UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
SCHEDULE
14C
Proxy
Statement Pursuant to Section 14(a) of the
Securities
Exchange Act of 1934
(AMENDMENT
NO. 1)
Filed
by
the Registrant x
Filed
by
a Party other than the Registrant ¨
Check
the
appropriate box:
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Preliminary
Proxy Statement
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Confidential,
for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
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Definitive
Proxy Statement
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Definitive
Additional Materials
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Soliciting
Material Pursuant to §240.14a-12
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CT
HOLDINGS ENTERPRISES, INC.
______________________________________________________________________________
(Name
of Registrant as Specified In Its Charter)
______________________________________________________________________________
(Name
of Person(s) Filing Proxy Statement, if other than the
Registrant)
Payment
of Filing Fee (Check the appropriate box):
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Fee
not
required.
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| x |
Fee
computed on table below per Exchange Act Rules 14a-6(i)(4)
and
0-11.
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(1)
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Title
of each class of securities to which transaction applies: Common
Stock
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(2)
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Aggregate
number of securities to which transaction applies: 14,200,050
shares
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(3)
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Per
unit price or other underlying value of transaction computed
pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing
fee is
calculated and state how it was determined): $1.75 (calculated
based on
the last sale in the over-the-counter market on August 21,
2007
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(4)
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Proposed
maximum aggregate value of transaction: $24,850,088
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(5)
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Total
fee paid: $763* *paid
by
Xcorporeal, Inc.
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Fee
paid previously with preliminary
materials.
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Check
box if any part of the fee is offset as provided by Exchange
Act Rule
0-11(a)(2) and identify the filing for which the offsetting
fee was paid
previously. Identify the previous filing by registration
statement number,
or the Form or Schedule and the date of its
filing.
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(1)
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Amount
Previously Paid:
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(2)
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Form,
Schedule or Registration Statement No.:
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(3)
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Filing
Party:
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Date
Filed:
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THE
INFORMATION IN THIS INFORMATION STATEMENT IS NOT COMPLETE AND MAY BE CHANGED.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS INFORMATION
STATEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING
AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT
TO COMPLETION, DATED AUGUST 22, 2007
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NOTICE
OF ACTION BY WRITTEN CONSENT
WE
ARE NOT ASKING YOU FOR A PROXY AND
YOU
ARE REQUESTED NOT TO SEND US A PROXY.
To
the
Stockholders of Xcorporeal, Inc. and CT Holdings Enterprises, Inc.:
This
information statement is furnished to the stockholders of Xcorporeal, Inc.
and
to the stockholders of CT Holdings Enterprises, Inc. (CTHE) in connection
with
the action taken by the written consents of the respective stockholders of
Xcorporeal and CTHE with respect to the transactions contemplated in the
merger
agreement dated as of August 10, 2007 by and among Xcorporeal, CTHE, and
its
newly-formed, wholly-owned merger subsidiary, XC Acquisition
Corporation. This
information statement is being sent to our stockholders to comply with the
requirements of Section 14(c) of the Securities Exchange Act of 1934, as
amended, or Exchange Act, and Section 228(e) of the Delaware General Corporation
Law, or DGCL. Except as otherwise noted, all references in this information
statement to the “companies,” “we,” “us,” “our,” or the “combined companies”
refers to the combined companies of Xcorporeal and CTHE after the effectiveness
of the merger.
Pursuant
to the merger agreement, the merger subsidiary of CTHE will merge with and
into Xcorporeal, and with Xcorporeal being the surviving corporation and
becoming a wholly-owned subsidiary of CTHE. Each share of Xcorporeal common
stock outstanding immediately prior to the effective time of the merger
will be
converted into one share of CTHE common stock. In addition, CTHE will assume
all
outstanding Xcorporeal options and warrants to purchase Xcorporeal common
stock.
There
is
currently no public market for Xcorporeal common stock. CTHE common stock
is
traded on the OTC Bulletin Board under the symbol “CTHE.” Following the merger,
it is anticipated that the combined companies’ common stock will continue to
trade on the OTCBB.
Upon
effectiveness of the merger, CTHE will change its name to “Xcorporeal, Inc.” and
its certificate of incorporation and bylaws will be amended and restated
to read
substantially as Xcorporeal’s immediately prior to the merger. Xcorporeal’s
certificate of incorporation will be amended to change its name to "Xcorporeal
Operations, Inc." All of the officers and directors of CTHE will resign,
and all
of the officers and directors of Xcorporeal shall become officers and directors
of CTHE effective as of the consummation of the merger.
Immediately
prior to the effectiveness of the merger, CTHE shall cause a reverse split
of
its common stock, whereby each 8.27 issued and outstanding shares of its
common
stock shall automatically be converted into and become one share of CTHE
common
stock. After the reverse stock split, but prior to the merger, there shall
remain a total of approximately 350,000 shares of CTHE common
stock.
CTHE
will
also adopt a 2007 Incentive Compensation Plan substantially identical to
Xcorporeal’s 2006 Incentive Compensation Plan in effect immediately prior to the
merger.
The
holders of 9,600,000 shares, or approximately 68% of the issued and outstanding
common stock of Xcorporeal, considered, voted on and adopted the proposal to
approve entering into the transactions contemplated by the merger agreement,
and
to approve the merger. This consent of stockholders is sufficient to approve
entering into the transactions. Accordingly, the action will not be submitted
to
the other Xcorporeal stockholders for a vote.
The
holders of 2,086,689 shares, or approximately 72% of the issued and outstanding
common stock of CTHE considered, voted on and adopted the proposal to approve
entering into the transactions contemplated by the merger agreement, and
to
approve the merger, reverse stock split, and incentive compensation plan.
This
consent of stockholders is sufficient to approve entering into the transactions.
Accordingly, the actions will not be submitted to the other CTHE stockholders
for a vote.
2
Under
Section 228 of the DGCL, Xcorporeal and CTHE are required to provide prompt
notice of the taking of any corporate action without a meeting, by less than
unanimous written consent, to those stockholders who have not consented in
writing and who, if the action had been taken at a meeting, would have been
entitled to notice of the meeting if the record date for such meeting had
been
the date that written consents signed by a sufficient number of stockholders
to
take the action were delivered to us. On August 10, 2007, there were 14,200,050
shares of Xcorporeal common stock outstanding, each of which would have been
entitled to one vote at a meeting called to approve the merger agreement
and the
transactions. On August 10, 2007, there were 2,894,675 shares of CTHE common
stock outstanding, each of which would have been entitled to one vote at
a
meeting called to approve the merger agreement and the
transactions.
The
accompanying information statement describes the merger agreement and proposed
merger in more detail. You are encouraged to read the entire document carefully.
In particular, you should carefully consider the discussion entitled “Risk
Factors.”
Under
Delaware law, holders of Xcorporeal common stock are entitled to dissenters’
rights of appraisal. Any holder of Xcorporeal common stock who did not vote
in
favor of the merger or the merger agreement has the right to demand in writing
from Xcorporeal, within 20 days after receiving notice that the merger has
become effective, payment for his or her shares and appraisal of their value.
Dissenting stockholders must follow the procedures regarding appraisal elements
contained in Section 262 of the DGCL, a copy of which is attached as Annex
B to
this information statement.
Please
note that you should not send stock certificates. There will be no exchange
of
certificates.
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Very
truly yours,
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Terren
S. Peizer
Executive
Chairman
Xcorporeal,
Inc.
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Steven
B. Solomon
Chairman,
President &
Chief
Executive Officer
CT
Holdings Enterprises, Inc.
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THIS
INFORMATION STATEMENT IS DATED AUGUST ___, 2007, AND IS FIRST BEING MAILED
TO
XCORPOREAL STOCKHOLDERS AND CTHE STOCKHOLDERS ON OR ABOUT AUGUST ___, 2007.
3
ANNEXES
ANNEX
A
Merger
Agreement
ANNEX
B
Appraisal
Rights Under Section 262 of the Delaware General Corporation
Law
ANNEX
C
2007
Incentive Compensation Plan of CT Holdings Enterprises, Inc.
ANNEX
D
Amended
and Restated Certificate of Incorporation of CT Holdings Enterprises,
Inc.
4
Summary
Term Sheet for the Merger
The
following is a summary of the principal terms of the merger. This summary does
not contain all information that may be important to you. We encourage you
to
read carefully this information statement, including the annexes and the
documents we have incorporated by reference into this information statement,
in
their entirety.
On
August
10, 2007, Xcorporeal entered into a merger agreement with CTHE and XC
Acquisition Corporation. In connection with the merger:
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Each
issued and outstanding share of Xcorporeal common stock will be
converted
into one share of newly issued CTHE common
stock;
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Warrants
and options to purchase common stock of Xcorporeal shall be automatically
converted into warrants and options to purchase common stock of
CTHE, and
CTHE will adopt a 2007 Incentive Compensation
Plan;
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Xcorporeal’s
certificate of incorporation will be amended to change its name
to
Xcorporeal Operations, Inc.;
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CTHE
shall cause a reverse stock split immediately prior to the effectiveness
of the merger upon which every 8.27 shares of CTHE common stock
shall be
automatically converted into one share of CTHE common
stock;
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CTHE’s
certificate of incorporation shall be amended and restated to read
substantially as Xcorporeal’s certificate of incorporation read
immediately prior to the effectiveness of the merger, and CTHE’s name will
be changed to Xcorporeal,
Inc;
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CTHE’s
bylaws shall be amended and restated to read substantially as Xcorporeal’s
bylaws read immediately prior to the
merger;
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The
officers and directors of CTHE shall resign effective as of the
merger,
and the directors and officers of Xcorporeal shall become officers
and
directors of CTHE effective as of the merger;
and
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Dissenters
to the merger shall have dissenters’ rights under Section 262 of the
DGCL.
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5
Table
of Contents
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Page
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QUESTIONS
AND ANSWERS ABOUT THE MERGER
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7
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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
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9
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SUMMARY
OF THE INFORMATION STATEMENT
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10
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COMPARATIVE
PER SHARE INFORMATION
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20
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MARKET
PRICE INFORMATION AND RELATED STOCKHOLDER MATTERS
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21
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WHERE
YOU CAN FIND MORE INFORMATION
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RISK
FACTORS
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23
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THE
MERGER
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32
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MATERIAL
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
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35
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THE
MERGER AGREEMENT
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40
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2007
INCENTIVE COMPENSATION PLAN
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44
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INFORMATION
ABOUT XCORPOREAL
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48
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INFORMATION
ABOUT CTHE
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64
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COMPARISON
OF RIGHTS OF HOLDERS OF XCORPOREAL COMMON STOCK AND CTHE COMMON
STOCK
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72
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LEGAL
MATTERS
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73
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INTERESTS
OF NAMED EXPERTS AND LEGAL COUNSEL
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73
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INDEX
TO FINANCIAL STATEMENTS OF XCORPOREAL, INC.
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F-1
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INDEX
TO FINANCIAL STATEMENTS OF CT HOLDINGS ENTERPRISES, INC.
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F-26
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6
Questions
and Answers about the Merger
Following
are questions and related answers that address some of the questions you
may
have regarding the pending merger transaction between Xcorporeal and CTHE,
the
charter amendment and related matters. These questions and answers may not
contain all of the information relevant to you, do not purport to summarize
all
material information relating to the merger agreement, the charter amendments,
the plan adoption or any of the other matters discussed in this information
statement, and are subject to, and are qualified in their entirety by, the
more
detailed information contained or incorporated by reference in or attached
to
this information statement. Therefore, please carefully read this information
statement, including the attached annexes, in its entirety.
Q:
WHY ARE WE PROPOSING THE MERGER?
A:
We
believe that a merger between Xcorporeal and CTHE presents an opportunity
to
enhance stockholder value for both companies. CTHE is a shell corporation
with
no active operations, and substantially no operating assets or liabilities.
Its
common stock is traded on the Over-the-Counter Bulletin Board under the
symbol “CTHE,” and has an active trading market. Xcorporeal has substantial
business operations and is fully public reporting, but there is no public
market
for its common stock. The combination of the two companies and the access
to an
active trading market could provide liquidity for Xcorporeal investors and
provide Xcorporeal with increased visibility within the investor community.
The
merger will also create a combined company with the potential of raising
additional capital to finance further development of Xcorporeal’s products if
needed. Stockholders of the combined company will be able to participate
in the
growth and opportunities that result from the merger.
To
review
the reasons for the merger in greater detail, see the section entitled “The
Merger - Reasons for the Merger.”
Q:
WHAT WILL HAPPEN IN THE MERGER?
A:
In the
proposed merger, XC Acquisition Corporation, a wholly-owned subsidiary of
CTHE,
will merge with and into Xcorporeal and, as a result, Xcorporeal will become
a
wholly-owned subsidiary of CTHE. In connection with the merger, CTHE will
change
its name to “Xcorporeal, Inc.” The merger agreement, which governs the merger,
is attached to this information statement as Annex A. You are encouraged
to read
it carefully.
Q:
WHAT WILL I RECEIVE IN THE MERGER?
A:
If the
merger is completed, if you are an Xcorporeal stockholder, each of your
Xcorporeal shares will be converted into one share of CTHE common stock.
For
example, if you owned 1,000 shares of Xcorporeal common stock, those shares
will
be converted into 1,000 shares of CTHE common stock after the merger. There
will
be no exchange of stock certificates in connection with the merger. The shares
of CTHE common stock that Xcorporeal stockholders receive will be restricted
under the Securities Act of 1933, as amended (the “Securities Act”), just as
your shares of Xcorporeal common stock were restricted immediately prior
to the
merger. CTHE common stock is listed on Over the Counter Bulletin Board under
the
symbol “CTHE.” There will be no fractional shares exchanged in the merger, and
there will be no need to pay cash in lieu of fractional
shares.
If
you
are a CTHE stockholder, immediately prior to the effectiveness of the merger,
pursuant to a reverse stock split, every 8.27 shares of CTHE common stock shall
automatically be converted into one share of CTHE common stock. We will issue
one additional share in the event that you would own a fractional share as
a
result of the reverse stock split.
Q:
WHAT ARE THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER ON XCORPOREAL
STOCKHOLDERS?
A:
The
material U.S. federal income tax consequences of the merger are described in
more detail in the section entitled “The Merger — Material United States Federal
Income Tax Consequences”. The tax consequences of the merger to you will depend
upon your particular situation. You should consult your own tax advisor for
a
full understanding of the federal, state, local and foreign income and other
tax
consequences of the merger.
Q:
SHOULD I SEND IN MY XCORPOREAL STOCK CERTIFICATES NOW?
A:
No.
Neither Xcorporeal nor CTHE will be exchanging physical securities after
the
merger becomes effective.
7
Q:
WHEN DO YOU EXPECT TO COMPLETE THE MERGER?
A:
Xcorporeal and CTHE are working to complete the merger as quickly as
practicable, and expect to complete the merger in the third quarter of 2007;
however, the exact timing cannot be predicted.
Q:
DO I HAVE APPRAISAL OR DISSENTER’S RIGHTS?
A:
Yes.
Holders of Xcorporeal common stock who have not consented to the merger are
entitled to exercise appraisal rights in connection with the merger, subject
to
compliance with applicable procedures under Delaware law, as described in
this
information statement. Because
CTHE’s stockholders are not being asked to relinquish their shares in connection
with the merger, they are not entitled to appraisal
rights.
The
holders of 9,600,000 shares, or 68% of the issued and outstanding common
stock
of Xcorporeal, considered, voted on and adopted the proposal to approve entering
into the transactions contemplated by the Merger Agreement, and to approve
the
merger with and into XC Acquisition Corporation. This consent of stockholders
is
sufficient to approve entering into the transactions. Accordingly, the action
will not be submitted to the other Xcorporeal stockholders for a vote.
Q:
WHOM SHOULD I CALL WITH QUESTIONS?
A:
If you
have any questions about the proposed merger or if you need additional copies
of
the information statement or the enclosed information, please call or write:
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Xcorporeal,
Inc.
11150
Santa Monica Boulevard, Suite 340
Los
Angeles, CA 90025
Attn:
Winson Tang
(310)
424-5668
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CT
Holdings Enterprises, Inc.
2100
McKinney Avenue, Suite 1500
Dallas,
TX 75201
Attn:
Steven B. Solomon
(214)
750-2454
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Q:
ARE THE CTHE STOCKHOLDERS ALSO REQUIRED TO APPROVE THE MERGER?
A:
Yes.
The holders of 2,086,689 shares, or 72.1% of the issued and outstanding common
stock of CTHE, considered, voted on and adopted the proposal to approve entering
into the transactions contemplated by the Merger Agreement, and to approve
the
merger, the reverse stock split, the charter amendments and the 2007 Incentive
Compensation Plan. This consent of stockholders is sufficient to approve
entering into the transactions. Accordingly, the actions will not be submitted
to the other CTHE stockholders for a vote.
Q:
WILL MY RIGHTS AS AN XCORPOREAL STOCKHOLDER CHANGE AS A RESULT OF THE MERGER?
A:
No.
Because the certificate of incorporation and bylaws of CTHE are being amended
and restated at the time of the merger to read substantially the same as
the
certificate and incorporation and bylaws of Xcorporeal, your rights as an
Xcorporeal stockholder will not change. There is a summary comparison of
the
rights of stockholders of CTHE and Xcorporeal starting on page ___ of this
information statement.
If
you
are a CTHE stockholder, your rights will change because the certificate of
incorporation and bylaws of CTHE are being amended and restated as described
in
the foregoing paragraph. Additionally, the par value of your shares will
change
from $0.01 to $0.0001. Also, as a result of the reverse stock split and merger,
CTHE stockholders will own approximately 350,000 shares in the combined company,
while Xcorporeal stockholders will own approximately 14.2 million shares
in the
combined company. Accordingly, your percentage ownership in CTHE will
substantially decrease to approximately 2.4% as a result of the
merger.
Q:
IS EVERYONE TREATED EQUALLY IN THE MERGER?
A:
No. A
number of directors and officers of Xcorporeal may have interests in the
merger
agreement and the merger that are different from those of stockholders who
are
not also directors and officers. In addition, Steven B. Solomon, an officer,
director and majority shareholder of CTHE, owns 50,000 shares of Xcorporeal
which he acquired in a private placement consummated in the fourth quarter
of
2006, on the same terms as all other investors in that offering. Mr. Solomon’s
Xcorporeal shares shall be converted into shares of CTHE on the same terms
and
conditions as all other Xcorporeal shareholders. All options outstanding
under
Xcorporeal's 2006 Incentive Compensation Plan will be assumed under CTHE's
2007
Incentive Compensation Plan. Any CTHE options or warrants outstanding prior
to
the merger will be cancelled and not assumed under the 2007 Incentive
Compensation Plan. These differences are explained in more detail on page
___ of
this information statement.
8
Q:
WHAT WILL HAPPEN IF THE MERGER IS NOT COMPLETED?
A:
If the
merger is not completed for any reason, Xcorporeal and CTHE may be subject
to a
number of other risks. Xcorporeal will continue to have no active trading
market
for its common stock, which would have an adverse impact on its ability to
avail
itself of the public markets for additional financing. CTHE will have no
operating business and will continue as a shell. Both companies will incur
the
expenses associated with attempting to effectuate the merger and the
transactions. The failure to consummate the merger could have an adverse
impact
on the price and trading of the companies’ common stock.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Any
statements in this document about expectations, beliefs, plans, objectives,
assumptions or future events or performance are not historical facts and are
forward-looking statements. These statements are often, but not always, made
through the use of words or phrases such as “may,” “should,” “could,” “predict,”
“potential,” “believe,” “will likely result,” “expect,” “will continue,”
“anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and
“outlook,” and similar expressions. Accordingly, these statements involve
estimates, assumptions and uncertainties, which could cause actual results
to
differ materially from those expressed in them. Any forward-looking statements
are qualified in their entirety by reference to the factors discussed throughout
this document. The following cautionary statements identify important factors
that could cause Xcorporeal’s, CTHE’s or the combined company’s actual results
to differ materially from those projected in the forward-looking statements
made
in this document. Among the key factors that have a direct bearing on
Xcorporeal’s, CTHE’s or the combined company’s results of operations are:
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general
economic and business conditions; the existence or absence of adverse
publicity; changes in marketing and technology; changes in political,
social and economic
conditions;
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competition
in and general risks of the medical products and services
industries;
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success
of acquisitions and operating initiatives; changes in business
strategy or
development plans; management of
growth;
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dependence
on senior management; business abilities and judgment of personnel;
availability of qualified personnel; labor and employee benefit
costs;
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ability
of Xcorporeal to retain and hire key executives, technical personnel
and
other employees;
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ability
of Xcorporeal to manage its growth and the difficulty of successfully
managing a larger, more geographically dispersed
organization;
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ability
of Xcorporeal to manage successfully its changing relationships
with
customers, suppliers, value-added resellers and strategic
partners;
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the
impact of government
regulation;
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volatility
in the stock price of CTHE;
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the
need and ability of Xcorporeal to obtain sufficient financing to
meet
potential capital
requirements;
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market
acceptance of each of the companies’ products and services and the ability
of Xcorporeal’s customers to accept new product and services offerings;
and
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·
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the
timing of, other conditions associated with, the completion of
the
merger.
|
These
factors and the risk factors referred to below could cause actual results or
outcomes to differ materially from those expressed in any forward-looking
statements made by Xcorporeal or CTHE, and you should not place undue reliance
on any such forward-looking statements. Further, any forward-looking statement
speaks only as of the date on which it is made and neither Xcorporeal nor CTHE
undertakes any obligation to update any forward-looking statement or statements
to reflect events or circumstances after the date on which such statement is
made or to reflect the occurrence of unanticipated events. New factors emerge
from time to time, and it is not possible for Xcorporeal or CTHE to predict
which will arise. In addition, neither Xcorporeal nor CTHE can assess the impact
of each factor on Xcorporeal or CTHE or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from
those
contained in any forward-looking statements.
9
SUMMARY
OF THE INFORMATION STATEMENT
This
summary highlights selected information from this information statement.
It does
not contain all of the information that is important to you. Xcorporeal and
CTHE
urge you to read carefully the entire information statement and the other
documents referred to in this information statement to fully understand the
merger. In particular, you should read the documents attached to this
information statement, including the merger agreement, which is attached
as
Annex
A.
For a guide as to where you can obtain more information on Xcorporeal and
CTHE,
see the section entitled “Where You Can Find More Information” beginning on page
[___]. We have included page references parenthetically to direct you to
a more
complete description of the topics presented in this summary of the information
statement. As your approval of the merger and the other matters described
in
this information statement is neither required nor requested, we are not
asking
you for a proxy and you are requested not to send us a proxy.
The
Companies
(Pages
___)
Xcorporeal,
Inc.
11150
Santa Monica Boulevard, Suite 340
Los
Angeles, CA 90025
Xcorporeal
is a medical device company actively researching and developing an
extra-corporeal platform to perform functions of various human organs. Our
prototype systems apply modern electronics and engineering principals to
reduce
the size, cost and power requirements of conventional extra-corporeal therapies
including kidney dialysis and ultrafiltration. We
were
incorporated in the State of Nevada in 2001. to engage in the acquisition,
exploration and development of natural resource properties. On August 31,
2006,
we changed our name to Xcorporeal, Inc. On September 1, 2006, we entered
into a
license agreement to acquire exclusive rights to acquire the technology on
which our business is based.
CT
Holdings Enterprises, Inc.
2100
McKinney Avenue, Suite 1500
Dallas,
TX 75201
Since
1996, CT Holdings has provided management expertise including consulting
on
operations, marketing and strategic planning and has been a source of capital
to
early stage technology companies. CT Holdings was incorporated in Delaware
in
1992. On March 13, 2006, CT Holdings changed its name to CT Holdings
Enterprises, Inc. The business model was designed to enable the companies
that
CTHE acquired or invested in to become market leaders in their industries.
CTHE’s business strategy since 1996 has led to the development, acquisition and
operation of technology based businesses with compelling valuations and strong
business models. Its goal has been to realize the value of these investments
for
CTHE’s shareholders through a subsequent liquidity event such as a sale, merger,
spin-off or initial public offering of the portfolio companies. Currently,
CTHE
has no active business operations.
XC
Acquisition Corporation
c/o
CT
Holdings Enterprises, Inc.
2100
McKinney Avenue, Suite 1500
Dallas,
TX 75201
CTHE
formed XC Acquisition Corporation solely for the purpose of effecting the
merger. To date, merger subsidiary has not conducted any activities other
than
those incidental to its formation and the execution of the merger agreement
and
related documents. Upon completion of the merger, merger subsidiary will
be
merged with and into Xcorporeal and the separate existence of merger subsidiary
will end.
Approval
of the Boards of Directors
(Pages
___)
Our
respective boards of directors have determined that the merger is in the
best
interests of Xcorporeal and CTHE and their stockholders and unanimously approved
the merger agreement and the transactions contemplated in the merger agreement
and related documents. To review the factors considered by the boards of
directors, see “The Merger - Reasons for the Merger.”
10
Written
Consent; Record Date
(Pages
___)
Under
Delaware corporate law and both companies’ bylaws, the companies’ stockholders
may approve the merger and the transactions contemplated by the merger agreement
by written consent of stockholders holding a majority of outstanding common
stock. On August 10, 2007, certain Xcorporeal stockholders, who together
held
approximately 68% of Xcorporeal outstanding common stock as of that date,
executed written consents to approve the merger and any other transactions
contemplated in the merger agreement. August 10, 2007 was the record date
for
determining the Xcorporeal stockholders entitled to receive notice of
stockholder action by written consent and receive this information statement.
This was also the record date for determining the number of shares of Xcorporeal
common stock outstanding and therefore the number of votes necessary to adopt
the merger agreement and approve the related transactions. On August 10,
2007,
there were 14,200,050 shares of Xcorporeal’s common stock outstanding and
entitled to vote, with each share entitled to one vote.
On
August
10, 2007, certain CTHE stockholders, who together held approximately 72%
of
CTHE's outstanding common stock as of that date, executed written consents
to
approve the merger and any other transactions contemplated in the merger
agreement, including the reverse stock split, the charter amendments and
the
2007 Incentive Compensation Plan. August 10, 2007 was the record date for
determining the CTHE stockholders entitled to receive notice of stockholder
action by written consent and receive this information statement. This was
also
the record date for determining the number of shares of CTHE common stock
outstanding and therefore the number of votes necessary to adopt the merger
agreement and approve the related transactions. On August 10, 2007, there
were
2,894,675 shares of CTHE common stock outstanding and entitled to vote, with
each share entitled to one vote.
Notwithstanding
the execution and delivery of the written consents, federal securities laws
provide that the merger may not be completed until 20 calendar days after the
date this information statement is mailed to our stockholders. Therefore, the
merger cannot be completed until that time has elapsed. We currently expect
the
merger to be completed as soon as the expiration of that 20 calendar day period,
subject to obtaining all other regulatory approvals.
The
Merger
(Pages
___)
In
the
proposed merger, XC Acquisitions Corporation, a wholly-owned subsidiary of
CTHE
will merge into Xcorporeal, with Xcorporeal as the surviving corporation.
As a
result, Xcorporeal will become a wholly-owned subsidiary of CTHE. Upon the
effectiveness of the merger, CTHE’s name will be changed to “Xcorporeal, Inc.”
THE MERGER AGREEMENT IS ATTACHED TO THIS INFORMATION STATEMENT AS ANNEX A.
YOU
ARE ENCOURAGED TO READ IT CAREFULLY.
What
Will Xcorporeal Shareholders Receive in the Merger
(Pages
___)
In
the
merger, each share of Xcorporeal common stock will be converted into the right
to receive one share of CTHE common stock.
Each
warrant, and each option, to purchase shares of Xcorporeal common stock
outstanding immediately before the completion of the merger will automatically
become a warrant or option, as the case may be, to purchase shares of CTHE
common stock under CTHE's 2007 Incentive Compensation Plan. The number of
shares
of CTHE common stock into which warrants and options are exercisable and
the
exercise price will not have to be adjusted because the exchange ratio in
the
merger is 1:1.
Ownership
of CTHE After the Merger
(Page
___)
Xcorporeal
and CTHE estimate that, after giving effect to the reverse stock split of CTHE
the common stock, the number of shares of CTHE common stock to be issued to
Xcorporeal stockholders in the merger will constitute approximately 97.6% of
the
outstanding common stock of the combined company after the merger, without
giving effect to the exercise of any Xcorporeal stock options or warrants
between the date of this information statement and the closing of the merger.
11
Conditions
to the Consummation of the Merger
(Pages
___)
The
completion of the merger depends on the satisfaction or waiver of a number
of
conditions set forth in the merger agreement, including the following:
|
·
|
The
representations and warranties of Xcorporeal and CTHE contained
in the
merger agreement shall be true and correct as of the closing of
the
merger;
|
|
·
|
Xcorporeal
and CTHE shall have performed all covenants contained in the merger
agreement;
|
|
·
|
There
shall be no judgment, order, decree or injunction in effect that
would
prohibit the transactions contemplated by the merger agreement
or
adversely affect the rights of parties to the
merger;
|
|
·
|
Xcorporeal
shall not have engaged in any practice or act, or entered into
any
transaction outside the ordinary course of business, which results
in a
material adverse effect;
|
|
·
|
The
merger shall have been duly approved by the shareholders of Xcorporeal
and
CTHE;
|
|
·
|
Xcorporeal
and CTHE shall have delivered customary documents and certificates
duly
executed in accordance with the merger agreement;
and
|
|
·
|
The
officers and directors of CTHE shall have resigned effective as
of the
Closing.
|
Termination
of the Merger Agreement
(Pages
___)
|
·
|
Xcorporeal
and CTHE may terminate the merger agreement by mutual written
consent.
|
|
·
|
Xcorporeal
may terminate the merger
agreement:
|
|
·
|
in
the event of an uncured breach of the merger agreement by
CTHE;
|
|
·
|
if
Xcorporeal is not reasonably satisfied with the results of its
due
diligence regarding CTHE;
|
|
·
|
if
Xcorporeal’s shares become quoted on the OTC Bulletin
Board;
|
|
·
|
if
the closing of the merger has not occurred by the close of business
on
Friday, August 31, 2007; or
|
|
·
|
if
the board of directors of Xcorporeal determines in good faith that
failure
to terminate the merger agreement would constitute a breach of
the
fiduciary duties of Xcorporeal’s
directors.
|
|
·
|
CTHE
may terminate the merger agreement upon written notice at any time
prior
to the closing of the merger:
|
|
·
|
in
the event of an uncured breach of the merger agreement by
Xcorporeal;
|
|
·
|
if
CTHE is not reasonably satisfied with the results of its due
diligence;
|
|
·
|
if
the closing of the merger shall not have occurred on or prior to
August
31, 2007; or
|
|
·
|
if
the board of directors or special committee of CTHE determines
in good
faith that failure to terminate the merger agreement would constitute
a
breach of the fiduciary duties of CTHE’s directors or members of the
special committee.
|
| · |
|
Either
Xcorporeal or CTHE may terminate the merger agreement in
the event that a
governmental entity has issued a final non-appealable order
restraining,
enjoining or otherwise prohibiting the transactions contemplated
in the
merger agreement.
|
| · |
In
addition, Xcorporeal may terminate the merger agreement and
rescind the
merger upon written notice to CTHE and the merger subsidiary
within 10
days after the closing of the merger if the shares of CTHE
common stock do
not continue to be quoted on the OTC Bulletin Board immediately
following
the merger.
|
12
Reasons
for the Merger
(Pages
__ )
For
a
description of the reasons considered by the Xcorporeal board of directors,
please see the section entitled “The Merger -Reasons for the Merger” beginning
on page ___.
For
a
description of the reasons considered by the CTHE board of directors and
special
committee, please see the section entitled “The Merger -Reasons for the Merger”
beginning on page ___.
Material
United States Federal Income Tax Consequences
(Pages
__ )
The
merger is intended to be treated as a tax-free reorganization within the
meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended, in which
case you would not recognize gain or loss on the exchange of Xcorporeal common
stock for CTHE stock. However, neither Xcorporeal nor CTHE intends to request
a
ruling from the Internal Revenue Service, and neither Xcorporeal nor CTHE
intends to request an opinion of their tax advisors, regarding the income
or
other tax consequences of the merger. No assurance can be given that the
Internal Revenue Service or the courts will agree that the merger qualifies
as a
tax-free reorganization under Section 368(a). Furthermore, the tax consequences
of the merger to you will depend on your own personal circumstances. Thus,
you
should consult your tax advisor regarding the tax consequences of the
merger.
Accounting
Treatment
(Page
___)
The
merger will be treated as a recapitalization of Xcorporeal. Xcorporeal will
be
deemed the accounting acquirer under generally accepted accounting principles.
The combined companies’ operating results will be consolidated as of the
consummation of the merger.
Interests
of Directors and Officers in the Merger
(Page
___)
Xcorporeal’s
directors and executive officers have interests in the merger that are different
from, or are in addition to, those of other stockholders that may make them
more
likely to approve and adopt the merger agreement and approve the merger.
The
merger agreement provides that the officers and directors of CTHE will resign
effective as of the closing of the merger, and that the officers and directors
of Xcorporeal immediately prior to the merger shall become the officers and
directors of CTHE. Specifically, Terren S. Peizer, Marc G. Cummins, Daniel
S.
Goldberger, Victor Gura, M.D., Hervé de Kergrohen,
M.D. Nicholas
S. Lewin, Kelly J. McCrann, and Jay Wolf will become the directors of
CTHE upon the effectiveness of the merger.
The
members of Xcorporeal’s board of directors were aware of, and considered the
interests of, themselves and Xcorporeal’s executive officers in approving the
merger and adopting the merger agreement.
Steven
B.
Solomon, an officer, director and majority shareholder of CTHE owns 50,000
shares of Xcorporeal common stock which he purchased in a private placement
consummated in the fourth quarter of 2006.
The
members of CTHE’s board of directors and special committee were aware of, and
considered the interests of, themselves and CTHE’s executive officers in
approving the merger and adopting the merger agreement.
Dissenters’
or Appraisal Rights
(Pages
___)
Under
the
laws of Delaware, where Xcorporeal is incorporated, holders of Xcorporeal
common
stock who have not consented to the merger and comply with the applicable
requirements of Delaware law will have the right to receive an appraisal
of the
value of their shares in connection with the merger and to be paid such value
in
cash. We have included a copy of Section 262 of the Delaware General Corporation
Law — Appraisal Rights as Annex B to this information statement.
13
Quotation
on OTC.BB
(Page
___)
The
common stock of CTHE is currently traded on the “OTC Bulletin Board”under the
symbol “CTHE.”
Risks
of the Merger
(Pages
___ — ___)
We
urge
you to read carefully all of the factors described in “Risk Factors” beginning
on page ___in connection with the transactions contemplated by the merger
agreement.
Related
Agreements
(Pages
___)
Xcorporeal
entered into an indemnity agreement with Steven B. Solomon, an officer, director
and majority shareholder of CTHE. The terms and conditions of each of the
foregoing agreements are described in “Related Agreements” beginning on page
[___].
|
Xcorporeal,
Inc. (a Development Stage Company)
|
|
Selected
Financial Data
|
The
selected consolidated financial data are derived from our audited consolidated
financial statements for the years ended December 31, 2002 through 2006
and
unaudited consolidated financial statements for the six months ended
June 30,
2007.
|
Six
Months Ended
|
Year Ended December 31,
|
|||||||||
|
30-Jun-07
|
2006
|
2005
|
||||||||
|
(in
thousands, except per share data)
|
||||||||||
|
Summary
of operations data:
|
||||||||||
|
Revenues
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Operating
(loss)
|
(8,283,805
|
)
|
(4,462,412
|
)
|
(35,753
|
)
|
||||
|
Net
(loss)
|
(7,663,879
|
)
|
(4,380,212
|
)
|
(35,753
|
)
|
||||
|
Basic
and diluted loss per common share
|
(0.54
|
)
|
(0.67
|
)
|
(0.01
|
)
|
||||
|
Shares
used in computing loss per common share
|
14,200,050
|
6,542,312
|
3,820,000
|
|||||||
|
Balance
sheet data:
|
||||||||||
|
Cash
and cash equivalents
|
346,887
|
27,440,987
|
-
|
|||||||
|
Marketable
securities
|
22,676,578
|
-
|
-
|
|||||||
|
Working
capital (deficit)
|
21,959,725
|
25,397,733
|
(52,557
|
)
|
||||||
|
Total
assets
|
23,334,428
|
27,535,543
|
-
|
|||||||
|
Total
stockholders' equity (deficit)
|
22,016,770
|
25,402,061
|
(52,557
|
)
|
||||||
|
Year Ended December 31,
|
||||||||||
|
2004
|
2003
|
2002
|
||||||||
|
(in
thousands, except per share data)
|
||||||||||
|
Summary
of operations data:
|
||||||||||
|
Revenues
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Operating
(loss)
|
(23,338
|
)
|
(12,988
|
)
|
(31,268
|
)
|
||||
|
Net
(loss)
|
(23,338
|
)
|
(12,962
|
)
|
(31,268
|
)
|
||||
|
Basic
and diluted loss per common share
|
(0.01
|
)
|
0.00
|
(0.01
|
)
|
|||||
|
Shares
used in computing loss per common share
|
3,820,000
|
3,820,000
|
2,720,000
|
|||||||
|
Balance
sheet data:
|
||||||||||
|
Cash
and cash equivalents
|
576
|
12,499
|
27,983
|
|||||||
|
Working
capital (deficit)
|
(16,804
|
)
|
6,534
|
19,496
|
||||||
|
Total
assets
|
1,376
|
13,232
|
27,983
|
|||||||
|
Total
stockholders' equity (deficit)
|
(16,804
|
)
|
6,534
|
19,496
|
||||||
14
|
CT
Holdings Enterprises, Inc.
|
|
Selected
Financial Data
|
The
selected consolidated financial data are derived from our audited consolidated
financial statements for the years ended December 31, 2002 through 2006
and
unaudited consolidated financial statements for the six months ended
June 30,
2007.
|
Six
Months Ended
|
Year Ended December 31,
|
|||||||||
|
30-Jun-07
|
2006
|
2005
|
||||||||
|
(in
thousands, except per share data)
|
||||||||||
|
Summary
of operations data:
|
||||||||||
|
Revenues
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Operating
income (loss)
|
133,034
|
5,325,016
|
(671,972
|
)
|
||||||
|
Loss
from discountinued operations
|
-
|
-
|
-
|
|||||||
|
Net
income (loss)
|
133,034
|
5,325,016
|
(671,972
|
)
|
||||||
|
Basic
and diluted income (loss) per common share
|
0.07
|
5.54
|
(0.70
|
)
|
||||||
|
Shares
used in computing income (loss) per common share
|
1,920,839
|
960,656
|
960,656
|
|||||||
|
Balance
sheet data:
|
||||||||||
|
Cash
and cash equivalents
|
271
|
197
|
197
|
|||||||
|
Working
capital (deficit)
|
(63,239
|
)
|
(455,573
|
)
|
(5,780,589
|
)
|
||||
|
Total
assets
|
271
|
197
|
197
|
|||||||
|
Total
stockholders' equity (deficit)
|
(63,239
|
)
|
(455,573
|
)
|
(5,780,589
|
)
|
||||
|
Year Ended December 31,
|
||||||||||
|
2004
|
2003
|
2002
|
||||||||
|
(in
thousands, except per share data)
|
||||||||||
|
Summary
of operations data:
|
||||||||||
|
Revenues
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Operating
income (loss)
|
(4,227,435
|
)
|
1,210,517
|
(5,932,120
|
)
|
|||||
|
Loss
from discountinued operations
|
-
|
-
|
(942,939
|
)
|
||||||
|
Net
income (loss)
|
(4,227,435
|
)
|
1,210,517
|
(7,060,490
|
)
|
|||||
|
Basic
and diluted income (loss) per common share
|
(4.46
|
)
|
1.41
|
(8.97
|
)
|
|||||
|
Shares
used in computing income (loss) per common share
|
947,307
|
855,859
|
786,830
|
|||||||
|
Balance
sheet data:
|
||||||||||
|
Cash
and cash equivalents
|
4,168
|
-
|
-
|
|||||||
|
Working
capital (deficit)
|
(5,379,765
|
)
|
(1,352,330
|
)
|
(3,412,847
|
)
|
||||
|
Total
assets
|
4,168
|
-
|
-
|
|||||||
|
Total
stockholders' equity (deficit)
|
(5,379,765
|
)
|
(1,352,330
|
)
|
(3,412,847
|
)
|
||||
15
Upon
the
consummation of the merger, CTHE will acquire all of the outstanding capital
stock of Xcorporeal in exchange for an equal number of shares of CTHE following
a 1 for 8.27 reverse stock split of CTHE’s common stock. Xcorporeal will become
a wholly-owned subsidiary of CTHE, and the current Xcorporeal stockholders
will
own approximately 97.6% of the post-split, post-merger outstanding shares
of
CTHE.
At
closing of the merger, CTHE will cease to be a shell corporation. Since
Xcorporeal will be the sole operating company as of the merger date, the
merger
will be accounted for as recapitalization of Xcorporeal. Because CTHE is
a shell
corporation with substantially no assets or liabilities, and Xcorporeal’s
stockholders will own approximately 97.6% of the capital stock following
the
merger, CTHE’s financial results will not have a material impact on the
financial statements of Xcorporeal.
The
number of CTHE shares and per share data have been adjusted to give effect
to a 1 for 70 reverse stock split effective in February 2007 but not for
the 1
for 8.27 reverse stock split to be effected in connection with the
merger.
16
Unaudited
pro forma condensed combined financial information
The
unaudited pro forma financial statements reflect the
merger between Xcoporeal and CTHE as though it occurred as of the dates
indicated herein From a legal standpoint, CTHE is considered to be the
acquirer.
As the former shareholders of Xcorporeal will end up with 97% of the outstanding
voting common stock of CTHE and CTHE is a public shell company, from an
accounting standpoint the transaction is considered to be a recapitalization
of
Xcorporeal.
The
following unaudited pro forma condensed combined financial statements and
related notes are presented to show the pro forma effects of the
recapitalization of Xcorporeal had the merger been consummated as of June
30,
2007 for the balance sheet and at January 1, 2006 for the year ended December
31, 2006 and the six months ended June 30, 2007.
Pro
forma
data are based on assumptions and include adjustments as explained in the
notes
to the unaudited pro forma combined financial statements. The pro forma
data are
not necessarily indicative of the financial results that would have been
attained had the merger occurred on the dates referenced above and should
not be
viewed as indicative of operations in future periods.
The
unaudited pro forma combined financial statements should be read in conjunction
with the notes thereto, the Xcorporeal financial statements as of and for
the
year ended December 31, 2006 included in its annual report on form 10-KSB
for
the year ended December 31, 2006 and the unaudited financial statements
as of
June 30, 2007 and for the six months then ended included in form 10-QSB
and the
financial statements as of and for the years ended December 31, 2006 and
as of
June 30, 2007 and for the six months then ended included on form
10-QSB.
17
|
XCORPOREAL,
INC.
|
|
(formerly
CT Holdings Enterprises, Inc.)
|
|
(a
Development Stage Company)
|
|
UNAUDITED
PROFORMA COMBINED BALANCE SHEET
|
|
June
30, 2007
|
||||||||||||||||
|
Xcorporeal,
Inc.
|
CT
Holdings Enterprises, Inc.
|
Proforma
Adjustments
|
Proforma
Combined
|
|||||||||||||
|
ASSETS
|
||||||||||||||||
|
Current
|
||||||||||||||||
|
Cash
|
$
|
346,887
|
$
|
271
|
$
|
-
|
$
|
347,158
|
||||||||
|
Marketable
securitities, at fair value
|
22,676,578
|
-
|
-
|
22,676,578
|
||||||||||||
|
Restricted
cash
|
83,050
|
-
|
-
|
83,050
|
||||||||||||
|
Prepaids
|
158,802
|
-
|
-
|
158,802
|
||||||||||||
|
Other
current assets
|
12,066
|
-
|
-
|
12,066
|
||||||||||||
|
Total
current assets
|
23,277,383
|
271
|
-
|
23,277,654
|
||||||||||||
|
Property,
plant & equipment, net
|
56,094
|
-
|
-
|
56,094
|
||||||||||||
|
Other
assets
|
951
|
-
|
-
|
951
|
||||||||||||
|
Total
Assets
|
23,334,428
|
271
|
-
|
23,334,699
|
||||||||||||
|
LIABILITIES
|
||||||||||||||||
|
Current
|
||||||||||||||||
|
Accounts
payable
|
455,036
|
57,418
|
225,000
|
(
C)
|
737,454
|
|||||||||||
|
Accrued
professional fees
|
427,259
|
-
|
250,000
|
(
C)
|
|
677,259
|
||||||||||
|
Accrued
royalties
|
208,333
|
-
|
-
|
208,333
|
||||||||||||
|
Accrued
other liabilities
|
111,630
|
-
|
-
|
111,630
|
||||||||||||
|
Other
current liabilities
|
115,400
|
6,092
|
-
|
121,492
|
||||||||||||
|
Total
Current Liabilities
|
1,317,658
|
63,510
|
475,000
|
1,856,168
|
||||||||||||
|
Commitments
and contingencies
|
||||||||||||||||
|
STOCKHOLDERS'
EQUITY (DEFICIENCY)
|
||||||||||||||||
|
Preferred
Stock, $0.001 par value, 10,120,919 shares authorized, none
outstanding
|
-
|
-
|
-
|
-
|
||||||||||||
|
Common
Stock, $0.0001 par value, 47,255,139 shares authorized, 14,350,071
issued
and outstanding at June 30, 2007
|
1,420
|
23,973
|
(23,958
|
)
|
(A)
/ (B)
|
|
1,435
|
|||||||||
|
Additional
paid-in capital
|
34,202,998
|
59,082,536
|
(59,145,790
|
)
|
(A)
/ (B)
|
|
34,139,744
|
|||||||||
|
Deficit
accumulated during the development stage
|
(12,187,648
|
)
|
(59,169,748
|
)
|
59,169,748
|
(12,662,648
|
)
|
|||||||||
|
(475,000
|
)
|
(C)
|
|
|||||||||||||
|
Total
Stockholders' Equity
|
22,016,770
|
(63,239
|
)
|
(475,000
|
)
|
21,478,531
|
||||||||||
|
Total
Liabilities & Stockholders' Equity
|
$
|
23,334,428
|
$
|
271
|
$
|
0
|
$
|
23,334,699
|
||||||||
|
|
Debit
|
Credit
|
||||||||||||||
|
(A)
Common
stock par value
|
23,973
|
|||||||||||||||
|
Additional
paid in capital
|
59,145,775
|
|||||||||||||||
|
Retained
deficit
|
59,169,748
|
|||||||||||||||
|
To
eliminate CTHE's equity and deficit accounts
|
||||||||||||||||
|
(B)
Additional
paid in capital
|
15
|
|||||||||||||||
|
Par
value common stock
|
15
|
|||||||||||||||
|
To
record the par value of the additional shares issues as part
of the merger
with CTHE. 2,894,673 / 8.27 = 350,021 less 200,000 shares
of Xcorporeal
retired for at net of 150,021 shares at $0.0001 per
share.
|
||||||||||||||||
|
(
C) To
accrue estimated merger costs of $250,000 and a one-time
signing bonus of
$225,000.
|
||||||||||||||||
18
|
XCORPOREAL,
INC.
|
|
(formerly
CT Holdings Enterprises, Inc.)
|
|
(a
Development Stage Company)
|
|
UNAUDITED
PROFORMA COMBINED STATEMENT OF
OPERATIONS
|
|
Year
Ended December 31, 2006
|
|||||||||||||
|
Xcorporeal,
Inc.
|
CT
Holdings Enterprises, Inc.
|
Proforma
Adjustments
|
Proforma
Combined
|
||||||||||
|
Operating
Expenses:
|
|||||||||||||
|
Selling,
general and administrative
|
$
|
3,174,995
|
$
|
99,185
|
$
|
-
|
$
|
3,274,180
|
|||||
|
Research
and development
|
1,287,322
|
-
|
-
|
1,287,322
|
|||||||||
|
Depreciation
and amortization
|
95
|
-
|
-
|
95
|
|||||||||
|
Settlement
of litigation
|
-
|
(4,583,852
|
)
|
-
|
(4,583,852
|
)
|
|||||||
|
Gain
on extinguishment of debt from related parties
|
-
|
(1,294,330
|
)
|
-
|
(1,294,330
|
)
|
|||||||
|
Interest
expense
|
-
|
179,262
|
-
|
179,262
|
|||||||||
|
Interest
expense - related party
|
-
|
285,922
|
-
|
285,922
|
|||||||||
|
Income
(loss) before Other Income and Income Tax
|
(4,462,412
|
)
|
5,313,813
|
-
|
851,401
|
||||||||
|
Interest
and Other Income
|
82,200
|
11,203
|
-
|
93,403
|
|||||||||
|
Income
(loss) before income taxes
|
(4,380,212
|
)
|
5,325,016
|
-
|
944,804
|
||||||||
|
Income
taxes
|
-
|
-
|
-
|
-
|
|||||||||
|
Net
Income (loss)
|
$
|
(4,380,212
|
)
|
$
|
5,325,016
|
$
|
-
|
$
|
944,804
|
||||
|
Basic
net income (loss) per share
|
$
|
(0.67
|
)
|
$
|
5.54
|
$
|
0.14
|
||||||
|
Basic
weighted average number of shares outstanding
|
6,542,312
|
960,656
|
6,692,333
|
(D) | |||||||||
|
Diluted
net income per share
|
$
|
(0.67
|
)
|
$
|
5.54
|
$
|
0.14
|
||||||
|
Diluted
weighted average number of shares outstanding
|
6,542,312
|
960,656
|
6,861,381
|
||||||||||
|
(D)
|
Reflects
the reduction in the weighted average number of shares due
to the
cancellation of 200,000 shares of Xcorporeal common stock and
the 350,021
shares of CTHE that remain from the merger transaction for
a net increase
of 150,021 weighted average number of shares.
|
|||||||||
|
(E)
|
Estimated
merger costs of $250,000 and a signing bonus of $225,000 are
excluded from
the statement of operations due to one time non-recurring
charges.
|
|||||||||
19
|
XCORPOREAL,
INC.
|
|
(formerly
CT Holdings Enterprises, Inc.)
|
|
(a
Development Stage Company)
|
|
UNAUDITED
PROFORMA COMBINED STATEMENT OF
OPERATIONS
|
|
For
the Six Months Ended June 30, 2007
|
|||||||||||||
|
Xcorporeal,
Inc.
|
CT
Holdings Enterprises, Inc.
|
Proforma
Adjustments
|
Proforma
Combined
|
||||||||||
|
Operating
Expenses:
|
|||||||||||||
|
Selling,
general and administrative
|
$
|
5,590,288
|
$
|
104,247
|
$
|
-
|
$
|
5,694,535
|
|||||
|
Research
and development
|
2,688,134
|
-
|
-
|
2,688,134
|
|||||||||
|
Depreciation
and amortization
|
5,383
|
-
|
-
|
5,383
|
|||||||||
|
Settlement
of litigation
|
-
|
-
|
-
|
-
|
|||||||||
|
Gain
on debt settlement
|
-
|
(237,281
|
)
|
-
|
(237,281
|
)
|
|||||||
|
Other
Income
|
-
|
-
|
-
|
-
|
|||||||||
|
Income
(loss) before Other Income and Income Tax
|
(8,283,805
|
)
|
133,034
|
-
|
(8,150,771
|
)
|
|||||||
|
Interest
Income
|
619,926
|
-
|
-
|
619,926
|
|||||||||
|
Income
(loss) before income taxes
|
(7,663,879
|
)
|
133,034
|
-
|
(7,530,845
|
)
|
|||||||
|
Income
taxes
|
-
|
-
|
-
|
-
|
|||||||||
|
Net
income (loss)
|
$
|
(7,663,879
|
)
|
$
|
133,034
|
$
|
-
|
$
|
(7,530,845
|
)
|
|||
|
Basic
and diluted net income (loss) per share
|
$
|
(0.54
|
)
|
$
|
0.07
|
$
|
(0.52
|
)
|
|||||
|
Weighted
average number of shares outstanding
|
14,200,050
|
1,920,839
|
14,350,071
|
(D) | |||||||||
|
(D)
|
Reflects
the reduction in the weighted average number of shares due
to the
cancellation of 200,000 shares of Xcorporeal common stock
and the 350,021
shares of CTHE that remain from the merger transaction for
a net increase
of 150,021 weighted average number of shares.
|
|||||||||
|
(F)
|
In
August 2007, CTHE issued 500,000 shares of its stock to an
executive
officer from services rendered. The fair value of these shares
of
approximately $225,000 will be recorded in expense in the
third quarter of
2007 on CTHE financial
statements.
|
|||||||||
20
MARKET
PRICE INFORMATION
AND
RELATED STOCKHOLDER MATTERS
There
has
never a public market for shares of Xcorporeal common stock. As of August
10,
2007, there were approximately 100 holders of record of our common stock.
We
have not paid any cash dividends in the past and do not anticipate paying
any
cash dividends in the foreseeable future. We intend to retain earnings,
if any,
to finance the expansion of our business and fund ongoing operations for
the
foreseeable future.
CTHE’s
common stock trades on the OTC Bulletin Board (“OTCBB”) under the symbol
CTHE (prior to February 2007, CTHE common stock traded under the symbol
CITN).
The following table sets forth, for the periods indicated, the high and
low
closing sale prices for CTHE common stock as reported by the OTCBB and
displayed
on its website. The quotations reflect inter-dealer prices, without retail
markup, markdown or commission, and may not represent actual transactions.
The
historical high and low prices below have been adjusted for the effects
of the 1
for 70 reverse stock split effective February 28, 2007 but do not reflect
the
proposed 1 for 8.27 reverse stock split. Following the merger, we expect
that
CTHE common stock will continue to be quoted and traded on the OTCBB; however,
we anticipate that we will change its trading symbol to “XCOR.”
|
High
|
Low
|
||||||
|
Year
Ended December 31, 2005:
|
|||||||
|
Quarter
ended March 31
|
$
|
1.05
|
$
|
0.35
|
|||
|
Quarter
ended June 30
|
0.56
|
0.42
|
|||||
|
Quarter
ended September 30
|
1.05
|
0.35
|
|||||
|
Quarter
ended December 31
|
1.05
|
0.56
|
|||||
|
Year
Ended December 31, 2006:
|
|||||||
|
Quarter
ended March 31
|
1.05
|
0.70
|
|||||
|
Quarter
ended June 30
|
0.77
|
0.42
|
|||||
|
Quarter
ended September 30
|
1.19
|
0.42
|
|||||
|
Quarter
ended December 31
|
0.63
|
0.35
|
|||||
|
Year
Ended December 31, 2007:
|
|||||||
|
Quarter
ended March 31
|
0.71
|
0.71
|
|||||
|
Quarter
ended June 30
|
0.80
|
0.55
|
|||||
|
Quarter
ending September 30 (through August 21, 2007)
|
2.15
|
0.41
|
|||||
As
of
August 21, 2007, there were approximately 752 holders of record of our
common
stock.
On
August
[___], 2007, the latest practicable date before the mailing of this information
statement, the last sale price of our common stock as reported on the OTCBB
was
$[___] per share. On August 10, 2007, the last trading day prior to the
public
announcement of the merger, the last sale price of our common stock as
reported
on the OTCBB was $0.45 per share.
21
WHERE
YOU CAN FIND MORE INFORMATION
Xcorporeal
and CTHE file annual, quarterly and special reports, information statements
and
other information with the SEC. You may read and copy any reports, statements
or
information that Xcorporeal and CTHE file with the SEC at the SEC’s public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
The public reference room in Washington, D.C. is located at 100 F Street,
N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. The SEC filings of Xcorporeal
and
CTHE are also available to the public from commercial document retrieval
services and at the Internet web site maintained by the SEC at
“http://www.sec.gov.”
Xcorporeal
has supplied all information contained in this information statement relating
to
Xcorporeal. CTHE has supplied all information contained in this information
statement relating to CTHE.
If
you
are an Xcorporeal stockholder, you may obtain, without charge, a copy of
the
Annual Report on Form 10-KSB for the year ended December 31, 2006, and
the most
recent Quarterly Report on Form 10-QSB of Xcorporeal, including the financial
statements required to be filed in such reports with the SEC pursuant to
the
Securities Exchange Act of 1934, as amended. You may also obtain copies
of the
exhibits to such reports, but Xcorporeal will charge a reasonable fee to
stockholders requesting such exhibits. You should direct your request in
writing
to Xcorporeal at the following address:
Xcorporeal,
Inc.
11150
Santa Monica Boulevard, Suite 340
Los
Angeles, CA 90025
Attn:
Winson Tang
If
you
are a CTHE stockholder, you may obtain, without charge, a copy of the Annual
Report on Form 10-KSB for the year ended December 30, 2006, and the most
recent
Quarterly Report on Form 10-QSB of CTHE, including the financial statements
required to be filed in such reports with the SEC pursuant to the Securities
Exchange Act of 1934, as amended. You may also obtain copies of the exhibits
to
such reports, but CTHE will charge a reasonable fee to stockholders requesting
such exhibits. You should direct your request in writing to CTHE at the
following address:
CT
Holdings Enterprises, Inc.
2100
McKinney Avenue
Dallas,
TX 75201
Attn:
Steven B. Solomon
22
Risk
Factors
YOU
SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, IN ADDITION TO THE OTHER
INFORMATION INCLUDED ELSEWHERE IN THIS INFORMATION STATEMENT AND THE DOCUMENTS
THAT XCORPOREAL AND CTHE HAVE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION. UNLESS THE CONTEXT REQUIRES OTHERWISE, THE USE OF THE
COMPANIES, THE COMBINED COMPANY, “US,” OR “WE” REFERS TO THE COMBINED COMPANY OF
XCORPOREAL AND CTHE AFTER GIVING EFFECT TO THE MERGER. ADDITIONAL RISKS
AND
UNCERTAINTIES NOT PRESENTLY KNOWN TO XCORPOREAL AND CTHE OR THAT ARE NOT
CURRENTLY BELIEVED TO BE IMPORTANT TO YOU, IF THEY MATERIALIZE, ALSO MAY
ADVERSELY AFFECT THE MERGER AND THE PRICE OF OUR STOCK.
Risks
Relating to the Proposed Merger
Xcorporeal
and CTHE may not achieve the benefits they expect from the merger, which
may
have a material adverse effect on the companies’ business, financial, and
operating results.
Xcorporeal
and CTHE entered into the merger agreement with the expectation that the
merger
will result in benefits to the combined company arising out of the combination
of the technology businesses of Xcorporeal and active trading market for
CTHE’s
common stock. To realize any benefits from the merger, the combined company’s
stock must continue to trade on the OTCBB following the merger. In addition,
we
will face the following post-merger challenges:
|
·
|
retaining
the management and employees
Xcorporeal;
|
|
·
|
developing
new products and services that utilize the assets and resources
of
Xcorporeal; and
|
|
·
|
retaining
existing strategic partners and suppliers of
Xcorporeal.
|
If
the
combined company is not successful in addressing these and other challenges,
then the benefits of the merger will not be realized and, as a result,
the
combined company’s operating results and the market price of CTHE’s common stock
may be adversely affected. These challenges, if not successfully met by
the
combined company, could result in possible unanticipated liabilities,
unanticipated costs, diversion of management attention and loss of personnel.
Neither Xcorporeal nor CTHE can assure you that we will be able to profitably
manage the combined company.
The
issuance of shares of CTHE’s common stock to Xcorporeal stockholders in the
merger will substantially dilute the percentage ownership interests of current
CTHE stockholders.
If
the
merger is completed, it is anticipated that CTHE will issue to Xcorporeal
stockholders approximately 14.2 million shares of CTHE common stock, and
approximately 4.2 million shares will be subject to stock options and
warrants to be issued to Xcorporeal stock option and warrant holders. Upon
completion of the merger, the former Xcorporeal stockholders, together
with the
holders of assumed Xcorporeal stock options and warrants, will be issued
shares
of our common stock, and options and warrants to acquire shares of our
common
stock, representing in the aggregate 97.6% of CTHE common stock on a
fully-diluted basis immediately following the merger. The issuance of CTHE
common stock to Xcorporeal stockholders will cause a significant reduction
in
the relative percentage interest of current CTHE stockholders in CTHE’s
earnings, if any, voting power and market capitalization.
If
we proceed with the merger, Xcorporeal stockholders will receive one share
of
CTHE common stock for each share of Xcorporeal common stock regardless of
changes in the market value of CTHE common stock or Xcorporeal common
stock.
Each
share of Xcorporeal common stock will be exchanged for one share of CTHE
common
stock upon completion of the merger. This exchange ratio is a fixed number
and
the merger agreement does not contain any provision to adjust this ratio
for
changes in the market price of either Xcorporeal common stock or CTHE’s common
stock. Neither party is permitted to terminate the merger agreement solely
because of changes in the market price of Xcorporeal or CTHE common stock.
Consequently, the specific dollar value of CTHE’s common stock to be received by
Xcorporeal stockholders will depend on the market value of CTHE common
stock at
the time of completion of the merger and may decrease from the date of
the
merger agreement. You are urged to obtain recent market quotations for
Xcorporeal common stock and CTHE common stock. Neither Xcorporeal nor CTHE
can
predict or give any assurances as to the market price of CTHE common stock
at
any time before or after the merger. The prices of Xcorporeal common stock
and
CTHE common stock may vary because of factors such as:
|
·
|
changes
in the business, operating results or prospects of Xcorporeal
or
CTHE;
|
23
|
·
|
actual
or anticipated variations in quarterly results of operations
of Xcorporeal
or CTHE;
|
|
·
|
market
assessments of the likelihood that the merger will be
completed;
|
|
·
|
the
timing of the completion of the
merger;
|
|
·
|
sales
of Xcorporeal common stock or CTHE common
stock;
|
|
·
|
additions
or departures of key personnel of Xcorporeal or
CTHE;
|
|
·
|
announcements
of significant acquisitions, strategic partnerships, joint ventures
or
capital commitments by
Xcorporeal;
|
|
·
|
conditions
or trends in the medical technology
industry;
|
|
·
|
announcements
of technological innovations, new products or services by Xcorporeal,
or
its competitors;
|
|
·
|
changes
in market valuations of other medical technology
companies;
|
|
·
|
the
prospects of post-merger
operations;
|
|
·
|
regulatory
considerations; and
|
|
·
|
general
market and economic
conditions.
|
If
the
merger is successfully completed, holders of Xcorporeal common stock will
become
holders of CTHE common stock. Xcorporeal’s business differs from CTHE’s
business, and Xcorporeal’s results of operations, may be affected by factors
different than those affecting CTHE’s results of operations and the price of
CTHE’s common stock. CTHE does not currently have any active
operations.
If
the costs associated with the merger exceed the benefits, the combined company
may experience adverse financial results, including increased
losses.
Xcorporeal
and CTHE will incur significant transaction costs as a result of the merger,
including legal and accounting fees that may exceed their current estimates.
In
addition, Xcorporeal and CTHE expect that the combined company will incur
consolidation and integration expenses, which they cannot accurately estimate
at
this time. Actual transaction costs may substantially exceed the current
estimates of Xcorporeal and CTHE and may affect the combined company’s financial
condition and operating results negatively. If the benefits of the merger
do not
exceed the costs associated with the merger, including any dilution to
CTHE’s
stockholders resulting from the issuance of shares in connection with the
merger, the combined company’s financial results could be adversely
affected, resulting in, among other things, increased losses.
No
Independent Financial Advisor.
Neither
Xcorporeal nor CTHE has engaged an independent financial advisor to consult
on
the relative advantages and disadvantages of the transactions. Therefore,
the
stockholders of both companies are dependent solely on the judgment of the
board
of directors of each company.
The
market price of CTHE’s common stock may decline as a result of the
merger.
The
market price of CTHE’s common stock may decline as a result of the merger for a
number of reasons, including if:
24
|
·
|
the
combined company does not achieve the perceived benefits of the
merger as
rapidly or to the extent anticipated by financial or industry
analysts;
|
|
·
|
the
effect of the merger on the combined company’s financial results is not
consistent with the expectations of financial or industry analysts;
or
|
|
·
|
significant
stockholders of Xcorporeal or CTHE decide to dispose of their
stock
following completion of the
merger.
|
Sales
of substantial amounts of CTHE common stock in the public market after the
proposed merger could materially adversely affect the market price of CTHE
common stock.
Based
on
the number of shares of Xcorporeal common stock outstanding as of August
10,
2007, and assuming no outstanding options or warrants to purchase Xcorporeal
common stock are exercised before the merger becomes effective, at the
closing
of the merger, CTHE will issue approximately 14.2 million shares of CTHE
common
stock to Xcorporeal stockholders in the merger. The sale of substantial
amounts
of CTHE common stock may result in substantial fluctuations in the price
of CTHE
common stock. In addition, sales of a substantial number of shares of CTHE
common stock within a short period of time could cause CTHE stock price
to fall.
The sale of these shares could also impair the combined company’s ability to
raise capital through sales of additional common stock.
Failure
to complete the merger could negatively impact Xcorporeal and CTHE, including
the market price CTHE common stock.
The
obligations of CTHE and Xcorporeal to complete the merger are subject to
the
satisfaction or waiver of certain conditions. See “The Merger Agreement —
Conditions to the Consummation of the Merger” on pages [___] to [___] of this
information statement for a discussion of these conditions. If these conditions
are not satisfied or waived, the merger may not be completed. If the merger
is
not completed for any reason, both CTHE and Xcorporeal may be subject to
other
material risks, including:
|
·
|
a
negative effect on the stock trading price of CTHE common stock
to the
extent that the current market price reflects a market assumption
that the
merger will be completed (Xcorporeal does not currently have
an active
trading market for its common
stock);
|
|
·
|
either
party may be required to pay a termination fee;
and
|
|
·
|
costs
related to the merger, such as legal and accounting fees, must
be paid
even if the merger is not
completed.
|
In
addition, if the merger is consummated but CTHE common stock ceases to be
traded
on the OTC Bulletin Board immediately after the effectiveness of the merger,
Xcorporeal may terminate the merger and rescind the merger agreement which
could
result in uncertainty in, or have an adverse impact on, the trading market
for
CTHE common stock.
Xcorporeal’s
officers and directors have interests different from yours that may influence
them to support or approve the merger.
The
terms
of the merger agreement and the agreements contemplated thereby affect
the
directors and officers of Xcorporeal in ways that may create interests
for them
in the merger that are different from, or in addition to, yours. These
interests
include:
|
·
|
the
existing rights to indemnification benefiting Xcorporeal’s directors and
officers found in Xcorporeal’s certificate of incorporation or bylaws,
applicable law or other sources will be duplicated in CTHE’s certificate
of incorporation and will continue
indefinitely.
|
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Messrs.
Terren S. Peizer, Executive Chairman of Xcorporeal, and Robert
Weinstein,
Xcorporeal’s Chief Financial Officer, will enter into employment
agreements with Xcorporeal in connection with closing of the
merger. Each
of these agreements is described in “Related Agreements” beginning on page
[___]; and
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|
·
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Steven
B. Solomon, an officer, director and majority shareholder of
CTHE, is the
record owner of 50,000 shares of Xcorporeal common stock which
he
purchased in connection with a private placement consummated
in the fourth
quarter of 2006.
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25
Uncertainty
regarding the merger and the effects of the merger could cause each company’s
customers or strategic partners to delay or defer
decisions.
Xcorporeal’s
customers and strategic partners, in response to the announcement of the
merger,
may delay or defer decisions, which could have a material adverse effect
on the
business of the relevant company, regardless of whether the merger is ultimately
completed.
The
merger may fail to qualify as a tax-free reorganization for federal income
tax
purposes, resulting in your recognition of taxable gain or loss in respect
of
your Xcorporeal shares.
The
merger is intended to qualify as a tax-free reorganization under Section
368(a)
of the Internal Revenue Code of 1986, as amended. The Internal Revenue
Service
will not provide a ruling on the matter, nor will Xcorporeal obtain an
opinion
from its legal counsel that the merger will constitute a tax-free reorganization
for federal income tax purposes. No assurance can be given that the Internal
Revenue Service or the courts will agree that the merger qualifies as a
tax-free
reorganization under Section 368(a). If the merger fails to qualify as
a
reorganization, you generally would recognize gain or loss on each share
of
Xcorporeal common stock surrendered in an amount equal to the difference
between
the sum of the amount of cash and/or the fair market value of CTHE common
stock
received for each such share of Xcorporeal common stock and your adjusted
tax
basis in such share.
Risks
Relating to the Business and Operations of Xcorporeal Following the
Merger
Our
limited operating history may make it difficult to evaluate our business
to date
and our future viability.
We
are in the early stage of operations and development, and have only a limited
operating history on which to base an evaluation of our business and prospects,
having just commenced operations in August 2006 in accordance with our new
business plan and entry into the medical devices industry. In addition,
our
operations and developments are subject to all of the risks inherent in
the
growth of an early stage company. We will be subject to the risks inherent
in
the ownership and operation of a company with a limited operating history
such
as regulatory setbacks and delays, fluctuations in expenses, competition,
the
general strength of regional and national economies, and governmental
regulation. Any failure to successfully address these risks and uncertainties
would seriously harm our business and prospects. We may not succeed given
the
technological, marketing, strategic and competitive challenges we will
face. The
likelihood of our success must be considered in light of the expenses,
difficulties, complications, problems and delays frequently encountered
in
connection with the growth of a new business, the continuing development
of new
technology, and the competitive and regulatory environment in which we
operate
or may choose to operate in the future. We have generated no revenues to
date,
and there can be no assurance that we will be able to successfully develop
our
products and penetrate our target markets.\
We
expect to continue to incur operating losses, and if we are not able to
raise
necessary additional funds we may have to reduce or stop
operations.
We
have not generated revenues or become profitable, may never do so, and
may not
generate sufficient working capital to cover the cost of operations. No
party
has guaranteed to advance additional funds to us to provide for any operating
deficits. Until we begin generating revenue, we may seek funding through
the
sale of equity, or securities convertible into equity, further dilution
to our
then existing stockholders may result. If we raise additional capital through
the incurrence of debt, our business may be affected by the amount of leverage
we incur, and our borrowings may subject us to restrictive covenants. Additional
funding may not be available to us on acceptable terms, or at all. If we
are
unable to obtain adequate financing on a timely basis, we may be required
to
delay, reduce or stop operations, any of which would have a material adverse
effect on our business.
26
Our
success will depend on our ability to retain our managerial personnel
and to
attract additional personnel.
Our
success will depend largely on our ability to attract and retain managerial
personnel. Competition for desirable personnel is intense, and we cannot
guarantee that we will be able to attract and retain the necessary staff.
The
loss of members of managerial, sales or scientific staff could have a material
adverse effect on our future operations and on successful development of
products for our target markets. The failure to maintain our management,
particularly our Executive Chairman and Chief Operating Officer and our
Chief
Medical and Scientific Officer, and to attract additional key personnel
could
materially adversely affect our business, financial condition and results
of
operations. Although we intend to provide incentive compensation to attract
and
retain our key personnel, we cannot guarantee that these efforts will be
successful.
We
will need to expand our finance, administrative, product development, sales
and
marketing, and operations staff. There are no assurances that we will be
able to
make such hires. In addition, we may be required to enter into relationships
with various strategic partners and other third parties necessary to our
business. Planned personnel may not be adequate to support our future
operations, management may not be able to hire, train, retain, motivate
and
manage required personnel or management may not be able to identify, manage
and
exploit existing and potential strategic relationships and market opportunities.
If we fail to manage our growth effectively, it could have a material adverse
effect on our business, results of operations and financial
condition.
We
need to develop our financial and reporting processes, procedures and controls
to support our anticipated growth.
We
have not historically invested significantly in our financial and reporting
systems. To comply with our public reporting requirements, and manage the
anticipated growth of our operations and personnel, we will be required
to
improve existing or implement new operational and financial systems, processes
and procedures, and to expand, train and manage our employee base. Our
current
and planned systems, procedures and controls may not be adequate to support
our
future operations.
The
laws and regulations affecting public companies, including the provisions
of the
Sarbanes-Oxley Act of 2002 and rules adopted or proposed by the Securities
and
Exchange Commission, will result in increased costs to us as we evaluate
the
implications of any new rules and respond to their requirements. New rules
could
make it more difficult or more costly for us to obtain certain types of
insurance, including director and officer liability insurance, and we may
be
forced to accept reduced policy limits and coverage or incur substantially
higher costs to obtain the same or similar coverage. We cannot predict
or
estimate the amount of the additional costs we may incur or the timing
of such
costs to comply with any new rules and regulations, or if compliance can
be
achieved.
We
cannot assure you that we will be able to complete development and obtain
necessary approvals for our proposed products even if we obtain sufficient
funding.
Even
if we obtain sufficient funding, no assurance can be given that we will
be able
to design or have designed parts necessary for the manufacture of our products
or complete the development of our proposed products within our anticipated
time
frames, if at all. Such a situation could have a material adverse effect
upon
our ability to remain in business.
The
success of our business will depend on our ability to develop and protect
our
intellectual property rights, which could be expensive.
Patent
and other proprietary rights are essential to our business. Our success
depends
to a significant degree on our ability to obtain and enforce patents and
licenses to patent rights, both in the U.S. and in other countries. We
cannot be
certain that the patents that we license from others will be enforceable
and
afford protection against competitors. Our patent rights may not provide
us with
proprietary protection or competitive advantages against competitors with
similar technologies. Even if such patents are valid, we cannot guarantee
that
competitors will not independently develop alternative technologies that
duplicate the functionality of our technology.
27
We
also rely on trademarks, copyrights, trade secrets and know-how to develop,
maintain and strengthen our competitive positions. While we protect our
proprietary rights to the extent possible, we cannot guarantee that third
parties will not know, discover or develop independently equivalent proprietary
information or techniques, that they will not gain access to our trade
secrets
or disclose our trade secrets to the public. Therefore, we cannot guarantee
that
we can maintain and protect unpatented proprietary information and trade
secrets. Misappropriation of our ual
property would have an adverse effect on our competitive position and may
cause
us to incur substantial litigation costs.
We
may be subject to claims that we infringe the intellectual property rights
of
others, and unfavorable outcomes could harm our business.
Our
future operations may be subject to claims, and potential litigation, arising
from our alleged infringement of patents, trade secrets or copyrights owned
by
other third parties. We intend to fully comply with the law in avoiding
such
infringements. However, within the medical devices industry, established
companies have actively pursued such infringements, and have initiated
such
claims and litigation, which has made the entry of competitive products
more
difficult. We may experience such claims or litigation initiated by existing,
better-funded competitors. Court-ordered injunctions may prevent us from
bringing new products to market, and the outcome of litigation and any
resulting
loss of revenues and expenses of litigation may substantially affect our
ability
to meet our expenses and continue operations.
We
compete against other dialysis equipment manufacturers with much greater
financial resources and better established products and customer relationships,
which may make it difficult for us to penetrate the market and achieve
significant sales of our products.
Our
proposed products will compete directly against equipment produced by Fresenius
Medical Care AG, Baxter Healthcare Corporation, Gambro AB, and others,
each of
which markets one or more FDA-cleared medical devices for the treatment
of acute
or chronic kidney failure.
Each
of these competitors offers products that have been in use for a longer
time
than our products and are more widely recognized by physicians, patients
and
providers. Most of our competitors have significantly more financial and
human
resources, more established sales, service and customer support infrastructures
and spend more on product development and marketing than we do. Many of
our
competitors also have established relationships with the providers of dialysis
therapy. Most of these companies manufacture additional complementary products
enabling them to offer a bundle of products and have established sales
forces
and distribution channels that may afford them a significant competitive
advantage.
The
market for our products is competitive, subject to change and affected
by new
product introductions and other market activities of industry participants,
including increased consolidation of ownership of clinics by large dialysis
chains. If we are successful, our competitors are likely to develop products
that offer features and functionality similar to our proposed products.
Improvements in existing competitive products or the introduction of new
competitive products may make it more difficult for us to compete for sales,
particularly if those competitive products demonstrate better safety,
convenience or effectiveness or are offered at lower prices. If we are
unable to
compete effectively against existing and future competitors and existing
and
future alternative treatments and pharmacological and technological advances,
it
will be difficult for us to penetrate the market and achieve significant
sales
of our products.
We
have not commissioned or obtained marketing studies which support the likelihood
of success of our business plan.
No
independent studies with regard to the feasibility of our proposed business
plan
have been conducted by any independent third parties with respect to our
present
and future business prospects and our capital requirements. In addition,
there
can be no assurances that our products or our treatment modality for ESRD
will
find sufficient acceptance in the marketplace to enable us to fulfill our
long
and short term goals, even if adequate financing is available and our products
are approved to come to market, of which there can be no
assurance.
28
Material
weaknesses in our internal control over financial reporting may make it
difficult to accurately evaluate our results of operations and financial
condition
In
our annual report report for the year ended December 31, 2006, we reported
material weaknesses in the effectiveness of our internal controls over
financial
reporting related to the application of generally accepted accounting principles
arising from (a) our accounting for the transaction by which we ceased to
be a shell corporation, (b) the assumptions used in estimating the fair
value of warrants issued to consultants,
(c) our accounting for research, development and other expenses incurred
pursuant to the License Agreement, and (d) the calculation of the weighted
average number of share outstanding. Despite our substantial efforts to
ensure
the integrity of our financial reporting process, we cannot guarantee that
we
will not identify additional weaknesses as we continue to work with the
new
systems that we have implemented. Any continuing material weaknesses in
our
internal control over financial reporting could result in errors in our
financial statements, which could erode market confidence in our company,
and
make it more difficult to raise needed additional funds, and adversely
affect
the market price of our common stock, if such a market ever
develops.
An
unfavorable result in the pending arbitration could have a material adverse
effect on our business.
We
consider the protection of our proprietary technology for treatment of
kidney
failure and congestive heart failure to be critical to our business prospects.
We obtained the rights to some of our most significant patented and
patent-pending technologies through a License Agreement with National Quality
Care, Inc. (NQCI). On December 1, 2006 we initiated arbitration against
NQCI for failure to fully perform its obligations under our License Agreement.
NQCI has filed counterclaims seeking to invalidate the License Agreement
and
claiming monetary damages against us. If NQCI were to prevail on some or
all of
its claims, we could be prevented from using some or all of the patented
technology we licensed from it. That could significantly impact our ability
to
use and develop our technologies, which would have a material adverse effect
on
our business and results of operations.
Risks
Related to Our Industry
Our
business will always be strictly regulated by the federal and other governments,
and we cannot assure you that we will remain in compliance with all applicable
regulation.
Clinical
testing, manufacture, promotion and sale of our proposed products are subject
to
extensive regulation by numerous governmental authorities in the U.S.,
principally the FDA, and corresponding foreign regulatory agencies. Changes
in
existing regulations or adoption of new regulations or policies could prevent
us
from obtaining, or affect the timing of, future regulatory approvals or
clearances. We cannot assure you that we will be able to obtain necessary
regulatory clearances or approvals on a timely basis, or at all, or that
we will
not be required to incur significant costs in obtaining or maintaining
such
foreign regulatory approvals. Delays in receipt of, or failure to receive,
such
approvals or clearances, the loss of previously obtained approvals or clearances
or the failure to comply with existing or future regulatory requirements
could
have a material adverse effect on our business, financial condition and
results
of operations.
Any
enforcement action by regulatory authorities with respect to past or future
regulatory noncompliance could have a material adverse effect on our business,
financial condition and results of operations. Noncompliance with applicable
requirements can result in fines, injunctions, civil penalties, recall
or
seizure of products, total or partial suspension of production, refusal
to
authorize the marketing of new products or to allow us to enter into supply
contracts and criminal prosecution.
Even
if our proposed products are approved for market, we will be subject to
continuing regulation. We will continuously be subject to routine inspection
by
the FDA and will have to comply with the host of regulatory requirements
that
usually apply to medical devices marketed in the U.S. including labeling
regulations, GMP requirements, MDR regulation (which requires a manufacturer
to
report to the FDA certain types of adverse events involving its products),
and
the FDA’s prohibitions against promoting products for unapproved or “off-label”
uses. Our failure to comply with applicable regulatory requirements could
result
in enforcement action by the FDA, which could have a material adverse effect
on
our business, financial condition and results of operations.
29
In
addition, failure to comply with applicable international regulatory
requirements can result in fines, injunctions, civil penalties, recalls
or
seizures of products, total or partial suspensions of production, refusals
by
foreign governments to permit product sales and criminal prosecution.
Furthermore, changes in existing regulations or adoption of new regulations
or
policies could prevent us from obtaining, or affect the timing of, future
regulatory approvals or clearances. There can be no assurance that we will
be
able to obtain necessary regulatory clearances or approvals on a timely
basis,
or at all, or that we will not be required to incur significant costs in
obtaining or maintaining such foreign regulatory approvals. Delays in receipt
of, or failure to receive, such approvals or clearances, the loss of previously
obtained approvals or clearances or the failure to comply with existing
or
future regulatory requirements could have a material adverse effect on
our
business, financial condition and results of operations.
Any enforcement action by regulatory authorities with respect to past or
future
regulatory noncompliance could have a material adverse effect on our business,
financial condition and results of operations.
Our
failure to respond to rapid changes in technology and its applications
and
intense competition in the medical devices industry could make our treatment
system obsolete.
The
medical devices industry is subject to rapid and substantial technological
development and product innovations. To be successful, we must respond
to new
developments in technology, new applications of existing technology and
new
treatment methods. Our response may be stymied if we require, but cannot
secure,
rights to essential third-party intellectual property. We may compete against
companies offering alternative treatment systems to ours, some of which
have
greater financial, marketing and technical resources to utilize in pursuing
technological development and new treatment methods. Our financial condition
and
operating results could be adversely affected if our medical device products
fail to compete favorably with these technological developments, or if
we fail
to be responsive on a timely and effective basis to competitors’ new devices,
applications, treatments or price strategies.
Product
liability claims could adversely affect our results of
operations
The
risk of product liability claims, product recalls and associated adverse
publicity is inherent in the testing, manufacturing, marketing and sale
of
medical products. In an effort to minimize our liability we purchase product
liability insurance coverage. In the future we may not be able to secure
product
liability insurance coverage on acceptable terms or at reasonable costs
when
needed. Any liability for mandatory damages could exceed the amount of
our
coverage. A successful product liability claim against us could require
us to
pay a substantial monetary award. Moreover, a product recall could generate
substantial negative publicity about our products and business and inhibit
or
prevent commercialization of other future product candidates.
Risks
Related to Our Common Stock
If
a market for our common stock does not develop, our stockholders may be
unable
to sell their shares.
There
is currently no market for our common stock and we can provide no assurance
that
a market will develop. If no market is ever developed for our shares, it
will be
difficult for stockholders to sell their stock. In such a case, stockholders
may
find that they are unable to achieve benefits from their
investment.
If
a market for our common stock develops, our stock price may be
volatile.
If
a market for our common stock develops, the price at which our common stock
will
trade may be highly volatile and may fluctuate as a result of a number
of
factors, including the number of shares available for sale in the market,
quarterly variations in our operating results, actual or anticipated
announcements of new data, studies, products or services by us or competitors,
regulatory investigations or determinations, acquisitions or strategic
alliances
by us or our competitors, recruitment or departures of key personnel, the
gain
or loss of significant customers, changes in the estimates of our operating
performance, market conditions in our industry and the economy as a whole.
Over
68% of our stock is controlled by a single stockholder who has the ability
to
substantially influence the election of directors and the outcome of matters
submitted to stockholders.
As
of December 31, 2006, Consolidated National, LLC (CNL), a limited liability
company whose managing member is our Chairman, directly owned 9,600,000
shares,
which represent 68% of our 14,200,050 shares of outstanding common stock
as of
April 9, 2007. As a result, CNL presently and is expected to continue to
have the ability to determine the outcome of issues submitted to our
stockholders. The interests of this stockholder may not always coincide
with our
interests or the interests of other stockholders, and it may act in a manner
that advances its best interests and not necessarily those of other
stockholders. One consequence to this substantial stockholder’s interest is that
it may be difficult for investors to remove management of the company.
It could
also deter unsolicited takeovers, including transactions in which stockholders
might otherwise receive a premium for their shares over then current market
prices.
30
Investors’
interests in our company will be diluted and investors may suffer dilution
in
their net book value per share if we issue additional shares or raise funds
through the sale of equity securities.
In
the event that we are required to issue any additional shares or enter
into
private placements to raise financing through the sale of equity securities,
investors’ interests in our company will be diluted and investors may suffer
dilution in their net book value per share depending on the price at which
such
securities are sold. If we issue any such additional shares, such issuances
also
will cause a reduction in the proportionate ownership and voting power
of all
other stockholders. Further, any such issuance may result in a change in
our
control.
We
have never paid cash dividends and do not intend to do so.
We
have never declared or paid cash dividends on our common stock. We currently
plan to retain any earnings to finance the growth of our business rather
than to
pay cash dividends. Payments of any cash dividends in the future will depend
on
our financial condition, results of operations and capital requirements,
as well
as other factors deemed relevant by our board of directors.
Xcorporeal
will need additional financing.
Xcorporeal
will need additional financing to maintain and expand its business, and
such
financing may not be available on favorable terms, if at all. Xcorporeal
intends
to finance the combined business through the private placement and public
offering of equity and debt securities. Xcorporeal has historically financed
its
operations through working capital and from equity investments. If Xcorporeal
needs additional financing, Xcorporeal cannot assure you that it will be
available on favorable terms, if at all. If Xcorporeal needs funds and
cannot
raise them on acceptable terms, Xcorporeal may not be able to:
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execute
its growth plan for the Wearable
Kidney;
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take
advantage of future opportunities, including synergistic
acquisitions;
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expand
its manufacturing facilities, if necessary, based on increased
demand for
the Wearable Kidney system;
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respond
to customers and competition;
or
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remain
in operation.
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31
THE
MERGER
This
section of the information statement and the next section entitled “The Merger
Agreement” describe the transactions. Although we believe that the description
in this section covers the material terms of the merger and the transactions,
this summary may not contain all of the information that is important to
you.
You should carefully read the entire information statement and the other
documents we refer to or incorporate by reference in this information statement
for a more complete understanding of the merger agreement and the transactions.
General
The
merger agreement provides that, at the effective time of the merger, XC
Acquisition Corporation, a wholly-owned subsidiary of CTHE, will merge
with and
into Xcorporeal, with Xcorporeal continuing in existence as the surviving
corporation and a wholly-owned subsidiary of CTHE. Each share of Xcorporeal
common stock issued and outstanding at the effective time of the merger
will be
converted into one share of CTHE common stock. Upon completion of the merger,
Xcorporeal will be a wholly-owned subsidiary of CTHE.
Any
options or warrants to purchase common stock of Xcorporeal in existence
immediately prior to the merger shall be automatically converted into options
and warrants to purchase common stock of CTHE, on the same terms and conditions
to which they were subject immediately prior to the merger under CTHE's
2007
Incentive Compensation Plan.
In
connection with the merger, CTHE will effect a reverse stock split whereby
immediately prior to the effectiveness of the merger, every 8.27 shares
of CTHE
common stock will be automatically converted into one share of CTHE common
stock. Upon the effectiveness of the merger CTHE will amend and restate
its
certificate of incorporation such that it reads substantially the same
as
Xcorporeal’s certificate of incorporation immediately prior to the merger, and
to change CTHE’s name to Xcorporeal, Inc. CTHE will also amend and restate its
bylaws to read substantially the same as Xcorporeal’s bylaws immediately prior
to the merger. Xcorporeal will amend its certificate of incorporation to
change
its name to Xcorporeal Operations, Inc. CTHE will adopt the 2007 Incentive
Compensation Plan.
Also
in
connection with the merger, the officers and directors of CTHE will resign
effective as of the merger, and the officers and directors of Xcorporeal
shall
become the officers and directors of CTHE.
Background
of the Merger
On
March
13, 2006, CTHE changed its name to CT Holdings Enterprises, Inc., and on
March
2, 2007, CTHE effected a 1 for 70 reverse stock split. CTHE’s goal was to
realize value for shareholders through a liquidity event such as a sale,
merger
or public offering.
On
August
31, 2006, Xcorporeal changed its name to Xcorporeal, Inc., and then acquired
rights to a congestive heart failure treatment products, Wearable Artificial
Kidney, and other medical devices, thereby becoming a developmental stage
company focused on researching, developing, and commercializing technology
and
products related to the treatment of kidney failure and congestive heart
failure. On October 13, 2006, the company reincorporated to Delaware.
Although
it is fully public reporting, Xcorporeal’s common stock has not been approved by
the NASD for public trading, while CTHE’s common stock is publicly traded on the
OTC Bulletin Board. On August 1, 2007, Xcorporeal’s counsel first contacted
CTHE’s president to explore the potential of a merger. Xcorporeal desired to
effectuate a reverse merger with a Form S-3 eligible shell corporation
with free
trading shares in the public market. CTHE desired to acquire a well-capitalized
operating business with an experienced management team. Following intensive
negotiations over the following week, the boards of directors (and in the
case
of CTHE, a special committee of the board of directors) approved the merger
agreement, and the parties executed the merger agreement and related
documentation on August 10, 2007.
Reasons
for the Merger
In
reaching the decision to adopt the merger agreement and recommend it for
approval by the respective stockholders of Xcorporeal and CTHE, the boards
of
directors consulted with respective management, as well as legal advisors.
As
discussed in greater detail below, these consultations included discussions
regarding Xcorporeal’s strategic business plan, the costs and risks of executing
that business plan as an independent company, its past and current business
operations and financial condition, and its future prospects, the strategic
rationale for the potential transaction with CTHE, and the terms and conditions
of the merger agreement.
32
In
approving the merger agreement, the boards of directors of Xcorporeal and
CTHE
considered reasons why the merger should be beneficial to the respective
companies and their stockholders. In the case of CTHE, references to the
board
of directors include the special committee convened to evaluate the merger.
These potential benefits included the following:
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the
merger into CTHE, which is listed on the “OTC Bulletin Board”and which has
an active trading market, could provide Xcorporeal with access
to an
active trading market which could in turn increase the liquidity
of its
investors’ shares and provide increased exposure for Xcorporeal within the
investor community;
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the
ability of the combined company to secure investor capital and
financing
for expansion of Xcorporeal’s
business;
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dissenters’
rights would be available to our stockholders under applicable
state
law;
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market
potential for Xcorporeal’s
technology;
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Xcorporeal’s
success and potential in establishing an extra-corporeal platform
technology;
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Xcorporeal’s
financial condition;
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apart
from the approval by our stockholders, completion of the merger
would not
require any material consents or approvals;
and
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based
on our historical efforts to pursue alternative transactions
and
familiarity with the companies in our industry, our management
did not
believe we would be able to complete a transaction that would
provide the
same or greater value to our stockholders within a reasonable
time
frame.
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CTHE
also
considered the following additional factors:
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the
historical, current and prospective financial condition, results
of
operations and cash flows of CTHE, taking into account the current
lack of
an operating business;
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CTHE’s
dependence on financing from its largest shareholder to meet
operating
costs and the lack of commitment from that shareholder that such
financing
will continue, with the result that CTHE could be forced to cease
operations if funds were not made available;
and
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the
remote likelihood that potential alternative transactions will
be
available to CTHE, or if available, such transactions would be
acceptable
to CTHE.
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In
the
course of deliberations, Xcorporeal’s board reviewed its historical, present and
projected financials under various scenarios, and its historical and short
and
long-term strategic objectives, the opportunities in the marketplace that
Xcorporeal is pursuing and the risks associated therewith. The board also
reviewed with Xcorporeal’s legal counsel a number of additional factors relating
to the merger, as follows:
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Xcorporeal’s
prospects to continue as an independent
company:
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the
negative effects of and limitations resulting from the absence
of an
active trading market for Xcorporeal common stock,
including:
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reduced
market liquidity;
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low
trading volume;
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lack
of analyst coverage;
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reduced
investor interest and difficulty in purchasing the stock;
and
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·
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Xcorporeal’s
inability to use its common stock to attract potential acquisition
candidates;
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·
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the
costs of continued research and development of our
technology;
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·
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Xcorporeal’s
small size, both in terms of revenue and market capitalization;
and
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·
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the
challenges faced by Xcorporeal’s competing in the medical technology
business versus significantly larger
companies;
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33
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·
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information
concerning the medical technology industry
generally;
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·
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historical
information concerning the business, financial condition, results
of
operations, technology, competitive position, industry trends
and
prospects for Xcorporeal;
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·
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the
likelihood that the merger would be
completed;
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·
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the
expectation that the merger should qualify as a tax-free
reorganization;
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·
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views
concerning the financial condition, results of operations and
businesses
of the combined companies before and after giving effect to the
merger
based on due diligence and publicly available earnings
estimates;
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·
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terms
and conditions of the merger agreement, including the closing
conditions;
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·
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the
belief that the terms of the merger agreement, including the
parties’
representations, warranties and covenants and the conditions
to the
parties’ respective obligations, are
reasonable;
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·
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the
impact of the merger on Xcorporeal’s ability to raise capital to finance
the development of our medical technology;
and
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·
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current
and historical market data with respect to the trading of Xcorporeal’s
common stock.
|
The
boards of Xcorporeal and CTHE also considered a number of potentially negative
factors in its deliberations:
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·
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the
loss of control by CTHE stockholders over the future operations
of the
combined company;
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·
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that,
while the transaction is expected to be completed, there can
be no
assurance that all conditions to the parties’ obligations to complete the
transaction would be met, and as a result, it is possible that
the
transaction may not be completed even if approved by the companies’
respective stockholders (see “Conditions to Consummation of the Merger,”
beginning on page (___);
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·
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that,
if the transaction does not close, the parties would have significant
expenses and that the respective management teams would have
expended
extensive efforts to attempt to complete the
transaction;
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·
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the
risk that the potential benefits of the merger might not be achieved
and
that Xcorporeal’s cash requirements could adversely affect the operations
of the combined company; and
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·
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other
risk factors described under the section entitled “Risk
Factors.”
|
In
addition to the factors considered above, in coming to its determinations,
our
board of directors was aware of the interests that some of our executive
officers and directors have with respect to the transaction in addition
to their
interests as our stockholders generally. See “Interests of Our Executive
Officers and Directors in the Merger,” beginning on page
[___].
The
foregoing discussion of the information and factors discussed and considered
by
the respective boards of directors is not meant to be exhaustive, but includes
the material factors considered by the boards of directors. In view of the
wide
variety of factors considered in connection with its evaluation of the merger
and the complexity of these matters, the boards of directors did not find
it
practicable to, and did not, quantify or otherwise assign relative weight
to the
individual factors considered in reaching its determination. In considering
the
factors listed above, individual members of the boards may have given different
weight to different factors. However, each board of directors concluded that
the
potential benefits of the transaction outweighed the potential negative factors
and that, overall, the proposed transaction had greater potential benefits
for
each of Xcorporeal and CTHE and its stockholders than other strategic
alternatives.
Recommendation
of the Boards
Taking
into account all of the material facts, matters and information, including
those
described above, our respective boards of directors believe that the merger
agreement is advisable and fair to and in the best interests of each of
Xcorporeal and CTHE and their respective stockholders.
34
No
Independent Financial Advisor
Neither
Xcorporeal nor CTHE has engaged an independent financial advisor to consult
on
the relative advantages and disadvantages of the transactions.
MATERIAL
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
General
The
following discussion summarizes certain material United States federal
income
tax consequences of the merger and the reverse stock split assuming that
the
merger is effected as described in the merger agreement and this information
statement. The following discussion is based on currently existing provisions
of
the Internal Revenue Code of 1986, as amended (the “Code”), existing Treasury
Regulations promulgated under the Code, and current administrative rulings
and
court decisions, all of which are subject to change. Any such change, which
may
or may not be retroactive, could alter the tax consequences of the reverse
stock
split and the merger.
Any
discussion of federal tax issues in this information statement is not intended
or written to be used as tax advice. To ensure compliance with IRS Circular
230,
shareholders are hereby notified that: (A) any discussion of federal tax
issues
in this information statement is not intended or written to be used, and
it
cannot be used by shareholders, for the purpose of avoiding penalties that
may
be imposed on them under the Internal Revenue Code; (B) such discussion
is
written to support the transactions or matters addressed herein; and (C)
shareholders should seek advice based on their particular circumstances
from an
independent tax advisor.
The
discussion set forth below does not address all U.S. federal income tax
considerations that may be relevant to Xcorporeal and CTHE stockholders
in light
of their particular circumstances, and does not apply to stockholders that
are
subject to special rules under U.S. federal income tax laws, such as:
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·
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foreign
persons;
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·
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financial
institutions, insurance companies, mutual funds, retirement plans,
dealers
in securities or foreign currencies, tax-exempt organizations
and
stockholders subject to the alternative minimum
tax;
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·
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stockholders
who hold Xcorporeal common stock as part of a hedge, straddle,
constructive sale or conversion transaction, or other risk reduction
arrangement;
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·
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stockholders
who acquired their Xcorporeal common stock through stock option
or stock
purchase programs or otherwise as compensation;
and
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·
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stockholders
whose functional currency is not the U.S.
dollar.
|
In
addition, this discussion does not consider the tax treatment of Xcorporeal
and
CTHE stockholders that hold their Xcorporeal shares through a partnership
or other pass-through entity and it does not address the tax consequences
of the
merger under foreign, state or local tax laws or U.S. federal estate tax
laws.
The
summary is limited to taxpayers who (i) hold their shares of Xcorporeal
common
stock as “capital assets” (generally, held for investment) and (ii) are U.S.
holders for federal income tax purposes. You are a U.S. holder for U.S.
federal
income tax purposes if you are:
(1)
an
individual citizen or resident of the United States;
(2)
a
corporation created or organized in the United States or under the laws
of the
United States or of any state (including the District of
Columbia);
(3)
an
estate whose income is subject to U.S. federal income tax regardless of
its
source, or
(4)
a
trust if (x) a United States court can exercise primary supervision over
the
trust’s administration and one or more United States persons are authorized to
control all substantial decisions of the trust or (y) certain circumstances
apply and the trust has validly elected to be treated as a United States
person.
This
discussion assumes that the merger constitutes a tax-free reorganization
within
the meaning of Section 368(a) of the Code. However, neither CTHE nor Xcorporeal
has requested nor will either request a ruling from the Internal Revenue
Service
or an opinion of counsel with regard to any of the tax consequences of the
merger. The Internal Revenue Service may assert a contrary position, and
it is
possible that the Internal Revenue Service may successfully assert a contrary
position in litigation or other proceedings.
35
Xcorporeal
and CTHE shareholders are urged to consult their own tax advisors as to
the U.S.
federal income tax consequences of the merger based on their own circumstances,
as well as the effects of state, local, non-U.S. tax laws and U.S. tax
laws
other than income tax laws.
Exchange
of Xcorporeal Stock
Based
on
the assumption that the merger will constitute a tax-free reorganization
within
the meaning of Section 368(a) of the Internal Revenue Code, and subject to
the
limitations and qualifications set forth in this discussion, the following
U.S.
federal income tax consequences will result from the merger:
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·
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an
Xcorporeal stockholder will not recognize gain or loss on the
exchange of
Xcorporeal common stock for CTHE common stock pursuant to the
merger;
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·
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the
aggregate tax basis of the shares of CTHE stock received by an
Xcorporeal
stockholder in the merger will be equal to the aggregate tax
basis of the
shares of Xcorporeal common stock surrendered in exchange
therefor;
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·
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the
holding period of the CTHE common stock received by an Xcorporeal
stockholder in the merger will include the holding period of
the
Xcorporeal common stock surrendered therefor;
and
|
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·
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Xcorporeal
will recognize no gain or loss as a result of the
merger.
|
We
cannot
assure you that the conclusions contained in this discussion will not be
challenged by the Internal Revenue Service or sustained by a court if
challenged. If the Internal Revenue Service were to assert successfully
that the
merger is not a tax-free reorganization within the meaning of Section 368(a)
of
the Code, then each Xcorporeal stockholder would be required to recognize
gain
or loss equal to the difference between: (i) the sum of the fair market
value of
the CTHE common stock received in the exchange, and (ii) the stockholder’s tax
basis in the Xcorporeal stock surrendered therefor. In such event, an Xcorporeal
stockholder’s tax basis in the CTHE common stock received would be equal to its
fair market value at the effective time of the merger, and the stockholder’s
holding period for the CTHE common stock would begin on the day after the
merger. The gain or loss recognized would be long-term capital gain or
loss if
the Xcorporeal stockholder’s holding period for the Xcorporeal common stock was
more than one year.
Cash
Instead of Fractional Shares
Because
there will be no fractional shares transferred in the exchange of Xcorporeal
common stock for CTHE common stock, there will be no cash paid in lieu of
fractional shares.
Backup
Withholding of U.S. Federal Income Tax
A
noncorporate holder of Xcorporeal shares may be subject to backup withholding
at
the then applicable rate with respect to the amount of cash, if any, received
instead of fractional share interests, unless the stockholder: (i) provides
a
correct taxpayer identification number (which, for an individual stockholder,
generally is the stockholder’s social security number) and certifies that he,
she or it is not subject to backup withholding on the substitute W-9 that
will
be included as part of the transmittal letter, or (ii) otherwise is exempt
from
backup withholding. Backup withholding will not apply to an Xcorporeal
stockholder who completes and signs the substitute Form W-9 that is included
as
part of the transmittal letter, or who otherwise proves to CTHE and its
exchange
agent that it is exempt from backup withholding. An Xcorporeal stockholder
who
does not provide a correct taxpayer identification number may be subject
to
penalties imposed by the Internal Revenue Service. Backup withholding is
not an
additional tax and may be claimed as a credit against an Xcorporeal
stockholder’s federal income tax liability, provided that the required
information is furnished to the Internal Revenue Service.
Reporting
and Record Keeping
An
Xcorporeal stockholder is required to retain records of the transaction,
and to
attach to the stockholder’s federal income tax return for the year of the merger
a statement setting forth all relevant facts with respect to the non-recognition
of gain or loss in the exchange. At a minimum, the statement must include:
(i)
the stockholder’s tax basis in the Xcorporeal common stock surrendered, and (ii)
the fair market value, as of the time of the effective date of the merger,
of
the CTHE common stock received in the exchange therefor.
36
The
preceding discussion does not purport to be a complete analysis of all
potential
tax consequences of the merger that may be relevant to a
particular Xcorporeal stockholder. Holders of Xcorporeal common stock
are urged to consult their own tax advisors regarding the specific tax
consequences to them of the merger, including the applicability and effect
of
foreign, state, local and other tax laws.
Federal
Income Tax Consequences of the Reverse Stock Split and Merger to CTHE
Stockholders
No
gain
or loss will be recognized by a CTHE stockholder upon his or her exchange
of CTHE common stock pursuant to the reverse stock split (except in
the case of the portion of whole shares attributable to the rounding up
of
fractional shares, as discussed herein). A CTHE stockholder's tax basis
in the
shares received as a result of the reverse split will be equal, in the
aggregate, to his or her basis in the CTHE common stock exchanged, increased
by
the income or gain attributable to the rounding up of fractional shares,
as
described herein. New CTHE common stock attributable to the rounding up
of
fractional shares to the nearest whole number of shares will be treated
for tax
purposes as if the fractional shares constitute a disproportionate dividend
distribution. Such CTHE stockholders generally will recognize ordinary
income to
the extent of earnings and profits of CTHE allocated to the portion of
each
whole share attributable to the rounding up process. If CTHE has no earnings
and
profits, the amount deemed distributed will be treated as a return of basis,
and
the remainder of the amount deemed distributed, if any, will be treated
as gain
from the sale of property. The CTHE stockholder's holding period for the
CTHE
common stock will include the period during which he or she held the pre-split
shares surrendered in the reverse split. The portion of the CTHE common
stock
received by a CTHE stockholder that are attributable to rounding up for
fractional shares will have a holding period commencing on the effective
date of
the reverse split. The reverse split would constitute a reorganization
within
the meaning of Section 368(1)(E) of the Internal Revenue Code of 1986,
as
amended, and CTHE will not recognize any gain or loss as a result of the
reverse split.
We
expect
that there will be no material federal income tax consequences of the merger
on
CTHE stockholders.
This
discussion regarding the tax consequence of the reverse stock split and
merger
are not binding upon the Internal Revenue Service or the courts, and there
can
be no assurance that the Internal Revenue Service or the courts will accept
the
positions expressed above. The state and local tax consequences of the
reverse
stock split and merger may vary significantly as to each stockholder, depending
upon the state in which he or she resides.
The
preceding discussion does not purport to be a complete analysis of all
potential
tax consequences of the reverse stock split and merger that may be relevant
to a particular CTHE stockholder. Holders of CTHE common stock are
urged to consult their own tax advisors regarding the specific tax consequences
to them of the reverse stock split and merger, including the applicability
and
effect of foreign, state, local and other tax
laws.
Accounting
Treatment
It
is
anticipated that the merger will be treated as a recapitalization of Xcorporeal
under generally accepted accounting principles. CTHE will consolidate the
operating results of Xcorporeal with those of its own, beginning as of
the date
the parties complete the merger.
Interests
of Xcorporeal Directors and Officers in the Merger
Under
the
merger agreement, all of the officers and directors of CTHE will resign upon
the
effectiveness of the merger, and all of the Xcorporeal directors, Terren
S.
Peizer, Marc G. Cummins, Daniel S. Goldberger, Victor Gura, M.D., Herve de
Kergrohen, M.D., Kelly J. McCrann, and Jay A. Wolf, are to be appointed to
the
board of directors of CTHE. Terren S. Peizer, Jay A. Wolf and Marc G. Cummins,
each a director of Xcorporeal, hold significant equity positions in Xcorporeal,
all of which will be exchanged for equity positions in CTHE. In addition,
all of
the officers of Xcorporeal will be appointed as officers of CTHE upon closing
of
the merger.
In
addition, Steven B. Solomon owns 50,000 shares of Xcorporeal common stock
purchased in a private placement during the fourth quarter of 2006.
37
Dissenters’
Appraisal Rights
Delaware
law entitles the holders of record of shares of Xcorporeal stock who follow
the
procedures specified in Section 262 of the Delaware General Corporation
Law to
have their shares appraised by the Delaware Court of Chancery and to receive
the
“fair value” of those shares, as of the effective time of the merger, as
determined by the court in place of the consideration that the holder would
otherwise receive in the merger. In order to exercise appraisal rights,
a
stockholder must demand and perfect the rights in accordance with Section
262 of
the Delaware General Corporation Law. The following is a summary of Section
262
and is qualified in its entirety by reference to Section 262, a copy of
which is
attached hereto as Annex B. Xcorporeal stockholders should carefully review
Section 262 of the Delaware General Corporation Law as well as information
discussed below to evaluate and, if they wish, perfect their rights to
appraisal.
Under
the
law of Delaware, where Xcorporeal is incorporated, holders of Xcorporeal
common
stock who have not consented to the merger and comply with the applicable
requirements of Delaware law will have the right to receive an appraisal
of the
value of their shares in connection with the merger and to be paid such value
in
cash.
Under
Sections 228(e) and 262(d)(2) of the DGCL, Xcorporeal is required to mail
to
each holder of Xcorporeal common stock who has not consented in writing
to the
adoption and approval of the merger agreement and the merger and the
transactions contemplated thereby a notice of corporate action taken without
a
meeting and notice of availability of appraisal rights. The notice of corporate
action taken without a meeting, notice of availability of appraisal rights
and a
copy of Section 262 of the DGCL must be delivered to the applicable Xcorporeal
stockholders by either Xcorporeal following receipt of the requisite approval
of
the adoption and approval of the merger agreement, the merger and the
transactions contemplated thereby, or by Xcorporeal within 10 days following
the
effective date of the merger. Such notice, if given on or after the effective
date of the Merger, must also notify the stockholders of the effective
date of
the Merger. Any stockholder entitled to appraisal rights may, on or before
20
days after the date of mailing of the notice of corporate action taken
without a
meeting and notice of availability of appraisal rights, demand in writing
from
Xcorporeal an appraisal of his, her or its shares of Xcorporeal common
stock.
Such demand will be sufficient if it reasonably informs Xcorporeal of the
identity of the stockholder and that the stockholder intends to demand
an
appraisal of the stockholder’s shares. Failure to make such a demand on or
before the expiration of such 20-day period will foreclose a stockholder’s
rights to appraisal. If the notice of corporate action taken without a
meeting
did not notify the stockholders of the effective date of the Merger, either
(i)
Xcorporeal must send a second notice before the effective date of the Merger
notifying each stockholder entitled to appraisal rights of the effective
date of
the Merger or (ii) Xcorporeal will send such second notice to each stockholder
entitled to appraisal rights on or within ten days after the effective
date of
the Merger, provided, however, that if such second notice is sent more
than
twenty days following the sending of the first notice, such second notice
need
only be sent to those stockholders entitled to appraisal rights and who
have
demanded appraisal rights of their shares in accordance with Section
262(d).
All
written demands for appraisal should be addressed to: Winson Tang, Xcorporeal,
Inc., 11150 Santa Monica Boulevard, Suite 340, Los Angeles, CA 90025. Only
the
holder of record of shares of Xcorporeal common stock is entitled to seek
appraisal of the fair value of the shares registered in the holder’s name. The
demand for appraisal must be executed by or for the holder of record, fully
and
correctly, as such holder’s name appears on the holder’s stock certificates. If
the stock is owned of record in a fiduciary capacity, such as by a trustee,
guardian or custodian, the demand should be made in that capacity, and
if the
stock is owned of record by more than one person, as in a joint tenancy
or
tenancy in common, the demand should be made by or for all owners of record.
An
authorized agent, including one or more joint owners, may execute the demand
for
appraisal for a holder of record; however, such agent must identify the
record
owner or owners and expressly disclose in such demand that the agent is acting
as agent for the record owner or owners.
A
record
holder, such as a broker who holds shares of Xcorporeal common stock as nominee
for beneficial owners, some of whom desire to demand appraisal, must exercise
appraisal rights on behalf of such beneficial owners with respect to the
stock
held for such beneficial owners. In such case, the written demand for appraisal
should set forth the number of shares covered by the demand. Unless a demand
for
appraisal specifies a number of shares, such demand will be presumed to cover
all shares held in the name of such record owner.
38
If
the
merger is completed, Xcorporeal, will, within 10 days after the effective
time
of the merger, give written notice of the effective time to each holder
of
Xcorporeal common stock who has satisfied the requirements of Section 262
of the
Delaware General Corporation Law. A person who elects to exercise appraisal
rights under Section 262 is called a “dissenting stockholder.” Within 120 days
after the effective time, Xcorporeal or any dissenting stockholder may
file a
petition in the court demanding a determination of the fair value of the
shares
of Xcorporeal common stock of all dissenting stockholders. Any dissenting
stockholder desiring the filing of such petition is advised to file such
petition on a timely basis, unless the dissenting stockholder receives
notice
that Xcorporeal or another dissenting stockholder has filed such a
petition.
If
a
petition for appraisal is timely filed, the court will determine which
stockholders are entitled to appraisal rights and thereafter will determine
the
fair value of the shares of Xcorporeal common stock held by dissenting
stockholders, exclusive of any element of value arising from the accomplishment
or expectation of the merger, but together with a fair rate of interest,
if any,
to be paid on the amount determined to be fair value. In determining such
fair
value, the court will take into account all relevant factors. The court may
determine such fair value to be more than, less than or equal to the
consideration that such dissenting stockholder would otherwise be entitled
to
receive pursuant to the merger agreement. If a petition for appraisal is
not
timely filed, then the right to an appraisal terminates.
The
costs
of the appraisal proceeding will be determined by the court and taxed against
the parties as the court determines to be equitable under the circumstances.
Upon the application of any dissenting stockholder, the court may determine
the
amount of interest, if any, to be paid upon the value of the stock of dissenting
stockholders entitled thereto. Upon application of a dissenting stockholder,
the
court may order all or a portion of the expenses incurred by any dissenting
stockholder in connection with the appraisal proceeding, including, without
limitation, reasonable attorneys’ fees and the fees and expenses of experts, to
be charged pro rata against the value of all shares entitled to
appraisal.
After
the
effective time of the merger, no dissenting stockholder will have any rights
of
an Xcorporeal stockholder with respect to such holder’s shares for any purpose,
except to receive payment to which Xcorporeal stockholders of record as
of a
date prior to the effective time are entitled, if any. If a dissenting
stockholder delivers to Xcorporeal a written withdrawal of the demand for
an
appraisal within 60 days after the effective time of the merger or thereafter
with the written approval of Xcorporeal, or if no petition for appraisal
is
filed within 120 days after the effective time, then the right of such
dissenting stockholder to an appraisal will cease and such dissenting
stockholder will be entitled to receive only the shares of common stock
of CTHE
as provided in the merger agreement.
The
foregoing is only a summary of Section 262 of the Delaware General Corporation
Law and is qualified in its entirety by reference to the full text of Section
262, which is included in Annex B.
Charter
Amendments
Upon
the
effectiveness of the merger, Xcorporeal will amend its certificate of
incorporation to change its name to Xcorporeal Operations, Inc.
Immediately
prior to the effectiveness of the merger, CTHE will amend its certificate
of
incorporation to effect a stock split whereby every 8.27 shares of CTHE common
stock will be automatically converted to one share of CTHE common
stock.
Upon
the
effectiveness of the merger, CTHE will amend and restate its certificate
of
incorporation to read substantially the same as the certificate of incorporation
of Xcorporeal immediately prior to the merger. The amendment to CTHE’s
certificate of incorporation shall also include changing CTHE’s name to
“Xcorporeal, Inc.” Upon the effectiveness of the merger, the bylaws of CTHE will
also be amended and restated to read substantially the same as the bylaws
of
Xcorporeal immediately prior to the merger. The Amended and Restated Certificate
of Incorporation is attached to this Information Statement as Annex
D.
Stock
Options and Warrants
Upon
the
effectiveness of the merger, options and warrants to purchase common stock
of
Xcorporeal shall automatically be converted into options and warrants to
purchase common stock of CTHE, on the same terms and conditions to which
they
were subject immediately prior to the merger under the 2007 Incentive
Compensation Plan. All outstanding warrants and options of CTHE will be
cancelled upon effectiveness of the merger.
39
Officers
and Directors
The
officers and directors of CTHE shall resign as of the effectiveness of
the
merger, and the officers and directors of Xcorporeal shall become the officers
and directors of CTHE. Specifically, Terren S. Peizer, Marc G. Cummings,
Daniel
S. Goldberger, Victor Gura, M.D., Herve de Kergrohen, M.D., Kelly J. McCrann,
and Jay Wolf will become the directors of CTHE upon the effectiveness of
the
merger.
Deregistration
of Xcorporeal Common Stock
If
the
merger is completed, Xcorporeal will undertake to have its common stock
deregistered under the Securities Exchange Act of 1934, as amended.
Federal
Securities Laws Consequences
The
shares of CTHE common stock to be issued to Xcorporeal stockholders in the
merger will not be registered under the Securities Act of 1933, as amended,
or
the Securities Act. These shares (which do not include any shares that may
be
issued upon exercise of the Xcorporeal warrants or options to be assumed
by CTHE
following the effective time of the merger) will be restricted just as the
shares of Xcorporeal were restricted immediately prior to the merger.
Stockholders may not sell their CTHE common stock acquired in the merger,
except
pursuant to:
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an
effective registration statement under the Securities Act covering
the
resale of those shares;
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an
exemption under Rule 145 under the Securities Act (or Rule 144
under the
Securities Act, if these persons are or become affiliates of
Xcorporeal);
or
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any
other applicable exemption under the Securities
Act.
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THE
MERGER AGREEMENT
This
section is a summary of the material terms and provisions of the merger
agreement, a copy of which is incorporated by reference and attached as Annex
A
to this information statement. The following description is not intended
to be a
complete description of all the terms of the merger agreement. You should
refer
to the full text of the merger agreement for details of the merger and the
terms
and conditions of the merger agreement. Xcorporeal and CTHE encourage you
to
carefully read the complete merger agreement for the precise legal terms
of the
merger agreement and other information that may be important to you.
The
Merger
The
merger agreement provides that upon the closing, XC Acquisition Corporation,
will be merged with and into Xcorporeal, with Xcorporeal as the surviving
corporation. As a result of the merger, Xcorporeal will become a wholly-owned
subsidiary of CTHE. The merger will become effective on the date of filing
of a
certificate of merger with the Secretary of State of the State of Delaware,
which the parties have agreed to file as soon as practicable after the
closing.
This is referred to as the “effective time” of the merger. Following the merger,
the certificate of incorporation and bylaws of the Xcorporeal will become
the
certificate of incorporation and bylaws of the merger subsidiary and CTHE,
and
the directors and officers of the Xcorporeal will become the directors
and
officers of the merger subsidiary and CTHE. CTHE will also change its name
to
“Xcorporeal, Inc.,” and Xcorporeal will change its name to “Xcorporeal
Operations, Inc.”
The
Exchange Ratio and Treatment of Securities
Immediately
prior to the effective time of the merger, CTHE shall effect a reverse
stock
split, whereby every 8.27 shares of its common stock shall be automatically
converted into one share of CTHE common stock.
At
the
effective time of the merger:
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each
share of Xcorporeal common stock issued and outstanding immediately
prior
to the effective time, other than dissenting shares, shares of
Xcorporeal
common stock held in the treasury of Xcorporeal or that are owned
by
Xcorporeal, or any of their respective wholly-owned subsidiaries
(other
than those held in a fiduciary capacity for the benefit of third
parties),
will cease to be outstanding and will be converted into one share
of CTHE
common stock;
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each
outstanding option to purchase Xcorporeal common stock issued
and
outstanding immediately prior to the effective time will be converted
into
an option to purchase CTHE common stock on the same terms and
conditions
as were applicable under the option to purchase Xcorporeal common
stock
before the merger; and
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each
outstanding warrant to purchase Xcorporeal common stock issued
and
outstanding immediately prior to the effective time will be converted
into
a warrant to purchase CTHE common stock on the same terms and
conditions
as were applicable under the warrant to purchase Xcorporeal common
stock
before the merger.
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No
Exchange of Certificates
Neither
Xcorporeal nor CTHE will be exchanging new stock certificates in connection
with
the merger.
HOLDERS
OF XCORPOREAL COMMON STOCK SHOULD NOT SEND IN THEIR
CERTIFICATES.
Because
CTHE will be issuing one share of its common stock for each share of Xcorporeal
common stock held of record, CTHE will not have to issue any fractional shares
in the merger. Accordingly, there will be no need to pay cash in lieu of
fractional shares.
Following
the merger, ComputerShare will continue to act as the transfer agent for
the
combined company.
Transfer
of Shares
The
stock
transfer books of Xcorporeal will be closed immediately upon the effective
time
and no transfers of shares of Xcorporeal common stock will be made or recorded
on the stock transfer books after the effective time of the merger.
Representations
and Warranties of Xcorporeal and CTHE
The
merger agreement contains customary representations and warranties on behalf
of
Xcorporeal, the merger subsidiary and CTHE relating to, among other things:
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corporate
organization and
qualification;
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capitalization;
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corporate
power and authority;
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absence
of conflicts and required filings and
consents;
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SEC
filings and reports;
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financial
statements;
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absence
of material adverse changes;
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litigation
and liabilities;
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compliance
with laws;
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brokers;
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taxes;
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securities
trading markets;
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with
respect to CTHE, that it meets the registrant requirements to
be eligible
to file a registration statement on Form
S-3;
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absence
of stockholder claims;
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banking
relationships;
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guarantees
and powers of attorney;
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books
and records; and
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contracts.
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The
representations and warranties in the merger agreement are complicated
and not
easily summarized. You should carefully read the sections of the merger
agreement entitled “Company’s Representations and Warranties” and “CTHE’s
Representations and Warranties.”
Directors
and Officers
The
officers and directors of CTHE will resign as of the effectiveness of the
merger
agreement. The officers and directors of Xcorporeal will become the officers
and
directors of CTHE.
Fees
and Expenses
All
expenses incurred in connection with the merger agreement will be paid
by the
party incurring such expenses, provided, that Xcorporeal shall pay for
up to
$25,000 of the reasonable, necessary and customary out-of-pocket costs
and
expenses (including legal fees) of CTHE incurred in connection with the
merger
agreement and the transactions.
Conditions
to the Consummation of the Merger
The
obligation of CTHE to effect the merger is subject to the satisfaction
at or
prior to the effective time of the following conditions, any or all of
which may
be waived, in whole or in part, to the extent permitted by applicable law:
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Xcorporeal’s
representations and warranties contained in the merger agreement
will be
true and correct as of the closing date, except to the extent
such
representations and warranties are qualified by materiality or
absence of
adverse changes, and CTHE shall have received a duly executed
certificate
from an officer of Xcorporeal to that
effect.
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Xcorporeal
shall have performed and complied in all material respects with
the
covenants, agreements and obligations contained in the merger
agreement.
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No
governmental entity or court shall have enacted any judgment,
order,
decree or injunction that prohibits the consummation of the merger
or the
consummation of the transactions contemplated
thereby.
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Xcorporeal
shall not have taken any action or entered into any transaction
outside
the ordinary course of business which results in a material adverse
effect
on it or its business.
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The
merger shall have been approved by the requisite number of Xcorporeal
stockholders.
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The
obligation of Xcorporeal to effect the merger is subject to the satisfaction
at
or prior to the effective time of the following conditions, any or all
of which
may be waived, in whole or in part, to the extent permitted by applicable
law:
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CTHE’s
representations and warranties contained in the merger agreement
will be
true and correct as of the closing date, except to the extent
such
representations and warranties are qualified by materiality or
absence of
adverse changes, and Xcorporeal shall have received a duly executed
certificate from an officer of CTHE to that
effect.
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CTHE
shall have performed, and complied in all material respects with,
the
covenants, agreements and obligations contained in the merger
agreement.
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No
governmental entity or court shall have enacted any judgment,
order,
decree or injunction that prohibits the consummation of the merger
or the
consummation of the transactions contemplated
thereby.
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CTHE
shall not have taken any action or entered into any transaction
outside
the ordinary course of business which results in a material adverse
effect
on it or its business.
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The
merger shall have been approved by the requisite number of CTHE
stockholders.
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CTHE
shall have delivered to Xcorporeal the resignations, effective
as of the
closing, of each officer and director of acquisition subsidiary
and
CTHE.
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Covenants
The
parties are subject to customary pre-closing covenants, including covenants
to:
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prepare,
execute and deliver all documents, and take all actions necessary
to
consummate the merger;
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give
all necessary third-party
notices;
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make
all necessary state and federal
filings;
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cooperate
with the other party as necessary in the furtherance of completing
the
merger;
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provide
reasonable access to the business, personnel and properties of
the
respective companies; and
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provide
notice to the other parties of any material adverse
developments.
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In
addition, as part of the merger agreement, certain CTHE stockholders who
currently hold restricted stock were granted “piggyback” registration rights
substantially similar to those granted to approximately fifty institutional
and
accredited investors who purchased shares of Xcorporeal’s common stock in
November 2006. As a result, these stockholders will have the right to add
their
shares to any registration statement filed by Xcorporeal under the Securities
Act. Piggyback registration rights may be exercised for no more than 29%
of the
total number of shares of Xcorporeal outstanding as of the filing date
of any
registration statement for which such rights are exercised.
Termination
The
merger agreement may be terminated at any time prior to completion of the
merger
by:
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Xcorporeal
and CTHE by mutual written
consent.
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Xcorporeal:
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in
the event of an uncured breach of the merger agreement by
CTHE;
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if
Xcorporeal is not reasonably satisfied with the results of its
due
diligence regarding CTHE;
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if
Xcorporeal’s shares become quoted on the OTC Bulletin
Board;
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if
the closing of the merger has not occurred by the close of business
on
Friday, August 31, 2007; or
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if
the board of directors or special committee of Xcorporeal determines
in
good faith that the failure to terminate the merger agreement
would
constitute a breach of the fiduciary duties of Xcorporeal’s
directors.
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CTHE:
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in
the event of an uncured breach of the merger agreement by
Xcorporeal;
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if
CTHE is not reasonably satisfied with the results of its due
diligence;
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if
the closing of the merger shall not have occurred on or prior
to August
31, 2007; or
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if
the board of directors or special committee of CTHE determines
in good
faith that failure to terminate the merger agreement would constitute
a
breach of the fiduciary duties of CTHE’s directors or members of the
special committee.
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Either
Xcorporeal or CTHE may terminate the merger agreement in the
event that a
governmental entity has issued a final non-appealable order restraining,
enjoining or otherwise prohibiting the transactions contemplated
in the
merger agreement.
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In
addition, Xcorporeal may terminate the merger agreement and rescind
the
merger upon written notice to CTHE and the merger subsidiary
within 10
days after the closing of the merger if the shares of CTHE common
stock do
not continue to be quoted on the OTC Bulletin Board immediately
following
the merger.
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If
the
agreement is terminated in accordance with the above provisions, the parties
will have no further obligation of any kind; provided, that, if the merger
agreement is terminated because Xcorporeal’s common stock becomes listed on the
OTC Bulletin Board, Xcorporeal shall pay to CTHE an amount equal to its
reasonable out-of-pocket costs and expenses related to the merger.
Related
Agreements
• As
a
condition to the merger agreement, CTHE has entered into an Indemnity Agreement
with Steven B. Solomon, pursuant to which Mr. Solomon represents and warrants
that to the best of his knowledge CTHE and merger subsidiary’s representations
and warranties contained in the merger agreement are true, complete and
correct
in all material respects. In addition, Mr. Solomon indemnifies and holds
Xcorporeal harmless from any and all claims arising out of or relating
to the
manner in which CTHE reported certain distributions, previously made to
shareholders of CTHE in its tax filings, including without limitation any
claims brought by CTHE shareholders in connection with the
foregoing.
2007
INCENTIVE COMPENSATION PLAN
Under
the
merger agreement, all options and warrants to purchase common stock granted
under Xcorporeal’s 2006 Incentive Compensation Plan will be assumed by CTHE
under a newly adopted, substantially identical 2007 Incentive Compensation
Plan
of CTHE. Any outstanding options and warrants of CTHE outstanding prior
to the
merger will be cancelled. The 2007 Plan was approved by CTHE’s shareholders at
the same time and in the same manner that the merger agreement was approved.
All
future grants of stock options by Xcorporeal after consummation of the
merger
will be under the 2007 Plan.
A
description of the 2007 Incentive Compensation Plan is set forth
below.
There
will be 3,900,000 shares of common stock authorized for issuance under
the plan.
Options to purchase 3,460,000 shares of common stock have already been
granted
under Xcorporeal’s 2006 Plan and will be assumed under the 2007
Plan.
The
purpose of the plan is to attract and retain the services of key management,
employees, outside directors and consultants, and to align long-term
pay-for-performance incentive compensation with shareholders’ interests. An
equity compensation plan aligns employees’ interests with those of our
shareholders, because an increase in stock price after the date of award
results
in increased value, thus rewarding employees for improved stock price
performance. Stock option grants under the plan may be intended to qualify
as
incentive stock options under Section 422 of the Tax Code, may be non-qualified
stock options governed by Section 83 of the Tax Code, restricted stock
units, or
other forms of equity compensation. Subject to earlier termination by our
board
of directors, the plan will remain in effect until all awards have been
satisfied or terminated under the terms of the plan.
We
believe that a broad-based incentive compensation plan is a valuable employee
incentive and retention tool that benefits all of our shareholders, and
that the
plan is necessary in order to provide appropriate incentives for achievement
of
company performance objectives and to continue to attract and retain the
most
qualified employees, directors and consultants in light of our ongoing
growth
and expansion. Without sufficient equity incentives available for grant,
we may
be forced to consider cash replacement alternatives to provide a
market-competitive total compensation package necessary to attract, retain
and
motivate the employee talent important to the future success of the company.
These cash replacement alternatives would then reduce the cash available
for
operations.
While
we
believe that employee equity ownership is a significant contributing factor
in
achieving superior corporate performance, we recognize that increasing
the
number of available shares under our option plans may lead to an increase
in our
stock overhang and potential dilution. We believe that our 2007 Incentive
Compensation Plan will be integral to our ability to achieve superior
performance by attracting, retaining and motivating the employee talent
important to attaining long-term improved company performance and shareholder
returns.
Overview
The
terms
of the plan provide for grants of stock options, stock appreciation rights,
restricted stock, deferred stock, bonus stock, dividend equivalents, other
stock-related awards and performance awards that may be settled in cash,
stock
or other property.
44
Shares
Available for Awards
The
total
number of shares of our common stock that will be subject to awards under
the
plan is equal to 440,000 shares, plus the number of shares with respect
to which
awards previously granted under the plan terminate without being exercised,
and
the number of shares that are surrendered in payment of any awards or any
tax
withholding requirements. Awards that are granted to replace awards assumed
pursuant to the acquisition of a business are not subject to this
limit.
Limitations
on Awards
No
more
than 2,000,000 shares of stock may be granted to an individual during any
fiscal
year under the plan. The maximum amount that may be earned by any one
participant for any fiscal year is $10,000,000 and the maximum amount that
may
be earned by any one participant for a performance period is
$10,000,000.
Eligibility
Our
employees, officers, directors and consultants are eligible for awards
under the
plan. However, incentive stock options may be granted only to our
employees.
Plan
Administrator
Our
board
of directors administers the plan, and has delegated authority to make
grants
under the plan to the compensation committee, whose members are “non-employee
directors” as defined by Rule 16b-3 of the Exchange Act, “outside directors” for
purposes of Section 162(m), and “independent” as defined by the rules and
regulations promulgated by the NASD and SEC, The board and committee, referred
to collectively as the administrator, determine the type, number, terms
and
conditions of awards granted under the plan.
Stock
Options and Stock Appreciation Rights
The
administrator may grant stock options, both incentive stock options, or
ISOs,
and non-qualified stock options, or NS0s. In addition, the administrator
may
grant stock appreciation rights, or SARs, which entitle the participant
to
receive the appreciation in our common stock between the grant date and
the
exercise date. These may include “limited” SARs exercisable for a period of time
after a change in control or other event. The exercise price per share
and the
grant price are determined by the administrator, but must not be less than
the
fair market value of a share of our common stock on the grant date. The
terms
and conditions of options and SARs generally are fixed by the administrator,
except that no stock option or SAR may have a term exceeding ten years.
Stock
options may be exercised by payment of the exercise price in cash, shares
that
have been held for at least six months, outstanding awards or other property
having a fair market value equal to the exercise price.
Restricted
and Deferred Stock
The
administrator may grant restricted stock, which is a grant of shares of
our
common stock that may not be sold or disposed of, and may be forfeited
if the
recipient’s service ends before the restricted period. Restricted stockholders
generally have all of the rights of a shareholder.
The
administrator may grant deferred stock, which confers the right to receive
shares of our common stock at the end of a specified deferral period, that
may
be forfeited if the recipient’s service ends before the restricted period. Prior
to settlement, an award of deferred stock generally carries no rights associated
with share ownership.
Dividend
Equivalents
The
administrator may grant dividend equivalents conferring the right to receive
awards equal in value to dividends paid on a specific number of shares
of our
common stock. These may be granted alone or in connection with another
award,
subject to terms and conditions specified by the
administrator.
Bonus
Stock and Awards
The
administrator may grant shares of our common stock free of restrictions
as a
bonus or in lieu of other obligations, subject to such terms as the
administrator may specify.
45
Other
Stock-Based Awards
The
administrator may grant awards under the plan that are based on or related
to
shares of our common stock. These might include convertible or exchangeable
debt
securities, rights convertible into common stock, purchase rights, payment
contingent upon our performance or other factors. The administrator determines
the terms and conditions of such awards.
Performance
Awards
The
right
to exercise or receive a grant or settlement of an award may be subject
to
performance goals and subjective individual goals specified by the
administrator. In addition, performance awards may be granted upon achievement
of pre¬established performance goals and subjective individual goals during a
fiscal year. Performance awards to our chief executive officer and four
highest
compensated officers, or covered employees, should qualify as deductible
performance based compensation under Internal Revenue Code section 162(m).
The
administrator will determine the grant amount, terms and conditions for
performance awards.
One
or
more of the following business criteria will be used by our Compensation
Committee in establishing performance goals for performance awards and
annual
incentive awards to covered employees: (1) total shareholder return; (2)
such
total shareholder return as compared to total return (on a comparable basis)
of
a publicly available index such as, but not limited to, the Russell 2000
Small
Cap Index and Russell Healthcare Index; (3) net income; (4) pretax earnings;
(5)
pretax operating earnings after interest expense and before bonuses, service
fees, and extraordinary or special items; (6) earnings per share; (7) operating
earnings; and (8) ratio of debt to shareholders’ equity.
After
the
end of each performance period, the administrator (which will be the
Compensation Committee for awards intended to qualify as performance based
for
purposes of section I62(m)) will determine the amount of any pools, the
maximum
amount of potential performance awards payable to each participant, and
the
amount of any other potential performance awards payable to participants
in the
plan.
Acceleration
of Vesting; Change in Control
The
administrator may accelerate vesting or other restrictions of any award,
including if we undergo a change in control as defined in the plan. In
addition,
performance goals relating to any performance-based award may be deemed
met upon
a change in control. Stock options and limited stock appreciation rights
may be
cashed out based on a defined “change in control price.”
In
the
event of a “corporate transaction” (as defined in the plan), the acquiror may
assume or substitute for each outstanding stock option.
Amendment
and Termination
Our
board
of directors may amend, alter, suspend, discontinue or terminate the plan
or the
administrator’s authority to grant awards without further shareholder approval,
except shareholder approval must be obtained for any amendment or alteration
required by law, regulation or applicable exchange rules. Unless earlier
terminated by our board of directors, the plan will terminate ten years
after
its adoption, or when no shares of our common stock remain available for
issuance under the plan and we have no further rights or obligations with
respect to outstanding awards under the plan. Amendments to any award that
have
a material adverse effect on a participant require their
consent.
Federal
Income Tax Consequences
The
information set forth above is a summary only and does not purport to be
complete. In addition, the information is based upon current Federal income
tax
rules and therefore is subject to change when those rules change. Moreover,
because the tax consequences to any recipient may depend on his or her
particular situation, each recipient should consult their tax adviser as
to the
Federal, state, local and other tax consequences of the grant or exercise
of an
award or the disposition of stock acquired as a result of an award. The
plan is
not qualified under the provisions of section 401(a) of the Internal Revenue
Code and is not subject to any of the provisions of the Employee Retirement
Income Security Act of 1974 (ERISA).
Non
qualified Stock Options
Generally,
there is no taxation upon the grant of a nonqualified stock option. On
exercise,
an optionee will recognize ordinary income equal to the excess, if any,
of the
fair market value on the date of exercise of the stock over the exercise
price.
If the optionee is our employee or an employee of an affiliate, that income
will
be subject to withholding tax. The optionee’s tax basis in those shares will be
equal to their fair market value on the date of exercise of the option,
and his
capital gain holding period for those shares will begin on that
date.
46
Subject
to the requirement of reasonableness, the provisions of Section 162(m)
and the
satisfaction of a tax reporting obligation, we will generally be entitled
to a
tax deduction equal to the taxable ordinary income realized by the
optionee.
Incentive
Stock Options
The
plan
provides for the grant of options that qualify as incentive stock options,
or
ISOs, as defined in Internal Revenue Code section 422. An optionee generally
is
not subject to ordinary income tax upon the grant or exercise of an ISO.
If the
optionee holds a share received on exercise of an ISO for a required holding
period of at least two years from the date the option was granted and at
least
one year from the date the option was exercised, the difference between
the
amount realized on disposition and the holder’s tax basis will be long-term
capital gain.
If
an
optionee disposes of a share acquired on exercise of an ISO before the
end of
the required holding period, the optionee generally will recognize ordinary
income equal to the excess of the fair market value of the share on the
date the
ISO was exercised over the exercise price. If the sales proceeds are less
than
the fair market value, the amount of ordinary income recognized will not
exceed
the gain realized on the sale. If the amount realized on a disqualifying
disposition exceeds the fair market value of the share, the excess will
be
short-term or long-term capital gain, depending on whether the holding
period
for the share exceeds one year.
For
purposes of the alternative minimum tax, or AMT, the amount by which the
fair
market value of a share of stock acquired on exercise of an ISO exceeds
the
exercise price generally will be an adjustment included in the optionee’s AMT
income. If there is a disqualifying disposition of the share in the year
in
which the option is exercised, there will be no adjustment for AMT purposes
with
respect to that share. If there is a disqualifying disposition in a later
year,
no income is included in the optionee’s AMT income for that year. The tax basis
of a share acquired on exercise of an ISO is increased by the amount of
the
adjustment taken into account with respect to that share for AMT
purposes.
We
are
not allowed an income tax deduction with respect to the grant or exercise
of an
ISO or the disposition of a share acquired on exercise of an ISO after
the
required. holding period. If there is a disqualifying disposition of a
share, we
are allowed a deduction in an amount equal to the ordinary income includible
in
income by the optionee, provided that amount constitutes an ordinary and
necessary business expense for us and is reasonable in amount, and either
the
employee includes that amount in income or we timely satisfy our reporting
requirements.
Stock
Awards
Generally,
the recipient of a stock award will recognize ordinary compensation income
at
the time the stock is received, equal to the excess of the fair market
value
over any amount paid for the stock. If the stock is not vested when received
(for example, if the employee is required to work for a period of time
in order
to have the right to sell the stock), the recipient generally will not
recognize
income until the stock becomes vested, at which time the recipient will
recognize ordinary compensation income equal to the excess of the fair
market
value of the stock over any amount paid for the stock. A recipient may
file an
election with the Internal Revenue Service within 30 days of receipt of
the
stock, to recognize ordinary compensation income as of the date the recipient
receives the award, equal to the excess of the fair market value over any
amount
paid for the stock.
The
recipient’s basis for the determination of gain or loss upon the subsequent
disposition of shares acquired as stock awards will be the amount paid
for the
shares plus any ordinary income recognized when the stock is received or
becomes
vested.
Subject
to the requirement of reasonableness, the provisions of Section 162(m)
and the
satisfaction of a tax reporting obligation, we will generally be entitled
to a
tax deduction equal to the taxable ordinary income realized by the recipient
of
the stock award.
Stock
Appreciation Rights
The
administrator may grant stock appreciation rights, or SARs, separate or
stand-alone of any other awards, or in tandem with options.
47
With
respect to stand-alone SARs, if the recipient receives the appreciation
inherent
in the SARs in cash, it will be taxable as ordinary compensation income
when
received. If the recipient receives the appreciation in shares of stock,
the
recipient will recognize ordinary compensation income equal to the excess
of the
fair market value of the stock on the day it is received over any amounts
paid
for the stock.
With
respect to tandem stock appreciation rights, if the recipient elects to
surrender the underlying option in exchange for cash or shares of stock
equal to
the appreciation inherent in the underlying option, the tax consequences
to the
recipient will be the same as discussed above. If the recipient elects
to
exercise the underlying option, the holder will be taxed at the time of
exercise
as if he or she had exercised a nonqualified stock option.
Subject
to the requirement of reasonableness, the provisions of Section 162(m)
and the
satisfaction of our tax reporting obligation, we will generally be entitled
to a
tax deduction equal to the taxable ordinary income realized by the recipient
of
the SAR.
Dividend
Equivalents
Generally,
the recipient of a dividend equivalent award will recognize ordinary
compensation income equal to the fair market value of the award when it
is
received. Subject to the requirement of reasonableness, the provisions
of
Section 162(m) and the satisfaction of our tax reporting obligation, we
will
generally be entitled to a tax deduction equal to the taxable ordinal),
income
realized by the recipient of the dividend equivalent.
Section
162 Limitations
Internal
Revenue Code Section 162(m) denies a deduction to any publicly held corporation
for compensation paid to our chief executive officer and four highest
compensated officers, to the extent that compensation exceeds $1 million.
It is
possible that compensation attributable to stock awards, when combined
with all
other types of compensation received by a covered employee may cause this
limitation to be exceeded in any particular year.
Certain
kinds of compensation, including qualified performance based compensation,
are
disregarded for purposes of the Section 162(m) deduction limitation.
Compensation attributable to some stock awards will qualify as performance-based
compensation if granted by a committee of the board of directors comprised
solely of “outside directors” only upon the achievement of an objective
performance goal established in writing by the committee while the outcome
is
substantially uncertain, and the material terms of the plan under which
the
award is granted is approved by stockholders.
A
stock
option or stock appreciation right may be considered performance based
compensation if the plan contains a per-employee limitation on the number
of
shares for which stock options and stock appreciation rights may be granted
during a specified period, the material terms of the plan are approved
by the
stockholders, and the exercise price of the option or right is no less
than the
fair market value of the stock on the date of grant.
INFORMATION
ABOUT XCORPOREAL
For
purposes of this section entitled “Information About Xcorporeal” only, all
references to “we,” “us,” or “our” refers to Xcorporeal prior to the
effectiveness of the merger.
Business
of Xcorporeal
Overview
We
are a
medical device company actively researching and developing an extra-corporeal
platform to perform functions of various human organs. Our prototype systems
apply modern electronics and engineering principals to reduce the size,
cost and
power requirements of conventional extracorporeal therapies including
ultrafiltration therapy for fluid overloading resulting from congestive
heart
failure and acute and chronic renal replacement therapies (kidney dialysis).
Our
platform may also improve the quality of therapy delivered ultimately leading
to
better patient outcomes and reduced healthcare costs. The products we plan
to
bring to market include:
|
·
|
Portable
kidney dialysis for use in the clinic, hospital, or at
home
|
|
·
|
Wearable
Artificial Kidney (WAK) for chronic treatment of End Stage Renal
Disease
(ESRD)
|
|
·
|
Portable
ultrafiltration for management of fluid overload in hospital
or clinic
settings
|
48
|
·
|
Wearable
Ultrafiltration Device (WUD) for chronic treatment of fluid
overload.
|
We
are a
development stage company, have been unprofitable since our inception, and
will
incur substantial additional operating losses for at least the next twelve
months as we continue to implement commercial operations and allocate
significant and increasing resources to research, development, clinical trials,
and other activities. Accordingly, our activities to date are not as broad
in
depth or scope as the activities we will undertake in the future, and our
historical operations and financial information are not indicative of our future
operating results, financial condition, or ability to operate profitably as
a
commercial enterprise.
Since
we
began implementing our current business model on August 31, 2006, we have
accomplished the following milestones:
|
·
|
Raised
over $29 million in equity financing in the fourth quarter of 2006
selling
shares of Xcorporeal common stock at $7.00 per
share.
|
|
·
|
Recruited
experienced independent board
members
|
|
·
|
Recruited
top industry management team and scientific
staff
|
|
·
|
Advanced
the clinical studies for our
technology
|
|
·
|
Paid
in excess of $1 million in licensed product development
expenses.
|
For
the
coming year we plan to test and develop the technology for our extra-corporeal
platform and other medical devices. In its simplest configuration, our product
platform can be used as an ultrafiltration
We
will
also plan our Validation and Verification strategy including bench testing,
clinical testing, and regulatory strategy in the U.S. and
abroad.
Some
of
our products may qualify for the 510(k) regulatory process in the U.S. based
on
the existence of predicate devices. Other products, for example our Wearable
Artificial Kidney and Wearable Ultrafiltration Device are likely to require
a
full PMA treatment which will be longer and more expensive.
Product
Applications
Our
Wearable Artificial Kidney (WAK) is a breakthrough technology for the chronic
treatment of End Stage Renal Disease (ESRD). We have successfully demonstrated
a
prototype system that weighs less than 6 kg., is battery operated, and can
be
worn by an ambulatory patient. Our miniature, wearable device will enable
continuous (24 x 7) renal replacement therapy on a chronic basis at home.
Continuous therapy has previously been shown to reduce mortality, reduce
morbidity, and improve quality of life in ESRD patients. Our WAK is the first
practical device to provide continuous, chronic therapy, because:
|
·
|
Reduced
size, weight, and power consumption allows us to deploy a wearable
package
so that the treatment does not interfere with normal activities
of daily
life.
|
|
·
|
Novel
vascular access makes the WAK safe and effective for home
use.
|
Packaged
differently, the same attributes (portability, size, weight, fluid and power
reduction) make the WAK a very attractive alternative to conventional Continuous
Renal Replacement Therapy (CRRT) machines for hospitalized patients. Our
miniature system can also be configured to treat fluid overload in Congestive
Heart Failure (CHF) patients.
Research
and Development
R&D
Team
We
acquired the exclusive license to our platform technology on September 1,
2006,
and have commenced planning and implementing our research and development
efforts. We have recruited an experienced scientific team to execute our
research and development plan. The goals of our research and development
efforts
will include:
|
·
|
Improving
the chemicals used in the dialysis process. The current chemicals
have
been used for decades. We believe new chemicals that last longer
and can
be used in smaller quantities would further reduce the cost and
weight of
our product.
|
49
|
·
|
Developing
software to allow physicians to customize the function of the device
to
meet the specific dialysis needs of each
patient.
|
|
·
|
Adapting
the extra-corporeal platform technology underlying our Wearable
Artificial
Kidney to other medical uses. We believe our technology is a platform
for
a number of other devices that can be used to treat other diseases
and
will offer substantive value propositions for patients and healthcare
providers.
|
|
·
|
Expanding
our recruiting and retaining an experienced team of scientists
and
engineers.
|
Clinical
Studies
The
feasibility of the WAK prototype was demonstrated in a porcine model during
2004
and 2005. The feasibility of the WAK prototype for treatment of fluid overload
in humans was demonstrated by the treatment of six volunteers in Vicenza,
Italy
in July and August 2006. We demonstrated the feasibility of the WAK prototype
for dialysis treatment in humans by the treatment of eight volunteers in
London
in March 2007. We are planning additional clinical trials over the next few
years, culminating in a pivotal study to support a regulatory
submission.
We
incurred approximately $1.5 million and $2.7 million in research and development
expenses for the three and six months ended June 30, 2007, respectively.
This
compares to $1.3 million incurred during the year ended December 31, 2006.
We expect our research and development expenses to increase as a result of
additional headcount in the areas of product development and quality assurance
and regulatory affairs, a higher level of third-party consulting activity
and
related expenses.
Third-party
Arrangements
In
July
2007, we entered into an agreement with Aubrey Group, Inc. an FDA-registered
third-party contract developer and manufacturer of medical devices for the
design and development of a Portable Artificial Kidney (PAK). The PAK will
be
designed for use as a Continuous Renal Replacement Therapy (CRRT) in either
a
hospital (with medical supervision) or home setting. The development is expected
to be completed by the end of 2008 and projected labor and material costs
are
estimated at approximately $5.1 million over the term. The agreement can
be
terminated at any time with 30 business days notice.
We
also
contract with other third parties to assist in our research and development
efforts and to supplement our internal resources while we continue to grow
our
organization.
Government
Regulation
US
Regulation
We
are
subject to extensive government regulation relating to the development and
marketing of our products. Due to the relatively early nature of our development
efforts, we have not yet confirmed with the FDA its view of the regulatory
status of any of our products or which center of the FDA might have primary
responsibility for review of the regulatory submissions we intend to make.
Depending on the claims made and the FDA’s ruling regarding the regulatory
status of each of our products, they may be designated as a device, a biologic
or as a combination product. However, we anticipate that regardless of
regulatory designation, we will need to conduct clinical studies involving
human
subjects before being able to market our products in the US.
To
support a regulatory submission, the FDA commonly requires clinical studies
to
show safety and effectiveness. While we cannot currently state the nature of
the
studies the FDA may require due to our early stage of product development,
it is
likely any product we attempt to develop will require time-consuming clinical
studies in order to secure approval.
Outside
the US, our ability to market potential products is contingent upon receiving
market application authorizations from the appropriate regulatory authorities.
These foreign regulatory approval processes may involve differing requirements
than those of the FDA, but also generally include many, if not all, of the
risks
associated with the FDA approval process described above, depending on the
country involved.
In
the
US, medical devices are classified into three different classes, Class I,
II and
III, on the basis of controls deemed reasonably necessary to ensure the safety
and effectiveness of the device. Class I devices are subject to general
controls, including labeling, pre-market notification and adherence to the
FDA’s
Good Manufacturing Practices (GMP), Class II devices are subject to general
and
special controls, including performance standards, post-market surveillance,
patient registries and FDA guidelines, and Class III devices are those which
must receive pre-market approval by the FDA to ensure their safety and
effectiveness, that is, life-sustaining, life-supporting and implantable
devices, or new devices, which have been found not to be substantially
equivalent to legally marketed devices. Because of their breakthrough nature,
some of our devices may be considered Class III.
50
Before
new medical devices such as our products can be marketed, marketing clearance
must be obtained through a pre-market notification under Section 510(k) of
the
Federal Food, Drug and Cosmetic (FDC) Act. Noncompliance with applicable
requirements can result in fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, refusal to
authorize the marketing of new products or to allow us to enter into supply
contracts and criminal prosecution. A 510(k) clearance will typically be
granted
by the FDA, if it can be established that the device is substantially equivalent
to a “predicate device,” which is a legally marketed Class I or II device or a
pre-amendment Class III device (that is, one that has been marketed since
a date
prior to May 28, 1976), for which the FDA has not called for pre-market approval
(PMA). The FDA has been requiring an increasingly rigorous demonstration
of
substantial equivalence, which may include a requirement to submit human
clinical trial data. It generally takes 4 to 12 months from the date of a
510(k)
submission to obtain clearance, but it may take longer.
If
clearance or approval is obtained, any device manufactured or distributed
by us
will be subject to pervasive and continuing regulation by the FDA. We will
be
subject to routine inspection by the FDA and will have to comply with the
host
of regulatory requirements that usually apply to medical devices marketed
in the
U.S. including labeling regulations, GMP requirements, Medical Device Reporting
(MDR) regulation which requires a manufacturer to report to the FDA certain
types of adverse events involving its products, and the FDA’s prohibitions
against promoting products for unapproved or “off-label”
uses.
European
Community
International
Organization for Standards (ISO) standards were developed by the European
Community (EC) as a tool for companies interested in increasing productivity,
decreasing cost and increasing quality. The EC uses ISO standards to provide
a
universal framework for quality assurance and to ensure the good quality
of
products and services across borders. The ISO standards (it is now ISO13485)
have facilitated trade throughout the EC, and businesses and governments
throughout the world are recognizing the benefit of the globally accepted
uniform standards. Any manufacturer we utilize for purposes of producing
our
products (including us, if we manufacture any of our own products) will be
required to obtain ISO certification to facilitate the highest quality products
and the easiest market entry in cross-border marketing. This will enable
us to
market our products in all of the member countries of the EC. We also will
be
required to comply with additional individual national requirements that
are
outside the scope of those required by the European Economic
Area.
Any
medical device that is legally marketed in the US may be exported anywhere
in
the world without prior FDA notification or approval. The export provisions
of
the FDC Act apply only to unapproved devices. While FDA does not place any
restrictions on the export of these devices, certain countries may require
written certification that a firm or its devices are in compliance with US
law.
In such instances FDA will accommodate US firms by providing a Certificate
for
Foreign Government. In cases where there are devices which the manufacturer
wishes to export during the interim period while their 510(k) submission is
under review, exporting may be allowed without prior FDA clearance under certain
limited conditions.
Competition
We
compete directly and indirectly with other biotechnology and healthcare
equipment businesses, including those in the dialysis industry. The major
competitors for the Xcorporeal platform technology are those companies
manufacturing and selling dialysis equipment and supplies. Xcorporeal will
compete with these companies in the critical care markets as well as the
wearable application markets. In many cases, these competitors are larger and
more firmly established than we are. In addition, our competitors have greater
marketing and development budgets and greater capital resources than our
company. The Wearable Artificial Kidney will also compete with dialysis clinics
in treating ESRD patients. We anticipate that some of our primary competitors
will be companies such as Baxter, Fresenius, Gambro, NxStage, and
Nephros.
License
Agreement
On
September 1, 2006, we entered into the License Agreement pursuant to which
we
obtained exclusive rights to our technology relating to the treatment of
kidney
failure and congestive heart failure, with no geographic restrictions, that
will
last for a period of ninety-nine years or until the expiration of its
proprietary rights in each item of intellectual property, if earlier. As
consideration for granting the license, we agreed to reimburse designated
costs
and expenses of our licensor, and pay a minimum royalty of 7% of net sales,
with
an annual minimum royalty of $250,000.
51
Patents
and Trademarks
We
have
exclusive license rights to two issued US patents, No. 20050101901 “Wearable
continuous renal replacement therapy device,” and No. 20040254514 “Wearable
ultrafiltration device” from the US Patent & Trademark Office. We also have
exclusive rights to a pending application specifically for the pump, the
most
critical part of all four devices, “Dual-Ventricle Pump Cartridge,” and another
proposed patent for “Method For Installing and Servicing a Wearable Continuous
Renal Replacement Therapy Device” which is aimed to prevent entry into the
wearable device market. We are actively developing our intellectual property,
and plan to continually expand our patent portfolio.
In
addition, we are actively developing additional intellectual property that
in
part supersedes the rights licensed under the License Agreement. We are filing
patent applications to protect and improve the inventions that are commercially
important for the development of our business and we plan to continually
expand
our patent portfolio.
We
have
pending applications to register our trademarks “Xcorporeal,” “Xcorporeal WUD”
and “Xcorporeal WAK.”
Employees
We
have
ten full-time employees, comprised of our Chief Operating Officer, Chief
Financial Officer, Chief Medical and Scientific Officer, Vice President of
Quality Assurance and Regulatory Affairs, and seven other personnel in research
and development and administration. During 2007, we plan to add additional
employees, particularly in the areas of product development, regulatory affairs,
and quality assurance. Our headcount is expected to exceed 15 employees by
the
end of the year. We also utilize, whenever appropriate, contract and part-time
professionals in order to conserve cash and resources. We believe that our
employee relations are good.
Business
Development
Formation
We
were
incorporated in the State of Nevada as Pacific Spirit Inc. on May 4, 2001
to
engage in the acquisition, exploration and development of natural resource
properties. On August 31, 2006, we changed our name to Xcorporeal,
Inc.
Contribution
and License Agreement
On
August
11, 2006, Consolidated National, LLC (CNL), whose sole managing member is
our
current chairman, entered into an Irrevocable Option Agreement with National
Quality Care, Inc. (NQCI) following extensive negotiations that commenced
in
late 2005. There was no pre-existing relationship between NQCI and CNL or
their
principals.
On
August
31, 2006, we entered into a Contribution Agreement with CNL, giving us the
right
to enter into a Merger Agreement and a License Agreement with NQCI. We issued
9,600,000 shares of common stock, a 96% voting interest in our company, to
CNL
in exchange for all of our right, title, and interest to the name “Xcorporeal”
and related trademark applications and domain names, and the right to enter
into
a License Agreement with NQCI. Prior to the August 31, 2006 transaction,
we were
a shell corporation.
On
September 1, 2006, we entered into a License Agreement with NQCI, pursuant
to
which we obtained the exclusive rights to the technology relating to our
congestive heart failure treatment, kidney failure treatment, and other medical
devices. As a result, we have become a developmental stage company focused
on
researching, developing, and commercializing technology and products related
to
the treatment of kidney failure and congestive heart failure.
On
December 1, 2006, we initiated arbitration proceedings against NQCI for its
breach of the License Agreement, which remains pending. On December 29, 2006,
NQCI served us with a written notice purporting to terminate the License
Agreement for unspecified alleged breaches. On January 2, 2006, we advised
NQCI
that we did not consent to termination of the License Agreement, that we
have
not breached the License Agreement, and that NQCI has no right to unilaterally
terminate the License Agreement in any event. Accordingly, the License Agreement
cannot be terminated.
52
Delaware
Reincorporation
We
were
incorporated in the State of Nevada as Pacific Spirit Inc. on May 4, 2001
to
engage in the acquisition, exploration and development of natural resource
properties. On August 31, 2006, we changed our name to Xcorporeal, Inc.,
and
thereafter acquired the rights to our congestive heart failure treatment
products, Wearable Artificial Kidney, and other medical devices. As a result,
we
have become a developmental stage company focused on researching, developing,
and commercializing technology and products related to the treatment of kidney
failure and congestive heart failure. On October 13, 2006, Xcorporeal, Inc.,
a
Nevada corporation (Xcorporeal Nevada), consummated a merger with and into
its
newly-formed, wholly-owned subsidiary, Xcorporeal Merger Corporation, a Delaware
corporation (Xcorporeal Delaware) for the purpose of
changing Xcorporeal’s domicile
from
Nevada to Delaware.
Terminated
Merger Agreement
On
September 1, 2006, we entered into a Merger Agreement with NQCI which
contemplated that we would acquire NQCI as a wholly owned subsidiary pursuant
to
a triangular merger, or we would issue to NQCI shares of our common stock
in
consideration of the assignment of the technology relating to our Wearable
Artificial Kidney and other medical devices.
The
merger was not consummated, and the Merger Agreement expired by its own terms
on
December 31, 2006. In addition, on December 29, 2006, NQCI served written
notice
that it was terminating the Merger Agreement, and on January 2, 2006, we
consented to the termination. Accordingly, the Merger Agreement is now
terminated. We will not be proceeding with any merger with NQCI. The termination
of the Merger Agreement had no effect on the License Agreement, the Contribution
Agreement, or the shares we issued to CNL.
Reports
to Security Holders
We
will
send an annual report including audited financial statements to all of our
stockholders of record. Anyone may obtain a copy of our annual report without
charge by writing us at: Investor Relations, Xcorporeal, Inc, 11150 Santa
Monica
Blvd., Suite 340, Los Angeles, California 90025.
We
file
reports with the Securities and Exchange Commission (SEC) in accordance with
the
Securities Exchange Act of 1934, as amended, including annual reports on
Form
10-KSB, quarterly reports on Form 10-QSB, current reports on Form 8-K, proxy
statements and other information.
The
public may read and copy any materials we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE, Washington, DC 20549. The public may
obtain
information on the operation of the Public Reference Room by calling the
SEC at
1-800-SEC-0330. We are an electronic filer, and the SEC maintains an Internet
site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC, which
can
be found at http://www.sec.gov.
Management’s
Discussion and Analysis
Results
of Operations for the years ended December 31, 2006 and
2005
We
have not generated any revenues since inception. We incurred a net loss of
$4,380,212 for the year ended December 31, 2006, compared to net loss of
$35,753 for the year ended December 31, 2005. The increase in net loss was
primarily due to professional fees and salaries, and payment of reimbursed
expenses under our License Agreement during the fourth quarter of 2006. At
December 31, 2006, we had working capital of $25,397,733, compared to
negative working capital of $(52,557) at the beginning of the year. At
December 31, 2006, our total assets were $27,535,543, which consisted
primarily of cash from the sale of our common stock. We had no assets at the
beginning of the year.
Off-Balance
Sheet Arrangements
As
of December 31, 2006, we had no off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our financial
condition, results of operations or cash flows.
53
Legal
Proceedings
From
time to time, we may be involved in litigation relating to claims arising out
of
our operations in the normal course of business. Except as described in
Item 3. Legal Proceedings, as of the date of this report we are not
currently involved in any legal proceeding that we believe would have a material
adverse effect on our business, financial condition or operating
results.
Critical
Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations
is
based upon our financial statements, which have been prepared in accordance
with
accounting principles generally accepted in the United States. Generally
accepted accounting principles require management to make estimates, judgments
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, and the disclosure of contingent assets and liabilities.
We base our estimates on experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form
the
basis for making judgments about the carrying values of assets and liabilities
that may not be readily apparent from other sources. Our actual results may
differ from those estimates.
We
consider our critical accounting policies to be those that involve significant
uncertainties, require judgments or estimates that are more difficult for
management to determine or that may produce materially different results when
using different assumptions. We consider the following accounting policies
to be
critical:
Identifiable
Intangibles
Certain
costs associated with obtaining and licensing patents and trademarks are
capitalized as incurred and are amortized on a straight-line basis over the
shorter of their estimated useful lives or their legal lives of 17 to
20 years. Amortization of such costs begins once the patent or trademark
has been issued. We evaluate the recoverability of our patent costs and
trademarks quarterly based on estimated undiscounted future cash
flows.
Stock-Based
Compensation
Effective
January 1, 2006, we adopted Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standards No.
(SFAS) No. 123-R , Share-Based
Payment.
SFAS
123-R requires employee stock options and rights to purchase shares under stock
participation plans to be accounted for under the fair value method and requires
the use of an option pricing model for estimating fair value. Accordingly,
share-based compensation is measured at grant date, based on the fair value
of
the award. At December 31, 2006, warrants to purchase our common stock were
issued to consultants, and options to purchase our common stock were granted
to
employees and directors.
The
fair value of all share purchase options and warrants granted to employees
are
expensed over their vesting period with a corresponding increase to Additional
Paid in Capital. Upon exercise of share purchase options and warrants, the
consideration paid by the option holder is recorded as an increase to share
capital.
We
use the Black-Scholes Option Valuation Model to calculate the fair value of
share purchase options and warrants at the date of grant. Pricing models require
the input of highly subjective assumptions, including the expected price
volatility. Changes in these assumptions can materially affect the fair value
estimate and, therefore, the existing models do not necessarily provide a
reliable measure of the fair value of our share purchase options and
warrants.
Recent
Accounting Pronouncements
In
July 2006, the FASB released FASB Interpretation No. (FIN) 48,
Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109.
FIN 48
clarifies the accounting and reporting for uncertainties in income tax law.
This
Interpretation prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of uncertain tax positions
taken or expected to be taken in income tax returns. This statement is effective
for fiscal years beginning after December 15, 2006. We are currently in the
process of evaluating the expected effect of FIN 48 on our results of operations
and financial position.
54
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements.
SFAS
157 establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. We are required to adopt the provision of SFAS
157, as applicable, beginning in fiscal year 2008. We are currently in the
process of evaluating the expected effect of SFAS 157 on our results of
operations and financial position.
In
February 2007, the FASB issued SFAS 159, “The
Fair Value Option for Financial Assets and Financial Liabilities — Including an
Amendment of FASB Statement No. 115, Accounting for Certain Investments in
Debt and Equity Securities”.
SFAS
159 permits an entity to choose to measure many financial instruments and
certain items at fair value. The objective of this standard is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reporting earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS 159 permits all entities to choose to measure eligible items
at
fair value at specified election dates. Entities will report unrealized gains
and losses on items for which the fair value option has been elected in earnings
at each subsequent reporting date. The fair value option: (a) may be
applied instrument by instrument, with a few exceptions, such as investments
accounted for by the equity method; (b) is irrevocable (unless a new
election date occurs); and (c) is applied only to entire instruments and
not to portions of instruments. SFAS No. 159 is effective as of the
beginning of an entity’s first fiscal year that begins after November 15,
2007, which for us would be our fiscal year beginning August 1, 2008. Early
adoption is permitted as of the beginning of the previous fiscal year provided
that the entity makes that choice in the first 120 days of that
fiscal
year and also elects to apply to provision of FASB Statement No. 157,
“Fair
Value Measurements.” We
are
currently evaluating the impact that the adoption of SFAS 159 will have on
our
financial statements.
In
December 2006, the FASB issued FSP 00-19-2, Accounting
for Registration Payment Arrangements,
which
addresses accounting for registration payment arrangements. FSP 00-19-2
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument
or
other agreement, should be separately recognized and measured in accordance
with
FASB Statement No. 5, “Accounting
for Contingencies.”
FSP
00-19-2 further clarifies that a financial instrument subject to a registration
payment arrangement should be accounted for in accordance with other applicable
generally accepted accounting principles without regard to the contingent
obligation to transfer consideration pursuant to the registration payment.
FSP
00-19-2 is effective immediately for registration payment arrangements and
the
financial instruments subject to those arrangements that are entered into or
modified subsequent to December 21, 2006. For registration payment
arrangement and related financial instruments entered into prior to
December 21, 2006, FSP 00-19-2 is effective for financial statements issued
for fiscal years beginning after December 15, 2006 and interim periods
within those financial years. Companies are required to report transition
through a cumulative- effect adjustment to the opening balance of retained
earnings as of the first interim period for the fiscal year in which FSP 00-19-2
is adopted. The adoption of FSP 00-19-2 during the fourth quarter of 2006 did
not have any affect on our financial position and results of operations.
In
September 2006, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. (SAB) 108 (Topic 1N), “Considering
the Effects of Prior Year Misstatement when Quantifying Misstatements in Current
Year Financial Statements.” SAB
No. 108 requires SEC registrants (i) to quantify misstatements using a
combined approach that considers both the balance-sheet and income-statement
approaches, (ii) to evaluate whether either approach results in quantifying
an error that is material in light of relevant quantitative and qualitative
factors, and (iii) to adjust their financial statements if the new combined
approach results in a conclusion that an error is material. SAB No. 108 is
effective for fiscal years ending after November 15, 2006. The adoption of
SAB No. 108 did not have any effect on our financial position and results
of operations.
Results
of Operations for the three and six months ended June 30,
2007
We
have
not generated any revenues since inception. We incurred net loss of $2.8
million
and $7.7 million for the three and six months ended June 30, 2007, compared
to a
net loss of $5,587 and $11,790 for the three and six months ended June 30,
2006,
respectively. The net loss for the three and six months ended June 30, 2007
was
primarily due to (i) research, development and other expenses related to
advancing our kidney and congestive heart failure treatment technologies,
(ii)
stock compensation expense related to options and warrants granted to directors,
officer, employees and consultants, and (iii) legal and audit fees. The net
loss
for the three and six months ended June 30, 2006 was a result of general
and
administrative expenses incurred for the non-operating public shell entity.
At
June 30, 2007, we had positive working capital of $22.0 million compared
to
positive working capital of $25.4 million for beginning of the
year.
55
Liquidity
and Capital Resources
We
expect
to incur operating losses and negative cash flows for the foreseeable future.
During the fourth quarter of 2006 we raised approximately $27.3 million (net
of
placement fees of $2.1 million) through a private placement. Our ability
to
execute on our current business plan is dependent upon our ability to develop
and market our products, and, ultimately, to generate
revenue.
At
June
30, 2007 we had cash, cash equivalents and marketable securities of
approximately $23,106,516, We are currently expending cash at a rate of
approximately $0.9 million per month. At present rates, we will not have
to
raise additional funds in the next twelve months,
Off-Balance
Sheet Arrangements
As
of
June 30, 2007, we had no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
results of operations or cash flows.
Legal
Proceedings
We
are
involved in arbitration against National Quality Care, Inc. concerning our
License Agreement, as described in our most recent annual report. From time
to
time, we may be involved in litigation relating to claims arising out of
our
operations in the normal course of business. As of the date of this report
we
are not currently involved in any legal proceeding that we believe would
have a
material adverse effect on our business, financial condition or operating
results.
Controls
and Procedures.
We
conducted an evaluation, under the supervision and with the participation
of our
President and Chief Operating Officer (principal executive officer) and Chief
Financial Officer (principal financial officer), of our disclosure controls
and
procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of June
30,
2007. Based upon this evaluation, our President and Chief Operating Officer
and
Chief Financial Officer concluded that our disclosure controls and procedures
were effective to ensure that required material information is included in
this
quarterly report for the period ended June 30, 2007.
There
were no changes in our internal control over financial reporting during the
quarter ended June 30, 2007 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
Directors,
Executive Officers, Promoters, Control Persons and Corporate Governance;
Compliance with Section 16(a) of the Exchange Act
Directors
and Executive Officers
Our
current officers and directors are listed below. Each of our directors will
serve for one year or until their respective successors are elected and
qualified. Our officers serve at the pleasure of the board of directors.
|
Name
|
Age
|
Position
|
Director
Since
|
|||
|
Terren
S. Peizer
|
47
|
Executive
Chairman of the Board
|
2006
|
|||
|
Winson
W. Tang
|
50
|
Chief
Operating Officer
|
||||
|
Victor
Gura, M.D.
|
65
|
Chief
Medical and Scientific Officer, and Director
|
2006
|
|||
|
Robert
Weinstein
|
47
|
Chief
Financial Officer
|
||||
|
Robert
S. Stefanovich
|
42
|
Interim
Chief Financial Officer
|
||||
|
Marc
G. Cummins
|
46
|
Director
|
2006
|
|||
|
Daniel
S. Goldberger
|
48
|
Director
|
2006
|
|||
|
Hervé
de Kergrohen, M.D.
|
48
|
Director
|
2006
|
|||
|
Nicholas
S. Lewin
|
29
|
Director
|
2007
|
|||
|
Kelly
J. McCrann
|
51
|
Director
|
2007
|
|||
|
Jay
A. Wolf
|
33
|
Director
|
2006
|
56
Terren
S. Peizer
has
served as Chairman of our Board of Directors since August 2006 and as Executive
Chairman since August 2007. From April 1999 to October 2003, Mr. Peizer served
as Chief Executive Officer of Clearant, Inc., which he founded to develop
and
commercialize a universal pathogen inactivation technology. He served as
Chairman of its board of directors from April 1999 to October 2004 and a
Director until February 2005. From February 1997 to February 1999, Mr. Peizer
served as President and Vice Chairman of Hollis-Eden Pharmaceuticals, Inc.
In
addition, from June 1999 through May 2003 he was a Director, and from June
1999
through December 2000 he was Chairman of the Board, of supercomputer designer
and builder Cray Inc., and remains its largest beneficial stockholder. Mr.
Peizer has been the largest beneficial stockholder and held various senior
executive positions with several technology and biotech companies. In these
capacities he has assisted the companies with assembling management teams,
boards of directors and scientific advisory boards, formulating business
and
financial strategies, investor and public relations, and capital formation.
Mr.
Peizer has been a Director, Chairman of the Board and Chief Executive Officer
of
Hythiam, Inc., a healthcare services management company focused on delivering
solutions for those suffering from alcoholism and other substance dependencies,
since September 2003. Mr. Peizer has a background in venture capital, investing,
mergers and acquisitions, corporate finance, and previously held senior
executive positions with the investment banking firms Goldman Sachs, First
Boston and Drexel Burnham Lambert. He received his B.S.E. in Finance from
The
Wharton School of Finance and Commerce.
Winson
W. Tang
was
appointed our Chief Operating Officer on August 10, 2007. Dr. Tang is an
executive with over 20 years of experience in academic medicine, biomedical
research and the biopharmaceutical industry. Dr. Tang has held drug development
positions of increasing responsibility at Amgen, Vertex, Tularik, and Isis
Pharmaceuticals. During his biopharmaceutical career, he has successfully
filed
for Investigation New Drug Applications and Clinical Trial Applications,
two
Biologic License Applications, in-licenses a preclinical drug candidate that
is
now marketed (Sensipar®) and commercialized two drugs (Infergen® and Aranesp®).
Both Infergen® and Aranesp® are important therapies for patients with end stage
renal disease. He was most recently the Director of Research for the Pacific
Capital Group, a private equity group where he managed the biotech investment
portfolio. Dr. Tang is a Diplomate of American Board of Internal Medicine
and a
fellow of the American College of Physicians. He has published more than
30
original research articles and book chapters. Dr. Tang is a graduate of The
Albert Einstein College of Medicine and completed a Residency in Internal
Medicine at the University of Southern California, a Clinical Fellowship
in
Nephrology at the University of California San Diego and a Research Fellowship
in Immunology at The Scripps Research Institute.
Victor
Gura, M.D.
has
served as our Chief Medical and Scientific Officer in December 2006. Dr.
Gura
has been a member of our board of directors since October 13, 2006. He served
as
Chief Scientific Officer of National Quality Care, Inc. from 2005 to November
2006. He was formerly its Chairman of the Board, President and Chief Executive
Officer. Dr. Gura is board certified in internal medicine/nephrology. He
has
been a director and principal shareholder of Medipace Medical Group, Inc.
in Los
Angeles, California, since 1980. Dr. Gura has been an attending physician
at
Cedars-Sinai Medical Center since 1984 and the medical director of Los Angeles
Community Dialysis since 1985. He also serves as a Clinical Assistant Professor
at UCLA School of Medicine. He was a fellow at the nephrology departments
at Tel
Aviv University Medical School and USC Medical Center. Dr. Gura received
his
M.D. from School of Medicine, Buenos Aires University.
Robert
Weinstein
has
served as our Chief Financial Officer since August 2007. Prior to joining
us,
Mr. Weinstein served as Vice President, Director of Quality Control &
Compliance of Citi Private Equity Services (formerly BISYS Private Equity
Services) New York, NY, a worldwide private equity fund administrator and
accounting service provider. In 2005, Mr. Weinstein was the Founder, Finance
& Accounting Consultant for EB Associates, LLC, Irvington, NY, an
entrepreneurial service organization. From 2003 to 2004, Mr. Weinstein served
as
the Chief Financial Officer for Able Laboratories, Inc., Cranbury, NJ. In
2002,
he served as Acting Chief Financial Officer of Eutotech, Ltd., Fairfax, VA,
a
distressed, publicly traded early-stage technology transfer and development
company. Mr. Weinstein received his M.B.A., Finance & International Business
from the University of Chicago, Graduate School of Business, and a B.S. in
Accounting from the State University of New York at Albany. Mr. Weinstein
is a
Certified Public Accountant (inactive) in the State of New
York.
57
Robert
S. Stefanovich
has
served as our interim Chief Financial Officer since January 2007. From September
2002 through July 2006, Mr. Stefanovich served as Executive Vice President
and
Chief Financial Officer of Artemis International Solutions Corporation, a
publicly traded software company. Prior to that, he held several senior
positions, including Chief Financial Officer and Secretary of Aethlon Medical
Inc., a publicly traded medical device company and Vice President of
Administration at SAIC, a Fortune 500 company. Mr. Stefanovich also was a
member
of the Software Advisory Group and an Audit Manager with Price Waterhouse
LLP’s
(now PricewaterhouseCoopers) hi-tech practice in San Jose, CA and Frankfurt,
Germany. He received his Masters of Finance/Accounting and Engineering from
University of Darmstadt, Germany.
Marc
G. Cummins
has
served as a Director since November 2006. He is a Managing Partner of Prime
Capital, LLC, a private investment firm focused on consumer companies. Prior
to
founding Prime Capital, Mr. Cummins was managing partner of Catterton Partners,
a private equity investor in consumer products and service companies with
over
$1 billion of assets under management. He has served as a director of Hythiam,
Inc. since 2004. Prior to joining Catterton in 1998, Mr. Cummins spent fourteen
years at Donaldson, Lufkin & Jenrette Securities Corporation where he was
Managing Director of the Consumer Products and Specialty Distribution Group,
and
was also involved in leveraged buyouts, private equity and high yield
financings. Mr. Cummins received a B.A. in Economics, magna cum laude, from
Middlebury College, where he was honored as a Middlebury College Scholar
and is
a member of Phi Beta Kappa. He also received an M.B.A. in Finance with honors
from The Wharton School at University of Pennsylvania.
Daniel
S. Goldberger
served
as our President and Chief Operating Officer from October 2006 to August
2007.
Mr.
Goldberger has recently been named as the new Chief Executive Officer of
Sound
Surgical Technologies, a privately held manufacturer of equipment for ultrasound
assisted liposuction.
Mr.
Goldberger served as Chief Executive Officer of Glucon Inc., a privately
held glucose monitoring business from 2004 to 2007. From 2001 to 2004, Mr.
Goldberger served as President and as a Director of the Medical Group of
OSI
Systems, Inc. (NASDAQ: OSIS), which included the Spacelabs, Dolphin, Osteometer
product lines with combined revenue approaching $250 million. Mr. Goldberger
was
also the co-founder of Optiscan Biomedical Corporation, where he served as
Director from 1994 to 2001 and also served as its Vice President from 1994
to
1998 and then as its President from 1998 to 2001. Mr. Goldberger has over
25
years of management experience with large and small medical device companies,
including Nellcor and Square One Technology. He received his B.S.M.E. from
Massachusetts Institute of Technology and his M.S.M.E. from Stanford University.
Hervé
de Kergrohen, M.D.
has
served as a Director since November 2006. Since August 2002, he has been
a
Partner with CDC Enterprises Innovation in Paris, a European venture capital
firm, and since January 2001 has been Chairman of BioData, an international
healthcare conference in Geneva. He sits on several boards with U.S. and
European private health care companies, including Kuros BioSurgery and Bioring
SA in Switzerland since January 2003, Praxim SA, Biomethode, and Hythiam,
Inc.
since September 2003, and Clearant, Inc. since December 2001. From February
1999
to December 2001 he was Head Analyst for Darier Hentsch & Co., then the
third largest Geneva private bank and manager of its CHF 700 million health
care
fund. From February 1997 to February 1998 he was the Head Strategist for
the
international health care sector with UBS AGin Zurich. Dr. de Kergrohen started
his involvement with financial institutions in 1995 with Bellevue Asset
Management in Zug, Switzerland, the fund manager of BB Biotech and BB Medtech,
where he covered the healthcare services sector. He was previously Marketing
Director with large U.S. pharmaceutical companies such as Sandoz USA and
G.D.
Searle, specialized in managed care. Dr. de Kergrohen received his M.D. from
Université Louis Pasteur, Strasbourg, and holds an M.B.A. from Insead,
Fontainebleau.
Nicholas
S. Lewin
has
served as a Director since February 2007. He has been a private investor
since
2000 operating in both the public and private markets. Mr. Lewin has invested
across many industries, and throughout the capital structure. He invests
in
special situations and in companies with innovative technologies and strong
intellectual property. Generally, these are activist situations working with
management. Representative industries include biotechnology, healthcare,
telecom
and media. Mr. Lewin sits on the boards of directors of VirnetX and Duramedic.
He holds a BA from Johns Hopkins University.
Kelly
J. McCrann
was
appointed as a Director on August 10, 2007. Mr. McCrann is a senior healthcare
executive with extensive experience in board governance, strategic leadership,
profit and loss management and strategic transactions. He was most recently
Senior Vice President of DaVita, Inc., where he was responsible for all home
based renal replacement therapies for the United States’ second largest kidney
dialysis provider. Prior to that, Mr. McCrann was the Chief Executive Officer
and President of PacificCare Dental and Vision, Inc. Mr. McCrann has held
positions of increasing responsibility at Professional Dental Associates,
Inc.,
Coram Healthcare Corporation, HMSS, Inc. and American Medical International.
He
is a graduate of the Harvard Business School and began his career as a
consultant for KPMG and McKinsey & Company.
58
Jay
A. Wolf
has
served as a Director since November 2006. He has over a decade of investment
and
operations experience in a broad range of industries. His investment experience
includes: senior and subordinated debt, private equity (including leveraged
transactions), mergers & acquisitions and public equity investments. Since
2003, Mr. Wolf has served as a Managing Director of Trinad Capital. From
1999 to
2003, he served as the Executive Vice President of Corporate Development
for
Wolf Group Integrated Communications Ltd. where he was responsible for the
company’s acquisition program. From 1996 to 1999, Mr. Wolf worked at Canadian
Corporate Funding, Ltd., a Toronto-based merchant bank in the senior debt
department and subsequently for Trillium Growth, the firm’s venture capital
Fund. He sits on the boards of Shells Seafood Restaurants, Prolink Holdings
Corporation, Optio Software, Inc. and Starvox Communications, Inc. Mr. Wolf
received a Bachelor of Arts from Dalhousie University.
Family
Relationships
There
are
no family relationships among any of our directors or executive
officers.
Legal
Proceedings
There
have been no events under any bankruptcy act, no criminal proceedings and no
judgments, injunctions, orders or decrees material to the evaluation of the
ability and integrity of any director, executive officer, promoter or control
person of our company during the past five years.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our officers
and directors and persons who beneficially own more than 10% of our common
stock
to file with the SEC initial reports of ownership and reports of changes
in
ownership of our common stock. These insiders are required by SEC regulations
to
furnish us with copies of all Section 16(a) forms they file, including Forms
3,
4 and 5. Based solely upon our review of copies of such forms we have received,
and other information available to us, to the best of our knowledge all required
forms have been filed on a timely basis, except for the filing of a Form
4 by
Mr. Peizer on November 22, 2006, a Form 3 by Dr. Gura and Mr. Goldberger
on
November 27, 2006, and a Form 3 by Mr. Cummins on December 18, 2006.
Code
of Ethics
We
have a
Code of Ethics that applies to all of our officers, directors and employees,
including our principal executive officer, principal financial officer,
principal accounting officer and controller, and others performing similar
functions.
Corporate
Governance
Nominating
Committee
Effective
February 27, 2007, our board of directors authorized the formation of a
Nominating Committee to consist entirely of independent directors. The
committee’s primary function is to review and recommend potential director
candidates.
The
Nominating Committee will consider director candidates that are suggested by
members of the board, as well as by management and stockholders. The committee
may also retain a third-party executive search firm to identify candidates.
The
process for identifying and evaluating nominees for director involves reviewing
potentially eligible candidates, conducting background and reference checks,
interviewing the candidate and others (as schedules permit), meeting to consider
and approve the candidate and, as appropriate, preparing and presenting to
the
full board an analysis with regard to particular recommended candidates. The
Nominating Committee considers a potential candidate’s experience, areas of
expertise, and other factors relative to the overall composition of the board.
The committee endeavors to identify director nominees who have the highest
personal and professional integrity, have demonstrated exceptional ability
and
judgment, and, together with other director nominees and members, are expected
to serve the long term interest of our stockholders and contribute to our
overall corporate goals.
59
Audit
Committee
Effective
February 27, 2007, our board of directors established a separately-designated
standing Audit Committee in accordance with section 3(a)(58)(A) of the Exchange
Act. Messrs. Wolf (Chairman), Cummins and Lewin are members of the Audit
Committee. All members of the Audit Committee are independent directors as
defined by NASD Marketplace Rule 4200(a)(15) and Rule 10A-3(b)(i) under the
Exchange Act.
Audit
Committee Financial Expert
The
board
of directors has determined that Mr. Wolf meets the applicable requirements
for
audit committee financial experts as defined by Item 401(e)(2) of Regulation
S-B.
Executive
Compensation
The
following table sets forth the total compensation received by the named
executive officer during the fiscal years ended December 31, 2006 and 2005:
SUMMARY
COMPENSATION TABLE
|
Non-Equity
|
Nonqualified
|
|||||||||||||||||||||||||||
|
Name
and
|
Stock
|
Option
|
Incentive
Plan
|
Deferred
|
All
Other
|
|||||||||||||||||||||||
|
principal
|
Salary
|
Bonus
|
Awards
|
Awards
|
Compensation
|
Compensation
|
Compensation
|
Total
|
||||||||||||||||||||
|
position
|
Year
|
($)
|
($)
|
($)
|
($)
|
($)
|
Earnings
($)
|
($)
|
($)
|
|||||||||||||||||||
|
Daniel
S. Goldberger
|
2006
|
$
|
35,170
|
—
|
—
|
$
|
70,497
|
—
|
—
|
$
|
105,667
|
|||||||||||||||||
|
President
& COO(1)
|
||||||||||||||||||||||||||||
|
Victor
Gura
Chief
Scientific
|
2006
|
$
|
35,000
|
—
|
—
|
$
|
88,121
|
—
|
—
|
$
|
123,121
|
|||||||||||||||||
|
Officer
|
||||||||||||||||||||||||||||
|
Peter
Sotola
|
2006
|
$
|
3,000
|
—
|
—
|
—
|
—
|
—
|
—
|
$
|
3,000
|
|||||||||||||||||
|
Former
President(2)
|
||||||||||||||||||||||||||||
| (1) |
Mr.
Goldberger resigned as President and Chief Operating Officer on
August 10,
2007. He remains a Director of Xcorporeal.
|
|
|
(2)
|
Mr. Sotola
resigned as president on October 13,
2006
|
Compensation
Agreements
Executive
Chairman
On
August
10, 2007, Terren S. Peizer entered into an Executive Chairman Agreement with
Xcorporeal for an initial term of three years. His compensation will be
$450,000 per year with a signing bonus of $225,000. Under the agreement,
Mr.
Peizer will be entitled to receive an annual bonus at the discretion of the
Board based on performance goals and targeted at 100% of his annual
compensation. He is also eligible to participate in any equity incentive
plans
adopted by Xcorporeal. Mr. Peizer will be entitled to all perquisites to
which
other directors and senior executives are entitled and participation in any
other fringe benefits offered by to Xcorporeal employees generally. In the
event
Mr. Peizer is terminated without cause or if he resigns for good reason,
as such
terms are defined in the Executive Chairman Agreement, Xcorporeal will be
obligated to pay Mr. Peizer in a lump sum an amount equal to three
years’ compensation (at the rate in effect at the time of termination),
plus 100% of the targeted bonus for the year of termination. At the end of
the
initial three year term, the Executive Chairman Agreement will automatically
renew for successive one year periods unless either party gives notice of
the
intent not to renew no later than six months prior to the end of the then
current term.
60
Chief
Financial Officer
On
August
10, 2007, Robert Weinstein has entered into an Employment Agreement with
Xcorporeal with an initial term of one year. His salary will be $275,000
per
year. Under the agreement, Mr. Weinstein will be entitled to receive an annual
bonus at the discretion of the Board based on performance goals and targeted
at
50% of his annual salary. In addition to any perquisites and other fringe
benefits provided to other executives, Mr. Weinstein will receive options
to
purchase 300,000 shares of common stock under Xcorporeal’s 2006 Incentive
Compensation Plan at an exercise price of $7.00 per share and vesting at
a rate
of 25% per year. In the event Mr. Weinstein is terminated without cause,
as such
term is defined in the Employment Agreement, Xcorporeal will be obligated
to pay
Mr. Weinstein in a lump sum an amount equal to 90 days’ salary (at the rate in
effect at the time of termination).
Chief
Medical and Scientific Officer
On
November 30, 2006, we entered into an employment agreement with Victor Gura,
M.D. On December 1, 2006, Victor Gura, M.D. became our Chief Medical and
Scientific Officer. Dr. Gura has been a member of our board of directors
since
October 13, 2006. Dr. Gura entered into a four-year Employment Agreement
with
us. His initial annual base salary is $420,000. Dr. Gura is eligible to receive
discretionary bonuses on an annual basis targeted at 50% of his annual salary.
Additionally, Dr. Gura was granted 500,000 stock options at an exercise price
of
$5 per share under our 2006 Incentive Compensation Plan. These options will
vest
20% on each of the first, second, third, fourth and fifth anniversaries and
expire November 14, 2011. He will also be granted options to purchase an
additional 500,000 shares of our common stock upon FDA approval of our first
product. Dr. Gura is eligible to receive reimbursement of reasonable and
customary relocation expenses as well as health, medical, dental insurance
coverage and insurance for accidental death and disability. In the event
he is
terminated by us without good cause or if he resigns for good reason, as
such
terms as are defined in the agreement, we will be obligated to pay Dr. Gura
in a
lump sum an amount equal to two year’s salary plus 200% of the targeted bonus.
In addition all stock options granted to Dr. Gura will vest
immediately.
Dr.
Gura’s agreement provides for medical insurance and disability benefits,
severance pay if his employment is terminated by us without cause or due
to
change in our control before the expiration of the agreement, and allows
for
bonus compensation and stock option grants as determined by our Board of
Directors. The agreement also contains a restrictive covenant preventing
competition with us and the use of confidential business information, except
in
connection with the performance of his duties for CTHE, for a period of two
years following the termination of his employment with us.
Incentive
Compensation Plan
On
October 13, 2006, after the effectiveness of the Delaware reincorporation,
we
adopted the Xcorporeal, Inc. 2006 Incentive Compensation Plan and the related
form of option agreement. The plan authorizes the grant of stock options,
restricted stock, restricted stock units and stock appreciation rights. At
December 31, 2006, there were 2,000,000 shares of common stock reserved for
issuance pursuant to the plan, subject to adjustment in accordance with the
provisions of the plan. Effective February 27, the total number of shares
of
common stock reserved for issuance pursuant to the plan was increased to
3,900,000. The 2006 Plan will be replaced and superseded
by the 2007 Incentive Compensation Plan upon the effectiveness of the
merger.
Outstanding
Equity Awards At Fiscal Year-End
The
following table sets forth information concerning unexercised options; stock
that has not vested; and equity incentive plan awards for each named executive
officer outstanding as of December 31, 2006:
|
OUTSTANDING
EQUITY AWARDS AT FISCAL
YEAR-END
|
|
OPTION
AWARDS
|
|
|
|
STOCK
AWARDS
|
|
|||||||||||||||||||||||
|
Name
|
|
Number
of Securities Underlying Unexercised Options (#)
Exercisable
|
|
Number
of Securities Underlying Unexercised Options (#)
Unexercisable
|
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options (#)
|
|
Option
Exercise Price ($)
|
|
Option
Expiration
Date
|
|
Number
of Shares or Units of Stock That Have Not Vested (#)
|
|
Market
Value of Shares or Units of Stock That Have Not Vested ($)
|
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or
Other Rights
That Have Not Vested (#)
|
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned
Shares, Units of
Other Rights That Have Not Vested (#)
|
|
|||||||||
|
Lino
Braganza
|
||||||||||||||||||||||||||||
|
VP
of Marketing & Sales
|
|
|
—
|
|
|
—
|
|
|
250,000
|
|
$
|
7.00
|
|
|
August
10, 2017
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
Braig
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VP
of Product Development
|
|
|
—
|
|
|
—
|
|
|
300,000
|
|
$
|
7.00
|
|
|
August
15, 2017
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel
Goldberger
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
—
|
|
|
—
|
|
|
200,000
|
|
$
|
5.00
|
|
|
November
14, 2016
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Victor
Gura
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Scientific Officer
|
|
|
—
|
|
|
—
|
|
|
500,000
|
|
$
|
5.00
|
|
|
November
14, 2016
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Herve
de Kergrohen
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
—
|
|
|
—
|
|
|
100,000
|
|
$
|
7.00
|
|
|
February
27, 2017
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nicolas
Lewin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
—
|
|
|
—
|
|
|
100,000
|
|
$
|
7.00
|
|
|
February
27, 2017
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kelly
McCrann
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
—
|
|
|
—
|
|
|
100,000
|
|
$
|
7.00
|
|
|
August
10, 2017
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terren
Peizer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
Chairman
|
|
|
—
|
|
|
—
|
|
|
700,000
|
|
$
|
5.00
|
|
|
November
14, 2011
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nina
Peled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
VP
|
|
|
—
|
|
|
—
|
|
|
150,000
|
|
$
|
7.00
|
|
|
February
27, 2017
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nina
Peled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Senior
VP
|
|
|
—
|
|
|
—
|
|
|
50,000
|
|
$
|
7.00
|
|
|
August
10, 2017
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Winson
Tang
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Operating Officer
|
|
|
—
|
|
|
—
|
|
|
300,000
|
|
$
|
7.00
|
|
|
May
11, 2017
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Robert
Weinstein
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Chief
Financial Officer
|
|
|
—
|
|
|
—
|
|
|
300,000
|
|
$
|
7.00
|
|
|
August
10, 2017
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Jay
Wolf
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Director
|
|
|
—
|
|
|
—
|
|
|
100,000
|
|
$
|
7.00
|
|
|
February
27, 2017
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
61
|
*
Dan Goldberger: 200,000 options canceled upon resignation as an
officer
|
|
*
Nina Peled: 150,000 shares granted upon hire as VP of Quality and
Regulatory Affairs
|
||||||||||||||||||||||
|
*
Nina Peled: additional 50,000 shares granted upon promotion to
Senior
VP
|
||||||||||||||||||||||
|
*
Stock warrants issued to OGT, LLC, company owned by Marc Cummins,
a
Director of Xcorporeal . 150,000 shares with an exercise price
of $7.00
and an expiration date of February 27,
2012
|
Compensation
Of Directors
The
following table reflects the compensation of directors for our fiscal year
ended
December 31, 2006:
DIRECTOR
COMPENSATION
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
|
|
|||||||
|
|
|
Fees
|
|
|
|
|
|
Incentive
|
|
Non-Qualified
|
|
All
|
|
|
|
|||||||
|
|
|
Earned
or
|
|
Stock
|
|
Option
|
|
Plan
|
|
Deferred
|
|
Other
|
|
|
|
|||||||
|
|
|
Paid
in
|
|
Awards
|
|
Awards
|
|
Compensation
|
|
Compensation
|
|
Compensation
|
|
|
|
|||||||
|
Name
|
|
Cash
($)
|
|
($)
|
|
($)
|
|
($)
|
|
Earnings
($)
|
|
($)
|
|
Total
($)
|
||||||||
|
Terren
S. Peizer
|
—
|
—
|
$
|
105,632
|
—
|
—
|
—
|
$
|
105,632
|
|||||||||||||
Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Equity
Compensation Plans
The
following table sets forth information with respect to compensation plans as
of
December 31, 2006:
Equity
Compensation Plan Information
|
Number
of securities to
be issued upon exercise
of outstanding options,
warrants and rights
|
Weighted-average exercise
price of outstanding
options, warrants
and rights
|
Number
of securities remaining
available for
future issuance under
equity compensation
plans (excluding
securities reflected
in column (a))
|
||||||||
|
Plan
category
|
(a)
|
(b)
|
(c)
|
|||||||
|
Equity
compensation plans approved by security holders
|
1,600,000
|
$
|
5.00
|
400,000
|
||||||
|
Equity
compensation plans not approved by security holders
|
—
|
—
|
—
|
|||||||
|
Total
|
1,600,000
|
$
|
5.00
|
400,000
|
||||||
Security
Ownership of Certain Beneficial Owners
The
following table sets forth the securities ownership of our directors, named
executive officers, and any person or group who is known to us to be the
beneficial owner of more than five percent of our common stock as of
December 31, 2006:
|
Name
and address of beneficial owner
(1)
|
Amount
and nature
of beneficial ownership
|
Percent
of class
|
|||||
|
Terren
S. Peizer
(2)
|
9,600,000
|
68
|
%
|
||||
|
Marc
G. Cummins
(3)
|
428,572
|
3
|
%
|
||||
|
Jay
A. Wolf
(4)
|
357,143
|
3
|
%
|
||||
|
Nicholas
S. Lewin
(5)
|
35,714
|
*
|
|||||
|
Winson
W. Tang
|
|||||||
|
Robert
Weinstein
|
|||||||
|
Daniel
S. Goldberger
|
—
|
—
|
|||||
|
Victor
Gura
|
—
|
—
|
|||||
|
Hervé
de Kergrohen
|
—
|
—
|
|||||
|
Kelly
J. McCrann
|
—
|
—
|
|||||
|
Robert
S. Stefanovich
|
—
|
—
|
|||||
|
All
directors and executive officers as a group (11 persons)
|
10,421,429
|
73
|
%
|
||||
|
*
|
Less
than one percent.
|
62
|
(1)
|
Unless
otherwise indicated, the address of all of the above named persons
is c/o
Xcorporeal, Inc., 11150 Santa Monica Blvd., Suite 340, Los Angeles,
California 90025.
|
|
(2)
|
Includes
9,600,000 shares held of record by Consolidated National, LLC,
of which
Mr. Peizer is the sole managing member and beneficial
owner.
|
|
(3)
|
Includes
428,572 shares held of record by Prime Logic Capital, LLC, CPS
Opportunities, and GPC LXI, LLC. Mr. Cummins is a Managing Partner
of
Prime Capital, LLC. He disclaims beneficial ownership of the reported
securities except to the extent of his pecuniary interest
therein.
|
|
(4)
|
Includes
357,143 shares held of record by Trinad Capital Master Fund Ltd.
(the
“Master Fund”), that may be deemed to be beneficially owned by Trinad
Management, LLC, the investment manager of the Master Fund and
Trinad
Capital LP; a controlling stockholder of the Master Fund; Trinad
Advisors
GP, LLC, the general partner of Trinad Capital LP; and Jay Wolf
a director
of the issuer and a managing director of Trinad Management, LLC
and a
managing director of Trinad Advisors GP, LLC. Mr. Wolf disclaims
beneficial ownership of the reported securities except to the extent
of
his pecuniary interest
therein.
|
|
(5)
|
Includes
27,514 shares held of record by Paizon Capital, which is beneficially
owned and controlled by Mr. Lewin’s immediate family members. Mr. Lewin
disclaims beneficial ownership of these
shares.
|
Unless
otherwise indicated, we believe that all persons named in the table have
sole
voting and investment power with respect to all shares of our common stock
beneficially owned by them. A person is deemed to be the beneficial owner
of
securities which may be acquired by such person within 60 days from the date
on
which beneficial ownership is to be determined, upon the exercise of options,
warrants or convertible securities. Each beneficial owner’s percentage ownership
is determined by assuming that options, warrants and convertible securities
that
are held by such person (but not those held by any other person) and which
are
exercisable, convertible or exchangeable within such 60 day period, have
been so
exercised, converted or exchanged.
Certain
Relationships and Related Transactions
Transactions
with Related Persons
In
connection with the contribution of the assets to our company, we issued to
Consolidated National, LLC (CNL), of which our Chairman is the sole managing
member and beneficial owner, an aggregate of 9,600,000 shares of common
stock.
We
owed
$64,620 to Peter Sotola at August 31, 2006, a director of Xcorporeal as of
that date, consisting of unpaid advances and management fees. This amount
was
forgiven by the former director, who was no longer a shareholder as of the
sale
of his common stock on August 31, 2006. The debt forgiveness was accounted
for
as an Addition to Paid in Capital.
Our
Chief
Medical and Scientific Officer and director of our Company, Dr. Victor Gura,
owns 13,453,250 shares of common stock of NQCI (or approximately 27.6% of
NQCI’s
common stock outstanding as of September 30, 2006) with whom we entered
into a license agreement. In addition, Medipace Medical Group, Inc., an
affiliate of Dr. Gura owns 800,000 shares of common stock of NQCI (or
approximately 1.6% of NQCI’s common stock outstanding as of September 30, 2006).
63
Director
Independence
Messrs.
Cummins, de Kergrohen, Lewin, McCrann and Wolf are independent directors
under
NASD Marketplace Rule 4200(a)(14).
Description
of Xcorporeal common stock
DESCRIPTION
OF XCORPOREAL CAPITAL STOCK
The
following description of our capital stock is intended to be a summary and
does
not describe all provisions of our certificate of incorporation or bylaws
or
Delaware law applicable to us. For a more thorough understanding of the terms
of
our capital stock, you should refer to our certificate of incorporation and
bylaws, which are included as exhibits to this information
statement.
Common
Stock
We
are
authorized to issue up to 40,000,000 share of our common stock, $0.0001
par
value. The holders of common stock are entitled to one vote per share on
all
matters to be voted upon by stockholders. Subject to preferences that may
be
applicable to any outstanding preferred stock, holders of common stock
are
entitled to receive ratably dividends as may be declared by the board of
directors out of funds legally available for that purpose. In the even
of our
liquidation, dissolution, or winding up, the holders of common stock are
entitled to share ratably in all assets remaining after payment of liabilities
and the liquidation preferences of any outstanding preferred stock. The
common
stock has no preemptive or conversion rights, other subscription rights,
or
redemption or sinking fund provisions. All issued and outstanding shares
of
common stock are fully paid and non-assessable. As of December 31, 2006,
there
are 14,200,050 shares of our common stock issued outstanding.
Preferred
Stock
Our
board
of directors has the authority, without further action by our stockholders,
to
issue up to 10,000,000 shares of preferred stock, $0.0001 par value, in
one or
more series and to designate the rights, preferences, privileges and
restrictions of each series. The issuance of preferred stock could have
the
effect of restricting dividends on the common stock, diluting the voting
power
of the common stock, impairing the liquidation rights of the common stock,
or
delaying or preventing a change in control without further action by our
stockholders. As of the date of this information statement, there are no
shares
of preferred stock outstanding, and we have no present plans to issue any
shares
of preferred stock. There
is
no preferred stock outstanding at this times.
INFORMATION
ABOUT CTHE
For
purposes of this section entitled “Information About CTHE” only, all references
to “we,” “us,” or “our” refers to CTHE prior to the effectiveness of the
merger.
Description
of Business
CTHE
provides management expertise including consulting on operations, marketing
and
strategic planning and a single source of capital to early stage technology
companies. The Company was incorporated in Delaware in 1992. The business
model
is designed to enable the companies with whom CTHE acquires or invests to
become
market leaders in their industries. The strategy over the years has led to
the
development, acquisition and operation of technology based businesses with
compelling valuations and strong business models. The goal is to realize
the
value of these investments for CTHE’s shareholders through a subsequent
liquidity event such as a sale, merger or initial public offering of the
investee companies. However, our business model is constrained by our lack
of
capital.
At
June
30, 2007, CTHE does not hold any investments and does not have any products
or
services, customers or revenue, and CTHE has no other lines of business.
Results
of Operations for the three and six months ended June 30, 2007 as compared
with
the three and six months ended June 30, 2006
Our
operations consist of costs and expenses for the activities to identify
additional technologies and companies in which we might invest, as well as
legal
defense costs and costs associated with SEC reporting. We do not generate
any
revenue.
General
and Administrative Expenses
During
the three and six months ended June 30, 2007 general and administrative expenses
were $7,117 and $69,034, respectively. This compares to $48,895 and $122,560,
respectively, for the three and six month periods ending June 30, 2006. General
and administrative expenses declined $41,778, or 85%, and $53,526, or 44%,
for
the three and six month periods, respectively, primarily due to lower legal
and
other professional fees. The Company had $34,800 of stock compensation expense
for the six month period ending June 30, 2007 versus none in the comparable
period in 2006. The Company also realized a $237,281 gain on settlement of
accounts payable in the first six months of 2007.
Interest
Expense
We
had no
interest expense during the three month period ended June 30, 2007 and $413
during the six month period ended June 30, 2007 compared to $168,266 and
$411,342, respectively, in 2006. Interest expense during the first two quarters
of 2007 was not significant because the litigation accrual, advances and
notes
payable to officers and shareholders, the demand note payable to Citadel
and the
convertible note payable to CITN Investment Inc. (“CII”) which, collectively,
generated interest expense in the first two quarters of 2006 were no longer
outstanding during the three and six month periods ending June 30,
2007.
Liquidity
and Capital Resources
We
received a report from our independent registered public accounting firm
for our
year ended December 31, 2006 containing an explanatory paragraph that
describes the uncertainty regarding our ability to continue as a going concern
due to our recurring operating losses and our significant working capital
deficiency. Historically, we have incurred recurring operating losses and
have a
stockholders’ deficit at June 30, 2007 of approximately $63,239. We had a cash
balance of $271 at June 30, 2007 and current liabilities total approximately
$63,510. We have limited access to capital, no plans to raise capital and
we
have not identified sources of capital at June 30, 2007. Our past funding
needs
of the business have been provided by financings through short-term notes
payable and additional investments from related parties, including our CEO
and
CH, however there can be no assurance that such funds will be available from
these related parties in the future. The Company has been and continues to
be
dependent upon outside financing to perform its business development activities,
make investments in new technology companies and to fund
operations.
64
Our
plans
to continue to support and expand our business development activities are
limited due to a lack of identification and availability of near term capital.
As a result, it is unlikely that the implementation of the Company’s business
strategy will generate positive cash flow in the foreseeable future. We have
no
plans at June 30, 2007 to raise additional capital to invest in new business
opportunities.
There
can
be no assurance that management’s plans will be successful or what other actions
may become necessary. There can be no assurance that the Company will ever
achieve liquidity for its investments. Until we are able to create liquidity
from an additional inflow of new capital, we will continue to require external
sources of working capital to fund our operating expenses. Our inability to
raise capital could have a material adverse effect on our business and
operations that could be material to our results of operations.
Cash
Used in Operating Activities
The
net
cash used in operating activities was approximately $43,000 for the six months
ended June 30, 2007 resulting from a net profit of approximately $133,000
offset
by non-cash charges of approximately $202,000, plus a net change in operating
liabilities of approximately $27,000.
Cash
Provided by Financing Activities
Net
cash
provided by financing activities was approximately $43,000 consisting primarily
of shares issued to the CEO for an advance made to the
Company.
Contractual
Obligations
There
are
no notes payable, other long-term debt obligations, capital lease obligations,
operating lease obligations or long-term capital purchase commitments at
June
30, 2007.
Controls
and Procedures
The
Company’s management, including the Company’s principal executive and financial
officer, has evaluated the effectiveness of the Company’s disclosure controls
and procedures (as defined in Rules 13(a) - 15(e) and 15(d) - 15(e) under
the
Securities Exchange Act of 1.934) as of the six months ended June 30, 2007,
the
period covered by the Form 10-QSB. Based upon that evaluation, the Company’s
principal executive and financial officer have concluded that the disclosure
controls and procedures were effective as of June 30, 2007 to provide reasonable
assurance that information required to be disclosed on the reports the Company
files or submits under the Exchange Act is recorded, processed, summarized
and
reported, within the time period specified in the Commission’s rules and forms
and that information required to be disclosed in the reports the Company
files
or submits is accumulated and communicated to management including the CEO
/
CFO, as appropriate to allow timely decisions regarding required disclosures.
There were no changes in the Company’s internal control over financial reporting
that occurred during the Company’s last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
Inherent
limitations on Effectiveness of Internal Controls
The
effectiveness of any system of internal control over financial reporting,
including CT Holdings’, is subject to inherent limitations, including the
exercise of judgment in designing, implementing, operating, and evaluating
the
controls and procedures, and the inability to eliminate misconduct completely.
Accordingly, any system of internal control over financial reporting, including
CT Holdings’, can only provide reasonable, not absolute assurances. In addition,
projections of any evaluation of effectiveness to future periods are subject
to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate. We intend to continue to monitor and upgrade our internal controls
as necessary or appropriate for our business, but cannot assure you that
such
improvements will be sufficient to provide us with effective internal control
over financial reporting.
The
Year ended December 31, 2006, compared with the Year ended December 31,
2005
Our
operations consisted of costs and expenses for providing services to our
investee
companies and the activities to identify additional technologies and
companies
in which we might invest, as well as legal defense costs and costs associated
with SEC reporting. We do not generate any direct revenue and because
our investee companies were not consolidated, we did not report revenue
from
investee businesses.
65
General
and Administrative Expenses
During
the year ended December 31, 2006 general and administrative expenses were
$99,185
versus $177,631 for the year ended December 31, 2005. The decrease of
$78,446
or 44% from the year earlier period is primarily due to lower legal defense
costs and lower management fees charged by CDSS in the respective year
periods.
Legal defense costs are expected to decline in future periods as a result
of
the settlement of the lawsuits during 2006. Management fees for services
provided by CDSS will no longer be incurred as a result of the termination
of the transition services agreement in December 2006. We may incur similar
costs, principally accounting, legal and SEC compliance related fees,
from
other providers of similar services, principally accounting and information
technology
support, however no assurances are provided that the costs of similar
services
may be available at the same cost as previously incurred and may possibly
be more expensive than the cost of services previously provided by CDSS.
Settlement
of Litigation
Since
August 1998 we have been engaged in litigation with Meyers Associates,
L.P.
f/k/a Roan/Meyers Associates, L.P. and f/k/a Janssen-Meyers Associates,
L.P.
(collectively "Meyers"). The original lawsuit arose out of an alleged 1995
contract
with a predecessor entity of the Company. Since the original lawsuit
was
filed, a number of court actions, motions and judgments have been prosecuted.
Two lawsuits with Meyers, further described below, were being vigorously
defended during the years ended December 31, 2006 and 2005. A settlement
of all litigation with Meyers was reached during 2006 and is discussed
below.
In
December 2001, the plaintiffs refiled a lawsuit, previously dismissed by
a
federal
court, in state court, seeking to enforce a proposed settlement term
sheet
executed on July 7, 2000. The case was filed in the Supreme Court of New
York,
that state's trial court, in a case styled Roan Meyers v. CT Holdings. CT
Holdings
filed counterclaims for breach of the term sheet as well as breach of
the
placement agency agreement. Cross motions for partial summary judgments were
argued
but on June 9, 2004 the court entered judgment in favor of Roan-Meyers in
the
amount of $3,000,000 and granted interest at the rate of 9% from October
31,
2000
through the date of final judgment, and thereafter at the statutory rate
allowed
by law. The Company appealed the final judgment, and the appellate court
affirmed the trial court's decision. The $3,000,000 judgment as well as
the
interest from October 2000 through December 31, 2005 of $1,404,590 was
accrued
at December 31, 2005. We continued to accrue interest on the judgment
of
approximately $179,000 during the year ended December 31, 2006 until ultimate
settlement
of the lawsuit discussed below.
On
April
8, 2005, Meyers filed a lawsuit in the Court of Chancery of the State
of
Delaware, in New Castle County, against the Company, Citadel Security
Software,
Inc. (CDSS) including Steven B. Solomon, the Chief Executive and a Director
of the Company, Chris A. Economou, a Director of the Company, Lawrence
Lacerte,
a former Director of the Company, and Phillip J. Romano, a former Director
of the Company (the "Individual Defendants"). The suit alleged that in
connection
with an action filed in the Supreme Court of New York, New
York
County,
to enforce a Settlement Term Sheet executed on July 7, 2000 by Meyers
and
CT
Holdings, Meyers was awarded a judgment against CT Holdings in the amount
of
$3
million plus interest on the judgment at the rate of 9% from October 31,
2000
until the date of entry of that judgment and thereafter at the statutory
rate
(the
"Judgment"). CT Holdings appealed the Judgment. The suit also alleged
that
CT
Holdings' May 2002 spin-off of its interests in CDSS to CT Holdings'
shareholders
rendered CT Holdings insolvent and constituted a fraudulent conveyance
to defraud CT Holdings' creditors, including Meyers. The suit asserted
fraudulent conveyance claims against CDSS and CT Holdings pursuant to
Delaware
statutory and common law. The suit also asserted a claim against CDSS
for
successor liability as the alleged successor in interest or alter ego of
CT
Holdings.
The suit alleged that the Individual Defendants who were officers and/or
directors of CT Holdings at the time of the spin-off breached fiduciary
duties
allegedly owed to creditors of CT Holdings, including Meyers, by approving
and allowing the spin-off transaction. The suit sought to void the spin-off
transaction or alternatively to hold CDSS liable for the Judgment including
interest, to recover damages against the Individual Defendants in an
amount
not less than the Judgment including interest, plus an unspecified amount
of
punitive, consequential and incidental damages, as well as attorneys' fees
and
costs.
66
On
August
23, 2006, CT Holdings and certain other parties entered into a Release
and
Settlement Agreement ("Agreement") by and among Meyers and their related
parties
(collectively, the "Meyers Released Parties") on the one hand and defendants
CT Holdings Enterprises, Citadel Security Software Inc., Steven B. Solomon,
Chris A. Economou, Lawrence Lacerte, Mark Rogers, Phillip J. Romano,
Axel
Sawallich, George Sharp and Gilbert Gertner (collectively "Defendants") on
the
other
hand. The Agreement provides for the settlement of litigation filed by
Meyers
against defendants CDSS, CT Holdings Enterprises, certain of our and
CDSS's
current and former directors and officers, Steven B. Solomon, Chris E.
Economou,
Lawrence Lacerte, Mark Rodgers, Phillip J. Romano and Axel Sawallich
in
the
Court of Chancery of the State of Delaware in and for New Castle County
(the
"Delaware Action") asserting various claims, and other litigation against
CT
Holdings and its former officers and directors (the "Actions"). Pursuant
to
the
Agreement, CDSS paid the sum of $1,250,000 to Meyers Associates in two
payments,
the first payment of $250,000 was made upon signing of the Agreement
in
August
2006 and the second payment of $1,000,000 was made on November 1, 2006
in
accordance with the terms of the Agreement. The Defendants were released
by
the
Plaintiffs from all claims in the actions 91 days after receipt of the
payments,
subject to the terms and conditions of the agreement. Accordingly, the
Company reversed the accrued liability for Meyers legal claims during 2006
in
the
amount of $4,583,852.
Gain
on Extinguishment of Debt
On
May
22, 2006 the Company and CII, an affiliate of the Company's CEO, entered
into
a
settlement, pursuant to which CII agreed to release the Company from
indebtedness
and accrued interest under the Amended Note of $271,148 plus accrued
interest of $9,211 through May 22, 2006, in exchange for the delivery to
CII
of
the shares of Parago and River Logic owned by the Company. The carrying
value
of
these shares was zero at the settlement date.
As a
result of this
settlement, the Company recorded a gain of $280,359 on the settlement with
CII,
a
related party, and recognized as interest expense the unamortized amount
of
beneficial conversion feature related to the debt at the time of settlement
of
approximately $250,290.
67
In
December 2006, we entered into an agreement with CDSS to cancel and terminate
the
Tax
Disaffiliation Agreement and the Transition Services Agreement and released
each other from all outstanding liabilities to the other. As a result
of
this
agreement, the gain on the extinguishment of debt includes approximately
$327,305 representing the release of principal and interest owed to
CDSS
for an unsecured demand note payable and $686,666 for the gain on the
release
of a non-interest bearing payable to CDSS.
Interest
Expense
Interest
expense for the years ended December 31, 2006 and 2005 was $465,184 and
$494,341,
respectively, representing interest expense on litigation accrual, advances
and notes payable to officers and shareholders, the demand note payable
to
CDSS
and the convertible note payable to CII. Interest expense related to
these
items is expected to decline in future periods as a result of the settlement
of the litigation and the settlement of the convertible note payable
to
CII.
The
year
2006 includes interest expense of approximately $179,000 related to the
Meyers
lawsuits versus approximately $279,000 accrued in 2005. Interest expense
associated
with the advances and the notes payable was approximately $35,000 in
2006
versus approximately $55,000 for 2005. Interest expense also includes
amortization
of the beneficial conversion feature associated with the CII convertible
note which totaled approximately $250,000 and $161,000 for the years
ended
December 31, 2006 and 2005, respectively.
Other
Income
Other
income for the year ended December 31, 2006 was $11,203, representing the
reversal
of excess accruals for a prior legal settlement.
Liquidity
and Capital Resources
We
have
received a report from our independent registered public accounting firm
for
our
year ended December 31, 2006 containing an explanatory paragraph that
describes
the uncertainty regarding our ability to continue as a going concern.
Although
we have a significant gain for the year ended December 31, 2006, we have
a
history of recurring operating losses and have a significant working
capital
deficiency at December 31, 2006 of approximately $456,000. We had a cash
balance
of $197 at December 31, 2006 and current liabilities total approximately
$456,000.
We have limited access to capital, no plans to raise capital, and we
have
not
identified sources of capital at December 31, 2006. Our past funding
needs
of
the business have been provided by financings through short-term notes
payable
and additional investments from related parties, including our CEO and
CII,
an
entity of which our CEO is an officer, director and 50% shareholder and
a
commitment to advance up to an additional $100,000 in exchange for 250,000
shares
of
our common stock, however there can be no assurance that such funds will
be
available from these related parties in the future. The Company has been
and
continues to be dependent upon outside financing to perform its business
development activities, make investments in new technology companies
and to fund operations.
68
Until
we
are able to create liquidity through a financing, investment or some
other
liquidity transaction, we will continue to require working capital to fund
operating
expenses. At December 31, 2006 we have not identified sources of capital
nor do we have any plans to raise sufficient amounts of capital to settle
liabilities or to fund business development activities.
On
February 14, 2007 our shareholders approved a proposal to amend the Company's
Certificate
of Incorporation to combine shares of the Company's common stock to effect
a
one for 70 reverse stock split. A 1 for 70 reverse stock split would
make
available sufficient authorized shares of common stock to settle commitments
to issue shares and to potentially facilitate a corporate transaction
such as a merger or financing. Corporate transactions of this nature
could improve liquidity, however there can be no assurance that the Company
will enter into any corporate transaction to improve
liquidity.
There
can
be no assurance that management's plans will be successful or what other
actions may become necessary. There can be no assurance that the Company
will
ever
achieve liquidity. Until we are able to create liquidity from an additional
inflow of new capital, we will continue to require external sources of
working capital to fund our operating expenses. Our inability to raise
capital
could have a material adverse effect on our business and operations that
could
be
material to our results of operations.
Cash
Flows from Operating Activities
During
the year ended December 31, 2006 the net cash used in operating activities
was approximately $46,000 resulting from net income approximately $5,325,000
offset by non-cash amortization of deferred debt discount of approximately
$250,000 recorded as interest expense, a gain of the extinguishment
of debt of approximately $1,294,000 and the reversal of
litigation
accruals of approximately $4,405,000 resulting from the settlement of
litigation
plus a reduction in operating liabilities of approximately
$77,000.
The
net
cash used in operating activities was approximately $43,000 for the year
ended
December 31, 2005 resulting from a net loss of approximately $672,000
offset
by
non-cash amortization of deferred debt discount of approximately $161,000
recorded as interest expense, a non-cash interest accrual on the litigation
judgment of approximately $279,000 plus a change in operating liabilities
of approximately $189,000.
Cash
Flows from Investing Activities
There
were no cash flows used or from investing activities in either year ended
December
31, 2006 or 2005.
Cash
Flows from Financing Activities
We
rely
on related parties, including our CEO, for funds to pay accounts payable
and
to
settle other liabilities. In some cases, our CEO elected to pay vendors
directly
rather than advance funds to the Company. We have presented these direct
vendor payments in the statement of cash flows as if the funds had been
first
advanced to the Company. During the years ended December 31, 2006 and
2005,
our
CEO paid vendors directly or advanced funds to the Company in the amount
of
approximately $46,000 and $38,800, respectively representing the total
amount
of
cash flows provided by financing activities in 2006 and 2005.
69
Contractual
Obligations
At
December 31, 2006 a $46,288 unsecured advance payable to an officer and a
$9,000
unsecured note payable plus accrued interest of approximately $7,800 to a
shareholder
which is in default at December 31, 2006. There are no other long-term
debt obligations, capital lease obligations, operating lease obligations
or long-term capital purchase commitments.
Off-Balance
Sheet Arrangements
We
entered into an Agreement dated as of December 4, 2006 with CDSS, where CDSS
assigned
to us causes of action and rights of CDSS related to claims against CDSS's
insurance carrier related to prior litigation. Subsequently,
we assigned these causes of action to Lawrence Lacerte, a former director
and
greater than 10% shareholder. The
Company has no other off-balance
sheet arrangements that have had, or are reasonably likely to have, a
current
or future effect on the Company's financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to
investors.
Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
As
of
August 22, 2007, there were issued and outstanding approximately 2,894,675
shares of common stock. There is no other class of voting security of CT
Holdings issued or outstanding. The following table sets forth the number
of
shares of common stock beneficially owned as of August 10, 2007, by (i) each
person known to CTHE to own more than 5% of the common stock, (ii) each
director, (iii) each named executive officer and (iv) all directors, named
executive officers and other executive officers as a group. We calculated
beneficial ownership according to Rule 13d-3 of the Securities Exchange Act
as
of that date. Shares issuable upon exercise of options that are exercisable
within 60 days after August 10, 2007 are included as beneficially owned by
the
option holder. Beneficial ownership generally includes voting and investment
power with respect to securities. Unless otherwise indicated below, the persons
and entities named in the table have sole voting and sole investment power
with
respect to all shares beneficially owned and has an address of c/o CT Holdings,
2100 McKinney Avenue, Suite 1500, Dallas, Texas 75201. The number of shares
owned have been adjusted for the effect of a 1 for 70 reverse stock split
approved by shareholders on February 14, 2007, but do not reflect the proposed
1
for 8.27 reverse stock split.
|
|
APPROXIMATE
|
||||||
|
|
NUMBER
OF
|
PERCENT
|
|||||
|
NAME
AND ADDRESS
|
SHARES
OWNED
|
OF
CLASS
|
|||||
|
Steven
B. Solomon
|
1,604,547
|
55.4
|
%
|
||||
|
|
|||||||
|
Lawrence
Lacerte
5950
Sherry Lane
Dallas,
Texas 75225
|
482,143
|
16.7
|
%
|
||||
|
|
|||||||
|
Chris
A. Economou
150
North Federal Highway, # 210
Fort
Lauderdale, Florida 33301
|
50,349
|
1.7
|
%
|
||||
|
|
|||||||
|
Mark
Rogers
751
Laurel St. #19
San
Carlos, California
|
49,308
|
1.7
|
%
|
||||
|
|
|||||||
|
Dr.
Axel Sawallich
Beatrixgasse
3
1030
Vienna, Austria.
|
25,532
|
*
|
|||||
|
|
|||||||
|
All
officers and directors as
a group (4 persons)
|
1,729,736
|
59.7
|
%
|
||||
|
*
|
Less
than 1%
|
70
Certain
Relationships and Related Transactions, and Director Independence
The
following is a description of the material terms of the agreements and
arrangements involving CTHE and its subsidiaries.
Agreements
Relating to the Sale of Substantially All of the Assets of CDSS
In
connection with the sale of substantially all of the assets of CDSS, we entered
into an Agreement dated as of December 4, 2006 (the “Agreement”) with CDSS.
Pursuant to the Agreement with CDSS:
|
1.
|
we
and CDSS canceled and terminated the Tax Disaffiliation Agreement
dated as
of May 17, 2002, and Transition Services Agreement dated as of
May 17,
2002 between us and CDSS;
|
|
2.
|
each
party released the other from all outstanding liabilities to each
other;
|
|
3.
|
CDSS
assigned to us causes of action and rights of CDSS related to claims
against CDSS’s insurance carrier related to prior
litigation;
|
|
4.
|
we
waived any and all rights in and to any of the assets transferred
by CDSS
pursuant to the asset purchase agreement;
and
|
|
5.
|
we
waived any prohibition or restriction to the transactions contemplated
by
the asset purchase agreement set forth in the Agreement and Plan
of
Distribution dated as of May 17, 2002 between us and CDSS or otherwise.
|
CT
Holdings’ Related Party Transactions
During
2006 our CEO paid approximately $46,000 of operating expenses on behalf of
CTHE
for which we recorded a non-interest bearing advance payable of
$46,000.
During
2005, our CEO advanced CTHE $38,800 and in December 2005, this amount plus
a
$5,000 note due to our CEO were converted to a note payable to CITN Investment,
Inc., further discussed below. At December 31, 2005, CTHE had a convertible
note
payable due to a related party, CITN Investment, Inc., a Texas corporation
(“CII”) and an affiliate of the company’s CEO. The convertible note was first
issued on May 24, 2004, when CTHE entered into a Loan and Security Agreement
(the “Loan Agreement”) with CII. The Loan Agreement provided for advances by CII
to CTHE of up to $600,000, such advances to be made in the sole discretion
of
CII. In the event the entire $600,000 was advanced to CTHE, the loans would
be
convertible, at the option of CII, into 1,014,286 shares of CTHE’s common stock
and a pro rata amount of such number of shares in the event less than the
$600,000 was advanced to CTHE. All advances under the Loan Agreement were
secured by a pledge of all CTHE’s assets. On May 24, 2004, CTHE was advanced
$200,000 by CII pursuant to the Loan Agreement and evidenced by a Secured
Convertible Promissory Note (the “Note”). The Note was amended in December 2005
and settled in May 2006 as discussed below.
In
December 2005, CTHE and CII entered into an Amended and Restated Secured
Convertible Promissory Note (the “Amended Note”). Pursuant to the Amended Note,
the principal was increased to $271,148 resulting from the combination of
the
principal and accrued interest from the original note with CII and additional
advances of $43,800 plus accrued interest of $1,222 through the issue date
of
the Amended Note. The Amended Note was convertible into 240 million pre 1
for 70
reverse split shares, and if the Amended Note was repaid by CTHE, CII had
an
option to purchase up to 71 million pre 1 for 70 reverse split shares of
CTHE’s
common stock at an exercise price equal to the par value per shares ($0.01
per
share). The note accrued interest at 8% per annum and was due the earlier
of May
24, 2006 or on demand by CII. This Amended Note was secured by a pledge of
all
of CTHE’s assets. The accrued interest on the Amended Note at December 31, 2005
was $772.
71
On
May
22, 2006 CTHE and CII entered into a settlement of the Amended Note, pursuant
to
which CII agreed to release CTHE from indebtedness and accrued interest under
the Amended Note of $271,148 plus accrued interest of $9,211 through May
22,
2006, in exchange for the delivery to CII of the shares of Parago and River
Logic owned by CTHE.
The
Company recorded a debt forgiveness gain related to this transaction in the
amount of $280,359 in the second quarter of 2006. CII retained its option
to purchase 51% of CTHE’s common stock, 1,014,286 shares of common stock of
CTHE’s, at an exercise price equal to the par value per shares ($0.01 per
share). The CII option to acquire 1,014,286 shares of common stock was exercised
on March 2, 2007 and otherwise would have expired on April 28, 2007, sixty
(60)
days following the effectiveness of the 1 for 70 reverse stock
split.
Pursuant
to the terms of the transition services agreement with CDSS until its
termination in December 2006, CTHE agreed to pay CDSS $10,000 per quarter
(reduced in July 2005 from $7,500 per month) for the services of its CEO,
CFO
and accounting and information management staff, as well as office rent and
indirect overhead expenses. The Company had a liability recorded for $650,000
for amounts payable to CDSS under this agreement at December 31, 2005. No
amount
was owed at December 31, 2006 because all amounts owed under the transition
services agreement were released on December 4, 2006 pursuant to the Agreement
discussed above.
The
Company has an accrued liability to a law firm in which an attorney who is
a
partner and who was a former CT Holdings’ employee and is a relative of our CEO
of approximately $97,000 and $100,000 at December 31, 2006 and 2005,
respectively.
CII
is
owned 50% by Steven B. Solomon, CTHE’s Chief Executive Officer and Chairman of
the Board, and 50% by Lawrence Lacerte, a shareholder and former director
of
CTHE. At December 31, 2006, Mr. Solomon beneficially owned 783,114 shares
of
CTHE’s common stock including, an unexercised stock option for 28,572 shares of
common stock, which was cancelled subsequent to December 31, 2006. 85,714
unissued shares of common stock from a prior exercise of an option, and as
a
result of his stock ownership in CII, Mr. Solomon was deemed the beneficial
owner of 507,143 shares of common stock underlying an option owned by CII,
more
than 50% of our common stock outstanding on that date, giving him potential
control of CTHE through the voting power over a majority of the shares of
our
outstanding common stock. Due to an insufficient number of authorized shares
at
December 31, 2006 (discussed below), approximately 621,430 shares were not
issuable to Mr. Solomon. Following the 1 for 70 reverse stock split in February
2007, Mr. Solomon was issued 85,714 the unissued shares of common stock from
his
prior exercise of an option, and CII exercised its option to acquire 1,014,286
shares. Subsequent to December 31, 2006, CII distributed 607,143 shares to Mr. Solomon and 407,143 shares to Mr.
Lacerte.
On
March
2, 2007, Mr. Solomon acquired 250,000 shares of common stock for providing
up to
$100,000 of cash for working capital purposes. On March 9, 2007, in recognition
of their service to CTHE, Mr. Economou, a director, was awarded 40,000 shares
of
common stock, Mr. Rogers, a director, was awarded 40,000 shares of common
stock,
Mr. Sawallich, a director, was awarded 20,000 shares of common stock, and
Mr.
Connelly, former Chief Financial Officer, was awarded 10,000 shares of common
stock. In August 2007, CTHE issued 500,000 shares of common stock to Mr.
Solomon
in connection with his services to CTHE and further advances of
funds.
COMPARISON
OF RIGHTS OF HOLDERS OF XCORPOREAL COMMON STOCK
AND
CTHE COMMON STOCK
Upon
completion of the merger, there will be no change in the rights of holders
of
Xcorporeal common stock because CTHE will amend and restate its certificate
of
incorporation and bylaws to be substantially similar to the certificate of
incorporation and bylaws of Xcorporeal immediately prior to the merger. CTHE
shareholders rights will change because of the changes to its certificate
of
incorporation and bylaws. In addition, the par value of CTHE common stock
will
change from $0.01 per share to $0.0001 per share as a result of the reverse
split. Also, as a result of the reverse stock split and merger, CTHE
stockholders will own approximately 350,000 shares in the combined company,
while Xcorporeal stockholders will own approximately 14.2 million shares
in the
combined company. Accordingly, CTHE shareholders’ percentage ownership in CTHE
will substantially decrease as a result of the merger.
Upon
completion of the merger, CTHE will change its name to Xcorporeal, Inc,
and
adopt the Certificate of Incorporation and Bylaws of Xcorporeal in effect
immediately prior to the merger. Those documents are substantially similar
to the current Certificate of Incorporation and Bylaws of CTHE except that
the
Bylaws of CTHE provide that stockholders representing 25% of the outstanding
common stock may call a special meeting of stockholders while the Bylaws
of
Xcorporeal provide that special meetings of stockholders may only be called
by
the Chairman of the Board, the Chief Executive Officer, the President or
Secretary of the corporation, in each case pursuant to a resolution of
the Board
of Directors.
72
LEGAL
MATTERS
Wood
& Sartain LLP, counsel to CTHE, will render an opinion as to certain legal
matters concerning the
shares of CTHE common stock to be issued to Xcorporeal stockholders pursuant
to
the merger.
INTERESTS
OF NAMED EXPERTS AND LEGAL COUNSEL
Dreier
Stein & Kahan LLP, legal counsel to Xcorporeal, and its attorneys hold no
shares of its common stock, but an attorney with the firm holds a warrant
to
purchase up to 200,000 shares of Xcorporeal’s common stock. Wood
& Sartain, LLP, legal counsel to CTHE owns no shares of its common
stock, but an attorney with the firm who is the brother-in-law of CTHE’s Chieft
Executive Officer, owns 53,572 shares of CTHE common stock.
73
INDEX
TO FINANCIAL STATEMENT OF
XCORPOREAL,
INC.
(a
Development Stage Company)
|
PAGE
|
||||
|
BALANCE
SHEETS AS OF JUNE 30, 2007 (UNAUDITED) AND DECEMBER 21,
2006
|
F-2
|
|||
|
STATEMENTS
OF OPERATIONS, THREE MONTHS ENDED JUNE 30, 2007, SIX
MONTHS ENDED, DATE OF INCEPTION TO JUNE 30, 2007
(UNAUDITED)
|
F-3
|
|||
|
STATEMENTS
OF CASH FLOWS, SIX MONTHS ENDED JUNE 30, 2007, SIX
MONTHS ENDED JUNE 30, 2006, DATE OF INCEPTION TO JUNE 30,
2007
(UNAUDITED)
|
F-4
|
|||
|
STATEMENTS
OF STOCKHOLDERS’ EQUITY (DEFICIENCY) DATE OF INCEPTION TO JUNE 30, 2007
(UNAUDITED)
|
F-5
|
|||
|
NOTES
TO INTERIM FINANCIAL STATEMENTS, JUNE 30, 2007 (UNAUDITED)
|
F-6
|
|||
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F-10
|
|||
|
|
||||
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F-11
|
|||
|
|
||||
|
FINANCIAL
STATEMENTS
|
||||
|
|
||||
|
BALANCE
SHEETS AS OF DECEMBER 31, 2006 AND 2005
|
F-12
|
|||
|
|
||||
|
STATEMENTS
OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005,
AND THE
PERIOD FROM INCEPTION (MAY 4, 2001) TO DECEMBER 31, 2006
|
F-13
|
|||
|
|
||||
|
STATEMENTS
OF STOCKHOLDERS’ EQUITY (DEFICIENCY) FOR THE YEARS ENDED DECEMBER 31,
2006 AND 2005, AND THE PERIOD FROM INCEPTION (MAY 4, 2001)
TO DECEMBER 31,
2006
|
F-14
|
|||
|
|
||||
|
STATEMENTS
OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005,
AND THE
PERIOD FROM INCEPTION (MAY 4, 2001) TO DECEMBER 31, 2006
|
F-15
|
|||
|
|
||||
|
NOTES
TO FINANCIAL STATEMENTS
|
F-16
|
|||
F-1
XCORPOREAL,
INC.
(a
Development Stage Company)
|
|
|
June
30,
|
|
|
December
31,
|
|
||
|
|
|
2007
|
|
|
2006
|
|
||
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
346,887
|
|
|
$
|
27,440,987
|
|
|
Marketable
securities, at fair value
|
|
|
22,676,578
|
|
|
|
—
|
|
|
Restricted
cash
|
|
|
83,050
|
|
|
|
—
|
|
|
Prepaids
|
|
|
158,802
|
|
|
|
70,850
|
|
|
Other
current assets
|
|
|
12,066
|
|
|
|
19,378
|
|
|
|
|
|
|
|
|
|
||
|
Total
current assets
|
|
|
23,277,383
|
|
|
|
27,531,215
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
56,094
|
|
|
|
3,328
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
951
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Total
Assets
|
|
|
23,334,428
|
|
|
|
27,535,543
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
455,036
|
|
|
|
143,606
|
|
|
Accrued
placement agent fees
|
|
|
—
|
|
|
|
1,348,470
|
|
|
Accrued
professional fees
|
|
|
427,259
|
|
|
|
312,208
|
|
|
Accrued
royalties
|
|
|
208,333
|
|
|
|
83,333
|
|
|
Accrued
other liabilities
|
|
|
111,630
|
|
|
|
121,189
|
|
|
Other
current liabilities
|
|
|
115,400
|
|
|
|
124,676
|
|
|
|
|
|
|
|
|
|
||
|
Total
Current Liabilities
|
|
|
1,317,658
|
|
|
|
2,133,482
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
Preferred
Stock, $0.001 par value, 10,000,000 shares authorized, none
outstanding
|
|
|
—
|
|
|
|
—
|
|
|
Common
Stock, $0.0001 par value, 40,000,000 shares authorized, 14,200,050
outstanding on June 30, 2007 and December 31, 2006
|
|
|
1,420
|
|
|
|
1,420
|
|
|
Additional
paid-in capital
|
|
|
34,202,998
|
|
|
|
29,924,410
|
|
|
Deficit
accumulated during the development stage
|
|
|
(12,187,648
|
)
|
|
|
(4,523,769
|
)
|
|
|
|
|
|
|
|
|
||
|
Total
Stockholders’ Equity
|
|
|
22,016,770
|
|
|
|
25,402,061
|
|
|
|
|
|
|
|
|
|
||
|
Total
Liabilities & Stockholders’ Equity
|
|
$
|
23,334,428
|
|
|
$
|
27,535,543
|
|
|
|
|
|
|
|
|
|
||
See
accompanying notes to the interim financial statements
F-2
(a
Development Stage Company)
(Unaudited)
|
|
|
|
|
|
|
|
May
4, 2001 (Date
|
|
||||||||
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
of
Inception) to
|
|
|||||||||
|
|
|
June
30,
|
|
June
30,
|
|
June
30,
|
|
|||||||||
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
||||||
|
Operating
Expenses:
|
||||||||||||||||
|
Selling,
general and administrative
|
$
|
1,611,188
|
$
|
5,587
|
$
|
5,590,288
|
$
|
11,790
|
$
|
8,908,940
|
||||||
|
Research
and development
|
1,482,037
|
—
|
2,688,134
|
—
|
3,975,456
|
|||||||||||
|
Depreciation
and amortization
|
3,862
|
—
|
5,383
|
—
|
5,478
|
|||||||||||
|
Loss
before Other Income and Income Tax
|
(3,097,087
|
)
|
(5,587
|
)
|
(8,283,805
|
)
|
(11,790
|
)
|
(12,889,874
|
)
|
||||||
|
Interest
Income
|
308,060
|
—
|
619,926
|
—
|
702,226
|
|||||||||||
|
Loss
before income taxes
|
(2,789,027
|
)
|
(5,587
|
)
|
(7,663,879
|
)
|
(11,790
|
)
|
(12,187,648
|
)
|
||||||
|
Income
taxes
|
—
|
—
|
—
|
—
|
—
|
|||||||||||
|
Net
Loss
|
$
|
(2,789,027
|
)
|
$
|
(5,587
|
)
|
$ |
(7,663,879
|
) | $ |
(11,790
|
) | $ |
(12,187,648
|
) | |
|
Basic
and diluted loss per share
|
$
|
(0.20
|
)
|
$
|
(0.00
|
)
|
$
|
(0.54
|
)
|
$
|
(0.00
|
)
|
||||
|
Weighted
average number of shares outstanding
|
14,200,050
|
3,820,000
|
14,200,050
|
3,820,000
|
||||||||||||
See
accompanying notes to the interim financial statements
F-3
(a
Development Stage Company)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
May
4, 2001 (Date
|
|
|
|
|
|
Six
Months Ended
|
|
|
of
Inception) to
|
|
||||||
|
|
|
June
30,
|
|
|
June
30,
|
|
||||||
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|||
|
Cash
flows used in operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss for the Period
|
|
$
|
(7,663,879
|
)
|
|
$
|
(11,790
|
)
|
|
$
|
(12,187,648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-employee
Stock Based Compensation
|
|
|
2,795,124
|
|
|
|
—
|
|
|
|
4,957,735
|
|
|
Stock
Based Compensation
|
|
|
1,483,464
|
|
|
|
—
|
|
|
|
1,747,715
|
|
|
Depreciation
and amortization
|
|
|
5,383
|
|
|
|
—
|
|
|
|
5,478
|
|
|
Net
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
Expenses
|
|
|
(87,952
|
)
|
|
|
—
|
|
|
|
(158,802
|
)
|
|
Other
Current Assets
|
|
|
7,312
|
|
|
|
—
|
|
|
|
(12,066
|
)
|
|
Other
Assets
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,000
|
)
|
|
Accounts
Payable and Accrued Liabilities
|
|
|
(806,548
|
)
|
|
|
5,459
|
|
|
|
1,202,257
|
|
|
Other
Current Liabilities
|
|
|
(9,276
|
)
|
|
|
—
|
|
|
|
115,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Net
Cash Used in Operating Activities
|
|
|
(4,276,372
|
)
|
|
|
(6,331
|
)
|
|
|
(4,330,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures
|
|
|
(58,100
|
)
|
|
|
—
|
|
|
|
(61,523
|
)
|
|
Restricted
Cash
|
|
|
(83,050
|
)
|
|
|
—
|
|
|
|
(83,050
|
)
|
|
Purchase
of marketable securities
|
|
|
(25,000,000
|
)
|
|
|
—
|
|
|
|
(25,000,000
|
)
|
|
Sale
of marketable securities
|
|
|
2,323,422
|
|
|
|
—
|
|
|
|
2,323,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Net
Cash Used in Investing Activities
|
|
|
(22,817,728
|
)
|
|
|
—
|
|
|
|
(22,821,151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Stock issued
|
|
|
—
|
|
|
|
—
|
|
|
|
27,434,349
|
|
|
Advances
from related party
|
|
|
—
|
|
|
|
6,590
|
|
|
|
64,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Net
Cash Provided by Financing Activities
|
|
|
—
|
|
|
|
6,590
|
|
|
|
27,498,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(decrease)
in cash during the period
|
|
|
(27,094,100
|
)
|
|
|
259
|
|
|
|
346,887
|
|
|
Cash,
beginning of the period
|
|
|
27,440,987
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Cash,
end of the period
|
|
$
|
346,887
|
|
|
$
|
259
|
|
|
$
|
346,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information; cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Income
taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
See
accompanying notes to the interim financial
statements
F-4
(a
Development Stage Company)
For
the Period May 4, 2001 (Inception) to June 30,
2007
(Unaudited)
|
|
|
|
|
Deficit
|
|
|||||||||||
|
|
|
|
|
Accumulated
|
|
|||||||||||
|
|
|
|
Additional
|
During
|
|
|||||||||||
|
|
Common
Stock
|
Paid-in
|
Development
|
|
||||||||||||
|
|
Shares
|
Amount
|
Capital
|
Stage
|
Total
|
|||||||||||
|
Common
stock issued for cash at $0.01 per share
|
2,500,000
|
$
|
250
|
$
|
24,750
|
$
|
25,000
|
|||||||||
|
Net
Loss for the year ended December 31, 2001
|
$
|
(40,255
|
)
|
(40,255
|
)
|
|||||||||||
|
Balance
as of December 31, 2001
|
2,500,000
|
250
|
24,750
|
(40,255
|
)
|
(15,255
|
)
|
|||||||||
|
Common
stock issued for cash at $0.05 per share
|
1,320,000
|
132
|
65,868
|
66,000
|
||||||||||||
|
Net
Loss for the year ended December 31, 2002
|
(31,249
|
)
|
(31,249
|
)
|
||||||||||||
|
Balance
as of December 31, 2002
|
3,820,000
|
382
|
90,618
|
(71,504
|
)
|
19,496
|
||||||||||
|
Net
Loss for the year ended December 31, 2003
|
(12,962
|
)
|
(12,962
|
)
|
||||||||||||
|
Balance
as of December 31, 2003
|
3,820,000
|
382
|
90,618
|
(84,466
|
)
|
6,534
|
||||||||||
|
Net
Loss for the year ended December 31, 2004
|
(23,338
|
)
|
(23,338
|
)
|
||||||||||||
|
Balance
as of December 31, 2004
|
3,820,000
|
382
|
90,618
|
(107,804
|
)
|
(16,804
|
)
|
|||||||||
|
Net
Loss for the year ended December 31, 2005
|
(35,753
|
)
|
(35,753
|
)
|
||||||||||||
|
Balance
as of December 31, 2005
|
3,820,000
|
382
|
90,618
|
(143,557
|
)
|
(52,557
|
)
|
|||||||||
|
Common
stock issued for a licence rights
|
9,600,000
|
960
|
40
|
1,000
|
||||||||||||
|
Capital
stock cancelled
|
(3,420,000
|
)
|
(342
|
)
|
342
|
—
|
||||||||||
|
Warrants
granted for consulting fees
|
2,162,611
|
2,162,611
|
||||||||||||||
|
Forgiveness
of related party debt
|
64,620
|
64,620
|
||||||||||||||
|
Common
stock issued for cash at $7.00, net of placement fees of
$2,058,024
|
4,200,050
|
420
|
27,341,928
|
27,342,348
|
||||||||||||
|
Stock-based
compensation expense
|
264,251
|
264,251
|
||||||||||||||
|
Net
loss for the period
|
(4,380,212
|
)
|
(4,380,212
|
)
|
||||||||||||
|
Balance
as of December 31, 2006
|
14,200,050
|
1,420
|
29,924,410
|
(4,523,769
|
)
|
25,402,061
|
||||||||||
|
Warrants
granted for consulting services
|
2,795,124
|
2,795,124
|
||||||||||||||
|
Stock-based
compensation expense
|
1,483,464
|
1,483,464
|
||||||||||||||
|
Net
loss for the period
|
(7,663,879
|
)
|
(7,663,879
|
)
|
||||||||||||
|
Balance
as of June 30, 2007
|
14,200,050
|
$
|
1,420
|
$
|
34,202,998
|
$
|
(12,187,648
|
)
|
$
|
22,016,770
|
||||||
See
accompanying notes to the interim financial statements
F-5
XCORPOREAL,
INC.
(a
Development Stage Company)
June 30,
2007
(Unaudited)
Note
1 — Interim Reporting
While
information presented in the accompanying interim financial statements is
unaudited, it includes all adjustments, which are, in the opinion of management,
necessary to present fairly the financial position, results of operations
and
cash flows for the interim period presented. All adjustments are of a normal
recurring nature. It is suggested that these interim financial statements
be
read in conjunction with our December 31, 2006 financial
statements.
The
results of operations for the period ended June 30, 2007, are not
necessarily indicative of the results that can be expected for the year ended
December 31, 2007.
Note
2 — Nature and Continuance of Operations
We
were incorporated in the State of Nevada as Pacific Spirit Inc. on May 4,
2001 to engage in the acquisition, exploration and development of natural
resource properties. On August 31, 2006, we changed our name to Xcorporeal,
Inc. and thereafter acquired the rights to our Wearable Artificial Kidney,
congestive heart failure treatment products, and other medical devices. As
a
result, we transitioned to a development stage company focused on researching,
developing and commercializing technology and products related to the treatment
of kidney failure and congestive heart failure.
On
October 13, 2006, Xcorporeal, Inc., a Nevada corporation (Xcorporeal
Nevada), consummated a merger with and into its newly-formed, wholly-owned
subsidiary, Xcorporeal Merger Corporation, a Delaware corporation (Xcorporeal
Delaware) for the purpose of changing our domicile from Nevada to Delaware.
Each
outstanding share of Xcorporeal Nevada common stock, par value $0.001 per
share,
was automatically converted into one share of Xcorporeal Delaware common
stock,
par value $0.0001 per share. The change in par value has been applied
retroactively. As a result of the reincorporation, the total number of common
stock authorized changed from 100,000,000 shares to 40,000,000 common shares;
the total number of preferred stock authorized remained at 10,000,000 shares,
resulting in a total number of capital stock authorized of 50,000,000
shares.
Note
3 — Development Stage Company
We
were previously a pre-exploration stage company as defined in the Statement
of
Financial Accounting Standards (“SFAS”) No. 7 and the Securities and
Exchange Act Guide No. 7. Effective with the execution of the license
agreement on August 31, 2006, we are a development stage company, devoting
substantially all of our efforts to the research, development and
commercialization of kidney and congestive heart failure treatment
technologies.
Risks
and Uncertainties—
We
operate in an industry that is subject to intense competition, government
regulation and rapid technological change. Our operations are subject to
significant risk and uncertainties including financial, operational,
technological, regulatory and other risks associated with a development stage
company, including the potential risk of business failure.
Note
4 — Cash Equivalents and Marketable Securities
We
invest available cash in short-term commercial paper, certificates of deposit
and high grade variable rate securities. Liquid investments with an original
maturity of three months or less when purchased are considered to be cash
equivalents.
Investments,
including auction rate securities and certificates of deposit, with maturity
dates greater than three months when purchased, which have readily determined
fair values, are classified as available-for-sale investments and reflected
in
current assets as marketable securities at fair market value. Auction rate
securities are recorded at par value, which equals fair market value, as
the
rate on such securities resets generally every 7, 28 or
35 days.
Restricted
cash represents deposits secured as collateral for a bank credit card
program.
F-6
Property
and equipment consist of the following at June 30, 2007:
|
|
|
|
|
|
|
Property
and equipment
|
|
$
|
61,523
|
|
|
Accumulated
depreciation
|
|
|
(5,429
|
)
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
56,094
|
|
Depreciation
expense for the three and six months ended June 30, 2007 was $3,847 and
$5,334, respectively. There was no depreciation expense during
2006.
Note
6 — Interest Income
Interest
income of $308,060 and $619,926 reported for the three and six months ended
June 30, 2007, respectively, are a result of the interest earned on our
cash raised from our private placement during the fourth quarter of
2006.
Note
7 — Mineral Property
By
a lease agreement effective June 1, 2001 and amended June 25, 2002,
November 25, 2002, January 9, 2004 and April 11, 2005, we were
granted the exclusive right to explore and mine the Del Oro and NP Claims
located in Pershing County of the State of Nevada. The term of this lease
was
for 30 years, renewable for an additional 30 years so long as the
conditions of the lease are met. We were required to pay minimum advanced
royalties payments on each January 9 of $50,000. We did not make the payment
which triggered an event of default under the lease. On March 10, 2006, we
received a termination notice and the lease was subsequently
terminated.
Note
8 — Related Party Transaction
We
were charged the following by a former director:
|
|
|
|
|
|
|
May
2, 2001
|
||||||||||
|
(Date
of
|
||||||||||||||||
|
|
Three
months ended
|
Six
months ended
|
Inception)
to
|
|||||||||||||
|
|
June
30,
|
June
30,
|
June
30,
|
|||||||||||||
|
|
2006
|
2007
|
2006
|
2007
|
2007
|
|||||||||||
|
Administrative
services
|
$
|
1,500
|
$
|
—
|
$
|
3,000
|
$
|
—
|
$
|
12,000
|
||||||
Note
9 — License Agreement
On
August 31, 2006, we entered into a Contribution Agreement with a company
whose sole managing member is our current Chairman. We issued 9,600,000 shares
of common stock in exchange for (a) the right, title, and interest to the
name “Xcorporeal” and related trademarks and domain names, and (b) the
right to enter into the Merger Agreement and License Agreement with National
Quality Care, Inc. (NQCI) dated September 1, 2006 pursuant to which we
obtained the exclusive rights to the technology relating to our congestive
heart
failure treatment, kidney failure treatment, and other medical devices. We
were
a shell corporation prior to the transaction. We valued the License Agreement
at
the carry-over basis of $1,000. As consideration for being granted the License,
we agreed to pay a minimum annual royalty of $250,000, or 7% of net sales.
We
recorded $208,333 in royalty expenses covering the minimum royalties from
commencement of the License Agreement through June 30, 2007. The first
minimum royalty payment is due by December 1, 2007. The License Agreement
expires in 2105.
Note
10 — Terminated Merger Agreement
On
September 1, 2006, we entered into a Merger Agreement with our licensor,
NQCI, which contemplated that we would either (i) acquire it as a wholly
owned subsidiary pursuant to a triangular merger, or (ii) issue shares of
our common stock in consideration of the assignment of the licensed technology.
The Merger Agreement expired by its own terms on December 31, 2006. In
addition, on December 29, 2006, NQCI served written notice that it was
terminating the Merger Agreement, and on January 2, 2007, we consented to
the termination. Accordingly, the Merger Agreement is now terminated. We
will
not be proceeding with any merger with NQCI. The termination of the Merger
Agreement had no effect on the License Agreement, the Contribution Agreement,
or
the shares we issued to CNL.
F-7
Note
11 — Stock Options and Warrants
Incentive
Compensation Plan
On
October 13, 2006, after the effectiveness of the Nevada reincorporation, we
adopted the Xcorporeal, Inc. 2006 Incentive Compensation Plan and the related
form of option agreement. The plan authorizes the grant of stock options,
restricted stock, restricted stock units and stock appreciation rights.
Effective February 28, 2007, there are 3,900,000 shares of common stock
reserved for issuance pursuant to the plan (subject to adjustment in accordance
with the provisions of the plan). The plan will continue in effect for a
term of
up to ten years
Stock
Options to Employees, Officer and Directors
The
Compensation Committee of our Board of Directors determines the terms of
the
options granted, including the exercise price, the number of shares subject
to
option, and the vesting period. Options generally vest over five years and
have
a maximum life of ten years. On May 11, 2007, we granted options to
purchase an aggregate of 625,000 shares of our common stock under the 2006
Incentive Compensation Plan to employees. The options vest ratably over 4
or
5 years, are exercisable at $7.00 per share, the fair market value of our
common stock on the grant date, and expire in 2017. The fair value of such
stock
options was $3.8 million.
We
reported $0.8 million and $1.5 million in stock-based compensation
expense for employees, officers and directors for the three and six month
period
ended June 30, 2007, respectively. No such stock-based compensation expense
was reported for the three and six month period ended June 30,
2006.
All
compensation expense for stock options granted has been determined under
the
fair value method using the Black-Scholes option-pricing model with the
following assumptions:
|
|
|
For
the quarter
|
||
|
|
|
ended
|
||
|
|
|
June
30, 2007
|
||
|
Expected
dividend yields
|
|
zero
|
|
|
|
Expected
volatility
|
|
|
110
|
%
|
|
Risk-free
interest rate
|
|
|
4.60
|
%
|
|
Expected
terms in years
|
|
|
6.25-6.50
|
|
Warrants
and Stock Options to Non-Employees
On
May 11, 2007, we also issued stock options to a consultant to purchase
50,000 shares of common stock in exchange for consulting services. These
stock
options vest ratably over 5 years so long as the consultant continues to
provide services, are exercisable at $7.00 per share, the fair market value
of
our common stock on the grant date and expire 2017. The resulting fair value
of
such stock options was $0.3 million.
We
reported $0.1 million and $2.8 million in stock-based compensation
expense for consultants for the three and six month period ended June 30,
2007, respectively. No such stock-based compensation expense was reported
for
the three and six month period ended June 30, 2006.
Compensation
for options granted to non-employees has been determined in accordance with
SFAS
No. 123 and EITF 96-18, “Accounting for Equity Instruments that are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
or
Services.” Accordingly, compensation is determined using the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measured.
For
options and warrants issued as compensation to non-employees for services
that
are fully vested and non-forfeitable at the time of issuance, the estimated
value is recorded in equity and expensed when the services are performed
and
benefit is received as provided by Financial Accounting and Standards Board
(“FASB”) Emerging Issues Task Force No. 96-18 “Accounting For Equity
Instruments That Are Issued To Other Than Employees For Acquiring or In
Conjunction With Selling Goods Or Services.”
F-8
All
charges for warrants granted have been determined under the fair value method
using the Black-Scholes option-pricing model with the following
assumptions:
|
|
|
For
the quarter
|
||
|
|
|
ended
|
||
|
|
|
June
30, 2007
|
||
|
Expected
dividend yields
|
|
zero
|
||
|
Expected
volatility
|
|
|
135
|
%
|
|
Risk-free
interest rate
|
|
|
4.67
|
%
|
|
Expected
terms in years
|
|
|
9.87
|
|
The
following table shows the change in unamortized compensation expense for
stock
options and warrants issued to employees, officers, directors and non-employees
during the six months ended June 30, 2007:
|
|
|
Stock
Options and
|
|
|
Unamortized
|
|
||
|
|
|
Warrants
|
|
|
Compensation
|
|
||
|
|
|
Outstanding
|
|
|
Expense
|
|
||
|
January 1,
2007
|
|
|
2,054,221
|
|
|
$
|
10,002,154
|
|
|
Granted
in the period
|
|
|
2,160,000
|
|
|
|
13,343,156
|
|
|
Cancelled
in the period
|
|
|
(50,000
|
)
|
|
|
(282,403
|
)
|
|
Expensed
in the period
|
|
|
|
|
|
|
(4,297,569
|
)
|
|
|
|
|
|
|
|
|
||
|
June 30,
2007
|
|
|
4,164,221
|
|
|
$
|
18,765,338
|
|
In
July 2007, we entered into an agreement with Aubrey Group, Inc., an
FDA-registered third-party contract developer and manufacturer of medical
devices for the design and development of a Portable Artificial Kidney (PAK).
The PAK will be designed for use as a Continuous Renal Replacement Therapy
(CRRT) in either a hospital (with medical supervision) or home setting. The
development is expected to be completed by the end of 2008 and projected
labor
and material costs are estimated at approximately $5.1 million over the
term. The agreement can be terminated at any time with 30 business days
notice.
F-9
Board
of
Directors and Stockholders
Xcorporeal
Inc.
(a
development stage company)
(formerly
Pacific Spirit, Inc.)
Santa
Monica, California
We
have
audited the accompanying balance sheet of Xcorporeal Inc., a development
stage
company as of December 31, 2006 and the related statements of operations,
stockholders’ equity, and cash flows for the year ended December 31, 2006 and
the period from inception (May 4, 2001) to December 31, 2006, except
that we did not audit these financial statements for the period from inception
(May 4, 2001) through December 31, 2005; those statements were audited
by other
auditors whose report dated February 2, 2006, except as to Note 4 in the
2005
financial statements which was as of March 10, 2006, expressed a going
concern
opinion on those statements. These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We
conducted our audit 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, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provide a reasonable
basis for
our opinion.
In
our
opinion, based on our audit and the report of other auditors, the financial
statements referred to above present fairly, in all material respects,
the
financial position of Xcorporeal Inc. at December 31, 2006 and the period
from inception (May 4, 2001) through December 31, 2006, and the results
of its
operations and its cash flows for the year ended December 31, 2006
,
in
conformity with accounting principles generally accepted in the United
States of
America.
As
more
fully described in Note 1 to the financial statements, effective January 1,
2006 the company adopted Statement of Financial Accounting Standards
No. 123R, “Share-Based Payment”
|
/s/
BDO Seidman, LLP
|
|||
|
Los
Angeles, California
|
|||
|
April 16,
2007
|
F-10
To
the
Stockholders,
Xcorporeal,
Inc. (formerly Pacific Spirit Inc.)
We
have
audited the accompanying balance sheet of Xcorporeal, Inc. (formerly Pacific
Spirit Inc.) (A Pre-exploration Stage Company) as of December 31, 2005 and
the related statements of operations, cash flows and stockholders’ equity
(deficiency) for the year ended December 31, 2005 and the period
May 4, 2001 (Date of Inception) to December 31, 2005. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based
on
our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform an audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our
audit provide a reasonable basis for our opinion.
In
our
opinion, these financial statements referred to above present fairly, in
all
material respects, the financial position of Xcorporeal, Inc. (formerly Pacific
Spirit Inc.) as of December 31, 2005 and the results of its operations and
its cash flows for the years ended December 31, 2005 and the period
May 4, 2001 (Date of Inception) to December 31, 2005, in conformity with
accounting principles generally accepted in the United States of
America.
The
accompanying financial statements referred to above have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1
to the
financial statements, the Company is in the pre-exploration stage, and has
no
established source of revenue and is dependent on its ability to raise capital
from shareholders or other sources to sustain operations. These factors,
along
with other matters as set forth in Note 1, raise substantial doubt that the
Company will be able to continue as a going concern. The financial statements
do
not include any adjustments that might result from the outcome of this
uncertainty.
|
|
|
|
|
Vancouver,
Canada
|
|
|
|
February 2,
2006, except as to Note 4
|
|
“AMISANO
HANSON”
|
|
which
is as of March 10, 2006
|
|
Chartered
Accountants
|
F-11
(formerly
Pacific Spirit Inc.)
(a
Development Stage Company)
|
Years
ended December 31,
|
|||||||
|
2006
|
2005
|
||||||
|
ASSETS
|
|
|
|||||
|
Current
|
|
|
|||||
|
Cash
|
$
|
27,440,987
|
$
|
—
|
|||
|
Prepaids
|
70,850
|
—
|
|||||
|
Other
current assets
|
19,378
|
—
|
|||||
|
Total
current assets
|
27,531,215
|
—
|
|||||
|
Property
and equipment, net
|
3,328
|
—
|
|||||
|
|
|||||||
|
Other
assets
|
1,000
|
—
|
|||||
|
Total
Assets
|
27,535,543
|
—
|
|||||
|
|
|||||||
|
Current
|
|||||||
|
Accounts
payable
|
143,606
|
—
|
|||||
|
Accrued
placement agent fees
|
1,348,470
|
—
|
|||||
|
Accrued
professional fees
|
312,208
|
—
|
|||||
|
Accrued
other liabilities
|
204,522
|
18,330
|
|||||
|
Due
to related party
|
—
|
34,227
|
|||||
|
Other
current liabilities
|
124,676
|
—
|
|||||
|
Total
Current Liabilities
|
2,133,482
|
52,557
|
|||||
|
Commitments
and contingencies
|
|||||||
|
|
|||||||
|
STOCKHOLDERS’
EQUITY (DEFICIENCY)
|
|||||||
|
|
|||||||
|
Preferred
Stock, $0.001 par value, 10,000,000 shares authorized, none
outstanding
|
—
|
—
|
|||||
|
Common
Stock, $0.0001 par value, 40,000,000 shares authorized, 14,200,050
and
3,820,000 outstanding on December 31, 2006 and 2005,
respectively
|
1,420
|
382
|
|||||
|
Additional
paid-in capital
|
29,924,410
|
90,618
|
|||||
|
Deficit
accumulated during the development stage
|
(4,523,769
|
)
|
(143,557
|
)
|
|||
|
Total
Stockholders’ Equity/(Deficiency)
|
25,402,061
|
(52,557
|
)
|
||||
|
Total
Liabilities & Stockholders’ Equity
|
$
|
27,535,543
|
$
|
—
|
|||
F-12
(formerly
Pacific Spirit Inc.)
(a
Development Stage Company)
|
|
|
Years
ended December
31,
|
|
May
4, 2001 (Date of
Inception) to December 31,
|
|
|||||
|
|
|
2006
|
|
2005
|
|
2006
|
||||
|
Operating
Expenses:
|
|
|
|
|||||||
|
Selling,
general and administrative
|
$
|
3,174,995
|
$
|
35,753
|
$
|
3,318,652
|
||||
|
Research
and development
|
1,287,322
|
—
|
1,287,322
|
|||||||
|
Depreciation
|
95
|
—
|
95
|
|||||||
|
|
||||||||||
|
Loss
before Other Income and Income Tax
|
(4,462,412
|
)
|
(35,753
|
)
|
(4,606,069
|
)
|
||||
|
|
||||||||||
|
Interest
Income
|
82,200
|
—
|
82,300
|
|||||||
|
|
|
|
||||||||
|
Loss
before income taxes
|
(4,380,212
|
)
|
(35,753
|
)
|
(4,523,769
|
)
|
||||
|
|
||||||||||
|
Income
taxes
|
—
|
—
|
—
|
|||||||
|
|
|
|
||||||||
|
Net
Loss
|
$
|
(4,380,212
|
)
|
$
|
(35,753
|
)
|
$
|
(4,523,769
|
)
|
|
|
|
||||||||||
|
Basic
and diluted loss per share
|
$
|
(0.67
|
)
|
$
|
(0.01
|
)
|
||||
|
|
||||||||||
|
Weighted
average number of shares outstanding
|
6,542,312
|
3,820,000
|
||||||||
See
accompanying notes to the financial statements
F-13
(formerly
Pacific Spirit Inc.)
(a
Development Stage Company)
For
the Period May 4, 2001 (Inception) to December 31,
2006
|
|
|
|
|
Deficit
|
|
|
||||||||||
|
|
|
|
|
Accumulated
|
|
|
||||||||||
|
|
|
|
Additional
|
|
During
|
|
|
|||||||||
|
|
|
Common
Stock
|
|
Paid-in
|
|
Development
|
|
|
||||||||
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Stage
|
|
Total
|
||||||
|
Common
stock issued for cash at $0.01 per share
|
2,500,000
|
$
|
250
|
$
|
24,750
|
$
|
25,000
|
|||||||||
|
Net
Loss for the year ended December 31, 2001
|
|
|
|
$
|
(40,255
|
)
|
(40,255
|
)
|
||||||||
|
|
|
|
|
|
|
|||||||||||
|
Balance
as of December 31, 2001
|
2,500,000
|
250
|
24,750
|
(40,255
|
)
|
(15,255
|
)
|
|||||||||
|
|
||||||||||||||||
|
Common
stock issued for cash at $0.05 per share
|
1,320,000
|
132
|
65,868
|
66,000
|
||||||||||||
|
Net
Loss for the year ended December 31, 2002
|
|
|
|
(31,249
|
)
|
(31,249
|
)
|
|||||||||
|
|
||||||||||||||||
|
Balance
as of December 31, 2002
|
3,820,000
|
382
|
90,618
|
(71,504
|
)
|
19,496
|
||||||||||
|
|
||||||||||||||||
|
Net
Loss for the year ended December 31, 2003
|
|
|
|
(12,962
|
)
|
(12,962
|
)
|
|||||||||
|
|
|
|
|
|
|
|||||||||||
|
Balance
as of December 31, 2003
|
3,820,000
|
382
|
90,618
|
(84,466
|
)
|
6,534
|
||||||||||
|
|
||||||||||||||||
|
Net
Loss for the year ended December 31, 2004
|
|
|
|
(23,338
|
)
|
(23,338
|
)
|
|||||||||
|
|
||||||||||||||||
|
Balance
as of December 31, 2004
|
3,820,000
|
382
|
90,618
|
(107,804
|
)
|
(16,804
|
)
|
|||||||||
|
|
||||||||||||||||
|
Net
Loss for the year ended December 31, 2005
|
|
|
|
(35,753
|
)
|
(35,753
|
)
|
|||||||||
|
|
||||||||||||||||
|
Balance
as of December 31, 2005
|
3,820,000
|
382
|
90,618
|
(143,557
|
)
|
(52,557
|
)
|
|||||||||
|
|
||||||||||||||||
|
Common
stock issued for licence rights
|
9,600,000
|
960
|
40
|
1,000
|
||||||||||||
|
Capital
stock cancelled
|
(3,420,000
|
)
|
(342
|
)
|
342
|
—
|
||||||||||
|
Warrants
granted for consulting fees
|
2,162,611
|
2,162,611
|
||||||||||||||
|
Forgiveness
of debt
|
64,620
|
64,620
|
||||||||||||||
|
|
||||||||||||||||
|
Common
stock issued for cash at $7.00, net of placement fees of
$2,058,024
|
4,200,050
|
420
|
27,341,928
|
27,342,348
|
||||||||||||
|
Stock-based
compensation expense
|
264,251
|
264,251
|
||||||||||||||
|
Net
loss for the period
|
|
|
|
(4,380,212
|
)
|
(4,380,212
|
)
|
|||||||||
|
|
||||||||||||||||
|
Balance
as of December 31, 2006
|
14,200,050
|
$
|
1,420
|
$
|
29,924,410
|
$
|
(4,523,769
|
)
|
$
|
25,402,061
|
||||||
See
accompanying notes to the financial statements
F-14
(formerly
Pacific Spirit Inc.)
(a
Development Stage Company)
|
May
4, 2001 (Date
|
||||||||||
|
Years
ended
|
of
Inception) to
|
|||||||||
|
December
31,
|
December
31,
|
|||||||||
|
2006
|
2005
|
2006
|
||||||||
|
Cash
flows used in operating activities
|
|
|
|
|||||||
|
Net
Loss for the Period
|
$
|
(4,380,212
|
)
|
$
|
(35,753
|
)
|
$
|
(4,523,769
|
)
|
|
|
|
||||||||||
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
||||||||||
|
Non-employee
Stock Based Compensation
|
2,162,611
|
2,162,611
|
||||||||
|
Stock
Based Compensation
|
264,251
|
264,251
|
||||||||
|
Depreciation
|
95
|
95
|
||||||||
|
Net
Change in assets and liabilities:
|
||||||||||
|
Prepaid
Expenses
|
(70,850
|
)
|
800
|
(70,850
|
)
|
|||||
|
Other
Current Assets
|
(19,378
|
)
|
(19,378
|
)
|
||||||
|
Other
Assets
|
(1,000
|
)
|
(1,000
|
)
|
||||||
|
Accounts
Payable and Accrued Liabilities
|
1,990,475
|
5,826
|
2,008,805
|
|||||||
|
Other
Current Liabilities
|
124,676
|
|
124,676
|
|||||||
|
|
||||||||||
|
Net
Cash Provided by (Used in) Operating Activities
|
70,668
|
(29,127
|
)
|
(54,559
|
)
|
|||||
|
|
||||||||||
|
Cash
Flows from Investing Activities
|
||||||||||
|
Capital
Expenditures
|
(3,423
|
)
|
—
|
(3,423
|
)
|
|||||
|
|
||||||||||
|
Net
Cash Used in Investing Activities
|
(3,423
|
)
|
—
|
(3,423
|
)
|
|||||
|
|
||||||||||
|
Cash
Flows from Financing Activities
|
||||||||||
|
Capital
Stock issued in Private Placement for $29,400,351 in cash; fees
of
$2,057,002
|
27,343,349
|
—
|
27,434,349
|
|||||||
|
Advances
from related party
|
30,393
|
28,551
|
64,620
|
|||||||
|
|
||||||||||
|
Net
Cash Provided by Financing Activities
|
27,373,742
|
28,551
|
27,498,969
|
|||||||
|
|
||||||||||
|
Increase/(decrease)
in cash during the period
|
27,440,987
|
(576
|
)
|
27,440,987
|
||||||
|
Cash,
beginning of the period
|
—
|
576
|
|
|||||||
|
|
||||||||||
|
Cash,
end of the period
|
$
|
27,440,987
|
$
|
—
|
$
|
27,440,987
|
||||
|
|
||||||||||
|
Supplemental
disclosure of cash flow information; cash paid for:
|
||||||||||
|
Interest
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
|
|
||||||||||
|
Income
taxes
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
See
accompanying notes to the financial statements
F-15
1.
NATURE OF OPERATIONS
We
were
incorporated in the State of Nevada as Pacific Spirit Inc. on May 4, 2001
to engage in the acquisition, exploration and development of natural resource
properties. On August 31, 2006, we changed our name to Xcorporeal, Inc. and
thereafter acquired the rights to our Wearable Artificial Kidney, congestive
heart failure treatment products, and other medical devices. As a result,
we
transitioned to a development stage company focused on researching, developing
and commercializing technology and products related to the treatment of kidney
failure and congestive heart failure.
On
October 13, 2006, Xcorporeal, Inc., a Nevada corporation (Xcorporeal
Nevada), consummated a merger with and into its newly-formed, wholly-owned
subsidiary, Xcorporeal Merger Corporation, a Delaware corporation (Xcorporeal
Delaware) for the purpose of changing the Company’s domicile from Nevada to
Delaware. Each outstanding share of Xcorporeal Nevada common stock, par value
$0.001 per share, was automatically converted into one share of Xcorporeal
Delaware common stock, par value $0.0001 per share. The change in par value
has
been applied retroactively. As a result of the reincorporation, the total
number
of common stock authorized changed from 100,000,000 shares to 40,000,000
common
shares; the total number of preferred stock authorized remained at 10,000,000
shares, resulting in a total number of capital stock authorized of 50,000,000
shares.
The
financial statements as of December 31, 2005, have been prepared using
generally accepted accounting principles in the United States of America
applicable for a going concern which assumes that the Company will realize
its
assets and discharge its liabilities in the ordinary course of business.
Realization values may be substantially different from carrying values as
shown
and these financial statements do not give affect to adjustments that would
be
necessary to the carrying values and classifications of assets and liabilities
should the Company be unable to continue as a going concern. The Company
has a
working capital deficiency of $52,557 and as at December 31, 2005, has not
yet attained profitable operations and has accumulated a deficit of $143,557
since inception. Its ability to continue as a going concern is dependent
upon
the ability of the Company to generate profitable operations in the future
and/or to obtain the necessary financing to meet its obligations and repay
its
liabilities arising from normal business operations when they come due. These
financial statements do not include any adjustments to the amounts and
classification of assets and liabilities that may be necessary should the
Company be unable to continue as a going concern. The Company anticipates
that
additional funding will be in the form of equity financing from the sale
of
common shares. The Company may also seek to obtain short-term loans from
the
directors of the Company. There are no current arrangements in place for
equity
funding or short-term loans.
2.
DEVELOPMENT STAGE COMPANY
We
were
previously a pre-exploration stage company as defined in the Statement of
Financial Accounting Standards (“SFAS”) No. 7 and the Securities and
Exchange Act Guide No. 7. Effective with the execution of the license
agreement on August 31, 2006, we are a development stage company, devoting
substantially all of our efforts to the research, development and
commercialization of kidney and congestive heart failure treatment
technologies.
Risks
and Uncertainties—
We
operate in an industry that is subject to intense competition, government
regulation and rapid technological change. Our operations are subject to
significant risk and uncertainties including financial, operational,
technological, regulatory and other risks associated with a development stage
company, including the potential risk of business failure.
3.
SUMMARY OF ACCOUNTING POLICIES
Cash
and Cash Equivalents —
Cash
equivalents are comprised of certain highly liquid investments with original
maturities of less than three months.
Property
and Equipment —
Property
and equipment are stated at cost less accumulated depreciation and amortization,
which are calculated using the straight-line method over the shorter of the
estimated useful lives of the related assets (generally ranging from three
to
five years), or the remaining lease term when applicable. Gains and losses
on
disposals are included in results of operations at amounts equal to the
difference between the book value of the disposed assets and the proceeds
received upon disposal. There were no gains or losses on disposals from
inception through the end of 2006. Expenditures for replacements and leasehold
improvements are capitalized, while expenditures for maintenance and repairs
are
expensed as incurred.
Identifiable
Intangibles and Amortization —
Costs
associated with obtaining and licensing patents and trademarks are capitalized
as incurred and are amortized on a straight-line basis over the shorter of
their
estimated useful lives or their legal lives of 17 to 20 years. Amortization
of such costs begins once the patent or trademark has been issued. We evaluate
the recoverability of our patent costs and trademarks quarterly based on
estimated undiscounted future cash flows.
F-16
Research
and Development —
Research
and development is expensed as incurred. Upfront and milestone payments made
to
third parties in connection with research and development collaborations
prior
to regulatory approval are expensed as incurred. Payments made to third parties
subsequent to regulatory approval are capitalized and amortized over the
shorter
of the remaining license or product patent life. At December 31, 2006, the
Company had no such capitalized research and development
costs.
Income
Taxes —
Under
SFAS 109, “Accounting for Income Taxes,” deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the consolidated financial statements and their respective tax basis. Deferred
income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts reported for income tax purposes, and (b) tax
credit carry-forwards. We record a valuation allowance for deferred tax assets
when, based on management’s best estimate of taxable income in the foreseeable
future, it is more likely than not that some portion of the deferred income
tax
assets may not be realized.
Earnings
per Share —
Under
SFAS 128, “Earnings per Share,” basic earnings per share is computed by dividing
net income available to common stockholders by the weighted average number
of
common shares assumed to be outstanding during the period of computation.
Diluted earnings per share reflect the potential dilution that could occur
if
securities or other contracts to issue common stock were exercised or converted
into common stock. As the Company had net losses for all periods presented,
basic and diluted loss per share are the same, as any additional common stock
equivalents would be anti-dilutive.
Share-Based
Compensation —
Effective January 1, 2006, we adopted FASB Statement No. 123R,
Share-Based
Payment
(“FAS
123R”) (see Note 14). FAS 123R requires all share-based payments to employees
to
be expensed over the requisite service period based on the grant-date fair
value
of the awards and requires that the unvested portion of all outstanding awards
upon adoption be recognized using the same fair value and attribution
methodologies previously determined under FASB Statement No. 123,
Accounting
for Stock-Based Compensation
. We
continue to use the Black-Scholes valuation method and applied the requirements
of FAS 123R using the modified prospective method. Prior to January 1,
2006, there was no share-based compensation expense.
Use
of Estimates —
The
consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States (“GAAP”) and, accordingly,
include certain amounts that are based on management’s best estimates and
judgments. Estimates are used in determining such items as provisions for
sales
discounts and returns, depreciable and amortizable lives, recoverability
of
inventories produced in preparation for product launches, amounts recorded
for
contingencies, environmental liabilities and other reserves, pension and
other
postretirement benefit plan assumptions, share-based compensation, acquisitions
and taxes on income. Because of the uncertainty inherent in such estimates,
actual results may differ from these estimates.
Reclassifications
—
Certain
reclassifications have been made to prior year amounts to conform with the
current year presentation.
Recently
Issued Accounting Standards
In
February 2007, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. (SFAS) 159, “ The
Fair Value Option for Financial Assets and Financial Liabilities - Including
an
Amendment of FASB Statement No. 115, Accounting for Certain Investments in
Debt and Equity Securities.”
SFAS
No. 159 permits an entity to choose to measure many financial instruments
and certain items at fair value. The objective of this standard is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reporting earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS No. 159 permits all entities to choose to measure eligible
items at fair value at specified election dates. Entities will report unrealized
gains and losses on items for which the fair value option has been elected
in
earnings at each subsequent reporting date. The fair value option: (a) may
be applied instrument by instrument, with a few exceptions, such as investments
accounted for by the equity method; (b) is irrevocable (unless a new
election date occurs); and (c) is applied only to entire instruments and
not to portions of instruments. SFAS No. 159 is effective as of the
beginning of an entity’s first fiscal year that begins after November 15,
2007, which for us would be our fiscal year beginning January 1, 2008.
Early adoption is permitted as of the beginning of the previous fiscal year
provided that the entity makes that choice in the first 120 days of that
fiscal year and also elects to apply to provision of FASB Statement
No. 157, “ Fair
Value Measurements.”
We
are
currently evaluating the impact that the adoption
of SFAS
No. 159 will have on our consolidated financial
statements.
F-17
In
December 2006, the FASB issued FSP 00-19-2, Accounting
for Registration Payment Arrangements
(“
FSP
00-19-2”)
which
addresses accounting for registration payment arrangements. FSP 00-19-2
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether
issued
as a separate agreement or included as a provision of a financial instrument
or
other agreement, should be separately recognized and measured in accordance
with
FASB Statement No. 5, “ Accounting
for Contingencies
.” FSP
00-19-2 further clarifies that a financial instrument subject to a registration
payment arrangement should be accounted for in accordance with other applicable
generally accepted accounting principles without regard to the contingent
obligation to transfer consideration pursuant to the registration payment.
FSP
00-19-2 is effective immediately for registration payment arrangements
and the
financial instruments subject to those arrangements that are entered into
or
modified subsequent to December 21, 2006. For registration payment
arrangement and related financial instruments entered into prior to
December 21, 2006, FSP 00-19-2 is effective for financial statements issued
for fiscal years beginning after December 15, 2006 and interim periods
within those financial years. Companies are required to report transition
through a cumulative-effect adjustment to the opening balance of retained
earnings as of the first interim period for the fiscal year in which FSP
00-19-2
is adopted. We have early adopted FSP 00-19-2 in 2006. There was no impact
on
our financial statements upon adoption.
In
September 2006, the FASB issued FASB Statement No. 157, “ Fair
Value Measurements”
(“
SFAS
No. 157”).
SFAS
No. 157 establishes a framework for measuring fair value in accordance with
generally accepted accounting principles, clarifies the definition of fair
value
within that framework, and expands disclosures about fair value measurements.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, which for us would be our fiscal year
beginning January 1, 2008. We are currently evaluating the impact that the
adoption of SFAS No. 157 will have on our consolidated financial
statements.
In
September 2006, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. (SAB) 108 (Topic 1N), “ Considering
the Effects of Prior Year Misstatement when Quantifying Misstatements in
Current
Year Financial Statements
,”. SAB
No. 108 requires SEC registrants (i) to quantify misstatements using a
combined approach that considers both the balance-sheet and income-statement
approaches, (ii) to evaluate whether either approach results in quantifying
an error that is material in light of relevant quantitative and qualitative
factors, and (iii) to adjust their financial statements if the new combined
approach results in a conclusion that an error is material. SAB No. 108 is
effective for fiscal years ending after November 15, 2006, which for us
would be our current fiscal year ending December 31, 2006. The adoption of
SAB No. 108 did not have any effect on our financial position and results
of operations.
In
July 2006, the FASB issued FASB Interpretation No. (FIN) 48, “
Accounting
for Uncertainty in Income Taxes — An Interpretation of FASB Statement
No. 109”
(“
FIN
48”).
FIN
48 prescribes detailed guidance for the financial statement recognition,
measurement and disclosure of uncertain tax positions recognized in an
enterprise’s financial statements in accordance with Statement No. 109, “
Accounting
for Income Taxes
.” Tax
positions must meet a more-likely-than-not recognition threshold at the
effective date to be recognized upon the adoption of FIN 48 and in subsequent
periods. FIN 48 will be effective for fiscal years beginning after
December 15, 2006 which for us would be our fiscal year beginning on
August 1, 2007. The provisions of FIN 48 will be applied to all tax
positions upon initial adoption of the Interpretation. The cumulative effect
of
applying the provisions of this Interpretation will be reported as an adjustment
to the opening balance of retained earnings for that fiscal year. We are
currently evaluating the impact of FIN 48 on our financial statements but
do not
believe that its adoption will have a material effect on our financial
position
or results of operations.
F-18
4.
MINERAL PROPERTY
By
a
lease agreement effective June 1, 2001 and amended June 25, 2002,
November 25, 2002, January 9, 2004 and April 11, 2005, the
Company was granted the exclusive right to explore and mine the Del Oro and
NP
Claims located in Pershing County of the State of Nevada. The term of this
lease
was for 30 years, renewable for an additional 30 years so long as the
conditions of the lease are met. The Company was required to pay minimum
advanced royalties payments on each January 9 of $50,000. The Company did
not
make the payment which triggered an event of default under the lease. On
March 10, 2006, the Company received a termination notice and the lease was
subsequently terminated.
5.
PROPERTY AND EQUIPMENT
Property
and equipment consist of the following at December 31,
2006:
|
Furniture
and office equipment
|
$
|
3,423
|
||
|
Accumulated
depreciation
|
(95
|
)
|
||
|
|
||||
|
Property
and equipment, net
|
$
|
3,328
|
Depreciation
expense for the years ended December 31, 2006 and 2005 was $95 and $0,
respectively.
6.
INTEREST INCOME
Interest
income of $82,200 reported for the year ended December 31, 2006 is a result
of the interest earned on our cash raised from our private placement as further
described in Note 14 below.
7.
LEASES
During
2006 we assumed a month-to-month lease for our research lab at Cedars-Sinai
Medical Center at a rate of $4,191 per month. In addition, as part of our
License Agreement (see Note 12. License Agreement) we reimbursed our licensor
for rent for medical office space for a three month period through
November 30, 2006 at $1,400 per month. NQCI subleased this space from a
related party of ours. We paid the $1,400 per month rent for December 2006
and January 2007 directly to the related party.
8.
LICENSE EXPENSES
As
part
of our License Agreement with National Quality Care, Inc. (NQCI) dated
September 1, 2006, we agreed to pay reasonable and necessary expenses
incurred in the ordinary course of business consistent with past practices,
during the period September 1, 2006 until the date of closing or
termination of the Merger Agreement, which occurred on December 31,
2006.
During
2006, we paid $1,182,359 on three invoices totaling $1,478,516 and the disputed
balance is included under the caption ‘ Other
current liabilities’
in
the
accompanying balance sheet as of December 31, 2006.
9.
NON-CASH TRANSACTIONS
Investing
and financing activities during the year ended December 31, 2006 that do
not have a direct impact on current cash flows have been excluded from
the
statements of cash flows as follows:
a)
We
cancelled 3,420,000 shares of common stock.
b)
We
issued 9,600,000 shares of common stock to acquire the right, title and
interest
to the name “Xcorporeal,” related trademarks and domain names, and the right to
enter into the License Agreement to obtain the rights to technology relating
to
congestive heart and kidney failure treatment and other devices. The value
of
the stock was recorded at $1,000, the carryover basis of our 96% stockholder
immediately following the transaction.
c)
A
former director of the Company forgave $64,620 of unpaid advances and management
fees.
There
were no non-cash transactions during the year ended December 31,
2005.
F-19
10.
LOSS PER COMMON SHARE
The
following table sets forth the computation of basic and diluted loss per
common
share:
|
|
Years
ended
|
||||||
|
|
December
31,
|
||||||
|
|
2006
|
2005
|
|||||
|
Numerator:
|
|
|
|||||
|
|
|
|
|||||
|
Net
Loss
|
$
|
(4,380,212
|
)
|
$
|
(35,753
|
)
|
|
|
|
|||||||
|
Denominator:
|
|||||||
|
Weighted
average outsanting shares of common stock
|
6,542,312
|
3,820,000
|
|||||
|
|
|||||||
|
Loss
per common share:
|
|||||||
|
|
|
|
|||||
|
Basic
|
$
|
(0.67
|
)
|
$
|
(0.01
|
)
|
|
|
|
|||||||
|
Diluted
|
$
|
(0.67
|
)
|
$
|
(0.01
|
)
|
|
Diluted
loss per common share for the years ended December 31, 2006 and 2005 does
not include the effect of stock options and warrants (see Note 15. Stock
Options
and Warrants to Non-Employees) since their effect would be anti-dilutive.
Options and warrants outstanding at December 31, 2006 and 2005 were
approximately 1.9 million and nil, respectively.
11.
INCOME TAXES
The
(benefit) provision for taxes on income from continuing operations is
comprised of the following for the years ended
December 31:
The
reported (benefit) provision for taxes on income from continuing operations
differs from the amount computed by applying the statutory federal
income tax
rate of 34% to loss before income taxes as follows for the years ended
December 31:
|
|
2006
(%)
|
2005
(%)
|
|||||
|
Income
tax benefit at statutory rate
|
(34.00
|
)
|
(34.00
|
)
|
|||
|
State
taxes, net of federal benefits
|
(5.83
|
)
|
(5.83
|
)
|
|||
|
Research
and development credits
|
(3.92
|
)
|
—
|
||||
|
Change
in valuation allowance
|
43.75
|
39.83
|
|||||
|
|
|||||||
|
Total
|
—
|
—
|
|||||
F-20
The
Company provides deferred income taxes for temporary differences between
assets
and liabilities recognized for financial reporting and income tax purposes.
The
tax effects of temporary differences at December 31 are as
follows:
|
|
2006
|
|
2005
|
||||
|
Net
operating loss carryforwards
|
$
|
778,063
|
$
|
39,238
|
|||
|
Tax
credits
|
171,690
|
—
|
|||||
|
Deferred
Stock Based compensation
|
966,726
|
—
|
|||||
|
|
|||||||
|
Deferred
tax assets
|
1,916,479
|
39,238
|
|||||
|
Valuation
allowance
|
(1,916,479
|
)
|
(39,238
|
)
|
|||
|
|
|||||||
|
Net
deferred tax liability
|
$
|
(0
|
)
|
$
|
(0
|
)
|
|
|
|
|
Based
upon the Company’s development stage status and history of operating
losses, realization of its deferred tax assets does not meet the
“more
likely than not” criteria under SFAS No. 109 and, accordingly, a
valuation allowance for the entire deferred tax asset amount has
been
recorded.
|
|
|
||
|
|
|
The
valuation allowance had an increase of $1.8 million and $0.04 million
in
2006 and 2005, respectively.
|
|
|
||
|
|
|
At
December 31, 2006, the Company has net operating loss carry forwards
for federal and state income tax purposes of approximately
$1.9 million which begin to expire in 2026 and 2021, respectively. In
addition, the Company has research and development and other tax
credits
for federal and state income tax purposes of approximately $83,676
and
$88,014, respectively. The federal credits begin to expire in 2026
and
state credits do not expire for California purposes.
|
|
|
||
|
|
|
Pursuant
to Sections 382 and 383 of the Internal Revenue Code, the utilization
of net operating losses (“NOL”) and other tax attributes may be subject to
substantial limitations if certain ownership changes occur during
a
three-year testing period (as defined). The Company is currently
evaluating the effect of the recent stock issuances on its ability
to
utilize its NOL or credit
carryovers.
|
12.
LICENSE AGREEMENT
On
August 31, 2006, we entered into a Contribution Agreement with a company
whose sole managing member is our current Chairman. We issued 9,600,000 shares
of common stock in exchange for (a) the right, title, and interest to the
name “Xcorporeal” and related trademarks and domain names, and (b) the
right to enter into the Merger Agreement and License Agreement dated September
1, 2006 pursuant to which we obtained the exclusive rights to the technology
relating to our congestive heart failure treatment, kidney failure treatment,
and other medical devices. We were a shell corporation prior to the transaction.
We valued the License Agreement at the carry-over basis of $1,000. As
consideration for being granted the License, we agreed to pay a minimum annual
royalty of $250,000, or 7% of net sales. We recorded $83,300 in royalty expenses
covering the minimum royalties from commencement of the License Agreement
through December 31, 2006. The first minimum royalty payment is due by
December 1, 2007. The License Agreement expires in 2105.
13.
TERMINATED MERGER AGREEMENT
On
September 1, 2006, we entered into a Merger Agreement with our licensor,
NQCI, which contemplated that we would either (i) acquire it as a wholly
owned subsidiary pursuant to a triangular merger, or (ii) issue shares of
our common stock in consideration of the assignment of the licensed technology.
The Merger Agreement expired by its own terms on December 31, 2006. In
addition, on December 29, 2006, NQCI served written notice that it was
terminating the Merger Agreement, and on January 2, 2006, we consented to
the termination. Accordingly, the Merger Agreement is now terminated. We
will
not be proceeding with any merger with NQCI. The termination of the Merger
Agreement had no effect on the License Agreement, the Contribution Agreement,
or
the shares we issued to CNL.
F-21
14.
STOCKHOLDERS’ EQUITY
During
the fourth quarter of 2006, we completed a private placement of an aggregate
of
4,200,050 unregistered shares of our common stock. Our shares were issued
to
approximately 100 institutional and accredited investors, priced at $7.00
per
share, for proceeds of approximately $27.3 million, net of placement agent
fees of $2.1 million. Purchasers included affiliates of our board members
Marc Cummins, Nicholas Lewin and Jay Wolf. We accounted for the placement
agent
fees as a reduction in the gross proceeds of the private placement and a
credit
to additional paid-in capital. In addition, we issued 3-year warrants to
purchase 100,000 and 29,221 shares of our common stock to two placement agents
at $7.00 and $7.25 per share (“Placement Agent Warrants”), respectively. The
fair value of the Placement Agent Warrants issued is $615,810 and was determined
using the Black-Scholes option-pricing model with the following assumptions:
Annual dividends - zero, expected volatility - 110%, risk free interest rate
-
4.6%, expected life - 3 years.
On
August 31, 2006, we issued immediately-exercisable, five-year warrants to
purchase an aggregate of 325,000 shares of common stock (see Note 15. Stock
Options and Warrants). The fair value for the consulting services provided
of
approximately $2,162,611 was recorded as a credit to additional paid-in capital
and a debit to selling, general and administrative expenses.
The
private placement was exempt from registration pursuant to Rule 506
promulgated under Regulation D of the Securities Act of 1933, as amended,
as a transaction not involving a public offering. We entered into registration
rights agreements with each of the purchasers, obligating us to use best
efforts
to file a registration statement covering the purchased shares. We filed
a
registration statement on Form S-3 with the SEC on December 22, 2006 to
register the common stock issued under this transaction. In response to
correspondence from the staff of the SEC dated January 18, 2007, we filed a
registration withdrawal request with the SEC on January 31, 2007 to
withdraw the registration statement on Form S-3 previously filed until such
time
as our common stock is quoted on the “OTC Bulletin Board” administered by Nasdaq
or other exchange.
15.
STOCK OPTIONS AND WARRANTS
Incentive
Compensation Plan
On
October 13, 2006, our Board of Directors and stockholders unanimously
approved the Xcorporeal, Inc. 2006 Incentive Compensation Plan and the related
form of option agreement. The plan authorizes the grant of stock options,
restricted stock, restricted stock units and stock appreciation rights. As
of
December 31, 2006, there were 2,000,000 shares of common stock reserved for
issuance pursuant to the plan, subject to adjustment in accordance with the
provisions of the plan. The purpose of the plan is to assist us in attracting,
motivating, retaining and rewarding high-quality employees, officers, directors
and consultants.
Stock
Options
The
Compensation Committee of our Board of Directors determines the terms of
the
options granted, including the exercise price, the number of shares subject
to
option, and the vesting period. Options generally vest over five years and
have
a maximum life of ten years. On November 14, 2006, we granted options to
purchase an aggregate of 1.6 million shares of our common stock under the
2006 Incentive Compensation Plan to two officers and the chairman of the
Company. The options vest ratably over 5 years, are exercisable at $5.00
per share and expire between 2011 and 2016. No options were granted during
the
year ended December 31, 2005. We reported $264,251 in stock-based
compensation expense during the year ended December 31, 2006. No
stock-based compensation expense was reported for the year ended
December 31, 2005.
F-22
All
compensation expense for stock options granted have been determined under
the
fair value method using the Black-Scholes option-pricing model with the
following assumptions:
|
|
For
the years ended December 31,
|
||||||
|
|
2006
|
2005
|
|||||
|
Annual
dividends
|
zero
|
—
|
|||||
|
Expected
volatility
|
110-135
|
%
|
—
|
||||
|
Risk
free interest rate
|
4.57-4.60
|
%
|
—
|
||||
|
Expected
life
|
5-10
years
|
—
|
|||||
In
addition, our Chief Medical and Scientific Officer will also be granted options
to purchase an additional 500,000 shares of our common stock upon FDA approval
of our first product.
Warrants
On
August 31, 2006, we issued immediately-exercisable, five-year warrants to
purchase an aggregate of 325,000 shares of common stock at $1.00 per share
to
consultants in exchange for services performed during the third quarter of
2006.
The fair value of the services provided was calculated using the Black-Scholes
pricing model and approximated $2,162,611. In addition, we issued 3-year
warrants to purchase 100,000 and 29,221 shares of our common stock to two
placement agents at $7.00 and $7.25 per share (“Placement Agent Warrants”),
respectively. The fair value of the Placement Agent Warrants issued is $615,810
and was also determined using the Black-Scholes option-pricing model. No
warrants were granted during the year ended December 31,
2005.
Compensation
for options granted to non-employees has been determined in accordance with
SFAS
No. 123 and EITF 96-18, “Accounting for Equity Instruments that are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
or
Services.” Accordingly, compensation expense is determined using the fair value
of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measured.
For
options and warrants issued as compensation to non-employees for services
that
are fully vested and non-forfeitable at the time of issuance, the estimated
value is recorded in equity and expensed when the services are performed
and
benefit is received as provided by Financial Accounting and Standards Board
(“FASB”) Emerging Issues Task Force No. 96-18 “Accounting For Equity
Instruments That Are Issued To Other Than Employees For Acquiring Or In
Conjunction With Selling Goods Or Services.” Non-vested options and warrants
issued for services performed are marked to market monthly.
All
charges for warrants granted have been determined under the fair value method
using the Black-Scholes option-pricing model with the following
assumptions:
|
|
For
the years ended December 31,
|
||||||
|
|
2006
|
2005
|
|||||
|
Annual
dividends
|
zero
|
—
|
|||||
|
Expected
volatility
|
110-120
|
%
|
—
|
||||
|
Risk
free interest rate
|
4.60-4.70
|
%
|
—
|
||||
|
Expected
life
|
3-5
years
|
—
|
|||||
F-23
The
following tables summarize information concerning outstanding options at
December 31, 2006 and 2005:
|
|
|
Weighted
|
|||||
|
|
|
Average
|
|||||
|
|
Stock
|
Exercise
|
|||||
|
|
Options
|
Price
|
|||||
|
Outstanding
at December 31, 2004
|
—
|
—
|
|||||
|
Granted
|
—
|
—
|
|||||
|
Exercised
|
—
|
—
|
|||||
|
Cancelled
or forfeited
|
—
|
—
|
|||||
|
|
|||||||
|
Outstanding
at December 31, 2005
|
—
|
—
|
|||||
|
|
|||||||
|
Granted
|
1,600,000
|
$
|
5.00
|
||||
|
Exercised
|
—
|
—
|
|||||
|
Cancelled
or forfeited
|
—
|
—
|
|||||
|
|
|||||||
|
Outstanding
at December 31, 2006
|
1,600,000
|
$
|
5.00
|
||||
|
|
|||||||
|
Exercisable
at December 31, 2005
|
—
|
—
|
|||||
|
|
|||||||
|
Exercisable
at December 31, 2006
|
—
|
—
|
|||||
The
following tables summarize information concerning outstanding warrants at
December 31, 2006 and 2005:
|
|
|
Weighted
|
|||||
|
|
|
Average
|
|||||
|
|
|
Exercise
|
|||||
|
|
Warrants
|
Price
|
|||||
|
Outstanding
at December 31, 2004
|
—
|
—
|
|||||
|
Granted
|
—
|
—
|
|||||
|
Exercised
|
—
|
—
|
|||||
|
Cancelled
or forfeited
|
—
|
—
|
|||||
|
|
|||||||
|
Outstanding
at December 31, 2005
|
—
|
—
|
|||||
|
|
|||||||
|
Granted
|
454,221
|
$
|
2.72
|
||||
|
Exercised
|
—
|
—
|
|||||
|
Cancelled
or forfeited
|
—
|
—
|
|||||
|
|
|||||||
|
Outstanding
at December 31, 2006
|
454,221
|
$
|
2.72
|
||||
|
|
|||||||
|
Exercisable
at December 31, 2005
|
—
|
—
|
|||||
|
|
|||||||
|
Exercisable
at December 31, 2006
|
454,221
|
$
|
2.72
|
||||
The
weighted average grant-date estimated fair value of stock options granted
in
2005 and 2006 approximated nil and $10.3 million or $6.42 per share,
respectively. The weighted average grant-date estimated fair value of
warrants
granted in 2005 and 2006 approximated nil and $2.8 million or $6.11 per share,
respectively. At December 31, 2006, the unamortized compensation charges
related to outstanding stock options were $10.0 million. There were no
unamortized compensation charges related to warrants at December 31, 2006.
No stock options or warrants were exercised during the two years ended
December 31, 2006.
F-24
|
|
Stock
|
|||
|
|
Options
|
|||
|
Outstanding
at December 31, 2005
|
—
|
|||
|
|
||||
|
Granted
|
1,600,000
|
|||
|
Exercised
|
—
|
|||
|
Cancelled
or forfeited
|
—
|
|||
|
|
||||
|
Outstanding
at December 31, 2006
|
1,600,000
|
|||
The
weighted average remaining contractual life of the warrants that are exercisable
as of December 31, 2006 approximates 4.18 years. No stock options were
exercisable as of December 31, 2006.
16.
RELATED PARTY TRANSACTIONS
We
were
charged the following by a former director:
|
|
|
|
May
2, 2001
|
|||||||
|
|
|
|
(Date
of
|
|||||||
|
|
Year
ended
|
|
Inception)
to
|
|||||||
|
|
December
31,
|
|
December
31,
|
|||||||
|
|
2006
|
2005
|
2006
|
|||||||
|
Administrative
services
|
$
|
3,000
|
$
|
9,000
|
$
|
12,000
|
||||
We
owed
$64,620 to related party at August 31, 2006, a director as of that date,
consisting of unpaid advances and management fees. This amount was forgiven
by
the former director, who was no longer a shareholder as of the sale of his
common stock on August 31, 2006. The debt forgiveness was accounted for as
an Addition to Paid in Capital.
17.
SUBSEQUENT EVENTS (unaudited)
Amendment
of the 2006 Incentive Compensation Plan
On
February 27, 2007, our board of directors approved an amendment to the 2006
Incentive Compensation Plan to increase the number of shares of common stock
reserved for issuance under the plan from 2,000,000 to 3,900,000. The amendment
was previously approved by our stockholders.
Issuance
of Stock Options and Warrants
Also
on
February 27, 2007, the board of directors approved the issuance of options
and warrants to directors, officers, other employees and consultants to purchase
a total of 1,035,000 and 225,000, respectively, of our common stock.
The options will vest 20% on each of the first, second, third, fourth and
fifth
anniversaries and expire five years from the grant date. The warrants have
a
5-year term and vest immediately.
Lease
for Corporate Headquarters
Effective
February 2, 2007, we entered into a one-year lease for our executive
offices of approximately 3,000 square feet for monthly rent of approximately
$11,000 per month.
F-25
INDEX
TO FINANCIAL STATEMENTS
|
Unaudited
Balance Sheets, June 30, 2007; December 31, 2006
|
F-26 | ||
|
Unaudited
Statements of Operations, three months ended June 30, 2007 and
2006; six
months ended June 30, 2007 and 2006
|
F-27 | ||
|
Unaudited
Statements of Cash Flows, six months ended June 30, 2006 and
2007
|
F-28 | ||
|
Notes
to Financial Statements, June 30, 2007
|
F-29 | ||
|
Report
of Independent Registered Public Accounting Firm
|
F-31
|
||
|
Balance
Sheets as of December 31, 2006 and 2005
|
F-32
|
||
|
Statements
of Operations for the years ended December 31, 2006 and
2005
|
F-33
|
||
|
Statements
of Changes in Stockholders' Deficit for the years ended December
31, 2006
and 2005
|
F-34
|
||
|
Statements
of Cash Flows for the years ended December 31, 2006 and 2005
|
F-35
|
||
|
Notes
to Financial Statements
|
F-36
|
UNAUDITED
BALANCE SHEETS
|
|
JUNE
30,
|
DECEMBER
31,
|
|||||
|
|
2007
|
2006
|
|||||
|
ASSETS
|
|
|
|||||
|
|
|
|
|||||
|
CURRENT
ASSETS
|
|
|
|||||
|
Cash
|
$
|
271
|
$
|
197
|
|||
|
|
|||||||
|
TOTAL
ASSETS
|
$
|
271
|
$
|
197
|
|||
|
|
|||||||
|
|
|||||||
|
CURRENT
LIABILITIES
|
|||||||
|
Accounts
payable and accrued expenses
|
$
|
57,418
|
$
|
392,681
|
|||
|
Advance
payable to officer
|
6,092
|
46,288
|
|||||
|
Note
payable to shareholder including accrued interest of
|
|||||||
|
$0
and $7,801
|
-
|
16,801
|
|||||
|
|
|||||||
|
Total
current liabilities
|
63,510
|
455,770
|
|||||
|
|
|||||||
|
COMMITMENTS
AND CONTINGENCIES
|
|||||||
|
|
|||||||
|
PREFERRED
STOCK, $0.01 stated value per share; 1,000,000 shares
authorized;
|
|||||||
|
No
shares issued or outstanding
|
-
|
-
|
|||||
|
COMMON
STOCK, $.01 par value per share; 60,000,000 shares
authorized;
|
|||||||
|
2,397,264
and 836,370 shares issued and outstanding at June 30, 2007
and
|
|||||||
|
December
31, 2006.
|
23,973
|
8,364
|
|||||
|
COMMON
STOCK, pending issuance (38,572 shares at December 31,
2006)
|
-
|
600,000
|
|||||
|
ADDITIONAL
PAID-IN CAPITAL
|
59,082,536
|
58,238,845
|
|||||
|
ACCUMULATED
DEFICIT
|
(59,169,74
|
)
|
(59,302,782
|
)
|
|||
|
|
|||||||
|
Total
stockholders’ deficit
|
(63,239
|
)
|
(455,573
|
)
|
|||
|
|
|||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$
|
271
|
$
|
197
|
|||
The
accompanying notes are an integral part of these financial
statements.
F-26
UNAUDITED
STATEMENTS OF OPERATIONS
|
|
THREE
MONTHS ENDED,
|
SIX
MONTHS ENDED
|
|||||||||||
|
|
JUNE
30
|
JUNE 30,
|
|||||||||||
|
|
2007
|
2006
|
2007
|
2006
|
|||||||||
|
Revenue
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||
|
|
|||||||||||||
|
General
and administrative expense
|
7,117
|
48,895
|
69,034
|
122,560
|
|||||||||
|
Stock
based compensation expense
|
-
|
-
|
34,800
|
-
|
|||||||||
|
Gain
on settlement of liabilities
|
-
|
-
|
-
-
|
||||||||||
|
Debt
settlement gain
|
-
|
(280,359
|
)
|
(237,281
|
)
|
(280,359
|
)
|
||||||
|
Interest
expense
|
-
|
168,266
|
413
|
411,342
|
|||||||||
|
|
|||||||||||||
|
Income
(loss) before income taxes
|
(7,117
|
)
|
63,198
|
133,034
|
(253,543
|
)
|
|||||||
|
Provision
for income taxes
|
-
|
-
|
-
|
-
|
|||||||||
|
|
|||||||||||||
|
Net
income (loss)
|
$
|
(7,117
|
)
|
$
|
63,198
|
$
|
133,034
|
$
|
(253,543
|
)
|
|||
|
|
|||||||||||||
|
Net
income (loss) per share - basic and diluted
|
$
|
0.00
|
$
|
0.00
|
$
|
0.07
|
$
|
0.00
|
|||||
|
|
|||||||||||||
|
Weighted
average common shares outstanding
|
|||||||||||||
|
-
basic and diluted
|
2,397,264
|
67,245,928
|
1,920,839
|
67,245,928
|
|||||||||
The
accompanying notes are an integral part of these financial
statements.
F-27
UNAUDITED
STATEMENTS OF CASH FLOWS
|
|
SIX
MONTHS ENDE
|
||||||
|
|
JUNE
30,
|
||||||
|
|
2007
|
2006
|
|||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|||||
|
Net
income (loss)
|
$
|
133,034
|
$
|
(253,543
|
)
|
||
|
Adjustments
to reconcile net income (loss) to net cash
|
|||||||
|
used
in operating activities:
|
|||||||
|
Amortization
of deferred debt discount
|
-
|
250,290
|
|||||
|
Accrual
for litigation and related interest
|
-
|
137,951
|
|||||
|
Gain
on settlement of accounts payable
|
(237,281
|
)
|
(280,359
|
)
|
|||
|
Stock
compensation expense
|
34,800
|
-
|
|||||
|
Changes
in operating assets and liabilities:
|
|||||||
|
Accounts
payable and accrued expenses
|
26,518
|
125,661
|
|||||
|
Payable
to CDSS Wind Down Inc.
|
-
|
20,000
|
|||||
|
|
|||||||
|
NET
CASH USED IN OPERATING ACTIVITIES
|
(42,929
|
)
|
-
|
||||
|
|
|||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|||||||
|
Shares
issued to officer for cash advance
|
36,911
|
-
|
|||||
|
Cash
advance from officer
|
6,092
|
-
|
|||||
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
43,003
|
-
|
|||||
|
Net
increase in cash and cash equivalents
|
74
|
-
|
|||||
|
|
|||||||
|
Cash
and cash equivalents at the beginning of the period
|
197
|
197
|
|||||
|
|
|||||||
|
Cash
and cash equivalents at the end of the period
|
$
|
271
|
$
|
197
|
|||
|
|
|||||||
|
|
|||||||
|
|
|||||||
|
Common
stock issued to related party for legal services
|
$
|
15,000
|
$
|
-
|
|||
|
|
|||||||
|
Common
stock issued to officer to settle advances and notes
payable
|
$
|
63,089
|
$
|
-
|
|||
|
|
|||||||
|
Contribution
from CDSS to pay legal expenses
|
$
|
109,500
|
$
|
-
|
|||
|
|
|||||||
|
Payment
of liability by officer recorded as an advance
|
$
|
-
|
$
|
20,000
|
|||
The
accompanying notes are an integral part of these financial
statements.
F-28
NOTES
TO
FINANCIAL STATEMENTS
JUNE
30,
2007
NOTE
A -
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim
Financial Statements and Basis of Presentation
These
unaudited interim financial statements have been prepared in accordance
with
accounting principles generally accepted in the United States for interim
financial information and in the opinion of management, reflect all adjustments
(consisting of normal, recurring adjustments) necessary to present fairly,
the
financial position, results of operations and cash flows of CT Holdings
Enterprises, Inc. (“CT Holdings” or the “Company”). On March 13, 2006
the Company changed its name from CT Holdings, Inc. to CT Holdings Enterprises,
Inc.
Some
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
in the United States have been condensed or omitted pursuant to rules and
regulations promulgated by the Securities and Exchange Commission (the
“Commission”). The results of operations for the interim periods
shown herein are not necessarily indicative of the results to be expected
for
any future interim period or for the entire year. These statements
should be read together with the audited financial statements and notes
thereto
included in the Company’s Form 10-KSB for the year ended December 31, 2006 on
file with the Commission.
Description
of Business
CT
Holdings provides management expertise including consulting on operations,
marketing and strategic planning and a single source of capital to early
stage
technology companies. The Company was incorporated in Delaware in 1992.
The
business model is designed to enable the companies with whom the Company
acquires or invests to become market leaders in their industries. The strategy
over the years has led to the development, acquisition and operation of
technology based businesses with compelling valuations and strong business
models. The goal is to realize the value of these investments for the Company's
shareholders through a subsequent liquidity event such as a sale, merger
or
initial public offering of the investee companies. However, our
business model is constrained by our lack of capital. At June 30, 2007,
the
Company does not hold any investments and does not have any products or
services, customers or revenue, and the Company has no other lines of
business.
Liquidity
The
Company has incurred recurring operating losses and has a stockholders'
deficit
at June 30, 2007 of $63,239. At June 30, 2007 there is a cash balance of
$271
and current liabilities total $63,510. The Company has limited access to
capital
at June 30, 2007, no plans to raise capital, and management has not identified
sources of capital at June 30, 2007. Past funding needs of the business
have
been provided by financings through notes payable, cash advances and additional
investments from related parties, including the Company's CEO and CITN
Investment Inc ("CII"), an affiliate of the Company’s CEO, however there can be
no assurance that such funds will be available from these related parties
in the
future. The Company has been and continues to be dependent upon outside
financing to perform its business development activities, make investments
in
new technology companies and to fund operations.
Reverse
Stock Split
On
February 14, 2007 our shareholders approved a proposal to amend the Company’s
Certificate of Incorporation to combine shares of the Comany’s common stock to
effect a one for 70 reverse stock split. A 1 for 70 reverse stock split
would
make available sufficient authorized shares of common stock to settle
commitments to issue shares and to potentially facilitate a corporate
transaction such as a merger or financing. Corporate transactions of this
nature
could improve liquidity, however there can be no assurance that the Company
will
enter into any corporate transaction to improve liquidity. The effect of
this
reverse split has been reflected in all share data for all periods
presented.
F-29
The
Company will continue to require working capital to fund operating
expenses. At
June 30, 2007, the Company has not identified sources of capital nor
does the
Company have any plans to raise sufficient amounts of capital to settle
liabilities or to fund business development activities.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure
of
contingent assets and liabilities at the date of the financial statements
and
the reported amounts of revenue and expenses during the reporting period.
Actual
results could differ from those estimates.
Net
Income (Loss) per Common Share
Basic
net
income (loss) per common share is computed by dividing net income (loss) to
common shareholders by the weighted average number of shares of common
stock
outstanding during the period.
Included
in the weighted average number of common shares outstanding for the three
and
six months ended June 30, 2006 are 38,571 shares that would have been
issued when a shareholder exercised his right to convert a note payable
to
common stock and 85,714 shares that would have been issued to the Company’s CEO
when he exercised his right to exchange Parago shares for CT Holdings’ shares if
the Company had the available authorized shares. These shares have
been included in the computation for the date that they would have been
issued. The effect of stock options for 41,679 shares of common stock
outstanding at June 30, 2006 have been excluded from the weighted average
shares
computation as they are antidilutive. The Company had no common stock
equivalents at June 30, 2007; therefore, for the three and six month
periods
ended June 30, 2007, diluted earnings per share are the same as basic
earnings
per share.
Income
Taxes
In
January 2007, the Company adopted the Financial Accounting Standards
Board
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - An
Interpretation of FASB Statement No. 109” (FIN 48). This Interpretation
clarifies the accounting for uncertainty in income taxes recognized in
a
company’s financial statements. FIN 48 requires companies to determine whether
it is “more likely than not” that a tax position will be sustained upon
examination by the appropriate taxing authorieties before any part of
thebenefit
can be recorded in the financial statements. it also provides guidance
on the
recognition, measurement and classification of income tax uncertainties,
along
with any related interest and penalties. The Company did not recognize
any
adjustments to our financial statements as a result of our implementation
of FIN
48.
NOTE
B -
RELATED PARTY TRANSACTIONS
On
March
2, 2007, the CEO exercised a right to acquire 250,000 shares of common
stock for
providing up to $100,000 of cash for working capital purposes. At December
31,
2006, the CEO had advanced the Company $46,288 against the $100,000 commitment
and at March 31, 2007, $6,408 remained available under his commitment
due to the
Company. This amount was received by the Company subsequent to March
31, 2007.
On March 9, 2007, in recognition of service to the Company, Mr. Economou,
a
director, was awarded 40,000 shares of common stock, Mr. Rogers, a director,
was
awarded 40,000 shares of common stock, Mr. Sawallich, a director, was
awarded
20,000 shares of common stock, and Mr. Connelly, former Chief Financial
Officer,
was awarded 10,000 shares of common stock. During the first quarter of
2007, the
Company issued 50,000 shares to a law firm in which the CEO’s brother-in-law is
a partner, in exchange for a reduction in accrued legal expenses of $15,000.
The
Company also issued 5,000 shares each to two consultants. The Company
recorded
stock based compensation expense in the amount of $34,800 related to
these
issuances.
Also
on
March 2, 2007, following the effectiveness of the 1 for 70 reverse stock
split,
the 85,715 unissued shares related to a previously exercised option were
issued
to the CEO, 38,572 shares of common stock related to the conversion of
a note
payable to a shareholder were issued to the shareholder and 1,014,286
shares
were issued to CII for an option exercised by CII.
Pursuant
to the terms of the transition services agreement with CDSS until its
termination in December 2006, the Company agreed to pay CDSS $10,000
per quarter
(reduced in July 2005 from $7,500 per month) for the services of its
CEO, CFO
and accounting and information management staff, as well as office rent
and
indirect overhead expenses. No amount was owed at March 31, 2007 because
all
amounts owed under the transition services agreement were released on
December
4, 2006 pursuant to the Agreement discussed above.
During
the three months ended March 31, 2007, CDSS paid $109,500 in legal expenses
on
behalf of the Company. The $109,500 has been recorded as a contribution
from
CDSS.
On
June
30, 2007, the Company received a cash advance from its CEO of approximately
$6,000 for the purpose of paying various vendors.
On
August
7, 2007, the Company issued 500,000 shares of restricted common stock
to Steven
B. Solomon, the Company’s Chief Executive Officer, in connection with his
services to the Company and further advances of funds. The Company issued
the
restricted common stock in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended, pursuant
to
a transaction to one accredited investor not involving any public
offering.
F-30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Shareholders
CT
Holdings Enterprises, Inc.
We
have
audited the accompanying balance sheets of CT Holdings Enterprises, Inc.,
formerly CT Holdings, Inc., (the Company) as of December 31, 2006 and 2005,
and
the related statements of operations, stockholders' deficit and cash flows
for
the years then ended. These financial statements are the responsibility
of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audits 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, audits of their internal
control over financial reporting. Our audits included consideration of
internal
control over financial reporting as a basis for designing audit procedures
that
are appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis
for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in
all
material respects, the financial position of CT Holdings Enterprises, Inc.
as of
December 31, 2006 and 2005, and the results of its operations and its cash
flows
for the years then ended in conformity with accounting principles generally
accepted in the United States.
The
accompanying financial statements have been prepared assuming that the
Company
will continue as a going concern. As more fully described in Note A, although
the Company has a significant gain for the year ended December 31, 2006,
historically the Company has incurred recurring operating losses and has
a
significant working capital deficiency at December 31, 2006. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described
in
Note A. The financial statements do not include any adjustments that may
result
from the outcome of this uncertainty.
|
/s/
KBA Group LLP
Dallas,
Texas
March
30, 2007
|
F-31
|
DECEMBER
31,
|
|||||||
|
2006
|
|
2005
|
|||||
|
ASSETS
|
|||||||
|
CURRENT
ASSETS
|
|||||||
|
Cash
|
$
|
197
|
$
|
197
|
|||
|
TOTAL
ASSETS
|
$
|
197
|
$
|
197
|
|||
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
|||||||
|
CURRENT
LIABILITIES
|
|||||||
|
Accounts
payable and accrued expenses
|
$
|
392,681
|
$
|
387,654
|
|||
|
Convertible
secured note payable to related party, including accrued interest
of $772
and net of deferred debt discount of $250,290 at December 31,
2005
|
-
|
21,630
|
|||||
|
Demand
note payable to CDSS Wind Down Inc. including accrued interest
payable of
$76,784 at December 31, 2005
|
-
|
301,784
|
|||||
|
Payable
to CDSS Wind Down Inc.
|
-
|
650,000
|
|||||
|
Advance
payable to officer
|
46,288
|
-
|
|||||
|
Note
payable to shareholder including accrued interest of $7,801 and
$6,128
|
16,801
|
15,128
|
|||||
|
Accrual
for litigation including accrued interest of $1,404,590 at December
31,
2005
|
-
|
4,404,590
|
|||||
|
Total
current liabilities
|
455,770
|
5,780,786
|
|||||
|
COMMITMENTS
AND CONTINGENCIES
|
|||||||
|
STOCKHOLDERS’
DEFICIT
|
|||||||
|
Preferred
stock, $.01 par value per share; 1,000,000 shares authorized;
no shares
issued or outstanding
|
-
|
-
|
|||||
|
Common
stock, $.01 par value per share; 60,000,000 shares authorized;
836,370
shares issued and outstanding
|
8,364
|
8,364
|
|||||
|
Common
stock pending issuance(38,572 shares)
|
600,000
|
600,000
|
|||||
|
Additional
paid-in capital
|
58,238,845
|
58,238,845
|
|||||
|
Accumulated
deficit
|
(59,302,782
|
)
|
(64,627,798
|
)
|
|||
|
Total
stockholders’ deficit
|
(455,573
|
)
|
(5,780,589
|
)
|
|||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
$
|
197
|
$
|
197
|
|||
The
accompanying notes are an integral part of these financial
statements.
F-32
CT
HOLDINGS ENTERPRISES, INC.
(formerly
CT Holdings, Inc.)
STATEMENTS
OF OPERATIONS
|
Years
Ended
|
|||||||
|
December
31,
|
|||||||
|
2006
|
|
2005
|
|||||
|
Revenue
|
$
|
-
|
$
|
-
|
|||
|
General
and administrative expense
|
99,185
|
177,631
|
|||||
|
Settlement
of litigation
|
(4,583,852
|
)
|
-
|
||||
|
Gain
on extinguishment of debt from related parties
|
(1,294,330
|
)
|
-
|
||||
|
Related
party interest expense
|
285,922
|
215,489
|
|||||
|
Interest
expense related to litigation
|
179,262
|
278,852
|
|||||
|
Other
income
|
(11,203
|
)
|
-
|
||||
|
Net
income (loss)
|
5,325,016
|
(671,972
|
)
|
||||
|
Net
income (loss) per share
|
|||||||
|
-
basic and diluted
|
$
|
5.54
|
$
|
(0.70
|
)
|
||
|
Weighted
average shares outstanding -
|
|||||||
|
-
basic and diluted
|
960,656
|
960,656
|
|||||
The
accompanying notes are an integral part of these financial
statements.
F-33
CT
HOLDINGS ENTERPRISES, INC.
(formerly
CT Holdings, Inc.)
STATEMENTS
OF CHANGES IN STOCKHOLDERS' DEFICIT
|
Common
Stock
|
|
Common
Stock Pending
|
|
Additional
Paid
|
|
Accumulated
|
|
|
|
||||||||||
|
|
|
Shares
|
|
Amount
|
|
Issue
|
|
Capital
|
|
Deficit
|
|
Total
|
|||||||
|
Balances
at
|
|||||||||||||||||||
|
December
31, 2004
|
836,370
|
$
|
8,364
|
$
|
600,000
|
$
|
57,967,697
|
$
|
(63,955,826
|
)
|
$
|
(5,379,765
|
)
|
||||||
|
Beneficial
conversion feature of note payable to related party
|
-
|
-
|
-
|
271,148
|
-
|
271,148
|
|||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
(671,972
|
)
|
(671,972
|
)
|
|||||||||||
|
Balances
at December 31, 2005
|
836,370
|
8,364
|
600,000
|
58,238,845
|
(64,627,798
|
)
|
(5,780,589
|
)
|
|||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
5,325,016
|
5,325,016
|
|||||||||||||
|
Balances
at December 31, 2006
|
836,370
|
$
|
8,364
|
$
|
600,000
|
$
|
58,238,845
|
$
|
(59,302,782
|
)
|
$
|
(455,573
|
)
|
||||||
The
accompanying notes are an integral part of these financial
statements.
F-34
|
Years
Ended
|
|||||||
|
December
31,
|
|||||||
|
2006
|
|
2005
|
|||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|||||||
|
Net
income (loss)
|
$
|
5,325,016
|
$
|
(671,972
|
)
|
||
|
Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
|
|||||||
|
Amortization
of beneficial conversion feature on debt recorded as interest
expense
|
250,290
|
160,858
|
|||||
|
Accrual
for litigation and related interest expense
|
179,262
|
278,852
|
|||||
|
Settlement
of litigation
|
(4,583,852
|
)
|
-
|
||||
|
Gain
on extinguishment of debt from related parties
|
(1,294,330
|
)
|
-
|
||||
|
Changes
in operating assets and liabilities:
|
|||||||
|
Accounts
payable and accrued expenses
|
5,027
|
124,491
|
|||||
|
Interest
payable
|
35,632
|
-
|
|||||
|
Payable
to CDSS Wind Down Inc.
|
36,667
|
65,000
|
|||||
|
NET
CASH USED IN OPERATING ACTIVITIES
|
(46,288
|
)
|
(42,771
|
)
|
|||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
-
|
-
|
|||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|||||||
|
Payments
made by officer to vendors on Company’s behalf
|
46,288
|
38,800
|
|||||
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
46,288
|
38,800
|
|||||
|
Net
change in cash and cash equivalents
|
-
|
(3,971
|
)
|
||||
|
Cash
and cash equivalents at the beginning of the year
|
197
|
4,168
|
|||||
|
Cash
and cash equivalents at the end of the year
|
$
|
197
|
$
|
197
|
|||
|
SUPPLEMENTAL
CASH FLOW ITEMS
|
|||||||
|
Interest
paid
|
$
|
-
|
$
|
-
|
|||
|
Income
taxes paid
|
$
|
-
|
$
|
-
|
|||
|
Beneficial
conversion feature of note payable to related party recorded
as deferred
debt discount
|
$
|
-
|
$
|
271,148
|
|||
|
Conversion
of advances and accrued interest into new note payable
|
$
|
-
|
$
|
71,148
|
|||
The
accompanying notes are an integral part of these financial
statements.
F-35
CT
HOLDINGS ENTERPRISES, INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
NATURE
OF BUSINESS
CT
Holdings Enterprises, Inc. (the "Company" or "CT Holdings") provides management
expertise including consulting on operations, marketing and strategic planning
and a single source of capital to early stage technology companies. The Company
was incorporated in Delaware in 1992. On March 13, 2006 the Company changed
its
name to CT Holdings Enterprises, Inc. The business model is designed to enable
the companies with whom the Company acquires or invests to become successful
in
their industries. The strategy over the years has led to the development,
acquisition and operation of technology based businesses with compelling
valuations and strong business models. The goal is to realize the value of
these
investments for the Company's shareholders through a subsequent liquidity
event
such as a sale, merger or initial public offering of the investee companies.
At
December 31, 2006 the Company does not hold any investments and does not
have
any products or services, customers or revenue, and the Company has no other
lines of business.
LIQUIDITY
The
Company has incurred recurring operating losses and has a significant
stockholders' deficit at December 31, 2006 of approximately $456,000. At
December 31, 2006 the cash balance was $197 and current liabilities total
approximately $456,000. We have limited access to capital, no plans to raise
capital and management has not identified sources of capital from unrelated
third parties. Past funding needs of the business have been provided by
financings through notes payable, cash advances and additional investments
from
related parties, including the Company's CEO and CITN Investment Inc. ("CII"),
an affiliate of the Company's CEO, however there can be no assurance that
such
funds will be available from these related parties in the future. The Company
has been and continues to be dependent upon outside financing to perform
its
business development activities, make investments in new technology companies
and to fund operations. The Company will continue to require working capital
to
fund operating expenses. The Company has explored investment and funding
alternatives but at December 31, 2006 the Company had not identified any
investments that would provide the ability to raise capital, nor did the
Company
have any plans to raise sufficient amounts of capital to settle liabilities
or
to fund business development activities.
On
February 14, 2007 the Company's shareholders approved a proposal to amend
the
Company's Certificate of Incorporation to combine shares of the Company's
common
stock to effect a one for 70 reverse stock split. A 1 for 70 reverse stock
split
would make available sufficient authorized shares of common stock to settle
commitments to issue shares and to potentially facilitate a corporate
transaction such as a merger or financing. Corporate transactions of this
nature
could improve liquidity, however there can be no assurance that the Company
will
enter into any corporate transaction to improve liquidity.
F-36
BASIS
OF PRESENTATION
The
accompanying financial statements of CT Holdings have been prepared in
accordance with accounting principles generally accepted in the United States.
All share and per share information contained in this report has been adjusted
to give effect to the 1 for 70 reverse stock split effective February 28,
2007.
USE
OF ESTIMATES
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the amounts reported in the financial statements. Actual results could
differ from those estimates. A valuation allowance is recorded to reduce
deferred tax assets to the amount that is believed more likely than not to
be
realized.
INVESTMENT
IN UNCONSOLIDATED AFFILIATES
At
December 31, 2006 the Company held no investments in unconsolidated affiliates.
At December 31, 2005 the Company held less than 20% ownership in two
unconsolidated affiliates, Parago, Inc. and River Logic, Inc. Both investments
were accounted for under the cost method of accounting and had no carrying
value
at December 31, 2005.
INCOME
TAXES
Deferred
income taxes are recognized using the asset and liability method. Deferred
income taxes are provided based upon estimated future tax effects of differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes calculated based upon
provisions of enacted laws.
STOCK-BASED
COMPENSATION
On
January 1, 2006, the Company adopted the modified prospective method of
SFAS No.
123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"), which is a
revision
of SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123").
SFAS
No. 123R supersedes APB Opinion No. 25, and amends SFAS No. 95, "Statement
of
Cash Flows". SFAS No. 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer
an
alternative. Under the modified prospective application, SFAS No. 123R
is
applied to new awards and to awards modified, repurchased or cancelled
after the
effective date. Compensation cost for the portion of awards for which requisite
service has not been rendered that are outstanding as of the effective
date is
recognized as the requisite service is rendered on or after the effective
date.
The compensation cost for that portion of awards is based on the grant
date fair
value of those awards as calculated for pro-forma disclosures under SFAS
No.
123.
All
awards outstanding at December 31, 2006 had been fully vested in periods
prior
to January 1, 2006 and therefore, the financial statements do not reflect
any
compensation expense related to stock-based compensation.
The
Company does not have any employees or significant operations and does
not
anticipate issuing any share-based payments in the future, therefore the
SFAS
123R is not expected to have a significant effect on the Company's financial
condition, cash flows or results of operations. However should the Company's
operations change, and include the issuance of share-based payments, SFAS
No.
123R would require the recording of stock compensation expense in the
future.
Prior
to
January 1, 2006, the Company accounted for stock-based employee compensation
arrangements in accordance with provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
complied
with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement
No.
123".
F-37
Under
APB
Opinion No. 25, compensation expense for employees is based on the excess,
if
any, on the date of grant, of the fair value of the Company's stock over
the
exercise price and is recognized on a straight-line basis over the vesting
term
of the option. All awards outstanding at December 31, 2005 had been fully
vested
in periods prior to January 1, 2005 and therefore, no pro forma footnote
disclosure is provided in the financial statements.
The
Company accounts for equity instruments issued to non-employees in accordance
with the provisions of SFAS No. 123 and SFAS No. 148 and Emerging Issues
Task
Force Issue No. 96-18, "Accounting for Equity Instruments That Are Issued
to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
or
Services." All transactions in which goods or services are the consideration
received for the issuance of equity instruments are accounted for based on
the
fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more reliably measurable. The measurement
date
of the fair value of the equity instrument issued is the earlier of the date
on
which the counterparty's performance is complete or the date on which it
is
probable that performance will occur.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
Company's financial instruments, including accounts payable and notes payable
are carried at cost, which approximates fair value due to the short maturity
of
these instruments.
NET
INCOME OR LOSS PER COMMON SHARE
On
February 14, 2007 the Company's shareholders approved a 1 for 70 reverse
stock
split and as a result, the number of shares of common stock used in the
computation of net income of loss per share was adjusted to reflect this
reverse
stock split for all periods presented. Basic and diluted net income per common
share for the year ended December 31, 2006 was computed by dividing net income
by 960,656 weighted average shares of common stock outstanding during the
year.
Included in the weighted average number of common shares outstanding for
the
year ended December 31, 2006 are 38,572 shares that would have been issued
when
a shareholder exercised his right to convert a note payable to common stock
(as
discussed in Note D) and 85,715 shares that would have been issued to the
CEO
when he exercised his right to exchange Parago shares for CT Holdings shares
if
the Company had the available authorized shares (as discussed in Note E).
The
weighted average shares outstanding used in the computation of diluted net
income per share excludes stock options to purchase 39,285 shares of common
stock at December 31, 2006 and the effect of an option to acquire 51% of
the
outstanding shares of the Company, approximately 1,014,286 shares at December
31, 2006, held by CITN Investment Inc. ("CII"), an affiliate of the Company's
CEO, because the option exercise prices exceeded the average market price
of the
common stock for the year ended December 31, 2006 resulting in an anti-dilutive
effect to the per share amounts.
Basic
and
diluted net loss per common share for the year ended December 31, 2005, adjusted
for the 1 for 70 reverse stock split, was computed by dividing net loss by
960,656 weighted average shares of common stock outstanding during the year.
Included in the weighted average number of common shares outstanding for
the
year ended December 31, 2006 are 38,572 shares that would have been issued
when
a shareholder exercised his right to convert a note payable to common stock
(as
discussed in Note D) and 85,715 shares that would have been issued to the
CEO
when he exercised his right to exchange Parago shares for CT Holdings shares
if
the Company had the available authorized shares (as discussed in Note E).
Stock
options to purchase 41,250 shares of common stock at December 31, 2005 were
excluded from the computation of diluted loss per share, as the effect would
be
anti-dilutive. In addition, diluted net loss per share excludes the
anti-dilutive effects
of the conversion feature of the Company's convertible note due CITN Investment
Inc. ("CII"), an affiliate of the Company's CEO, at December 31, 2005 and
an
option to acquire 51% of the outstanding shares of the Company, approximately
1,014,286 shares at December 31, 2005, held by CII.
F-38
NOTE
B INCOME TAXES
The
significant components of the Company's deferred tax assets are as
follows:
|
December
31,
|
|||||||
|
2006
|
|
2005
|
|||||
|
Deferred
tax assets
|
|||||||
|
Net
operating loss carryforwards
|
$
|
4,578,000
|
$
|
10,948,000
|
|||
|
Capital
loss carryforward
|
1,042,000
|
-
|
|||||
|
Reserve
on investments
|
-
|
1,059,000
|
|||||
|
Accounts
payable and accrued expenses
|
-
|
1,498,000
|
|||||
|
Total
deferred tax assets, net
|
5,620,000
|
13,505,000
|
|||||
|
Valuation
allowance
|
(5,620,000
|
)
|
(13,505,000
|
)
|
|||
|
Total
deferred tax assets, net
|
$
|
-
|
$
|
-
|
|||
The
difference between the provision for income taxes and the amount computed
by
applying the federal statutory rate to loss before provision for income
taxes
are as follows:
|
December
31,
|
|
||||||
|
|
|
2006
|
|
2005
|
|||
|
Provision
(benefit) computed at federal statutory rate
|
$
|
1,811,000
|
$
|
(228,000
|
)
|
||
|
Capital
loss
|
1,042,000
|
-
|
|||||
|
Net
operating loss adjustment
|
4,505,000
|
-
|
|||||
|
Permanent
differences
|
158,000
|
79,000
|
|||||
|
Other
|
369,000
|
-
|
|||||
|
Increase
(decrease) in valuation allowance
|
(7,885,000
|
)
|
149,000
|
||||
| $ |
-
|
$
|
-
|
||||
For
federal income tax purposes, at December 31, 2006 the Company had a net
operating loss carryforward of approximately $13,500,000, which is subject
to
annual limitations as prescribed by the Internal Revenue Code, is available
to
offset future taxable income and expires at various dates through 2026. In
2002,
the Company divested of businesses it had owned having net operating loss
carryforwards through the date of divestiture of approximately $13.2 million
and
a related deferred tax asset and offsetting valuation allowance of approximately
$4.5 million. In 2006, the Company clarified its tax position on the net
operating loss carryforwards of these divested businesses and reduced the
total
amount of net loss carryforwards by approximately $13.2 million and also
reduced
the related deferred tax asset and valuation allowance by approximately $4.5
million. The reduction of the net operating loss carryforward, the deferred
tax
asset and the valuation allowance has no impact on the current year tax
computation as the Company believes that due to a history of recurring operating
losses, the net operating loss carryforwards and the related deferred tax
asset
were not realizable at any time since the divestiture of these businesses
in
2002.
The
Company also had a capital loss carryforward of approximately $3,100,000,
related to the sale of its investments in Parago and River Logic, which is
also
subject to annual limitations prescribed by the Internal Revenue Code, and
is
available to offset future capital gains through expiration in 2011. A valuation
allowance has been recorded for the entire amount of the net deferred tax
asset
due to uncertainty of realization.
F-39
NOTE
C - STOCK OPTIONS
The
Company has issued stock options to purchase common stock to directors,
employees and consultants. Options are granted at no less than fair value
at the
date of grant. Generally, the options vest over no more than three years.
See
NOTE E - Related Party Transactions for a discussion of an option held by
CITN
Investment Inc., exercisable pursuant to the settlement of a note payable,
to
acquire 51% of the shares outstanding following the effectiveness of a reverse
stock split. There were 39,285 and 41,250 stock options outstanding, fully
vested and exercisable, at December 31, 2006 and 2005, respectively. The
following tables summarize information regarding stock options at December
31,
2006:
|
2006
|
|
2005
|
|
||||||||||||||||
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
Weighted
|
|
||||||
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
Average
|
|
||||||
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
|
Exercise
|
|
||||||
|
|
|
Shares
|
|
Price
|
|
Term
|
|
Value
|
|
Shares
|
|
Price
|
|
||||||
|
Outstanding
at the beginning of the year
|
41,250
|
$
|
16.120
|
41,682
|
$
|
16.932
|
|||||||||||||
|
Granted
|
-
|
-
|
|||||||||||||||||
|
Modified
|
-
|
-
|
|||||||||||||||||
|
Exercised
|
-
|
-
|
|||||||||||||||||
|
Cancelled
|
(1,965
|
)
|
$
|
13.995
|
(432
|
)
|
$
|
94.767
|
|||||||||||
|
Outstanding
at the end of the year
|
39,285
|
$
|
16.227
|
4.30
years
|
$
|
0.00
|
41,250
|
$
|
16.120
|
||||||||||
|
Vested
and expected to vest at December 31, 2006
|
39,285
|
$
|
16.227
|
4.30
Years
|
$
|
0.00
|
41,250
|
$
|
16.120
|
||||||||||
|
Options
exercisable at December 31, 2006
|
39,285
|
$
|
16.227
|
4.30
years
|
$
|
0.00
|
41,250
|
$
|
16.120
|
||||||||||
All
awards outstanding at December 31, 2006 and 2005 had been fully vested
in
periods prior to January 1, 2005. Details of option exercise prices are
shown
below.
|
Range
of exercise Prices
|
Outstanding/
Exercisable Shares
|
Weighted-average
remaining contractual life (in years)
|
Weighted-
average exercise price
|
||||||||
| $ |
14.0000
|
32,142
|
4.33
|
$
|
14.0000
|
||||||
| $ |
26.2495
|
7,143
|
4.14
|
$
|
26.2495
|
||||||
|
39,285
|
$
|
16.2276
|
|||||||||
The
Company uses the Black-Scholes option-pricing model to value compensation
expense related to its stock options. All awards outstanding at December
31,
2006 and 2005 had been fully vested in periods prior to January 1, 2005 and
as a
result, the Company had no unrecognized compensation expense related to stock
options.
See
NOTE
E - Related Party Transactions for a discussion of an option held by CITN
Investment Inc., exercisable at December 31, 2006 pursuant to the settlement
of
a note payable, to acquire 1,014,286 shares of common stock following the
effectiveness of a reverse stock split.
F-40
NOTE
D - NOTES PAYABLE TO SHAREHOLDERS
The
Company has presented $600,000 as "Common stock pending issuance", a separate
Component of Stockholders' Deficit at December 31, 2006 and 2005. This
represents 38,572 shares of CT Holdings that were to be issued upon the
conversion of a note payable to a shareholder in 2003. Due to the lack
of
available authorized shares, the shareholder has waived his right to receive
these shares until such time as the shares become authorized. When these
shares
are issued the Company will record an increase to Common Stock of $386
(par
value) and to additional paid-in capital of $599,614. See NOTE - G SUBSEQUENT
EVENTS for a further discussion of the unissued shares.
The
Company has a note payable which was originally due June 30, 2002 for $9,000
to
a shareholder which was in default at December 31, 2006 and 2005 and because
it
is in default, bears interest at 18% per annum. Accrued interest on the
note
payable was $7,801 and $6,128 at December 31, 2006 and
2005.
NOTE
E - RELATED PARTY TRANSACTIONS
At
December 31, 2005, the Company had a convertible note payable due to a
related
party, CITN Investment, Inc., a Texas corporation ("CII") and an affiliate
of
the Company's CEO. The convertible note was first issued on May 24, 2004,
when
the Company entered into a Loan and Security Agreement (the "Loan Agreement")
with CII. The Loan Agreement provided for advances by CII to the Company
of up
to $600,000, such advances to be made in the sole discretion of CII.
In
the event the entire $600,000 was advanced to the Company, the loans would
be
convertible, at the option of CII, into 51% of the fully diluted common
stock
outstanding, approximately 1,014,286 shares of the Company's common stock,
and a
pro rata amount of such number of shares in the event less than the $600,000
was
advanced to the Company. All advances under the Loan Agreement were secured
by a
pledge of all the Company's assets. On May 24, 2004, the Company was advanced
$200,000 by CII pursuant to the terms of the Loan Agreement and evidenced
by a
Secured Convertible Promissory Note (the "Note"). The Note was amended
in
December 2005 as discussed below.
In
December 2005, the Company and CII entered into an Amended and Restated
Secured
Convertible Promissory Note (the "Amended Note"). Pursuant to the Amended
Note,
the principal was increased to $271,148 resulting from the combination
of the
principal and accrued interest from the original note with CII and additional
advances of $43,800 plus accrued interest of $1,222 through the issue date
of
the Amended Note. The Amended Note was convertible into approximately 3.4
million shares of common stock. The note accrued interest at 8% per annum
and
was due the earlier of May 24, 2006 or on demand by CII. This Amended Note
was
secured by a pledge of all of the Company's assets. The accrued interest
on the
Amended Note at December 31, 2005 was $772.
The
conversion price of the Amended Note of approximately $0.00113 per share
was
below the fair value per share of the common stock at the date the note
was
issued. In addition, the Company issued an option to CII to acquire 51%
of the
fully diluted shares outstanding, approximately 1,014,286 shares of common
stock
at an exercise price of par value per share. Accordingly, the Company recorded
the fair value of the option and beneficial conversion feature of the note
payable of $271,148 as debt discount. The debt discount was being amortized
over
the life of the Note and a $20,858 charge was recorded as interest expense
during the year ended December 31, 2005. The Amended Note was recorded
net of
deferred debt discount of $250,290 at December 31, 2005. As a result of
the
amendment, the original debt discount of $140,000 related to the Note was
fully
amortized to interest expense during the year ended December 31,
2005.
If
the
Amended Note was repaid by the Company, CII had an option to purchase 51%
of the
Company's common stock, or 1,014,268 shares of the Company's common stock
at an
exercise price equal to the par value per share ($0.01 per share). The note
was
settled in May 2006 and the option became exercisable (see discussion of
the
settlement below). The option would expire on the earlier of May 22, 2011
or 60
days after the effectiveness of a reverse stock split. See NOTE - G SUBSEQUENT
EVENTS for a further discussion of the unissued shares.
On
May
22, 2006 the Company and CII entered into a settlement of the Amended Note,
pursuant to which CII agreed to release the Company from indebtedness and
accrued interest under the Amended Note of $271,148 plus accrued interest
of
$9,211 through May 22, 2006, in exchange for the delivery to CII of the shares
of Parago and River Logic owned by the Company. The Company recorded a gain
on
the extinguishment of debt gain with related party for this transaction in
the
amount of $280,359 in the second quarter of 2006.
In
connection with the sale of substantially all of the assets of Citadel
Security
Software Inc. ("CDSS"), a former affiliated investee company, the Company
entered into an Agreement dated as of December 4, 2006 (the "Agreement")
with
CDSS. Pursuant to the Agreement with CDSS:
1.
the
Company and CDSS canceled and terminated the Tax Disaffiliation Agreement
dated
as of May 17, 2002, and Transition Services Agreement dated as of May 17,
2002
between the Company and CDSS;
2.
each
party released the other from all outstanding liabilities to each
other;
3.
CDSS
assigned to the Company causes of action and rights of CDSS related to
claims
against CDSS's insurance carrier related to prior litigation;
4.
the
Company waived any and all rights in and to any of the assets transferred
by
CDSS pursuant to the asset purchase agreement; and
5.
the
Company waived any prohibition or restriction to the transactions contemplated
by the asset purchase agreement set forth in the Agreement and Plan of
Distribution dated as of May 17, 2002 between the Company and CDSS or
otherwise.
As
a
result of this Agreement included in the gain on the extinguishment of
debt with
related parties is approximately $327,000 representing the release of principal
and interest of owed to CDSS for an unsecured demand note payable and
approximately $687,000 for the gain on the release of a non-interest bearing
payable to CDSS.
During
2006 our CEO paid approximately $46,000 of operating expenses on behalf
of the
Company for which we recorded an advance payable of $46,000. This advance
is
non-interest bearing and is due on demand. During 2005, the Company's CEO
advanced $38,800 and in December 2005, this amount plus a $5,000 note due
to the
Company's CEO were converted to principle in the Amended Note previously
discussed.
F-42
The
Company has an accrued liability to a law firm in which an attorney who is
a
partner and who was a former CT Holdings' employee and is a relative the
Company's CEO of approximately $97,000 and $100,000 at December 31, 2006
and
2005, respectively.
Pursuant
to the terms of the transition services agreement with CDSS until its
termination in December 2006, the Company agreed to pay CDSS $10,000 per
quarter
(reduced in July 2005 from $7,500 per month) for the services of its CEO,
CFO
and accounting and information management staff, as well as office rent and
indirect overhead expenses. The Company had a liability recorded for $650,000
for amounts payable to CDSS under this agreement at December 31, 2005. No
amount
was owed at December 31, 2006 because all amounts owed under the transition
services agreement were released on December 4, 2006 pursuant to the Agreement
discussed above.
In
June
2001, the Company's CEO and a director funded and guaranteed CT Holdings'
participation in a bridge loan financing to Parago. In consideration for
this
funding and guarantees, CT Holdings had agreed to permit the CEO to exchange
up
to 5,000,000 (pre 1:1000 reverse stock split) Parago shares into up to 85,715
shares of CT Holdings' common stock. The CEO exercised the exchange right
in
February 2004. The CEO waived his right to receive the shares of CT Holdings
until the authorized shares become available. See NOTE - G SUBSEQUENT EVENTS
for
a further discussion of the unissued shares.
NOTE
F - SETTLEMENT OF LAWSUIT
Since
August 1998 the Company had been engaged in litigation with Meyers Associates,
L.P. f/k/a Roan/Meyers Associates, L.P. and f/k/a Janssen-Meyers Associates,
L.P. (collectively "Meyers"). The original lawsuit arose out of an alleged
1995
contract with a predecessor entity of the Company. Since the original lawsuit
was filed, a number of court actions, motions and judgments have been
prosecuted. Two lawsuits with Meyers, further described below, were being
vigorously defended during the years ended December 31, 2006 and 2005. A
settlement of all litigation with Meyers was reached during 2006 and is
discussed below.
In
December 2001, the plaintiffs refiled a lawsuit, previously dismissed by
a
federal court, in state court, seeking to enforce a proposed settlement term
sheet executed on July 7, 2000. The case was filed in the Supreme Court of
New
York, that state's trial court, in a case styled Roan Meyers v. CT Holdings.
CT
Holdings filed counterclaims for breach of the term sheet as well as breach
of
the placement agency agreement. Cross motions for partial summary judgments
were
argued but on June 9, 2004 the court entered judgment in favor of Roan-Meyers
in
the amount of $3,000,000 and granted interest at the rate of 9% from October
31,
2000 through the date of final judgment, and thereafter at the statutory
rate
allowed by law. The Company appealed the final judgment, and the appellate
court
affirmed the trial court's decision. The $3,000,000 judgment as well as the
interest from October 2000 through December 31, 2005 of $1,404,590 was accrued
at December 31, 2005. The Company continued to accrue interest on the judgment
of approximately $179,000 during the year ended December 31, 2006 until ultimate
settlement of the lawsuit discussed below.
F-43
On
April
8, 2005, Meyers filed a lawsuit in the Court of Chancery of the State of
Delaware, in New Castle County, against the Company, Citadel Security Software,
Inc. (CDSS) including Steven B. Solomon, the Chief Executive and a Director
of
the Company, Chris A. Economou, a Director of the Company, Lawrence Lacerte,
a
former Director of the Company, and Phillip J. Romano, a former Director
of the
Company (the "Individual Defendants"). The suit alleged that in connection
with
an action filed in the Supreme Court of New York, New York County, to enforce
a
Settlement Term Sheet executed on July 7, 2000 by Meyers and CT Holdings,
Meyers
was awarded a judgment against CT Holdings in the amount of $3 million plus
interest on the judgment at the rate of 9% from October 31, 2000 until the
date
of entry of that judgment and thereafter at the statutory rate (the "Judgment").
CT Holdings appealed the Judgment. The suit also alleged that CT Holdings'
May
2002 spin-off of its interests in CDSS to CT Holdings' shareholders rendered
CT
Holdings insolvent and constituted a fraudulent conveyance to defraud CT
Holdings' creditors, including Meyers. The suit asserted fraudulent conveyance
claims against CDSS and CT Holdings pursuant to Delaware statutory and common
law. The suit also asserted a claim against CDSS for successor liability
as the
alleged successor in interest or alter ego of CT Holdings. The suit alleged
that
the Individual Defendants who were officers and/or directors of CT Holdings
at
the time of the spin-off breached fiduciary duties allegedly owed to creditors
of CT Holdings, including Meyers, by approving and allowing the spin-off
transaction. The suit seeks to void the spin-off transaction or alternatively
to
hold CDSS liable for the Judgment including interest, to recover damages
against
the Individual Defendants in an amount not less than the Judgment including
interest, plus an unspecified amount of punitive, consequential and incidental
damages, as well as attorneys' fees and costs.
On
August
23, 2006, CT Holdings and certain other parties entered into a Release and
Settlement Agreement ("Agreement") by and among Meyers and their related
parties
(collectively, the "Meyers Released Parties") on the one hand and defendants
CT
Holdings Enterprises, Citadel Security Software Inc., Steven B. Solomon,
Chris
A. Economou, Lawrence Lacerte, Mark Rogers, Phillip J. Romano, Axel Sawallich,
George Sharp and Gilbert Gertner (collectively "Defendants") on the other
hand.
The Agreement provides for the settlement of litigation filed by Meyers against
defendants CDSS, CT Holdings Enterprises, certain of CDSS's current and former
directors and officers, Steven B. Solomon, Chris E. Economou, Lawrence Lacerte,
Mark Rodgers, Phillip J. Romano and Axel Sawallich in the Court of Chancery
of
the State of Delaware in and for New Castle County (the "Delaware Action")
asserting various claims, and other litigation against CT Holdings and its
former officers and directors (the "Actions"). Pursuant to the Agreement,
CDSS
paid the sum of $1,250,000 to Meyers in two payments, the first payment of
$250,000 was made upon signing of the Agreement in August 2006 and the second
payment of $1,000,000 was made on November 1, 2006 in accordance with the
terms
of the Agreement. The Defendants were released by the Plaintiffs from all
claims
in the actions 91 days after receipt of the payments, subject to the terms
and
conditions of the agreement. Accordingly, the Company reversed the accrued
liability for Meyers legal claims during 2006 in the amount of $4,583,852
and
recorded a benefit from a settlement of lawsuit in the same
amount.
F-44
NOTE
G - SUBSEQUENT EVENTS
On
February 14, 2007 the Company's shareholders approved a proposal to amend
the
Company's Certificate of Incorporation to combine shares of the Company's
common
stock to effect a one for 70 reverse stock split. A 1 for 70 reverse stock
split
would make available sufficient authorized shares of common stock to settle
commitments to issue shares and to potentially facilitate a corporate
transaction such as a merger or financing. Corporate transactions of this
nature
could improve liquidity, however there can be no assurance that the Company
will
enter into any corporate transaction to improve liquidity.
On
March
2, 2007, following the effectiveness of the 1 for 70 reverse stock split,
the
85,715 unissued shares related to a previously exercised option were issued
to
the CEO, 38,572 shares of common stock related to the conversion of a note
payable to a shareholder were issued to the shareholder and the option for
1,014,286 shares held by CII exercised by CII.
On
March
2, 2007, the CEO of the Company acquired 250,000 shares of the Company's
common stock for providing up to $100,000 of cash to fund operating expenses
of
the Company.
On
March
9, 2007 the Company awarded 110,000 shares of common stock to three directors
and an officer of the Company. The Company expects to record stock based
compensation expense during the first quarter of 2007 for the fair value
of
common shares of approximately $32,000.
In
August
2007, the Company issued 500,000 shares of its common stock to its Chief
Executive Officer for services rendered and in settlement of an outstanding
payable.
F-45