposition of, or the grant of interest in, the Trust
Assets;
(b) to
collect, liquidate or otherwise convert into cash, or such other property as it
deems appropriate, all property, assets and rights in the Trust Assets, and to
pay, discharge, and satisfy all other claims, expenses, charges, Liabilities and
obligations existing with respect to the Trust Assets, the Trust or the Trustee
including paying the Trustee fees under this Agreement;
(c) to
elect, appoint, engage, retain or employ any Persons as agents, representatives,
employees, or independent contractors (including without limitation real estate
advisors, investment advisors, accountants, transfer agents, attorneys,
managers, appraisers, brokers, or otherwise) in one or more capacities, and to
pay reasonable compensation from the Trust Assets for services in as many
capacities as such Person may be so elected, appointed, engaged, retained or
employed (provided that any such agreements or arrangements with a person
or entity affiliated with the Trustee shall be on terms no less favorable to the
Trust than those available to the Trust in similar agreements or arrangements
with unaffiliated third parties, and such agreements or arrangements shall be
terminable, without penalty, on no more than 60 days prior written notice by the
Trustee), to prescribe the titles, powers and duties, terms of service and other
terms and conditions of the election, appointment, engagement, retention or
employment of such Persons and, except as prohibited by law, to delegate any of
the powers and duties of the Trustee to agents, representatives, employers,
independent contractors or other Persons;
(d) to
retain and set aside such funds out of the Trust Assets as the Trustee shall
deem necessary or expedient to pay, or provide for the payment of (i) unpaid
claims, expenses, charges, Liabilities and obligations of the Trust or the
Company; and (ii) the expenses of administering the Trust Assets;
(e) to
do and perform any and all acts necessary or appropriate for the conservation
and protection of the Trust Assets, including acts or things necessary or
appropriate to maintain the Trust Assets pending sale or disposition thereof or
distribution thereof to the Beneficiaries;
(f)
to institute or defend actions or judgments
for declaratory relief or other actions or judgments and to take such other
action, in the name of the Trust or the Company or as otherwise required, as the
Trustee may deem necessary or desirable to enforce any instruments, contracts,
agreements, causes of action, or rights relating to or forming a part of the
Trust Assets;
(g) to
determine conclusively from time to time the value of and to revalue the
securities and other property of the Trust, in accordance with independent
appraisals or other information as it deems necessary or
appropriate;
(h) to
cancel, terminate, enforce, perform under (provided that such performance is
consistent with the purpose of the Trust set forth in Section 2.2(a) and Section
2.2(b) hereof), or amend any instruments, contracts, agreements, obligations, or
causes of action relating to or forming a part of the Trust Assets, and to
execute new instruments, contracts, agreements, obligations or causes of action
notwithstanding that the terms of any such instruments, contracts, agreements,
obligations, or causes of action may extend beyond the term of the
Trust;
(i)
in the event any of the property which is or may
become a part of the Trust Assets is situated in any state or other jurisdiction
in which the Trustee is not qualified to act as Trustee, to nominate and appoint
an individual or corporate trustee qualified to act in such state or other
jurisdiction in connection with the property situated in that state or other
jurisdiction as a trustee of such property and require from such trustee such
security as may be designated by the Trustee. The trustee so appointed shall
have all the rights, powers, privileges and duties and shall be subject to
the conditions and limitations of this Agreement, except as limited by the
Trustee and except where the same may be modified by the laws of such state or
other jurisdiction (in which case, the laws of the state or other jurisdiction
in which such trustee is acting shall prevail to the extent necessary). Such
trustee shall be answerable to the Trustee herein appointed for all monies,
assets and other property which may be received by it in connection with the
administration of such property. The Trustee hereunder may remove such
trustee, with or without cause, and appoint a successor trustee at any time by
the execution by the Trustee of a written instrument declaring such trustee
removed from office, and specifying the effective date of removal;
(j)
to cause any investments of any part of the Trust Assets
to be registered and held in its name or in the names of a nominee or nominees
without increase or decrease of liability with respect thereto;
(k) to
vote by proxy or otherwise on behalf of the Beneficiaries and with full power of
substitution all shares of stock and all securities held as Trust Assets
hereunder and to exercise every power, election, discretion, option and
subscription right and give every notice, make every demand, and to do every act
or thing in respect of any shares of stock or any securities held as Trust
Assets which the Trustee might or could do if it were the absolute owner
thereof;
(l)
to undertake or join in any merger, plan of
reorganization, consolidation, liquidation, dissolution, readjustment or other
transaction of any corporation, any of whose shares of stock or other
securities, obligations, or properties may at any time constitute a part of the
Trust Assets and to accept the substituted shares of stock, bonds,
securities, obligations and properties and to hold the same in trust in
accordance with the provisions hereof;
(m) to
authorize transactions between corporations or other entities whose securities,
or other interests therein (either in the nature of debt or equity) are held as
part of the Trust Assets;
(n) in
connection with the sale or other disposition or distribution of any securities
held by the Trustee, to comply with applicable Federal and state securities
laws, and to enter into agreements relating to the sale or other disposition or
distribution thereof;
(o) to
do and perform any and all acts necessary or appropriate to comply with the
registration and reporting requirements of the Trust under Federal and state
securities laws, if any;
(p) to
terminate and dissolve any entities held as part of the Trust; and
(q) to
perform any act authorized, permitted, or required under any instrument,
contract, agreement, right, obligation, or cause of action relating to or
forming a part of the Trust Assets whether in the nature of an approval,
consent, demand, or notice thereunder or otherwise, unless such act would
require the consent of the Beneficiaries in accordance with the express
provisions of this Agreement.
ARTICLE
VII
CONCERNING
THE TRUSTEE, BENEFICIARIES, EMPLOYEES AND AGENTS
7.1 Generally.
The Trustee accepts and undertakes to discharge the trust created by this
Agreement, upon the terms and conditions hereof, for the benefit of the
Beneficiaries. The Trustee shall exercise such of the rights and powers vested
in it by this Agreement in accordance with applicable law and use the same
degree of care and skill in their exercise as a prudent person would exercise or
use under the circumstances in the conduct of his own affairs. No provision of
this Agreement shall be construed to relieve the Trustee from liability for its
own grossly negligent action, its own grossly negligent failure to act, or its
own fraud or willful misconduct, except that:
(a) the
Trustee shall not be liable to the Beneficiaries for the acts or omissions of an
agent, representative, employee, advisor or manager appointed by the Trustee
hereunder, except where the Trustee specifically directs the act of such Person,
delegates the authority to such Person to act where the Trustee was under a duty
not to delegate, does not use reasonable prudence in the selection or retention
of such Person, does not periodically review such person’s overall performance
and compliance with the terms of such delegation, conceals the act or omission
of such Person or neglects to take reasonable steps to redress any wrong
committed by such Person when the Trustee is aware of such Person’s act or
omission;
(b) the
Trustee shall not be liable except for the performance of such duties and
obligations as are specifically set forth in this Agreement, and no implied
covenants or obligations shall be read into this Agreement against the
Trustee;
(c) in
the absence of bad faith on the part of the Trustee, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon any certificates or opinions furnished to the
Trustee and conforming to the requirements of this Agreement, but in the case of
any such certificates or opinions which are specifically required to be
furnished to the Trustee by any provision hereof, the Trustee shall be under a
duty to examine the same to determine whether or not they conform to the
requirements of this Agreement;
(d) the
Trustee shall not be liable for any reasonable error of judgment made in good
faith; and
(e) the
Trustee shall not be liable with respect to any action taken or omitted to be
taken by such Trustee in good faith in accordance with the terms and conditions
of this Agreement and at the direction of Beneficiaries having aggregate Units
constituting at least two-thirds of the total Units held by all Beneficiaries
relating to the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any right or power conferred upon
the Trustee under this Agreement.
7.2 Reliance
by Trustee. Except as otherwise provided in Section 7.1:
(a) The
Trustee may consult with legal counsel, auditors or other experts to
be selected by it, and the advice or opinion of such counsel, auditors or
other experts shall be full and complete personal protection to the Trustee and
agents of the Trust in respect of any action taken or suffered by the Trustee in
good faith and in reliance on, or in accordance with, such advice or
opinion.
(b) Persons
dealing with the Trustee shall look only to the Trust Assets to satisfy any
liability incurred by the Trustee to such Person in carrying out the terms of
the Trust and the Trustee shall have no personal or individual obligation
whatsoever to satisfy any such liability.
(c) As
far as reasonably practicable, the Trustee shall cause any written instrument
creating an obligation of the Trust Assets to include a reference to this
Agreement and to provide that neither the Beneficiaries, the Trustee nor its
agents, representative, advisors nor employees shall be liable thereunder, and
that the other parties to such instrument shall look solely to the Trust Assets
for the payment of any claim thereunder or the performance thereof; provided
that the omission of such provision from any such instrument shall not render
the Beneficiaries, the Trustee or its agents, representatives, advisors or
employees liable, nor shall the Trustee be liable to anyone for such
omission.
7.3 Limitation
on Liability to Third Persons. No Beneficiary shall be subject to any personal
liability whatsoever, in tort, contract, or otherwise, to any Person in
connection with the Trust Assets or the affairs of the Trust, and neither the
Trustee, nor any employee, agent, representatives or advisor of the Trust
shall be subject to any personal liability whatsoever in tort, contract, or
otherwise, to any Beneficiary or any other Person in connection with the Trust
Assets or the affairs of the Trust, except for gross negligence, fraud or
willful misconduct knowingly and intentionally committed in bad faith by such
Trustee, employee, agent, representative or advisor of the Trust, and all
such other Persons shall look solely to the Trust Assets for satisfaction of
claims of any nature arising in connection with the affairs of the Trust. The
Trustee shall at its sole discretion, at the expense of the Trust, maintain
insurance for the protection of the Trust Assets, the Beneficiaries, the
Trustee, employees, agents, representatives and advisors of the Trust in
such amount as the Trustee shall deem adequate to cover all foreseeable
liability to the extent available at reasonable rates.
7.4 Written
Instruments of Trustee. Any written instrument creating an obligation of the
Trust Assets shall be conclusively taken to have been executed or done by the
Trustee, employee or agent of the Trust only in its capacity as Trustee under
this Agreement, or in its capacity as an employee or agent of the Trust or
Trustee.
7.5 Indemnification.
The Trustee and each Person appointed or employed by the Trustee pursuant to
Section 5.13 or Section 5.14 (including, without limitation, the directors,
officers, employees, agents, representatives and advisors of each such Person
(each an “Indemnified Person” and collectively the “Indemnified
Persons”)), shall be indemnified out of the Trust Assets against all liabilities
and expenses, including amounts paid in satisfaction of judgments, in compromise
or as fines and penalties, and counsel fees, reasonably incurred by the
Indemnified Persons in connection with the defense or disposition of any action,
suit or other proceeding by the Trustee or any other Person, whether civil or
criminal, in which the Indemnified Person may be involved or with which the
Indemnified Person may be threatened: (i) in the case of a Trustee or Person
appointed or employed by the Trustee pursuant to Section 5.13 or 5.14, while in
office or thereafter, by reason of his being or having been such a Trustee,
employee, agent, representative or advisor, including, without limitation, in
connection with or arising out of any action, suit or other proceeding based on
any alleged breach of duty, neglect, error, misstatement, misleading statement,
omission or act of any such Trustee or Person in such capacity; and (ii) in the
case of any director, officer, employee, agent, representative or advisor of any
such Person, by reason of any such Person exercising or failing to exercise any
right or power hereunder; provided that the Indemnified Person shall not be
entitled to such indemnification with respect to any matter as to which the
Indemnified Person shall have been found pursuant to a final non-appealable
judgment of a court of competent jurisdiction to have acted with gross
negligence, fraud or willful misconduct. The rights accruing to any Indemnified
Person under these provisions shall not exclude any other right to which the
Indemnified Person may be lawfully entitled; provided, that no Indemnified
Person may satisfy any right of indemnity or reimbursement granted herein or to
which the Indemnified Person may be otherwise entitled, except out of the Trust
Assets, and no Beneficiary shall be personally liable to any person with respect
to any claim for indemnity or reimbursement or otherwise. The Trustee may make
advance payments in connection with indemnification under this Section 7.5,
provided that the Indemnified Person shall have given a written undertaking to
repay any amount advanced to the Indemnified Person and to reimburse the Trust
in the event that it is subsequently and finally determined that the Indemnified
Person is not entitled to such indemnification. The Trustee shall
purchase such insurance as it believes, in the exercise of its discretion,
adequately insures that each Indemnified Person shall be indemnified against any
such loss, liability, or damage pursuant to this Section 7.5. Nothing contained
herein shall restrict the right of the Trustee to indemnify or reimburse such
Indemnified Person in any proper case, even though not specifically provided for
herein, nor shall anything contained herein restrict the right of any such
Indemnified Person to contribution under applicable law.
7.6 No
Duty Not to Compete. Subject to applicable law, the Trustee, in its individual
capacity, or through Persons that it controls or in which it has an interest,
may directly or indirectly engage in or possess any interest in any business
venture, including, but not limited to, the ownership, financing, management of
or the investment in securities, or the provision of any services in connection
with such activities, whether or not such activities are similar to or in
competition with the business activities of the Company. The Trustee shall have
no duty to present any business opportunity to the Trust before taking advantage
of such opportunity either in such Trustee’s individual capacity or through
participation in any Person.
ARTICLE
VIII
PROTECTION
OF PERSONS DEALING WITH THE TRUSTEE
8.1 Reliance
on Statements by Trustee. Any Person dealing with the Trustee shall be fully
protected in relying upon the Trustee’s certificate, signed by the Trustee, with
respect to the authority that the Trustee has to take any action under this
Agreement. Any Person dealing with the Trustee shall be fully protected in
relying upon the Trustee’s certificate setting forth the facts concerning the
action taken by the Trustee pursuant to this Agreement, including the
aggregate number of Units held by the Beneficiaries causing such action to be
taken.
8.2 Application
of Money Paid or Transferred to Trustee. No person dealing with the Trustee
shall be required to follow the application by the Trustee of any money or
property which may be paid or transferred to the Trustee.
ARTICLE
IX
COMPENSATION
OF TRUSTEE
9.1 Amount
of Compensation. In lieu of commissions or other compensation fixed by law for
trustees, the Trustee shall receive as reasonable compensation for services as
Trustee hereunder the amounts set forth in Exhibit A attached
hereto.
9.2 Dates
of Payment. The compensation payable to the Trustee pursuant to the provisions
of Section 9.1 shall be paid for the time period set forth
in Schedule A attached hereto.
9.3 Expenses.
The Trustee shall be reimbursed from the Trust Assets for all expenses
reasonably incurred, and appropriately documented, by such Trustee in the
performance of its duties in accordance with this Agreement.
ARTICLE
X
TRUSTEES
AND SUCCESSOR TRUSTEES
10.1 Number
and Qualification of Trustees.
(a) Subject
to Section 10.3, there shall be one (1) Trustee of the Trust, who need not
be a citizen or resident of, or a corporation which is incorporated under,
or a limited liability company organized under the laws of the State of
Delaware.
(b) The
Trustee represents that it possesses every license, permit, charter and
authorization (collectively, “Authorizations”) necessary to execute and deliver
this Agreement and perform its obligations hereunder and has given every notice
and taken every action required by applicable law or governmental authorities
and regulatory bodies to perform its obligations hereunder; except where the
failure to possess such Authorizations or the failure to give such notice or
take such action would not have a material adverse effect on the ability of
Trustee to perform its obligations hereunder.
(c) If
a corporate (or its equivalent) Trustee shall ever change its name, or shall
reorganize or reincorporate or shall merge with or into or consolidate with any
other company, such corporate (or its equivalent) trustee shall be deemed to be
a continuing entity and shall continue to act as a trustee hereunder with the
same liabilities, duties, powers, titles, discretions and privileges as are
herein specified for a Trustee.
10.2 Resignation
and Removal. Any Trustee may resign and be discharged from the Trust hereby
created by giving written notice to the Beneficiaries at their respective
addresses as they appear on the records of the Trustee. Such resignation shall
become effective on the date specified in such notice, which date shall be at
least 30 days after the date of such notice, or upon the appointment of such
Trustee’s successor, and such successor’s acceptance of such appointment,
whichever is earlier. Any Trustee may be removed at any time, with cause, by
Beneficiaries having aggregate Units of at least a two-thirds of the total Units
held by all Beneficiaries. Any Trustee may be removed at any time, without
cause, by Beneficiaries having aggregate Units of at least two-thirds of the
total Units held by all Beneficiaries.
10.3 Appointment
of Successor. Should at any time the Trustee die, resign or be removed, or be
adjudged bankrupt or insolvent, a vacancy shall be deemed to exist and the
Beneficiaries may, pursuant to Article XII hereof, call a meeting in order that
Beneficiaries holding at least a majority of the Units represented at the
meeting may appoint a successor Trustee. In the event that the Beneficiaries do
not elect a successor Trustee within 30 days of the resignation, removal,
bankruptcy or insolvency of such Trustee, the successor Trustee shall be
appointed by a court of competent jurisdiction upon application of any
Beneficiary or known creditor of the Trust.
10.4 Acceptance
of Appointment by Successor Trustee. Any successor Trustee appointed hereunder
shall execute an instrument accepting such appointment hereunder and shall
deliver one counterpart, in case of a resignation, to the resigning Trustee.
Thereupon such successor Trustee shall, without any further act, become vested
with all the rights, powers, and duties of its predecessor in the Trust
hereunder with like effect as if originally named therein; but the resigning
Trustee shall nevertheless, when requested in writing by the successor
Trustee, execute and deliver an instrument or instruments conveying and
transferring to such successor Trustee upon the trust herein expressed, all the
rights, powers, and trusts of such resigning Trustee.
10.5 Bond.
Unless required by the Board prior to the Transfer Date or unless a bond is
required by law, no bond shall be required of the original Trustee hereunder.
Unless a bond is required by law and such requirement cannot be waived by or
with approval of the Beneficiaries holding aggregate Units constituting at least
a majority of the total Units held by all Beneficiaries, no bond shall be
required of any successor trustee hereunder. If a bond is required by law, no
surety or security with respect to such bond shall be required unless required
by law and such requirement cannot be waived by or with approval of the
Beneficiaries or unless required by the Board. If a bond is required by the
Board or by law, the Board or the Trustee, as the case may be, shall determine
whether, and to what extent, a surety or security with respect to such bond
shall be required. The cost of any such bond shall be borne by the
Trust.
ARTICLE
XI
CONCERNING
THE BENEFICIARIES
11.1 Evidence
of Action by Beneficiaries. Whenever in this Agreement it is provided that the
Beneficiaries may take any action (including the making of any demand or
request, the giving of any notice, consent, or waiver, the removal of a Trustee,
the appointment of a successor Trustee, or the taking of any other action), the
fact that at the time of taking any such action such Beneficiaries have joined
therein may be evidenced: (i) by any instrument or any number of instruments of
similar tenor executed by the Beneficiaries in person or by agent or attorney
appointed in writing or (ii) by the record of the Beneficiaries voting in favor
thereof at any meeting of Beneficiaries duly called and held in accordance with
the provisions of Article XII.
11.2 Limitation
on Suits by Beneficiaries. No Beneficiary shall have any right by virtue of any
provision of this Agreement to institute any action or proceeding at law or in
equity against any party other than the Trustee upon or under or with respect to
the Trust Assets or the agreements relating to or forming part of the Trust
Assets, and the Beneficiaries (by their acceptance of any distribution made to
them pursuant to this Agreement) waive any such right.
11.3 Requirement
of Undertaking. The Trustee may request any court to require, and any court may
in its discretion require, in any suit for the enforcement of any right or
remedy under this Agreement, or in any suit against the Trustee for any action
taken or omitted to be taken by it as Trustee, the filing by any party litigant
in such suit of an undertaking to pay the costs of such suit, and such court may
in its discretion assess reasonable costs, including reasonable attorneys’ fees,
against any party litigant in such suit, having due regard to the merits and
good faith of the claims or defenses made by such party litigant; provided that
the provisions of this Section 11.3 shall not apply to any suit by the
Trustee.
ARTICLE
XII
MEETING
OF BENEFICIARIES
12.1 Purpose
of Meetings. A meeting of the Beneficiaries may be called at any time and from
time to time pursuant to the provisions of this Article for the purposes of
taking any action which the terms of this Agreement permit Beneficiaries having
a specified aggregate Beneficial Interest to take either acting alone or
with the Trustee.
12.2 Meeting
Called by Trustee. The Trustee may at any time call a meeting of the
Beneficiaries to be held at such time and at such place within or without the
State of Delaware as the Trustee shall determine. Written notice of every
meeting of the Beneficiaries shall be given by the Trustee (except as provided
in Section 12.3), which written notice shall set forth the time and place of
such meeting and in general terms the action proposed to be taken at such
meeting, and shall be mailed not more than 60 nor less than 10 days before such
meeting is to be held to all of the Beneficiaries of record not more than 60
days before the date of such meeting. The notice shall be directed to the
Beneficiaries at their respective addresses as they appear in the records
of the Trust.
12.3 Meeting
Called on Request of Beneficiaries. Within 45 days after written request to the
Trustee by Beneficiaries holding an aggregate of at least a majority of the
total Units held by all Beneficiaries to call a meeting of all Beneficiaries,
which written request shall specify in reasonable detail the action proposed to
be taken, the Trustee shall proceed under the provisions of Section 12.2 to call
a meeting of the Beneficiaries, and if the Trustee fails to call such meeting
within such 45 day period then such meeting may be called by such Beneficiaries,
or their designated representatives, requesting such meeting.
12.4 Persons
Entitled to Vote at Meeting of Beneficiaries. Each Beneficiary shall be entitled
to vote at a meeting of the Beneficiaries either in person or by his proxy duly
authorized in writing. The signature of the Beneficiary on such written
authorization need not be witnessed or notarized. Each Beneficiary shall be
entitled to a number of votes equal to the number of Units held by such
Beneficiary as of the applicable record date.
12.5 Quorum.
At any meeting of Beneficiaries, the presence of Beneficiaries having aggregate
Units sufficient to take action on any matter for the transaction of which such
meeting was called shall be necessary to constitute a quorum, but if less than a
quorum be present, Beneficiaries having aggregate Units of at least a majority
of the total Units held by all Beneficiaries represented at the meeting may
adjourn such meeting with the same effect and for all intents and purposes as
though a quorum had been present. Except to the extent a different percentage is
specified in this Agreement for a particular matter or is required by law, the
approval of Beneficiaries having aggregate Units of at least a majority of the
total Units held by all Beneficiaries shall be required for taking action on any
matter voted on by the Beneficiaries.
12.6 Adjournment
of Meeting. Subject to Section 12.5, any meeting of Beneficiaries may be
adjourned from time to time and a meeting may be held at such adjourned time and
place without further notice.
12.7 Conduct
of Meetings. The Trustee shall appoint the Chairman (or may serve as the
Chairman) and the Secretary of the meeting. The vote upon any resolution
submitted to any meeting of Beneficiaries shall be by written ballot. An
Inspector of Votes, appointed by the Chairman of the meeting, shall count all
votes cast at the meeting for or against any resolution and shall make and
file with the Secretary of the meeting their verified written
report.
12.8 Record
of Meeting. A record of the proceedings of each meeting of Beneficiaries shall
be prepared by the Secretary of the meeting. The record shall be signed and
verified by the Secretary of the meeting and shall be delivered to the Trustee
to be preserved by it. Any record so signed and verified shall be conclusive
evidence of all of the matters therein stated.
ARTICLE
XIII
AMENDMENTS
13.1 Consent
of Beneficiaries. At the written direction or with the written consent of
Beneficiaries holding at least a majority of the total Units held by all
Beneficiaries or such greater or lesser percentage as shall be specified in this
Agreement for the taking of an action by the Beneficiaries under the affected
provision of this Agreement, the Trustee shall promptly make and execute a
declaration amending this Agreement for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of this Agreement
or amendments thereto; provided that no such amendment shall increase the duties
or potential liability of the Trustee hereunder without the written consent of
the Trustee nor reduce the compensation to the Trustee for services
rendered; provided, further, that no such amendment shall permit the Trustee to
engage in any activity prohibited by Section 6.1 hereof or affect the
Beneficiaries’ rights to receive their pro rata shares of the Trust Assets at
the time of any distribution, and that no such amendment shall cause the Trust,
in the opinion of counsel, to be treated for all tax purposes, as other than a
liquidating trust under Treasury Regulation Section 301.7701-4(d), or cause the
Beneficiaries to be treated as other than the owners of their respective shares
of the Trust’s taxable income pursuant to Section 671 through 677 of the Code
and any analogous provision of state or local law.
13.2 Notice
and Effect of Amendment. Promptly after the execution by the Trustee of any such
declaration of amendment, the Trustee shall give notice of the substance of such
amendment to the Beneficiaries or, in lieu thereof, the Trustee may send a copy
of the amendment to each Beneficiary. Upon the execution of any such declaration
of amendment by the Trustee, this Agreement shall be deemed to be modified and
amended in accordance therewith and the respective rights, limitations of
rights, obligations, duties, and immunities of the Trustee and the Beneficiaries
under this Agreement shall thereafter be determined, exercised and enforced
hereunder subject in all respects to such modification and amendments, and all
the terms and conditions of any such amendment shall thereby be deemed to be
part of the terms and conditions of this Agreement for any and all
purposes.
ARTICLE
XIV
MISCELLANEOUS
PROVISIONS
14.1 Filing
Documents. This Agreement shall be filed or recorded in such office or offices
as the Trustee may determine to be necessary or desirable. A copy of this
Agreement and all amendments thereof shall be maintained in the office of the
Trustee and shall be available at all times during regular business hours for
inspection by any Beneficiary or his duly authorized representative. The Trustee
shall file or record any amendment of this Agreement in the same places
where the original Agreement is filed or recorded. The Trustee shall file or
record any instrument which relates to any change in the office of a Trustee in
the same places where the original Agreement is filed or recorded.
14.2 Intention
of Parties to Establish Trust. This Agreement is intended to create a
liquidating trust and is not intended to create, a corporation, association,
partnership or joint venture of any kind for purposes of Federal income taxation
or for any other purpose.
14.3 Beneficiaries
Have No Rights or Privileges as Stockholders of the Company. Except as expressly
provided in this Agreement or under applicable law, the Beneficiaries (by their
vote with respect to the Plan and/or their acceptance of any distributions made
to them pursuant to this Agreement) shall have no rights or privileges
attributable to their former status as stockholders of the Company.
14.4 Laws
as to Construction. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without regard to the
conflicts of law principles thereof. The Trustee, the Company and the
Beneficiaries (by their vote with respect to the Plan and/or their acceptance of
any distributions made to them pursuant to this Agreement) consent and agree
that this Agreement shall be governed by and construed in accordance with such
laws.
14.5 Severability.
In the event any provision of this Agreement or the application thereof to any
Person or circumstances shall be finally determined by a court of proper
jurisdiction to be invalid or unenforceable to any extent, the remainder of this
Agreement, or the application of such provision to persons or circumstances
other than those as to which it is held invalid or unenforceable, shall not be
affected thereby, and each provision of this Agreement shall be valid and
enforced to the fullest extent permitted by law.
14.6 Notices.
Any notice or other communication by the Trustee to any Beneficiary shall be
deemed to have been sufficiently given, for all purposes, if deposited, postage
prepaid, in the post office or letter box addressed to such Person at his
address as shown in the records of the Trust.
All
notices and other communications hereunder shall be in writing and shall be
deemed to have been duly given if delivered personally or sent by cable,
telegram, facsimile to the parties at the following addresses, provided that
facsimile notices are confirmed telephonically or by depositing a copy of such
notice in the mail, or at such other addresses as shall be specified by the
parties by like notice:
(a) If
to the Trustee:
[_________]
[_________]
[_________]
Attn:
[_________]
(b) If
to the Company:
Xcorporeal,
Inc.
80 Empire
Drive
Lake
Forest, CA 92630
Attn: Kelly
J. McCrann
Facsimile
No. (949) ___-____
with a
copy to:
[_________]
[_________]
[_________]
Attn:
[_________]
14.7 Counterparts.
This Agreement may be executed in any number of counterparts, each of which
shall be an original, but such counterparts shall together constitute one and
the same instrument.
IN
WITNESS WHEREOF, Xcorporeal, Inc. and Xcorporeal Operations, Inc. has each
caused this Agreement to be executed by its President and Chief Executive
Officer, and the Trustee herein has executed this Agreement on this
___ day of ________________, 2010.
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XCORPOREAL,
INC.
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By:
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Name:
Kelly J. McCrann
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Title:
Chief Executive Officer
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XCORPOREAL
OPERATIONS, INC.
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By:
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Name:
Kelly J. McCrann
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Title:
Chief Executive Officer
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,
TRUSTEE
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Name:
Kelly J. McCrann
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Title:
Authorized Signatory
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EXHIBIT
A
Compensation
of Trustee
A1. The
Trustee shall receive the following compensation for its services as Trustee
hereunder (the “Services”):
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ten
(10%) percent of the aggregate Royalty Payments (as defined in the Asset
Purchase Agreement) up to 10 million dollars ($10,000,000) received
by the Trust pursuant to the terms of the Asset Purchase Agreement;
and
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five
(5%) percent of the aggregate distributions to Beneficiaries in excess of
10 million dollars ($10,000,000) received by the Trust pursuant to the
terms of the Asset Purchase
Agreement.
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A2. Subject
to Section A1 hereof, the Trustee shall invoice the Trust on a quarterly basis
for Services rendered during the prior month. Payment by the Trust for such
Services, if applicable, relating to such period shall be due as of the date of
receipt by the Trust of its share of the Royalty Payments pursuant the terms of
the Asset Purchase Agreement. Payment by the Trust for such applicable Expenses
(as defined below) relating to such period shall be due as of the date of such
invoice.
A3. In
addition to the compensation to the Trustee set forth above, the Trustee shall
be reimbursed for all reasonable out-of-pocket expenses (“Expenses”) incurred by
Trustee in connection with providing the Services. Expenses shall include,
without limitation:
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fees
and expenses of independent professionals and consultants (such as
attorneys, accountants, environmental experts, etc.) incurred by or on
behalf of the Trust;
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the
costs associated with obtaining the services of certain current directors
and executive and administrative personnel of the Company, as determined
by the Trustee;
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the
costs associated with obtaining the services of accounts receivable
collection personnel, as determined by the
Trustee;
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document
storage costs required to maintain Company and Trust records;
and
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reasonable
out-of-pocket, third party expenses incurred by the Trustee, including
copying, faxes, messenger, postage, costs of forwarding Company phone and
email lines and other direct out-of-pocket
costs.
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Any and
all Expenses incurred in any month by the Trustee shall be included and itemized
in the invoice prepared by the Trustee with respect to such
month.
EXHIBIT
B
The
Company’s Stockholder List as of the Final Record Date
ANNEX D
AGREEMENT
This
AGREEMENT (the “
Agreement
”), dated as of
December 14, 2009 (the “
Effective Date
”), is by and
between Fresenius USA, Inc., a Massachusetts corporation with its principal
executive office at 920 Winter Street, Waltham, MA 02451 (the “
FUSA
”), and Xcorporeal, Inc.,
a Delaware corporation with its principal executive office at 80 Empire Drive,
Lake Forest, CA 92630 (“
Xcorporeal
”).
Reference
is made to that certain Asset Purchase Agreement dated as of the Effective Date,
by and among FUSA, Xcorporeal, Xcorporeal Operations, Inc. and National Quality
Care, Inc. (the “
Asset Purchase
Agreement
”), pursuant to which Xcorporeal, Operations and NQCI intend to
sell to FUSA the Purchased Assets. Any capitalized terms not defined
herein shall have the meanings ascribed to them in the Asset Purchase
Agreement.
WHEREAS,
in anticipation of the Closing, FUSA desires to pay Xcorporeal for certain
expenses expected to be incurred by Xcorporeal before the Closing;
and
WHEREAS,
prior to the Closing, FUSA desires to utilize certain consulting services of
Xcorporeal and Xcorporeal desires to provide such consulting services to FUSA;
and
WHEREAS,
in anticipation of the Closing, FUSA has incurred and will continue to incur
certain expenses on behalf of Xcorporeal, and the parties desire to agree upon
the terms and conditions for the repayment of such expenses by Xcorporeal in the
event the Closing fails to take place by February 28, 2010, unless otherwise
agreed to by the Sellers and FUSA.
NOW,
THEREFORE, in consideration of the premises and mutual covenants contained
herein the parties agree as follows:
1.
Lease
. Xcorporeal
is a lessee under that certain Standard Industrial/Commercial Lease dated
October 6, 2008, by and between Xcorporeal and Olen Commercial Realty Corp. (the
“
Lease
”) pertaining to
the premises located at 80 Empire Drive, Lake Forest, California
92630. Subject to the approval of the Lessor, FUSA shall, upon the
Closing Date, assume the Lease and all future obligations arising thereunder,
provided, however, that FUSA shall not assume any liability or obligation
arising, or related to, any period prior to the Closing Date. In
consideration of such assumption, Xcorporeal hereby agrees to pay to FUSA on the
Closing Date the amount of $175,000, representing approximately six (6) months
of rent and common area expenses that are expected to be incurred by FUSA under
the Lease following the Closing Date. Xcorporeal shall be entitled to receive
the return of the Letters of Credit and any other security deposits posted by it
in connection with such Lease and FUSA will reasonably cooperate with Xcorporeal
in any actions requested by Xcorporeal to ensure the return of such items on a
timely basis.
2.
Consulting
Services
. FUSA hereby engages, effective November 16, 2009,
Xcorporeal to perform such consulting, advisory and related services to and for
FUSA as may be reasonably requested from time to time by FUSA and its affiliates
(the “
Services
”), and
Xcorporeal hereby accepts such engagement by FUSA (the “
Engagement
”), on the terms set
forth in this Agreement, for the period beginning on the Effective Date and
ending on the Closing Date, unless sooner terminated in accordance with Section
2(d) hereof (the “
Term
”).
(a)
Key
Personnel
. The parties agree that Dr. Victor J. Gura, Barry
Fulkerson and Mark Smith (collectively, the “
Key Personnel
”) are essential
to the Services to be provided pursuant to the Engagement, and are the only
employees of Xcorporeal that will provide such Services, and that the assignment
of the Key Personnel to perform the Services will be continuous throughout the
term of the Engagement. The parties further agree that should any
such Key Personnel no longer be employed by Xcorporeal during the term of the
Engagement, for whatever reason, FUSA shall have the right to terminate the
Engagement immediately upon notice to Xcorporeal.
(b)
Cooperation
. Xcorporeal
shall use its reasonable commercial efforts in the provision of the Services
pursuant to the Engagement. Xcorporeal shall cooperate with FUSA’s
personnel, shall not interfere with the conduct of FUSA’s business and shall
observe all rules, regulations and security requirements of FUSA concerning the
safety of persons and property to the extent known to Xcorporeal.
(c)
Fee
. For
the Services rendered by Xcorporeal during the Term, FUSA shall pay to
Xcorporeal a fee, payable in cash in semi-monthly installments, at the following
annual rate for the full-time services of each of the Key
Personnel:
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Dr.
Victor J. Gura
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$442,000/year
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Barry
Fulkerson
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$212,000/year
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Mark
Smith
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$167,000/year
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FUSA will
also reimburse Xcorporeal for all reasonable out-of-pocket Denver, CO to Lake
Forest, CA commuting expenses incurred by Xcorporeal on behalf of Barry
Fulkerson and Mark Smith in the course of their performance of duties pursuant
to the Engagement. For purposes of clarification, the amounts above
shall be prorated for the duration of the Term and FUSA shall have no obligation
to pay any amounts other than during the Term. The parties
acknowledge that, notwithstanding the date of this Agreement, FUSA and its
affiliates have previously engaged the services of Barry Fulkerson and Mark
Smith and have paid the required fees for such services. The parties
further agree and acknowledge that any amounts paid by FUSA with respect to the
services provided by Dr. Victor J. Gura (“
Gura
”) pursuant to this
Agreement shall be offset against any capital contributions of FUSA or its
affiliates in connection with any HD WAK joint venture between FUSA or an
affiliate of FUSA and Gura, and potentially others related to the development of
the HD WAK and other related applications as contemplated by the exclusivity
letter between Fresenius Medical Care Holdings, Inc. and Xcorporeal, Inc. dated
as of September 21, 2009.
(d)
Termination
. Notwithstanding
anything to the contrary contained in this Agreement, the Engagement shall
terminate upon the earliest to occur of the following (the “
Termination
Date
”):
(i) At
the election of FUSA, for cause, immediately upon written notice by FUSA to
Xcorporeal. For the purposes of this Section 2(d)(i), cause for
termination shall be deemed to exist upon (a) a good faith finding by FUSA of
the failure of Xcorporeal to perform the Services in accordance with this
Agreement, which failure comes more than thirty (30) days after Xcorporeal’s
receipt of a written notice from FUSA of such failure, (b) bad faith, gross
negligence or willful misconduct of any Key Personnel; (c) the conviction of any
Key Personnel of, or the entry of a pleading of guilty or nolo contendere by any
Key Personnel to, any crime involving moral turpitude or any felony; (d) a
knowing or willful breach by Xcorporeal or any Key Personnel of Section 2(f)(i),
which breach shall not be cured within thirty (30) days after Xcorporeal’s
receipt of a written notice from FUSA of such breach; or (e) a knowing or
willful breach by Xcorporeal or any Key Personnel of Section 2(f)(ii), which
breach shall not be cured within thirty (30) days after Xcorporeal’s receipt of
a written notice from FUSA of such breach;
(ii) The
death or disability of any Key Personnel. As used in this Agreement,
the term “disability” means the inability of Key Personnel with or without
reasonable accommodation as may be required by state or federal law, due to
physical or mental disability, for a period of sixty (60) days, to perform the
Services; and
(iii) February
28, 2010.
(e)
Effect of
Termination
. Upon the termination of the Engagement, FUSA
shall pay Xcorporeal (i) the consulting fees otherwise payable to Xcorporeal
under Section 2(c) through the last day of the Engagement, and (ii) all unpaid
expense reimbursements payable to Xcorporeal pursuant to Section 2(c) (together,
the “
Earned/Accrued
Amounts
”). Following payment of the Earned/Accrued Amounts,
FUSA shall have no further obligation to Xcorporeal pursuant to the
Engagement.
(f)
Inventions and Proprietary
Information
.
(i)
Inventions
.
(1) All
inventions, discoveries, computer programs, data, technology, designs,
innovations and improvements (whether or not patentable and whether or not
copyrightable) related to the business of FUSA (“
Inventions
”) which are made,
conceived, reduced to practice, created, written, designed or developed by Key
Personnel, solely or jointly with others and whether during normal business
hours or otherwise, during the performance of Services for FUSA pursuant to the
Engagement or thereafter if resulting or directly derived from Proprietary
Information (as defined below), shall be the sole property of
FUSA. Xcorporeal hereby assigns, and shall use its best efforts to
cause the Key Personnel to assign, to FUSA all Inventions and any and all
related patents, copyrights, trademarks, trade names, and other industrial and
intellectual property rights and applications therefor, in the United States and
elsewhere and appoints, and shall use its best efforts to cause the Key
Personnel to appoint, any officer of FUSA as its duly authorized attorney to
execute, file, prosecute and protect the same before any government agency,
court or authority. Upon the request of FUSA and at FUSA’s expense,
Xcorporeal shall, and shall use its best efforts to cause the Key Personnel to,
execute such further assignments, documents and other instruments as may be
reasonably necessary or desirable to fully and completely assign all Inventions
to FUSA and to assist FUSA in applying for, obtaining and enforcing patents or
copyrights or other rights in the United States and in any foreign country with
respect to any Invention. Xcorporeal also hereby waives all claims to
moral rights in any Inventions.
(2) Xcorporeal
shall promptly disclose to FUSA all Inventions and will maintain adequate and
current written records (in the form of notes, sketches, drawings and as may be
specified by FUSA) to document the conception and/or first actual reduction to
practice of any Invention. Such written records shall be available to
and remain the sole property of FUSA at all times.
(3) Notwithstanding
the foregoing, Inventions, if any, patented or unpatented, which Xcorporeal
and/or the Key Personnel made prior to the commencement of Xcorporeal’s
engagement as consultant for FUSA are excluded from the scope of this Agreement.
To preclude any possible uncertainty, attached hereto as
Exhibit A
is a
complete list of all Inventions (a) that Xcorporeal and/or the Key Personnel has
or have, alone or jointly with others, conceived, developed or reduced to
practice prior to Xcorporeal’s engagement as a consultant for FUSA, (b) that
Xcorporeal and/or the Key Personnel considers to be its or their property or the
property of third parties, and (c) that Xcorporeal wishes to have excluded from
the scope of this Agreement. If disclosure of any such invention on
Exhibit A
would
potentially cause Xcorporeal to violate a prior confidentiality agreement,
Xcorporeal understands that it is obligated only to describe such invention in
general terms in order to avoid such violation.
(ii)
Proprietary
Information
.
(1) Xcorporeal
acknowledges that its relationship with FUSA is one of high trust and confidence
and that in the course of the Services it will have access to and contact with
Proprietary Information. Subject to Section 2(f)(ii)(3), Xcorporeal
agrees that it will not, during the Term or at any time thereafter, disclose to
others, or use for its benefit or the benefit of others, any Proprietary
Information or Invention.
(2) For
purposes of this Agreement, Proprietary Information shall mean, by way of
illustration and not limitation, all information (whether or not patentable and
whether or not copyrightable) owned, possessed or used by FUSA, including,
without limitation, any Invention, formula, vendor information, customer
information, apparatus, equipment, trade secret, process, research, report,
technical data, know-how, computer program, software, software documentation,
hardware design, technology, marketing or business plan, forecast, unpublished
financial statement, budget, license, price, cost and employee list that is
communicated to, learned of, developed or otherwise acquired by Xcorporeal in
the course of it providing the Services to FUSA.
(3) Xcorporeal’s
obligations under this Section 2(f)(ii) shall not apply to any Proprietary
Information that (a) is or becomes known to the general public under
circumstances involving no unauthorized disclosure by Xcorporeal of the terms of
this Section 2(f)(ii), (b) was available to Xcorporeal or Key Personnel on a
non-confidential basis prior to disclosure by Xcorporeal, (c) is generally
disclosed to third parties by FUSA without confidentiality restrictions on such
third parties, (d) is approved for release by written authorization of an
officer of FUSA or (e) is prepared, conceived or discovered by Xcorporeal or Key
Personnel or their representatives subsequent to the Termination
Date.
(4) Upon
termination of the Engagement or at any other time upon request by FUSA,
Xcorporeal shall promptly deliver to FUSA all records, files, memoranda, notes,
designs, data, reports, price lists, customer lists, drawings, plans, computer
programs, software, software documentation, sketches, laboratory and research
notebooks and other documents (and all copies or reproductions of such
materials) relating to the business of FUSA.
(5) Xcorporeal
represents that its retention as a consultant for FUSA and its performance of
the Engagement does not, and shall not, breach any agreement that obligates
Xcorporeal to keep in confidence any trade secrets or confidential or
proprietary information of Xcorporeal or of any other party or to refrain from
competing, directly or indirectly, with the business of any other party or
otherwise conflict with any of Xcorporeal’s agreements or obligations to any
other party. Xcorporeal shall not disclose to FUSA any trade secrets
or confidential or proprietary information of any other party.
(6) Xcorporeal
acknowledges that FUSA from time to time may have agreements with other persons
or with the United States Government, or agencies thereof, that impose
obligations or restrictions on FUSA regarding inventions made during the course
of work under such agreements or regarding the confidential nature of such
work. Xcorporeal agrees to be bound by all such obligations and
restrictions that are known to Xcorporeal and to take all action reasonably
necessary to discharge the obligations of FUSA under such agreements to the
extent such obligations relate to Xcorporeal.
(iii)
Remedies
. Xcorporeal
acknowledges that any breach of the provisions of this Section 2(f) shall result
in serious and irreparable injury to FUSA for which FUSA cannot be adequately
compensated by monetary damages alone. Xcorporeal agrees, therefore,
that, in addition to any other remedy it may have, FUSA shall be entitled to
enforce the specific performance of Section 2 by Xcorporeal and to seek both
temporary and permanent injunctive relief (to the extent permitted by law)
without the necessity of proving actual damages.
(g)
Non-Competition
. Subject
to the consummation of the transactions contemplated under the Asset Purchase
Agreement, Xcorporeal agrees that during the Term and for two (2) years
immediately thereafter, Xcorporeal will not directly or indirectly for its own
benefit or the benefit of others:
(i) render
services for a competing organization, as an employee, officer, agent, broker,
partner, or stockholder (except that Xcorporeal may own five percent (5%) or
less of the equity securities of any publicly-traded company);
(ii) hire
or seek to persuade any employee of FUSA or any of its affiliates to discontinue
employment or to become employed in any a competing organization or seek to
persuade any independent contractor or supplier to discontinue its relationship
with FUSA or any of its affiliates; and
(iii) solicit,
direct, take away or attempt to take away any business or customers of FUSA or
any of its affiliates.
Nothing
in this Agreement shall preclude Xcorporeal or any Key Personnel from working
for a competitor of FUSA or its affiliates after termination of the Engagement,
provided that
, subject
to the consummation of the transactions contemplated under the Asset Purchase
Agreement, Xcorporeal will not be engaged, directly or indirectly, in
any business in which FUSA or its affiliates are actively engaged upon
termination of the Engagement or in any new business which FUSA or its affiliate
are in the process of setting up and in which Xcorporeal had direct involvement
during the Term.
(h)
Other
Agreements
. Xcorporeal hereby represents that Xcorporeal is
not bound by the terms of any agreement with any other party to refrain from
using or disclosing any trade secret or confidential or proprietary information
relating to the Proprietary Information in the course of Xcorporeal’s
relationship with FUSA, to refrain from competing, directly or indirectly, with
the business of such other party or to refrain from soliciting employees,
customers or suppliers of such other party. Xcorporeal agrees to
furnish FUSA with a copy of any such agreement upon request.
(i)
Independent Contractor
Status
. Xcorporeal shall perform all consulting services under
Section 2 as an “independent contractor” and not as an employee or agent of
FUSA. Xcorporeal is not authorized to assume or create any obligation
or responsibility, express or implied, on behalf of, or in the name of, FUSA or
to bind FUSA in any manner.
3.
Development
Expenses
. Xcorporeal acknowledges and agrees that in the event
the Closing does not take place as a result of Xcorporeal consummating a
Superior Proposal, Xcorporeal shall reimburse FUSA for the following expenses,
to the extent such (other than (d) and (e) below) are reasonably incurred on
Xcorporeal’s behalf for the benefit of Xcorporeal, concurrently with the
consummation of such Superior Proposal:
(a) Tooling;
(b) Prototyping;
(c) IP
Maintenance;
(d) All
reasonably documented third party expenses incurred by FUSA in negotiating and
documenting the transactions contemplated by the Asset Purchase Agreement and
this Agreement, including reasonable attorneys’ fees and expenses;
(e) Consulting
fees; and
(f) Miscellaneous
consulting expenses, i.e. travel.
4.
Notices
. All
notices required or permitted under this Agreement shall be in writing and shall
be provided as set forth in the Asset Purchase Agreement.
5.
Entire
Agreement
. This Agreement (together with the Asset Purchase
Agreement, the schedules and exhibits thereto and other documents and agreements
delivered pursuant to the Asset Purchase Agreement, to the extent referred to
herein) constitutes the entire agreement between the parties and supersedes all
prior agreements and understandings, whether written or oral, relating to the
subject matter of this Agreement.
6.
Amendment
. This
Agreement may be amended or modified only by a written instrument executed by
both FUSA and Xcorporeal.
7.
Governing
Law
. This Agreement shall be construed, interpreted and
enforced in accordance with the laws of the State of Delaware without regard to
its principles or conflicts of laws.
8.
Successors and
Assigns
. This Agreement shall be binding upon, and inure to
the benefit of, both parties and their respective successors and assigns,
including any corporation with which, or into which, FUSA may be merged or which
may succeed to its assets or business, provided, however, that subject to the
last sentence of this Section 8, the obligations of Xcorporeal are personal and
may not be assigned. Xcorporeal may assign its respective rights and obligations
hereunder, including under any agreements contemplated by this Agreement, to a
liquidating trust established for the benefit of Xcorporeal’s stockholders (the
“
Xcorporeal Trust
”) and
the Xcorporeal Trust may assign any or all of it respective rights and
obligations hereunder to any purchaser of a part or all of such trust’s rights,
assets and/or obligations, without the prior written consent of any other
party.
9.
Interpretation
. If
any restriction set forth in Section 9 is found by any court of competent
jurisdiction to be unenforceable because it extends for too long a period of
time or over too great a range of activities or in too broad a geographic area,
it shall be interpreted to extend only over the maximum period of time, range of
activities or geographic area as to which it may be enforceable.
10.
Miscellaneous
.
(a) No
delay or omission by FUSA or Xcorporeal in exercising any right under this
Agreement shall operate as a waiver of that or any other right. A
waiver or consent given by FUSA or Xcorporeal on any one occasion shall be
effective only in that instance and shall not be construed as a bar or waiver of
any right on any other occasion.
(b) The
captions of the sections of this Agreement are for convenience of reference only
and in no way define, limit or affect the scope or substance of any section of
this Agreement.
(c) In
the event that any provision of this Agreement shall be invalid, illegal or
otherwise unenforceable, the validity, legality and enforceability of the
remaining provisions shall in no way be affected or impaired
thereby.
(d) This
Agreement may be executed in two or more counterparts, and by the different
parties hereto in separate counterparts, each of which when executed shall be
deemed to be an original but all of which taken together shall constitute one
and the same agreement.
[Remainder
of Page Intentionally Left Blank]
IN
WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day
and year set forth above.
|
FRESENIUS
USA, INC.
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|
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By:
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/s/ Mohsen
Reihany
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Name:
Mohsen Reihany
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Title:
Senior Advisor To Chairman of The Board
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XCORPOREAL,
INC.
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By:
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/s/
Kelly J.
McCrann
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Name:
Kelly J. McCrann
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Title:
Chief Executive Officer
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ANNEX E
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington
D.C. 20549
Form 10-K
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(Mark
One)
|
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x
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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
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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
For
the transition period
from to
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Commission
File Number 001-33874
Xcorporeal,
Inc.
(Exact
name of registrant as specified in its charter)
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Delaware
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75-2242792
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(State
or other jurisdiction of
Incorporation
or organization)
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(I.R.S.
Employer
Identification
Number)
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12121
Wilshire Blvd., Suite 350
Los
Angeles, California 90025
(Address
of principal executive offices and zip code)
Registrant’s
telephone number, including area code:
(310) 923-9990
Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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|
Name of Each Exchange on Which
Registered
|
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Common
Stock, $0.0001 par value
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NYSE
Amex
|
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
£
No
x
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
£
No
x
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. Yes
x
No
£
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K(§229.405 of this chapter) 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.
x
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” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer
£
|
Accelerated
filer
£
|
Non-accelerated
filer
£
(Do
not check if a smaller reporting company)
|
Smaller
reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes
£
No
x
The
aggregate market value of the voting common stock held by non-affiliates of the
registrant computed by reference to the closing price of the registrant’s common
stock on June 30, 2008, as reported on the NYSE Amex, was approximately
$7,288,459. For purposes of this disclosure, shares of common stock held by
persons who hold more than 5% of the outstanding shares of common stock and
shares held by executive officers and directors of the registrant have been
excluded because such persons may be deemed to be affiliates. This determination
of executive officer or affiliate status is not necessarily a conclusive
determination for other purposes.
As of
March 23, 2009, the registrant had issued and outstanding 14,754,687 shares of
common stock, $0.0001 par value per share.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
TABLE
OF CONTENTS
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Forward
Looking Statements
|
E-4
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PART
I
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Item
1.
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Business
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E-5
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Item
1A.
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Risk
Factors
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E-12
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Item
1B.
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Unresolved
Staff Comments
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E-21
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Item
2.
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Properties
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E-21
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Item
3.
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Legal
Proceedings
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E-21
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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E-23
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PART
II
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|
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Item
5.
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Market
For Registrant’s Common Equity, Related Stockholder Maters and Issuer
Purchases of Equity
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E-24
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Item
6.
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Selected
Financial Data
|
E-24
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
E-24
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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E-29
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Item
8.
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Financial
Statements and Supplementary Data
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E-30
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|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
E-51
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Item
9A.
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Controls
and Procedures
|
E-51
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Item
9B.
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Other
Information
|
E-52
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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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E-53
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Item
11.
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Executive
Compensation
|
E-55
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|
Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
E-63
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Item
13.
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Certain
Relationships and Related Transactions and Director
Independence
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E-64
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Item
14:
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Principal
Accounting Fees and Services
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E-65
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PART
IV
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Item
15:
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Exhibits
and Financial Statement Schedules
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E-66
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Signatures
|
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E-67
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FORWARD
LOOKING STATEMENTS
Unless
the context otherwise indicates or requires, as used in this Annual Report on
Form 10-K, or the “Annual Report”, references to “Xcorporeal, ”“we,” “us,” “our”
or the “Company” refer to Xcorporeal, Inc., a Delaware corporation, and prior to
October 12, 2007, the company which is now our subsidiary and known as
Xcorporeal Operations, Inc., or “Operations”.
This
Annual Report contains “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995 with respect to the financial
condition, results of operations, business strategies, operating efficiencies or
synergies, competitive positions, growth opportunities for existing products,
plans and objectives of management, markets for our stock and other matters.
Statements in this Annual Report that are not historical facts are
“forward-looking statements” for the purpose of the safe harbor provided by
Section 21E of the Securities Exchange Act of 1934, as amended, or the “Exchange
Act”, and Section 27A of the Securities Act of 1933, or the “Securities Act”.
Forward-looking
statements reflect our current expectations or forecasts of future events.
Forward-looking statements generally can be identified by the use of
forward-looking terminology such as “may,” “will,” “expect,” “anticipate,”
“intend,” “estimate,” “believe,” “project,” “continue,” “plan,” “forecast,” or
other similar words.
Such forward-looking statements, including, without
limitation, those relating to our future business prospects, revenues and
income, wherever they occur, are necessarily estimates reflecting the best
judgment of our senior management on the date on which they were made, or if no
date is stated, as of the date of this Annual Report. These forward-looking
statements are subject to risks, uncertainties and assumptions, including those
described in the “Risk Factors” described below, that may affect the operations,
performance, development and results of our business. Because the factors
discussed in this Annual Report could cause our actual results or outcomes to
differ materially from those expressed in any forward-looking statements made by
us or on our behalf, you should not place undue reliance on any such
forward-looking statements. New factors emerge from time to time, and it is not
possible for us to predict which factors will arise. In addition, we cannot
assess the impact of each factor on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.
You
should understand that, in addition to those factors discussed in the section
captioned “Risk Factors,” and events discussed in the section captioned
“Business - Recent Developments,” factors that could affect our future results
and could cause our actual results to differ materially from those expressed in
such forward-looking statements, include, but are not limited to:
|
·
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the
effect of receiving a “going concern” statement in our independent
registered public accounting firm’s report on our 2008 financial
statements;
|
|
·
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our
significant capital needs and ability to obtain financing both on a
short-term and a long-term basis;
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|
·
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the
results of the arbitration proceeding with National Quality Care, Inc., or
“NQCI”;
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|
·
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our
ability to meet continued listing standards of NYSE Amex (formerly
American Stock Exchange);
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|
·
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our
ability to successfully research and develop marketable
products;
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|
·
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our
ability to obtain regulatory approval to market and distribute our
products;
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|
·
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anticipated
trends and conditions in the industry in which we operate, including
regulatory changes;
|
|
·
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general
economic conditions; and
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|
·
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other
risks and uncertainties as may be detailed from time to time in our public
announcements and filings with the U.S. Securities and Exchange
Commission, or the “SEC”.
|
Although
we believe that our expectations are reasonable, we cannot assure you that our
expectations will prove to be correct. Should any one or more of these risks or
uncertainties materialize, or should any underlying assumptions prove incorrect,
actual results may vary materially from those described in this annual report as
anticipated, believed, estimated, expected or intended.
These
factors are not exhaustive, and new factors may emerge or changes to the
foregoing factors may occur that could impact our business.
Except to the extent
required by law, w
e undertake no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or any other reason. All subsequent forward-looking statements
attributable to us or any person acting on our behalf are expressly qualified in
their entirety by the cautionary statements contained or referred to herein. In
light of these risks, uncertainties and assumptions, the forward-looking events
discussed in this Annual Report may not occur. You should review carefully the
sections captioned “Risk Factors,” “Business - Recent Developments” and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included elsewhere in this Annual Report for a more complete
discussion of these and other factors that may affect our business.
PART
I
Item
1. Business
Overview
We are a
medical device company developing an innovative
extra-corporeal
platform
technology to be used in devices to replace the function of various human
organs. These devices will seek to provide patients with improved, efficient and
cost effective therapy. The platform leads to three initial
products:
|
·
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A
Portable Artificial Kidney, or “PAK”, for attended care Renal Replacement
Therapy, or “RRT”, for patients suffering from Acute Renal Failure, or
“ARF”
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|
·
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A
PAK for home hemodialysis for patients suffering from End Stage Renal
Disease, or “ESRD”
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|
·
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A
Wearable Artificial Kidney, or “WAK”, for continuous ambulatory
hemodialysis for treatment of ESRD
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We have
completed functional prototypes of our attended care and home PAKs that we plan
to commercialize after obtaining notification clearance from the Food and Drug
Administration, or “FDA”, under Section 510(k) of the Federal Food, Drug and
Cosmetic, or “FDC”, Act based on the existence of predicate devices, which,
subject to our capital limitations described below, we plan to seek in the
future. We have demonstrated a feasibility prototype of the WAK and we will
determine whether to devote any available resources to the development of the
WAK; commercialization of the WAK will require development of a functional
prototype and likely a full pre-market approval, or “PMA”, by the FDA, which
could take several years or longer. Unless we are able to raise funds to satisfy
our current liabilities and other obligations as they become due and obtain
additional debt or equity financing, as more fully described below in section
captioned “Business - Recent Developments”, we will not be able to submit a
510(k) notification with the FDA for the PAK or the WAK.
Our PAK
for the attended care market is a portable, multifunctional renal replacement
device that will offer cost-effective therapy for those patients suffering from
ARF, causing a rapid decline in kidney function. We have completed our
functional prototype of this product, which is currently undergoing bench
testing, and, subject to our capital limitations described below, plan to submit
a 510(k) filing with the FDA in the future. We plan to commercialize this
product after receiving clearance from the FDA. Timing of FDA clearance is
uncertain at this time. Unless we are able to raise funds to satisfy our current
liabilities and other obligations as they become due and obtain additional debt
or equity financing, we will not be able to submit a 510(k) notification with
the FDA for this product.
Our PAK
for the home hemodialysis market is a device for patients suffering from ESRD,
in whom the kidneys have ceased to function. We have also completed our
functional prototype of this product, which is currently undergoing bench
testing, and, subject to our capital limitations described below, we intend to
submit a 510(k) with the FDA in the future. Unless we are able to raise funds to
satisfy our current liabilities and other obligations as they become due and
obtain additional debt or equity financing, we will not be able to submit a
510(k) notification with the FDA for this product. Clinical trials would be
anticipated to commence after the FDA clearance is received.
Our WAK
is a device for the chronic treatment of ESRD. We have successfully demonstrated
a prototype system that weighs less than 6 kg., is battery operated, and can be
worn by an ambulatory patient. Assuming that the Technology Transaction
described below closes and we are able to raise funds to satisfy our current
liabilities and other obligations as they become due and obtain additional debt
or equity financing, we will evaluate the feasibility of furthering our
development of this product over the next 12 months
.
In 2009,
to the extent we have or are able to obtain sufficient funds to do so, we plan
to continue testing and developing the technology for our
extra-corporeal
platform. We
will also implement our validation and verification strategy including bench
testing, clinical testing and regulatory strategy in the U.S. and
abroad.
While we
may eventually exploit our technology’s potential Congestive Heart Failure, or
“CHF”, applications through licensing or strategic arrangements, we will focus
initially on the renal replacement applications described above.
We have
focused much of our efforts on development of the PAK, which we do not believe
has been derived from the Technology (as defined below) covered by the License
Agreement. As described in the section captioned “Background of the Technology
Transaction,” once the Technology Transaction has closed and the results of the
arbitration proceeding are final, we will determine whether to devote any
available resources to development of the WAK. Because none of our products is
yet at a stage where it can be marketed commercially and because of the capital
limitations that we are experiencing, we are not able to predict what portion of
our future business, if any, will be derived from each of our
products.
We are a
development stage company, have generated no revenues to date and have been
unprofitable since our inception, and will incur substantial additional
operating losses for at least the next twelve months as we continue, to the
extent available, to allocate resources to research, development, clinical
trials, commercial operations, and other activities. We do not believe our
existing cash reserves will be sufficient to satisfy our current liabilities and
other obligations before we achieve profitability. Our ability to meet such
obligations as they become due will depend on our ability to secure debt or
equity financing. Unless we are able to obtain funds sufficient to support our
operations and to satisfy our ongoing capital requirements, as more fully
described below, we will not be able to develop any of our products, submit
510(k) notifications or PMA applications to the FDA, conduct clinical trials or
otherwise commercialize any of our products. We may not be able to
obtain needed funds on acceptable terms, or at all, and there is substantial
doubt of our ability to continue as a going concern. Accordingly, our historical
operations and financial information are not indicative of our future operating
results, financial condition, or ability to operate profitably as a commercial
enterprise.
Our
History
We were
incorporated in the State of Delaware in 1992. As of June 30, 2007, we did not
conduct any active business and were considered a “shell company” as defined in
Rule 12(b)-2 promulgated under the Exchange Act. On August 10, 2007, we entered
into a merger agreement with Xcorporeal, Inc., referred to herein as “pre-merger
Xcorporeal”, which conducted the business described in this Annual Report before
the merger became effective on October 12, 2007. Pre-merger Xcorporeal became
our wholly-owned subsidiary and changed its name to “Xcorporeal Operations,
Inc”, referred to herein as “Operations.” We changed our name from “CT Holdings
Enterprises, Inc.” to “Xcorporeal, Inc.” All of our former officers and
directors resigned, and all of the officers and directors of pre-merger
Xcorporeal became our officers and directors, effective as of October 12,
2007.
On
September 1, 2006, Operations entered into a License Agreement with National
Quality Care, Inc. pursuant to which we obtained the exclusive rights to the
technology relating to our kidney failure treatment, and other medical devices.
As a result, we became a development stage company focused on researching,
developing and commercializing technology and products related to the treatment
of kidney failure. On December 1, 2006, Operations initiated arbitration
proceedings against NQCI for its breach of the License Agreement, which remains
pending. Throughout this Annual Report we refer to the License Agreement with
NQCI as the “License Agreement”. For a complete description of the License
Agreement and the arbitration proceedings please see section captioned “Recent
Developments - Background of the Technology Transaction” below and Item 3 -
Legal Proceedings.
Recent
Developments
Corporate Restructuring
The deterioration of the economy over
the last year, coupled with the prolonged and continuing delay in consummating
the Technology Transaction, has significantly adversely affected our Company.
Many of the expectations on which we had based our 2008 and 2009 business
development plans slowly eroded as a result of the lengthy arbitration
proceeding with NQCI commenced in 2006 and continuing into the second quarter of
2009. The possibility of an adverse decision in the arbitration proceeding with
respect to our ownership right to the Technology has been and continues to be a
major factor in our inability to secure debt or equity financing. Accordingly,
we have had to modify our activities and business. In response to the general
economic downturn affecting the development of our products and liquidity
condition, we have instituted a variety of measures in an attempt to conserve
cash and reduce our operating expenses. Our actions included:
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Reductions
in our labor force – On March 13, 2009, we gave notice of employment
termination to 19 employees. This represents a total work-force reduction
of approximately 73%. We paid accrued vacation benefits of approximately
$70,000 to the terminated employees. The layoffs and our other efforts
focused on streamlining our operations designed to reduce our annual
expenses by approximately $3.5 million to a current operating burn rate of
approximately $200,000 per month. These actions had to be carefully and
thoughtfully executed and we will take additional actions, if necessary.
Most important to us in making these difficult decisions is to give as
much consideration as possible to all of our employees, whom we greatly
value. We hope to be in the financial position in the near future to offer
re-employment to certain of our terminated
employees.
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Refocusing
our available assets and employee resources on the development of the
PAK.
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Continuing
vigorous efforts to minimize or defer our operating
expenses.
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Exploring
various strategic alternatives, which may include the license of certain
of our intellectual property rights, as a means to further develop our
technologies, among other possible transactions and
alternatives.
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Intensifying
our search to obtain additional financing to support our operations and to
satisfy our ongoing capital requirements in order to improve our liquidity
position.
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Continuing
to prosecute our patents and take other steps to perfect our intellectual
property rights.
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In light of the unprecedented economic
slow down, lack of access to capital markets and prolonged arbitration
proceeding with NQCI, we were compelled to undertake the efforts outlined above
in order to remain in the position to continue our operations. We hope to be
able to obtain additional financing to meet our cash obligations as they become
due and otherwise proceed with our business plan. Our ability to execute on our
current business plan is dependent upon our ability to obtain equity or debt
financing, develop and market our products, and, ultimately, to generate
revenue. Unless we are able to raise financing sufficient to support our
operations and to satisfy our ongoing financing requirements, we will not be
able to develop any of our products, submit 510(k) notifications to the FDA,
conduct clinical trials or otherwise commercialize any of our products. We will
make every effort however, to continue the development of the PAK. As a result
of these conditions, there is substantial doubt about our ability to continue as
a going concern. Our ability to continue as a going concern is substantially
dependent on the successful execution of many of the actions referred to above,
on the timeline contemplated by our plans and our ability to obtain additional
financing. We cannot assure you that we will be successful now or in the future
in obtaining any additional financing on terms favorable to us, if at all. The
failure to obtain financing will have a material adverse effect on our financial
condition and operations.
Other Considerations
– Royalty and Other Payments Under
the License Agreement
As
consideration for entering into the License Agreement, we agreed to pay to NQCI
a minimum annual royalty of $250,000, or 7% of net sales. As a result of the
transfer of the Technology (as defined below) to us, we may be able to realize
additional savings of not having to compensate NQCI for any royalty payments
accrued and not yet paid. Although we have asserted that NQCI’s breaches of the
License Agreement excused our obligation to make the minimum royalty payments,
we recorded $583,333 in royalty expenses, covering the minimum royalties, from
commencement of the License Agreement through December 31, 2008. The License
Agreement expires in 2105. If we are able to acquire the Technology from NQCI,
the arbitrator, Richard C. Neal (Ret), has indicated that the License Agreement
would be terminated simultaneously with such acquisition. As a result of the
Technology becoming our sole and exclusive property, among other benefits, we
should be able to discontinue these royalty payments to NQCI and realize
corresponding savings.
The
License Agreement also requires us to reimburse NQCI’s reasonable and necessary
expenses incurred in the ordinary course of business consistent with past
practices, or the “Licensor Expenses”, until the closing or the termination of
the Merger Agreement (as defined below). The Second Interim Award (as defined
below) states that the License Agreement will remain in full force and effect
until the Technology Transaction closes or the arbitrator determines that it
will never close. Although we have contested its right to any further payments,
NQCI has made a claim for reimbursement of approximately $690,000 in alleged
expenses under the License Agreement as of December 31, 2008. As a result of the
Technology becoming our sole and exclusive property, among other benefits, we
may be able to realize additional savings of not having to reimburse NQCI for
any Licensor Expenses accrued and not yet paid. For a complete description of
the License Agreement and the arbitration proceedings please see below section
captioned “Background of the Technology Transaction” and Item 3 - Legal
Proceedings.
Technology
Transaction
Seeking Stockholder Approval
of the Technology Transaction
We are
currently in the process of seeking approval from our stockholders to issue
9,230,000 shares of our common stock to NQCI in order to obtain ownership of the
Technology. The stockholder approval is being sought in accordance with an
Interim Award issued by the arbitrator on June 9, 2008, referred to herein as
the “Interim Award”, in an arbitration proceeding with NQCI, as modified by
later decisions, including the Amended Order Re Interim Relief Etc. issued by
the arbitrator on January 30, 2009, referred to herein as the “Order”, and in
order to minimize the risk that the arbitrator will issue an alternative award
that could have a material adverse effect on our financial condition and
operations. The arbitrator has refused to issue a final award until stockholder
approval has been obtained from our stockholders, which may effectively prevent
us from obtaining effective court review of the arbitrator’s actions. The most
material terms of the proposed transaction are summarized as
follows:
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Subject
to the satisfaction of the terms of the Interim Award, as modified by the
Order, NQCI will grant, transfer and assign to Operations all of the
Technology covered by the License Agreement currently in effect between
NQCI and Operations;
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The
Technology includes all patents and patent applications related to a WAK
and other portable or continuous dialysis methods or
devices;
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Under
the terms of the Interim Award, as modified by the Order, we filed a proxy
statement with the SEC to obtain stockholder approval for the issuance of
shares of our common stock to acquire the Technology and issue to NQCI
9,230,000 shares of our common
stock;
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If
and when we are able to do so, we will issue and deliver to
NQCI 9,230,000 shares of our common stock in consideration for the
Technology. As a result, NQCI will own approximately 39% of our
outstanding common stock and become our largest
stockholder;
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Except
for its definition, indemnification, representation and warranty
provisions, the License Agreement shall thereafter be terminated and be of
no further force or effect; and
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After
the transfer of the Technology by NQCI to us, under the Interim Award, as
modified by the Order, we will be required to file a registration
statement with the SEC to register for resale under the Securities Act the
shares issued to NQCI, referred to herein as the “Registration
Statement”.
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The SEC
is continuing to review our preliminary proxy statement. We cannot predict when
we would be able to hold our stockholder meeting to obtain stockholder approval
of the share issuance.
Background of the Technology
Transaction
On
September 1, 2006, Operations entered into the License Agreement with NQCI
pursuant to which we obtained exclusive rights to the technology relating to the
treatment of kidney failure and other applications, with no geographic
restrictions for a license term of 99 years (or, if earlier, until the
expiration of NQCI's proprietary rights in the Technology) for an annual royalty
of 7% of net sales, with a minimum annual royalty of $250,000. The Technology
relates primarily to the WAK, and also covers “Derivative Works,” such as an
original work that is based upon one or more pre-existing works.
On
September 1, 2006, Operations also entered into a Merger Agreement with NQCI,
referred to herein as the “Merger Agreement”, which contemplated that we would
acquire NQCI as a wholly owned subsidiary pursuant to a triangular merger,
referred to herein as the “NQCI Merger”, or we would issue shares of our common
stock to NQCI stockholders in consideration of the assignment of the Technology,
referred to herein as the “Technology Transaction”. The Merger Agreement
provided that Operations had no obligation to issue or deliver any shares after
December 31, 2006, unless the parties mutually agreed to extend such date, which
they did not. In addition, on December 29, 2006, NQCI served us with written
notice that it was terminating the Merger Agreement, which we accepted.
Accordingly, the NQCI Merger was not consummated.
On
December 1, 2006, Operations initiated an arbitration proceeding against NQCI
for its breach of the License Agreement, which remains pending. NQCI claimed the
License Agreement was terminated, and we sought a declaration that the License
Agreement remained in effect until the closing of the NQCI merger or the
Technology Transaction. We later amended our claims to seek damages for NQCI’s
failure to perform its obligations under the License Agreement. NQCI filed
counterclaims seeking to invalidate the License Agreement and claiming monetary
damages against us. NQCI also filed claims against Victor Gura, M.D.,
our Chief Medical and Scientific Officer, claiming he breached his obligations
to NQCI by agreeing to serve on our Board of Directors. Following a hearing and
extensive briefing, the arbitrator denied both parties’ claims for damages.
Although NQCI never filed an amendment to its counterclaims to seek specific
performance, on June 9, 2008, the arbitrator issued an Interim Award granting
specific performance of the Technology Transaction.
The
Interim Award stated that the total aggregate shares of stock to be received by
NQCI stockholders at the closing of the Technology Transaction should equal 48%
of all Operations shares outstanding as of the date of the Merger Agreement. On
September 1, 2006, there were 10,000,000 shares of Operations common stock
outstanding.
On August
4, 2008, the arbitrator issued the Second Interim Award, referred to herein as
the “Second Interim Award”, modifying the initial Interim Award, stating that,
if we desire to close the Technology Transaction, we must obtain approval from a
majority of our stockholders and issue 9,230,000 shares of our common stock to
NQCI. As a result of our issuances of our common stock subsequent to the date of
the Merger Agreement and following the closing of the Technology Transaction,
NQCI would own approximately 39% of our total outstanding shares, which would
make NQCI our largest stockholder. In addition, pursuant to the terms of the
Second Interim Award, the arbitrator found that, with the exception of
stockholder approval, virtually all conditions to closing the Technology
Transaction have been waived, including virtually all of NQCI’s representations
and warranties concerning the Technology.
The
Second Interim Award also stated that, contrary to the assertions made by NQCI,
the License Agreement will remain in full force and effect until the Technology
Transaction closes or the arbitrator determines that it will never close. Upon
closing of the Technology Transaction and satisfaction of the terms of the
Interim Award, as modified by the Order, the License Agreement will terminate
and we will own all of the Technology.
On
September 4, 2008, the arbitrator ruled that, even though we are not a party to
any of the agreements or the arbitration, our shares of common stock should be
issued to NQCI rather than shares of Operations.
The
arbitrator has not ordered us to close the Technology Transaction. However, the
Second Interim Award states that, if our stockholders fail to approve the
issuance of stock to effectuate the Technology Transaction, all of the
Technology covered by the License shall be declared the sole and exclusive
property of NQCI, and the arbitrator shall schedule additional hearings to
address two questions: whether the PAK technology is included within that
Technology, and whether NQCI is entitled to compensatory damages and the amount
of damages under these circumstances. During the arbitration, NQCI took the
position that we had misappropriated trade secrets regarding the WAK and used
them to create the PAK. The arbitrator found that we had not misappropriated
NQCI’s trade secrets. However, should the Technology Transaction not close for
any reason, and the arbitrator rules that the licensed Technology must be
returned to NQCI, the arbitrator could find that the PAK is derived in whole or
in part from licensed Technology, and could rule that Operations must “return”
the PAK technology to NQCI or that NQCI is entitled to compensatory damages or
both.
The
Second Interim Award required that we file the Registration Statement within 30
days after the closing of the Technology Transaction. The arbitrator
acknowledged that our obligation is to file the Registration Statement and to
use reasonable efforts to have the shares registered and not to guarantee
registration and resultant actual public tradability. However, the arbitrator
nevertheless ordered that the Registration Statement must be declared effective
within 90 days. Pursuant to the terms of the Order, the arbitrator modified the
Second Interim Award by reserving on what the final terms of our obligation to
file the Registration Statement will be and stating that such registration
obligation shall be in accordance with applicable laws, including applicable
U.S. federal securities laws. While the arbitrator also retained jurisdiction to
monitor our compliance with such obligation, to award any appropriate relief to
NQCI if we fail to comply with such obligation and to render a decision on any
other matters contested in this proceeding, the time periods set forth in the
Second Interim Award and summarized in this paragraph are no longer
applicable.
The Order
also provided, among other things, that if we file the Proxy Statement, obtain
stockholder approval to issue to NQCI 9,230,000 shares of our common stock and
issue such shares to NQCI, the arbitrator’s awards requiring specific
performance of the Technology Transaction will be effectuated and the arbitrator
anticipates confirming that all of the Technology covered by the License
Agreement shall be declared our sole and exclusive property and that the
alternate relief NQCI seeks will be moot.
The
arbitrator held a conference call hearing with the Company and NQCI on March 13,
2009 in which the parties discussed the reasons for the difficulties in closing
the Technology Transaction and explored potential alternatives. The parties were
asked to submit letter briefs outlining their suggested alternatives for
consideration by the arbitrator. The parties submitted their respective letter
briefs on March 24, 2009.
As of the
date of this Annual Report, the arbitration proceeding with NQCI continues and
the arbitrator has not yet issued a final award to either party and has not made
a final ruling with respect to whether the closing of the Technology Transaction
shall occur or whether potential alternatives should be pursued.
The
Technology
The
Merger Agreement provides that, at the closing of the Technology Transaction,
NQCI shall absolutely, unconditionally, validly and irrevocably sell, transfer,
grant and assign to Operations all of the Technology, including, but not limited
to, the inventions embodied or described in the Licensor Patents and Patent
Applications as defined in the License Agreement.
“Technology”
includes all existing and hereafter developed Intellectual Property, Know-How,
Licensor Patents, Licensor Patent Applications, Derivative Works, and any other
technology invented, improved or developed by NQCI, or as to which NQCI owns or
holds any rights, arising out of or relating to the research, development,
design, manufacture or use of:
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(a)
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any
medical device, treatment or method as of September 1,
2006;
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(b)
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any
portable or continuous dialysis methods or devices, specifically including
any wearable artificial kidney, or “Wearable Kidney”, and related
devices;
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(c)
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any
device, methods or treatments for congestive heart failure;
and
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(d)
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any
artificial heart or coronary
device.
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“Intellectual
Property” includes:
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(a)
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patents,
patent applications, and patent rights;
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(b)
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trademarks,
trademark registrations and applications;
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(c)
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copyrights,
copyright registrations, and applications; and
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(d)
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trade
secrets, confidential information and
know-how.
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“Licensed
Products” includes all products based on or derived from the Technology,
including, but not limited to the Wearable Kidney and all related devices,
whether now-existing or hereafter developed.
Research
and Development
R&D
Team
We employ an interdisciplinary team of scientists and engineers who
are developing the PAK and a separate, interdisciplinary team developing the
WAK. However, as a result of general economic conditions in 2008 and a
deterioration of our liquidity position, coupled with the prolonged and
continuing delay in our ability to consummate the Technology Transaction, we
have been significantly adversely affected. As a result, on March 13, 2009 we
terminated 19 employees or 73% of our staff. We hope to be in the financial
position in the near future to offer re-employment to certain of our terminated
employees.
In
addition, we had previously retained Aubrey Group, Inc. (“Aubrey”), an
FDA-registered third-party contract developer and manufacturer of medical
devices, to assist with the design and development of subsystems of the PAK,
referred to herein as the “Aubrey Agreement.” As of December 31, 2008, Aubrey
substantially completed its work and we intend to terminate this agreement. A
variation of this device will be developed for chronic home
hemodialysis.
We
incurred $20.9 million and $7.1 million in research and development costs in
fiscal years 2008 and 2007, respectively, including the August 4, 2008, $10.2
million fair value accrual for a potential 9.23 million shares issuance to
effectuate the Technology Transaction in accordance to the Second Interim Award.
Excluding the accrual for shares issuable, we incurred $10.7 million and $7.1
million in research and development costs in fiscal years 2008 and 2007,
respectively.
Portable Artificial
Kidney
The PAK
is a multifunctional device that will perform hemodialysis, hemofiltration and
ultrafiltration under direct medical supervision. A variation of this device
will be developed for chronic home hemodialysis. An initial prototype of the
PAK, capable of performing the basic functions of a hemodialysis machine, and
demonstrating our unique new fluidics circuit, was completed at the end of 2007.
The first physical prototype including industrial design of the PAK was
completed in October 2008. We hope to further refine this prototype by adding to
it safety sensors and electronic controls. Subject to our ability to obtain debt
or equity financing to satisfy our current liabilities and other obligations as
they become due, as more fully described above in the section captioned “Recent
Developments,” we hope to complete the final product design of the PAK. The PAK
units will undergo final verification and validation prior to a 510(k)
submission for clinical use under direct medical supervision. A clinical study
will not be required for this submission.
Wearable Artificial
Kidney
In a
clinical feasibility study conducted in London in March 2007, a research
prototype of the WAK was demonstrated in eight patients with end-stage renal
disease. Patients were treated for up to eight hours with adequate clearances of
urea and creatinine. The device was well tolerated and patients were able to
conduct activities of normal daily living including walking and sleeping. There
were no serious adverse events although clotting of the dialyzer occurred in two
patients. To our knowledge, this is the first successful demonstration of a WAK
in humans. Assuming that the Technology Transaction closes and sufficient
working capital is available to us, we hope to make substantial improvements to
the WAK. This work will result in a WAK Generation 2.0. Pending FDA approval of
an investigational Device Exemption (IDE), additional clinical studies will be
conducted upon completion of the Generation 2.0 WAK prototype.
If we
successfully obtain additional financing, we plan to make improvements to the
WAK design intended to move it from a feasibility prototype to a product
prototype. These include improvement of the heparin pumping system intended to
address the dialyzer clotting problem, the addition of safety sensors required
for commercial dialysis equipment, the addition of electrical controls to
provide a convenient user interface, improvements to the blood flow circuit and
further miniaturization of the device to improve fit to the human body.
Additional clinical studies will be conducted upon completion of the
prototype.
Third-party
Arrangements
In July
2007, we entered into the Aubrey Agreement. The PAK will be designed for
intermittent hemodialysis or Continuous Renal Replacement Therapy (CRRT) in an
attended care setting as well as for treatments in a home setting. As of
December 31, 2008, Aubrey substantially completed its work and we intend to
terminate this agreement. At the inception of the Aubrey Agreement, total labor
and material costs over the term of the agreement were budgeted to amount to
approximately $5.1 million and as of December 31, 2008, the agreement was
substantially completed under the budgeted amount at a cost of $3.2
million.
We also
contract with other third parties to assist in our research and development
efforts and to supplement our internal resources while we continue to grow our
organization.
Government
Regulation
US
Regulation
We are subject to extensive government
regulation relating to the development and marketing of our products. Due to the
relatively early nature of our development efforts, we have not yet confirmed
with the FDA its view of the regulatory status of any of our
products.
To support a regulatory submission,
the FDA may require clinical studies to show safety and effectiveness. While we
cannot currently state the nature of the studies the FDA may require due to our
early stage of product development, it is likely that some products we attempt
to develop will require time-consuming clinical studies in order to secure
approval.
Outside the US, our ability to market
potential products is contingent upon receiving market application
authorizations from the appropriate regulatory authorities. These foreign
regulatory approval processes may involve different requirements from those of
the FDA, but also generally include many, if not all, of the risks associated
with the FDA approval process described above, depending on the country
involved.
In the US, medical devices are
classified into three different classes, Class I, II and III, on the basis of
controls deemed reasonably necessary to ensure the safety and effectiveness of
the device. Class I devices are subject to general controls, including
labelling, pre-market notification and adherence to the FDA’s Good Manufacturing
Practices, or “GMP”, Class II devices are subject to general and special
controls, including performance standards, post-market surveillance, patient
registries and FDA guidelines, and Class III devices are those which must
receive pre-market approval by the FDA to ensure their safety and effectiveness,
that is, life-sustaining, life-supporting and implantable devices, or new
devices, which have been found not to be substantially equivalent to legally
marketed devices. Because of their breakthrough nature, some of our devices may
be considered Class III.
Before new class II medical devices,
such as our current and pipeline products, can be marketed, marketing clearance
must be obtained through a pre-market notification under Section 510(k) of the
FDC Act. Non-compliance with applicable requirements can result in fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, refusal to authorize the marketing of new products or
to allow us to enter into supply contracts and criminal prosecution. A 510(k)
clearance will typically be granted by the FDA if it can be established that the
device is substantially equivalent to a “predicate device,” which is a legally
marketed Class I or II device or a pre-amendment Class III device (that is, one
that has been marketed since a date prior to May 28, 1976), for which the FDA
has not called for PMA. The FDA has been requiring an increasingly rigorous
demonstration of substantial equivalence, which may include a requirement to
submit human clinical trial data. It generally takes 4 to 12 months from the
date of a 510(k) submission to obtain clearance, but it may take
longer.
If clearance or approval is obtained,
any device manufactured or distributed by us will be subject to pervasive and
continuing regulation by the FDA. We will be subject to routine inspection by
the FDA and will have to comply with the host of regulatory requirements that
usually apply to medical devices marketed in the U.S. including labelling
regulations, GMP requirements, Medical Device Reporting (MDR) regulation, which
requires a manufacturer to report to the FDA certain types of adverse events
involving its products, and the FDA’s prohibitions against promoting products
for unapproved or “off-label” uses.
International Organization for
Standards, or “ISO”, standards were developed by the European Community, or
“EC”, as a tool for companies interested in increasing productivity, decreasing
cost and increasing quality. The EC uses ISO standards to provide a universal
framework for quality assurance and to ensure the good quality of products and
services across borders. The ISO standards (now ISO13485) have facilitated trade
throughout the EC, and businesses and governments throughout the world are
recognizing the benefit of the globally accepted uniform standards. Any
manufacturer we utilize for purposes of producing our products (including us, if
we manufacture any of our own products) will be required to obtain ISO
certification to facilitate the highest quality products and the easiest market
entry in cross-border marketing. This will enable us to market our products in
all of the member countries of the EC. We also will be required to comply with
additional individual national requirements that are outside the scope of those
required by the European Economic Area.
Any medical device that is legally
marketed in the US may be exported anywhere in the world without prior FDA
notification or approval. The export provisions of the FDC Act apply only to
unapproved devices. While FDA does not place any restrictions on the export of
these devices, certain countries may require written certification that a firm
or its devices are in compliance with US law. In such instances FDA will
accommodate US firms by providing a Certificate for Foreign Government. In cases
where there are devices which the manufacturer wishes to export during the
interim period while their 510(k) submission is under review, exporting may be
allowed without prior FDA clearance under certain limited
conditions.
Competition
We compete directly and indirectly
with other biotechnology and healthcare equipment businesses, including those in
the dialysis industry. The major competitors for our platform technology are
those companies manufacturing and selling dialysis equipment and supplies. We
anticipate that some of our primary competitors will be companies such as
Baxter, Fresenius, Gambro, NxStage and B Braun. We will compete with these
companies in the critical care markets as well as dialysis clinics, and the home
and wearable application markets. In many cases, these competitors are larger
and more firmly established than we are. In addition, our competitors have
greater marketing and development budgets and greater capital resources than our
company. Others are working on portable and wearable peritoneal dialysis
machines and competitors are working on portable hemodialysis machines, but we
are not aware of any other wearable hemodialysis machines currently under
development.
Patents
and Trademarks
We have
exclusive licenses to three issued U.S. patents, U.S. Patent No. 7,309,323
entitled “Wearable continuous renal replacement therapy device,” No. 7,276,042
entitled “Low hydraulic resistance cartridge,” and No. 6,960,179 entitled
“Wearable continuous renal replacement therapy device.” We also have exclusive
licenses to several pending U.S. patent applications, including U.S. Patent
Application No. 11/500,572 entitled “Dual-ventricle pump cartridge, pump, and
method of use in a wearable continuous renal replacement therapy
device.”
In addition to our exclusive licenses,
we are actively protecting inventions that are commercially important to our
business by developing our own intellectual property and filing and prosecuting
our own patents. We currently have 24 pending U.S. patent applications and 3 PCT
applications.
We also have pending applications to
register our trademarks, “Xcorporeal” and “Xcorporeal WAK.”
Employees
As of December 31, 2008, we had
approximately 24 full-time employees. However, as discussed above in the section
captioned “Recent Developments,” during the first quarter of 2009, we had to
adjust our employee headcount to more closely match our capital availability
and, as a result, terminated the employment of 19 employees. Assuming that we
have sufficient resources, we hope to increase our headcount in the future. We
also utilize, whenever appropriate, contract and part-time professionals in
order to advance our technologies while conserving cash and
resources.
Reports
to Security Holders
Our
Internet address is www.xcorporeal.com. The content on our website is available
for information purposes only. It should not be relied upon for investment
purposes, nor is it incorporated by reference into this Annual
Report.
We
make available free of charge through our Internet website under the heading
“Investors,” our Annual Report on Form 10-K or 10-KSB, Quarterly
Reports on Form 10-Q or 10-QSB, current reports on Form 8-K, Proxy
Statements on Schedule 14A and amendments to those reports and statements after
we electronically file such materials with the SEC. Copies of our key corporate
governance documents, including our Code of Ethics and charters for the
Audit Committee, the Compensation Committee and the Nominating
Committee are also available on our website. Our stockholders may
request free copies of these documents, including a copy of this Annual
Report, without charge by writing us at: Investor Relations, Xcorporeal, Inc,
12121 Wilshire Blvd. Suite 350, Los Angeles, California
90025.
Our
filed Annual and Quarterly Reports, Proxy Statements and other previously filed
SEC reports are also available to the public through the SEC’s website at
http://www.sec.gov. Materials we file with the SEC may also be read and copied
at the SEC’s Public Reference Room at 100 F Street, NE, Washington D.C.
20549. Information on the operation of the Public Reference Room may be obtained
by calling the SEC at 1-800-SEC-0330.
Item
1A. Risk
Factors
You should carefully consider and
evaluate all of the information in this Annual Report, including the risk
factors listed below. While we describe each risk separately, some of these
risks are interrelated and certain risks could trigger the applicability of
other risks described below. Also, the risks and uncertainties described below
are not the only ones that we may face. Additional risks and uncertainties not
presently known to us, or that we currently do not consider significant, could
also potentially impair, and have a material adverse effect on, our business,
results of operations and financial condition. If any of these risks occur, our
business, results of operations and financial condition could be harmed, the
price of our common stock could decline, and future events and circumstances
could differ significantly from those anticipated in the forward-looking
statements contained in this Annual Report.
Risks
Related to Our Business
There
is substantial doubt about our ability to continue as a going
concern.
Our independent registered public
accounting firm has issued a report on our financial statements for the fiscal
year ended December 31, 2008, that states that our recurring losses from
operations and net capital deficiency raise substantial doubt about our ability
to continue as a going concern. Our plans concerning these matters are discussed
in the section captioned “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and in Note 1, “Nature of Operations and
Going Concern Uncertainty” to the financial statements filed as part of this
Annual Report. Our ability to operate is dependent on meeting our cash
obligations as they become due which will depend on our ability to secure debt
or equity financing on acceptable terms or otherwise address these matters. If
we fail to do so for any reason, we would not be able to continue as a going
concern and could potentially be forced to seek relief through a filing under
the U.S. Bankruptcy Code.
We
need financing to continue our ongoing operations and will need additional
financing in the future.
We need
financing to continue our ongoing operations and pay our liabilities and we will
need additional financing to maintain and expand our business, and financing may
not be available on favorable terms, if at all.
We may finance our business through the
private placement or public offering of equity or debt securities. If we raise
additional funds by issuing equity securities, such financing may result in
further dilution to our stockholders. Any equity securities issued also may
provide for rights, preferences or privileges senior to those of holders of our
common stock. If we raise additional funds by issuing additional debt
securities, these debt securities would have rights, preferences and privileges
senior to those of holders of our common stock, and the terms of the debt
securities issued could impose significant restrictions on our operations. If we
raise additional funds through collaborations and licensing arrangements, we
might be required to relinquish significant rights to our technology or
products, or to grant licenses on terms that are not favorable to us. If we need
funds and cannot raise them on acceptable terms, we may not be able to execute
our business plan and our stockholders may lose substantially all of their
investment.
We
expect to continue to incur operating losses, and if we are not able to raise
necessary additional funds we may have to reduce or stop
operations.
We have not generated revenues or
become profitable, may never do so, and may not generate sufficient working
capital to cover the cost of operations. Our existing cash, cash equivalents and
marketable securities may not be sufficient to fund our business until we can
become cash flow positive and we may never become cash flow positive. No party
has guaranteed to advance additional funds to us to provide for any operating
deficits. Until we begin generating revenue, we may seek funding through the
sale of equity, or securities convertible into equity, which could result in
further dilution to our then existing stockholders. If we raise additional
capital through the incurrence of debt, our business may be affected by the
amount of leverage we incur, and our borrowings may subject us to restrictive
covenants. Such funding may not be available to us on acceptable terms, or at
all. If we are unable to obtain adequate financing on a timely basis, we may be
required to delay, reduce or stop operations, any of which would have a material
adverse effect on our business.
An
unfavorable result in the pending arbitration could have a material adverse
effect on our business.
We
consider the protection of our proprietary technology for treatment of kidney
failure, which we have licensed and are developing, to be critical to our
business prospects. We obtained the rights to some of our most significant
patented and patent-pending technologies through a License Agreement with NQCI.
On December 1, 2006, Operations initiated arbitration against NQCI for its
breach of the License Agreement, which remains pending. NQCI subsequently filed
counterclaims seeking to invalidate the License Agreement and claiming monetary
damages against us. On June 9, 2008, the arbitrator issued an Interim Award
granting specific performance of the Technology Transaction in consideration of
NQCI stockholders receiving 48% of all Operations shares outstanding as of the
date of the Merger Agreement. On August 4, 2008, the arbitrator issued a Second
Interim Award, modifying the initial Interim Award, stating that, if we desire
to close the Technology Transaction, we must obtain approval from a majority of
our stockholders and issue 9,230,000 shares of our common stock to NQCI. On
August 15, 2008, the arbitrator awarded NQCI $1.87 million of over $4 million it
claimed in attorneys’ fees and costs. The award has no effect on the additional
amount of approximately $690,000 claimed by NQCI in unpaid royalties and alleged
expenses under the License Agreement. The arbitrator has not yet ruled on this
claim.
On
September 4, 2008, the arbitrator issued an order that we should issue and
deliver the 9,230,000 shares directly to NQCI, rather than directly to NQCI
stockholders, if we obtain stockholder approval and elect to proceed with the
Technology Transaction.
On
January 30, 2009, the arbitrator issued the Order, which provides, among other
things, that if we file the Proxy Statement, obtain stockholder approval to
issue to NQCI 9,230,000 shares of our common stock as consideration for the
closing of the Technology Transaction and issue such shares to NQCI, the
arbitrator anticipates confirming that all of the Technology covered by the
License Agreement shall be declared our sole and exclusive
property.
The
arbitrator held a conference call hearing with the Company and NQCI on March 13,
2009 in which the parties discussed the reasons for the difficulties in closing
the Technology Transaction and explored potential alternatives. The parties were
asked to submit letter briefs outlining their suggested alternatives for
consideration by the arbitrator. The parties submitted their respective letter
briefs on March 24, 2009.
The
arbitrator has stated that he has not yet issued a final award that may be
confirmed or challenged in a court of competent jurisdiction. A party to the
arbitration could challenge the interim award in court, even after stockholders
approve the transaction. In addition, the arbitrator could again change the
award by granting different or additional remedies, even after stockholders
approve the transaction. We cannot guarantee that the arbitrator would order
that stockholders be given another opportunity to vote on the transaction, even
if such changes are material. Arbitrators have broad equitable powers, and
arbitration awards are difficult to challenge in court, even if the arbitrator
makes rulings that are inconsistent or not in accordance with the law or the
evidence.
Should
the arbitrator order a material change to the Second Interim Award, as modified
by the Order, after the vote of our stockholders, and further order that our
stockholders not be given another opportunity to vote on such proposal or on
such material change, such order could conflict with applicable federal
securities laws or NYSE Amex rules to which we are subject. In such event, we
would ask the arbitrator to amend such changed award or attempt to seek review
of the changed award in a court of competent jurisdiction. The closing of the
Technology Transaction may render any court review or appeal moot, effectively
preventing us from challenging any of the arbitrator’s awards in
court.
If the
arbitrator were to further modify any interim awards or orders, or if NQCI were
to prevail on some or all of its claims, we could be prevented from using some
or all of the patented technology we licensed from NQCI. That could
significantly impact our ability to use and develop our technologies, which
would have a material adverse effect on our business and results of
operations.
Our
limited operating history may make it difficult to evaluate our business to date
and our future viability.
We are in the early stage of
operations and development, and have only a limited operating history on which
to base an evaluation of our business and prospects, having commenced operations
in August 2006 in accordance with our new business plan and entry into the
medical devices industry. In addition, our operations and developments are
subject to all of the risks inherent in the growth of an early stage company. We
will be subject to the risks inherent in the ownership and operation of a
company with a limited operating history such as regulatory setbacks and delays,
fluctuations in expenses, competition, the general strength of regional and
national economies, and governmental regulation. Any failure to successfully
address these risks and uncertainties would seriously harm our business and
prospects. We may not succeed given the technological, marketing, strategic and
competitive challenges we will face. The likelihood of our success must be
considered in light of the expenses, difficulties, complications, problems and
delays frequently encountered in connection with the growth of a new business,
the continuing development of new technology, and the competitive and regulatory
environment in which we operate or may choose to operate in the future. We have
generated no revenues to date, and there can be no assurance that we will be
able to successfully develop our products and penetrate our target
markets.
Our
success will depend on our ability to retain our managerial personnel and to
attract additional personnel.
Competition for desirable personnel is
strong, and we cannot guarantee that we will be able to attract and retain the
necessary staff. The loss of members of managerial, sales or scientific staff
could have a material adverse effect on our future operations and on successful
development of products for our target markets. The failure to maintain our
management, particularly Kelly J. McCrann, our Chairman of the Board and Chief
Executive Officer, Robert Weinstein, our Chief Financial Officer and Secretary,
and Victor Gura, M.D., our Chief Medical and Scientific Officer, and to attract
additional key personnel could materially adversely affect our business,
financial condition and results of operations. Although we will provide
incentive compensation to attract and retain our key personnel, we cannot
guarantee that these efforts will be successful.
We will need to expand our finance,
administrative, product development, sales and marketing, and operations staff.
There are no assurances that we will be able to make such hires. However, as
discussed above in the section captioned “Recent Developments,” during the first
quarter of 2009, we had to adjust our employee headcount to more closely match
our capital availability and, as a result, terminated the employment of 19
employees. Assuming that we have sufficient resources, we hope to increase our
headcount in the future. In addition, we may be required to enter into
relationships with various strategic partners and other third parties necessary
to our business. Planned personnel may not be adequate to support our future
operations, management may not be able to hire, train, retain, motivate and
manage required personnel or management may not be able to identify, manage and
exploit existing and potential strategic relationships and market opportunities.
If we fail to manage our growth or personnel needs effectively, it could have a
material adverse effect on our business, results of operations and financial
condition.
We
need to develop our financial and reporting processes, procedures and controls
to support our anticipated growth.
We have begun investing in our
financial and reporting systems. To comply with our public reporting
requirements, and manage the anticipated growth of our operations and personnel,
we will be required to continue to improve existing or implement new operational
and financial systems, processes and procedures, and to expand, train and manage
our employee base. Our current and planned systems, procedures and controls may
not be adequate to support our future operations.
The laws and regulations affecting
public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and
rules adopted or proposed by the SEC, will result in increased costs to us as we
evaluate the implications of any new rules and respond to their requirements.
New rules could make it more difficult or more costly for us to obtain certain
types of insurance, including director and officer liability insurance, and we
may be forced to accept reduced policy limits and coverage or incur
substantially higher costs to obtain the same or similar coverage. In addition,
the need to comply with any new rules and regulations will continue to place
significant demands on our financial and accounting staff, financial, accounting
and information systems, and our internal controls and procedures, any of which
may not be adequate to support our anticipated growth. We cannot predict or
estimate the amount of the additional costs we may incur or the timing of such
costs to comply with any new rules and regulations, or if compliance can be
achieved.
We
cannot assure you that we will be able to complete development and obtain
necessary approvals for our proposed products even if we obtain sufficient
funding.
We will need additional financing to
maintain and expand our business, and such financing may not be available on
favorable terms, if at all. Even if we obtain sufficient funding, no assurance
can be given that we will be able to design or have designed parts necessary for
the manufacture of our products or complete the development of our proposed
products within our anticipated time frames, if at all. Such a situation could
have a material adverse effect upon our ability to remain in business. For
additional risks that we may encounter as a result of our need for additional
financing, please see risk factor below captioned “We need financing to continue
our ongoing operations and will need additional financing in the
future”.
The
success of our business will depend on our ability to develop and protect our
intellectual property rights, which could be expensive.
Patent and other proprietary rights
are essential to our business. Our success and the competitiveness of our
products are heavily dependent upon our proprietary technology and our ability
to obtain and enforce patents and licenses to patent rights, both in the U.S.
and in other countries. We cannot be certain that the patents that we license
from others will be enforceable and afford protection against competitors. We
rely on a combination of trademark and copyright laws, trade secrets and
know-how to develop, confidentiality procedures and contractual provisions to
maintain and strengthen our competitive position. Such means of protecting our
proprietary rights may not be adequate because such laws provide only limited
protection. While we protect our proprietary rights to the extent
possible, we cannot guarantee that third parties will not know, discover or
develop independently equivalent proprietary information or techniques, that
they will not gain access to our trade secrets or disclose our trade secrets to
the public. Therefore, we cannot guarantee that we can maintain and protect
unpatented proprietary information and trade secrets. Misappropriation of our
intellectual property would have an adverse effect on our competitive position,
may cause us to incur substantial litigation costs and could harm our business,
financial condition and results of operations and your investment.
Generally, we enter into
confidentiality and non-disclosure of intellectual property agreements with our
employees, consultants and many of our vendors, and generally control access to
and distribution of our proprietary information. Notwithstanding these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our proprietary information without authorization or to develop similar
information independently.
Additionally, our patent rights may
not provide us with proprietary protection or competitive advantages against
competitors with similar technologies. Even if such patents are valid, we cannot
guarantee that competitors will not independently develop alternative
technologies that duplicate the functionality of our technology. Our competitors
may independently develop similar or superior technology. Policing unauthorized
use of proprietary rights is difficult, and some international laws do not
protect proprietary rights to the same extent as United States laws. Litigation
periodically may be necessary to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. Litigation is costly and may not be successful.
Our failure to protect our proprietary technology or manufacturing processes
could harm our business, financial condition and results of operations and your
investment.
We may be subject to claims that we
infringe the intellectual property rights of others and unfavorable outcomes
could harm our business
.
Our future operations may be subject
to claims, and potential litigation, arising from our alleged infringement of
patents, trade secrets or copyrights owned by other third parties, including
third party rights in patents that have not yet been issued. We
intend to fully comply with the law in avoiding such infringements. However,
within the medical devices industry, established companies have actively pursued
such infringements, and have initiated such claims and litigation, which has
made the entry of competitive products more difficult. We may experience such
claims or litigation initiated by existing, better-funded
competitors.
If we do
infringe, the holder of the patent may seek to cause us to cease using the
technology subject to the patent, or require us to enter into a license or other
similar agreement and pay for our use of the intellectual property. In either
case, such event may have a material negative impact on our performance.
Court-ordered injunctions may prevent us from bringing new products to market,
and the outcome of litigation and any resulting loss of revenues and expenses of
litigation may substantially affect our ability to meet our expenses and
continue operations. Also, since we rely upon unpatented proprietary technology,
there is no assurance that others may not acquire or independently develop the
same or similar technology.
Patent
applications in the United States are maintained in secrecy until patents are
issued, and the publication of discoveries in the scientific literature tends to
lag behind actual discoveries. Therefore, we cannot guarantee that we will be
the first creator of future inventions for which we seek patents or the first to
file patent applications for any of our inventions.
Patent
applications filed in foreign countries are subject to laws, rules and
procedures which differ from those of the United States. We cannot be
certain that:
·
patents
will be issued from future applications;
·
any
future patents will be sufficient in scope or strength to provide meaningful
protection or any commercialadvantage to us;
·
foreign
intellectual property laws will protect our intellectual property;
or
·
others
will not independently develop similar products, duplicate our products or
design around any patentswhich may be issued to us.
Policing
unauthorized use of intellectual property is difficult. The laws of
other countries may afford little or no effective protection of our technology.
We cannot assure you that the steps taken by us will prevent misappropriation of
our technology, which may cause us to lose customers and revenue opportunities.
In addition, pursuing persons who might misappropriate our intellectual property
could be costly and divert the attention of management from the operation of our
business.
We are
not aware and do not believe that any of our technologies or products infringe
the proprietary rights of third parties. Nevertheless, third parties may claim
infringement with respect to our current or future technologies or products or
products manufactured by others and incorporating our technologies. Responding
to any such claims, whether or not they are found to have merit, could be time
consuming, result in costly litigation, cause development delays, require us to
enter into royalty or license agreements, or require us to cease using the
technology that is the intellectual property of a third party. Royalty or
license agreements may not be available on acceptable terms or at all. As a
result, infringement claims could have a material adverse affect on our
business, operating results, and financial condition.
Confidentiality
agreements with employees, licensees and others may not adequately prevent
disclosure of trade secrets and other proprietary information.
In order
to protect our proprietary technology and processes, we rely in part on
confidentiality provisions in our agreements with employees, licensees, and
others. These agreements may not effectively prevent disclosure of confidential
information and may not provide an adequate remedy in the event of unauthorized
disclosure of confidential information. In addition, others may independently
discover trade secrets and proprietary information. Costly and time-consuming
litigation could be necessary to enforce and determine the scope of our
proprietary rights, and failure to obtain or maintain trade secret protection
could adversely affect our competitive business position.
We
compete against other dialysis equipment manufacturers with much greater
financial resources and better established products and customer relationships,
which may make it difficult for us to penetrate the market and achieve
significant sales of our products.
Our proposed products will compete
directly against equipment produced by Fresenius Medical Care AG, Baxter
Healthcare Corporation, Gambro AB, NxStage Medical, Inc., B Braun and others,
each of which markets one or more FDA-cleared medical devices for the treatment
of acute or chronic kidney failure.
Each of these competitors offers
products that have been in use for a longer time than our products and are more
widely recognized by physicians, patients and providers. Most of our competitors
have significantly more financial and human resources, more established sales,
service and customer support infrastructures and spend more on product
development and marketing than we do. Many of our competitors also have
established relationships with the providers of dialysis therapy. Most of these
companies manufacture additional complementary products enabling them to offer a
bundle of products and have established sales forces and distribution channels
that may afford them a significant competitive advantage.
The healthcare business in general, and
the market for our products in particular, is competitive, subject to change and
affected by new product introductions and other market activities of industry
participants, including increased consolidation of ownership of clinics by large
dialysis chains. If we are successful, our competitors are likely to develop
products that offer features and functionality similar to our proposed products.
Improvements in existing competitive products or the introduction of new
competitive products may make it more difficult for us to compete for sales,
particularly if those competitive products demonstrate better safety,
convenience or effectiveness or are offered at lower prices. If we are unable to
compete effectively against existing and future competitors and existing and
future alternative treatments and pharmacological and technological advances, it
will be difficult for us to penetrate the market and achieve significant sales
of our products.
We
have not commissioned or obtained marketing studies which support the likelihood
of success of our business plan.
No independent studies with regard to
the feasibility of our proposed business plan have been conducted by any
independent third parties with respect to our present and future business
prospects and our capital requirements. In addition, there can be no assurances
that our products or our treatment modality for ESRD will find sufficient
acceptance in the marketplace to enable us to fulfil our long and short term
goals, even if adequate financing is available and our products are approved to
come to market, of which there can be no assurance.
Our
ability to utilize net operating loss carry forwards may be
limited.
At
December 31, 2008, we had net operating loss carry forwards (NOLs) for U.S.
federal and state income tax purposes of approximately $24.3 million. These NOLs
may be used to offset future taxable income, to the extent we generate any
taxable income, and thereby reduce or eliminate our future U.S. federal and
California income taxes otherwise payable. Section 382 of the
Internal Revenue Code of 1986, as amended, or the “Code”, imposes limitations on
a corporation’s ability to utilize NOLs if it experiences an “ownership change”
as defined in Section 382 of the Code. In general terms, an ownership
change may result from transactions that have the effect of increasing the
percentage ownership of certain stockholders in the stock of a corporation by
more than 50 percentage points over a three-year period. In the event of an
ownership change, a corporation’s utilization of NOLs generated prior to the
ownership change is subject to an annual limitation determined by multiplying
the value of the corporation at the time of the ownership change by the
“applicable long-term tax-exempt rate,” as defined in the Code. Any unused
annual limitation may be carried over to later years. Our NOLs for federal and
state income tax purposes begin to expire in 2021.
In 2007,
we determined that an ownership change occurred under Section 382. The
utilization of our federal NOLs, capital loss carryforwards and other tax
attributes related to our company prior to the merger with pre-merger Xcorporeal
therefore will be limited to zero. Accordingly, we have reduced our NOLs and
capital loss and minimum tax credit carryforwards to the amount that we estimate
that we would be able to utilize in the future, if profitable, considering the
above limitations. At December 31, 2008, after Section 382 reductions we had
NOLs for U.S. federal income tax purposes of approximately $24.3 million which
NOLs will begin to expire in 2021. $24.3 million of the net NOLs are also valid
for state income tax purposes and will begin to expire in 2021.
The
occurrence of one or more natural disasters or acts of terrorism could adversely
affect our operations and financial performance.
The
occurrence of one or more natural disasters or acts of terrorism could result in
physical damage to or the temporary closure of our corporate office and/or
operating facility. It may also result in the temporary lack of an adequate work
force in a market and/or the temporary or long term disruption in the supply of
materials (or a substantial increase in the cost of those materials) from
suppliers. One or more natural disasters or acts of terrorism could materially
and adversely affect our operations and financial performance. Furthermore,
insurance costs associated with our business may rise significantly in the event
of a large scale natural disaster or act of terrorism.
Terrorist
attacks and other attacks or acts of war may adversely affect the markets on
which our common stock trades, which could have a materially adverse effect on
our financial condition, our results of operations and the price of our common
stock.
On
September 11, 2001, the United States was the target of terrorist attacks of
unprecedented scope. In March 2003, the United States and allied nations
commenced a war in Iraq. These attacks and the war in Iraq caused global
instability in the financial markets. There could be further acts of terrorism
in the United States or elsewhere that could have a similar impact. Armed
hostilities or further acts of terrorism could cause further instability in
financial markets and could directly impact our financial condition, our
results
of
operations and the price of our common stock.
Risks
Related to Our Industry
Our
business will always be strictly regulated by the federal and other governments
and we cannot assure you that we will remain in compliance with all applicable
regulation.
The
healthcare industry is highly regulated and continues to undergo significant
changes as third-party payers, such as Medicare and Medicaid, traditional
indemnity insurers, managed care organizations and other private payers increase
efforts to control cost, utilization and delivery of healthcare services.
Healthcare companies are subject to extensive and complex federal, state and
local laws, regulations and judicial decisions. In addition, clinical testing,
manufacture, promotion and sale of our proposed products are subject to
extensive regulation by numerous governmental authorities in the U.S.,
principally the FDA, and corresponding foreign regulatory agencies. Compliance
with laws and regulations enforced by regulatory agencies who have broad
discretion in applying them may be required for the medical products developed
or used by us. Many healthcare laws and regulations applicable to our business
are complex, applied broadly and subject to interpretation by courts and
government agencies. Regulatory, political and legal action and pricing
pressures could prevent us from marketing some or all of our products and
services for a period of time or permanently. Moreover, changes in existing
regulations or adoption of new regulations or policies could prevent us from
obtaining, or affect the timing of, future regulatory approvals or clearances.
We cannot assure you that we will be able to obtain necessary regulatory
clearances or approvals on a timely basis, or if at all, or that we will not be
required to incur significant costs in obtaining or maintaining such foreign
regulatory approvals. Delays in receipt of, or failure to receive, such
approvals or clearances, the loss of previously obtained approvals or clearances
or the failure to comply with existing or future regulatory requirements could
have a material adverse effect on our business, financial condition and results
of operations.
Any
enforcement action by regulatory authorities with respect to past or future
regulatory non-compliance could have a material adverse effect on our business,
financial condition and results of operations. Non-compliance with applicable
requirements can result in fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, refusal to
authorize the marketing of new products or to allow us to enter into supply
contracts and criminal prosecution.
Even if
our proposed products are approved for sale, we will be subject to continuing
regulation. We continuously will be subject to routine inspection by the FDA and
will have to comply with the host of regulatory requirements that usually apply
to medical devices marketed in the U.S. including labelling regulations, Quality
System requirements, MDR regulations (which requires a manufacturer to report to
the FDA certain types of adverse events involving its products), and the FDA’s
prohibitions against promoting products for unapproved or “off-label” uses. Our
failure to comply with applicable regulatory requirements could result in
enforcement action by the FDA, which could have a material adverse effect on our
business, financial condition and results of operations.
In
addition, foreign laws, regulations and requirements applicable to our business
and products are often vague and subject to change and interpretation. Failure
to comply with applicable international regulatory requirements can result in
fines, injunctions, civil penalties, recalls or seizures of products, total or
partial suspensions of production, refusals by foreign governments to permit
product sales and criminal prosecution. Furthermore, changes in existing
regulations or adoption of new regulations or policies could prevent us from
obtaining, or affect the timing of, future regulatory approvals or clearances.
There can be no assurance that we will be able to obtain necessary regulatory
clearances or approvals on a timely basis, or if at all, or that we will not be
required to incur significant costs in obtaining or maintaining such foreign
regulatory approvals. Delays in receipt of, or failure to receive, such
approvals or clearances, the loss of previously obtained approvals or clearances
or the failure to comply with existing or future regulatory requirements could
have a material adverse effect on our business, financial condition and results
of operations. Any enforcement action by regulatory authorities with respect to
past or future regulatory non-compliance could have a material adverse effect on
our business, financial condition and results of operations.
Our
failure to respond to rapid changes in technology and its applications and
intense competition in the medical devices industry could make our treatment
system obsolete.
The medical devices industry is subject
to rapid and substantial technological development and product innovations. To
be successful, we must respond to new developments in technology, new
applications of existing technology and new treatment methods. Our response may
be stymied if we require, but cannot secure, rights to essential third-party
intellectual property. We may compete against companies offering alternative
treatment systems to ours, some of which have greater financial, marketing and
technical resources to utilize in pursuing technological development and new
treatment methods. Our financial condition and operating results could be
adversely affected if our medical device products fail to compete favorably with
these technological developments, or if we fail to be responsive on a timely and
effective basis to competitors’ new devices, applications, treatments or price
strategies.
Product
liability claims could adversely affect our results of operations.
The risk of product liability claims,
product recalls and associated adverse publicity is inherent in the testing,
manufacturing, marketing and sale of medical products. In an effort to minimize
our liability we purchase product liability insurance coverage. In the future,
we may not be able to secure product liability insurance coverage on acceptable
terms or at reasonable costs when needed. Any liability for mandatory damages
could exceed the amount of our coverage. A successful product liability claim
against us could require us to pay a substantial monetary award. Moreover, a
product recall could generate substantial negative publicity about our products
and business and inhibit or prevent commercialization of other future product
candidates.
Risks
Related to Our Common Stock
If
we fail to meet continued listing standards of NYSE Amex, our common stock may
be delisted which would have a material adverse effect on the price
of our common stock.
Our
common stock is currently traded on the NYSE Amex under the symbol “XCR”. In
order for our securities to be eligible for continued listing on NYSE Amex, we
must remain in compliance with certain NYSE Amex continued listing standards. As
of December 31, 2008 we were not in compliance with Sections 1003(a)(i),
1003(a)(ii) and 1003(a)(iii) of the Amex Company Guide because our stockholders’
equity was below the level required by the NYSE Amex continued listing
standards. Our stockholders’ equity fell below the required standard due to
several years of operating losses. NYSE Amex will normally consider suspending
dealings in, or removing from the listing of, securities of a company under
Section 1003(a)(i) for a company that has stockholders’ equity of less than
$2,000,000 if such company has sustained losses from continuing operations
and/or net losses in two of its three most recent fiscal years, under Section
1003(a)(ii) for a company that has stockholders’ equity of less than $4,000,000
if such company has sustained losses from continuing operations and/or net
losses in three of its four most recent fiscal years or under Section
1003(a)(iii) for a company that has stockholders’ equity of less than $6,000,000
if such company has sustained losses from continuing operations and/or net
losses in its five most recent fiscal years. As of December 31, 2008, our
stockholders' equity was below that required under Sections 1003(a)(i),
1003(a)(ii) and 1003(a)(iii) of the Amex Company Guide and we have sustained net
losses in our five most recent fiscal years. If we receive
notification from the NYSE Amex that we are no longer in compliance with their
minimum listing requirements and if we fail to regain compliance with such
continued listing requirements, our common stock may be delisted
which would have a material adverse affect on the price and liquidity of our
common stock.
Furthermore, we cannot assure you that
we will continue to satisfy other requirements necessary to remain listed on the
NYSE Amex or that the NYSE Amex will not take additional actions to delist our
common stock. As a result of the resignation of Marc Cummins from his positions
of a member of our Board of Directors and a member of the Audit Committee of the
Board of Directors, effective March 6, 2009, we are no longer in compliance with
Section 803(A)(1) of the Amex Company Guide because a majority of the members of
our Board of Directors are not independent directors. In order to fill the
vacancy in the Audit Committee created by such resignation, effective March 26,
2009, Hans-Dietrich Polaschegg, a member of our Board of Directors, was
appointed to the Audit Committee.
If for any reason, our common stock
were to be delisted from the NYSE Amex, we may not be able to list our common
stock on another national exchange or market. If our common stock is not listed
on a national exchange or market, the trading market for our common stock may
become illiquid.
If
we are delisted from NYSE Amex, our common stock may be subject to the “penny
stock” rules of the SEC, which would make transactions in our common stock
cumbersome and may reduce the value of an investment in our stock.
The
SEC has adopted Rule 3a51-1 under the Exchange Act which establishes the
definition of a “penny stock,” for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, Rule 15g-9
requires:
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that a broker or dealer approve a person's account for
transactions in penny stocks; and
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the broker or dealer receive from
the investor a written
agreement to
the transaction, setting forth the
identity and quantity of the penny stock to be
purchased.
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In order
to approve a person's account for transactions in
penny stocks, the broker or dealer must:
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obtain financial information and investment experience
objectives of the person; and
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make
a reasonable determination that the transactions in
penny
stocks are suitable for that person and the person has
sufficient knowledge and experience in
financial matters to be capable of evaluating the risks of
transactions in penny stocks.
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The
broker or dealer must also deliver, prior to
any transaction in a penny stock, a
disclosure schedule prescribed by the SEC relating to the
penny stock market, which, in highlight form:
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sets forth the
basis on which the broker or dealer made
the suitability determination;
and
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that
the broker or dealer received a
signed, written agreement from the investor prior to
the transaction.
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Generally, brokers may be less willing
to execute transactions in securities subject to the “penny stock” rules. This
may make it more difficult for our investors to dispose of our common stock and
cause a decline in the market value of our stock.
Disclosure also has to be made about
the risks of investing in penny stocks in both public offerings and in secondary
trading and about the commissions payable to both the broker-dealer and the
registered representative, current quotations for the securities and the rights
and remedies available to an investor in cases of fraud in penny stock
transactions. Finally, monthly statements have to be sent to investors
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.
Our
stock price is volatile and accordingly, you could lose all or part of the value
of your shares of our common stock.
Our
common stock is traded on the NYSE Amex and trading volume is often limited and
sporadic. As a result, the trading price of our common stock on NYSE Amex is not
necessarily a reliable indicator of our fair market value. The market price of
our common stock has historically been highly volatile and may continue to
fluctuate significantly due to a number of factors, some of which may be beyond
our control, including:
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the
number of shares available for sale in the
market;
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sales
of our common stock by shareholders because our business profile does not
fit their investment objectives;
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actual
or anticipated fluctuations in our operating
results;
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developments
relating to our products and related proprietary
rights;
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actual
or anticipated announcements of new data and announcements relating to our
operating performance;
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government
regulations and changes thereto and regulatory investigations or
determinations;
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our
ability to meet continued listing standards of NYSE
Amex
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announcements
of our competitors or their success in the biotechnology and healthcare
equipment business, including those in the dialysis
industry;
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recruitment
or departures of key personnel;
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the
gain or loss of significant
customers;
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the
operating and stock price performance of other comparable
companies;
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developments
and publicity regarding our industry;
and
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general
economic and market conditions in our industry and the economy as a
whole.
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In addition, the stock market in
general has experienced volatility that has often been unrelated to the
operating performance of individual companies. These broad market fluctuations
may adversely affect the trading price of our common stock, regardless of our
actual performance, and could enhance the effect of any fluctuations that do
relate to our operating results.
Over
42% of our stock is controlled by a single stockholder which has the ability to
substantially influence the election of directors and the outcome of matters
submitted to our stockholders.
As of December 31, 2008, Consolidated
National, LLC, a limited liability company, or “CNL”, of which Terren S. Peizer,
a member of our Board of Directors, is the sole managing member and beneficial
owner, directly owned approximately 6.23 million shares, representing
approximately 42.2% of our outstanding common stock. As a result, CNL and Mr.
Peizer presently have and are expected to continue to have the ability to
determine the outcome of issues submitted to our stockholders. The interests of
CNL or Mr. Peizer, acting in his capacity as a stockholder, may not always
coincide with our interests or the interests of our other stockholders and they
may act in a manner that advances their best interests and not necessarily those
of our stockholders. The ownership position of CNL and Mr. Peizer may make it
difficult for our stockholders to remove our management from office should they
choose to do so. It could also deter unsolicited takeovers, including
transactions in which our stockholders might otherwise receive a premium for
their shares over then current market prices.
Pursuant
to the terms of the Second Interim Award, as modified by the Order, if we desire
to close the Technology Transaction, we will be required to issue 9,230,000
shares of our common stock to NQCI and a result, NQCI would own approximately
39% of our total outstanding shares, making NQCI our largest stockholder and
giving NQCI the ability to substantially influence the election of directors and
the outcome of matters submitted to our stockholders.
On August 4, 2008, the arbitrator
issued a Second Interim Award, modifying the initial Interim Award, stating
that, if we desire to close the Technology Transaction, we must, among other
things, issue to NQCI 9,230,000 shares of our common stock. Accordingly,
following the closing of the Technology Transaction, NQCI would own
approximately 39% of our total outstanding shares, making NQCI our largest
stockholder. As a result, NQCI would have the ability to determine the outcome
of issues submitted to our stockholders. The interests of NQCI may not always
coincide with our interests or the interests of our other stockholders and it
may act in a manner that advances its best interests and not necessarily those
of our stockholders. The ownership position of NQCI may make it difficult for
our stockholders to remove our management from office should they choose to do
so. It could also deter unsolicited takeovers, including transactions in which
our stockholders might otherwise receive a premium for their shares over then
current market prices.
Sales
of common stock by our large stockholders, or the perception that such sales may
occur, could depress our stock price.
The market price of our common stock
could decline as a result of sales by, or the perceived possibility of sales by,
our large stockholders, including NQCI in the event that the Technology
Transaction closes. Most of our outstanding shares were registered on a Form S-4
registration statement in connection with our merger with pre-merger Xcorporeal,
and are eligible for public resale. As of December 31, 2008, approximately 58%
of our outstanding common stock was held by our officers, directors and
affiliates and may be sold pursuant to an effective registration statement or in
accordance with Rule 144 promulgated under the Securities Act or pursuant to
other exempt transactions. Pursuant to the terms of the Second Interim Award, as
modified by the order, we are required to issue NQCI 9,230,000 shares of our
common stock if we want to close the Technology Transaction. Future
sales of our common stock by our significant stockholders, including NQCI if it
acquires these shares, or the perception that such sales may occur, could
depress the market price of our common stock.
Investors’
interests in our company will be diluted and investors may suffer dilution in
their net book value per share if we issue additional shares of stock or raise
funds through the sale of equity securities.
In the event that we are required to
issue any additional shares of stock or enter into private placements to raise
financing through the sale of equity securities, investors’ interests in our
company will be diluted and investors may suffer dilution in their net book
value per share depending on the price at which such securities are sold. If we
issue any such additional shares, such issuances also will cause a reduction in
the proportionate ownership and voting power of all of our other stockholders.
Further, any such issuance may result in a change in our control of our
company.
We
have never paid cash dividends and do not intend to do so.
We have never declared or paid cash
dividends on our common stock. We currently plan to retain any earnings to
finance the growth of our business rather than to pay cash dividends. Payments
of any cash dividends in the future will depend on our financial condition,
results of operations and capital requirements, as well as other factors deemed
relevant by our Board of Directors.
There
is an increased potential for short sales of our common stock due to the sales
of shares issued upon exercise of the warrants or options, which could
materially affect the market price of the stock.
Downward pressure on the market price of
our common stock that likely will result from sales of our common stock issued
in connection with an exercise of warrants or options could encourage short
sales of our common stock by market participants. Generally, short selling means
selling a security, contract or commodity not owned by the seller. The seller is
committed to eventually purchase the financial instrument previously sold. Short
sales are used to capitalize on an expected decline in the security’s price. As
the holders exercise their warrants or options, we issue shares to the
exercising holders, which such holders may then sell into the market. Such sales
could have a tendency to depress the price of the stock, which could increase
the potential for short sales.
We
became a publicly traded company through a merger with a public shell company,
and we could be liable for unanticipated liabilities of our predecessor
entity.
We became a publicly traded company
through a merger between Xcorporeal, Inc. and CT Holdings Enterprises, Inc., a
publicly traded “shell company” that had previously provided management
expertise including consulting on operations, marketing and strategic planning
and a single source of capital to early stage technology
companies. Although we believe the shell company had substantially no
assets and liabilities as of the merger, we may be subject to claims related to
the historical business of the shell, as well as costs and expenses related to
the merger.
Item
1B. Unresolved
Staff Comments
Not applicable.
Item
2: Properties
Corporate
Office and Operating Facility
As of
February 22, 2008, we entered into a 5 year lease agreement for 4,352 square
feet of corporate office space located in Los Angeles, California. The total
lease payments will be $1,096,878 over the 5 year period with the lease expiring
on February 28, 2013. On October 6, 2008, as modified on October 23, 2008, we
also entered into a 5 year lease agreement, commencing November 27, 2008,
through November 26, 2013, with early possession on October 27, 2008, for our
new operating facility which consists of approximately 21,400 square feet of
office and lab space in Lake Forest, California. The total lease payments will
be $1,367,507 over the lease term. Additionally, we lease two corporate
apartments, approximately 800 and 550 square feet, expiring March 31, 2009 and
April 18, 2009, respectively, located in Irvine, California, for combined
monthly rent of $3,765, which we plan to vacate after the expiration of their
lease terms. All of the space is in good condition and we expect it to remain
suitable to meet our needs for the foreseeable future. Consistent with the
actions undertaken as part of our corporate restructuring described above in
section captioned “Business - Recent Developments”, we intend to consolidate our
offices and sublease our current corporate office located in Los Angeles,
California. For more information, please see Note 11, “Leases” to our financial
statements filed as part of this Annual Report.
Item
3. Legal
Proceedings
From time
to time we may be a defendant or plaintiff in various legal proceedings arising
in the normal course of our business. Except as set forth below, we are
currently not a party to any material pending legal proceedings or government
actions, including any bankruptcy, receivership, or similar proceedings. In
addition, except as set forth below, our management is not aware of any known
litigation or liabilities that could affect our operations. Furthermore, with
the exception of Dr. Gura, our Chief Medical and Scientific Officer, who
according to NQCI’s preliminary Proxy Statement on Schedule 14A, Amendment No.
2, filed with the SEC on February 13, 2009, owns 15,497,250 shares of NQCI’s
common stock which includes 800,000 shares held by Medipace Medical Group, Inc.
an affiliate of Dr. Gura and includes 250,000 shares subject to warrants held by
Dr. Gura which are currently exercisable, or approximately 20.9% of its total
outstanding shares as of January 31, 2009, we do not believe that there are any
proceedings to which any of our directors, officers, or affiliates, any owner of
record who beneficially owns more than five percent of our common stock, or any
associate of any such director, officer, affiliate of the Company, or security
holder is a party adverse to the Company or has a material interest adverse to
the Company.
On
December 1, 2006, Operations initiated arbitration proceedings against NQCI for
its breach of the License Agreement, which remains pending. NQCI claimed the
License Agreement was terminated, and we sought a declaration that the License
Agreement remained in effect until the closing of the Merger or the Technology
Transaction. We later amended our claims to seek damages for NQCI’s failure to
perform its obligations under the License Agreement. NQCI filed counterclaims
seeking to invalidate the License Agreement and claiming monetary damages
against us. NQCI also filed claims against Dr. Gura, claiming he breached his
obligations to NQCI by agreeing to serve on our Board of Directors. Following a
hearing and extensive briefing, the arbitrator denied both parties’ claims for
damages. Although NQCI never filed an amendment to its counterclaims to seek
specific performance, on June 9, 2008, the arbitrator, issued an Interim Award
granting specific performance of the Technology Transaction.
The
Interim Award stated that the total aggregate shares of stock to be received by
NQCI stockholders at the closing should equal 48% of all Operations shares
outstanding as of the date of the Merger Agreement. On September 1, 2006, there
were 10,000,000 shares of Operations common stock outstanding. NQCI proposed
four possible share interest awards, arguing that it was entitled to shares
representing a 48% or 54% interest based on Operations shares outstanding at the
time of the Merger Agreement or our present number of outstanding
shares.
On August
4, 2008, the arbitrator issued a Second Interim Award, modifying the initial
Interim Award, stating that, if we desire to close the Technology Transaction,
we must obtain approval from a majority of our stockholders and issue 9,230,000
shares of our common stock to NQCI. It is our understanding that the arbitrator
based his decision as to the number of shares that we must issue on the factors
set forth below. Our understanding set forth below is derived from the terms of
the Second Interim Award and the Order, which we strongly encourage you to read
and review carefully, copies of which were attached to our Proxy Statement on
Schedule 14A, Amendment No. 5, filed with the SEC on February 10,
2009.
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In
accordance with the second paragraph of page 7 of the Award, under the
Merger Agreement, the number of shares of our common stock which NQCI was
to receive at the closing of the transaction contemplated by the Merger
Agreement was based on the number of shares or our common stock
outstanding as of the date of the Merger Agreement, or 10,000,000
shares.
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If
the Merger Agreement was terminated, resulting in the closing of the
Technology Transaction, (i) pursuant to Section 6(B)(2)(i) of the Merger
Agreement, NQCI was to receive a 48% share of the aggregate amount of our
shares of common stock if we terminated the Merger Agreement for NQCI’s
breach or either party terminated under the December 1 or December 29
deadlines, and (ii) pursuant to Section 6(B)(2)(ii) of the Merger
Agreement, NQCI was to get a 54% share if we terminated for
dissatisfaction with our due diligence, or NQCI terminated for our breach
(as more fully described in the Merger
Agreement).
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The
arbitrator determined that NQCI was not entitled to terminate the Merger
Agreement outright and that its notice of termination was improper.
Therefore, the arbitrator determined that, since NQCI was at fault, NQCI
is entitled to receive the lesser of the two alternatives (48% instead of
54%).
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Therefore,
according to the arbitrator, in order to award a 48% share to NQCI,
assuming that there were 10,000,000 shares of our common stock outstanding
on the date of the Merger Agreement, we must issue to NQCI 9,230,000
shares of our common stock, which would represent 48% of the aggregate
total of 19,230,000 shares of our common stock which would have been
outstanding after giving effect to such
issuance.
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Following
the closing of the Technology Transaction, NQCI would own approximately 39% of
our total outstanding shares, making NQCI our largest stockholder. The
arbitrator found that, with the exception of stockholder approval, virtually all
conditions to closing the Technology Transaction have been waived, including
virtually all of NQCI’s representations and warranties concerning the
Technology.
The
Second Interim Award also stated that, contrary to the assertions made by NQCI,
the License Agreement will remain in full force and effect until the Technology
Transaction closes or the arbitrator determines that it will never close. Upon
closing of the Technology Transaction and satisfaction of the terms of the
Award, as modified by the Order, the License Agreement will terminate and we
will own all of the Technology.
On
January 3, 2008, the arbitrator issued an order denying NQCI’s motion to amend
its counterclaim to add us as a successor company following the Merger. However,
in the Second Interim Award, the arbitrator found that we are the successor to
Operations as a result of the merger, even though we are not a party to any of
the agreements or the arbitration, and ordered that our shares should be issued
to NQCI rather than shares of Operations.
The arbitrator has not ordered us to
close the Technology Transaction. However, the Second Interim Award states that,
if our stockholders fail to approve the issuance of stock to effectuate the
Technology Transaction, all of the Technology covered by the License shall be
declared the sole and exclusive property of NQCI, and the arbitrator shall
schedule additional hearings to address two questions: whether the PAK
technology is included within that Technology, and whether NQCI is entitled to
compensatory damages and the amount of damages under these circumstances. During
the arbitration, NQCI took the position that we had misappropriated trade
secrets regarding the WAK and used them to create the PAK. The arbitrator found
that we had not misappropriated NQCI’s trade secrets. However, should the
Technology Transaction not close for any reason, and the arbitrator rules that
the licensed Technology must be returned to NQCI, the arbitrator could find that
the PAK is derived in whole or in part from licensed Technology, and could rule
that Operations must “return” the PAK technology to NQCI or that NQCI is
entitled to compensatory damages or both.
On August
15, 2008, the arbitrator awarded NQCI $1.87 million of over $4 million it
claimed in attorneys’ fees and costs. The award has no effect on the additional
amount of approximately $690,000 claimed by NQCI in alleged expenses, Licensor
Expenses, under the License Agreement. The arbitrator has not yet ruled on this
claim.
In an
August 29, 2008 Order Re Issuance of Xcorporeal Shares, the arbitrator stated
that the shares should be issued directly to NQCI’s stockholders. However, on
September 4, 2008, the arbitrator issued an order that we should issue and
deliver the 9,230,000 shares directly to NQCI, rather than directly to NQCI
stockholders, if we obtain stockholder approval and elect to proceed with the
Technology Transaction.
The
Second Interim Award required that we file a registration statement under the
Securities Act to register for resale the shares to be issued to NQCI within 30
days after the closing of the Technology Transaction. The arbitrator
acknowledged that our obligation is to file the registration statement and to
use reasonable efforts to have the shares registered and not to guarantee
registration and resultant actual public tradability. However, the arbitrator
nevertheless ordered that the registration statement must be declared effective
within 90 days.
On
January 30, 2009, the arbitrator issued the Order, in which the arbitrator
modified the Second Interim Award by reserving on what the final terms of our
obligation to file the resale registration statement will be and stating that
such registration obligation shall be in accordance with applicable laws,
including applicable U.S. federal securities laws. While the arbitrator also
retained jurisdiction to monitor our compliance with such obligation, to award
any appropriate relief to NQCI if we fail to comply with such obligation and to
render a decision on any other matters contested in this proceeding, the time
periods set forth in the Second Interim Award and summarized in the preceding
paragraph are no longer applicable. The Order also provided, among other things,
that if we file the Proxy Statement, obtain stockholder approval to issue to
NQCI 9,230,000 shares of our common stock as consideration for the closing of
the Technology Transaction and issue such shares to NQCI, the arbitrator
anticipates confirming that all of the Technology covered by the License
Agreement shall be declared our sole and exclusive property.
The
arbitrator held a conference call hearing with the Company and NQCI on March 13,
2009 in which the parties discussed the reasons for the difficulties in closing
the Technology Transaction and explored potential alternatives. The parties were
asked to submit letter briefs outlining their suggested alternatives for
consideration by the arbitrator. The parties submitted their respective letter
briefs on March 24, 2009.
As of the
date of this Annual Report, the arbitration proceeding with NQCI continues and
the arbitrator has not yet issued a final award to either party and has not made
a final ruling with respect to whether the closing of the Technology Transaction
shall occur or whether potential alternatives should be pursued.
Furthermore,
the arbitrator has stated that he has not yet issued a final award that may be
confirmed or challenged in a court of competent jurisdiction. A party to the
arbitration could challenge the interim award in court, even after stockholders
approve the transaction. In addition, the arbitrator could again change the
award by granting different or additional remedies, even after stockholders
approve the transaction. We cannot guarantee that the arbitrator would order
that stockholders be given another opportunity to vote on the transaction, even
if such changes are material. Arbitrators have broad equitable powers, and
arbitration awards are difficult to challenge in court, even if the arbitrator
makes rulings that are inconsistent or not in accordance with the law or the
evidence.
Should
the arbitrator order a material change to the Second Interim Award, as modified
by the Order, after the vote of stockholders on this proposal, and further order
that our stockholders not be given another opportunity to vote on this proposal
or on such material change, such order could conflict with applicable federal
securities laws or NYSE Amex rules to which we are subject. In such event, we
would ask the arbitrator to amend such changed award or attempt to seek review
of the changed award in a court of competent jurisdiction. The closing of the
Technology Transaction may render any court review or appeal moot, effectively
preventing us from challenging any of the arbitrator’s awards in
court.
Item
4. Submission
of Matters to a Vote of Security Holders
None.
PART
II
Item
5. Market
for Registrant’s Common Equity, Related Stockholder Maters and Issuer Purchases
of Equity Securities
Market
Information
Our
common stock is traded on the NYSE Amex (formerly American Stock Exchange) under
the symbol “XCR.” Prior to December 7, 2007, our common stock was quoted on the
Over-The-Counter Bulletin Board under the symbol “XCPL”. Immediately
prior to our merger with the pre-merger Xcorporeal on October 12, 2007, a
one-for-8.27 reverse split of our common stock was executed. Historical stock
prices prior to October 12, 2007 have been adjusted for this reverse stock
split.
As of
March 4, 2009, there were approximately 797 record holders of our common stock,
representing approximately 3,654 beneficial owners.
Following
is a list by fiscal quarters of the split-adjusted closing sales prices of our
common stock. Such prices represent inter-dealer quotations, do not represent
actual transactions, and do not include retail mark-ups, markdowns or
commissions. Such prices were determined from information provided by a majority
of the market makers for the Company’s common stock.
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High
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Low
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Fiscal
Year Ended December 31, 2008
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4
th
Quarter
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$
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0.50
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$
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0.16
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3
rd
Quarter
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1.44
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0.50
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2
nd
Quarter
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4.21
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1.00
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1
ST
Quarter
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4.94
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2.34
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High
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Low
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Fiscal
Year Ended December 31, 2007
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4
th
Quarter
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$
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14.06
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$
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4.27
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3
rd
Quarter
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17.45
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3.39
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2
nd
Quarter
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6.62
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4.30
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1
ST
Quarter
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13.89
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2.40
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We did
not pay any cash dividends in 2008 or 2007 and we do not intend to pay cash
dividends in the foreseeable future. It is our present intention to
utilize all available funds for the development of our business. Our future
dividend policy will depend on the requirements of financing agreements to which
we may be a party. Any future determination to pay dividends will be at the
discretion of our Board of Directors and will depend upon, among other factors,
our results of operations, financial condition, capital requirements and
contractual restrictions.
Securities
Authorized For Issuance Under Equity Compensation Plans
The
following table provides information about our common stock that may be issued
upon the exercise of equity instruments under all of our existing equity
compensation plans as of December 31, 2008:
|
|
|
|
|
|
|
|
|
Number
of Securities
|
|
|
|
|
|
|
|
|
|
|
Remaining
Available
|
|
|
|
|
Number
of Securities
|
|
|
|
|
|
for
Future Issuances
|
|
|
|
|
to
be Issued
|
|
|
Weighted-Average
|
|
|
Under
the Equity
|
|
|
|
|
Upon
Exercise of
|
|
|
Exercise
Price of
|
|
|
Compensation
Plans
|
|
|
|
|
Outstanding
Options,
|
|
|
Outstanding
Options,
|
|
|
(Excluding
Securities
|
|
|
Plan
Category
|
|
Warrants and
Rights
|
|
|
Warrants and
Rights
|
|
|
Reflected in
Column(a))
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity
compensation plans approved by security holders
|
|
|
3,877,500
|
|
|
$
|
5.39
|
|
|
|
2,922,500
|
|
|
Equity
compensation plans not approved by security holders
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
Total
|
|
|
3,877,500
|
|
|
$
|
5.39
|
|
|
|
2,922,500
|
|
In connection with our merger with
pre-merger Xcorporeal on October 12, 2007, options to purchase 3,880,000 shares
of common stock that had been granted under pre-merger Xcorporeal’s 2006
Incentive Compensation Plan were assumed by us under the Merger Agreement. Of
these shares, 2,900,000 shares remain outstanding as of December 31, 2008. Any
of our options or warrants that were outstanding prior to the merger with
pre-merger Xcorporeal were cancelled upon effectiveness of the merger. Our 2007
Incentive Compensation Plan was approved by our Board of Directors and a
majority of our stockholders at the same time and in the same manner that the
Merger Agreement was approved, and was ratified by our stockholders on November
26, 2007. As of December 31, 2008, there were 3,900,000 shares of our common
stock authorized for issuance upon the exercise of options granted or to be
granted under our 2007 Incentive Compensation Plan, of which options to purchase
977,500 shares of our common stock have already been granted.
For further information, refer to Note
17, “Stock Options and Warrants” to our financial statements filed as part of
this Annual Report.
Performance
Graph
Not required for smaller reporting
companies.
Unregistered
Sales of Equity Securities and Use of Proceeds from Registered
Securities
Other than set forth below, the
information regarding our sales of our unregistered securities for the fiscal
years ended December 31, 2008 and 2007, has been previously furnished in our
Annual Reports on Form 10-K or 10-KSB, Quarterly Reports on Form 10-Q or 10-QSB
and/or our Current Reports on Form 8-K.
On
November 10, 2008, we issued 50,000 restricted shares of our common stock to
certain third party consultant in consideration of consulting services provided
to us.
The foregoing issuance
was exempt from registration under Section 4(2) of the Securities Act and/or
Rule 506 promulgated thereunder.
Use
of Proceeds from Registered Securities
None.
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers.
None.
Item
6. Selected
Financial Data.
Not required for smaller reporting
companies.
Item
7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
In addition to reviewing this
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” section, you should also carefully review sections captioned
“Business - Recent Developments” and “Risk Factors” above for a more complete
discussion of the current events that are affecting and other factors that may
affect our business.
Recent
Developments
Corporate
Restructuring
The deterioration of the economy over
the last year, coupled with the prolonged and continuing delay in consummating
the Technology Transaction, has significantly adversely affected our Company.
Many of the expectations on which we had based our 2008 and 2009 business
development plans slowly eroded as a result of the lengthy arbitration
proceeding with NQCI commenced in 2006 and continuing into the second quarter of
2009. The possibility of an adverse decision in the arbitration proceeding with
respect to our ownership right to the Technology (as defined below) has been and
continues to be a major factor in our inability to secure debt or equity
financing. Accordingly, we have had to modify our activities and business. In
response to the general economic downturn affecting the development of our
products and liquidity condition, we have instituted a variety of measures in an
attempt to conserve cash and reduce our operating expenses. Our actions
included:
|
·
|
Reductions
in our labor force – On March 13, 2009, we gave notice of employment
termination to 19 employees. This represents a total work-force reduction
of approximately 73%. We paid accrued vacation benefits of approximately
$70,000 to the terminated employees. The layoffs and our other efforts
focused on streamlining our operations designed to reduce our annual
expenses by approximately $3.5 million to a current operating burn rate of
approximately $200,000 per month. These actions had to be carefully and
thoughtfully executed and we will take additional actions, if necessary.
Most important to us in making these difficult decisions is to give as
much consideration as possible to all of our employees, whom we greatly
value. We hope to be in the financial position in the near future to offer
re-employment to certain of our terminated
employees.
|
|
·
|
Refocusing
our available assets and employee resources on the development of the
PAK.
|
|
·
|
Continuing
vigorous efforts to minimize or defer our operating
expenses.
|
|
·
|
Exploring
various strategic alternatives, which may include the license of certain
of our intellectual property rights, as a means to further develop our
technologies, among other possible transactions and
alternatives.
|
|
·
|
Intensifying
our search to obtain additional financing to support our operations and to
satisfy our ongoing capital requirements in order to improve our liquidity
position.
|
|
·
|
Continuing
to prosecute our patents and take other steps to perfect our intellectual
property rights.
|
In light of the unprecedented economic
slow down, lack of access to capital markets and prolonged arbitration
proceeding with NQCI, we were compelled to undertake the efforts outlined above
in order to remain in the position to continue our operations. We hope to be
able to obtain additional financing to meet our cash obligations as they become
due and otherwise proceed with our business plan. Our ability to execute on our
current business plan is dependent upon our ability to obtain equity or debt
financing, develop and market our products, and, ultimately, to generate
revenue. Unless we are able to raise financing sufficient to support our
operations and to satisfy our ongoing financing requirements, we will not be
able to develop any of our products, submit 510(k) notifications to the FDA,
conduct clinical trials or otherwise commercialize any of our products. We will
make every effort however, to continue the development of the PAK. As a result
of these conditions, there is substantial doubt about our ability to continue as
a going concern. Our ability to continue as a going concern is substantially
dependent on the successful execution of many of the actions referred to above,
on the timeline contemplated by our plans and our ability to obtain additional
financing. We cannot assure you that we will be successful now or in the future
in obtaining any additional financing on terms favorable to us, if at all. The
failure to obtain financing will have a material adverse effect on our financial
condition and operations.
Other
Considerations – Royalty and Other Payments Under the License
Agreement
As consideration for entering into the
License Agreement, we agreed to pay to NQCI a minimum annual royalty of
$250,000, or 7% of net sales. As a result of the transfer of the Technology to
us, we may be able to realize additional savings of not having to compensate
NQCI for any royalty payments accrued and not yet paid. Although we have
asserted that NQCI’s breaches of the License Agreement excused our obligation to
make the minimum royalty payments, we recorded $583,333 in royalty expenses,
covering the minimum royalties, from commencement of the License Agreement
through December 31, 2008. The License Agreement expires in 2105. The License
Agreement also requires us to reimburse NQCI’s Licensor Expenses until the
closing or the termination of the Merger Agreement. The Second Interim Award
states that the License Agreement will remain in full force and effect until the
Technology Transaction closes or the arbitrator determines that it will never
close. Although we have contested its right to any further payments, NQCI has
made a claim for reimbursement of approximately $690,000 in alleged expenses
under the License Agreement as of December 31, 2008. If we are able to acquire
the Technology from NQCI, the arbitrator has indicated that the License
Agreement would be terminated simultaneously with such acquisition. As a result
of the Technology becoming our sole and exclusive property, among other
benefits, we should be able to discontinue these royalty payments to NQCI,
realize corresponding savings and we may also be able to realize additional
savings of not having to reimburse NQCI for any Licensor Expenses accrued and
not yet paid.
Basis
of Presentation
This
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” section should be read in conjunction with the accompanying
financial statements which have been prepared assuming that we will continue as
a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Our recurring
losses from operations and net capital deficiency raise substantial doubt about
our ability to continue as a going concern. Our ability to continue as a going
concern is substantially dependent on the successful execution of many of the
actions referred to above and otherwise discussed in this “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
section and in Note 1, “Nature of Operations and Going Concern Uncertainty” to
our financial statements filed as part of this Annual Report, on the timeline
contemplated by our plans and our ability to obtain additional financing. The
uncertainty of successful execution of our plans, among other factors, raises
substantial doubt as to our ability to continue as a going concern. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Results
of Operations for the years ended December 31, 2008 and 2007
We have
not generated any revenues since inception. We incurred a net loss of
$22,987,273 for the year ended December 31, 2008, compared to net loss of
$17,074,051 for the year ended December 31, 2007. The increase in net loss was
primarily due to (i) research, development, and other expenses related to
advancing our kidney failure treatment technologies, (ii) stock compensation
expense related to options and warrants granted to directors, officer, employees
and consultants, and (iii) legal fees, (iv) common stock issuances as
compensation for consulting services, (v) accruals for alleged licensor expenses
and interim awards issued in the arbitration with NQCI, and (vi) increased
company personnel. At December 31, 2008, we had negative working capital of
$805,912 compared to positive working capital of $14,958,099 at the
beginning of the year. At December 31, 2008, our total assets were $4,351,073,
compared to $17,252,546 at the beginning of the year, which consisted primarily
of cash from the sale of our common stock sold in December 2006.
Interest
Income
Interest
income of $320,622 and $1,184,930 was reported for the years ended December 31,
2008 and 2007, respectively.
Liquidity
and Capital Resources
We expect
to incur operating losses and negative cash flows for the foreseeable future.
During the fourth quarter 2006, we raised approximately $27.3 million (net of
placement fees of $2.1 million) through a private placement. Our ability to
execute on our current business plan is dependent upon our ability to develop
and market our products, and, ultimately, to generate revenue.
As of
December 31, 2008, we had cash, cash equivalents, and marketable securities of
approximately $3.4 million. We project to expend approximately $1.9 million
in the first quarter of 2009 and expend cash at a rate of approximately $0.2
million per month based upon the recent restructuring effected by our company
going forward. See above section captioned “Recent Developments”. In addition,
we may become obligated to pay damages, costs or legal fees in connection with
the ongoing arbitration described under Part I, Item 3-Legal Proceedings above,
in an amount of $1.87 million under the Interim Award issued on August 15, 2008.
At present rates, we will have to obtain additional debt or equity financing
during the next several months.
We expect
to incur negative cash flows and net losses for the foreseeable future. In
addition, we may become obligated to pay damages, costs or legal fees in
connection with the ongoing arbitration with NQCI. Based upon our current plans,
we believe that our existing cash reserves will not be sufficient to meet our
operating expenses and capital requirements before we achieve profitability.
Accordingly, we will be required to seek additional funds through public or
private placement of shares of our preferred or common stock or through public
or private debt financing. Our ability to meet our cash obligations as they
become due and payable will depend on our ability to sell securities, borrow
funds, reduce operating costs, or some combination thereof. We may not be
successful in obtaining necessary funds on acceptable terms, if at all. The
inability to obtain financing could require us to curtail our current plans in
order to decrease spending, which could have a material adverse effect on our
plan of operations. Our ability to execute on our current business plan is
dependent upon our ability to obtain equity financing, develop and market our
products, and, ultimately, to generate revenue. As a result of these conditions,
there is substantial doubt about our ability to continue as a going
concern.
Upon
receipt of the approximately $27.3 million raised through the private placement
of our common stock in the fourth quarter of 2006, we strategically began our
operating activities and research and development efforts which resulted in a
net loss of $23.0 million in 2008. In addition, we invested $25.0
million in high grade money market funds and marketable securities of which we
have sold $22.0 million, leaving a balance of $3.0 million as of December 31,
2008.
We have
focused much of our efforts on development of the PAK, which has not been
derived from the technology covered by the License Agreement. Through the
productive research and development efforts of the PAK, we have completed
functional prototypes of our attended care and home PAKs that we plan to
commercialize after 510(k) clearance from the FDA which we plan to submit in
2010. Prior to the 510(k) submission to the FDA for clinical use under direct
medical supervision, the units will undergo final verification and validation.
It generally takes 4 to 12 months from the date of a 510(k) submission to obtain
clearance from the FDA, although it may take longer. We expect that our monthly
expenditures will increase as we shift resources towards developing a marketing
plan for the PAK.
We have
used some of our resources for the development of the WAK and have demonstrated
a feasibility prototype. Commercialization of the WAK will require development
of a functional prototype and likely a full pre-market approval by the FDA,
which could take several years. Our rights to the WAK derive in part from the
License Agreement pursuant to which we obtained the exclusive rights to the
Technology. Once we acquire the Technology and the results of the arbitration
proceeding with NQCI are final, we will determine whether to devote additional
resources to development of the WAK.
If we
ever become obligated to reimburse all or a substantial portion of the $690,000
in NQCI’s alleged expenses related to the License Agreement and $1.87 million in
NQCI’s attorneys’ fees incurred in the arbitration awarded under the interim
award issued on August 15, 2008, these obligations could have a material adverse
effect on our liquidity and financial ability to continue with ongoing
operations as currently planned.
Because
neither the PAK nor the WAK is yet at a stage where it can be marketed
commercially, we are not able to predict the portion of our future business
which will be derived from each.
Research
and Development
Through
March 13, 2009, we employed an interdisciplinary team of scientists and
engineers who were developing the PAK and a separate, interdisciplinary team
developing the WAK. However, as discussed above during the first quarter of
2009, we had to adjust our employee headcount to more closely match our capital
availability and, as a result, terminated the employment of 19 employees. In
addition, we had retained Aubrey Group, Inc., an FDA-registered third-party
contract developer and manufacturer of medical devices, to assist with the
engineering of the PAK. As of December 31, 2008, Aubrey substantially completed
its work and we terminated this agreement. The PAK has been engineered to
perform both hemodialysis, hemofiltration and ultrafiltration under direct
medical supervision. A variation of this device will be developed for chronic
home hemodialysis. An initial laboratory prototype of the PAK, capable of
performing the functions of a hemodialysis machine, and demonstrating our unique
new fluidics circuit, was completed at the end of 2007. The first physical
prototype including industrial design of the PAK was completed in October 2008.
Further refinements to this prototype are now in progress. We hope to complete
the final product design of the PAK and submit the for final verification and
validation prior to a 510(k) submission for clinical use under direct medical
supervision. A clinical study is not required for this submission.
In a
clinical feasibility study conducted in London in March 2007, a research
prototype of the WAK was successfully demonstrated in eight patients with
end-stage renal disease. Patients were successfully treated for up to eight
hours with adequate clearances of urea and creatinine. The device was well
tolerated and patients were able to conduct activities of normal daily living
including walking and sleeping. There were no serious adverse events although
clotting of the dialyzer occurred in two patients. To our knowledge, this is the
first successful demonstration of a WAK in humans.
We
incurred $20.9 million and $7.1 million in research and development costs in the
fiscal years 2008 and 2007, respectively, including the August 4, 2008, $10.2
million fair value accrual for a potential 9.23 million shares issuance to
effectuate the Technology Transaction in accordance to the Second Interim Award
(as defined below). Less the accrual for shares issuable, we incurred $10.7
million and $7.1 million in research and development costs in the fiscal years
2008 and 2007, respectively. The increase in research and development costs in
2008 from 2007 is attributable to our efforts to advance our kidney failure
treatment technologies and an increase in personnel.
Contractual
Obligations and Commercial Commitments
The following table sets forth a
summary of our material contractual obligations and commercial commitments as of
December 31, 2008.
|
Contractual
Obligations:
|
|
Total
|
|
|
Less than 1
year
|
|
|
1 - 3 years
|
|
|
3 - 5 years
|
|
|
More
than 5 years
|
|
|
Capital Lease
Obligations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Operating Lease Obligations
(1)
|
|
|
2,422,931
|
|
|
|
411,845
|
|
|
|
1,677,342
|
|
|
|
333,744
|
|
|
|
-
|
|
|
Research & Development
Contractual Commitments
|
|
|
68,688
|
|
|
|
68,688
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other
Liabilities
|
|
|
34,325
|
|
|
|
34,325
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
2,525,944
|
|
|
$
|
514,858
|
|
|
$
|
1,677,342
|
|
|
$
|
333,744
|
|
|
$
|
-
|
|
(1)
Operating lease commitments for our corporate office, operating facility, Dr.
Gura’s office (a related party transaction), two corporate apartments and
equipment.
Since
Aubrey substantially completed its work under the Aubrey Agreement and we intend
to terminate this agreement, this table excludes any remaining obligations under
the Aubrey Agreement.
As of
December 31, 2008, we had no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
results of operations or cash flows.
Legal
Proceedings
We are
involved in arbitration against NQCI as described above in section captioned
“Item 3 - Legal Proceedings”. From time to time, we may be involved in
litigation relating to claims arising out of our operations in the normal course
of business. As of the date of this Annual Report, we are not currently involved
in any other legal proceeding that we believe would have a material adverse
effect on our business, financial condition or operating results.
Critical
Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations is
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. Generally
accepted accounting principles require management to make estimates, judgments
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, and the disclosure of contingent assets and liabilities.
We base our estimates on experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that may not be readily apparent from other sources. Our actual results may
differ from those estimates.
We
consider our critical accounting policies to be those that involve significant
uncertainties, require judgments or estimates that are more difficult for
management to determine or that may produce materially different results when
using different assumptions. We consider the following accounting policies to be
critical:
Marketable
Securities
We
classify investments with maturity dates greater than three months when
purchased as marketable securities. Investments, including certificates of
deposit with maturity dates greater than three months when purchased and which
have readily determined fair values, are classified as available-for-sale
investments and reflected in current assets as marketable securities at fair
market value. Our investment policy requires that all investments be
investment grade quality and no more than ten percent of our portfolio may be
invested in any one security or with one institution.
As of
December 31, 2008 and 2007, short-term investments classified as
available-for-sale were as follows:
|
|
|
December 31,
2008
|
|
|
|
|
Aggregate
Fair
|
|
|
Gross
Unrealized
|
|
|
Estimated
Fair
|
|
|
|
|
Value
|
|
|
Gains /
(Losses)
|
|
|
Value
|
|
|
Commercial
paper
|
|
$
|
897,993
|
|
|
$
|
-
|
|
|
$
|
897,993
|
|
|
Corporate
securities fixed rate
|
|
|
457,930
|
|
|
|
-
|
|
|
|
457,930
|
|
|
Total
|
|
$
|
1,355,923
|
|
|
$
|
-
|
|
|
$
|
1,355,923
|
|
|
|
|
December
31, 2007
|
|
|
|
|
Aggregate
Fair
|
|
|
Gross
Unrealized
|
|
|
Estimated
Fair
|
|
|
|
|
Value
|
|
|
Gains /
(Losses)
|
|
|
Value
|
|
|
Commercial
paper
|
|
$
|
10,283,818
|
|
|
$
|
-
|
|
|
$
|
10,283,818
|
|
|
Corporate
obligation
|
|
|
2,245,770
|
|
|
|
-
|
|
|
|
2,245,770
|
|
|
Total
|
|
$
|
12,529,588
|
|
|
$
|
-
|
|
|
$
|
12,529,588
|
|
Xcorporeal
reviews impairments associated with the above in accordance with SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity Securities,” and FASB
Staff Position FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments,” to determine the
classification of the impairment as temporary or other-than-temporary.
Xcorporeal considers these investments not to be impaired as of December 31,
2008 and 2007.
There
were no gross unrealized gains or losses as of December 31, 2008 and
2007.
Shares
Issuable
Pursuant
to the Second Interim Award issued on August 4, 2008, which stated that, if the
Technology Transaction is submitted to and approved by our stockholders,
9,230,000 shares of our common stock should be issued to NQCI to effectuate the
transaction, we accrued for the 9,230,000 shares of our common stock. As the
Second Interim Award stated that we must issue 9,230,000 upon the closing of the
Technology Transaction and we have been unable to consummate such transaction,
such contingency is not within our control and we have therefore, recorded the
issuance as a liability, rather than as an equity issuance. Until issuance, the
shares issuable will be recorded at fair value in accordance with EITF 00-19,
with subsequent changes in fair value recorded as non-operating change in fair
value of shares issuable to our statement of operations. The fair value of the
shares will be measured using the closing price of our common stock on the
reporting date. The measured fair value of $10,153,000 for the accrued 9,230,000
shares on August 4, 2008, the date of the Second Interim Award, was accrued
under “Shares issuable” and expensed to “Research and development.” From marking
to market, the fair value of the shares issuable was revalued at $1,569,100 as
of December 31, 2008. The resulting non-operating change in fair value of
$8,583,900 to our statement of operations for the year ended December 31, 2008
was recognized as “Change in fair value of shares issuable.” Stockholder
approval for the issuance of 9,230,000 shares of our common stock to NQCI and
the issuance of such shares are pending to date.
Although
we are seeking stockholder approval for the issuance of 9,230,000 shares of our
common stock to effectuate the Technology Transaction, we are uncertain whether
the SEC will clear its review of the form of our proxy statement that we will
use to solicit stockholder approval of the transaction, whether our stockholders
will vote to approve the transaction, whether shares will be issued to NQCI, or
whether when filed, the SEC will declare effective the registration statement to
register the shares for resale. If the Technology Transaction does not close,
the arbitrator may issue alternative relief. In the event of an alternate
relief, the above accrual may be adjusted and the accrual or the actual
settlement will be recorded to coincide with the alternate award.
Stock-Based
Compensation
Statements
of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
Share-Based Payment
, (SFAS
123(R)) and Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) No. 107 (SAB 107) require the measurement and recognition of compensation
expense for all share-based payment awards made to employees and directors based
on estimated fair values. We have applied the provisions of SAB 107 in its
adoption of SFAS 123(R).
In
determining stock based compensation, we consider various factors in our
calculation of fair value using a black-scholes pricing model. These factors
include volatility, expected term of the options and forfeiture rates. A change
in these factors could result in differences in the stock based compensation
expense.
Recent
Accounting Pronouncements
In
February 2007, the Financial Accounting Standards Board (“FASB”) issued FASB
Statement No. 159,
“The Fair
Value Option for Financial Assets and
Financial Liabilities — Including an
Amendment of FASB Statement No. 115,
Accounting for Certain Investments
in Debt and Equity Securities”
(
“SFAS No.
159”
). SFAS No. 159 permits
an entity to choose to measure many financial instruments and certain items at
fair value. The objective of this standard is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reporting
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. SFAS No. 159 permits all
entities to choose to measure eligible items at fair value at specified election
dates. Entities will report unrealized gains and losses on items for which the
fair value option has been elected in earnings at each subsequent reporting
date. The fair value option: (a) may be applied instrument by instrument, with a
few exceptions, such as investments accounted for by the equity method; (b) is
irrevocable (unless a new election date occurs); and (c) is applied only to
entire instruments and not to portions of instruments. SFAS No. 159 is effective
as of the beginning of an entity’s first fiscal year that begins after November
15, 2007, which for us is our fiscal year beginning January 1, 2008. The
adoption of SFAS No. 159 did not have any effect on our consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
141(R)”). SFAS 141(R) replaces SFAS No. 141, “Business Combinations”, but
retains the requirement that the purchase method of accounting for acquisitions
be used for all business combinations. SFAS 141(R) expands on the disclosures
previously required by SFAS 141, better defines the acquirer and the acquisition
date in a business combination, and establishes principles for recognizing and
measuring the assets acquired (including goodwill), the liabilities assumed and
any non-controlling interests in the acquired business. SFAS 141(R) also
requires an acquirer to record an adjustment to income tax expense for changes
in valuation allowances or uncertain tax positions related to acquired
businesses. SFAS 141(R) is effective for all business combinations with an
acquisition date in the first annual period following December 15, 2008; early
adoption is not permitted. We will adopt this statement as of January 1, 2009.
The impact of SFAS 141(R) will have on our consolidated financial statements
will depend on the nature and size of acquisitions we complete after we adopt
SFAS 141(R).
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51” (SFAS 160). SFAS
160 requires that non-controlling (or minority) interests in subsidiaries be
reported in the equity section of the company’s balance sheet, rather than in a
mezzanine section of the balance sheet between liabilities and equity. SFAS 160
also changes the manner in which the net income of the subsidiary is reported
and disclosed in the controlling company’s income statement. SFAS 160 also
establishes guidelines for accounting for changes in ownership percentages and
for deconsolidation. SFAS 160 is effective for financial statements for fiscal
years beginning on or after December 1, 2008 and interim periods within those
years. The adoption of SFAS 160 is not expected to have a material impact on our
financial position, results of operations or cash flows.
In
March 2008, the FASB issued SFAS No. 161,
Disclosures About Derivative
Instruments and Hedging Activities
, or “SFAS 161”. SFAS 161 enhances the
disclosure requirements for derivative instruments and hedging activities. This
Standard is effective January 1, 2009. Since SFAS 161 requires only
additional disclosures concerning derivatives and hedging activities, adoption
of SFAS 161 will not affect the Company’s financial condition or results of
operation.
In
May 2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted
Accounting Principles
(SFAS 162). SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles in the
United States (the GAAP hierarchy). SFAS 162 will become
effective November 15, 2008. The adoption of SFAS 162 did not have a material
impact on our financial position, results of operations or cash
flows.
In June
2008, the FASB reached a consensus on EITF Issue No. 07-5,
Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity’s Own Stock
, or “EITF
07-5”. EITF 07-5 requires that we apply a two-step approach in evaluating
whether an equity-linked financial instrument (or embedded feature) is indexed
to our own stock, including evaluating the instrument’s contingent exercise and
settlement provisions. EITF 07-5 is effective for fiscal years beginning after
December 15, 2008. We are currently evaluating the effects, if any, that EITF
07-5 will have on our consolidated financial statements.
Item
7A. Quantitative
and Qualitative Disclosures About Market Risk.
Not required for smaller reporting
companies.
Item
8. Financial
Statements and Supplementary Data.
CONTENTS
|
|
PAGE
|
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
E-31
|
|
|
|
|
FINANCIAL
STATEMENTS
|
|
|
|
|
|
BALANCE
SHEETS AS OF DECEMBER 31, 2008 AND 2007
|
E-32
|
|
|
|
|
STATEMENTS
OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007, AND THE
PERIOD FROM INCEPTION (MAY 4, 2001) TO DECEMBER 31, 2008
|
E-33
|
|
|
|
|
STATEMENTS
OF STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2008
AND 2007, AND THE PERIOD FROM INCEPTION (MAY 4, 2001) TO DECEMBER 31,
2008
|
E-34
|
|
|
|
|
STATEMENTS
OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007, AND THE
PERIOD FROM INCEPTION (MAY 4, 2001) TO DECEMBER 31, 2008
|
E-35
|
|
|
|
|
NOTES
TO FINANCIAL STATEMENTS
|
E-36
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders
Xcorporeal,
Inc.
(a
development stage company)
Los
Angeles, California
We have
audited the accompanying consolidated balance sheets of Xcorporeal, Inc. as of
December 31, 2008 and 2007 and the related consolidated statements of
operations, stockholders’ deficit, and cash flows for each of the two years in
the period ended December 31, 2008 and the period from inception (May 4, 2001)
to December 31, 2008. These financial statements are the
responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The Company is
not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits 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.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Xcorporeal, Inc. at December
31, 2008 and 2007, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 2008 and the period from
inception (May 4, 2001) to December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has suffered recurring losses from operations and has a
net capital deficiency that raise substantial doubt about its ability to
continue as a going concern. Management’s plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ BDO
Seidman, LLP
Los
Angeles, California
March 30,
2009
XCORPOREAL,
INC.
(a
Development Stage Company)
BALANCE SHEETS
|
|
|
Years
ended
|
|
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
407,585
|
|
|
$
|
106,495
|
|
|
Marketable
securities, at fair value
|
|
|
2,955,714
|
|
|
|
16,401,898
|
|
|
Restricted
cash
|
|
|
301,675
|
|
|
|
68,016
|
|
|
Prepaid
expenses & other current assets
|
|
|
260,024
|
|
|
|
408,303
|
|
|
Tenant
improvement allowance receivable
|
|
|
87,658
|
|
|
|
-
|
|
|
Total
current assets
|
|
|
4,012,656
|
|
|
|
16,984,712
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
337,554
|
|
|
|
266,912
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
863
|
|
|
|
922
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
4,351,073
|
|
|
$
|
17,252,546
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
789,827
|
|
|
$
|
1,125,239
|
|
|
Accrued
legal fees & licensing expense
|
|
|
2,873,396
|
|
|
|
312,208
|
|
|
Accrued
royalties
|
|
|
583,333
|
|
|
|
83,333
|
|
|
Accrued
professional fees
|
|
|
211,820
|
|
|
|
113,020
|
|
|
Accrued
compensation
|
|
|
149,664
|
|
|
|
196,541
|
|
|
Accrued
other liabilities
|
|
|
54,429
|
|
|
|
68,946
|
|
|
Payroll
liabilities
|
|
|
7,448
|
|
|
|
11,926
|
|
|
Deferred
rent
|
|
|
148,651
|
|
|
|
-
|
|
|
Other
current liabilities
|
|
|
-
|
|
|
|
115,400
|
|
|
Total
current liabilities
|
|
|
4,818,568
|
|
|
|
2,026,613
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issuable
|
|
|
1,569,100
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
& CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.0001 par value, 10,000,000 shares authorized, none
outstanding
|
|
|
-
|
|
|
|
-
|
|
|
Common
stock, $0.0001 par value, 40,000,000 shares authorized, 14,754,687 and
14,372,472 issued and outstanding on December 31, 2008 and December 31,
2007, respectively
|
|
|
1,475
|
|
|
|
1,437
|
|
|
Additional
paid-in capital
|
|
|
42,547,023
|
|
|
|
36,822,316
|
|
|
Deficit
accumulated during the development stage
|
|
|
(44,585,093
|
)
|
|
|
(21,597,820
|
)
|
|
Total
stockholders' (deficit) equity
|
|
|
(2,036,595
|
)
|
|
|
15,225,933
|
|
|
Total
Liabilities & Stockholders' (Deficit) Equity
|
|
$
|
4,351,073
|
|
|
$
|
17,252,546
|
|
See
accompanying notes to these financial statements.
XCORPOREAL,
INC.
(a
Development Stage Company)
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
May
4, 2001 (Date
|
|
|
|
|
Years
ended
|
|
|
of
Inception) to
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
$
|
9,001,819
|
|
|
$
|
11,084,040
|
|
|
$
|
23,404,511
|
|
|
Research and
development
|
|
|
20,914,825
|
|
|
|
7,141,170
|
|
|
|
29,343,317
|
|
|
Other
expenses
|
|
|
1,871,430
|
|
|
|
-
|
|
|
|
1,871,430
|
|
|
Depreciation and
amortization
|
|
|
104,719
|
|
|
|
32,171
|
|
|
|
136,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before other income, income taxes, and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses
|
|
|
(31,892,793
|
)
|
|
|
(18,257,381
|
)
|
|
|
(54,756,243
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income
|
|
|
323,249
|
|
|
|
1,184,930
|
|
|
|
1,590,479
|
|
|
Change
in fair value of shares issuable
|
|
|
8,583,900
|
|
|
|
-
|
|
|
|
8,583,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes and other expenses
|
|
|
(22,985,644
|
)
|
|
|
(17,072,451
|
)
|
|
|
(44,581,864
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
1,629
|
|
|
|
1,600
|
|
|
|
3,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(22,987,273
|
)
|
|
$
|
(17,074,051
|
)
|
|
$
|
(44,585,093
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(1.57
|
)
|
|
$
|
(1.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
14,604,274
|
|
|
|
14,206,489
|
|
|
|
|
|
See
accompanying notes to these financial statements.
XCORPOREAL,
INC.
(a
Development Stage Company)
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
For
the Period May 4, 2001 (Inception) to December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
During
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Development
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stage
|
|
|
Total
|
|
|
Common
stock issued for cash at $0.01 per share
|
|
|
2,500,000
|
|
|
$
|
250
|
|
|
$
|
24,750
|
|
|
|
|
|
$
|
25,000
|
|
|
Net
Loss for the year ended December 31, 2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(40,255
|
)
|
|
|
(40,255
|
)
|
|
Balance
as of December 31, 2001
|
|
|
2,500,000
|
|
|
|
250
|
|
|
|
24,750
|
|
|
|
(40,255
|
)
|
|
|
(15,255
|
)
|
|
Common
stock issued for cash at $0.05 per share
|
|
|
1,320,000
|
|
|
|
132
|
|
|
|
65,868
|
|
|
|
|
|
|
|
66,000
|
|
|
Net
Loss for the year ended December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,249
|
)
|
|
|
(31,249
|
)
|
|
Balance
as of December 31, 2002
|
|
|
3,820,000
|
|
|
|
382
|
|
|
|
90,618
|
|
|
|
(71,504
|
)
|
|
|
19,496
|
|
|
Net
Loss for the year ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,962
|
)
|
|
|
(12,962
|
)
|
|
Balance
as of December 31, 2003
|
|
|
3,820,000
|
|
|
|
382
|
|
|
|
90,618
|
|
|
|
(84,466
|
)
|
|
|
6,534
|
|
|
Net
Loss for the year ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,338
|
)
|
|
|
(23,338
|
)
|
|
Balance
as of December 31, 2004
|
|
|
3,820,000
|
|
|
|
382
|
|
|
|
90,618
|
|
|
|
(107,804
|
)
|
|
|
(16,804
|
)
|
|
Net
Loss for the year ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,753
|
)
|
|
|
(35,753
|
)
|
|
Balance
as of December 31, 2005
|
|
|
3,820,000
|
|
|
|
382
|
|
|
|
90,618
|
|
|
|
(143,557
|
)
|
|
|
(52,557
|
)
|
|
Common
stock issued for license rights at $0.0001 per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
share
|
|
|
9,600,000
|
|
|
|
960
|
|
|
|
40
|
|
|
|
|
|
|
|
1,000
|
|
|
Capital
stock cancelled
|
|
|
(3,420,000
|
)
|
|
|
(342
|
)
|
|
|
342
|
|
|
|
|
|
|
|
-
|
|
|
Warrants
granted for consulting fees
|
|
|
|
|
|
|
|
|
|
|
2,162,611
|
|
|
|
|
|
|
|
2,162,611
|
|
|
Forgiveness
of related party debt
|
|
|
|
|
|
|
|
|
|
|
64,620
|
|
|
|
|
|
|
|
64,620
|
|
|
Common
stock issued for cash at $7.00, net of placement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fees
of $2,058,024
|
|
|
4,200,050
|
|
|
|
420
|
|
|
|
27,341,928
|
|
|
|
|
|
|
|
27,342,348
|
|
|
Stock-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
264,251
|
|
|
|
|
|
|
|
264,251
|
|
|
Net
loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,380,212
|
)
|
|
|
(4,380,212
|
)
|
|
Balance
as of December 31, 2006
|
|
|
14,200,050
|
|
|
|
1,420
|
|
|
|
29,924,410
|
|
|
|
(4,523,769
|
)
|
|
|
25,402,061
|
|
|
Capital
stock cancelled
|
|
|
(200,000
|
)
|
|
|
(20
|
)
|
|
|
20
|
|
|
|
|
|
|
|
-
|
|
|
Common
stock issued pursuant to consulting agreement at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4.90
per share
|
|
|
20,000
|
|
|
|
2
|
|
|
|
97,998
|
|
|
|
|
|
|
|
98,000
|
|
|
Recapitalization
pursuant to merger
|
|
|
352,422
|
|
|
|
35
|
|
|
|
(37,406
|
)
|
|
|
|
|
|
|
(37,371
|
)
|
|
Warrants
granted for consulting services
|
|
|
|
|
|
|
|
|
|
|
2,917,309
|
|
|
|
|
|
|
|
2,917,309
|
|
|
Stock-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
3,721,485
|
|
|
|
|
|
|
|
3,721,485
|
|
|
Additional
proceeds from the sale of common stock in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
198,500
|
|
|
|
|
|
|
|
198,500
|
|
|
Net
loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,074,051
|
)
|
|
|
(17,074,051
|
)
|
|
Balance
as of December 31, 2007
|
|
|
14,372,472
|
|
|
|
1,437
|
|
|
|
36,822,316
|
|
|
|
(21,597,820
|
)
|
|
|
15,225,933
|
|
|
Common
stock issued as compensation for consulting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
services
at $3.61 per share
|
|
|
200,000
|
|
|
|
20
|
|
|
|
721,980
|
|
|
|
|
|
|
|
722,000
|
|
|
Common
stock issued as compensation for consulting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
services
at $3.80 per share
|
|
|
20,000
|
|
|
|
2
|
|
|
|
75,998
|
|
|
|
|
|
|
|
76,000
|
|
|
Cashless
exercise of warrants
|
|
|
112,215
|
|
|
|
11
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
0
|
|
|
Common
stock issued as compensation for consulting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
services
at $0.32 per share
|
|
|
50,000
|
|
|
|
5
|
|
|
|
15,995
|
|
|
|
|
|
|
|
16,000
|
|
|
Reversal
of liability from the sale of common stock in 2006
|
|
|
|
|
|
|
|
|
|
|
115,400
|
|
|
|
|
|
|
|
115,400
|
|
|
Warrants
granted for consulting services
|
|
|
|
|
|
|
|
|
|
|
91,306
|
|
|
|
|
|
|
|
91,306
|
|
|
Stock-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
4,704,039
|
|
|
|
|
|
|
|
4,704,039
|
|
|
Net
loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,987,273
|
)
|
|
|
(22,987,273
|
)
|
|
Balance
as of December 31, 2008
|
|
|
14,754,687
|
|
|
$
|
1,475
|
|
|
$
|
42,547,023
|
|
|
$
|
(44,585,093
|
)
|
|
$
|
(2,036,595
|
)
|
See
accompanying notes to these financial statements.
XCORPOREAL,
INC.
(a
Development Stage Company)
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
May
4, 2001 (Date
|
|
|
|
|
Years
ended
|
|
|
of
Inception) to
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Cash
flows used in operating activities
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the period
|
|
$
|
(22,987,273
|
)
|
|
$
|
(17,074,051
|
)
|
|
$
|
(44,585,093
|
)
|
|
Adjustments
to reconcile net loss to net cash (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based
compensation
|
|
|
4,704,039
|
|
|
|
3,721,485
|
|
|
|
8,689,775
|
|
|
Non-employee stock based
compensation
|
|
|
91,306
|
|
|
|
2,917,309
|
|
|
|
5,171,226
|
|
|
Common stock issuance for
consulting services rendered
|
|
|
814,000
|
|
|
|
98,000
|
|
|
|
912,000
|
|
|
Increase in shares
issuable
|
|
|
10,153,000
|
|
|
|
-
|
|
|
|
10,153,000
|
|
|
Mark to market of shares
issuable
|
|
|
(8,583,900
|
)
|
|
|
-
|
|
|
|
(8,583,900
|
)
|
|
Depreciation
|
|
|
104,660
|
|
|
|
32,093
|
|
|
|
136,848
|
|
|
Net change in assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in
Receivables
|
|
|
(87,658
|
)
|
|
|
|
|
|
|
(87,658
|
)
|
|
Decrease (increase) in
prepaid expenses and other current assets
|
|
|
148,279
|
|
|
|
(318,075
|
)
|
|
|
(260,024
|
)
|
|
Decrease in other
assets
|
|
|
59
|
|
|
|
78
|
|
|
|
(863
|
)
|
|
Increase (decrease) in
accounts payable and accrued liabilities
|
|
|
2,758,704
|
|
|
|
(144,241
|
)
|
|
|
4,632,546
|
|
|
Increase in deferred
rent
|
|
|
148,651
|
|
|
|
-
|
|
|
|
148,651
|
|
|
Net
cash used in operating activities
|
|
|
(12,736,133
|
)
|
|
|
(10,767,402
|
)
|
|
|
(23,673,492
|
)
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(175,302
|
)
|
|
|
(295,676
|
)
|
|
|
(474,402
|
)
|
|
Restricted
cash
|
|
|
(233,659
|
)
|
|
|
(68,016
|
)
|
|
|
(301,675
|
)
|
|
Purchase of marketable
securities
|
|
|
(8,598,102
|
)
|
|
|
(25,000,000
|
)
|
|
|
(33,598,102
|
)
|
|
Sale
of marketable
securities
|
|
|
22,044,286
|
|
|
|
8,598,102
|
|
|
|
30,642,388
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
13,037,223
|
|
|
|
(16,765,590
|
)
|
|
|
(3,731,791
|
)
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital stock
issued
|
|
|
-
|
|
|
|
-
|
|
|
|
27,549,748
|
|
|
Advances from related
party
|
|
|
-
|
|
|
|
-
|
|
|
|
64,620
|
|
|
Additional proceeds from
the sale of common stock in 2006
|
|
|
-
|
|
|
|
198,500
|
|
|
|
198,500
|
|
|
Net
cash provided by financing activities
|
|
|
-
|
|
|
|
198,500
|
|
|
|
27,812,868
|
|
|
Increase
(decrease) in cash during the period
|
|
|
301,090
|
|
|
|
(27,334,492
|
)
|
|
|
407,585
|
|
|
Cash
at beginning of the period
|
|
|
106,495
|
|
|
|
27,440,987
|
|
|
|
-
|
|
|
Cash
at end of the period
|
|
$
|
407,585
|
|
|
$
|
106,495
|
|
|
$
|
407,585
|
|
|
Supplemental
disclosure of cash flow information; cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Income
taxes
|
|
$
|
1,629
|
|
|
$
|
-
|
|
|
$
|
3,229
|
|
See
accompanying notes to these financial statements.
XCORPOREAL,
INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008
|
1.
|
NATURE
OF OPERATIONS AND GOING CONCERN
UNCERTAINTY
|
On
October 12, 2007, pursuant to a merger agreement with Xcorporeal, Inc.
(hereinafter referred to as “Operations”), our wholly-owned subsidiary, merged
with and into Operations, which became our wholly-owned subsidiary and changed
its name to “Xcorporeal Operations, Inc.” We changed our name from CT Holdings
Enterprises, Inc. (“CTHE”), to “Xcorporeal, Inc.” and amended our certificate of
incorporation and bylaws to read substantially as Operations. As a result, our
authorized common stock changed from 60,000,000 shares to 40,000,000 common
shares, and our authorized preferred stock changed from 1,000,000 shares to
10,000,000 shares, resulting in total authorized capital stock of 50,000,000
shares.
Immediately
prior to the merger, we caused a one-for-8.27 reverse split of our common stock.
Each share of Operations common stock was then converted into one share of our
common stock. In addition, we assumed all outstanding Operations’ options and
warrants to purchase Operations common stock.
In this
merger, CTHE was considered to be the legal acquirer and Xcorporeal to be the
accounting acquirer. As the former shareholders of Operations owned over 97% of
the outstanding voting common stock of CTHE immediately after the merger and
CTHE was a public shell company, for accounting purposes Operations was
considered the accounting acquirer and the transaction was considered to be a
recapitalization of Operations.
Historical
financial statements prior to the merger were restated to be those of
Operations. The merger was accounted for as if it were an issuance of the common
stock of Operations to acquire our net assets, accompanied by a
recapitalization. Historical stockholders’ equity of Operations was
retroactively restated for the equivalent number of shares received in the
merger, after giving effect to the difference in par value with an offset to
paid-in capital. The assets and liabilities of Operations were carried forward
at their predecessor carrying amounts. Retained deficiency of Operations was
carried forward after the merger. Operations prior to the merger were those of
Operations. Earnings per share for periods prior to the merger were restated to
reflect the number of equivalent shares received by Operations’ stockholders.
The costs of the transaction were expensed to the extent they exceed cash
received from CTHE. References to “we,” “us,” “our” and the “company” after
consummation of the merger include CTHE and Operations.
As a
result of the merger, we transitioned to a development stage company focused on
researching, developing, and commercializing technology and products related to
the treatment of kidney failure.
We expect to incur negative cash flows
and net losses for the foreseeable future. Based upon our current plans, we
believe that our existing cash reserves will not be sufficient to meet our
current liabilities and other obligations as they become due and payable.
Accordingly, we will need to seek to obtain additional debt or equity financing
through a public or private placement of shares of our preferred or common stock
or through a public or private financing. Our ability to meet such obligations
will depend on our ability to sell securities, borrow funds, reduce operating
costs, or some combination thereof. We may not be successful in obtaining
necessary financing on acceptable terms, if at all. As of December 31, 2008, we
had negative working capital of $805,912, accumulative deficit of $44,585,093,
and stockholders’ deficit of $2,036,595. Cash used in 2008 operations was
$12,736,133. As a result of these conditions, there is substantial doubt about
our ability to continue as a going concern. The financial statements filed as
part of this Annual Report do not include any adjustments that might result from
the outcome of this uncertainty.
Upon
receipt of the approximate $27.3 million raised through a private placement of
our common stock which was completed in the fourth quarter of 2006, we
strategically began our operating activities and research and development
efforts which resulted in a net loss of $23.0 million in 2008 and $17.1 million
in 2007, including approximately a net $1.6 million fair value accrual of a
potential 9.23 million shares issuance discussed in Note 4, “Legal Proceedings”
below. In addition, we invested $25.0 million in high grade money market funds
and marketable securities. We sold $22.0 million of these investments leaving a
balance of $3.0 million as of December 31, 2008.
We are a
medical device company developing an innovative
extra-corporeal
platform
technology to be used in devices to replace the function of various human
organs. We hope that the platform will lead to three initial products: (i) a
Portable Artificial Kidney (PAK) for hospital Renal Replacement Therapy, (ii) a
PAK for home hemodialysis and (iii) a Wearable Artificial Kidney (WAK) for
continuous ambulatory hemodialysis. Our rights to the WAK derive in part from
the License Agreement between Operations and NQCI pursuant to which we obtained
the exclusive rights to the Technology. See Note 4, “Legal Proceedings”
below.
We have
focused much of our efforts on development of the PAK, which has not been
derived from the technology covered by the License Agreement. Through our
research and development efforts, we have completed functional prototypes of our
hospital and home PAKs that we plan to commercialize after 510(k) notification
clearance from the Food and Drug Administration (FDA) which we plan to seek in
the future. Prior to the 510(k) submission to the FDA for clinical use under
direct medical supervision, the units will undergo final verification and
validation. It generally takes 4 to 12 months from the date of a 510(k)
submission to obtain clearance from the FDA, although it may take longer. We
hope to begin to shift out of the development and build phase of the prototype
equipment and into product phase, which should help us to reduce the related
spending on research and development costs as well as consulting and material
costs. See Note 19, “Product Development Agreement” below. With this transition,
there will be a shift of resources towards verification and validation of our
devices along with developing a marketing plan for the PAK.
In
addition, we have used some of our resources for the development of the WAK of
which we have demonstrated a feasibility prototype. Commercialization of the WAK
will require development of a functional prototype and likely a full pre-market
approval by the FDA, which could take several years. Once the Technology
Transaction has closed and the results of the arbitration proceeding described
in Note 4, “Legal Proceedings” are final, we will determine whether to devote
available resources to development of the WAK.
Because
neither the PAK nor the WAK is yet at a stage where it can be marketed
commercially, we are not able to predict the portion of our future business
which will be derived from each.
|
2.
|
DEVELOPMENT STAGE
COMPANY
|
We are a
development stage company, devoting substantially all of our efforts to the
research, development, and commercialization of kidney failure treatment
technologies.
Risks and Uncertainties —
We
operate in an industry that is subject to intense competition, government
regulation, and rapid technological change. Our operations are subject to
significant risk and uncertainties including financial, operational,
technological, legal, regulatory, and other risks associated with a development
stage company, including the potential risk of business failure.
|
3.
|
SUMMARY
OF ACCOUNTING POLICIES
|
Cash and Cash Equivalents —
Cash equivalents are comprised of certain highly liquid investments with
original maturities of less than three months.
Marketable Securities —
We
classify investments with maturity dates greater than three months when
purchased as marketable securities. Investments, including certificates of
deposit with maturity dates greater than three months when purchased and which
have readily determined fair values, are classified as available-for-sale
investments and reflected in current assets as marketable securities at fair
market value. Our investment policy requires that all investments be investment
grade quality and no more than ten percent of our portfolio may be invested in
any one security or with one institution.
As of
December 31, 2008 and 2007, short-term investments classified as
available-for-sale were as follows:
|
|
|
December
31, 2008
|
|
|
|
|
Aggregate
Fair
|
|
|
Gross
Unrealized
|
|
|
Estimated
Fair
|
|
|
|
|
Value
|
|
|
Gains
/ (Losses)
|
|
|
Value
|
|
|
Commercial
paper
|
|
$
|
897,993
|
|
|
$
|
-
|
|
|
$
|
897,993
|
|
|
Corporate
securities fixed rate
|
|
|
457,930
|
|
|
|
-
|
|
|
|
457,930
|
|
|
Total
|
|
$
|
1,355,923
|
|
|
$
|
-
|
|
|
$
|
1,355,923
|
|
|
|
|
December
31, 2007
|
|
|
|
|
Aggregate
Fair
|
|
|
Gross
Unrealized
|
|
|
Estimated
Fair
|
|
|
|
|
Value
|
|
|
Gains
/ (Losses)
|
|
|
Value
|
|
|
Commercial
paper
|
|
$
|
10,283,818
|
|
|
$
|
-
|
|
|
$
|
10,283,818
|
|
|
Corporate
obligation
|
|
|
2,245,770
|
|
|
|
-
|
|
|
|
2,245,770
|
|
|
Total
|
|
$
|
12,529,588
|
|
|
$
|
-
|
|
|
$
|
12,529,588
|
|
We review
impairments associated with the above in accordance with SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity Securities,” and FASB
Staff Position FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments,” to determine the
classification of the impairment as temporary or other-than-temporary. We
consider these investments not to be impaired as of December 31, 2008 and
2007.
There
were no gross unrealized gains or losses as of December 31, 2008 and
2007.
Property and Equipment —
Property and equipment are stated at cost less accumulated depreciation
and amortization, which are calculated using the straight-line method over the
shorter of the estimated useful lives of the related assets (generally ranging
from three to five years), or the remaining lease term when applicable. Gains
and losses on disposals are included in results of operations at amounts equal
to the difference between the book value of the disposed assets and the proceeds
received upon disposal. There were no gains or losses on disposals from
inception through the end of 2008. Expenditures for replacements and leasehold
improvements are capitalized, while expenditures for maintenance and repairs are
expensed as incurred.
Research and Development —
Research and development is expensed as incurred. Upfront and milestone
payments made to third parties in connection with research and development
collaborations prior to regulatory approval are expensed as incurred. Payments
made to third parties subsequent to regulatory approval are capitalized and
amortized over the shorter of the remaining license or product patent life. At
December 31, 2008, we had no such capitalized research and development
costs.
Income Taxes —
Under SFAS
109, “Accounting for Income Taxes,” deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the consolidated financial statements and their respective tax basis. Deferred
income taxes reflect the net tax effects of (a) temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts reported for income tax purposes, and (b) tax credit
carry-forwards. We record a valuation allowance for deferred tax assets when,
based on management’s best estimate of taxable income in the foreseeable future,
it is more likely than not that some portion of the deferred income tax assets
may not be realized.
Earnings per Share —
Under
SFAS 128, “Earnings per Share,” basic earnings per share is computed by dividing
net income available to common stockholders by the weighted average number of
common shares assumed to be outstanding during the period of computation.
Diluted earnings per share reflect the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. As we had net losses for all periods presented, basic and
diluted loss per share is the same across the periods and any additional common
stock equivalents would be anti-dilutive.
Share-Based Compensation —
Effective January 1, 2006, we adopted FASB Statement No. 123R,
Share-Based Payment
(“FAS
123R”) (see Note 17, “Stock Options and Warrants”). FAS 123R requires all
share-based payments to employees to be expensed over the requisite service
period based on the grant-date fair value of the awards and requires that the
unvested portion of all outstanding awards upon adoption be recognized using the
same fair value and attribution methodologies previously determined under FASB
Statement No. 123,
Accounting
for Stock-Based
Compensation
. We continue to
use the Black-Scholes valuation method and applied the requirements of FAS 123R
using the modified prospective method. Prior to January 1, 2006, there was no
share-based compensation expense.
Use of Estimates —
The
consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States (“GAAP”) and, accordingly,
include certain amounts that are based on management’s best estimates and
judgments. Estimates are used in determining such items as depreciable and
amortizable lives, amounts recorded for contingencies, share-based compensation,
taxes on income. Because of the uncertainty inherent in such estimates, actual
results may differ from these estimates.
Recently
Issued Accounting Standards
In
February 2007, the Financial Accounting Standards Board (“FASB”) issued FASB
Statement No. 159,
“The Fair
Value Option for Financial Assets and
Financial Liabilities — Including an
Amendment of FASB Statement No. 115,
Accounting for Certain Investments
in Debt and Equity Securities”
(
“SFAS No.
159”
). SFAS No. 159 permits
an entity to choose to measure many financial instruments and certain items at
fair value. The objective of this standard is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reporting
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. SFAS No. 159 permits all
entities to choose to measure eligible items at fair value at specified election
dates. Entities will report unrealized gains and losses on items for which the
fair value option has been elected in earnings at each subsequent reporting
date. The fair value option: (a) may be applied instrument by instrument, with a
few exceptions, such as investments accounted for by the equity method; (b) is
irrevocable (unless a new election date occurs); and (c) is applied only to
entire instruments and not to portions of instruments. SFAS No. 159 is effective
as of the beginning of an entity’s first fiscal year that begins after November
15, 2007, which for us is our fiscal year beginning January 1, 2008. The
adoption of SFAS No. 159 did not have any effect on our consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
141(R)”). SFAS 141(R) replaces SFAS No. 141, “Business Combinations”, but
retains the requirement that the purchase method of accounting for acquisitions
be used for all business combinations. SFAS 141(R) expands on the disclosures
previously required by SFAS 141, better defines the acquirer and the acquisition
date in a business combination, and establishes principles for recognizing and
measuring the assets acquired (including goodwill), the liabilities assumed and
any non-controlling interests in the acquired business. SFAS 141(R) also
requires an acquirer to record an adjustment to income tax expense for changes
in valuation allowances or uncertain tax positions related to acquired
businesses. SFAS 141(R) is effective for all business combinations with an
acquisition date in the first annual period following December 15, 2008; early
adoption is not permitted. We will adopt this statement as of January 1, 2009.
The impact of SFAS 141(R) will have on our consolidated financial statements
will depend on the nature and size of acquisitions we complete after we adopt
SFAS 141(R).
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51” (SFAS 160). SFAS
160 requires that non-controlling (or minority) interests in subsidiaries be
reported in the equity section of the company’s balance sheet, rather than in a
mezzanine section of the balance sheet between liabilities and equity. SFAS 160
also changes the manner in which the net income of the subsidiary is reported
and disclosed in the controlling company’s income statement. SFAS 160 also
establishes guidelines for accounting for changes in ownership percentages and
for deconsolidation. SFAS 160 is effective for financial statements for fiscal
years beginning on or after December 1, 2008 and interim periods within those
years. The adoption of SFAS 160 is not expected to have a material impact on our
financial position, results of operations or cash flows.
In
March 2008, the FASB issued SFAS No. 161,
Disclosures About Derivative
Instruments and Hedging Activities
, or “SFAS 161”. SFAS 161 enhances the
disclosure requirements for derivative instruments and hedging activities. This
Standard is effective as of January 1, 2009. Since SFAS 161 requires only
additional disclosures concerning derivatives and hedging activities, adoption
of SFAS 161 will not affect our financial condition or results of
operation.
In
May 2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted
Accounting Principles
(SFAS 162). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States (the GAAP hierarchy). SFAS 162 became effective
November 15, 2008. The adoption of SFAS 162 did not have a material impact on
our financial position, results of operations or cash flows.
In June
2008, the FASB reached a consensus on EITF Issue No. 07-5,
Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity’s Own Stock
, or “EITF
07-5”. EITF 07-5 requires that we apply a two-step approach in evaluating
whether an equity-linked financial instrument (or embedded feature) is indexed
to our own stock, including evaluating the instrument’s contingent exercise and
settlement provisions. EITF 07-5 is effective for fiscal years beginning after
December 15, 2008. We are currently evaluating the effects, if any, that EITF
07-5 will have on our consolidated financial statements.
On
December 1, 2006, Operations initiated arbitration against NQCI for NQCI's
failure to fully perform its obligations under the License Agreement dated
September 1, 2006. On September 1, 2006, Operations also entered into a Merger
Agreement with NQCI which contemplated that Operations would acquire NQCI as a
wholly owned subsidiary pursuant to a triangular merger, or would issue to NQCI
shares of common stock in consideration of the assignment of the technology
relating to the WAK and other medical devices which, as listed under
“Technology” on the License Agreement, are “all existing and hereafter developed
Intellectual Property, Know-How, Licensor Patents, Licensor Patent Applications,
Derivative Works and any other technology, invented, improved or developed by
Licensor, or as to which Licensor owns or holds any rights, arising out of or
relating to the research, development, design, manufacture or use of (a) any
medical device, treatment or method as of the date of this Agreement, (b) any
portable or continuous dialysis methods or devices , specifically including any
wearable artificial kidney, or “Wearable Artificial Kidney”, and related
devices, (c) any device, methods or treatments for congestive heart failure, and
(d) any artificial heart or coronary device”, collectively referred to herein as
the “Technology Transaction”. The merger was never consummated.
On
January 3, 2008, the arbitrator issued an order denying NQCI’s motion to amend
its counterclaim to add us as a successor company following the merger. However,
in the Second Interim Award, the arbitrator found that we are the successor to
Operations as a result of the merger, even though we are not a party to any of
the agreements or the arbitration, and ordered that our shares should be issued
to NQCI rather than shares of Operations.
On June
9, 2008, the arbitrator issued an Interim Award granting specific performance of
the Technology Transaction. The Interim Award stated that the total aggregate
shares of stock to be received by NQCI at the closing should equal 48% of all
Operations shares outstanding as of the date of the Merger Agreement. On
September 1, 2006, there were 10,000,000 shares of Operations common stock
outstanding.
On August
4, 2008, the arbitrator issued a Second Interim Award, stating that 9,230,000
shares of our common stock should be issued to NQCI to effectuate the Technology
Transaction. As of December 31, 2008, there were 14,754,687 shares of our common
stock issued and outstanding. Accordingly, following closing of the Technology
Transaction, NQCI would be our largest stockholder and would own approximately
39% of our total outstanding shares.
The
arbitrator has not ordered us to close the Technology Transaction. However, the
arbitrator found that, with the exception of shareholder approval, virtually all
conditions to closing the Technology Transaction have been waived. The award
further states that, if we or our stockholders do not approve the issuance of
our stock to effectuate the Technology Transaction, all of the Technology
covered by the License Agreement will be declared the sole and exclusive
property of NQCI, and the arbitrator will schedule additional hearings to
address whether the PAK technology is included within that Technology, and
whether NQCI is entitled to compensatory damages and the amount of damages, if
any, under these circumstances. Upon closing of the Technology Transaction, the
License Agreement will terminate, and we will own all of the
Technology.
The
Second Interim Award also stated that the License Agreement will remain in full
force and effect until the Technology Transaction closes or the arbitrator
determines that it will never close. NQCI has made a claim for reimbursement of
approximately $690,000 in alleged expenses, Licensor Expenses, under the License
Agreement which were accrued under “Accrued legal fees & licensing expense”
as of December 31, 2008. The Licensor Expenses were accrued in the fiscal year
ended December 31, 2008, with the expenditure recorded as Licensing Expense
within research and development operating expenses.
On August
15, 2008, the arbitrator awarded NQCI $1.87 million to settle over $4 million
NQCI claimed in attorneys’ fees and costs which have been accrued under “Accrued
legal fees & licensing expense” as of December 31, 2008. The settlement of
legal fees was accrued in the year ended at December 31, 2008, with the
expenditure recognized as “Other expenses” and payment pending to
date.
The
Second Interim Award required that we file a registration statement under the
Securities Act to register for resale the shares to be issued to NQCI within 30
days after the closing of the Technology Transaction. The arbitrator
acknowledged that our obligation is to file the registration statement and to
use reasonable efforts to have the shares registered and not to guarantee
registration and resultant actual public tradability. However, the arbitrator
nevertheless ordered that the registration statement must be declared effective
within 90 days.
The
Second Interim Award requires that we file a registration statement under the
Securities Act to register for resale the shares to be issued to NQCI within 30
days after the closing of the Technology Transaction. The arbitrator
acknowledged that our obligation is to file the registration statement and to
use reasonable efforts to have the shares registered and not to guarantee
registration and resultant actual public tradability. However, the arbitrator
nevertheless ordered that the registration statement must be declared effective
within 90 days. We have no control over whether the registration statement will
be declared effective by the SEC, and no way to predict what further action, if
any, the arbitrator may order if it is not declared effective.
On
January 30, 2009, the arbitrator issued the Order, in which the arbitrator
modified the Second Interim Award by reserving on what the final terms of our
obligation to file the resale registration statement will be and stating that
such registration obligation shall be in accordance with applicable laws,
including applicable U.S. federal securities laws. While the arbitrator also
retained jurisdiction to monitor our compliance with such obligation, to award
any appropriate relief to NQCI if we fail to comply with such obligation and to
render a decision on any other matters contested in this proceeding, the time
periods set forth in the Second Interim Award and summarized in the preceding
paragraph are no longer applicable. The Order also provided, among other things,
that if we file the proxy statement, obtain stockholder approval to issue to
NQCI 9,230,000 shares of our common stock as consideration for the closing of
the Technology Transaction and issue such shares to NQCI, the arbitrator
anticipates confirming that all of the Technology covered by the License shall
be declared our sole and exclusive property.
The
Technology Transaction will be accounted for as a purchase of the Technology in
exchange for shares of our common stock. In accordance with FASB Concepts
Statement No. 7,
Using Cash
Flow Information and Present Value in Accounting Measurements
, the
Technology Transaction will be measured based on the fair value of the shares
issued, which is clearly more evident than the fair value of the intellectual
property. Through the evaluation of the components of the intellectual property
and information pursuant to the arbitration suggesting it may not be
proprietary, we have determined the intellectual property is not economically
viable. However, continuing research on the technology will be useful in
developing the prototype of our Wearable Artificial Kidney. In accordance with
FASB 2,
Accounting for
Research and Development Costs
, and its related interpretations, we have
expensed the value of the intellectual property, determined in process research
and development, at the date of acquisition. See Note 10,
“
Shares
Issuable
”,
below.
Pursuant
to the Second Interim Award, which stated that, if the Technology
Transaction is submitted to and approved by our stockholders, 9,230,000 shares
of our common stock should be issued to NQCI to effectuate the transaction, we
accrued for the 9,230,000 shares of our common stock. As the Second Interim
Award states that we must issue 9,230,000 upon the closing of the Technology
Transaction and we have been unable to consummate such transaction, such
contingency is not within our control and we have therefore, recorded
the obligation to issue the shares as a liability, rather than as an
equity issuance. The fair value of the 9,230,000 shares was measured using the
closing price of our common stock on August 4, 2008, the date of the Second
Interim Award, and revalued, marked to market, as of the end of the year ending
at December 31, 2008. The fair value of the accrued shares on August 4, 2008,
was $10,153,000 which is reflected in research and development expense. The
obligation to issue the shares was revalued at $1,569,100 as of December 31,
2008, resulting in a $8,583,900 non-operating gain, classified as change in fair
value of shares issuable in the statement of operations for the year ended
December 31, 2008. The net fair value of $1,569,100 was accrued under “Shares
issuable” as of December 31, 2008. Stockholder approval and issuance
of the shares are pending to date.
We are
currently in the process of seeking approval from our stockholders to issue
9,230,000 shares of our common stock in order to obtain ownership of the
Technology. The stockholder approval is being sought in accordance with an
Interim Award issued on June 9, 2008, and in order to minimize the risk that the
arbitrator will issue an alternative award that could have a material adverse
effect on our financial condition and operations. The arbitrator has refused to
issue a final award until this stockholder approval has been obtained from our
stockholders, which may effectively prevent us from obtaining effective court
review of the arbitrator’s actions. If the Technology Transaction does not
close, the arbitrator may issue alternative relief. In the event of an
alternative award, the above accrual may be adjusted and the accrual or the
actual settlement will be recorded to coincide with the alternate
award.
If the
9,230,000 shares are issued pursuant to the approval of our stockholders, then
the $1,569,100 contingent liability recorded on our balance sheet will be
adjusted through earnings to an amount equal to the product of 9,230,000 shares
and the trading price of our common stock on that day and then be
eliminated by increasing the number of our issued and outstanding common shares
by 9,230,000 and increasing our stockholders’ equity by a
corresponding amount.
The
arbitrator held a conference call hearing with the Company and NQCI on March 13,
2009 in which the parties discussed the reasons for the difficulties in closing
the Technology Transaction and explored potential alternatives. The parties were
asked to submit letter briefs outlining their suggested alternatives for
consideration by the arbitrator. The parties submitted their respective letter
briefs on March 24, 2009.
As of the
date of this Annual Report, the arbitration proceeding with NQCI continues and
the arbitrator has not yet issued a final award to either party and has not made
a final ruling with respect to whether the closing of the Technology Transaction
shall occur or whether potential alternatives should be pursued.
The
arbitrator has stated that he has not yet issued a final award that may be
confirmed or challenged in a court of competent jurisdiction. A party to the
arbitration could challenge the interim award in court, even after stockholders
approve the transaction. In addition, the arbitrator could again change the
award by granting different or additional remedies, even after stockholders
approve the transaction. We cannot guarantee that the arbitrator would order
that our stockholders should be given another opportunity to vote on the
transaction, even if such changes are material. Arbitrators have broad equitable
powers, and arbitration awards are difficult to challenge in court, even if the
arbitrator makes rulings that are inconsistent or not in accordance with the law
or the evidence.
|
5.
|
CASH EQUIVALENTS AND MARKETABLE
SECURITIES
|
We invest
available cash in short-term commercial paper, certificates of deposit, money
market funds, and high grade marketable securities. We consider any liquid
investment with an original maturity of three months or less when purchased to
be cash equivalents. Investments, including certificates of deposit with
maturity dates greater than three months when purchased and which have readily
determined fair values, are classified as available-for-sale investments and
reflected in current assets as marketable securities at fair market value. Our
investment policy requires that all investments be investment grade quality and
no more than ten percent of our portfolio may be invested in any one security or
with one institution. At December 31, 2008, all of our cash was held in high
grade money market funds and marketable securities.
Restricted
cash represents deposits secured as collateral for a letter of credit pursuant
to our new operating facility lease agreement at December 31, 2008 and for a
bank credit card program at December 31, 2007.
|
6.
|
FAIR
VALUE MEASUREMENTS
|
Effective
January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements,” (“SFAS
157”). SFAS 157 defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. This statement
does not require any new fair value measurements; rather, it applies to other
accounting pronouncements that require or permit fair value measurements. In
February 2008, FSP FAS 157-2, “Effective Date of FASB Statement
No. 157”, was issued, which delays the effective date of SFAS 157 to
fiscal years and interim periods within those fiscal years beginning after
November 15, 2008 for non-financial assets and non-financial liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). We elected to defer the
adoption of the standard for these non-financial assets and
liabilities.
Fair
value is defined under SFAS 157 as the price that would be received to sell an
asset or paid to transfer a liability in the principal or most advantageous
market in an orderly transaction between market participants on the measurement
date. SFAS 157 also establishes a three-level hierarchy, which requires an
entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value.
Beginning
January 1, 2008, assets and liabilities recorded at fair value in the balance
sheets are categorized based upon the level of judgment associated with the
inputs used to measure their fair value. Level inputs, as defined by SFAS 157,
are as follows:
|
|
·
|
Level
I - inputs are unadjusted, quoted prices for identical assets or
liabilities in active markets at the measurement
date.
|
|
|
·
|
Level
II - inputs, other than quoted prices included in Level I, that are
observable for the asset or liability through corroboration with market
data at the measurement date.
|
|
|
·
|
Level III - unobservable inputs
that reflect management’s best estimate of what market participants would
use in pricing the asset or liability at the measurement
date.
|
The
following table summarizes fair value measurements by level at December 31, 2008
for assets and liabilities measured at fair value on a recurring
basis:
|
|
|
Level
I
|
|
|
Level
II
|
|
|
Level
III
|
|
|
Total
|
|
|
Cash
and cash equivalents
|
|
$
|
407,585
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
407,585
|
|
|
Marketable
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper
|
|
|
897,993
|
|
|
|
-
|
|
|
|
-
|
|
|
|
897,993
|
|
|
Corporate securities fixed
rate
|
|
|
457,930
|
|
|
|
-
|
|
|
|
-
|
|
|
|
457,930
|
|
|
Money market
fund
|
|
|
1,599,791
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,599,791
|
|
|
Restricted
cash
|
|
|
301,675
|
|
|
|
-
|
|
|
|
-
|
|
|
|
301,675
|
|
|
Total
assets
|
|
$
|
3,664,974
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,664,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issuable
|
|
$
|
-
|
|
|
$
|
1,569,100
|
|
|
$
|
-
|
|
|
$
|
1,569,100
|
|
|
Total
liabilities
|
|
$
|
-
|
|
|
$
|
1,569,100
|
|
|
$
|
-
|
|
|
$
|
1,569,100
|
|
Liabilities
measured at market value on a recurring basis include shares issuable resulting
from the Second Interim Award in the arbitration against NQCI. Until issued, the
shares will be marked to market in accordance with Emerging Issues Task Force
No. 00-19,
Accounting for
Derivative Financial Instruments Indexed to and Potentially Settled in, a
Company’s Own Stock
(“EITF 00-19”), with subsequent changes in fair value
recorded as non-operating change in fair value of shares issuable to our
statement of operations. The fair value of the shares will be measured using the
closing price of our common stock on the reporting date. See Note 10, “Shares
Issuable” below, for further additional information related to the shares
issuable.
The
following table sets forth the computation of basic and diluted loss per common
share:
|
|
|
Years
ended
|
|
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(22,987,273
|
)
|
|
$
|
(17,074,051
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average outstanding
shares of common stock
|
|
|
14,604,274
|
|
|
|
14,206,489
|
|
|
Loss per common
share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(1.57
|
)
|
|
|
(1.20
|
)
|
|
Diluted
|
|
$
|
(1.57
|
)
|
|
$
|
(1.20
|
)
|
Diluted
loss per common share for the years ended December 31, 2008 and 2007 does not
include the effect of stock options and warrants (see Note 17, “Stock Options
and Warrants”) since their effect would be anti-dilutive. Options and warrants
outstanding at December 31, 2008 and 2007 were approximately 4.4 million and 4.7
million, respectively. The 9,230,000 shares issuable discussed in Note 10,
“
Shares
Issuable,
”
below, have not been taken into consideration.
The
provision for income taxes for the years ended December 31, 2008 and 2007 are
summarized as follows (in thousands):
|
|
|
2008
|
|
|
2007
|
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
State
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
2
|
|
|
|
2
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
Total income tax
provision
|
|
$
|
2
|
|
|
$
|
2
|
|
Deferred
tax assets (liabilities) are comprised of the following (in
thousands):
|
|
|
2008
|
|
|
2007
|
|
|
Deferred tax
assets:
|
|
|
|
|
|
|
|
Stock based
compensation
|
|
$
|
5,342
|
|
|
$
|
3,611
|
|
|
Accrued
liability
|
|
|
1,145
|
|
|
|
124
|
|
|
Other
|
|
|
78
|
|
|
|
-
|
|
|
Total deferred tax
assets
|
|
|
6,565
|
|
|
|
3,735
|
|
|
Deferred tax
liabilities:
|
|
|
|
|
|
|
|
|
|
Fixed
assets
|
|
|
36
|
|
|
|
6
|
|
|
Prepaid
expenses
|
|
|
62
|
|
|
|
155
|
|
|
Total deferred tax
liabilities
|
|
|
98
|
|
|
|
161
|
|
|
|
|
|
6,467
|
|
|
|
3,574
|
|
|
Net operating
loss
|
|
|
9,660
|
|
|
|
4,834
|
|
|
Research & development
credits
|
|
|
1,446
|
|
|
|
599
|
|
|
|
|
|
17,573
|
|
|
|
9,007
|
|
|
Valuation
allowance
|
|
|
(17,573
|
)
|
|
|
(9,007
|
)
|
|
Net deferred tax assets or
(liabilities)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
Valuation Allowance on Deferred
Taxes
|
|
|
|
|
(in
thousands)
|
|
|
(in
thousands)
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Beginning
balance
|
|
$
|
9,007
|
|
|
$
|
1,917
|
|
|
Additions
|
|
|
8,566
|
|
|
|
7,090
|
|
|
Ending
balance
|
|
$
|
17,573
|
|
|
$
|
9,007
|
|
Rate
Reconciliation for the U.S. federal statuary rate and the effective tax
rate:
|
|
|
Years
ended
|
|
|
|
|
12/31/08
(%)
|
|
|
12/31/07
(%)
|
|
|
Federal statutory
rate
|
|
|
(34.00
|
)
|
|
|
(34.00
|
)
|
|
State and local income taxes, net
of federal tax benefits
|
|
|
(5.83
|
)
|
|
|
(5.83
|
)
|
|
Permanent
differences
|
|
|
5.81
|
|
|
|
0.68
|
|
|
Research & development
credits
|
|
|
(3.68
|
)
|
|
|
(2.72
|
)
|
|
Other
|
|
|
0.45
|
|
|
|
0.00
|
|
|
Effective tax
benefit
|
|
|
(37.25
|
)
|
|
|
(41.87
|
)
|
|
Valuation
allowance
|
|
|
37.25
|
|
|
|
41.87
|
|
|
|
|
|
0.00
|
|
|
|
0.00
|
|
Based
upon our development stage status and history of operating losses, realization
of our deferred tax assets does not meet the criteria under SFAS 109, and
accordingly a valuation allowance for the entire deferred tax asset amount has
been recorded at December 31, 2008 and 2007.
The
valuation allowance had an increase of $8.6 million and $7.1 million in 2008 and
2007, respectively.
Pursuant
to Sections 382 and 383 of the Internal Revenue Code, the utilization of net
operating losses and other tax attributes may be subject to substantial
limitations if certain ownership changes occur during a three-year testing
period (as defined). In 2008, we determined that an ownership change
occurred under Section 382 of the Internal Revenue Code. The utilization of our
federal net operating loss carryforwards, capital loss carryforwards and other
tax attributes related to CTHE will be limited to zero. Accordingly, we have
reduced our net operating loss, capital loss and minimum tax credit
carryforwards to the amount that we estimate that we would be able to utilize in
the future, if profitable, considering the above limitations.
At
December 31, 2008, we had net operating loss carry forwards for Federal purposes
of approximately $24.3 million which begin to expire in 2021. $24.3 million of
the Federal net operating loss carry forwards are also valid for state income
tax purposes and begin to expire in 2021.
In
addition, we had research and development tax credits for Federal and state
income tax purposes of approximately $826,000 and $620,000 respectively. The
federal credits begin to expire in 2026 and state credits do not expire for
California purposes.
During
the year ended December 31, 2007, we adopted FIN 48 which clarifies the
accounting for income taxes by prescribing the minimum threshold a tax position
is required to meet before being recognized in the financial statements as well
as guidance on de-recognition, measurement, classification and disclosure of tax
positions. The adoption of FIN 48 by us did not have an effect on our financial
condition or results of operations and resulted in no cumulative effect of
accounting change being recorded as of January 1, 2007.
Interest and penalties related to income tax matters are included in
the Company's income tax provision.
There was
no significant uncertain tax position identified during the year ended December
31, 2008.
We file income tax returns in the U.S. federal jurisdiction and
various state jurisdictions. Tax years that remain subject to examinations by
tax authorities are 2001 through 2007. There are no current income tax audits in
any jurisdictions for open tax years.
|
9.
|
PROPERTY AND
EQUIPMENT
|
Property
and equipment consist of the following at:
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Property
and equipment
|
|
$
|
474,402
|
|
|
$
|
299,100
|
|
|
Accumulated
depreciation
|
|
|
(136,848
|
)
|
|
|
(32,188
|
)
|
|
Property
and equipment, net
|
|
$
|
337,554
|
|
|
$
|
266,912
|
|
Depreciation expense for the years
ended December 31, 2008, and 2007, was $104,660 and $32,093,
respectively.
Pursuant
to the August 4, 2008, Second Interim Award, which stated that, if the
Technology Transaction is submitted to and approved by our stockholders,
9,230,000 shares of our common stock should be issued to NQCI to effectuate the
transaction, we accrued for the 9,230,000 shares of our common stock. As the
Second Interim Award states that we must issue 9,230,000 upon the closing of the
Technology Transaction and we have been unable to consummate such transaction,
such contingency is not within our control and we have therefore, recorded the
issuance as a liability, rather than as an equity issuance. As of December 31,
2008, we accrued for the 9,230,000 shares of our common stock to be issued to
NQCI in accordance with FASB 5,
Accounting for Contingencies
,
with the initial fair value of the shares measured on August 4, 2008, the date
of the Second Interim Award.
Until issued, the
shares will be marked to market in accordance with Emerging Issues Task Force
No. 00-19,
Accounting for
Derivative Financial Instruments Indexed to and Potentially Settled in, a
Company’s Own Stock
(“EITF 00-19”), with subsequent changes in fair value
recorded as non-operating change in fair value of shares issuable to our
statement of operations. The fair value of the shares will be measured using the
closing price of our common stock on the reporting date. The measured fair value
of $10,153,000 for the accrued 9,230,000 shares on August 4, 2008, the date of
the Second Interim Award, was accrued under “Shares issuable” and expensed to
“Research and development.” From marking to market, the fair value of the shares
issuable was revalued at $1,569,100 as of December 31, 2008. The resulting
non-operating change in fair value of $8,583,900 to the statement of operations
for the year ended December 31, 2008 was recognized as “Change in fair value of
shares issuable.” Stockholder approval and issuance of the shares are pending to
date.
We are in
the process of seeking stockholder approval for the issuance of the 9,230,000
shares of our common stock to effectuate the Technology Transaction. There can
be no assurance, that such stockholder approval will be obtained, whether shares
will be issued to NQCI or whether the SEC will declare effective the
registration statement registering the shares for resale. If the Technology
Transaction does not close, the arbitrator may issue alternative relief. In the
event of an alternative award, the above accrual may be adjusted and the accrual
or the actual settlement will be recorded to coincide with the alternate
award.
As of
February 22, 2008, we entered into a 5-year lease agreement and relocated our
corporate office to a location in Los Angeles, CA. The total lease payments will
be $1,096,878 over the lease term. As of December 31, 2008, our remaining total
lease payments are $957,614.
The
following is a schedule by years of future minimum lease payments required under
the 5-year corporate office lease as of December 31, 2008:
|
Year
ending December 31:
|
|
|
|
|
2009
|
|
$
|
215,859
|
|
|
2010
|
|
|
224,650
|
|
|
2011
|
|
|
233,528
|
|
|
2012
|
|
|
242,842
|
|
|
2013
|
|
|
40,735
|
( 1)
|
|
Total
minimum payments required
|
|
$
|
957,614
|
|
(1)
Initial term of the lease agreement ends February 2013
In
October 2008 we entered into a 5-year lease agreement through November 26, 2013,
for our new operating facility in Lake Forest, CA. The lease agreement includes
a tenant improvement allowance of $363,800 which 50% can be applied to rent
payments with the remaining 50% applied to tenant improvement and related
expenditures. As of December 31, 2008, we expended $87,658 in improvement and
related expenses which we are pending reimbursement in accordance to the tenant
improvement allowance. The $87,658 was recognized under “Tenant improvement
allowance receivable” as of December 31, 2008. The total lease payments,
including the 50% of the tenant improvement allowance applied to rent payments,
will be $1,367,507 over the lease term. As of December 31, 2008, our remaining
total lease payments are $1,340,828.
The
following is a schedule by years of future minimum lease payments required under
the 5-year operating facility lease as of December 31, 2008:
|
Year
ending December 31:
|
|
|
|
|
2009
|
|
|
135,837
|
|
|
2010
|
|
|
293,722
|
|
|
2011
|
|
|
303,994
|
|
|
2012
|
|
|
314,266
|
|
|
2013
|
|
|
293,009
|
(1)
|
|
Total
minimum payments required
|
|
$
|
1,340,828
|
|
(1)
Initial term of the lease agreement ends February 2013
Additionally,
we lease two corporate apartments, approximately 800 and 550 square feet,
expiring March 31, 2009 and April 18, 2009, respectively, located in Irvine, for
combined monthly rent of $3,765, which we plan to vacate after the expiration of
the leases.
All of
the space is in good condition and we expect it to remain suitable to meet our
needs for the foreseeable future. We intend to consolidate our offices and
sublease our current corporate office located in Los Angeles,
California.
|
12.
|
NON-CASH
TRANSACTIONS
|
During
the year ended December 31, 2008, there was a reversal of a non-cash liability
of $115,400.
Investing
and financing activities during the year ended December 31, 2007, that do not
have a direct impact on current cash flows have been excluded from the
statements of cash flows, as follows:
a)
Pre-merger Xcorporeal cancelled 200,000 shares of common stock pursuant to a
settlement agreement with one of our stockholders, and
b)
Immediately prior to the effectiveness of the merger, we caused a reverse split
of our common stock, whereby each 8.27 issued and outstanding shares of our
common stock were converted into one share of common stock.
Interest
income of $320,622 and $1,184,930 was reported for years ended December 31, 2008
and 2007, respectively.
On August
15, 2008, the arbitrator in the NQCI arbitration issued another interim award,
awarding NQCI a total of $1,871,430 in attorney’s fees and costs. Pursuant to
the award, we accrued the liability under “Accrued legal fees & licensing
expense” and captured the expenditure in “Other expenses” in the year ended
December 31, 2008.
|
15.
|
RELATED PARTY
TRANSACTION
|
In
connection with the contribution of the assets to our company, on August 31,
2006
we issued to
Consolidated National, LLC, or “CNL”, of which Terren Peizer, a member of our
Board of Directors, who beneficially owns 42.2% of our outstanding common stock
as of December 31, 2008, is the sole managing member and beneficial owner, an
aggregate of 9,600,000 shares of our common stock of which 6,232,596 shares are
still held by CNL.
Dr.
Victor Gura, our Chief Medical and Scientific Officer, owns 15,497,250 shares of
common stock of National Quality Care, Inc. (or approximately 20.9% of National
Quality Care, Inc.'s common stock outstanding as of January 31, 2009) with whom
we entered into the License Agreement. Such shares include 800,000 shares owned
by Medipace Medical Group, Inc., an affiliate of Dr. Gura (or approximately 1.1%
of NQCI's common stock outstanding as of January 31, 2009), and 250,000 shares
subject to warrants held by Dr. Gura which are currently exercisable (or
approximately 0.3% of NQCI's common stock outstanding as of January 31,
2009).
Pursuant
to a consulting agreement effective December 1, 2007, Daniel S. Goldberger, then
a director, provided consulting services to us as our interim Chief Executive
Officer. In consideration of the services, we paid Mr. Goldberger $15,000 per
month during the first two months and $12,500 per month thereafter during the
term of the consulting agreement. From execution through December 31, 2008, Mr.
Goldberger was compensated $152,500 for his services. Mr. Goldberger resigned as
interim Chief Executive Officer on October 6, 2008, and resigned as a member of
our Board of Directors on October 7, 2008, and remained a strategic consultant
to the Company through December 31, 2008.
Dr. Gura
maintains an office located in Beverly Hills, California. Pursuant to a
reimbursement agreement effective January 29, 2008, we reimburse 50% of the
rental and 50% of his monthly parking. The term of the agreement commenced on
April 23, 2007, the date of the office lease agreement, and continues until the
date on which he ceases to use the remote office to perform his duties as our
Chief Medical and Scientific Officer. From commencement through December 31,
2008, we reimbursed Dr. Gura $1,710 and $37,988 for 50% of the monthly parking
and rental, respectively.
On August
31, 2006, we entered into a Contribution Agreement with CNL. We issued 9,600,000
shares of common stock in exchange for (a) the right, title, and interest to the
name “Xcorporeal” and related trademarks and domain names, and (b) the right to
enter into a License Agreement with NQCI, dated September 1, 2006, pursuant to
which we obtained the exclusive rights to the technology relating to our kidney
failure treatment and other medical devices which, as listed under “Technology”
on the License Agreement, are “all existing and hereafter developed Intellectual
Property, Know-How, Licensor Patents, Licensor Patent Applications, Derivative
Works and any other technology, invented, improved or developed by Licensor, or
as to which Licensor owns or holds any rights, arising out of or relating to the
research, development, design, manufacture or use of (a) any medical device,
treatment or method as of the date of this Agreement, (b) any portable or
continuous dialysis methods or devices, specifically including any Wearable
Artificial Kidney and related devices, (c) any device, methods or treatments for
congestive heart failure, and (d) any artificial heart or coronary device.”
Operations was a shell corporation prior to the transaction. We valued the
License Agreement at the carry-over basis of $1,000. As consideration for being
granted the License, we agreed to pay to NQCI a minimum annual royalty of
$250,000, or 7% of net sales. Although we have asserted that NQCI’s breaches of
the License Agreement excused our obligation to make the minimum royalty
payments, we recorded $583,333 in royalty expenses covering the minimum
royalties from commencement of the License Agreement through December 31, 2008.
The License Agreement expires in 2105.
The
License Agreement also stipulates the reimbursement of reasonable and necessary
expenses incurred in the ordinary course of business consistent with past
practices (“Licensor Expenses”) until the closing or the termination of the
Merger Agreement. The Second Interim Award from the arbitration with NQCI states
that the License Agreement will remain in full force and effect until the
Technology Transaction closes or the arbitrator determines that it will never
close. Although we have contested its right to any further payments, NQCI has
made a claim for reimbursement of approximately $690,000 in alleged expenses
under the License Agreement which were accrued under “Accrued legal fees &
licensing expense” as of December 31, 2008. See Note 4, “Legal Proceedings”
above, for further additional information related to this License
Agreement.
|
17.
|
STOCK OPTIONS AND
WARRANTS
|
Incentive
Compensation Plan
On
October 12, 2007, we adopted the Xcorporeal, Inc. 2007 Incentive Compensation
Plan and the related form of option agreement that is substantially identical to
the 2006 Incentive Compensation Plan that was in effect at Operations
immediately prior to the merger.
The plan
authorizes the grant of stock options, restricted stock, restricted stock units,
and stock appreciation rights. There are 3,900,000 shares of common stock
authorized for issuance under to the 2007 Incentive Compensation Plan (subject
to adjustment in accordance with the provisions of the plan). The plan will
continue in effect for a term of up to ten years. As of December 31, 2008, there
were options to purchase 977,500 shares outstanding and 2,922,500 shares
available for issuance under the 2007 Incentive Compensation Plan.
On
October 12, 2007, we also assumed options to purchase up to 3,880,000 shares of
common stock that were granted by Operations under its 2006 Incentive
Compensation Plan, of which 980,000 have since been forfeited, canceled, or
expired, and therefore, options to purchase 2,900,000 shares remain
outstanding.
Stock
Options to Employees, Officers and Directors
The
Compensation Committee of our Board of Directors determines the terms of the
options granted, including the exercise price, the number of shares subject to
option, and the vesting period. Options generally vest over five years and have
a maximum life of ten years.
We
reported $4,704,039 and $3,721,485 in stock-based compensation expense for
employees, officers, and directors for the years ended December 31, 2008 and
2007, respectively.
All
compensation expense for stock options granted has been determined under the
fair value method using the Black-Scholes option-pricing model with the
following assumptions:
|
|
|
For
the years ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Expected
dividend yields
|
|
zero
|
|
|
zero
|
|
|
Expected
volatility
|
|
|
130-136
|
%
|
|
|
110-136
|
%
|
|
Risk-free
interest rate
|
|
|
3.53-3.81
|
%
|
|
|
4.18-4.68
|
%
|
|
Expected
terms in years
|
|
2.87-8.96
years
|
|
|
6.25-10
years
|
|
Warrants
and Stock Options to Non-Employees
During
the year ended December 31, 2008, there was no issuance of
warrants.
We reported $91,306 and $2,917,309 in
stock-based compensation expenses for consultants for the years ended December
31, 2008 and 2007, respectively.
Compensation
for options granted to non-employees has been determined in accordance with SFAS
No. 123R, EITF 96-18, and EITF 00-18, “Accounting for Equity Instruments that
are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services.” Accordingly, compensation is determined using the
fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measured.
For
options and warrants issued as compensation to non-employees for services that
are fully vested and non-forfeitable at the time of issuance, the estimated
value is recorded in equity and expensed when the services are performed and
benefit is received as provided by Financial Accounting and Standards Board
(“FASB”) Emerging Issues Task Force No. 96-18 “Accounting For Equity Instruments
That Are Issued To Other Than Employees For Acquiring or In Conjunction With
Selling Goods Or Services.”
All
charges for warrants granted have been determined under the fair value method
using the Black-Scholes option-pricing model with the following
assumptions:
|
|
|
For
the years ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Expected
dividend yields
|
|
zero
|
|
|
zero
|
|
|
Expected
volatility
|
|
|
130-136
|
%
|
|
|
117-136
|
%
|
|
Risk-free
interest rate
|
|
|
1.00-4.69
|
%
|
|
|
3.45-4.65
|
%
|
|
Expected
terms in years
|
|
0.88-8.63
years
|
|
|
4.80-9.62
years
|
|
The
following tables summarize information concerning outstanding options at
December 31, 2008 and 2007:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Stock
Options
|
|
|
Exercise Price
|
|
|
Outstanding
at December 31, 2005
|
|
|
-
|
|
|
$
|
-
|
|
|
Granted
|
|
|
1,600,000
|
|
|
|
5.00
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled
or forfeited
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding
at December 31, 2006
|
|
|
1,600,000
|
|
|
|
5.00
|
|
|
Granted
|
|
|
2,872,500
|
|
|
|
7.00
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled
or forfeited
|
|
|
(675,000
|
)
|
|
|
6.41
|
|
|
Outstanding
at December 31, 2007
|
|
|
3,797,500
|
|
|
|
6.26
|
|
|
Granted
|
|
|
905,000
|
|
|
|
2.75
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled
or forfeited
|
|
|
(825,000
|
)
|
|
|
6.52
|
|
|
Outstanding
at December 31, 2008
|
|
|
3,877,500
|
|
|
|
5.39
|
|
|
Exercisable
at December 31, 2006
|
|
|
-
|
|
|
|
-
|
|
|
Exercisable
at December 31, 2007
|
|
|
440,000
|
|
|
|
5.61
|
|
|
Exercisable
at December 31, 2008
|
|
|
1,000,500
|
|
|
$
|
5.94
|
|
The
following tables summarize information concerning outstanding warrants at
December 31, 2008 and 2007:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Outstanding
at December 31, 2005
|
|
|
-
|
|
|
$
|
-
|
|
|
Granted
|
|
|
454,221
|
|
|
|
2.72
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled
or forfeited
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding
at December 31, 2006
|
|
|
454,221
|
|
|
|
2.72
|
|
|
Granted
|
|
|
422,500
|
|
|
|
7.29
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled
or forfeited
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding
at December 31, 2007
|
|
|
876,721
|
|
|
|
4.92
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
(325,000
|
)
|
|
|
1.00
|
|
|
Cancelled
or forfeited
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding
at December 31, 2008
|
|
|
551,721
|
|
|
|
7.24
|
|
|
Exercisable
at December 31, 2006
|
|
|
454,221
|
|
|
|
2.72
|
|
|
Exercisable
at December 31, 2007
|
|
|
754,221
|
|
|
|
4.42
|
|
|
Exercisable
at December 31, 2008
|
|
|
544,221
|
|
|
$
|
7.22
|
|
The
weighted average remaining contractual life of the stock options that are
exercisable as of December 31, 2008, is approximately 8.24 years. The weighted
average remaining contractual life of the warrants that are exercisable as of
December 31, 2008, is approximately 2.52 years.
The
weighted average grant-date estimated fair value of stock options granted in
2008 and 2007 is approximately $0.5 million and $12.7 million or $0.60 and $5.79
per share, respectively. There were no warrants granted in 2008. The weighted
average grant-date estimated fair value of warrants granted in 2007 is
approximately $2.4 million or $5.63 per share. At December 31, 2008 and 2007,
the unamortized compensation charges related to outstanding stock options were
$10,091,802 and $17,818,693, respectively. At December 31, 2008 and 2007, the
unamortized compensation charges related to outstanding warrants were $224 and
$410,049, respectively. In 2008, we issued an aggregate of 112,215 shares of our
common stock pursuant to cashless exercise of warrants by three warrant
holders.
The
following table shows the change in unamortized compensation expense for stock
options and warrants issued to employees, officers, directors and non-employees
during the year ended December 31, 2008:
|
|
|
Stock
Options and
Warrants
|
|
|
Unamortized
Compensation
|
|
|
|
|
Outstanding
|
|
|
Expense
|
|
|
January
1, 2008
|
|
|
4,674,221
|
|
|
$
|
18,228,742
|
|
|
Granted
in the period
|
|
|
905,000
|
|
|
|
542,827
|
|
|
Forfeited
& Cancelled in the period
|
|
|
(825,000
|
)(1)
|
|
|
(2,392,494
|
)
|
|
Expensed
in the period
|
|
|
-
|
|
|
|
(6,287,049
|
)
|
|
Exercised
in the period
|
|
|
(325,000
|
)(2)
|
|
|
-
|
|
|
December
31, 2008
|
|
|
4,429,221
|
|
|
$
|
10,092,026
|
|
(1) One
of our directors voluntarily forfeited his 200,000 options on September 8, 2008.
Due to his continued services as a director on the date of his voluntary
forfeiture, this was treated as a cancellation and all unamortized expense of
$924,021 was fully recognized in the period. Subsequently, on October 7, 2008
the director resigned from our Board of Directors.
(2) The
cashless exercises of the granted 325,000 warrant shares resulted in the
issuance of an aggregate of 112,215 shares of our common stock.
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number
of
|
|
|
Average
|
|
|
|
|
Options
and
|
|
|
Exercise
|
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Stock Options and Warrants
|
|
|
|
|
|
|
|
Balance
at January 1, 2008
|
|
|
4,674,221
|
|
|
$
|
6.01
|
|
|
Granted
|
|
|
905,000
|
|
|
|
2.75
|
|
|
Exercised
|
|
|
(325,000
|
)
|
|
|
1.00
|
|
|
Forfeited
& Cancelled
|
|
|
(825,000
|
)
|
|
|
6.52
|
|
|
Balance
at December 31, 2008
|
|
|
4,429,221
|
|
|
$
|
5.62
|
|
|
18.
|
STOCKHOLDERS’ (DEFICIT)
EQUITY
|
Pursuant
to the terms of the arbitration interim award associated to the Technology
Transaction, we are planning to seek stockholder approval to issue 9,230,000
shares of our common stock directly to NQCI to effectuate the transaction. Upon
issuance and delivery of the proposed shares, NQCI will be our largest
stockholder, owning approximately 39% of our total outstanding
shares.
As a
result of our continued operating losses and the accrual for 9,230,000 shares,
discussed further in Note 4, “Legal Proceedings” and Note 10, “Shares Issuable”
above, “Total Stockholders’ (Deficit) Equity” has a negative balance with our
deficit accumulated during the development stage being greater than our
additional paid in capital as of December 31, 2008.
During
the year ended December 31, 2008, we issued an aggregate of 270,000 shares of
our common stock as compensation for consulting services rendered to us.
Pursuant to cashless exercises of warrants by three warrant holders, we issued
an aggregate of 112,215 shares of our common stock.
During
the year ended December 31, 2007, 200,000 shares of common stock were cancelled
pursuant to a settlement agreement with one of our stockholders. Immediately
prior to the effectiveness of the merger, we caused a reverse split of our
common stock, whereby each 8.27 issued and outstanding shares of our common
stock were converted into one share of common stock. Pursuant to a consulting
agreement, we issued 20,000 shares of our common stock.
|
19.
|
PRODUCT
DEVELOPMENT AGREEMENT
|
In July
2007, we entered into the Aubrey Agreement. The PAK will be designed for
intermittent hemodialysis or Continuous Renal Replacement Therapy (CRRT) in an
attended care setting as well as for treatments in a home setting. As of
December 31, 2008, Aubrey substantially completed its work and we intend to
terminate this agreement. At the inception of the Aubrey Agreement, total labor
and material costs over the term of the agreement were budgeted to amount to
approximately $5.1 million and as of December 31, 2008, the agreement was
substantially completed under the budgeted amount at a cost of $3.2
million.
|
20.
|
SUBSEQUENT EVENTS
(UNAUDITED)
|
Corporate Restructuring
The continuing delay in consummating
the Technology Transaction has significantly adversely affected our Company.
Accordingly, we have had to modify our activities and business. We have
instituted a variety of measures in an attempt to conserve cash and reduce our
operating expenses. Our actions included:
|
·
|
Reductions
in our labor force – On March 13, 2009, we gave notice of employment
termination to 19 employees. This represents a total work-force reduction
of approximately 73%. We paid accrued vacation benefits of approximately
$70,000 to terminated employees. The layoffs and our other efforts focused
on streamlining our operations designed to reduce our annual expenses by
approximately $3.5 million to a current operating burn rate of
approximately $200,000 per month.
|
|
·
|
Refocusing
our available assets and employee resources on the development of the
PAK.
|
|
·
|
Continuing
vigorous efforts to minimize or defer our operating
expenses.
|
|
·
|
Exploring
various strategic alternatives, which may include the license of certain
of our intellectual property rights, as a means to further develop our
technologies, among other possible transactions and
alternatives.
|
|
·
|
Intensifying
our search to obtain additional financing to support our operations and to
satisfy our ongoing capital requirements in order to improve our liquidity
position.
|
|
·
|
Continuing
to prosecute our patents and take other steps to perfect our intellectual
property rights.
|
In light of the unprecedented economic
slow down, lack of access to capital markets and prolonged arbitration
proceeding with NQCI, we were compelled to undertake the efforts outlined above
in order to remain in the position to continue our operations. We hope to be
able to obtain additional financing to meet our cash obligations as they become
due and otherwise proceed with our business plan. Our ability to execute on our
current business plan is dependent upon our ability to obtain equity or debt
financing, develop and market our products, and, ultimately, to generate
revenue. Unless we are able to raise financing sufficient to support our
operations and to satisfy our ongoing financing requirements, we will not be
able to develop any of our products, submit 510(k) notifications to the FDA,
conduct clinical trials or otherwise commercialize any of our products. We will
make every effort however, to continue the development of the PAK. As a result
of these conditions, there is substantial doubt about our ability to continue as
a going concern. Our ability to continue as a going concern is substantially
dependent on the successful execution of many of the actions referred to above,
on the timeline contemplated by our plans and our ability to obtain additional
financing. We cannot assure you that we will be successful now or in the future
in obtaining any additional financing on terms favorable to us, if at all. The
failure to obtain financing will have a material adverse effect on our financial
condition and operations.
We will continue to analyze the effects
of the events described above to determine if any subsequent changes are
required to the accounting treatment of such events.
Other
Considerations – Royalty and Other Payments Under the License
Agreement
As consideration for entering into the
License Agreement, we agreed to pay to NQCI a minimum annual royalty of
$250,000, or 7% of net sales. As a result of the transfer of the Technology to
us, we may be able to realize additional savings of not having to compensate
NQCI for any royalty payments accrued and not yet paid. Although we have
asserted that NQCI’s breaches of the License Agreement excused our obligation to
make the minimum royalty payments, we recorded $583,333 in royalty expenses,
covering the minimum royalties, from commencement of the License Agreement
through December 31, 2008. The License Agreement expires in 2105. The License
Agreement also requires us to reimburse NQCI’s reasonable and necessary expenses
incurred in the ordinary course of business consistent with past practices, or
the “Licensor Expenses”, until the closing or the termination of the Merger
Agreement. The Second Interim Award states that the License Agreement will
remain in full force and effect until the Technology Transaction closes or the
arbitrator determines that it will never close. Although we have contested its
right to any further payments, NQCI has made a claim for reimbursement of
approximately $690,000 in alleged expenses under the License Agreement as of
December 31, 2008. If we are able to acquire the Technology from NQCI, the
arbitrator has indicated that the License Agreement would be terminated
simultaneously with such acquisition. As a result of the Technology becoming our
sole and exclusive property, among other benefits, we would be able to
discontinue these royalty payments to NQCI, realize corresponding savings and we
should be able to realize additional savings of not having to reimburse NQCI for
any Licensor Expenses accrued and not yet paid.
Item
9.
Changes in and Disagreements With
Accountants on Accounting and
Financial
Disclosure.
None.
Item
9A(T).
Controls and
Procedures
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
Annual Report (December 31, 2008), as is defined in Rule 13a-15(e) promulgated
under the Exchange Act. Our disclosure controls and procedures are intended to
ensure that the information we are required to disclose in the reports that we
file or submit under the Exchange Act is (i) recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms and (ii)
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as the principal executive and financial
officers, respectively, to allow timely decisions regarding required
disclosures.
Based on
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this Annual Report, our
disclosure controls and procedures were effective.
Our
management has concluded that the financial statements included in this Annual
Report present fairly, in all material respects our financial position, results
of operations and cash flows for the periods presented in conformity with
generally accepted accounting principles.
It should
be noted that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the
system will be met. In addition, the design of any control system is based in
part upon certain assumptions about the likelihood of future events. Because of
these and other inherent limitations of control systems, there can be
no
assurance
that any design will succeed in achieving its stated goals under all potential
future conditions.
Management’s
Report on Internal Control Over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
our financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the
Exchange Act). Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of
America.
Our
internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our assets,
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America, and that our
receipts and expenditures are being made only in accordance with authorizations
of our management and directors, and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. Our management, with the
participation of our Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period covered by this
Annual Report, our internal control over financial reporting was
effective.
This Annual Report does not include an
audit report of our independent registered public accounting firm regarding our
internal control over financial reporting. In addition, our management’s report
on our internal control over financial reporting is not subject to attestation
by our registered public accounting firm pursuant to temporary rules of the SEC
that permit us to provide only our management’s report in this Annual
Report.
Changes
in Internal Control Over Financial Reporting
In
connection with the evaluation of our internal controls during our last fiscal
quarter, our Chief Executive Officer and Chief Financial Officer concluded that
there has been no change in our internal control over financial reporting during
the fourth quarter ended December 31, 2008, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Item
9B. Other
Information.
None.
PART
III
Item 10.
Directors
,
Executive Officers
and Corporate
Governance
The
names, ages and positions of our executive officers and directors, as of
December 31, 2008, are set forth below. Biographical information for each
of these persons who currently serves as our officer and/or director, as
provided to us by each respective individual also, is presented
below:
|
Name
|
|
Age
|
|
Position
|
|
Director
Since
|
|
|
|
|
|
|
|
|
|
Kelly
J. McCrann
|
|
53
|
|
Chairman
of the Board and Chief Executive Officer
|
|
2007
|
|
Robert
Weinstein
|
|
48
|
|
Chief
Financial Officer and Secretary
|
|
n/a
|
|
Victor Gura, M.D.
|
|
66
|
|
Chief
Medical and Scientific Officer
|
|
n/a
|
|
Terren
S. Peizer
|
|
49
|
|
Director
|
|
2007
|
|
Hans-Dietrich
Polaschegg, Ph.D.
|
|
66
|
|
Director
|
|
2007
|
|
Jay
A. Wolf
|
|
36
|
|
Director
|
|
2007
|
|
Marc
G. Cummins (1)
|
|
49
|
|
Director
|
|
2007
|
(1) Mr.
Cummins resigned as a member of our Board of Directors effective March 6,
2009.
Kelly J. McCrann
was appointed
as a member of Operations’ board of directors in August 2007. In October 2008,
Mr. McCrann was appointed our Chairman of the Board and Chief Executive Officer.
Mr. McCrann is a senior healthcare executive with extensive experience in board
governance, strategic leadership, profit and loss management and strategic
transactions. He was most recently Senior Vice President of DaVita Inc., where
he was responsible for all home based renal replacement therapies for the United
States’ second largest kidney dialysis provider. Prior to that, Mr. McCrann was
the Chief Executive Officer and President of PacifiCare Dental and Vision, Inc.
Mr. McCrann has held positions of increasing responsibility at Professional
Dental Associates, Inc., Coram Healthcare Corporation, HMSS, Inc. and American
Medical International. He is a graduate of the Harvard Business School and began
his career as a consultant for KPMG and McKinsey & Company.
Robert Weinstein
was appointed
our Chief Financial Officer in October 2007. He also serves on the board of
directors of Operations. He was appointed as Chief Financial Officer of
Operations in August 2007. Prior to joining us, Mr. Weinstein served as Vice
President, Director of Quality Control & Compliance of Citi Private Equity
Services (formerly BISYS Private Equity Services) New York, NY, a worldwide
private equity fund administrator and accounting service provider. In 2005, Mr.
Weinstein was the Founder, Finance & Accounting Consultant for EB
Associates, LLC, Irvington, NY, an entrepreneurial service organization. From
December 2002 to November 2004, Mr. Weinstein served as the Chief Financial
Officer for Able Laboratories, Inc., which filed Chapter 11 bankruptcy in July
2005. In 2002, he served as Acting Chief Financial Officer of Eutotech, Ltd.,
Fairfax, VA, a distressed, publicly traded early-stage technology transfer and
development company. Mr. Weinstein received his M.B.A., Finance &
International Business from the University of Chicago, Graduate School of
Business, and a B.S. in Accounting from the State University of New York at
Albany. Mr. Weinstein is a Certified Public Accountant (inactive) in the State
of New York.
Victor Gura, M.D.
became
Operations’ Chief Medical and Scientific Officer in December 2006, and became a
member of the Board in October 2006. He resigned as a director in October 2008.
Dr. Gura continues to serve as a member of our Board of Advisors. He served as
Chief Scientific Officer of National Quality Care, Inc. from 2005 to November
2006. He was formerly its Chairman of the Board, President and Chief Executive
Officer. Dr. Gura is board certified in internal medicine/nephrology. He has
been a director and principal stockholder of Medipace Medical Group, Inc. in Los
Angeles, California, since 1980. Dr. Gura has been an attending physician at
Cedars-Sinai Medical Center since 1984 and the medical director of Los Angeles
Community Dialysis since 1985. He also serves as a Clinical Assistant Professor
at UCLA School of Medicine. He was a fellow at the nephrology departments at Tel
Aviv University Medical School and USC Medical Center. Dr. Gura received his
M.D. from School of Medicine, Buenos Aires University.
Terren S. Peizer
served as our
Executive Chairman until October 2008. He became the Chairman of Operations’
board of directors in August 2006 and our Executive Chairman in August 2007.
From April 1999 to October 2003, Mr. Peizer served as Chief Executive Officer of
Clearant, Inc., which he founded to develop and commercialize a universal
pathogen inactivation technology. He served as Chairman of its board of
directors from April 1999 to October 2004 and a Director until February 2005.
From February 1997 to February 1999, Mr. Peizer served as President and Vice
Chairman of Hollis-Eden Pharmaceuticals, Inc. In addition, from June 1999
through May 2003 he was a Director, and from June 1999 through December 2000 he
was Chairman of the Board, of supercomputer designer and builder Cray Inc., and
remains its largest beneficial stockholder. Mr. Peizer has been the largest
beneficial stockholder and held various senior executive positions with several
technology and biotech companies. In these capacities he has assisted the
companies with assembling management teams, boards of directors and scientific
advisory boards, formulating business and financial strategies, investor and
public relations, and capital formation. Mr. Peizer has been a Director,
Chairman of the Board and Chief Executive Officer of Hythiam, Inc., a healthcare
services management company focused on delivering solutions for those suffering
from alcoholism and other substance dependencies, since September 2003. Mr.
Peizer has a background in venture capital, investing, mergers and acquisitions,
corporate finance, and previously held senior executive positions with the
investment banking firms Goldman Sachs, First Boston and Drexel Burnham Lambert.
He received his B.S.E. in Finance from The Wharton School of Finance and
Commerce.
Hans-Dietrich Polaschegg, PhD.
serves as a consultant to the medical device industry. From 1979 to 1994, Dr.
Polaschegg held positions of increasing responsibility at Fresenius AG, a global
leader in the manufacture of dialysis products. As Head of Research and
Development of the medical systems division of Fresenius, he designed three
hemodialysis machines. Dr. Polaschegg holds 88 medical technology patents and is
credited with inventing electrolyte balancing, thermal energy balancing, safe
dialysate filtering, blood volume monitoring by ultrasound density, and safe
on-line hemodiafiltration. He is a member of several international American and
European standard committees including Chairman of the Extracorporeal
Circulation and Infusion and Technology Committee. Dr. Polaschegg received his
PhD in Nuclear Physics from Technical University of Vienna in
Austria.
Jay A. Wolf
became a member of
Operations’ Board of Directors in November 2006. He has over a decade of
investment and operations experience in a broad range of industries. His
investment experience includes: senior and subordinated debt, private equity
(including leveraged transactions), mergers & acquisitions and public equity
investments. Since 2003, Mr. Wolf has served as a Managing Director of Trinad
Capital. From 1999 to 2003, he served as the Executive Vice President of
Corporate Development for Wolf Group Integrated Communications Ltd. where he was
responsible for our acquisition program. From 1996 to 1999, Mr. Wolf worked at
Canadian Corporate Funding, Ltd., a Toronto-based merchant bank in the senior
debt department and subsequently for Trillium Growth, the firm’s venture capital
Fund. He sits on the boards of Shells Seafood Restaurants, Prolink Holdings
Corporation, Optio Software, Inc. and Starvox Communications, Inc. Mr. Wolf
received a Bachelor of Arts from Dalhousie University.
There are no family relationships, as
defined in Item 401 of Regulation S-K, between any of the officers and/or
directors named above, and there is no arrangement or understanding between any
of the directors named above and any other person pursuant to which he or she
was elected as a director.
No executive officer or director has
been involved, directly or indirectly, in any bankruptcy or insolvency
proceeding of any kind.
No executive officer or
director is currently involved in any litigation nor has such person been
involved in any litigation that would have a bearing on any such person's
fitness or other ability to act and serve as our director or
officer.
Each of our directors serve for a term
of one year or until their respective successors are elected and qualified or
until removed from office in accordance with our bylaws. Our executive
officers are elected annually by the Board of Directors and serve at the
discretion of the Board of Directors.
Information
Regarding Committees
Our Board of Directors has established
three committees: an Audit Committee, a Compensation Committee and
a
Nominating
Committee. The Board of Directors has also adopted written corporate
governance guidelines for the Board and a written committee charter for each of
the Board’s committees, describing the authority and responsibilities delegated
to each committee by the Board. A copy of our Audit Committee Charter,
Compensation Committee Charter and Nominating Committee Charter can be found on
our website at http://www.xcorporeal.com.
Audit Committee
– As of
December 31, 2008, the Audit Committee consisted of Messrs. Cummins and Wolf,
with Mr. Wolf serving as the chairman; however, effective March 6, 2009, Mr.
Cummins resigned from his positions of a member of our Board of Directors and
our Audit Committee. The Board has determined that each of the members of the
Audit Committee is independent as defined under the applicable NYSE Amex
standards, meet the applicable requirements for audit committee members,
including Rule 10A-3(b) under the Securities and Exchange Act of 1934, as
amended, and, that Mr. Wolf qualifies as an “audit committee financial expert”
as such term is defined in Item 407(d)(5) of SEC Regulation S-K. In order
to fill the vacancy in the Audit Committee created by Mr. Cummins’ resignation,
effective March 26, 2009, Hans-Dietrich Polaschegg, a member of our Board of
Directors, was appointed to the Audit Committee.
As a result of Mr. Cummins’ resignation
from his position of a member of our Board of Directors, we are no longer in
compliance with Section 803(A)(1) of the Amex Company Guide because a majority
of the members of our Board of Directors are not independent
directors.
Compensation Committee
–
The Compensation Committee currently consists of Dr. Polaschegg and Mr. Wolf,
with Dr. Polaschegg serving as the chairman, each of whom is independent as
defined under the applicable NYSE Amex standards. The Compensation Committee
reviews and recommends to the Board of Directors for approval the compensation
of our executive officers.
Nominating Committee
–
As of December 31, 2008, the Nominating Committee currently consisted of Messrs.
Cummins and Polaschegg, with Mr. Cummins serving as the chairman; however, Mr.
Cummins resigned as a member of our Board of Directors effective March 6, 2009.
The Board has determined that each of the members of the Audit Committee is
independent as defined under the applicable NYSE Amex standards. The nominating
committee nominates new directors and oversees corporate governance
matters.
Changes
in Nominating Procedures
There
have not been any material changes to the procedures by which our stockholders
may recommend nominees to our Board of Directors since the end of our 2007
fiscal year.
Section
16(a) Beneficial Ownership reporting Compliance
Section 16(a) of the Exchange
Act requires any person who is our director or executive officer or
who beneficially holds more than 10% of any class of our securities which
have been registered with the SEC, to file reports of initial ownership and
changes in ownership with the SEC. These persons are also required under
the regulations of the SEC to furnish us with copies of all Section
16(a)
reports they file.
To our knowledge, based solely on our
review of the copies of the Section 16(a) reports furnished to us, all Section
16(a) filing
requirements
applicable to our directors, executive officers and holders of more than 10% of
any class of our registered securities were timely complied with during the
year ended December 31, 2008.
Upon
effectiveness of the merger between our company and pre-merger Xcorporeal, we
adopted a Code of Ethics that applies to all of our officers, directors and
employees, including our principal executive officer, principal financial
officer, principal accounting officer and controller, and others performing
similar functions. A copy of our Code of Ethics can be found under the
“Company”, sub-category “Corporate Governance”, section of our website at
www.xcorporeal.com, and any waiver from the Code of Ethics will be timely
disclosed on our website as will any amendments to the Code of
Ethics.
Item 11.
Executive
Compensation
COMPENSATION
DISCUSSION AND ANALYSIS
The
following discussion and analysis contains statements regarding future
individual and company performance targets and goals. These targets and goals
are disclosed in the limited context of our compensation programs and should not
be understood to be statements of management's expectations or estimates of
results or other guidance. We specifically caution investors not to apply these
statements to other contexts.
We
believe our long term success is dependent on a leadership team with the
integrity, skills, and dedication necessary to oversee a growing organization on
a day-to-day basis. In addition, the leadership must have the vision to
anticipate and respond to future market and regulatory developments. Our
executive compensation program is designed to enable us to attract, motivate and
retain a senior management team with the collective and individual abilities to
meet these challenges. The program's primary objective is to align executives'
efforts with the long term interests of stockholders by enhancing our
reputation, financial success and capabilities.
General
Executive Compensation Philosophy
We
compensate our executives, including our named executive officers who are
identified in the Summary Compensation Table, through a combination of base
salary, cash bonus incentives, long-term equity incentive compensation, and
related benefits. These components are designed, in aggregate, to be competitive
with comparable organizations and to align the financial incentives for the
executives with the short and long term interests of stockholders.
Our
Compensation Committee receives our management’s recommendations and then
discusses, reviews and considers management's recommendations with respect to
the compensation of those members of senior management whose compensation the
committee considers. The committee then makes its recommendation to the Board of
Directors which discusses and then decides raises, bonuses and
options. Although their advice may be sought and they may be questioned by
the committee, executive members of the Board of Directors do not participate in
the committee’s or the Board of Directors' discussion and vote. Prior to
the committee making its recommendations, the members of the Compensation
Committee have several discussions among themselves and meet to discuss, among
other things, the performance and contributions of each of the members of senior
management whose compensation they are considering as well as expectations (of
the individual for the year and the future and those of our company), results,
responsibilities, and desire to retain such executive. In addition, the
Compensation Committee may have conversations with certain others before making
its recommendations.
Our
philosophy is to provide a compensation package that attracts, motivates and
retains executive talent, and delivers rewards for superior performance as well
as consequences for underperformance. Specifically, our executive
compensation program is designed to:
|
·
|
provide
a competitive total compensation package that is competitive within the
medical device industry in which we compete for executive talent, and will
assist in the retention of our executives and motivate them to perform at
a superior level;
|
|
·
|
link
a substantial part of each of our executive’s compensation to the
achievement of our financial and operating objectives and to the
individual's performance;
|
|
·
|
provide
long-term incentive compensation that focuses our executives' efforts on
building stockholder value by aligning their interests with our
stockholders; and
|
|
·
|
provide
incentives that promote executive
retention.
|
Each
year, our management and the Board of Directors approve financial and
non-financial objectives for our company and our executive officers, which may
be reflected in our executive employment agreements and incentive compensation
plans. We design our incentive compensation plans to reward company-wide
performance. In addition, we also consider the individual performance of each
executive officer and other relevant criteria, such as the accomplishments of
the management team as a whole. In designing and administering our executive
compensation programs, we attempt to strike an appropriate balance among these
elements.
The major
compensation elements for our named executive officers are base salary,
performance-based bonuses, stock options, insurance benefits and perquisites.
Each of these elements is an integral part of and supports our overall
compensation objectives. Base salaries (other than increases), insurance
benefits and perquisites form stable parts of our executive officers’
compensation packages that are not dependent on our performance during a
particular year. We set these compensation elements at competitive levels so
that we are able to attract, motivate and retain highly qualified executive
officers. Consistent with our performance-based philosophy, we reserve the
largest potential compensation awards for performance- and incentive-based
programs. These programs include awards that are based on our financial
performance and provide compensation in the form of both cash and equity to
provide incentives that are tied to both our short-term and long-term
performance. Our performance-based bonus program rewards short-term and
long-term performance, while our equity awards, in the form of stock options,
reward long-term performance and align the interests of management with our
stockholders.
Board of Directors Determination of
Compensation Awards
Our
Compensation Committee recommends and the Board of Directors determines the
compensation awards to be made to our executive officers. Our Compensation
Committee recommends and the Board of Directors determines the total
compensation levels for our executive officers by considering several factors,
including each executive officer's role and responsibilities, how the executive
officer is performing against those responsibilities, our performance, and the
competitive market data applicable to the executive officers’
positions.
In
arriving at specific levels of compensation for executive officers, the Board of
Directors has relied on:
|
·
|
the
recommendations of our management;
|
|
·
|
benchmarks
provided by generally available compensation surveys;
and
|
|
·
|
the
experience of the members of our Board of Directors and their knowledge of
compensation paid by comparable companies or companies of similar size or
generally engaged in the healthcare services
business.
|
We seek
an appropriate relationship between executive pay and our corporate performance.
Our executive officers are entitled to customary benefits generally available to
all of our employees, including group medical, dental and life insurance and a
401(k) plan. We have employment agreements (which include severance
arrangements) with three of our key executive officers to provide them with the
employment security and severance deemed necessary to retain them.
Components
of Executive Compensation
Base salary.
Base salaries
provide our executive officers with a degree of financial certainty and
stability. We seek to provide base salaries sufficient to attract and retain
highly qualified executives. Whenever management proposes to enter into a new
employment agreement or to renew an existing employment agreement, the
Compensation Committee reviews and recommends, and the Board of Directors
determines, the base salaries for such persons, including our chief
executive officer and our other executive officers. Salaries are also reviewed
in the case of executive promotions or other significant changes in
responsibilities. In each case, the Compensation Committee and the Board of
Directors each take into account competitive salary practices, scope of
responsibilities, the results previously achieved by the executive and his or
her development potential.
On an
individual basis, a base salary increase, where appropriate and as contemplated
by the individual's employment agreement, is designed to reward performance
consistent with our overall financial performance in the context of competitive
practice. Performance reviews, including changes in an executive officer's scope
of responsibilities, in combination with general market trends determine
individual salary increases. Aside from contractually provided minimum cost of
living adjustments, no formulaic base salary increases are provided to the named
executive officers.
In
addition to complying with the executive compensation policy and to the
requirements of applicable employment agreements, compensation for each of the
our executive officers for 2008 was based on the executive's performance of his
or her duties and responsibilities, our performance, both financial and
otherwise, and the success of the executive in managing, developing and
executing our business development, sales and marketing, financing and strategic
plans, as appropriate. No merit raises or bonuses were approved or recommended
for our executive officers for 2008.
Bonus.
Executive officers are
eligible to receive cash bonuses based on the degree of our achievement of
financial and other objectives and the degree of achievement by each such
officer of his or her individual objectives. Within such guidelines the amount
of any bonus is discretionary.
The
primary purpose of our performance incentive awards is to motivate our
executives to meet or exceed our company-wide short-term performance objectives.
Our cash bonuses are designed to reward management-level employees for their
contributions to individual and corporate objectives. Regardless of our
performance, the Board of Directors retains the discretion to adjust the amount
of our executives’ bonus based upon individual performance or
circumstances.
At the
beginning of 2008, the management and the Board of Directors established
performance objectives for the payment of incentive awards to each of our named
executive officers and other senior management employees. Performance objectives
were based on corporate objectives established as part of the annual operating
plan process. Year end bonus awards were based on attainment of these
performance objectives as adjusted to reflect changes in our business and
industry throughout the year. Our Compensation Committee recommended and the
Board of Directors determined that bonuses in the amounts set forth in the
Summary Compensation Table below were appropriate. Each individual's bonus
was determined based upon the individual’s attainment of performance objectives
pre-established for that participant by the Board of Directors, senior
management, or the executive's supervisor. Our management and the Board of
Directors established our chief executive officer's performance
objectives.
In
general, each participant set for himself or herself (subject to his or her
supervisor’s review and approval or modification) a number of objectives for
2008 and then received a performance evaluation against those objectives as a
part of the year-end compensation review process. The individual objectives
varied considerably in detail and subject matter depending on the executive's
position. By accounting for individual performance, we were able to
differentiate among executives and emphasize the link between individual
performance and compensation.
Stock options.
Equity
participation is a key component of our executive compensation program. Under
the incentive compensation plan, we are permitted to grant stock options to our
officers, directors, employees and consultants. To date, stock options have been
the sole means of providing equity participation to executive officers. Stock
options are granted to our executive officers primarily based on the officer's
actual and expected contribution to our development. Options are designed to
retain our executive officers and motivate them to enhance our stockholder value
by aligning their financial interests with those of the our stockholders. Stock
options are intended to enable us to attract and retain key personnel and
provide an effective incentive for management to create stockholder value over
the long term since the option value depends on appreciation in the price of our
common stock.
Our
employees, including our executive officers, are eligible to participate in the
award of stock options under our 2007 Incentive Compensation Plan, as
amended. Option grant dates for newly hired or promoted officers and other
eligible employees have typically been approved on the first Board of Directors
meeting date following the date of employment or in the new position. Employees
who have demonstrated outstanding performance during the year may be awarded
options during or following the year. Such grants provide an incentive for
our executives and other employees to increase our market value, as represented
by our market price, as well as serving as a method for motivating and retaining
our executives.
In
determining to provide long-term incentive awards in the form of stock options,
the Board of Directors considered cost and dilution impact, market trends
relating to long-term incentive compensation and other relevant factors. The
Board of Directors determined that an award of stock options more closely aligns
the interests of the recipient with those of our stockholders because the
recipient will only realize a return on the option if our stock price increases
over the term of the option.
Perquisites and Other
Benefits.
We also provide other benefits to our executive
officers that are not tied to any formal individual or our performance criteria
and are intended to be part of a competitive overall compensation program. For
2008, these benefits were solely comprised of an automobile allowance paid to
Dr. Gura. We also offer 401(k) retirement plans and medical plans, for which our
executives are generally charged the same rates as all other of our
employees.
Chief
Executive Officer Compensation
Our
Compensation Committee, at least annually, reviews and recommends to the Board
of Directors the compensation of Kelly McCrann, our Chairman of the Board of
Directors and Chief Executive Officer, in accordance with the terms of his
employment agreement, as well as any variations in his compensation the
committee feels are warranted. Mr. McCrann, as a member of the Board of
Directors, does not participate in and abstains from all discussions and
decisions of the Board of Directors with regard to his compensation. The Board
of Directors believes that in the highly competitive healthcare industry in
which we operate, it is important that Mr. McCrann receive compensation
consistent with compensation received by chief executive officers of competitors
and companies in similar stages of development. Mr. McCrann was a Board of
Directors member and did not receive a bonus in 2008. His base salary for
2008 is currently $325,000, prorated for his October 2, 2008 start date. See
section captioned “Employment Agreements and Termination of Employment and
Change-in-Control Arrangements” below for a description of the material terms
and conditions of Mr. McCrann's employment agreement.
Severance
and Change of Control Arrangements
We have
entered into change of control employment agreements with certain of our named
executive officers, as described in “Employment Agreements.” These agreements
provide for severance payments to be made to our named executive officers if
their employment is terminated under specified circumstances following a change
of control. We also provide benefits to these executive officers upon qualifying
terminations. The agreements are designed to retain our named executive officers
and provide continuity of management in the event of an actual or threatened
change of control and to ensure that our named executive officers’ compensation
and benefits expectations would be satisfied in such event.
Internal
Revenue Code Limits on Deductibility of Compensation
Section 162(m)
generally disallows a Federal income tax deduction to public companies for
certain compensation in excess of $1 million paid to a corporation’s chief
executive officer or any of its four other most highly compensated executive
officers. Qualifying performance-based compensation will not be subject to the
deduction limit if certain requirements are met. The Board of Directors is of
the opinion that our incentive compensation plan has been structured to qualify
the compensation income deemed to be received upon the exercise of stock options
granted under the plans as performance-based compensation. The Board of
Directors will review with appropriate experts or consultants as necessary the
potential effects of Section 162(m) periodically and in the future may decide to
structure additional portions of compensation programs in a manner designed to
permit unlimited deductibility for federal income tax purposes.
We are not currently
subject to the limitations of Section 162(m) because no executive officers
received cash payments during 2008 in excess of $1 million. To the extent that
we may be subject to the Section 162(m) limitation in the future, the effect of
this limitation on earnings may be mitigated by net operating losses, although
the amount of any deduction disallowed under Section 162(m) could increase
alternative minimum tax by a portion of such disallowed amount. For information
relating to our net operating losses, see the consolidated financial statements
included in this Annual Report.
All
members of our Compensation Committee qualify as outside directors. The Board of
Directors considers the anticipated tax treatment to our company and our
executive officers when reviewing executive compensation and our compensation
programs. The deductibility of some types of compensation payments can depend
upon the timing of an executive's vesting or exercise of previously granted
rights. Interpretations of and changes in applicable tax laws and regulations,
as well as other factors beyond the Board of Directors’ control, also can affect
the deductibility of compensation.
While the
tax impact of any compensation arrangement is one factor to be considered, such
impact is evaluated in light of our overall compensation philosophy. The Board
of Directors will consider ways to maximize the deductibility of executive
compensation, while retaining the discretion it deems necessary to compensate
officers in a manner commensurate with performance and the competitive
environment for executive talent. From time to time, the Board of Directors may
award compensation to our executive officers which is not fully deductible if it
determines that such award is consistent with its philosophy and is in our and
our stockholders’ best interests, or as part of initial employment offers, such
as grants of nonqualified stock options.
Sections 280G
and 4999 of the Code impose certain adverse tax consequences on compensation
treated as excess parachute payments. An executive is treated as having received
excess parachute payments for purposes of Sections 280G and 4999 if he or
she receives compensatory payments or benefits that are contingent on a change
in the ownership or control of a corporation, and the aggregate amount of such
contingent compensatory payments and benefits equal or exceeds three times the
executive's base amount. If the executive's aggregate contingent compensatory
payments and benefits equal or exceed three times the executive's base amount,
the portion of the payments and benefits in excess of one times the base amount
are treated as excess parachute payments. Treasury Regulations define the events
that constitute a change in ownership or control of a corporation for purposes
of Sections 280G and 4999 and the executives subject to Sections 280G
and 4999.
An
executive's base amount generally is determined by averaging the executive's
Form W-2 taxable compensation from the corporation and its subsidiaries for
the five calendar years preceding the calendar year in which the change in
ownership or control occurs. An executive's excess parachute payments are
subject to a 20% excise tax under Section 4999, in addition to any
applicable federal income and employment taxes. Also, the corporation's
compensation deduction in respect of the executive's excess parachute payments
is disallowed under Section 280G. If we were to be subject to a change of
control, certain amounts received by our executives (for example, amounts
attributable to the accelerated vesting of stock options) could be excess
parachute payments under Sections 280G and 4999. We provide our chief
executive officer with tax gross up payments in event of a change of
control.
Section 409A
of the Code imposes distribution requirements on nonqualified deferred
compensation plans and arrangements. If a nonqualified deferred compensation
plan or arrangement fails to comply with Section 409A of the Code, an
executive participating in such plan or arrangement will be subject to adverse
tax consequences (including an additional 20% income tax on amounts deferred
under the plan or arrangement). Our nonqualified deferred compensation plans and
arrangements for our executive officers are intended to comply with
Section 409A of the Code, or to be exempt from the requirements of
Section 409A of the Code.
SUMMARY
COMPENSATION TABLE
The
following table sets forth the total compensation received by our named
executive officers during the fiscal years ended December 31, 2008 and
2007:
|
Name and Principal
Position
|
|
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)(1)
|
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
|
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
|
Kelly
J. McCrann,
|
|
2008
|
|
|
80,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,411
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
97,411
|
|
|
Chairman
& CEO (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
Weinstein,
|
|
2008
|
|
|
286,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
449,346
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
735,846
|
|
|
CFO
& Secretary
|
|
2007
|
|
|
100,128
|
|
|
|
21,400
|
|
|
|
—
|
|
|
|
175,564
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
297,092
|
|
|
Victor
Gura
,
|
|
2008
|
|
|
437,600
|
|
|
|
—
|
|
|
|
—
|
|
|
|
858,246
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,000
|
(3)
|
|
|
1,313,846
|
|
|
Chief
Medical &
|
|
2007
|
|
|
455,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
855,901
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,500
|
(3)
|
|
|
1,330,401
|
|
|
Scientific
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel S.
Goldberger
,
|
|
2008
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
152,500
|
(5)
|
|
|
152,500
|
|
|
Former
President,
|
|
2007
|
|
|
219,898
|
|
|
|
—
|
|
|
|
—
|
|
|
|
238,457
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
458,355
|
|
|
COO
& Interim CEO (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents
the dollar amount recognized for financial statement reporting purposes
with respect to fiscal years 2008 and 2007 in accordance with
SFAS 123(R), and includes amounts from awards granted in and prior to
2008 and 2007. Additional information concerning the Company’s
accounting for stock awards may be found in Note 17, “Stock Options and
Warrants” to our financial statements filed as part of this Annual
Report.
|
|
(2)
|
Mr.
McCrann was appointed as the Chairman of the Board of Directors and our
CEO on October 2, 2008.
|
|
(3)
|
Represents
auto allowance that Dr. Gura received in the respective fiscal year
pursuant to his employment agreement
.
|
|
(4)
|
Mr.
Goldberger resigned as our President and COO on August 10, 2007. Mr.
Goldberger also served as our interim CEO from January to October 2008 and
was paid as an independent
consultant.
|
|
(5)
|
Represents
compensation that Mr. Goldberger received pursuant to his consulting
agreement as an independent consultant while serving as our interim CEO
from January to October 2008 and providing consulting services thereafter
until December 31, 2008.
|
GRANTS
OF PLAN-BASED AWARDS FOR FISCAL YEAR 2008
The
following table presents information regarding grants of plan-based awards to
our named executive officers during the fiscal year ended December 31,
2008.
|
|
|
|
|
Estimated Possible Payouts
Under
Non-Equity Incentive Plan
Awards(1)
|
|
|
Estimated Future Payouts
Under
Equity Incentive Plan Awards(2)
|
|
|
All
Other
Stock
Awards:
Number
|
|
|
All
Other
Option
Awards
Number
of
|
|
|
Exercise
|
|
|
Grant
Date
Fair
Value of
|
|
|
Name
|
|
Grant Date
|
|
Threshold
($)
|
|
|
Target
($)
|
|
|
Maximum
($)
|
|
|
Threshold
($)
|
|
|
Target
($)
|
|
|
Maximum
($)
|
|
|
of
Shares of
Stock
or Units
(#)
|
|
|
Securities
Under-
lying
Option
(#)
|
|
|
or Base
Price of
Option
Awards
($/Sh)
|
|
|
Stock
and
Option
Awards
($)(1)
|
|
|
Kelly J.
McCrann,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chairman
& CEO
|
|
10/02/08
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
700,000
|
|
|
|
1.50
|
|
|
|
282,646
|
|
|
(1)
|
Represents
the total grant date fair value determined for financial statement
reporting purposes in accordance with SFAS 123(R) for awards granted in
2008.
|
OUTSTANDING
EQUITY AWARDS AT LAST FISCAL YEAR-END
The
following table sets forth all outstanding equity awards held by our named
executive officers as of December 31, 2008:
|
|
|
|
OPTION AWARDS
|
|
|
Name
|
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
|
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
|
|
|
Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
|
|
|
|
Option
Exercise
Price ($)
|
|
|
Option
Expiration
Date
|
|
|
Kelly
J. McCrann,
Chairman
of the
Board
& CEO
|
|
|
—
|
|
|
|
700,000
|
|
|
|
—
|
|
|
|
1.50
|
|
|
10/02/18
|
|
|
Robert
Weinstein,
CFO
& Secretary
|
|
|
75,000
|
|
|
|
225,000
|
|
|
|
—
|
|
|
|
7.00
|
|
|
08/10/17
|
|
|
Victor
Gura
,
Chief
Medical &
Scientific
Officer
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
—
|
|
|
|
5.00
|
|
|
11/14/16
|
|
|
Daniel S.
Goldberger
,
Former
President, COO & Interim CEO (1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
(1)
|
Mr.
Goldberger resigned as our President and COO on August 10, 2007. From
January to October 2008, Mr. Goldberger served as our interim CEO. Mr.
Goldberger also resigned from his position as a member of the Board of
Directors in October 2008. On September 8, 2008, Mr. Goldberger
voluntarily forfeited his remaining 200,000
options.
|
OPTIONS EXERCISES AND STOCK VESTED IN
2008
No
options were exercised during the fiscal year ended December 31, 2008. During
the fiscal year ended December 31, 2008, an aggregate of 1,544,721 shares of our
common stock underlying our outstanding options, warrants, stock awards,
restricted stock unit awards and similar instruments vested. We granted options
to purchase an aggregate of 905,000 shares of our common stock and options to
purchase an aggregate of 825,000 shares of our common stock were forfeited by
the departed employees and consultants whose services were terminated during the
fiscal year ended December 31, 2008.
PENSION
BENEFITS
We did
not have a defined benefit pension plan or a defined contribution plan and the
named executive officers received no benefits under any retirement plan during
the year ended December 31, 2008.
NON-QUALIFIED
DEFERRED COMPENSATION
We had no
deferred compensation plans during the year ended December 31,
2008.
Employment
Agreements and Termination of Employment and Change-in-Control
Arrangements
The
employment agreements for Dr. Victor Gura, Kelly McCrann, and Robert Weinstein
were in effect during the year ended December 31, 2008, with only Dr. Gura’s and
Mr. Weinstein’s employment agreements in effect during the year ended December
31, 2007.
Chief
Executive Officer
-
On
October 6, 2008, we entered into an employment agreement with Kelly J. McCrann,
effective October 2, 2008, for a term of two years at an initial annual base
salary of $325,000. Mr. McCrann is eligible to receive discretionary bonuses
based on achieving designated individual goals and milestones, overall
performance and profitability. Additionally, Mr. McCrann was granted 700,000
stock options as an exercise price of $1.50 per share under our 2007 Incentive
Compensation Plan, which vests 25% on each of the first, second, third and
fourth anniversaries of the grant date, with anti-dilution protections. He will
be included in our medical, dental, disability and life insurance, pensions and
retirement plans, and other benefit plans and programs. If Mr. McCrann is
terminated without good reason or resigns for good reason, as defined in his
employment agreement, we will be obligated to pay Mr. McCrann twelve month's
base salary (at the rate in effect at the time of termination).
Chief
Financial Officer - On August 10, 2007, Robert Weinstein entered into an
employment agreement with Operations with an initial term of three years, with
automatic one year renewals, which agreement has been assumed by us. His initial
base salary was $275,000. Mr. Weinstein will be entitled to receive an annual
bonus at the discretion of the Board of Directors based on performance goals and
targeted at 50% of his annual salary. In addition to any perquisites and other
fringe benefits provided to other executives, Mr. Weinstein received options to
purchase 300,000 shares of common stock under the Operations 2006 Incentive
Compensation Plan at an exercise price of $7.00 per share and vesting at a rate
of 25% per year, which options have been assumed under our 2007 Incentive
Compensation Plan. In the event Mr. Weinstein is terminated by us without good
cause or he resigns for good reason, as such terms are defined in his employment
agreement, we will be obligated to pay Mr. Weinstein in a lump sum an amount
equal to 12 months salary (at the rate in effect at the time of termination) and
benefits.
Chief
Medical and Scientific Officer - On November 30, 2006, Victor Gura, M.D. entered
into an employment agreement with Operations for a term of four years, which
agreement has been assumed by us. In October 2007, Dr. Gura became our Chief
Medical and Scientific Officer, which position he has held with Operations since
December 2006. Dr. Gura was a member of our Board of Directors from
October 2007 and until October 2008, and was appointed as a member of the board
of directors of Operations in October 2006. His initial annual base
salary was $420,000. Dr. Gura is eligible to receive discretionary bonuses
on an annual basis targeted at 50% of his annual salary. Additionally, Dr. Gura
was granted 500,000 stock options at an exercise price of $5 per share under the
Operations 2006 Incentive Compensation Plan. These options, which were assumed
under our 2007 Incentive Compensation Plan, will vest 25% on each of the first,
second, third, and fourth anniversaries of the original grant date and expire
November 14, 2011. He will also be granted options to purchase an additional
500,000 shares of our common stock upon FDA approval of our first product. Dr.
Gura is eligible to receive reimbursement of reasonable and customary relocation
expenses as well as health, medical, dental insurance coverage and insurance for
accidental death and disability. In the event he is terminated by us without
good cause or if he resigns for good reason, as such terms as are defined in his
employment agreement, we will be obligated to pay Dr. Gura in a lump sum an
amount equal to two year’s salary (at the rate in effect at the time of
termination) plus 200% of the targeted bonus for the year in which termination
occurs. In addition all stock options granted to Dr. Gura will vest
immediately.
Dr.
Gura’s agreement provides for medical insurance and disability benefits,
severance pay if his employment is terminated by us without cause or due to
change in our control before the expiration of the agreement, and allows for
bonus compensation and stock option grants as determined by our Board of
Directors. Dr. Gura’s employment agreement also contains a restrictive covenant
preventing competition with us and the use of confidential business information,
except in connection with the performance of his duties for us, for a period of
two years following the termination of his employment with us.
Confidentiality
Agreements
Each of
our employees is required to enter into a confidentiality agreement. These
agreements provide that for so long as the employee works for us, and after the
employee’s termination for any reason, the employee may not disclose in any way
any of our proprietary confidential information.
Limitation
on Liability and Indemnification Matters
Our
certificate of incorporation and amended and restated bylaws limit the liability
of directors and executive officers to the maximum extent permitted by Delaware
law. The limitation on our directors’ and executive officers’ liability may not
apply to liabilities arising under the federal securities laws. Our certificate
of incorporation and amended and restated bylaws provide that we shall indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to our directors and executive officers pursuant to our certificate of
incorporation and amended and restated bylaws, we have been informed that in the
opinion of the SEC such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
At
present, there is no pending litigation or proceeding involving any of our
directors, officers, employees or agents where indemnification will be required
or permitted. We are not aware of any threatened litigation or proceeding that
might result in a claim for such indemnification.
COMPENSATION
OF DIRECTORS
Compensation.
Some of our
directors have been granted stock options to purchase shares of our common
stock. Our directors also receive cash compensation for their services as
directors. All members of the Board of Directors receive reimbursement for
actual travel-related expenses incurred in connection with their attendance at
meetings of the Board of Directors or its committees.
Options.
Directors are
eligible to receive options under our 2007 Incentive Compensation
Plan.
The
following table provides information regarding compensation that was paid to the
individuals who served as our directors during the year ended December 31, 2008.
Except as set forth in the table, directors did not earn nor receive cash
compensation or compensation in the form of stock awards, stock option awards or
any other form.
The
following table reflects the compensation of our directors for our fiscal year
ended December 31, 2008:
|
Name
|
|
Fees Earned
or Paid in
Cash ($)
|
|
|
Stock
Awards ($)
|
|
|
Option
Awards
($) (1)(7)
|
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
|
|
Change in
Pension Value and
Nonqualified
Deferred
Compensation
Earnings ($)
|
|
|
All Other
Compensation ($)
|
|
|
Total ($)
|
|
|
Terren
S. Peizer
|
|
|
281,250
|
(2)
|
|
|
—
|
|
|
|
822,582
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,103,832
|
|
|
Kelly
J. McCrann
|
|
|
—
|
|
|
|
—
|
|
|
|
120,960
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
120,960
|
|
|
Hans-Dietrich
Polaschegg
|
|
|
60,000
|
(3)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
60,000
|
|
|
Jay
A. Wolf
|
|
|
—
|
|
|
|
—
|
|
|
|
120,818
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
120,818
|
|
|
Daniel
Goldberger (4)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Dr.
Victor Gura (5)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Marc
G. Cummins (6)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
(1)
|
Represents
the dollar amount recognized for financial statement reporting purposes
with respect to fiscal year 2008 in accordance with SFAS 123(R), and
includes amounts from awards granted in and prior to
2008.
|
|
(2)
|
Represents
compensation that Mr. Peizer received for his services as Executive
Chairman. Mr. Peizer was paid pursuant to his Executive Chairman Agreement
and as an independent consultant. Mr. Peizer served as our Executive
Chairman until October 2008.
|
|
(3)
|
Represents
compensation that Dr. Polaschegg received for his research and development
consulting services. Dr. Polaschegg was compensated in accordance with his
month to month consulting agreement and paid as an independent
consultant.
|
|
(4)
|
On
October 6, 2008, Mr. Goldberger resigned as our interim CEO, and on
October 7, 2008, Mr. Goldberger resigned as a member of the Board. Other
than the options granted to him, which he voluntarily forfeited on
September 8, 2008, Mr. Goldberger did not receive any other compensation
for his services as director.
|
|
(5)
|
On
October 7, 2008, Dr. Gura resigned as a member of our Board of
Directors. Dr. Gura did not receive any compensation or options for his
services as a director.
|
|
(6)
|
Mr.
Cummins resigned as a member of our Board of Directors effective March 6,
2009.
|
|
(7)
|
The
aggregate number of option awards outstanding as of December 31, 2008 for
each of our directors serving in such capacity on such date are as
follows: Mr. Peizer’s - 280,000 stock options which were vested and
exercisable within 60 days of March 23, 2009 and 420,000 stock options
which were unvested and unexercisable of such date, Mr. McCrann - 20,000
stock options which were vested and exercisable within 60 days of March
23, 2009 and 780,000 stock options which were unvested and unexercisable
of such date, Dr. Polaschegg - 0, Mr. Wolf - 40,000 stock options which
were vested and exercisable within 60 days of March 23, 2009 and 60,000
stock options which were unvested and unexercisable of such date, Mr.
Goldberger - 0, Dr. Gura - 250,000 stock options which were vested and
exercisable within 60 days of March 23, 2009 and 250,000 stock options
which were unvested and unexercisable of such date, and Mr. Cummins -
0.
|
Compensation
Committee Interlocks and Insider Participation
Not required for smaller reporting
companies.
Compensation
Committee Report
Not required for smaller reporting
companies.
Item 12.
Security Ownership and Certain
Beneficial Owners and Management and Related Stockholder
Matters
Security Ownership of
Certain
Beneficial
Owners and Management
The
following table sets forth certain information regarding the shares of common
stock beneficially owned as of March 23, 2009 by: (i) each person known to
us to be the beneficial owner of more than 5% of our common stock,
(ii) each of our directors, (iii) our chief executive officer and the
two most highly compensated executive officers other than the chief executive
officer, who were serving as executive officers at the end of our last fiscal
year (collectively, the “named executive officers”) and other executive officers
named in the Summary Compensation Table set forth in the “Executive
Compensation” section, and (iv) all such directors and executive officers
as a group.
|
Name and Address
of Beneficial Owner (1)
|
|
Title of Class of Shares
Owned
|
|
Amount and Nature of
Beneficial Ownership
|
|
|
Percent of
Class
|
|
|
Terren
S. Peizer (2)
|
|
common
stock
|
|
|
6,512,596
|
|
|
|
43.3
|
%
|
|
Jay
A. Wolf (3)
|
|
common
stock
|
|
|
397,143
|
|
|
|
2.7
|
%
|
|
Victor
Gura (4)
|
|
common
stock
|
|
|
250,000
|
|
|
|
1.7
|
%
|
|
Kelly
J. McCrann (5)
|
|
common
stock
|
|
|
120,000
|
|
|
|
*
|
|
|
Robert
Weinstein (6)
|
|
common
stock
|
|
|
95,000
|
|
|
|
*
|
|
|
Hans-Dietrich
Polaschegg
|
|
common
stock
|
|
|
—
|
|
|
|
—
|
|
|
Marc
G. Cummins (7)(8)
|
|
common
stock
|
|
|
1,557,158
|
|
|
|
10.6
|
%
|
|
All
directors and named executive officers
as
a group (7 persons)
|
|
common
stock
|
|
|
8,931,897
|
|
|
|
58.9
|
%
|
|
*
|
Represents
beneficial ownership of less than
1%.
|
|
(1)
|
Unless
otherwise indicated, the address of all of the above named persons is c/o
Xcorporeal, Inc., 12121 Wilshire Blvd., Suite 350, Los Angeles, California
90025.
|
|
(2)
|
Includes
6,232,596 shares held of record by Consolidated National, LLC, of which
Mr. Peizer is the sole managing member and beneficial owner. As of
December 31, 2008, shares of our common stock underlying 280,000 stock
options granted to Mr. Peizer’s were vested and exercisable within 60 days
of March 23, 2009.
|
|
(3)
|
Includes
357,143 shares held of record by Trinad Capital Master Fund Ltd. (the
“Master Fund”), that may be deemed to be beneficially owned by Trinad
Management, LLC, the investment manager of the Master Fund and Trinad
Capital LP; a controlling stockholder of the Master Fund; Trinad Advisors
GP, LLC, the general partner of Trinad Capital LP; and Jay Wolf a director
of the issuer and a managing director of Trinad Management, LLC and a
managing director of Trinad Advisors GP, LLC. Mr. Wolf disclaims
beneficial ownership of the reported securities except to the extent of
his pecuniary interest therein. Also includes 40,000 shares of our common
stock underlying stock options issued to Mr. Wolf’s which were vested and
exercisable within 60 days of March 23,
2009.
|
|
(4)
|
Represents
shares of our common stock underlying 250,000 stock option granted to Dr.
Gura which were vested and exercisable within 60 days of March 23,
2009.
|
|
(5)
|
Includes
shares of our common stock underlying 20,000 stock options granted to Mr.
McCrann which were vested and exercisable within 60 days of March 23,
2009.
|
|
(6)
|
Includes
shares of our common stock underlying 75,000 stock options granted to Mr.
Weinstein which were vested and exercisable within 60 days of March 23,
2009.
|
|
(7)
|
Mr.
Cummins resigned as a member of our Board of Directors effective March 6,
2009.
|
|
(8)
|
Represents
shares held of record by Prime Logic Capital, LLC, CPS Opportunities, and
GPC LXI, LLC. Mr. Cummins is a Managing Partner of Prime Capital, LLC. He
disclaims beneficial ownership of the reported securities except to the
extent of his pecuniary interest therein. Excludes warrants to purchase
150,000 shares held by OGT, LLC, an affiliate of Prime Logic, over which
Mr. Cummins disclaims beneficial ownership except to the extent of his
pecuniary interest therein.
|
Unless
otherwise indicated, we believe that all persons named in the above table have
sole voting and investment power with respect to all shares of our common stock
beneficially owned by them. A person is deemed to be the beneficial owner of
securities which may be acquired by such person within 60 days from the date on
which beneficial ownership is to be determined, upon the exercise of options,
warrants or convertible securities. Each beneficial owner’s percentage ownership
is determined by assuming that options, warrants and convertible securities that
are held by such person (but not those held by any other person) and which are
exercisable, convertible or exchangeable within such 60 day period, have been so
exercised, converted or exchanged.
Item 13.
Certain
Relationships
and
Related Transactions
and Director
Independence.
Certain
Relationships and Related Transactions
Related-party
transactions have the potential to create actual or perceived conflicts of
interest between our company and our directors and executive officers or their
immediate family members. The Board reviews such matters as they pertain to
related-party transactions as defined by Item 404(b) of the SEC’s
Regulation S-K. In deciding whether to continue to allow these
related-party transactions involving a director, executive officer, or their
immediate family members, the Board considered, among other
factors:
|
·
|
information
about the services proposed to be or being provided by or to the related
party or the nature of the
transactions;
|
|
·
|
the
nature of the transactions and the costs to be incurred by our company or
payments to us;
|
|
·
|
an
analysis of the costs and benefits associated with the transaction and a
comparison of comparable or alternative services that are available to us
from unrelated parties;
|
|
·
|
the
business advantage that we would gain by engaging in the
transaction; and
|
|
·
|
an
analysis of the significance of the transaction to our company and to the
related party.
|
The Board
determined that the related party transactions disclosed herein are on terms
that are fair and reasonable to us, and which are as favorable to our company as
would be available from non-related entities in comparable transactions. The
Board believes that there is a business interest to our company in supporting
the transactions and the transactions meet the same standards that we apply to
comparable transactions with unaffiliated entities. Although the aforementioned
controls are not written, each determination was made by the Board and reflected
in its minutes.
Below are
the transactions that occurred since the beginning of the fiscal year 2008, or
any currently proposed transactions, in which, to our knowledge, we were or are
a party, in which the amount involved exceeded $120,000, and in which any of our
directors, director nominees, executive officers, holders of more than 5% of any
class of our common stock, or any member of the immediate family of any of the
foregoing persons had or will have a direct or indirect material
interest.
In
connection with the contribution of the assets to our company, on August 31,
2006
we issued to
CNL, of which Terren Peizer, our former Executive Chairman and current member of
the Board, who beneficially owns 43.3% of our outstanding common stock, is the
sole managing member and beneficial owner, an aggregate of 9,600,000 shares of
common stock of which 6,232,596 shares are still held by CNL.
Mr.
Peizer served until October 2008 as our Executive Chairman pursuant to his
Executive Chairman Agreement dated August 10, 2007. In consideration of his
services, commencing July 1, 2007, we paid Mr. Peizer base compensation of
$450,000 per annum with a signing bonus of $225,000. From January 1, 2008
through October 2008, Mr. Peizer received $281,250 for his services under the
agreement. Mr. Peizer voluntarily resigned from his position as Executive
Chairman in October 2008 and remains a member of our Board of
Directors.
Dr. Gura,
our Chief Medical and Scientific Officer, owns 15,497,250 shares of common stock
of NQCI (or approximately 20.9% of NQCI’s common stock outstanding as of January
31, 2009) with whom we entered into the License Agreement. Such shares include
800,000 shares owned by Medipace Medical Group, Inc., an affiliate of Dr. Gura
(or approximately 1.1% of NQCI’s common stock outstanding as of January 31,
2009), and 250,000 shares subject to warrants held by Dr. Gura which are
currently exercisable (or approximately 0.3% of NQCI’s common stock outstanding
as of January 31, 2009).
Pursuant
to a consulting agreement effective December 1, 2007, Daniel S. Goldberger, a
former member of our Board of Directors, provided consulting services as our
interim Chief Executive Officer. In consideration of the services, we paid Mr.
Goldberger $15,000 per month during the first two months and $12,500 per month
thereafter during the term of the consulting agreement. From the date of his
consulting agreement through September 30, 2008, Mr. Goldberger was compensated
$130,000 for his services. Mr. Goldberger resigned as interim Chief Executive
Officer on October 6, 2008, and as a director on October 7, 2008, and remained
as a strategic consultant to our company through the end of 2008. Mr. Goldberger
received an additional $22,500 in compensation for such services.
Dr. Gura
maintains an office located in Beverly Hills, California. Pursuant to a
reimbursement agreement effective January 29, 2008, we reimburse 50% of the
rental and 50% of his monthly parking. The term of the agreement commenced on
April 23, 2007, the date of the office lease agreement, and continue until the
date on which he ceases to use the remote office to perform his duties as our
Chief Medical and Scientific Officer. From commencement through December 31,
2008, we reimbursed our Chief Medical and Scientific Officer $1,710 and $37,988
for 50% of the monthly parking and rental, respectively.
After review of all of the relevant
transactions or relationships of each director and his family members, our
Board of Directors has determined that Messrs. Cummins, Polaschegg and Wolf are
“independent” as that term is defined under the applicable NYSE Amex standards,
including that each such director is free of any relationship that would
interfere with his individual exercise of independent judgment. Each of the
members of our Audit Committee, Compensation Committee and Nominating Committee
were determined by the Board of Directors to be independent under applicable
NYSE Amex standards.
As a result of Mr. Cummins’ resignation
from his position of a member of our Board of Directors effective March 6, 2009,
we are no longer in compliance with Section 803(A)(1) of the Amex Company Guide
because a majority of the members of our Board of Directors are not independent
directors.
Item 14.
Principal
Accounting
Fees and
Services.
BDO
Seidman served as the independent registered public accounting firm for
Operations, and as of the effective date of the merger between us and
pre-merger Xcorporeal, Inc., BDO Seidman has served as our independent
registered public accounting firm.
Audit
Fees
Total
fees for professional services rendered by our principal accountant for the
audit and review of our financial statements included in our Form 10-Q/10-QSBs
and Form 10-K/10-KSBs, and services provided in connection with our other SEC
filings for the years ended December 31, 2007 and 2008 were $303,155 and
$202,174, respectively.
Audit-Related
Fees
Audit-related
fees are for accounting technical consultations and totaled $0 in 2008 and
$24,000 in 2007.
Tax
Fees
We paid
no fees for professional services with respect to tax compliance, tax advice, or
tax planning to our auditor in 2007 or 2008.
All
Other Fees
Our
principal accountant did not bill us any other fees during 2007 or
2008.
Audit
committee’s pre-approval policies and procedures
Our Audit
Committee has responsibility for the approval of all audit and non-audit
services before we engage an accountant. All of the services rendered to us by
BDO Seidman, LLP are pre-approved by our Audit Committee before the engagement
of the auditors for such services. Our pre-approval policy expressly provides
for the annual pre-approval of all audits, audit-related and all non-audit
services proposed to be rendered by the independent auditor for the fiscal year,
as specifically described in the auditor's engagement letter, such annual
pre-approval to be performed by our Audit Committee.
PART
IV
Item
15.
Exhibits and
Financial Statement Schedules.
|
(a)
|
|
The
Following documents are filed as a part of this
report:
|
Our financial statements are as set
forth under Item 8 of this Annual Report on Form 10-K.
|
|
2.
|
|
Financial
Statement Schedules
|
The
auditors’ report with respect to the above-listed financial statement schedule
appears on page 30 of this Annual Report. All other financial statements and
schedules not listed are omitted either because they are not applicable, not
required or the required information is included in the financial
statements.
|
|
3.
|
|
Exhibits
required by Item 601 of Regulation
S-K
|
The
exhibits listed in the Exhibit Index, which appears immediately following the
signature page of this report and is incorporated herein by reference, are filed
as part of this Annual Report.
SIGNATURES
Pursuant
to the requirements of Section 13 of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the date indicated.
XCORPOREAL, INC.
Date: March
31,
2009 By:
/s/
Kelly J.
McCrann
Kelly J. McCrann
Chief Executive Officer
(Principal Executive
Officer)
Date: March
31,
2009 By:
/s/
Robert
Weinstein
Robert Weinstein
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Kelly J. McCrann and Robert Weinstein, or either of
them, his or her attorneys-in-fact, for such person in any and all
capacities, to sign any amendments to this report and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
either of said attorneys-in-fact, or substitute or substitutes, may do or cause
to be done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
|
Signature
|
|
Title(s)
|
|
Date
|
|
|
|
|
|
|
|
/s/
Kelly J.
McCrann
|
|
Chairman
of the Board of Directors
|
|
March
31, 2009
|
|
Kelly
J. McCrann
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Terren S.
Peizer
|
|
Director
|
|
March
31, 2009
|
|
Terren
S. Peizer
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Hans-Dietrich Polaschegg,
Ph.D.
|
|
Director
|
|
March
31, 2009
|
|
Hans-Dietrich
Polaschegg, Ph.D.
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Jay A.
Wolf
|
|
Director
|
|
March
31, 2009
|
|
Jay
A. Wolf
|
|
|
|
|
EXHIBIT
INDEX
|
No.
|
|
Description
|
|
2.1
|
|
Merger
Agreement, dated as of September 1, 2006, by and among Xcorporeal,
Inc., NQCI Acquisition Corporation and National Quality Care,
Inc.(1)
|
|
3.1
|
|
Amended
and Restated Certificate of Incorporation of Xcorporeal, Inc.
(1)
|
|
3.2
|
|
Amended
and Restated Bylaws of Xcorporeal, Inc. (1)
|
|
4.1
|
|
Specimen
of Common Stock certificate (1)
|
|
10.1†
|
|
Form
of Indemnification Agreement for directors (1)
|
|
10.2†
|
|
Xcorporeal,
Inc. 2007 Incentive Compensation Plan (1)
|
|
10.3
|
|
License
Agreement, dated as of September 1, 2006 (1)
|
|
10.4†
|
|
Contribution
Agreement, dated as of August 31, 2006 (1)
|
|
10.5†
|
|
Employment
Agreement, dated as of November 30, 2006, between Xcorporeal, Inc. and
Victor Gura, M.D. (1)
|
|
10.6
|
|
Form
of Innovation, Proprietary Information and Confidentiality Agreement
(1)
|
|
10.7†
|
|
Executive
Chairman Agreement, dated as of August 10, 2007, between Xcorporeal, Inc.
and Terren S. Peizer (1)
|
|
10.8†
|
|
Employment
Agreement of Robert Weinstein (1)
|
|
10.9†
|
|
Consulting
Agreement, dated as of October 1, 2007, between Xcorporeal, Inc. and
Hans-Dietrich Polaschegg (1)
|
|
10.10
|
|
Services
Agreement, dated as of March 22, 2007, between Xcorporeal, Inc. and Aubrey
Group, Inc. (1)
|
|
10.11†
|
|
Employment
Agreement, dated as of November 30, 2006, between Xcorporeal, Inc. and
Kelly J. McCrann. (2)
|
|
10.12†
|
|
Services
Agreement, dated as of January 24, 2008, between Xcorporeal, Inc. and
Daniel S. Goldberger (3)
|
|
10.13
|
|
Lease
for Operating Facility, dated as of October 6, 2008, between Xcorporeal,
Inc. and
Olen
Commercial Realty Corp. (4)
|
|
14.1
|
|
Code
of Ethics (1)
|
|
21.1
|
|
Subsidiaries
of Xcorporeal, Inc.*
|
|
23.1
|
|
Consent
of Independent Registered Public Accounting Firm *
|
|
31.1
|
|
Rule
13a-14(a) Certification of Chief Executive Officer *
|
|
31.2
|
|
Rule
13a-14(a) Certification of Chief Financial Officer *
|
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*
|
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*
|
____________
|
|
† Management
contracts, compensatory plans or
arrangements.
|
(1)
Incorporated by reference to exhibit of the same number to our Quarterly Report
on Form 10-Q filed November 13, 2007.
(2)
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K
filed October 8, 2008.
(3)
Incorporated
by reference to Exhibit 10.1 to our Current Report on Form 8-K filed January 25,
2008.
(4)
Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q
filed November 19, 2008.
Exhibit
31.1
CERTIFICATION
PURSUANT TO
RULE
13a/15d OF THE SECURITIES EXCHANGE ACT OF 1934,
AS
ADOPTED PURSUANT TO
SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kelly
J. McCrann, certify that:
|
1.
|
I
have reviewed this Annual Report on Form 10-K of Xcorporeal, Inc.
(“registrant”);
|
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(b)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of registrant’s board of directors
(or persons performing the equivalent functions):
(a) All
significant deficiencies and material weakness in the design or operation of
internal controls over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal controls over financial
reporting.
Exhibit
31.2
CERTIFICATION
PURSUANT TO
RULE
13a/15d OF THE SECURITIES EXCHANGE ACT OF 1934,
AS
ADOPTED PURSUANT TO
SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert
Weinstein, certify that:
|
1.
|
I
have reviewed this Annual Report on Form 10-K of Xcorporeal, Inc.
(“registrant”);
|
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(b)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of registrant’s board of directors
(or persons performing the equivalent functions):
(a) All
significant deficiencies and material weakness in the design or operation of
internal controls over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal controls over financial
reporting.
Chief
Financial Officer and Secretary
Exhibit
32.1
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT
OF 2002
In
connection with the Annual Report of Xcorporeal, Inc. (the “Company”) on Form
10-K for the period ending December 31, 2008, as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), I, Kelly J. McCrann,
as Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §
1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002,
that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended; and
(2)
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/
Kelly J.
McCrann
Kelly J.
McCrann
Chief
Executive Officer
Date:
March 31, 2009
This
certification accompanies this Report on Form 10-K pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by
such Act, be deemed filed by the Company for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended.
A signed
original of this written statement required by Section 906, another document
authenticating, acknowledging or otherwise adopting the signature that appears
in typed form within the electronic version of this written statement required
by Section 906, has been provided to the Company and will be retained and
furnished to the Securities and Exchange Commission or its staff upon
request.
Exhibit
32.2
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT
OF 2002
In
connection with the Annual Report of Xcorporeal, Inc. (the “Company”) on Form
10-K for the period ending December 31, 2008, as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), I, Robert Weinstein,
as Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §
1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002,
that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended; and
(2)
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/
Robert
Weinstein
Robert
Weinstein
Chief
Financial Officer
Date:
March 31, 2009
This
certification accompanies this Report on Form 10-K pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by
such Act, be deemed filed by the Company for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended.
A signed
original of this written statement required by Section 906, another document
authenticating, acknowledging or otherwise adopting the signature that appears
in typed form within the electronic version of this written statement required
by Section 906, has been provided to the Company and will be retained and
furnished to the Securities and Exchange Commission or its staff upon
request.
ANNEX F
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
|
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2009
Or
|
¨
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from ___________________to____________________
Commission
file number 001-33874
XCORPOREAL,
INC.
(Exact
name of small business issuer as specified in its charter)
|
Delaware
|
75-2242792
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer Identification No.)
|
12121
Wilshire Blvd., Suite 350, Los Angeles, California 90025
(Address
of principal executive offices) (Zip Code)
(310)
923-9990
(Registrant’s
telephone number, including area code)
Not
applicable
(Former
name, former address and former fiscal year, if changed since last
report)
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. Yes
R
No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes
¨
No
¨
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” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
|
¨
Large accelerated filer
|
¨
Accelerated filer
|
|
|
|
|
¨
Non-accelerated filer (Do not check if a smaller reporting company)
|
þ
Smaller reporting company
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).Yes
¨
No
R
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
|
Class
|
|
Outstanding
as of November 12, 2009
|
|
Common
Stock, $0.0001 par value
|
|
15,154,687
shares
|
INDEX
|
PART
I — FINANCIAL INFORMATION
|
|
F-3
|
|
|
|
|
|
Item
1. Financial Statements
|
|
F-3
|
|
|
|
|
|
Balance
Sheets at September 30, 2009 (unaudited) and December 31,
2008
|
|
|
|
|
|
|
|
Statements
of Operations (unaudited) for the three and nine months ended September
30, 2009 and September 30, 2008 and the period from inception (May 4,
2001) to September 30, 2009
|
|
F-4
|
|
|
|
|
|
Statements
of Cash Flows (unaudited) for the nine months ended September 30, 2009 and
September 30, 2008 and the period from inception (May 4, 2001) to
September 30, 2009
|
|
F-5
|
|
|
|
|
|
Statement
of Stockholders Equity (Deficit) for the nine months ended September 30,
2009 and the period from inception (May 4, 2001) to September 30, 2009
(unaudited)
|
|
F-6
|
|
|
|
|
|
Notes
to the Interim Financial Statements
|
|
F-7
|
|
|
|
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
|
F-19
|
|
|
|
|
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
|
|
F-27
|
|
|
|
|
|
Item
4. Controls and Procedures
|
|
F-28
|
|
|
|
|
|
PART
II — OTHER INFORMATION
|
|
F-29
|
|
|
|
|
|
Item
1. Legal Proceedings
|
|
F-29
|
|
|
|
|
|
Item
1A. Risk Factors
|
|
F-31
|
|
|
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
|
F-33
|
|
|
|
|
|
Item
6. Exhibits
|
|
F-34
|
|
|
|
|
|
Signatures
|
|
F-35
|
PART
I — FINANCIAL INFORMATION
ITEM
1. Financial Statements
XCORPOREAL,
INC.
(a
Development Stage Company)
BALANCE
SHEETS
(Unaudited)
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
35,734
|
|
|
$
|
407,585
|
|
|
Marketable
securities, at fair value
|
|
|
288,703
|
|
|
|
2,955,714
|
|
|
Restricted
cash
|
|
|
305,871
|
|
|
|
301,675
|
|
|
Prepaid
expenses and other current assets
|
|
|
123,351
|
|
|
|
260,024
|
|
|
Expense
receivable
|
|
|
54,641
|
|
|
|
-
|
|
|
Tenant
improvement allowance receivable
|
|
|
43,260
|
|
|
|
87,658
|
|
|
Total
Current Assets
|
|
|
851,560
|
|
|
|
4,012,656
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
246,804
|
|
|
|
337,554
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
819
|
|
|
|
863
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
1,099,183
|
|
|
$
|
4,351,073
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
945,385
|
|
|
$
|
789,827
|
|
|
Accrued
legal fees and licensing expense
|
|
|
1,871,430
|
|
|
|
2,873,396
|
|
|
Accrued
royalties
|
|
|
-
|
|
|
|
583,333
|
|
|
Accrued
professional fees
|
|
|
442,444
|
|
|
|
211,820
|
|
|
Accrued
compensation
|
|
|
143,040
|
|
|
|
149,664
|
|
|
Accrued
other liabilities
|
|
|
72,137
|
|
|
|
54,429
|
|
|
Payroll
liabilities
|
|
|
1,054
|
|
|
|
7,448
|
|
|
Deferred
compensation
|
|
|
171,513
|
|
|
|
-
|
|
|
Deferred
gain
|
|
|
200,000
|
|
|
|
-
|
|
|
Deferred
rent
|
|
|
280,390
|
|
|
|
148,651
|
|
|
Total
Current Liabilities
|
|
|
4,127,393
|
|
|
|
4,818,568
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issuable
|
|
|
-
|
|
|
|
1,569,100
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
& CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.0001 par value, 10,000,000 shares authorized, none
outstanding
|
|
|
-
|
|
|
|
-
|
|
|
Common
stock, $0.0001 par value, 40,000,000 shares authorized, 15,154,687 and
14,754,687 issued and outstanding on September 30, 2009 and December 31,
2008, respectively
|
|
|
1,515
|
|
|
|
1,475
|
|
|
Additional
paid-in capital
|
|
|
44,328,779
|
|
|
|
42,547,023
|
|
|
Deficit
accumulated during the development stage
|
|
|
(47,358,504
|
)
|
|
|
(44,585,093
|
)
|
|
Total
Stockholders' Deficit
|
|
|
(3,028,210
|
)
|
|
|
(2,036,595
|
)
|
|
Total
Liabilities & Stockholders' Deficit
|
|
$
|
1,099,183
|
|
|
$
|
4,351,073
|
|
See
accompanying notes to interim financial statements.
XCORPOREAL,
INC.
(a
Development Stage Company)
STATEMENTS
OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 4, 2001 (Date
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
of Inception) to
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
$
|
924,454
|
|
|
$
|
2,111,578
|
|
|
$
|
3,493,481
|
|
|
$
|
7,756,230
|
|
|
$
|
26,897,992
|
|
|
Research
and development
|
|
|
586,741
|
|
|
|
12,694,055
|
|
|
|
2,415,055
|
|
|
|
18,900,027
|
|
|
|
31,758,372
|
|
|
Other
expenses
|
|
|
-
|
|
|
|
1,871,430
|
|
|
|
-
|
|
|
|
1,871,430
|
|
|
|
1,871,430
|
|
|
Depreciation
and amortization
|
|
|
30,672
|
|
|
|
27,253
|
|
|
|
92,274
|
|
|
|
75,837
|
|
|
|
229,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before other income, income taxes and other expenses
|
|
|
(1,541,867
|
)
|
|
|
(16,704,316
|
)
|
|
|
(6,000,810
|
)
|
|
|
(28,603,524
|
)
|
|
|
(60,757,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction
of liabilities due to arbitrator's ruling & settlement
|
|
|
-
|
|
|
|
-
|
|
|
|
1,647,799
|
|
|
|
-
|
|
|
|
1,647,799
|
|
|
Loss
on disposal
|
|
|
-
|
|
|
|
-
|
|
|
|
(382
|
)
|
|
|
-
|
|
|
|
(382
|
)
|
|
Interest
and other income
|
|
|
915
|
|
|
|
44,871
|
|
|
|
11,657
|
|
|
|
278,941
|
|
|
|
1,602,136
|
|
|
Change
in and reduction of shares issuable
|
|
|
-
|
|
|
|
5,538,000
|
|
|
|
1,569,100
|
|
|
|
5,538,000
|
|
|
|
10,153,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes and other expenses
|
|
|
(1,540,952
|
)
|
|
|
(11,121,445
|
)
|
|
|
(2,772,636
|
)
|
|
|
(22,786,583
|
)
|
|
|
(47,354,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
-
|
|
|
|
300
|
|
|
|
775
|
|
|
|
1,900
|
|
|
|
4,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,540,952
|
)
|
|
$
|
(11,121,745
|
)
|
|
$
|
(2,773,411
|
)
|
|
$
|
(22,788,483
|
)
|
|
$
|
(47,358,504
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(0.10
|
)
|
|
$
|
(0.76
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(1.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
14,759,035
|
|
|
|
14,704,687
|
|
|
|
14,756,152
|
|
|
|
14,561,070
|
|
|
|
|
|
See
accompanying notes to interim financial statements.
XCORPOREAL,
INC.
(a
Development Stage Company)
STATEMENTS
OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
May 4, 2001 (Date
|
|
|
|
|
Nine Months Ended
|
|
|
of Inception) to
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
Cash
flows used in operating activities
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the period
|
|
$
|
(2,773,411
|
)
|
|
$
|
(22,788,483
|
)
|
|
$
|
(47,358,504
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to net cash (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors,
officers, employees stock based compensation
|
|
|
1,718,109
|
|
|
|
3,813,158
|
|
|
|
10,407,884
|
|
|
Consultants
stock based compensation
|
|
|
3,687
|
|
|
|
92,842
|
|
|
|
5,174,913
|
|
|
Common
stock issuance for consulting services rendered
|
|
|
60,000
|
|
|
|
798,000
|
|
|
|
972,000
|
|
|
Increase
in shares issuable
|
|
|
-
|
|
|
|
10,153,000
|
|
|
|
10,153,000
|
|
|
Mark
to market of shares issuable
|
|
|
(1,569,100
|
)
|
|
|
(5,538,000
|
)
|
|
|
(10,153,000
|
)
|
|
Depreciation
|
|
|
92,230
|
|
|
|
75,792
|
|
|
|
229,078
|
|
|
Net
change in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in receivables
|
|
|
(10,243
|
)
|
|
|
-
|
|
|
|
(97,901
|
)
|
|
Decrease
(increase) in prepaid expenses and other current assets
|
|
|
136,673
|
|
|
|
107,830
|
|
|
|
(123,351
|
)
|
|
Decrease
(increase) in other assets
|
|
|
44
|
|
|
|
45
|
|
|
|
(819
|
)
|
|
(Decrease)
increase in accounts payable and accrued liabilities
|
|
|
(1,194,427
|
)
|
|
|
2,859,622
|
|
|
|
3,438,119
|
|
|
Increase
in deferred compensation
|
|
|
171,513
|
|
|
|
-
|
|
|
|
171,513
|
|
|
Increase
in deferred gain
|
|
|
200,000
|
|
|
|
-
|
|
|
|
200,000
|
|
|
Increase
in deferred rent
|
|
|
131,739
|
|
|
|
40,929
|
|
|
|
280,390
|
|
|
Net
cash used in operating activities
|
|
|
(3,033,186
|
)
|
|
|
(10,385,265
|
)
|
|
|
(26,706,678
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(1,480
|
)
|
|
|
(113,629
|
)
|
|
|
(475,882
|
)
|
|
Restricted
cash
|
|
|
(4,196
|
)
|
|
|
228
|
|
|
|
(305,871
|
)
|
|
Purchase
of marketable securities
|
|
|
(22,044,286
|
)
|
|
|
(8,598,102
|
)
|
|
|
(55,642,388
|
)
|
|
Sale
of marketable securities
|
|
|
24,711,297
|
|
|
|
19,243,315
|
|
|
|
55,353,685
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
2,661,335
|
|
|
|
10,531,812
|
|
|
|
(1,070,456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
stock issued
|
|
|
-
|
|
|
|
-
|
|
|
|
27,549,748
|
|
|
Advances
from related party
|
|
|
-
|
|
|
|
-
|
|
|
|
64,620
|
|
|
Additional
proceeds from the sale of common stock in 2006
|
|
|
-
|
|
|
|
-
|
|
|
|
198,500
|
|
|
Net
cash provided by financing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
27,812,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
increase in cash during the period
|
|
|
(371,851
|
)
|
|
|
146,547
|
|
|
|
35,734
|
|
|
Cash
at beginning of the period
|
|
|
407,585
|
|
|
|
106,495
|
|
|
|
-
|
|
|
Cash
at end of the period
|
|
$
|
35,734
|
|
|
$
|
253,042
|
|
|
$
|
35,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information; cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Income
taxes
|
|
$
|
775
|
|
|
$
|
1,900
|
|
|
$
|
4,004
|
|
See
accompanying notes to interim financial statements.
XCORPOREAL,
INC.
(a
Development Stage Company)
STATEMENTS
OF STOCKHOLDERS’ EQUITY (DEFICIT)
For
the Period May 4, 2001 (Inception) to September 30, 2009
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
During
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Development
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stage
|
|
|
Total
|
|
|
Common
stock issued for cash at $0.01 per share
|
|
|
2,500,000
|
|
|
$
|
250
|
|
|
$
|
24,750
|
|
|
|
|
|
$
|
25,000
|
|
|
Net
Loss for the year ended December 31, 2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(40,255
|
)
|
|
|
(40,255
|
)
|
|
Balance
as of December 31, 2001
|
|
|
2,500,000
|
|
|
|
250
|
|
|
|
24,750
|
|
|
|
(40,255
|
)
|
|
|
(15,255
|
)
|
|
Common
stock issued for cash at $0.05 per share
|
|
|
1,320,000
|
|
|
|
132
|
|
|
|
65,868
|
|
|
|
|
|
|
|
66,000
|
|
|
Net
Loss for the year ended December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,249
|
)
|
|
|
(31,249
|
)
|
|
Balance
as of December 31, 2002
|
|
|
3,820,000
|
|
|
|
382
|
|
|
|
90,618
|
|
|
|
(71,504
|
)
|
|
|
19,496
|
|
|
Net
Loss for the year ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,962
|
)
|
|
|
(12,962
|
)
|
|
Balance
as of December 31, 2003
|
|
|
3,820,000
|
|
|
|
382
|
|
|
|
90,618
|
|
|
|
(84,466
|
)
|
|
|
6,534
|
|
|
Net
Loss for the year ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,338
|
)
|
|
|
(23,338
|
)
|
|
Balance
as of December 31, 2004
|
|
|
3,820,000
|
|
|
|
382
|
|
|
|
90,618
|
|
|
|
(107,804
|
)
|
|
|
(16,804
|
)
|
|
Net
Loss for the year ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,753
|
)
|
|
|
(35,753
|
)
|
|
Balance
as of December 31, 2005
|
|
|
3,820,000
|
|
|
|
382
|
|
|
|
90,618
|
|
|
|
(143,557
|
)
|
|
|
(52,557
|
)
|
|
Common
stock issued for license rights at $0.0001 per share
|
|
|
9,600,000
|
|
|
|
960
|
|
|
|
40
|
|
|
|
|
|
|
|
1,000
|
|
|
Capital
stock cancelled
|
|
|
(3,420,000
|
)
|
|
|
(342
|
)
|
|
|
342
|
|
|
|
|
|
|
|
-
|
|
|
Warrants
granted for consulting fees
|
|
|
|
|
|
|
|
|
|
|
2,162,611
|
|
|
|
|
|
|
|
2,162,611
|
|
|
Forgiveness
of related party debt
|
|
|
|
|
|
|
|
|
|
|
64,620
|
|
|
|
|
|
|
|
64,620
|
|
|
Common
stock issued for cash at $7.00, net of placement fees of
$2,058,024
|
|
|
4,200,050
|
|
|
|
420
|
|
|
|
27,341,928
|
|
|
|
|
|
|
|
27,342,348
|
|
|
Consultants
stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
88,122
|
|
|
|
|
|
|
|
88,122
|
|
|
Directors,
officers, employees stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
176,129
|
|
|
|
|
|
|
|
176,129
|
|
|
Net
loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,380,212
|
)
|
|
|
(4,380,212
|
)
|
|
Balance
as of December 31, 2006
|
|
|
14,200,050
|
|
|
|
1,420
|
|
|
|
29,924,410
|
|
|
|
(4,523,769
|
)
|
|
|
25,402,061
|
|
|
Capital
stock cancelled
|
|
|
(200,000
|
)
|
|
|
(20
|
)
|
|
|
20
|
|
|
|
|
|
|
|
-
|
|
|
Common
stock issued pursuant to consulting agreement at $4.90 per
share
|
|
|
20,000
|
|
|
|
2
|
|
|
|
97,998
|
|
|
|
|
|
|
|
98,000
|
|
|
Recapitalization
pursuant to merger
|
|
|
352,422
|
|
|
|
35
|
|
|
|
(37,406
|
)
|
|
|
|
|
|
|
(37,371
|
)
|
|
Consultants
stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
2,917,309
|
|
|
|
|
|
|
|
2,917,309
|
|
|
Directors,
officers, employees stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
3,721,485
|
|
|
|
|
|
|
|
3,721,485
|
|
|
Additional
proceeds from the sale of common stock in 2006
|
|
|
|
|
|
|
|
|
|
|
198,500
|
|
|
|
|
|
|
|
198,500
|
|
|
Net
loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,074,051
|
)
|
|
|
(17,074,051
|
)
|
|
Balance
as of December 31, 2007
|
|
|
14,372,472
|
|
|
|
1,437
|
|
|
|
36,822,316
|
|
|
|
(21,597,820
|
)
|
|
|
15,225,933
|
|
|
Common
stock issued as compensation for consulting services at $3.61 per
share
|
|
|
200,000
|
|
|
|
20
|
|
|
|
721,980
|
|
|
|
|
|
|
|
722,000
|
|
|
Common
stock issued as compensation for consulting services at $3.80 per
share
|
|
|
20,000
|
|
|
|
2
|
|
|
|
75,998
|
|
|
|
|
|
|
|
76,000
|
|
|
Cashless
exercise of warrants
|
|
|
112,215
|
|
|
|
11
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
-
|
|
|
Common
stock issued as compensation for consulting services at $0.32 per
share
|
|
|
50,000
|
|
|
|
5
|
|
|
|
15,995
|
|
|
|
|
|
|
|
16,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal
of liability from the sale of common stock in 2006
|
|
|
|
|
|
|
|
|
|
|
115,400
|
|
|
|
|
|
|
|
115,400
|
|
|
Consultants
stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
91,306
|
|
|
|
|
|
|
|
91,306
|
|
|
Directors,
officers, employees stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
4,704,039
|
|
|
|
|
|
|
|
4,704,039
|
|
|
Net
loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,987,273
|
)
|
|
|
(22,987,273
|
)
|
|
Balance
as of December 31, 2008
|
|
|
14,754,687
|
|
|
|
1,475
|
|
|
|
42,547,023
|
|
|
|
(44,585,093
|
)
|
|
|
(2,036,595
|
)
|
|
Consultants
stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,771
|
|
|
|
|
|
|
|
1,771
|
|
|
Directors,
officers, employees stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
385,848
|
|
|
|
|
|
|
|
385,848
|
|
|
Net
loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(176,830
|
)
|
|
|
(176,830
|
)
|
|
Balance
as of March 31, 2009
|
|
|
14,754,687
|
|
|
$
|
1,475
|
|
|
$
|
42,934,642
|
|
|
$
|
(44,761,923
|
)
|
|
$
|
(1,825,806
|
)
|
|
Consultants
stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,895
|
|
|
|
|
|
|
|
1,895
|
|
|
Directors,
officers, employees stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
661,780
|
|
|
|
|
|
|
|
661,780
|
|
|
Net
loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,055,629
|
)
|
|
|
(1,055,629
|
)
|
|
Balance
as of June 30, 2009
|
|
|
14,754,687
|
|
|
$
|
1,475
|
|
|
$
|
43,598,317
|
|
|
$
|
(45,817,552
|
)
|
|
$
|
(2,217,760
|
)
|
|
Common
stock issued as compensation for consulting services at $0.15 per
share
|
|
|
400,000
|
|
|
|
40
|
|
|
|
59,960
|
|
|
|
|
|
|
|
60,000
|
|
|
Consultants
stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
21
|
|
|
Directors,
officers, employees stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
670,481
|
|
|
|
|
|
|
|
670,481
|
|
|
Net
loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,540,952
|
)
|
|
|
(1,540,952
|
)
|
|
Balance
as of September 30, 2009
|
|
|
15,154,687
|
|
|
$
|
1,515
|
|
|
$
|
44,328,779
|
|
|
$
|
(47,358,504
|
)
|
|
$
|
(3,028,210
|
)
|
See
accompanying notes to interim financial statements
XCORPOREAL,
INC.
(a
Development Stage Company)
NOTES
TO INTERIM FINANCIAL STATEMENTS
September
30, 2009
(Unaudited)
Note 1 - Interim Reporting
While information presented in the
accompanying interim financial statements is unaudited, it includes normal and
recurring adjustments, which are, in the opinion of management, necessary to
present fairly the financial position, results of operations, and cash flows for
the interim period presented.
The
results of operations for the period ended September 30, 2009 are not
necessarily indicative of the results that can be expected for the year ending
December 31, 2009.
Note
2 – Nature of Operations and Going Concern Uncertainty
On
October 12, 2007, pursuant to a merger agreement with Xcorporeal, Inc.
(hereinafter referred to as “Operations”), our wholly-owned subsidiary, merged
with and into Operations, which became our wholly-owned subsidiary and changed
its name to “Xcorporeal Operations, Inc.” In connection with the merger, we
changed our name from CT Holdings Enterprises, Inc. (“CTHE”), to “Xcorporeal,
Inc.” In this merger, CTHE was considered to be the legal acquirer and
Xcorporeal to be the accounting acquirer. As the former stockholders of
Operations owned over 97% of the outstanding voting common stock of CTHE
immediately after the merger and CTHE was a public shell company, for accounting
purposes Operations was considered the accounting acquirer and the transaction
was considered to be a recapitalization of Operations. As a result of the
merger, we transitioned to a development stage company focused on researching,
developing, and commercializing technology and products related to the treatment
of kidney failure.
As of
November 12, 2009, we had available cash of approximately $120,000, excluding
restricted cash. We currently have a monthly burn rate of approximately
$116,000. Under these current conditions, we will have sufficient cash
approximately through the next 30 days from November 12, 2009, assuming no
further cash injections are received. In addition to previously taken
restructuring efforts, including reduction of personnel, we also reduced our
cash outflows by means of deferring 50% of the monthly compensation for 5 of our
6 active employees effective July 1, 2009 and currently continue to defer 50% of
the monthly compensation for 3 of our 6 active employees. Two of our engineers
are providing consulting services to a certain third party with which we have
agreed to an exclusivity period to negotiate a potential cooperative transaction
and such third party is fully reimbursing us for our employment expenses of our
two engineers including salaries and overhead. As of September 30, 2009, we
deferred approximately a total of $172,000 in employee compensation, recognized
under “Deferred compensation” on our balance sheet. We will consider, if
feasible, further reduction of our costs and expenses. Therefore, we must raise
additional funds to be able to continue our operations. If we are unable to
secure additional capital within the approximately the next 30 days from
November 12, 2009, we will be forced to file for bankruptcy and/or cease our
operations. The accompanying financial statements have been prepared on the
basis of a going concern and do not reflect any adjustments due to these
conditions.
We are
currently actively considering all potential transactions, which may include the
Proposed Transaction (as described below under Note 4, “Legal Proceedings”),
strategic partnership(s), disposition of substantially all or all of our assets
or a business combination with another entity in a transaction where we would
not be the surviving entity. As part of a potential strategic transaction
we have been considering, we have entered into an arrangement with a certain
third party, with which we have agreed to an exclusivity period to negotiate a
potential cooperative transaction, in exchange for a non-refundable payment of
$200,000 made to us by such third party, recognized under “Deferred gain” as of
September 30, 2009 on our balance sheet. The exclusivity period expires upon the
later of 100 calendar days from September 21, 2009 and the termination date of a
definitive agreement entered into with such third party, if any, at which time
the non-refundable exclusivity payment will be earned and recognized as other
income; however, if a definitive agreement for a transaction is entered into
with such third party prior thereto, the exclusivity payment will be credited
against the purchase price in such transaction. During the exclusivity period,
we will provide to the third party access to our employees, properties,
contracts, records and other related materials. In addition, in the mutual
interests of us and such third party and at the direction of the third party, in
connection with the potential strategic transaction, we actively resumed
research and development of our Portable Artificial Kidney product with direct
reimbursement of related expenditures by such third party. As of September 30,
2009, we incurred and expect reimbursement of approximately $43,000, recognized
under “Expense receivable” on our balance sheet and offset as a credit to our
statement of operations for the three months ended September 30, 2009, for these
expenses. Currently, the exclusivity period remains in effect and negotiations
continue. Among other reasons, due to the current economic conditions and those
particularly affecting healthcare related companies and because of our lack of
liquidity, there is no assurance that any such transaction will occur or that it
would be accretive to our stockholders or result in any payment being made to
our stockholders. If we are unsuccessful in obtaining immediate debt or equity
financing on terms acceptable to us or otherwise unsuccessful in addressing our
liquidity concerns or if we are unable to enter into any such transaction, this
could have a material adverse effect on our plan of operation, may result in the
curtailment of our operations and/or require us to file for
bankruptcy.
The approximate total of $55,000 under
“Expense receivable” recognized and offset as a credit to our statement of
operations as of September 30, 2009, consists of an anticipated payroll tax
refund in the amount of approximately $12,000 pursuant to COBRA premium
assistance payments and the reimbursable research and development expenses in
the amount of approximately $43,000 described above.
Effective as of September 4, 2009, our
common stock commenced trading on the Pink Sheets Electronic OTC Market, an
inter-dealer electronic quotation service of securities traded over-the-counter
also known as the Pink Sheets (“Pink Sheets”), under the symbol “XCRP.PK”. In
addition, effective as of the same date, our common stock was suspended from
trading on NYSE Amex LLC (formerly American Stock Exchange) (“Amex”). As part of
our analysis of ways to reduce costs and in light of the high cost of continuing
to be a public reporting company under the Exchange Act and complying with the
Sarbanes-Oxley Act of 2002, we are contemplating exploring and may be required
to explore other alternatives, such as deregistering under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or “going dark” and
having our common stock continue to be quoted on the Pink Sheets without being a
reporting company under Section 12(g) of the Exchange Act. We are
continuing to evaluate our options. Our recent move to the Pink
Sheets has provided meaningful savings to us as a result of the elimination
of fees associated with being listed on a national stock exchange and
deregistering under the Exchange Act would provide substantial savings as a
result of the elimination of the costs of being registered under the Exchange
Act. Analysis of deregistering under the Exchange Act involves not only
reducing costs, but also our expected sources of future capital as well as the
number of record holders of our outstanding common stock. Subject to our
satisfaction of certain conditions, a move to deregister under the Exchange Act
may result in a less liquid market for our shares, but would result in continued
public trading of our common stock by holders wishing to trade.
We expect to incur negative cash flows
and net losses for the foreseeable future. Based upon our current plans, we
believe that our existing cash reserves will not be sufficient to meet our
current liabilities and other obligations as they become due and payable.
Accordingly, within approximately the next 30 days we will need to seek to
obtain additional debt or equity financing through a public or private placement
of shares of our preferred or common stock or through a public or private
financing or we will need to effect a transaction for the sale or license of
substantially all or all of our assets. Our ability to meet such obligations
will depend on our ability to sell securities, borrow funds, reduce operating
costs, effect a transaction for the sale or license of substantially all or all
of our assets or enter into a business combination with another entity in a
transaction where we would not be the surviving entity or some combination
thereof. We may not be successful in obtaining necessary financing on acceptable
terms, if at all. As of September 30, 2009, we had negative working capital of
$3,275,833, accumulated deficit of $47,358,504, and total stockholders’ deficit
of $3,028,210. Cash used in operations for the nine months ended September 30,
2009 was $3,033,186. As a result of these and other conditions described herein,
there is substantial doubt about our ability to continue as a going concern. The
financial statements filed as part of this Quarterly Report on Form 10-Q do not
include any adjustments that might result from the outcome of this
uncertainty.
Our
operating activities and research and development efforts resulted in a net loss
of $23.0 million in 2008 and $2.8 million during the nine months ended September
30, 2009, including a reduction in arbitration liabilities of approximately $1.6
million and change in fair value of shares issuable of approximately $1.6
million as a result of the issuance of the Partial Final Award and the execution
of the Agreement and Stipulation Regarding Partial Final Award entered into
among us, Operations and National Quality Care, Inc. (“NQCI”) on August 7, 2009
in connection with the arbitration proceeding between us and NQCI, as more
fully discussed in Note 4, “Legal Proceedings” below. Both the reduction of
$1.6 million in arbitration liabilities and the change in fair value of $1.6
million were non-cash items. In addition, we invested $25.0 million in high
grade money market funds and marketable securities during the first quarter of
2007 and since then, we sold $24.7 million of these investments, leaving a
balance of $0.3 million as of September 30, 2009.
Pursuant
to the terms of the Partial Final Award issued on April 13, 2009, NQCI was
awarded an amount equal to approximately $1.87 million in attorneys’ fees and
costs consistent with the Arbitrator’s order issued on August 13, 2008 related
to the same and NQCI’s application for interim royalties and expenses was
denied. For a further discussion of the Partial Final Award, see Note 4, “Legal
Proceedings” below. We intend to pay the $1.87 million in attorneys’ fees and
costs due to NQCI from the proceeds received in connection with the consummation
of the Proposed Transaction, or another Transaction (each term as defined below
in Note 4, “Legal Proceedings”), if such transaction is consummated, or upon
raising of additional capital to sufficiently satisfy the award and or other
immediate liquidity requirements, which funds we will need to obtain within
approximately the next 30 days from November 12, 2009. Pursuant to the terms of
the Agreement and Stipulation Regarding Partial Final Award entered into in
connection with the Memorandum, as more fully explained below in Note 4, “Legal
Proceedings”, NQCI agreed not to attempt before December 1, 2009 to execute on
or file any motion, petition or application or commence any proceeding seeking
the collection of such award of attorneys’ fees and costs, which is intended to
allow us, Operations and NQCI a sufficient period within which to execute a
definitive agreement in connection for the Proposed Transaction or a
Transaction. Such period shall automatically be extended for a period of 120
days from December 1, 2009 if the acquisition agreement is executed in full on
or before December 1, 2009. In addition, if the execution of the acquisition
agreement occurs on or before December 1, 2009, the December 1, 2009 deadline
shall automatically be further extended for a period of 60 days for each
amendment to a proxy or information statement related to the transactions
contemplated by such definitive agreement, filed by us in response to comments
made by the Securities and Exchange Commission (the “SEC”). However, there can
be no assurances that the Proposed Transaction or any other Transaction will
occur.
We are a
medical device company that has been engaged in developing an innovative
extra-corporeal
platform
technology to be used in devices to replace the function of various human
organs. We hope that the platform will lead to the following three initial
products: (i) a Portable Artificial Kidney (“PAK”) for attended care Renal
Replacement Therapy, (ii) a PAK for home hemodialysis and (iii) a Wearable
Artificial Kidney (“WAK”) for continuous ambulatory hemodialysis. Our rights to
the WAK derive in part from the License Agreement between Operations and NQCI,
dated as of September 1, 2006 (“License Agreement”), pursuant to which we
obtained a perpetual exclusive license in the Technology. See Note 4, “Legal
Proceedings” below.
We have
focused much of our efforts on development of the PAK, which we do not believe
has been derived from the technology covered by the License Agreement. Through
the productive research and development efforts of the PAK, we have completed
functional prototypes of our attended care and home PAKs that we hope to
commercialize after 510(k) notification clearance from the Food and Drug
Administration (“FDA”) which we hope to submit sometime in the future. Prior to
the 510(k) submission to the FDA for clinical use under direct medical
supervision, the units will undergo final verification and validation. It
generally takes 4 to 12 months from the date of a 510(k) submission to obtain
clearance from the FDA, although it may take longer. We hope to begin to shift
out of the development and build phase of the prototype equipment and into
product phase, which should help us to reduce the related spending on research
and development costs as well as consulting and material costs. See Note 15,
“Product Development Agreement” below. With this transition, we hope to shift
available resources towards verification and validation of our devices along
with developing a marketing plan for the PAK. This plan will be dependant on our
ability to raise funds to satisfy our current liabilities and other obligations
as they become due and obtaining additional debt or equity financing and
otherwise continuing our business operations. If we are unsuccessful in doing
so, we will not be able to submit a 510(k) notification with the FDA for this
product.
In addition, we have used some of our
resources for the development of the WAK of which we have demonstrated a
feasibility prototype. Commercialization of the WAK will require development of
a functional prototype and likely a full pre-market approval by the FDA, which
could take several years. Subject to us continuing our business operations
and/or entering into a transaction for the sale of substantially all or all of
our assets or a business combination with another entity in a transaction where
we would not be the surviving entity, we will determine whether to devote
available resources to the development of the WAK.
Because
neither the PAK nor the WAK is yet at a stage where it can be marketed
commercially, we are not able to predict the portion of our future business
which will be derived from each.
Note 3 – Development Stage
Company
We are a
development stage company, devoting substantially all of our efforts to the
research, development, and commercialization of kidney failure treatment
technologies.
Risks and Uncertainties —
We
operate in an industry that is subject to intense competition, government
regulation, and rapid technological change. Our operations are subject to
significant risk and uncertainties including financial, operational,
technological, legal, regulatory, and other risks associated with a development
stage company, including the potential risk of business failure.
Note
4 – Legal Proceedings
Partial
Final Award
On
December 1, 2006, Operations initiated the arbitration proceeding (the
“Proceeding”) against NQCI for its breach of the License Agreement. On April 13,
2009, the arbitrator (the “Arbitrator”) issued a Partial Final Award (“Partial
Final Award”) which resolved the remaining issues that were pending for
decision in the Proceeding. The Partial Final Award provided that we and
Operations shall have a perpetual exclusive license (“Perpetual License”) in the
Technology (as defined in the Merger Agreement, dated as of September 1, 2006
(the “Merger Agreement”), among us, Operations and NQCI and the License
Agreement) primarily related to the WAK and any other Technology contemplated to
be transferred under the Technology Transaction (as defined in the Merger
Agreement). Under the terms of the Partial Final Award, in consideration of the
Perpetual License to us, NQCI was awarded a royalty of 39% of all net income,
ordinary or extraordinary, received by us (“Royalty”) and NQCI is to receive 39%
of any shares received in any merger transaction to which we or Operations may
become a party. NQCI’s interest as licensor under the Perpetual License shall be
freely assignable. In addition, the Partial Final Award provided that we shall
pay NQCI an amount equal to approximately $1,871,000 in attorneys’ fees and
costs previously awarded by the Arbitrator in an order issued on August 13,
2008, that NQCI’s application for interim royalties and expenses was denied and
that NQCI was not entitled to recover any additional attorneys’ fees. Finally,
the Partial Final Award also provides that the Arbitrator retained jurisdiction
to supervise specific performance of the terms and obligations of the Award
including, but not limited to, any dispute between the parties over the manner
of calculation of the Royalty. The Partial Final Award was issued as a result of
each party’s request for the Arbitrator to order alternative relief due the
parties’ inability to proceed with the Technology Transaction. For a full
description of the Proceeding and the Arbitrator’s interim awards issued in
connection therewith, please see Item 3 - Legal Proceedings of our Annual Report
on Form 10-K for the year ended December 31, 2008 and our subsequent reports
filed with the SEC.
As a result of the award to NQCI under
the terms of the Partial Final Award of approximately $1.87 million in
attorneys’ fees and costs but denial of NQCI’s application of interim expenses,
we reversed the accruals for the related expenses resulting in an approximately
$1.0 million non-operating reduction in arbitration liabilities to the statement
of operations for the nine months ended September 30, 2009. The $1.87
million award of NQCI’s attorneys’ fees and costs was recognized as “Other
expenses” during the year ended December 31, 2008, and remains accrued under
“Accrued legal fees & licensing expense” on our balance sheet as of
September 30, 2009.
Binding
Memorandum of Understanding
On August
7, 2009, to clarify, resolve and settle certain issues and any disputes that
have arisen between us and NQCI with respect to the Final Partial Award and the
Proceeding, we and Operations (collectively, the “Xcorp Parties”) entered into a
Binding Memorandum of Understanding (the “Memorandum”) with NQCI (NQCI, together
with the Xcorp Parties is collectively referred to as the “Parties”). Under the
terms of the Memorandum, among other things, the Parties agreed to: (i) assign
and transfer all of their rights, title and interest in and to
certain technology comprised of a certain U.S. Patent Application and
related intellectual property (as described in the Memorandum) (the “Polymer
Technology”) to a limited liability company to be formed under the laws of the
State of Delaware (the “Joint Venture”), which will be jointly owned by the
Parties and through which the Parties will jointly pursue the development and
exploitation of the Polymer Technology, and (ii) negotiate, execute and deliver
within 60 days following the Stockholder Vote Date (as defined below) an
operating agreement governing the operation of the Joint Venture based on the
terms set forth in the Memorandum (the “Operating Agreement”).
The Xcorp
Parties and NQCI will be the initial two members of the Joint Venture (Xcorp
Parties’ interest shall be held of record by either us or Operations, as
determined by the Xcorp Parties) with NQCI and the Xcorp Parties having a 60%
and 40% membership interest (the “Membership Interests”) in the Joint Venture,
respectively. Subject to such other terms and provisions as the Parties may
agree upon, the Operating Agreement shall include the following
terms:
|
|
·
|
the
Joint Venture shall be managed by a three-member board of managers (the
“JV Board”);
|
|
|
·
|
until
such time as NQCI fails to hold a greater percentage of the Membership
Interests than the Xcorp Parties, two members of the JV Board (each, a “JV
Manager”) shall be designated by NQCI and until such time as the Xcorp
Parties fail to hold at least 10% of the Membership Interests and one JV
Manager shall be designated by the Xcorp
Parties;
|
|
|
·
|
NQCI
shall have the right to appoint a Chairman and/or a Chief Executive
Officer of the Joint Venture, who will have day-to-day management
authority with respect to the Joint Venture, subject to oversight by the
JV Board and the terms and conditions of the Memorandum and the Operating
Agreement, and a Chief Scientific Officer, who may be employed by the
Joint Venture upon customary and reasonable terms and
conditions;
|
|
|
·
|
if
a JV Manager provides additional services to the Joint Venture as an
employee or a consultant, he or she may be compensated by the Joint
Venture as is mutually reasonably approved in writing by the Parties;
provided that with the exception of reimbursement of reasonable expenses
incurred in connection with their services performed for the Joint Venture
in their official officer capacity, neither Robert Snukal, the Chief
Executive Officer of NQCI, nor Kelly McCrann, our Chairman and Chief
Executive Officer (or such other persons as may be appointed or elected in
their place), shall in any event receive a salary or other compensation
from the Joint Venture;
|
|
|
·
|
except
as otherwise required by law, all decisions related to the operations of
the Joint Venture shall be made by a majority of the JV Board, except that
certain actions (as described in the Memorandum) by the Joint Venture or
any of its subsidiaries shall require the affirmative vote or written
consent of the holders of at least 90.1% of the Membership Interests then
outstanding; and
|
|
|
·
|
from
and after August 1, 2009, the Xcorp Parties shall pay 61% and NQCI shall
pay 39% of the reasonable costs and expenses related to protecting,
preserving and exploiting the Licensed Technology (as defined
below).
|
In
addition, the Xcorp Parties agreed to contribute $500,000 in cash to the bank
account established by the Joint Venture, on the later of (x) three business
days of the consummation of the first to occur of the Proposed Transaction or
another Transaction (as such terms are defined below) and (y) the date on which
the Joint Venture establishes such bank account, for which the Parties (or their
representatives) shall be joint signatories. Furthermore, provided that the
Proposed Transaction or a Transaction has been consummated, NQCI agreed to
contribute on the Xcorp Parties’ behalf an additional $500,000 in cash to the
Joint Venture at such time as the JV Board reasonably determines that such funds
are required to facilitate the Joint Venture’s development of the Polymer
Technology. This additional contribution amount will be reimbursed to NQCI by
the Xcorp Parties from the first funds distributed to the Xcorp Parties by the
Joint Venture (other than pursuant to certain quarterly tax related
distributions). Additionally, with respect to the Joint Venture, the Parties
agreed to certain liquidity rights consisting of customary rights of first
refusal and co-sale rights, unlimited piggyback registration rights and the
right to up to two demand registrations (subject to lock-ups and other
underwriter requirements), customary preemptive rights (available to a member of
the Joint Venture for so long as such member holds at least 10% of the
Membership Interests then outstanding), customary anti-dilution protections and
other standard distribution and information rights.
The
Parties also agreed to cooperate as reasonably required by the Xcorp Parties in
order for us to consummate a transaction involving an exclusive license
and/or sale to a third party (the “Proposed Transaction”) of a part,
substantially all or all of our technology and other intellectual property
rights licensed to us under the License Agreement, other than the Polymer
Technology (the “Licensed Technology”), or any other transaction (a
“Transaction”) involving the sale, license or other disposition by us of a part,
substantially all or all of the Licensed Technology. The Parties further agreed
that upon the consummation of a Proposed Transaction, they will allocate any
license fees and any other additional consideration received in such transaction
between the Parties (collectively, the “Transaction Proceeds”), in accordance
with the terms set forth in the Memorandum and summarized below, subject to the
actual terms of the Proposed Transaction, when and if such transaction is
consummated. However, there can be no assurances that the Proposed Transaction
or any other Transaction will occur or that the terms thereof will be similar to
those provided for in the Memorandum and summarized below, and the actual terms
of the Proposed Transaction or another Transaction will be provided for in the
definitive agreement entered into in connection with such
transaction.
|
|
·
|
NQCI
shall receive 36.96% of the Transaction Proceeds (which amount is intended
to represent an amount equal to 39% of the net royalty payments provided
for by the terms of the Partial Final Award following the deduction
therefrom of the Xcorp Parties expenses incurred in connection with
the Proposed Transaction), plus $1,871,430 in attorneys’ fees and costs
payable to NQCI pursuant to the terms of the Partial Final Award
(collectively, the “NQCI Amount”);
|
|
|
·
|
The
third party will pay the Xcorp Parties $250,000 upon the earlier of the
signing of a letter of intent and an acquisition agreement providing for
the Proposed Transaction, approximately 50% (less the foregoing $250,000)
of the Transaction Proceeds payable in cash to the Xcorp Parties upon the
closing of the Proposed Transaction (the “First Installment”),
approximately 25% of such proceeds such number of months after the
consummation of the Proposed Transaction as provided in the documents
governing the Proposed Transaction (the “Second Installment”)
and 25% of such
proceeds after the payment of the Second Installment (the “Third
Installment”, and collectively with the First Installment and the Second
Installment, the
“Installments”).
|
|
|
·
|
The
Transaction Proceeds shall be allocated between the Parties as
follows: (i) $250,000 to the Xcorp Parties, payable to the Xcorp
Parties on the earlier of the signing of a letter of intent and an
acquisition agreement providing for the Proposed Transaction, (ii) to
NQCI, an amount equal to the NQCI Amount less the sum of the Second
Installment and the Third Installment, payable to NQCI within seven
business days of receipt of the First Installment, (iii) to the Xcorp
Parties, the remainder of the First Installment, (iv) to NQCI, the amount
of the Second Installment, payable to NQCI within three business days of
receipt of the Second Installment, (v) to NQCI, the amount of the Third
Installment, payable to NQCI within three business days of receipt of the
Third Installment (the “Third NQCI Payment”) and (vi) the remainder
of the Transaction Proceeds shall be retained by the Xcorp Parties;
provided that under no circumstances shall NQCI be entitled to or receive
from the Transaction Proceeds an amount greater than the NQCI
Amount;
|
|
|
·
|
In
the event any of the Installments are paid by the third party in other
than cash, NQCI shall receive its proportionate share of such
consideration in accordance with the terms of the Memorandum;
and
|
|
|
·
|
The
Xcorp Parties shall also pay to NQCI 39% of any royalty or other payments
received by the Xcorp Parties in excess of the Transaction Proceeds in
connection with the Proposed
Transaction.
|
In the event that the timing or the
amount of the payments from the third party under the terms of the Proposed
Transaction (or another Transaction) is other than as contemplated in the
Memorandum, the Parties shall make such equitable adjustments as are required to
preserve, to the maximum extent possible, the intent of the distribution of
Transaction Proceeds provisions of the Memorandum. In the event that the Xcorp
Parties do not consummate the Proposed Transaction or if the terms of the
Proposed Transaction are other than what is contemplated under the Memorandum
and the Xcorp Parties instead consummate an alternative Transaction, the Parties
shall apply the methodology specified in the Memorandum to the maximum extent
possible in order to allocate between them the proceeds of such
Transaction.
Additionally, NQCI agreed to use its
best efforts to enter into an agreement with a certain third party pursuant to
which such third party and NQCI will each (a) confirm and acknowledge (i) their
joint ownership of the Polymer Technology, (ii) the existence and validity of
the exclusive license to NQCI of the medical applications of the Polymer
Technology and (iii) the existence and validity of the exclusive license to such
third party of the non-medical applications of the Polymer Technology; and
(b) agree to prepare, execute and deliver as promptly as practicable upon
request by either of such parties a definitive license agreement reflecting the
terms and conditions of the foregoing exclusive licenses. The Parties also
agreed to certain customary representation and warranty, indemnity and other
miscellaneous terms.
The
foregoing summary of the Memorandum and the transactions contemplated thereby
does not purport to be complete and is subject to, and qualified in its entirety
by, the full text of the Memorandum, annexed as Exhibit 10.1 to our Quarterly
Report on Form 10-Q for the six-month period ended June 30, 2009, filed with the
SEC on August 13, 2009.
Agreement
and Stipulation Regarding Partial Final Award
In
connection with the issuance of the Partial Final Award and the execution of the
Memorandum between the Parties, on August 7, 2009 Operations entered into an
Agreement and Stipulation Regarding Partial Final Award (the “Stipulation”) with
NQCI. Pursuant to the terms of the Stipulation, Operations and NQCI agreed (i)
not to challenge the terms of the Partial Final Award or any portion of such
award, (ii) that any of the Parties may, at any time, seek to confirm all but
not part of the Partial Final Award through the filing of an appropriate
petition or motion with the appropriate court and in response to such action to
confirm the Partial Final Award, no Party will oppose, object to or in any way
seek to hinder or delay the court’s confirmation of the Partial Final Award, but
will in fact support and stipulate to such confirmation, (iii) to waive any and
all right to appeal from, seek appellate review of, file or prosecute any
lawsuit, action, motion or proceeding, in law, equity, or otherwise,
challenging, opposing, seeking to modify or otherwise attacking the confirmed
Partial Final Award or the judgment thereon and (iv) subject to certain
conditions, NQCI will not attempt before December 1, 2009 (the “Non-Execution
Period”) to execute on or file any motion, petition or application or
commence any proceeding seeking the collection of any attorneys’ fees that have
been awarded in NQCI’s favor under the terms of the Partial Final Award, which
is intended to allow the Parties a sufficient period within which to execute a
definitive acquisition agreement (the “Acquisition Agreement”) in connection
with the Proposed Transaction or a Transaction; provided that such period shall
automatically be extended for a period of 120 days from December 1, 2009 (the
“Extension Date”) if the Acquisition Agreement is executed in full on or before
December 1, 2009. If the execution of the Acquisition Agreement occurs on or
before December 1, 2009, the Extension Date shall automatically be further
extended for a period of 60 days for each amendment to a proxy or information
statement related to the transactions contemplated by the Acquisition Agreement,
filed by us in response to comments made by the SEC.
In the
event we enter into an Acquisition Agreement for the Proposed Transaction or a
Transaction, we anticipate that we will call a special or annual meeting of our
stockholders at which our stockholders will be asked to vote on the terms of the
Proposed Transaction or a Transaction, pursuant to a proxy or information
statement that we would file with the SEC in connection therewith (the
“Stockholder Vote Date”). If and when we do file such proxy or information
statement with the SEC, our stockholders and other investors are urged to
carefully read such statement and any other relevant documents filed with the
SEC when they become available, because they will contain important information
about us and the transaction. Copies of such proxy or information statement and
other documents filed by us with the SEC will be available at the Web site
maintained by the SEC at www.sec.gov.
The
foregoing summary of the Stipulation and the transactions contemplated thereby
does not purport to be complete and is subject to, and qualified in its entirety
by, the full text of the Stipulation, annexed as Exhibit 99.2 to our Quarterly
Report on Form 10-Q for the six-month period ended June 30, 2009, filed with the
SEC on August 13, 2009.
As a result of the issuance of the
Partial Final Award and the execution of the Stipulation the Technology
Transaction will not occur, we are no longer obligated to issue the 9,230,000
shares of our common stock (the “Shares”) to NQCI, formerly required pursuant to
the terms of the Second Interim Award issued by the Arbitrator on August 4,
2008, and we are no longer required to file a resale registration statement
under the Securities Act of 1933, as amended, for the Shares. Accordingly, the
net fair value of $1,569,100 for the Shares accrued under “Shares issuable” as
of December 31, 2008 was reversed resulting in an adjustment of $1,569,100 to
non-operating income in the statement of operations, recognized as “Change in
and reduction of shares issuable”, for the nine months ended September 30,
2009.
In addition, pursuant to the terms of
the Stipulation, we reversed the accruals for the minimum royalty under the
terms of the License Agreement, resulting in a $645,833 non-operating reduction
in arbitration liabilities to the statement of operations for the nine months
ended September 30, 2009. See Note 12, “License Agreement” below.
In the event we are unable to comply
with the terms of the Stipulation, this could have a material adverse effect on
our capital structure, business and financial condition.
Note
5 – Cash Equivalents and Marketable Securities
We invest
available cash in short-term commercial paper, certificates of deposit, money
market funds, and high grade marketable securities. We consider any liquid
investment with an original maturity of three months or less when purchased to
be cash equivalents. Investments, including certificates of deposit with
maturity dates greater than three months when purchased, and which have readily
determined fair values, are classified as available-for-sale investments and
reflected in current assets as marketable securities at fair market value.
Historically, we have complied with our investment policy which requires that
all investments be investment grade quality and no more than ten percent of our
portfolio may be invested in any one security or with one institution. However,
recently, our ability to continue to follow this policy has not been practicable
due to the small aggregate amount of investment funds that has been remaining
for investment. As a result, as of September 30, 2009, all of our cash was held
in a high grade money market fund.
Restricted
cash represents deposits secured as collateral for a letter of credit pursuant
to our operating facility lease agreement at September 30, 2009.
Note
6 – Fair Value Measurements
Effective
January 1, 2008, we adopted Accounting Standards Codification (“ASC”) 820
Fair Value Measurements and
Disclosures
(“ASC 820”) (formerly Statement of Financial Standards No.
(“FAS”) 157
Fair Value
Measurements
). ASC 820 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
This statement does not require any new fair value measurements; rather, it
applies to other accounting standards that require or permit fair value
measurements. In February 2008, ASC 820-10-65
Fair Value Measurements and
Disclosures,
subtopic
Overall,
section
Transition and Open Effective Date
Information
(“ASC 820-10-65”) (formerly Financial Accounting Standards
Board (“FASB”) Staff Positions (“FSP”) FAS 157-2
Effective Date of FASB Statement
No. 157
), was issued, which delays the effective date of ASC 820 to
fiscal years and interim periods within those fiscal years beginning after
November 15, 2008 for non-financial assets and non-financial liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). We elected to defer the
adoption of the standard for these non-financial assets and
liabilities.
Fair
value is defined under ASC 820 as the price that would be received to sell an
asset or paid to transfer a liability in the principal or most advantageous
market in an orderly transaction between market participants on the measurement
date. ASC 820 also establishes a three-level hierarchy, which requires an entity
to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value.
Beginning
January 1, 2008, assets and liabilities recorded at fair value in the balance
sheets are categorized based upon the level of judgment associated with the
inputs used to measure their fair value. Level inputs, as defined by ASC 820,
are as follows:
|
|
·
|
Level
I - inputs are unadjusted, quoted prices for identical assets or
liabilities in active markets at the measurement
date.
|
|
|
·
|
Level
II - inputs, other than quoted prices included in Level I, that are
observable for the asset or liability through corroboration with market
data at the measurement date.
|
|
|
·
|
Level
III - unobservable inputs that reflect management’s best estimate of what
market participants would use in pricing the asset or liability at the
measurement date.
|
The
following table summarizes fair value measurements by level at September 30,
2009 for assets and liabilities measured at fair value on a recurring
basis:
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
|
Cash
and cash equivalents
|
|
$
|
35,734
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
35,734
|
|
|
Marketable
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Corporate
securities fixed rate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Money
market fund
|
|
|
288,703
|
|
|
|
-
|
|
|
|
-
|
|
|
|
288,703
|
|
|
Restricted
cash
|
|
|
305,871
|
|
|
|
-
|
|
|
|
-
|
|
|
|
305,871
|
|
|
Total
assets (1)
|
|
$
|
630,308
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
630,308
|
|
(1) The
carrying amount for cash and cash equivalents, marketable securities, and
restricted cash approximates the fair value of such instruments due to the
variable rate of interest and/or the short maturities of these financial
instruments.
ASC
825-10-50
Financial
Instruments,
subtopic
Overall,
section
Disclosure
(“ASC 825-10-50”)
(formerly FAS 107
Disclosures
about Fair Value of Financial Instruments)
, requires disclosure of fair
value information about certain financial instruments for which it is practical
to estimate that value. The carrying amounts reported on our balance sheet for
cash and cash equivalents, marketable securities and restricted cash
approximates the fair value because of the variable rate of interest and/or
short-term maturity of these financial instruments. The total aggregate carrying
value of our cash and cash equivalents, marketable securities and restricted
cash was $630,308 and $3,664,974 as of September 30, 2009 and December 31, 2008,
respectively, which approximates the total aggregate fair value at the end of
the same periods. As considerable judgment is required to develop estimates of
fair value, the estimates are not necessarily indicative of the amounts we could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts.
Short-term
investments classified as available-for-sale were as follows:
|
|
|
September 30, 2009
|
|
|
|
|
Aggregate Fair
Value
|
|
|
Gross Unrealized
Gains / (Losses)
|
|
|
Estimated Fair
Value
|
|
|
Commercial
paper
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Corporate
securities fixed rate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
We review
impairments associated with the above in accordance with ASC 320-10-35
Investments-Debt and Securities,
subtopic
Overall,
section
Subsequent
Measurement
(“ASC 320-10-35”) (formerly FAS 115
Accounting for Certain Investments
in Debt and Equity Securities
and FSP FAS 115-1 and FAS 124-1
The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments
) to determine the
classification of the impairment as temporary or other-than-temporary. However,
due to the small aggregate amount of available investment funds, we did not hold
investments in commercial paper and/or high grade marketable securities, but
rather held our cash in a high grade money market fund as of September 30, 2009.
There were no short-term investments classified as available-for-sale as of
September 30, 2009 and as a result, the related impairments review was not
necessary.
There
were no gross unrealized gains or losses as of September 30, 2009.
Note
7 – Property and Equipment
Property
and equipment consist of the following at September 30, 2009:
|
Property
and equipment
|
|
$
|
474,244
|
|
|
Accumulated
depreciation
|
|
|
(227,440
|
)
|
|
Property
and equipment, net
|
|
$
|
246,804
|
|
Depreciation
expense for the three and nine months ended September 30, 2009 was $30,658 and
$92,230, respectively, compared to $27,238 and $75,792, respectively, for the
same periods in 2008.
During
the three months ended September 30, 2009, we did not dispose of any fixed
assets. During the nine months ended September 30, 2009, we disposed of two
fixed assets decreasing our property and equipment by an aggregate of $2,514 and
as a result, we recognized a total net loss on disposal in the amount of
$382.
In
accordance with ASC 360-10-35
Property, Plant, and Equipment,
subtopic
Overall,
section
Subsequent
Measurement
(“ASC 360-10-35”) (formerly FAS 144
Accounting for the Impairment or
Disposal of Long-Lived Assets)
, we performed a test of recoverability on
our property and equipment as of September 30, 2009. As a result of this test,
we determined our property and equipment not to be impaired and the carrying
value to be recoverable.
Formerly,
pursuant to the terms of the Second Interim Award issued on August 4, 2008,
which stated that the Technology Transaction was required to be submitted for
approval by our stockholders and subject to such approval, the Shares were
required to be issued to NQCI to effectuate the transaction, we accrued for the
issuance of the Shares to NQCI. As the Second Interim Award stated that we had
to issue the Shares upon the closing of the Technology Transaction and we were
unable to consummate the transaction, such contingency not being within our
control, we therefore, recorded the issuance as a liability, rather than as an
equity issuance. As of December 31, 2008, we accrued for the Shares to be issued
to NQCI in accordance with ASC 450
Contingencies
(“ASC 450”)
(formerly FAS 5
Accounting for
Contingencies)
, with the initial fair value of the Shares measured on
August 4, 2008, the date of the Second Interim Award.
Until issued, the
Shares were marked to market in accordance with ASC 815-40
Derivatives and Hedging,
subtopic
Contracts in
Entity’s Own Equity
(“ASC 815-40”) (formerly Emerging Issues Task Force
No. (“EITF”) 00-19
Accounting
for Derivative Financial Instruments Indexed to and Potentially Settled in, a
Company’s Own Stock
), with subsequent changes in fair value recorded as
non-operating change in fair value of shares issuable to our statement of
operations. The fair value of the Shares was measured using the closing price of
our common stock on the reporting date. The measured fair value of $10,153,000
for the accrued Shares on August 4, 2008, the date of the Second Interim Award,
was accrued under “Shares issuable” and expensed to “Research and development.”
From marking to market, the fair value of the Shares was revalued at $1,569,100
as of December 31, 2008. The resulting non-operating adjustment in fair value of
$8,583,900 to the statement of operations for the year ended December 31, 2008
was recognized as “Change in fair value of shares issuable.”
As a
result of the issuance of the Partial Final Award and the execution of the
Stipulation and the Memorandum, see Note 4, “Legal Proceedings” above, the
Technology Transaction will not occur, we are no longer obligated to issue the
Shares to NQCI, we are no longer required to file a resale registration
statement under the Securities Act covering the Shares and the Technology
Transaction will not be submitted to our stockholders for approval. Accordingly,
the net fair value of $1,569,100 for the Shares accrued under “Shares issuable”
as of December 31, 2008, was reversed due to the arbitrator’s Partial Final
Award, resulting in an adjustment of $1,569,100 to non-operating income in the
statement of operations, recognized as “Change in and reduction of shares
issuable”, for the nine months ended September 30, 2009.
As of
February 22, 2008, we entered into a 5-year lease agreement and relocated our
corporate office to a location in Los Angeles, CA. The total lease payments will
be $1,096,878 over the lease term. As of September 30, 2009, our remaining total
lease payments for our corporate office were $796,068.
The
following is a schedule by years of future minimum lease payments required under
the 5-year corporate office lease as of September 30, 2009:
|
Year
ending December 31:
|
|
|
|
|
|
|
2009
|
|
$
|
54,313
|
|
|
( 1
)
|
|
2010
|
|
|
224,650
|
|
|
|
|
2011
|
|
|
233,528
|
|
|
|
|
2012
|
|
|
242,842
|
|
|
|
|
2013
|
|
|
40,735
|
|
|
( 2
)
|
|
|
|
|
|
|
|
|
|
Total
minimum payments required
|
|
$
|
796,068
|
|
|
|
( 1 )
excludes lease payments made through September 30, 2009
( 2 )
initial term of the lease agreement ends February 2013
In
October 2008, we entered into a 5-year lease agreement through November 26,
2013, for our operating facility in Lake Forest, CA. The lease agreement
includes a tenant improvement allowance of $363,800, 50% of which can be applied
to rent payments with the remaining 50% applied to tenant improvement and
related expenditures. As of September 30, 2009, we expended $88,865 in
improvement and related expenses. After the drawdown of the 50% of the tenant
improvement allowance applicable to rent payments, in lieu of reimbursement to
us of cash by the landlord for the incurred improvements, the $88,865 will be
applied to rent payments with $45,605 applied as of September 30, 2009. The
remaining $43,260 was recognized under “Tenant improvement allowance receivable”
on our balance sheet as of September 30, 2009. The total lease payments,
including the 50% of the tenant improvement allowance applied to rent payments,
will amount to $1,367,507 over the lease term. As of September 30, 2009, our
remaining total lease payments for our operating facility are
$1,276,581.
The
following is a schedule, by years, of future minimum lease payments required
under the 5-year operating facility lease as of September 30,
2009:
|
Year
ending December 31:
|
|
|
|
|
|
|
2009
|
|
|
71,590
|
|
|
( 1
)
|
|
2010
|
|
|
293,722
|
|
|
|
|
2011
|
|
|
303,994
|
|
|
|
|
2012
|
|
|
314,266
|
|
|
|
|
2013
|
|
|
293,009
|
|
|
( 2
)
|
|
|
|
|
|
|
|
|
|
Total
minimum payments required
|
|
$
|
1,276,581
|
|
|
|
( 1 )
excludes lease payments made and applied through September 30, 2009
( 2 )
initial term of the lease agreement ends November 2013
All of
the space is in good condition and we expect it to remain suitable to meet our
needs for the foreseeable future. We intend to consolidate our offices and
sublease our current corporate office located in Los Angeles, California. As of
September 30, 2009, we continued to utilize both locations.
Note
10 – Interest Income
Interest
income of $915 and $11,657 and $44,871 and $278,941 was reported for the three
and nine months ended September 30, 2009 and 2008, respectively.
Note
11 – Related Party Transactions
In
connection with the contribution of certain assets to us by Consolidated
National, LLC (“CNL”),
on August
31, 2006
we issued
to CNL of which Terren Peizer, formerly our Executive Chairman and currently a
member of our Board of Directors, who beneficially owned 41.1% of our
outstanding common stock as of September 30, 2009, is the sole managing member
and beneficial owner, an aggregate of 9,600,000 shares of our common stock of
which 6,232,596 shares are still held by CNL.
We
previously entered into an Executive Chairman Agreement with Mr. Peizer for an
initial term of three years, with automatic one-year renewals. Mr. Peizer served
as our Executive Chairman until October 2008. For his services as our Executive
Chairman, Mr. Peizer was (i) scheduled to receive compensation in the amount of
$450,000 per annum as of July 1, 2007, with a signing bonus of $225,000,
(ii) scheduled to receive an annual bonus at the discretion of our Board of
Directors based on our performance goals and targeted at 100% of his base
compensation and (iii) eligible to participate in any of our equity incentive
plans. In the event Mr. Peizer’s position was terminated without good cause
or he resigned for good reason, we were obligated to pay Mr. Peizer a lump
sum in an amount equal to three years’ base compensation plus 100% of the
targeted bonus. Pursuant to the Executive Chairman Agreement, Mr. Peizer was
paid as an independent consultant. On August 19, 2008, Mr. Peizer and we agreed
that Mr. Peizer would cease serving as our Executive Chairman and would defer
cash payments of his compensation until further notice. Pursuant to Mr. Peizer's
non-involvement in operational aspects of the Company, we did not accrue for
related services for the three months ended September 30, 2009; however, Mr.
Peizer continues to be a member of our Board of Directors. As of September 30,
2009, we accrued, under “Accrued professional fees”, $393,750 for his deferred
compensation. We are currently in discussions with Mr. Peizer for the
forgiveness of the entire deferred compensation amount.
Dr.
Victor Gura, our Chief Medical and Scientific Officer, owns 15,497,250 shares of
common stock of NQCI (or approximately 20.9% of NQCI’s common stock outstanding
as of January 31, 2009), the company with which we entered into the License
Agreement. Such shares include 800,000 shares owned by Medipace Medical Group,
Inc., an affiliate of Dr. Gura (or approximately 1.1% of NQCI’s common stock
outstanding as of January 31, 2009), and 250,000 shares subject to warrants held
by Dr. Gura which are currently exercisable (or approximately less than 1.0% of
NQCI’s common stock outstanding as of January 31, 2009).
Dr. Gura
maintains an office located in Beverly Hills, California. Pursuant to a
reimbursement agreement effective January 29, 2008, we reimburse 50% of the
rental and 50% of his monthly parking. The term of the agreement commenced on
April 23, 2007, the date of the office lease agreement, and will continue until
the date on which Dr. Gura ceases to use the remote office to perform his duties
as our Chief Medical and Scientific Officer. From commencement through September
30, 2009, we incurred $2,317 and $59,542, reimbursed Dr. Gura $2,216 and
$55,873, and deferred $101 and $3,669 for the 50% reimbursement of the monthly
parking and rental, respectively.
Note
12 – License Agreement
On August
31, 2006, we entered into a Contribution Agreement with CNL. We issued CNL
9,600,000 shares of common stock in exchange for (a) the right, title, and
interest to the name “Xcorporeal” and related trademarks and domain names, and
(b) the right to enter into a License Agreement with NQCI, pursuant to which we
obtained the exclusive rights to the technology relating to our kidney failure
treatment and other medical devices which, as listed under “Technology” on the
License Agreement, are “all existing and hereafter developed Intellectual
Property, Know-How, Licensor Patents, Licensor Patent Applications, Derivative
Works and any other technology, invented, improved or developed by Licensor, or
as to which Licensor owns or holds any rights, arising out of or relating to the
research, development, design, manufacture or use of (a) any medical device,
treatment or method as of the date of this Agreement, (b) any portable or
continuous dialysis methods or devices, specifically including any Wearable
Artificial Kidney and related devices, (c) any device, methods or treatments for
congestive heart failure, and (d) any artificial heart or coronary device.”
Operations was a shell corporation prior to the transaction. We valued the
License Agreement at the carry-over basis of $1,000. As consideration for being
granted the License, we agreed to pay to NQCI a minimum annual royalty of
$250,000, or 7% of net sales, although we have asserted in the Proceeding that
NQCI’s breaches of the License Agreement excused our obligation to make the
minimum royalty payments. However, as a result of the execution of the
Memorandum and the Stipulation, in the event we enter into the Proposed
Transaction or another Transaction, we will no longer be obligated to pay NQCI
any royalty payments under the License Agreement. For a more detailed discussion
of the Memorandum and the Stipulation, see Note 4, “Legal Proceedings”
above.
Although
under the terms of the Partial Final Award the Arbitrator denied NQCI’s
application for interim royalties, we recorded $645,833 in royalty expenses
covering the minimum royalties from commencement of the License Agreement
through March 31, 2009. Pursuant to the Memorandum and the Stipulation the
parties thereto agreed to forego the interim royalties provided for under the
terms of the Partial Final Award. As a result, we reversed the accruals for the
minimum royalty payments, resulting in a $645,833 non-operating reduction in
arbitration liabilities to the statement of operations for the nine months ended
September 30, 2009. See Note 4, “Legal Proceedings” above.
Note
13 – Stock Options and Warrants
Incentive
Compensation Plan
On
October 12, 2007, we adopted the Xcorporeal, Inc. 2007 Incentive Compensation
Plan and the related form of option agreement that is substantially identical to
the 2006 Incentive Compensation Plan that was in effect at Operations
immediately prior to the merger.
The plan
authorizes the grant of stock options, restricted stock, restricted stock units,
and stock appreciation rights. There are 3,900,000 shares of common stock
authorized for issuance under to the 2007 Incentive Compensation Plan (subject
to adjustment in accordance with the provisions of the plan). The plan will
continue in effect for a term of up to ten years. As of September 30, 2009,
there were outstanding options to purchase 720,000 shares of our common stock
and 3,180,000 shares were available for issuance under the 2007 Incentive
Compensation Plan.
On
October 12, 2007, we also assumed options to purchase up to 3,880,000 shares of
common stock that were granted by Operations under its 2006 Incentive
Compensation Plan, of which 1,635,000 have since been forfeited, canceled, or
expired, and therefore, options to purchase 2,245,000 shares of our common stock
remain outstanding.
Stock
Options to Employees, Officers and Directors
The
Compensation Committee of our board of directors determines the terms of the
options granted, including the exercise price, the number of shares subject to
option, and the vesting period. Options generally vest over five years and have
a maximum life of ten years.
During
the three months ended September 30, 2009, no options were granted, forfeited,
canceled, or exercised.
We
reported $670,481 and $1,718,109 in stock-based compensation expense for
employees, officers, and directors for the three and nine months ended September
30, 2009, respectively. For the three and nine months ended September 30, 2008,
we reported $1,731,200 and $3,813,158, respectively, in stock-based compensation
expense for employees, officers, and directors.
All
compensation expense for stock options granted has been determined under the
fair value method using the Black-Scholes option-pricing model with the
following assumptions:
|
|
|
For the nine months ended
|
|
|
|
|
September 30, 2009
|
|
|
Expected
dividend yields
|
|
zero
|
|
|
Expected
volatility
|
|
|
130%
|
|
|
Risk-free
interest rate
|
|
|
3.53-3.81%
|
|
|
Expected
terms in years
|
|
2.12-9.01
years
|
|
Warrants
and Stock Options to Non-Employees
During
the three months ended September 30, 2009, we did not issue any warrants. As of
September 30, 2009, there were 551,721 warrants outstanding, which were fully
vested and exercisable.
We reported $21 and $3,687 in
stock-based compensation expenses for consultants for the three and nine months
ended September 30, 2009, respectively. We reported $8,097 and $92,842 in
stock-based compensation expense for consultants for the three and nine months
ended September 30, 2008, respectively. The reduction in stock-based
compensation expense was a result of options forfeited as a result of the
termination of consulting services of certain of our consultants and vesting
options and warrants.
Compensation
for options granted to non-employees has been determined in accordance with ASC
718
Compensation-Stock
Compensation
(“ASC 718”) (formerly FAS 123R
Share-Based Payment
) and ASC
505-50
Equity,
subtopic
Equity-Based Payments to
Non-Employees
(“ASC 505-50”) (formerly EITF 96-18
Accounting For Equity Instruments
That Are Issued To Other Than Employees For Acquiring or In Conjunction With
Selling Goods Or Services
and EITF 00-18
Accounting Recognition for Certain
Transaction Involving Equity Instruments Granted to Other Than
Employees)
. Accordingly, compensation is determined using the fair value
of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measured.
For
options and warrants issued as compensation to non-employees for services that
are fully vested and non-forfeitable at the time of issuance, the estimated
value is recorded in equity and expensed when the services are performed and
benefit is received as provided by ASC 505-50.
All
charges for warrants granted have been determined under the fair value method
using the Black-Scholes option-pricing model with the following
assumptions:
|
|
|
For the nine months ended
|
|
|
|
|
September 30, 2009
|
|
|
Expected
dividend yields
|
|
zero
|
|
|
Expected
volatility
|
|
|
130%
|
|
|
Risk-free
interest rate
|
|
|
1.05-3.19%
|
|
|
Expected
terms in years
|
|
0.14-7.62
years
|
|
The
following table shows the change in unamortized compensation expense for stock
options and warrants issued to employees, officers, directors and non-employees
during the nine months ended September 30, 2009:
|
|
|
Stock Options and
Warrants
Outstanding
|
|
|
Unamortized Compensation
Expense
|
|
|
|
|
|
|
|
|
|
|
January
1, 2009
|
|
|
4,429,221
|
|
|
|
10,092,109
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
in the period
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
& Cancelled in the period
|
|
|
(912,500
|
)
(1)
|
|
|
(2,932,478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Expensed
in the period
|
|
|
-
|
|
|
|
(2,167,551
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
in the period
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2009
|
|
|
3,516,721
|
|
|
$
|
4,992,080
|
|
(1) As
part of streamlining our operations, we terminated 19 employees on March 13,
2009 and one employee on April 30, 2009. As a result, the terminated employees’
unvested and unexercised vested options were forfeited. The terminated employees
did not exercise their vested options and therefore, the vested options expired
60 days from their termination date.
|
|
|
Number of
Options and
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Stock Options and Warrants
|
|
|
|
|
|
|
|
Balance
at January 1, 2009
|
|
|
4,429,221
|
|
|
$
|
5.62
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
& Cancelled
|
|
|
(
912,500
|
)
|
|
|
7.00
|
|
|
Balance
at September 30, 2009
|
|
|
3,516,721
|
|
|
$
|
5.26
|
|
Note
14 – Stockholders’ Deficit
Effective
as of September 4, 2009, our common stock commenced trading on the Pink Sheets
Electronic OTC Market, an inter-dealer electronic quotation service of
securities traded over-the-counter also known as the Pink Sheets (“Pink
Sheets”), under the symbol “XCRP.PK”. In addition, effective as of the same
date, our common stock was suspended from trading on NYSE Amex LLC (formerly
American Stock Exchange) (“Amex”).
On
September 30, 2009, 400,000 shares of common stock were granted as compensation
for consulting services rendered to us.
Our
“Total Stockholders’ Deficit” as of September 30, 2009, is a result of our
continued operating losses with our deficit accumulated during the development
stage being greater than our additional paid in capital.
Note
15 – Product Development Agreement
In July
2007, we entered into the Aubrey Agreement for assistance with the development
of the PAK. As of March 31, 2009, the work was completed and we terminated the
agreement with Aubrey.
Note
16 – Subsequent Events
On
October 15, 2009, we paid approximately $76,000, which was non-reimbursable by a
certain third party described above under Note 2, “Nature of Operations and
Going Concern Uncertainty”, of the approximately $172,000 in deferred employee
compensation as of September 30, 2009. As of November 12, 2009, we had
approximately $162,000 in deferred employee compensation recognized under
“Deferred compensation” on our balance sheet.
As of
November 12, 2009, the “Expense receivable” balance of approximately $43,000
formerly existing as of September 30, 2009, described above under Note 2,
“Nature of Operations and Going Concern Uncertainty”, was paid in full. As of
the same date, we had approximately $112,000 in “Expense receivable” which
included approximately $12,000 of an anticipated payroll tax refund pursuant to
COBRA premium assistance payments as of September 30, 2009.
As of
November 12, 2009, the exclusivity negotiation period remains in effect and we
are continuing negotiations with a certain third party, as more fully described
above under Note 2, “Nature of Operations and Going Concern
Uncertainty”.
Our
management has evaluated subsequent events and their impact on the reported
results and disclosures through November 16, 2009, which is the date these
financial statements were issued and filed with the SEC.
ITEM
2.
Management
’
s Discussion and Analysis of
Financial Condition and
Results of Operations.
The
following discussion of our financial condition and results of operations should
be read in conjunction with our interim financial statements and the related
notes, and the other financial information included in this report.
Forward-Looking
Statements
Unless
the context otherwise indicates or requires, as used in this Quarterly Report on
Form 10-Q, or the “Quarterly Report”, references to “Xcorporeal, ”“we,” “us,”
“our” or the “Company” refer to Xcorporeal, Inc., a Delaware corporation, and
prior to October 12, 2007, the company which is now our subsidiary and known as
Xcorporeal Operations, Inc., or “Operations”.
This
Quarterly Report contains “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995 with respect to the financial
condition, results of operations, business strategies, operating efficiencies or
synergies, competitive positions, growth opportunities for existing products,
plans and objectives of management, markets for our stock and other
matters. Statements in this Quarterly Report that are not historical facts are
“forward-looking statements” for the purpose of the safe harbor provided by
Section 21E of the Securities Exchange Act of 1934, as amended, or the “Exchange
Act”, and Section 27A of the Securities Act of 1933, or the “Securities Act”.
Forward-looking statements reflect our current expectations or forecasts of
future events. Forward-looking statements generally can be identified by the use
of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,”
“intend,” “estimate,” “believe,” “project,” “continue,” “plan,” “forecast,” or
other similar words. Such forward-looking statements, including, without
limitation, those relating to our future business prospects, revenues and
income, wherever they occur, are necessarily estimates reflecting the best
judgment of our senior management on the date on which they were made, or if no
date is stated, as of the date of this Quarterly Report. These
forward-looking statements are subject to risks, uncertainties and assumptions,
including those described below in Item 1A - Risk Factors, in the section
captioned “Risk Factors” of our Annual Report on Form 10-K (the “Annual
Report”) filed with the United States Securities and Exchange Commission (the
“SEC”) on March 31, 2009, and in the section captioned “Risk Factors” in
each of our Quarterly Reports on Form 10-Q, filed with the SEC on May 15, 2009
and August 13, 2009 (collectively, the “Quarterly Reports”), that may affect the
operations, performance, development and results of our business. Because these
factors could cause our actual results or outcomes to differ materially from
those expressed in any forward-looking statements made by us or on our behalf,
you should not place undue reliance on any such forward-looking statements.
New factors emerge from time to time, and it is not possible for us to predict
which factors will arise. In addition, we cannot assess the impact of each
factor on our business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements.
You
should understand that, in addition to those factors discussed below in Item 1A
- Risk Factors and in the section captioned “Risk Factors” of our Annual
Report and events discussed below in the section captioned “Recent
Developments,” factors that could affect our future results and could cause our
actual results to differ materially from those expressed in such
forward-looking statements, include, but are not limited to:
|
|
·
|
the
effect of receiving a “going concern” statement in our independent
registered public accounting firm’s report on our 2008 financial
statements included in the Annual
Report;
|
|
|
·
|
our
substantial capital needs and ability to obtain financing both on
immediate, short-term and a long-term
basis;
|
|
|
·
|
the
results of the arbitration proceeding with National Quality Care, Inc., or
“NQCI”, and its impact on our ability to exercise our business plan going
forward;
|
|
|
·
|
our
ability to successfully research and develop marketable
products;
|
|
|
·
|
our
ability to obtain regulatory approval to market and distribute our
products;
|
|
|
·
|
anticipated
trends and conditions in the industry in which we operate, including
regulatory changes;
|
|
|
·
|
general
economic conditions; and
|
|
|
·
|
other
risks and uncertainties as may be detailed from time to time in our public
announcements and filings with the
SEC.
|
Although
we believe that our expectations are reasonable, we cannot assure you that our
expectations will prove to be correct. Should any one or more of these risks or
uncertainties materialize, or should any underlying assumptions prove incorrect,
actual results may vary materially from those described in this Quarterly Report
as anticipated, believed, estimated, expected or intended.
These
factors are not exhaustive, and new factors may emerge or changes to the
foregoing factors may occur that could impact our business. Except to the extent
required by law, we undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or any other reason. All subsequent forward-looking statements
attributable to us or any person acting on our behalf are expressly qualified in
their entirety by the cautionary statements contained or referred to herein. In
light of these risks, uncertainties and assumptions, the forward-looking events
discussed in this Quarterly Report may not occur. You should review carefully
Item 1A - Risk Factors, this Item 2 and the section captioned “Risk Factors”
included in our Annual Report and Quarterly Reports for a more complete
discussion of these and other factors that may affect our business.
Overview
We
are a medical device company that has been engaged in developing an
innovative
extra-corporeal
platform technology to be used in devices to replace the
function of various human organs. These devices will seek to provide patients
with improved, efficient and cost effective therapy. We hope that the platform
will lead to the following three products:
|
|
·
|
A
Portable Artificial Kidney, or “PAK”, for attended care Renal Replacement
Therapy, or “RRT”, for patients suffering from Acute Renal Failure, or
“ARF”
|
|
|
·
|
A
PAK for home hemodialysis for patients suffering from End Stage Renal
Disease, or “ESRD”
|
|
|
·
|
A
Wearable Artificial Kidney, or “WAK”, for continuous ambulatory
hemodialysis for treatment of ESRD
|
Because
of our lack of resources and difficulty in obtaining financing, we have been
unable to continuously engage in our development activities, and therefore, are
evaluating our immediate and substantial liquidity needs as described herein. If
we are unable to obtain the necessary capital for any reason, including through
the sale of all or substantially all of our assets, a business combination with
another entity in a transaction where we would not be the surviving entity or a
combination thereof, we may need to or will be forced to discontinue our
operations and liquidate our assets and/or may be forced to seek protection
under bankruptcy laws. Subject to us first entering into a transaction for the
sale of substantially all or all of our assets or a business combination
with another entity in a transaction where we would not be the surviving entity,
if we are able to obtain necessary capital and otherwise continue our business
operations, (i) we plan to continue testing and developing the technology for
our
extra-corporeal
platform and (ii) while we hope to eventually exploit our technology’s potential
Congestive Heart Failure, or “CHF”, applications through licensing or strategic
arrangements, we intend to focus initially on the renal replacement applications
described below.
We have
completed functional prototypes of our attended care and home PAKs that we hope
to commercialize after obtaining notification clearance from the Food and Drug
Administration, or “FDA”, under Section 510(k) of the Federal Food, Drug and
Cosmetic, or “FDC”, Act based on the existence of predicate devices, which,
subject to our capital limitations described below, we plan to seek in the
future. We have demonstrated a feasibility prototype of the WAK and we will
determine whether to devote any available resources to the development of
the WAK; commercialization of the WAK will require development of a functional
prototype and likely a full pre-market approval, or “PMA”, by the FDA, which
could take several years or longer. Subject to us first entering into a
transaction for the sale of substantially all or all of our assets or a
business combination with another entity in a transaction where we would not be
the surviving entity, unless we are able to raise funds to satisfy our
current liabilities and other obligations as they become due, obtain additional
debt or equity financing and otherwise continue our business operations, we will
not be able to submit a 510(k) notification with the FDA for the PAK or
the WAK.
Our PAK
for the attended care market is a portable, multifunctional renal replacement
device that will offer cost-effective therapy for those patients suffering from
ARF, causing a rapid decline in kidney function. We have completed our
functional prototype of this product, which is currently undergoing bench
testing, and, subject to our capital limitations described below, plan to submit
a 510(k) filing with the FDA in the future. We plan to commercialize this
product after receiving clearance from the FDA. Timing of FDA clearance is
uncertain at this time. Subject to us first entering into a transaction for the
sale of substantially all or all of our assets or a business combination
with another entity in a transaction where we would not be the surviving entity,
unless we are able to raise funds to satisfy our current liabilities and other
obligations as they become due, obtain additional debt or equity financing and
otherwise continue our business operations, we will not be able to submit a
510(k) notification with the FDA for this product.
Our PAK
for the home hemodialysis market is a device for patients suffering from ESRD,
in whom the kidneys have ceased to function. We have also completed our
functional prototype of this product, which is currently undergoing bench
testing, and, subject to our capital limitations described below, we intend
to submit a 510(k) with the FDA in the future. Subject to us first entering into
a transaction for the sale of substantially all or all of our assets or a
business combination with another entity in a transaction where we would not be
the surviving entity, unless we are able to raise funds to satisfy our current
liabilities and other obligations as they become due, obtain additional debt or
equity financing and otherwise continue our business operations, we will not be
able to submit a 510(k) notification with the FDA for this product. Clinical
trials would be anticipated to commence after the FDA clearance is
received.
Our WAK
is a device for the chronic treatment of ESRD. We have successfully demonstrated
a prototype system that weighs less than 6 kg., is battery operated, and can be
worn by an ambulatory patient. Subject to us first entering into a transaction
for the sale of substantially all or all of our assets or a business
combination with another entity in a transaction where we would not be the
surviving entity, assuming we are able to raise funds to satisfy our current
liabilities and other obligations as they become due and obtain additional debt
or equity financing and assuming we continue our business operations, we will
continue to evaluate the feasibility of furthering our development of this
product.
We also
hope to implement our validation and verification strategy including bench
testing, clinical testing and regulatory strategy in the U.S. and
abroad.
We have
focused much of our efforts on development of the PAK, which we do not believe
has been derived from the Technology (as defined below) covered by the License
Agreement (as defined below). As described below under “Recent
Developments,” subject to us first entering into a transaction for the sale
of substantially all or all of our assets or a business combination with
another entity in a transaction where we would not be the surviving entity, we
will determine whether to devote any available resources to development of the
WAK. Because none of our products is yet at a stage where it can be marketed
commercially and because of the capital limitations that we are experiencing, we
are not able to predict what portion of our future business, if any, will be
derived from each of our products.
We are a
development stage company, have generated no revenues to date and have been
unprofitable since our inception, and, unless we consummate a transaction for
the sale of substantially all or all of our assets or a business
combination with another entity in a transaction where we would not be the
surviving entity, will incur substantial additional operating losses for at
least the foreseeable future as we continue, to the extent available, to
allocate our extremely limited resources to ongoing business operations and
other activities. We do not believe our existing cash reserves will be
sufficient to satisfy our current liabilities and other obligations before we
achieve profitability. Our ability to meet such obligations as they become due
will depend on our ability to secure debt or equity financing and/or consummate
a transaction for the sale of substantially all or all of our assets or a
business combination with another entity in a transaction where we would not be
the surviving entity. Unless we are able to obtain funds sufficient to support
our operations and to satisfy our ongoing capital requirements, as more fully
described below, we will not be able to develop any of our products, submit
510(k) notifications or PMA applications to the FDA, conduct clinical trials or
otherwise commercialize any of our products. We may not be able to
obtain needed funds on acceptable terms, or at all, and there is substantial
doubt of our ability to continue as a going concern. Accordingly, our historical
operations and financial information are not indicative of our future operating
results, financial condition, or ability to operate profitably as a commercial
enterprise.
Recent
Developments
Our
Deteriorating Financial Position and Potential Strategic
Transaction
In light
of our ongoing substantially deteriorating financial position and our immediate
need of additional financing, we have continued our efforts to streamline our
operations, including continuing some of the actions outlined below under the
caption “Restructuring Efforts”, in order to conserve any available resources.
Our management also continues to evaluate any possible strategic alternatives,
including entering into a transaction for the sale of substantially all or all
of our assets, a business combination with another entity in a transaction where
we would not be the surviving entity, licensing of certain of our intellectual
property rights, as a means to further develop our technologies, discontinuing
our operations and liquidating our assets and/or seeking protection under
bankruptcy laws.
As part
of a potential strategic transaction we have been considering, we have agreed
with a certain third party to an exclusivity period to negotiate a potential
cooperative transaction, in exchange for a non-refundable payment of $200,000
made to us by such third party. The exclusivity period will expire upon the
later of 100 calendar days from September 21, 2009 and the termination date of a
definitive agreement entered into with such third party, if any. If a definitive
agreement for the transaction is entered into prior thereto, the exclusivity
payment will be credited against the purchase price in such transaction. During
the exclusivity period, we have been providing and will continue to provide to
the third party access to our employees, properties, contracts, records and
other related materials. In addition, in the mutual interests of us and such
third party and at the direction of the third party, in connection with the
potential strategic transaction we have actively resumed research and
development of our Portable Artificial Kidney product with direct reimbursement
of related expenditures by such third party. Currently, the exclusivity period
remains in effect and negotiations continue. Among other reasons, due to the
current economic conditions and those particularly affecting healthcare related
companies, there is no assurance that any such transaction will occur or that it
would be accretive to our stockholders or result in any payment being made to
our stockholders. The financial statements filed as part of this Quarterly
Report on Form 10-Q does not include any adjustments that might result from the
outcome of this transaction, if any.
Trading
on Pink Sheets
Effective
as of September 4, 2009, our common stock commenced trading on the Pink Sheets
Electronic OTC Market, an inter-dealer electronic quotation service of
securities traded over-the-counter also known as the Pink Sheets (“Pink
Sheets”), under the symbol “XCRP.PK”. In addition, effective as of the same
date, our common stock was suspended from trading on NYSE Amex LLC (formerly
American Stock Exchange) (“Amex”).
Restructuring
Efforts
The
deterioration of the economy over the last year, coupled with the prolonged
delay in our ability to reach a resolution with respect to the consummation of
the Technology Transaction, has significantly adversely affected us. Many of the
expectations on which we had based our 2008 and 2009 business development plans
slowly eroded as a result of the lengthy arbitration proceeding with NQCI
commenced in 2006 and continuing into the second quarter of 2009. The
possibility of an adverse decision in the arbitration proceeding with respect to
our ownership right to the Technology has been a major factor in our inability
to secure debt or equity financing. Accordingly, during the first nine months of
2009, we modified certain of our activities and business and instituted a
variety of measures in an attempt to conserve cash and reduce our operating
expenses. Our actions included: termination of employment of 20 of our employees
or a reduction of approximately 77% of our labor force, deferral of compensation
for 5 of our 6 employees with continued deferral for 3 of our 6 employees,
reaching an agreement with the landlord for our operating facility in Lake
Forest, CA, to apply $88,865, in lieu of reimbursement of such amount to us
expended for the incurred improvements at such facility, toward rent payments
with $45,605 applied as of September 30, 2009, refocusing our available assets
and employee resources on the development of the PAK, agreeing to a direct
reimbursement arrangement for PAK related research and development expenses with
a certain third party with which we have agreed to an exclusivity period to
negotiate a potential cooperative transaction, continuing vigorous efforts to
minimize or defer our operating expenses, searching to obtain additional
financing to support our operations and to satisfy our ongoing capital
requirements in order to improve our liquidity position and continuing to
prosecute our patents and take other steps to perfect our intellectual property
rights. In light of the unprecedented economic slow down, lack of access to
capital markets and prolonged arbitration proceeding with NQCI, we were
compelled to undertake the efforts outlined above in order to remain in the
position to continue our operations. For a more detailed discussion of our
restructuring efforts, please see section entitled “Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
— Recent Developments” in our Quarterly Report on Form 10-Q for the six
month period ended June 30, 2009, filed with the SEC on August 13,
2009.
Due to
our continuing substantially deteriorating financial position, we have continued
some of the actions outlined above and will continue our efforts to streamline
our operations in order to conserve any available resources. Our management
continues to evaluate any possible strategic alternatives, including entering
into a transaction for the sale of substantially all or all of our assets, a
business combination with another entity in a transaction where we would not be
the surviving entity, licensing of certain of our intellectual property rights,
as a means to further develop our technologies, discontinuing our operations and
liquidating our assets and/or seeking protection under bankruptcy laws. There is
no assurance that any such sale transaction will occur or that it would be
accretive to our stockholders or result in any payment being made to our
stockholders. Subject to continuing our business operations, we hope to be
able to obtain additional financing to meet our cash obligations as they become
due and otherwise proceed with our business plan. Our ability to execute on our
current business plan is dependent upon us continuing our business operations,
our ability to obtain equity or debt financing, develop and market our products,
and, ultimately, to generate revenue. Subject to continuing our business
operations and unless we are able to raise financing sufficient to support our
operations and to satisfy our ongoing financing requirements, we will not be
able to develop any of our products, submit 510(k) notifications to the FDA,
conduct clinical trials or otherwise commercialize any of our products. We will
make every effort however, to continue the development of the PAK. As a result
of these conditions, there is substantial doubt about our ability to continue as
a going concern. Our ability to continue as a going concern is substantially
dependent on the successful execution of many of the actions referred to above,
on the timeline contemplated by our plans and our ability to obtain
additional financing. We cannot assure you that we will be successful now or in
the future in obtaining any additional financing on terms favorable to us, if at
all. The failure to obtain financing will have a material adverse effect on our
financial condition and operations.
Management’s
Discussion and Analysis
Basis
of Presentation
This
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” section should be read in conjunction with the accompanying
unaudited interim financial statements which have been prepared assuming that we
will continue as a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. Our
recurring losses from operations and net capital deficiency raise substantial
doubt about our ability to continue as a going concern. Our ability to continue
as a going concern is substantially dependent on the successful execution of
many of the actions referred to above and otherwise discussed in this
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” section and in Note 2, “Nature of Operations and Going Concern
Uncertainty” to our unaudited interim financial statements filed as part of this
Quarterly Report, on the timeline contemplated by our plans and our ability to
obtain additional financing. The uncertainty of successful execution of our
plans, among other factors, raises substantial doubt as to our ability to
continue as a going concern. The accompanying unaudited interim financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Results
of Operations for the three and nine months ended September 30,
2009.
We have
not generated any revenues since inception. We incurred a net loss of $1.5
million and $2.8 million for the three and nine months ended September 30, 2009,
respectively, compared to a net loss of $11.1 million and $22.8 million for the
three and nine months ended September 30, 2008, respectively. The decrease in
net loss was primarily due to (i) non-operating income resulting from accrual
reversals resulting from the issuance of the Partial Final Award and the
execution of the Stipulation and the Memorandum entered into with NQCI in
connection with the Proceeding, (ii) corporate restructuring, (iii) completion
and termination of the Aubrey Agreement, (iv) reduced legal fees, (v)
forfeitures of terminated employees’ unvested stock options, (vi) continuous
efforts to minimize current operating expenses, and (vi) an agreement with a
certain third party, with which we have agreed to an exclusivity period to
negotiate a potential cooperative transaction, for the direct reimbursement
of PAK related research and development expenses as well as salaries and
overhead expenses of our two engineers. At September 30, 2009, we had a negative
working capital of $3.3 million compared to a positive working capital of $1.4
million at September 30, 2008. At September 30, 2009, our total assets were $1.1
million compared to $4.4 million at December 31, 2008, which consisted primarily
of cash raised from the sale of our common stock sold in December
2006.
Interest
Income
For the
three and nine months ended September 30, 2009, respectively, we earned
interest income of $915 and $11,657 compared to $44,871 and $278,941 for the
three and nine months ended September 30, 2008, respectively. The decrease
in interest income was due to the depletion of cash held in our investment
account as a result of our use of cash for operations.
Liquidity
and Capital Resources
We expect
to incur operating losses and negative cash flows for the foreseeable future.
During the fourth quarter 2006, we raised approximately $27.3 million (net of
placement fees of $2.1 million) through a private placement. Our ability to
execute on our current business plan is dependent upon our ability to secure
additional funding, develop and market our products, and, ultimately, to
generate revenue.
As of
September 30, 2009, we had cash, cash equivalents and marketable securities of
approximately $0.3 million. We expended $0.2 million and
$3.0 million of cash during the three and nine months ended September 30,
2009, respectively, and we project to expend cash at a rate below
$0.1 million per month for the remainder of the 2009 fiscal year based upon
our restructuring efforts taken to date and planned going forward. However,
should our efforts to further reduce our costs and expenses not materialize, we
project to expend cash at a rate of approximately $0.1 million per month. Some
of these restructuring efforts undertaken included: deferral of compensation for
5 of our 6 employees with continued deferral for 3 of our 6 employees, reaching
an agreement with the landlord for our operating facility in Lake Forest, CA, to
apply $88,865, in lieu of reimbursement of such amount to us expended for the
incurred improvements at such facility, toward rent payments with $45,605
applied as of September 30, 2009 (after the drawdown of the 50% of the tenant
improvement allowance applicable to rent payments), reaching an agreement
with a certain third party with which we have agreed to an exclusivity period to
negotiate a potential cooperative transaction for a direct reimbursement by such
third party of our employment expenses of our two engineers, including salaries
and overhead expenses incurred by us in connection with consulting services
provided by our two engineers to such certain third party, and continuing
vigorous efforts to minimize or defer our operating expenses. For a more
detailed discussion of our restructuring efforts undertaken to date, please see
above section captioned “Recent Developments.” In addition, in accordance with
the terms of the Stipulation and the Memorandum entered into with NQCI in
connection with the Proceeding, we are obligated to pay damages, costs and legal
fees in connection with the Proceeding described above in an amount of $1.87
million.
Based on
our current cash and cash equivalent resources, other current assets, current
monthly operating burn rate, and using assumptions that by nature are imprecise,
our management believes we have available liquidity to fund our limited
restructured operations approximately through the next 30 days from November 12,
2009. We will consider further reduction of our costs and expenses in the near
future, if feasible. Therefore, we must raise additional funds to be able
to continue our operations within approximately the next 30 days from November
12, 2009. We may not be successful in doing so on terms acceptable to us, and
the inability to raise capital will require us to curtail our current plans,
which will have a material adverse effect on our plan of operation or will
result in the curtailment of our operations. Our ability to execute on our
current business plan is dependent upon us continuing our
business operations and our ability to obtain equity financing, develop and
market our products, and, ultimately, to generate revenue.
As of
November 12, 2009, we had available cash of approximately $120,000, excluding
restricted cash. We currently have a monthly burn rate of approximately
$116,000. Under these current conditions, we will have sufficient cash
approximately through the next 30 days from November 12, 2009, assuming no
further cash injections are received. In addition to previously taken
restructuring efforts, including reduction of personnel, we also reduced our
cash outflows by means of deferring 50% of the monthly compensation for 5 of our
6 active employees effective July 1, 2009 and currently continue to defer 50% of
the monthly compensation for 3 of our 6 active employees. Two of our engineers
are providing consulting services to the third party with which we have agreed
to an exclusivity period to negotiate a potential cooperative transaction, and
such third party is fully reimbursing us for our employment expenses of our two
engineers, including salaries and overhead. As of September 30, 2009, we
deferred approximately a total of $172,000 in employee compensation, recognized
under “Deferred compensation” on our balance sheet. We may consider further
reducing our costs and expenses in the near future, if feasible. Therefore,
we must raise additional funds to be able to continue our operations. If we are
unable to secure additional capital within approximately the next 30 days from
November 12, 2009, we will be forced to file for bankruptcy and/or cease our
operations. The accompanying financial statements have been prepared on the
basis of a going concern and do not reflect any adjustments due to these
conditions.
We expect
to incur negative cash flows and net losses for the foreseeable future. In
addition, pursuant to the terms of the Partial Final Award, NQCI was awarded an
amount equal to approximately $1.87 million in attorneys’ fees and costs
consistent with the Arbitrator’s order issued on August 13, 2008 related to the
same and NQCI’s application for interim royalties and expenses was denied. We
intend to pay such attorneys’ fees and costs due to NQCI from the proceeds
received in connection with the consummation of the Proposed Transaction, or
another Transaction, if such transaction is consummated, or upon raising of
additional capital to sufficiently satisfy such award and or other immediate
liquidity requirements, which funds we will need to obtain within approximately
the next 30 days from November 12, 2009. Pursuant to the terms of the
Stipulation, NQCI agreed not to attempt before December 1, 2009 to execute on or
file any motion, petition or application or commence any proceeding seeking the
collection of such award of attorneys’ fees and costs, which is intended to
allow the Parties a sufficient period within which to execute a definitive
agreement in connection with the Proposed Transaction or a Transaction. Such
period shall automatically be extended for a period of 120 days from December 1,
2009 if the definitive agreement is executed in full on or before December 1,
2009. In addition, if the execution of the definitive agreement occurs on or
before December 1, 2009, the December 1, 2009 deadline shall automatically be
further extended for a period of 60 days for each amendment to a proxy or
information statement related to the transactions contemplated by the
acquisition agreement, filed by us in response to comments made by the SEC.
However, there can be no assurances that the Proposed Transaction or any other
Transaction will occur or that it would be accretive to our stockholders or
result in any payment being made to our stockholders.
As part
of a potential cooperative transaction we have been considering with a certain
third party, we have agreed to an exclusivity negotiation period with such third
party in exchange for a non-refundable payment of $200,000 made to us by such
third party, recognized under “Deferred gain” as of September 30, 2009 on our
balance sheet. The exclusivity period expires upon the later of 100 calendar
days from September 21, 2009 and the termination date of a definitive agreement
entered into with such third party, if any. However, if a definitive agreement
for the transaction is entered into prior thereto, the exclusivity payment will
be credited against the purchase price in such transaction. During the
exclusivity period, we will provide to the third party access to our employees,
properties, contracts, records and other related materials. In addition, in the
mutual interests of us and such third party and at the direction of the third
party, in connection with the potential strategic transaction, we actively
resumed research and development of our Portable Artificial Kidney product with
direct reimbursement of related expenditures by such third party. As of
September 30, 2009, we incurred and expect reimbursement of approximately
$43,000, recognized under “Expense receivable” on our balance sheet and offset
as a credit to our statement of operations for the three months ended September
30, 2009, for these expenses. Currently, the exclusivity period remains in
effect and negotiations continue.
If we are
unable to enter into a definitive agreement and otherwise comply with the
deadlines and requirements summarized above, under the terms of the Stipulation,
NQCI will have the right to execute on or file any motion, petition or
application or commence any proceeding seeking the collection of the sum of
approximately $1.87 million in attorneys’ fees and costs that have been awarded
in NQCI’s favor under the terms of the Partial Final Award, which would impact
our ability to use and develop our technologies, would have a material adverse
effect on our business and results of operations and may cause us to cease our
operations and/or file for bankruptcy.
Based
upon our current plans, we believe that our existing cash reserves will not be
sufficient to meet our operating expenses and capital requirements before we
achieve profitability. Accordingly, we need to seek additional funds through
public or private placement of shares of our preferred or common stock or
through public or private debt financing, or to enter into a transaction for the
sale or licensing of our assets, including the sale of substantially all or all
of our assets, or a business combination with another entity in a transaction
where we would not be the surviving entity. Our ability to meet our cash
obligations as they become due and payable depends on our ability to sell
securities, borrow funds, further reduce operating costs, sell or license our
assets, including the sale of substantially all or all of our assets or a
business combination with another entity in a transaction where we would not be
the surviving entity, or some combination thereof. We may not be successful in
obtaining necessary funds on acceptable terms, if at all. The inability to
obtain financing will require us to curtail our current plans, which will have a
material adverse effect on our plan of operations. Our ability to execute on our
current business plan is dependent upon our ability to obtain equity financing,
develop and market our products, and, ultimately, to generate revenue. As a
result of these conditions, there is substantial doubt about our ability to
continue as a going concern.
We are
currently actively considering all potential transactions, which may include the
Proposed Transaction (as described above), strategic partnership(s), disposition
of substantially all or all of our assets, a business combination with another
entity in a transaction where we would not be the surviving entity and/or
licensing of certain of our intellectual property rights, as a means to further
develop our technologies. Because of the current economic conditions and
those particularly affecting healthcare related companies and because of our
lack of liquidity, there is no assurance that any such transaction will occur or
that it would be accretive to our stockholders or result in any payment being
made to our stockholders. If we are unsuccessful in obtaining immediate debt or
equity financing on terms acceptable to us or otherwise unsuccessful in
addressing our liquidity concerns or if we are unable to enter into any such
transaction, this could have a material adverse effect on our plan of operation,
may result in the curtailment of our operations and/or require us to file for
bankruptcy.
As part
of our analysis of ways to reduce costs and in light of the high cost of
continuing to be a public reporting company under the Exchange Act and complying
with the Sarbanes-Oxley Act of 2002, we are contemplating exploring and may be
required to explore alternative platforms, such as deregistering under the
Exchange Act, or “going dark” and having our common stock continue to be quoted
on the Pink Sheets without being a reporting company under Section 12(g) of the
Exchange Act. We are continuing to evaluate our options. Our recent
move to the Pink Sheets has provided meaningful savings to us as a result
of the elimination of fees associated with being listed on a national stock
exchange and deregistering under the Exchange Act would provide substantial
savings as a result of the elimination of the costs of being registered under
the Exchange Act. Analysis of deregistering under the Exchange Act involves
not only reducing costs, but also our expected sources of future capital as well
as the number of record holders of our outstanding common stock. A move to
deregister under the Exchange Act may result in a less liquid market for our
shares, but would result in continued public trading of our common stock by
holders wishing to trade.
Our
operating activities and research and development efforts resulted in a net loss
of $23.0 million in 2008 and $1.5 million and $2.8 during the three and nine
months ended September 30, 2009, respectively. In addition, we invested $25.0
million in high grade money market funds and marketable securities of which we
sold $24.7 million of the investments, leaving a balance of $0.3 million as of
September 30, 2009.
We have
focused much of our efforts on development of the PAK, which has not been
derived from the technology covered by the License Agreement. Through the
productive research and development efforts of the PAK, we have completed
functional prototypes of our attended care and home PAKs that we hope to
commercialize after 510(k) clearance from the FDA which we hope to
submit sometime in the future. Prior to the 510(k) submission to the FDA
for clinical use under direct medical supervision, the units will undergo final
verification and validation. It generally takes 4 to 12 months from the date of
a 510(k) submission to obtain clearance from the FDA, although it may take
longer. We expect that our monthly expenditures will increase as we shift
resources towards developing a marketing plan for the PAK. This plan will be
dependant on our ability to raise funds to satisfy our current liabilities and
other obligations as they become due and obtaining additional debt or equity
financing and otherwise continuing our business operations. If we are
unsuccessful in doing so, we will not be able to submit a 510(k)
notification with the FDA for this product.
We have
used some of our resources for the development of the WAK and have demonstrated
a feasibility prototype. Commercialization of the WAK will require development
of a functional prototype and likely a full pre-market approval by the FDA,
which could take several years. Our rights to the WAK derive in part from the
License Agreement pursuant to which we obtained the exclusive rights to the
Technology. Subject to continuing our business operations and/or entering into a
transaction for the sale of substantially all or all of our assets or a
business combination with another entity in a transaction where we would not be
the surviving entity, we will determine whether to devote additional resources
to the development of the WAK.
Because
neither the PAK nor the WAK is yet at a stage where it can be marketed
commercially, we are not able to predict the portion of our future business
which will be derived from each.
Research
and Development
We
employed an interdisciplinary team of scientists and engineers who were
developing the PAK and a separate, interdisciplinary team developing the WAK. As
a result of general economic conditions in 2008 and a deterioration of our
liquidity position, coupled with the prolonged delay in our ability to reach a
resolution with respect to the consummation of the Technology Transaction, we
have been significantly adversely affected. As a result, as of September 30,
2009 we have terminated 20 employees or 77% of our staff and have deferred
compensation of approximately $172,000. However, our downsized team is
continuing limited development of the PAK and we hope to be able to in the
future to devote any then available resources to the development of the
WAK.
In
addition, in the interest of the potential cooperative transaction with a
certain third party that we are currently considering, we have agreed to an
exclusivity period with such third party to negotiate a potential cooperative
transaction, and in connection therewith, we have actively resumed research and
development of our Portable Artificial Kidney. Such third party has agreed to
reimburse us for our related expenditures as well as salaries and overhead
expenses of our two engineers. As of September 30, 2009, we incurred and expect
reimbursement of approximately $43,000 for these expenses, recognized under
“Expense receivable” and offset as a credit to our statement of operations for
the three months ended September 30, 2009.
The PAK
is a multifunctional device that will perform hemodialysis, hemofiltration and
ultrafiltration under direct medical supervision. A variation of this device
will be developed for chronic home hemodialysis. An initial prototype of the
PAK, capable of performing the basic functions of a hemodialysis machine, and
demonstrating our unique new fluidics circuit, was completed at the end of
2007. The first physical prototype including industrial design of the PAK was
completed in October 2008. We hope to further refine this prototype by adding to
it safety sensors and electronic controls. Subject to our ability to obtain
debt or equity financing to satisfy our current liabilities and other
obligations as they become due, as more fully described above in the section
captioned “Recent Developments,” we hope to complete the final product
design of the PAK. The PAK units will undergo final verification and validation
prior to a 510(k) submission for clinical use under direct medical supervision.
A clinical study will not be required for this submission.
In a
clinical feasibility study conducted in London in March 2007, a research
prototype of the WAK was demonstrated in eight patients with end-stage renal
disease. Patients were treated for up to eight hours with adequate clearances of
urea and creatinine. The device was well tolerated and patients were able
to conduct activities of normal daily living including walking and
sleeping. There were no serious adverse events although clotting of the dialyzer
occurred in two patients. To our knowledge, this is the first successful
demonstration of a WAK in humans. Subject to us continuing our business
operations and further subject to us first consummating the Proposed
Transaction or another Transaction for the sale of substantially all or all of
our assets or a business combination with another entity in a transaction where
we would not be the surviving entity, and further subject to availability
of sufficient working capital to us, we hope to make substantial improvements to
the WAK. This work will result in a WAK Generation 2.0. Pending FDA approval of
an investigational Device Exemption (IDE), additional clinical studies will be
conducted upon completion of the Generation 2.0 WAK prototype.
Subject
to continuing our business operations and/or entering into a transaction for the
sale of substantially all or all of our assets, or a business combination with
another entity in a transaction where we would not be the surviving entity, if
we successfully obtain additional financing, we plan to make improvements to the
WAK design intended to move it from a feasibility prototype to a product
prototype. These include improvement of the heparin pumping system intended to
address the dialyzer clotting problem, the addition of safety sensors required
for commercial dialysis equipment, the addition of electrical controls to
provide a convenient user interface, improvements to the blood flow circuit, and
further miniaturization of the device to improve fit to the human body.
Additional clinical studies will be conducted upon completion of the
prototype.
We
incurred $0.6 million and $2.4 million in research and development costs during
the three and nine months ended September 30, 2009, respectively. This
compares to $12.7 million and $18.9 million incurred during the three and
nine months ended September 30, 2008, respectively. The decrease in research and
development costs is attributable to the completion and termination of the
Aubrey Agreement, our research and development progress, our corporate
restructuring efforts, entry into the Stipulation and the Memorandum with NQCI
and a direct reimbursement of PAK related research and development expenses
arrangement, including salaries and overhead expenses of our two engineers,
agreed to with a certain third party.
Contractual
Obligations and Commercial Commitments
The
following table sets forth a summary of our material contractual obligations and
commercial commitments as of September 30, 2009:
|
Contractual Obligations:
|
|
Total
|
|
|
Less than 1
year
|
|
|
1 - 3 years
|
|
|
3 - 5 years
|
|
|
More than 5
years
|
|
|
Capital
Lease Obligations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Operating
Lease Obligations (1)
|
|
|
2,149,059
|
|
|
|
137,973
|
|
|
|
1,677,342
|
|
|
|
333,744
|
|
|
|
-
|
|
|
Research
& Development Contractual Commitments
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other
Liabilities
|
|
|
6,515
|
|
|
|
1,335
|
|
|
|
5,180
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
2,160,574
|
|
|
$
|
144,308
|
|
|
$
|
1,682,522
|
|
|
$
|
333,744
|
|
|
$
|
-
|
|
Off-Balance
Sheet Arrangements
As of
September 30, 2009, we had no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
results of operations or cash flows.
Critical
Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations is
based upon our unaudited interim financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. Generally accepted accounting principles require management to make
estimates, judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and the disclosure of contingent assets and
liabilities. We base our estimates on experience and on various other
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that may not be readily apparent from other sources.
Our actual results may differ from those estimates.
We
consider our critical accounting policies to be those that involve significant
uncertainties, require judgments or estimates that are more difficult for
management to determine or that may produce materially different results when
using different assumptions. We consider the following accounting policies to be
critical:
Marketable
Securities
We
classify investments with maturity dates greater than three months when
purchased as marketable securities. Investments, including certificates of
deposit with maturity dates greater than three months when purchased, and which
have readily determined fair values, are classified as available-for-sale
investments and reflected in current assets as marketable securities at fair
market value. Historically, we have complied with our investment policy
which requires that all investments be investment grade quality and no more than
ten percent of our portfolio may be invested in any one security or with one
institution. However, recently, our ability to continue to follow this policy
has not been practicable due to the small aggregate amount of investment funds
that has been remaining for investment. As a result, as of September 30, 2009,
all of our cash was held in a high grade money market fund.
Short-term
investments classified as available-for-sale were as follows:
|
|
|
September 30, 2009
|
|
|
|
|
Aggregate Fair
Value
|
|
|
Gross
Unrealized
Gains / (Losses)
|
|
|
Estimated Fair
Value
|
|
|
Commercial
paper
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Corporate
securities fixed rate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
We review
impairments associated with the above in accordance with ASC 320-10-35
Investments-Debt and Securities,
subtopic
Overall,
section
Subsequent
Measurement
(formerly FAS 115
Accounting for Certain Investments
in Debt and Equity Securities
and FSP FAS 115-1 and FAS 124-1
The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments
) to determine the
classification of the impairment as temporary or other-than-temporary. However,
due to the small aggregate amount of available investment funds, we did not hold
investments in commercial paper and/or high grade marketable securities, but
rather held our cash in high grade money market funds as of September 30, 2009.
There were no short-term investments classified as available-for-sale as of
September 30, 2009 and as a result, the related impairments review was not
necessary.
There
were no gross unrealized gains or losses as of September 30, 2009.
Shares
Issuable
Pursuant
to the August 4, 2008, Second Interim Award, stating that, if the Technology
Transaction is submitted to and approved by our stockholders, 9,230,000 shares
of our common stock should be issued to NQCI to effectuate the transaction, we
accrued for the 9,230,000 shares of our common stock. As the Second Interim
Award stated that we must issue 9,230,000 shares upon the closing of the
Technology Transaction and we have been unable to consummate such transaction,
such contingency not being within our control, we have therefore, recorded the
issuance as a liability, rather than as an equity issuance. As of December 31,
2008, we accrued for the 9,230,000 shares of our common stock to be issued to
NQCI in accordance with ASC 450
Contingencies
(formerly FAS 5
Accounting for
Contingencies)
, with the initial fair value of the shares measured on
August 4, 2008, the date of the Second Interim Award.
Until issuance, the
shares were being marked to market in accordance with ASC 815-40
Derivatives and Hedging,
subtopic
Contracts in
Entity’s Own Equity
(formerly EITF 00-19
Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in, a Company’s Own Stock
), with subsequent changes in fair value recorded as non-operating change in
fair value of shares issuable to our statement of operations. The fair value of
the shares was measured using the closing price of our common stock on the
reporting date. The measured fair value of $10,153,000 for the accrued 9,230,000
shares on August 4, 2008, the date of the Second Interim Award, was accrued
under “Shares issuable” and expensed to “Research and development.” From marking
to market, the fair value of the shares issuable was revalued at $1,569,100 as
of December 31, 2008. The resulting non-operating adjustment in fair value of
$8,583,900 to the statement of operations for the year ended December 31, 2008
was recognized as “Change in fair value of shares issuable.”
The Technology
Transaction was not submitted to our stockholders for approval.
As a
result of the issuance of the Partial Final Award and the execution of the
Stipulation and the Memorandum, see Note 4, “Legal Proceedings” above, the
Technology Transaction will not occur and we will no longer be obligated to
issue the Shares to NQCI formerly required pursuant to the terms of the Second
Interim Award issued by the Arbitrator on August 4, 2008, and will no
longer be required to file a resale registration statement under the Securities
Act for the Shares. Accordingly, the net fair value of $1,569,100 for the
9,230,000 issuable shares accrued under “Shares issuable” as of December 31,
2008, was reversed resulting in an adjustment of $1,569,100 to non-operating
income in the statement of operations, recognized as “Change in and reduction of
shares issuable”, for the nine months ended September 30, 2009.
Stock-Based
Compensation
ASC 718
Compensation-Stock
Compensation
(formerly FAS 123R
Share-Based Payment
) and
Securities and Exchange Commission issued Staff Accounting Bulletin No. 107
(“SAB 107”) require the measurement and recognition of compensation expense for
all share-based payment awards made to employees and directors based on
estimated fair values. We have applied the provisions of SAB 107 in its adoption
of ASC 718.
In
determining stock-based compensation, we consider various factors in our
calculation of fair value using a black-scholes pricing model. These factors
include volatility, expected term of the options, and forfeiture rates. A change
in these factors could result in differences in the stock based compensation
expense.
Recent
Accounting Standards
In
April 2009, the FASB released ASC 825-10-65
Financial Instruments,
subtopic
Overall,
section
Transition and
Open Effective Date Information
(“ASC 825-10-65”) (formerly FSP FAS
No. 107-1 and Accounting Principles Board Opinion (“APB”) 28-1
Interim Disclosure about Fair Value
of Financial
Instruments
) which requires interim disclosures regarding the fair values
of financial instruments that are within the scope of ASC 825-10-50
Financial Instruments,
subtopic
Overall,
section
Disclosure
.
Additionally,
ASC 825-10-65 requires disclosure of the methods and significant assumptions
used to estimate the fair value of financial instruments on an interim basis as
well as changes of the methods and significant assumptions from prior periods.
ASC 825-10-65 does not change the accounting treatment for these financial
instruments and is effective for interim and annual periods ending after
June 15, 2009. We adopted ASC 825-10-65 as of June 30,
2009.
In
May 2009, the FASB issued ASC 855
Subsequent Events
(“ASC
855”)
(formerly
FAS 165
Subsequent
E
vents
) which
sets forth the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. ASC 855 will be effective for interim or
annual periods ending after June 15, 2009 and will be applied
prospectively. We adopted the provisions of ASC 855 as of June 30, 2009.
The adoption of ASC 855 did have a material impact on our financial position,
results of operations, and cash flows.
In
June 2009, the FASB issued ASC 105
Generally Accepted Accounting
Principles
(“ASC 105”) (formerly FAS 168
The FASB Accounting Standards
Codification (Codification) and the Hierarchy of GAAP
) which establishes
the Codification as the single source of authoritative U.S. GAAP recognized by
the FASB to be applied by nongovernmental entities. SEC rules and interpretive
releases are also sources of authoritative GAAP for SEC registrants. ASC 105
modifies the GAAP hierarchy to include only two levels of GAAP: authoritative
and non-authoritative. ASC 105 is effective beginning for periods ended after
September 15, 2009. As ASC 105 is not intended to change or alter existing
GAAP, it will not impact the Company’s financial position, results of operations
and cash flows.
In August
2009, the FASB issued Accounting Standard Update (“ASU”) 2009-05 under ASC 820
Fair Value Measurements and
Disclosures
concerning measuring liabilities at fair value. The new
guidance provides clarification that in circumstances in which a quoted price in
an active market for the identical liability is not available, a reporting
entity is required to measure fair value using certain valuation techniques.
Additionally, it clarifies that a reporting entity is not required to
adjust the fair value of a liability for the existence of a restriction that
prevents the transfer of the liability. This new guidance is effective for the
first reporting period after its issuance, however earlier application is
permitted. The adoption of this guidance is not expected to have a material
impact on the Company’s consolidated financial position or results of
operations.
ITEM
3. Quantitative and Qualitative Disclosures
about Market Risk
We invest
our cash in short term high grade commercial paper, certificates of deposit,
money market accounts, and marketable securities. We consider any liquid
investment with an original maturity of three months or less when purchased to
be cash equivalents. We classify investments with maturity dates greater than
three months when purchased as marketable securities, which have readily
determined fair values and are classified as available-for-sale securities. Our
investment policy requires that all investments be investment grade quality and
no more than ten percent of our portfolio may be invested in any one
security or with one institution. Historically, we complied with our
investment diversification policy which states that no more than ten percent of
our total marketable securities will be invested in a single, specific security.
However, our ability to continue to abide by this stipulation has not been
practicable based upon the small total amount of investment funds.
Investments
in both fixed rate and floating rate interest earning instruments carry a degree
of interest rate risk arising from changes in the level or volatility of
interest rates; however, interest rate movements do not materially affect the
market value of our portfolio because of the short-term nature of these
investments. A reduction in the overall level of interest rates may
produce less interest income from our investment portfolio. The market risk
associated with our investments in debt securities is substantially mitigated by
the frequent turnover of our portfolio.
ITEM
4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer and our Chief
Financial Officer, conducted an evaluation of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
Quarterly Report, as is defined in Rules 13a-15(e) and 15d-15(e) promulgated
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our
disclosure controls and procedures are intended to ensure that the information
we are required to disclose in the reports that we file or submit under the
Exchange Act is (i) recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms and (ii) accumulated and
communicated to our management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, as the principal executive and financial
officer, to allow timely decisions regarding required disclosures.
Based on
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this Quarterly Report,
our disclosure controls and procedures were effective. Our management has
concluded that the financial statements included in this Quarterly Report
present fairly, in all material respects our financial position, results of
operations and cash flows for the periods presented in conformity with generally
accepted accounting principles.
It should
be noted that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the
system will be met. In addition, the design of any control system is based in
part upon certain assumptions about the likelihood of future events. Because of
these and other inherent limitations of control systems, there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions.
Changes in
Internal Control over
Financial
Reporting
In
connection with the evaluation of our internal controls during our last fiscal
quarter, our Chief Executive Officer and Chief Financial Officer concluded that
there have been no changes in our internal control over financial reporting, as
defined in Rule 13a-15(f) under the Exchange Act during our most recent fiscal
quarter that have materially affected, or are reasonably likely to materially
affect our internal control over financial reporting.
PART
II — OTHER INFORMATION
ITEM
1. Legal Proceedings.
From time
to time we may be a defendant or plaintiff in various legal proceedings arising
in the normal course of our business. Except as set forth below, we are
currently not a party to any material pending legal proceedings or government
actions, including any bankruptcy, receivership, or similar proceedings. In
addition, except as set forth below, our management is not aware of any known
litigation or liabilities that could affect our operations. Furthermore, with
the exception of Dr. Gura, our Chief Medical and Scientific Officer, who
according to NQCI’s preliminary Proxy Statement on Schedule 14A, Amendment No.
2, filed with the SEC on February 13, 2009, owns 15,497,250 shares of NQCI’s
common stock which includes 800,000 shares held by Medipace Medical Group,
Inc. an affiliate of Dr. Gura and includes 250,000 shares subject to warrants
held by Dr. Gura which are currently exercisable, or approximately 20.9% of its
total outstanding shares as of January 31, 2009, we do not believe that
there are any proceedings to which any of our directors, officers, or
affiliates, any owner of record who beneficially owns more than five percent of
our common stock, or any associate of any such director, officer, affiliate of
ours, or security holder is a party adverse to us or has a material interest
adverse to us.
On
December 1, 2006, Operations initiated the Proceeding against NQCI for its
breach of the License Agreement. On April 13, 2009, the Arbitrator issued a
Partial Final Award which resolved the remaining issues that were pending
for decision in the Proceeding. The Partial Final Award adopted one of the
proposals submitted to the Arbitrator by us and provides that we and Operations
shall have a perpetual exclusive license (the “Perpetual License”) in the
Technology (as defined in the Merger Agreement, dated as of September 1, 2006
(the “Merger Agreement”), among the Company, Operations and NQCI and the License
Agreement, dated as of September 1, 2006 (the “License Agreement”), between the
Company and NQCI) primarily related to the Wearable Artificial Kidney and any
other Technology contemplated to be transferred under the Technology Transaction
(as defined in the Merger Agreement). Under the terms of the Partial Final
Award, in consideration of the Perpetual License to the Company, NQCI was
awarded a royalty of 39% of all net income, ordinary or extraordinary,
received by us (the “Royalty”) and NQCI is to receive 39% of any shares received
in any merger transaction to which the Company or Operations may become a party.
NQCI’s interest as licensor under the Perpetual License shall be freely
assignable. In addition, the Partial Final Award provides that we shall pay NQCI
an amount equal to approximately $1,871,000 in attorneys’ fees and costs
previously awarded by the Arbitrator in an order issued on August 13, 2008, that
NQCI’s application for interim royalties and expenses is denied and that NQCI is
not entitled to recover any additional attorneys’ fees. Finally, the Partial
Final Award also provides that the Arbitrator shall retain jurisdiction to
supervise specific performance of the terms and obligations of the Award
including, but not limited to, any dispute between the parties over the manner
of calculation of the Royalty. The Partial Final Award was issued by the
Arbitrator as a result of each party’s request for the Arbitrator to order
alternative relief due the parties’ inability to proceed with the Technology
Transaction. For a full description of the Proceeding and the Arbitrator’s
interim awards issued in connection therewith, please see Item 3 - Legal
Proceedings of our Annual Report.
On April
17, 2009, NQCI requested that the Arbitrator correct material terms of the
Partial Final Award relating to the meaning and calculation of the Royalty
terms. We opposed the request and on May 1, 2009, the Arbitrator denied NQCI’s
request to modify the language of the Partial Final Award. The Arbitrator
further held that past expenses shall not be included in net income computations
for purposes of the Royalty, that NQCI may make an application to the Arbitrator
requesting a royalty distribution, specifying the amount sought and basis for
the claimed amount, and that NQCI is entitled to audit our financial statements,
books and records to verify our net income, on an annual basis, or more often,
if the Arbitrator permits.
Binding Memorandum of
Understanding
On August
7, 2009, to clarify, resolve and settle certain issues and any disputes that
have arisen between us and NQCI with respect to the Partial Final Award and the
Proceeding, the Xcorp Parties entered into the Memorandum with NQCI. Under the
terms of the Memorandum, among other things, the Parties agreed to: (i) assign
and transfer all of their rights, title and interest in and to the Polymer
Technology to the Joint Venture, which will be jointly owned by the Parties and
through which the Parties will jointly pursue the development and
exploitation of the Polymer Technology, and (ii) negotiate, execute and deliver
within 60 days following the Stockholder Vote Date the Operating Agreement
governing the operation of the Joint Venture based on the terms set forth in the
Memorandum.
The Xcorp
Parties and NQCI will be the initial two members of the Joint Venture (Xcorp
Parties’ interest shall be held of record by either us or Operations, as
determined by the Xcorp Parties) with NQCI and the Xcorp Parties having a 60%
and 40% membership interest (the “Membership Interests”) in the Joint Venture,
respectively. Subject to such other terms and provisions as the Parties may
agree upon, the Operating Agreement shall include the following
terms:
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the
Joint Venture shall be managed by a three-member JV
Board;
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until
such time as NQCI fails to hold a greater percentage of the Membership
Interests than the Xcorp Parties, two members of the JV Board shall be
designated by NQCI and until such time as the Xcorp Parties fail to hold
at least 10% of the Membership Interests and one JV Manager shall be
designated by the Xcorp Parties;
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NQCI
shall have the right to appoint a Chairman and/or a Chief Executive
Officer of the Joint Venture, who will have day-to-day management
authority with respect to the Joint Venture, subject to oversight by the
JV Board and the terms and conditions of the Memorandum and the Operating
Agreement, and a Chief Scientific Officer, who may be employed by the
Joint Venture upon customary and reasonable terms and
conditions;
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if
a JV Manager provides additional services to the Joint Venture as an
employee or a consultant, he or she may be compensated by the Joint
Venture as is mutually reasonably approved in writing by the Parties;
provided that with the exception of reimbursement of reasonable expenses
incurred in connection with their services performed for the Joint Venture
in their official officer capacity, neither Robert Snukal, the Chief
Executive Officer of NQCI, nor Kelly McCrann, our Chairman and Chief
Executive Officer (or such other persons as may be appointed or elected in
their place), shall in any event receive a salary or other compensation
from the Joint Venture;
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except
as otherwise required by law, all decisions related to the operations of
the Joint Venture shall be made by a majority of the JV Board, except that
certain actions (as described in the Memorandum) by the Joint Venture or
any of its subsidiaries shall require the affirmative vote or written
consent of the holders of at least 90.1% of the Membership Interests then
outstanding; and
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from
and after August 1, 2009, the Xcorp Parties shall pay 61% and NQCI shall
pay 39% of the reasonable costs and expenses related to protecting,
preserving and exploiting the Licensed
Technology.
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In
addition, the Xcorp Parties agreed to contribute $500,000 in cash to the bank
account established by the Joint Venture, on the later of (x) three business
days of the consummation of the first to occur of the Proposed Transaction or
another Transaction and (y) the date on which the Joint Venture establishes such
bank account, for which the Parties (or their representatives) shall be joint
signatories. Furthermore, provided that the Proposed Transaction or a
Transaction has been consummated, NQCI agreed to contribute on the Xcorp
Parties’ behalf an additional $500,000 in cash to the Joint Venture at such time
as the JV Board reasonably determines that such funds are required
to facilitate the Joint Venture’s development of the Polymer Technology.
This additional contribution amount will be reimbursed to NQCI by the Xcorp
Parties from the first funds distributed to the Xcorp Parties by the Joint
Venture (other than pursuant to certain quarterly tax related distributions).
Additionally, with respect to the Joint Venture, the Parties agreed to certain
liquidity rights consisting of customary rights of first refusal and co-sale
rights, unlimited piggyback registration rights and the right to up to two
demand registrations (subject to lock-ups and other underwriter requirements),
customary preemptive rights (available to a member of the Joint Venture for so
long as such member holds at least 10% of the Membership Interests then
outstanding), customary anti-dilution protections and other standard
distribution and information rights.
The
Parties also agreed to cooperate as reasonably required by the Xcorp Parties in
order for us to consummate the Proposed Transaction for the sale of the Licensed
Technology or another Transaction involving the sale, license or other
disposition by us of the Licensed Technology. The Parties further agreed that
upon the consummation of a Proposed Transaction, they will allocate the
Transaction Proceeds received in such transaction in accordance with the terms
set forth in the Memorandum and summarized below, subject to the actual terms of
the Proposed Transaction, when and if such transaction is consummated. However,
there can be no assurances that the Proposed Transaction or any other
Transaction will occur or that the terms thereof will be similar to those
provided for in the Memorandum and summarized below, and the actual terms of the
Proposed Transaction or another Transaction will be provided for in the
definitive agreement entered into in connection with such
transaction.
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NQCI
shall receive the NQCI Amount;
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The
third party will pay the Xcorp Parties $250,000 upon the earlier of the
signing of a letter of intent and an acquisition agreement providing for
the Proposed Transaction, approximately 50% (less the foregoing $250,000)
of the Transaction Proceeds payable in cash to the Xcorp Parties as the
First Installment, approximately 25% of such proceeds as the Second
Installment
and 25% of such proceeds as the Third
Installment;
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The
Transaction Proceeds shall be allocated between the Parties as follows:
(i) $250,000 to the Xcorp Parties, payable to the Xcorp Parties on the
earlier of the signing of a letter of intent and an acquisition agreement
providing for the Proposed Transaction, (ii) to NQCI, an amount equal to
the NQCI Amount less the sum of the Second Installment and the Third
Installment, payable to NQCI within seven business days of receipt of the
First Installment, (iii) to the Xcorp Parties, the remainder of the First
Installment, (iv) to NQCI, the amount of the Second Installment, payable
to NQCI within three business days of receipt of the Second Installment,
(v) to NQCI, the amount of the Third Installment, payable to NQCI within
three business days of receipt of the Third Installment and (vi) the
remainder of the Transaction Proceeds shall be retained by the Xcorp
Parties; provided that under no circumstances shall NQCI be entitled to or
receive from the Transaction Proceeds an amount greater than the NQCI
Amount;
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In
the event any of the Installments are paid by the third party in other
than cash, NQCI shall receive its proportionate share of such
consideration in accordance with the terms of the Memorandum;
and
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The
Xcorp Parties shall also pay to NQCI 39% of any royalty or other payments
received by the Xcorp Parties in excess of the Transaction Proceeds in
connection with the Proposed
Transaction.
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In the
event that the timing or the amount of the payments from the third party under
the terms of the Proposed Transaction (or another Transaction) is other than as
contemplated in the Memorandum, the Parties shall make such equitable
adjustments as are required to preserve, to the maximum extent possible, the
intent of the distribution of Transaction Proceeds provisions of the Memorandum.
In the event that the Xcorp Parties do not consummate the Proposed Transaction
or if the terms of the Proposed Transaction are other than what is contemplated
under the Memorandum and the Xcorp Parties instead consummate an alternative
Transaction, the Parties shall apply the methodology specified in the Memorandum
to the maximum extent possible in order to allocate between them the proceeds of
such Transaction.
Additionally,
NQCI agreed to use its best efforts to enter into an agreement with a certain
third party pursuant to which such third party and NQCI will each (a) confirm
and acknowledge (i) their joint ownership of the Polymer Technology, (ii) the
existence and validity of the exclusive license to NQCI of the medical
applications of the Polymer Technology and (iii) the existence and validity of
the exclusive license to such third party of the non-medical applications of the
Polymer Technology; and (b) agree to prepare, execute and deliver as promptly as
practicable upon request by either of such parties a definitive license
agreement reflecting the terms and conditions of the foregoing exclusive
licenses. The Parties also agreed to certain customary representation and
warranty, indemnity and other miscellaneous terms.
The
foregoing summary of the Memorandum and the transactions contemplated thereby
does not purport to be complete and is subject to, and qualified in its entirety
by, the full text of the Memorandum filed as Exhibit 10.1 to our Quarterly
Report on Form 10-Q for the six month period ended June 30, 2009, filed
with the SEC on August 13, 2009.
Agreement and Stipulation
Regarding Partial Final Award
In
connection with the issuance of the Partial Final Award and the execution of the
Memorandum between the Parties, on August 7, 2009 Operations entered into the
Stipulation with NQCI, pursuant to which Operations and NQCI agreed (i) not to
challenge the terms of the Partial Final Award or any portion of such award,
(ii) that any of the Parties may, at any time, seek to confirm all but not part
of the Partial Final Award through the filing of an appropriate petition or
motion with the appropriate court and in response to such action to confirm the
Partial Final Award, no Party will oppose, object to or in any way seek to
hinder or delay the court’s confirmation of the Partial Final Award, but will in
fact support and stipulate to such confirmation, (iii) to waive any and all
right to appeal from, seek appellate review of, file or prosecute any lawsuit,
action, motion or proceeding, in law, equity, or otherwise, challenging,
opposing, seeking to modify or otherwise attacking the confirmed Partial Final
Award or the judgment thereon and (iv) subject to certain conditions, NQCI will
not attempt during the Non-Execution Period to execute on or file any motion,
petition or application or commence any proceeding seeking the collection of any
attorneys’ fees that have been awarded in NQCI’s favor under the terms of the
Partial Final Award, which is intended to allow the Parties a sufficient
period within which to execute an Acquisition Agreement in connection with the
Proposed Transaction or a Transaction; provided that such period shall
automatically be subject to an Extension Date if the Acquisition Agreement is
executed in full on or before December 1, 2009. If the execution of the
Acquisition Agreement occurs on or before December 1, 2009, the Extension Date
shall automatically be further extended for a period of 60 days for each
amendment to a proxy or information statement related to the transactions
contemplated by the Acquisition Agreement, filed by us in response to
comments made by the SEC.
In the
event we enter into an Acquisition Agreement for the Proposed Transaction
or another Transaction, we anticipate that we will call a special or annual
meeting of our stockholders at which our stockholders will be asked to vote on
the terms of such transaction, pursuant to a proxy or information statement that
we would file with the SEC in connection therewith. If and when we do file such
proxy or information statement with the SEC, our stockholders and other
investors are urged to carefully read such statement and any other relevant
documents filed with the SEC when they become available, because they will
contain important information about us and the transaction. Copies of such proxy
or information statement and other documents filed by us with the SEC will be
available at the Web site maintained by the SEC at www.sec.gov.
The
foregoing summary of the Stipulation and the transactions contemplated thereby
does not purport to be complete and is subject to, and qualified in its entirety
by, the full text of the Stipulation, filed as Exhibit 99.2 to our Quarterly
Report on Form 10-Q for the six month period ended June 30, 2009,
filed with the SEC on August 13, 2009.
As a
result of the issuance of the Partial Final Award and the execution of the
Stipulation and the Memorandum, the Technology Transaction will not occur, we
will no longer be obligated to issue the 9,230,000 shares of our common stock,
or the “Shares”, to NQCI and we will no longer be required to file a resale
registration statement under the Securities Act for the Shares.
ITEM
1A.
Risk Factors.
Investing
in our common stock involves a high degree of risk. In addition to the
information set forth in this report, you should carefully consider and evaluate
the risks described under section captioned “Risk Factors” in Part I, Item 1A of
our Annual Report, Part II, Item 1A of our Quarterly Reports and the
updated risk factors noted below. While we describe each risk separately herein
and in the Annual Report, some of these risks are interrelated and certain risks
could trigger the applicability of other risks described below. Also, the risks
and uncertainties described below and in the Annual Report are not the only ones
that we may face. Additional risks and uncertainties not presently known to us,
or that we currently do not consider significant, could also potentially impair,
and have a material adverse effect on, our business, results of operations
and financial condition. If any of these risks occur, our business, results of
operations and financial condition could be harmed, the price of our common
stock could decline, and future events and circumstances could differ
significantly from those anticipated in the forward-looking statements contained
in this Quarterly Report. As a result the trading price of our common stock may
decline, and you might lose part or all of your investment.
Except
for the updated risk factors set forth below, there have been no material
changes in our risk factors from those described in Part 1, Item 1A, “Risk
Factors”, in our Annual Report, other than those risk factors updated in Part
II, Item 1A, “Risk Factors”, in our Quarterly Reports.
We
do not have sufficient cash to fund the development of our products or maintain
our operations. If we are unable to obtain additional financing during 2009, we
will be required to substantially further curtail or cease operations, seek
bankruptcy protection and/or otherwise wind up our business. If we
raise additional funding through sales of equity or equity-based securities,
your shares will be diluted. If we need additional funding for operations and we
are unable to raise it, we may be forced to liquidate assets and/or curtail or
cease operations.
We
anticipate that, based on our current operating plan and our existing cash and
cash equivalents, we will be able to fund our operations approximately through
the next 30 days from November 22, 2009. We are actively managing our liquidity
by limiting our expenses. If we are unable to raise additional capital by such
date and/or consummate a transaction for the sale of all or substantially all of
our assets, we will be required to substantially further curtail or cease
operations, seek bankruptcy protection or otherwise wind up our business. Any of
these actions will materially harm our business, results of operations and any
future prospects.
We have
been engaged in efforts to defer all significant expenditures as well as major
expenditures for the development of all of our products pending additional
financing or partnership support. We continue to evaluate opportunities to
reduce operating expenses. However, there can be no assurance that we will be
successful in these efforts. If we are forced to reduce or cease our operations
we may trigger additional obligations, including severance obligations, which
would further negatively impact our liquidity and capital
resources.
As a
result of our recurring losses from operations and a net capital deficiency, the
report from our independent registered public accounting firm regarding our
consolidated financial statements for the year ended December 31, 2008 includes
an explanatory paragraph expressing substantial doubt about our ability to
continue as a going concern. We need to obtain debt, equity or equity-based
financing (such as convertible debt). Such financing may not be available on
favorable terms, or at all. If we raise additional funds by selling additional
shares of our capital stock, or securities convertible into shares of our
capital stock, the ownership interest of our existing stockholders may be
diluted. The amount of dilution could be increased by the issuance of warrants
or securities with other dilutive characteristics, such as anti-dilution clauses
or price resets. If we need additional funding for operations and we are unable
to raise it, we may be forced to liquidate assets and/or curtail or cease
operations.
We urge
you to review the additional information about our liquidity and capital
resources in the “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” section of this report. If we cease to continue as a
going concern due to lack of available capital or otherwise, you may lose your
entire investment in our company.
We
may need to liquidate in a voluntary or involuntary dissolution under Delaware
law or to seek protection under the provisions of the U.S. Bankruptcy Code, and
in that event, it is unlikely that our stockholders would receive any value for
their shares.
We have
incurred net operating losses every year since our inception. As of September
30, 2009, we had an accumulated deficit of approximately $47.4 million and have
been unable to raise the necessary capital to continue our existing operations.
We are currently evaluating our strategic alternatives with respect to the
development of any of our products and/or a transaction for the sale of a part,
all or substantially all of our assets. We cannot assure our stockholders that
any actions that we take would raise or generate sufficient capital to fully
address the uncertainties of our financial position. As a result, we may be
unable to realize value from our assets and discharge our liabilities in the
normal course of business. If we are unable to settle our obligations to our
creditors or if we are unable to consummate a transaction for the sale of all or
substantially all of our assets or another strategic transaction with respect to
the products that we have been engaged in developing, we would likely need to
liquidate in a voluntary dissolution under Delaware law or to seek protection
under the provisions of the U.S. Bankruptcy Code. In that event, we or a trustee
appointed by the court may be required to liquidate our assets. In either of
these events, we might realize significantly less value from our assets than
their carrying values on our financial statements. The funds resulting from the
liquidation of our assets would be used first to satisfy obligations to
creditors before any funds would be available to our stockholders, and any
shortfall in the proceeds would directly reduce the amounts available for
distribution, if any, to our creditors and to our stockholders.
In the
event we are required to liquidate under Delaware law or the federal bankruptcy
laws, it is highly unlikely that stockholders would receive any value for their
shares.
We
are seeking to maximize the value of our assets, and address our liabilities and
raise additional capital for our existing business. We are attempting to pursue
asset out-licenses, asset sales, mergers or similar strategic transactions with
respect to any of our product that we have been engaged in developing. We may be
unable to satisfy our liabilities and can provide no assurances that we can be
successful in completing any corporate transaction with any third party or
executing a strategic transaction with respect to our assets and/or our products
that we have been engaged in developing.
Due to
our financial position, we are unable to initiate further development of our
products, however, we have actively resumed research and development of the PAK
as a result of the direct reimbursement arrangement of the related expenditures
agreed to with a certain third party
with
which we have agreed to an exclusivity period to negotiate a potential
cooperative transaction. We continue to actively consider this potential
strategic deal, as well as all other strategic alternatives, with respect to our
products that we have been engaged in developing and our assets, with the goal
of maximizing the value of those assets. There are substantial challenges and
risks which will make it difficult to successfully implement any of these
opportunities. Even if we decide to pursue a strategic transaction with respect
to our products that we have been engaged in developing and/or for the sale of
all or substantially all of our assets, we may be unable to do so on acceptable
terms, if at all. There can be no assurances that any such transaction will
occur or that it would be accretive to our stockholders or result in any payment
being made to our stockholders. In the event we are unable to complete a
strategic transaction with respect to our products that we have been engaged in
developing and/or for the sale of a part, all or substantially all of our
assets, we may be forced to liquidate in a voluntary dissolution under Delaware
law or to seek protection under the provisions of the U.S. Bankruptcy
Code.
Stockholders
should recognize that in our efforts to address our liabilities and fund future
operations and development of our products, we may pursue strategic alternatives
that result in our stockholders having little or no continuing interest in our
assets as stockholders or otherwise. In such circumstances we will continue to
evaluate our alternatives in light of our cash position, including the
possibility that we may need to liquidate in a voluntary dissolution under
Delaware law or to seek protection under the provisions of the U.S. Bankruptcy
Code.
As
a result of being delisted from Amex on September 4, 2009 and our common stock
commencing quotation on the Pink Sheets effective as of the same date, the
following risk factor is no longer applicable to us.
“If
we fail to meet continued listing standards of Amex or Amex commences a
proceeding to delist our common stock from the exchange, our common stock may be
delisted from Amex which would have a material adverse effect on the price
of our common stock.
Our
common stock is currently traded on the Amex under the symbol “XCR”. In order
for our securities to be eligible for continued listing on Amex, we must remain
in compliance with certain Amex continued listing standards. As of December 31,
2008, we were not in compliance with Sections
1003(a)(i),
1003(a)(ii)
and 1003(a)(iii) of the Amex Company Guide (the “Company
Guide”) because our stockholders’ equity was below the level required by the
Amex continued listing standards. Our stockholders’ equity fell below the
required standard due to several years of operating losses. Amex will normally
consider suspending dealings in, or removing from the listing of, securities of
a company under Section 1003(a)(i) for a company that has stockholders’ equity
of less than $2,000,000 if such company has sustained losses from continuing
operations and/or net losses in two of its three most recent fiscal years, under
Section 1003(a)(ii) for a company that has stockholders’ equity of less than
$4,000,000 if such company has sustained losses from continuing operations
and/or net losses in three of its four most recent fiscal years or under Section
1003(a)(iii) for a company that has stockholders’ equity of less than $6,000,000
if such company has sustained losses from continuing operations and/or net
losses in its five most recent fiscal years. As of December 31, 2008, our
stockholders' equity was below that required under Sections 1003(a)(i),
1003(a)(ii) and 1003(a)(iii) of the Amex Company Guide and we have sustained net
losses in our five most recent fiscal years.
On May
15, 2009, we received notice (the “Notice”) from the staff of the Amex
indicating that we were not in compliance with certain of Amex’s continued
listing standards as set forth in Part 10 of the Company Guide. Specifically,
according to the Notice, we were not in compliance with
Section 1003(a)(iv) of the Company Guide in that we have “sustained losses
which are so substantial in relation to our overall operations or our existing
financial resources, or our financial condition has become so impaired that it
appears questionable, in the opinion of Amex, as to whether we will be able to
continue operations and/or meet our obligations as they mature.”
In order
to maintain its listing on Amex, we were required to submit a plan of compliance
(a “Plan”) to Amex by June 15, 2009, advising Amex of the actions we have
taken or intend to take to regain compliance with Section 1003(a)(iv)
by November 16, 2009. Subsequently, we submitted a Plan to Amex before the June
15, 2009 deadline and Amex is currently in the process of reviewing the Plan. If
the Plan is not accepted by Amex, we will be subject to delisting proceedings.
If Amex accepts the Plan, then we will be able to continue our listing during
the Plan period, during which time we will be subject to periodic reviews to
determine whether it is making progress consistent with the Plan. Even if the
Plan is accepted, if we are not in compliance with the continued listing
standards of the Company Guide by November 16, 2009, or if we do not make
progress consistent with the Plan during such period, Amex will initiate
delisting proceedings as appropriate.
In
accordance with the terms of the Notice, we have been included in a list of
issuers that are not in compliance with Amex’s continued listing standards,
which is posted at www.amex.com and includes the specific listing standard(s)
with which a company does not comply. Our common stock continues to trade on
Amex. Amex has advised us that Amex is utilizing the financial status
indicator fields in the Consolidated Tape Association’s Consolidated Tape System
(“CTS”) and Consolidated Quote Systems (“CQS”) Low Speed and High Speed Tapes to
identify companies that are noncompliant with NYSE Amex’s continued listing
standards and/or delinquent with respect to a required federal securities law
periodic filing. Accordingly, we have become subject to the trading symbol
extension “.BC” to denote our noncompliance. The indicator will not change our
trading symbol itself, but will be disseminated as an extension of our symbol on
the CTS and CQS whenever our trading symbol is transmitted with a quotation or
trade.
If Amex
does not accept our Plan or we receive notification from the Amex that we are no
longer in compliance with other continued listing requirements and if we fail to
regain compliance with such continued listing requirements, our common
stock may be delisted which would have a material adverse affect on the price
and liquidity of our common stock.
Furthermore, we cannot assure you that
we will continue to satisfy other requirements necessary to remain listed on the
Amex or that the NYSE Amex will not take additional actions to delist our common
stock. If for any reason, our common stock were to be delisted from the Amex, we
may not be able to list our common stock on another national exchange or market.
If our common stock is not listed on a national exchange or market, the trading
market for our common stock may become illiquid.”
ITEM
2. Unregistered Sales of Equity
Securities; Use of Proceeds from Registered Securities.
Except as
set forth below, for the nine months ended September 30, 2009, we did not have
any other unregistered sales of equity securities or use of proceeds from
registered securities.
In
September 2009, we issued 400,000 shares of restricted common stock to a certain
third party as compensation for consulting services. We issued the shares in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act, in a transaction not involving any public
offering.
ITEM
6. Exhibits.
|
No.
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|
Description of
Exhibit
|
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10.1
|
|
Binding
Memorandum of Understanding, dated August 7, 2009. (1)
|
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31.1
|
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Certification
of Chief Executive Officer Pursuant to Rule 13a-14 or 15d-14 of the
Securities Exchange Act of 1934, as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.*
|
|
31.2
|
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14 or 15d-14 of the
Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.*
|
|
32.1
|
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.**
|
|
32.2
|
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.**
|
|
99.1
|
|
Agreement
and Stipulation Regarding Partial Final Award, dated August 7, 2009.
(2)
|
______________
|
(1)
|
Incorporated
by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q, filed
with the SEC on August 13, 2009.
|
|
(2)
|
Incorporated
by reference to Exhibit 99.2 of our Quarterly Report on Form 10-Q, filed
with the SEC on August 13,
2009.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
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XCORPOREAL,
INC.
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|
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Date:
November 16, 2009
|
By:
|
/s/
Robert
Weinstein
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|
Robert
Weinstein
|
|
|
|
Chief
Financial Officer
|
|
|
|
(Principal
Financial Officer and
|
|
|
|
Principal
Accounting Officer)
|
Exhibit 31.1
CERTIFICATION
PURSUANT TO
RULE
13a-14/15d-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS
ADOPTED PURSUANT TO
SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kelly
J. McCrann, certify that:
1. I have
reviewed this Quarterly Report on Form 10-Q of Xcorporeal, Inc.
(“registrant”);
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations, and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures as of the end of the period covered by
this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect the
registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a) All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize, and
report financial information; and
(b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial
reporting.
|
Date:
November 16, 2009
|
/
s/
Kelly J.
McCrann
|
|
|
|
Kelly
J. McCrann
|
|
|
|
Chairman
of the Board and
|
|
|
|
Chief
Executive Officer
|
|
Exhibit 31.2
CERTIFICATION
PURSUANT TO
RULE
13a-14/15d-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS
ADOPTED PURSUANT TO
SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert
Weinstein, certify that:
1. I have
reviewed this Quarterly Report on Form 10-Q of Xcorporeal, Inc.
(“registrant”);
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations, and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures as of the end of the period covered by
this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect the
registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a) All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize, and
report financial information; and
(b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial
reporting.
|
Date:
November 16, 2009
|
/s/
Robert
Weinstein
|
|
|
|
Robert
Weinstein
|
|
|
|
Chief
Financial Officer
|
|
|
|
(Principal
Financial Officer and
|
|
|
|
Principal
Accounting Officer)
|
|
Exhibit 32.1
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report on Form 10-Q of Xcorporeal, Inc. (the
“Company”) for the quarter ended September 30, 2009, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Kelly
J. McCrann, Chairman of the Board and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The
Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended; and
(2) The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
|
/s/
Kelly J.
McCrann
|
|
Kelly
J. McCrann
|
|
Chief
Executive Officer and
|
|
Chairman
of the Board
|
Date:
November 16, 2009
Exhibit
32.2
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report on Form 10-Q of Xcorporeal, Inc. (the
“Company”) for the quarter ended September 30, 2009, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Robert
Weinstein, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The
Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended; and
(2) The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
|
/s/
Robert
Weinstein
|
|
Robert
Weinstein
|
|
Chief
Financial Officer and
|
|
Principal
Accounting Officer)
|
Date:
November 16, 2009
PROXY
XCORPOREAL,
INC.
PROXY
FOR SPECIAL MEETING OF STOCKHOLDERS
SOLICITED
BY THE BOARD OF DIRECTORS
The
undersigned hereby appoints Kelly J. McCrann and Robert Weinstein as proxies
with full power of substitution to vote and act on and consent in respect to any
and all shares of the stock of XCORPOREAL, Inc. (the “Company”) held or owned by
or standing in the name of the undersigned on the Company’s books on January 4,
2010 at the Special Meeting of Stockholders of the Company to be held the
offices of Kaye Scholer LLP, 1999 Avenue of the Stars, Suite 1700, Los Angeles,
California 90067-6048, on February ___, 2010, at 10:00 a.m. local time, and any
continuation or adjournment thereof, with all power the undersigned would
possess if personally present at the meeting.
THE UNDERSIGNED HEREBY DIRECTS AND
AUTHORIZES SAID PROXIES, AND EACH OF THEM, OR THEIR SUBSTITUTES, TO VOTE AS
SPECIFIED BELOW WITH RESPECT TO THE PROPOSALS LISTED IN THE PARAGRAPH ON THE
REVERSE SIDE, OR IF NO SPECIFICATION IS MADE, TO VOTE IN FAVOR
THEREOF.
The
undersigned hereby further confers upon said proxies, and each of them, or their
substitutes, discretionary authority to vote in respect to all other matters
which may properly come before the meeting or any continuation or adjournment
thereof.
The
undersigned hereby acknowledges receipt of: (1) Notice of Special Meeting of
Stockholders of the Company and (2) accompanying Proxy Statement.
XCORPOREAL,
INC.
ELECTRONIC
VOTING INSTRUCTIONS
YOU CAN
VOTE BY INTERNET OR TELEPHONE!
AVAILABLE
24 HOURS A DAY, 7 DAYS A WEEK
Instead
of mailing your proxy, you may choose one of the two voting methods outlined
below to vote your proxy.
VALIDATION
DETAILS ARE LOCATED BELOW IN THE TITLE BAR
|
PROXIES
SUBMITTED BY THE INTERNET OR TELEPHONE MUST BE RECEIVED BY 11:59 P.M.,
EASTERN DAYLIGHT TIME, ON FEBRUARY ___ , 2010.
|
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VOTE-BY-INTERNET
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OR
|
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VOTE-BY-TELEPHONE
|
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Log
on to the Internet
|
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Call
toll-free
|
|
and
go to [______________] -
|
|
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1-800-[___]-[____]
(_____) within the
|
|
follow
the steps outlined on the
|
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|
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United
States, Canada and Puerto Rico
|
|
secured
website.
|
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any
time on a touch tone telephone
|
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There
is no charge to you for the call.
|
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Follow
the instructions provided by the
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recorded
message.
|
Important
Notice Regarding the Availability of Proxy Materials for Xcorporeal,
Inc.’s
Special
Meeting of Stockholders to be Held on February ___, 2010
The Proxy
Statement and a form of a proxy card are available at
http://www.xcorporeal.com/htmls/sec_filings.html.
Information on Xcorporeal’s
website
does not constitute a part of this Proxy Statement.
(Continued
and to be signed on reverse side)
-
Detach here from proxy voting card -
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PLEASE
o
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MARK VOTE
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AS IN THIS
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EXAMPLE
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1.
To approve the sale of substantially all of the assets
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FOR
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AGAINST
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ABSTAIN
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of
Xcorporeal, Inc. pursuant to the Asset Purchase
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o
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o
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o
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Agreement,
dated December 14, 2009.
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2.
To approve the voluntary liquidation and
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FOR
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AGAINST
|
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ABSTAIN
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dissolution
of Xcorporeal, Inc. pursuant to a Plan
|
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o
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o
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o
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of
Liquidation and Dissolution.
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3.
To approve the adoption of the Liquidating Trust
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FOR
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AGAINST
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ABSTAIN
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Agreement.
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o
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o
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o
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4.
To approve any proposal to adjourn the Special
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FOR
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AGAINST
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ABSTAIN
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Meeting
to solicit additional proxies in favor of the
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o
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o
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o
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approval
of any or all of the foregoing proposals,
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if
there are insufficient votes for such approval
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at
time of the Special Meeting.
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This
proxy is solicited on behalf of the Board of Directors of XCORPOREAL,
Inc. Whether or not you plan to attend the meeting in
person, you are urged to sign and promptly mail this proxy in the
return envelope so that your stock may be represented at the Special
Meeting.
|
|
NOTE:
Sign exactly as your name(s) appears on your stock certificate. If shares of
stock stand of record in the names of two or more persons or in the name of
husband and wife, whether as joint tenants or otherwise, both or all of such
persons should sign the above proxy. If shares of stock are held of record by a
corporation, the proxy should be executed by the President or Vice President and
the Secretary or Assistant Secretary. Executors or administrators or other
fiduciaries who execute the above proxy for a deceased stockholder should give
their full title. Please date the proxy.
-
Detach here from proxy voting card
-