Document/Exhibit Description Pages Size
1: S-1 Registration Statement (General Form) 62 286K
2: EX-3.1 Articles of Incorporation 21 65K
3: EX-3.2 Bylaws 14 73K
4: EX-5.1 Opinion re: Legality 2 10K
5: EX-10.1 Stock Purchase Agreement 4 17K
6: EX-23.1 Consent of Experts or Counsel 1 6K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
MB SOFTWARE CORPORATION
(Exact name o registrant as specified in its charter)
Texas 3842 59-2220004
(State Or Other (Primary Standard Industrial (IRS Employer
Jurisdiction Of Incorporation Classification Code Number) Identification No.)
or Organization)
777 Main Street
Suite 3100
Fort Worth, Texas 76102
Ph: (817) 820-7080
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Scott A. Haire
777 Main Street
Suite 3100
Fort Worth, Texas 76102
Ph: (817) 820-7080
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
With Copies To:
Colbert Johnston LLP
Attention: Robert J. Johnston, Esq.
6021 Morriss Road, Suite 101
Flower Mound, Texas 75028
Ph: (972) 724-3338
Fax: (972) 724-1922
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [ ]
If this Form is filed to register additional securities of an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
[Enlarge/Download Table]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective Registration Statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective Registration Statement
for the same offering. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company;
Large Accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
CALCULATION OF REGISTRATION FEE
------------------------- ---------------------- ---------------------- ----------------------- ----------------------
Title of each Class Proposed Maximum Proposed
of Securities Amount to be Offering Price Maximum Aggregate Amount of
to be registered Registered per share (1) Offering Price Registration Fee
------------------------- ---------------------- ---------------------- ----------------------- ----------------------
Common Stock 3,993,104 $1.50 $5,989,656 $235.39
------------------------- ---------------------- ---------------------- ----------------------- ----------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
PROSPECTUS
3,993,104
Shares of common stock of MB Software Corporation (par value $0.001 per share)
This prospectus relates to the resale by certain selling shareholder
identified in the section of this prospectus entitled "Selling Shareholder" on
page 32 and their permitted transferees, from time to time of up to 3,993,104
shares of our common stock under this prospectus, issued as:
- 86,207 shares issued by the Company in a private placement;
- up to 1,500,000 shares to be issued upon the exercise of warrants,
which were granted by the Company in a private placement;
- up to 1,206,897 shares to be issued upon the conversion of notes
issued by the Company in a private placement; and
- up to 1,200,000 shares to be transferred upon the exercise of
warrants, which were granted by H.E.B., LLC, a Nevada limited
liability company and the Company's majority shareholder
We are not offering or selling any of our common stock pursuant to this
prospectus. We will not receive any proceeds from any sales made by the selling
shareholder in this offering but we will pay the expense of this offering. We
will, however, receive the proceeds from the exercise of the warrants and
options issued to the selling shareholder if and when they are exercised.
The selling shareholder may, but is not obligated to, offer all or part of
their shares for resale from time to time through public or private
transactions, at either prevailing market prices or at privately negotiated
prices. We do not know when or in what amount the selling shareholder may offer
shares for sale, including whether the selling shareholder will sell any or all
of the shares offered by this Prospectus.
Investing in our common stock involves risks. See "Risk Factors" beginning
on page 5 to read about factors you should consider before buying shares of our
common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
Our shares of common stock are traded on the NASD's Over-the-Counter
Bulletin Board under the symbol "MBSB."
INFORMATION CONTAINED IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED UNTIL THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
NOR DOES IT SEEK OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
The date of this prospectus is April __, 2008.
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this document or any
other document to which we refer you. Neither we nor the selling shareholder
have authorized anyone to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. Neither we nor the selling shareholder are making an offer to sell these
securities in a jurisdiction where the offer or sale is not permitted. The
information contained in this document is current only as of its date,
regardless of the time of delivery of this prospectus or of any sales of shares
of common stock. Our business, financial condition, results of operations and
prospects may have changed since that date.
TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................2
RISK FACTORS...................................................................4
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.............................12
USE OF PROCEEDS...............................................................13
MARKET PRICE OF AND DIVIDENDS ON FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS..........................................13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.................................................14
BUSINESS......................................................................21
DIRECTORS AND EXECUTIVE OFFICERS..............................................24
EXECUTIVE COMPENSATION........................................................28
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................28
SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT........................30
DESCRIPTION OF SECURITIES.....................................................31
SELLING SHAREHOLDER...........................................................32
SHARES ELIGIBLE FOR FUTURE SALE...............................................33
PLAN OF DISTRIBUTION..........................................................34
INDEPENDENT PUBLIC ACCOUNTANTS................................................35
LEGAL MATTERS.................................................................35
EXPERTS.......................................................................35
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE....................................36
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES............................36
INTERESTS OF NAMED EXPERTS AND COUNSEL........................................36
WHERE YOU CAN FIND MORE INFORMATION...........................................36
INDEX TO FINANCIAL STATEMENTS................................................F-1
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS..............................38
RECENT SALES OF UNREGISTERED SECURITIES.......................................39
EXHIBITS......................................................................39
UNDERTAKINGS..................................................................40
SIGNATURES....................................................................42
PROSPECTUS SUMMARY
This summary highlights selected information about MB Software Corporation
and the offering that is contained in detail throughout this prospectus. You
should read the entire prospectus before making an investment decision,
especially the information presented under the heading "Risk Factors" and the
financial statements and related notes included elsewhere in this prospectus, as
well as the other documents to which we refer you. Except as otherwise indicated
by the context, references in this prospectus to "we," "us," "our," or the
"company" are to the business of MB Software Corporation and its subsidiaries
and do not include the selling shareholder.
OUR BUSINESS
Our current focus is developing and marketing products for the advanced
wound care market, as pursued through our wholly-owned subsidiary, Wound Care
Innovations, LLC, a Nevada limited liability company. We hold the exclusive
worldwide license to certain patented technologies and processes related to an
advanced collagen based wound care product formulation, which we market under
the brand name "CellerateRx(TM)".
Our CellerateRx products are currently marketed to and being used by wound
care providers of all types. These products are also approved for reimbursement
under Medicare Part B and as a consequence, the professional medical market is,
and will remain the primary focus of our marketing and sales efforts for the
immediate future.
OUR CORPORATE INFORMATION
MB Software Corporation was incorporated in 1982 as a Colorado corporation
and was reincorporated in the State of Texas in 2002. References in this report
to "we" or "the Company" refer to MB Software Corporation.
Effective August 20, 2004, we acquired Wound Care Innovations, LLC through
a merger of Wound Care Innovations with a newly formed Company subsidiary.
Prior to our acquisition of Wound Care Innovations, Wound Care Innovations
had obtained the distribution rights for CellerateRx products for the domestic
medical, retail, government and first aid human use wound care markets, and
certain non-exclusive rights for several international markets. Effective
November 2007, we obtained the exclusive worldwide license to the patented
technologies underlying our CellerateRx products. CellerateRx(TM) is a trademark
of Applied Nutritionals, Inc.
THE OFFERING
Common stock offered by us 0 shares
Common stock offered by the selling shareholder 3,993,104 shares
Common stock to be outstanding after the offering 19,434,447 shares
2
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table provides our summary historical consolidated financial
data for the periods ended and as of the dates indicated. The summary historical
consolidated statement of operations data and summary historical consolidated
balance sheet data presented below for the years ended December 31, 2006, and
December 31, 2007, which have been derived from our audited consolidated
financial statements, and have been audited by Pritchett, Siler & Hardy, P.C.,
independent certified public accountants. The historical results are not
necessarily indicative of the results to be expected in any future period. You
should read the summary consolidated historical financial data set forth below
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Plan or Operation" and with our financial statements, including introductory
paragraphs, and the related notes appearing elsewhere in this prospectus.
As of and for the
Year Ended December 30,
----------------------------
2006 2007
------------ ------------
Summary of Operations Data:
Total revenue $ 189,755 $ 630,505
(Loss) from operations (487,885) (405,737)
Net (loss) (623,559) (542,756)
Net (loss) per common share:
Basic and Diluted $ (0.04) $ (0.03)
Number of weighted-average
shares of common stock
outstanding:
Basic and Diluted 16,141,343 16,141,343
Balance Sheet Data:
Cash and cash equivalents $ 236,301 $ 781
Total assets 496,287 405,730
Long-term debt and capital leases -- --
Total Liabilities 1,767,311 2,219,510
Stockholders' (deficit) equity $ (1,271,024) $ (1,813,780)
3
RISK FACTORS
An investment in our securities involves a high degree of risk. You should
carefully consider the following risks and the other information set forth
elsewhere in this Registration Statement, including our financial statements and
related notes, before you decide to purchase shares of our common stock. If any
of these risks occur, our business, financial condition and results of
operations could be adversely affected. As a result, the trading price of our
common stock could decline, perhaps significantly, and you could lose part or
all of your investment.
WE EXPECT TO INCUR LOSSES IN THE FUTURE AND MAY NOT ACHIEVE OR MAINTAIN
PROFITABILITY
We have incurred net losses since we began our current operations in 2004.
Our net loss was approximately $623,559 for our year ended December 31, 2006,
and approximately $542,756 for the year ended December 31, 2007. We expect to
make significant investments in our sales and marketing programs and research
and development, resulting in a substantial increase in our operating expenses.
Consequently, we will need to generate significant additional revenue to achieve
and maintain profitability in the future. We may not be able to generate
sufficient revenue from sales of our products and related professional services
to become profitable. Even if we do achieve profitability, we may not sustain or
increase profitability on a quarterly or annual basis. In addition to funding
operations through increased revenue, we anticipate that we will need to raise
additional capital before reaching profitability. We cannot predict when we will
operate profitably, if at all. If we fail to achieve or maintain profitability,
our stock price may decline.
WE HAVE A LIMITED OPERATING HISTORY WITH WHICH YOU CAN EVALUATE OUR CURRENT
BUSINESS MODEL AND PROSPECTS
We acquired Wound Care Innovations in August of 2004 and we have not been
profitable to date. Although we have seen our sales increase in the four and a
half years since the acquisition, we cannot predict if and when we may become
profitable. Even if we become profitable in the future, we cannot accurately
predict the level of, or our ability to sustain profitability. Because we have
not yet been profitable and cannot predict any level of future profitability,
you bear the risk of a complete loss of your investment in the event our
business plan is unsuccessful.
>> Because our products are still at a relatively early stage of
commercialization, it is difficult for us to forecast the full level
of market acceptance that our solution will attain;
>> competitors may develop products that render our products obsolete or
noncompetitive or that shorten the life cycles of our products.
Although we have had initial success, the market may not continue to
accept our wound care products;
>> we may not be able to attract and retain a broad customer base; and
>> we may not be able to negotiate and maintain favorable strategic
relationships.
Failure to successfully manage these risks could harm our business and
cause our stock price to fall. Furthermore, to remain competitive, we will need
to add to our current product line, and we may not succeed in creating and
marketing new products. A decline in demand for, or in the average price of, our
wound care products would have a direct negative effect on our business and
could cause our stock price to fall.
4
OUR PRODUCTS ARE MANUFACTURED ONLY BY APPLIED NUTRITIONALS
Applied Nutritionals holds the patent to, and is currently the sole source
of the products we offer for sale. Our growth and ability to meet customer
demands depends in part on our ability to obtain timely deliveries of product
from our manufacturer. We may in the future experience a shortage of product as
a result of manufacturing process issues or capacity problems at our supplier,
or strong demand for the ingredients constituting our products.
If shortages or delays persist, the cost to manufacture our products may
increase, or may not be available at all, and we may also encounter shortages if
we do not accurately anticipate our needs. We may not be able to secure enough
product at reasonable prices or of acceptable quality to meet our or our
customer's needs. Accordingly, our revenues could suffer and our costs could
increase until other sources can be developed. There can be no assurance that we
will not encounter these problems in the future.
The fact that we do not own our manufacturing facilities could have an
adverse impact on the supply of our products and on operating results. While we
will have the ability to manufacture these products in the event that Applied
Nutritionals is not able to fulfill our product orders, in such event, we may
temporarily be prevented from marketing and selling our products until we were
able to locate a substitute manufacturer.
THE MARKETS IN WHICH WE COMPETE ARE INTENSELY COMPETITIVE, WHICH COULD ADVERSELY
AFFECT OUR REVENUE GROWTH
The market for wound care products is intensely competitive. Competition
in the wound care market is heavy among a vast array of medical devices, drugs,
and therapies. Many of our existing and potential competitors have better brand
recognition, longer operating histories, larger customer bases and are very well
capitalized and will continue to compete aggressively.
Most companies providing wound care products are able to offer customers
multiple products. By doing so, they effectively offset the cost of customer
acquisition and support across several revenue sources. With only one product
line, our costs are relatively much higher and may prevent us from achieving
strong profitability.
Further, although our wound care products have performed well in customer
evaluations, we are a relatively unknown entity with a relatively unknown brand
in a market significantly controlled by much larger products companies. We may
not, even with strong customer accounts, be able to establish the credibility
necessary to secure large national customers.
Our competitors may be able to keep us out of some distribution channels,
close us out from some larger accounts with "Master Contracts" for full product
lines, and create market awareness that hinders our abilities to secure key
accounts in a cost effective way. Increased competition could significantly
reduce our future revenue and increase our operating losses due to price
reductions, lower gross margins or lost market share, which could harm our
business and cause our stock price to decline.
PRODUCT LIABILITY EXPOSURE
We face an inherent risk of exposure to product liability claims in the
event that the use of any product we sell results in injury. Such claims may
include, among others, that these products contain contaminants or include
inadequate instructions as to use or inadequate warnings concerning side effects
and interactions with other substances. We do not have, and do not anticipate
obtaining, contractual indemnification from parties supplying raw materials or
marketing the products we sell. In any event, any such indemnification if
5
obtained would be limited by our terms and, as a practical matter, to the
creditworthiness of the indemnifying party. In the event that we do not have
adequate insurance or contractual indemnification, product liabilities relating
to defective products could have a material adverse effect on our operations and
financial condition.
FEDERAL REGULATIONS AND CHANGES IN REIMBURSEMENT POLICIES
Our CellerateRx products are currently classified by the FDA as Class I
medical devices, and are further classified as dressings and are cleared for
marketing for the following indications: pressure ulcers, diabetic ulcers,
surgical wounds, ulcers due to arterial insufficiency, traumatic wounds, 1st and
2nd degree burns, and superficial wounds. Because our products are classified by
the FDA as medical devices and not drugs, we were not required to pursue
stringent clinical trials. Many physicians and larger, sophisticated healthcare
provider organizations, however, often require clinical studies demonstrating
specific performance capabilities of any new products. We do not have results
from controlled clinical studies and the lack of such studies could adversely
affect our ability to obtain large institutional customers. Further, if the FDA
were to change its policies regarding the classification or marketing of our
products for any reason, we would likely be required to conduct and submit data
to satisfy additional requirements.
Healthcare services are heavily reliant upon health insurance
reimbursement. Although many current insurance plans place much of the financial
risk on providers of care (allowing them to choose whatever products/therapies
are most cost effective) under capitated or prospective payment structures, much
of our business is related to Medicare-eligible populations. Although our
products are currently eligible for reimbursement under Medicare Part B,
adjustments to our reimbursement amounts or a change in Medicare's reimbursement
policies could have an adverse effect on our ability to pursue market
opportunities.
IF WE CANNOT MEET OUR FUTURE CAPITAL REQUIREMENTS, OUR BUSINESS WILL SUFFER
We will need additional financing to continue operating our business. We
need to raise additional funds in the future through public or private debt or
equity financings in order to:
>> fund operating losses;
>> scale sales and marketing to address the market for wound care
products;
>> take advantage of opportunities, including more rapid expansion or
acquisitions of complementary products or businesses;
>> hire, train and retain employees;
>> develop new products; or
>> respond to economic and competitive pressures.
If our capital needs are met through the issuance of equity or convertible
debt securities, the percentage ownership of our stockholders will be reduced.
Our future success may be determined in large part by our ability to obtain
additional financing, and we can give no assurance that we will be successful in
obtaining adequate financing on favorable terms, if at all. If adequate funds
are not available or are not available on acceptable terms, our operating
results and financial condition may suffer, and our stock price may decline.
6
OUR OPERATING RESULTS MAY FLUCTUATE, WHICH MAY ADVERSELY AFFECT OUR STOCK PRICE
We are an emerging company. As such, our quarterly revenue and results of
operations are difficult to predict. We have experienced fluctuations in revenue
and operating results from quarter-to-quarter and anticipate that these
fluctuations will continue until the company reaches critical mass and the
market becomes more stable. These fluctuations are due to a variety of factors,
some of which are outside of our control, including:
>> the fact that we are a relatively young company with relatively young
products;
>> our ability to attract new customers and retain existing customers;
>> the length and variability of our sales cycle, which makes it
difficult to forecast the quarter in which our sales will occur;
>> the amount and timing of operating expense relating to the expansion
of our business and operations;
>> the development of new wound care products or product enhancements by
us or our competitors;
>> actual events, circumstances, outcomes, and amounts differing from
judgments, assumptions, and estimates used in determining the values
of certain assets (including the amounts of related valuation
allowances), liabilities, and other items reflected in our financial
statements; and
>> how well we execute on our strategy and operating plans.
As a consequence, operating results for a particular future period are
difficult to predict, and, therefore, prior results are not necessarily
indicative of results to be expected in future periods. Any of the foregoing
factors, or any other factors discussed elsewhere herein, could have a material
adverse affect on our business, results of operations, and financial condition
that could adversely affect our stock price.
We also typically realize a significant portion of our revenue in the last
few weeks of a quarter because of our customers' purchasing patterns. As a
result, we are subject to significant variations in license revenue and results
of operations if we incur a delay in a large customer's order. If we fail to
close one or more significant license agreements that we have targeted to close
in a given quarter, this failure could seriously harm our operating results for
that quarter. Failure to meet or exceed the expectation of securities analysts
or investors due to any of these or other factors may cause our stock price to
fall.
OUR REVENUES FOR A PARTICULAR PERIOD ARE DIFFICULT TO PREDICT, AND A SHORTFALL
IN REVENUES MAY HARM OUR OPERATING RESULTS
As a result of a variety of factors discussed in this report, our revenues
for a particular quarter are difficult to predict. Our net sales may grow at a
slower rate than we anticipate, or may decline. We plan our operating expense
levels based primarily on forecasted revenue levels. These expenses and the
impact of long-term commitments are relatively fixed in the short term. A
shortfall in revenue could lead to operating results being below expectations as
we may not be able to quickly reduce these fixed expenses in response to short
term business changes.
7
DISRUPTION OF, OR CHANGES IN, OUR DISTRIBUTION MODEL OR CUSTOMER BASE COULD HARM
OUR SALES AND MARGINS
If we fail to manage the distribution of our products properly, or if the
financial condition or operations of our reseller channels weaken, our revenues
and gross margins could be adversely affected. Furthermore, a change in the mix
of our customers between service provider and enterprise, or a change in the mix
of direct and indirect sales, could adversely affect our revenues and gross
margins.
Several factors could also result in disruption of or changes in our
distribution model or customer base, which could harm our sales and margins,
including the following:
>> in some instances, we compete with some of our resellers through our
direct sales, which may lead these channel partners to use other
suppliers that do not directly sell their own products;
>> some of our resellers may have insufficient financial resources and
may not be able to withstand changes in business conditions;
OUR PROPRIETARY RIGHTS MAY PROVE DIFFICULT TO ENFORCE
We generally rely on patents, copyrights, trademarks, and trade secret
laws to establish and maintain proprietary rights in our technology and
products. While we have the exclusive license underlying our collagen based
CellerateRx products, there can be no assurance that these patents or our other
proprietary rights will not be challenged, invalidated, or circumvented or that
our rights will in fact provide competitive advantages to us. In addition, the
laws of some foreign countries may not protect our proprietary rights to the
same extent, as do the laws of the United States. The outcome of any actions
taken in these foreign countries may be different than if such actions were
determined under the laws of the United States. If we are unable to protect our
proprietary rights (including aspects of products protected other than by patent
rights) in a market, we may find ourselves at a competitive disadvantage to
others who need not incur the substantial expense, time, and effort required to
create the innovative products that have enabled us to be successful.
WE MAY BE FOUND TO INFRINGE ON INTELLECTUAL PROPERTY RIGHTS OF OTHERS
Third parties, including customers, may in the future assert claims or
initiate litigation related to exclusive patent, copyright, trademark, and other
intellectual property rights to technologies and related standards that are
relevant to us. These assertions may emerge over time as a result of our growth
and the general increase in the pace of patent claims assertions, particularly
in the United States. Because of the existence of a large number of patents in
the healthcare field, the secrecy of some pending patents, and the rapid rate of
issuance of new patents, it is not economically practical or even possible to
determine in advance whether a product or any of its components infringes or
will infringe the patent rights of others. The asserted claims and/or initiated
litigation can include claims against us or our manufacturers, suppliers, or
customers, alleging infringement of their proprietary rights with respect to our
existing or future products or components of those products. Regardless of the
merit of these claims, they can be time-consuming, result in costly litigation
and diversion of technical and management personnel, or require us to develop a
non-infringing technology or enter into license agreements. Where claims are
made by customers, resistance even to unmeritorious claims could damage customer
relationships. There can be no assurance that licenses will be available on
acceptable terms and conditions, if at all, or that our indemnification by our
suppliers will be adequate to cover our costs if a claim were brought directly
against us or our customers. Furthermore, because of the potential for high
court awards that are not necessarily predictable, it is not unusual to find
even arguably unmeritorious claims settled for significant amounts. If any
infringement or other intellectual property claim made against us by any third
8
party is successful, or if we fail to develop non-infringing technology or
license the proprietary rights on commercially reasonable terms and conditions,
our business, operating results, and financial condition could be materially and
adversely affected.
FAILURE TO RETAIN AND RECRUIT KEY PERSONNEL WOULD HARM OUR ABILITY TO MEET KEY
OBJECTIVES
Our success will depend in large part on our ability to attract and retain
skilled executive, managerial, sales, and marketing personnel. Competition for
these personnel is intense in the market today. Volatility or lack of positive
performance in our stock price may also adversely affect our ability to attract
and retain key employees. The loss of services of any of our key personnel, the
inability to retain and attract qualified personnel in the future, or delays in
hiring required personnel, particularly executive management, engineering and
sales personnel, could make it difficult to meet key objectives, such as timely
and effective product introductions.
OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE
Significant variations in our quarterly operating results may adversely
affect the market price of our common stock. Our operating results have varied
on a quarterly basis during our operating history, and we expect to experience
significant fluctuations in future quarterly operating results. These
fluctuations have been and may in the future be caused by numerous factors, many
of which are outside of our control. We believe that period-to-period
comparisons of our results of operations will not necessarily be meaningful and
that you should not rely upon them as an indication of future performance. Also,
it is likely that our operating results could be below the expectations of
public market analysts and investors. This could adversely affect the market
price of our common stock.
In addition, the stock market has experienced extreme price and volume
fluctuations that have affected the market price of many small companies, in
particular, and that have often been unrelated to the operating performance of
these companies. These factors, as well as general economic and political
conditions, may materially adversely affect the market price of our common stock
in the future. Additionally, volatility or a lack of positive performance in our
stock price may adversely affect our ability to retain key employees, some of
whom we anticipate compensating in part based on the performance of our stock
price.
FAILURE TO MANAGE OUR PLANNED GROWTH COULD HARM OUR BUSINESS
Our ability to successfully market and sell our wound care products and
implement our business plan requires an effective plan for managing our future
growth. We plan to increase the scope of our operations at a rapid rate. Future
expansion efforts will be expensive and may strain our managerial and other
resources. To manage future growth effectively, we must maintain and enhance our
financial and accounting systems and controls, integrate new personnel and
manage expanded operations. If we do not manage growth properly, it could harm
our operating results and financial condition and cause our stock price to fall.
A FEW OF OUR EXISTING SHAREHOLDERS OWN A LARGE PERCENTAGE OF OUR VOTING STOCK
AND WILL HAVE A SIGNIFICANT INFLUENCE OVER MATTERS REQUIRING STOCKHOLDER
APPROVAL AND COULD DELAY OR PREVENT A CHANGE IN CONTROL
You may lack an effective vote on corporate matters and management may be
able to act contrary to your objectives. Our officers and board members own
approximately 83.9% of the 16,727,550 shares of our common stock outstanding. If
management votes together, it will influence the outcome of corporate actions
9
requiring shareholder approval, including the election of directors, mergers and
asset sales. As a result, new stockholders may lack an effective vote with
respect to the election of directors and other corporate matters. Therefore, it
is possible that management may take actions with respect to its ownership
interest, which may not be consistent with your objectives or desires. For
example, our officers, directors and principal stockholders could delay or
prevent an acquisition or merger even if the transaction would benefit other
stockholders. In addition, this significant concentration of share ownership may
adversely affect the trading price for our common stock because investors often
perceive disadvantages in owning stock in companies with controlling
stockholders. Please see "Principal Stockholders" for a more detailed
description of our share ownership.
LIQUIDITY OF OUR COMMON STOCK
Although there is a public market for our common stock, trading volume has
been historically low which substantially increases your risk of loss. We can
give no assurance that an active and liquid public market for the shares of the
common stock will develop in the future. Low trading volume in our common stock
could affect your ability to sell the shares of common stock. The development of
a public trading market depends upon not only the existence of willing buyers
and sellers, but also on market makers. The market bid and asked prices for the
shares may be significantly influenced by decisions of the market makers to buy
or sell the shares for their own account, which may be critical for the
establishment and maintenance of a liquid public market in the shares. Market
makers are not required to maintain a continuous two-sided market and are free
to withdraw firm quotations at any time. Additionally, in order to maintain our
eligibility for quotation on the OTC Bulletin Board, we need to have at least
one registered and active market maker. No assurance can be given that any
market making activities of any additional market makers will commence or that
the activities of current market makers will be continued.
SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY LOWER OUR STOCK PRICE AND
IMPAIR OUR ABILITY TO RAISE FUNDS IN FUTURE OFFERINGS
Future sales of large amounts of common stock could adversely affect the
market price of our common stock and our ability to raise capital. Substantially
all of the outstanding shares of our common stock are freely tradable, without
restriction or registration under the Securities Act, other than the sales
volume restrictions of Rule 144 applicable to shares held beneficially by
persons who may be deemed to be affiliates. The price of our common stock could
also drop as a result of the exercise of options for common stock or the
perception that such sales or exercise of options could occur. These factors
also could make it more difficult for us to raise funds through future offerings
of our common stock.
As of April 1, 2008, there were 16,731,639 shares of common stock issued
and 16,757,550 outstanding. In addition, we have issued convertible notes, which
if held to maturity will convert into 1,206,897 shares of common stock, and
warrants representing 1,500,000 shares of common stock are currently
outstanding. In addition, we have 1,490.196 shares of our Series A Convertible
Preferred Stock issued and outstanding that will automatically convert into
7,600,000 shares of common stock upon the filing of an amendment to our Articles
of Incorporation increasing our authorized number of shares of common stock from
20,000,000 to 100,000,000. We intend to file such an amendment during the second
quarter of 2008.
OUR ARTICLES AND BYLAWS MAY DELAY OR PREVENT A POTENTIAL TAKEOVER OF US
Our Articles of Incorporation, as amended, and Bylaws, as amended, contain
provisions that may have the effect of delaying, deterring or preventing a
potential takeover of us, even if the takeover is in the best interest of our
stockholders. The Bylaws limit when stockholders may call a special meeting of
10
stockholders. The Articles also allow the Board of Directors to fill vacancies,
including newly created directorships.
NO DIVIDEND PAYMENTS
We have not paid and do not currently intend to pay dividends, which may
limit the current return you may receive on your investment in our common stock.
Future dividends on our common stock, if any, will depend on our future
earnings, capital requirements, financial condition and other factors. We
currently intend to retain earnings, if any, to increase our net worth and
reserves. Therefore, we do not anticipate that any holder of common stock will
receive any cash, stock or other dividends on our shares of common stock at any
time in the near future. You should not expect or rely on the potential payment
of dividends as a source of current income.
"PENNY STOCK" LIMITATIONS
Our common stock currently trades on the OTC Bulletin Board. Since our
common stock continues to trade below $5.00 per share, our common stock is
considered a "penny stock" and is subject to SEC rules and regulations, which
impose limitations upon the manner in which our shares can be publicly traded.
These regulations require the delivery, prior to any transaction involving
a penny stock, of a disclosure schedule explaining the penny stock market and
the associated risks. Under these regulations, certain brokers who recommend
such securities to persons other than established customers or certain
accredited investors must make a special written suitability determination
regarding such a purchaser and receive such purchaser's written agreement to a
transaction prior to sale. These regulations have the effect of limiting the
trading activity of our common stock and reducing the liquidity of an investment
in our common stock.
Stockholders should be aware that, according to the Securities and
Exchange Commission Release No. 34- 29093, the market for penny stocks has
suffered in recent years from patterns of fraud and abuse. These patterns
include:
Control of the market for the security by one or a few broker-dealers that
are often related to the promoter or issuer;
Manipulation of prices through prearranged matching of purchases and sales
and false and misleading press releases;
"Boiler room" practices involving high pressure sales tactics and
unrealistic price projections by inexperienced sales persons;
Excessive and undisclosed bid-ask differentials and markups by selling
broker-dealers; and
The wholesale dumping of the same securities by promoters and
broker-dealers after prices have been manipulated to a desired level, along with
the inevitable collapse of those prices with consequent investor losses.
Furthermore, the "penny stock" designation may adversely affect the
development of any public market for the Company's shares of common stock or, if
such a market develops, its continuation. Broker-dealers are required to
personally determine whether an investment in "penny stock" is suitable for
customers.
11
Penny stocks are securities (i) with a price of less than five dollars per
share; (ii) that are not traded on a "recognized" national exchange; (iii) whose
prices are not quoted on the NASDAQ automated quotation system (NASDAQ-listed
stocks must still meet requirement (i) above); or (iv) of an issuer with net
tangible assets less than $2,000,000 (if the issuer has been in continuous
operation for at least three years) or $5,000,000 (if in continuous operation
for less than three years), or with average annual revenues of less than
$6,000,000 for the last three years.
Section 15(g) of the Exchange Act and Rule 15g-2 of the Commission require
broker-dealers dealing in penny stocks to provide potential investors with a
document disclosing the risks of penny stocks and to obtain a manually signed
and dated written receipt of the document before effecting any transaction in a
penny stock for the investor's account. Potential investors in the Company's
common stock are urged to obtain and read such disclosure carefully before
purchasing any shares that are deemed to be "penny stock."
Rule 15g-9 of the Commission requires broker-dealers in penny stocks to
approve the account of any investor for transactions in such stocks before
selling any penny stock to that investor. This procedure requires the
broker-dealer to (i) obtain from the investor information concerning his or her
financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor's financial
situation, investment experience and investment objectives. Compliance with
these requirements may make it more difficult for the Company's stockholders to
resell their shares to third parties or to otherwise dispose of them.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "could," "expect," "plan," "intend,"
"anticipate," "believe," "estimate," "predict," "potential," or "continue," or
the negative of such terms or other comparable terminology. These statements are
only predictions. Actual events or results may differ materially. In evaluating
these statements, you should specifically consider various factors, including
the risks outlined in the "Risk Factors" section above. These factors may cause
our actual results to differ materially from any forward-looking statement.
Readers are urged to carefully review and consider the various disclosures we
make in this prospectus and in our other reports filed with the Securities and
Exchange Commission.
We undertake no obligation to update or revise forward-looking statements
to reflect changed assumptions, the occurrence of unanticipated events or
changes in the future operating results over time. Our management believes its
assumptions are based upon reasonable data derived from and known about our
business and operations. No assurances are made that our actual results of
operations or the results of our future activities will not differ materially
from these assumptions.
12
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
shares of common stock offered by the selling shareholder. The Company will,
however, receive proceeds from the exercise of the warrants described in this
prospectus, if and when these warrants are exercised. We could raise an
additional $1,750,000 if all of the warrants described in this Prospectus are
exercised. These warrants also contain an automatic exercise feature that is
triggered if the volume weighted average market price of our common stock is
equal to or greater than $3.00 per share for a period of 20 consecutive days and
if there is an effective registration statement for the shares underlying the
warrants. We can give no assurance that any or all of these warrants or options
will ever be exercised.
MARKET PRICE OF AND DIVIDENDS ON FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is quoted on the Over the Counter Bulletin
Board, a service maintained by the National Association of Securities Dealer,
Inc. under the symbol "MBSB". Trading in the common stock in the
over-the-counter market has been limited and sporadic and the quotations set
forth below are not necessarily indicative of actual market conditions. Further,
these prices reflect inter-dealer prices without retail mark-up, mark-down, or
commission, and may not necessarily reflect actual transactions.
The high and low sales prices are as follows for the periods indicated:
----------- --------------------------- ------------- ------------
YEAR QUARTER ENDING HIGH LOW
----------- --------------------------- ------------- ------------
2006 March 31, 2006 $0.45 $0.10
----------- --------------------------- ------------- ------------
June 30, 2006 $0.45 $0.10
----------- --------------------------- ------------- ------------
September 30, 2006 $0.20 $0.10
----------- --------------------------- ------------- ------------
December 31, 2006 $0.10 $0.05
----------- --------------------------- ------------- ------------
2007 March 31, 2007 $0.45 $0.05
----------- --------------------------- ------------- ------------
June 30, 2007 $0.30 $0.06
----------- --------------------------- ------------- ------------
September 30, 2007 $0.35 $0.10
----------- --------------------------- ------------- ------------
December 31, 2007 $1.10 $0.32
----------- --------------------------- ------------- ------------
RECORD HOLDERS
As of April 1, 2008, there were approximately 2,000 shareholders of record
holding a total of 16,727,550 shares of common stock. The holders of the common
stock are entitled to one vote for each share held of record on all matters
submitted to a vote of stockholders. Holders of the common stock have no
preemptive rights and no right to convert their common stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
common stock.
DIVIDENDS
The Company has not declared any cash dividends since inception and does
not anticipate paying any dividends in the foreseeable future. The payment of
dividends is within the discretion of the board of directors and will depend on
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the Company's earnings, capital requirements, financial condition, and other
relevant factors. There are no restrictions that currently limit the Company's
ability to pay dividends on its common stock other than those generally imposed
by applicable state law. The Company has determined that it will utilize any
earnings in the expansion of its business.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and related notes that appear in this document. In addition
to historical consolidated financial information, the following discussion
contains forward-looking statements that reflect our plans, estimates and
beliefs. Our actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to these
differences include those discussed below and elsewhere in this memorandum,
particularly in "Risk Factors."
Because of our dependence upon consumer perceptions, adverse publicity
associated with illness or other adverse effects resulting from the use of our
products or any similar products distributed by other companies could have a
material adverse effect on our operations. Such adverse publicity could arise
even if the adverse effects associated with such products resulted from
consumers' failure to consume such products as directed. In addition, we may not
be able to counter the effects of negative publicity concerning the efficacy of
our products. Any such occurrence could have a negative effect on our
operations.
Other key factors that affect our operating results are:
>> Overall customer demand and acceptance for our various products.
>> Volume of products ordered and the prices at which we sell our
products.
>> Our ability to manage our cost structure for capital expenditures and
operating expenses such as salaries and benefits, freight and
royalties.
>> Our ability to match operating costs to shifting volume levels.
>> Increases in the cost of raw materials and other supplies.
>> The impact of competitive products.
>> Limitations on future financing.
>> Increases in the cost of borrowings and unavailability of debt or
equity capital.
>> Our inability to gain and/or hold market share.
>> Exposure to and expense of resolving and defending product liability
claims and other litigation.
>> Managing and maintaining growth.
>> The success of product development and new product introductions into
the marketplace.
14
>> The departure of key members of management.
>> Our ability to efficiently manufacture our products.
>> Unexpected customer bankruptcy.
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS/RISK FACTORS
The following discussion should be read in conjunction with the financial
statements and the notes thereto and the other financial information appearing
elsewhere in this document. In addition to historical information, the following
discussion and other parts of this document contain certain forward-looking
information. When used in this discussion, the words "believes," "anticipates,"
"expects," and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties,
which could cause actual results to differ materially from those projected due
to a number of factors beyond our control. We do not undertake to publicly
update or revise any of our forward-looking statements even if experience or
future changes show that the indicated results or events will not be realized.
You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. You are also urged to
carefully review and consider our discussions regarding the various factors that
affect our business, included in this section and elsewhere in this report.
OVERVIEW AND PLAN OF OPERATION
Our current focus is developing and marketing products for the advanced
wound care market, as pursued through our wholly-owned subsidiary, Wound Care
Innovations, LLC, a Nevada limited liability company. We hold the exclusive
worldwide license to certain patented technologies and processes related to an
advanced collagen based wound care product formulation, which we market under
the brand name "CellerateRx(TM)". These products are FDA cleared for marketing
for the following indications: pressure ulcers, diabetic ulcers, surgical
wounds, ulcers due to arterial insufficiency, traumatic wounds, 1st and 2nd
degree burns, and superficial wounds.
Our CellerateRx products are currently marketed to and being used by wound
care providers of all types. These products are also approved for reimbursement
under Medicare Part B and as a consequence, the professional medical market is,
and will remain the primary focus of our marketing and sales efforts for the
immediate future. We believe that these products are unique in composition,
applicability, clinical performance, and demonstrate the ability to reduce costs
associated with standard wound management.
We currently have limited business operations, maintaining leased offices
in Fort Worth, Texas and Fort Lauderdale, Florida. All of our major business
functions are performed by our subsidiary, Wound Care Innovations, LLC. Although
Wound Care Innovations is a product distributor, it is also responsible for
product packaging development, packaging materials, and coordination of all
processes except the actual manufacturing of the product. Wound Care Innovations
also conducts other activities that are typical of a product distributor,
including sales, marketing, customer service, and customer support. All of these
activities are run and managed out of Wound Care Innovations' Fort Lauderdale
offices.
Manufacturing of our products is conducted by Applied Nutritionals.
CellerateRx is a trademark of Applied Nutritionals, LLC. Warehousing, shipping,
and physical inventory management is outsourced to Diamond Contract
Manufacturing of Rochester, NY.
Our sales and marketing activities to date have been limited and have
resulted in a nominal revenue stream. Through these activities, we have,
however, secured product evaluations with a number of key accounts. These
15
accounts are regional and national healthcare provider organizations that
represent strong recurring revenue opportunities for the Company.
We currently intend to secure capital resources for expansion of staff,
inventories, marketing efforts, and research and development; however we may be
unsuccessful in our efforts to secure such capital. If we are successful in
raising capital, we anticipate hiring a number of management, marketing, and
clinical staffs to secure additional accounts, market to the broader US wound
care market, support customers in specific geographies, broaden our
clinical/educational programs, and evaluate retail and international market
opportunities.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these consolidated financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
costs and expenses, and related disclosures. On an ongoing basis, we evaluate
our estimates and assumptions. Our actual results may differ from these
estimates under different assumptions or conditions.
We believe that of our significant accounting policies, which are
described in the notes to our consolidated financial statements, the following
accounting policies involve a greater degree of judgment and complexity.
Accordingly, these are the policies we believe are the most critical to aid in
fully understanding and evaluating our consolidated financial condition and
results of operations.
Inventories. Inventories are stated at the lower of cost or net realizable
value, with cost computed on a first-in, first-out basis. Inventories consist of
powders, gels and the related packaging supplies. The Company has recorded an
allowance for obsolete and slow moving inventory of $7,260 at December 31, 2007.
Stock-based compensation. The Company adopted SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123(R)"), on January 1, 2006, which requires the
measurement and recognition of compensation expense for all share-based awards
made to employees and directors, including employee stock options and shares
issued through its employee stock purchase plan, based on estimated fair values.
Prior to the adoption of SFAS 123(R), the Company accounted for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Under the intrinsic value method that was used to account for
stock-based awards prior to January 1, 2006, which had been allowed under the
original provisions of SFAS 123, compensation expense is recorded on the date of
grant if the current market price of the underlying stock exceeded the exercise
price. Any compensation expense is recorded on a straight-line basis over the
vesting period of the grant.
Effective January 1, 2006, The Company adopted the fair value recognition
provisions of SFAS 123(R) using the modified prospective application method.
Under this transition method, compensation expense recognized will include the
applicable amounts of: (a) compensation expense of all stock-based payments
granted prior to, but not yet vested as of January 1, 2006, and (b) compensation
expense for all stock-based payments granted subsequent to January 1, 2006.
Results for periods prior to January 1, 2006, have not been restated. The
adoption of this new standard had no impact to the Company's financial position,
results of operations or cash flows as the Company's previous stock-based
compensation awards expired prior to January 1, 2006, and there have been no
grants during the current year. Based on the Company's evaluation of the
adoption of the new standard, however, the Company believes that it could have a
significant impact to the Company's financial position and overall results of
16
operations depending on the number of stock options granted in a given year.
RESULTS OF OPERATIONS
Year ended December 31, 2007 Compared to Year ended December 31, 2006
Revenues. The Company generated revenues for the year ended December 31,
2007 of $630,505 compared to revenues of $189,755 for the year ended December
31, 2006, or a 233% increase in revenues.
Cost of revenues and gross margin. Costs of revenues for the year ended
December 31, 2007 were $223,184 resulting in a gross profit margin of $407,321,
compared to cost of revenues for the year ended December 31, 2006 of $193,057
and gross loss margin of $3,302. Our margins continue to be small, but our
client base is growing and we believe that the product is gaining traction in
the wound care field.
Selling, general and administrative expenses ("SGA"). SGA consists
primarily of wages, facility-related expenses such as rent and utilities, and
outside professional services such as legal and professional fees incurred in
connection with our SEC reporting requirements. SGA for 2007 were $813,058
compared to $484,583 for fiscal 2006, or an increase of approximately 68%. We
expect SGA to increase in the future as we continue to expand our marketing
efforts and the number of products we offer and as our business continues to
grow and the costs associated with being a public company continue to increase
as a result of increased reporting requirements, including but not limited to
the Sarbanes-Oxley Act of 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has limited resources to maintain its current
operations, secure more inventories, and meet its contractual obligations.
Additional capital must be raised through equity or debt offerings. If we are
unable to obtain additional capital, we will be unable to operate our business.
During 2006, certain related parties advanced us approximately $153,000 for
working capital purposes. We also secured a short-term loan of $500,000, due
March 31, 2007. We generated a net loss of $623,559 and our cash position at
December 31, 2006 was $236,301. During 2007 our short term borrowings increased
by $230,197. We generated a loss of $542,756 and our cash position at December
31, 2007 was $781.
Effective January 1, 2008, $1,495,664 of Company debt was cancelled in
exchange for 490.196 shares of our Series A Convertible Preferred stock.
Effective January 11, 2008, we received $50,000 from the sale and issuance
of 86,207 shares of our common stock and warrants to purchase common stock, and
an additional $700,000 from the sale and issuance of a convertible promissory
note.
Without realization of additional capital or significant revenues from
operations, it would be unlikely for the Company to continue as a going concern.
The consolidated financial statements have been prepared on a going concern
basis, which contemplates realization of assets and liquidation of liabilities
in the ordinary course of business. The Company has continuously incurred losses
from operations and has a significant accumulated deficit. The appropriateness
of using the going concern basis is dependent upon the Company's ability to
obtain additional financing or equity capital and, ultimately, to achieve
profitable operations. These conditions raise substantial doubt about its
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty and
should not be regarded as typical for normal operating periods.
17
It is the Company's belief that it will continue to incur nominal losses
for at least the next twelve months, and as a result will require additional
funds from debt or equity investments to meet such needs. The Company
anticipates that its officers and shareholders will contribute sufficient funds
to satisfy the cash needs of the Company for the next twelve months. However,
there can be no assurances to that effect, as the Company has insignificant
revenues and the Company's need for capital may change dramatically if it is
successful in acquiring a new business. If the Company cannot obtain needed
funds, it may be forced to curtail or cease its activities. Our future funding
requirements will depend on numerous factors, some of which are beyond the
Company's control. These factors include our ability to operate profitably,
recruit and train management and personnel, and to compete with other,
better-capitalized and more established competitors. To meet these objectives,
management's plans are to (i) raise capital by obtaining financing through
private placement efforts, (ii) issue common stock for services rendered in lieu
of cash payments and (iii) obtain loans from officers and shareholders as
necessary.
The Company does not anticipate incurring significant research and
development costs, the purchase of any major equipment, or any significant
changes in the number of its employees over the next twelve months.
GOING CONCERN
The Company has continuously incurred losses from operations and has a
significant accumulated deficit. The appropriateness of using the going concern
basis is dependent upon the Company's ability to obtain additional financing or
equity capital and, ultimately, to achieve profitable operations. These
conditions raise substantial doubt about its ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
It is the Company's belief that it will continue to incur nominal losses
for at least the next twelve months, and as a result will require additional
funds from debt or equity investments to meet such needs. Without realization of
additional capital, it would be unlikely for the Company to continue as a going
concern. The Company anticipates that its officers and shareholders will
contribute sufficient funds to satisfy the cash needs of the Company for the
next twelve months. However, there can be no assurances to that effect, as the
Company has insignificant revenues and the Company's need for capital may change
dramatically if it is successful in acquiring a new business. If the Company
cannot obtain needed funds, it may be forced to curtail or cease its activities.
To meet these objectives, management's plans are to (i) raise capital by
obtaining financing through private placement efforts; (ii) issue common stock
for services rendered in lieu of cash payments and (iii) obtain loans from
officers and shareholders as necessary.
The Company's future ability to achieve these objectives cannot be
determined at this time. The accompanying financial statements do not include
any adjustments that might result from the outcome of this uncertainty and
should not be regarded as typical for normal operating periods.
INTELLECTUAL PROPERTY EXCLUSIVE LICENSING AGREEMENT
Effective November 28, 2007, Wound Care Innovations entered into separate
exclusive license agreements with Applied Nutritionals and its founder George
Petito, pursuant to which Wound Care Innovations obtained the exclusive
world-wide license to certain patented technologies and processes related to
CellerateRx products.
Wound Care Innovations had been marketing and selling CellerateRx for the
three previous years under the terms of a distribution agreement that had been
terminated in 2005. The new licenses are limited to the human health care market
for external wound care, and include any new product developments based on the
18
licensed patent and processes. The term of these licenses extends through the
life of the licensed patent.
In consideration for the licenses, Wound Care Innovations agreed to pay to
Applied Nutritionals and Mr. Petito the following royalties, beginning January
3, 2008: (a) an advance royalty of $100,000 in the aggregate, (b) an aggregate
royalty of fifteen percent (15%) of gross sales occurring during the first year
of the license; (c) an additional advance royalty of $400,000, in the aggregate,
on January 3, 2009; plus (d) an aggregate royalty of three percent (3%) of gross
sales for all sales occurring after the payment of the $400,000 advance royalty.
In addition, after January 3, 2009, Wound Care Innovations must maintain a
minimum aggregate annual royalty payment of $375,000.
All royalties, other than the advance royalty payments described above,
are due and payable on a calendar quarterly basis on or before the forty-fifth
(45th) day immediately following the calendar quarter in which gross sales are
received.
In connection with the above transaction, the Company issued to Mr. Petito
1,000 shares of a newly designated Series A Convertible Preferred Stock. Each
share of Preferred Stock will automatically convert into 5,100 shares of Common
Stock upon the filing of an amendment to our Articles of Incorporation
increasing our authorized number of shares of common stock from 20,000,000 to
100,000,000. We intend to file such an amendment during the second quarter of
2008.
In addition to the license agreements, Wound Care Innovations also entered
into an exclusive manufacturing agreement with Applied Nutritionals pursuant to
which Applied Nutritionals will manufacture all CellerateRx and related products
for Wound Care Innovations. The term of the manufacturing agreement extends
through the life of the licensed patent; but may be terminated by a successor in
interest to Wound Care Innovations, provided that the successor in interest has
annual revenues of at least $100,000,000 or a market capitalization of at least
$200,000,000.
Prior to entering into the new license agreements, Applied Nutritionals
held 900,000 shares of our common stock. These shares were issued to Applied
Nutritionals in 2004, in connection with the previous distribution agreement for
CellerateRx products. As majority member and manager of Applied Nutritionals,
Mr. Petito may be deemed to be the beneficial owner of these shares.
DESCRIPTION OF PROPERTY
The Company's principal executive office is located at 777 Main Street,
Fort Worth, Texas 76102. These offices contain approximately 2,390 square feet
and are leased for a 2 year term expiring March 31, 2010. Rental on our
executive offices is $3,784.00 per month. Wound Care's principal office is
located at 790 E Broward Blvd, Suite 300, Fort Lauderdale, Florida 33301. These
offices contain approximately 2,000 square feet and are leased for a 5 year term
expiring September 2009. Rental on Wound Care's office is $4,130.77 per month.
LEGAL PROCEEDINGS
We are from time to time involved in various legal proceedings incidental
to the conduct of our business. We believe that the outcome of all such pending
legal proceedings will not in the aggregate have a material adverse effect on
our business, financial condition, results of operations or liquidity.
19
BUSINESS
BUSINESS OVERVIEW
Our current focus is developing and marketing products for the advanced
wound care market, as pursued through our wholly-owned subsidiary, Wound Care
Innovations. We hold the exclusive worldwide license to certain patented
technologies and processes related to an advanced collagen based wound care
product formulation, which we market under the brand name "CellerateRx(TM)".
These products are FDA cleared for marketing for the following indications:
pressure ulcers, diabetic ulcers, surgical wounds, ulcers due to arterial
insufficiency, traumatic wounds, 1st and 2nd degree burns, and superficial
wounds. We believe that these products are unique in composition, applicability,
clinical performance, and demonstrate the ability to reduce costs associated
with standard wound management.
Our CellerateRx products are currently marketed to and being used by wound
care providers of all types. These products are also approved for reimbursement
under Medicare Part B and as a consequence, the professional medical market is,
and will remain the primary focus of our marketing and sales efforts for the
immediate future. We believe that these products are unique in composition,
applicability, clinical performance, and demonstrate the ability to reduce costs
associated with standard wound management.
We currently have limited business operations, maintaining leased offices
in Fort Worth, Texas and Fort Lauderdale, Florida. All of our major business
functions are performed by our subsidiary, Wound Care Innovations, LLC. Although
Wound Care Innovations is a product distributor, it is also responsible for
product packaging development, packaging materials, and coordination of all
processes except the actual manufacturing of the product. Wound Care Innovations
also conducts other activities that are typical of a product distributor,
including sales, marketing, customer service, and customer support. All of these
activities are run and managed out of Wound Care Innovations's Fort Lauderdale
offices.
Manufacturing of our products is conducted by Applied Nutritionals.
CellerateRx is a trademark of Applied Nutritionals, LLC. Warehousing, shipping,
and physical inventory management is outsourced to Diamond Contract
Manufacturing of Rochester, NY.
We have been pre-marketing CellerateRX products to select markets and have
received positive user feedback from many healthcare markets, including long
term care facilities, wound care centers, hospitals, homecare agencies, and
durable medical equipment companies. Through these activities, we have, however,
secured product evaluations with a number of key accounts. These accounts are
regional and national healthcare provider organizations that represent strong
recurring revenue opportunities for the Company. Our pre-marketing work is
beginning to bear results that we believe will generate additional revenues
during 2008.
We currently intend to secure capital resources for expansion of staff,
inventories, marketing efforts, and research and development; however we may be
unsuccessful in our efforts to secure such capital. If we are successful in
raising capital, we anticipate hiring a number of management, marketing, and
clinical staffs to secure additional accounts, market to the broader US wound
care market, support customers in specific geographies, broaden our
clinical/educational programs, and evaluate retail and international market
opportunities.
WOUND CARE INDUSTRY
The U.S. wound care market serves between three to five million patients
annually with wounds resulting from diabetes, arterial insufficiency, pressure
caused by immobility and other causes. Advanced wound care technologies, a
segment of the overall U.S. wound care market, was approximately $2.6 billion in
20
2006, and is expected to reach $4.6 billion by 2011, an average annual growth
rate of approximately 12%. According to BBC Research, wound care dressings,
sealants, and anti-adhesion products held approximately 59% of the advanced
wound care technologies market in 2006. By the end of 2011 this segment is
expected to hold 55% of the total U.S. market.
New technologies and an increasing older population are two of the major
driving forces behind the advanced wound care market. There is growing appeal
for the market due to the fast healing benefits and reduced patient follow-ups.
In addition, military wound care, alternative wound care, future research, and
upcoming technology represent significant trends and growth for the changing
wound care market.
Within the wound care products market, there are two typical groups of
products: drugs and devices. CellerateRx products are currently classified by
the FDA as Class I medical devices, and are further classified as dressings.
Although collagen has been used for a number of years as a component of wound
care dressings, we believe that the patented form of collagen in CellerateRx
products allows these dressings to have a more active role in wound therapy than
other currently available collagens based wound care dressings. The dressing
market in the United States is currently estimated to be $2.5 billion per year.
The overall market for wound care products in the U.S. consists of
healthcare professionals and organizations that provide care for those with
wounds; durable medical equipment companies that supply ambulatory patients with
products; and product companies that market drugs, devices, and methodologies to
healthcare organizations and patients. Presently, we focus on sales and
marketing activities directed toward professionals and organizations that will
either resell CellerateRx products or use them in the course of treating their
patient's wounds.
GENERAL BUSINESS PLAN
Our general business plan is to introduce CellerateRx products to select
national and regional healthcare provider organizations, and focus on
geographically-targeted marketing. Our CellerateRx products are currently being
used by a variety of wound care providers, and are getting to market through a
variety of distribution channels. CellerateRx products are currently approved
for reimbursement under Medicare Part B. As a consequence, the professional
medical market is, and will, remain the primary focus of our marketing and sales
efforts for the immediate future.
PRODUCTS
Currently, our products for the professional healthcare market consist of
CellerateRX in both gel and powder form. Both products contain the patented form
of collagen and may be used on a variety of wounds, wound states, and phases.
Although no clinical studies are currently planned, we intend to conduct a
number of clinical studies for the purposes of quantifying the benefits of
CellerateRX. We anticipate planning study design and management in the near
future.
Effective November 28, 2007, we entered into separate exclusive license
agreements with Applied Nutritionals and its founder George Petito, pursuant to
which Wound Care Innovations obtained the exclusive worldwide license to certain
patented technologies and processes related to CellerateRx. Wound Care
Innovations had been marketing and selling CellerateRx during the previous three
years under the terms of a distribution agreement with Applied Nutritionals that
was terminated in 2005. The new licenses are limited to the human health care
market for external wound care, and include any new product developments based
on the licensed patent and processes. The term of these licenses extends through
the life of the licensed patent.
21
In consideration for the licenses, Wound Care Innovations agreed to pay
Applied Nutritionals and Mr. Petito the following royalties, beginning January
3, 2008: (a) an advance royalty of $100,000 in the aggregate, (b) an aggregate
royalty of fifteen percent (15%) of gross sales occurring during the first year
of the license; (c) an additional advance royalty of $400,000, in the aggregate,
on January 3, 2009; plus (d) an aggregate royalty of three percent (3%) of gross
sales for all sales occurring after the payment of the $400,000 advance royalty.
In addition, after January 3, 2009, we must maintain a minimum aggregate annual
royalty payment of $375,000.
MARKETING, SALES, AND DISTRIBUTION
The Company anticipates building and supporting a limited sales and
marketing force directed toward securing key high profile accounts, penetrating
select geographic markets, and supporting the efforts of our resellers and
distributors. The wound care products market has a variety of overlapping
distribution channels, with many customers able to procure products in multiple
ways. With an intended limited internal sales force, our goal is to market
directly to large accounts and open distribution channels preferred by those
clients, as well as marketing through traditional online, offline, trade show
and local activities.
We believe that the spectrum of use of CellerateRx products allows us to
market to a wide range of customers, and will facilitate relationships with
compatible product companies for potential joint marketing activities.
Our packaging, inventory management, and shipping activities are currently
outsourced to Diamond Contract Manufacturing, a non-affiliated entity who
provides packaging, warehousing, and fulfillment services from their Rochester,
NY facilities.
PRODUCT PRODUCTION AND DEVELOPMENT
In addition to the license agreements for the patented technologies and
processes related to CellerateRx, Wound Care Innovations also entered into an
exclusive manufacturing agreement with Applied Nutritionals pursuant to which
Applied Nutritionals will manufacture all CellerateRx and related products for
us. The term of the manufacturing agreement extends through the life of the
licensed patent; but may be terminated by a successor in interest, if such
successor has, annual revenues of at least $100,000,000 or a market
capitalization of at least $200,000,000.
We conduct our research and development activities, in conjunction with
Applied Nutritionals. Although our efforts are currently focused on marketing
and selling our current product lines, we anticipate that we may develop
derivative products, utilizing the patented form of collagen, for other markets
and applications.
EMPLOYEES
We currently have three employees in Florida. In addition, we use
administrative services provided by two employees of an entity managed by Mr.
Scott Haire, our Chairman, President and Chief Executive Officer.
COMPETITION
The wound care market is served by a number of large, multi-product line
companies offering a suite of products to the market. CellerateRx products
compete with all primary dressings, some prescription therapies (drugs), and
other medical devices. Manufacturers and distributors of competitive products
22
include: Smith & Nephew, Johnson & Johnson, Healthpoint, and Biocore. Many of
our competitors are significantly larger that we are and have more financial and
personnel resources than we do. Consequently, we will be at a competitive
disadvantage in marketing and selling our products into the marketplace. We
believe, however, that the patented molecular form of collagen we use in
CellerateRx allows our products to outperform currently available non-active
dressings, reduce the cost of wound management, and replace a variety of other
products with a single primary dressing.
23
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company:
Year First
Name Age Position Elected
Scott A. Haire 43 Chairman, Chief Executive 1993
Officer, President and Director
Gilbert A. Valdez 64 Director 1996
Araldo A. Cossutta 83 Director 1994
Steven W. Evans 57 Director 1994
Robert E. Gross 63 Director 1994
Thomas J. Kirchhofer 67 Director 1994
Executive Officers of the Company are elected on an annual basis and serve
at the discretion of the Board of Directors. Directors of the Company are
elected on an annual basis.
Scott A. Haire is Chairman of the Board, Chief Executive Officer and
President of the Company. Prior to founding MB Software Corporation, he was an
employee of the Company from November 1993 to June 1994. Previously, Mr. Haire
was president of Preferred Payment Systems, a company specializing in electronic
claims and insurance system related projects.
Gilbert A. Valdez is Chief Operating Officer of the Company and past
President and CEO of four major financial and healthcare corporations. Most
recently, he served as CEO of Hospital Billing and Collection Services, Inc., a
$550 million healthcare receivables financing entity located in Wilmington,
Delaware; Datix Corporation, an Atlanta-based corporate divestiture from
Harris-Lanier; Medaphis Corporation, an interstate, multi-dimensional healthcare
service agency based in Atlanta; and NEIC, a national consortium of 40 major
insurance companies formed for development of electronic claim billing
standards. Mr. Valdez has 30 years of senior healthcare receivables financing
experience.
Araldo A. Cossutta is President of Cossutta and Associates, an
architectural firm based in New York City, with major projects throughout the
world. Previously, he was a partner with I.M. Pei & Partners and is a graduate
of the Harvard Graduate School of Design and the Ecole des Beaux Arts in Paris.
Mr. Cossutta was a significant shareholder in Personal Computer Card Corporation
("PC3") and was chairman of PC3 at the time of its acquisition by the Company in
November 1993. He also was a large shareholder and director of Computer
Integration Corporation of Boca Raton, Florida from 1993 to 2000.
Steven W. Evans is a Certified Public Accountant with Evans Miller &
Warriner, PSC, an accounting firm which he established in 1976 in Barbourville
Kentucky. He is also a founder and active in PTRL, which operates contract
research laboratories located in Kentucky, California and Germany. He is also a
founder and active in the management of environmental, financial and hotel
corporations in Kentucky and Tennessee.
Robert E. Gross is President of R. E. Gross & Associates, providing
consulting and systems projects for clients in the multi-location service,
banking and healthcare industries. From 1987 to 1990, he was vice
president-technical operations for Medaphis Physicians Service Corp., Atlanta,
24
Georgia. Prior to that, he held executive positions with Chi-Chi's, Inc., Royal
Crown and TigerAir. He also spent 13 years as an engineer with IBM.
Thomas J. Kirchhofer is president of Synergy Wellness Centers of Georgia,
Inc. He is past president of the Georgia Chiropractic Association.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
Our business is managed under the direction of the Board of Directors. The
Board of Directors meets on a regularly scheduled basis to review significant
developments affecting us and to act on matters requiring approval of the Board
of Directors. It also holds special meetings when an important matter requires
attention or action by the Board of Directors between scheduled meetings. During
fiscal 2007, the Board of Directors did not meet, but acted by unanimous written
consent 4 times. The Board of Directors does not have a standing audit,
compensation, nominating or governance committee.
All of our directors are independent, as defined by Rule 4200(a)(15) of
the Nasdaq's listing standards, except for Mr. Haire, who is not independent
because he is currently employed by the Company as its Chief Executive Officer
and Mr. Cossutta, who is not independent due to the above described acquisition
of Wound Care.
Audit Committee
---------------
The Company does not maintain a standing Audit Committee. An audit
committee typically reviews, acts on and reports to the board of directors with
respect to various auditing and accounting matters, including the
recommendations and performance of independent auditors, the scope of the annual
audits, fees to be paid to the independent auditors, and internal accounting and
financial control policies and procedures. Certain stock exchanges currently
require companies to adopt a formal written charter that establishes an audit
committee that specifies the scope of an audit committee's responsibilities and
the means by which it carries out those responsibilities. In order to be listed
on any of these exchanges, the Company will be required to establish an audit
committee.
The Company's board of directors does not have an "audit committee
financial expert," within the meaning of such phrase under applicable
regulations of the Securities and Exchange Commission, serving on its audit
committee. The board of directors believes that all members of its audit
committee are financially literate and experienced in business matters, and that
one or more members of the audit committee are capable of (i) understanding
generally accepted accounting principles ("GAAP") and financial statements, (ii)
assessing the general application of GAAP principles in connection with our
accounting for estimates, accruals and reserves, (iii) analyzing and evaluating
our financial statements, (iv) understanding our internal controls and
procedures for financial reporting; and (v) understanding audit committee
functions, all of which are attributes of an audit committee financial expert.
However, the board of directors believes that there is not any audit committee
member who has obtained these attributes through the experience specified in the
SEC's definition of "audit committee financial expert." Further, like many small
companies, it is difficult for the Company to attract and retain board members
who qualify as "audit committee financial experts," and competition for these
individuals is significant. The board believes that its current audit committee
is able to fulfill its role under SEC regulations despite not having a
designated "audit committee financial expert."
Indebtedness of Directors and Executive Officers
------------------------------------------------
None of our directors or officers or their respective associates or
affiliates is indebted to us.
25
Family Relationships
--------------------
There are no family relationships among our directors or executive
officers.
Compensation Committee
----------------------
The Company does not maintain a standing Compensation Committee. Due to
the Company's small size at this point in time, the Board of Directors has not
established a separate compensation committee. All members of the Board of
Directors (with the exception of any member about whom a particular compensation
decision is being made) participate in the compensation award process. During
fiscal 2007, no executive officer received any compensation from the Company.
Nominating Committee
--------------------
The Company does not maintain a standing Nominating Committee and does not
have a Nominating Committee charter. Due to the Company's small size at this
point in time, the Board of Directors has not established a separate nominating
committee and feels that all directors should have input into nomination
decisions. As such, all members of the Board of Directors generally participate
in the director nomination process. Under the rules promulgated by the SEC, the
Board of Directors is, therefore, treated as a "nominating committee".
The Board of Directors will consider qualified nominees recommended by
shareholders. Shareholders desiring to make such recommendations should submit
such recommendations to the Corporate Secretary, c/o MB Software Corporation 777
Main Street, Suite 3100, Fort Worth, Texas 76102. The Board of Directors will
evaluate candidates properly proposed by shareholders in the same manner as all
other candidates.
With respect to the nominations process, the Board of Directors does not
operate under a written charter, but under resolutions adopted by the Board of
Directors. The Board of Directors is responsible for reviewing and interviewing
qualified candidates to serve on the Board of Directors, for making
recommendations for nominations to fill vacancies on the Board of Directors, and
for selecting the nominees for selection by the Company's shareholders at each
annual meeting. The Board of Directors has not established specific minimum age,
education, experience or skill requirements for potential directors. The Board
of Directors takes into account all factors they consider appropriate in
fulfilling their responsibilities to identify and recommend individuals as
director nominees. Those factors may include, without limitation, the following:
o an individual's business or professional experience, accomplishments,
education, judgment, understanding of the business and the industry in
which the Company operates, specific skills and talents, independence,
time commitments, reputation, general business acumen and personal and
professional integrity or character;
o the size and composition of the Board of Directors and the interaction
of its members, in each case with respect to the needs of the Company
and its shareholders; and
o regarding any individual who has served as a director of the Company,
his or her past preparation for, o attendance at, and participation in
meetings and other activities of the Board of Directors or its
committees and his or her overall contributions to the Board of
Directors and the Company.
The Board of Directors may use multiple sources for identifying and
evaluating nominees for directors, including referrals from the Company's
current directors and management as well as input from third parties, including
executive search firms retained by the Board of Directors. The Board of
26
Directors will obtain background information about candidates, which may include
information from directors' and officers' questionnaires and background and
reference checks, and will then interview qualified candidates. The Board of
Directors will then determine, based on the background information and the
information obtained in the interviews, whether to recommend that a candidate be
nominated to the Board of Directors. We strongly encourage and, from time to
time actively survey, our shareholders to recommend potential director
candidates.
Shareholder Communications with the Company's Board of Directors
Any shareholder wishing to send written communications to the Company's
Board of Directors may do so by sending them in care of Lucy Singleton,
Corporate Secretary, at the Company's principal executive offices. All such
communications will be forwarded to the intended recipient(s).
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires our officers and directors, and
persons who own more than 10% of a registered class of our equity securities, to
file initial reports of ownership and reports of changes in ownership with the
SEC. Such persons are required by SEC regulation to furnish us with copies of
all Section 16(a) forms they file. Based solely on its review of the copies of
such forms received by it and representations from certain reporting persons
regarding their compliance with the relevant filing requirements, the Company
believes that all filing requirements applicable to its officers, directors and
10% shareholders were complied with during the fiscal year ended December 31,
2007, with the exception of one transaction effected by Mr. Cossutta, which was
filed late.
CODE OF ETHICS
Due to the current formative stage of the Company's development, it has
not yet developed a written code of ethics for its directors or executive
officers.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
No compensation in excess of $100,000 was awarded to, earned by, or paid
to any executive officer of the Company during the last three years. The
following table and the accompanying notes provide summary information for each
of the last three fiscal years concerning cash and non-cash compensation paid or
accrued by the Company's Chief Executive Officer over the past three years.
-------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
--------------------------- ------------------------------------- -------------------------------------------------------
Awards Payouts
----------------------------------------------------------------- ---------------------------- --------------------------
Other Restricted Securities
Name and Annual Stock Underlying LTIP All Other
Principal Position Year Salary Bonus Compensation Award(s) Options payouts Compensation
($) ($) ($) ($) SARs(#) ($) ($)
------------------- -------- ------------ ---------- ------------ ------------- -------------- ---------- ---------------
Scott A. Haire 2007 -0- - - - - - -
2006 -0- - - - - - -
2005 -0- - - - - -
------------------- -------- ------------ ---------- ------------ ------------- -------------- ---------- ---------------
EMPLOYMENT AGREEMENTS
None of our executive officers has an employment agreement with the
Company or any of its subsidiaries.
DIRECTOR COMPENSATION
We do not pay our directors a fee for attending scheduled and special
meetings of our board of directors. We intend to reimburse each director for
reasonable travel expenses related to such director's attendance at board of
directors and committee meetings. In the future we might have to offer some
compensation to attract the caliber of independent board members the Company is
seeking.
CERTAIN RELATIONSHIPS AND RELATED TRANACTIONS
Effective August 20, 2004, we acquired Wound Care Innovations, LLC through
a merger of Wound Care with a newly formed Company subsidiary. The consideration
paid by the Company for Wound Care consisted of an aggregate of 6,000,000 shares
of our common stock. These shares were issued to H.E.B., LLC, a Nevada limited
liability company, and to Mr. Araldo Cossutta, the sole owners of Wound Care.
Mr. Scott A. Haire, our Chairman of the Board, Chief Executive Officer and
President is a one-percent member, but the managing member of HEB, and Mr.
Cossutta is a member of our Board of Directors.
In connection with the acquisition of Wound Care, HEB and Mr. Cossutta
also agreed to convert an aggregate of $1,800,612 of Wound Care's debt and other
obligations owed to HEB and Mr. Cossutta into an aggregate of 2,257,303
additional shares of our common stock.
Effective November 28, 2007, Wound Care Innovations entered into separate
exclusive license agreements with Applied Nutritionals and its founder George
Petito, pursuant to which Wound Care Innovations obtained the exclusive
world-wide license to certain patented technologies and processes related to
CellerateRx products.
28
Wound Care Innovations had been marketing and selling CellerateRx for the
three previous years under the terms of a distribution agreement that had been
terminated in 2005. The new licenses are limited to the human health care market
for external wound care, and include any new product developments based on the
licensed patent and processes. The term of these licenses extends through the
life of the licensed patent.
In consideration for the licenses, Wound Care Innovations agreed to pay to
Applied Nutritionals and Mr. Petito the following royalties, beginning January
3, 2008: (a) an advance royalty of $100,000 in the aggregate, (b) an aggregate
royalty of fifteen percent (15%) of gross sales occurring during the first year
of the license; (c) an additional advance royalty of $400,000, in the aggregate,
on January 3, 2009; plus (d) an aggregate royalty of three percent (3%) of gross
sales for all sales occurring after the payment of the $400,000 advance royalty.
In addition, after January 3, 2009, Wound Care Innovations must maintain a
minimum aggregate annual royalty payment of $375,000.
All royalties, other than the advance royalty payments described above,
are due and payable on a calendar quarterly basis on or before the forty-fifth
(45th) day immediately following the calendar quarter in which gross sales are
received.
In addition to the license agreements, Wound Care Innovations also entered
into an exclusive manufacturing agreement with Applied Nutritionals pursuant to
which Applied Nutritionals will manufacture all CellerateRx and related products
for Wound Care Innovations. The term of the manufacturing agreement extends
through the life of the licensed patent; but may be terminated by a successor in
interest to Wound Care Innovations, provided that the successor in interest has
annual revenues of at least $100,000,000 or a market capitalization of at least
$200,000,000.
In connection with the above transaction, the Company issued to Mr. Petito
1,000 shares of a newly designated Series A Convertible Preferred Stock.
Prior to entering into the new license agreements, Applied Nutritionals
held 900,000 shares of our common stock. These shares were issued to Applied
Nutritionals in 2004, in connection with the previous distribution agreement for
CellerateRx products. As majority member and manager of Applied Nutritionals,
Mr. Petito may be deemed to be the beneficial owner of these shares.
Effective January 1, 2008, we issued 490.196 shares of our Series A
Convertible Preferred Stock to Keystone Equity Partners in exchange for the
cancellation of approximately $1,500,000 in debt. The debt was recently acquired
by Keystone from H.E.B., LLC, our majority shareholder, and its affiliates.
Each share of Series A Convertible Preferred Stock will automatically
convert into an aggregate of 5,100 shares of common stock upon the filing of an
amendment to our Articles of Incorporation increasing our authorized number of
shares of common stock from 20,000,000 to 100,000,000. The preferred stock
participates with the common stock, on an as converted basis with respect to
dividends and liquidation, and votes together with the common stock as a single
class, as if such shares of preferred stock had been converted. The preferred
stock will automatically convert into an aggregate of 5,100,000 shares of common
stock upon the filing an amendment to our Articles of Incorporation increasing
our authorized number of shares of common stock from 20,000,000 to 100,000,000.
29
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of April 1, 2008, there were 16,727,550 shares of common stock issued
and outstanding. The following table sets forth certain information concerning
the ownership of the Company's common stock as of April 1, 2008, with respect
to: (a) each person known to the Company to be the beneficial owner of more than
five percent of the Company's common stock; (b) all directors; and (c) directors
and executive officers of the Company as a group. The notes accompanying the
information in the table below are necessary for a complete understanding of the
figures provided below.
Amount and Nature
Title Name of Beneficial of Beneficial Percent
Class Owner of Group(1) Ownership of Class
Common Scott A. Haire(2) 7,095,184 42.4%
Chairman and
Chief Executive Officer
Common Araldo A. Cossutta 5,015,000 30.0%
Director
Common Steven W. Evans 1,015,000 6.1%
Director
Common Thomas J. Kirchhofer -- *
Director
Common Robert E. Gross -- *
Director
Common Gilbert Valdez 1,666 *
Chief Operating Officer
and Director
Common Applied Nutritionals, LLC 900,000 5.4%
1890 Bucknell Drive
Bethleham, PA 18015
Common George Petito 6,000,000(3) 27.5%
1890 Bucknell Drive
Bethleham, PA 18015
Common Keystone Equity Partners 2,500,000(4) 13.0%
5125 Stephanie Drive
Ft. Worth, TX 76117
Common T Squared Investments, LLC 1,286,207(5) 7.7%
c/o T Squared Capital LLC
1325 Sixth Avenue, Floor 28
New York, New York 10019
Common All Directors and Executive Officers
As a Group (six in number) 14,026,850 83.9%
30
* less than 1%
(1) Unless otherwise noted, the address for each person or entity listed is 777
Main Street, Suite 3100, Fort Worth, Texas 76102.
(2) 6,980,070 of these shares are held by H.E.B., LLC. Mr. Haire is the
managing member of H.E.B., LLC, and as such, is deemed to be the beneficial
owner of such shares.
(3) Consists of 900,000 shares held by Applied Nutritionals and 1,000 shares of
Preferred Stock that will automatically convert into 5,100,000 shares of
Common Stock upon the effectiveness of the Amendment. Mr. Petito is the
majority member and the manager of Applied Nutritionals and in such
capacity, may be deemed to be the beneficial owner of such shares.
(4) Consists of 490.196 shares of Preferred Stock that will automatically
convert into 2,500,000 shares of Common Stock upon the effectiveness of the
Amendment.
(5) Consists of options granted by H.E.B., LLC to purchase 1,200,000 shares,
exercisable within 60 days.
DESCRIPTION OF SECURITIES
The following description is a summary of the material terms of our
capital stock. This summary is subject to and qualified in its entirety by our
Articles of Incorporation, as amended, and Bylaws as amended, and by the
applicable provisions of Texas law.
Our authorized capital stock consists of 20,000,000 shares of common
stock, having a par value of $0.001 per share and 5,000,000 shares of
convertible preferred stock, having a par value of $10.00 per share.
COMMON STOCK
Each outstanding share of common stock entitles the holder thereof to one
vote per share on all matters. Our Articles of Incorporation do not permit
cumulative voting for the election of directors, which means that the holders of
more than 50 percent of such outstanding shares voting for the election of
directors can elect all of the directors to be elected, if they so choose; in
such event, the holders of the remaining shares will not be able to elect any of
our directors. Stockholders do not have preemptive rights to purchase shares in
any future issuance of our common stock.
The holders of shares of our common stock are entitled to dividends out of
funds legally available when and as declared by our board of directors. Our
board of directors has never declared a dividend and does not anticipate
declaring a dividend in the foreseeable future. In the event of liquidation,
dissolution or winding up of the affairs of the company, holders are entitled to
receive, ratably, the net assets available to stockholders after payment of all
creditors and of any liquidation preference to the holders of the company's
preferred shares.
All of the issued and outstanding shares of our common stock are duly
authorized, validly issued, fully paid, and non-assessable. To the extent that
additional shares of our common stock are issued, the relative interests of
existing stockholders will be diluted.
PREFERRED STOCK
The board of directors may, without further action of our common
stockholders, issue shares of preferred stock in one or more series and fix or
alter the rights and preferences thereof, including the voting rights,
redemption provisions (including sinking fund provisions), dividend rights,
dividend rates, liquidation preferences, conversion rights and any other rights,
preferences, privileges and restrictions of any wholly un-issued series of
preferred stock. The board of directors may, without further action by our
common stockholders, issue shares of preferred stock that it has designated.
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The rights of holders of common stock will be subject to, and may be
adversely affected by, the rights of holders of preferred stock. While the
issuance of preferred stock provides flexibility in connection with additional
financing, possible acquisitions and other corporate purposes, future issuances
may have the effect of delaying, deferring or preventing the change of control
in us without further action by the stockholders and may discourage bids for the
common stock at a premium over the market price. The board of directors may,
without stockholder approval, provide for the issuance of preferred stock that
could have voting, conversion or other rights superior to the rights of holders
of common stock.
The board of directors has classified one series of preferred stock,
Series A Convertible Preferred Stock (the "Series A Stock"). Each share of
Series A Stock is convertible into 5,100 shares of common stock and will
automatically convert upon the effectiveness of an amendment to our Articles of
Incorporation increasing the number of authorized shares of common stock from
20,000,000 to 100,000,000. Each share of Series A Stock participates with the
common stock, on an as converted basis, with respect to dividends and
liquidation and votes together as a class with the common stock (on an as
converted basis).
SELLING SHAREHOLDER
The following table sets forth the name of the selling shareholder and for
each selling shareholder, the number of shares of common stock beneficially
owned as of March 4, 2008, the number of shares being registered, and the amount
and percentage (if one percent or more) of shares of common stock to be owned by
each selling shareholder after the offering is complete. All information with
respect to share ownership has been furnished by the selling shareholder. The
shares being offered are being registered to permit public secondary trading of
the shares and the selling shareholder may offer all or part of the shares owned
for resale from time to time. The selling shareholder is under no obligation,
however, to sell any shares immediately pursuant to this prospectus, nor is the
selling shareholder obligated to sell all or any portion of the shares at any
time. Therefore, no estimate can be given as to the number of shares of common
stock that will be sold pursuant to this prospectus or the number of shares that
will be owned by the selling shareholder upon termination of the offering made
hereby.
---------------------------------------------------------------------------------------------------------------------
Selling shareholder Shares of
Shares of Common Stock Percentage
Common Stock to be issued Total Shares of ownership (if
to be upon the Shares of Common one percent
Shares of issued upon exercise of Common Stock held or more)
Common Stock the conversion warrants Stock to be after the after the
Issued of Notes and/or registered offering offering is
options is complete complete
---------------------------------------------------------------------------------------------------------------------
Thomas Sauve
(T Squared Investments, LLC) 86,207 1,206,897 2,700,000 3,993,104 0
---------------------------------------------------------------------------------------------------------------------
The shares being registered were acquired by the selling shareholder on
January 11, 2008, through a private placement of common stock, convertible
notes, warrants and options described below.
Pursuant to the terms of the Note Purchase Agreement, the Company issued
and sold to the selling shareholder a convertible promissory note in the
principal amount of $700,000 (the "Note"). The Company also issued and sold to
the selling shareholder 86,207 shares of Common Stock and warrants to purchase
an aggregate of 1,500,000 additional shares of Common Stock ("Warrants"), at a
cash purchase price of $50,000, pursuant to the terms of a Common Stock Purchase
Agreement.
The Note bears interest at the rate of eight percent per annum, payable
32
monthly. The Note initially converts into 1,206,897 shares, subject to the
adjustments to the conversion price described below; provided that the selling
shareholder shall not be entitled to convert the Note into shares of Common
Stock that would result in beneficial ownership by the selling shareholder and
its affiliates of more than 4.9% of the then outstanding number of shares of
Common Stock on such date. The conversion price of the Note shall automatically
be adjusted if the Company's pre-tax earnings fall below certain thresholds.
Specifically, if the Company's pre-tax earnings are between $0.093 and $0.046
per share as reported for the six months ended June 30, 2008, the conversion
price of the Note shall be decreased proportionally by 0% if the pre-tax
earnings are $0.093 per share or greater and by 50% if the pre-tax earnings are
$0.046 per share. In addition, if the Company's pre-tax earnings are between
$0.204 and $0.102 per share as reported for the year ended December 31, 2008,
the conversion price of the Note shall be decreased proportionally by 0% if the
pre-tax earnings are $0.204 per share or greater and by 50% if the pre-tax
earnings are $0.102 per share. In no event, however, shall the aforementioned
conversion price adjustments be made if the price of the Common Stock has not,
during the three months prior to the aforementioned measurement dates, been
below $3.00 per share for any consecutive 20 day period. The conversion price of
the Note shall also be adjusted if the Company subsequently issues equity at a
price per share below the then current conversion price of the Note.
The Warrants are exercisable at any time and expire on January 11, 2013.
The Warrants are exercisable at $1.00 per share with respect to 500,000 shares
of Common Stock, and $1.25 per share with respect to 1,000,000 shares of Common
Stock. The exercise price automatically adjusts if the Company's pre-tax
earnings fall below certain thresholds, on the same basis as adjustments to the
conversion price of the Note described above. The Warrants also contain an
automatic exercise feature that is triggered if the volume weighted average
market price of the Common Stock is equal to or greater than $3.00 per share for
a period of 20 consecutive days and if there is an effective registration
statement for the shares underlying the Warrants.
The Common Stock Purchase Agreement contains restrictions on the Company's
ability to issue additional debt and preferred stock and provides the selling
shareholder with a right of first refusal with respect to any subsequent funding
of the Company. The Common Stock Purchase Agreement also restricts the ability
of the Company's officers and directors to sell shares of Common Stock for a
period of three years.
In connection with the transactions described above, HEB LLC, a Nevada
limited liability company and a majority shareholder of the Company and an
affiliate of Mr. Scott Haire, our Chairman and Chief Executive Officer, issued
to the selling shareholder options to purchase an aggregate of 1,200,000 shares
of the Company's Common Stock ("Options"). These Options may be exercised at any
time prior to the expiration of the date that is the later of (a) 36 months from
the grant date, or (b) 24 months from the effectiveness of a registration
statement covering the resale of the shares underlying the option. The exercise
price of the Options is (1) $300,000 with respect to 300,000 shares; (2)
$450,000 with respect to 300,000 shares; (3) $600,000 with respect to 300,000
shares; and (4) $750,000 with respect to 300,000 shares.
The Company has agreed to file a registration statement covering the
resale of all shares of Common Stock sold, to be issued upon conversion of the
Notes and the exercise of the Warrants and Options. This registration statement
to which this Prospectus is a part, satisfies our obligation.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, and assuming the conversion of the Note
and the exercise of the warrants and options described above, we will have
19,434,447 shares of common stock outstanding. A current stockholder who is an
"affiliate" of the company, defined in Rule 144 as a person who directly, or
33
indirectly through one or more intermediaries, controls, or is controlled by, or
is under common control with, the company, will be required to comply with the
resale limitations of Rule 144.
Purchasers of the shares offered by the selling shareholder, other than
affiliates, may resell their shares immediately. Sales by affiliates will be
subject to the volume and other limitations of Rule 144, including certain
restrictions regarding the manner of sale, notice requirements, and the
availability of current public information about the company. The volume
limitations generally permit an affiliate to sell, within any three month
period, a number of shares that does not exceed the greater of one percent of
the outstanding shares of common stock or the average weekly trading volume
during the four calendar weeks preceding his sale. A person who ceases to be an
affiliate at least three months before the sale of restricted securities
beneficially owned for at least one years may sell the restricted securities
under Rule 144 without regard to any of the Rule 144 limitations.
PLAN OF DISTRIBUTION
The 3,993,104 shares being offered by the selling shareholder may be sold
or distributed from time to time by the selling shareholder (the term "selling
shareholder" includes, for purposes of this section, donees, pledgees,
transferees or other successors-in-interest selling shares received after the
date of this prospectus from a named selling shareholder as a gift, pledge,
partnership distribution or other non-sale related transfer) directly to one or
more purchasers or through brokers, dealers, or underwriters who may act solely
as agents or may acquire shares as principals. Such sales or distributions may
be made at prevailing market prices, at prices related to such prevailing market
prices, or at variable prices negotiated between the sellers and purchasers that
may vary. The distribution of the shares may be effected in one or more of the
following methods:
o ordinary brokerage transactions, including long or short sales,
o transactions involving cross or block trades, or otherwise on the OTC
Bulletin Board,
o purchases by brokers, dealers, agents or underwriters as principals
and subsequent resales by the purchasers for their own accounts
pursuant to this prospectus,
o sales "at the market" to, or through, market makers or into an
existing market for the shares,
o sales not involving market makers or established trading markets,
including direct sales to purchasers or sales effected through agents,
o transactions involving puts, calls and other options, swaps, or other
derivatives, whether exchange-listed or otherwise, or
o transactions involving any combination of the foregoing or any other
legally available means.
In addition, the selling shareholder may enter into hedging transactions
with one or more broker-dealers who may engage in short sales of shares in the
course of hedging the positions they assume with the selling shareholder. The
selling shareholder may also enter into options or other transactions with one
or more broker-dealers requiring the delivery of the shares by such
broker-dealers with the possibility that such shares may be resold thereafter
pursuant to this prospectus.
A broker, dealer, underwriter, or agent participating in the distribution
of the shares may receive compensation in the form of discounts, concessions, or
commissions from the selling shareholder and/or purchasers of the shares for
whom such person may act as an agent, to whom such person may sell as principal,
or both; and such compensation as to a particular person may be in excess of
customary commissions. The selling shareholder and any broker-dealers acting in
connection with the sale of the shares being registered may be deemed to be
underwriters within the meaning of Section 2(11) of the Securities Act of 1933,
as amended, or the Securities Act, and any profit realized by them on the resale
of shares as principals may be deemed underwriting compensation under the
Securities Act. We have agreed to indemnify each selling shareholder against
certain liabilities, including liabilities arising under the Securities Act. We
34
know of no existing arrangements between the selling shareholder and any other
stockholder, broker, dealer, underwriter, or agent relating to the sale or
distribution of the shares, nor can we presently estimate the amount, if any, of
such compensation.
Because selling shareholder may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, the selling shareholder will be
subject to the prospectus delivery requirements of the Securities Act.
Although we will receive no proceeds from the sale of shares pursuant to
this prospectus, we have agreed to bear the costs and expenses of the
registration of the shares, including legal and accounting fees, and such costs
and expenses are estimated to be approximately $16,235.
We have informed the selling shareholder that while they are engaged in a
distribution of the shares included in this prospectus they will be required to
comply with certain anti-manipulative rules contained in Regulation M under the
Exchange Act. With certain exceptions, Regulation M prohibits any selling
shareholder, any affiliated purchaser, and any broker-dealer or other person who
participates in such distribution from bidding for or purchasing, or attempting
to induce any person to bid for or purchase, any security that is the subject of
the distribution until the entire distribution is complete. Regulation M also
prohibits any bids or purchases made in order to stabilize the price of a
security in connection with the distribution of that security.
Upon our being notified by the selling shareholder that any material
arrangement has been entered into with a broker-dealer for the sale of shares
through a block trade, special offering, exchange, distribution or secondary
distribution or a purchase by a broker or dealer, a supplement to this
prospectus will be filed, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing (i) the name of each such selling shareholder and of
the participating broker-dealer(s), (ii) the number of shares involved, (iii)
the price at which such shares were sold, (iv) the commissions paid or discounts
or concessions allowed to such broker-dealer(s), where applicable, (v) that such
broker-dealer(s) did not conduct any investigation to verify the information set
out or incorporated by reference in this prospectus and (vi) other facts
material to the transaction. In addition, upon our being notified by the selling
shareholder that a donee, pledgee, transferee or other successor-in-interest
intends to sell more than 500 shares, a supplement to this prospectus will be
filed.
INDEPENDENT PUBLIC ACCOUNTANTS
There have been no changes in and/or disagreements with Pritchett, Siler &
Hardy, P.C., independent certified public accountants, on accounting and
financial disclosure matters.
LEGAL MATTERS
Certain legal matters in this offering, including the legality of the
common stock offered pursuant to this prospectus, will be passed upon for the
Company and the selling shareholder by Colbert Johnston LLP.
EXPERTS
The consolidated financial statements of the Company included in this
prospectus have been audited for the year ending December 31, 2006 and December
31, 2007 by Pritchett, Siler & Hardy, P.C., independent certified public
accountants, as stated in the opinion, which has been rendered upon the
authority of said firm as experts in accounting and auditing.
35
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On February 13, 2007, we dismissed Clancy and Co., P.L.L.C. as our
independent auditors. The reports of Clancy and Co., P.L.L.C. on our financial
statements for the year ended December 31, 2005 did not contain an adverse
opinion or a disclaimer of opinion, and were not modified as to uncertainty,
audit scope or accounting principles, other than the "going concern" disclaimer
contained therein. The decision to change our independent registered public
accountant was authorized and approved by our board of directors. On February
13, 2007, we engaged Pritchett, Siler & Hardy, P.C., as our new independent
registered public accountant.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES
The Company's Bylaws provide that the Company has the power to indemnify
its directors and officers to the fullest extent provided by Texas law. Pursuant
to Texas law, a corporation may indemnify its officers and directors, provided
that such person:
(a) conducted himself or herself in good faith;
(b) reasonably believed (i) in the case of conduct in his or her official
capacity as an officer or director or officer of the corporation,
that such conduct was in the corporation's best interests; and (ii)
in all other cases, that his or her conduct was at least not opposed
to the corporation's best interests; and
(c) in the case of any criminal proceeding, had no reasonable cause to
believe that such conduct was unlawful.
The effect of these provisions is potentially to indemnify our directors
and officers from all costs and expenses of liability incurred by them in
connection with any action, suit or proceeding in which they are involved by
reason of their affiliation with the Company.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our officers, directors, or persons controlling the
Company under the foregoing provisions, the Company has been informed that in
the opinion of the Securities Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
INTERESTS OF NAMED EXPERTS AND COUNSEL
No "Expert" or "Counsel" as defined by Item 509 of Regulation S-K
promulgated pursuant to the Securities Act, whose services were used in the
preparation of this Form S-1, was hired on a contingent basis or will receive a
direct or indirect interest in the company.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission under the Securities Act of 1933 with respect to the shares
of common stock offered in this offering prospectus. This prospectus, which is a
part of the registration statement, does not contain all of the information set
forth in the registration statement, or the exhibits that are part of the
registration statement. You should refer to the registration statement and its
exhibits for additional information that is not contained in this prospectus.
Whenever we make reference in this prospectus to any of our contracts,
36
agreements or other documents, you should refer to the exhibits attached to the
registration statement for copies of the actual contract, agreement or other
document.
We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and we are required to file reports, any proxy
statements and other information with the Securities and Exchange Commission.
You can read our Securities and Exchange Commission files, including this
registration statement, at the Securities and Exchange Commission's web site at
http://www.sec.gov. You may also read and copy any documents we file with the
Securities and Exchange Commission at its public reference facility at 450 Fifth
Street, N.W., Washington, D.C. 20549. You may also obtain copies of the
documents at prescribed rates by writing to the Public Reference Section of the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information on the operation of the public reference facilities.
37
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm......................F-1
Consolidated Balance Sheet..................................................F-17
Consolidated Statements of Operations.......................................F-18
Consolidated Statements of Changes in Stockholders' Deficiency..............F-19
Consolidated Statements of Cash Flows.......................................F-20
Notes to the Consolidated Financial Statements..............................F-21
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
MB SOFTWARE CORPORATION AND SUBSIDIARY
We have audited the accompanying consolidated balance sheets of MB Software
Corporation and Subsidiary as of December 31, 2007 and 2006 and the related
consolidated statements of operations, changes in stockholders' deficiency and
cash flows for the years ended December 31, 2007 and 2006. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MB Software
Corporation and Subsidiary as of December 31, 2007 and 2006 and the consolidated
results of their operations and their cash flows for the years ended December
31, 2007 and 2006, in conformity with accounting principles generally accepted
in the United States of America.
The accompanying financial statements have been prepared assuming that MB
Software Corporation and Subsidiary will continue as a going concern. As
discussed in Note 2 to the financial statements, MB Software Corporation and
Subsidiary have incurred recurring losses and has a stockholders' deficiency.
Further, the Company has current liabilities in excess of current assets. These
factors raise substantial doubt about the ability of the Company to continue as
a going concern. Management's plans in regards to these matters are also
described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
/s/ Pritchett, Siler & Hardy, P.C.
PRITCHETT, SILER & HARDY, P.C.
Salt Lake City, Utah
March 28, 2008
MB SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2007
ASSETS
------
CURRENT ASSETS:
Cash $ 781
Accounts Receivable 24,668
Notes Receivable 81,650
Inventory 263,276
------------
Total current assets 370,375
Property and Equipment, Net 23,335
Investments
Other Assets 12,020
------------
TOTAL ASSETS $ 405,730
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 110,107
Dividends/Royalties, Accrued liabilities 326,649
Accrued interest-Related Parties 274,680
Notes Payable- Related Parties 1,498,074
Notes Payable 10,000
------------
Total Current Liabilities 2,219,510
------------
TOTAL LIABILITIES 2,219,510
Stockholders' Deficiency
Preferred stock, $10 par value, 5,000,000 shares 10,000
authorized; 1,000 issued and outstanding
Common stock: $0.001 par value; 100,000,000 shares 16,145
authorized;
16,145,432 issued and 16,141,343 outstanding: --
Additional paid-in capital 11,171,496
Less Treasury Stock, at cost; 4,089 shares (12,039)
Accumulated deficit (12,999,382)
------------
Total stockholders deficiency (1,813,780)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' $ 405,730
DEFICIENCY ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
MB SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------
2007 2006
------------ ------------
Revenues $ 630,505 $ 189,755
Cost of revenues 223,184 193,057
------------ ------------
Gross margin 407,321 (3,302)
Selling, general and administrative (813,058) (484,583)
------------ ------------
Loss from operations (405,737) (487,885)
Other income (expense)
Interest expense, net (137,019) (135,674)
------------ ------------
Total other income (expense) (137,019) (135,674)
------------ ------------
Loss before provision for income taxes (542,756) (623,559)
Current tax expense -- --
Deferred tax expense -- --
Loss from continuing operations (542,756) (623,559)
------------ ------------
Net loss $ (542,756) $ (623,559)
============ ============
Basic and diluted loss per share:
Continuing operations $ (0.03) $ (0.04)
------------ ------------
$ (0.03) $ (0.04)
============ ============
Weighted average common shares outstanding 16,141,343 16,141,343
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
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MB SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
YEARS ENDED DECEMBER 31, 2007 AND 2006
---------------------------------------------------------------------------------------------------------------------
Preferred Preferred
Stock Stock Common Common Additional
Shares Amount Stock Stock Paid-In Accumulated Treasury
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance,December 31, 16,145,432 $ 16,145 $ 1,181,496 $(11,833,067) $ (12,039)
2005
Net Loss (623,559)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31,
2006 16,145,432 16,145 11,181,496 (12,456,626) (12,039)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Issuance of preferred
stock 1,000 10,000 (10,000)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net Loss (542,756)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31,
2007 1,000 $ 10,000 16,145,432 $ 16,145 $ 11,181,496 $(12,999,382) $ (12,039)
============ ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
[Enlarge/Download Table]
MB SOFTWARE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------
2007 2006
--------- ---------
Cash flows from operating activities
------------------------------------
Loss from continuing operations $(542,756) $(623,559)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation 20,080 21,786
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 35,056 (29,526)
(Increase) decrease in inventory (166,705) (65,927)
(Increase) decrease in prepaid expenses and other assets 48,256 85,090
Increase (decrease) in accounts payable and accrued liabilities 64,711 213,166
Increase (decrease) in royalties payable, including related accrued interest 160,460 --
--------- ---------
Net cash flows (used) in operating activities (380,898) (398,970)
Cash flows from investing activities
------------------------------------
Increase in notes receivable (81,650) --
Purchase of fixed assets -- (16,430)
--------- ---------
Net cash flows used in investing activities (81,650) (16,430)
Cash flows from financing activities
------------------------------------
Principal payments under capital lease obligation (3,169) (3,992)
Proceeds from notes payable 10,000 --
Proceeds from notes payable-related parties 385,000 670,000
Payments on notes payable-related party (105,000) --
Net payment on line of credit-related party (59,803) (17,135)
--------- ---------
Net cash flows provided by financing activities 227,028 648,873
--------- ---------
Increase (decrease) in cash (235,520) 233,473
Cash and cash equivalents, beginning of year 236,301 2,828
--------- ---------
Cash and cash equivalents, end of year $ 781 $ 236,301
--------- ---------
Cash paid during the year for:
------------------------------
Interest $ 108 $ --
========= =========
Income taxes -- --
========= =========
Supplemental non-cash investing and financing activities: For the year ended
December 31, 2007:
The Company issued 1,000 shares of Preferred Stock in connection with the
signing of a License agreement.
For the year ended December 31, 2006:
None
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
MB SOFTWARE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31 2007 AND 2006
NOTE 1 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
MB Software Corporation, a Texas corporation and subsidiary Wound Care
Innovations, LLC, a Nevada limited liability company (collectively referred to
as the "Company") distributes collagen-based wound care products to healthcare
providers such as physicians, clinics and hospitals throughout the United
States.
Significant Accounting Policies
Principles of consolidation and presentation - The consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiary.
All intercompany transactions and balances have been eliminated upon
consolidation.
Business combinations - Transfers and exchanges of assets between companies
under common control are accounted for at historical cost in a manner similar to
that in a pooling of interests accounting. The excess of the cost of the asset
acquired over the net assets sold at their book values are charged to additional
paid-in capital.
Use of estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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
revenues and expenses during the reporting period. Management makes its best
estimate of the ultimate outcome for these items based on historical trends and
other information available when the financial statements are prepared. Changes
in estimates are recognized in accordance with the accounting rules for the
estimate, which is typically in the period when new information becomes
available to management. Actual results could differ from those estimates.
Fair value of financial instruments - For certain of the Company's financial
instruments, including cash and cash equivalents, accounts receivable, accounts
payable and other accrued liabilities, and amounts due to related parties, the
carrying amounts approximate fair value due to their short maturities.
Cash and cash equivalents - The Company considers all highly liquid investments
purchased with original maturities of three months or less to be cash
equivalents. There were no cash equivalents at December 31, 2007. The Company
maintains its cash in bank deposit accounts at high quality financial
institutions. The balances at times may exceed Federally insured limits of
$100,000.
Fixed assets - Fixed assets are stated at cost. Depreciation for financial
statement purposes is computed on the straight-line method over the estimated
useful lives of the related assets ranging from three to seven years. When fixed
assets are sold or otherwise disposed of, the asset account and related
accumulated depreciation account are relieved, and any gain or loss is included
in operations. Maintenance and repairs are expensed as incurred. Replacements
and betterments are capitalized. Depreciation expense for 2007 amounted to
$20,080 (2006: $21,786).
Revenue recognition - Revenue is recognized when the product is shipped and the
risks and rewards of ownership have transferred to the customer. The Company
F-6
recognizes shipping and handling fees as revenue, and the related expenses as a
component of cost of sales.
Allowance for doubtful accounts - The Company establishes an allowance for
doubtful accounts to ensure accounts receivables are not overstated due to
uncollectibility. Bad debt reserves are maintained based on a variety of
factors, including the length of time receivables are past due and a detailed
review of certain individual customer accounts. If circumstances related to
customers change, estimates of the recoverability of receivables would be
further adjusted. The allowance for doubtful accounts at December 31, 2007, and
2006 is $9,000 and $0 respectively.
Inventories - Inventories are stated at the lower of cost or net realizable
value, with cost computed on a first-in, first-out basis. Inventories consist of
powders, gels and the related packaging supplies. The Company has recorded an
allowance for obsolete and slow moving inventory of $7,261 and $75,000 at
December 31, 2007 and 2006 respectively
Long-lived assets - Long-lived assets and certain identifiable intangibles to be
held and used by the Company are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company continuously evaluates the recoverability of its
long-lived assets based on estimated future cash flows and the estimated
liquidation value of such long-lived assets, and provides for impairment if such
undiscounted cash flows are insufficient to recover the carrying amount of the
long-lived assets. If impairment exists, an adjustment is made to write the
asset down to its fair value, and a loss is recorded as the difference between
the carrying value and fair value. Fair values are determined based on quoted
market values, discounted cash flows or internal and external appraisals, as
applicable. Assets to be disposed of are carried at the lower of carrying value
or estimated net realizable value.
Income taxes - The Company recognizes deferred tax assets and liabilities for
the expected tax consequences of temporary differences between the tax bases of
assets and liabilities and their reported amounts using enacted tax rates in
effect for the year the differences are expected to reverse. The Company records
a valuation allowance to reduce the deferred tax assets to the amount that is
more likely than not to be realized.
Stock-based compensation - The Company adopted SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123(R)"), on January 1, 2006, which requires the
measurement and recognition of compensation expense for all share-based awards
made to employees and directors, including employee stock options and shares
issued through its employee stock purchase plan, based on estimated fair values.
Prior to the adoption of SFAS 123(R), the Company accounted for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Under the intrinsic value method that was used to account for
stock-based awards prior to January 1, 2006, which had been allowed under the
original provisions of SFAS 123, compensation expense is recorded on the date of
grant if the current market price of the underlying stock exceeded the exercise
price. Any compensation expense is recorded on a straight-line basis over the
vesting period of the grant. The adoption of this standard had no impact to the
Company's financial position, results of operations or cash flows as the
Company's previous stock-based compensation awards expired prior to January 1,
2006, and there have been no grants during 2006 or 2007. See Note 8 for a
description of the Company's stock option plan.
Earnings per share - Basic and diluted earnings or loss per share ("EPS")
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amounts in the financial statements are computed in accordance with SFAS No.
128, "Earnings per Share." Basic EPS is based on the weighted average number of
common shares outstanding. Diluted EPS is based on the weighted average number
of common shares outstanding plus dilutive common stock equivalents. Basic EPS
is computed by dividing net earnings available to common stockholders
(numerator) by the weighted average number of common shares outstanding
(denominator) during the period. Diluted EPS is calculated by dividing net
earnings by the weighted average number of common shares outstanding and other
dilutive securities. Accordingly, diluted EPS was not presented because it was
antidilutive. All per share and per share information are adjusted retroactively
to reflect stock splits and changes in par value.
Related party transactions - A related party is generally defined as (i) any
person that holds 10% or more of the Company's securities and their immediate
families, (ii) the Company's management, (iii) someone that directly or
indirectly controls, is controlled by or is under common control with the
Company, or (iv) anyone who can significantly influence the financial and
operating decisions of the Company. A transaction is considered to be a related
party transaction when there is a transfer of resources or obligations between
related parties.
Recent accounting pronouncements - The Financial Accounting Standards Board
("FASB") has issued the following pronouncements:
In December 2007, the FASB issued FAS No. 141 (Revised 2007), "Business
Combinations" (FAS 141R) which replaces FAS No. 141, "Business Combinations".
FAS 141R establishes principles and requirements for how an acquirer recognizes
and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in the acquiree and the
goodwill acquired. The statement also establishes disclosure requirements that
will enable users to evaluate the nature and financial effects of the business
combination. FAS 141R is effective for our fiscal year 2009 and must be applied
prospectively to all new acquisitions closing on or after January 1, 2009. Early
adoption of this standard is not permitted. We are currently evaluating the
impact, if any, of FAS 141R on our Consolidated Financial Statements.
In February 2007, the FASB issued FAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities -- Including an amendment of FASB
Statement No. 115" (FAS 159). FAS 159 expands the use of fair-value accounting
but does not affect existing standards that require assets or liabilities to be
carried at fair value. Under FAS 159, a company may elect to use fair value to
measure various assets and liabilities including accounts receivable,
available-for-sale and held-to-maturity securities, equity method investments,
accounts payable, guarantees and issued debt. If the use of fair value is
elected, any upfront costs and fees related to the item must be recognized in
earnings and cannot be deferred. The fair value election is irrevocable and
generally made on an instrument-by-instrument basis, even if a company has
similar instruments that it elects not to measure based on fair value. At the
adoption date, unrealized gains and losses on existing items for which fair
value has been elected are reported as a cumulative adjustment to beginning
retained earnings. Subsequent to the adoption of FAS 159, changes in fair value
are recognized in earnings. FAS 159 is effective for our fiscal year 2008. We
are currently evaluating the impact, if any, of FAS 159 on our Consolidated
Financial Statements.
In December 2007, the FASB issued FAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements -An Amendment of ARB No. 51" (FAS 160). FAS
160 requires that accounting and reporting for minority interests be
recharacterized as noncontrolling interests and classified as a component of
equity. The standard is effective for our fiscal year 2009 and must be applied
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prospectively. We do not expect that the adoption of FAS 160 will have a
material impact on our Consolidated Financial Statements.
In February 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements 133 and 140, ("SFAS
155"). SFAS was effective for the Company beginning January 1, 2007. The
statement permits interests in hybrid financial instruments that contain an
embedded derivative that would otherwise require bifurcation, to be accounted
for as a single financial instrument at fair value, with changes in fair value
recognized in earnings. This election is permitted on an
instrument-by-instrument basis for all hybrid financial instruments held,
obtained, or issued as of the adoption date. The adoption had no impact to the
Company's consolidated financial position, results of operations or cash flows.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty of Income Taxes-an interpretation of FASB Statement No. 109 ("FIN
48"), which clarifies the accounting for uncertainty in income tax positions.
This Interpretation requires that the Company recognize in the consolidated
financial statements the impact of a tax position that is more likely than not
to be sustained upon examination based on the technical merits of the position.
The provisions of FIN 48 will be effective for the Company as of the beginning
of the Company's 2008 fiscal year, with the cumulative effect of the change in
accounting principle recorded as an adjustment to opening retained earnings. The
provisions of FASB Interpretation 48 are not expected to have any impact on the
Company's financial statements.
In September 2006, the FASB issued FASB No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Benefits ("FAS 158"). FAS 158
addresses the accounting for defined benefit pension plans and other
postretirement benefit plans ("plans"). Specifically, FAS 158 requires companies
to recognize an asset for a plan's overfunded status or a liability for a plan's
underfunded status and to measure a plan's assets and its obligations that
determine its funded status as of the end of the company's fiscal year, the
offset of which is recorded, net of tax, as a component of other comprehensive
income in shareholders' equity. FAS 158 was effective for the Company as of
September 30, 2007 and applied prospectively. The provisions of FAS 158 are not
expected to have any impact on the Company's financial statements.
In September 2006, the FASB issued FASB statement No. 157, Fair Value
Measurements ("FAS 157"). FAS 157 establishes a single authoritative definition
of fair value, sets out a framework for measuring fair value and expands on
required disclosures about fair value measurement. FAS 157 is effective for the
Company on October 1, 2008 and will be applied prospectively. The provisions of
FAS 157 are not expected to have a material impact on the Company's financial
statements.
Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force ("EITF")), the American Institute of Certified Public
Accountants ("AICPA"), and the SEC did not or are not believed by management to
have a material impact on the Company's present or future financial statements.
NOTE 2 - GOING CONCERN
The financial statements have been prepared on a going concern basis, which
contemplates realization of assets and liquidation of liabilities in the
ordinary course of business. The Company has continuously incurred losses from
operations and has a significant accumulated deficit. The appropriateness of
using the going concern basis is dependent upon the Company's ability to obtain
additional financing or equity capital and, ultimately, to achieve profitable
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operations. These conditions raise substantial doubt about its ability to
continue as a going concern.
It is the Company's belief that it will continue to incur losses for at least
the next twelve months, and as a result will require additional funds from debt
or equity investments to meet such needs. To meet these objectives, management's
plans are to (i) raise capital by obtaining funds from debt financing and / or
equity financing through private placement efforts, (ii) issue common stock for
services rendered in lieu of cash payments (iii) convert outstanding debt to
equity and (iii) obtain loans from shareholders. Without realization of
additional capital, it would be unlikely for the Company to continue as a going
concern. The Company anticipates that its shareholders will contribute
sufficient funds to satisfy the cash needs of the Company for the next twelve
months. However, there can be no assurances to that effect, as the Company's
need for capital may change dramatically if it is successful in expanding its
current business or acquiring a new business. If the Company cannot obtain
needed funds, it may be forced to curtail or cease its activities.
Management believes that actions presently taken to revise the Company's
operating and financial requirements provide the opportunity for the Company to
continue as a going concern. The Company's future ability to achieve these
objectives cannot be determined at this time. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
NOTE 3 - EXCLUSIVE LICENSE AGREEMENT
Effective November 28, 2007, Wound Care Innovations entered into separate
exclusive license agreements with Applied Nutritionals and its founder George
Petito, pursuant to which Wound Care Innovations obtained the exclusive
world-wide license to certain patented technologies and processes related to
CellerateRx products.
Wound Care Innovations had been marketing and selling CellerateRx for the three
previous years under the terms of a distribution agreement that had been
terminated in 2005. The new licenses are limited to the human health care market
for external wound care, and include any new product developments based on the
licensed patent and processes. The term of these licenses extends through the
life of the licensed patent.
In consideration for the licenses, Wound Care Innovations agreed to pay to
Applied Nutritionals and Mr. Petito the following royalties, beginning January
3, 2008: (a) an advance royalty of $100,000 in the aggregate, (b) an aggregate
royalty of fifteen percent (15%) of gross sales occurring during the first year
of the license; (c) an additional advance royalty of $400,000, in the aggregate,
on January 3, 2009; plus (d) an aggregate royalty of three percent (3%) of gross
sales for all sales occurring after the payment of the $400,000 advance royalty.
In addition, after January 3, 2009, Wound Care Innovations must maintain a
minimum aggregate annual royalty payment of $375,000.
All royalties, other than the advance royalty payments described above, are due
and payable on a calendar quarterly basis on or before the forty-fifth (45th)
day immediately following the calendar quarter in which gross sales are
received.
In connection with the above described license agreements, we issued to Mr.
George Petito 1,000 shares of a newly designated Series A Convertible Preferred
Stock. Each share of Series A Convertible Preferred Stock will automatically
convert into 5,100 shares of common stock upon the filing of an amendment to our
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[Enlarge/Download Table]
Articles of Incorporation increasing our authorized number of shares of common
stock from 20,000,000 to 100,000,000. The preferred stock participates with the
common stock, on an as converted basis with respect to dividends and
liquidation, and votes together with the common stock as a single class, as if
such shares of preferred stock had been converted. The preferred stock will
automatically convert into an aggregate of 5,100,000 shares of common stock upon
the filing an amendment to our Articles of Incorporation increasing our
authorized number of shares of common stock from 20,000,000 to 100,000,000.
In addition to the license agreements, Wound Care Innovations also entered into
an exclusive manufacturing agreement with Applied Nutritionals pursuant to which
Applied Nutritionals will manufacture all CellerateRx and related products for
Wound Care Innovations. The term of the manufacturing agreement extends through
the life of the licensed patent; but may be terminated by a successor in
interest to Wound Care Innovations, provided that the successor in interest has
annual revenues of at least $100,000,000 or a market capitalization of at least
$200,000,000.
NOTE 4 - RELATED PARTY TRANSACTIONS
Notes Payable
Funds are advanced from various related parties including the Company's
President and CEO/CFO. Other shareholders fund the company as necessary to meet
working capital requirements and expenses. The advances are made pursuant to a
note agreement that bears interest at 10% per annum, payable quarterly, and with
maturity dates through December 31, 2008 per the table below. All notes are
current liabilities and some of the notes are currently in default. Accrued
interest due to related parties included in accrued liabilities as of December
31, 2007 was approximately $274,680. The following is a summary of amounts due
to / from related parties as of December 31, 2007:
Related party Nature of relationship Terms of the agreement Amounts due to
related parties
------------------------- ----------------------------- ----------------------------------------------- -----------------
Scott Haire, an Chairman of the Board, CEO Unsecured note dated July $ 10,000
individual and CFO of this Company 11, 2005 for $10,000 at 10%
per annum, due on Dec 31,
2008
HEB, LLC, a Nevada Scott Haire, is a Series of funds advanced 338,664
Limited Liability one-percent under two separate,
Company Member, but the managing unsecured $1 million lines
member of credit dated November 26,
2003 and November 4, 2004,
both of HEB, LLC at 10% per
annum; no maturity date,
interest payable quarterly;
unused lines available at
December 31, 2007 total
$1,661,336.
Araldo Cossutta, an Director and stockholder of Six separate, unsecured 647,000
individual the Company notes as follows: (i)
$75,000 note dated September
30, 2004, at 10% per annum,
due Dec 31, 2008; (ii)
$80,000 note dated September
14, 2005, at 10% per annum,
due Dec 31, 2008; (iii)
$350,000 note dated Oct.15,
2007 at 10% per annum, due
Dec 31, 2007 and (iv)
$42,000 noted date April 5,
2005, at 10% per annum, due
Dec 31, 2008 and (v) $50,000
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note dated January 4, 2006,
at 10% per annum, due Dec.
31, 2007 and (vi) $50,000
note dated January 31, 2006
due Dec. 31, 2007.
eAppliance Payment Controlling owners in Note dated January 1, 2004 2,410
Solutions, LLC a Nevada eAppliance Payment for $2,410 at 10% per annum;
Limited Liability Solutions, LLC are Cossutta $10,000 line of credit.
Company and Haire
Keystone Equity Partners Investors Note dated December 14, 2006 500,000
for $500,000 at 10% per
annum; due Dec. 31, 2008
$1,498,074
=================
Notes Receivable
During December 2007 the Company extended a Line of Credit to HEB, LLC in the
amount of $500,000. Interest is accrued on outstanding balances at 10% per
annum. At December 31, 2007 the amount advanced and receivable on the Line was
$81,650.
Administrative services
The Company provides limited administrative services to other companies
affiliated through common ownership of the Company's shareholders.
NOTE 5 - FIXED ASSETS
Fixed assets consists of the following:
Furniture and fixtures $ 13,607
Phone system 13,302
Computer equipment 11,796
Artwork 30,000
Web-Site 16,430
----------------
85,135
Less accumulated depreciation (61,799)
----------------
Net book value $ 23,336
================
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Consulting Agreement
The Company's subsdiary entered into a Consulting Agreement dated November 15,
2007, for consulting and development of customers and delivery of presentations,
payment shall be $7,383.34 per month. The Agreement can be terminated by either
party with a two week notice.
Operating leases
The Company leases office space and office equipment under operating leases
expiring in various years through 2009. Rental expense charged to operations for
2007 was approximately $96,077 (2006: $109,500). Minimum future rental payments
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under non-cancelable operating leases having remaining terms in excess of 1 year
as of December 31, 2007, for each of the next five years and in the aggregate
are as follows:
2008 $ 56,636
2009 39,441
2010 --
----------------
$ 96,077
================
Federal Payroll Taxes
The Company is delinquent in the payment of its payroll tax liabilities with the
Internal Revenue Service. As of December 31, 2007, unpaid payroll taxes total
approximately $203,484 and related penalties and interest approximated $123,000
computed through December 31, 2007. These liabilities have been recorded as
accrued liabilities and general and administrative expenses at December 31,
2007. The Company expects to pay these delinquent payroll tax liabilities as
soon as possible. The final amount due will be subject to the statutes of
limitations related to such liabilities and to negotiations with the Internal
Revenue Service.
NOTE 7 -NOTES PAYABLE
The Company has entered into the following non-related party notes payable:
Island Capital Dated November 14, 2007 $10,000.00
Due March 31, 2008
Related Party Notes Payable (See Note 4) 1,498,074.00
------------
Total Note Payable 1,508,074.00
Less Current Portions (1,508,074.00)
------------
Total Long-Term Debt --
NOTE 8 - STOCKHOLDERS' EQUITY TRANSACTIONS
Common stock issued
At December 31, 2007 and 2006 the Company had 16,145,432 shares of common stock
issued and 16,141,343 outstanding. Of these shares, 4,089 shares are held by the
Company as treasury stock.
Preferred Stock Issued
Each share of Series A Convertible Preferred Stock will automatically convert
into 5,100 shares of common stock upon the filing of an amendment to our
Articles of Incorporation increasing our authorized number of shares of common
stock from 20,000,000 to 100,000,000. The preferred stock participates with the
common stock, on an as converted basis with respect to dividends and
liquidation, and votes together with the common stock as a single class, as if
such shares of preferred stock had been converted. The preferred stock will
F-13
automatically convert into an aggregate of 5,100,000 shares of common stock upon
the filing an amendment to our Articles of Incorporation increasing our
authorized number of shares of common stock from 20,000,000 to 100,000,000.
Effective November 28, 2007, in connection with the entry by Wound Care
Innovations into certain license agreements with Applied Nutritionals and Mr.
George Petito, The Company issued to Mr. George Petito 1,000 shares of a newly
designated Series A Convertible Preferred Stock.
Effective January 1, 2008, the Company issued 490.196 shares of our Series A
Convertible Preferred Stock to Keystone Equity Partners in exchange for the
cancellation of approximately $1,500,000 in debt. (See Note 12).
NOTE 9 - CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Major Customers and Trade Receivables
The Company has 5 customers in 2007 (2006: 4 customers) that each account for
more than 10% of its revenues. Trade receivables from these customers totaled
approximately $24,618 or 73% of total accounts receivable balance at December
31, 2007, and were unsecured.
NOTE 10 - CONCENTRATION OF SUPPLIER RISK
The Company purchases substantially all of its powders and gels from one vendor.
If this vendor became unable to provide materials in a timely manner and the
Company was unable to find alternative vendors, the Company's business,
operating results and financial condition would be materially adversely
affected.
NOTE 11 - INCOME TAXES
The deferred tax consequences of temporary differences in reporting items for
financial statement and income tax purposes are recognized, as appropriate.
Realization of the future tax benefits related to the deferred tax assets is
dependent on many factors, including the Company's ability to generate taxable
income within the net operating loss carry forward period. Management has
considered these factors in reaching its conclusion as to the valuation
allowance for financial reporting purposes.
At December 31, 2007, deferred tax asset results from the deferred tax benefit
of net operating losses. The net current and non-current deferred tax assets
have a 100% valuation allowance, as the ability of the Company to generate
sufficient taxable income in the future is uncertain. The net change in the
valuation allowance for 2007 was approximately $118,000 (2006: $200,000).
The Company generated net operating losses for financial reporting and Federal
income tax reporting prior to its reorganization in 1993. As of December 31,
2005, subject to limitations under Internal Revenue Code Section 382,
approximately $437,000 of these losses is available for use after the
reorganization, which expire in 2008 if not previously utilized. The net
operating loss carry forward at December 31, 2007 is approximately $12,700,000
and will begin to expire in 2008, if not utilized.
A reconciliation of expected federal income tax expense (benefit) based on the
U.S. Corporate income tax rate of 34% to actual expense (benefit) for 2007 and
2006 is as follows (rounded):
F-14
2007 2006
---------- ----------
Expected federal income tax benefit $ 184,500 $ 212,000
Valuation allowance and other (184,500) (212,000)
---------- ----------
Income tax expense (benefit) -- --
========== ==========
Deferred tax asset at December 31, 2007, is as follows:
Net operating loss carry forwards $ 4,318,000
Valuation allowance (4,318,000)
-------------
Net current deferred tax asset --
NOTE 12-SUBSQUENT EVENTS
Subsequent to year end the Company issued 86,207 shares of common stock and
warrants to purchase an additional 1,500,000 shares of common stock for cash of
$50,000 or approximately $0.58 per share.
Subsequent to year end the Company issued 500,000 shares of common stock for
services.
Subsequent to year end the Company issued an 8% convertible promissory note for
cash of $700,000. The note converts to 1,206,897 shares of common stock subject
to adjustments based on EPS and will be issued within 120 days of the issuance
of the Registration Statement.
Effective January 1, 2008, the Company issued 490.196 shares of our Series A
Convertible Preferred Stock to Keystone Equity Partners in exchange for the
cancellation of approximately $1,500,000 in debt.
NOTE 13-LOSS PER SHARE
The following data show the amounts used in computing loss per share for the
periods presented:
2007 2006
---- ----
Loss available to common shareholders (numerator $(542,756) $(623,559)
-----------------------------------------------------
Weighted average number of common shares
Outstanding during the period used in loss per
Share (denominator) 16,141,343 16,141,343
Dilutive loss per share is not presented, as the Company had no common
equivalent shares for all periods presented that would affect the computation of
diluted loss per share.
F-15
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT MADE IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY MB SOFTWARE OR THE SELLING SHAREHOLDERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO
BUY ANY OF THE COMMON STOCK OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF MB
SOFTWARE SINCE SUCH DATE.
39
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses incurred or (expected) relating to this Registration Statement
and distribution are as follows: The amounts set forth are estimates except for
the SEC registration fee:
Amount
>> SEC registration fee $ 235
>> Accountants' fees and expenses $ 1,000
>> Miscellaneous $ 15,000
>> Total $ 16,235
The Registrant will bear all of the expenses shown above.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Bylaws provide that the Company has the power to indemnify
its directors and officers to the fullest extent provided by Texas law. Pursuant
to Texas law, a corporation may indemnify its officers and directors, provided
that such person:
(a) conducted himself or herself in good faith;
(b) reasonably believed (i) in the case of conduct in his or her official
capacity as an officer or director or officer of the corporation, that
such conduct was in the corporation's best interests; and (ii) in all
other cases, that his or her conduct was at least not opposed to the
corporation's best interests; and
(c) in the case of any criminal proceeding, had no reasonable cause to
believe that such conduct was unlawful.
The effect of these provisions is potentially to indemnify our directors
and officers from all costs and expenses of liability incurred by them in
connection with any action, suit or proceeding in which they are involved by
reason of their affiliation with the Company.
40
RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is information regarding the issuance and sales of the
company's securities without registration for the past three (3) years prior to
the date of this Registration Statement. No such sales involved the use of an
underwriter, no advertising or public solicitation were involved, the securities
bear a restrictive legend and no commissions were paid in connection with the
sale of any securities.
Effective November 28, 2007, in connection with the entry by Wound Care
Innovations into certain license agreements with Applied Nutritionals and Mr.
George Petito, we issued to Mr. George Petito 1,000 shares of a newly designated
Series A Convertible Preferred Stock.
Effective December 27, 2007, we issued 490.196 shares of our Series A
Convertible Preferred Stock to Keystone Equity Partners in exchange for the
cancellation of approximately $1,500,000 in debt.
Effective January 11, 2008, we issued and sold 86,207 shares of our common
stock and warrants to purchase an aggregate of 1,500,000 additional shares of
common stock in exchange for $50,000. We also issued and sold a convertible note
in the principal amount of $700,000 (the "Note"). The Note initially converts
into 1,206,897 shares, subject to certain adjustments to the conversion price.
The foregoing issuance of the shares of our common stock, the convertible
promissory notes and the warrants described above were made in private
transactions or private placements intending to meet the requirements of one or
more exemptions from registration. In addition to any noted exemption below, we
relied upon Regulation D and Section 4(2) of the Securities Act of 1933, as
amended (the "Act"). The investors were not solicited through any form of
general solicitation or advertising, the transactions being non-public
offerings, and the sales were conducted in private transactions where the
investor identified an investment intent as to the transaction without a view to
an immediate resale of the securities; the shares were "restricted securities"
in that they were both legended with reference to Rule 144 as such and the
investors identified they were sophisticated as to the investment decision and
in most cases we reasonably believed the investors were "accredited investors"
as such term is defined under Regulation D based upon statements and information
supplied to us in writing and verbally in connection with the transactions. We
have never utilized an underwriter for an offering of our securities and no
sales commissions were paid to any third party in connection with the
above-referenced sales.
EXHIBITS
Exhibit No.
3.1 Articles of Incorporation.*
3.2 Bylaws.*
5.1 Opinion of Colbert Johnston LLP.*
10.1 Stock Purchase Agreement dated as of December 28, 2007, by and
between MB Software Corporation and Keystone Equity Partners.*
10.2 Exclusive Patent and Trademark License dated as of November 28, 2007,
by and between Wound Care Innovations, L.L.C. and Applied
Nutritionals, LLC. (Incorporated by reference from Exhibit 10.1 to
the Company's Current Report on Form 8-K filed with the Commission on
November 30, 2007).
41
10.3 Exclusive License dated as of November 28, 2007, by and between Wound
Care Innovations, LLC and George Petito (Incorporated by reference
from Exhibit 10.2 to the Company's Current Report on Form 8-K filed
with the Commission on November 30, 2007).
10.4 Manufacturing Agreement dated as of November 28, 2007, by and between
Wound Care Innovations, L.L.C. and Applied Nutritionals, LLC
(Incorporated by reference from Exhibit 10.3 to the Company's Current
Report on Form 8-K filed with the Commission on November 30, 2007).
10.5 Common Stock Purchase Agreement, dated as of January 11, 2008, by and
between MB Software Corporation and T Squared Investments LLC
(Incorporated by reference from Exhibit 10.1 to the Company's Current
Report on Form 8-K filed with the Commission on January 23, 2008).
10.6 Note Purchase Agreement, dated as of January 11, 2008, by and between
MB Software Corporation and T Squared Investments LLC (Incorporated
by reference from Exhibit 10.2 to the Company's Current Report on
Form 8-K filed with the Commission on January 23, 2008).
10.7 Common Stock Purchase Warrant "A," dated as of January 11, 2008
(Incorporated by reference from Exhibit 10.3 to the Company's Current
Report on Form 8-K filed with the Commission on January 23, 2008).
10.8 Common Stock Purchase Warrant "B," dated as of January 11, 2008
(Incorporated by reference from Exhibit 10.4 to the Company's Current
Report on Form 8-K filed with the Commission on January 23, 2008).
10.9 Registration Rights Agreement Common Stock Purchase Agreement, dated
as of January 11, 2008, by and between MB Software Corporation and T
Squared Investments LLC (Incorporated by reference from Exhibit 10.5
to the Company's Current Report on Form 8-K filed with the Commission
on January 23, 2008).
23.1 Consent of Pritchett, Siler & Hardy, P.C.*
* Filed herewith
UNDERTAKINGS
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement
(a) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(b) To reflect in the prospectus any facts or events which, individually
or in the aggregate, represent a fundamental change in the information
set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed that
which is being registered) and any deviation from the high or low end
of the estimated maximum range, may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
42
"Calculation of Registration Fee" table in the effective registration
statement; and
(c) To include any additional or changed material information on the plan
of distribution.
2. For determining liability under the Securities Act of 1933, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
3. File a post-effective amendment to remove from registration any of the
securities being registered, which remain unsold at the end of the offering.
4. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or controlling persons of the
company pursuant to the foregoing provisions or otherwise, the company has been
advised that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in that Act and is,
therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by us of expenses incurred or paid by a director,
officer or controlling person of us in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, we will, unless in the
opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by us is against public policy as expressed in the Securities
Act and we will be governed by the final adjudication of such issue.
43
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, Texas on April
10,2008.
MB SOFTWARE CORPORATION
By: /s/ Scott A. Haire Date: April 10, 2008
----------------------------------------
Scott A. Haire, Chief Executive Officer,
Chief Financial Officer and
President
By: /s/ /s/ Lucy Singleton Date: April 10, 2008
-----------------------------------------
Lucy Singleton, Chief Accounting Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date stated.
By: /s/ Scott A. Haire Date: April 10, 2008
-------------------------
Scott A. Haire, Director
By: /s/ Gilbert A. Valdez Date: April 10, 2008
---------------------------
Gilbert A. Valdez, Director
By: /s/ Araldo A. Cossutta Date: April 10, 2008
-----------------------------
Araldo A. Cossutta, Director
By: /s/ Steven W. Evans Date: April 10, 2008
- ------------------------
Steven W. Evans, Director
By: /s/ Robert E. Gross Date: April 10, 2008
-------------------------
Robert E. Gross, Director
By: /s/ Thomas J. Kirchhofer Date: April 10, 2008
------------------------------
Thomas J. Kirchhofer, Director
44
Dates Referenced Herein and Documents Incorporated by Reference
9 Subsequent Filings that Reference this Filing
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