-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UAkkyjFfc7/ZtCtqru9GffRm/kFWOffpS8TMC0U1vcu2xr/Rp+pXqFUAbq5Xz3Dc 1BKE3wCP0HSdqi61WiYQ8Q== 0001091818-02-000049.txt : 20020414 0001091818-02-000049.hdr.sgml : 20020414 ACCESSION NUMBER: 0001091818-02-000049 CONFORMED SUBMISSION TYPE: 424B1 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 20020211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HYPERBARIC SYSTEMS CENTRAL INDEX KEY: 0001070181 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 770481056 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-74728 FILM NUMBER: 02534733 BUSINESS ADDRESS: STREET 1: 1127 HARKER AVE CITY: PALO ALTO STATE: CA ZIP: 94301 BUSINESS PHONE: 6503230943 MAIL ADDRESS: STREET 1: 1127 JARKER AVENUE CITY: PALO ALTO STATE: CA ZIP: 94301 424B1 1 hyrb_424b1-021102.txt PROSPECTUS SUMMARY [HYPERBARIC SYSTEMS LOGO] 10,000,000 Shares Common Stock $1.00 per share Hyperbaric Systems is offering 10,000,000 shares of common stock at a price of $1.00 per share. These shares are being offered by us, using certain of our executive officers, directors and broker-dealers, on a self-underwritten, best efforts basis. There is no minimum amount of securities that we must sell in order to receive any subscription. We may receive little or no funds from this offering. The funds that we receive from this offering will not be placed into an escrow account. We are not engaging underwriters for this offering. Our common stock is listed on the NASD O-T-C Market Bulletin Board under the symbol "HYRB.OB". On February 8, 2002, the last sale price of our common stock on the O-T-C Market Bulletin Board was $ 0.82 per share. ______________________________________________________________________________ See "Risk Factors" beginning on page 5 for a discussion of material issues to consider before purchasing our common stock. ______________________________________________________________________________ Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The date of this prospectus is February 8, 2002. TABLE OF CONTENTS Page Prospectus Summary...................................................... 5 Risk Factors............................................................ 7 Use of Proceeds......................................................... 13 Price Range of Common Stock and Dividend Policy......................... 13 Capitalization.......................................................... 14 Selected Consolidated Financial Data......... ......................... 15 Management's Discussion and Analysis of Financial Condition and Results of Operations......... ......................... 17 Business................................................................ 21 Management.............................................................. 30 Related Party Transactions.............................................. 35 Principal Stockholders.................................................. 36 Description of Capital Stock............................................ 37 Shares Eligible for Future Sale......................................... 38 Plan of Distribution.................................................... 39 Legal Matters........................................................... 40 Experts................................................................. 40 Where You Can Find Additional Information............................... 40 Index to Financial Statements.......................................... F-1 You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock. In this prospectus, "Hyperbaric Systems", "Hyperbaric," "we", "us" and "our" refer to Hyperbaric Systems, a California corporation. All trademarks, service marks or tradenames referred to in this prospectus are the property of their respective owners. PROSPECTUS SUMMARY This summary highlights information described more fully elsewhere in this prospectus. You should read the entire prospectus carefully. HYPERBARIC SYSTEMS Our Business The principal business objective of Hyperbaric Systems is to develop and provide economical, non-toxic methods of extending the shelf life and improving the quality of blood platelets and other biological material. THE OFFERING We may offer and sell shares of our common stock under this prospectus. Common stock offered 10,000,000 shares of common stock, $.001 par value. Price $1.00 per share. Common stock to be outstanding 23,424,100 shares, excluding an after this Offering aggregate of 3,252,098 shares reserved for issuance upon the exercise of outstanding stock options and warrants. Use of proceeds Proceeds we receive from the issuance of the shares will be used for working capital and general corporate purposes. O-T-C Market Bulletin Board symbol: "HYRB.OB" SUMMARY FINANCIAL DATA
Nine Months Ended September 30, Years Ended December 31, 2001 2000 2000 1999 Statements of Operations Data: (unaudited) (unaudited) Revenue $ -- $ -- $ -- $ -- Operating expenses: General and administrative: Stock based compensation 826,300 904,400 1,474,200 304,300 Other general and administrative expenses 503,600 518,800 701,900 502,700 Total general and administrative 1,329,900 1,423,200 2,176,100 807,000 Research and development 207,900 251,500 265,200 212,500 Sales and marketing 38,100 50,000 57,100 52,100 Total operating expenses 1,575,900 1,724,700 2,498,400 1,071,600 Loss from operations (1,575,900) (1,724,700) (2,498,400) (1,071,600) Other income (expense) (731,200) (87,000) (136,500) (25,800) Provision for income taxes -- (800) (800) -- Net loss (2,307,100) (1,812,500) (2,635,700) (1,098,200) Basic and diluted loss per share $ (0.19) $ (0.26) $ (0.37) $ (0.18) Basic and diluted weighted-average common shares outstanding 12,206,600 6,879,400 7,124,800 6,171,300 September 30, December 31, 2001 2000 Balance Sheet Data: Cash $ 201,200 $ 9,100 Working capital (deficit) $ (203,600) $(1,046,100) Total stockholders' deficiency $ (197,400) $(1,038,700)
RISK FACTORS Our business, financial condition or results of operations could be materially and adversely affected by any of the following risks: WE HAVE A HISTORY OF LOSSES, AND OUR ACCOUNTANTS HAVE RAISED DOUBTS ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN. Since our inception in 1998, we have incurred substantial losses from operations, resulting primarily from costs related to research and development and building our infrastructure. Because of our status as a development stage company and the need to conduct additional research and development prior to introducing products and services to the market, we expect to incur net losses for the foreseeable future. If our growth is slower than we anticipate or our operating expenses exceed our expectations, our losses will be significantly greater. We may never achieve profitability. Primarily as a result of these recurring losses, our independent certified public accountants modified their report on our December 31, 2000 financial statements, which are included in this prospectus, to include an uncertainty paragraph wherein they expressed substantial doubt about our ability to continue as a going concern. We are in the fourth year of research and development, with an accumulated loss during the development stage of $6,313,000. We currently do not know when our research and development will be completed, or if a product will ever result from this research and development activity. We anticipate that the funds spent on research and development activities will need to increase significantly prior to completion of research and development and commercialization of a product. Additionally, we may not be able to secure funding in the future necessary to complete our intended research and development activities. These conditions give rise to substantial doubt about our ability to continue as a going concern. Our financial statements do not include adjustments relating to the recoverability and classification of reported asset amounts or the amount and classification of liabilities that might be necessary should we be unable to continue as a going concern. Our continuation as a going concern is dependent upon our ability to obtain additional financing from the sale of our common stock, as may be required, and ultimately to attain profitability. WE REQUIRE IMMEDIATE ADDITIONAL CAPITAL. We currently anticipate that based on our short-term forecast of raising additional funds of $1.2 million, we will have sufficient funds to meet our anticipated needs for working capital, capital expenditures and business operations until April 2002. In the next twelve months, we estimate that we will have aggregate cash requirements of $2,500,000. However, we have raised only $925,100 through September 30, 2001. We therefore need to raise additional capital. Obtaining capital will be challenging in a difficult environment, due to the economic downturn in the United States economy and the further impact on the economy of recent terrorist attacks. We currently have no commitments for any future funding, and there can be no assurance that we will be able to obtain additional funding in the future from either debt or equity financings, bank loans, collaborative arrangements or other sources on terms acceptable to us, or at all. If adequate funds are not available or are not available on acceptable terms when required, we may be required to significantly curtail our operations or may not be able to fund expansion, take advantage of unanticipated acquisition opportunities, develop or enhance services or products or respond to competitive pressures. Such inability could have a material adverse effect on our business, results of operations and financial condition. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution and such securities may have rights, preferences and privileges senior to those of our common stock. WE ARE A DEVELOPMENT STAGE COMPANY, AND HAVE A LIMITED OPERATING HISTORY ON WHICH TO EVALUATE OUR POTENTIAL FOR FUTURE SUCCESS. We are a development stage company, and have yet to produce or sell any products or services. We have only a limited operating history upon which you can evaluate our business and prospects, and have yet to develop sufficient experience regarding actual revenues to be received from our products and services. You must consider the risks and uncertainties frequently encountered by early stage companies in new and rapidly evolving markets. If we are unsuccessful in addressing these risks and uncertainties, our business, results of operations and financial condition will be materially and adversely affected. OUR FUTURE REVENUES ARE UNPREDICTABLE AND OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY. We have a very limited operating history, and have no revenue to date. We cannot forecast with any degree of certainty whether any of our products or services will ever generate revenue or the amount of revenue to be generated by any of our products or services. In addition, we cannot predict the consistency of our quarterly operating results. Factors which may cause our operating results to fluctuate significantly from quarter to quarter include: - - our ability to attract new and repeat customers; - - our ability to keep current with the evolving requirements of our target market; - - our ability to protect our proprietary technology; - - the ability of our competitors to offer new or enhanced products or services; and - - unanticipated delays or cost increases with respect to research and development. Because of these and other factors, we believe that quarter-to-quarter comparisons of our results of operations are not good indicators of our future performance. If our operating results fall below the expectations of securities analysts and investors in some future periods, then our stock price may decline. ESTABLISHING OUR REVENUES AND ACHIEVING PROFITABILITY WILL DEPEND ON OUR ABILITY TO DEVELOP AND COMMERCIALIZE OUR PRODUCTS. Much of our ability to establish revenues and to achieve profitability and positive cash flows from operations will depend on the successful introduction of our products in development. Products based on our technologies will represent new methods of treatment and preservation. Our prospective customers, including blood banks, hospitals and clinics, will not use our products unless they determine that the benefits provided by these products are greater than those available from competing products. Even if the advantage from our planned products is clinically established, prospective customers may not elect to use such products for a variety of reasons. We may be required to undertake time-consuming and costly development activities and seek regulatory clearance or approval for new products. The completion of the development and commercialization of any of our products under development remains subject to all of the risks associated with the commercialization of new products based on innovative technologies, including unanticipated technical or other problems, manufacturing difficulties and the possible insufficiency of the funds allocated for the completion of such development. WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY. As a development stage company, we are entering a biological material preservation market that is presently addressed by large companies with extensive financial resources. Those companies include DuPont and Baxter, among others. Additionally, smaller companies with which we may compete include LifeCell Corporation for platelet preservation, Cerus for viral inactivation of platelets and other blood products and Cryo Life for preserving heart valves by cryo-preservation. We have limited funds with which to develop products and services, and many of our competitors have significantly more resources than we do. These companies are active in research and development of biological material preservation, and we do not know the current status of their development efforts. Most of the above competitors have significantly greater financial resources, technical expertise and managerial capabilities than we currently possess. WE MAY FAIL TO OBTAIN GOVERNMENT APPROVAL OF OUR PROCESSES. The United States Food & Drug Administration ("FDA") regulates the commercial distribution and marketability of medical solutions and equipment. In the event that we determine that these regulations apply to our proposed products, we will need to obtain FDA approval for such distribution. The process of obtaining FDA approval may be expensive, lengthy and unpredictable. We have not developed our products to the level where these approval processes can be started. We do not know if such approval could be obtained in a timely fashion, if at all. There also can be no assurance that the various states in which our products will be sold will not impose additional regulatory requirements or marketing impediments on our products. The regulation of our processes and products outside the United States will vary by country. Noncompliance with foreign country requirements may include some or all of the risks associated with noncompliance with FDA regulation as well as other risks. WE MAY FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS. We believe that the establishment of strategic partnerships will greatly benefit the growth of our business, and we intend to seek out and enter into strategic alliances. We may not be able to enter into these strategic partnerships on commercially reasonable terms or at all. Even if we enter into strategic alliances, our partners may not attract significant numbers of customers or otherwise prove advantageous to our business. Our inability to enter into new strategic alliances could have a material and adverse effect on our business. WE ARE SELLING UP TO 10,000,000 SHARES OF OUR COMMON STOCK ON A SELF- UNDERWRITTEN, BEST EFFORTS BASIS. AS A RESULT, PURCHASERS OF OUR COMMON STOCK WILL NOT HAVE THE BENEFIT OF AN UNDERWRITER'S DUE DILIGENCE, WHOSE TASK IS, AMONG OTHERS, TO CONFIRM THE ACCURACY OF THE DISCLOSURES MADE IN THIS PROSPECTUS. We are selling up to 10,000,000 shares of our common stock on a self- underwritten, best efforts basis. There is no minimum amount that we must receive with respect to these shares and we may receive a small amount of proceeds, if any. Due to the fact that we are not engaging underwriters, there will be no due diligence performed with respect to shares of common stock sold pursuant to this offering. An underwriter's due diligence involves confirming the accuracy of disclosures made in the prospectus and helping the issuer arrive at a fair price for the securities being sold. Persons who invest in this offering should be aware of a conflict of interest on our part as a result of the fact that there is no independent underwriter which will perform due diligence with respect to us, confirm the accuracy of our disclosures made in this prospectus or help us arrive at a fair price for our common stock. SINCE THIS OFFERING HAS NO MINIMUM, WE MAY NOT RAISE SIGNIFICANT PROCEEDS PRIOR TO ITS COMPLETION. There is no minimum amount that we may receive in this offering. Accordingly, we may receive a small amount of proceeds, if any. If we fail to raise significant proceeds, we may not be able to proceed with our proposed plan of operations, which would have a material adverse effect on our business. WE ARE LESS LIKELY TO SELL THE SHARES WE ARE OFFERING ON A SELF-UNDERWRITTEN, BEST EFFORTS BASIS THAN IF WE WERE SELLING THE SHARES THROUGH AN UNDERWRITER. By selling our common stock on an self-underwritten, "best efforts" basis, we will not be able to utilize the services of an underwriter to offer or sell our securities for us in connection with this offering. We will undertake our own best efforts to market and sell the securities to the public. We have not set a minimum with respect to the amount of our securities that we intend to sell. Even if a purchaser buys shares of our common stock, we may not be able to sell any other additional shares proposed for sale pursuant to this offering. If we do not raise a sufficient amount of funds through this offering, we may not be able to proceed with our proposed research and development and current plan of operations. This may cause significant losses and our stockholders may lose all or a substantial portion of their investment. SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT STOCKHOLDERS MAY ADVERSELY AFFECT OUR STOCK PRICE. To date, we have had a very limited trading volume in our common stock. As long as this condition continues, the sale of a significant number of shares of common stock at any particular time could be difficult to achieve at the market prices prevailing immediately before such shares are offered. In addition, sales of substantial amounts of common stock, including shares issued upon the exercise of outstanding options and warrants, under Securities and Exchange Commission Rule 144 or otherwise could adversely affect the prevailing market price of our common stock and could impair our ability to raise capital at that time through the sale of our securities. OUR COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE; OUR COMMON STOCK IS "PENNY STOCK". The market price of our common stock is likely to be highly volatile as the stock market in general, and the market for technology companies in particular, has been highly volatile. The trading prices of many technology companies' stocks have recently been highly volatile and have recorded lows well below historical highs. Factors that could cause such volatility in our common stock may include, among other things: - - actual or anticipated fluctuations in our quarterly operating results; - - announcements of technological innovations; - - our ability or inability to raise additional capital, or the terms and conditions of such additional capital; - - delays in the regulatory approval process for our products; - - changes in financial estimates by securities analysts; - - conditions or trends in our industry; and - - changes in the market valuations of other comparable companies. In addition, our stock is currently traded on the NASD O-T-C Bulletin Board and it is uncertain that we will be able to successfully apply for listing on the AMEX, the NASDAQ National Market, or the Nasdaq SmallCap Market in the foreseeable future due to the trading price for our common stock, our working capital and revenue history. Failure to list our shares on the AMEX, the Nasdaq National Market, or the Nasdaq SmallCap Market, will impair the liquidity for our common stock. The Securities and Exchange Commission has adopted regulations which generally define a "penny stock" to be any security that 1) is priced under five dollars, 2) is not traded on a national stock exchange or on NASDAQ, 3) may be listed in the "pink sheets" or the NASD OTC Bulletin Board, 4) is issued by a company that has less than $5 million in net tangible assets and has been in business less than three years, or by a company that has under $2 million in net tangible assets and has been in business for at least three years, or by a company that has revenues of $6 million for 3 years. Penny stocks can be very risky: penny stocks are low-priced shares of small companies not traded on an exchange or quoted on NASDAQ. Prices often are not available. Investors in penny stocks are often unable to sell stock back to the dealer that sold them the stock. Thus an investor may lose his/her investment. Our common stock is a "penny stock" and thus is subject to rules that impose additional sales practice requirements on broker/dealers who sell such securities to persons other than established customers and accredited investors, unless the common stock is listed on The Nasdaq SmallCap Market. Consequently, the "penny stock" rules may restrict the ability of broker/dealers to sell our securities, and may adversely affect the ability of holders of our common stock to resell their shares in the secondary market. SOME OF THE INFORMATION IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS. Some of the information in this prospectus contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "may", "will", "expect", "intend", "anticipate", "believe", "estimate" and "continue" or similar words. You should read statements that contain these words carefully because they: - - discuss our expectations about our future performance; - - contain projections of our future operating results or of our future financial condition; or - - state other "forward-looking" information. We believe it is important to communicate our expectations to our stockholders. There may be events in the future, however, that we are not able to predict accurately or over which we have no control. The risk factors listed in this section, as well as any cautionary language in this prospectus, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward- looking statements. Before you invest in our common stock, you should be aware that the occurrence of any of the events described in these risk factors and elsewhere in this prospectus could have a material and adverse effect on our business, results of operations and financial condition and that upon the occurrence of any of these events, the trading price of our common stock could decline and you could lose all or part of your investment. OUR COMMON SHAREHOLDERS MAY EXPERIENCE SUBSTANTIAL DILUTION. The sale of a substantial number of shares of our common stock in the public market, or the prospect of such sales, could materially and adversely affect the market price of our common stock. We are authorized to issue up to 50,000,000 shares of common stock. To the extent of such authorization, our Board of Directors will have the ability, without seeking stockholder approval, to issue additional shares of common stock in the future for such consideration as our Board of Directors may consider sufficient. The issuance of additional common stock in the future will reduce the proportionate ownership and voting power of our common stock held by existing stockholders. Sales in the public market of substantial amounts of our common stock, including sales of common stock issuable upon exercise of options and warrants, could depress prevailing market prices for our common stock. Even the perception that such sales could occur might impact market prices for the common stock. The existence of outstanding options and warrants may prove to hinder our future equity financings. WE MAY BE EXPOSED TO PRODUCT LIABILITY CLAIMS FOR WHICH WE CURRENTLY DO NOT CARRY INSURANCE. Our business will expose us to potential product liability risks inherent in the testing, manufacturing and marketing of medical products. We currently do not carry insurance covering these risks. We currently anticipate that prior to introducing any such products into the marketplace, we will obtain product liability insurance; however, we cannot assure you that such insurance will be available on acceptable terms or that it will provide adequate coverage against potential liabilities. OUR BUSINESS DEPENDS ON THE CONTINUED SERVICE AND PERFORMANCE OF OUR EMPLOYEES. Our performance is substantially dependent on the continued services and on the performance of our executive officers and other key employees. The loss of the services of any of these executive officers or key employees could materially and adversely affect our business. We currently do not have any "key person" insurance on any of our executive officers or key employees. Additionally, we believe we will need to attract, retain and motivate talented management and other highly skilled employees to be successful. Competition for employees that possess knowledge of our target market is intense. We may be unable to retain our key employees or attract, assimilate and retain other highly qualified employees in the future. USE OF PROCEEDS Proceeds we receive pursuant to the issuance of the shares will be used for working capital and general corporate purposes. PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY Our common stock has been traded on the NASD O-T-C Market Bulletin Board since May 18, 1999. Prior to that date, our common stock was not actively traded in the public market. Our common stock is listed on the NASD O-T-C Market Bulletin Board under the symbol "HYRB.OB". Since October 2001, our common stock has also been traded on the Frankfurt Stock Exchange under the symbol "HYT". The following table sets forth, for the periods indicated, the high and low bid prices for our common stock on the NASD O-T-C Market as reported by various Bulletin Board market makers. The quotations do not reflect adjustments for retail mark-ups, mark-downs, or commissions and may not necessarily reflect actual transactions. - ----------------------------------------------------------------------------- Period Low Bid High Bid - ------ ------- -------- Fiscal 2001 - ----------------------------------------------------------------------------- Fourth Quarter (October 1, 2001 to November 23, 2001) $ 0.55 $ 1.14 Third Quarter (July 1, 2001 to September 30, 2001) $ 0.46 $ 1.88 Second Quarter (April 1, 2001 to June 30, 2001) $ 0.16 $ 0.54 First Quarter (January 1, 2001 to March 31, 2001) $ 0.19 $ 1.37 Fiscal 2000 - ----------------------------------------------------------------------------- Fourth Quarter (October 1, 2000 to December 31, 2000) $ 0.26 $ 0.59 Third Quarter (July 1, 2000 to September 30, 2000) $ 0.40 $ 1.50 Second Quarter (April 1, 2000 to June 30, 2000) $ 1.01 $ 1.75 First Quarter (January 1, 2000 to March 31, 2000) $ 0.50 $ 1.75 Fiscal 1999 - ----------------------------------------------------------------------------- Fourth Quarter (October 1, 1999 to December 31, 1999) $ 0.59 $ 2.28 Third Quarter (July 1, 1999 to September 30, 1999) $ 0.25 $ 1.00 - ----------------------------------------------------------------------------- On November 23, 2001, the high and low bid prices of our common stock on the Bulletin Board were $ 1.05 and $ 1.03 per share, respectively, and there were approximately 170 holders of record of our common stock. To date, we have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings for funding growth and therefore, do not expect to pay any dividends in the foreseeable future. Payment of future dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion. CAPITALIZATION The following table sets forth, as of September 30, 2001, our capitalization on an actual basis as adjusted to reflect the issuance of common stock offered by this prospectus. This information should be read in conjunction with our Financial Statements and the related Notes appearing elsewhere in this prospectus. September 30, 2001 ------------------ Actual As Adjusted (1) ---------- ---------- Stockholders' deficit Common stock, no par or stated value; 50,000,000 shares authorized; 13,424,100 shares issued and outstanding actual, 23,424,100 shares issued and outstanding as adjusted $ 6,617,900 $ 16,617,900 Other receivables (502,300) (502,300) Accumulated deficit during the development stage (6,313,000) (6,313,000) ---------- ---------- Total stockholders' equity (deficit) (197,400) 13,802,600 ---------- ---------- Total capitalization $ (197,400) $ 13,802,600 ---------- ---------- (1) Reflects the issuance and sale of the 10,000,000 shares of common stock included in this prospectus, at a price of $1.00 per share. SELECTED FINANCIAL DATA The following selected financial data as of December 31, 1999 and 2000, and for each of the respective years then ended, are derived from our financial statements, which have been audited by L.L. Bradford & Company LLC, independent auditors, and are included elsewhere in this prospectus. The following selected financial data as of September 30, 2001 and for the nine- month periods ended September 30, 2000 and 2001 are derived from unaudited financial statements that, in our opinion, reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial position as of such date and results of operations for these periods. Operating results for the nine-month period ended September 30, 2001 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2001. The data set forth below should be read in conjunction with our Financial Statements and Notes thereto included elsewhere in this prospectus and with "Management's Discussion and Analysis of Financial Condition and Results of Operations".
Nine Months Ended September 30, Years Ended December 31, 2001 2000 2000 1999 Statements of Operations Data: (unaudited) (unaudited) Revenue $ -- $ -- $ -- $ -- Operating expenses: General and administrative: Stock based compensation 826,300 904,400 1,474,200 304,300 Other general and administrative Expenses 503,600 518,800 701,900 502,700 Total general and administrative 1,329,900 1,423,200 2,176,100 807,000 Research and development 207,900 251,500 265,200 212,500 Sales and marketing 38,100 50,000 57,100 52,100 Total operating expenses 1,575,900 1,724,700 2,498,400 1,071,600 Loss from operations (1,575,900) (1,724,700) (2,498,400) (1,071,600) Other income (expense) (731,200) (87,000) (136,500) (25,800) Provision for income taxes -- (800) (800) -- Net loss (2,307,100) (1,812,500) (2,635,700) (1,098,200) Basic and diluted loss per share $ (0.19) $ (0.26) $ (0.37) $ (0.18) Basic and diluted weighted-average common shares outstanding 12,206,600 6,879,400 7,124,800 6,171,300 September 30, December 31, 2001 2000 Balance Sheet Data: Cash $ 201,200 $ 9,100 Working capital (deficit) $ (203,600) $(1,046,100) Total stockholders' deficiency $ (197,400) $(1,038,700)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING OUR EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE WORDS "EXPECTS", "ANTICIPATES", "INTENDS", "BELIEVES", OR SIMILAR LANGUAGE. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS, UNCERTAINTIES AND OTHER FACTORS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS ARE BASED ON INFORMATION AVAILABLE TO US ON THE DATE HEREOF AND SPEAK ONLY AS OF THE DATE HEREOF. THE FACTORS DISCUSSED BELOW UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS ARE AMONG THOSE FACTORS THAT IN SOME CASES HAVE AFFECTED OUR RESULTS AND COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. The following discussion should be read in conjunction with the Financial Statements and Notes thereto. Overview We are a development stage company, and have a very limited operating history and no revenue to date. Our prospects must be considered in light of the risks and uncertainties encountered by companies in an early stage of development involving new technologies and overcoming regulatory approval process requirements before any revenue is possible. We have experienced operating losses since our inception. These losses have resulted from the significant costs incurred in the development of our technology and the establishment of our research and development facility. Expenditures will increase in all areas in order to execute our business plan, particularly in research and development and in gaining regulatory approval to market our products in the U.S. and abroad. Our principal business objective is to develop and provide economical, non-toxic methods of extending the shelf life and improving the quality of blood platelets and other biological material. We have been successful in preserving blood platelets for ten days under refrigeration while maintaining cell structure and morphology, which has never been done before to our knowledge. We hope to validate our findings at an independent blood center in California and submit them for government approval in the next quarter. We will continue efforts on prototype development and the generation of pre-clinical and clinical data in the months ahead. It is anticipated that we will submit our first application for FDA approval and begin clinical testing of our first product for blood platelet storage within the next six to nine months. We plan to begin research on kidney preservation and developing solutions that will operate under refrigerated temperature conditions within the next six months. In addition to our previously-filed patent applications, we filed a provisional patent application in June 2001 to cover recent discoveries in our platelet preservation process. We anticipate filing additional patent applications relating to platelet preservation during the next twelve months of operations, which should strengthen our competitive position in the platelet preservation marketplace. We will also seek strategic alliances with companies that have the capability to provide technical and clinical expertise as well as financial and marketing expertise to leverage our current expertise in these areas. We also plan to relocate our current research and development facility from Russia to a more suitable location to accommodate more equipment and personnel, and intend to establish a central administrative facility in the U.S. within the next six to nine months. RESULTS OF OPERATIONS Nine Months Ended September 30, 2001 Compared with Nine Months Ended September 30, 2000 General and Administrative Expenses. Our total general and administrative expenses in the nine months ended September 30, 2001 equaled $1,329,900, a decrease from $1,423,200 for the comparable period in 2000. This decrease was primarily due to a decrease in stock-based and cash-based compensation and payment of certain professional fees. Research and Development. Our research and development expenses decreased from $251,500 for the nine months ended September 30, 2000 to $207,900 for the nine months ended September 30, 2001, due to a shut down of our Russian branch in August 2001. Sales and Marketing Expenses. Our sales and marketing expenses for the nine months ended September 30, 2001 equaled $38,100, a decrease from $50,000 for the nine months ended September 30, 2000. This decrease was due to our decision to decrease our sales and marketing expenses until our products are ready for introduction into the market. Interest Income. We did not have any interest income for the nine-month period ended September 30, 2001, compared to interest income of $400 for the comparable period in 2000. Interest Expense. We incurred interest expense of $75,000 for the nine months ended September 30, 2001, as compared to $87,400 in the same period in 2000. The increase is primarily due to interest on related party notes payable. Net Loss. As a result of the foregoing factors, our net loss increased from $1,812,500 for the nine months ended September 30, 2000, to $2,307,100 for the nine months ended September 30, 2001. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 We did not generate revenue in the years ended December 31, 2000 and 1999. We are a development stage company in the third year of research and development activities, and do not anticipate receiving revenue until we complete product development and clinical testing. We incurred $2,176,100 in general and administrative expenses during the year ended December 31, 2000, as compared to $807,000 of general and administrative expenses during the year ended December 31, 1999. The increase was due primarily to a significant expansion in our use of stock-based compensation, which equaled $1,474,200 during the year ended December 31, 2000 compared to $304,300 in the comparable period in 1999. Due to our need to conserve operating cash, we utilized stock-based compensation to expand our business and retain several employees and consultants in 2000. The remainder of the increase was due to expenses related to our reporting and other obligations as a public company. We expensed $265,000 on research and development in the year ended December 31, 2000, compared to research and development expenses of $212,500 in the year ended December 31, 1999. The slight increase was due to an expansion of our research and development efforts. Our sales and marketing expenses remained essentially level, totaling $57,100 in the year ended December 31, 2000, compared to $52,100 in the year ended December 31, 1999. We intend to maintain a minimal sales and marketing effort until our products are ready for introduction into the market. Interest income equaled $500 for the year ended December 31, 2000, compared to $600 in the year ended December 31, 1999. This interest income reflected the minimal cash reserves that we maintained in these years. We incurred interest expense of $137,000 during the year ended December 31, 2000, compared to interest expense of $26,400 during the year ended December 31, 1999. The increase was due to interest recorded on a promissory note that we issued in June 2000, and on promissory notes that we issued pursuant to a rescission offer conducted in the third quarter of 2000. Based on these expenses, we incurred a net loss of $2,635,700 for the year ended December 31, 2000, compared to a loss of $1,098,200 for the year ended December 31, 1999. LIQUIDITY AND CAPITAL RESOURCES Since our inception, we have financed our operations through financing from the founders and private investors, a public offering under Regulation D Rule 504, and private placements under Regulation D Rule 505. Our operating plan for calendar year 2001 has been focused on development of our products. It is our estimate that a cash requirement of $1,200,000 is required to support this plan through April 2002, comprised of $1,000,000 for operating expenses and $200,000 for capital expenditures. We have received an aggregate of $925,100 through September 30, 2001, and are currently seeking additional funding. There can be no assurance that additional financing will be available at terms favorable to us or at all. In the next 12 months, we estimate that we will have aggregate cash requirements of $2,500,000, and will seek strategic investors to provide such financing. We anticipate continued growth in our operations and a corresponding growth in our operating expenses and capital expenditures. We do not anticipate any revenue from operations for the next two or three years. Therefore, our success will be dependent on funding from private placements of equity securities. At the present time, however, we have no agreements or other arrangements for any such private placements. GOING CONCERN We are in the fourth year of research and development, with an accumulated loss during the development stage through September 30, 2001 of $6,313,000. We currently do not know when our research and development will be completed, or if a product will ever result from this research and development activity. We anticipate that the funds spent on research and development activities will need to increase significantly prior to completion of research and development and commercialization of a product. Additionally, we may not be able to secure funding in the future necessary to complete our intended research and development activities. These conditions give rise to substantial doubt about our ability to continue as a going concern. Our financial statements do not include adjustments relating to the recoverability and classification of reported asset amounts or the amount and classification of liabilities that might be necessary should we be unable to continue as a going concern. Our continuation as a going concern is dependent upon our ability to obtain additional financing from the sale of our common stock, as may be required, and ultimately to attain profitability. The report of our independent certified public accountants, included in our most recent Annual Report on Form 10-KSB, contains a paragraph regarding our ability to continue as a going concern. BUSINESS Overview HyperBaric Systems was incorporated on February 26, 1998, in the State of California. We are a development stage company whose principal business objective is to develop and provide economical, non-toxic methods of extending the shelf life and improving the quality of blood platelets and other biological material, and bringing them to the market place. Our potential customers include blood banks, hospitals, clinics, and similar organizations. We have no revenue from product sales or services to date. Our development efforts and operations have been funded though equity infusions from investors and loans from shareholders. THE PLEXLIFE SYSTEM FOR PRESERVATION OF PLATELETS Blood platelets are a component of whole blood that is responsible for the clotting process of blood and used by the body when a person has an open wound from injury or surgery. The majority of platelets, however, are required by cancer patients who have undergone chemo-therapy treatments, a process that destroys platelets. In order to restore the platelets, continuous transfusions are given to patients until the body is able to restore normal platelet counts. Blood platelet preservation is achieved by storing the platelets under refrigeration utilizing a proprietary process and solution to maintain cell function viability and morphology. The objective of our technology is to maintain high quality platelets for a longer period of time than is currently possible using conventional methods. Even longer platelet storage periods could be achieved using hydrostatic pressure to prevent platelets from freezing under sub-zero temperatures. Further research is required to establish the protocol and storage times under these conditions. The storage and preservation of organs such as the kidney, liver and heart will be considered using the same techniques used in the preservation of platelets, however it is anticipated that the solution and process will vary for each organ type. On October 31, 1998, we applied for a patent on Method and Apparatus for Preserving Biological materials. We also applied for another patent in February 1999 covering processes and solutions to facilitate blood platelet preservation. Both patent applications have been submitted but have not been issued as of this date. We are continuing the development of our PlexLife System, a proprietary technology that extends the shelf life of blood platelets beyond the current five-day period. It is our goal to increase this time from five to seven or nine days and longer while preserving platelet quality and keeping bacterial growth to a minimum. Current practices used in blood banks promote bacteria growth and the quality degrades over time because platelets are stored at room temperature. The PlexLife system stores platelets at refrigeration temperatures, a few degrees above the freezing point of water. Historically, platelets stored at refrigerated temperatures for more than a few hours change their shape from discoid to sphere. It has been found that such platelets are quickly removed from circulation by the body within hours after transfusion and are not acceptable for cancer patients who have undergone chemotherapy, a process that destroys platelets. Repeated platelet transfusions are administered to cancer patients that have undergone chemotherapy until the body produces sufficient platelet counts where no further transfusions are required. It is desirable to have platelets that circulate for more than a few hours after transfusion. One test marker used to predict platelet survival after infusion is the morphology or the platelet shape. Platelets that maintain their discoid shape are more likely to survive longer after transfusion than platelets that change their shape. We are developing a process whereby platelets are refrigerated at slightly above the freezing point of water and stored there until needed. Recent tests show that up to 68% of the starting disc population remain discs after 24 hours of refrigeration. Our goal is to store refrigerated platelets for 7 days to 9 days and retain at least 50% discs. Tests are continuing to meet this goal. If the technology is proven through further testing and granted FDA approval, it should be considered unique and revolutionary. We are targeting blood banks and hospitals as our main customers in the worldwide markets. We are also seeking possible alliances and licensees. THE PLEXLIFE SYSTEM FOR PRESERVATION OF ORGANS We believe that the basic approach used to store platelets can be applied to the preservation of organs such as the kidney, heart and liver. The hyperbaric chamber could be an instrumental part of our ability to store organs at sub-zero temperatures to prevent freezing even at freezing temperatures. OPERATIONS AND FACILITIES During the initial months following our Company's incorporation, we recruited key members of the management and technical team, conducted market research and established the basic infrastructure and plan for our company. At September 30, 2001, we had six employees in the U.S. and eleven at our research facility in Russia. In August 1998, we established a branch office in Krasnoyarsk, Russia, where we conduct research and development for platelet preservation. Krasnoyarsk was chosen to take advantage of low cost technical expertise, availability of low cost materials such as titanium, and also because two members of our team, Dr. Vladimir Serebrennikov, Director of Research and Mr. Leonid Babak, Branch Chief of Russian Operations, both reside there. The Russian government has placed no restrictions on our ability to operate our business, hire employees in Russia, and freely transport our assets from Russia to the U.S. without any assessment or payments to the Russian Federation. There are no material restrictions or regulations to which we are subject in Russia as a result of our activities there. Conducting operations in Russia does not affect FDA approval or our proposed business activities in the United States, because no clinical trials are or will be conducted there. Limited platelet experiments have been conducted under contract at the Sacramento Blood Foundation in California and preliminary kidney preservation studies at a university in Ciudad, Obregon in Mexico. RESEARCH AND DEVELOPMENT We have developed a research and development strategy that considers the FDA and international approval processes and their impact on bringing a product to market. Based on these constraints, we have developed a research and development plan that requires multiple developments being conducted at the same time. We have developed a three-phase strategy, with estimated time requirements for the research and development, and market introduction of products. The plan starts with a platelet preservation product which stores platelets under refrigeration for seven to nine days using our PlexLife solution by itself. The second phase is the market introduction of the PlexLife System utilizing our hyperbaric container. Our third phase is to find a viable alternative to the current organ preservation methods with both solution under refrigeration and a complete system at sub-zero temperatures. Governmental approval for human testing will be required for each of these three phases of development. Our plan is to obtain the necessary approvals for each phase. PLATELET PRESERVATION - REFRIGERATION Our platelet preservation plan starts with a platelet preservation product using the PlexLife solution by itself. We have been able to successfully store platelets for ten days at refrigerated temperatures, which is considered to be a major milestone in the cold storage of platelets. We are now in the process of having our technology validated by an independent test facility in the U.S. Currently the industry stores platelets at ambient temperature for a maximum of five days, a FDA-imposed limit due to historic bacterial infection of the platelets. PLATELET PRESERVATION - SUB-ZERO STORAGE This development is intended to result in longer storage times for platelets, combining the use of solutions, sub-zero temperature and high pressure. It is our goal to develop a storage method that will preserve the viability of platelets with little or no bacterial growth for a period greater than 13 days. This will provide the medical community with a new and economical method for long-term platelet storage, thereby reducing the current loss of product. The successful implementation of refrigerated platelets at nine days or beyond may eliminate the need for sub-zero stored platelets for most blood center needs. ORGAN PRESERVATION This effort will incorporate storage of organs involving experiments with animal organs to demonstrate our ability to harvest, store and transplant organs. The goal is to achieve a level of physical condition and viability of these organs that is equal to or superior to present storage methods and storage times. The development process includes the development of solutions, cooling methods and possibly the use of chambers to protect organs from freezing at sub-zero storage temperatures. TEST RESULTS Non-clinical experiments and tests of platelet preservation and other research and development activities are being conducted in Russia as well as production of prototype and pre-production hyperbaric units used to store platelets at sub-zero temperatures. Recent tests of platelets stored under refrigeration include morphology, HSR and ESC- tests that may predict the behavior and survival of stored platelets after infusion in patients. Normally, platelets stored at refrigerated temperatures for only a few hours change their shape and become spherical. Such platelets are not useful for the major cancer market because they are quickly removed from circulation by the body. The platelets used in our tests were prepared using a proprietary process which includes a set of solutions and methods to allow platelets to be refrigerated without causing activation or shape change. We are continuing to conduct experiments to find the optimal conditions of storage at refrigerated temperatures. Currently, we were able to achieve up to 24 hours of refrigerated storage of platelets with up to 68% remaining discs. Up to 13% of the platelets remain discs after five days of storage. Subsequent tests indicated very little disc loss after the first 24 hours of storage, where disc percentage remained essentially constant for 72 hours, which was the limit of these particular tests. We are optimistic that we will achieve our goal to store platelets under refrigeration for 7 to 9 days and still retain 50% or greater discs. PRODUCT DEVELOPMENT We have engaged Quintiles, Inc., an international regulatory consulting firm, to assist with planning and managing the regulatory approval process. This firm specializes in the design and implementation of regulatory strategies, including experiment design and monitoring. Thus far we have used it only on a limited basis, as we have not yet started clinical trials. We anticipate that Quintiles' participation will increase as we meet with the FDA to proceed with clinical trials. As an overall strategy, we intend to limit the system claims for our Plexlife system and to progressively expand them as FDA and/or EU approval is granted for each succeeding claim. We also plan to market our first products in countries that have relaxed regulatory requirements for product sales. We believe that this should provide a shorter time to market. DISTRIBUTION, SALES AND CUSTOMERS It is our intent to market our platelet preservation products to blood centers and hospitals through established medical specialty dealers and distributors or equipment manufacturers that currently supply products to the market. Similar strategies will be employed for other future preservation products. It is our plan to license the manufacturing, sales and distribution of our Phemtest product to a manufacturer that sells feminine disposable products to the market. As we are in the development stage of operations, we currently have no customers and dependency on particular customers cannot be anticipated at this time. Sources and Availability of Raw Materials Since we are in the development stage, we have not yet begun to manufacture our products. Our products, as manufactured, should not use any exotic or hard to find raw materials and we believe that suppliers can be identified. We are constantly reviewing the materials used in the development process, with particular attention to availability and future cost. We cannot currently anticipate what the availability of materials and suppliers will be at the time our products enter production. OUR DISPOSABLE PHEMTEST TEST SYSTEM On September 1, 1998, we entered into a purchase agreement with Paul Okimoto, one of our officers and directors, acquiring all patent rights owned by Mr. Okimoto to a disposable test device called Phemtest. Mr. Okimoto received no cash payment in consideration for the assignment of the above mentioned patents. The product, a disposable vaginal disease test device for women, was developed during the early 1980's and the first patent application was filed in 1985. It is based on the pH level reading of the vaginal tract to determine the presence of bacterial infection. A pH reading of higher than 4.5 is an indication that a pathology exists and that the patient should see a physician for precise diagnosis and treatment. The prototype has a retractable tip that can be extended well into the vestibule of the vagina. Our product development efforts remain focused on the PlexLife system for platelet preservation. Therefore we intend to find a suitable licensee who is capable of completing the steps necessary to manufacture, and market the Phemtest product. To date, we have not located such a licensee, and there can be no assurance that a licensee will be obtained, or that we can negotiate a license on favorable terms. FDA approval of the Phemtest product will also be required; we have not commenced the testing process required for such approval. Competition As a development stage company, we are entering a biological material preservation market that is presently addressed by large companies with extensive financial resources. Those companies include DuPont and Baxter, among others. Additionally, smaller companies with which we may compete include LifeCell for platelet preservation, Cerus for viral inactivation for platelets and other blood products and Cryo Life for preserving heart valves by cryo-preservation. We believe that these companies are active in research and development of biological material preservation; however, we do not know the current status of their development efforts. Most of the above competitors have significantly greater financial resources, technical expertise and managerial capabilities than we currently possess. LifeCell Corporation is attempting to develop and obtain FDA approval for extending the storage time of blood platelets using cryo-preservatives. Cerus Corporation has developed a viral inactivation product for platelets that is intended to eliminate or reduce viral testing requirements. This product is now in clinical trials. These products if approved could have a material adverse impact on the market for extending platelet storage times using our technology. We believe that most, if not all, of our competitors use toxic chemicals such as Dimethyl Sulfoxide (DMSO) to preserve platelets, and store organs and other biologic material. It is our intent to achieve longer preservation of such material and provide higher quality material by using non-toxic solutions and by storing the biologic material at refrigerated temperatures for moderate storage times and below the freezing point of water, without destroying the cellular integrity of the material, for longer storage times. We also believe that our approach will be inexpensive in comparison to alternative preservation methods because the toxic solutions used by our competition must be removed from the material before use in most cases. The solution we use for platelet preservation is intended to be directly usable. INTELLECTUAL PROPERTY We consider our intellectual property to be a key cornerstone and asset of our business. As such, the intellectual property, which consists of applied-for patents, trade secrets, copyrights and know-how will be both developed and protected. We plan to gain wide protection for our intellectual property worldwide by patent and trademark filings in major foreign markets as well as the careful protection of trade secrets through contract and procedure. In addition to the previous patent application filings, we recently filed a provisional patent application in June 2001. Prior to the formation of our company, Vladimir Serebrennikov, our Technical Director of Research and Development, conducted independent research over a ten-year period, involving research concerning the preservation of biologic material using high pressure. After we were formed on February 26, 1998, the knowledge he gained was applied to the preservation of blood platelets, our primary market focus. New methods were developed in the container hardware design, processes and solutions for platelets, which continue to evolve as we continue our research and development efforts. On June 1, 1998, we were assigned the entire worldwide right, title and interest in a preservation technology applicable to, but not limited to platelets (a blood component), red blood cells, heart valves, tissue and organs. This technology concerned all of the discoveries, concepts and ideas whether patentable or not, invented and developed by Messrs. Leonid Babak and Vladimir Serebrennikov. The assignment was in exchange for our issuance of 877,500 shares of common stock to each of Messrs. Babak and Serebrennikov, valued at the time of issuance at $0.0025 per share. Since this assignment, we have been performing further research and development on the technology assigned, and have filed one patent application and a continuation in part, as described elsewhere herein. We anticipate filing additional patents on other aspects of the technology assigned by Messrs. Babak and Serebrennikov as additional inventions are reduced to practice. A patent covering the hardware design of the container, preservation methodologies and processes was filed by us on October 31, 1998 followed by a continuation-in-part (CIP), which was filed in February of 1999 covering our solutions and other preservation methodologies. We expect that additional patents will follow for organ preservation and other biologic material as such systems are developed. We filed an international application with the Patent Cooperation Treaty based on our U.S. patent application, designating all countries and regions on October 12, 1999. We believe that the patent and its extensions will protect the current core technology and provide us with a long-term competitive advantage in the market. New processes for preserving platelets were developed by us, which we have proceeded to patent. Although we believe that our methods for preserving platelets are patentable, there can be no assurance that we will be granted a patent. If such patents are not granted, this could have a material adverse effect on our ability to compete with other companies that have much greater financial and technical resources than we currently possess. We purchased the patents for a product titled Phemtest from Paul Okimoto, an officer and director, on September 1, 1998. The patents "VAGINAL TESTING APPLICATOR AND METHOD", Patent Number 4,784,158, was issued November 15, 1988, and "BODY CAVITY SPECIMEN COLLECTING AND TESTING APPARATUS", Patent Number 4,945,921, was issued August 7, 1990. Pursuant to the purchase agreement for the patents, we paid $1,375 to the law firm of Flehr, Hohbach, Test and Herbert as a patent maintenance fee to assure that the patents would remain in force. We also agreed to pay Mr. Okimoto a royalty payment of 5% of gross sales of Phemtest for the next five years. The first $16,000 in royalty payments are to be paid to a law firm to be designated by Mr. Okimoto, the next $75,000 in royalties are to be paid to Mr. Okimoto in shares of our common stock, valued at $2.00 per share, and the remaining royalties to be paid to Mr. Okimoto, if any, are to be paid in cash. Government Regulation The FDA and the European Union ("EU") have regulations for the marketability of medical solutions and equipment. We have not developed our products to the level where these approval processes can be started. We believe that all of the products currently in development will require FDA approval prior to marketing. Our initial products are at the prototype development stage and preclinical testing. We intend to submit our initial Investigational New Drug Exemption ("IND") and Investigational Device Exemption ("IDE") as soon as sufficient preclinical data is obtained. Both of the IND and IDE must be filed with the FDA prior to conducting clinical trials on human subjects. The success completion of clinical trials is the final step toward receiving FDA approval of our product for marketing. Our anticipated first product is a set of solutions and process used to store platelets at refrigerated temperatures by blood centers. As such, we must obtain regulatory approval from the FDA to market the solutions and process. In addition, if a device is required in the processing or storage of platelets, we must obtain regulatory approval from the FDA to market the device and the platelet product to be stored in our device. We intend to pursue 510(k) approval from the FDA for our storage device, although there is a possibility that the FDA could determine that an application for a new device may be required. A 510(k) submission will require a showing of "substantial equivalence" to one or more legally marketed devices. Regulatory review of a 510(k) application should take a few months less than that for a new device application. We believe that in either case the data required would be approximately the same preclinical and clinical data demonstrating safety and efficacy. In order for us to receive FDA 510(k) approval, we believe that we will need to show that platelets stored utilizing our device must be equivalent to platelets stored using currently approved methods. We would do these utilizing laboratory tests of platelet function and results of a clinical trial. If we determine that we will pursue new claims for platelets stored using our device, more extensive clinical trials would be necessary. We do not expect to pursue new claims initially, even if we believe that some may be supported by our research. We currently intend to file our initial IND/IDE within the first half of 2002. Depending on the outcome of clinical trials and the claims submitted for approval, we believe that it could take as long as two to four years to obtain needed data, submit requests for marketing approval, and obtain regulatory approval or denial. Russian regulations governing patents and procedures for ownership of patents are similar to those in the U.S., as they state that any patentable products or ideas developed through the branch personnel will be our property as long as an agreement with employees and outside sub-contract personnel stipulate that such inventions shall be assigned to us. This is similar to U.S. law. It is our practice to require that all personnel and outside contractors sign such an agreement. The assignment of products developed or patents granted prior to any payment by us for the development of a product would require approval by the Russian government. Even though Mr. Serebrennikov holds some patents individually which could relate to our technology, we have elected not to purchase these existing patents held by Mr. Serebrennikov because they have become public domain outside of Russia, and because we do not feel that they are important to our business. As an approved medical device, our storage product must be manufactured according to Quality Systems Regulations ("QSR") and Good Manufacturing Practices ("GMP"). We intend to be in compliance with these regulations during product development. It is our plan to manufacture devices through contract manufacturers experienced in the FDA regulations and familiar with QSR requirements and whose facilities are in compliance with QSR. We intend to audit all contract manufacturers to help assure proper compliance. Components of our device are comprised of usual metals, plastics, and electronic parts and should generate no unusual disposal streams. Employees We presently have 17 employees, six in the U.S. and 11 in Russia. Our employees are currently not represented by a collective bargaining agreement, and we believe that our relations with our employees are good. PROPERTY We currently own no real property and have no interest in any real property. We have not yet entered into a lease on facilities in the United States. Our principal address as reported herein is the residence of one of our employees. Although the real estate leasehold market in California is highly competitive, we believe that as we require facilities in California we will be able to find such available facilities at a reasonable cost. Our primary research and development effort is conducted at our facility in Kransnoyark, Russia. We employ eleven people at that facility, including researchers and support personnel. We have also conducted platelet experiments at the Sacramento Blood Foundation in Sacramento, California on a contract basis since April of 1999. The experiments are conducted under our direction, but using the Foundation's personnel. LEGAL PROCEEDINGS We are not aware of any threatened legal proceedings to which we are a party. MANAGEMENT Executive Officers and Directors The following table sets forth the names and positions of our directors and executive officers and other key personnel as of September 30, 2001: Name Age Position - -------------------------- --- -------------------------------------- Harry Masuda 57 President, Chief Executive Officer, and a Director Paul Okimoto 66 Chairman of the Board and Executive Vice President Rocky Umar 66 Vice President, Strategic Planning Robert Strom 59 Vice President, Marketing and Sales Dr. Luis Toledo 57 Chief Medical Officer Dr. David Lucas 59 Scientific Director George Tsukuda 57 Director Leonid Babak 52 Branch Chief of Russian Operations Dr. Vladimir Serebrennikov 52 Technical Director of Research and Development for Preservation Systems - ------------------------------------------------------------------------------ There is no family relationship between any of our directors and executive officers. Each Director holds office until the next annual meeting of the shareholders or until his successor is elected and duly qualified. Executive officers are appointed by and serve at the pleasure of the Board of Directors. The following sets forth biographical information concerning our directors, executive officers and key personnel for at least the past five years: HARRY MASUDA joined us in February 1998 as our Chief Executive Officer, President, and a Director. Mr. Masuda is the former president of several high tech companies including Piiceon, Inc., a manufacturer of computer peripheral products for microcomputers. Mr. Masuda also founded HK Microwave; a manufacturer of high frequency phase locked oscillators used in cellular telephone base stations, later acquired by Dynatech Corporation. Mr. Masuda received his BSEE and MSEE from San Jose State University. From October 1997 to February 1998, Mr. Masuda was a business consultant, and he served as President of International Web Exchange from July 1995 to October 1997. PAUL OKIMOTO joined us in February 1998 as Executive Vice President and a Director. Mr. Okimoto served as President of Sanhill Systems from 1991 to January 1998. LUIS TOLEDO, M.D., PhD. became our Chief Medical Officer in March 2000. Dr. Toledo is an internationally recognized authority on organ transplantation and preservation. He has authored 10 books on transplantation and related subjects, authored or co-authored 500 scientific publications, and contributed to chapters of 77 books. Dr. Toledo has held many medical staff positions including: Co-Chief, Transplantation and Director, Surgical Research at the Henry Ford Hospital and Chief, Transplantation and Director, Research at Mount Carmel Mercy Hospital. He is also currently the Director of Research at the Borgess Medical Center and is Director of the Michigan Transplant Institute. He also serves as Professor of Surgery and Director, Experimental Research Program at Michigan State University. ROCKY UMAR joined us in May 1998 as Vice President of Marketing; in March 2001 he became our Vice President, Strategic Planning. Mr. Umar was an Information Systems Consultant from 1993 to April 1998. Prior to consulting, Mr. Umar served as Senior Executive for Product Management, Marketing and Sales at Cogar Corporation, and was responsible for acquisitions, marketing and sales, and planning for Singer Company, Business Machines Division. Mr. Umar was also CEO of Witek, Inc. a wireless technology company. ROBERT STROM joined us in March 2001 as Vice President of Marketing and Sales. Mr. Strom started a newspaper, The Prince George Progress, in 1963 at the age of 20. After selling his publishing business seven years later, he became a partner in ACI, Inc., a New York-based cosmetics company, where he managed all sales and marketing activities. Mr. Strom subsequently founded Cosmania, an international cosmetics company that he sold to American International, Inc. in 1996. DAVID LUCAS, Ph.D. joined us in January 1999 as Scientific Director. Dr. Lucas obtained BA and Ph.D. degrees in Microbiology and Immunology from Duke University and did postdoctoral work at Harvard Medical Center. He served as a faculty member at the University of Arizona for 16 years, where he taught medical students and graduate students. Previous industry positions were as Director of Research for American Qualex, an immunochemical company; Vice President of Protein Technology, where he developed veterinary biologic products; Vice President for Research and Technology Transfer at Children's Hospital Oakland; and President of PediaPharm Corporation, a development stage pharmaceutical products company. Dr. Lucas was President of PediaPharm from 1994 to October 1998. GEORGE TSUKUDA became a member of our Board of Directors in February 1998. Mr. Tsukuda was self-employed as a psychotherapist from 1987 to September 1996, working primarily with children doing play therapy. After terminating his practice, he worked full-time on completing his doctoral dissertation in clinical social work through Smith College School of Social Work in Northhampton, Massachusetts. Mr. Tsukuda received his Ph.D. in August of 1998. Mr. Tsukuda has also been a Freelance Writer since August 1998. LEONID BABAK joined us in February 1998 as Branch Chief of Russian Operations. Mr. Babak graduated with a degree in physics and mathematics from Krasnoyarsk State University in Russia. He has held various positions within the University and the Geophysics department for the Metallurgy Ministry. Mr. Babak also served as President of Sibina TK, a trading company, from 1997 to February 1998, and was President of Krasnoyarsk Marketing from 1992 to 1997. VLADIMIR SEREBRENNIKOV joined us in February 1998 as our Director, Research and Development of Preservation Systems. He received a degree in physics from Krasnoyarsk State University in Russia and a doctoral degree in physics from the same university, specializing in high hydrostatic pressure research. He taught physics at Krasnoyarsk State University for a number of years and published numerous scientific papers related to high-pressure research phenomena. Dr. Serebrennikov has received a number of patents related to high-pressure storage of biological material at low temperatures. COMMITTEES OF THE BOARD OF DIRECTORS We do not currently have an Audit Committee, Compensation Committee or any other committee of the Board of Directors. DIRECTORS' COMPENSATION Directors who are also our employees receive no additional compensation for serving on the Board. We reimburse non-employee Directors for all travel and other expenses incurred in connection with attending meetings of the Board of Directors. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION We did not have a Compensation Committee or any other committee of the Board of Directors performing similar functions during the years ended December 31, 1999 and 2000. Mr. Harry Masuda, our Chief Executive Officer, participated in deliberations of the Board of Directors relating to his compensation. SECTION 16(A) BENEFICIAL REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers and Directors, and persons who own more than ten percent of a class of our capital stock, to file reports of ownership and changes in their ownership with the Securities and Exchange Commission. These persons are required to furnish us with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms received by us, we believe that during the year ended December 31, 2000, Messrs. Masuda, Umar, Strom and Tsukuda did not timely file a Form 3, and Mr. Masuda did not timely file certain Form 4s. EXECUTIVE COMPENSATION The following table sets forth information concerning compensation for services in all capacities awarded to, earned by or paid to our Chief Executive Officer (the "Named Executive Officer") during the years ended December 31, 2000 and 1999. No other executive officer received cash compensation in excess of $100,000 during these years. - --------------------------------------------------------------------------- SUMMARY COMPENSATION TABLE (1) - --------------------------------------------------------------------------- ANNUAL COMPENSATION - --------------------------------------------------------------------------- YEAR SALARY - --------------------------------------------------------------------------- H. Masuda, Chief Executive Officer 2000 $52,000 1999 $66,000 - --------------------------------------------------------------------------- (1) The Columns for "Bonus", "Other Annual Compensation", "Restricted Stock Awards", "Securities underlying Options/SARs", "LTIP Payouts" and "All Other Compensation" have been omitted because there is no compensation required to be reported. OPTION/SAR GRANTS IN LAST FISCAL YEAR No options or stock appreciation rights were granted to the Named Executive Officer during the year ended December 31, 2000. OPTION EXERCISES AND YEAR-END OPTION VALUES No options were exercised by the Named Executive Officer during the year ended December 31, 2000. At December 31, 2000, the Named Executive Officer did not hold any options to purchase our common stock. Employment Agreements And Termination Of Employment And Change Of Control Arrangements In May 1998, we entered into an employment agreement with Rocky Umar, employing him as our Vice President of Marketing for a minimum term of one year for a salary ranging from $2,000 per month to $10,000 per month, depending upon performance. This agreement also includes the payment of a commission equal to one percent of our sales in excess of $1,500,000 over a consecutive six-month period, not to exceed a $100,000 commission per 12-month period. Mr. Umar was also granted an option to purchase 200,000 shares of restricted common stock at $.025 per share pursuant to our Statutory Incentive Stock Option Plan. Mr. Umar is also eligible for a bonus of up to $5,000 after the first year of employment, for the sole purpose of exercising the stock options. In June 1998, we entered into an employment agreement with Vladimir Serebrennikov, employing him as the Technical Director of Preservation Systems for a minimum one-year term. The agreement provides for the payment to Mr. Serebrennikov of $400 per month, which salary may be adjusted, with a bonus of $25,000 upon the successful completion of project milestones set forth in the employment agreement. On the same date, we entered into an Agreement of Assignment of Patent and Technology with Mr. Serebrennikov, wherein Mr. Serebrennikov assigned to us the entire worldwide right, title and interest in and to his technology for preserving and transporting biologic and non- biologic material and in and to all of his discoveries, concepts and ideas, whether patentable or not. Pursuant to this agreement, Mr. Serebrennikov received 877,500 shares, valued at $0.0025 per share, of our restricted common stock. In June 1998, we entered into an employment agreement with Leonid Babak, providing for his employment as the Branch Chief of Russian Operations for a minimum one-year term. The agreement provides for a salary of $400 per month, which salary may be adjusted, with a bonus of $5,000 upon the successful completion of project milestones set forth in the employment agreement. On the same date, we also entered into an Agreement of Assignment of Patent and Technology with Mr. Babak. Mr. Babak assigned to us the entire worldwide right, title and interest in and to his technology for preserving and transporting biologic and non-biologic material and in and to all of his discoveries, concepts and ideas, whether patentable or not. Pursuant to this agreement, Mr. Babak received 877,500 shares, valued at $0.0025 per share, of our restricted common stock. LIMITATION OF LIABILITY AND INDEMNIFICATION Our Articles of Incorporation and By-laws provide for indemnification of our officers and directors to the fullest extent permissible under California law. Additionally, we have entered into indemnification agreements with each of our officers and Directors, and therefore purchasers of these securities may have a more limited right of action than they would have except for this limitation in the Articles of Incorporation and By-laws. These agreements provide, in general, that we shall indemnify and hold harmless such directors and officers to the fullest extent permitted by law against any judgments, fines, amounts paid in settlement, and expenses, including attorneys' fees and disbursements, incurred in connection with, or in any way arising out of, any claim, action or proceeding against, or affecting, such directors and officers resulting from, relating to or in any way arising out of, the service of such persons as our directors and officers. There are presently no material pending legal proceedings to which a director, officer and employee of ours is a party. There is no pending litigation or proceeding involving one of our directors, officers, employees or other agents as to which indemnification is being sought, and we are not aware of any pending or threatened litigation that may result in claims for indemnification by any director, officer, employee or other agent. We currently do not have directors' and officers' liability insurance to defend and indemnify directors and officers who are subject to claims made against them for their actions and omissions as directors and officers. We intend to purchase this insurance when funds are available. To the extent provisions of our articles of incorporation provide for indemnification of directors for liabilities arising under the Securities Act of 1933 or the Securities Exchange Act of 1934, those provisions are, in the opinion of the Securities and Exchange Commission, against public policy and therefore are unenforceable. RELATED PARTY TRANSACTIONS The following describes transactions to which we were or are a party and in which any of our directors, officers, or significant stockholders, or members of the immediate family of any of the foregoing persons, had or has a direct or indirect material interest. In May 1998, we entered into an employment agreement with Rocky Umar, employing him as our Vice President of Marketing for a minimum term of one year for a salary ranging from $2,000 per month to $10,000 per month, depending upon performance. This agreement also includes the payment of a commission equal to one percent of our sales in excess of $1,500,000 over a consecutive six-month period, not to exceed a $100,000 commission per 12-month period. Mr. Umar was also granted an option to purchase 200,000 shares of restricted common stock at $.025 per share pursuant to our Statutory Incentive Stock Option Plan. Mr. Umar is also eligible for a bonus of up to $5,000 after the first year of employment, for the sole purpose of exercising the stock options. In June 1998, we entered into an employment agreement with Vladimir Serebrennikov, employing him as the Technical Director of Preservation Systems for a minimum one-year term. The agreement provides for the payment to Mr. Serebrennikov of $400 per month, which salary may be adjusted, with a bonus of $25,000 upon the successful completion of project milestones set forth in the employment agreement. On the same date, we entered into an Agreement of Assignment of Patent and Technology with Mr. Serebrennikov, wherein Mr. Serebrennikov assigned to us the entire worldwide right, title and interest in and to his technology for preserving and transporting biologic and non- biologic material and in and to all of his discoveries, concepts and ideas, whether patentable or not. Pursuant to this agreement, Mr. Serebrennikov received 877,500 shares, valued at $0.0025 per share, of our restricted common stock. In June 1998, we entered into an employment agreement with Leonid Babak, providing for his employment as the Branch Chief of Russian Operations for a minimum one-year term. The agreement provides for a salary of $400 per month, which salary may be adjusted, with a bonus of $5,000 upon the successful completion of project milestones set forth in the employment agreement. On the same date, we also entered into an Agreement of Assignment of Patent and Technology with Mr. Babak. Mr. Babak assigned to us the entire worldwide right, title and interest in and to his technology for preserving and transporting biologic and non-biologic material and in and to all of his discoveries, concepts and ideas, whether patentable or not. Pursuant to this agreement, Mr. Babak received 877,500 shares, valued at $0.0025 per share, of our restricted common stock. On May 28, 1998, we entered into a Consultant Agreement with Dr. Luis Toledo, whereby Dr. Toledo was appointed to our advisory board for a minimum term of one year. The agreement also provides for a payment to Dr. Toledo of a commission equal to five percent of all sales within the organ transplant market for a five-year period from the date of the agreement, so long as Dr. Toledo remains a consultant and advisory board member. This commission is limited to a total of $1,000,000. Dr. Toledo has also been granted options to purchase 200,000 shares of restricted common stock at $.025 per share pursuant to our Non-Statutory Incentive Stock Option Plan, and is eligible for a bonus of up to $5,000 after the first year as a consultant and advisory board member up to the expiration of the stock options for the sole purpose of exercising the stock options. On June 24, 1998, we invited Eric Slayton, President of Global Healthcare, to be a member of our advisory board. We granted to Mr. Slayton an option to purchase 40,000 shares of restricted common stock at $.025 per share pursuant to our Non-Statutory Incentive Stock Option Plan. We purchased the patents for a product titled Phemtest from Paul Okimoto, an officer and director, on September 1, 1998. The patents "VAGINAL TESTING APPLICATOR AND METHOD", Patent Number 4,784,158, was issued November 15, 1988, and "BODY CAVITY SPECIMEN COLLECTING AND TESTING APPARATUS", Patent Number 4,945,921, was issued August 7, 1990. Pursuant to the purchase agreement for the patents, we paid $1,375 to the law firm of Flehr, Hohbach, Test and Herbert as a patent maintenance fee to assure that the patents would remain in force. We also agreed to pay Mr. Okimoto a royalty payment of 5% of gross sales of Phemtest for the next five years. The first $16,000 in royalty payments are to be paid to a law firm to be designated by Mr. Okimoto, the next $75,000 in royalties are to be paid to Mr. Okimoto in shares of our common stock, valued at $2.00 per share, and the remaining royalties to be paid to Mr. Okimoto, if any, are to be paid in cash. PRINCIPAL STOCKHOLDERS The following table sets forth information with respect to the beneficial ownership of our common stock as of November 12, 2001, by each person or group of affiliated persons who we know beneficially owned 5% or more of our common stock, each of our directors, and all of our directors and executive officers as a group. All of the share numbers are calculated to include the effect of a one to four stock split, effective July 21, 1998. Unless otherwise indicated in the footnotes to the table, the following individuals have sole vesting and sole investment control with respect to the shares they beneficially own. The amount of shares owned by each shareholder in the following table was calculated pursuant to Rule 13d-3(d) of the Exchange Act. Under Rule 13d-3(d), shares not outstanding which are subject to options, warrants, rights or conversion privileges exercisable within 60 days are deemed outstanding for the purpose of calculating the number and percentage owned by each other person listed. The total number of outstanding shares of common stock at November 12, 2001 is 13,424,100.
Principal Shareholders Name Number of Percent of Outstanding Percent of Outstanding and Address Shares Owned Shares Before Offering Shares After Offering - ---------------------------- ------------ ---------------------- ---------------------- Harry Masuda 1127 Harker Avenue Palo Alto, CA 94301 921,300 6.9% 3.9% YN Faarkaghyn Shiaght Lorne; House Trust Limited(1) 669 35th Street Richmond, CA 94805 917,500 6.8% 3.9% Paul Okimoto 669 35th Street Richmond, CA 94805 917,500 6.8% 3.9% Leonid Babak 31 Apt. 16; Novaja Zarja St. Krasnoyarsk, Russia 66028 877,500 6.5% 3.7% Vladimir Serebrennikov 1A Apt 53 Academgorodok Krasnoyarsk, Russia 66036 877,500 6.5% 3.7% Max C. Tanner 2950 E. Flamingo Rd.; Suite G Las Vegas, NV 89121 800,000 6.0% 3.4% All Officers and Directors as a Group (nine persons) 2,257,847 16.8% 9.6%
(1) Paul Okimoto, an officer and director of the Company, acted as Trustee in receiving and forwarding these shares to YN Faarkaghyn Shiaght Lorne House Trust Limited, for the benefit of Mark Tameichi Okimoto, Michael Akira Okimoto, Eric Yoshiro Okimoto, Daryl Takashi Okimoto, Mary T. Hernandez and Betty Yamaguchi. The permanent Trustee is Ronald Buchanan of Lorne House Management Ltd. Mr. Okimoto expressly disclaims beneficial ownership of said shares. As indicated in the table above, our executive officers and directors beneficially own, in the aggregate, 16.8% of our outstanding common stock. As a result these stockholders may, as a practical matter, be able to influence all matters requiring stockholder approval including the election of directors, merger or consolidation and the sale of all or substantially all of our assets. This concentration of ownership may delay, deter or prevent acts that would result in a change of control, which in turn could reduce the market price of our common stock. DESCRIPTION OF CAPITAL STOCK The descriptions in this section and in other sections of this prospectus of our securities and various provisions of our articles of incorporation and our bylaws are descriptions of the material terms of our securities. Our articles of incorporation and bylaws have been filed with the Securities and Exchange Commission as exhibits to this registration statement of which this prospectus forms a part. Common Stock. Our authorized capital stock consists of 50,000,000 shares of common stock, no par value per share. The holders of common stock (i) have equal ratable rights to dividends from funds legally available therefore, when, as and if declared by the Board of Directors of the Company; (ii) are entitled to share ratably in all of the assets of the Company available for distribution or winding up of the affairs of the Company; (iii) do not have preemptive subscription or conversion rights and there are no redemption rights applicable thereto; and (iv) are entitled to cumulative voting on all matters which shareholders may vote on at all meetings of shareholders. The holders of shares of our common stock have cumulative voting rights pursuant to the California General Corporation Law. Upon the effective election of cumulative voting by any shareholder, each shareholder entitled to vote at any election of directors may cumulate such shareholder votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which the shareholder's shares are normally entitled, or distribute the shareholder's votes on the same principle among as many candidates as the shareholder sees fit. To date, we have not paid or declared any dividends and we have no intention of declaring or paying any dividends in the foreseeable future. If we decide to pay dividends, that decision will be made by our Board of Directors, which will likely consider, among other things, our earnings, our capital requirements and our financial condition, as well as other relevant factors. Preferred Stock. We currently do not have any authorized preferred stock. Transfer Agent and Registrar We have engaged the services of First American Stock Transfer as our transfer agent and registrar. SHARES ELIGIBLE FOR FUTURE SALE On November 12, 2001, 13,424,100 shares of our common stock were outstanding, and 1,448,000 shares of common stock were subject to options granted under our Stock Option Plans and otherwise. Of the outstanding shares, 1,804,098 shares of common stock are immediately eligible for sale in the public market without restriction or further registration under the Securities Act of 1933, as amended (the "Act") unless purchased by or issued to any "affiliate" of ours, as that term is defined in Rule 144 promulgated under the Act. All other outstanding shares of our common stock are "restricted securities" as such term is defined under Rule 144, in that such shares were issued in private transactions not involving a public offering and may not be sold in the absence of registration other than in accordance with Rules 144, 144(k) or 701 promulgated under the Act or another exemption from registration. In general, under Rule 144 as currently in effect, a person, including an affiliate, who has beneficially owned shares for at least one year is entitled to sell, within any three-month period commencing 90 days after the date of this prospectus, a number of shares that does not exceed the greater of one percent of the then outstanding shares of our common stock or the average weekly trading volume in our common stock during the four calendar weeks preceding the date on which notice of such sale is filed, subject to various restrictions. In addition, a person who is not deemed to have been an affiliate of ours at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years would be entitled to sell those shares under Rule 144(k) without regard to the requirements described above. To the extent that shares were acquired from an affiliate, such person's holding period for the purpose of effecting a sale under Rule 144 commences on the date of transfer from the affiliate. There has been very limited trading volume in our common stock to date. Sales of substantial amounts of our common stock under Rule 144, this prospectus or otherwise could adversely affect the prevailing market price of our common stock and could impair our ability to raise capital through the future sale of our securities. PLAN OF DISTRIBUTION We are offering 10,000,000 shares of common stock, using certain of our executive officers, directors and broker-dealers, on a self-underwritten, best-efforts basis. There is no minimum amount of securities that we must sell in order to receive any subscriptions. The common stock will be offered at a price of $1.00 per share. From time to time, we may offer discounts to purchasers of large amounts of our common stock. Our offering will commence on the date of this prospectus and will continue until the earlier of December 31, 2002, all of the shares offered are sold, or we otherwise terminate the offering. If you decide to subscribe for any shares in this offering, you must execute and deliver a subscription agreement and deliver a check or certified funds in U.S. dollars to us for acceptance or rejection. Please contact Harry Masuda, President and Chief Executive Officer, at (650) 323-0943 for more information. LEGAL MATTERS The validity of the issuance of the common stock offered hereby will be passed upon for us by Silicon Valley Law Group, San Jose, California. EXPERTS The financial statements at December 31, 2000, and for the two years then ended, included in this prospectus have been audited by L.L. Bradford & Company, LLC, independent certified public accountants, to the extent and for the periods set forth in their report, which contains an explanatory paragraph regarding our ability to continue as a going concern, appearing elsewhere herein and in the registration statement, and are included in reliance upon such report given upon the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission a Registration Statement on Form SB-2. This prospectus, which is a part of the registration statement, does not contain all of the information included in the registration statement. Some information is omitted, and you should refer to the registration statement and its exhibits. With respect to references made in this prospectus to any contract, agreement or other document of ours, such references are not necessarily complete and you should refer to the exhibits attached to the Registration Statement for copies of the actual contract, agreement or other document. You may review a copy of the Registration Statement, including exhibits, at the Securities and Exchange Commission's public reference room at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 or Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The public may obtain information on the operation of the public reference room by calling the Securities and Exchange Commission at 1-800- SEC-0330. We will also file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy any reports, statements or other information on file at the public reference rooms. You can also request copies of these documents, for a copying fee, by writing to the Securities and Exchange Commission. Our Securities and Exchange Commission filings and the registration statement can also be reviewed by accessing the Securities and Exchange Commission's Internet site at http://www.sec.gov, which contains reports, proxy and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission. You should rely only on the information provided in this prospectus or any prospectus supplement. We have not authorized anyone else to provide you with different information. We are not making an offer to sell, nor soliciting an offer to buy, these securities in any jurisdiction where that would not be permitted or legal. Neither the delivery of this prospectus nor any sales made hereunder after the date of this prospectus shall create an implication that the information contained herein or our affairs have not changed since the date hereof. INDEX TO FINANCIAL STATEMENTS Unaudited Financial Statements at September 30, 2001 and for the Nine Months Then Ended Page ---- Balance Sheet (unaudited)............................................... F-2 Statements of Operations (unaudited).................................... F-3 Statement of Stockholders' Deficit (unaudited).......................... F-4 Statements of Cash Flows (unaudited).................................... F-6 Notes to Financial Statements (unaudited)............................... F-7 Financial Statements at December 31, 2000 and for the Two Years Then Ended Report of Independent Certified Public Accountants...................... F-10 Balance Sheet........................................................... F-11 Statements of Operations................................................ F-12 Statement of Stockholders' Equity....................................... F-13 Statements of Cash Flow................................................. F-16 Notes to Financial Statements........................................... F-17 F-2 HYPERBARIC SYSTEMS (A DEVELOPMENT STAGE COMPANY) BALANCE SHEET SEPTEMBER 30, 2001 (UNAUDITED) ASSETS Current assets Cash $ 201,200 Prepaid expenses and other current assets 30,400 --------- Total current assets 231,600 Fixed assets, net 6,200 --------- Total assets $ 237,800 ========= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities Accounts payable $ 63,200 Accrued liabilities 105,000 Stockholder payables 178,400 Stock subject to rescission 88,600 --------- Total current liabilities 435,200 --------- Total liabilities 435,200 Commitments and contingencies - Stockholders' deficit Common stock; no par or stated value; 50,000,000 shares authorized, 13,424,100 shares issued and outstanding 6,617,900 Other receivables (502,300) Accumulated deficit during development stage (6,313,000) --------- Total stockholders' deficit (197,400) --------- Total liabilities and stockholders' deficit $ 237,800 ========= See accompanying Notes to Financial Statements. F-3 HYPERBARIC SYSTEMS (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS (UNAUDITED)
February 26, 1998 (Inception) Three Months Ended Nine Months Ended Through September 30, June 30, September 30, 2001 2000 2001 2000 2001 Revenue $ -- $ -- $ -- $ -- $ -- Operating expenses General and administrative Stock based compensation 656,300 63,600 826,300 904,400 2,615,000 Other general and administrative 209,800 119,500 503,600 518,800 1,861,500 expenses Total general and administrative 866,100 183,100 1,329,900 1,423,200 4,476,500 Research and development 66,800 89,600 207,900 251,500 773,900 Sales and marketing 12,700 9,600 38,100 50,000 168,100 Total operating expenses 945,600 282,300 1,575,900 1,724,700 5,418,500 Loss from operations (945,600) (282,300) (1,575,900) (1,724,700) (5,418,500) Other income (expense) Loan fees (562,500) -- (656,200) -- (656,200) Interest income -- -- -- 400 2,500 Interest expense (30,100) (29,100) (75,000) (87,400) (238,400) Loss before provision for income taxes (1,538,200) (311,400) (2,307,100) (1,811,700) (6,310,600) Provision for income taxes -- -- -- 800 2,400 Net loss $(1,538,200) $ (311,400) $(2,307,100) $(1,812,500) $(6,313,000) Basic and diluted loss per share $ (0.12) $ (0.04) $ (0.19) $ (0.26) $ (0.94) Basic and diluted weighted average common shares outstanding 12,627,700 7,081,600 12,206,600 6,879,400 6,734,700 See accompanying Notes to Financial Statements.
F-4 HYPERBARIC SYSTEMS (A DEVELOPMENT STAGE COMPANY) STATEMENT OF STOCKHOLDERS' DEFICIT (UNAUDITED)
Loan Fees Prepaid Related to Option Consulting Common Stock to Purchase Services Paid in Shares Amount Common Stock Common Stock Balance, December 31, 2000 $ 8,136,200 $3,818,600 $(656,200) $ (195,200) Issuance of common stock for cash (net offering costs of $95,300) 2,167,700 772,100 -- -- Stock options and warrants exercised 734,200 153,000 -- -- Issuance of common stock in satisfaction of accounts payable 67,600 24,800 -- -- Satisfaction of accrued liabilities related to granting warrants -- 18,100 -- -- Satisfaction of stockholder payables related to granting warrants -- 274,000 -- -- Issuance of common in satisfaction of promissory note issued as a result of rescission offering 416,600 178,200 -- -- Issuance of common stock in satisfaction of convertible note payable related party (including interest of $82,700) 257,300 272,700 -- -- Amortization of prepaid consulting services -- -- -- 195,200 Issuance of common stock for services 184,500 91,200 -- -- Stock based compensation related to granting warrants and options -- 280,200 -- -- Deemed interest expense related to conversion feature of note payable -- 55,700 -- -- Current period amortization of loan fees related to options to purchase common stock -- -- 656,200 -- Issuance of common stock for other receivables 800,000 104,000 -- -- Common shares due related to termination of consulting agreement 510,000 398,300 -- -- Issuance of common stock in exchange for consulting agreement 150,000 177,000 -- -- Net loss -- -- -- -- Balance, September 30, 2001 $13,424,100 $6,617,900 $ -- $ -- See accompanying Notes to Financial Statements.
F-5 HYPERBARIC SYSTEMS (A DEVELOPMENT STAGE COMPANY) STATEMENT OF STOCKHOLDERS' DEFICIT (continued) (UNAUDITED)
Total Other Accumulated Stockholders Receivables Deficit Deficit Balance, December 31, 2000 $ -- $ (4,005,900) $ (1,038,700) Issuance of common stock for cash (net offering costs of $95,300) -- -- 772,1000 Stock options and warrants exercised -- -- 153,000 Issuance of common stock in satisfaction of accounts payable -- -- 24,800 Satisfaction of accrued liabilities related to granting warrants -- -- 18,100 Satisfaction of stockholder payables related to granting warrants -- -- 274,000 Issuance of common in satisfaction of promissory note issued as a result of rescission offering -- -- 178,200 Issuance of common stock in satisfaction of convertible note payable related party (including interest of $82,700) -- -- 272,700 Amortization of prepaid consulting services -- -- 195,200 Issuance of common stock for services -- -- 91,200 Stock based compensation related to granting warrants and options -- -- 280,200 Deemed interest expense related to conversion feature of note payable -- -- 55,700 Current period amortization of loan fees related to options to purchase common stock -- -- 656,200 Issuance of common stock for other receivables (104,000) -- -- Common shares due related to termination of consulting agreement (398,300) -- -- Issuance of common stock in exchange for consulting agreement -- -- 177,000 Net loss -- (2,307,100) (2,307,100) Balance, September 30, 2001 $ (502,300) $ (6,313,000) $ (197,400)
F-6 HYPERBARIC SYSTEMS (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS (UNAUDITED)
February 26, 1998 Nine Months Ended (Inception) September 30, Through 2001 2000 September 30, 2001 Cash Flows From Operating Activities: Net loss $ (2,307,100) $ (1,812,500) $ (6,313,000) Adjustments to reconcile net loss to net cash used in operating activities: Stock based compensation 826,300 904,400 2,615,000 Depreciation 1,200 1,200 3,600 Deemed interest expense 55,700 -- 92,800 Amortization of discount and loan fees on notes payable 656,200 84,500 774,800 Changes in operating assets liabilities: -- -- Change in prepaid expenses and other assets (21,300) (5,500) (30,400) Change in bank overdraft (500) -- -- Change in accounts payable (23,900) 60,000 87,900 Change in accrued liabilities (16,100) (82,400) 123,100 Change in related party wages and accrued expenses -- 133,100 -- Change in stockholder payables 150,500 -- 421,700 Net cash used by operating activities 679,000 (717,200) (2,224,500) Cash flows from investing activities: Purchase of fixed assets -- (6,100) (9,800) Net cash used by investing activities -- (6,100) (9,800) Cash flows from financing activities: Proceeds from issuance of common stock 925,100 515,900 2,209,800 Proceeds from borrowing on notes payable 24,000 161,700 323,100 Principal payments on notes payable (68,900) (5,000) (97,400) Net cash provided by financing activities 880,200 672,600 2,435,500 Net increase (decrease) in cash and cash equivalents 201,200 (50,700) 201,200 Cash and cash equivalents, beginning of period -- 52,100 -- Cash and Cash Equivalents, end of period 201,200 $ 1,400 $ 201,200 Supplemental Disclosure of Cash Flow Information: Cash paid for income taxes -- $ -- $ 1,600 Cash paid for interest -- $ 600 $ 200 Schedule of non-cash financing activities: Principal payments on notes payable through the issuance of common stock -- $ -- $ 5,000 Rescission of common stock related to Reg. D offering dated September 1, 1999 and February 2, 2000 -- $ -- $ 334,400 Loan fees related to options to purchase common stock -- $ -- $ 750,000 Issuance of common stock for prepaid consulting services -- $ -- $ 335,100 Issuance of common stock in exchange for other receivable 104,000 $ -- $ 104,000 Issuance of common stock in satisfaction of accounts payable 24,800 $ -- $ 24,800 Satisfaction of accrued liabilities relating to granting warrants 18,100 $ -- $ 18,100 Satisfaction of stockholder payables related to granting of warrants and options 274,000 $ -- $ 274,000 Issuance of common stock for finder's fees 16,900 $ -- $ 16,900 Issuance of common stock in satisfaction of convertible note payable related party 190,000 $ -- $ 190,000 Issuance of common stock in satisfaction of promissory note issued as a result of rescission offering $ 178,200 $ -- $ 245,700 See accompanying Notes to Financial Statements
F-7 HYPERBARIC SYSTEMS (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. BASIS OF PRESENTATION The accompanying financial statements have been prepared in accordance with Securities and Exchange Commission requirements for interim financial statements. Therefore, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The financial statements should be read in conjunction with the Form 10-KSB for the year ended December 31, 2000 of HyperBaric Systems (the Company). The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the full year. In the opinion of management, the information contained herein reflects all adjustments necessary to make the results of operations for the interim periods a fair statement of such operations. All such adjustments are of a normal recurring nature. NOTE 2. OTHER RECEIVABLE During April 2001, the Company issued 800,000 shares of the Company's common stock for $104,000. As of September 30, 2001, the Company has not received these funds and is currently taking necessary actions to collect or have the shares returned and cancelled. NOTE 3. CONVERTIBLE NOTE PAYABLE - RELATED PARTY During June 2000, the Company entered into an unsecured loan agreement with a stockholder to borrow a principal amount up to $500,000, with interest at 10%, and maturing in June 2004. The loan agreement also contained a conversion feature for converting the loan balance into restricted common stock, based on the unpaid principal and interest balances of the loan. In September 2001, the stockholder converted the balance of $272,700 (including interest of $87,700) into 257,300 shares of the Company's common stock. Additionally, a warrant was granted to purchase 500,000 shares of the Company's common stock at $0.30 per share. The fair value of the warrants as computed using the Black-Scholes option-pricing model was $750,000 and was recorded as unamortized loan fees related to options to purchase common stock - - related party, of which $93,800 was recorded as loan fees during the year ended December 31, 2000. As of September 30, 2001, the remaining unamortized loan fees were completely amortized upon conversion of the related loan. NOTE 4. TERMINATION OF CONSULTING AGREEMENT In January 2001, the Company entered into a Financial Consulting Services Agreement with an entity whereby the entity agreed to provide financial consulting services for one year in exchange for 200,000 restricted shares of the Company's common stock. In conjunction with that agreement, the Company also entered into a second Financial Consulting Services Agreement with three individuals whereby the individuals agreed to provide financial consulting services for one year in exchange for 510,000 free trading shares of the Company's common stock. These two agreements will hereafter be collectively referred to as the Consulting Agreements while both the entity and individuals will hereafter be collectively referred to as the Consultants. In January 2001, the Company issued 710,000 shares of the Company's common stock as pertaining to the Consulting Agreements. In August 2001, the Company entered into a Termination Agreement (the Termination) with the Consultants, whereby both parties agreed to terminate the Consulting Agreements. As a material inducement to the Company and Consultants to enter into the Termination, the Consultants agreed to return all 710,000 shares of the Company's common stock in exchange for 150,000 shares of the Company's common stock. As of September 30, 2001, the Company received and cancelled 200,000 shares from the Consultant, while the remaining 510,000 shares remain outstanding. The 710,000 shares were originally expensed in the amount of $554,500 as stock based compensation in January 2001. As no services were performed by the Consultants, the Company reversed the entire expense of $554,500 while recording an other receivable of $398,300 for the 510,000 outstanding shares. The following proforma statements of operations shows the effects of the Termination and related reduction of expenses for the three months ended March 30, 2001, the period in which the transactions were previously reported: F-8
For the Three Months Ended March 31, 2001 Previously Reported Restated Difference ------------------- ---------- ---------- Revenue $ -- $ -- $ -- Operating expenses 884,800 330,300 554,500 Loss from operations 884,800 330,300 554,500 Other expense 70,600 70,600 0 Loss before provision for income taxes 955,400 400,900 554,500 Provision for income taxes -- -- -- --------- --------- --------- Net Loss $ 955,400 $ 400,900 $ 554,500 ========= ========= ========= Basic and diluted loss per common share $ (0.10) $ (0.05) $ (0.05) ========= ========= ========= Basic and diluted weighted average Common shares outstanding 9,241,000 8,712,400 528,600 ========= ========= =========
NOTE 5. STOCK OPTION PLAN The Company adopted the following stock option plan during August 2001: 2001 Stock Option Plan The purpose of this plan is to strengthen the Company by providing both incentive stock options (ISO's) and nonqualified options (NQO's) as a means to: (i) encourage selected officers and key employees to accept or continue employment with the Company, and (ii) increase the interest of selected officers, directors, key employees and consultants in the Company's welfare through participation in the growth in value of the common stock of the Company. Eligible persons may be granted ISO's with an exercise price of no less then the fair value of the stock on the date of grant or NQO's with an exercise price of no less then 85% of the fair value of the stock on the date of grant. Both types of options may be granted to any ten percent stockholder at no less then 110% of the fair market value of the stock covered by the option at the time the option is granted. The Company has set aside 1,585,500 shares of common stock for this plan with no options granted as of September 30, 2001. F-9 NOTE 6. GOING CONCERN The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company is in the development stage, has no operating revenue and incurred a net loss of $2,307,100 for the nine months ended September 30, 2001. The Company is in the fourth year of research and development, with an accumulated loss during the development stage of $6,313,000, a stockholders' deficit of $197,400 and a working capital deficiency of $203,600 as of September 30, 2001. As of September 30, 2001, management is uncertain as to the completion date of its proposed products or whether the products will be completed at all. Management's plan, in this regard, is to raise financing of approximately $2,500,000 through a combination of equity and debt financing. Management believes this amount will be sufficient to finance the continuing research for the next twelve months. However, there is no assurance that the Company will be successful in raising such financing. These conditions give rise to substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include adjustments relating to the recoverability and classification of reported asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to obtain additional financing or sale of its common stock as may be required and ultimately to attain profitability. L.L. Bradford & Company, LLC Certified Public Accountants and Consultants 3441 Eastern Avenue Las Vegas, Nevada 89109 F-10 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders HyperBaric Systems (A Development Stage Company) Palo Alto, California We have audited the accompanying balance sheet of HyperBaric Systems (A Development Stage Company) as of December 31, 2000, and the related statements of operations, stockholders' deficit, and cash flows for the years ended December 31, 2000 and 1999 and for the period from February 26, 1998 (Inception) through December 31, 2000. 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 audit. We conducted our audit in accordance auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of HyperBaric Systems as of December 31, 2000, and the results of its activities and cash flows for the years ended December 31, 2000 and 1999 and for the period from February 26, 1998 (Inception) through December 31, 2000 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 losses from operations and current liabilities exceed current assets, all of which raise substantial doubt about its ability to continue as a going concern. Management's plans in regards 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. L.L. Bradford & Company, LLC March 14, 2001 Las Vegas, Nevada F-11 HYPERBARIC SYSTEMS (A DEVELOPMENT STAGE COMPANY) BALANCE SHEET DECEMBER 31, 2000 ASSETS Current assets Prepaid expenses and other current assets $9,100 Total current assets 9,100 Fixed assets, net 7,400 Total assets $16,500 LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities Bank overdraft $500 Accounts payable 111,900 Accrued liabilities 139,200 Stockholder payables 301,900 Note payable - related party 68,900 Convertible note payable - related party 166,000 Stock subject to rescission 266,800 Total current liabilities 1,055,200 Total liabilities 1,055,200 Commitments and contingencies -- Stockholders' deficit Common stock; no par or stated value; 50,000,000 shares authorized, 8,136,200 shares issued and outstanding 3,818,600 Unamortized loan fees related to options to purchase common stock - related party, net (656,200) Prepaid consulting services paid in common stock (195,200) Accumulated deficit during development stage (4,005,900) Total stockholders' deficit (1,038,700) Total liabilities and stockholders' deficit $16,500 See accompanying Notes to Financial Statements. F-12 HYPERBARIC SYSTEMS (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS
February 26, 1998 Year ended December 31, (Inception) Through 2000 1999 December 31, 2000 Revenue $ -- $ -- $ -- Operating expenses General and administrative Stock based compensation 1,474,200 304,300 1,788,700 Other general and administrative expenses 701,900 502,700 1,357,900 Total general and administrative 2,176,100 807,000 3,146,600 Research and development 265,200 212,500 566,000 Sales and marketing 57,100 52,100 130,000 Total operating expenses 2,498,400 1,071,600 3,842,600 Loss from operations (2,498,400) (1,071,600) (3,842,600) Other income (expense) Interest income 500 600 2,500 Interest expense (137,000) (26,400) (163,400) Loss before provision for income taxes (2,634,900) (1,097,400) (4,003,500) Provision for income taxes 800 800 2,400 Net loss $ (2,635,700) $ (1,098,200) $ (4,005,900) Basic and diluted loss per common share $ (0.37) $ (0.18) $ (0.65) Basic and diluted weighted average common shares outstanding 7,124,800 6,171,300 6,130,770 See accompanying Notes to Financial Statements.
F-13 HYPERBARIC SYSTEMS (A DEVELOPMENT STAGE COMPANY) STATEMENT OF STOCKHOLDERS' EQUITY
Loan Fees Related to Options Common Stock to Purchase Shares Amount Common Stock Balance at February 26, 1998 (Date of inception) -- $ -- $ -- Issuance of common stock in February 1998 for founders' services 4,058,000 10,200 -- Issuance of common stock for cash in April, July and December 1998 413,600 118,400 -- Issuance of common stock in September 1998 in Reg. D offering, net of offering cost of $10,600 1,000,000 239,400 -- Issuance of common stock in September 1998 for cash paid and services, net of offering cost of $149,400 600,000 600 -- Net loss -- -- -- Balance, December 31, 1998 6,071,600 368,600 -- Issuance of common stock and warrants for cash during 1999 from Reg. D offering dated September 1, 1999, net of offering costs of $163,000 287,200 379,500 -- Exercise of stock options in August 1999 31,000 400 -- Issuance of common stock for services in May and December 1999 5,200 7,800 -- Issuance of warrants in August and September 1999 in connection with debt securities -- 24,800 -- Stock based compensation relating to options and warrants -- 296,500 -- Net loss -- -- -- Balance, December 31, 1999 6,395,000 1,077,600 -- Issuance of common stock and warrants for cash during 2000 from Reg. D offering dated September 1, 1999, net of offering costs of $25,800 140,100 184,400 -- Issuance of common stock and warrants for cash during 2000 from Reg. D offering dated February 2, 2000, net of offering costs of $28,100 224,500 308,700 -- Issuance of common stock for cash 81,200 24,400 -- Stock options and warrants exercised 390,600 28,900 -- Issuance of common stock in satisfaction of promissory note issued as a result of rescission offering 206,700 67,500 -- Rescission of common stock related to Reg. D offering dated September 1, 1999 and February 2, 2000 (222,900) (334,400) -- Issuance of common stock in satisfaction of promissory note 13,500 5,000 -- Issuance of common stock for prepaid consulting services in October and December 2000 907,500 335,100 -- Amortization of prepaid consulting services -- -- -- Stock based compensation relating to options and warrants -- 1,334,300 -- Loan fees related to options to purchase common stock -- 750,000 (750,000) Deemed interest expense related to conversion feature of note payable -- 37,100 -- Current period amortization of loan fees related to options to purchase common stock -- -- 93,800 Net loss -- -- -- Balance, December 31, 2000 8,136,200 $3,818,600 $ (656,200) See accompanying Notes to Financial Statements.
F-14 HYPERBARIC SYSTEMS (A DEVELOPMENT STAGE COMPANY) STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
Prepaid Consulting Total Services Paid in Accumulated Stockholders' Common Stock Deficit Deficit Balance at February 26, 1998 (Date of inception) $ -- $ -- $ -- Issuance of common stock in February 1998 for founders' services -- -- 10,200 Issuance of common stock for cash in April, July and December 1998 -- -- 118,400 Issuance of common stock in September 1998 in Reg. D offering, net of offering cost of $10,600 -- -- 239,400 Issuance of common stock in September 1998 for cash paid and services, net of offering cost of $149,400 -- -- 600 Net loss -- (272,000) (272,000) Balance, December 31, 1998 -- (272,000) 96,600 Issuance of common stock and warrants for cash during 1999 from Reg. D offering dated September 1, 1999, net of offering costs of $163,000 -- -- 379,500 Exercise of stock options in August 1999 -- -- 400 Issuance of common stock for services in May and December 1999 -- -- 7,800 Issuance of warrants in August and September 1999 in connection with debt securities -- -- 24,800 Stock based compensation relating to options and warrants -- -- 296,500 Net loss -- (1,098,200) (1,098,200) Balance, December 31, 1999 -- (1,370,200) (292,600) Issuance of common stock and warrants for cash during 2000 from Reg. D offering dated September 1, 1999, net of offering costs of $25,800 -- -- 184,400 Issuance of common stock and warrants for cash during 2000 from Reg. D offering dated February 2, 2000, net of offering costs of $28,100 -- -- 308,700 Issuance of common stock for cash -- -- 24,400 Stock options and warrants exercised -- -- 28,900 Issuance of common stock in satisfaction of promissory note issued as a result of rescission offering -- -- 67,500 Rescission of common stock related to Reg. D offering dated September 1, 1999 and February 2, 2000 -- -- (334,400) Issuance of common stock in satisfaction of promissory note -- -- 5,000 Issuance of common stock for prepaid consulting services in October and December 2000 (335,100) -- -- Amortization of prepaid consulting services 139,900 -- 139,900 Stock based compensation relating to options and warrants -- -- 1,334,300 Loan fees related to options to purchase common stock -- -- -- Deemed interest expense related to conversion feature of note payable -- -- 37,100 Current period amortization of loan fees related to options to purchase common stock -- -- 93,800 Net loss -- (2,635,700) (2,635,700) Balance, December 31, 2000 $ (195,200) $ (4,005,900) $ (1,038,700) See accompanying Notes to Financial Statements.
F-15 HYPERBARIC SYSTEMS (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOW
February 26, 1998 Year ended December 31, (Inception) Through 2000 1999 December 31, 2000 Cash flows from operating activities: Net loss $(2,635,700) $(1,098,200) $(4,005,900) Adjustments to reconcile net loss to net cash used in operating activities: Stock based compensation 1,474,200 304,300 1,788,700 Depreciation 1,800 600 2,400 Deemed interest expense 37,100 -- 37,100 Amortization of discount and loan fees on notes payable 93,800 24,800 118,600 Changes in operating assets and liabilities: Increase in prepaid expenses and other assets (5,800) (2,300) (9,100) Increase in bank overdraft 500 -- 500 Increase (decrease) in accounts payable (17,100) 117,400 111,800 Increase in accrued liabilities 35,200 97,200 139,200 Increase in stockholder payables 188,700 69,600 271,200 Net cash used by operating activities (827,300) (486,600) (1,545,500) Cash flows from investing activities: Purchase of fixed assets (6,100) (2,700) (9,800) Net cash provided by investing activities (6,100) (2,700) (9,800) Cash flows from financing activities: Proceeds from issuance of common stock 546,400 379,900 1,284,700 Proceeds from borrowing on notes payable 234,900 64,200 299,100 Principal payments on notes payable -- (28,500) (28,500) Net cash provided by financing activities 781,300 415,600 1,555,300 Net increase in cash and cash equivalents (52,100) (73,700) -- Cash and cash equivalents, beginning of period 52,100 125,800 -- Cash and cash equivalents, end of period $ - $ 52,100 $ -- Supplemental disclosure of cash flow information: Cash paid for income taxes $ 800 $ 1,600 $ 2,400 Cash paid for interest $ 300 $ 200 $ 500 Schedule of non-cash financing activities: Principal payments on notes payable through the issuance of common stock $ 5,000 $ -- $ 5,000 Rescission of common stock related to Reg. D offering dated September 1, 1999 and February 2, 2000 $ 334,400 $ -- $ 334,400 Issuance of common stock in satisfaction of promissory note issued as a result of rescission offering $ 67,500 $ -- $ 67,500 Issuance of common stock for prepaid consulting services $ 335,100 $ -- $ 335,100 Loan fees related to options to purchase common stock $ 750,000 $ -- $ 750,000 See accompanying Notes to Financial Statements.
F-16 HYPERBARIC SYSTEMS (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS NOTE 1. DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT POLICIES Description of business - HyperBaric Systems (hereinafter referred to as the Company) is a development stage company incorporated on February 26, 1998 under the laws of the state of California. The business purpose of the Company is to develop the technology for preservation of certain biologic material, including platelets (a blood component), red blood cells, heart valves, tissue and organs. The Company is in the third year of its research and development activities. The Company's goal is to develop the technology to extend and maintain functionality of these materials for much longer periods of time than is currently possible. The Company's research facility is located in Krasnoyarsk, Russia. Going concern - The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company is in the development stage, has no operating revenue and incurred a net loss of approximately $2,635,700 for the year ended December 31, 2000. The Company is in the third year of research and development, with an accumulated loss during the development stage of approximately $4,005,900, a stockholders' deficit of approximately $1,038,700 and a working capital deficiency of approximately $1,046,100 as of December 31, 2000. As of December 31, 2000, management is uncertain as to the completion date or if the product will be completed at all. Management's plan, in this regard, is to raise financing of approximately $2,500,000 through a combination of equity and debt financing. Management believes this amount will be sufficient to finance the continuing research for the next twelve months. However, there is no assurance that the Company will be successful in raising such financing. These conditions give rise to substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include adjustments relating to the recoverability and classification of reported asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to obtain additional financing or sale of its common stock as may be required and ultimately to attain profitability. Stock split - On July 21, 1998, the Company completed a four for one stock split. All shares and per share data have been restated to reflect the stock split. Use of estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. F-17 Cash and cash equivalents - The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company places its cash and cash equivalents with high quality institutions. At times, such funds may be in excess of the Federal Insurance Corporation limit of $100,000. Fixed assets - Fixed assets are stated at cost less accumulated depreciation. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income (expense). The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful life of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability. Research and development costs - Research and development expenditures are charged to expenses as incurred. Advertising and marketing costs - The Company recognizes advertising and marketing costs in accordance with Statement of Position 93-7 Reporting on Advertising Costs. Accordingly, the Company expenses the costs of producing advertisements at the time production occurs, and expenses the costs of communication advertising in the period in which the advertising space or airtime is used. Income taxes - The Company accounts for its income taxes in accordance with Statement of Financial Accounting Standards No. 109. Deferred tax assets and liabilities at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. New accounting pronouncement - In June 1998, the FASB issued SFAS No.133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS No. 133, as amended by SFAS No. 137, is effective for all quarters of fiscal years beginning after June 15, 2000. F-18 The Company has not entered into derivatives contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of the new standard on January 1, 2001 to affect its financial statements. Stock-based compensation - The Company applies Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and Related Interpretations in accounting for stock options issued to employees. Under APB No. 25, employee compensation cost is recognized when estimated fair value of the underlying stock on date of the grant exceeds price of the stock option. For stock options and warrants issued to non-employees, the Company applies SFAS No. 123, Accounting for Stock-Based Compensation, which requires the recognition of compensation cost based upon the fair value of stock options at the grant date using the Black-Scholes option pricing model. Fair values of financial instruments - The carrying amounts of accounts payable, accrued liabilities, and stocks subject to rescission approximate fair value because of the short-term maturity of these instruments. Net loss per common share - The Company computes net loss per share in accordance with SFAS No. 128, Earnings per Share. (SFAS No. 128) and SEC Staff Accounting Bulletin No. 98 (SAB 98'). Under the provisions of SFAS No. 128 and SAB 98, basic net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net loss per share gives effect to common stock equivalents, however, potential common shares are excluded if their effect is antidilutive. For the years ended December 31, 2000 and 1999, options and warrants to purchase 1,935,500 and 1,325,300 shares of common stock, respectively, were excluded from the computation of diluted earnings per share because their effect would be antidilutive. Foreign currency transactions - Gains or losses resulting from foreign currency transactions have been insignificant and are included in the statement of operations when incurred. Reclassification - The financial statements from 1999 and 1998 reflect certain reclassifications, which have no effect on net income, to conform to classifications in the current year. HYPERBARIC SYSTEMS (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (continued) NOTE 2. FIXED ASSETS A summary of fixed assets of December 31, 2000 follows: Equipment $ 9,800 Less: accumulated depreciation $ 2,400 ------- $ 7,400 NOTE 3. ACCRUED LIABILITIES A summary of accrued liabilities of December 31, 2000 follows: Wages payable $ 81,500 Accrued expenses 57,700 ------- $ 139,200 NOTE 4. RELATED PARTY TRANSACTIONS The Company has entered into various stock purchase agreements and employment contracts with stockholders of the Company. As of December 31, 2000, the following transactions and/or agreements have been consummated: On February 26, 1998, the Company issued 877,500 shares of common stock valued at $0.0025 per share to an officer and director of the Company for services rendered in organizing and planning the initial business structure of the Company and for his overall business expertise and consultation. On July 18, 1998, this officer purchased 40,000 additional shares of common stock for $0.25 per share. On February 26, 1998, the Company issued 877,500 shares of common stock valued at $0.0025 per share to an officer and director of the Company for services rendered in organizing meetings with potential business partners and providing business contacts. On February 26, 1998, the Company issued 60,000 shares of common stock valued at $0.0025 per share to a director of the Company for services rendered in organizing meetings with potential business partners and providing general business consultation services. On April 6, 1998, this director purchased 60,000 additional shares of common stock for $0.25 per share and was issued a warrant to purchase 50,000 shares of restricted common stock at $0.375 through March 24, 2000. In July 1998, this director purchased 73,600 additional shares of common stock for $0.25 per share and was issued an option to purchase 20,000 shares of common stock at $0.025 per share pursuant to the Company's Non-Statutory Incentive Stock Option Plan. In May 1999, this director purchased 3,000 additional shares of common stock for $1.50 per share. In August 1999, this director exercised the vested portion of this stock option and purchased 6,000 shares of common stock. On February 26, 1998, the Company issued 488,000 shares of common stock valued at $0.0025 per share to three consultants for technical, translation and business consultation services rendered. On May 10, 1998, the Company entered into an Employment Agreement with Rocky Umar, as the Vice President of Marketing for a minimum term of one year and whereby he receives a salary ranging from $2,000 per month to $10,000 per month, depending upon performance and the possibility of a commission equal to 1% of sales under Mr. Umar's management that exceeds $1,500,000 for a consecutive six-month period, not to exceed a $100,000 commission per 12-month period. Mr. Umar has been granted an option to purchase 200,000 shares of common stock at $0.025 per share pursuant to the Company's Statutory Incentive Stock Option Plan. Further, Mr. Umar is eligible for a bonus of up to $5,000 after the first year of employment up to the expiration of the stock options. On May 28, 1998, the Company entered into a Consulting Agreement whereby Dr. Luis Toledo was appointed to the Company's advisory board. Under the Consulting Agreement the Company pays Dr. Toledo a commission equal to 5% of all sales within the organ transplant market for the lessor of a five year period from the date of the agreement, or as long as Dr. Toledo remains a consultant and advisory board member. Such commission is limited to a total of $1,000,000. Further, Dr. Toledo, a participant in the Company's Non-Statutory Incentive Stock Option Plan, has been granted options to purchase 200,000 shares of common stock of the Company at $0.025 per share. In addition, Dr. Toledo is eligible for a bonus of up to $5,000 after the first year as a consultant and advisory board member. On June 1, 1998, the Company entered into an Agreement of Assignment of Patent and Technology with Leonid Babak and Vladimir Serebrennikov whereby these individuals assigned to the Company the entire worldwide right, title and interest in and to their invention of technology for preserving and transporting biologic and non-biologic material and in and to all of the discoveries, concepts and ideas whether patentable or not. Pursuant to this Agreement of Assignment of Patent and Technology, each individual received 877,500 shares of the Company's common stock with an ascribed value of $2,200, determined at the time of issuance on February 26, 1998 at $0.0025 per share, which has been expensed as research and development. On June 24, 1998, the Company appointed Eric Slayton, President of Global Healthcare, to be a member of the advisory board. The Company granted to Mr. Slayton an option to purchase 40,000 shares of common stock of the Company at $0.025 per share pursuant to the Company's Non-Statutory Incentive Stock Option Plan. On September 1, 1998, the Company entered into a purchase agreement with Paul Okimoto, an officer and director of the Company, acquiring all rights to a disposable venereal disease test device called Phemtest, for which Mr. Okimoto owned the patent. The Company paid to the law firm of Flehr, Hohbach, Test and Herbert, $1,375 for the patent maintenance fee, and has also agreed to pay Mr. Okimoto a royalty payment of 5% of gross of Phemtest for the next five years. In September 1998, the Company issued 600,000 shares of common stock to its legal counsel at their fair market value of $0.25 per share for services rendered in connection with a private placement (Note 6) and $600 cash for an aggregate value of $150,000. Since the services related to the offering, the $149,400 cost has been recorded as a cost of the offering. There was no effect on operations. The Company entered into an employment agreement with David Lucas on January 1, 1999, whereby Mr. Lucas as Scientific Director oversees the research and development efforts of the Company. The Company pays Mr. Lucas $3,000 per month. F-21 On October 28, 1999, the Company entered into an employment agreement with the then Chief Financial Officer and Secretary for a minimum term of one year. The compensation ranged from $6,000 to $9,200 per month. In addition, he was granted three options to purchase 150,000 shares of restricted common stock at $0.25, $0.50 and $1.62 per share pursuant to the Company's Statutory Incentive Stock Option Plan. Further, he was eligible for a bonus of $1,000 after January 1, 2000. On November 20, 1999, the Company entered into a consulting agreement for receiving market information, technical contacts and business and investor contacts. In consideration, the Company issued warrants to purchase up to 800,000 shares of common stock at an exercise price of $1.50 per share. The warrants expired on June 30, 2000. During fiscal year 2000, a stockholder relinquished 320,000 shares of the Company's common stock held by this stockholder to three consultants to satisfy outstanding amounts due to them. The stockholder subsequently received 330,000 shares of the Company's common stock from the Company to replace shares relinquished to these consultants. The value of the shares relinquished and 10,000 additional shares issued to the stockholder by the Company, have been allocated between stock based compensation approximating $56,400 and prepaid consulting services related to issuance of common stock approximating $48,300 as of December 31, 2000. On March 27, 2000, the Company entered an Employment Agreement with Dr. Luis Toledo, a stockholder, whereby Dr. Toledo is employed as the Chief Medical Officer for a minimum term of one year and receives base compensation of $6,000 a month, which may be adjusted based on the Company's ability to raise defined amounts of capital. In addition, the Company granted an option to purchase 75,000 shares of common stock at $1.50. All stock options granted in a consulting agreement dated May 28, 1998 shall remain and continue to vest according to the defined schedule. On January 1, 2000, the Company entered an Employment Agreement with Leonid Babak, a stockholder, whereby Mr. Babak is employed as the Branch Director of Russian Operations for a minimum term of one year and receives base compensation of $500 a month and $700 a month in fringe benefits. On January 1, 2000, the Company also entered into a separate Employment Agreement with Vladimir Serebrennikov, a stockholder, whereby Mr. Serebrennikov is employed as the Technical Director of Preservation Systems for a minimum term of one year and the Company pays Mr. Serebrennikov $500 per month, which salary may be adjusted, with a bonus of $25,000 upon the successful completion of the Phase I development within the agreed upon time frame. Stockholder payables consist of the following at December 31, 2000: Wages payable to stockholder employees $ 292,600 Accrued interest and other 9,300 ------- $ 301,900 NOTE 5. NOTE PAYABLE-RELATED PARTY During fiscal year 2000, a stockholder and officer of the Company advanced a total of $68,900 to the Company under various unsecured notes bearing interest at 10% and due on demand. NOTE 6. CONVERTIBLE NOTE PAYABLE-RELATED PARTY During June 2000, the Company entered into an unsecured loan agreement with a stockholder to borrow a principal amount up to $500,000 of which a total of $166,000 has been drawn on as of December 31, 2000. The term of the loan is four years, with interest at 10%, and maturing in June 2004. The stockholder/lender has the option of converting this loan to restricted common stock, at $0.75 per share, based on the unpaid principal and interest balances of the loan. Due to the conversion feature of the debt and the Company's historical range of common stock prices, the Company anticipates it will record significant amounts of deemed interest in the future as funds are drawn on the loan. During the year ended December 31, 2000, the Company recorded $37,100 of deemed interest expense relating to this conversion feature. In the event the Company completes a public offering of shares of common stock for an aggregate amount of at least $1,000,000, the unpaid principal and accrued interest on the loan will be automatically converted into the Company's common stock. The stockholder/lender was also granted a warrant to purchase 500,000 shares of the Company's common stock at $0.30 per share with life of four years. The fair value of the warrants as computed using the Black-Scholes option pricing model was $750,000 and recorded as unamortized loan fees related to options to purchase common stock - related party, of which $93,800 was recorded as interest expense during the year ended December 31, 2000. Subsequent to December 31, 2000 and through the date of this report, the Company has not borrowed additional funds under this loan agreement. NOTE 7. STOCK SUBJECT TO RECISSION On June 24, 2000, the Company extended to stockholders who purchased common stock under two Private Placement Memorandums dated September 1, 1999 and February 2, 2000, the option to rescind their investment (Rescission Offer). As a result of this Rescission Offer, the Company has rescinded approximately 222,900 shares with a value of $334,400 (based on an original offering price of $1.50 per share); see Note 8 for additional discussions. The terms of the Rescission Offer require the return of certificate(s) evidencing the investor's shares and warrants. In exchange, the Company will issue a promissory note payable upon the earlier of one year from the date of the note, or the receipt of funding sufficient to permit repayment of the principal and interest due under the note. The note will bear an interest rate of 10% per annum, compounded annually. Stock subject to rescission totaling $266,800 as of December 31, 2000 relates to investors who either have accepted the offer and have not returned the certificate(s) evidencing the investor's shares and warrant, or no form of acceptance or decline was received by the Company. As of December 31, 2000, 463,200 shares of common stock are subject to rescission. NOTE 8. COMMON STOCK The Company undertook an offering, under Regulation D, Rule 504 pursuant to which it sold 1,000,000 shares of common stock at $0.25 per share to raise $250,000 via an Offering Memorandum dated August 15, 1998 (the Offering). The Offering commenced on August 15, 1998 and terminated on September 4, 1998. The transfer of 42,800 of the 1,000,000 shares is limited under the provisions of Rule 144(e) because these shares were issued to affiliates or control persons and are therefore control stock. The remaining 957,200 of the 1,000,000 shares were issued to non-affiliates and are therefore free trading. All of the 1,000,000 shares were issued in reliance on the Federal exemption from registration under Rule 504 of Regulation D and a Form D relating to these shares was filed with the U.S. Securities Exchange Commission (the (SEC) on September 9, 1998. On June 21, 1999, the stockholders approved an increase in the authorized number of shares of common stock from 10,000,000 to 50,000,000 shares. During fiscal year 1999, the Company undertook a private placement, under Regulation D, Rule 505 pursuant to which it offered to sell 2,000,000 shares of common stock at $1.50 per share under an Offering Memorandum dated September 1, 1999 and was effectively terminated on June 15, 2000, as discussed in Note 7. Each two shares had a two-year warrant to purchase an additional share of common stock at $2.50 per share. During the year ended December 31, 2000 and 1999, 140,100 and 287,200 shares of common stock, respectively, were sold under the terms of this private placement. Except for the exercise of stock options, all other stock sales in 1999 were to various individuals at $1.50 per share. In May and December 1999, the Company issued 5,200 shares valued at $1.50 per share to two unrelated parties for services rendered. During fiscal year 2000, the Company undertook a private placement, under Regulation D, Rule 506 pursuant to which it offered to sell 2,000,000 shares of common stock at $1.50 per share under an Offering Memorandum dated February 2, 2000 and was effectively terminated on June 15, 2000, as discussed in Note 7. Each two shares had a two-year warrant to purchase an additional share of common stock at $2.50 per share. During the year ended December 31, 2000, 224,500 shares of common stock were sold under the terms of this private placement. The Company issued 206,700 shares of common stock during fiscal year 2000 related to conversion of promissory notes, as discussed in Note 7, totaling $67,500 resulting from the June 15, 2000 Rescission Offer. During the third and fourth quarters of 2000, the Company issued 907,500 shares with a weighted average fair value of $0.37 per share to seven unrelated parties for services to be rendered with terms up to 12 months. As of December 31, 2000, $139,900 has been recorded as stock based compensation for the services with the remaining portion of $195,200 recorded as prepaid consulting services paid in common stock, which will be expensed when such services have been rendered. NOTE 9. STOCK OPTION PLANS AND WARRANTS The Company adopted the following plans during 1998: Statutory Incentive Stock Option Plan The purpose of this plan is to strengthen the Company by providing incentive stock options as a means to attract, retain and motivate corporate personnel. The options may not be granted to employees who own stock possessing more than 10% of the total combined voting power of the stock of the Company. As of December 31, 2000, 600,000 shares have been authorized for option grants. A summary of the status of this plan as of December 31, 2000, and changes during the period from February 26, 1998 (date of inception) to December 31, 2000 is presented in the following table: Shares Weighted Available for Options Average Exercise Grant Outstanding Price - ------------------------------------------------------------------------------- Authorized, February 26, 1998 (date of inception) 600,000 - $ - Granted (250,000) 250,000 0.07 Balance, December 31, 1998 350,000 250,000 0.07 Granted (325,000) 325,000 0.58 Forfeited 75,000 (75,000) .50 Balance December 31, 1999 100,000 500,000 0.34 Granted (75,000) 75,000 1.50 Exercised - (152,000) 0.03 - ------------------------------------------------------------------------------- Balance December 31, 2000 25,000 423,000 $ 0.67 The weighted-average fair value of statutory stock options granted during 2000 and 1999 was $-- and $0.48, respectively. The following table summarizes information about statutory stock options outstanding as of December 31, 2000:
Options Outstanding Options Exercisable - ------------------------------------------------------------------------------------- Weighted Number Average Weighted Number Weighted Range of Outstanding Remaining Average Exercisable Average Exercise as of Contractual Exercise as of Exercise Prices 12/31/00 Life Price 12/31/00 Price ---------- -------- -------- -------- -------- -------- $ 0.025 48,000 2.4 years $ 0.025 - $ - $ 0.25 - 0.50 260,000 1.3 years $ 0.38 78,000 $ 0.38 $ 1.50 - 1.62 115,000 4.8 years $ 1.54 34,500 $ 1.54 ---------- -------- -------- -------- -------- -------- 423,000 $ 0.67 112,500 $ 0.74 ---------- -------- -------- -------- -------- --------
The following table summarizes information about statutory stock options granted during the year ended December 31, 2000: Exercise Price Equals, Exceeds or is Number of Less Than Options Mkt. Price of Weighted- Weighted- Granted Stock on Average Range of Average Fair During 2000 Grant Date Exercise Price Exercise Prices Value - ------------ ------------ ------------- ---------------- ------------- - Equals $ - $ - $ - 75,000 Exceeds $ 1.50 $ 1.50 $ - - Less Than $ - $ - $ - - ------------ ------------ ------------- ---------------- ------------- 75,000 $ 1.50 $ 1.50 $ - - ------------ ------------- ---------------- ------------- Compensation expense under APB No. 25 relating to statutory options that became exercisable in 2000 and 1999 was $-- and $5,600, respectively. Employees may exercise their options to purchase their shares according to the following schedule: Rocky Umar All others at inception 20% - after 1st year 24% 30% after 2nd year 32% 30% after 3rd year 24% 40% Non-Statutory Incentive Stock Options Plans The purpose of this plan is to promote the interest of the Company by providing a method whereby non-employees, advisory board members, members of the board of directors, consultants and independent contractors, who provide valuable services to the Company, may be offered incentives as rewards which will encourage them to acquire a proprietary interest in the Company. As of December 31, 2000, 2,000,000 shares have been authorized for option grants. A summary of the status of this plan as of December 31, 2000 and changes during the period from February 26, 1998 (date of inception) to December 31, 2000 is presented in the following table: Weighted Shares Average Available Options Exercise For Grant Outstanding Price --------- ----------- -------- Authorized, February 26, 1998, (date of inception) 2,000,000 - $ - Granted (800,000) 800,000 0.24 --------- ------- ---- Balance, December 31, 1998 1,200,000 800,000 0.24 Granted (142,500) 142,500 0.32 Exercised - (31,000) 0.01 Forfeited 350,000 (350,000) 0.50 --------- ------- ---- Balance, December 31, 1999 1,407,500 561,500 0.12 Granted (352,500) 352,500 0.88 Exercised - (191,000) 0.06 Forfeited - - - --------- ------- ---- Balance, December 31, 2000 1,055,000 723,000 $ 0.40 --------- ------- ---- The weighted-average fair value of non-statutory stock options granted during 2000 and 1999 was $0.27 and $0.25, respectively. The following table summarizes information about the non-statutory stock options outstanding as of December 31, 2000: Weighted Number Average Weighted Number Weighted Range of Outstanding Remaining Average Exercisable Average Exercise as of Contractual Exercise as of Exercise Prices 12/31/00 Life Price 12/31/00 Price - ---------- ---------- ----------- -------- --------- -------- $0.01-0.03 257,500 2.5 years $ 0.03 287,000 $ 0.03 $0.10-0.30 188,000 3.1 years $ 0.18 27,000 $ 0.15 $ 0.50 75,000 3.1 years $ 0.50 22,500 $ 0.50 $ 1.50 202,500 2.5 years $ 1.50 62,500 $ 1.50 - ---------- ---------- ----------- -------- --------- -------- 723,000 $ 0.40 399,000 $ 0.29 The Company estimates the fair value of non-statutory stock options by using the Black-Scholes option pricing-model with the following weighted-average assumptions used for grants in 2000 and 1999; no dividend yield; expected volatility of 150% and 33%; risk free interest rates of 5.7% and 4.6%; expected lives of 2.6 years for all plan options. The following table summarizes information about non-statutory stock options granted during the year ended December 31, 2000: Exercise Price Equals, Exceeds or is Number of Less Than Options Mkt. Price of Weighted- Range of Weighted- Granted Stock on Average Exercise Average Fair During 2000 Grant Date Exercise Price Prices Value - ----------- -------------- -------------- ---------- ------------ - Equals $ - $ - $ - 102,500 Exceeds $ 1.50 $ - $ 0.02 250,000 Less Than $ 0.63 $0.01-0.10 $ 0.38 - ----------- -------------- -------------- ---------- ------------ 352,500 $ 0.32 $ 0.27 - ----------- -------------- ------------ Compensation expense under SFAS No. 123 relating to non-statutory stock options that became exercisable in 2000 and 1999 was $96,600 and $10,800, respectively. Stock Purchase Warrants In connection with certain business transactions and debt or equity offerings, the Company has granted various warrants to purchase common stock. The following table summarizes activity relating to outstanding warrants from February 26, 1998 (date of inception) to December 31, 1999: Weighted Average Warrants Exercise Outstanding Price ----------- --------- Balance, February 26, 1998 (date if inception) - $ - Granted 100,000 $ 0.38 ---------- --------- Balance, December 31, 1998 100,000 $ 0.38 Granted 942,800 $ 1.62 ---------- --------- Balance, December 31, 1999 1,042,800 $ 1.50 Granted 1,398,600 $ 1.20 Exercised (41,600) $ 0.34 Expired (900,000) $ 1.38 Forfeited (75,800) $ 2.50 ---------- --------- Balance, December 31, 2000 1,424,000 $ 2.36 ========== ========= The weighted average fair value of warrants granted during 2000 and 1999 was $0.84 and $0.44, respectively. The following table summarizes information about warrants outstanding at December 31, 2000: Weighted Number Average Outstanding Remaining Number Exercise as of Contractual Exercisable as -------- ----------- ----------- -------------- Price 12/31/00 Life 12/31/00 $ 0.375 458,400 0.5 years 458,400 $ 1.50 746,300 0.6 years 746,300 $ 2.50 219,300 2 years 219,300 -------- ----------- ----------- -------------- 1,424,000 1,424,000 =========== ============== The following table summarizes information about warrants granted during the year ended December 31, 2000:
Exercise Price Equals, Exceeds or is Number of Less Than Options Mkt. Price of Weighted-Weighted- Granted Stock on Average Range of Average Fair During 2000 Grant Date Exercise Price Exercise prices Value ------------ ------------ ------------ -------------- ---------- - Equals $ - $ - $ - 898,600 Exceeds $ 1.71 $ 1.50 - 2.50 $ 1.10 500,000 Less Than $ 0.30 $ 1.50 $ 1.74 ------------ ------------ ------------ -------------- ---------- 1,398,600 $ 1.62 $ 1.33 ------------ ------------ -------------- ----------
The Company estimates the fair value of warrants at the grant date by using the Black-Scholes option pricing-model with the following weighted-average assumptions used for grants in 2000 and 1999; no dividend yield; expected volatility of 150% and 157%; risk free interest rates of 5.7% and 5.3%; and expected lives of 1.5 and 1.5 years. Compensation expense relating to warrants granted for services in 2000 and 1999 was $1,237,700 and $280,100. In addition, a $24,800 discount on notes payable and stock offering costs totaling $111,800 were recorded in 1999 relating to warrants granted in connection with various debt and equity transactions and $94,800 was recorded in 2000 as interest expense relating to warrants granted in connection with a debt transaction. NOTE 10. INCOME TAXES The Company did not record any current or deferred income tax provision or benefit for any of the periods presented due to continuing net losses and nominal differences. The Company has provided a full valuation allowance on the deferred tax asset, consisting primarily of net operating losses, because of uncertainty regarding its realizability. As of December 31, 2000, the Company had a net operating loss carry forward of approximately $4,005,900 for both federal and state income tax purposes to offset future taxable income, if any. Utilization of the net operating loss carry forward, which begins to expire at various times starting in 2009, may be subject to certain limitations under Section 382 of the Internal Revenue Code of 1986, as amended, and other limitations under state and foreign tax laws. To the extent that net operating losses of approximately $1,724,600, when realized, relate to stock options and warrants, the resulting benefits will be credited to stockholders' equity. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are approximately as follows: December 31, December 31, 2000 1999 Net operating loss $ (1,362,000) $ (465,900) Depreciation -- -- Total deferred tax assets (1,362,000) (465,900) Valuation allowance for deferred tax assets 1,362,000 465,900 Net deferred tax assets $ -- $ -- NOTE 11. SUBSEQUENT EVENTS In January 2001, the Company entered into a consulting agreement to advise the Directors and Officers of the Company regarding general financial and business matters including mergers and acquisitions, capital structures, periodic preparation and distribution of research reports, etc. for 12 months from the date of the agreement. In consideration, the Company issued 200,000 shares of common stock. In January 2001, the Company entered into a consulting agreement with three consultants to advise the Directors and Officers of the Company regarding general financial and business matters including due diligence studies, capital structures, periodic preparation and distribution of research reports, etc. for 12 months from the date of the agreement In consideration, the Company issued 510,000 shares of common stock. HYPERBARIC SYSTEMS 10,000,000 Shares of Common Stock ______________________ PROSPECTUS ______________________ February 8, 2002 -----END PRIVACY-ENHANCED MESSAGE-----