UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
SCHEDULE
14A
(Rule
14a-101)
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
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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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x
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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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Xcorporeal, Inc.
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(Name
of Registrant as Specified In Its Charter)
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(Name
of Person(s) Filing Proxy Statement, if other than the
Registrant)
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Payment
of Filing Fee (Check the appropriate box):
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No
fee required.
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¨
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Fee
computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
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1)
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Title
of each class of securities to which transaction
applies:
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2)
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Aggregate
number of securities to which transaction applies:
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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):
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4)
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Proposed
maximum aggregate value of transaction:
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5)
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Total
fee paid:
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x
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Fee
previously paid with preliminary materials.
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¨
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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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4)
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Date
Filed:
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Xcorporeal,
Inc.
80
Empire Drive
Lake
Forest, CA 92630
February
16, 2010
Dear
Stockholders:
You are cordially invited to attend a
special meeting of stockholders (the “Special Meeting”) of Xcorporeal, Inc., a
Delaware corporation, on March 15, 2010 at 11:00 a.m., local time. The
Special Meeting will be held at the offices of Kaye Scholer LLP, 1999 Avenue of
the Stars, Suite 1700, Los Angeles, California 90067-6048. The Special
Meeting will consist of a discussion and voting on matters set forth in the
accompanying Notice of Special Meeting of Stockholders.
The Notice of Special Meeting of
Stockholders and a Proxy Statement, which more fully describe the formal
business to be conducted at the Special Meeting, follow this
letter.
Regardless of whether or not you plan
to attend the Special Meeting, your vote is important and we encourage you to
vote promptly. After reading the Proxy Statement, please promptly mark, sign and
date the enclosed proxy card and return it in the prepaid envelope
provided. The Proxy Statement and accompanying proxy card are first being
mailed to you on or about February 16, 2010.
We look forward to seeing you at the
Special Meeting.
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Sincerely
yours,
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/s/
Kelly J.
McCrann
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Kelly
J. McCrann
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Chairman
of the Board and Chief Executive
Officer
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Xcorporeal,
Inc.
80
Empire Drive
Lake
Forest, CA 92630
NOTICE
OF SPECIAL MEETING OF STOCKHOLDERS
TO
BE HELD ON MARCH 15, 2010
To
the Stockholders of Xcorporeal, Inc.:
NOTICE
IS HEREBY GIVEN that a special meeting of stockholders (the “Special Meeting”)
of Xcorporeal, Inc., a Delaware corporation (“Xcorporeal” or the “Company”),
will be held at the offices of Kaye Scholer LLP, 1999 Avenue of the Stars, Suite
1700, Los Angeles, California 90067-6048, on March 15, 2010, at 11:00 a.m.,
local time. At the Special Meeting, you will be asked:
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1.
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to
approve the sale of substantially all of the assets (the “Assets”) of
Xcorporeal (the “Asset Sale”) pursuant to an Asset Purchase Agreement (as
amended, the “Asset Purchase Agreement”), attached to the accompanying
proxy statement as Annex A, by and among Fresenius USA,
Inc. (“FUSA”), a Massachusetts corporation and a wholly-owned
subsidiary of Fresenius Medical Care Holdings, Inc., Xcorporeal,
Xcorporeal Operations, Inc., a Delaware corporation and a wholly-owned
subsidiary of Xcorporeal, and National Quality Care, Inc., a Delaware
corporation, dated as of December 14, 2009, in the form attached to the
accompanying Proxy Statement as Annex A (the “Asset Sale
Proposal”);
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2.
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to
approve the voluntary liquidation and dissolution of Xcorporeal pursuant
to a Plan of Liquidation and Dissolution (the “Plan of
Liquidation”), in the form attached to the accompanying Proxy
Statement as Annex B (the “Plan of Liquidation
Proposal”);
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3.
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to
approve the adoption of the Liquidating Trust Agreement (the “Liquidating
Trust Agreement”), in the form attached to the accompanying Proxy
Statement as Annex C, providing for, among other things, in the event
that the Asset Sale Proposal and the Plan of Liquidation Proposal are
approved by our stockholders and the Asset Sale is subsequently
consummated, the transfer of all of our assets remaining after the
consummation of the Asset Sale, including rights to certain payments under
the Asset Purchase Agreement (collectively, the “Remaining Assets”),
together with all of our liabilities and obligations not satisfied prior
to our dissolution (collectively, the “Remaining Liabilities”), to the
Liquidating Trust (as defined in the Proxy Statement) (the “Liquidating
Trust Agreement Proposal”);
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4.
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to
approve any proposal to adjourn the Special Meeting to a later date to
solicit additional proxies in favor of the approval of the Asset Sale
Proposal, the Plan of Liquidation Proposal or the Liquidating Trust
Agreement Proposal, if there are insufficient votes for approval of any of
such proposals at the time of the Special Meeting (the “Adjournment
Proposal”); and
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5.
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to
transact such other business as may properly come before the Special
Meeting and any adjournment or postponement
thereof.
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The foregoing matters are described in
more detail in the enclosed Proxy Statement.
Our Board of Directors has carefully
reviewed and considered each of the foregoing proposals and the terms and
conditions of the Asset Purchase Agreement, the Asset Sale, the Plan of
Liquidation and the Liquidating Trust Agreement and has concluded that the Asset
Purchase Agreement, the Asset Sale, the transfer of all of the Remaining Assets
and Remaining Liabilities to the Liquidating Trust pursuant to the terms of the
Liquidating Trust Agreement, subject to the approval by our stockholders of the
Asset Sale and the Plan of Liquidation and subsequent consummation of the Asset
Sale, and, if the Asset Sale is not approved or consummated, the disposition of
all of our Assets, and, in either case, the complete liquidation and dissolution
of the Company pursuant to the Plan of Liquidation, are all in the best
interests of the Company and our stockholders.
The Board of Directors recommends
that you vote: (1) “
FOR
” the approval of the Asset Sale
Proposal, (2) “
FOR
” the approval of the Plan of
Liquidation Proposal, (3) “
FOR
” the approval of the Liquidating
Trust Agreement Proposal and (4) “
FOR
” the approval of the Adjournment
Proposal.
The enclosed Proxy Statement is issued
in connection with the solicitation of a proxy on the enclosed form by
our Board of Directors for use at the Special Meeting. The Proxy Statement
not only describes the items that our stockholders are being asked to consider
and vote on at the Special Meeting, but also provides you with important
information about us. Financial and other important information concerning us is
also contained in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008 and our Quarterly Report on Form 10-Q for the nine-month
period ended September 30, 2009, attached to the accompanying Proxy Statement as
Annex E and Annex F, respectively, and our other reports filed with the
Securities and Exchange Commission (the “SEC”) and any amendments thereto that
we may file with the SEC.
The Board of Directors believes that
the approval of all three proposals (the Asset Sale Proposal, the Plan of
Liquidation Proposal and the Liquidating Trust Agreement Proposal) would
maximize stockholder value by increasing the possibility that we will be able to
distribute liquidation proceeds, if any, from the Liquidating Trust to our
stockholders in the future, including our share of any Royalty Payments and any
value we may realize from our rights to the Option (each capitalized term as
defined in the Proxy Statement) . To the extent such amounts may become
available for distribution in the future, they will be distributed pro-rata from
the Liquidating Trust.
NONE OF THE CASH PROCEEDS FROM THE
ASSET SALE WILL BE DISTRIBUTED TO OUR STOCKHOLDERS IN LIGHT OF THE FACT THAT
CURRENTLY OUR TOTAL LIABILITES AND OBLIGATIONS SIGNIFICANTLY EXCEED OUR TOTAL
ASSETS.
However, our Board of Directors believes that the approval
of all three proposals, increases the possibility that we will be able to
distribute some liquidation proceeds from the Liquidating Trust to our
stockholders, including our share of any Royalty Payments and any value we may
realize from our rights to the Option.
If the Plan of Liquidation is not
approved, we will not present the Liquidating Trust Agreement Proposal for a
vote of our stockholders at the Special Meeting and will proceed with the Asset
Sale, and we will use the cash received from the Asset Sale and the Remaining
Assets to pay off our liabilities and ongoing operating expenses, to the extent
we have available cash and assets to do so. Our Board of Directors
believes that if all three proposals are not approved, including the Plan of
Liquidation Proposal, we will be forced to discontinue our operations and
proceed with a liquidation in bankruptcy and that there will not be any funds or
other assets available for distribution to our stockholders. See “Proposal No.
2: Approval of the Plan of Liquidation and Dissolution.”
If our stockholders approve the Plan of
Liquidation, but the Asset Sale is not approved or is not consummated, we will
not present the Liquidating Trust Agreement Proposal for a vote of our
stockholders at the Special Meeting and will move forward with our dissolution.
If this occurs, our Board of Directors will be authorized to sell and liquidate
our Assets, on such terms and to such parties as the Board of Directors
determines in its sole discretion without requiring further stockholder
approval.
Although
the authority referred to herein will give our Board of Directors authorization
to sell our Assets to one or more third parties, including FUSA,
w
e do not
have any agreement or understanding with any party, including FUSA, with respect
to the sale of any or all of our assets if the Asset Sale is not approved or if
the Asset Sale is not consummated.
Therefore,
we have no current intention to sell the Assets to any third party, including
FUSA, except pursuant to the Asset Purchase Agreement, if approved by our
stockholders.
After an
extensive review of a range of strategic alternatives for the Company, including
continuing the Company as an independent entity, exploring potential merger and
acquisition transactions and any possible financing arrangements and exerting
considerable efforts to maximize the value of our assets, the Board of Directors
believes that the Asset Purchase Agreement presents the best offer for the sale
of the Assets and that the consummation of the Asset Sale and the liquidation of
the Company pursuant to the Plan of Liquidation and the Liquidating Trust
Agreement would maximize stockholder value by increasing the possibility that we
will be able to distribute liquidation proceeds. Our Board of Directors believes
that if all three proposals are not approved, including the Asset Sale Proposal,
we will be forced to discontinue our operations and proceed with a liquidation
in bankruptcy and that there will not be any funds or other assets available for
distribution to our stockholders. See “Proposal No. 1: Approval of the Sale of
Substantially All of the Assets of Xcorporeal”, “Proposal No. 2: Approval of the
Plan of Liquidation and Dissolution” and “Proposal No. 3: Approval of the
Liquidating Trust Agreement.”
If the Asset Sale is not consummated
and the Plan of Liquidation is not approved, whether due to lack of stockholder
approval or other reasons, we will not present the Liquidating Trust Agreement
Proposal for a vote of our stockholders at the Special Meeting and our Board of
Directors believes that we will then be forced to discontinue operations and
proceed with a liquidation in bankruptcy, such that there will not be any funds
or other assets available for a distribution to our stockholders. See “Proposal
No. 1: Approval of the Sale of Substantially All of the Assets of Xcorporeal”,
“Proposal No. 2: Approval of the Plan of Liquidation and Dissolution” and
“Proposal No. 3: Approval of the Liquidating Trust Agreement.”
If the Asset Sale and the Plan of
Liquidation are approved, but the Liquidating Trust Agreement Proposal is not
approved, we will move forward with the consummation of the Asset Sale and will
use the cash proceeds received from the Asset Sale and the Remaining Assets to
pay off our liabilities and ongoing operating expenses, to the extent we have
available cash and assets to do so. Our Board of Directors believes
that if all three proposals are not approved, including the Liquidating Trust
Agreement Proposal, we will be forced to discontinue operations and proceed with
a liquidation in bankruptcy and that there will not be any funds or other assets
available for distribution to our stockholders. See “Proposal No. 1: Approval of
the Sale of Substantially All of the Assets of Xcorporeal” and “Proposal No. 2:
Approval of the Plan of Liquidation and Dissolution.”
We urge you to read the accompanying
Proxy Statement in its entirety and consider it carefully. Please pay
particular attention to (1) the “Risk Factors” beginning on page
61
for a discussion of the risks related to the Asset Sale, the Plan of
Liquidation, the Liquidating Trust Agreement and the risks related to our
business, in the event any or all of the first three proposals (the Asset Sale
Proposal, the Plan of Liquidation Proposal and the Liquidating Trust Agreement
Proposal) are not approved by our stockholders, and (2) “Proposal No. 3:
Approval of the Liquidating Trust Agreement — Liquidating Distributions;
Nature; Amount; Timing”, which reflects our current estimate of the timing of
and the amounts that may be ultimately available for liquidating distributions
to our stockholders.
Our Board of Directors has fixed the
close of business on February 8, 2010 as the record date (the “Record Date”) for
the determination of stockholders entitled to notice of, and to vote at, the
Special Meeting and any adjournment thereof. Only our stockholders of record at
the close of business on Record Date will be entitled to notice of, and to vote
at, the Special Meeting.
You can vote in one of three
ways:
(1) Use
the toll-free telephone number on your proxy card to vote by phone;
(2) Visit
the website noted on your proxy card to vote via the Internet; or
(3) Sign,
date and return your proxy card in the enclosed envelope to vote by
mail.
Pursuant
to the rules promulgated by the SEC, we have elected to provide access to our
proxy materials by sending you this Proxy Statement and a form of the proxy card
and notifying you of the availability of such proxy materials on the Internet.
This Proxy Statement, a form of a proxy card and the other material accompanying
this Proxy Statement are available under “Proxy”, sub-category “Proxy Statement
Materials”, section of our web site at www.xcorporeal.com. We began distributing
this Proxy Statement and a form of the proxy card on or about February 16,
2010.
The Company hopes you can attend the
Special Meeting. However, whether or not you plan to attend, please vote either
by Internet or by telephone or complete, sign, date and return the accompanying
proxy card as soon as possible in the enclosed envelope. If you attend the
Special Meeting, you may revoke your earlier vote if you wish and vote
personally. Each of the Asset Sale Proposal, the Plan of Liquidation Proposal
and the Liquidating Trust Agreement Proposal requires the approval of the
holders of at least a majority of shares of our common stock outstanding as of
the Record Date and entitled to vote thereon and the Adjournment Proposal
requires the approval of the holders of at least a majority of the shares of our
common stock represented in person or by proxy at the Special Meeting and
entitled to vote thereon. Therefore, it is very important that your shares be
represented.
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By
order of the Board of Directors
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/s/ Robert Weinstein
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Robert
Weinstein
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Chief
Financial Officer and Secretary
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Lake
Forest, California
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February
16, 2010
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YOUR
VOTE IS IMPORTANT!
ALL STOCKHOLDERS ARE INVITED TO ATTEND
THE SPECIAL MEETING IN PERSON. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING, YOU SHOULD READ THE ATTACHED PROXY STATEMENT CAREFULLY, AND VOTE YOUR
SHARES BY INTERNET, BY TELEPHONE OR BY COMPLETING, DATING AND SIGNING THE
ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE AND RETURNING IT IN THE ENCLOSED
POSTAGE PREPAID ENVELOPE. PLEASE NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF
RECORD BY A BROKER, BANK OR OTHER NOMINEE AND YOU WISH TO VOTE AT THE SPECIAL
MEETING, YOU MUST OBTAIN FROM THE RECORD HOLDER A PROXY ISSUED IN YOUR NAME OR
BRING AN ACCOUNT STATEMENT OR LETTER FROM THE NOMINEE INDICATING YOUR BENEFICIAL
OWNERSHIP AS OF THE RECORD DATE.
Important
Notice Regarding the Availability of Proxy Materials for Xcorporeal,
Inc.’s
Special
Meeting of Stockholders to be Held on March 15, 2010
The Proxy
Statement and a form of a proxy card are available at
http://www.xcorporeal.com/htmls/proxy_listing.html.
Information on Xcorporeal’s
website
does not constitute a part of this Proxy Statement.
Neither the SEC nor any state
securities regulatory agency has approved or disapproved the Asset Sale
Proposal, the Plan of Liquidation Proposal, the Liquidating Trust Agreement
Proposal or the Adjournment Proposal, passed upon the merits or fairness of the
Asset Sale, the Plan of Liquidation or the Liquidating Trust Agreement nor
passed upon the adequacy or accuracy of the disclosure in this
document. Any representation to the contrary is a criminal
offense.
XCORPOREAL,
INC.
80
Empire Drive
Lake
Forest, CA 92630
PROXY
STATEMENT
FOR
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD
MARCH 15
, 2010
This
proxy statement (the “Proxy Statement”) is being furnished to the stockholders
of Xcorporeal, Inc., a Delaware corporation, in connection with the solicitation
of proxies on behalf of Xcorporeal’s board of directors to be used at a special
meeting of its stockholders (the “Special Meeting”) to be held on March 15, 2010
at 11:00 a.m., local time, at the offices of Kaye Scholer LLP, 1999 Avenue of
the Stars, Suite 1700, Los Angeles, California 90067-6048, and any adjournments
thereof, for the purposes set forth herein and in the accompanying Notice of
Special Meeting of Stockholders.
As
used in this Proxy Statement, unless the context otherwise requires, the terms
“we,” “us,” “our,” the “Company,” and “Xcorporeal” refer to Xcorporeal, Inc.,
including all of its subsidiaries, and prior to October 12, 2007, the company
which is now our wholly-owned subsidiary and known as Xcorporeal Operations,
Inc., a Delaware corporation, and the term “Operations” refers solely to
Xcorporeal Operations, Inc.
This Proxy Statement and the
accompanying proxy card are first being mailed to all stockholders entitled to
vote at the Special Meeting on or about February 16, 2010 (the “Mailing
Date”).
Only stockholders of record as of the
close of business on February 8, 2010 (the “Record Date”) are entitled to notice
of, and to vote at, the Special Meeting or any adjournment or postponement
thereof. At the close of business on the Record Date, there were 15,354,687
shares of our common stock and no shares of our preferred stock
outstanding. Each share of our common stock is entitled to one vote.
Shares cannot be voted at the Special Meeting unless the holder thereof is
present or represented by proxy.
YOUR
VOTE IS VERY IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN. PLEASE VOTE
AS SOON AS POSSIBLE TO MAKE SURE THAT YOUR SHARES ARE REPRESENTED AT THE SPECIAL
MEETING. TO VOTE YOUR SHARES, PLEASE EITHER VOTE BY INTERNET, BY TELEPHONE OR
COMPLETE, DATE, AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE
POSTAGE-PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING. VOTING BY INTERNET, BY TELEPHONE OR BY SENDING IN YOUR PROXY CARD WILL
NOT PREVENT YOU FROM VOTING YOUR SHARES AT THE SPECIAL MEETING, IF YOU DESIRE TO
DO SO, AS YOU MAY REVOKE YOUR EARLIER VOTE.
TABLE
OF CONTENTS
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SUMMARY
TERM SHEET
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10
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Summary
of Terms of the Asset Sale
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13
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QUESTIONS
AND ANSWERS ABOUT THE MEETING AND THE PROPOSALS
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17
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
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30
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PROPOSAL
NO. 1: Approval of the Sale of Substantially All of the Assets of
Xcorporeal
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31
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General
Overview
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31
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Background
of the Asset Sale
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31
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Description
of the Asset Purchase Agreement
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33
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Purchase
and Sale of Assets
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34
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Purchase
Price
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34
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Assets
to be Retained by the Company
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35
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Representations
and Warranties of the Company
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35
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Representations
and Warranties of FUSA
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36
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Conduct
Prior to Closing
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36
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Conditions
to Each Party’s Obligations
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36
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Conditions
Precedent to FUSA’s Obligations
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36
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Conditions
Precedent to Xcorporeal’s Obligations
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37
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The
Closing
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37
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Survival
of Representations and Warranties and Indemnification
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37
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Exclusivity
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38
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Termination
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38
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Side
Agreement
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38
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Voting
Agreement
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39
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Description
of the Arbitration Proceeding and Other Agreements Entered into with
NQCI
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39
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Payments
of a Portion of the Aggregate Consideration to NQCI
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40
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No
Opinion of Financial Advisor
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44
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Interests
of Our Executive Officers and/or Directors in the Asset Sale, Plan of
Liquidation and Liquidating Trust Agreement
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44
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Accounting
Treatment
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45
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Certain
Federal Income Tax Consequences to the Company
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45
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Votes
Required for the Approval of the Sale of Substantially All of the Assets
of Xcorporeal
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45
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Recommendation
of Our Board of Directors
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45
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PROPOSAL
NO. 2: Approval of the Plan of Liquidation and Dissolution
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46
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General
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46
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Background
and Reasons for the Proposed Liquidation and Dissolution
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46
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Nature,
Amount and Timing of Liquidating Distributions
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58
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The
Plan of Liquidation is Contingent Upon the Approval and Consummation of
the Asset Sale
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48
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Estimated
Distributions to Stockholders
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48
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Sale
of Our Assets
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49
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Principal
Provisions of the Plan of Liquidation
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50
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Conduct
Following Adoption of the Plan of Liquidation and Establishment of the
Liquidating Trust
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52
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Contingent
Liabilities; Contingent Reserves
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52
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Abandonment
and Amendment
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53
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Plan
of Liquidation Expenses and Indemnification
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53
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Trading
of Our Common Stock
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53
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Interests
of Our Executive Officers and/or Directors in the Asset Sale, the
Plan of Liquidation and
the
Liquidating Trust Agreement
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53
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Regulatory
Approvals
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53
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Absence
of Appraisal Rights
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53
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Material
U.S. Federal Income Tax Consequences
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54
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Votes
Required for the Approval of the Plan of Liquidation
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55
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Recommendation
of Our Board of Directors
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55
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PROPOSAL
NO. 3: Approval of the Liquidating Trust Agreement
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56
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General
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56
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Background
and Reasons for the Proposed Liquidation and Dissolution and Establishment
of the Liquidating Trust
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56
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Transfers
to the Liquidating Trust; Nature; Amount; Timing
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56
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Terms
of the Liquidating Trust
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57
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Trading
of Interests in the Liquidating Trust
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57
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Nature,
Amount and Timing of Liquidating Distributions
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58
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The
Establishment of the Liquidating Trust is Contingent Upon the Approval of
the Asset Sale,
the
Plan of Liquidation and the Liquidating Trust Agreement and the
Consummation of the Asset Sale
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58
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Estimated
Distributions to Stockholders
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58
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Conduct
Following Adoption of the Plan of Liquidation and Establishment of the
Liquidating Trust
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59
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Trading
of Our Common Stock
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59
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Interests
of Our Executive Officers and/or in the Liquidating Trust
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59
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Regulatory
Approvals
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59
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Absence
of Appraisal Rights
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59
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Material
U.S. Federal Income Tax Consequences
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59
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Votes
Required for the Approval of the Liquidating Trust
Agreement
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59
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Recommendation
of Our Board of Directors
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59
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PROPOSAL
NO. 4: Approval of Any Proposal to Adjourn the Special Meeting to Solicit
Additional Proxies
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In
Favor of the Approval of any or all of Proposals No. 1, No. 2 and No.
3
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60
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RISK
FACTORS
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61
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Risks
Related to Proposals No. 1, No. 2 and No. 3
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61
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Risks
Related to the Asset Sale
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62
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Risks
Related to the Plan of Liquidation
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63
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Risks
Related to Our Continuing Business Operations
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65
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Risks
Related to Our Common Stock
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65
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IMPORTANT
INFORMATION CONCERNG US
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BENEFICIAL
OWNERSHIP
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69
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Stock
Ownership of Certain Beneficial Owners and Management
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69
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Market
Information
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68
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Dividend
Policy
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68
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STOCKHOLDER
PROPOSALS
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69
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HOUSEHOLDING
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70
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WHERE
YOU CAN FIND MORE INFORMATION
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70
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WHO
CAN HELP ANSWER YOUR QUESTIONS
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70
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OTHER
MATTERS
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70
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IMPORTANT
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70
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Annex
A – Asset Purchase Agreement
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A-1
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Annex
B – Form of Plan of Liquidation and Dissolution
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B-1
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Annex C
– Form of Liquidating Trust Agreement
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C-1
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Annex D
– Side Agreement
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D-1
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Annex E
– Annual Report on Form 10-K for the fiscal year ended December 31,
2008
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E-1
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Annex F
– Quarterly Report on Form 10-Q for the quarter ended September 30,
2009
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F-1
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Annex
G – Amendment No. 1 to Asset Purchase Agreement
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G-1
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Annex
H – Amendment No. 1 to Side Agreement
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H-1
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SUMMARY
TERM SHEET
This summary highlights selected
information from this Proxy Statement and may not contain all of the information
that is important to you. To fully understand the proposed Asset Sale
transaction and subsequent liquidation of the Company, you should carefully read
this entire Proxy Statement and the materials attached to this Proxy
Statement.
Asset
Sale
Asset Purchase Agreement
On December 14, 2009, we, Operations
and National Quality Care, Inc. (“NQCI”, and collectively with the Company and
Operations, the “Sellers”) entered into an Asset Purchase Agreement (as amended,
the “Asset Purchase Agreement”) with Fresenius USA, Inc. (“FUSA”), a
Massachusetts corporation and a wholly-owned subsidiary of Fresenius Medical
Care Holdings, Inc., attached to this Proxy Statement as Annex A, which provides
for the sale of substantially all of each Sellers’ assets (the “Asset Sale”) to
FUSA for an aggregate cash purchase price of $8,000,000 (the “Cash Purchase
Price”) and certain other royalty payment rights (as more fully discussed
below). Subject to the terms and conditions of the Asset Purchase Agreement, the
Cash Purchase Price will be paid to the Sellers as follows: (a) an exclusivity
fee in the amount of $200,000 previously paid by FUSA to the Company, (b)
$3,800,000 on the date of closing (the “Closing Date”) of the transactions (the
“Transactions”) contemplated under the Asset Purchase Agreement (the “Closing”),
of which the Company and NQCI will receive $1,650,000 and $2,150,000,
respectively, (c) $2,000,000 on April 1, 2010, of which the Company and NQCI
will receive $375,000 and $1,625,000, respectively, and (d) $2,000,000 on April
1, 2011, of which the Company and NQCI will receive $75,000 and $1,925,000,
respectively. Of the Cash Purchase Price being paid to NQCI,
$1,871,430 is being paid to satisfy the Company’s liability to NQCI for NQCI’s
attorneys’ fees and costs awarded by the arbitrator pursuant to the terms of the
Partial Final Award issued on April 13, 2009.
In addition, during the life of the
patents included in the HD WAK Technology (as defined below) (the “HD WAK
Patents”), which expire between November 11, 2021 and September 9, 2024,
the Company will be entitled to certain royalty payments from the sale of
wearable hemodialysis (“HD WAK”) devices in each country where such sales
infringe valid and issued claims of the Sellers’ HD WAK Patents issued in such
country (“HD WAK Devices Royalty”) and the attendant disposables that
incorporate the HD WAK Technology (as defined below) (“Attendant Disposables”),
not to exceed a certain maximum amount per patient per week in a country where
such sales infringe valid and issued claims of the HD WAK Patents issued in such
country (the “Attendant Disposables Royalty”, and together with the HD WAK
Devices Royalty, the “HD WAK Royalty”). Such payment for Attendant
Disposables will not be payable with regard to Attendant Disposables that
incorporate any technology for which a Supersorbent Royalty (as defined below)
is paid by FUSA to any Seller or any of their affiliates. NQCI will be entitled
to certain amounts in respect of the HD WAK Royalty.
Additionally, during the life of any
patents included in the Supersorbent Technology (as defined below) (the
“Supersorbent Patents”), the Company will be entitled to certain royalty
payments on each supersorbent cartridge sold per patient in each country where
such sales infringe valid and issued claims of the Supersorbent Patents issued
in such country less any and all royalties payable to The Technion Research and
Development Foundation Ltd. (“TRDF”) pursuant to the Research Agreement and
Option for License, dated June 16, 2005 (the “Research Agreement”), or any
subsequently executed license agreement between TRDF and FUSA. Such payment for
supersorbent cartridges will not be payable with regard to supersorbent
cartridges that incorporate any HD WAK Technology for which a HD WAK Royalty is
paid by FUSA to any Seller or any of their affiliates (the “Supersorbent
Royalty,” and together with the HD WAK Royalty, the “Royalty Payments”). NQCI
will be entitled to certain amounts in respect of the Supersorbent Royalty.
While several applications for patents are pending, no patent incorporating the
Supersorbent Technology has yet been issued. For a more detailed discussion of
the consideration to be provided under the Asset Purchase Agreement, see
“Proposal No. 1: Approval of the Sale of Substantially All of the Assets of
Xcorporeal — Description of the Asset Purchase Agreement —
Purchase Price
.”
FUSA also granted to the Sellers an
option to obtain a perpetual, worldwide license to the Supersorbent Technology
for use in healthcare fields other than renal (the “Option”). The Option will be
exercisable during the twelve-month period following FUSA’s receipt of
regulatory approval for the sale of a supersorbent product in the United States
or European Union, which we expect will require further development of the
supersorbent technology with TRDF and successful completion of clinical trials
by FUSA. In the event that the Option becomes exercisable and a Seller exercises
the Option, the consideration payable to FUSA by such Seller(s) for the exercise
of the Option will consist of a payment in the amount of $7,500,000, payable in
immediately available funds, and a payment of an ongoing royalty in an amount
equal to the lesser of $0.75 per supersorbent cartridge and $1.50 per patient
per week in each country where such sales infringe valid and issued claims of
the Supersorbent Patents issued in such country.
On
February 8, 2010, the Sellers and FUSA entered into Amendment No. 1 (the “APA
Amendment”) to the Asset Purchase Agreement, which extended from February 28,
2010 until March 31, 2010 the date upon which any party to the Asset Purchase
Agreement may terminate the Asset Purchase Agreement if the closing of the
transactions contemplated therein has not occurred. Except for this
modification, all of the terms and provisions of the Asset Purchase Agreement
remain in full force and effect. A copy of the APA Amendment is attached to this
Proxy Statement as Annex G.
FUSA will purchase our only business
segment, which consists of the business related to our
extra-corporeal
platform and
development of any products to be derived therefrom.
Side Agreement
In connection with the Asset Purchase
Agreement, the Company entered into a side agreement, dated December
14, 2009 (as amended, the “Side Agreement”), with FUSA pursuant to which
(i) subject to the approval of the lessor, FUSA agreed on the Closing Date
to assume the lease agreement of our operating facility located at 80 Empire
Drive, Lake Forest, California 92630 (the “Lease”) and in consideration of such
assumption, we agreed to pay to FUSA on the Closing Date the amount of $175,000,
representing approximately six months of rent and common area expenses that are
expected to be incurred by FUSA under the Lease following the Closing Date, (ii)
FUSA engaged us to perform such consulting, advisory and related services
through three employees of the Company, including Dr. Victor Gura, our Chief
Scientific and Medical Officer (collectively, the “Employees”), to and for FUSA
as may be reasonably requested from time to time by FUSA and its affiliates (the
“Services”), for the period beginning on November 16, 2009 and ending on the
Closing Date, unless sooner terminated in accordance with the terms of the Side
Agreement, and in consideration for the Services rendered by us during such
term, FUSA agreed to pay to us a cash fee, payable in semi-monthly installments,
at the annual rate for the full-time services of each of the Employees, as more
fully described in the Side Agreement, and (iii) in consideration of FUSA having
incurred and continuing to incur certain expenses on our behalf, we
agreed to reimburse FUSA for certain of its expenses reasonably
incurred on our behalf, including, tooling, prototyping and intellectual
property maintenance expenses, all reasonably documented third party expenses
incurred by FUSA in negotiating and documenting the transactions contemplated by
the Asset Purchase Agreement and the Side Agreement (including FUSA’s reasonable
attorneys’ fees and expenses), consulting fees and certain other miscellaneous
consulting expenses, in the event the closing under the Asset Purchase Agreement
does not take place as a result of the Company consummating a Superior
Proposal. Pursuant to the Side Agreement, the Company has received
payments in an aggregate amount of $197,291.64 for the Services of the Employees
to FUSA and the Employees continued to receive their normal compensation from
the Company in approximately the same aggregate amount.
In
connection with the APA Amendment, on February 12, 2010, we and FUSA entered
into Amendment No. 1 (the “Side Agreement Amendment”) to the Side Agreement,
which extended from February 28, 2010 until March 31, 2010 the date on which the
Employees shall cease providing Services to FUSA, unless the Side Agreement is
terminated prior thereto as provided in the Side Agreement. Except for this
modification, all of the terms and provisions of the Side Agreement remain in
full force and effect. A copy of the Side Agreement Amendment is attached to
this Proxy Statement as Annex H.
The material terms of the Side
Agreement are summarized above and a copy of the Side
Agreement is attached to this Proxy Statement as Annex D. Stockholders
are urged to carefully review the Side Agreement in its entirety.
Voting Agreement
In connection with the execution of the
Asset Purchase Agreement, certain of the Sellers’ executive officers and/or
directors executed a Stockholder Voting Agreement (the “Voting Agreement”).
Under the Voting Agreement, such directors and/or executive officers of
the Company have committed (i) to vote all of the shares of the
Company’s common stock owned by them as of December 14, 2009, together with
all shares of our common stock acquired by them as a result of the exercise of
any options owned by them as of such date, in favor of the adoption of the Asset
Purchase Agreement and the approval of the Asset Sale, and (ii) subject to
certain exceptions, not to enter into discussions concerning or provide
confidential information in connection with alternative business combination
transactions. The shares subject to the Voting Agreement constitute
approximately 41.4% of our outstanding common stock as of the Record Date, and
more than 50% of NQCI’s outstanding voting securities.
The material terms of the Voting
Agreement are summarized above and a copy of the Voting
Agreement is annexed as Exhibit B to the Asset Purchase Agreement, which is
attached hereto as Annex A. Stockholders are urged to carefully review the
Voting Agreement in its entirety.
Our Board of Directors approved,
subject to stockholder approval, the Asset Purchase Agreement and the
transactions contemplated thereunder, including the sale of substantially all of
our assets to FUSA, and voted to recommend that our stockholders approve the
Asset Purchase Agreement and the Asset Sale. We are now seeking stockholder
approval of the Asset Purchase Agreement and the Asset Sale. For a more detailed
discussion of the principal provisions of the Asset Purchase Agreement, see
“Proposal No. 1: Approval of the Asset Sale—Principal Provisions of the Asset
Purchase Agreement.”
Plan
of Liquidation
Prior to the mailing of this Proxy
Statement, our Board of Directors approved, subject to stockholder approval, a
Plan of Liquidation and Dissolution (the “Plan of Liquidation”), in the form
attached to this Proxy Statement as Annex B, providing for our complete
liquidation and dissolution, and voted to recommend that our stockholders
approve the Plan of Liquidation. We are now seeking stockholder approval for
this Plan of Liquidation. See “Proposal No. 2: Approval of the Plan of
Liquidation and Dissolution — Principal Provisions of the Plan of
Liquidation.”
If our stockholders approve the Plan of Liquidation, but the Asset
Sale is not approved or is not consummated, we will not present the Liquidating
Trust Agreement Proposal for a vote of our stockholders at the Special Meeting
and will move forward with our dissolution. If this occurs, our Board of
Directors will be authorized to sell and liquidate our Assets, on such terms and
to such parties as the Board of Directors determines in its sole discretion.
Although
the authority referred to herein will give our Board of Directors authorization
to sell our Assets to one or more third parties, including FUSA, w
e do
not have any agreement or understanding with any party, including
FUSA, with respect to the sale of any or all of our assets if the Asset
Sale is not approved or if the Asset Sale is not consummated.
Therefore,
we have no current intention to sell the Assets to any third party, including
FUSA, except pursuant to the Asset Purchase Agreement, if approved by our
stockholders.
Liquidating
Trust Agreement
Prior to the mailing of this Proxy
Statement, our Board of Directors approved, subject to stockholder approval, the
Liquidating Trust Agreement (the “Liquidating Trust Agreement”), in the form
attached to this Proxy Statement as Annex C, providing for, among other things,
in the event that the Asset Sale, the Plan of Liquidating and the Liquidating
Trust Agreement are approved by our stockholders and the Asset Sale is
subsequently consummated, the transfer of all of our assets remaining after
the consummation of the Asset Sale, including rights to certain payments under
the Asset Purchase Agreement (collectively, the “Remaining Assets”), together
with all of our liabilities and obligations not satisfied prior to our
dissolution (the “Remaining Liabilities”), to the Liquidating Trust (as defined
below), resulting in our complete liquidation and dissolution, and voted to
recommend that our stockholders approve the Liquidating Trust Agreement.
The term
of the Liquidating Trust will be 3 years (subject to extension under certain
circumstances) and the interests in the trust will be non-transferable, subject
to certain exceptions as required by law. The Trustee (as defined below) intends
to sell any Remaining Assets, including our share of the Royalty Payments and
our rights to the Option, prior to the expiration of the term of the Liquidating
Trust and to distribute the proceeds, if any, to holders of beneficial interests
of the Liquidating Trust.
We are
now seeking stockholder approval for this Liquidating Trust Agreement. The
transfer of our Remaining Assets and Remaining Liabilities to the Liquidating
Trust pursuant to the Liquidating Trust Agreement will be contingent upon
approval by our stockholders of the Asset Sale, the Plan of Liquidation and
the Liquidating Trust Agreement and the subsequent consummation of the Asset
Sale. For a more detailed discussion of the Liquidating Trust Agreement, see
“Proposal No. 3: Approval of the Liquidating Trust Agreement.”
Proposal
to Adjourn the Special Meeting
As described above, our Board of
Directors has determined that the foregoing proposals are in the best interests
of our stockholders. Because approval of these proposals is a necessary step to
completing the Asset Sale and the dissolution and liquidation of the Company, we
are seeking stockholder approval to give us the right to elect to adjourn the
Special Meeting to solicit additional proxies in favor of any of these proposals
if it appears at the time of the Special Meeting that an insufficient number of
votes will be cast to approve any of these proposals.
Required
Vote
The affirmative vote of the holders of
a majority of the shares of our common stock issued and outstanding on the
Record Date is required for the approval of the Asset Sale and the Plan of
Liquidation. The approval of the Adjournment Proposal requires the affirmative
vote of the holders of a majority of the shares of our common stock represented
in person or by proxy and entitled to vote thereon at the Special
Meeting.
SUMMARY
OF TERMS OF THE ASSET SALE
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The
Parties
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Xcorporeal,
Inc.
We
are a medical device company that has been engaged in developing an
innovative
extra-corporeal
platform
technology to be used in devices to replace the function of various human
organs (the “Xcorporeal Business”).
Xcorporeal
Operations, Inc.
Operations
is our wholly-owned subsidiary.
National
Quality Care, Inc.
NQCI
is a research and development company. NQCI’s platform technology is a
wearable artificial kidney for dialysis and other medical applications.
This device treats the blood of patients through a pulsating,
dual-chambered pump. NQCI has also been engaged in developing the
Supersorbent Technology jointly with the efforts of TRDF (collectively,
the “NQCI Business”, and together with the Xcorporeal Business, the
“Business”).
Fresenius
USA, Inc.
Fresenius
Medical Care Holdings, Inc. (“Fresenius Medical Care”) is the world's
largest integrated provider of products and services for individuals
undergoing dialysis because of chronic kidney failure, a condition that
affects more than 1,770,000 individuals worldwide. Fresenius USA,
Inc. (“FUSA”) is a wholly-owned subsidiary of Fresenius Medical Care
and a part of Fresenius SE, a global health care group with products and
services for dialysis, the hospital and the medical care of patients at
home.
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Assets
Proposed to be Sold to FUSA
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We
are proposing to sell to FUSA substantially all of our assets, properties
and intellectual property rights used in connection with the operation of
our business, excluding (i) our cash, restricted cash and cash
equivalents, (ii) our accounts receivable, (iii) our marketable
securities, (iv) our website and (v) our insurance policies.
As
consideration for the sale of substantially all of our assets to FUSA, on
the closing date of the Asset Sale (the “Closing Date”) we will receive
(a) $2,100,000, which is our portion of the Cash Purchase Price, in
addition to $200,000 which was previously paid to us as the exclusivity
fee, of which $1,650,000 will be paid to us on the Closing Date, $375,000
will be paid to us on April 1, 2010 and $75,000 will be paid to us on
April 1, 2011, and (b) our share of the Royalty Payments (as defined
below). In addition, of the portion of the Cash Purchase Price being paid
to NQCI, per the agreement of the Sellers, $1,871,430 is being paid to
satisfy our liability to NQCI for NQCI’s attorneys’ fees and costs awarded
by the arbitrator pursuant to the terms of the Partial Final Award issued
on April 13, 2009.
FUSA
will purchase our only business segment, which consists of the business
related to our
extra-corporeal
platform
and development of any products to be derived
therefrom.
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Liabilities
Assumed by FUSA
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FUSA
will not assume any of the Sellers’ liabilities incurred prior to the
closing date of the transactions contemplated under the Asset Purchase
Agreement.
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Restrictions
on Our Ability to Solicit Third Party Proposals; Ability to enter into a
Superior Proposal
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Subject
to certain fiduciary out exceptions, the Asset Purchase Agreement contains
restrictions on our ability to solicit third party proposals and on our
ability to provide information and engage in discussions and negotiations
with unsolicited third parties.
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Conditions
to the Closing of the Asset Sale
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The
obligations of the parties to complete the Asset Sale are subject to
certain conditions,
including:
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that
the representations and warranties of the Sellers contained in the Asset
Purchase Agreement are true and correct in all respects as of the date of
the Asset Purchase Agreement and as of the Closing
Date,
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the
approval of the Asset Sale by each of the Seller’s stockholders holding
the majority of the outstanding voting securities of such Seller (the
“Stockholder Approvals”);
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that
certain third party consents are obtained by the
Sellers;
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that
no Material Adverse Effect (as defined below) shall have occurred with
respect to the Assets or, recognizing the constraints of the Sellers’
financial situation, the Business since the date of the Asset Purchase
Agreement and no fact or circumstance shall have occurred or arisen since
the date of the Asset Purchase Agreement that would reasonably be expected
to have such a Material Adverse Effect;
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that
the Research Agreement shall have been validly assigned to FUSA and the
exclusive license for use of the Supersorbent Technology in any and all
medical applications, as contemplated by the Research Agreement, shall
have been executed and delivered to FUSA; and
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certain
other customary conditions.
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Termination
of the Asset Purchase Agreement
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The
Asset Purchase Agreement may be terminated under certain
circumstances, including:
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by
the mutual agreement of FUSA and the Sellers;
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by
the Sellers or FUSA if any governmental authority shall have issued a
final order, decree or ruling or taken any other action, which has the
effect of permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated under the Asset Purchase
Agreement;
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by
the Sellers if the board of directors of any Seller determines in good
faith that it has received a Superior Proposal (as defined below) and that
it is required to terminate the Asset Purchase Agreement in order to
comply with its fiduciary duties, and otherwise complies with certain
terms of the Asset Purchase Agreement;
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by
FUSA if the Stockholder Approvals have not been obtained on or before
March 31, 2010; and
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subject
to certain limitations, by FUSA or any Seller, if the closing has not
occurred on or before March 31, 2010 and the Asset Purchase Agreement has
not previously been terminated.
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In
connection with the termination as a result of any Seller proceeding with
a Superior Proposal, contemporaneously with the closing of a transaction
contemplated by a Superior Proposal, such terminating Seller shall be
obligated to pay a termination fee of $2,500,000 to FUSA. In the event
such terminating Seller is the Company, the Company also agreed to
reimburse FUSA for, among other things, all of its reasonably incurred
development expenses in connection with the provision of the Services (as
defined below) by certain personnel of the Company to
FUSA.
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Payment
of Expenses
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All
costs and expenses incurred in connection with the Asset Sale shall be
paid by the party incurring such expenses.
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Material
Income Tax Consequences of the
Asset Sale
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We
believe that we will not incur any material federal or state income taxes
as a result of the Asset Sale because our tax basis for the assets being
sold exceeds the sale proceeds that will be received from
FUSA.
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Payment
of a Portion of the Transaction Proceeds to NQCI
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Pursuant
to the terms of the Binding Memorandum of Understanding, dated as of
August 7, 2009 (the “Memorandum”), the Sellers agreed to mutually
cooperate in order for us to consummate a transaction involving an
exclusive license and/or sale to a third party (the “Proposed
Transaction”) of a part, substantially all or all of our technology and
other intellectual property rights licensed to us by NQCI under the
License Agreement, dated as of September 1, 2006, and which transaction
also contemplated an arrangement with respect to the Polymer Technology
(herein referred to as “supersorbent”) (the “Licensed Technology”), or any
other transaction (a “Transaction”) involving the sale, license or other
disposition by us of a part, substantially all or all of the Licensed
Technology. The Sellers further agreed that upon the consummation of a
Proposed Transaction, they will allocate any license fees and any other
additional consideration received in such transaction between the Sellers
under the terms of the Partial Final Award (as defined
below).
Pursuant
to the terms of the Memorandum and subject to the terms of the Asset
Purchase Agreement, NQCI was entitled to receive (i) 36.96% of the cash
proceeds to be received by us in a Proposed Transaction (which amount is
intended to represent an amount equal to 39% of the net royalty payments
provided for by the terms of the Partial Final Award issued on April 13,
2009 by the arbitrator in the arbitration proceeding between the Sellers
and NQCI (the “Partial Final Award”)), following the deduction therefrom
of our expenses incurred in connection with the Proposed Transaction, plus
$1,871,430 in attorneys’ fees and costs payable by us to NQCI pursuant to
the terms of the Partial Final Award, and (ii) 39% of any other
consideration to be received by us in connection with a Proposed
Transaction.
Therefore,
pursuant to the terms of the Memorandum, pursuant to the terms of the
Asset Purchase Agreement, NQCI will receive $5,700,000 of the Cash
Purchase Price, $1,871,430 is being paid to satisfy our liability to NQCI
for NQCI’s attorneys’ fees and costs awarded by the arbitrator pursuant to
the terms of the Partial Final Award, and shall be entitled to receive 40%
of any HD WAK Royalty and 60% of any Supersorbent Royalty payments. For a
more detailed discussion of the payment arrangements between the Sellers
in connection with the Asset Purchase Agreement, see “Proposal No. 1:
Approval of the Asset Sale — Description of the Arbitration Proceeding and
Other Transactions Entered Into With NQCI; Payment of a Portion of the
Aggregate Consideration Under the Asset Purchase Agreement to
NQCI.”
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Summary
of Terms of the Plan of Liquidation and Complete Dissolution
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Plan
of Liquidation
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The
consummation of the Plan of Liquidation is contingent upon our
stockholders approving the Plan of Liquidation. For detailed information
regarding the Plan of Liquidation, see “Proposal No. 2: Approval of the
Plan of Liquidation and Dissolution.” A form of the Plan of Liquidation is
attached to this Proxy Statement as Annex B.
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If
our stockholders approve the Plan of Liquidation, but the Asset Sale is
not approved or is not consummated, we will not present the Liquidating
Trust Agreement Proposal for a vote of our stockholders at the Special
Meeting and will move forward with our dissolution. If this occurs, our
Board of Directors will be authorized to sell and liquidate our Assets, on
such terms and to such parties as the Board of Directors determines in its
sole discretion.
Although
the authority referred to herein will give our Board of Directors
authorization to sell our Assets to one or more third parties, including
FUSA, w
e
do not have any agreement or understanding with any party, including FUSA,
with respect to the sale of any or all of our assets if the Asset Sale is
not approved or if the Asset Sale is not consummated.
Therefore,
we have no current intention to sell the Assets to any third party,
including FUSA, except pursuant to the Asset Purchase Agreement, if
approved by our stockholders.
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Modification
or Abandonment of the Plan of Liquidation
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Our
Board of Directors may modify, amend or abandon the Plan of Liquidation,
notwithstanding stockholder approval, to the extent permitted by the
General Corporation Law of the State of Delaware (the “DGCL”). We will not
amend the Plan of Liquidation under circumstances that would require
additional stockholder solicitations without complying with applicable
law.
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Summary
of Terms of the Liquidating Trust Agreement
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Liquidating
Trust
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Subject
to stockholder approval of the Asset Sale, the Plan of Liquidation and the
Liquidating Trust Agreement, the consummation of the Asset Sale and
our Board of Directors not amending or abandoning our Plan of Liquidation,
we anticipate transferring to the Liquidating Trust all of our Remaining
Assets, including our share of any Royalty Payments and our rights to the
Option, and Remaining Liabilities. Prior to the mailing of this Proxy
Statement, our Board of Directors approved the terms of the Liquidating
Trust Agreement, in the form attached to this Proxy Statement as
Annex C.
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We
anticipate establishing the Liquidating Trust contemporaneously with the
closing of the Asset Sale. The term of the Liquidating Trust will be 3
years (subject to extension under certain circumstances) and the interests
in the trust will be non-transferable, subject to certain exceptions as
required by law. Kelly J. McCrann, our Chairman and Chief Executive
Officer, or his affiliate will be the trustee of the Liquidating Trust
(the “Trustee”) and will receive certain compensation for such services,
as more fully discussed under Proposal No. 3. We anticipate that such
transfer to the Liquidating Trust will be made as soon as practicable
after the closing of the Asset Sale.
The
Trustee intends to sell any Remaining Assets, including our share of the
Royalty Payments and our rights to the Option, prior to the expiration of
the term of the Liquidating Trust and to distribute the proceeds, if any,
to holders of beneficial interests of the Liquidating Trust.
For
detailed information regarding the terms of the Liquidating Trust, see
“Proposal No. 3: Approval of the Liquidating Trust
Agreement.”
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Anticipated
Timing and Projected Amount of Transfer to the Liquidating
Trust
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Subject
to stockholder approval of the Asset Sale, the Plan of Liquidation and the
Liquidating Trust Agreement, the consummation of the Asset Sale, our
Board of Directors not amending or abandoning our Plan of Liquidation and
satisfaction of our and the Liquidating Trust’s liabilities and expenses,
we anticipate that the Trustee will make distribution(s) of the
liquidation proceeds from the Liquidating Trust, if any, upon the receipt
of any Royalty Payments to be paid to us by FUSA.
As
of the date hereof, we are unable to estimate what the value of the
liquidation proceeds from the Royalty Payments per share of our
common stock outstanding as of the Record Date would be. The actual
distribution amount(s), if any, will be determined and the final
distribution, if any, will be made by the Trustee in his sole discretion
after the realization over-time of the cash value of our share of any
Royalty Payments and any value we may realize from our rights to the
Option, and settlement and satisfaction of all of our and the Liquidating
Trust’s liabilities and expenses.
NONE OF THE CASH PROCEEDS FROM
THE ASSET SALE WILL BE DISTRIBUTED TO OUR STOCKHOLDERS IN LIGHT OF THE
FACT THAT CURRENTLY OUR TOTAL LIABILITES AND OBLIGATIONS SIGNIFICANTLY
EXCEED OUR TOTAL ASSETS.
However, our Board of Directors
believes that the approval of all three proposals, increases the
possibility that we will be able to distribute some liquidation proceeds
from the Liquidating Trust to our stockholders, including our share of any
Royalty Payments and our rights to the
Option.
|
QUESTIONS
AND ANSWERS ABOUT THE MEETING AND THE PROPOSALS
|
Q:
|
What
is the purpose of the Special
Meeting?
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A:
|
At
the Special Meeting, our stockholders will consider and vote on the
following proposals:
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1.
|
to
approve the sale (the “Asset Sale”) of substantially all of our assets
(the “Assets”) pursuant to the Asset Purchase Agreement, dated as of
December 14, 2009, entered into by and among FUSA, Xcorporeal, Operations
and NQCI, attached to this Proxy Statement as Annex A (the “Asset Sale
Proposal”);
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2.
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to
approve our voluntary dissolution and liquidation pursuant to a Plan of
Liquidation and Dissolution (the “Plan of Liquidation”), in the form
attached to this Proxy Statement as Annex B (the “Plan of Liquidation
Proposal”). For a detailed discussion of the Plan of Liquidation, see
“Proposal No. 2: Approval of the Plan of Liquidation and Dissolution —
Principal Provisions of the Plan of
Liquidation”;
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3.
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to
approve the Liquidating Trust Agreement (the “Liquidating Trust
Agreement”), in the form attached to this Proxy Statement as Annex C,
providing for, among other things, in the event that the Asset Sale and
the Plan of Liquidation are approved by our stockholders and the Asset
Sale is subsequently consummated, the transfer of all of our assets
remaining after the Asset Sale, including rights to certain payments and
the Option under the Asset Purchase Agreement (collectively, the
“Remaining Assets”), together with all of our liabilities and obligations
remaining prior to such transfer (the “Remaining Liabilities”), to the
Liquidating Trust and our resulting complete liquidation and
dissolution contemplated by the Plan of Liquidation (the “Liquidating
Trust Agreement Proposal”). The transfer of all of our Remaining Assets
and Remaining Liabilities to the Liquidating Trust pursuant to the Plan of
Liquidation will be contingent upon approval by our stockholders of the
Asset Sale, the Plan of Liquidation, the Liquidating Trust Agreement and
the subsequent consummation of the Asset Sale. For a more detailed
discussion of the Plan of Liquidation, see “Proposal No. 2: Approval of
the Plan of Liquidation and Dissolution — Principal Provisions of the Plan
of Liquidation” and Proposal No. 3: Approval of the Liquidating Trust
Agreement”;
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4.
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to
approve any proposal to adjourn the Special Meeting to a later date to
solicit additional proxies in favor of the approval of the Asset Sale
Proposal, the Plan of Liquidation Proposal or the Liquidating Trust
Agreement Proposal, if there are insufficient votes for approval of any
such proposals at the time of the Special Meeting (the “Adjournment
Proposal”); and
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5.
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to
transact such other business as may properly come before the Special
Meeting and any adjournment or postponement
thereof.
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|
Q:
|
What
is our Board of Directors’ recommendation with respect to the Asset Sale
Proposal, the Plan of Liquidation Proposal, the Liquidating Trust
Agreement Proposal and the Adjournment
Proposal?
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A:
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Our
Board of Directors (the “Board of
Directors”):
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·
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determined
that the Asset Sale and other transactions contemplated by the Asset
Purchase Agreement, are fair to, advisable and in the best interests of us
and our stockholders;
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·
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approved in all respects the
Asset Sale and the other transactions contemplated by the Asset Purchase
Agreement;
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·
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approved
and adopted that the Plan of Liquidation and the other transactions
contemplated thereby;
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·
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approved
and adopted in all respects the Plan of Liquidation and the transactions
contemplated thereby;
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·
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approved
and adopted in all respects the Liquidating Trust Agreement, including the
transfer of all our Remaining Assets to the Liquidating Trust, subject to
the approval of the Asset Sale, the Plan of Liquidation and Liquidating
Trust Agreement by our stockholders and the subsequent consummation of the
Asset Sale, and the other transactions contemplated by the Plan of
Liquidation;
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·
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determined
that the adoption of the Adjournment Proposal is advisable and in the best
interests of us and our
stockholders.
|
Accordingly,
our Board of Directors recommends that you vote: (1) “
FOR
” the approval of
the Asset Sale Proposal, (2) “
FOR
” the approval of
the Plan of Liquidation Proposal, (3) “
FOR
” the approval of
the Liquidating Trust Agreement Proposal and (4) “
FOR
” the approval of
the Adjournment Proposal.
|
Q:
|
Are
there risks I should consider before deciding on the
proposals?
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A:
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Yes.
You should carefully consider the risk factors set forth under the caption
“Risk Factors” beginning on page
61
of this Proxy Statement in evaluating whether to approve the Asset Sale
Proposal, the Plan of Liquidation Proposal, the Liquidating Trust
Agreement Proposal and the Adjournment Proposal. These risk factors should
be considered along with any other information included herein, including
any forward-looking statements made herein. See “Where You Can Find More
Information.”
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|
Q:
|
What
is Xcorporeal’s current business?
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A:
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We
are a medical device company that has been engaged in developing an
innovative
extra-corporeal
platform technology to be used in devices to
replace the function of various human organs. These devices will seek to
provide patients with improved, efficient and cost effective therapy. We
hope that the platform will lead to the following three
products:
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A
Portable Artificial Kidney, or “PAK”, for attended care Renal Replacement
Therapy, or “RRT”, for patients suffering from Acute Renal Failure, or
“ARF”;
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A
PAK for home hemodialysis for patients suffering from End Stage Renal
Disease, or “ESRD”; and
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A
Wearable Artificial Kidney, or “WAK”, for continuous ambulatory
hemodialysis for treatment of ESRD
|
We are a
development stage company and we have previously focused much of our efforts on
development of the PAK. We have generated no revenues to date and have been
unprofitable since our inception. Because of our lack of resources and
difficulty in obtaining financing, our existing cash reserves will not be
sufficient to satisfy our liabilities and other obligations and we will not be
able to develop any of our products, submit 510(k) notifications or PMA
applications to the FDA, conduct clinical trials or otherwise commercialize any
of our products, and therefore, are proposing to sell substantially
all of our assets to FUSA as described herein. If the Asset Sale is not
consummated or if the Plan of Liquidation is not approved by our stockholders
for any reason, we will discontinue our operations and liquidate our assets and
will be forced to seek protection under bankruptcy laws.
The
Asset Sale, the Plan of Liquidation, the Liquidating Trust Agreement and
Possible Distribution(s) to Stockholders
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Q:
|
What
assets are we proposing to sell?
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A:
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We
are proposing to sell to FUSA substantially all of our assets consisting
of our assets, properties, intellectual property and intellectual property
rights used in connection with the operation of our business, excluding
the Remaining Assets, which consist of our (i) cash, restricted cash and
cash equivalents, (ii) accounts receivable, (iii) marketable securities
and (iv) website.
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FUSA will
purchase our only business segment, which consists of the business related to
our
extra-corporeal
platform and development of any products to be derived therefrom. For more
information about the Remaining Assets we will retain and payment terms under
the Asset Purchase Agreement, please see “Proposal No. 1: Approval of the Sale
of Substantially All of the Assets of Xcorporeal ─ Description of the Asset
Purchase Agreement ─
Assets to be Retained by the Company
” and “Proposal No. 1: Approval of
the Sale of Substantially All of the Assets of Xcorporeal ─ Description of
the Asset Purchase Agreement ─
Purchase Price
”,
respectively.
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Q:
|
Why
has the Board of Directors recommended the Asset Sale, the Plan of
Liquidation and the Liquidating Trust
Agreement?
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A:
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The
deterioration of the economy over the last 18 months and the economic
conditions particularly affecting development-stage health care related
companies, coupled with the prolonged delay in reaching a resolution with
respect to the arbitration proceeding with NQCI commenced in December 2006
(the “Arbitration”) and the consummation of the Technology Transaction (as
defined below) has significantly adversely affected us. Many of the
expectations on which we had based our 2008 and 2009 business development
plans slowly eroded as a result of the lengthy Arbitration which continued
into the second quarter of 2009. The possibility of an adverse decision in
the Arbitration with respect to our ownership right to the Technology (as
defined below) was a major factor in our inability to secure debt or
equity financing. Accordingly, we have had to modify or curtail our
activities and business operations. In addition, in response to the
general economic downturn affecting the development of our products and
liquidity condition, we instituted a variety of measures in an attempt to
conserve cash and reduce our operating expenses. As a result and after
making several attempts to identify and implement a business plan that
could be successful over the long term and an exhaustive search for a
strategic and product development partner, our Board of Directors
determined that it is in the best interests of the Company and our
stockholders to (i) enter into the Asset Purchase Agreement with FUSA and
consummate the Asset Sale, (ii) dissolve and liquidate the Company
pursuant to the Plan of Liquidation, including subject to the approval by
our stockholders of the Asset Sale, the Plan of Liquidation and the
Liquidating Trust Agreement and the consummation of the Asset Sale,
transfer all of our Remaining Assets and Remaining Liabilities to the
Liquidating Trust. After an extensive review of a range of strategic
alternatives for the Company, including our continuing the Company as an
independent entity, exploring potential mergers and acquisitions and any
possible financing arrangements and expending considerable efforts to
maximize the value of our assets, the Board of Directors believes that the
Asset Purchase Agreement presents the best offer for the sale of the
Assets and maximizes stockholder value and our Board of Directors
recommends the Asset Sale to our stockholders. Our Board of Directors also
determined that the Plan of Liquidation was the most advantageous plan for
the dissolution and liquidation of the Company and that the
establishment of the Liquidating Trust provides the best vehicle to carry
out our liquidation after the consummation of the Asset Sale, and
therefore, approved and recommends the Plan of Liquidation and Liquidating
Trust Agreement to our stockholders. See “Proposal No. 1: Approval of the
Sale of Substantially All of the Assets of the Company – History of the
Asset Sale”, “Proposal No. 2: Approval of the Plan of Liquidation and
Dissolution ─
Background and Reasons for the
Proposed Liquidation and Dissolution
” and “Proposal No. 3: Approval
of the Liquidating Trust
Agreement.”
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|
Q:
|
Who is the buyer in the Asset
Sale?
|
|
A:
|
The
buyer is Fresenius USA, Inc., a Massachusetts corporation and a
wholly-owned subsidiary of Fresenius Medical Care Holdings, Inc. Fresenius
Medical Care is the world's largest integrated provider of products and
services for individuals undergoing dialysis because of chronic kidney
failure, a condition that affects more than 1,770,000 individuals
worldwide. Fresenius Medical Care is a part of Fresenius SE, a global
health care group with products and services for dialysis, the hospital
and the medical care of patients at home. The principal offices of
Fresenius Medical Care North America are located at 920 Winter Street,
Waltham, MA 02451-1457. The telephone number of Fresenius North America is
(781) 699-9000.
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|
Q:
|
What are the expected proceeds
and other consideration to be received from the Asset
Sale?
|
|
A:
|
Pursuant
to the Asset Purchase Agreement, the aggregate cash consideration (the
“Cash Purchase Price”) that will be paid by FUSA to the Sellers on the
Closing Date is $8,000,000, $200,000 which was previously paid to us as an
exclusivity fee, $3,800,000 of which will be paid on the closing date of
the Asset Sale (the “Closing Date”), $2,000,000 will be paid on April 1,
2010 and $2,000,000 will be paid on April 1, 2011. $2,300,000 is our
portion of the Cash Purchase Price, of which $200,000 was previously paid
to us as the exclusivity fee, $1,650,000 will be paid to us on the
Closing Date, $375,000 will be payable to us on April 1, 2010 and $75,000
will be payable to us on April 1, 2011. Of the Cash Purchase Price being
paid to NQCI, per the agreement of the Sellers, $1,871,430 will be
paid to satisfy our liability to NQCI for NQCI’s attorneys’ fees and costs
awarded by the arbitrator pursuant to the terms of the Partial Final Award
issued on April 13, 2009.
|
In
addition, during the life of the patents included in the HD WAK Technology (as
defined below) (the “HD WAK Patents”), which expire between November 11,
2021 and September 9, 2024, the Company will be entitled to certain
royalty payments from the sale of wearable hemodialysis (“HD WAK”) devices in
each country where such sales infringe valid and issued claims of the Sellers’
HD WAK Patents issued in such country (“HD WAK Devices Royalty”) and the
attendant disposables that incorporate the HD WAK Technology (as defined below)
(“Attendant Disposables”), not to exceed a certain maximum amount per patient
per week in a country where such sales infringe valid and issued claims of the
HD WAK Patents issued in such country (the “Attendant Disposables Royalty”, and
together with the HD WAK Devices Royalty, the “HD WAK Royalty”). Such
payment for Attendant Disposables will not be payable with regard to Attendant
Disposables that incorporate any technology for which a Supersorbent Royalty (as
defined below) is paid by FUSA to any Seller or any of their affiliates. NQCI
will be entitled to certain amounts in respect of the HD WAK
Royalty.
Additionally,
during the life of any patents included in the Supersorbent Technology (as
defined below) (the “Supersorbent Patents”), the Company will be entitled to
certain royalty payments on each supersorbent cartridge sold per patient in each
country where such sales infringe valid and issued claims of the Supersorbent
Patents issued in such country less any and all royalties payable to The
Technion Research and Development Foundation Ltd. (“TRDF”) pursuant to the
Research Agreement and Option for License, dated June 16, 2005 (the “Research
Agreement”), or any subsequently executed license agreement between TRDF and
FUSA. Such payment for supersorbent cartridges will not be payable with regard
to supersorbent cartridges that incorporate any HD WAK Technology for which a HD
WAK Royalty is paid by FUSA to any Seller or any of their affiliates (the
“Supersorbent Royalty,” and together with the HD WAK Royalty, the “Royalty
Payments”). NQCI will be entitled to certain amounts in respect of the
Supersorbent Royalty. While several applications for patents are pending, no
patent incorporating the Supersorbent Technology has yet been issued. For a more
detailed discussion of the principal provisions of the Asset Purchase Agreement,
see “Proposal No. 1: Approval of the Sale of Substantially All of the Assets of
Xcorporeal — Description of the Asset Purchase Agreement” and for a more
detailed discussion of the aggregate consideration to be provided under the
Asset Purchase Agreement, see “Proposal No. 1: Approval of the Sale of
Substantially all of the Assets of Xcorporeal — Description of the Asset
Purchase Agreement -
Purchase Price
.”
FUSA also
granted to the Sellers an option to obtain a perpetual, worldwide license to the
Supersorbent Technology for use in healthcare fields other than renal (the
“Option”). The Option will be exercisable during the twelve-month period
following FUSA’s receipt of regulatory approval for the sale of a supersorbent
product in the United States or European Union, which we expect will require
further development of the supersorbent technology with TRDF and successful
completion of clinical trials by FUSA. In the event that the Option becomes
exercisable and a Seller exercises the Option, the consideration payable to FUSA
by such Seller(s) for the exercise of the Option will consist of a payment in
the amount of $7,500,000, payable in immediately available funds, and a payment
of an ongoing royalty in an amount equal to the lesser of $0.75 per supersorbent
cartridge and $1.50 per patient per week in each country where such sales
infringe valid and issued claims of the Supersorbent Patents issued in such
country.
NONE OF THE CASH
PURCHASE PRICE
WILL BE DISTRIBUTED TO OUR
STOCKHOLDERS IN LIGHT OF THE FACT THAT CURRENTLY OUR TOTAL LIABILITES AND
OBLIGATIONS SIGNIFICANTLY EXCEED OUR TOTAL ASSETS.
However, our
Board of Directors believes that the approval of all three proposals, increases
the possibility that we will be able to distribute some liquidation proceeds
from the Liquidating Trust to our stockholders, including our share of any
Royalty Payments and the value we may realize from our rights to the
Option. See “Proposal No. 2: Approval of the Plan of Liquidation and
Dissolution —
Estimated
Distribution to Stockholders
” and “Proposal No. 3: Approval of the
Liquidating Trust Agreement —
Estimated Distribution to
Stockholders
.”
|
Q:
|
How
was the amount of the aggregate consideration to be received in the Asset
Sale determined?
|
|
A:
|
The
Board of Directors organized a process in connection with the sale of the
Company or the Assets in order to maximize the net proceeds of any sale
transaction. The Board of Directors hired William Blair & Company, a
nationally-recognized investment bank and financial advisor (“William
Blair”), to broadly canvass the market with a view towards identifying all
possible acquirers of the Company or the Assets. William Blair and Synergy
Partners (a Pacific Rim investment banker and agent) approached
approximately 65 potential investors, partners and/or acquirers,
worldwide, to determine their level of interest in the Company’s
operations and technology. Once we and William Blair had identified those
parties with an interest in discussing a possible transaction, we engaged
in concurrent discussions with all such parties as a way of validating and
maximizing the purchase price, or potential economics of partnering to
further develop the Company’s technology and bringing related products to
market. In order to create an informal “auction” environment, we let each
prospective acquirer know that discussions with other parties were
taking place. In connection with these discussions, we made available to
the prospective acquirers information related to us necessary for the
conduct of their due diligence including, without limitation, publicly
available information, analyst reports, market data and relevant
publications highlighting the Company’s activities and accomplishments. In
addition, we evaluated partnering with certain strategic parties while
potentially selling certain of our assets to other parties worldwide. In
the case of FUSA, the negotiations involved considerable focus on the sale
of substantially all of the Assets. FUSA did not express any
interest in acquiring the equity of the Company. As the Company’s product
development has been focused on ultimately commercializing a hemodialyis
device for chronically ill patients to treat themselves at home, based
upon FUSA’s expertise in hemodialysis and its desire to develop a device
that can be marketed for home use for chronically ill dialysis patients,
FUSA recognized the potential value in the Company’s
technology.
|
|
Q:
|
When
will the Asset Sale be completed?
|
|
A
:
|
The
Asset Purchase Agreement provides that we must satisfy certain conditions
before the Asset Sale will close including, without limitation, (i) that
the representations and warranties of the Sellers contained in the Asset
Purchase Agreement are true and correct in all respects as of the date of
the Asset Purchase Agreement and as of the Closing Date, (ii) the
requirement to obtain the approval of the Asset Sale by each of the
Seller’s stockholders holding the majority of the outstanding voting
securities of such Seller (the “Stockholder Approvals”), (iii) that
certain third party consents are obtained by the Sellers, (iv) that no
Material Adverse Effect (as defined below) shall have occurred with
respect to the Assets or, recognizing the constraints of the Sellers’
financial situation, the Business since the date of the Asset Purchase
Agreement and no fact or circumstance shall have occurred or arisen since
the date of the Asset Purchase Agreement that would reasonably be expected
to have such a Material Adverse Effect, (v) that the Research Agreement
shall have been validly assigned to FUSA and the exclusive license for use
of the Supersorbent Technology in any and all medical applications, as
contemplated by the Research Agreement, shall have been executed and
delivered to FUSA, and (vi) certain other customary conditions. Subject to
the satisfaction of the closing conditions, we expect to consummate the
Asset Sale on or before March 31, 2010. We anticipate that the Asset Sale
will close soon after our stockholders approve the Asset Sale, if they
do.
|
|
Q:
|
What
will happen if the Asset Sale, the Plan of Liquidation and the Liquidating
Trust Agreements are approved?
|
If the
Asset Sale, the Plan of Liquidation and the Liquidating Trust Agreement are
approved and the Asset Sale is consummated, we will move forward with the
complete liquidation and dissolution of the Company and will transfer all of our
Remaining Assets and Remaining Liabilities to the Liquidating Trust. The Plan of
Liquidation gives the trustee of the Liquidating Trust (the “Trustee”) the
authority to sell the Remaining Assets. Stockholder approval of the Plan of
Liquidation also will constitute approval of any and all such future Remaining
Asset sales. Pursuant to the terms of the Liquidating Trust, the Trustee will
pay or adequately provide for the payment of all of our known obligations and
liabilities prior to any distributions to our stockholders. The Trustee
then will be authorized to convert all of the Remaining Assets into cash, on
such terms and to such parties, as the Trustee determines in his sole discretion
without requiring further stockholder approval, in order to pay off all of our
liabilities and distribute any remaining cash proceeds from the Liquidating
Trust to our stockholders. We are unable to determine at this point the
amount(s) that will be distributed to our stockholders, if any, from the
Liquidating Trust. If any amounts become available for distribution in the
future, they will be distributed from the Liquidating Trust. See
“Proposal No.3: Approval of the Liquidating Trust Agreement ─ Nature, Amount and
Timing of Liquidating Distributions.”
|
Q:
|
What
will happen if the Asset Sale is not approved but the Plan of Liquidation
is approved?
|
|
A:
|
If
our stockholders approve the Plan of Liquidation, but the Asset Sale is
not approved or is not consummated, we will not present the Liquidating
Trust Agreement Proposal for a vote of our stockholders at the Special
Meeting and will move forward with the complete liquidation and
dissolution of the Company without establishment of the Liquidating Trust.
The Plan of Liquidation gives our Board of Directors the authority to sell
all of our assets. If this happens, our Board of Directors will be
authorized to sell and liquidate our assets, including the Assets, on such
terms and to such parties as the Board of Directors determines in its sole
discretion.
Although
the authority referred to herein will give our Board of Directors
authorization to sell our Assets to one or more third parties, including
FUSA, w
e
do not have any agreement or understanding with any party, including
FUSA, with respect to the sale of any or all of our assets if the
Asset Sale is not approved or if the Asset Sale is not consummated.
Therefore,
we have no current intention to sell the Assets to any third party,
including FUSA, except pursuant to the Asset Purchase Agreement, if
approved by our stockholders.
Because the
Board of Directors believes that the Asset Purchase Agreement presents the
best offer for the sale of the Assets and because of our already extremely
limited resources, if the Asset Sale is not consummated for whatever
reason, we will be forced to discontinue our operations and proceed with a
liquidation in bankruptcy. Under such circumstances, it is highly
doubtful that there would be any assets to distribute to our
stockholders.
|
|
Q:
|
What
will happen if both the Asset Sale and the Plan of Liquidation are not
approved?
|
|
A:
|
If
the Asset Sale is not consummated and the Plan of Liquidation is not
approved, whether due to lack of stockholder approval or other reasons, we
will not present the Liquidating Trust Agreement Proposal for a vote of
our stockholders at the Special Meeting. All of our remaining assets most
likely would then be used to maintain our curtailed operations until such
time that we would have little or no assets and we will be forced to
discontinue operations and proceed with a liquidation in bankruptcy. Our
Board of Directors believes that if all three proposals are not approved,
we will be forced to discontinue our operations and proceed with a
liquidation in bankruptcy. Under such circumstances, it is highly doubtful
that there would be any assets to distribute to our
stockholders.
|
|
Q:
|
What
will happen if the Asset Sale is approved, but the Plan of Liquidation is
not approved?
|
|
A:
|
If
the Asset Sale is approved, but the Plan of Liquidation is not approved by
our stockholders, we will not present the Liquidating Trust Agreement
Proposal for a vote of our stockholders at the Special Meeting and we
would then move forward to complete the Asset Sale under the Asset
Purchase Agreement. We would not make any liquidating distributions to our
stockholders and will attempt to maximize cash remaining after satisfying
our liabilities by negotiating possible reduced payments for our remaining
obligations. We would continue to manage the Company as a publicly-owned
entity, would expect to continue to incur the substantial costs
of being a public company and will explore what, if any, alternatives are
then available for the future of our business, including “going dark.”
However, our already substantially depleted resources and proceeds of the
Asset Sale would then be further diminished, which would most likely
result in the curtailment of our operations and require us to file for
bankruptcy. In such event, our Board of Directors believes that if all
three proposals are not approved, we will be forced to discontinue our
operations and proceed with a liquidation in bankruptcy. Under such
circumstances, it is highly doubtful that there would be any assets to
distribute to our stockholders.
|
|
Q:
|
How
will the Company use the Transaction Proceeds of the Asset
Sale?
|
|
A:
|
We
intend to use all of our share of the Cash Purchase Price to pay our
outstanding liabilities and obligations. None of the Cash Purchase
Price will be available for distribution to our stockholders in light of
the fact that currently our total liabilities and obligations
significantly exceed our total assets. We will attempt to maximize
cash remaining after the Asset Sale by negotiating possible reduced
payments for our remaining obligations. A portion of our share of the Cash
Purchase Price may also be used by to fund our day-to-day operations prior
to our dissolution. We intend to retain as much of the non-cash Remaining
Assets as possible for conversion into cash and eventual distribution, if
any, to our stockholders pursuant to the Plan of Liquidation and the
Liquidating Trust Agreement. Cash distributions, if any, to our former
stockholders will be made from the Liquidating Trust to the extent that
our share of any Royalty Payments and any value realized from our rights
to the Option exceed the Remaining Liabilities transferred to and the
expenses of the Liquidating Trust. If the Plan of Liquidation or the
Liquidating Trust Agreement are not approved by our stockholders, our
share of the Cash Purchase Price and our Remaining Assets will be used by
us to satisfy our liabilities and obligations. Our Board of Directors
believes that if all three proposals are not approved, we will be forced
to discontinue our operations and proceed with a liquidation in
bankruptcy. Under such circumstances, it is highly doubtful that there
would be any assets to distribute to our
stockholders.
|
|
Q:
|
What
will our business be after the Asset
Sale?
|
|
A
:
|
After
the closing of the Asset Sale, if the Plan of Liquidation and the
Liquidating Trust Agreement are approved by our stockholders, we and
Operations will file a certificate of dissolution with the State of
Delaware. Thereafter, our sole activities will relate to the liquidation
and winding up of the Company and Operations pursuant to the Plan of
Liquidation and the Liquidating Trust Agreement. If the Plan of
Liquidation is not approved by our stockholders, we will not present the
Liquidating Trust Agreement Proposal for a vote of our stockholders at the
Special Meeting and we will attempt to obtain financing and/or
identify and establish a successful business model. Considering our recent
financial performance, it is unlikely that we would be able to obtain
additional equity or debt financing. If we were unable to obtain
sufficient capital, we would deplete our available limited resources
and may be required to discontinue operations and/or proceed with a
liquidation in bankruptcy. Our Board of Directors believes that if all
three proposals are not approved, we will be forced to discontinue our
operations and proceed with a liquidation in bankruptcy. Under such
circumstances, it is highly doubtful that there would be any assets to
distribute to our stockholders.
|
|
Q:
|
What actions will our Board of
Directors take if the
Asset Sale, the
Plan of Liquidation
and the
Liquidating Trust Agreement are
approved?
|
|
A:
|
(i)
If the Asset Sale, the Plan of Liquidation and the Liquidating Trust
Agreement are approved by our stockholders, we will take the following
actions:
|
|
|
|
complete
the Asset Sale and the consummation of the transactions contemplated under
the Asset Purchase Agreement;
|
|
|
|
file
a certificate of dissolution for each of Xcorporeal and Operations with
the Secretary of State of the State of
Delaware;
|
|
|
|
establish
the Liquidating Trust and transfer to the Liquidating Trust all of our
Remaining Assets and the Remaining
Liabilities;
|
|
|
|
pursuant
to the terms of the Liquidating Trust, the Trustee will pay or adequately
provide for the payment of all of our known obligations and liabilities
prior to any distributions to our
stockholders;
|
|
|
|
attempt
to maximize cash remaining after satisfying our liabilities by negotiating
possible reduced payments for our remaining obligations;
and
|
|
|
|
the
trustee of the Liquidating Trust will distribute in accordance with the
Liquidating Trust’s governance documents pro rata in one or more
liquidating distributions over time to or for the benefit of our former
stockholders and beneficiaries of the Liquidating Trust any available cash
or cash equivalents obtained from the conversion into cash of all of the
rights and assets transferred to the Liquidating
Trust.
|
(ii)
If the Asset Sale is not approved by our stockholders, but the Plan of
Liquidation is approved by our stockholders, we will not present the Liquidating
Trust Agreement Proposal for a vote of our stockholders at the Special Meeting
and we will take the following actions:
|
|
|
attempt
to sell all of our Assets on available terms most favorable to
us;
|
|
|
|
discontinue
our operations and liquidate our assets and conduct our business
operations only to the extent necessary to wind up our business
affairs;
|
|
|
|
file
a certificate of dissolution for each of Xcorporeal and Operations with
the Secretary of State of the State of
Delaware;
|
|
|
|
attempt
to maximize cash remaining after satisfying our liabilities by negotiating
possible reduced payments for our remaining
obligations;
|
|
|
|
attempt
to pay or adequately provide for the payment of all of our known
obligations and liabilities, to the extent of our then available
resources;
|
|
|
|
to
the extent of our then available resources, establish a contingency
reserve designed to satisfy any additional unknown or contingent
liabilities or acquire insurance to protect us against such liabilities;
and/or
|
|
|
|
seek
protection under bankruptcy laws. Due to the fact that our liabilities and
obligations significantly exceed our assets, it is highly doubtful that
there would be any cash or cash equivalents to distribute to our
stockholders.
|
(iii) If
the Asset Sale and the Plan of Liquidation are approved by our stockholders, but
the Liquidating Trust Agreement is not approved by our stockholders, we will
take the following actions:
|
|
|
complete
the Asset Sale and the consummation of the transactions contemplated under
the Asset Purchase Agreement;
|
|
|
|
file
a certificate of dissolution for each of Xcorporeal and Operations with
the Secretary of State of the State of
Delaware;
|
|
|
|
attempt
to maximize cash remaining after satisfying our liabilities by negotiating
possible reduced payments for our remaining
obligations;
|
|
|
|
attempt
to pay or adequately provide for the payment of all of our known
obligations and liabilities, to the extent of our then available
resources;
|
|
|
|
to
the extent of our then available resources, establish a contingency
reserve designed to satisfy any additional unknown or contingent
liabilities or acquire insurance to protect us against such liabilities;
and/or
|
|
|
|
discontinue
our operations and liquidate our Remaining Assets, conduct our business
operations only to the extent necessary to wind up our business affairs
and seek protection under bankruptcy laws. Due to the fact that our
liabilities and obligations significantly exceed our assets, it is highly
doubtful that there would be any cash or cash equivalents to distribute to
our stockholders.
|
|
Q:
|
What
is the Liquidating Trust?
|
|
A:
|
No
third party is entitled to rely on no-action positions taken by the staff
of the SEC. However, in order to have facts similar to those presented in
several no-action letters in which the staff took such no-action positions
allowing registrants whose securities are registered under Section
12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), and who are otherwise not eligible to deregister under
applicable rules of the Exchange Act, to deregister from their Section
13(a) and Section 15 reporting obligations, we plan to establish a
Liquidating Trust which will exist only for the limited purpose
of effecting liquidation of all of our assets and liabilities within
the 3-year period from the establishment date of the Liquidating Trust. In
connection therewith and pursuant to our Plan of Liquidation, if the Asset
Sale, the Plan of Liquidation and the Liquidating Trust Agreement are
approved by our stockholders and we subsequently consummate the Asset
Sale, we intend to transfer to the Liquidating Trust all of our Remaining
Assets and all of our Remaining
Liabilities.
|
|
Q:
|
What
are the terms of the Liquidating
Trust?
|
|
A;
|
If
the Asset Sale, the Plan of Liquidation and the Liquidating Trust
Agreement are approved by our stockholders and we subsequently consummate
the Asset Sale, our Board of Directors intends to transfer our share of
any Royalty Payments and our rights to the Option and the other Remaining
Assets, if any, together with all of the Remaining Liabilities, to the
Liquidating Trust established for the benefit of our stockholders, which
rights and assets would thereafter be sold or distributed on terms
approved by the Trustee of such trust. The purpose of the Liquidating
Trust would be to serve as a temporary repository for the trust property
prior to its disposition or distribution to our stockholders, to
distribute or sell such property on terms satisfactory to the Trustee, and
to distribute to our stockholders any net proceeds of such sale after
paying any liabilities assumed by the Liquidating Trust. The Liquidating
Trust will also assume all of our Remaining Liabilities and will be
obligated to pay any expenses and Remaining Liabilities that remain
unsatisfied.
|
The
Liquidating Trust will be established pursuant to a Liquidating Trust Agreement
to be entered into with an affiliate of Kelly J. McCrann, our Chairman and Chief
Executive Officer, to act as trustee thereunder, as approved by our Board of
Directors (the “Trustee”), substantially in the form attached to this Proxy
Statement as Annex C. The Liquidating Trust will assume all of our
obligations and liabilities with respect to the assets transferred to the
Liquidating Trust, including, without limitation, any unsatisfied claims and
unascertained or contingent liabilities relating to these transferred assets,
and any such conveyances to the Liquidating Trust will be in trust for our
stockholders. The transfer to the Liquidating Trust and distribution of
interests therein to our stockholders, if any, will enable us to divest
ourselves of the trust property and permit our stockholders to enjoy the
economic benefits of ownership of such property and the Royalty Payments whose
fair value on the date of this Proxy Statement is uncertain.
Upon the
determination by the Trustee that all of the Liquidating Trust’s liabilities
have been satisfied, but in any event, not more than 3 years from the date of
the transfer of our Remaining Assets to it (subject to an extension only under
certain circumstances), the Liquidating Trust will, to the fullest extent
permitted by law, make a final distribution of any remaining assets to the
holders of the beneficial interests of the trust.
The
Trustee intends to sell any Remaining Assets, including our share of the Royalty
Payments and our rights to the Option, prior to the expiration of the term of
the Liquidating Trust and to distribute the proceeds, if any, to holders of
beneficial interests of the Liquidating Trust.
The
adoption of the Plan of Liquidating and the Liquidating Trust Agreement by our
stockholders constitutes full and complete stockholder approval of the
appointment of the liquidating trustee of the Liquidating Trust, the execution
of Liquidating Trust Agreement and the transfer of our assets to the Liquidating
Trusts.
|
Q:
|
What
will stockholders receive in the
liquidation?
|
|
A:
|
As
of the date hereof, we cannot determine what amount(s), if any, will be
available to distribute to our stockholders. If we receive our share of
any Royalty Payments and are able to realize any value from our
rights to the Option, if the products underlying the technology being sold
to FUSA as part of the Assets are successfully developed and if we incur
no additional liabilities, amounts may become available for distribution
to our stockholders in the future, and if so, will be distrusted from the
Liquidating Trust. However, our Board of Directors has determined that
approving the Asset Sale, the Plan of Liquidating and the Liquidating
Trust Agreement would increase the possibility that the Trustee will be
able to distribute liquidation proceeds from the Liquidating Trust to our
stockholders. See “Proposal No. 2: Approval of the Plan of Liquidation and
Dissolution” and “Proposal No. 3: Approval of the Liquidating Trust
Agreement —
Nature,
Amount and Timing of Liquidating
Distributions
.”
|
|
Q:
|
When
will stockholders receive payment of any available liquidation
proceeds?
|
|
A:
|
We
presently expect to transfer the Remaining Assets and the Remaining
Liabilities to the Liquidating Trust, as soon as practicable after the
Special Meeting and in connection with the filing of a certificate of
dissolution for each of Xcorporeal and Operations with the Secretary of
State of the State of Delaware. Upon our receipt of our share of the
Royalty Payments, if any, and/or conversion into cash of the value of the
stream of Royalty Payments due to us under the Asset Purchase Agreement,
if any, and after satisfaction of all of our liabilities and obligations
and the costs and liabilities associated with the establishment and
maintenance of the Liquidating Trust, the remaining cash amounts, if any,
will be distributed by the Trustee to our stockholders as the Trustee
determines in his sole discretion in accordance with the terms of the
Liquidating Trust. As of the date hereof, however, we are not able to
predict the precise nature, amount or timing of any distributions, due
primarily to our inability to predict the amount of our remaining
liabilities or the amount that we will expend during the course of the
liquidation and the amount, if any, of the Royalty Payments due to us or
the value that the Trustee would be able to realize upon conversion of the
stream of Royalty Payments due to us under the Asset Purchase Agreement
into cash. If the Asset Sale, the Plan of Liquidation and the Liquidating
Trust Agreement are approved by our stockholders, once the Remaining
Assets and Remaining Liabilities have been transferred to the Liquidating
Trust, the Trustee, in his sole discretion, will determine the actual
amount and timing of all distributions to our stockholders. See, “Proposal
No. 3: Approval of the Liquidating Trust Agreement — Liquidation
Distributions” and “Risk Factors — Risks Related to the Plan of
Liquidation.”
|
|
Q:
|
Do
our executive officers and/or directors have any interest in the Asset
Sale, the Plan of Liquidation or Liquidating Trust
Agreement?
|
|
A:
|
Certain
of our executive officers have employment, change in control and other
agreements that provide for severance payments full vesting of all
unvested equity awards if any such executive officer's employment is
terminated for any reason in connection with a change in control or if we
terminate their employment at any time without cause or if they are
constructively terminated and/or certain other payments in the event we
successfully consummate the Asset
Sale.
|
The
consummation of the Asset Sale will constitute a change of control under these
agreements and will trigger certain severance payments to our executive
officers. The employment of each of these executive officers will be terminated
by us either prior to or during the wind down of our activities. In either case,
such terminations will be deemed terminations in connection with a change in
control and/or require such other severance payments. The change of control,
severance payments and/or certain other payments that will be due by the Company
to our executive officers will be in the amount up to $1,924,300, if our
executive officers are terminated as a result of the Asset Sale or if the
Asset Sale is successfully consummated, assuming no excise tax gross-up payments
are due. In particular, Kelly J. McCrann, our Chairman and Chief Executive
Officer, Robert Weinstein, our Chief Financial Officer and Secretary, and Dr.
Victor Gura, our Chief Medical and Scientific Officer, may be entitled
to severance payments in the amount up to $325,000, $286,500 and
$1,312,800, respectively, under their employment agreements. In addition, if the
Asset Sale is consummated, Mr. McCrann will be entitled to a payment of $432,500
as a sale transaction success fee. Furthermore, in connection with certain
restructuring efforts previously undertaken by us to reduce our operating
expenses, Messrs. McCrann and Weinstein and Dr. Gura, may be entitled
to receive deferred compensation in the amount of approximately
$95,563, $83,531 and $82,050, respectively, our other employees may be
entitled to receive deferred compensation, in the aggregate, of approximately
$60,000, and a member of our Board of Directors may be entitled to receive
deferred compensation in the amount of approximately $70,000. Additionally, as
of February 15, 2010, we estimate that certain of our employees would be
entitled to receive accrued vacation pay, in the aggregate, of approximately
$150,000.
In
addition, Mr. McCrann (or an entity affiliated with Mr. McCrann) will also serve
as the Trustee of the Liquidating Trust and under the terms of the Liquidating
Trust Agreement, in the form attached to this Proxy Statement as Annex C, will
receive the following compensation for his services as the Trustee: 10% of the
aggregate Royalty Payments received by the Liquidating Trust up to $10 million
and 5% of any Royalty Payments in excess thereof. Mr. McCrann will also be
entitled to reimbursement of his expenses incurred as Trustee on behalf of the
Liquidating Trust.
As of
December 31, 2009, there were 1.16 million shares of common stock underlying
unvested stock options held by our executive officers that will vest as a result
of the Asset Sale. The weighted-average exercise price of those stock options is
$3.25 per share. None of these stock options have an exercise price at or below
$0.07, the last reported sale price of our common stock as quoted on the Pink
Sheets Electronic OTC Market (the “Pink Sheets”) on the Record Date. Since we do
not anticipate that any substantial amount of our share of the Cash Purchase
Price will be available for distribution to our stockholders, we anticipate that
none of these stock options will be exercised. In addition, as of the Record
Date, our executive officers and/or directors also held 6,352,596 shares of
common stock that will be entitled to the same per share liquidating
distributions from the Liquidating Trust, if any, that will be made to the other
shares of common stock outstanding. See “Proposal No. 1: Approval of the Asset
Sale — Interests of Our Executive Officers and/or Directors in the
Asset Sale, the Plan of Liquidation and the Liquidating Trust
Agreement.”
Additionally,
on the Closing Date a joint venture to be formed by FUSA and Dr. Gura may
enter into an employment agreement with Dr. Gura, pursuant to which Dr. Gura
would assist FUSA in the further development of the Assets for a certain period
after Closing Date, at a set salary to be determined by FUSA and Dr. Gura. In
addition, Dr. Gura may receive an ownership stake in such joint venture. On the
Closing Date, FUSA will not enter into any other employment or consulting
arrangements with any of our executive officers or employees. Other than
described herein, we do not know whether FUSA will enter into any employee or
consulting arrangements thereafter with any of our executive officers or
employees and FUSA has not notified us of any intention to do so to
date.
|
Q:
|
What
happens to my shares of common stock after the dissolution of the
Company?
|
|
A:
|
If
the Asset Sale, the Plan of Liquidation and the Liquidating Trust
Agreement are approved by our stockholders and the Asset Sale is
consummated, the transfer of the Remaining Assets and Remaining
Liabilities to the Liquidating Trust under the Plan of Liquidation and the
Liquidating Trust Agreement or the wind up of our affairs under the Plan
of Liquidation will be in complete cancellation of all of the outstanding
shares of our common stock. From and after the effective date of the
certificate of dissolution to be filed by the Company with the Secretary
of State of the State of Delaware (the “Final Record Date”), and subject
to applicable law, our common stock will be treated as no longer being
outstanding and each holder of our common stock shall cease to have any
rights in respect thereof, except the right to receive distributions, if
any, pursuant to and in accordance with the Plan of Liquidation or the
trust agreement governing the Liquidating Trust, as applicable. To
the extent any amounts become available for distribution in the future as
a result of the Liquidating Trust receiving any Royalty Payments and
realizing any value from our rights to the Option, to the extent such
exceed the Remaining Liabilities and expenses of the Liquidating Trust,
they will also be distributed pro-rata from the Liquidating Trust. The
actual distribution amount will be determined and the final distribution
will be made by the Trustee in his sole discretion after the realization
over-time of the cash value, if any, of the Royalty Payments and our
rights to the Option, and settlement and satisfaction of all our
liabilities and expenses.
|
|
Q:
|
Should
I send in my stock certificates
now?
|
|
A:
|
No.
You should not forward your stock certificates before receiving
instructions to do so. As a condition to being a beneficiary of the
Liquidating Trust and receipt of any distribution to the stockholders as
beneficiaries thereof or receipt of any distribution pursuant to our Plan
of Liquidation, if the Asset Sale is not consummated for whatever reason,
our Board of Directors, in its absolute discretion, may require the
stockholders to (i) surrender their certificates evidencing their shares
of common stock to us or (ii) furnish us with evidence satisfactory to the
Board of Directors of the loss, theft or destruction of such certificates,
together with such surety bond or other security or indemnity as may be
required by and satisfactory to the Board of Directors. If surrender of
stock certificates should be required following the dissolution, we will
send you written instructions regarding such surrender. Any distributions
otherwise payable by us to our stockholders who have not surrendered their
stock certificates, if requested to do so, will be held in trust for such
stockholders, without interest, pending the surrender of such certificates
(subject to escheat pursuant to the laws relating to unclaimed
property).
|
|
Q:
|
Can
I still sell my shares?
|
|
A:
|
You
may sell your shares at this time in accordance with the federal and state
securities rules and regulations. If the Plan of Liquidation is approved
by our stockholders, the Board of Directors, in its absolute discretion,
may direct that our stock cease being traded on the Pink Sheets and that
our stock transfer books be closed and recording of transfers of common
stock discontinued. From and after the Final Record Date, and subject
to applicable law, our common stock will be treated as no longer being
outstanding and each holder of our common stock shall cease to have any
rights in respect thereof, except the right to receive distributions
pursuant to and in accordance with the Plan of Liquidation and/or the
trust agreement governing the Liquidating Trust, as applicable.
Thereafter, certificates representing shares of our common stock will not
be assignable or transferable on the books of the Company except by will,
intestate succession or operation of law. See “Proposal No. 3: Approval of
the Liquidating Trust Agreement — Trading of Interests in any
Liquidating Trust” and “Proposal No. 3: Approval of the Liquidating Trust
Agreement — Trading of Our Common
Stock.”
|
|
Q:
|
Does
the Asset Sale or the dissolution and liquidation of the Company require
any regulatory approvals?
|
|
A:
|
We
are not aware of any United States federal or state regulatory
requirements or governmental approvals or actions that may be required to
consummate the Asset Sale or the dissolution and liquidation of the
Company, except for compliance with the applicable regulations of the SEC
in connection with this Proxy Statement and compliance with the General
Corporation Law of the State of Delaware (the “DGCL”). Additionally, the
dissolution of the Company requires that we obtain a certificate from the
department of revenue for the State of Delaware certifying that every
license fee, tax, increase, or penalty of the Company has been paid or
provided for.
|
|
Q:
|
Does
the Plan of Liquidation involve any risk of liability to
stockholders?
|
|
A:
|
As
of the date of this Proxy Statement, no distributions have been made to
our stockholders. However, as part of our Plan of Liquidation, we are
obligated to pay, or make provision for the payment of, our expenses and
our fixed and contingent liabilities. Under the DGCL, a stockholder
could be held personally liable to our creditors for any deficiency, to
the extent of such stockholder’s previous distributions from us in
liquidation, if we fail to make adequate provision for the payment of our
expenses and liabilities. Moreover, if a stockholder has paid
taxes on distributions previously received by the stockholder, a repayment
of all or a portion of the prior distribution could result in a
stockholder incurring a net tax cost if the stockholder’s repayment of an
amount previously distributed does not cause a commensurate reduction in
taxes payable by that stockholder. If we fail to create an adequate
contingency reserve for payment of our expenses and liabilities, each of
our stockholders could be held liable for payment to our creditors for
amounts owed to creditors in excess of the contingency reserve, up to the
amount actually distributed to such stockholder. Because no distributions
have been made to our stockholders as of the date hereof, we do not
believe there is any material risk of liability to our stockholders
resulting from our fixed and contingent
liabilities.
|
General
Information About Voting
|
Q:
|
Who
is entitled to vote?
|
|
A:
|
The
Record Date for the Special Meeting is February 8, 2010. Only stockholders
of record at the close of business on the Record Date are entitled to
notice of and to vote at the Special Meeting. At the close of business on
the Record Date there were 15,354,687 shares of our common stock and
no shares of our preferred stock outstanding. Except as otherwise required
by law, the holders of shares of our common stock vote together as a
single class on all matters presented to the
stockholders.
|
|
Q:
|
How
many votes are required to authorize and approve the Asset Sale Proposal,
the Plan of Liquidation Proposal and the Adjournment
Proposal?
|
|
A:
|
At
the Special Meeting, our stockholders will consider and vote on the Asset
Sale Proposal, the Plan of Liquidation Proposal, the Liquidating Trust
Agreement Proposal and the Adjournment Proposal as separate proposals,
however, we will not present the Liquidating Trust Agreement Proposal at
the Special Meeting unless both the Asset Sale Proposal and the Plan of
Liquidating Proposal are approved by our stockholders. The approval of
each of the Asset Sale Proposal, the Plan of Liquidation Proposal and the
Liquidating Trust Agreement Proposal requires the affirmative vote of the
holders of a majority of shares of our common stock outstanding as of the
Record Date and entitled to vote thereon. The approval of the Adjournment
Proposal requires the affirmative vote of the holders of a majority of the
shares of our common stock represented in person or by proxy and entitled
to vote thereon. Members of our Board of Directors and our executive
officers who hold (or are deemed to hold) as of the Record Date an
aggregate of 6,352,596 shares of our common stock (approximately 41.4% of
the outstanding shares of our common stock as of the Record Date) have
agreed to vote for the approval of each of the proposals at the
Special Meeting.
|
|
Q:
|
Do
I have dissenters’ rights?
|
|
A:
|
No.
Under the DGCL, stockholders will not have dissenters’ rights in
connection with the Asset Sale or the Plan of Liquidation. Section 262 of
the DGCL provides that appraisal rights shall be available for the shares
of any class or series of stock of a constituent corporation in a merger
or consolidation to be effected pursuant to Section 251 of the DGCL.
Because the transactions contemplated under the Asset Purchase Agreement
or by the Plan of Liquidation will not involve a merger or consolidation
of the Company, our stockholders will not have appraisal rights in
connection with the Asset Sale or the Plan of
Liquidation.
|
|
Q:
|
What
if my shares are held in “street name” by a
broker?
|
|
A:
|
If
you are the beneficial owner of shares held in “street name” by a broker
(or banker or other nominee), your broker, as the record holder of the
shares, is required to vote those shares in accordance with your
instructions. Stockholders should follow the directions provided by
brokers regarding how to instruct brokers to vote the
shares.
|
|
Q:
|
How
many shares must be present to hold the Special Meeting and how are votes
counted?
|
|
A:
|
A
quorum must be present at the Special Meeting for any business to be
conducted. The presence at the Special Meeting, in person or by proxy, of
the holders of a majority of the shares of our common stock outstanding on
the Record Date will constitute a quorum. Your shares will be considered
part of the quorum if you return a signed and dated proxy card, if you
vote by telephone or by the Internet, or if you vote at the Special
Meeting. Proxies received but marked as abstentions or broker non-votes
will be included in the calculation of the number of shares considered to
be present at the Special Meeting.
|
Under the
rules of various national and regional securities exchanges, an abstaining vote
and a broker non-vote are counted as present and are, therefore, included for
purposes of determining whether a quorum of shares is present at the Special
Meeting. A broker non-vote occurs when a broker submits a proxy card with
respect to shares held in a fiduciary capacity (generally referred to as being
held in “street name”) but declines to vote on a particular matter because the
broker has not received voting instructions from the beneficial owner. Under the
rules that govern brokers who are voting with respect to shares held in street
name, brokers have the discretion to vote such shares on routine matters, but
not on non-routine matters such as the approval of the Asset Sale Proposal, the
Plan of Liquidation Proposal and the Liquidating Trust Agreement Proposal. If
you do not vote or do not instruct your broker or bank how to vote, it will have
the same effect as voting “AGAINST” the Asset Sale Proposal, the Plan of
Liquidation Proposal and the Liquidating Trust Agreement Proposal and will have
no effect on the Adjournment Proposal.
|
Q:
|
What
if a quorum is not present at the Special
Meeting?
|
|
A:
|
If
we do not have a quorum at the Special Meeting or if we do not have
sufficient affirmative votes in favor of the foregoing proposals, we may,
subject to stockholder approval of the Adjournment Proposal, adjourn the
Special Meeting to a later time to permit further solicitation of proxies,
if necessary, to obtain additional votes in favor of the foregoing
proposals. In addition, we may adjourn the Special Meeting without notice,
other than by the announcement made at the Special Meeting. Under our
Bylaws, we can adjourn the Special Meeting by approval of the holders of a
majority of our common stock having voting power present in person or
represented by proxy thereat. We are soliciting proxies to vote in favor
of adjournment of the Special Meeting, regardless of whether a quorum is
present, if necessary to provide additional time to solicit votes in favor
of approval of the Asset Sale Proposal, the Plan of Liquidation Proposal
or the Liquidating Trust Agreement
Proposal.
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Q:
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Who
is bearing the costs of the solicitation of proxies in connection with the
Special Meeting?
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A:
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We
will bear the cost of the solicitation of proxies from its stockholders.
In addition to solicitation by mail, our directors, officers and employees
may solicit proxies from our stockholders by telephone, facsimile or other
electronic means or in person. Following the original mailing of the Proxy
Statement and other soliciting materials, we will request brokers,
custodians, nominees and other record holders to forward copies of the
Proxy Statement and other soliciting materials to persons for whom they
hold shares of our common stock and to request authority for the exercise
of proxies. We will reimburse any of these custodians, nominees and
fiduciaries for their reasonable out-of-pocket expenses in doing so. We
may engage an agent to assist us in the solicitation of proxies. If we do
so, such agent’s fee and services will be consistent with our past
arrangements and within the range of what is common for companies with
similar operations and a number of stockholders similar to
us.
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All
stockholders may vote by mail. Registered stockholders (who own their shares in
their own name) and most beneficial stockholders (who own shares through a bank,
broker or other nominee) also may vote by telephone or the Internet. If one of
these options is available to you, we strongly encourage you to use it because
it is faster and less costly. Registered stockholders can vote by telephone by
calling 1-800-652-VOTE (8683) within the USA, US territories and Canada or
on the Internet at www.investorvote.com/CITN. Please have your proxy card in
hand when calling or going online. To vote by mail, please sign, date and
mail your proxy card in the envelope provided.
If you
own your shares through a bank, broker or other nominee you should follow the
separate instructions that the record stockholder provides to you. Although most
banks and brokers now offer telephone and Internet voting, availability and
specific processes will depend on their voting arrangements.
If you
attend the Special Meeting in person, you may request a ballot when you arrive.
If your shares are held in the name of your bank, broker or other nominee, you
need to bring an account statement or letter from the nominee indicating that
you were the beneficial owner of the shares on the Record Date for
voting.
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Q:
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Can
I change my vote after I submit my
proxy?
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A:
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Yes,
you may revoke your proxy and change your vote at any time before the
polls close at the meeting by:
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•
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voting
again by Internet or by
telephone;
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•
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signing
another proxy with a later
date;
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•
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giving
written notice of the revocation of your proxy to our Secretary prior to
the Special Meeting; or
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•
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voting
in person at the Special
Meeting.
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Q:
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What
happens if I do not give specific voting
instructions?
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A:
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Stockholders of Record
.
If you are a stockholder of record and
you:
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•
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Indicate
when voting on the Internet or telephone that you wish to vote as
recommended by our Board of Directors
or
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•
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if
you sign and return a proxy card without giving specific voting
instructions,
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then the
proxy holders will vote your shares in the manner recommended by our Board of
Directors on all matters presented in this Proxy Statement and as the proxy
holders may determine in their discretion with respect to any other matters
properly presented for a vote at the Special Meeting.
Beneficial Owners of Shares Held in
Street Name
. If you are a beneficial owner of shares held in street name
and do not provide the nominee who holds your shares with specific voting
instructions, the nominee will inform our inspector of election that it does not
have the authority to vote on this matter with respect to your shares. This is
generally referred to as a “broker non-vote.” When our inspector of election
tabulates the votes for any particular matter, broker non-votes will be counted
for purposes of determining whether a quorum is present, but will not otherwise
be counted.
ABSTENTIONS AND
BROKER NON-VOTES WILL HAVE THE EFFECT OF A VOTE “AGAINST” THE APPROVAL OF THE
ASSET SALE PROPOSAL
,
THE
PLAN OF LIQUIDATION
PROPOSAL
AND THE
LIQUIDATING TRUST AGREEMENT PROPOSAL
.
Please provide
voting instructions to the nominee that holds your shares by carefully following
their instructions.
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Q:
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How
do I access proxy materials on the
Internet?
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A:
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Stockholders
can access our Notice of Special Meeting and Proxy Statement and a form of
a proxy card on the Internet on the “Proxy”, sub-category “Proxy Statement
Materials”, section of our website at www.xcorporeal.com. Our public
filings can also be accessed at the SEC’s web site at www.sec.gov. See
“Where You Can Find More
Information.”
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Q:
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What if other matters come up
at the Special Meeting?
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A:
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The
matters described in this Proxy Statement are the only matters we know of
that will be voted on at the Special Meeting. If any other matter or
matters are properly brought before the Special Meeting or any adjournment
or postponement of the Special Meeting, it is the intention of the persons
named in the accompanying form of proxy to vote the proxy on such matters
in accordance with their best
judgment.
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Q:
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What
do stockholders need to do now?
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A:
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After
carefully reading and considering the information contained in this Proxy
Statement, each stockholder should vote by Internet or by telephone or
complete and sign his or her proxy card and return it in the enclosed
return envelope as soon as possible so that his or her shares may be
represented at the meeting. A majority of shares entitled to vote must be
represented at the meeting to enable us to conduct business at the
meeting.
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Q:
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Who
should I contact with questions?
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A:
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If
you have any additional questions about the Asset Sale Proposal, the Plan
of Liquidation Proposal, the Adjournment Proposal or if you need
additional copies of this Proxy Statement or any public filings referred
to in this Proxy Statement, you should contact our Investor Relations
Department at Xcorporeal, Inc., 80 Empire Drive, Lake Forest, CA 92630 or
(949) 600-4640. Our public filings can also be accessed at the SEC’s web
site at www.sec.gov. See “Where You Can Find More
Information.”
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Proxy Statement and the annexes and exhibits attached hereto contain
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995 with respect to the financial condition, results
of operations, business strategies, operating efficiencies or synergies,
competitive positions, growth opportunities for existing products, plans and
objectives of management, markets for our stock and other matters. Statements in
this Proxy Statement that are not historical facts are “forward-looking
statements” for the purpose of the safe harbor provided by Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section
27A of the Securities Act of 1933, as amended (the “Securities Act”). These
forward-looking statements are only predictions and reflect our current
expectations or forecasts of future events. Forward-looking statements generally
can be identified by the use of forward-looking terminology such as “may,”
“will,” “expect,” “anticipate,” “intend,” “estimate,” “believe,” “project,”
“continue,” “plan,” “forecast,” or other similar words. Such forward-looking
statements, including, without limitation, those relating to our future business
prospects, revenues and income, wherever they occur, are necessarily estimates
reflecting the best judgment of our senior management on the date on which they
were made, or if no date is stated, as of the date of this Proxy Statement.
These forward-looking statements are subject to risks, uncertainties and
assumptions, including those described below under the caption “Risk Factors”,
in the section captioned “Risk Factors” of our Annual Report on Form 10-K
(the “Form 10-K”) filed with the SEC on March 31, 2009, and in the sections
captioned “Risk Factors” of our Quarterly Reports on Form 10-Q (each, a
“Quarterly Report”), filed with the SEC on May 15, 2009, August 13, 2009 and
November 16, 2009, respectively, that may affect the operations, performance,
development and results of our business. Because these factors could cause our
actual results or outcomes to differ materially from those expressed in any
forward-looking statements made by us or on our behalf, you should not
place undue reliance on any such forward-looking statements. New factors emerge
from time to time, and it is not possible for us to predict which factors will
arise. In addition, we cannot assess the impact of each factor on our business
or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking
statements.
You
should understand that, in addition to those factors discussed below under the
caption “Risk Factors” and in the section captioned “Risk Factors” of our
Form 10-K and our Quarterly Reports, factors that could affect our future
results and could cause our actual results to differ materially from those
expressed in such forward-looking statements, as well as factors that could
affect the Sellers’ ability to consummate the Asset Sale, include, but are not
limited to:
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·
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the
effect of receiving a “going concern” statement in our independent
registered public accounting firm’s report on our 2008 financial
statements;
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our
significant capital needs and ability to obtain financing both on a
short-term and a long-term basis;
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our
ability to successfully research and develop marketable products and our
ability to obtain regulatory approval to market and distribute such
products;
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anticipated
trends and conditions in the industry in which we operate, including
regulatory changes;
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general
economic conditions;
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our ability
to obtain the approval of the Assets Sale and Plan of Liquidation
by our stockholders;
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our ability
to satisfy our liabilities and obligations out of the proceeds of the
transactions described herein and other available resources, if
any;
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our ability
to distribute any remaining cash to our stockholders;
and
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other
risks and uncertainties as may be detailed from time to time in our public
announcements and filings with the
SEC.
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Although
we believe that our expectations are reasonable, we cannot assure you that our
expectations will prove to be correct. Should any one or more of these risks or
uncertainties materialize, or should any underlying assumptions prove incorrect,
actual results may vary materially from those described in this Proxy Statement
as anticipated, believed, estimated, expected or intended.
These
factors are not exhaustive, and new factors may emerge or changes to the
foregoing factors may occur that could impact our business. Except to the extent
required by law, we undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or any other reason. All subsequent forward-looking statements
attributable to us or any person acting on our behalf are expressly qualified in
their entirety by the cautionary statements contained or referred to herein. In
light of these risks, uncertainties and assumptions, the forward-looking events
discussed in this Proxy Statement may not occur. You should review carefully
sections captioned “Risk Factors” included in our Form 10-K and our Quarterly
Reports and the risks discussed under the caption “Risk Factors” below for a
more complete discussion of these and other factors that may affect our
business.
PROPOSAL
NO. 1: APPROVAL OF THE SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF
XCORPOREAL
General
Overview
At the Special Meeting, our
stockholders will be asked to consider and vote upon a proposal to approve the
sale of substantially all of our Assets to FUSA, including all of our assets,
properties and rights used in our business, excluding our (i) cash, restricted
cash and cash equivalents, (ii) accounts receivable, (iii) marketable
securities, (iv) website and (v) insurance policies.
As consideration for the sale of
substantially all of our assets to FUSA, on the closing date of the Asset Sale
(the “Closing Date”) we will receive (a) $2,100,000, which is our portion of the
Cash Purchase Price, in addition to $200,000 which was previously paid to us as
the exclusivity fee, of which $1,650,000 will be paid to us on the Closing Date,
$375,000 will be paid to us on April 1, 2010 and $75,000 will be paid to us on
April 1, 2011, and (b) our share of the Royalty Payments and rights to the
Option (each term as defined below). In addition, of the portion of the Cash
Purchase Price being paid to NQCI, per the agreement of the Sellers, $1,871,430
is being paid to satisfy our liability to NQCI for NQCI’s attorneys’ fees and
costs awarded by the arbitrator pursuant to the terms of the Partial Final Award
issued on April 13, 2009.
The Asset Sale will be made pursuant to
the Asset Purchase Agreement. The material terms of the Asset Purchase Agreement
are presented below under the caption “
Description of the Asset Purchase
Agreement
” and a copy of the Asset Purchase Agreement is attached to this
Proxy Statement as Annex A. Stockholders are urged to carefully review the Asset
Purchase Agreement in its entirety.
Background
of the Asset Sale
In late 2007, we began to explore
strategic alternatives available to us, including the possible sale of some of
our assets or the equity of the Company. In February 2008, we engaged William
Blair & Company (“William Blair”) as our financial advisor in connection
with a possible private placement or the sale of our securities or merger, sale
or exchange of 50% or more of our authorized capital stock or sale of some or
all of our assets. At such time, our intent was to execute our modified
business plan to continue the development of the PAK. Around this time,
based on deteriorating economic conditions and our inability to obtain debt or
equity financing, our Board of Directors began to discuss whether to sell the
equity of the Company as a single entity or to sell certain of our assets in one
or more transactions at an acceptable price. We did not believe that
raising additional capital through an equity or debt offering was achievable
given the ongoing arbitration with NQCI and the private investors which we
contacted regarding such capital investments specifically indicated to us that
the uncertainty of the outcome of the arbitration with NQCI was the reason why
capital financing was unavailable to us. After extensive discussions, our
Board of Directors concluded that sale of certain of our assets was the
preferred course of action insofar as the proceeds of such sale would have
allowed us to continue to develop certain of our products to be derived from
the
extra-corporeal
platform
technology. Moreover, the Board of Directors noted that even if a single buyer
existed, a better aggregate price might be obtained by selling individual assets
to buyers with a specific interest in them.
In March 2008, in light of our
continuing deteriorating liquidity position, ongoing severe economic recession
and our inability to obtain additional debt or equity financing, the Board of
Directors reconsidered its strategy of selling certain of our assets and
concluded that sale of the equity of the Company to a single buyer was the
preferred course of action insofar as it would save time, minimize transaction
expenses and provide the greatest possibility of a distribution to our
stockholders. However, the Board of Directors also noted that there might not be
a single buyer for our range of technologies. As a result of the foregoing
considerations, the Board of Directors authorized our management to explore the
sale of the equity of the Company to a single buyer as a preferred course of
action, but agreed to study the response of buyers in order to validate the
decision to pursue a single transaction.
We, William Blair and Synergy Partners,
a Pacific Rim investment banker and agent (“Synergy”), prepared a list of more
than 60 prospective acquirers and financing sources and we began making contact
with them in March 2008. More than 30 prospective acquirers and investors
expressed preliminary interest in all or parts of the Company and requested
additional information, and out of those 5 potential acquirers also visited us.
By late 2008, we concluded that none of the prospective buyers were interested
in acquiring the equity of the Company and that either no bids would be
forthcoming or bids would be significantly below what our Board of Directors
believed to be the fair value of the Company due to the all-or-none requirement.
However, a few prospective acquirers had a strong interest in acquiring our
technology related to the PAK.
In September 2008, our former Chief
Executive Officer, Dan Goldberger, visited two potential acquirers to determine
their level of interest in either partnering with us or acquiring the equity of
the Company. Both of these parties agreed to conduct further due diligence and
provide their level of interest in a transaction.
In October 2008, Kelly J. McCrann, our
Chairman and Chief Executive Officer, traveled to several locations worldwide to
gauge the level of interest of three other potential strategic partners that
expressed interest in a possible transaction with us.
In November 2008, Mr. McCrann, Dr.
Victor Gura, our Chief Scientific and Medical Officer, Barry Fulkerson (our
chief engineer) and Robert Weinstein, our Chief Financial Officer, attended the
American Society of Nephrology conference held in Philadelphia, Pennsylvania. We
privately debuted, under signed confidentiality agreements, our PAK prototype
and displayed our WAK to a select group of parties that we believed might be
interested such devices, some of which had already been contact by us. Based
upon Mr. McCrann’s visits to the three potential strategic partners, we were
approached by a third-party which is engaged in the manufacture and
commercialization of dialysis and other medical devices (“Development Partner”),
regarding an interest in partnering with us to develop a continuous renal
replacement therapy (“CRRT”) device using our platform technology. As a
result of our initial discussions, we facilitated the start of its due diligence
process.
Several discussions and meetings, both
at our headquarters and offices of the Development Partner, were held between
Mr. McCrann, Dr. Gura, and two of our senior product engineers along with the
Development Partner’s senior product development team. After several
discussions and meetings, a preliminary term sheet for the development of a CRRT
device was drafted in December 2008. After subsequent negotiations over the
contents of the term sheet, in March 2009, the Development Partner provided the
Company a draft memorandum of understanding (“MOU”) expanding the terms outlined
in the December 2008 term sheet. After providing the MOU, the Development
Partner informed us that they would have to postpone their decision to move
forward with this project based upon general economic conditions and other
development projects the Development Partner was pursuing.
In light of our then diminishing
resources, consisting primarily of capital raised through a private placement
that closed during the fourth quarter 2006, and the apparent lack of interest in
the Assets by the prospective acquirers exploring the acquisition of all of our
assets in a single transaction, our Board of Directors continued to consider
strategies for continuing to operate the Company as a going concern, again
exploring the sale of some of the Assets, this time to a wider group of
prospective acquirers without the requirement of buying the equity of the
Company, or shutting down the Company’s business operations, liquidating assets
and distributing any remaining cash proceeds to our stockholders. However, at
such time, few prospective acquirers expressed an interest in aggressively
pursuing the acquisition of our Assets due to the uncertain surrounding the
outcome of the arbitration proceeding with NQCI, which commenced in
2006 and continued into the second quarter of 2009.
Given these circumstances, in late
March 2009, Mr. McCrann began a preliminary dialogue with Mr. Ben Lipps,
Chairman of the Board of Fresenius Medical Care Holdings, Inc. (“Fresenius
Medical Care”), to determine the interest of Fresenius Medical Care to acquire
certain or all of our Assets. From April 2009 to June 2009, Mr. McCrann and Mr.
Lipps, along with Mohsen Reihany, senior advisor to Mr. Lipps, exchanged
numerous telephone calls concerning a potential proposal by Fresenius Medical
Care to purchase substantially all of our Assets. During the same period that
discussions with Fresenius Medical Care were taking place, Mr. McCrann also held
several preliminary discussions with another potential acquirer, whom he visited
in October 2008. The other party expressed interest in acquiring certain of our
assets but did not submit a final offer nor pursued extensive due diligence of
the Company or our assets.
In June 2009, Fresenius Medical Care
commenced its extensive due diligence review of our Company and our
assets.
During the period from September 2008
to late September 2009, our Board of Directors held nine meetings to discuss the
potential financing sources, strategic partners and potential third parties who
may have been interested in acquiring our assets. The Board of Directors
provided guidance relating to the Development Partner transaction, the ongoing
discussions with companies interested in acquiring certain of our assets and the
final decision to pursue the sale of substantially all of our assets to
Fresenius Medical Care or its affiliates.
In addition, in the spring of 2009, Mr.
McCrann engaged in discussions with a certain third party introduced to us by
Synergy. Following the initial rounds of preliminary discussions to determine
the third party’s interest in purchasing certain of the Assets, the
chairman of the board and the head of the medical group of such third party
visited our operating facility in Lake Forest in order to observe the
demonstration of certain of our products. These meetings were followed by the
engineers and sales representatives of the third party also visiting our
operating facility later in the spring of 2009. However, following such
discussions and visits of our operating facility, the third party informally
indicated that it was only interested in our PAK technology, and subsequently
ceased all discussions with us. During such discussions, our management apprised
our Board of Directors of the status of the dialogue and the third party’s
acquisition intent (or the lack thereof) with respect to our Assets. Our
efforts to engage in further discussions with this party have not provided any
meaningful results or proposals since.
Additionally, during the later parts of
the summer 2009 and beginning of September 2009, Mr. McCrann engaged in
discussions with another potential strategic acquirer to gauge its interest in
purchasing certain and/or all of our Assets. Such strategic acquirer expressed
an informal interest in certain of our assets, and specifically the WAK. During
this time, the head of development for renal technology of such strategic
acquirer visited our operating facility to further discuss its expression of
interest, however, as a result of such visits no formal expression of interest
was indicated to us and our efforts to engage in further discussions with this
party have not provided any meaningful results or proposals to date. Throughout
this process, Mr. McCrann and Mr. Weinstein apprised our Board of Directors of
the status of the talks and this potential strategic acquirer’s intent (or the
lack thereof) with respect to our Assets.
On August 6, 2009, our Board of
Directors held a telephonic meeting with Messrs. McCrann and Weinstein and other
members of our management and counsel to the Company to discuss the status of
negotiations with interested bidders. These officers also discussed the
current status of discussions with Fresenius Medical Care and was authorized to
negotiate a letter of intent with Fresenius Medical Care or its affiliates.
Management reported to the Board of Directors that discussions with the
Development Partner continued and that other discussions now were focused on
specific assets, rather than a transaction for the equity of the
Company.
On September 9, 2009, we reviewed the
terms of a transaction proposed by FUSA, a wholly-owned subsidiary of Fresenius
Medical Care, in a draft non-binding term sheet for the acquisition of all of
the Assets, which also included proposed provisions prohibiting us from
soliciting other offers. The non-binding term sheet indicated that any further
efforts by FUSA would be subject to its remaining due diligence and confirmation
by FUSA and its counsel of certain approvals that would allow it to proceed with
the transaction.
Following our review of FUSA’s
non-binding term sheet, Mr. McCrann held several telephonic discussions with
FUSA, including its willingness to increase their purchase price. In
connection with such discussions, FUSA continued to indicate that it was
not interested in acquiring the equity of the Company through the purchase of
all of our outstanding shares of common stock.
On September 21, 2009, the Sellers and
FUSA executed an exclusivity letter (the “Exclusivity Letter”) pursuant to which
the Sellers agreed to grant FUSA access to the books, records, personnel,
properties, contracts and other data of the Sellers, subject to reasonable time,
location and other restrictions for the purpose of FUSA further conducting its’
“due diligence” of the Seller’s operations in connection with FUSA’s intent in
purchasing substantially all of the assets of the Sellers. The Sellers also
agreed that, until the later of (i) December 21, 2009 and (ii) the date on which
any of the parties provided the others with written notice that negotiations to
execute a definitive agreement were terminated (which any of the parties were
entitled to do in their sole discretion), they would not directly or indirectly
(i) solicit or take any other action to facilitate any offers from third parties
with respect to the acquisition of the Company or a part or all of the Assets,
(ii) enter into an agreement to facilitate, approve or endorse such proposal or
in connection with such proposal, abandon or terminate the proposed transaction
between the Sellers and FUSA or (iii) enter into discussions, inquire or furnish
information with respect to any such proposal (a “Acquisition
Proposal”).
The Board of Directors held telephonic
meetings with Mr. McCrann and Mr. Weinstein to discuss the status of the
transaction with FUSA, including a detailed discussion of the terms of the
non-binding term sheet with FUSA. During the later of such meetings, the Board
of Directors determined that the Asset Sale would maximize stockholder value and
that the Company’s best change to receive any royalty payment(s) from the sale
of its assets is to consummate the Asset Sale and thereby, indirectly partnering
with FUSA, the world's largest integrated provider of products and services for
individuals undergoing dialysis because of chronic kidney failure. The Board of
Directors also determined that approving the Asset Sale would increase the
possibility that we will be able to distribute liquidation proceeds from the
Liquidating Trust to our stockholders.
Our Board of Directors approved the
Asset Purchase Agreement and the sale of the Assets to FUSA as described in this
Proxy Statement. Under the Asset Purchase Agreement, the Sellers have
agreed to restrictions similar to those contained in the Exclusivity Letter
until the earlier of the consummation of the Asset Sale and the termination of
the Asset Purchase Agreement in accordance with its terms; provided, that we may
prior to obtaining approval of the Asset Sale contemplated by this Proxy
Statement engage in negotiations or discussions with any party that has made an
unsolicited bona fide Acquisition Proposal and, subject to certain conditions,
furnish nonpublic information regarding the Company to such party, provided that
our Board of Directors may only take such actions if it has determined in good
faith, after consultation with its advisors, that such action is required in
order for the Board of Directors to comply with its fiduciary obligations to our
stockholders under applicable law. We agreed to promptly notify FUSA of any
Acquisition Proposal, the terms thereof and requests related thereto. In
addition, in consideration of FUSA signing the Asset Purchase Agreement, the
Sellers agreed that in connection with the termination of the Asset Purchase
Agreement as a result of any Seller proceeding with a Superior Proposal,
contemporaneously with the closing of a transaction contemplated by a Superior
Proposal, such terminating Seller shall be obligated to pay a termination fee of
$2,500,000 to FUSA. In the event such terminating Seller is the
Company, the Company also agreed to reimburse FUSA for, among other things, all
its reasonably incurred development expenses in connection with the provision of
the Services (as defined below) by certain personnel of the Company to
FUSA.
We will promptly consider in good faith
any proposed alteration of the terms of the Asset Purchase Agreement in response
to any Acquisition Proposal.
The Sellers and FUSA executed the Asset
Purchase Agreement on December 14, 2009 and we publicly announced this
transaction on December 18, 2009.
On
February 8, 2010, the Sellers and FUSA entered into the APA Amendment, which
extended from February 28, 2010 until March 31, 2010 the date upon which any
party to the Asset Purchase Agreement may terminate the Asset Purchase Agreement
if the closing of the transactions contemplated therein has not occurred. Except
for this modification, all of the terms and provisions of the Asset Purchase
Agreement remain in full force and effect.
During the latter stages of the
negotiations among the Company, FUSA and NQCI regarding the Asset Purchase
Agreement, our Board of Directors considered persons who would be in the best
position to serve as the Trustee of the Liquidating Trust and represent the
interests of the beneficiaries of the Liquidating Trust. In October
2009, Mr. McCrann and our Board of Directors discussed whether Mr. McCrann (or
an entity affiliated with Mr. McCrann) would consider serving as the Trustee.
Mr. McCrann informed the Board of Directors that he would be prepared to serve
as the Trustee of the Liquidating Trust for compensation deemed appropriate by
the independent members of the Board of Directors. Our Board of
Directors proposed that as the Trustee of the Liquidating Trust, Mr. McCrann (or
an entity affiliated with Mr. McCrann) would receive the following compensation
for his services as the Trustee: 10% of the aggregate Royalty Payments received
by the Liquidating Trust up to $10 million and 5% of any Royalty Payments in
excess thereof. At the November 2009 meeting of our Board of Directors, Mr.
McCrann accepted and agreed to serve as the Trustee of the Liquidating Trust on
the foregoing terms. Such compensation arrangement was developed and approved by
the independent members of our Board of Directors of the Company at the November
2009 meeting. Based on their business experience, consideration of
what compensation would be considered reasonable for the service as the trustee
of the Liquidating Trust and the fact that the
liquidating
trustee would only receive compensation
on a contingent payment basis
with no assurances of receiving any amounts for serving as such, our independent
directors deemed that such incentive compensation arrangement was appropriate,
reasonable and in the best interest of our stockholders. We did not discuss with
FUSA any of the terms of Mr. McCrann’s compensation for his services as the
Trustee.
It is our
understanding that, due to Dr. Gura’s expertise with the HD WAK Technology and
the Supersorbent Technology, during the latter stages of negotiations regarding
the Asset Purchase Agreement in October and November 2009, FUSA expressed
an interest in potentially forming a joint venture subsequent to the Closing of
the Asset Sale among Dr. Gura, FUSA and other potential third party investors to
further the development of such technology. While we understand that
no specific terms have been agreed upon by Dr. Gura and FUSA as of the date of
this Proxy Statement, the purpose of the relationship would be to raise funds
from outside investors to provide for the development of the technology acquired
by FUSA under the Asset Purchase Agreement. Dr. Gura would most likely be
an employee of or consultant to the entity formed to conduct the fundraising
activities. We understand that among the alternative structures being discussed
by Dr. Gura and FUSA are a possible ownership interest in such entity by
FUSA or, alternatively, a contractual arrangement between FUSA and the entity to
be formed and no direct ownership by FUSA. As of the date of this Proxy
Statement, Dr. Gura continues to provide the Services to FUSA pursuant to the
terms of the Side Agreement and, to our knowledge, no contractual or other
binding arrangement exists between Dr. Gura and FUSA. On the Closing Date, FUSA
will not enter into any employment or consulting arrangements with any of our
executive officers or employees. Other than as described herein, we do not know
whether FUSA will enter into any employee or consulting arrangements thereafter
with any of our executive officers or employees and FUSA has not notified us of
any intention to do so to date.
THE FOLLOWING SECTION OF THE PROXY
STATEMENT DESCRIBES MATERIAL ASPECTS OF THE PROPOSED SALE OF SUBSTANTIALLY ALL
OF OUR ASSETS. WHILE WE BELIEVE THAT THE DESCRIPTION COVERS THE MATERIAL TERMS
OF THE ASSET SALE, THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT MAY
BE IMPORTANT TO YOU. YOU SHOULD READ THIS ENTIRE DOCUMENT AND THE OTHER
DOCUMENTS WE REFER TO CAREFULLY FOR A MORE COMPLETE UNDERSTANDING OF THE ASSET
SALE.
Description
of the Asset Purchase Agreement
The
following is a brief summary of certain key provisions of the Asset Purchase
Agreement. This description is qualified in its entirety by reference to the
Asset Purchase Agreement, a copy of which is attached to this Proxy Statement
as
Annex A.
Stockholders are urged to read the Asset Purchase Agreement in its
entirety.
Purchase
and Sale of Assets
Out of the assets being sold by the
Sellers to FUSA, we agreed to sell and FUSA agreed to purchase all of the Assets
and rights of the Company consisting of the following:
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all
of our patents, trademarks, trade names, and other intellectual property,
including domain names (the “Business IP Rights”) that comprise, are used,
are held for use, or are intended for use by the Company in connection
with or relating to the designs for portable hemodialysis devices (the
“PAK Technology”);
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the
Business IP Rights that comprise, are used or are held for use by the
Company in connection with or relating to the designs for continuous renal
replacement therapy devices (the “CRRT
Technology”);
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the
Business IP Rights that comprise, are used or are held for use by the
Company in connection with or relating to the designs for wearable
hemodialysis devices (the “HD WAK
Technology”);
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the
Business IP Rights that comprise, are used or are held for use by the
Company in connection with or relating to the designs for wearable
ultrafiltration devices (the “WUD
Technology”);
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the
Business IP Rights that comprise, are used or are held for use by the
Company in connection with or relating to the designs for wearable
continuous renal replacement therapy devices (the “WAK CRRT
Technology”);
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the
Business IP Rights that comprise, are used or are held for use by the
Company in connection with or relating to the development of the
supersorbent technology (the “Supersorbent
Technology”);
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all
of our other intellectual property used in connection with our
business;
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all
software used internally by the Company (and collectively with the PAK
Technology, the CRRT Technology, the HD WAK Technology, the WUD
Technology, the WAK CRRT Technology and the Supersorbent Technology, the
“Business Intellectual Property”);
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our
tangible property and equipment;
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all
of our personal property leases;
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certain
contracts or agreements to which we are a party relating to our
business;
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all
permits relating to our business to the extent that such permits are
transferable;
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subject
to certain exceptions, all of our books and records relating to our
business; and
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all
goodwill associated with our business and the Business Intellectual
Property.
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FUSA will
not be assuming any liabilities arising out of the operation of the business or
liabilities associated with the Sellers’ ownership or use of any of the Assets
prior to the closing of the Asset Purchase Agreement.
Purchase
Price
The
aggregate consideration (the “Aggregate Consideration”) for the Assets to be
paid by FUSA to the Sellers consists of the following:
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aggregate
cash payments in the amount of $8,000,000 (the “Cash Purchase Price). The
Cash Purchase Price shall be paid to the Sellers as follows: (a) an
exclusivity fee in the amount of $200,000 previously paid by FUSA to us,
(b) $3,800,000 on the date of closing (the “Closing Date”) of the
transactions (the “Transactions”) contemplated under the Asset Purchase
Agreement (the “Closing”), of which we and NQCI will receive $1,650,000
and $2,150,000, respectively, (c) $2,000,000 on April 1, 2010 (the “First
Installment”), of which we and NQCI will receive $375,000 and $1,625,000,
respectively, and (d) $2,000,000 on April 1, 2011 (the “Second
Installment”), of which the Company and NQCI will receive $75,000 and
$1,925,000, respectively. In the aggregate, if the Asset Sale is
consummated, we will receive $2,300,000 and NQCI will receive $5,700,000
of the Cash Purchase Price. In addition, of the Cash Purchase Price being
paid to NQCI, $1,871,430 is being paid to satisfy our liability to NQCI
for NQCI’s attorneys’ fees and costs awarded by the arbitrator pursuant to
the terms of the Partial Final Award issued on April 13, 2009 (the
“Partial Final Award”);
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during
the life of the patents included in the HD WAK Technology (the “HD WAK
Patents”), which expire between November 11, 2021 and September 9,
2024, we will be entitled to royalty payments equal to 60% of (i) 2%
of the net revenues received by FUSA from the sale of wearable
hemodialysis (“HD WAK”) devices in each country where such sales infringe
valid and issued claims of the Sellers’ HD WAK Patents issued in such
country (“HD WAK Devices Royalty”) plus (ii) $0.75 per treatment for the
attendant disposables that incorporate the HD WAK Technology (“Attendant
Disposables”), not to exceed a maximum of $1.50 per patient per week in a
country where such sales infringe valid and issues claims of the HD WAK
Patents issued in such country (the “Attendant Disposables Royalty”, and
together with the HD WAK Devices Royalty, the “HD WAK Royalty”). Such
payment for Attendant Disposables will not be payable with regard to
Attendant Disposables that incorporate any technology for which a
Supersorbent Royalty (as defined below) is paid by FUSA to any Seller or
any of their affiliates. NQCI will be entitled to the remaining
40% of the HD WAK Royalty; and
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during
the life of any patents included in the Supersorbent Technology (the
“Supersorbent Patents”), we will be entitled to royalty payments equal in
an amount to 40% of (i) the lesser of $0.75 per supersorbent cartridge or
$1.50 per patient per week in each country where such sales infringe valid
and issued claims of the Supersorbent Patents issued in such country less
(B) any and all royalties payable to The Technion Research and Development
Foundation Ltd. (“TRDF”) pursuant to the Research Agreement and Option for
License, dated June 16, 2005 (the “Research Agreement”), or any
subsequently executed license agreement between TRDF and FUSA. Such
payment for supersorbent cartridges will not be payable with regard to
supersorbent cartridges that incorporate any HD WAK Technology for which a
HD WAK Royalty is paid by FUSA to any Seller or any of their affiliates
(the “Supersorbent Royalty,” and together with the HD WAK Royalty, the
“Royalty Payments”). NQCI will be entitled to the remaining 60% of the
Supersorbent Royalty. While several applications for patents are pending,
no patent incorporating the Supersorbent Technology has yet been
issued.
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The
allocation of the Aggregate Consideration between the Sellers is consistent and
was agreed to in accordance with the terms of the Memorandum (as defined below)
and the Partial Final Award.
FUSA also granted to the Sellers an
option to obtain a perpetual, worldwide license to the Supersorbent Technology
for use in healthcare fields other than renal (the “Option”). The Option will be
exercisable during the twelve-month period following FUSA’s receipt of
regulatory approval for the sale of a supersorbent product in the United States
or European Union, which we expect will require further development of the
supersorbent technology with TRDF and successful completion of clinical trials
by FUSA. In the event that the Option becomes exercisable and a Seller exercises
the Option, the consideration payable to FUSA by such Seller(s) for the exercise
of the Option will consist of a payment in the amount of $7,500,000, payable in
immediately available funds, and a payment of an ongoing royalty in an amount
equal to the lesser of $0.75 per supersorbent cartridge and $1.50 per patient
per week in each country where such sales infringe valid and issued claims of
the Supersorbent Patents issued in such country.
Assets
to be Retained by the Company
We will
retain all assets not sold to FUSA, including the following:
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our
cash, restricted cash and cash
equivalents;
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our
marketable securities;
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our
website, including its content, look and feel, verbiage and
images;
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security
deposits for our corporate and operating
facilities;
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our
share of the Cash Purchase Price, which is equal to
$2,300,000;
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our
share of the Royalty Payments;
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our
rights to the Option;
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certain
computer and office equipment; and
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our
minute book, stock records, corporate seal and our and our employees’
corporate and personal, financial and SEC
records.
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FUSA will
purchase our only business segment, which consists of the business related to
our
extra-corporeal
platform and development of any products to be derived therefrom.
Representations
and Warranties of the Company
In the
Asset Purchase Agreement, we made certain customary representations and
warranties to FUSA regarding:
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organization,
standing and power, and authority;
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condition
of acquired tangible assets; taxes; title to the purchased
assets;
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lack
of infringement of or by our intellectual
property;
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compliance
with laws, licenses and permits;
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employee
benefits, labor, and environmental matters;
and
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absence
of litigation, required consents, and broker, finder and investment
banking fees.
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These
representations and warranties may be subject to certain exceptions that are set
forth in exhibits and schedules to the Asset Purchase Agreement.
Representations
and Warranties of FUSA
FUSA made
certain customary representations and warranties to the Sellers regarding
organization and standing, authority and authorization, absence of litigation
that is effecting or which could affect the legality, validity or enforceability
of the Asset Purchase Agreement and the Transactions, brokers’ fees and
availability of funds to pay the cash portion of the Aggregate Consideration for
the Assets.
Conduct
Prior to Closing
In order
to obtain the approval of the Asset Sale, the Asset Purchase Agreement and the
Transactions by our stockholders, our Board of Directors agreed: (a) to hold a
meeting of our stockholders for the purpose of voting to approve and adopt the
Asset Purchase Agreement and the Transactions contemplated hereby and, subject
to the fiduciary duties of our Board of Directors, to (i) recommend
approval and adoption of the Asset Purchase Agreement and the Transactions by
our stockholders and include in any proxy or information statement such
recommendation and (ii) take all reasonable and lawful action to solicit
and obtain such approval, (b) as promptly as practicable to prepare this Proxy
Statement, (c) at or prior to the closing, to deliver to FUSA a certificate of
our Secretary setting forth the voting results from our stockholder meeting and
(d) otherwise to use our reasonable best efforts to hold our stockholders
meeting as soon as practicable after the date of the Asset Purchase Agreement.
In addition, NQCI agreed, acting through its board of directors, subject to and
in accordance with applicable law and its certificate of incorporation and
by-laws, as soon as practicable, to solicit the written consent of its
stockholders to approve and adopt the Asset Purchase Agreement and the
Transactions.
Until the
closing of Asset Purchase Agreement, we are obligated to carry on our business
in the ordinary course in substantially the same manner as previously conducted
immediately prior to the execution of the Asset Purchase Agreement. We also
agreed to: (a) use our best efforts to carry on our business and our affairs in
such a manner so that our representations, warranties and covenants contained in
the Asset Purchase Agreement shall continue to be accurate and correct
throughout such period, and on and as of the Closing Date as if made by us on
the Closing Date, (b) promptly notify FUSA, in writing, of any material
development with respect to our business or any of our assets or properties, (c)
confer with FUSA concerning operational matters of a material nature, and (d)
use our best efforts, recognizing the constraints of our financial condition,
(i) to preserve intact our present business organization, (ii) to keep
available the services of our present officers and employees, (iii) to
preserve our relationships with customers, suppliers and others having business
dealings with us, and (iv) not to do or permit to be done any action that would
result in a Material Adverse Effect. “Material Adverse Effect” means
(in the case of either (x) or (y)) that (x) there has not been any fact,
event, circumstance or change affecting or relating to Xcorporeal, Operations
which, individually or, in the aggregate, has had a material adverse effect on
the financial condition or results of operations of Xcorporeal and Operations,
taken as a whole and (y) there has not been any fact, event, circumstance or
change affecting or relating to NQCI which, individually or in the aggregate,
has had a material adverse effect on the financial condition or results of
operations of NQCI.
The
parties further agreed not to issue or make any press release or other public
statements or otherwise announce the transactions described in the Asset
Purchase Agreement, except as approved by the parties in writing.
Until the
closing of the Asset Purchase Agreement, we will afford FUSA and its officers,
authorized employees, accountants, counsel and other authorized representatives
reasonable access during normal business hours to the properties, books, records
and personnel of the business, as FUSA may reasonably request (subject to any
limitations that are reasonably required to preserve any applicable attorney
client privilege or third party confidentiality obligation).
The
Sellers also agreed to certain other covenants customary of the transactions of
this nature.
Conditions
Precedent to Each Party’s Obligations
The
obligation of the parties to effect the Transactions is subject to the
satisfaction, at or before the closing, of the following
conditions:
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the
approval of the Asset Sale by each of the Seller’s stockholders holding
the majority of the outstanding voting securities of such Seller (the
“Stockholder Approvals”);
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that
no governmental authority of competent jurisdiction shall have
enacted, issued, promulgated, enforced or entered any statute, rule,
regulation, executive order, decree, injunction or other order (whether
temporary, preliminary or permanent) which is in effect and having the
effect of making the Transactions illegal or otherwise prohibiting or
materially restricting consummation of the Transactions; provided,
however, that the parties shall use their reasonable best efforts to cause
any such decree, judgment, injunction or other order to be vacated or
lifted; and
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that
certain third party consents are obtained by the
Sellers.
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Conditions
Precedent to FUSA’s Obligations
The
obligation of FUSA to purchase the Assets is subject to the satisfaction,
at or before the closing, of the following conditions:
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that
the representations and warranties of the Sellers contained in the Asset
Purchase Agreement are true and correct in all respects as of the date of
the Asset Purchase Agreement and as of the Closing
Date;
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the
Sellers shall have performed in all material respects all obligations
required to be performed by them under the Asset Purchase Agreement at or
prior to the closing;
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that
no Material Adverse Effect (as defined below) shall have occurred with
respect to the Assets or, recognizing the constraints of the Sellers’
financial situation, the Business since the date of the Asset Purchase
Agreement and no fact or circumstance shall have occurred or arisen since
the date of the Asset Purchase Agreement that would reasonably be expected
to have such a Material Adverse
Effect;
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no
fact or condition shall have arisen that would preclude in any material
respect FUSA from taking title in the
Assets;
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prior
to or concurrently with the closing, FUSA and us shall have negotiated and
delivered a WAK/PAK Technology Assignment of License assigning to FUSA all
of our licensed rights to current and future intellectual property
comprised of certain U.S. patents and patent applications relating to PAK
Technology and WAK HD Technology;
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FUSA
shall have received from counsel to the Sellers, one or more customary
legal opinions; and
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the
Research Agreement shall have been validly assigned to FUSA and the
exclusive license for use of the Supersorbent Technology in any and all
medical applications, as contemplated by the Research Agreement, shall
have been executed and delivered on terms and conditions substantially as
set forth in Appendix C to the Research Agreement and otherwise on terms
and conditions reasonably satisfactory to FUSA; such license shall be in
the name of and for the benefit of FUSA or shall be in the name of and for
the benefit of NQCI and shall be assigned to FUSA at the Closing with the
written consent of TRDF.
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Conditions
Precedent to Our Obligations
Our
obligation to consummate the transactions contemplated by the Asset Purchase
Agreement is subject to the satisfaction of the following
conditions:
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that
the representations and warranties of FUSA shall be true and correct in
all respects (without giving effect to any limitation as to “materiality”
or “material adverse effect” or any similar limitation set forth therein)
as of the date of the Asset Purchase Agreement, and except to the extent
such representations and warranties speak as of an earlier date, as of the
Closing Date as though made on and as of the closing;
and
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that
FUSA shall have performed in all material respects all obligations
required to be performed by it under the Asset Purchase Agreement at or
prior to closing.
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The
Closing
The
closing of the Asset Purchase Agreement will take place on such date and at such
time and place as may be mutually agreed upon by the parties as soon as
practicable after the satisfaction or waiver of all conditions in the Asset
Purchase Agreement.
Survival
of Representations and Warranties and Indemnification
From the
closing until April 1, 2011 (the “Survival Period”), in the event either of the
Sellers, on one hand, and FUSA, on the other hand (each, as applicable, an
“Indemnifying Party ”) breaches any of its representations, warranties or
covenants contained in the Asset Purchase Agreement, except that the
representations and warranties of the Sellers with respect to organization and
standing, authority, the Assets being free and clear of all encumbrances (except
as provided in the disclosure schedules to the Asset Purchase Agreement),
certain other representation and warranties regarding the Assets, intellectual
property and brokers shall survive as long as FUSA is required to pay the
Royalty Payments to the Sellers or until termination of the Asset Purchase
Agreement in accordance with its terms, and provided that FUSA, in the event of
a breach by any of the Sellers, or the Sellers, in the event of a breach by FUSA
(each, as applicable, an “ Indemnified Party ”) makes a written claim for
indemnification to the other, then the Indemnifying Party shall indemnify and
hold harmless the Indemnified Party, in the event the Indemnifying Party is
FUSA, from and against any and all Damages incurred by or suffered to Sellers or
its affiliates by reason of (a) any of the Assumed Liabilities (as defined
below), including the failure of FUSA to pay, discharge or perform any of the
Assumed Liabilities as and when due; and (b) any breach of any
representation or warranty of FUSA contained herein, and in the event the
Indemnifying Parties are the Sellers, from and against any and all Damages
incurred by or suffered to FUSA or its affiliates by reason of (x) any
liability or obligation relating to any Seller or the Assets, other than Assumed
Liabilities, and (y) any breach of any representation or warranty of
Sellers contained in the Asset Purchase Agreement. In the event of
the final determination of any liability under the Asset Purchase Agreement
from Sellers to FUSA, FUSA may, upon written notice to Sellers, setoff or
recoup, in whole or in part, such amounts from the First Installment, the Second
Installment and the Royalty Payments. “Damages” means any loss, liability,
claim, damage and expense, including reasonable attorneys’ fees.
The
indemnification liability for the Sellers is capped at $2,000,000
plus the amount of
Royalty Payments that have been paid, or are due and payable, to Sellers under
the Asset Purchase Agreement. In addition, neither Seller will have any
indemnification liability (for indemnification or otherwise) until the aggregate
amount of all Damages actually incurred or suffered by FUSA under the Asset
Purchase Agreement exceeds $50,000 (the “Threshold Amount”) and then only for
the amount of the damages exceeding the Threshold Amount.
Exclusivity
The
Sellers have agreed, similar to the restrictions contained in the Exclusivity
Letter, that until the earlier of the consummation of the Asset Sale and the
termination of the Asset Purchase Agreement in accordance with its terms (the
“Termination Date”), they would not directly or indirectly (i) solicit or take
any other action to facilitate any offers from third parties with respect to the
acquisition of the Company or a part or all of the Assets, (ii) enter into an
agreement to facilitate, approve or endorse such proposal or in connection with
such proposal, abandon or terminate the Asset Sale transaction or (iii) enter
into discussions, inquire or furnish information with respect to any such
proposal (a “Acquisition Proposal”); provided, that the Sellers may prior to
obtaining approval of the Asset Sale contemplated by this Proxy Statement engage
in negotiations or discussions with any party that has made an unsolicited bona
fide Acquisition Proposal and, subject to certain conditions, furnish nonpublic
information regarding the Company to such party, provided that our Board of
Directors may only take such actions if it has determined in good faith,
after consultation with its advisors, that such action is required in order for
the Board of Directors to comply with its fiduciary obligations to our
stockholders under applicable law (the “Superior Proposal”). We agreed to
promptly notify FUSA of any Acquisition Proposal, the terms thereof and requests
related thereto. We will promptly consider in good faith any proposed alteration
of the terms of the Asset Purchase Agreement in response to any Acquisition
Proposal. In addition, the parties agreed that in connection with the
termination of the Asset Purchase Agreement as a result of any Seller proceeding
with a Superior Proposal, contemporaneously with the closing of a transaction
contemplated by a Superior Proposal, such terminating Seller shall be
obligated to pay a termination fee of $2,500,000 to FUSA. In the
event such terminating Seller is the Company, the Company also agreed to
reimburse FUSA for, among other things, all its reasonably incurred development
expenses in connection with the provision of the Services (as defined below) by
certain personnel of the Company to FUSA.
Termination
The Asset
Purchase Agreement may be terminated under certain circumstances,
including:
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by
the mutual agreement of FUSA and the
Sellers;
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by
the Sellers or FUSA if any governmental authority shall have issued a
final order, decree or ruling or taken any other action, which has the
effect of permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated under the Asset Purchase
Agreement;
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by
the Sellers if the board of directors of any Seller determines in good
faith that it has received a Superior Proposal (as defined below) and that
it is required to terminate the Asset Purchase Agreement in order to
comply with its fiduciary duties, and otherwise complies with certain
terms of the Asset Purchase
Agreement;
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by
FUSA if the Stockholder Approvals have not been obtained on or before
March 31, 2010; and
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subject
to certain limitations, by FUSA or any Seller, if the closing has not
occurred on or before March 31, 2010 and the Asset Purchase Agreement has
not previously been terminated.
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Any
termination of the Asset Purchase Agreement would be effective immediately upon
delivery of a valid written notice of the terminating party to the other
parties. If any party terminates the Asset Purchase Agreement, all obligations
of the parties terminate without any liability of any party to any other party
(except for any liability of any party for willful breaches of the Asset
Purchase Agreement).
In
connection with the termination as a result of any Seller proceeding with a
Superior Proposal, contemporaneously with the closing of a transaction
contemplated by a Superior Proposal, such terminating Seller shall be obligated
to pay a termination fee of $2,500,000 to FUSA. In the event such terminating
Seller is the Company, we also agreed to reimburse FUSA for, among other things,
all of its reasonably incurred development expenses in connection with the
provision of the Services (as defined below) by certain of our personnel to
FUSA.
Side
Agreement
In
connection with the Asset Purchase Agreement, we entered into a side
agreement, dated December 14, 2009 (as amended, the “Side
Agreement”), with FUSA pursuant to which (i) subject to the approval of the
lessor, FUSA agreed on the Closing Date to assume the lease agreement of
our operating facility located at 80 Empire Drive, Lake Forest, California 92630
(the “Lease”) and in consideration of such assumption, we agreed to pay to FUSA
on the Closing Date the amount of $175,000, representing approximately six
months of rent and common area expenses that are expected to be incurred by FUSA
under the Lease following the Closing Date, (ii) FUSA engaged us to perform
such consulting, advisory and related services through three employees of the
Company, including Dr. Victor Gura, our Chief Scientific and Medical Officer
(collectively, the “Employees”), to and for FUSA as may be reasonably requested
from time to time by FUSA and its affiliates (the “Services”), for the period
beginning on November 16, 2009 and ending on the Closing Date, unless sooner
terminated in accordance with the terms of the Side Agreement, and in
consideration for the Services rendered by us during such term, FUSA agreed to
pay to us a cash fee, payable in semi-monthly installments, at the annual rate
for the full-time services of each of the Employees, as more fully described in
the Side Agreement, and (iii) in consideration of FUSA having incurred and
continuing to incur certain expenses on our behalf, we agreed to reimburse
FUSA for certain of its expenses reasonably incurred on our behalf,
including, tooling, prototyping and intellectual property maintenance expenses,
all reasonably documented third party expenses incurred by FUSA in negotiating
and documenting the transactions contemplated by the Asset Purchase Agreement
and the Side Agreement (including FUSA’s reasonable attorneys’ fees and
expenses), consulting fees and certain other miscellaneous consulting expenses,
in the event the closing under the Asset Purchase Agreement does not take place
as a result of the Company consummating a Superior Proposal. Pursuant
to the Side Agreement, the Company has received payments in an aggregate amount
of $197,291.64 for the Services of the Employees to FUSA and the Employees
continued to receive their normal compensation from the Company in approximately
the same aggregate amount.
In
connection with the APA Amendment, on February 12, 2010, we and FUSA entered
into Amendment No. 1 (the “Side Agreement Amendment”) to the Side Agreement,
which extended from February 28, 2010 until March 31, 2010 the date on which the
Employees shall cease providing Services to FUSA, unless the Side Agreement is
terminated prior thereto as provided in the Side Agreement. Except for this
modification, all of the terms and provisions of the Side Agreement remain in
full force and effect. A copy of the Side Agreement Amendment is attached to
this Proxy Statement as Annex H.
The material
terms of the Side Agreement are summarized above and a copy of the
Side Agreement is attached to this Proxy Statement as Annex
D. Stockholders are urged to carefully review the Side Agreement in its
entirety.
Voting
Agreement
In
connection with the execution of the Asset Purchase Agreement, certain of
the Sellers’ executive officers and/or directors executed a Stockholder Voting
Agreement (the “Voting Agreement”). Under the Voting Agreement, such
directors and/or executive officers of the Company have committed (i) to vote
all of the shares of the Company’s common stock owned by them as of
December 14, 2009, together with all shares of our common stock acquired by them
as a result of the exercise of any options owned by them as of such date, in
favor of the adoption of the Asset Purchase Agreement and the approval of the
Asset Sale, and (ii) subject to certain exceptions, not to enter into
discussions concerning or provide confidential information in connection with
alternative business combination transactions. The shares subject to the
Voting Agreement constitute approximately 41.4% of our outstanding common stock
as of Record Date, and more than 50% of NQCI’s outstanding voting
securities. The terms of the Voting Agreement are summarized above
and a copy of the Voting Agreement is annexed as Exhibit B
to the Asset Purchase Agreement, a copy of which is attached to this Proxy
Statement as Annex A. Stockholders are urged to carefully review the Voting
Agreement in its entirety.
Description
of the Arbitration Proceeding and Other Agreements Entered Into With
NQCI
The
following is a brief summary of certain key provisions of the Partial Final
Award issued on April 13, 2009 in our arbitration proceeding with NQCI as such
relate to the Asset Purchase Agreement and certain key provisions of the Binding
Memorandum of Understanding and the Agreement, dated as of August 7, 2009 (the
“Memorandum”), and Stipulation Regarding Partial Final Award, dated as of August
7, 2009 (the “Stipulation”), entered into between us, Operations and NQCI. The
descriptions of our legal proceedings are also set forth in our Form 10-K and
Quarterly Reports. Stockholders are urged to read the full descriptions of our
legal proceedings set forth in our Form 10-K and Quarterly Reports and the
Memorandum and the Stipulation in their entirety.
Arbitration
Proceeding with NQCI and the Issuance of the Partial Final Award
On
December 1, 2006, we initiated the arbitration proceeding (the “Proceeding”)
against NQCI for its alleged breach of the License Agreement (as defined below).
On April 13, 2009, the arbitrator (the “Arbitrator”) in the Proceeding issued a
Partial Final Award, which resolved the remaining issues that were
pending for decision in the Proceeding. The Partial Final Award provided that we
shall have a perpetual exclusive license (the “Perpetual License”) to the
Technology (as defined in the Merger Agreement, dated as of September 1, 2006,
or the “Merger Agreement”, among the Sellers and the License Agreement, dated as
of September 1, 2006 (the “License Agreement”), between us and NQCI) primarily
related to the WAK and any other Technology contemplated to be transferred
under the Technology Transaction. Under the terms of the Partial Final Award, in
consideration of the award of the Perpetual License to us, NQCI was awarded a
royalty of 39% of all net income, ordinary or extraordinary, to be received by
us (the “Royalty”) and NQCI is to receive 39% of any shares received in any
merger transaction to which Xcorporeal or Operations may become a party. In
addition, the Partial Final Award provided that we were obligated to pay NQCI
$1,871,430 for its attorneys’ fees and costs previously awarded by the
Arbitrator in an order issued on August 13, 2008, that NQCI’s application for
interim royalties and expenses was denied and that NQCI was not entitled to
recover any additional attorneys’ fees. The Partial Final Award followed the
issuance by the arbitrator of an Interim Award on June 9, 2008. The Interim
Award would have required us to issue 9,230,000 shares of our common stock to
NQCI in exchange for the transfer of the Technology to us. The primary reason
for the change in the relief provided for under the Interim Award (the
requirement to issue shares) and the Partial Final Award (the royalty referred
to above) resulted from our concern, expressed to the arbitrator, that such
shares could not be issued to NQCI in compliance with the federal securities
laws because of the financial condition of NQCI.
Binding
Memorandum of Understanding
On August
7, 2009, to clarify, resolve and settle disputes that have arisen between us and
NQCI with respect to the Partial Final Award, including with respect to the
rights of the parties regarding the Supersorbent Technology and the application
of the Partial Final Award in the case of a sale of the Technology, we and
Operations entered into the Memorandum with NQCI. Under the terms of the
Memorandum, among other things, the parties agreed to: (i) assign and transfer
all of their rights, title and interest in and to certain technology
comprised of a certain U.S. Patent Application and related intellectual property
(as described in the Memorandum) (the “Polymer Technology”) to a limited
liability company to be formed under the laws of the State of Delaware (the
“Joint Venture”), which was to be jointly owned by the parties and through which
the parties would jointly pursue the development and exploitation of the Polymer
Technology, and (ii) negotiate, execute and deliver within 60 days following the
date of the Special Meeting an operating agreement governing the operation of
the Joint Venture based on the terms set forth in the Memorandum (the “Operating
Agreement”). However, as a result of the execution of the Asset Purchase
Agreement and the intended transfer of all or substantially all of the Sellers’
assets thereunder, including all of the Sellers’ intellectual property, to FUSA,
the parties have since abandoned their efforts to pursue the Operating
Agreement.
Agreement
and Stipulation Regarding Partial Final Award
In
connection with the issuance of the Partial Final Award and the execution of the
Memorandum, on August 7, 2009 Operations entered into the Stipulation with NQCI.
Pursuant to the terms of the Stipulation, Operations and NQCI agreed (i) not to
challenge the terms of the Partial Final Award or any portion of such award,
(ii) that any of the parties may, at any time, seek to confirm all but not part
of the Partial Final Award through the filing of an appropriate petition or
motion with the appropriate court and in response to such action to confirm the
Partial Final Award, no party will oppose, object to or in any way seek to
hinder or delay the court’s confirmation of the Partial Final Award, but will in
fact support and stipulate to such confirmation, and (iii) to waive any and all
right to appeal from, seek appellate review of, file or prosecute any lawsuit,
action, motion or proceeding, in law, equity, or otherwise, challenging,
opposing, seeking to modify or otherwise attacking the confirmed Partial Final
Award or the judgment thereon. In addition, under the terms of the Stipulations,
as of December 1, 2009, NQCI has not attempted to execute on or file any
motion, petition or application or commence any proceeding seeking the
collection of any attorneys’ fees that have been awarded in NQCI’s favor under
the terms of the Partial Final Award (the “Collection Action”), which was
intended to allow the Parties a sufficient period within which to execute the
Asset Purchase Agreement. In addition, in accordance with the terms of the
Memorandum and as a result of the execution of the Asset Purchase Agreement,
NQCI agreed not to proceed with the Collection Action until April 1, 2010 (the
“Extension Date”) and the Extension Date shall automatically be further extended
for a period of 60 days for each amendment to this Proxy Statement that we will
file with the SEC in response to comments made by the SEC.
Payment
of a Portion of the Aggregate Consideration to NQCI
Pursuant
to the terms of the Memorandum and the terms of the Asset Purchase Agreement and
subject to the consummation of the Asset Sale, the Sellers have agreed that upon
the consummation of the Asset Sale, they will allocate the Cash Purchase Price,
the Royalty Payments and any other additional consideration received pursuant to
the Asset Purchase Agreement as follows:
·
the
Cash Purchase Price shall be paid to the Sellers as follows:
o an
exclusivity fee in the amount of $200,000 previously paid by FUSA to the
Company,
o $3,800,000
on the Closing Date (the “Initial Payment”),
o $2,000,000
on April 1, 2010 as the First Installment,
o $2,000,000
on April 1, 2011 as the Second Installment,
§
from
the Initial Payment, we and NQCI will receive $1,650,000 and $2,150,000,
respectively,
§
from
the First Installment, we and NQCI will receive $375,000 and $1,625,000,
respectively, and
§
from
the Second Installment, we and NQCI will receive $75,000 and $1,925,000,
respectively,
·
during
the life of any HD WAK Patents, which expire between November 11, 2021 and
September 9, 2024, we will be entitled to 60% of the HD WAK Royalty and
NQCI will be entitled to the remaining 40% of the HD WAK Royalty,
and
·
during
the life of any Supersorbent Patents, we will be entitled to 40% of the
Supersorbent Royalty payments and NQCI will be entitled to the remaining 60% of
the Supersorbent Royalty. While several applications for patents are pending, no
patent incorporating the Supersorbent Technology has yet been
issued.
·
In
addition, under the Asset Purchase Agreement, we and NQCI will
also receive rights to the Option.
In the
aggregate, if the Asset Sale is consummated, we would receive $2,300,000
(including the exclusivity fee of $200,000) and NQCI would receive $5,700,000 of
the Cash Purchase Price. In addition, of the Cash Purchase Price
being paid to NQCI, $1,871,430 is being paid to satisfy our liability
to NQCI for NQCI’s attorneys’ fees and costs awarded by the arbitrator pursuant
to the terms of the Partial Final Award.
In the
event that for any reason the timing or the amount of the payments under the
terms of the Asset Purchase Agreement is other than as contemplated above,
pursuant to the terms of the Memorandum the Sellers agreed to make such
equitable adjustments as are required to preserve, to the maximum extent
possible, the intent of the distribution of Transaction Proceeds pursuant to the
provisions of the Memorandum. In the event that Asset Sale is not approved by
our stockholders or we do not consummate the Asset Sale or if the terms of the
Asset Sale are other than what is contemplated under the Memorandum and the
Sellers instead consummate an alternative transaction, the Sellers agreed to
apply the methodology specified in the Memorandum to the maximum extent possible
in order to allocate between them the proceeds of such Transaction.
Pro
Forma Financial Information
The
following unaudited pro forma financial statements have been prepared to present
the balance sheet as if the Asset Sale closed on September 30, 2009. Also
presented are the Statement of Operations for the fiscal year ended December 31,
2008 and the nine-month period ended September 30, 2009, as if the Asset Sale
closed on January 1, 2008. Such pro forma financial statements were derived from
our audited consolidated financial statements for the fiscal year ended December
31, 2008 and our unaudited consolidated financial statements for the nine-month
period ended September 30, 2009. The unaudited pro forma financial statements
have been prepared in accordance with U.S. generally accepted accounting
principles on the basis of specific information and assumptions available at the
present time regarding the transaction.
These
unaudited pro forma consolidated financial statements should be read in
conjunction with our audited financial statements and the related notes as filed
as part of our Form 10-K and our unaudited financial statements and the related
notes filed as part of our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2009 (the “Form 10-Q”), attached to this Proxy Statement as Annex
F.
In
addition, our stockholders should review the table on page 49 of this Proxy
Statement, which presents possible outcomes of our highest and lowest estimates
in the amount of our contractual liabilities that will exist as of the Closing
Date and the per share amount of our portion of the cash proceeds of the Asset
Sale that may be then available for distribution, if any, by the Trustee to our
stockholders depending on certain possible outcomes related to the value of such
contractual liabilities. The Company is currently attempting to negotiate
settlements of such liabilities. The pro forma financial statements do not
reflect such estimates and other assumptions made by the Company in the table on
page 49 of this Proxy Statement.
XCORPOREAL,
INC.
(a
Development Stage Company)
UNAUDITED
PROFORMA
STATEMENT
OF OPERATIONS
FOR
THE TWELVE MONTHS ENDED DECEMBER 31,
2008
|
|
|
December
31, 2008
|
|
|
Proforma
Adjustments
|
|
|
Notes
|
|
|
Proforma
Statement of Operations After Asset Sale
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
$
|
9,001,819
|
|
|
$
|
2,626,366
|
|
|
|
A
|
|
|
$
|
11,628,185
|
|
|
Research
and development
|
|
|
20,914,825
|
|
|
|
1,238,925
|
|
|
|
B
|
|
|
|
22,153,750
|
|
|
Other
expenses
|
|
|
1,871,430
|
|
|
|
-
|
|
|
|
|
|
|
|
1,871,430
|
|
|
Depreciation
and amortization
|
|
|
104,719
|
|
|
|
-
|
|
|
|
|
|
|
|
104,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before other income, income taxes and other
expenses
|
|
|
(31,892,793
|
)
|
|
|
(3,865,291
|
)
|
|
|
|
|
|
|
(35,758,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on Asset Sale
|
|
|
-
|
|
|
|
3,668,308
|
|
|
|
C
|
|
|
|
3,668,308
|
|
|
Reduction
of liabilities due to arbitrator's ruling & settlement
|
|
|
-
|
|
|
|
1,585,299
|
|
|
|
D
|
|
|
|
1,585,299
|
|
|
Loss
on disposal
|
|
|
-
|
|
|
|
(3,627
|
)
|
|
|
E
|
|
|
|
(3,627
|
)
|
|
Interest
and other income
|
|
|
323,249
|
|
|
|
-
|
|
|
|
|
|
|
|
323,249
|
|
|
Change
in and reduction of shares issuable
|
|
|
8,583,900
|
|
|
|
1,569,100
|
|
|
|
F
|
|
|
|
10,153,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes and other expenses
|
|
|
(22,985,644
|
)
|
|
|
2,953,789
|
|
|
|
|
|
|
|
(20,031,855
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
1,629
|
|
|
|
-
|
|
|
|
|
|
|
|
1,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(22,987,273
|
)
|
|
$
|
2,953,789
|
|
|
|
|
|
|
$
|
(20,033,484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(1.57
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(1.37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
14,604,274
|
|
|
|
|
|
|
|
|
|
|
|
14,604,274
|
|
XCORPOREAL,
INC.
(a
Development Stage Company)
UNAUDITED
PROFORMA
STATEMENT
OF OPERATIONS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30,
2009
|
|
|
September
30, 2009
|
|
|
Proforma
Adjustments
|
|
|
Notes
|
|
|
Proforma
Statement of Operations After Asset Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
$
|
3,493,481
|
|
|
$
|
(446,013
|
)
|
|
|
G
|
|
|
$
|
3,047,468
|
|
|
Research
and development
|
|
|
2,415,055
|
|
|
|
(189,692
|
)
|
|
|
H
|
|
|
|
2,225,363
|
|
|
Other
expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
Depreciation
and amortization
|
|
|
92,274
|
|
|
|
-
|
|
|
|
|
|
|
|
92,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before other income, income taxes and other
expenses
|
|
|
(6,000,810
|
)
|
|
|
635,705
|
|
|
|
|
|
|
|
(5,365,105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on Debt Settlement
|
|
|
-
|
|
|
|
436,677
|
|
|
|
I
|
|
|
|
436,677
|
|
|
Reduction
of liabilities due to arbitrator's ruling & settlement
|
|
|
1,647,799
|
|
|
|
-
|
|
|
|
|
|
|
|
1,647,799
|
|
|
Loss
on disposal
|
|
|
(382
|
)
|
|
|
-
|
|
|
|
|
|
|
|
(382
|
)
|
|
Interest
and other income
|
|
|
11,657
|
|
|
|
-
|
|
|
|
|
|
|
|
11,657
|
|
|
Change
in and reduction of shares issuable
|
|
|
1,569,100
|
|
|
|
-
|
|
|
|
|
|
|
|
1,569,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes and other expenses
|
|
|
(2,772,636
|
)
|
|
|
1,072,382
|
|
|
|
|
|
|
|
(1,700,254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
775
|
|
|
|
-
|
|
|
|
|
|
|
|
775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(2,773,411
|
)
|
|
$
|
1,072,382
|
|
|
|
|
|
|
$
|
(1,701,029
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
14,756,152
|
|
|
|
|
|
|
|
|
|
|
|
14,756,152
|
|
(a
Development Stage Company)
|
|
|
September
30, 2009
|
|
|
Proforma
Adjustments
|
|
|
Notes
|
|
|
Proforma
Balance Sheet After Asset Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
35,734
|
|
|
$
|
(35,734
|
)
|
|
|
J
|
|
|
$
|
-
|
|
|
Marketable
securities, at fair value
|
|
|
288,703
|
|
|
|
(288,703
|
)
|
|
|
K
|
|
|
|
-
|
|
|
Restricted
cash
|
|
|
305,871
|
|
|
|
(305,871
|
)
|
|
|
L
|
|
|
|
-
|
|
|
Prepaid
expenses and other current assets
|
|
|
123,351
|
|
|
|
(123,351
|
)
|
|
|
M
|
|
|
|
-
|
|
|
Accounts
receivable
|
|
|
-
|
|
|
|
493,260
|
|
|
|
N
|
|
|
|
493,260
|
|
|
Expense
receivable
|
|
|
54,641
|
|
|
|
(42,905
|
)
|
|
|
O
|
|
|
|
11,736
|
|
|
Tenant
improvement allowance receivable
|
|
|
43,260
|
|
|
|
(43,260
|
)
|
|
|
P
|
|
|
|
-
|
|
|
Total
Current Assets
|
|
|
851,560
|
|
|
|
(346,564
|
)
|
|
|
|
|
|
|
504,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
246,804
|
|
|
|
(243,163
|
)
|
|
|
Q
|
|
|
|
3,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
819
|
|
|
|
(819
|
)
|
|
|
R
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
1,099,183
|
|
|
$
|
(590,546
|
)
|
|
|
|
|
|
$
|
508,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
945,385
|
|
|
$
|
125,585
|
|
|
|
S
|
|
|
$
|
1,070,970
|
|
|
Accrued
legal fees and licensing expense
|
|
|
1,871,430
|
|
|
|
(1,871,430
|
)
|
|
|
T
|
|
|
|
-
|
|
|
Accrued
royalties
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
Accrued
professional fees
|
|
|
442,444
|
|
|
|
56,250
|
|
|
|
U
|
|
|
|
498,694
|
|
|
Accrued
compensation
|
|
|
143,040
|
|
|
|
258,233
|
|
|
|
V
|
|
|
|
401,273
|
|
|
Accrued
other liabilities
|
|
|
72,137
|
|
|
|
(11,315
|
)
|
|
|
W
|
|
|
|
60,822
|
|
|
Payroll
liabilities
|
|
|
1,054
|
|
|
|
4,764
|
|
|
|
X
|
|
|
|
5,818
|
|
|
Deferred
compensation
|
|
|
171,513
|
|
|
|
(171,513
|
)
|
|
|
Y
|
|
|
|
-
|
|
|
Deferred
gain
|
|
|
200,000
|
|
|
|
(200,000
|
)
|
|
|
Z
|
|
|
|
-
|
|
|
Onerous
lease
|
|
|
-
|
|
|
|
775,700
|
|
|
AA
|
|
|
|
775,700
|
|
|
Deferred
rent
|
|
|
280,390
|
|
|
|
(280,390
|
)
|
|
BB
|
|
|
|
-
|
|
|
Total
Current Liabilities
|
|
|
4,127,393
|
|
|
|
(1,314,116
|
)
|
|
|
|
|
|
|
2,813,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issuable
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
& CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.0001 par value, 10,000,000 shares authorized, none
outstanding
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
Common
stock, $0.0001 par value, 40,000,000 shares authorized, 15,154,687 and
14,754,687 issued and outstanding on September 30, 2009 and December 31,
2008, respectively
|
|
|
1,515
|
|
|
|
-
|
|
|
|
|
|
|
|
1,515
|
|
|
Additional
paid-in capital
|
|
|
44,328,779
|
|
|
|
-
|
|
|
|
|
|
|
|
44,328,779
|
|
|
Deficit
accumulated during the development stage
|
|
|
(47,358,504
|
)
|
|
|
723,570
|
|
|
|
|
|
|
|
(46,634,934
|
)
|
|
Total
Stockholders' Deficit
|
|
|
(3,028,210
|
)
|
|
|
723,570
|
|
|
|
|
|
|
|
(2,304,640
|
)
|
|
Total
Liabilities & Stockholders' Deficit
|
|
$
|
1,099,183
|
|
|
$
|
(590,546
|
)
|
|
|
|
|
|
$
|
508,637
|
|
For
purposes of determining the pro forma effect of the Asset Sale, the adjustments
below have been made.
|
A.
|
As
a result of the consummation of the Asset Sale, severance payment in the
amount of $611,500 to Messrs. McCrann and Weinstein and a transaction
bonus in the amount of $432,500 to Mr. McCrann were accrued. In addition,
in connection with the Asset Sale, $163,163 in prepaid expenses were
expensed, remaining lease payment in the amount of $914,065 for our former
principal executive office located in Los Angeles, CA were recognized, and
other expenses in an aggregate total of $505,138 were
accrued.
|
|
B.
|
As
a result of the consummation of the Asset Sale, a severance payment in the
amount of $1,312,800 to Dr. Gura was accrued. In addition, $12,192 in
prepaid expenses were expensed, $105,102 of deferred rent was reversed as
a result of the transfer of the Lake Forest facility lease, and $19,035 of
employer payroll tax was accrued.
|
|
C.
|
Reflects
the net gain on the Asset Sale.
|
|
D.
|
Pursuant
to the Partial Final Award, the amount of our liabilities due to NQCI in
the arbitration was reduced.
|
|
E.
|
Loss
recognized from disposal of assets not included in the Asset
Sale.
|
|
F.
|
Pursuant
to the Partial Final Award, reversed the accrual of 9,230,000 shares
issuable to NQCI.
|
|
G.
|
As
a result of the consummation of the Asset Sale, expenditure of prepaid
expenses was reversed in the amount of $53,162 pursuant to prepaid
expenses as of December 31, 2008 fully expensed, full expenditure of
$12,653 of the remaining prepaid expenses as of September 30, 2009, $120
credit recognition of unclaimed FSA contributions, $1,108 of employer
payroll taxes accrued, depreciation and amortization reversed for an
aggregate total of $241,961 pursuant to the assets sold as of December 31,
2008, and $164,531 of deferred rent reversed pursuant to the onerous lease
of our former principal executive office located in Los Angeles, CA as of
December 31, 2008.
|
|
H.
|
As
a result of the consummation of the Asset Sale, $191,793 of deferred rent
was reversed pursuant to the transfer of the Lake Forest facility lease as
of December 31, 2008. In addition, $2,101 of employer payroll tax was
accrued.
|
|
I.
|
Reflects
the gain from settlement of liabilities pertaining to $38,517 of
compensation liabilities and $398,160 of other liabilities resulting from
liquidation efforts following the consummation of the Asset
Sale.
|
|
J.
|
Records
receipt of cash from proceeds upon closing of $1,650,000, $42,905 expense
receivable, $305,871 release of restricted cash, and $288,703 pursuant to
the closure of the investment account with cash used to pay severances of
$1,523,027, $432,500 transaction bonus, $125,982 accrued PTO, $150,054
deferred compensation, $31,564 related employer payroll taxes, and $60,086
other liabilities.
|
|
K.
|
Closure
of investment account.
|
|
L.
|
Release
of restricted cash pursuant to the transfer of the Lake Forest facility
lease.
|
|
M.
|
Reflects
the full expenditure of the remaining $65,815 of prepaid expenses, $20,367
Los Angeles office security deposit applied, and Lake Forest facility
deposits of $37,169 refunded.
|
|
N.
|
Reflects
proceeds from the Asset Sale payable April 1, 2010 and April 1, 2011 plus
$43,260 receivable from the unapplied tenant improvement allowance
receivable.
|
|
O.
|
Reflects
employer payroll tax refund pursuant to COBRA premium assistance payments
pending receipt.
|
|
P.
|
Records
accounts receivable of the unapplied tenant improvement allowance
receivable to the monthly lease expense of the Lake Forest
facility.
|
|
Q.
|
Recognition
of $241,110 net assets sold with $2,053 net disposal of assets excluded
from the sale of assets.
|
|
R.
|
Sale
of intangible asset.
|
|
T.
|
NQCI
legal fees pursuant to the arbitration paid directly to NQCI by the
purchaser of the Asset Sale.
|
|
U.
|
Settlement
and accrual of professional fees totaling $393,750 and $450,000,
respectively.
|
|
V.
|
Reflects
severance accruals of $1,924,300, $432,500 transaction bonus, $17,058
settlement, and $2,081,509 payment of a portion of these net compensation
liabilities which included PTO accruals of
$125,982.
|
|
W.
|
Payment
of accrued liabilities.
|
|
X.
|
Pursuant
to the payment of a portion of the compensation liabilities, related
accrued employer payroll taxes
paid.
|
|
Y.
|
Settlement
and payment of deferred compensation in the amount of $21,458 and
$150,054, respectively.
|
|
Z.
|
Gain
recognized with consummation of Asset
Sale.
|
|
AA.
|
Accrued
remaining lease payments for our former principal executive office located
in Los Angeles, CA.
|
|
BB.
|
Deferred
rent reversed as a result of the LA onerous lease accrual and transfer of
the Lake Forest facility
lease.
|
Interests
of Our Executive Officers and/or Directors in the Asset Sale, the Plan of
Liquidation and the Liquidating Trust Agreement
Certain
of our executive officers have employment, change in control and other
agreements that provide for severance payments full vesting of all unvested
equity awards if any such executive officer's employment is terminated for any
reason in connection with a change in control or if we terminate their
employment at any time without cause or if they are constructively terminated
and/or certain other payments in the event we successfully consummate the Asset
Sale.
The
consummation of the Asset Sale will constitute a change of control under these
agreements triggering certain severance payments to our executive officers. The
employment of each of these executive officers will be terminated by us either
prior to or during the wind down of our activities. In either case, such
terminations will be deemed terminations in connection with a change in control
and/or require such other severance payments. The change of control, severance
payments and/or certain other payments that will be due by the Company to our
executive officers will be in the amount up to $1,924,300, if our executive
officers are terminated as a result of the Asset Sale or if the Asset Sale is
successfully consummated, assuming no excise tax gross-up payments are due. In
particular, Kelly J. McCrann, our Chairman and Chief Executive Officer, Robert
Weinstein, our Chief Financial Officer and Secretary, and Dr. Victor Gura, our
Chief Medical and Scientific Officer, may be entitled to severance payments
in the amount up to $325,000, $286,500 and $1,312,800, respectively, under their
employment agreements. In addition, if the Asset Sale is consummated, Mr.
McCrann will be entitled to a payment of $432,500 as a sale transaction success
fee. Furthermore, in connection with certain restructuring efforts
previously undertaken by us to reduce our operating expenses, Messrs. McCrann
and Weinstein and Dr. Gura, may be entitled to receive deferred compensation in
the amount of approximately $95,563, $83,531 and $82,050, respectively, our
other employees may be entitled to receive deferred compensation, in the
aggregate, of approximately $60,000, and a member of our Board of Directors may
be entitled to receive deferred compensation in the amount of approximately
$70,000. Additionally, as of February 15, 2010, we estimate that
certain of our employees would be entitled to receive accrued vacation pay, in
the aggregate, of approximately $150,000.
In
addition, Mr. McCrann (or an entity affiliated with Mr. McCrann) will also serve
as the Trustee of the Liquidating Trust and under the terms of the Liquidating
Trust Agreement, in the form attached to this Proxy Statement as Annex C, will
receive the following compensation for his services as the Trustee: 10% of the
aggregate Royalty Payments received by the Liquidating Trust up to $10 million
and 5% of any Royalty Payments in excess thereof. Mr. McCrann will also be
entitled to reimbursement of his expenses incurred as Trustee on behalf of the
Liquidating Trust. The foregoing compensation arrangement was developed and
approved by the independent members of the Board of Directors of the Company in
November 2009 after Mr. McCrann informed the Board of Directors that he would be
prepared to serve as trustee of the Liquidating Trust for compensation deemed
appropriate by the independent members of the Board of Directors.
As of
December 31, 2009, there were 1.16 million shares of common stock underlying
unvested stock options held by our executive officers that will vest as a result
of the Asset Sale. The weighted-average exercise price of those stock options is
$3.25 per share. None of these stock options have an exercise price at or below
$0.07, the last reported sale price of our common stock as quoted on the Pink
Sheets on the Record Date. Since we do not anticipate that any substantial
amount of our share of the Cash Purchase Price will be available for
distribution to our stockholders, we anticipate that none of these stock options
will be exercised. In addition, as of Record Date, our executive officers and/or
directors also held 6,352,596 shares of common stock that will be entitled to
the same per share liquidating distributions from the Liquidating Trust, if any,
that will be made to the other shares of common stock outstanding.
Additionally,
on the Closing Date a joint venture to be formed by FUSA and Dr. Gura may
enter into an employment agreement with Dr. Gura, pursuant to which Dr. Gura
would assist FUSA in the further development of the Assets for a certain period
after Closing Date, at a set salary to be determined by FUSA and Dr. Gura. In
addition, Dr. Gura may receive an ownership stake in such joint venture. On the
Closing Date, FUSA will not enter into any other employment or consulting
arrangements with any of our executive officers or employees. Other than
described herein, we do not know whether FUSA will enter into any employee or
consulting arrangements thereafter with any of our executive officers or
employees and FUSA has not notified us of any intention to do so to
date.
No
Opinion of Financial Advisor
Our Board
of Directors has not received any opinion from a financial advisor or other
third party that the cash payment to be received by us in the Asset Sale is
fair, from a financial point of view, to us and our stockholders. Over the past
several months, we have engaged in extensive discussions and negotiations with
other potential interested acquisition parties. As described in further detail
under “Background of the Asset Sale,” the consideration offered by FUSA
following our extensive discussions with FUSA and other potential acquirers of
our Assets was far in excess of any other indication of interest received by us.
As a result of the process described above, our Board of Directors believes that
it has a good understanding of the perceived market value of the Assets and what
a disinterested third party would be willing to pay. Accordingly, our Board of
Directors believes that the financial consideration offered by FUSA is fair to
us and our stockholders.
Accounting
Treatment
Under
generally accepted accounting principles, upon consummation of the Asset Sale,
we will remove the net assets sold from our consolidated balance sheet and
record the gain or loss on the sale, net of transaction, severance and other
related costs in its consolidated statement of operations.
Certain
Federal Income Tax Consequences to the Company
The
following summary of the anticipated federal income tax consequences to us of
the Asset Sale is not intended as tax advice and is not intended to be a
complete description of the federal income tax consequences of the Asset Sale.
This summary is based upon the Internal Revenue Code of 1986 (the “Code”), as
presently in effect, the rules and regulations promulgated thereunder, current
administrative interpretations and court decisions. No assurance can be given
that future legislation, regulations, administrative interpretations or court
decisions will not significantly change these authorities, possibly with
retroactive effect. No rulings have been requested or received from the Internal
Revenue Service (“IRS”) as to the matters discussed and there is no intent to
seek any such ruling. Accordingly, no assurance can be given that the IRS will
not challenge the tax treatment of certain matters discussed or, if it does
challenge the tax treatment, that it will not be successful.
The Asset
Sale will be treated for federal income tax purposes as a taxable sale upon
which gain or loss will be recognized by us. The amount of gain or loss
recognized by us with respect to the sale of a particular asset will be measured
by the difference between the amount realized by us on the sale of that asset
and our tax basis in that asset. The amount realized by us on the Asset Sale
will include the amount of cash received, the fair market value of any other
property received, and total liabilities assumed or taken subject to by FUSA.
For purposes of determining the amount realized by us with respect to specific
assets, the total amount realized by us will generally be allocated among the
assets according to the rules prescribed under Section 1060(a) of the Code. Our
basis in our assets is generally equal to their cost, as adjusted for certain
items, such as depreciation. The determination of whether gain or loss is
recognized by us will be made with respect to each of the assets to be sold.
Accordingly, we may recognize gain on the sale of certain assets and loss on the
sale of certain others, depending on the amount of consideration allocated to an
asset as compared with the basis of that asset.
Generally,
the proposed sale of substantially all of our operating assets will not produce
any separate and independent federal income tax consequences to our
stockholders.
Each
stockholder is urged to consult his or her own tax advisor as to the federal
income tax consequences of the Asset Sale, and as to any state, local, foreign
or other tax consequences based on his or her particular facts and
circumstances.
EACH
STOCKHOLDER SHOULD CONSULT ITS OWN TAX ADVISOR TO DETERMINE THE STOCKHOLDER’S
PARTICULAR U.S. FEDERAL INCOME TAX CONSEQUENCES AND OTHER TAX CONSEQUENCES TO
THE STOCKHOLDER OF THE ASSET SALE, INCLUDING ANY STATE, LOCAL AND FOREIGN TAX
LAWS AND THE EFFECT OF ANY CHANGES IN SUCH LAWS.
Votes
Required for the Approval of the Sale of Substantially All of the Assets of
Xcorporeal
The
approval of the Asset Sale requires the affirmative vote of the holders of a
majority of the outstanding shares of our common stock.
Recommendation
of Our Board of Directors
OUR
BOARD OF DIRECTORS HAS DETERMINED THAT THE ASSET SALE IS IN THE BEST INTERESTS
OF OUR COMPANY AND OUR STOCKHOLDERS. THE BOARD OF DIRECTORS HAS APPROVED THE
ASSET PURCHASE AGREEMENT AND RECOMMENDS THAT STOCKHOLDERS VOTE “ FOR ” THE ASSET
SALE PROPOSAL.
PROPOSAL
NO. 2: APPROVAL OF THE PLAN OF LIQUIDATION AND DISSOLUTION
General
At the
Special Meeting, our stockholders will be asked to consider and vote upon a
proposal to voluntarily dissolve and liquidate the Company and if the Asset Sale
Proposal and the Plan of Liquidation Proposal are approved by our
stockholders, to consider and vote upon a proposal to transfer to the
Liquidating Trust any available proceeds and payment rights received from the
sale of our Assets and any other assets not used to satisfy our liabilities and
obligations. If the Asset Sale Proposal, this proposal and the Liquidating Trust
Agreement Proposal are approved and the Asset Sale is consummated, we will
transfer to the Liquidating Trust the Remaining Assets and Remaining Liabilities
and the trustee of the Liquidating Trust may make distributions to our
stockholders in the future as beneficiaries of the trust.
For a
discussion of the actions we will take (i) if the Asset Sale is not approved by
our stockholders, but the Plan of Liquidation is approved by our stockholders,
or (ii) if the Asset Sale and the Plan of Liquidation are approved by our
stockholders, but the Liquidating Trust Agreement is not approved by our
stockholders, please see below under the section captioned “─Principal
Provisions of the Plan of Liquidation.”
In
giving consideration for approval of this Proposal No. 2 and the Liquidating
Trust Agreement Proposal (Proposal No. 3), we urge our stockholders to read the
discussion of Proposal No. 2 set forth below together with the discussion of the
Liquidating Trust Agreement Proposal, which is set forth below under the caption
“Proposal No. 3: Approval of the Liquidating Trust Agreement”.
A form of
the Plan of Liquidation and the Liquidating Trust Agreement are
attached to this Proxy Statement as Annex B and Annex C, respectively.
Stockholders are urged to carefully review the Plan of Liquidation and the
Liquidating Trust Agreement in their entirety.
Background
and Reasons for the Proposed Liquidation and Dissolution
Background
for the Proposed Liquidation and Dissolution
The
deterioration of the economy over the last 18 months, coupled with the prolonged
delay in our ability to reach a resolution with respect to the consummation of
the Technology Transaction, has significantly adversely affected us. Many of the
expectations on which we had based our 2008 and 2009 business development plans
slowly eroded as a result of the lengthy arbitration proceeding with NQCI
commenced in 2006 and continuing into the second quarter of 2009. The
possibility of an adverse decision in the arbitration proceeding with respect to
our ownership right to the Technology has been a major factor in our inability
to secure debt or equity financing. Accordingly, during the first nine months of
2009, we modified certain of our activities and business and instituted a
variety of measures in an attempt to conserve cash and reduce our operating
expenses. Our actions included: termination of employment of 20 of our employees
or a reduction of approximately 77% of our labor force, deferral of compensation
for 5 of our 6 employees with continued deferral for 3 of our 6 employees,
reaching an agreement with the landlord for our operating facility in Lake
Forest, CA, to apply $88,865, in lieu of reimbursement of such amount to us
expended for the incurred improvements at such facility, toward rent payments
with $45,605 applied as of September 30, 2009, refocusing our available assets
and employee resources on the development of the PAK, agreeing to a direct
reimbursement arrangement for PAK related research and development expenses with
a certain third party with which we have agreed to an exclusivity period to
negotiate a potential cooperative transaction, continuing vigorous efforts to
minimize or defer our operating expenses, searching to obtain additional
financing to support our operations and to satisfy our ongoing capital
requirements in order to improve our liquidity position and continuing to
prosecute our patents and take other steps to perfect our intellectual property
rights. In light of the unprecedented economic slowdown, lack of access to
capital markets and prolonged arbitration proceeding with NQCI, we were
compelled to undertake the efforts outlined above in order to remain in the
position to continue our operations. For a more detailed discussion of our
restructuring efforts, please see section captioned “Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
— Recent Developments” in our Form 10-Q, attached to this Proxy Statement
as Annex F.
Due to
our continuing substantially deteriorating financial position, we have continued
some of the actions outlined above and will continue our efforts to streamline
our operations in order to conserve any available resources. Our management
evaluated any possible strategic alternatives, including entering into a
transaction for the sale of substantially all or all of our assets, a business
combination with another entity in a transaction where we would not be the
surviving entity, licensing of certain of our intellectual property rights, as a
means to further develop our technologies, discontinuing our operations and
liquidating our assets and/or seeking protection under bankruptcy
laws.
Unfortunately,
none of the strategic alternatives that we pursued resulted in any agreements or
transactions that offered long range success for the Company or means of
securing additional financing. Because we have been unable to raise financing
sufficient to support our operations and to satisfy our ongoing financing
requirements, we have been unable to develop any of our products, submit 510(k)
notifications to the FDA, conduct clinical trials or otherwise commercialize any
of our products. In addition, we have been unable to take any efforts to
continue the development of the PAK.
After an
extensive review of a range of our strategic alternatives, including our
continuing as an independent entity, exploring mergers and acquisitions and any
possible financing arrangements and considerable efforts to maximize the value
of our assets, our Board of Directors believes that the Asset Purchase Agreement
presents the best offer for the sale of the Assets that will maximize
stockholder value. If the Asset Sale is consummated and the Plan of Liquidation
is approved, the Board of Directors believes that such actions would increase
the possibility that we will be able to distribute liquidation proceeds
from the Liquidating Trust to our stockholders as soon as practicable,
including our share of any Royalty Payments made by FUSA and any value realized
from our rights to the Option that could be available in the future for
distribution to our stockholders.
As a
result of the conditions outlined above and in connection with the execution of
the Asset Purchase Agreement, our Board of Directors has determined that it is
in the Company’s and our stockholders’ best interests to proceed with the Plan
of Liquidation.
As of
December 31, 2009, we had cash and cash equivalents and marketable securities of
approximately $0.2 million, excluding restricted cash. Based upon our
restructuring efforts taken to date, including the voluntary deferral of 50% of
the salaries of our three officers, we have been expending cash at a rate below
$0.1 million per month, and expect to expend such resources at the same
rate for the remainder of the first quarter of 2010 fiscal year. Under the
current economic conditions and based on our current cash and cash equivalent
resources and salary deferrals, including the exclusivity fee in the amount of
$200,000 received by us in September 2009, and using assumptions that by nature
are imprecise, our management believes that we will run out of cash by March 31,
2010. We will attempt, if possible, to further reduce our monthly cash burn rate
and take certain other additional measures, including deferral of payments to
certain parties, in order to provide an additional 30 days for us to hold the
Special Meeting to give the opportunity to our stockholders to vote on the Asset
Sale, the Plan of Liquidation and the Liquidating Trust Agreement. In addition,
in accordance with the terms of the Stipulation and the Memorandum, we are
obligated to pay damages, costs and legal fees in connection with the
arbitration proceeding with NQCI described above in an amount of
$1,871,430.
Moreover, our current
liabilities significantly exceeded our current assets as of December 31, 2009
and as of the date of this Proxy Statement. Therefore, because we have been
unsuccessful in our efforts to secure additional capital or sell any or all of
our Assets, this has caused a material adverse effect on our plan of
operations and unless the Asset Sale, the Plan of Liquidation and the
Liquidating Trust Agreement proposals are approved by our stockholders and the
Asset Sale is consummated, we will forced to file for bankruptcy and cease our
operations.
Prior to
the mailing of this Proxy Statement, in connection with the Asset Sale, our
Board of Directors adopted the Plan of Liquidation and Dissolution of
Xcorporeal, Inc. and the Liquidating Trust Agreement and directed that the Plan
of Liquidation Proposal and the Liquidating Trust Agreement Proposal be
submitted to our stockholders for approval at the Special Meeting.
Reasons
for the Proposed Liquidation and Dissolution
In
considering the Plan of Liquidation and the Liquidating Trust Agreement, our
Board of Directors carefully considered the terms of the Plan of Liquidation and
the Liquidating Trust Agreement and the dissolution process under Delaware law,
as well as other available strategic alternatives. As part of our Board of
Directors’ evaluation process, they considered the risks and timing of each
alternative available to us, as well as management’s financial projections, and
consulted with management and our legal and financial advisors. In approving the
Plan of Liquidation, our Board of Directors considered several of the factors
set out above as well as the following factors:
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·
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seeking
to make available for distribution to our stockholders rights with the
potential to yield the maximum amount of cash in the quickest period of
time and taking such actions would increase the possibility that we will
be able to distribute liquidation proceeds from the Liquidating Trust to
our stockholders as soon as practicable, including our share of any
Royalty Payments made by FUSA and any value realized from our rights to
the Option under the Asset Purchase
Agreement;
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the
significant costs associated with our ongoing operations, which we had
already reduced to the extent management believed reasonable to permit
continuation of our operations;
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the
significant uncertainties as to our ability to obtain the future financing
required to permit us to execute our business strategy given the capital
raising difficulties in the debt and equity capital
markets;
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the
substantial accounting, legal and other expenses associated with being a
small publicly-traded company in light of our existing and expected
history of losses;
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the
ability to settle contingent liabilities and if such contingent
liabilities cannot be settled to the satisfaction of our Board,
the ability to seek confirmation from a court that all liabilities
are satisfied prior to liquidation;
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the
terms and conditions of the Plan of Liquidation, including the provisions
that permit our Board to revoke the plan if our Board determines that, in
light of new proposals presented or changes in circumstances, dissolution
and liquidation are no longer advisable and in the best interests of the
Company and our stockholders;
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the
fact that Delaware corporate law requires that the Plan of Liquidation be
approved by the affirmative vote of holders of a majority of the shares of
our common stock entitled to vote, which ensures that our Board will not
be taking actions of which a significant portion of our stockholders
disapprove; and
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the
reduced cost of setting up the Liquidating Trust and implementing the Plan
of Liquidation, coupled with the termination of our registration and
reporting obligations under the Exchange Act, compared to the cost of
operating a scaled-down public
company.
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Our Board
of Directors also considered a number of potentially countervailing factors in
its deliberations concerning the Plan of Liquidation and the Liquidating Trust
Agreement, including:
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the
uncertainty of the timing, nature and amount of any Royalty Payments and
resulting liquidating distributions to
stockholders;
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uncertainty
of the value, if any, of our rights to the
Option;
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the
risks associated with the sale of the Assets to FUSA and any remaining
non-cash assets as part of the Plan of Liquidation;
and
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the
fact that, if the Plan of Liquidation is approved by our stockholders,
stockholders would generally not be permitted to transfer shares of our
common stock after the effective date of the Plan of
Liquidation.
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The
preceding discussion is not meant to be an exhaustive description of the
information and factors considered by our Board of Directors, but addresses
the material information and factors considered. In view of the wide
variety of factors considered in connection with its evaluation of the Plan of
Liquidation and the Liquidating Trust Agreement and the complexity of these
matters, our Board of Directors did not quantify or otherwise attempt to assign
relative weights to the various factors considered in reaching its
determination. In considering the factors described above, individual members of
our Board of Directors may have given different weight to different
factors. After taking into account all of the factors set forth above, as
well as others, our Board of Directors agreed that the benefits of
the Asset Sale followed by our liquidation and dissolution pursuant to the
Plan of Liquidation and the Liquidating Trust Agreement outweigh the
risks.
The
Plan of Liquidation is Not Contingent Upon the Approval and Consummation of the
Asset Sale
In lieu
of satisfying all of our liabilities and obligations prior to making any
transfers to the Liquidating Trust and eventual distributions by the Trustee to
our stockholders, we may instead reserve assets deemed by management and our
Board of Directors to be adequate to provide for such liabilities and
obligations.
Uncertainties
as to the precise value of the Royalty Payments and any value that we may
realize from our rights to the Option and the ultimate amount of our liabilities
make it impracticable to predict the aggregate net value ultimately
distributable to stockholders. Claims, liabilities and expenses from operations
(including, but not limited to, operating costs such as salaries, directors'
fees, income taxes, payroll and local taxes, legal, accounting and miscellaneous
office expenses), although currently declining, will continue to be incurred
following stockholder approval of the Asset Sale and the approval and adoption
of the Plan of Liquidation. These expenses will reduce the amount of assets
available for ultimate distribution to our stockholders, if any, and, while a
precise estimate of those expenses cannot currently be made, our management and
Board of Directors estimates that available cash will be adequate to provide for
our obligations, liabilities, expenses and claims (including contingent
liabilities) and we will make every effort to maximize any distributions to be
made to our stockholders. However, no assurances can be given that available
cash and amounts received on the Asset Sale and the sale of our remaining assets
will be adequate to provide for our obligations, liabilities, expenses and
claims and to make cash distributions to stockholders. If such available cash
and amounts received on the Asset Sale and the sale of our remaining assets
are not adequate to provide for our obligations, liabilities, expenses and
claims, distributions of cash to our stockholders will be reduced and could be
eliminated.
Estimated
Distribution to Stockholders
Subject
to the approval of our stockholders of the Asset Sale, the Plan of Liquidation
and the Liquidating Trust Agreement and the consummation of the Asset Sale, the
following table shows our management's estimate of cash proceeds and outlines
our best estimate of potential distributions that could be made by the Trustee
from the Liquidating Trust to our stockholders as of the date of this Proxy
Statement. Our independent registered public accounting firm has not performed
any procedures with respect to the information in the following table and,
accordingly, does not express any form of assurance on that information. The
following estimates are not guarantees and they do not reflect the total range
of possible outcomes. The actual amount of our share of the Royalty
Payments that may be received by us or the value we may derive from of our
rights to the Option that may be realized by us in the future, if any, cannot be
determined as of the date of this Proxy Statement. The table assumes that we
will complete the proposed Asset Sale by March 15, 2010. Our current intention
is to file the Certificate of Dissolution of the Company as soon as practicable
after the completion of the Asset Sale. As the Trustee liquidates our share of
the Royalty Payments, if any, to be paid by FUSA under the Asset Purchase
Agreement and realizes any value from our rights to the Option, and we liquidate
any other Remaining Assets and pay off our outstanding liabilities, the Trustee
may distribute liquidation proceeds, if any, to our stockholders as the Trustee
deems appropriate in its sole discretion under the terms of the Liquidating
Trust. A creditor could seek an injunction against the making of distributions
to our stockholders on the ground that the amounts to be distributed were needed
to provide for the payment of our liabilities and expenses. To the extent the
closing of the Asset Sale is delayed beyond March 31, 2010, the date on which
FUSA has the right to terminate the Asset Purchase Agreement, we anticipate that
we will be unable to continue as a going concern and will be forced to liquidate
and file for bankruptcy.
The
amount, if any, that the Trustee may ultimately distribute to our stockholders
following liquidation, is heavily dependent on the success of the technology
being sold to FUSA and the value of the Royalty Payments and the Option, if any.
The actual amount of Royalty Payments that may be received by us or the value
realized by us from our rights to the Option, if any, cannot be determined as of
the date of this Proxy Statement.
The
following table is not a guarantee of the final result of the potential
contractual liabilities referenced above, but rather, merely presents possible
outcomes of our highest and lowest estimates in the amount of our contractual
liabilities that will exist as of the Closing Date and the per share amount of
our portion of the Cash Purchase Price that would be then available for
distribution, if any, by the Trustee to our stockholders depending on certain
possible outcomes related to the value of such contractual liabilities. However,
the actual amount of Royalty Payments that may be received by us in the future,
if any, cannot be determined as of the date of this Proxy Statement. None of the
Cash Purchase Price will be distributed to our stockholders under either the
highest or lowest estimates of our contractual liabilities that will exists as
of the Closing date.
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High (1)
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Low (2)
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(in
thousands, except per share)
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Assets
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Net
Proceeds of Asset Sale (3)
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$
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2,292
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$
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2,292
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Cash
& cash equivalents at closing
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$
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0
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|
$
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0
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|
All
other assets
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$
|
0
|
|
|
$
|
0
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Total
Assets
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$
|
2,292
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|
|
$
|
2,292
|
|
|
|
|
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|
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|
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Liabilities
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|
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Accounts
payable
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$
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1,122
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$
|
579
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Accrued
expenses (4)
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$
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457
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|
$
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375
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Asset
Sale expenses (5)
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$
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1,016
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|
$
|
616
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Wind
down liabilities (6)
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$
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3,108
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$
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1,174
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|
|
|
|
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|
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Total
Liabilities
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|
$
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5,703
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$
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2,755
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Net
negative balance of cash available as a result of the Asset
Sale
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$
|
(3,411
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)
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|
$
|
(463
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)
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Net
cash available for transfer to the Liquidating Trust as of the Closing
Date
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|
$
|
0
|
|
|
$
|
0
|
|
|
($
per share based on 15,354,687 shares outstanding as of February 8,
2010)
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|
$
|
N/A
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|
|
$
|
N/A
|
|
|
|
(1)
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The
low estimate assumes the highest amount of our contractual liabilities
that we would expect to be liable for as of the Closing
Date.
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(2)
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The
high estimate assumes the most favorable resolution of our known
contractual liabilities existing as of the Closing
Date.
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(3)
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Represents
$2,100,000 as our portion of the Cash Purchase Price (not including
$200,000 received by us as the exclusivity fee) and includes receipt of
$300,000 underlying the letter of credit issued to the landlord of our
operating facility less $145,000 payable to FUSA in connection with
its assumption of such lease pursuant to the Side Agreement, plus return
of our a security deposit of $37,000 deposited with the landlord upon the
execution of such lease.
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(4)
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Includes
$312,102 of deferred compensation payable to our executive
officers.
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(5)
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Includes
$432,500 of sale transaction success bonus payable to our Chief Executive
Officer.
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(6)
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Wind
down liabilities primarily consist of the estimated severance costs of
$611,500 and up to approximately $1.924 million that may be due to
our executive officers less amounts paid through the expected Closing Date
(as more fully discussed herein), and a range of estimates on additional
expenses including up to approximately $740,000 as the remaining payments
due under the lease of our principal executive offices and legal fees
associated with the wind down of approximately
$88,000.
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We will
attempt, if possible, to negotiate and take certain other additional measures,
including deferral of payments to certain parties, in order to reduce our
aggregate liabilities.
Sale
of our Assets
In order
for us to sell all or substantially all of our assets, under the DGCL we are
required to obtain approval of our stockholders to consummate such asset sale,
including the Asset Sale. To proceed with the Asset Sale pursuant to
the terms of the Asset Purchase Agreement, we are hereby seeking stockholder
approval as discussed in this Proxy Statement. In the event the Asset Sale is
not approved by our stockholders, the
Plan of Liquidation gives our Board
of Directors the authority to sell all or substantially all our remaining assets
following our dissolution. Approval of the Plan of Liquidation
constitutes stockholder approval of the sale of all or substantially all of our
assets and we are not required to and will not seek any further stockholder
approval with respect to the specific terms of any particular asset sale
approved by our Board of Directors
pursuant
to the Plan of Liquidation in the event the Asset Purchase Agreement is not
approved
. We may conduct sales by any means, including by
competitive bidding or private negotiations. The prices at which we may be
able to sell our share of the rights to any Royalty Payments or our rights to
the Option will depend largely on factors beyond our control, including, without
limitation, the value of such rights, the condition of the technology being sold
to FUSA, FUSA’s ability to develop such technology, the financial condition of
FUSA, the condition of financial markets, the availability of financing to
prospective purchasers of our share of the rights to the Royalty Payments and/or
the Option and regulatory approvals, as applicable. In addition, we
may not obtain as high a price for any rights to Royalty Payments or the Option
as we might secure if we were not in liquidation.
Although
the authority referred to herein will give our Board of Directors authorization
to sell our Assets to one or more third parties, including FUSA (other than
pursuant to the Asset Purchase Agreement), we do not have any agreement or
understanding with any party with respect to the sale of any or all of our
assets if the Asset Sale is not approved or if the Asset Sale is not
consummated. Therefore, we have no current intention to sell the Assets to any
third party, including FUSA, except pursuant to the Asset Purchase Agreement, if
approved by our stockholders.
If the
Asset Sale, the Plan of Liquidation and the Liquidating Trust Agreement are
approved by our stockholders and the Asset Sale is consummated, we intend to
transfer to the Liquidating Trust our share of the rights to any Royalty
Payments and our rights to the Option and other Remaining Assets, if any,
together with all of our Remaining Liabilities.
Our sale
of an appreciated asset will result in the recognition of taxable gain to the
extent that the proceeds from the sale of such asset exceeds our tax basis in
such asset.
Our sale
of depreciated assets generally will result in deductible losses to the extent
that our tax basis for such asset exceeds the proceeds from the sale of such
asset.
We believe that
the
looses resulting from the sale of depreciated assets will offset the gains
resulting from the sale of appreciated assets, if any. Moreover, to the extent
such losses are insufficient to offset such gains, we believe that
we
have sufficient useable net operating losses carryovers from prior years to
offset substantially all of the federal income or gain that could be recognized
by us for federal income tax purposes. As a result, we anticipate being
subject only to related state tax liabilities, if any.
Principal
Provisions of the Plan of Liquidation
Once the
Plan of Liquidation is effective, the steps below will be completed at such
times as our Board of Directors, in its absolute discretion, deems necessary,
appropriate or advisable. A form of the Plan of Liquidation is attached to this
Proxy Statement as Annex B.
If
the Asset Sale, the Plan of Liquidation and the Liquidating Trust Agreement are
approved by our stockholders, we will take the following actions.
We will
complete the Asset Sale and the closing of the Asset Purchase Agreement. Our
officers will negotiate and consummate the sales of our other Remaining Assets
and settle our contractual commitments and other liabilities insofar as our
Board of Directors deems such sales necessary, appropriate or advisable. We will
not solicit any further stockholder votes with respect to the approval of the
specific terms of any particular sales of assets approved by our Board of
Directors. On or before the date of the Special Meeting, we will establish the
Liquidating Trust on the terms of the Liquidating Trust Agreement, attached
hereto as Annex C, and as summarized in discussion of Proposal No.
3.
We
will file certificate of dissolution with the State of Delaware pursuant to
Section 275 of the DGCL. Our dissolution will become effective, in
accordance with Section 275 of the DGCL, upon proper filing of the
certificate of dissolution with the Secretary of State of Delaware (the
“Dissolution Date”). Pursuant to the DGCL, we will continue to exist for three
years after the Dissolution Date or for such longer period as the
Delaware Court of Chancery shall direct, for the purpose of prosecuting and
defending suits, whether civil, criminal or administrative, by or against us,
and enabling us to settle and close our business, to dispose of and convey our
property, to discharge our liabilities and to distribute to our stockholders any
remaining assets, but not for the purpose of continuing the business for which
we were organized. Moreover, we will continue after such period for the purpose
of pending legal actions.
Pursuant
to the terms of the Liquidating Trust Agreement, the Trustee will pay or
adequately provide for the payment of all of our known obligations and
liabilities prior to any distributions to our stockholders. The Trustee of the
Liquidating Trust will then distribute in accordance with the trust’s governance
documents pro rata in one or more liquidating distributions over time to or for
the benefit of our former stockholders and beneficiaries of the Liquidating
Trust any available amount(s) of the Royalty Payments due to us or the value
that the Trustee would be able to realize upon conversion of the stream of
Royalty Payments due to us under the Asset Purchase Agreement into cash and any
cash proceeds realized by us from our rights to the Option.
We intend
to transfer to the Liquidating Trust our share of the rights to the Royalty
Payments, the Option and our other Remaining Assets, if any, together with all
of our Remaining Liabilities.
If
the Asset Sale is not approved by our stockholders, but the Plan of Liquidation
is approved by our stockholders, we will not present the Liquidating Trust
Agreement Proposal for a vote at the Special Meeting, and we will take the
following actions.
We will
attempt to sell all our assets on available terms most favorable to us.
If the
Asset Sale is not approved, approval of the Plan of Liquidation by our
stockholders will authorize our Board of Directors to sell and liquidate our
Assets, on such terms and to such parties as the Board of Directors determines
in its sole discretion
.
Our officers will negotiate and consummate the sales of all of our assets
and properties insofar as our Board of Directors deems such sales necessary,
appropriate or advisable. We are not required to and will not solicit any
further stockholder votes with respect to the approval of the specific terms of
any particular sales of assets approved by our Board of Directors.
Although
the authority referred to herein will give our Board of Directors authorization
to sell our Assets to one or more third parties, including FUSA, w
e do
not have any agreement or understanding with any party,
including
FUSA,
with respect to the sale of any or all of our assets if the Asset
Sale is not approved or if the Asset Sale is not consummated.
Therefore,
we have no current intention to sell the Assets to any third party, including
FUSA, except pursuant to the Asset Purchase Agreement, if approved by our
stockholders.
If the
Asset Sale is not approved by our stockholders, but the Plan of Liquidation is
approved by our stockholders, due to our recent financial condition, our already
substantially depleted resources and in light of our aggregate liabilities
exceeding our assets, we will be forced to discontinue our operations and seek
protection under bankruptcy laws. In such event, it is highly
doubtful that any cash or cash equivalents will be available for distribution to
our stockholders.
We will
file a certificate of dissolution with the State of Delaware pursuant to
Section 275 of the DGCL. Our dissolution will become effective, in
accordance with Section 275 of the DGCL, on the Dissolution Date. Pursuant
to the DGCL, we will continue to exist for three years after the Dissolution
Date or for such longer period as the Delaware Court of Chancery shall direct,
for the purpose of prosecuting and defending suits, whether civil, criminal or
administrative, by or against us, and enabling us to settle and close our
business, to dispose of and convey our property, to discharge our liabilities
and to distribute to our stockholders any remaining assets, but not for the
purpose of continuing the business for which we were organized. Moreover, we
will continue after such period for the purpose of pending legal
actions.
From and
after the Dissolution Date, we will not engage in any business activities except
to the extent necessary to preserve the value of our assets, wind down our
business and affairs, and distribute our assets in accordance with the Plan of
Liquidation and pursuant to Section 278 of the DGCL.
We will
pay or adequately provide for the payment of all of our known obligations and
liabilities. We will establish a contingency reserve designed to satisfy any
additional unknown or contingent liabilities or acquire insurance to protect us
and our stockholders against such liabilities. Finally, we will distribute pro
rata in one or more liquidating distributions to or for the benefit of our
stockholders any available cash or cash equivalents obtained from the conversion
of all of our assets into cash, net of our liabilities. Due to our liabilities
and obligations significantly exceeding our assets, most likely we would have no
cash or cash equivalents to distribute to our stockholders.
If
the Asset Sale and the Plan of Liquidation are approved by our stockholders, but
the Liquidating Trust Agreement is not approved by our stockholders, we will
take the following actions.
We will
complete the Asset Sale and the closing of the Asset Purchase Agreement but will
not establish the Liquidating Trust. Our officers will negotiate and consummate
the sales of our other Remaining Assets and settle our contractual commitments
and other liabilities insofar as our Board of Directors deems such sales
necessary, appropriate or advisable. We will not solicit any further stockholder
votes with respect to the approval of the specific terms of any particular sales
of assets approved by our Board of Directors.
We will
file a certificate of dissolution with the State of Delaware pursuant to
Section 275 of the DGCL. Our dissolution will become effective, in
accordance with Section 275 of the DGCL, on the Dissolution Date. Pursuant
to the DGCL, we will continue to exist for three years after the Dissolution
Date or for such longer period as the Delaware Court of Chancery shall direct,
for the purpose of prosecuting and defending suits, whether civil, criminal or
administrative, by or against us, and enabling us to settle and close our
business, to dispose of and convey our property, to discharge our liabilities
and to distribute to our stockholders any remaining assets, but not for the
purpose of continuing the business for which we were organized. Moreover, we
will continue after such period for the purpose of pending legal
actions.
We will
attempt to maximize cash remaining after satisfying our liabilities by
negotiating possible reduced payments for our remaining
obligations.
From and
after the Dissolution Date, we will not engage in any business activities except
to the extent necessary to preserve the value of our assets, wind down our
business and affairs, and distribute our assets in accordance with the Plan of
Liquidation and pursuant to Section 278 of the DGCL.
We will
pay or adequately provide for the payment of all of our known obligations and
liabilities. To the extent of our then available resources, we will establish a
contingency reserve designed to satisfy any additional unknown or contingent
liabilities or acquire insurance to protect us and our stockholders against such
liabilities. Finally, we will distribute pro rata in one or more liquidating
distributions to or for the benefit of our stockholders any available cash or
cash equivalents obtained from the conversion of all of our assets into cash,
net of our liabilities. Due to the fact that our liabilities and
obligations significantly exceed our assets, it is highly doubtful that there
would be any cash or cash equivalents to distribute to our
stockholders.
Plan
of Liquidation
The Plan
of Liquidation provides that our Board of Directors will liquidate our assets in
accordance with any applicable provision of the DGCL, including
Sections 280 or 281. Without limiting the flexibility of our Board of
Directors, our Board may, at its option, cause us to follow the procedures set
forth in Sections 280 and 281(a) of the DGCL, which provide for us to:
(1) give notice of the dissolution to all persons having a claim against us
and publish such notice, (2) offer to any claimant on a contract whose
claim is contingent, conditional or unmatured security in an amount sufficient
to provide compensation to the claimant if the claim matures, and petition the
Delaware Court of Chancery to determine the amount and form of security
sufficient to provide compensation to any such claimant who rejects such offer
in accordance with Section 280 of the DGCL, (3) petition the Delaware
Court of Chancery to determine the amount and form of security that would be
reasonably likely to be sufficient to provide compensation for (A) claims
that are the subject of pending litigation against us and not barred under
Section 280, (B) claims of contingent creditors who have rejected our
offer of security, and (C) claims that have not been made known to us at
the time of dissolution, but that, based on facts known to us, are likely to
arise or become known within five years (or longer, but no more than
10 years, in the discretion of the Delaware Court of Chancery),
(4) pay all claims made against us and not rejected, (5) post all
security offered and not rejected and all security ordered by the Delaware Court
of Chancery in accordance with Section 280 of the DGCL, and (6) pay or
make provision for all other claims that are mature, known and uncontested or
finally determined to be owing. In connection with any such proceedings, the
Court may appoint a guardian to protect the interests of unknown future
claimants.
Notwithstanding
the foregoing, we will not be required to follow the procedures described in
Section 280 of the DGCL, and the adoption of the Plan of Liquidation by our
stockholders will constitute full and complete authority for our Board and
officers, without further stockholder action, to proceed with our dissolution
and liquidation in accordance with Section 281(b) of the DGCL, which
requires the adoption of a plan of distribution pursuant to which the dissolved
corporation is to pay or make reasonable provision for all claims and
obligations known to the corporation, make such provision as is reasonably
likely to compensate any claim against the corporation that is the subject of a
pending action, and make such provision as is reasonably likely to compensate
certain potential future claimants. If there are insufficient assets, the plan
must provide for payment according to priority, and pro rata distribution to
creditors of equal priority. Any remaining assets may be distributed to
stockholders.
Subject
to any asset available for distribution to our stockholders, we may, from time
to time, make liquidating distributions of our remaining funds and unsold
assets, if any, in cash or in kind, to the holders of record of shares of our
common stock at the close of business on the Dissolution Date. Such liquidating
distributions, if any, will be made to the holders of shares of our Common Stock
on a pro rata basis; all determinations as to the time for and the amount and
kind of distributions will be made by our Board, in its absolute discretion. No
assurances can be given that available cash and amounts received on the sale of
assets will be adequate to provide for our obligations, liabilities, expenses
and claims, and to make any cash distributions to our
stockholders.
We will
close our stock transfer books and discontinue recording transfers of shares of
our common stock on the Dissolution Date, at which time our capital stock and
stock certificates evidencing shares of our common stock will not be assignable
or transferable on our books.
Conduct
Following Adoption of the Plan of Liquidation and Establishment of the
Liquidating Trust
Assuming
that the Plan of Liquidation and the Liquidating Trust Agreement are approved
and adopted, subject to our stockholders’ approval of the Asset Sale and the
subsequent consummation of the Asset Sale, we intend to continue the process of
scaling back our operations and winding down our affairs.
If the
Asset Sale, the Plan of Liquidation and the Liquidating Trust Agreement are
approved by our stockholders, following the Dissolution Date our activities will
be limited to winding down our affairs and transferring our Remaining Assets and
Remaining Liabilities to the Liquidating Trust.
If the
Asset Sale is not approved by our stockholders, but the Plan of Liquidation is
approved by our stockholders, following the Dissolution Date our activities will
be limited to winding down our affairs, taking such action as may be necessary
to preserve the value of our assets and distributing our assets in accordance
with the Plan of Liquidation. We will seek to distribute or liquidate all of our
assets in such manner and upon such terms as our Board determines to be in our
and our stockholders’ best interests.
Pursuant
to the Plan of Liquidation, we will continue to indemnify our officers,
directors, employees and agents in accordance with our Certificate of
Incorporation and our Bylaws and any contractual arrangements for actions taken
in connection with the Plan of Liquidation and the winding down of our affairs.
Our Board of Directors, in its absolute discretion, is authorized to obtain and
maintain insurance as may be necessary, appropriate or advisable to cover our
indemnification obligations under the Plan of Liquidation. Upon the Liquidation
Effective Time, we will obtain and fully pay for insurance policies that provide
coverage for events occurring on or before the Liquidation Effective Time with a
claims period of six years from and after the Liquidation Effective Time from
insurance carriers with the same or better credit ratings as our current
insurance carriers with respect to directors’ and officers’ liability insurance
with benefits and levels of coverage that are no less favorable than those on
our existing policies.
In
connection with the winding down of our affairs, it is also our intent to reduce
the size of our Board of Directors following the completion of the Asset Sale
and prior to the Liquidation Effective Time to the extent our Board of Directors
deems appropriate. To the extent not necessary to comply with any applicable
laws, some of our directors may also resign from our Board of Directors prior to
the completion of the Asset Sale.
Contingent
Liabilities; Contingency Reserve
Under the
DGCL, we are required, in connection with our dissolution, to pay or provide for
payment of all of our liabilities and obligations. Following the Dissolution
Date, we will pay, to the extent of our funds and assets available, all expenses
and fixed and other known liabilities, or set aside as a contingency reserve,
assets which we believe to be adequate for payment thereof (the “Contingency
Reserve”).
We are
currently unable to estimate with precision the amount of any Contingency
Reserve that may be required, but any such amount will be deducted before the
determination of amounts available for distribution to
stockholders.
The
actual amount of any Contingency Reserve will be based upon estimates and
opinions of management and our Board of Directors and derived from review of our
estimated operating expenses, including, but not limited to, accrued
liabilities, anticipated compensation payments, estimated legal and accounting
fees, rent, payroll and other taxes payable, miscellaneous office expenses,
other expenses accrued in our financial statements, and contractual liability
claims related to our real estate leases. There can be no assurance that the
Contingency Reserve in fact will be sufficient. After the liabilities, expenses
and obligations for which the Contingency Reserve had been established have been
satisfied in full, we will distribute to our stockholders any remaining portion
of the Contingency Reserve. The remaining portion of the Contingency Reserve
will be paid to the holders of shares of our common stock on a pro rata
basis.
Abandonment
and Amendment
Under the
Plan of Liquidation, our Board of Directors may modify, amend or abandon the
Plan of Liquidation, notwithstanding stockholder approval, to the extent
permitted by the DGCL. We will not amend or modify the Plan of Liquidation under
circumstances that would require additional stockholder solicitations under the
DGCL or the federal securities laws without complying with the DGCL or the
federal securities laws, as applicable. We have no present plan or intention to
modify, amend or abandon the Plan of Liquidation.
If our
Board of Directors determines that the abandonment or amendment of the Plan of
Liquidation would be in the best interest of our stockholders and therefore
abandons or amends the terms of the Plan of Liquidation, distribution of
liquidation proceeds may be significantly delayed and may not occur as currently
contemplated in the Plan of Liquidation. The most likely reason for abandoning
the Plan of Liquidation would be to pursue a strategic transaction of some kind,
which likely would require us to seek stockholder approval.
Plan
of Liquidation Expenses and Indemnification
In
addition, in connection with and for the purpose of implementing and assuring
completion of the Plan of Liquidation, we may, in the absolute discretion of our
Board of Directors, pay any brokerage, agency, legal and other fees and expenses
of persons rendering services to us in connection with the collection, sale,
exchange or other disposition of our property and assets and the implementation
of the Plan of Liquidation, including, but not limited to, the payment of
retainer fees to any such persons.
Pursuant
to the Plan of Liquidation, we will continue to indemnify our officers,
directors, employees and agents in accordance with our Certificate of
Incorporation and our Bylaws and any contractual arrangements for actions taken
in connection with the Plan of Liquidation and the winding down of our affairs.
Our Board of Directors, in its absolute discretion, is authorized to obtain and
maintain insurance as may be necessary, appropriate or advisable to cover our
indemnification obligations under the Plan of Liquidation. On or before we file
the Certificate of Dissolution, we will obtain and fully pay for insurance
policies that provide coverage for events occurring on or before the Liquidation
Effective Time with a claims period of six years from and after the Liquidation
Effective Time from insurance carriers with the same or better credit ratings as
our current insurance carriers with respect to directors’ and officers’
liability insurance with benefits and levels of coverage that are no less
favorable than those on our existing policies.
Trading
of Our Common Stock
After we
close our stock transfer books, the prices of our common stock will cease to be
reported on the Pink Sheets Electronic OTC Market (the “Pink Sheets”). During
the liquidation period, we would continue to be subject to certain public
company obligations and public company reporting requirements under the federal
securities laws. After the Final Record Date, we will make appropriate filings
with the SEC to allow us to cease filing certain periodic and current reports
and other information with the SEC.
Interests
of Our Executive Officers and/or Directors in the Asset Sale, the Plan of
Liquidation and the Liquidating Trust Agreement
For
information regarding severance, change of control and other payments that will
be triggered by the Asset Sale and the interests of our executive officers
and/or directors in the Plan of Liquidation, see “Proposal No. 1: Approval
of the Sale
of
Substantially All or the Assets or Xcorporeal
—Interests of Our Executive
Officers and/or Directors in the Asset Sale, the Plan of Liquidation and the
Liquidating Trust Agreement.”
Regulatory
Approvals
No United
States federal or state regulatory requirements must be complied with or
approvals obtained in connection with the dissolution.
Absence
of Appraisal Rights
Under
Delaware law, our stockholders are not entitled to appraisal rights for their
shares of our common stock in connection with the transactions contemplated by
the Plan of Liquidation or to any similar rights of dissenters under Delaware
law.
Material
U.S. Federal Income Tax Consequences
The
following discussion is a general summary of the material U.S. Federal income
tax consequences of the Plan of Liquidation, the Liquidating Trust Agreement or
the receipt of non-liquidating distributions to us and our stockholders, but
does not purport to be a complete analysis of all the potential tax
effects.
EACH
STOCKHOLDER IS ADVISED TO CONSULT HIS, HER OR ITS TAX ADVISOR FOR ACTUAL TAX
CONSEQUENCES TO HIM, HER OR IT OF THE PLAN OF LIQUIDATION OR THE RECEIPT OF
NON-LIQUIDATING DISTRIBUTIONS.
The discussion addresses
neither the tax consequences that may be relevant to particular categories of
investors subject to special treatment under certain federal income tax laws
(such as dealers in securities, banks, insurance companies, tax-exempt
organizations, and foreign individuals and entities) nor any tax consequences
arising under the laws of any state, local or foreign jurisdiction. The
discussion is based upon the Code, Treasury Regulations, the IRS rulings and
judicial decisions now in effect, all of which are subject to change at any
time; any such changes may be applied retroactively. The following discussion
has no binding effect on the IRS or the courts. No assurances can be given
that the tax treatment described herein will remain unchanged at the time that
distributions are made. No ruling has been requested from the IRS with respect
to the anticipated tax treatment of the Plan of Liquidation, the Liquidating
Trust Agreement or the receipt of non-liquidating distributions, and we will not
seek an opinion of counsel with respect to the anticipated tax treatment. The
failure to obtain a ruling from the IRS or an opinion of counsel results in less
certainty that the anticipated tax treatment summarized herein will be obtained.
If any of the conclusions stated herein proves to be incorrect, the result could
be increased taxation at the Company’s and/or our stockholder level, thus
reducing the benefit to our stockholders and us from the liquidation or from
non-liquidating distributions.
Tax
Consequences to the Company
After the
approval of the Plan of Liquidation and subject to approval of the Asset Sale
and the Liquidating Trust Agreement, and until the liquidation is complete, we
will continue to be subject to tax on our taxable income. We will generally
recognize income, gain or loss on sales of our property or collection of claims
pursuant to the Plan of Liquidation. Upon any distribution of property to our
stockholders, we will generally recognize gain or loss as if such property was
being sold to our stockholders at its fair market value.
Tax
Consequences to Our Stockholders
As a
result of our liquidation, a stockholder generally will recognize gain or loss
equal to the difference between (1) the sum of the amount of cash and the
fair market value of any property distributed to such stockholder, if any, less
any known liabilities assumed by the stockholder or to which the distributed
property is subject, and (2) such stockholder's tax basis for his, her or
its shares of our common stock. A stockholder's tax basis in his or her shares
will depend upon various factors, including, but not limited to, the
stockholder's cost and the amount and nature of any distributions received with
respect thereto. A stockholder's gain or loss will be computed on a “per share”
basis. We expect to make more than one liquidating distribution to our
stockholders, each of which will be allocated proportionately to each share of
our common stock owned by a stockholder. The value of each liquidating
distribution will be applied against and reduce a stockholder's tax basis
in his or her shares of our common stock. Gain will be recognized by reason of a
liquidating distribution only to the extent that the aggregate value of such
distributions received by a stockholder with respect to a share exceeds his, her
or its tax basis for that share. Any loss will generally be recognized only
when the final distribution from us has been received and then only if the
aggregate value of the liquidating distributions with respect to a share is less
than the stockholder's tax basis for that share. If a stockholder is required to
return any distribution, any payments by a stockholder in satisfaction of any
liability not covered by the Contingency Reserve, which is described in greater
detail elsewhere in this Proxy Statement, generally would produce a loss in
the year paid, which loss could fail to cause a reduction in taxes payable in an
amount equal to the amount of the taxes paid on amounts previously distributed.
Gain or loss recognized by a stockholder will generally be treated as capital
gain or loss provided the shares are held as capital assets. Such gain or loss
will be subject to tax at the short-term or long-term capital gain tax rate,
depending on the period for which such shares are held by the stockholder.
Long-term capital gain of non-corporate taxpayers may be subject to more
favorable tax rates than ordinary income or short-term capital gain. The
deductibility of capital losses is subject to various limitations. We will
provide our stockholders and the IRS with a statement each year of the amount of
cash and the fair market value of any property distributed to the stockholders
during that year, at such time and in such manner as required by the Treasury
Regulations.
Liquidating
Trust
In the
event we transfer our Remaining Assets to the Liquidating Trust for the benefit
of the stockholders, we intend to treat any such liquidating trust as a grantor
trust of the stockholders. Assuming the liquidating trust is properly
characterized as a grantor trust, our stockholders will be treated for U.S.
federal income tax purposes as first having constructively received their pro
rata share of the property transferred to the Liquidating Trust in a taxable
transaction and then having contributed such property to the trust. The amount
of the deemed distribution to the stockholders, if any, generally will be
reduced by the amount of any known liabilities assumed by the Liquidating Trust
or to which the transferred property is subject. A liquidating trust qualifying
as a grantor trust is itself not subject to U.S. federal income tax. Former
holders of common stock of the Company, as owners of the liquidating trust,
would be required to take into account for U.S. federal income tax purposes
their respective allocable portions of any income, gain or loss recognized by
such liquidating trust, whether or not they receive any actual distributions
from the liquidating trust, and accordingly may recognize taxable income without
the receipt of cash. As a result, our stockholders will not be taxable when
distributions are actually made by the Liquidating Trust and, if our
stockholders never receive an amount previously treated as income as a
distribution from the Liquidating Trust, the stockholders may be entitled to a
loss deduction. Our stockholders would receive annual statements from the
Liquidating Trust reporting their respective allocable shares of the various tax
items of the trust.
Back-Up
Withholding
Unless a
stockholder complies with certain reporting and/or Form W-9 certification
procedures or is an exempt recipient under applicable provisions of the Code and
Treasury Regulations, he, she or it may be subject to back-up withholding tax
with respect to any payments received pursuant to the Plan of
Liquidation. The back-up withholding tax is currently imposed at a
rate of 28%. Back-up withholding generally will not apply to payments made to
some exempt recipients such as a corporation or financial institution or to a
stockholder who furnishes a correct taxpayer identification number or provides a
certificate of foreign status and provides certain other required information.
If back-up withholding applies, the amount withheld is not an additional tax,
but is credited against the stockholder's U.S. federal income tax
liability.
Taxation of Non-U.S.
Stockholders
Foreign
corporations or persons who are not citizens or residents of the United States
should consult their tax advisors with respect to the U.S. and non-U.S. tax
consequences of the Plan of Liquidation or the receipt of non-liquidating
distributions.
State
and Local Income Tax Consequences
Stockholders
may also be subject to liability for state and local taxes with respect to the
receipt of liquidating or non-liquidating distributions. State and local tax
laws may differ in various respects from federal income tax law. Stockholders
should consult their tax advisors with respect to the state and local tax
consequences of the Plan of Liquidation or the receipt of non-liquidating
distributions.
The
foregoing summary of certain income tax consequences is included for general
information only and does not constitute legal advice to any stockholder. The
tax consequences of the Plan of Liquidation may vary depending upon the
particular circumstances of the stockholder. We recommend that each
stockholder consult his, her or its own tax advisor regarding the tax
consequences of the Plan of Liquidation or the receipt of non-liquidating
distributions.
Votes
Required for the Approval of the Plan of Liquidation
The
approval of the Plan of Liquidation requires the affirmative vote of the holders
of a majority of the outstanding shares of our common stock.
Recommendation
of Our Board of Directors
PRIOR
TO THE MAILING OF THIS PROXY STATEMENT, OUR BOARD OF DIRECTORS:
(1) DETERMINED THAT THE LIQUIDATION, AND THE OTHER TRANSACTIONS
CONTEMPLATED THEREBY, ARE FAIR TO, ADVISABLE AND IN THE BEST INTERESTS OF OUR
STOCKHOLDERS, (2) APPROVED IN ALL RESPECTS THE PLAN OF LIQUIDATION AND THE
OTHER TRANSACTIONS CONTEMPLATED THEREBY AND (3) RECOMMENDED THAT OUR
STOCKHOLDERS VOTE “
FOR
” THE APPROVAL
AND ADOPTION OF THE PLAN OF LIQUIDATION.
PROPOSAL
NO. 3: APPROVAL OF THE LIQUIDATING TRUST AGREEMENT
General
If the
Asset Sale Proposal and the Plan of Liquidation Proposal are approved by our
stockholders at the Special Meeting, our stockholders will be asked to consider
and vote upon a proposal to transfer to the Liquidating Trust any available
proceeds and payment rights received from the sale of our Assets and any other
assets not used to satisfy our liabilities and obligations. If the Asset Sale
Proposal, the Plan of Liquidation Proposal and the Liquidating Trust Agreement
Proposal are approved and the Asset Sale is consummated, we will transfer to the
Liquidating Trust the Remaining Asset and Remaining Liabilities and the trustee
of the Liquidating Trust may make distributions to our stockholders in the
future as beneficiaries of the trust.
In
giving consideration for approval of this Proposal No. 3, we urge our
stockholders to read the discussion of Proposals No. 1 and No. 2 set forth above
together with the discussion of this Proposal No. 3.
A form of
the Liquidating Trust Agreement is attached to this Proxy Statement as
Annex C. Stockholders are urged to carefully review the Liquidating Trust
Agreement in its entirety.
Background
and Reasons for the Proposed Liquidation and Dissolution and Establishment of
the Liquidating Trust
For a
discussion of the background and the reasons for the proposed liquidation and
dissolution, establishment of the Liquidating Trust and transfer of our
Remaining Assets and Remaining Liabilities to the Liquidating Trust, please see
“Proposal No. 2: Approval of the Plan of Liquidation and Dissolution ─
Background and Reasons for the
Proposed Liquidation and Dissolution
” above.
Transfer
to the Liquidating Trust; Nature; Amount; Timing
The Cash
Purchase Price and net cash proceeds, if any, of our remaining assets, together
with any other cash held by us, will not be distributed to our stockholders, as
we expect that after deduction for expenses and a Contingency Reserve (as
defined below), our liabilities will exceed our assets. However, we intend to
transfer to the Liquidating Trust, after deduction of expenses, our share of the
rights to any Royalty Payments and the Option and any other rights and assets
remaining after the Asset Sale (the “Remaining Assets”) and not used to satisfy
our liabilities and obligations, if any, together with all of our then remaining
liabilities and obligations not satisfied prior our liquidation (the “Remaining
Liabilities”). We intend that any distributions to our stockholders by the
Trustee of the Liquidating Trust (as defined below) will be in the form of cash.
Nevertheless, no distributions will be made until such time as we have
determined the amount of the Contingency Reserve, which is not expected to occur
until after the closing of the Asset Sale, and until the Trustee has determined
the monetary value of the Royalty Payments, the Option and other Remaining
Assets, if any, and the Trustee has been able to monetize such payment rights
and assets.
The
proportionate interests of all of our stockholders in the Royalty Payments, our
rights to the Option and other Remaining Assets, if any, to be transferred to
the Liquidating Trust, will be fixed on the basis of their respective stock
holdings at the close of business on the Final Record Date, and after such date,
any distributions made by the Liquidating Trust will be made solely to
stockholders of record on the Final Record Date. The actual nature, amount and
timing of all distributions will be determined by the Trustee, in his sole
discretion, and will depend upon the Trustee’s ability to convert the Royalty
Payments, rights to the Option and other Remaining Assets, if any, into cash and
pay and settle our Remaining Liabilities, as well as the expenses associated
with the Liquidating Trust. However, there can be no assurances that even if the
Asset Sale is consummated and the Plan of Liquidation and the Liquidating Trust
Agreement are approved, there will be sufficient assets for the Trustee to make
eventual distributions to our stockholders. Further, our Board of Directors has
the right to abandon or amend the Plan of Liquidation to the extent permitted by
the DGCL. If our Board of Directors determines that the abandonment or amendment
of the Plan of Liquidation would be in the best interest of our stockholders and
therefore abandons or amends the terms of the Plan of Liquidation, transfer
and distribution of liquidation proceeds and other rights may be significantly
delayed and may not occur as currently contemplated in the Plan of Liquidation.
See below “─ Abandonment and Amendment.”
If
the Asset Sale, the Plan of Liquidation and the Liquidating Trust Agreement are
approved and the Asset Sale is consummated, our Board of Directors believes that
we will not have sufficient assets to pay our current liabilities and
obligations and to make cash distributions directly to our stockholders (not as
a result of any distributions from the Liquidating Trust). We will attempt to
maximize cash remaining after satisfying our liabilities by negotiating possible
reduced payments for our remaining obligations. The actual distribution
amount(s) of any distribution(s) will be determined and the final distribution
will be made by the Trustee in his sole discretion after the realization
over-time of the cash value, if any, of the Royalty Payments and our rights to
the Option, and settlement and satisfaction of all our liabilities and
expenses.
Other
factors that may affect the per share distribution amount to stockholders
include the actual amount of expenses we incur for such things as legal and
accounting fees related to the Asset Sale, the Plan of Liquidation and the
Liquidating Trust Agreement, operating expenses and other liabilities we incur
that would reduce the per share distribution amount. Such factors could
reduce the estimated distribution amounts and, in particular, could reduce the
estimated distribution amount at the low recovery end of the range to
zero.
NONE OF THE CASH PROCEEDS FROM THE
ASSET SALE WILL BE DISTRIBUTED TO OUR STOCKHOLDERS IN LIGHT OF THE FACT THAT
CURRENTLY OUR TOTAL LIABILITES AND OBLIGATIONS SIGNIFICANTLY EXCEED OUR TOTAL
ASSETS.
However, our Board of Directors believes that the approval
of all three proposals, increases the possibility that we will be able to
distribute some liquidation proceeds from the Liquidating Trust to our
stockholders, including our share of any Royalty Payments and any value we may
derive from our rights to the Option.
Terms
of the Liquidating Trust
If the
Asset Sale, the Plan of Liquidation and the Liquidating Trust Agreement are
approved by our stockholders and the Asset Sale is consummated, our Board of
Directors intends to transfer our share of the right to any Royalty Payments,
the Option and the other Remaining Assets, if any, together with all of the
Remaining Liabilities, to the Liquidating Trust established for the benefit of
our stockholders, which rights and assets would thereafter be sold or
distributed on terms approved by the Trustee of such trust. The purpose of the
Liquidating Trust would be to serve as a temporary repository for the trust
property prior to its disposition or distribution to our stockholders, to
distribute or sell such property on terms satisfactory to the Trustee, and to
distribute to our stockholders any net proceeds of such sale after paying any
liabilities assumed by the Liquidating Trust. To the extent that a
distribution from, or transfer to, the Liquidating Trust of any asset or
property cannot be effected without the consent of a governmental authority, no
such distribution or transfer will be effected without such consent. The
Liquidating Trust will also assume all of our Remaining Liabilities and will be
obligated to pay any expenses and Remaining Liabilities that remain unsatisfied.
If the Contingency Reserve transferred to the Liquidating Trust is exhausted,
such expenses and liabilities will be satisfied out of the Liquidating Trust’s
other unsold assets.
The
Liquidating Trust will be established pursuant to a Liquidating Trust Agreement,
substantially in the form attached to this Proxy Statement as Annex C, to be
entered into between us and Mr. McCrann, our Chairman and Chief Executive
Officer, or an affiliate appointed by Mr. McCrann to act as trustee thereunder,
as approved by our Board of Directors (the “Trustee”). Under a standard
liquidating trust, property is transferred to one or more liquidating trustees,
to be held in trust for the benefit of the stockholder beneficiaries subject to
the terms of the applicable liquidating trust agreement and immediately
thereafter or when the Trustee deems appropriate to do so, interests in the
liquidating trust are distributed to the trust’s beneficiaries. The Trustee, in
his capacity as trustee, will assume all of our obligations and liabilities with
respect to the assets transferred to the Liquidating Trust, including, without
limitation, any unsatisfied claims and unascertained or contingent liabilities
relating to these transferred assets, and any such conveyances to the Trustee
will be in trust for our stockholders. The transfer to the Liquidating Trust and
distribution of interests therein to our stockholders, if any, will enable us to
divest ourselves of the trust property and permit our stockholders to enjoy the
economic benefits of ownership of such property and the Royalty Payments and the
Option whose fair value on the date of this Proxy Statement is uncertain. We
anticipate that the interests would be evidenced only by the records of the
Liquidating Trust, that there would be no certificates or other tangible
evidence of such interests, and that no holder of our stock would be required to
pay any cash or other consideration for the interests to be received in the
distribution, if any, subject to the surrender of the stock certificates held by
such stockholder. Such interests in the Liquidating Trust will not be
transferable other than by will, intestate succession or operation of
law.
Upon the
determination by the Trustee that all of the Liquidating Trust’s liabilities
have been satisfied, but in any event, not more than 3 years from the date of
the transfer of the Remaining Assets to the Liquidating Trust, the Liquidating
Trust will, to the fullest extent permitted by law, make a final distribution of
any remaining assets to the holders of the beneficial interests of the trust.
Notwithstanding the foregoing, the term of the Liquidating Trust may be extended
past such three-year period only if the Liquidating Trust applies for and
receives no-action relief from the staff of the SEC to the effect that it
would not recommend enforcement action for the failure of the beneficial
interests to be registered under the Securities Act or the Exchange Act or for
the failure to file periodic reports under the Exchange Act as a result of the
extension of the Liquidating Trust. The Trustee intends to sell any Remaining
Assets, including our share of the Royalty Payments and our rights to the
Option, prior to the expiration of the term of the Liquidating Trust and
distribute the proceeds, if any, to holders of beneficial interests of the
Liquidating Trust.
The
adoption of the Liquidating Trust Agreement by our stockholders constitutes full
and complete stockholder approval of the appointment of the Trustee of the
Liquidating Trust, the execution of Liquidating Trust Agreement and the transfer
of our assets to the Liquidating Trust. As more fully discussed herein, subject
to stockholder approval of the Asset Sale, the Plan of Liquidation and the
Liquidating Trust Agreement and the consummation of the Asset Sale, we intend to
transfer our share of the Royalty Payments, our rights to the Option and the
other Remaining Assets, if any, together with all of our Remaining Liabilities,
to the Liquidating Trust. In addition, our Board of Directors believes the
flexibility provided by the Plan of Liquidation with respect to the Liquidating
Trust to be necessary, advisable, and appropriate.
Trading
of Interests in the Liquidating Trust
Interests
in the Liquidating Trust that may be distributed to our stockholders will not be
transferable other than by will, intestate succession or operation of
law.
We have
an obligation to continue to comply with the applicable reporting requirements
of the Exchange Act even though compliance with such reporting requirements is
economically substantially burdensome. In order to curtail expenses,
we h
ave
structured the liquidation and dissolution of the Company to have facts similar
to those presented
in a series of no-action letters issued to third
parties not related to us allowing registrants whose securities are registered
under Section 12(g) of the Exchange Act and who are otherwise not eligible
to deregister under applicable rules of the Exchange Act, to deregister from
their Section 13(a) reporting obligations.
No third
party is entitled to rely on such no-action positions taken by the staff of the
SEC. However, i
n order to
have
facts similar to
such no-action letters, we plan to establish the
Liquidating Trust which will exist only for the limited purpose of effecting
liquidation of all of our assets remaining after the Asset Sale and liabilities
within the 3-year period from the date of the transfer of the Remaining Assets
to the Liquidating Trust, subject to an extension if the Trustee believes that
an extension is in the best interests of the beneficiaries of the Liquidating
Trust and the Liquidating Trust has applied for and received no-action relief
from the SEC relating to an extension of the term. In connection therewith, the
terms of the Liquidating Trust will restrict the ability of the
beneficiaries of the trust to transfer their interests in the Liquidating Trust.
We anticipate that we would continue to file Current Reports on Form 8-K to
disclose material events relating to our dissolution and liquidation and to
distribute to holders of beneficial interests of the Liquidating Trust annual
reports containing unaudited financial statements of the Liquidating Trust.
We
will file such reports under the cover of Form 10-K and each Form 10-K will
include as an exhibit a customary certification of the Trustee of the
Liquidating Trust similar in form to those described in such no-action
letters.
While we would have preferred to obtain our own no-action
position from the staff of the SEC, our lack of financial resources and the time
typically involved in obtaining a no-action letter made obtaining such a letter
impractical.
As our
stockholders may be deemed to have received a liquidating distribution equal to
their pro rata share of the value of the net assets distributed to the
Liquidating Trust which is treated as a grantor trust for tax purposes, the
distribution of non-transferable interests could result in tax liability to the
Liquidating Trust interest holders, even though such holders will not readily be
able to realize the value of such interests to pay such taxes or otherwise. See
“Material U.S. Federal Income Tax Consequences” below.
Nature,
Amount and Timing of Liquidating Distributions
The
amount of the Liquidating Trust’s distributions will depend on a number of
factors, including, but not limited to, the value of the Royalty Payments
received by us and any value that we may be able to realize from our rights to
the Option, our liabilities existing on the date of the approval and adoption of
the Plan of Liquidation (including severance payments), our operating expenses
that accrue following approval and adoption of the Plan of Liquidation and the
amount of any claims that may be asserted against us. The expenses of the
Liquidating Trust will include professional fees and other expenses of
liquidation and although we intend to work diligently to minimize such expenses,
they may be significant.
Other
factors that may affect the per share distribution amount to stockholders
include the actual amount of expenses we incur for such things as legal and
accounting fees related to the Asset Sale, the Plan of Liquidation and the
Liquidating Trust Agreement, operating expenses and other liabilities we incur
that would reduce the per share distribution amount. Such factors could reduce
the estimated distribution amounts and, in particular, could reduce the
estimated distribution amount at the low recovery end of the range to
zero.
The
Establishment of the Liquidating Trust is Contingent Upon the Approval of the
Asset Sale, the Plan of Liquidation and the Liquidating Trust Agreement and the
Consummation of the Asset Sale
In lieu
of satisfying all of our liabilities and obligations prior to making any
transfers to the Liquidating Trust and eventual distributions by the Trustee to
our stockholders, we may instead reserve assets deemed by management and our
Board of Directors to be adequate to provide for such liabilities and
obligations.
Uncertainties
as to the precise value of the Royalty Payments and our rights to the Option and
the ultimate amount of our liabilities make it impracticable to predict the
aggregate net value ultimately distributable to stockholders. Claims,
liabilities and expenses from operations (including, but not limited to,
operating costs such as salaries, directors' fees, income taxes, payroll and
local taxes, legal, accounting and miscellaneous office expenses), although
currently declining, will continue to be incurred following stockholder approval
of the Asset Sale, approval and adoption of the Plan of Liquidation, approval
and establishment of the Liquidating Trust Agreement and the consummation of the
Asset Sale. These expenses will reduce the amount of assets available for
ultimate distribution to our stockholders, if any, and, while a precise estimate
of those expenses cannot currently be made, our management and Board of
Directors estimates that available cash will be not adequate to provide for our
obligations, liabilities, expenses and claims (including contingent liabilities)
and we will make every effort to maximize any distributions to be made to our
stockholders. In addition, no assurances can be given that available cash and
amounts received from the Asset Sale and the sale of our Remaining Assets will
be adequate to provide for our obligations, liabilities, expenses and claims and
to make cash distributions to stockholders. If such available cash and amounts
received from the Asset Sale and the sale of our Remaining Assets are not
adequate to provide for our obligations, liabilities, expenses and claims, we
may be required to reduce the distributions, if any, of cash to our stockholders
or not make any distributions at all.
Estimated
Distribution to Stockholders
For a
discussion of the estimated distribution to our stockholders following the
transfer of our Remaining Assets and Remaining Liabilities to the Liquidating
Trust, please see “Proposal No. 2: Approval of the Plan of Liquidation and
Dissolution ─
Estimated
Distrib
ution to
Stockholders
” above.
Conduct
Following Adoption of the Plan of Liquidation and the Establishment of the
Liquidating Trust
For a
discussion of our conduct following the adoption of the Plan of Liquidation and
the establishment of the Liquidating Trust Agreement, please see “Proposal No.
2: Approval of the Plan of Liquidation and Dissolution ─
Conduct Following Adoption of the
Plan of Liquidation
” above.
Trading
of Our Common Stock
After we
close our stock transfer books, the prices of our common stock will cease to be
reported on the Pink Sheets Electronic OTC Market (the “Pink Sheets”). During
the liquidation period, we would continue to be subject to certain public
company obligations and public company reporting requirements under the federal
securities laws. After the Final Record Date, we will make appropriate filings
with the SEC to allow us to cease filing certain periodic and current reports
and other information with the SEC.
Interests
of Our Executive Officers and/or Directors in the Liquidating Trust
For
information regarding severance, change of control and other payments that would
be triggered by the Asset Sale and the interests of our executive officers
and/or directors in the Plan of Liquidation and the Liquidating Trust, see
“Proposal No. 1: Approval of the Asset Sale—Interests of Our Executive
Officers and/or Directors in the Asset Sale, the Plan of Liquidation and the
Liquidating Trust Agreement.”
Regulatory
Approvals
No United
States federal or state regulatory requirements must be complied with or
approvals obtained in connection with the dissolution.
Absence
of Appraisal Rights
Under
Delaware law, our stockholders are not entitled to appraisal rights for their
shares of our common stock in connection with the transactions contemplated by
the Liquidating Trust Agreement or to any similar rights of dissenters under
Delaware law.
Material
U.S. Federal Income Tax Consequences
For a
discussion of a general summary of the material U.S. Federal income tax
consequences of the Plan of Liquidation and the Liquidating Trust Agreement or
the receipt of non-liquidating distributions to us and our stockholders, please
see “Proposal No. 2: Approval of the Plan of Liquidation and Dissolution ─
Material U.S. Federal Income Tax
Consequences
” above.
Votes
Required for the Approval of the Liquidating Trust Agreement
The
approval of the Liquidating Trust Agreement requires the affirmative vote of the
holders of a majority of the outstanding shares of our common
stock.
Recommendation
of Our Board of Directors
PRIOR
TO THE MAILING OF THIS PROXY STATEMENT, OUR BOARD OF DIRECTORS:
(1) DETERMINED THAT THE LIQUIDATING TRUST AGREEMENT AND THE OTHER
TRANSACTIONS CONTEMPLATED THEREBY, ARE FAIR TO, ADVISABLE AND IN THE BEST
INTERESTS OF OUR STOCKHOLDERS, (2) APPROVED IN ALL RESPECTS THE
LIQUIDATING TRUST AGREEMENT AND THE OTHER TRANSACTIONS CONTEMPLATED THEREBY AND
(3) RECOMMENDED THAT OUR STOCKHOLDERS VOTE “
FOR
” THE APPROVAL OF
THE LIQUIDATING TRUST AGREEMENT.
PROPOSAL
NO. 4: APPROVAL OF ANY PROPOSAL TO ADJOURN THE SPECIAL MEETING TO
SOLICIT
ADDITIONAL PROXIES IN FAVOR OF THE APPROVAL OF ANY OF PROPOSALS NO. 1, NO. 2 OR
NO. 3
As
described above, our Board of Directors has determined that Proposals No. 1, No.
2 or No. 3 are in the best interests of our stockholders and recommends that you
vote
“
FOR
”
all of these proposals.
Because approval of these proposals is a necessary step to completing the Asset
Sale and the dissolution and liquidation of the Company, we may elect to adjourn
the Special Meeting to solicit additional proxies in favor of any of these
proposals if it appears at the time of the Special Meeting that an insufficient
number of votes will be cast to approve any of these proposals.
Votes
Required for the Approval to Adjourn the Special Meeting to Solicit Additional
Proxies in Favor of the Approval of any of Proposals No. 1, No. 2 or No.
3
The
approval of the Adjournment Proposal requires the affirmative vote of the
holders of a majority of the shares of our common stock represented in person or
by proxy and entitled to vote thereon.
OUR
BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “
FOR
” APPROVAL OF
PROPOSAL NO. 4 TO APPROVE ANY PROPOSAL TO ADJOURN THE SPECIAL MEETING TO A LATER
DATE TO SOLICIT ADDITIONAL PROXIES IN FAVOR OF THE APPROVAL OF ANY OF PROPOSALS
NO. 1, NO. 2 OR NO. 3, IF THERE ARE INSUFFICIENT VOTES FOR SUCH APPROVAL AT THE
TIME OF THE SPECIAL MEETING.
RISK
FACTORS
You
should carefully consider the risks described below, together with all the other
information included in this Proxy Statement, before making a decision about
voting on the proposals submitted for your consideration.
Risks
Related to Proposals No. 1, No. 2 and No. 3
Our stockholders
could approve the
Asset Sale and
the Plan of Liquidation, but not approve the Liquidating Trust Agreement,
approve the
Asset Sale but
vote against the Plan of Liquidation,
or disapprove of
the Asset Sale but approve the Plan of Liquidation.
If either
the Asset Sale or the Plan of Liquidation is not approved by our stockholders,
we will not present Proposal No. 3 (Approval of the Liquidating Trust Agreement)
to our stockholders. If our stockholders approve and we complete the Asset Sale,
we will have minimal operations and assets with which to generate revenues and
cash, and expect to retain only those employees required to wind down our
business. We do not intend to invest in another operating business. If the Plan
of Liquidation is not approved, we will proceed with the Asset Sale, pay all of
our liabilities and obligations that are not assumed by FUSA to the extent we
have available cash and assets to do so, and use some of the cash received from
the Asset Sale to pay ongoing operating expenses. Our Board of Directors
believes that if all three proposals are not approved, including the Plan of
Liquidation Proposal, we will be forced to discontinue our operations
and proceed with a liquidation in bankruptcy and that there will not be any
funds or other assets available for distribution to our
stockholders.
If our stockholders approve the Plan of
Liquidation, but the Asset Sale is not approved or is not consummated, we will
not present the Liquidating Trust Agreement Proposal for a vote of our
stockholders at the Special Meeting and will move forward with our
dissolution. If this occurs, our Board of Directors will be authorized to
sell and liquidate our Assets, on such terms and to such parties as the Board of
Directors determines in its sole discretion.
Although
the authority referred to herein will give our Board of Directors authorization
to sell our Assets to one or more third parties, including FUSA, w
e do
not have any agreement or understanding with any party, including FUSA, with
respect to the sale of any or all of our assets if the Asset Sale is not
approved or if the Asset Sale is not consummated.
Therefore,
we have no current intention to sell the Assets to any third party, including
FUSA, except pursuant to the Asset Purchase Agreement, if approved by our
stockholders.
After an extensive review of a range of strategic
alternatives for the Company, including continuing the Company as an independent
entity, exploring potential mergers and acquisitions transactions and any
possible financing arrangements and exerting considerable efforts to maximize
the value of our assets, the Board of Directors believes that the Asset Purchase
Agreement presents the best offer for the sale of the Assets and that the
consummation of the Asset Sale and the liquidation of the Company pursuant to
the Plan of Liquidation and the Liquidating Trust Agreement would maximize
stockholder value by increasing the possibility that we will be able to
distribute liquidation proceeds. Our Board of Directors believes that if all
three proposals are not approved, including the Asset Sale Proposal, we will be
forced to discontinue our operations and proceed with a liquidation in
bankruptcy and that there will not be any funds or other assets available for
distribution to our stockholders.
If the Asset Sale is not consummated
and the Plan of Liquidation is not approved, whether due to lack of stockholder
approval or other reasons, we will not present the Liquidating Trust Agreement
Proposal for a vote of our stockholders at the Special Meeting and our Board of
Directors believes that we will then be forced to discontinue operations and
proceed with a liquidation in bankruptcy, such that there will not be any funds
or other assets available for a distribution to our stockholders.
If the Asset Sale and the Plan of
Liquidation are approved, but the Liquidating Trust Agreement Proposal is not
approved, we will move forward with the consummation of the Asset Sale and will
use the cash received from the Asset Sale and the Remaining Assets to pay off
our liabilities and ongoing operating expenses, to the extent we have available
cash and assets to do so. Our Board of Directors believes that if all
three proposals are not approved, including the Liquidating Trust
Agreement Proposal, we will be forced to discontinue operations
and proceed with a liquidation in bankruptcy and that there will not be any
funds or other assets available for distribution to our
stockholders.
IN ANY EVENT,
NONE OF THE CASH PROCEEDS FROM THE
ASSET SALE WILL BE DISTRIBUTED TO OUR STOCKHOLDERS IN LIGHT OF THE FACT THAT
CURRENTLY OUR TOTAL LIABILITES AND OBLIGATIONS SIGNIFICANTLY EXCEED OUR TOTAL
ASSETS.
However, our Board of Directors believes that the approval
of all three proposals, increases the possibility that we will be able to
distribute some liquidation proceeds from the Liquidating Trust to our
stockholders, including our share of any Royalty Payments and our rights to the
Option.
Even
if the Asset Sale is consummated, we cannot be certain of the amount, if any, of
the distribution to our stockholders under the Plan of Liquidation.
Liquidation
and dissolution may not create value to our stockholders or result in any
remaining capital for distribution to our stockholders. However, these
distributions are dependent upon the consummation of the Asset Sale, as well as
proceeding with our anticipated Plan of Liquidation and establishment of the
Liquidating Trust, and we cannot be certain of the precise amount available for
distribution to our stockholders pursuant to the Plan of Liquidation and
the Liquidating Trust. In addition, the amount available for distribution to our
stockholders will primarily depend on how much proceeds we generate from the
value of our share of the Royalty Payments and our rights to the Option. As of
the date of this Proxy Statement, we are unable to determine the value of
the Royalty Payments or the Option.
Claims,
liabilities and expenses from operations (including, but not limited to,
operating costs such as salaries, directors’ fees, directors’ and officers’
insurance, payroll and local taxes, legal and accounting fees and miscellaneous
office expenses) will continue to be incurred by us as we seek to close the
Asset Sale and liquidate our Remaining Assets and provide for our liabilities in
dissolution by transferring our Remaining Assets and all of our Remaining
Liabilities to the Liquidating Trust. Satisfaction of these claims, liabilities
and expenses from the Liquidating Trust will reduce the amount of assets
available for ultimate distribution to our stockholders, if any. If available
cash and amounts received on the sale of our assets are not adequate to provide
for our obligations, liabilities, expenses and claims, the Trustee may not be
able to distribute meaningful cash, or any cash at all, to our
stockholders.
NONE OF THE CASH PROCEEDS FROM THE
ASSET SALE WILL BE DISTRIBUTED TO OUR STOCKHOLDERS IN LIGHT OF THE FACT THAT
CURRENTLY OUR TOTAL LIABILITES AND OBLIGATIONS SIGNIFICANTLY EXCEED OUR TOTAL
ASSETS.
However, our Board of Directors believes that the approval of all
three proposals, increases the possibility that we will be able to distribute
some liquidation proceeds from the Liquidating Trust to our stockholders,
including our share of any Royalty Payments and our rights to the Option.
Risks
Related to the Asset Sale
Because
of the closing conditions in the Asset Purchase Agreement and the possibility
that FUSA may terminate the Asset Purchase Agreement in specific instances, we
cannot be sure when, or even if, the Asset Sale will be completed.
The
closing of the Asset Sale is subject to the satisfaction of a number of closing
conditions, including, among others, the requirement that each of the Sellers
obtain approval of the Asset Sale by their respective stockholder. In addition,
FUSA may terminate the Asset Purchase Agreement if the closing of the Asset Sale
does not occur prior to March 31, 2010. We cannot guarantee that we will be able
to meet the closing conditions of the Asset Purchase Agreement. If we are unable
to meet the closing conditions, FUSA will not be obligated to purchase the
Assets. We also cannot be sure that other circumstances, for example, a Material
Adverse Effect, will not arise that would allow FUSA to terminate the Asset
Purchase Agreement prior to closing of the Asset Sale. If the Asset Sale is not
approved or does not close, our Board of Directors will be forced to evaluate
other alternatives, which are expected to be far less favorable to us and our
stockholders than the Asset Sale.
Failure
to complete the Asset Sale may seriously affect our liquidity and ability to
continue as a going concern.
The Board
of Directors approved the Asset Sale and the Plan of Liquidation in part because
we believe that our cash flows and assets will be sufficient only over the next
30 days to cover our operating expenses. We will attempt, if possible, to
further reduce our monthly cash burn rate and take certain other additional
measures, including deferral of payments to certain parties, in order to provide
an additional 30 days for us to hold the Special Meeting to give the opportunity
to our stockholders to vote on the Asset Sale and the Plan of
Liquidation.
If we do
not complete the Asset Sale for whatever reason, our Board of Directors believes
that we will be unable to obtain any form of financing to continue funding our
operations. In the absence of the approval of the Asset Sale, we will not be
able to meet our operating expenses and will be forced to terminate operations
and/or seek protection under applicable United States bankruptcy laws, in either
case, there will not be funds available for distribution to our
stockholders.
We
will incur significant costs in connection with the Asset Sale, whether or not
it is completed.
We
currently expect to incur approximately between $600,000 and up to $1,000,000 of
costs related to the Asset Sale depending on our ability to negotiate with our
service providers to reduce such expense amounts. These expenses include, but
are not limited to, financial advisory, legal and accounting fees and expenses,
employee expenses, filing fees, printing expenses, proxy solicitation and other
related charges. We may also incur additional unanticipated expenses in
connection with the Asset Sale. Approximately $150,000 of the costs related to
the Asset Sale, such as legal fees, will be incurred regardless of whether the
Asset Sale is completed. These payments will additionally decrease the remaining
cash available for eventual distribution from the Liquidating Trust to our
stockholders, if any, in connection with our dissolution and liquidation. If the
Asset Sale is not consummated, we will be forced to cease our operations and/or
resort to, bankruptcy protection and, in either case, there will not be funds
available for distribution to our stockholders.
Our
executive officers and/or directors have interests in the Asset Sale, the Plan
of Liquidation and the Liquidating Trust Agreement other than, or in addition
to, their interests as our stockholders generally.
Certain
of our executive officers have employment, change in control and other
agreements that provide for severance payments full vesting of all unvested
equity awards if any such executive officer's employment is terminated for any
reason in connection with a change in control or if we terminate their
employment at any time without cause or if they are constructively terminated
and/or certain other payments in the event we successfully consummate the Asset
Sale.
Certain
of our executive officers have employment, change in control and other
agreements that provide for severance payments full vesting of all unvested
equity awards if any such executive officer's employment is terminated for any
reason in connection with a change in control or if we terminate their
employment at any time without cause or if they are constructively terminated
and/or certain other payments in the event we successfully consummate the Asset
Sale.
The
consummation of the Asset Sale will constitute a change of control under these
agreements and will trigger certain severance payments to our executive
officers. The employment of each of these executive officers will be terminated
by us either prior to or during the wind down of our activities. In either case,
such terminations will be deemed terminations in connection with a change in
control and/or require such other severance payments. The change of control,
severance payments and/or certain other payments that will be due by the Company
to our executive officers will be in the amount up to $1,924,300, if our
executive officers are terminated as a result of the Asset Sale or if the
Asset Sale is successfully consummated, assuming no excise tax gross-up payments
are due. In particular, Kelly J. McCrann, our Chairman and Chief Executive
Officer, Robert Weinstein, our Chief Financial Officer and Secretary, and Dr.
Victor Gura, our Chief Medical and Scientific Officer, may be entitled
to severance payments in the amount up to $325,000, $286,500 and
$1,312,800, respectively, under their employment agreements. In addition, if the
Asset Sale is consummated, Mr. McCrann will be entitled to a payment of $432,500
as a sale transaction success fee. Furthermore, in connection with certain
restructuring efforts previously undertaken by us to reduce our
operating expenses, Messrs. McCrann and Weinstein and Dr. Gura, may be
entitled to receive deferred compensation in the amount of approximately
$95,563, $83,531 and $82,050, respectively, our other employees may be
entitled to receive deferred compensation, in the aggregate, of approximately
$60,000, and a member of our Board of Directors may be entitled to receive
deferred compensation in the amount of approximately $70,000. Additionally, as
of February 15, 2010, we estimate that certain of our employees would be
entitled to receive accrued vacation pay, in the aggregate, of approximately
$150,000.
In
addition, Mr. McCrann (or an entity affiliated with Mr. McCrann) will also serve
as the Trustee of the Liquidating Trust and under the terms of the Liquidating
Trust Agreement, substantially in the form attached to this Proxy Statement as
Annex C, will receive the following compensation for his services as the
Trustee: 10% of the aggregate Royalty Payments received by the Liquidating Trust
up to $10 million and 5% of any Royalty Payments in excess thereof. Mr. McCrann
will also be entitled to reimbursement of his expenses incurred as Trustee on
behalf of the Liquidating Trust.
As of
December 31, 2009, there were 1.16 million shares of common stock underlying
unvested stock options held by our executive officers that will vest as a result
of the Asset Sale. The weighted-average exercise price of those stock options is
$3.25 per share. None of these stock options have an exercise price at or below
$0.07, the last reported sale price of our common stock as quoted on the Pink
Sheets Electronic OTC Market (the “Pink Sheets”) on the Record Date. Since we do
not anticipate that any substantial amount of our share of the Cash Purchase
Price will be available for distribution to our stockholders, we anticipate that
none of these stock options will be exercised. In addition, as of the Record
Date, our executive officers and/or directors also held 6,352,596 shares of
common stock that will be entitled to the same per share liquidating
distributions from the Liquidating Trust, if any, that will be made to the other
shares of common stock outstanding. See “Proposal No. 1: Approval of the Asset
Sale — Interests of Our Executive Officers and/or Directors in the
Asset Sale, the Plan of Liquidation and the Liquidating Trust
Agreement.”
Additionally,
on the Closing Date a joint venture to be formed by FUSA and Dr. Gura may
enter into an employment agreement with Dr. Gura, pursuant to which Dr. Gura
would assist FUSA in the further development of the Assets for a certain period
after Closing Date, at a set salary to be determined by FUSA and Dr. Gura. In
addition, Dr. Gura may receive an ownership stake in such joint venture. On the
Closing Date, FUSA will not enter into any other employment or consulting
arrangements with any of our executive officers or employees. Other than
described herein, we do not know whether FUSA will enter into any employee or
consulting arrangements thereafter with any of our executive officers or
employees and FUSA has not notified us of any intention to do so to
date.
Risks
Related to the Plan of Liquidation and the Liquidating Trust
Agreement
If
we receive less from the Asset Sale than we expect or if we must pay more for
our liabilities and operating expenses than we anticipate, the rights and/or
assets we transfer to the Liquidating Trust and in turn, the Trustee may not be
able to distribute meaningful cash, or any cash at all, to our
stockholders.
The
amount of cash ultimately distributed to stockholders from the Liquidating Trust
depends on the value of the consideration we obtain from the sale of our assets
and the amount of our liabilities during the liquidation process. We have
attempted to estimate such revenues, liabilities and costs. However, those
estimates may be inaccurate. Factors that could impact our estimates include,
but are not limited to, the following:
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If
any of the estimates regarding our Plan of Liquidation, including the
recovery of our estimated asset amounts (including, without limitation,
our marketable securities), and the settlement of our outstanding
obligations during the liquidation process, are inaccurate, the amount we
transfer to the Liquidating Trust and that the Trustee may ultimate
distribute to our stockholders may be reduced. For instance, if claims are
asserted against us and are successful, the Trustee will have to pay these
claims before making distributions, if any, to our stockholders from
the Liquidating Trust;
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We
have made certain estimates regarding the cost of personnel required and
other operating costs (including legal and consulting fees) necessary to
liquidate and dissolve the Company, many of which could vary significantly
and are dependent on the timing of closing of the Asset Sale and the sale
of our other remaining assets. If the timing differs from our plans, then
we may incur additional costs above our current estimates and may transfer
fewer assets to the Liquidating Trust and reduce the cash that may be
distributed by the Trustee to our stockholders, if any;
and
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We
are required to obtain certain third party consents and approvals as a
condition to closing the Asset Sale. Currently, we do not expect that the
cost of these consents and approvals will be significant. However, if our
expectation is incorrect, the amount we distribute to our common
stockholders may be reduced.
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If
our stockholders do not approve our voluntary dissolution and liquidation and
the Liquidating Trust Agreement, we will not have the resources to continue
operations without seeking additional capital, which we believe would be very
difficult to obtain, and our resources may diminish completely.
We have
very limited cash resources and these resources continue to diminish. As of
December 31, 2009, we had cash and cash equivalents and marketable securities of
approximately $0.2 million, excluding restricted cash. We project to expend cash
at a rate below $0.1 million per month for the remainder of the first quarter of
the 2010 fiscal year based upon the recent restructuring effected by us going
forward and until our cash resources run out.
We expect
to continue to incur negative cash flows and net losses going forward, and
absent an unforeseen source of additional capital, we expect that our cash
resources will run out by approximately March 31, 2010. We will attempt, if
possible, to further reduce our monthly cash burn rate and take certain other
additional measures, including deferral of payments to certain parties, in order
to provide an additional 30 days for us to hold the Special Meeting to give the
opportunity to our stockholders to vote on the Asset Sale, the Plan of
Liquidation and the Liquidating Trust Agreement. Considering our recent
financial performance, it is unlikely that we would be able to obtain additional
equity or debt financing. Therefore, unless we are able to consummate the Asset
Sale by approximately March 31, 2010, we would completely deplete our already
significantly limited resources and will be forced to discontinue our operations
and/or file for bankruptcy.
In
addition, pursuant to the terms of the Partial Final Award, NQCI was awarded
$1,871,430 in attorneys’ fees and costs consistent with the arbitrator’s order
issued on August 13, 2008 related to the same. Of the portion of the Cash
Purchase Price being paid to NQCI, $1,871,430 is being paid to satisfy our
liability to NQCI for NQCI’s attorneys’ fees and costs awarded by the arbitrator
pursuant to the terms of the Partial Final Award. Furthermore, pursuant to the
terms of the Stipulation, NQCI agreed not to attempt to execute on or file
any motion, petition or application or commence any proceeding seeking the
collection of such attorneys’ fees (the “Collection Action”), which was intended
to allow the parties a sufficient period within which to execute the Asset
Purchase Agreement. In addition, in accordance with the terms of the Memorandum
and as a result of the execution of the Asset Purchase Agreement, NQCI agreed
not to proceed with the Collection Action until April 1, 2010 (the “Extension
Date”) and the Extension Date shall automatically be further extended for a
period of 60 days for each amendment to this Proxy Statement that we will file
with the SEC in response to comments made by the SEC.
If we are
unable to otherwise comply with the deadlines and requirements summarized above,
under the terms of the Stipulation, NQCI will have the right to execute on or
file any motion, petition or application or commence any proceeding seeking the
collection of the sum of $1,871,430 in attorneys’ fees and costs that have been
awarded in NQCI’s favor under the terms of the Partial Final Award, which may
impact our ability to consummate the Asset Sale, if such transaction remains
available to us at that time, or any other transaction, and would have a
material adverse effect on our business and results of operations and will cause
us to cease our operations and/or file for bankruptcy.
Distributions
to our stockholders could be delayed.
All or a
portion of the distribution(s) from the Liquidating Trust to our stockholders
could be delayed, depending on many factors, including if a creditor seeks an
injunction against the making of distributions to our stockholders on the ground
that the amounts to be distributed were needed to provide for the payment of our
liabilities and expenses. Any action of this type could delay or substantially
diminish the amount available for distribution to our stockholders. As a
result of these and other factors, the Trustee may need to hold back, for
transfer to the Liquidating Trust at a later date, if at all, some or all of the
estimated distributions that we expect to be made to our
stockholders.
Your
ability to buy or sell shares of our common stock will be impaired when our
stock no longer is traded on the Pink Sheets. You may not buy or sell shares
after the Plan of Liquidation is implemented when we close our stock transfer
books.
Upon
dissolution, our stock will no longer trade on the Pink Sheets. When our common
stock ceases to trade on the Pink Sheets, your ability to obtain price
quotations and buy and sell shares will be materially impaired. In addition, we
will close our stock transfer books after the filing of the Certificate of
Dissolution in Delaware, after which you will no longer be able to transfer
shares.
Each
stockholder may be liable to our creditors for an amount up to the amount
distributed to such stockholder by us if our reserves for payments to creditors
are inadequate.
Once we
file the certificate of dissolution with the Secretary of State of Delaware, the
legal effect will be to dissolve the Company. In the event we fail to create an
adequate contingency reserve for payment of our expenses and liabilities, each
of our stockholders could be held liable for payment to our creditors up to the
amount distributed to such stockholder in the liquidation. In such event, a
stockholder could be required to return up to all amounts received as
distributions pursuant to the Plan of Liquidation and ultimately could receive
nothing under the Plan of Liquidation. Moreover, even though a stockholder has
paid taxes on amounts previously received, a repayment of all or a portion of
such amount will not result in a recalculation of the gain or loss on the
liquidation. Instead, a stockholder’s repayment will generally be deductible as
a capital loss in the year in which the contingent liability is paid, and such
capital loss cannot be carried back to offset any liquidation gain recognized
earlier. See “Material U.S. Federal Income Tax Consequences of the Plan of
Liquidation or the Receipt of Non-liquidating Distributions.” We cannot assure
you that the contingency reserve that we will establish will be adequate to
cover all expenses and liabilities.
Recordation
of transfers of our common stock on our stock transfer books will be restricted
as of the Final Record Date, and thereafter it generally will not be possible
for stockholders to change record ownership of our stock.
We intend
to discontinue recording transfers of our common stock at the close of business
on the Final Record Date. Thereafter, certificates representing our common stock
will be deemed cancelled and will not be assignable or transferable on the books
of the transfer agent except by will, intestate succession or operation of law,
and will no longer be traded in the open market. After the Final Record Date, we
intend to make liquidation distributions pursuant to the Plan of Liquidation and
deregister our common stock with the SEC thereby discontinuing our reporting
obligations under the Exchange Act. The liquidation distributions under the Plan
of Liquidation shall be in complete cancellation of all of the outstanding
shares of our common stock. From and after the Final Record Date, and subject to
applicable law, our common stock will be treated as no longer being outstanding
and each holder of our common stock shall cease to have any rights in
respect thereof, except the right to receive distributions pursuant to and in
accordance with the Plan of Liquidation. The proportionate interests of all of
our stockholders will be fixed in our books on the basis of their respective
stock holdings at the close of business on the Final Record Date. Further, after
the Final Record Date, any transfers to the Liquidating Trust that we make for
eventual distributions to the beneficiaries of the trust will be made solely to
the stockholders of record at the close of business on the Final Record Date
(except as may be necessary to reflect subsequent transfers recorded on our
books as a result of any assignments by will, intestate succession or operation
of law).
We
may be required to continue to incur the expenses of complying with public
company reporting requirements.
We have
an obligation to continue to comply with the applicable reporting requirements
of the Exchange Act even though compliance with such reporting requirements is
economically substantially burdensome. In order to curtail expenses, we intend
to, after filing our certificate of dissolution, to rely on the positions taken
by the staff of the SEC in a series of no-action letters issued to third parties
not related to us allowing registrants whose securities are registered under
Section 12(g) of the Exchange Act and who are otherwise not eligible to
deregister under applicable rules of the Exchange Act, to deregister from their
Section 13(a) reporting obligations. In order to be able to take advantage of
such no-action positions taking by the staff of the SEC, we plan to establish
the Liquidating Trust which will exist only for the limited purpose of effecting
liquidation of all of our assets remaining after the Asset Sale and liabilities
within the 3-year period from the date of the transfer of the Remaining Assets
to the Liquidating Trust, subject to an extension if the Trustee believes that
an extension is in the best interests of the beneficiaries of the Liquidating
Trust and the Liquidating Trust has applied for and received no-action relief
from the SEC relating to an extension of the term. In connection therewith, the
terms of the Liquidating Trust will restrict the ability of the
beneficiaries of the trust to transfer their interests in the Liquidating Trust.
We anticipate that we would continue to file Current Reports on Form 8-K to
disclose material events relating to our dissolution and liquidation and to
distribute to holders of beneficial interests of the Liquidating Trust annual
reports containing unaudited financial statements of the Liquidating Trust.
We
will file such reports under the cover of Form 10-K and each Form 10-K will
include as an exhibit a customary certification of the Trustee of the
Liquidating Trust similar in form to those described in such no-action
letters.
Risks
Related to Our Continuing Business Operations
If our
stockholders do not approve all three proposals, the Asset Sale, the Plan of
Liquidation and the Liquidating Trust Agreement, and if we are unable to
consummate the Asset Sale, our Board of Directors believes that we will be
forced to discontinue operations and file for bankruptcy. Any such alternative
we select will have anticipated and unanticipated negative consequences. If the
Asset Sale is consummated, we will cease to be an operating entity, and in the
event the Asset Sale is not consummated for whatever reason, we will be required
to discontinue operations and consider a liquidation in bankruptcy. Therefore,
as a result of us ceasing to be an operating or an existing entity, the risks
related to our continuing business operations would likely no longer be
applicable to us. However, for a discussion of such risks please see our Form
10-K and our Quarterly Reports.
Risks
Related to Our Common Stock
Our
common stock is subject to the “penny stock” rules of the SEC, which makes
transactions in our common stock cumbersome and may reduce the value of an
investment in our stock.
The SEC
has adopted Rule 3a51-1 under the Exchange Act which establishes the definition
of a “penny stock,” for the purposes relevant to us, as any equity security that
has a market price of less than $5.00 per share or with an exercise price of
less than $5.00 per share, subject to certain exceptions. For any transaction
involving a penny stock, unless exempt, Rule 15g-9 requires:
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·
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that a broker or dealer approve a person's account for
transactions in penny stocks; and
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·
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the broker or dealer receive from
the investor a written agreement to
the transaction, setting forth the identity and quantity of
the penny stock to be purchased.
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In order
to approve a person's account for transactions in
penny stocks, the broker or dealer must:
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·
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obtain financial information and investment experience
objectives of the person; and
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stocks
are
suitable for that person and the person has
sufficient knowledge and experience in financial matters to be
capable of evaluating the risks of transactions in penny
stocks.
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The
broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the SEC relating to
the penny stock market, which, in highlight form:
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sets forth the
basis on which the broker or dealer made the suitability
determination; and
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that
the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
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Generally,
brokers may be less willing to execute transactions in securities subject to the
“penny stock” rules. This may make it more difficult for our investors to
dispose of our common stock and cause a decline in the market value of our
stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
to investors disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks.
Our
stock price is volatile and accordingly, you could lose all or part of the value
of your shares of our common stock.
Our
common stock is traded on the Pink Sheets and trading volume is often limited
and sporadic. As a result, the trading price of our common stock on Pink Sheets
is not necessarily a reliable indicator of our fair market value. The market
price of our common stock has historically been highly volatile and may continue
to fluctuate significantly due to a number of factors, some of which may be
beyond our control, including:
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the
number of shares available for sale in the
market;
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sales
of our common stock by stockholders because our business profile does not
fit their investment objectives;
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actual
or anticipated fluctuations in our operating
results;
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developments
relating to our products and related proprietary
rights;
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actual
or anticipated announcements of new data and announcements relating to our
operating performance;
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government
regulations and changes thereto and regulatory investigations or
determinations;
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announcements
of our competitors or their success in the biotechnology and healthcare
equipment business, including those in the dialysis
industry;
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recruitment
or departures of key personnel;
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the
gain or loss of significant
customers;
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the
operating and stock price performance of other comparable
companies;
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developments
and publicity regarding our industry;
and
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general
economic and market conditions in our industry and the economy as a
whole.
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In
addition, the stock market in general has experienced volatility that has often
been unrelated to the operating performance of individual companies. These broad
market fluctuations may adversely affect the trading price of our common stock,
regardless of our actual performance, and could enhance the effect of any
fluctuations that do relate to our operating results.
Over
41% 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 our stockholders.
As of
Record Date, Consolidated National, LLC, a limited liability company, or “CNL”,
of which Terren S. Peizer, a member of our Board of Directors, is the sole
managing member and beneficial owner, directly owned approximately 6.23 million
shares, representing approximately 41.4% of our outstanding common stock. As a
result, CNL and Mr. Peizer presently have and are expected to continue to have
the ability to determine the outcome of issues submitted to our stockholders.
The interests of CNL or Mr. Peizer, acting in his capacity as a stockholder, may
not always coincide with our interests or the interests of our other
stockholders and they may act in a manner that advances their best interests and
not necessarily those of our stockholders. The ownership position of CNL
and Mr. Peizer may make it difficult for our stockholders to remove our
management from office should they choose to do so. It could also deter
unsolicited takeovers, including transactions in which our stockholders might
otherwise receive a premium for their shares over then current market
prices.
Sales
of common stock by our large stockholders, or the perception that such sales may
occur, could depress our stock price.
The
market price of our common stock could decline as a result of sales by, or the
perceived possibility of sales by, our large stockholders. Most of our
outstanding shares were registered on a Form S-4 registration statement in
connection with our merger with pre-merger Xcorporeal, and are eligible for
public resale. As of Record Date, approximately 41.4% of our outstanding common
stock was held by our officers, directors and affiliates and may be sold
pursuant to an effective registration statement or in accordance with Rule 144
promulgated under the Securities Act or pursuant to other exempt transactions.
Future sales of our common stock by our significant stockholders, including NQCI
if it acquires these shares, or the perception that such sales may occur, could
depress the market price of our common stock.
Investors’
interests in our company will be diluted and investors may suffer dilution in
their net book value per share if we issue additional shares of stock or raise
funds through the sale of equity securities.
In the
event that we are required to issue any additional shares of stock or enter into
private placements to raise financing through the sale of equity securities,
investors’ interests in our company will be diluted and investors may suffer
dilution in their net book value per share depending on the price at which such
securities are sold. If we issue any such additional shares, such issuances also
will cause a reduction in the proportionate ownership and voting power of all of
our other stockholders. Further, any such issuance may result in a change in our
control of our company.
We
have never paid cash dividends and do not intend to do so.
We have
never declared or paid cash dividends on our common stock. We currently plan to
retain any earnings to finance the growth of our business rather than to pay
cash dividends. Payments of any cash dividends in the future will depend on our
financial condition, results of operations and capital requirements, as well as
other factors deemed relevant by our Board of Directors.
We
became a publicly traded company through a merger with a public shell company,
and we could be liable for unanticipated liabilities of our predecessor
entity.
We became
a publicly traded company through a merger between Xcorporeal, Inc. and CT
Holdings Enterprises, Inc., a publicly traded “shell company” that had
previously provided management expertise including consulting on operations,
marketing and strategic planning and a single source of capital to early stage
technology companies. Although we believe the shell company had
substantially no assets and liabilities as of the merger, we may be subject
to claims related to the historical business of the shell, as well as costs and
expenses related to the merger.
IMPORTANT
INFORMATION CONCERNING US
Description
of the Business
For a description of our business, see
our Form 10-K delivered with this Proxy Statement as Annex E and our Form 10-Q
for the fiscal quarter ended September 30, 2009 delivered with this Proxy
Statement as Annex F (the “Form 10-Q”). The Form 10-K and Form 10-Q
do not include the exhibits originally filed with such reports.
Description
of Property
For a description of our properties see
the Form 10-K and Form 10-Q.
Legal
Proceedings
For a description of our legal
proceedings see the Form 10-K and Form 10-Q.
Financial
Statements
Our financial statements are included
in the Form 10-K and Form 10-Q.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Management's discussion and analysis of
financial condition and results of operations is included in the Form 10-K
and Form 10-Q.
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
There were no changes in or
disagreements with accountants on matters of accounting principles or practices
or financial disclosures for the periods covered by the Form 10-K and Form
10-Q.
Quantitative
and Qualitative Disclosures about Market Risk
Not applicable to smaller reporting
companies.
Selected
Consolidated Financial Data
Not applicable to smaller reporting
companies.
Market
Information
Our
common stock is traded on the Pink Sheets under the symbol “XCRP.PK”. From
December 7, 2007 and until September 3, 2009, our common stock was trading on
the NYSE Amex (formerly American Stock Exchange) under the symbol “XCR” and
prior thereto, our common stock was quoted on the Over-The-Counter Bulletin
Board under the symbol “XCPL”. Immediately prior to our merger with
the pre-merger Xcorporeal on October 12, 2007, a one-for-8.27 reverse split of
our common stock was executed. Historical stock prices prior to October 12,
2007 have been adjusted for this reverse stock split.
Following is a list by fiscal quarters
of the split-adjusted closing sales prices of our common stock. Such prices
represent inter-dealer quotations, do not represent actual transactions, and do
not include retail mark-ups, markdowns or commissions. Such prices were
determined from information provided by a majority of the market makers for our
common stock.
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High
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Low
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Fiscal
Year Ending December 31, 2009
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4th
Quarter
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$
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0.15
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$
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0.04
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3rd
Quarter
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0.25
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0.11
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2nd
Quarter
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0.38
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0.16
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1st
Quarter
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0.60
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0.12
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Fiscal
Year Ended December 31, 2008
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4th
Quarter
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$
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0.50
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$
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0.16
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3rd
Quarter
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1.44
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0.50
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2nd
Quarter
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4.21
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1.00
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1ST
Quarter
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4.94
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2.34
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Fiscal
Year Ended December 31, 2007
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4th
Quarter
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$
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14.06
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$
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4.27
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3rd
Quarter
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17.45
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3.39
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2nd
Quarter
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6.62
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4.30
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1ST
Quarter
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13.89
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2.40
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This
table reflects the range of high and low bid prices for our common stock during
the indicated periods. The quotations for our common stock since September 4,
2009 as published by the Pink Sheets merely reflect the prices at which
transactions were proposed, and do not necessarily represent actual
transactions. Prices do not include retail markup, markdown or
commissions.
As of the
Record Date, there were approximately 755 record holders and 3,655 beneficial
owners of our common stock.
Dividend
Policy
We did not pay any cash dividends in
2009, 2008 or 2007 and we do not intend to pay cash dividends in the foreseeable
future. It is our present intention to utilize all available funds to
consummate the Asset Sale and transfer all of Remaining Asset and Remaining
Liabilities to the Liquidating Trust. If we are successful in doing so, our
corporate existence will cease on the date the we file the Certificate of
Dissolution, except for certain liquidation and dissolution purposes as required
under the DGCL.
BENEFICIAL
OWNERSHIP
Security Ownership of
Certain
Beneficial
Owners and Management
The
following table sets forth certain information regarding the shares of common
stock beneficially owned as of Record Date by: (i) each person known to us
to be the beneficial owner of more than 5% of our common stock, (ii) each
of our directors, (iii) our chief executive officer and the two most highly
compensated executive officers other than the chief executive officer, who were
serving as executive officers at the end of our last fiscal year (collectively,
the “named executive officers”) and other executive officers named in the
Summary Compensation Table set forth in the “Executive Compensation” section of
our Form 10-K, and (iv) all such directors and executive officers as a
group.
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Name and Address
of Beneficial Owner (1)
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Title of Class of Shares
Owned
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Amount and Nature of
Beneficial Ownership
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Percent of
Class
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Terren
S. Peizer (2)
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common
stock
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6,652,596
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42.7
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%
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Jay
A. Wolf (3)
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common
stock
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60,000
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*
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Victor
Gura (4)
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common
stock
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375,000
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2.4
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%
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Kelly
J. McCrann (5)
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common
stock
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315,000
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2.0
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%
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Robert
Weinstein (6)
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common
stock
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170,000
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1.1
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%
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Hans-Dietrich
Polaschegg
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common
stock
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—
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—
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All
current directors and named executive officers as a group (6
persons)
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common
stock
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7,572,596
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46.2
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%
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* Represents
beneficial ownership of less than 1%.
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(1)
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Unless
otherwise indicated, the address of all of the above named persons is c/o
Xcorporeal, Inc., 80 Empire Drive, Lake Forest, CA
92630.
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(2)
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Includes
6,232,596 shares held of record by Consolidated National, LLC, of which
Mr. Peizer is the sole managing member and beneficial owner. As of the
Record Date, shares of our common stock underlying 420,000 stock options
granted to Mr. Peizer’s were vested and exercisable within 60 days of the
Record Date.
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(3)
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Represents
shares of our common stock underlying stock options issued to Mr. Wolf’s
which were vested and exercisable within 60 days of the Record
Date.
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(4)
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Represents
shares of our common stock underlying stock option granted to Dr. Gura
which were vested and exercisable within 60 days of the Record
Date.
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(5)
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Includes
shares of our common stock underlying 215,000 stock options granted to Mr.
McCrann which were vested and exercisable within 60 days of the Record
Date.
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(6)
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Includes
shares of our common stock underlying 150,000 stock options granted to Mr.
Weinstein which were vested and exercisable within 60 days of the Record
Date.
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Unless
otherwise indicated, we believe that all persons named in the above table have
sole voting and investment power with respect to all shares of our common stock
beneficially owned by them. A person is deemed to be the beneficial owner of
securities which may be acquired by such person within 60 days from the
date on which beneficial ownership is to be determined, upon the exercise of
options, warrants or convertible securities. Each beneficial owner’s percentage
ownership is determined by assuming that options, warrants and convertible
securities that are held by such person (but not those held by any other person)
and which are exercisable, convertible or exchangeable within such 60 day
period, have been so exercised, converted or exchanged.
STOCKHOLDER
PROPOSALS
We do not
intend to hold an annual meeting of stockholders if the Asset Sale is completed
and we file our Certificate of Dissolution with the Secretary of State of the
State of Delaware. If, however, we do hold an annual meeting of stockholders and
the date of such meeting is changed by more than 30 days from our 2008 annual
meeting, proposals intended to be presented at that meeting would be required to
be received by us at our corporate headquarters, located at Xcorporeal, Inc.,
Investor Relations Department, 80 Empire Drive, Lake Forest, CA 92630 or (949)
600-4640, no later than the close of business on the 10
th
day
following the day on which the date of the annual meeting was publicly
announced. To be considered for presentation at our next annual meeting of
stockholders, if held, but not for inclusion in our proxy statement and form of
proxy for that meeting, under our Bylaws no business may be brought before an
annual meeting of stockholders unless it is specified in the notice of the
annual meeting of stockholders or is otherwise brought before the annual meeting
of stockholders by or at the direction of our Board of Directors or by a
stockholder entitled to vote who has delivered written notice to our
corporate Secretary (containing certain information specified in our Bylaws
about the stockholder and the proposed action) not later than 10 days following
the day on which public announcement of the date of such meeting is first made
by us. In addition, any stockholder who wishes to submit a nomination to our
Board of Directors must deliver written notice of the nomination within this
time period and comply with the information requirements in our bylaws relating
to stockholder nominations. These requirements are separate from and in addition
to the SEC's requirements that a stockholder must meet in order to have a
stockholder proposal included in our proxy statement.
HOUSEHOLDING
Unless we
have received contrary instructions, we may send a single copy of this Proxy
Statement to any household at which two or more of our stockholders reside if we
believe the stockholders are members of the same family. Each stockholder in the
household will continue to receive a separate proxy card. This process,
known as “householding,” reduces the volume of duplicate information received at
your household and helps to reduce our expenses.
If you
would like to receive your own proxy, follow the instructions described below.
Similarly, if you share an address with another stockholder and together both of
you would like to receive only a single proxy, follow these instructions: if
your shares are registered in your own name, please contact our transfer agent,
Computershare Inc. or if a bank, broker or other nominee holds your shares,
please contact your bank, broker or other nominee directly.
WHERE
YOU CAN FIND MORE INFORMATION
We are
subject to the reporting requirements of the Exchange Act and we file annual,
quarterly and current reports, proxy statements and other information with the
SEC. You may read and copy the reports, proxy statements and other information
that we file at the SEC’s Public Reference Room at 100 F Street NE,
Washington, D.C. 20549 at prescribed rates. Information on the operation of the
Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. Our
filings are also available free of charge at the SEC's website at
http://www.sec.gov.
You
should rely only on the information contained in this Proxy Statement. No one
has been authorized to provide you with information that is different from what
is contained in this Proxy Statement. The date of this Proxy Statement
is January 25, 2010. You should not assume that the information contained
in this Proxy Statement is accurate as of any date other than that date. The
mailing of this Proxy Statement will not create any implication to the
contrary.
WHO
CAN HELP ANSWER YOUR QUESTIONS
If you
have additional questions about the asset sale, you should contact:
Xcorporeal,
Inc.
80 Empire
Drive, Lake Forest, CA 92630
Attention:
Investor Relations Department
Phone
Number: (949) 600-4640
OTHER MATTERS
Our Board
of Directors does not presently intend to bring any other business before the
Special Meeting, and, so far as is known to our Board of Directors, no matters
are to be brought before the Special Meeting except as specified in the Notice
of the Special Meeting. As to any business that may properly come before the
Special Meeting, however, it is intended that proxies, in the form enclosed,
will be voted in respect thereof in accordance with the judgment of the persons
voting such proxies.
IMPORTANT
Whether
or not you plan to attend the Special Meeting, please vote as promptly as
possible. If a quorum is not reached, we will have the added expense of
re-issuing these proxy materials. If you attend the Special Meeting and so
desire, you may withdraw your proxy and vote in person.
Thank
you for acting promptly.
By Order
of the Board of Directors
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/s/
Kelly
McCrann
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Chairman
of the Board and Chief Executive
Officer
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Lake
Forest, California
February
16, 2010
ANNEX
A
ASSET
PURCHASE AGREEMENT
This
Asset Purchase Agreement (the “
Agreement
”) is made and
executed this 14
th
day of
December, 2009 by and among Xcorporeal, Inc., a Delaware corporation (“
Xcorporeal
”), Xcorporeal
Operations, Inc., a Delaware corporation and a wholly owned subsidiary of
Xcorporeal (“
Operations
”), National Quality
Care, Inc., a Delaware corporation (“
NQCI,
” and together with
Xcorporeal, Operations and NQCI, “
Sellers
”) and Fresenius USA,
Inc., a Massachusetts corporation (“
Purchaser
”).
WITNESSETH:
WHEREAS
, Sellers are
development stage companies engaged in the development of technologies related
to portable hemodialysis devices, continuous renal replacement therapy devices,
wearable hemodialysis devices and wearable ultrafiltration devices, including,
the development of the supersorbent renal technology, the “
Business
”);
WHEREAS
, concurrently with the
execution and delivery of this Agreement and as a condition and inducement to
Purchaser’s willingness to enter into this Agreement, each of the stockholders
of the Sellers set forth on
Exhibit A
(the “
Stockholders
”)
is entering into an agreement
with Purchaser in the form attached hereto as
Exhibit B
(the
“Voting Agreements”
) to vote
all of the shares of voting stock of the applicable Seller owned by such
Stockholder according to the terms set forth in the Voting
Agreements;
WHEREAS
, on or about the
Closing Date, Xcorporeal and Operations intend to transfer all or substantially
all of their assets (other than the Purchased Asserts) and liabilities to a
liquidating trust established for the benefit of Xcorporeal’s stockholders (the
“
Xcorporeal Trust
”). In
the event of such transfer, references herein to “Xcorporeal” shall thereafter
be deemed to be references to the “
Xcorporeal
Trust
”;
WHEREAS
, in connection with
the execution and delivery of the letter dated September 21, 2009, among the
Sellers and Purchaser, Purchaser paid to Xcorporeal a non-refundable exclusivity
fee in the amount of $200,000, which will be credited against the Purchase Price
(as defined herein);
WHEREAS
, Sellers desire to
sell to Purchaser the Purchased Assets (as defined below) in consideration for
the payment of the Purchase Price, in accordance with the terms hereinafter set
forth; and
WHEREAS
, Purchaser desires to
acquire the Purchased Assets.
NOW, THEREFORE
, in
consideration of the premises and the mutual covenants and agreements
hereinafter set forth, the parties hereto hereby agree as follows:
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1.1.
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Assets
To Be Sold and Purchased
. Subject to the terms and conditions of
this Agreement, Sellers agree to sell, convey, assign and deliver to
Purchaser, free and clear of all liens and encumbrances, and Purchaser
agrees to purchase from Sellers at the Closing (as hereinafter defined),
all of the right, title and interest that Sellers possess as of the
Closing in and to Sellers’ assets set forth in this Section 1.1.
(collectively, the “
Purchased
Assets
”):
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(a)
|
Intellectual
Property
. (i) The patents, trademarks, trade names, and other
intellectual property, including domain names incorporating the same, in
each case whether registered or not, and wherever such rights exist,
together with the right to recover for any past infringement thereof (the
“
Business IP
Rights
”) listed on
Schedule
1.1(a)(i)
, that comprise, are used, are held for use, or are
intended for use by the Sellers in connection with or relating to the
designs for portable hemodialysis devices (“
PAK Technology
”), (ii)
the Business IP Rights listed on
Schedule
1.1(a)(ii)
, that comprise, are used or are held for use by the
Sellers in connection with or relating to the designs for continuous renal
replacement therapy devices (“
CRRT Technology
”), (iii)
the Business IP Rights listed on
Schedule
1.1(a)(iii)
, that comprise, are used or are held for use by the
Sellers in connection with or relating to the designs for wearable
hemodialysis devices (“
HD
WAK Technology
”), (iv) the Business IP Rights listed on
Schedule
1.1(a)(iv)
, that comprise, are used or are held for use by the
Sellers in connection with or relating to the designs for wearable
ultrafiltration devices (“
WUD Technology
”), (v)
the Business IP Rights listed on
Schedule
1.1(a)(v)
that comprise, are used or are held for use by the
Sellers in connection with or relating to the designs for wearable
continuous renal replacement therapy devices (“
WAK CRRT Technology
”),
(vi) the Business IP Rights listed on
Schedule
1.1(a)(vi)
that comprise, are used or are held for use by the
Sellers in connection with or relating to the development of the
supersorbent technology (“
Supersorbent
Technology
”)
,
(vii) all other intellectual property used in connection with the
Business, other than the domain names listed on
Schedule
1.1(a)(vii)
, whether registered or not, the right to recover for
any past infringement thereof, and the right to protection of interests
therein, and (viii) all software used internally by Sellers, including
external facing software (clauses (i) through (viii) being collectively
called the “
Business
Intellectual Property
”);
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(b)
|
Tangible
P&E
. All furniture, fixtures, equipment, computers, computer
hardware, computer peripheral equipment, tools, supplies and other
tangible personal property owned by Sellers, including the tangible
personal property listed on
Schedule 1.1(b)
(the “
Tangible
P&E
”);
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(c)
|
Personal
Property Leases
. The leases listed on
Schedule
1.1(c)
, including all Sellers’ rights with respect to the
underlying personal property (the “
Personal Property
Leases
”);
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(d)
|
Contracts
.
All contracts or agreements to which any Seller is a party or is bound
listed on
Schedule 1.1(d)
(collectively, the “
Business Contracts
”)
(said Business Contracts, together with the Personal Property Leases,
being collectively called the “
Purchased
Contracts
”);
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(e)
|
Permits
.
All permits relating to the Business to the extent that such permits are
transferable;
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(f)
|
Books
and Records
. All business records, tangible data, documents, files,
supplier lists, business and marketing plans, creative materials,
advertising, promotional materials, price lists, blueprints,
specifications, designs, drawings, plans, operation or maintenance
manuals, bids, invoices, sales literature, key metrics, data costs
reconciliation and all other books and records (“
Books and Records
”);
and
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(g)
|
Goodwill
.
All goodwill associated with the Business and the Business Intellectual
Property.
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1.2.
|
Limitations
on Assignability
.
|
|
|
(a)
|
Notwithstanding
anything in this Agreement to the contrary, to the extent that any of the
Purchased Assets are not assignable without the consent of a third party,
neither this Agreement, nor any of the instruments or documents executed
and delivered in connection herewith or contemplated hereby, shall
constitute an assignment or assumption thereof, or attempted assignment or
attempted assumption thereof, if such assignment or attempted assignment,
or assumption or attempted assumption, would constitute a breach
thereof.
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(b)
|
If,
prior to the Closing, Sellers have not or cannot obtain such consent or
approval necessary for the assignment and assumption of any of the
Purchased Contracts (each a “
Nonassigned Asset
”),
Sellers and Purchaser agree to use commercially reasonable efforts to
secure such assignment as soon as practicable. Unless and until such
Nonassigned Assets are assigned by Sellers and assumed by Purchaser, such
Nonassigned Assets shall
not
constitute
Purchased Assets, nor shall any liabilities related thereto constitute
Assumed Liabilities.
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1.3.
|
Excluded
Assets
. All the assets of Sellers which are not specifically
included as Purchased Assets hereunder shall remain the assets of Sellers
and shall not be sold or conveyed hereunder (the “
Excluded Assets
”).
Without limiting the generality of the foregoing, the Purchased Assets
shall not include (a) cash, restricted cash, cash equivalents or accounts
receivable of any Seller, (b) marketable securities held by any Seller,
(c) the capital stock, membership interest or other equity interest of any
Seller, (d) any Seller’s websites, including each such site’s content,
look and feel, verbiage and images, (e) the domain names listed on
Schedule
1.3(e)
, (f) all employment and consultant agreements of either
Seller and (g) the other assets listed on
Schedule
1.3(f)
.
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1.4.
|
Assumed
Liabilities
. The “
Assumed Liabilities
”
shall consist solely of the liabilities and obligations arising on or
after Closing under each properly assigned and assumed Purchased Contract.
The Assumed Liabilities shall not include any outstanding liabilities of
Sellers related to Sellers’ performance (or lack thereof) under any such
Purchased Contract prior to Closing. At the Closing and subject to the
terms and conditions set forth herein, Purchaser and Sellers shall execute
an “Assumption Agreement”, in the form and substance reasonably
satisfactory to all of the parties, whereby Purchaser will solely and
exclusively undertake, assume and agree to perform, pay, become liable for
and discharge when due the Assumed
Liabilities.
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1.5.
|
Excluded
Liabilities
. Except for the Assumed Liabilities, Purchaser shall
not assume and shall have no responsibility for any liabilities of Sellers
of any nature whatsoever, including, without limitation, those arising in
connection with, or related to, the Purchased Assets. Sellers shall have
no responsibility for any liabilities arising in connection with, or
related to, the Purchased Assets after the
Closing.
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1.6.
|
No
Expansion of Third Party Rights
. The assumption by Purchaser of the
Assumed Liabilities shall in no way expand the rights or remedies of any
third party against Purchaser, Sellers or any affiliate of any of them as
compared to the rights and remedies which such third party would have had
against the Sellers had Purchaser not assumed such obligations (other than
the right to enforce any Assumed Liabilities directly against Purchaser as
a result of the assumption of the Assumed Liabilities by
Purchaser).
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2.
|
Purchase Price and
Allocation
.
|
|
|
2.1.
|
Purchase
Price
. Subject to the terms and conditions of this Agreement, in
consideration for the sale, conveyance, assignment and delivery of the
Purchased Assets, Purchaser shall deliver to Sellers, to be divided among
the Sellers as set forth on
Schedule 2.1
,
payment by wire transfer to such bank account or bank accounts as shall be
specified by Xcorporeal, in immediately available funds, the sum of
$8,000,000 (the “
Purchase
Price
”) to be paid as
follows:
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|
|
(a)
|
The
exclusivity fee in the amount of $200,000 previously paid by Purchaser to
Xcorporeal.
|
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|
(b)
|
$3,800,000
on the date of closing (the “
Closing
Payment
”).
|
|
|
(c)
|
$2,000,000
on April 1, 2010 (the “
First
Installment
”).
|
|
|
(d)
|
$2,000,000
on April 1, 2011 (the “
Second Installment
,” and
together with the First Installment, the “
Installment
Payments
”).
|
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(e)
|
Additional
quarterly payments during the life of the patents included in the HD WAK
Technology (the “
HD WAK
Patents
”), payable not later than the forty-fifth (45
h
)
day following the end of each of Purchaser’s fiscal quarters, in an amount
equal to (A) two percent (2%) of the Net Revenues actually received by
Purchaser from the sale of HD WAK devices in each country where such sales
infringe valid and issued claims of the HD WAK Patents issued in such
country (“
HD WAK
Devices
”) plus (B) $0.75 per treatment for the attendant
disposables that incorporate the HD WAK Technology (“
Attendant Disposables
,”
and
together with
the HD WAK Devices, the “
Acquired Technology
Products
”), not to exceed a maximum of $1.50 per patient per week
in a country where such sales infringe valid and issues claims of the HD
WAK Patents issued in such country, provided, however, that such payment
for Attendant Disposables shall not be payable with regard to Attendant
Disposables that incorporate any technology for which a Supersorbent
Royalty (as defined below) is paid by Purchaser to any Seller or any of
their affiliates (the “
HD
WAK Royalty
”). For purposes of this Section 2.1(e), “
Net Revenues
” shall mean
all gross revenues received by Purchaser from the sale of Acquired
Technology Products or attendant disposables, as the case may be, less:
(1) royalties or the like paid to third parties on the Acquired Technology
Products or attendant disposables, as the case may be, in connection with
intellectual property rights owned or controlled by such third parties
that are necessary to commercialize such Acquired Technology Products or
attendant disposables; (2) discounts, rebates and deductions actually
granted to customers based on volumes and/or revenues commercialized, or
any other deductions or the like allowed (whether in cash or trade) to
wholesalers or distributors or to other customers for quantity purchases,
prompt payments or other special conditions; (3) credits, write-offs,
collection fees, allowances or refunds, not exceeding the original invoice
amount, for claims, returns, collections or bad debts, and any other
allowances made for returned or deficient goods or services; (4)
transportation expenses, including any and all carriage or insurance
charges, packaging, freight, and costs of delivery; (5) expenses and costs
resulting from recalls or product liability claims other than those
arising from the process of manufacturing the Acquired Technology Products
by Purchaser or by third parties (other than Sellers or their affiliates)
on its behalf; and (6) sales and use taxes and other fees or taxes imposed
by any government or governmental agency, including, but not limited to
any import, export or customs duties. Notwithstanding anything to the
contrary contained herein, Purchaser may assign any or all of its
obligations with respect to the Continuing Payments to any joint venture
formed between Purchaser and/or some or all of the Sellers into which the
HD WAK Technology is contributed or otherwise
transferred.
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(f)
|
Additional
quarterly payments during the life of any patents included in the
Supersorbent Technology (the “
Supersorbent Patents
”),
payable not later than the forty-fifth (45
h
)
day following the end of each of Purchaser’s fiscal quarters, in an amount
equal to (A) the lesser of $0.75 per supersorbent cartridge or $1.50 per
patient per week in each country where such sales infringe valid and
issued claims of the Supersorbent Patents issued in such country less (B)
any and all royalties payable to The Technion Research and Development
Foundation Ltd. (“
TRDF
”) pursuant to that
certain Research Agreement and Option for License dated June 16, 2005
among NQCI, TRDF and Prof. Moris Eisen (the “
Research
Agreement
”)
or any subsequently executed license agreement between TRDF and
Purchaser substantially reflecting the terms set forth in Appendix C to
the Research Agreement, provided, however, that such payment for
supersorbent cartridges shall not be payable with regard to supersorbent
cartridges that incorporate any HD WAK Technology for which a HD WAK
Royalty is paid by Purchaser to any Seller or any of their affiliates (the
“
Supersorbent
Royalty
,” and together with the HD WAK Royalty, the “
Royalty Payments,
” and
together with the Installment Payments, the “
Continuing
Payments
”).
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2.2.
|
Allocation
of Purchase Price
. The parties hereto agree that the Closing
Payment, and the Continuing Payments, shall be allocated among the Sellers
and to the Purchased Assets as provided in
Schedule 2.1
and
Schedule
2.2
hereto. Neither Purchaser nor any Seller shall perform any act
or permit any omission in any tax filing or otherwise which is
inconsistent with the allocation set forth in
Schedule 2.1
or
Schedule
2.2
.
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2.3.
|
Record
Keeping Regarding Royalty Payments
.
Purchaser shall keep
complete and accurate records with respect to the amounts to be paid to
Sellers as Royalty Payments hereunder. Purchaser shall provide Sellers
with a statement of the calculation of the applicable amounts due
hereunder, in connection with each payment. Upon reasonable prior written
notice by Sellers, Purchaser shall provide Sellers’ independent third
party accountants with reasonable access to Purchaser’s records necessary
to determine amounts due hereunder, provided, however, that such
accountants shall agree to a standard confidentiality agreement. Such
examination may take place not more than once every twelve (12) months,
unless an error is found in Sellers’ favor in excess of five percent (5%)
of the applicable quarterly payment of the HD WAK Royalty or Supersorbent
Royalty, in which case Sellers may make two (2) examinations within the
subsequent twelve (12) months following discovery of the error. If an
error is discovered as a result of any such examination, the party in
whose favor the error was made shall within 30 days pay the amount in
error. Any such examination shall be at the Sellers’ sole expense unless
errors of accounting in Purchaser’s favor amounting to five percent (5%)
or more of the total Royalty Payments paid to Sellers under this Agreement
for the previous one year period are found in which event all reasonable
and documented out-of pocket examination expenses actually incurred by
Sellers shall be at Purchaser’s
expense.
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3.1.
|
Closing
Time and Place
. The closing of the sale and purchase of the
Purchased Assets pursuant to this Agreement (the “
Closing
”) shall take
place on such date and at such time and place as may be mutually agreed
upon by the parties (the “
Closing
Date
”).
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3.2.
|
Deliveries
by Seller
. Sellers shall deliver to Purchaser at the Closing the
following:
|
|
|
(a)
|
One
or more executed Bills of Sale from each Seller in substantially the form
of
Exhibit
C
attached hereto, transferring the Purchased Assets owned by that
Seller to Purchaser.
|
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|
(b)
|
Any
third party consents required to assign the Purchased Contracts, as noted
on
Schedule
3.2(b)
.
|
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|
(c)
|
A
copy, certified by the Secretary of each Seller, of resolutions of the
Board of Directors of each Seller authorizing the execution and delivery
of this Agreement and the agreements contemplated hereby and the
consummation of the transactions contemplated hereby and
thereby.
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(d)
|
Evidence
of the approval of the stockholders of Xcorporeal and NQCI authorizing the
execution and delivery of this Agreement and the agreements contemplated
hereby and the consummation of the transactions contemplated hereby and
thereby.
|
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|
(e)
|
One
or more patent assignments in substantially the form attached hereto as
Exhibit
D
, assigning all of Xcorporeal’s and NQCI’s issued patents and
patent applications.
|
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(f)
|
One
or more trademark assignments in substantially the form of
Exhibit E
attached hereto.
|
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|
(g)
|
The
legal opinions required pursuant to Section 7.2(f)
hereof.
|
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|
(h)
|
Such
other instruments of conveyance as Purchaser or its counsel may reasonably
request in order to effect the sale, transfer, conveyance and assignment
to Purchaser of valid ownership of the Purchased
Assets.
|
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|
3.3.
|
Deliveries
by Purchaser
. Purchaser shall deliver to Sellers at the Closing the
following:
|
|
|
(a)
|
The
Closing Payment, payable in cash, by wire transfer of immediately
available funds, to the account or accounts and in the proportions
designated in writing by Sellers.
|
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|
(b)
|
An
executed Assumption of Liabilities in the form of
Exhibit F
attached hereto.
|
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|
(c)
|
A
copy, certified by the Secretary of Purchaser, of resolutions of the Board
of Directors of Purchaser and the Management Board of Fresenius Medical
Care Management AG authorizing the execution and delivery of this
Agreement and the agreements contemplated hereby and the consummation of
the transactions contemplated hereby and
thereby.
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3.4.
|
Joint
Deliveries
. The parties shall each deliver at the Closing, the
following:
|
|
|
(a)
|
An
executed PAK Technology, WUD Technology and HD WAK Technology assignment
of license in the form of
Exhibit G
attached hereto (
the
“WAK/PAK Technology Assignment of
License
”).
|
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(b)
|
An
executed assignment of any and all rights of NQCI to the Supersorbent
Technology in the form of
Exhibit H
hereto.
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4.
|
Representations
and Warranties of Sellers
.
As of the
Closing, Xcorporeal, represents and warrants with respect to itself and
Operations, and NQCI represents and warrants with respect to itself, to
Purchaser as follows:
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4.1.
|
Organization
and Standing of Sellers
. Each of Xcorporeal, Operations and NQCI is
a corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware.
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4.2.
|
Authority
.
Subject to receipt of the Stockholder Approvals, each Seller has all
requisite corporate or limited liability company, as applicable, power and
authority to enter into this Agreement and the agreements contemplated
hereby and to consummate the transactions contemplated hereby and thereby.
Except as set forth on
Schedule 4.2
and subject to receipt of the Stockholder Approvals, the execution and
delivery of this Agreement and the agreements contemplated hereby by each
Seller and the consummation by each Seller of the transactions
contemplated hereby and thereby have been duly authorized by all necessary
corporate action on the part of such Seller. Subject to receipt of the
Stockholder Approvals, this Agreement and the agreements contemplated
hereby have been duly executed and delivered by each Seller and (assuming
the valid authorization, execution and delivery by Purchaser) constitute
the valid and binding obligations of each Seller enforceable against such
Seller in accordance with their respective
terms.
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4.3.
|
Notice
.
Except as set forth on
Schedule 4.3
(the “
Required
Consents
”), no Seller is required to give any notice to, make any
filing with or obtain any authorization, consent or approval of any person
or entity in order for the parties to consummate the transactions
contemplated by this Agreement.
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4.4.
|
Claims
.
Except as set forth on
Schedule 4.4
,
there are no actions, suits, investigations, claims or demands of any kind
pending or, to the knowledge of any Seller, threatened against any Seller
(i) in relation to the Purchased Assets; (ii) which could materially or
adversely affect the Purchased Assets; or (iii) which could prevent the
consummation of the transactions contemplated hereby or cause such
transactions to be rescinded. Except as set forth on
Schedule 4.4
,
there are no outstanding injunctions, judgments, orders or decrees of any
kind related to the Purchased
Assets.
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4.5.
|
No
Violation
. Except as set forth on
Schedule
4.5(a)
, the consummation of the transactions contemplated by this
Agreement and compliance with the provisions hereof will not conflict with
or result in a breach of the terms, conditions or provisions of, any order
of any court or other agency of government or the certificate of
incorporation or bylaws or certificate of organization or operating
agreement of any Seller. Except as set forth on
Schedule
4.5(a)
, no authorization, consent or approval or any order of any
governmental or public authority or agency is required for the execution
by any Seller of this Agreement or the other agreements contemplated
hereby or the consummation of the transactions contemplated hereby or
thereby by any Seller.
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4.6.
|
Purchased
Assets
. Except as set forth on
Schedule 4.6
,
Sellers have the right to transfer the Purchased Assets free and clear of
all liens and encumbrances.
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4.7.
|
Compliance
with Laws
. Except as set forth on
Schedule 4.7
,
the Business is being, and during the thirty-six (36) month period prior
to the Closing has been conducted and operated in compliance in all
material respects with all domestic or foreign, federal, state or local
statute, law, regulation, constitution, code, edict, proclamation, treaty,
ruling, pronouncement, decision, opinion, interpretation, ordinance, rule,
regulation, order, writ, injunction, directive, judgment, permit, license,
decree or other requirement (“
Applicable Law
”) issued,
enacted, adopted, passed, approved, promulgated, made, implemented or
otherwise put into effect by or under the authority of any applicable
foreign, domestic, federal, territorial, state or local governmental
authority, tribal authority, quasi-governmental authority,
instrumentality, court, government or self-regulatory organization,
commission, tribunal or organization or any regulatory, administrative or
other agency, or any political or other subdivision, department or branch
of any of the foregoing (“
Governmental
Authority
”). During the twenty-four (24) month period prior to the
Closing, no Seller has received written notification from any Governmental
Authority asserting that the conduct of the Business is not in compliance
with any Applicable Law. Sellers have all permits necessary for the
conduct and operation of the Business as currently conducted, such permits
are in full force and effect, to the knowledge of the Sellers no
violations are or have been recorded in respect of any thereof and no
proceeding is pending or, to the knowledge of any Seller, threatened to
revoke or limit any such permit.
Schedule 4.7
contains a true and complete list of all such permits under which any
Seller is operating or bound, and Sellers have furnished to Purchaser true
and complete copies thereof.
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4.8.
|
Reports
and Financial Statements
. Except as set forth on
Schedule 4.8
,
each of Xcorporeal and NQCI has timely (including any applicable
extensions) filed all reports required to be filed by it with the
Securities and Exchange Commission (the “
SEC
”) pursuant to the
Securities Act of 1933, as amended (the “
Securities Act
”), or the
Securities Exchange Act of 1934, as amended (the “
Exchange Act
”), since
December 31, 2006 (collectively, the “
Company SEC Reports
”),
and has previously made available to Purchaser true and complete copies of
all such Company SEC Reports. Such Company SEC Reports, as of their
respective dates, complied in all material respects with the applicable
requirements of the Securities Act and the Exchange Act, as the case may
be, and none of such Company SEC Reports, as of their respective dates,
contained any untrue statement of material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading. The consolidated financial statements of Xcorporeal
included in the Company SEC Reports have been prepared in accordance with
United States generally accepted accounting principles (“
GAAP
”) consistently
applied throughout the periods indicated (except as otherwise noted
therein or, in the case of unaudited statements, as permitted by Form 10-Q
of the SEC) and fairly presented (subject, in the case of unaudited
statements, to normal recurring year-end adjustments and any other
adjustments described therein) the consolidated financial position of
Xcorporeal as at the dates thereof and the consolidated results of
operations and cash flows of Xcorporeal for the periods then ended. Since
December 31, 2008, there has been no change in any of the significant
accounting (including tax accounting) policies or procedures of Xcorporeal
or Operations.
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4.9.
|
Absence
of Certain Changes or Events
. Except as set forth in the Company
SEC Reports filed as of the date of this Agreement and except as set forth
on
Schedule
4.9
, since December 31, 2008, (i) Xcorporeal, Operations and NQCI
have each conducted its respective businesses and operations in the
ordinary course of Business and consistent with past practices and has not
taken any actions that, if it had been in effect, (ii) there has not been
any fact, event, circumstance or change affecting or relating to
Xcorporeal, Operations which, individually or, in the aggregate, has had a
material adverse effect on the financial condition or results of
operations of Xcorporeal and Operations, taken as a whole and (iii) there
has not been any fact, event, circumstance or change affecting or relating
to NQCI which, individually or in the aggregate, has had a material
adverse effect on the financial condition or results of operations of NQCI
(in the case of either (ii) or (iii) a “
Material Adverse
Effect
”).
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4.10.
|
Litigation
.
Except for litigation disclosed in the notes to the financial statements
included in Xcorporeal’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2008, or in the Company SEC Reports filed subsequent
thereto, as of the date hereof, there is no suit, action, proceeding or
investigation pending or, to the knowledge of any Seller, threatened
against any Seller or with respect to which any Seller could be required
to provide indemnification or to otherwise contribute to liabilities or
damages relating thereto; nor is there any judgment, decree, injunction,
rule or order of any Governmental Authority outstanding against any
Seller.
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|
4.11.
|
Absence
of Undisclosed Liabilities
. Except for liabilities or obligations
which are accrued or reserved against in Xcorporeal’s consolidated
financial statements (or reflected in the notes thereto) included in the
Company SEC Reports or in NQCI’s statement of liabilities as of October
31, 2009, as set forth on
Schedule 4.11
,
or which were incurred after October 31, 2009, in the ordinary course of
business and consistent with past practice, none of the Sellers has any
liabilities or obligations (whether absolute, accrued, contingent or
otherwise) of a nature required by GAAP to be reflected in a balance sheet
(or reflected in the notes thereto) or which have had or could reasonably
be expected to have a Material Adverse
Effect.
|
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|
(a)
|
Each
Seller has timely filed all federal, state and local tax returns that it
was required to file. All such tax returns are correct and complete in all
material respects. All taxes owed by any Seller (whether or not shown on
any tax return) have been timely paid, except for those being contested in
good faith. No Seller is currently the beneficiary of any extension of
time within which to file any tax return. No Seller has received any
notice or inquiry from any jurisdiction where such Seller has not filed
tax returns to the effect that such filings may be required or that such
Seller and/or any of such Seller’s properties or assets may otherwise be
subject to taxation by such jurisdiction. There are no liens or other
encumbrances on any of the assets of any Seller that arose in connection
with any failure (or alleged failure) to pay any tax. No Seller has waived
any statute of limitations in respect of taxes or agreed to any extension
of time with respect to a tax assessment or deficiency. No Seller is a
party to or bound by any tax allocation or sharing contract. No Seller has
any liability or potential liability for the taxes of any other person or
entity as a transferee or successor, by contract, or
otherwise.
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|
(b)
|
Each
Seller has withheld and paid all taxes required to have been withheld and
paid in connection with amounts paid or owing to any employee, independent
contractor, creditor, stockholder, or other third
party.
|
|
|
(c)
|
No
domestic or foreign, federal, state, or local tax audits or administrative
or judicial tax proceedings are pending or, to any Seller’s knowledge,
threatened with respect to any Seller. No Seller has received from any
domestic or foreign, federal, state, or local Governmental Authority
(including jurisdictions where such Seller has not filed tax returns) any
(i) written notice indicating an intent to open an audit or other review,
(ii) request for information related to tax matters, or (iii) notice of
deficiency or proposed adjustment for any amount of tax proposed,
asserted, or assessed by any taxing authority against such
Seller.
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|
(a)
|
No
Seller owns any real property.
Schedule
4.13(a)
lists as of the date hereof (i) all written leases,
subleases, licenses, rental or occupancy agreements and other agreements
(including all amendments) to lease, sublease, license or otherwise occupy
or permit occupancy of, and describes all oral leases, subleases,
licenses, rental or occupancy agreements pursuant to which any Seller
leases, subleases, licenses, or otherwise rents or occupies or has agreed
to lease, sublease, license or otherwise occupies or permit occupancy of,
any real property, including all leasehold or subleasehold estates and
other rights to use or occupy any land, buildings, structures,
improvements, fixtures or other interest in real property (each, a “
Real Property Lease
” and
collectively, the “
Leased
Real Property
”), (ii) a schedule of Leased Real Property by street
address and (iii) the identity of the lessor, lessee and current occupant
(if different from lessee) of each such parcel of Leased Real
Property.
|
|
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(b)
|
The
applicable Seller is the owner and holder of all interests and leasehold
estates purported to be granted by each Real Property Lease, each Real
Property Lease is valid, subsisting, in full force and effect, binding
upon and enforceable against such Seller and the other parties thereto in
accordance with its terms; and the interests and/or leasehold estate
created by each Real Property Lease is free and clear of all liens or
encumbrances except means (i) mechanics’, carriers’, workers’
warehouseman’s, materialman’s, repairman’s, landlords’, or other liens
arising or incurred in the ordinary course of the Business with respect to
charges not yet due and payable, (ii) security interests of equipment
lessors to evidence title retention; (iii) statutory liens for current
taxes or assessments not yet due or payable (collectively, “
Permitted Liens
”). No
Seller has delivered or received written notice of any alleged default by
any party to a Real Property Lease and no Seller is in breach of or
default under any of the Real Property Leases, nor to any Seller’s
knowledge is any other party to any Real Property Lease in breach of or
default under such Real Property Lease, nor does any condition exist that,
with or without notice, lapse of time or the happening or occurrence of
any other event, could result in a breach of or constitute a default under
any Real Property Lease. No proceeding is pending or, to Seller’s
knowledge, threatened for the taking or condemnation of all or any portion
of the property demised under any Real Property Lease. There is no
brokerage commission or finder’s fee due from any Seller and unpaid with
regard to any of the Real Property Leases, or which will become due at any
time in the future with regard to any Real Property Lease. Sellers have
furnished to Purchaser prior to the execution and delivery of this
Agreement true and complete copies of all Real Property Leases. There are
no subleases or rights of occupancy with respect to the Leased Real
Property.
|
|
|
4.14.
|
Assets
.
Each Seller has good, valid and marketable title to all of their
respective properties and assets (whether real, personal, or mixed and
whether tangible or intangible) included in the Purchased Assets, free and
clear of all liens or encumbrances other than Permitted Liens, and,
subject to Stockholder Approvals, the Sellers have the full right, power
and authority to sell, transfer, assign, convey and deliver all of the
Purchased Assets to Purchaser. The applicable Seller has a valid and
enforceable right to use all tangible items of personal property leased by
or licensed to it, free and clear of all liens or encumbrances other than
Permitted Liens. Subject to reasonable wear and tear, all of Sellers’
properties and assets have been maintained in accordance with good
business practice and industry standards, are in good operating condition
and repair, are free from material defects (patent and latent), and are
suitable for the purposes for which they are used and intended to be used.
Schedule
4.14
contains an accurate and complete list of each item of
Tangible P&E having a fair market value on Sellers’ books and records
of at least $10,000 as of the Closing
Date.
|
|
|
4.15.
|
Extent
of Assets
. The Purchased Assets include, without limitation, all of
the real (immovable) and personal (movable) property, intangible
(incorporeal) property, rights and other assets of every kind and nature
whatsoever owned, leased or used by any Seller for the conduct of the
Business as currently conducted and as conducted during the past twelve
(12) months, excluding the Excluded Assets. The Purchased Assets,
excluding the Excluded Assets and the rights and technology underlying the
WAK/PAK Technology Assignment of License, constitute all the assets
necessary or desirable to conduct the Business in the manner presently
conducted by Sellers.
|
|
|
4.16.
|
Personal
Property Leases
.
Schedule 4.16
is an accurate and complete list of each Personal Property Lease involving
the payment by Sellers of lease payments that in the aggregate exceed
$10,000 per calendar year. Sellers have provided Purchaser with correct
and complete copies of all Personal Property Leases listed on
Schedule 4.16
.
Each Personal Property Lease is valid and binding upon the applicable
Seller and, to the knowledge of Sellers, enforceable against the other
parties thereto in accordance with its terms. No Seller is in breach of or
default under any Personal Property Lease, and no event has occurred or
circumstance exists which, with the delivery of notice, the passage of
time or both, would constitute such a breach or default by any Seller, or
permit the termination, modification or acceleration of any obligation of
such Seller under such Personal Property Lease. To the knowledge of
Sellers, no other party to any Personal Property Lease is in breach
thereof or default thereunder.
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|
4.17.
|
Intellectual
Property
.
|
|
|
(a)
|
Schedule
4.17(a)
sets forth a true, complete and accurate list of all
Business Intellectual Property that is owned by any Seller and used in or
related to the Business and identifies which Seller is the owner thereof.
Except for any intellectual property of third parties from which any
Seller has licensed rights pursuant to the agreements listed in
Schedule
4.17(b)
which identifies which Seller is the licensee thereof,
Sellers exclusively own and possess all right, title and interest in and
to the Business Intellectual Property free and clear of all security
interests, liens, or encumbrances. No Business Intellectual Property used
in or related to the Business is involved in any interference, reissue,
re-examination or opposition proceeding. Except for rights acquired
pursuant to the agreements listed in
Schedule
4.17(b)
, the Excluded Assets, the Business Intellectual Property
listed on
Schedule
4.17(a)
constitutes all of the Business Intellectual Property
necessary to conduct the Business as currently being conducted, as
previously conducted, and as currently proposed to be
conducted.
|
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(b)
|
Schedule
4.17(b)
sets forth a true, complete and accurate list of all
agreements pursuant to which any Business Intellectual Property is
licensed to any Seller and identifies to which Seller it is so licensed.
With respect to Business Intellectual Property that is licensed to any
Seller and used or related to the Business, such Seller has a valid and
enforceable right or license to use such Business Intellectual Property,
such right or license is transferable to Purchaser without the consent of
or termination right of any third party, and such right or license is
being transferred under this Agreement. No Seller is in breach of any
agreement pursuant to which any Business Intellectual Property is licensed
to any Seller.
|
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|
(c)
|
Schedule
4.17(c)
sets forth a true, complete and accurate list of all
agreements pursuant to which any Business Intellectual Property is
licensed to any third party from any Seller and identifies which Seller is
the licensor thereof. Except as set forth in
Schedule
4.17(c)
, no licenses, covenants not to sue, or other rights of use
have been granted to third parties with respect to any of the Business
Intellectual Property, and no Seller is under no obligation to grant any
of the foregoing.
|
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(d)
|
The
Business Intellectual Property is valid, fully subsisting, and
enforceable. The applicable Seller has maintained all of the Business
Intellectual Property and has paid all registration and maintenance fees
to the extent necessary to validly maintain all registrations with any
regulatory authorities with respect to the Business Intellectual Property.
Except as set forth in
Schedule
4.17(d)
, no fees or actions that fall due within 90 days following
the Closing Date are required to maintain or otherwise avoid the
abandonment of any rights included in the Business Intellectual Property.
To the knowledge of Sellers, no rights in or to any Business Intellectual
Property owned by or licensed to any Seller and used in connection with
the Business are infringed, misappropriated or otherwise violated by any
third party.
|
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|
(e)
|
The
conduct of the Business as presently, previously, and presently proposed
to be conducted does not infringe the intellectual property rights of any
third party. None of the Business Intellectual Property is subject to any
outstanding judgment, injunction, order or decree issued against any
Seller which restricts the use thereof by it and there are no pending, or
to the knowledge of Sellers, threatened claims against any Seller or the
Business alleging that the operation of the Business infringes or violates
(or in the past infringed or violated) the rights of any third party or
constitutes a misappropriation of (or in the past constituted a
misappropriation of) and Business Intellectual Property right of any third
party.
|
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|
(f)
|
Except
as set forth on
Schedule
4.17(f)
, all personnel of the Business, including employees,
agents, consultants, and contractors who have contributed to or
participated in the conception, creation, and/or development of the
Business Intellectual Property on behalf of any Seller have executed
nondisclosure agreements and have executed appropriate instruments of
assignment in favor of the applicable Seller giving such Seller exclusive
ownership of all tangible and intangible Business Intellectual Property
thereby arising. Each Seller has taken commercially reasonable security
measures to protect the secrecy, confidentiality and value of all know-how
and trade secrets used in the
Business.
|
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(g)
|
Each
Seller has obtained and possesses valid licenses from third parties to use
all of the third party software programs present on the computers and
other software-enabled electronic devices that it owns or leases or that
it has otherwise provided to its respective employees for their use.
Schedule
4.17(g)
lists all software or other material that is distributed as
“free software,” “open source software” or under a similar licensing or
distribution model (including the GNU General Public License, GNU Lesser
General Public License, Mozilla Public License, BSD licenses, the Artistic
License, the Netscape Public License, the Sun Community Source License,
the Sun Industry Standards License and the Apache License) (“
Open Source Materials
”)
which is used by the Company, and describes the manner in which such Open
Source Materials are or were used. Sellers’ use of Open Source Materials
included within the Company’s products will not require, as a condition of
use, modification or distribution of such Open Source Materials, that
other software incorporated into, derived from or distributed with such
Open Source Materials be (A) disclosed or distributed in source code form,
(B) be licensed for the purpose of making derivative works, or (C) be
redistributable at no charge.
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4.18.
|
Permits
.
The applicable Seller possesses the permits set forth on
Schedule 4.18
.
The permits set forth on
Schedule 4.18
include all of the permits necessary for such Seller to own the respective
Purchased Assets and operate the Business as conducted as of the Closing.
The Business is operated in compliance in all material respects with, all
permits. All of the permits listed on
Schedule 4.18
are in full force and effect, and no Seller has received, during the past
three (3) years, any written notice to the contrary except as set forth on
Schedule
4.18
.
|
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(a)
|
Set
forth on
Schedule
4.19(a)
is an accurate and complete list of all Material Contracts.
Sellers have delivered or made available to Purchaser a complete copy of
each Material Contract included in the Purchased Contracts and all
amendments thereto. The term “
Material Contract
” means
each of the following contracts included in the Purchased Contracts
relating to the Business:
|
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(i)
|
Any
contract (or group of related contracts) for the purchase or sale of
commodities, supplies, products or other personal property, or for the
furnishing or receipt of services that involves expenditures or receipts
of the Business in excess of $25,000 annually and which cannot be
terminated on thirty (30) or less days notice without
penalty;
|
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(ii)
|
Any
contract not made in the ordinary course of the
Business;
|
|
|
(iii)
|
Any
distribution, franchise, license, sales or commission contract related to
the Business;
|
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|
(iv)
|
Any
contract that includes any most favored terms, pricing, or similar
provisions or that contains covenants that in any way purport to restrict
the business activity of the Business (or any part thereof), limit the
freedom of any Seller or the Business (or any part thereof) to engage in
any line of business or to compete with any person, or limit the right of
any Seller to assert claims in litigation, including, but not limited to,
claims of infringement of intellectual property
rights;
|
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|
(v)
|
Any
contract (or group of related contracts) involving annual revenues of more
than $25,000 under which any Seller has granted price protection
provisions;
|
|
|
(vi)
|
Any
contract with an indemnity
obligation;
|
|
|
(vii)
|
Any
purchase, supply or other contract imposing on any Seller confidentiality
covenants;
|
|
|
(viii)
|
Any
purchase, supply or other contract, other than service contracts, imposing
on any Seller nonsolicitation
covenants;
|
|
|
(ix)
|
Any
purchase, supply or other contract (or group of related contracts) which
provides for warranties or return of product, rebates, sharing of fees,
grant of discounts or similar arrangements involving annual sales by any
Seller in excess of $25,000 or which provides a grant of exclusivity by
any Seller to another contracting
party;
|
|
|
(x)
|
Any
contract (or group of related contracts) which provides for consignment or
similar arrangement of tangible assets having a fair market value in
excess of $25,000;
|
|
|
(xi)
|
Any
collective bargaining agreement;
|
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|
(xii)
|
Any
contract for the employment of any individual on a full-time, part-time or
other basis or providing severance benefits or any consulting agreement
providing annual compensation in excess of
$25,000;
|
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|
(xiii)
|
Any
contract under which it has advanced or loaned any amount to any of the
employees of the Business;
|
|
|
(xiv)
|
Any
contract that is a joint venture
agreement;
|
|
|
(xv)
|
Any
contract establishing any technology escrow or granting any party
manufacturing rights; and
|
|
|
(xvi)
|
Any
contract that is an amendment, supplement or modification (whether oral or
written) in respect of any of the
foregoing.
|
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(b)
|
Except
as set forth on
Schedule 4.19(b)
,
with respect to each of the Purchased Contracts, (i) such Purchased
Contract is valid and binding upon the applicable Seller and enforceable
against the other parties thereto in accordance with its terms, (ii) the
applicable Seller is not in breach of or default under such Purchased
Contract and no event has occurred or circumstance exists which, with the
delivery of notice, the passage of time or both, would constitute a breach
or default, or permit the termination, modification or acceleration of any
obligation under such Purchased Contract, and (iii) to the knowledge of
Sellers, no other party to any Purchased Contract is in breach thereof or
default thereunder.
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4.20.
|
No
Other Agreement
. No Seller nor any of their affiliates
or representatives has any commitment or legal obligation, absolute or
contingent, to any other person other than Purchaser, to sell, assign,
transfer or effect a sale or other disposition of any of the Purchased
Assets or the Business.
|
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4.21.
|
Employee
Benefit Plans and Contracts
.
|
|
|
(a)
|
No
liability under Title IV of ERISA has been incurred by any Seller or any
ERISA Affiliate since the effective date of ERISA that has not been
satisfied in full, and no condition exists that presents a material risk
to any Seller or any trade or business, whether or not incorporated, that
together with any Seller would be deemed a “single employer” under Section
414 of the Code (an “
ERISA Affiliate
”) of
incurring a liability under such
Title.
|
|
|
(b)
|
To
Sellers’ knowledge, neither any Seller nor any ERISA Affiliate, nor any
Plan and neither any Seller nor any ERISA Affiliate has any continuing
liability thereunder, nor any trust created thereunder, nor any trustee or
administrator thereof has engaged in a transaction in connection with
which any Seller, any of the Plans, any such trust, or any trustee or
administrator thereof, could, directly or indirectly, be subject to a
civil penalty assessed pursuant to Section 409 or 502(i) of ERISA, a tax
imposed pursuant to Section 4975, 4976, 4980B, 4980D, 4980E, or 4980F of
the Code, or any other material liability. For purposes of this Section
4.21 the “
Plan
”
shall mean any bonus, deferred compensation, incentive compensation,
equity incentive, severance pay, medical, life or other health and welfare
benefit, profit-sharing, or pension plan, program, agreement or
arrangement, and each other employee benefit plan, program, agreement or
arrangement, sponsored, maintained or contributed to or required to be
contributed to by any Seller or any ERISA Affiliate for the benefit of any
employee, independent contractor, or consultant or former employee,
independent contractor, or consultant of any Seller, whether formal or
informal unless such plan, program, agreement or arrangement has been
terminated.
|
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(c)
|
None
of the Plans is a “multiemployer plan,” as such term is defined in Section
3(37) of ERISA, a “multiple employer welfare arrangement,” as such term is
defined in Section 3(40) of ERISA, or a single employer plan that has two
or more contributing sponsors, at least two of whom are not under common
control, within the meaning of Section 4063(a) of
ERISA.
|
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(d)
|
Neither
any Seller nor any ERISA Affiliate has ever sponsored, maintained or
contributed to a pension plan (within the meaning of Section 3(2) of
ERISA) subject to Title IV of ERISA, Section 302 of ERISA or Section 412
of the Code.
|
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(e)
|
Each
of the Plans that is intended to be “qualified” within the meaning of
Section 401(a) of the Code has received a favorable determination (or IRS
opinion letter) from the IRS in respect of each such Plan. To
the knowledge of Sellers, each of the Plans that is intended to satisfy
the requirements of section 125 or 501(c)(9) of the Code satisfies such
requirements. To the Knowledge of Sellers, each of the Plans
has been operated and administered in accordance with its terms and
Applicable Laws, including but not limited to ERISA and the
Code.
|
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4.22.
|
Employees;
Labor Relations
.
|
|
|
(a)
|
Schedule
4.22(a)
contains a true and complete list of all current directors
and officers of each Seller and all current employees, independent
contractors and consultants of each Seller, along with the current
position and current salary and bonus for each such person. No
Seller is delinquent in payments to any of its directors, officers,
employees, independent contractors or consultants for any wages, salaries,
commissions, bonuses or other compensation for any services performed by
them or material amounts required to be reimbursed to such directors,
officers, employees, independent contractors or consultants. To
Sellers’ knowledge, no director, officer or employee of any Seller is in
violation of any term of any material employment contract, independent
contractor agreement for services, patent disclosure agreement,
confidentiality and invention assignment agreement or any other contract
relating to the relationship of such director, officer, employee with any
Seller or any other party because of the nature of the business conducted
or currently proposed to be conducted by Sellers. Each employee
of the Sellers, each consultant to Sellers who in the ordinary performance
of such consultant’s duties on behalf of such Seller has access to
confidential information respecting Sellers’ Business Intellectual
Property, and each officer of each Seller has executed a customary
confidentiality and assignment of inventions agreement, and copies of all
such agreements have been provided to
Purchaser.
|
|
|
(b)
|
No
Seller is bound by any collective bargaining, labor, or similar
agreements, including material local or side
agreements.
|
|
|
(c)
|
Each
Seller is in compliance with the requirements of the Workers Adjustment
and Retraining Notification Act or any state-law equivalent (collectively,
“
WARN
”) and has no
liabilities pursuant to WARN.
|
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4.23.
|
Regulatory
Compliance
. Sellers have delivered true and correct
copies of the registrations, pre-market notifications, pre-market
applications, pre-market approvals, and investigational device exemption
applications (and any amendments or supplements thereto) related to the
Business and has delivered copies of all material written communications
between any Seller and the United States Food and Drug Administration
(“
FDA
”) or any
other applicable Governmental Authority regulating medical products and
any existing written summaries of material discussions between such
parties that describe matters that are material to assessing compliance of
the Business. The operation of the Business is in compliance in
all material respects with all FDA and other comparable state and local
Applicable Laws applicable to the Business, including FDA and comparable
state and local rules and regulations relating to clinical studies or
investigations, Good Practices, advertising and promotion, pre- and
post-marketing adverse device experience and adverse device experience
reporting, and all other pre- and post-marketing reporting requirements,
as applicable.
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4.24.
|
Hazardous
Substances
. Each Seller is in compliance in all material
respects with all Applicable Laws governing or related to environmental
matters. There are no claims pending or, to the knowledge of
Sellers, threatened against any Seller or the Leased Real Property
relating to any Applicable Laws governing or related to environmental
matters. Sellers have no actual or alleged liability, whether
fixed or contingent, under any Environmental
Law.
|
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4.25.
|
Brokers
. Except
for William Blair & Company, no broker, investment banker or other
person or entity engaged by Seller is entitled to any broker’s, finder’s
or other similar fee or commission in connection with the transactions
contemplated by this Agreement.
|
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(a)
|
Xcorporeal
. The
affirmative vote of the holders of a majority of the outstanding shares of
Xcorporeal’s common stock (the “
Xcorporeal Stockholder
Approval
”) is the only vote of the holders of any class or series
of Xcorporeal’s capital stock necessary to approve the transactions
contemplated by this Agreement.
|
|
|
(b)
|
NQCI
. The
affirmative vote of the holders of a majority of the outstanding shares of
NQCI’s common stock (the “
NQCI Stockholder
Approval,
” and together with the Xcorporeal Stockholder Approval,
the “
Stockholder
Approvals
”) is the only vote of the holders of any class or series
of NQCI’s capital stock necessary to approve the transactions contemplated
by this Agreement.
|
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4.27.
|
Sufficiency
of Purchase Price
. Sellers have marketed the assets
being sold and otherwise considered their value and have determined that
the consideration being received by each Seller from Purchaser herein
constitutes fair consideration and reasonably equivalent value for the
assets being conveyed. This transaction was negotiated at arms
length between unrelated parties with each side represented by independent
counsel. The proceeds to be received by each Seller from the
Purchase Price are sufficient to satisfy in full all of the liabilities of
such Seller.
|
|
|
4.28.
|
Disclosure
. No
representation or warranty made by Sellers in this Agreement and no
statement contained in any document or other writing furnished or to be
furnished to Purchaser or its representatives pursuant to the provisions
hereof contains any untrue statement of fact or omits to state any fact
necessary in order to make the statements made herein or therein not
misleading.
|
|
5.
|
Representations
and Warranties of Purchaser.
As
of the Closing, Purchaser represents and warrants to Sellers as
follows:
|
|
|
5.1.
|
Organization
and Standing of Purchaser
. Purchaser is a corporation
duly organized, validly existing and in good standing under the laws of
the state of Massachusetts.
|
|
|
5.2.
|
Authority
. Purchaser
has all requisite corporate power and authority to enter into this
Agreement and the agreements contemplated hereby and to consummate the
transactions contemplated hereby and thereby. The execution and
delivery of this Agreement and the agreements contemplated hereby by
Purchaser and the consummation by Purchaser of the transactions
contemplated hereby and thereby have been duly authorized by all necessary
corporate action by Purchaser. This Agreement and the
agreements contemplated hereby have been duly executed and delivered by
Purchaser and (assuming the valid authorization, execution and delivery by
Sellers) constitute the legal, valid and binding obligations of Purchaser
enforceable against Purchaser in accordance with their respective
terms.
|
|
|
5.3.
|
No
Violation
. The consummation of the transactions
contemplated by this Agreement and compliance with the provisions hereof
will not conflict with or result in a breach of the terms, conditions or
provisions of, any order of any court or other agency of government or the
certificate of incorporation or bylaws of Purchaser. No
authorization, consent or approval or any order of any governmental or
public authority or agency is required for the execution by Purchaser of
this Agreement or the other agreements contemplated hereby or the
consummation of the transactions contemplated hereby or thereby by
Purchaser.
|
|
|
5.4.
|
Financing
. The
Purchaser has sufficient immediately available funds to pay, in cash, the
Purchase Price and all other amounts payable pursuant to this Agreement or
otherwise necessary to enter into this Agreement and the agreements
contemplated hereby and to consummate the transactions contemplated hereby
and thereby. Upon the consummation of such transactions, (a) the
Purchaser will not be insolvent, (b) the Purchaser will not be left
with unreasonably small capital, (c) the Purchaser will not have
incurred debts beyond its ability to pay such debts as they mature and
(d) the capital of the Purchaser will not be
impaired.
|
|
|
5.5.
|
Litigation
. As
of the Closing, no suit, action, proceeding or investigation pending or,
to the knowledge of the Purchaser, threatened against the Purchaser, which
could affect the legality, validity or enforceability of this Agreement,
the agreements contemplated hereby and to consummation of the transactions
contemplated hereby and thereby.
|
|
|
5.6.
|
Brokers
. No
broker, investment banker or other person or entity engaged by Purchaser
is entitled to any broker’s, finder’s or other similar fee or commission
in connection with the transactions contemplated by this
Agreement.
|
|
6.
|
Survival
of Representations and Warranties;
Indemnification
.
|
|
|
6.1.
|
Survival
of Representations and Warranties
. The representations and
warranties in this Agreement shall survive consummation of the
transactions contemplated hereby for a period ending on April 1, 2011,
except that the representations and warranties included in Section 4.1,
4.2, 4.6, 4.14, 4.17 and 4.25 shall survive as long as Purchaser is
required to pay the Royalty Payments to the Sellers hereunder (the “
Survival Period
”), or
upon termination of this Agreement pursuant to Section 10.01, and,
following the Survival Period or the termination of this Agreement, as the
case may be, no party shall make any claim whatsoever for any breach of
any representation or warranty hereunder, subject to this Section 6.1 and
Section 10.
|
|
|
6.2.
|
Indemnification
by Sellers
. Sellers shall, jointly and severally,
indemnify and hold harmless Purchaser and its affiliates for any loss,
liability, claim, damage and expense, including reasonable attorneys’ fees
(collectively, “
Damages
”) incurred by or
suffered to Purchaser or its affiliates by reason
of: (a) any liability or obligation relating to any Seller
or the Purchased Assets, other than Assumed Liabilities; and (b) any
breach of any representation or warranty of Sellers contained
herein. In the event of the final determination of any
liability under this Section 6.2 from Sellers to Purchaser, Purchaser may,
upon written notice to Sellers, setoff or recoup, in whole or in part,
such amounts from the Continuing
Payments.
|
|
|
6.3.
|
Indemnification
by Purchaser
. Purchaser shall indemnify and hold
harmless each Seller and its affiliates for any Damages incurred by or
suffered to Sellers or its affiliates by reason
of: (a) any of the Assumed Liabilities, including the
failure of Purchaser to pay, discharge or perform any of the Assumed
Liabilities as and when due; and (b) any breach of any representation
or warranty of Purchaser contained
herein.
|
|
|
6.4.
|
Notice
and Opportunity to Defend
. Each party agrees to give the
other party prompt written notice of any potential claim under this
Section 6 and, if such potential claim arises out of a claim or
demand of a third party, agrees to give the other party full opportunity,
at its expenses, to defend against such third party claim or
demand.
|
|
|
6.5.
|
Limitation
on Indemnification
. The obligations of Sellers to
indemnify, save and hold harmless Purchaser from and against Damages
pursuant to this Section 6 shall at all times and in all events be limited
to an aggregate amount equal to $2,000,000 plus the amount of Royalty
Payments that have been paid, or are due and payable, to Sellers
hereunder. In addition, neither Seller will have any liability
(for indemnification or otherwise) under this Section 6 until the
aggregate amount of all Damages actually incurred or suffered by Purchaser
hereunder exceeds $50,000 (the “
Threshold Amount
”) and
then only for the amount of the damages exceeding the Threshold
Amount.
|
|
7.
|
Conditions to
Closing
.
|
|
|
7.1.
|
Conditions
to Each Party’s Obligation to Effect the Merger
. The
respective obligations of each party to effect the transactions
contemplated hereby shall be subject to the satisfaction at or prior to
the Closing of the following
conditions:
|
|
|
(a)
|
Stockholder
Approvals
. The Stockholder Approvals shall have been
obtained.
|
|
|
(b)
|
No Order
. No
Governmental Authority (including a federal or state court) of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered
any statute, rule, regulation, executive order, decree, injunction or
other order (whether temporary, preliminary or permanent) which is in
effect and having the effect of making the transactions contemplated
hereby illegal or otherwise prohibiting or materially restricting
consummation of the transactions contemplated hereby; provided, however,
that the parties shall use their reasonable best efforts to cause any such
decree, judgment, injunction or other order to be vacated or
lifted.
|
|
|
(c)
|
Required
Consents
. All of the Required Consents shall have been
obtained.
|
|
|
7.2.
|
Conditions
to Obligations of Purchaser
. The obligations of
Purchaser to consummate the transactions contemplated hereby shall be
subject to the satisfaction at or prior to the Closing of the following
additional conditions, unless waived in writing by
Purchaser:
|
|
|
(a)
|
Representations and
Warranties
. The representations and warranties of the
Sellers shall be true and correct in all respects (without giving effect
to any limitation as to “materiality” or “material adverse effect” or any
similar limitation set forth therein), as of date hereof, and except to
the extent such representations and warranties speak as of an earlier
date, as of the Closing Date as though made at and as of the
Closing.
|
|
|
(b)
|
Performance of Obligations of
the Sellers
. Sellers shall have performed in all
material respects all obligations required to be performed by them under
this Agreement at or prior to the
Closing.
|
|
|
(c)
|
No Material Adverse
Effect
. No Material Adverse Effect shall have occurred
with respect to the Purchased Assets or, recognizing the constraints of
Sellers’ financial situation, the Business since the date of this
Agreement and no fact or circumstance shall have occurred or arisen since
the date of this Agreement that would reasonably be expected to have such
a Material Adverse Effect.
|
|
|
(d)
|
Impairment of
Title
. No fact or condition shall have arisen that would
preclude in any material respect the Purchaser from taking title in the
Purchased Assets.
|
|
|
(e)
|
WAK/PAK Technology Assignment
of License
. Prior to or concurrently with the Closing,
Purchaser and Xcorporeal shall have negotiated and delivered a WAK/PAK
Technology Assignment of License assigning to Purchaser all of
Xcorporeal’s licensed rights to current and future intellectual property
comprised of certain U.S. patents and patent applications relating to PAK
Technology and WAK HD Technology.
|
|
|
(f)
|
Sellers’ Counsel
Opinions
. The Purchaser shall have received from counsel
to the Sellers, one or more legal opinions in substantially the form of
Exhibit I
attached hereto, addressed to the Purchaser and dated as of the Closing
Date.
|
|
|
(g)
|
Supersorbent
Rights
. The Research Agreement shall have been validly
assigned to Purchaser and the exclusive license for use of the
Supersorbent Technology in any and all medical applications, as
contemplated by the Research Agreement, shall have been executed and
delivered on terms and conditions substantially as set forth in Appendix C
to the Research Agreement and otherwise on terms and conditions reasonably
satisfactory to Purchaser; such license shall be in the name of and for
the benefit of Purchaser or shall be in the name of and for the benefit of
NQCI and shall be assigned to Purchaser at the Closing with the written
consent of TRDF.
|
|
|
7.3.
|
Conditions
to Obligation of the Sellers
. The obligation of the
Sellers to consummate the transactions contemplated by this Agreement
shall be subject to the satisfaction at or prior to the Closing of the
following additional conditions, unless waived in writing by the
Sellers:
|
|
|
(a)
|
Representations and
Warranties
. The representations and warranties of
Purchaser shall be true and correct in all respects (without giving effect
to any limitation as to “materiality” or “material adverse effect” or any
similar limitation set forth therein) as of the date hereof, and except to
the extent such representations and warranties speak as of an earlier
date, as of the Closing Date as though made on and as of the
Closing.
|
|
|
(b)
|
Performance of Obligations of
Purchaser
. Purchaser shall have performed in all
material respects all obligations required to be performed by it under
this Agreement at or prior to
Closing.
|
|
|
8.1.
|
Proxy
Statement; Stockholder
Approvals
.
|
|
|
(a)
|
Unless
the Agreement has been terminated in accordance with Section 10.1(c),
Xcorporeal, acting through its board of directors, shall, subject to and
in accordance with applicable law and its certificate of incorporation and
by-laws, promptly and duly call, give notice of, convene and hold as soon
as practicable, a meeting of the holders of its stockholders (or solicit
the written consent of stockholders) for the purpose of voting to approve
and adopt this Agreement and the transactions contemplated hereby, and,
subject to the fiduciary duties of its board of directors under applicable
law based on advice by outside legal counsel, (i) recommend approval
and adoption of this Agreement and the transactions contemplated hereby by
the stockholders of Xcorporeal and include in any proxy or information
statement (“
Proxy
Statement
”) such recommendation and (ii) take all reasonable
and lawful action to solicit and obtain such
approval.
|
|
|
(b)
|
NQCI,
acting through its board of directors, shall, subject to and in accordance
with applicable law and its certificate of incorporation and by-laws, as
soon as practicable, solicit the written consent of its stockholders to
approve and adopt this Agreement and the transactions contemplated
hereby,
|
|
|
(c)
|
Xcorporeal,
as promptly as practicable shall cause any required Proxy Statement to be
developed and shall allow Purchaser two business days to review such Proxy
Statement prior to it being delivered to its
stockholders.
|
|
|
(d)
|
At
or prior to the Closing, Xcorporeal shall deliver to the Purchaser a
certificate of its Secretary setting forth the voting results from its
stockholder meeting.
|
|
|
(e)
|
Xcorporeal
shall use all reasonable best efforts to hold its stockholders meeting as
soon as practicable after the date
hereof.
|
|
|
8.2.
|
Conduct
of Business of the Companies Prior to the Closing
Date
. During the period from the date of this Agreement
and continuing through the Closing Date, each of the Sellers agrees that
except as expressly contemplated or permitted by this Agreement or to the
extent that Purchaser shall otherwise consent in writing, each of the
Sellers shall use its best efforts to carry on the Business and its
affairs in such a manner so that the representations, warranties and
covenants contained herein shall continue to be accurate and correct
throughout such period, and on and as of the Closing Date as if made by
each Seller on the Closing Date, and throughout such period, each Seller
shall (a) carry on the Business in the ordinary course in substantially
the same manner as previously conducted immediately prior to the execution
of this Agreement, (b) promptly notify Purchaser, in writing, of any
material development with respect to the Business or any assets or
properties of such Seller, (c) confer with Purchaser concerning
operational matters of a material nature, and (d) use best efforts,
recognizing the constraints of its financial condition, (i) to
preserve intact its present business organization, (ii) keep
available the services of its present officers and employees,
(iii) preserve its relationships with customers, suppliers and others
having business dealings with it, and (iv) not do or permit to be done any
action that would result in a Material Adverse
Effect.
|
|
|
8.3.
|
Public
Announcements
. None of the parties to this Agreement shall issue or
make any press release or other public statements or otherwise announce
the transactions described herein to employees, customers or suppliers
except and unless such release, statement or announcement has been jointly
approved by Purchaser and Sellers (which approval shall not be
unreasonably withheld, conditioned or delayed), except as may be required
by applicable law or by obligations pursuant to any listing agreement with
any securities market or any securities market regulations. If
either party is so required to issue or make a press release, public
statement or other announcement, it shall inform the other party prior to
the issuance or making thereof and shall reasonably consult with the other
party regarding the content
thereof.
|
|
|
8.4.
|
Protection
of Trade Secrets
. Each Seller shall take efforts that
are reasonable under the circumstances to prevent the unauthorized
disclosure to any other person or entity of any of the Trade Secrets used
in or related to the Business. Each Seller shall take all steps
reasonably necessary to protect and preserve the confidentiality of the
Trade Secrets and other confidential information of the Business. “
Trade Secrets
” means
business or technical information including, but not limited to, formulas
or methods of manufacturing and production and Know-How, that is not
generally known to other persons or entities who are not subject to an
obligation of nondisclosure and that derives actual or potential
commercial value from not being generally known to other persons or
entities. “
Know-How
” means ideas,
designs, concepts, compilations of information, methods, techniques,
procedures and processes, inventions and discoveries, whether or not
patentable.
|
|
|
8.5.
|
Bulk
Sales Compliance
. Except with respect to each of the
Sellers’ obligations which comprise the Assumed Liabilities, each Seller
shall pay in full from the Purchase Price all sums due and owing its
creditors. Purchaser and each of the Sellers hereby waive
compliance with any “bulk sales” law under any applicable uniform
commercial code. Notwithstanding the foregoing, the Sellers
shall indemnify and hold Purchaser harmless as provided for any
claim, liability or expense arising from or in connection with
non-compliance with any applicable bulk sales law as it pertains to the
transactions contemplated hereby.
|
|
|
8.6.
|
Access
to Information
. Between the date of this Agreement and
the Closing Date, upon reasonable notice and at reasonable times without
undue disruption to the Business, each Seller will give Purchaser and its
authorized representatives full access to all personnel, offices and other
facilities and to all Books and Records of each Seller (including tax
returns and accounting work papers) and will permit Purchaser to make
copies thereof and will fully cooperate with regard to such inspections as
it may reasonably request for any purpose, including verification that the
representations and warranties were true when made and continue to be true
through and including the Closing Date and will cause its officers to
furnish Purchaser such financial and operating data and other information
with respect to the business and properties of each Company which
Purchaser may from time to time reasonably
request.
|
|
|
8.7.
|
All
Reasonable Effort
s
. Subject
to the terms and conditions herein provided, each of the parties hereto
agrees to use all reasonable efforts to take, or cause to be taken, all
actions, and to do, or cause to be done as promptly as practicable, all
things necessary, proper and advisable under applicable laws and
regulations to consummate and make effective as promptly as practicable
the transactions contemplated by this Agreement and the Additional
Documents and to cause the conditions to the Closing set forth herein to
be satisfied.
|
|
|
8.8.
|
Consents
and Approvals
. Sellers shall use reasonable efforts to
obtain all of the Required
Consents.
|
|
|
8.9.
|
Other
Negotiations by Sellers
. During the period from the date
hereof to the Closing Date or the date this Agreement is terminated in
accordance with provisions hereof, no Seller shall directly, or indirectly
through representatives, enter into any agreement, discussion, negotiation
with or provide any information to, any other corporation, firm, entity or
other persons or solicit, encourage, entertain or consider any inquiries
or proposals, with respect to (i) the possible disposition of any of
the Business (including any of the Purchased Assets), (ii) any
business combination involving any Seller, whether by way of merger,
consolidation, share exchange or other transactions, or (iii) the
sale of any shares of the capital stock of any Seller (an “
Acquisition Proposal
”);
provided,
however
, that nothing contained in this Agreement shall prohibit
the board of directors of any Seller from complying with the requirements
of Rule 14e-2(a) under the Exchange Act, if applicable, with respect to an
Acquisition Proposal or any other applicable law or furnishing any
information to, or entering into discussions or negotiations with, any
person that makes an unsolicited bona fide Acquisition Proposal if, (A)
the board of directors of applicable Seller, after consultation with its
outside legal counsel, determines in good faith that the failure to take
such action would be a breach of its fiduciary duties under applicable law
and (B) the board of directors of applicable Seller determines in good
faith that such Acquisition Proposal may lead to a transaction that would,
if consummated, result in a transaction more favorable to such Seller’s
stockholders from a financial point of view than the transactions
contemplated under this Agreement and the agreements contemplated hereby
(any such more favorable Acquisition Proposal, a “
Superior Proposal
”).
Such Seller shall promptly communicate to Purchaser the terms of any
proposal which it may receive in respect of an Acquisition Proposal and
any request by or indication of interest on the part of any third party
with respect to initiation of any Acquisition Proposal or discussions with
respect thereto (the “
Notice
”). Such Seller
shall keep Purchaser informed of any material changes (including material
amendments) to any such Acquisition Proposal. Notwithstanding
the foregoing, neither Seller shall terminate this Agreement pursuant to
this Section 8.9 unless and until (i) three business days have elapsed
following the delivery to Purchaser of a written notice of such
determination by the board of directors of such Seller and (x) such Seller
has delivered the Notice and (y) during such three business day
period, such Seller otherwise cooperates with Purchaser with respect to
the Acquisition Proposal that constitutes a Superior Proposal with the
intent of enabling Purchaser to engage in good faith negotiations to make
such adjustments in the terms and conditions of this Agreement as would
enable such Seller to proceed with the transactions contemplated hereby on
such adjusted terms and conditions and (ii) at the end of such three
business day period the board of directors of the applicable Seller
continues reasonably to believe that such Acquisition Proposal constitutes
a Superior Proposal.
|
|
|
8.10.
|
Supersorbent
Option
. Purchaser hereby grants to Sellers an option to
license/sublicense from Purchaser the perpetual worldwide exclusive rights
to utilize and develop the Supersorbent Technology, with the right to
sublicense (without any additional consideration (other than the royalties
provided for below) due to Purchaser), in the healthcare fields other than
renal, including the right to manufacture any products resulting therefrom
(the “
Option
”). Such
Option shall be exercisable only during the twelve (12) month period
immediately following Sellers’ receipt of written notice from Purchaser of
Purchaser’s receipt of applicable regulatory approval for the sale of a
product in the United States or European Union utilizing the Supersorbent
Technology. Contemporaneously with such notice, Purchaser shall
provide reasonable written evidence to Sellers of its receipt of such
approval. In order to exercise the Option, a Seller shall
provide written notice of such election to Purchaser (the “
Election
Notice
”). Purchaser and Sellers (or Seller, as
applicable) shall negotiate in good faith and shall, within thirty (30)
days of Purchaser’s receipt of the Election Notice, execute a license
agreement the terms and conditions of which shall include the
following:
|
|
|
(a)
|
An
initial royalty payment equal to $7,500,000 in immediately available
funds;
|
|
|
(b)
|
An
ongoing royalty, payable quarterly along with the delivery of reasonable
sales reports and data, in an amount equal to the lesser of $0.75 per
supersorbent cartridge or $1.50 per patient per week in each country where
such sales infringe valid and issued claims of the Supersorbent Patents
issued in such country;
|
|
|
(c)
|
That
Sellers (or Seller, as applicable) shall be entitled to transfer or
sublicense its rights under such license without any additional
consideration due to Purchaser, provided that such transfer or sublicense
is limited to the healthcare fields other than
renal;
|
|
|
(d)
|
That
such license shall consist of the perpetual worldwide exclusive rights to
utilize and develop the Supersorbent Technology, with the right to
sublicense (without any additional consideration (other than the royalties
provided for above) due to Purchaser), in the healthcare fields other than
renal, including the right to manufacture any products resulting
therefrom; and
|
|
|
(e)
|
Other
usual and customary terms found in similar license
agreements.
|
|
9.
|
Restrictive
Covenants
.
|
|
|
9.1.
|
Non-Compete
. As
a material inducement for Purchaser to enter into this Agreement, each of
the Sellers hereby agrees that none of them nor any of their affiliates or
subsidiaries shall, effective as of the Closing and continuing until the
second (2
nd
)
anniversary of the date of Closing (the “
Restricted Period
”),
directly or indirectly, run, own an equity interest in, manage, consult
with, be employed by, furnish services to, operate or control any
business, venture or activity that is directly or indirectly competitive
with Business, provided, however, that any joint venture among Purchaser
and any or all of the Sellers shall not be violation
hereof.
|
|
|
9.2.
|
Nonsolicitation
. As
a material inducement for Purchaser to enter into this Agreement, each of
the Sellers hereby agree that none of them nor any of their affiliates or
subsidiaries shall, during the Restricted Period, directly or indirectly,
take any action that is intended to, or could reasonably be expected to,
result in any customer, employee or vendor of the Purchaser or of the
Business from discontinuing or limiting its affiliation with Purchaser or
the Business.
|
|
|
10.1.
|
Methods
of Termination
. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned at any time prior to the
Closing:
|
|
|
(a)
|
by
the mutual written consent of Purchaser and the
Sellers;
|
|
|
(b)
|
by
Purchaser or by Sellers if any Governmental Authority shall have issued an
order, decree or ruling or taken any other action, which such order,
decree, ruling or action has become final and nonappealable and which has
the effect of permanently restraining, enjoining or otherwise prohibiting
the transactions contemplated by this
Agreement;
|
|
|
(c)
|
by
Sellers, subject to complying with the terms of this Agreement, upon the
decision by the board of directors of any Seller to enter into an
agreement concerning a transaction that constitutes a Superior Proposal,
if such Seller notifies Purchaser in writing that it intends to enter into
such an agreement;
|
|
|
(d)
|
by
Purchaser if the Stockholder Approvals have not been obtained on or before
February 28, 2010;
|
|
|
(e)
|
upon
written notice to the other party by Purchaser or any Seller, if the
Closing has not occurred on or before February 28, 2010 and this Agreement
has not previously been terminated, provided, however that the right to
terminate the Agreement under this Section 10.1(e) shall not be available
to any party if the failure of such party to fulfill any of its
obligations under this Agreement has been the cause of, or resulted in,
the failure of the Closing to occur on or before such
date.
|
|
|
10.2.
|
Procedure
Upon Termination
. In the event of termination of this
Agreement by the Sellers or Purchaser, written notice thereof shall
promptly be given to the other parties and this Agreement shall terminate
and the transactions contemplated hereby shall be abandoned, without
further action by any party to this Agreement. If this
Agreement is so terminated, no party to this Agreement shall have any
right or claim against another party on account of such termination unless
this Agreement is terminated by a party on account of the breach of any
representation, warranty, term or covenant herein by the other party or
parties in which event the non-breaching party shall have all rights and
remedies available to it at law or in
equity.
|
|
|
10.3.
|
Breakup
Fee
. Contemporaneously with the closing of a
transaction contemplated by a Superior Proposal, the Seller party to such
transaction (or if applicable, the Sellers) shall pay to Purchaser, in
immediately available funds, a breakup fee in the amount of
$2,500,000.
|
|
|
11.1.
|
Taxes
. Purchaser
shall pay when due and as required by law all sales and/or use taxes,
recording fees and all other taxes and fees on the transfer of the
Purchased Assets imposed upon it and arising by virtue of the sale of the
Purchased Assets. Sellers shall be responsible for any and all
taxes due in connection with its activities in relation to the Purchased
Assets prior to Closing and Purchaser shall be responsible for any and all
taxes due in connection with its activities in relation to the Purchased
Assets following Closing.
|
|
|
11.2.
|
Notice
. All
notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed duly given to any party (a) upon delivery
to the address of such party set forth below if delivered in person or by
courier or if sent by certified or registered mail (return receipt
requested), postage prepaid, (b) upon dispatch if transmitted by
telecopy or other means of facsimile or electronic mail, in any case to
the parties at the following addresses, telecopy numbers or email
addresses, as the case may be, provided that e-mail and facsimile notices
are confirmed telephonically or by depositing a copy of such notice in the
mail:
|
If to
Xcorporeal or Operations:
12121
Wilshire Blvd, Suite 350
Los
Angeles, CA 890025
Attn: Kelly
J. McCrann
Facsimile
No. 310.923.9969
Email:
kmccrann@xcorporeal.com
If to
NQCI:
National
Quality Care, Inc.
2431 Hill
Drive
Los
Angeles, California 90041
Attention: Chief
Executive Officer
Facsimile
No. 323.254.1015
Email:
nqcinc@sbcglobal.net
If to
Purchaser:
Fresenius
USA, Inc.
920
Winter Street
Waltham,
MA 02451-1457
Attn: Douglas
Kott
Facsimile
No. (781) 699-9698
Email:
doug.kott@fmc-na.com
or to
such other address or telecopy number as any party may designate by written
notice in the aforesaid manner.
|
|
11.3.
|
Assignability
. Other
than as expressly herein, this Agreement and the rights and obligations
hereunder shall not be assignable by any of the parties hereto without the
prior written consent of the other parties; provided that Xcorporeal and
NQCI (if applicable) may assign its respective rights and obligations
hereunder, including under any agreements contemplated by this Agreement,
to the Xcorporeal Trust or a liquidating trust established for the benefit
of NQCI’s stockholders (the “
NQCI Trust
”), as
applicable, and the Xcorporeal Trust and/or the NQCI Trust may assign any
or all of it respective rights and obligations hereunder to any purchaser
of a part or all of such trust’s rights, assets and/or obligations,
without the prior written consent of any other party. This
Agreement shall inure to the benefit of and be binding upon the successors
and any permitted assigns of Purchaser, Sellers, the Xcorporeal Trust and
the NQCI Trust.
|
|
|
11.4.
|
Governing
Law
. The internal law, not the law of conflicts, of the State of
Delaware will govern all questions concerning the construction, validity
and interpretation of this Agreement and the performance of the
obligations imposed by this
Agreement.
|
|
|
11.5.
|
Entire
Agreement
. This Agreement, the Schedules and Exhibits
hereto, and other documents delivered or to be delivered pursuant to this
Agreement, together with the side agreement dated as of the date hereof
among Xcorporeal, Operations and Purchaser, contain or will contain the
entire agreement among the parties hereto with respect to the transactions
contemplated herein and supersede all previous oral and written
agreements. The Schedules to this Agreement constitute a part of this
Agreement and are incorporated into this Agreement for all purposes as if
fully set forth herein.
|
|
|
11.6.
|
Waiver
. Any
failure of any Seller or Purchaser to comply with any obligation,
covenant, agreement or condition herein may be waived in writing by
Purchaser or Sellers, respectively, but such waiver or failure to insist
upon strict compliance with such obligation, covenant, agreement or
condition shall not operate as a waiver of, or estoppel with respect to,
any subsequent or other
failure.
|
|
|
11.7.
|
Amendment
. This
Agreement may be amended, modified, or supplemented only by written
agreement of Purchaser and each
Seller.
|
|
|
11.8.
|
Headings
. The
section and other headings contained in this Agreement are for reference
purposes only and shall not affect the interpretation or meaning of this
Agreement.
|
|
|
11.9.
|
Counterparts
. This
Agreement shall be executed in several counterparts, each of which shall
be deemed an original, but all of which together shall constitute one and
the same Agreement. A signature page of this Agreement executed
and transmitted via facsimile or electronic mail shall be deemed an
original for all purposes.
|
|
|
11.10.
|
Further
Assurances
. At any time after the Closing Date, each
Seller will, at Purchaser’s request and without further consideration,
promptly execute, acknowledge and deliver any other assurances or
documents reasonably requested by Purchaser in order to complete the
conveyance of the Purchased Assets.
|
|
|
11.11.
|
Payment
of Expenses
. All fees, costs and expenses, including
legal and accounting fees, incurred in connection with this Agreement and
the transactions contemplated hereby shall be paid by the party hereto
incurring said fees, costs or
expenses.
|
|
|
11.12.
|
No
Strict Construction
. The language used in this Agreement
shall be deemed to be the language chosen by the parties hereto to express
their mutual intent and no rule of strict construction will be applied
against any party.
|
|
|
11.13.
|
No
Third Party Beneficiary
. Except for the Xcorporeal
Trust, the NQCI Trust and their successors and any permitted assigns, no
third party shall be deemed to benefit from the terms of this Agreement
nor shall any such third party be deemed a beneficiary
hereof.
|
[Signature
Page Follows]
[Signature
Page to Asset Purchase Agreement]
IN
WITNESS WHEREOF, the parties have executed this Agreement on the date first
above written.
|
SELLERS:
|
|
PURCHASER:
|
|
XCORPOREAL,
INC.
|
|
FRESENIUS
USA, INC.
|
|
|
|
|
|
|
|
By:
|
/s/
Kelly J.
McCrann
|
|
By:
|
/s/
Mohsen Reihany
|
|
|
Name:
Kelly J. McCrann
|
|
Name:
|
Mohsen
Reihany
|
|
|
Its:
Chairman and CEO
|
|
Its:
|
Senior
Advisor To Chairman of The Board
|
|
|
|
|
|
|
|
|
XCORPOREAL
OPERATIONS, INC.
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
Kelly J.
McCrann
|
|
|
|
|
Name:
Kelly J. McCrann
|
|
|
|
|
Its:
Chairman and CEO
|
|
|
|
|
|
|
|
|
|
|
NATIONAL
QUALITY CARE, INC.
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
Robert
Snukal
|
|
|
|
|
Name:
Robert Snukal
|
|
|
|
|
Its: CEO
|
|
|
|
Exhibit
A
|
Name of Stockholder of Xcorporeal,
Inc.
|
|
Terren
S. Peizer
|
|
Kelly
J. McCrann
|
|
Robert
Weinstein
|
|
|
|
Name of Stockholder of National Quality Care,
Inc.
|
|
Robert
Snukal
|
|
Leonardo
Berezovsky
|
|
Ronald
Lang
|
|
Jose
Spiwak
|
|
Edmond
Rambod
|
Exhibit
B
SHAREHOLDER
VOTING AGREEMENT
This
SHAREHOLDER VOTING AGREEMENT (this “
Agreement
”) is entered into as
of December 14, 2009, by and among Fresenius USA, Inc., a Massachusetts
corporation (“
Acquiror
”)
and the stockholders of Xcorporeal, Inc., a Delaware corporation (the “
Company
”), identified on
Schedule A
attached
hereto (each a “
Stockholder
” and collectively,
the “
Stockholders
”).
WITNESSETH:
WHEREAS,
as of the date hereof, each Stockholder “beneficially owns” (as such term is
defined in Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as
amended) and is entitled to dispose of (or to direct the disposition of) and to
vote (or to direct the voting of) that total number of shares of common stock,
par value $0.0001 per share (the “
Common Stock
”), of the Company
as are set forth adjacent to such Stockholder’s name on
Schedule A
attached
hereto (the “
Owned
Shares
”), as such shares may be adjusted after the date hereof by stock
dividend, stock split, recapitalization, combination, acquisition,
consolidation, reorganization or other change in the capital structure of the
Company affecting the Common Stock (such shares of Common Stock, together with
any other shares of Common Stock the voting power over which is acquired by a
Stockholder during the period from and including the date hereof through and
including the date on which this Agreement is terminated in accordance with its
terms, are collectively referred to herein as the “
Subject Shares
”);
WHEREAS,
Acquiror, the Company, Xcorporeal Operations, a Delaware corporation and a
wholly owned subsidiary of the Company (“
Operations
”)
and National Quality
Care, Inc., a Delaware corporation (“
NQCI
”) propose to enter into
an Asset Purchase Agreement dated as of the date hereof (the “
Purchase Agreement
”), pursuant
to which Acquiror will purchase certain assets of the Company, Operations and
NQCI, (the “
Acquisition
”);
and
WHEREAS,
as a condition to the willingness of Acquiror to enter into the Purchase
Agreement, and as an inducement and in consideration therefor, Acquiror has
required that the Stockholders agree, and the Stockholders have agreed, to enter
into this Agreement.
NOW,
THEREFORE, in consideration of the foregoing and the mutual premises,
representations, warranties, covenants and agreements contained herein, the
parties hereto, intending to be legally bound, hereby agree as
follows:
ARTICLE
I
DEFINITIONS
Section
1.1.
Capitalized Terms
. For
purposes of this Agreement, capitalized terms used and not defined herein shall
have the respective meanings ascribed to them in the Purchase
Agreement.
ARTICLE
II
VOTING
AGREEMENT AND IRREVOCABLE PROXY
Section
2.1.
Agreement to Vote the Subject
Shares
. Each Stockholder, in its capacity as such, hereby agrees that,
during the period commencing on the date hereof and continuing until the
termination of this Agreement (such period, the “
Voting Period
”), at any
meeting (or any adjournment or postponement thereof) of the holders of any class
or classes of the capital stock of the Company, however called, such Stockholder
shall vote or cause to be voted the Subject Shares (a) in favor of the approval
of the terms of the Purchase Agreement, the Acquisition and the other
transactions contemplated by the Purchase Agreement (and any actions required in
furtherance thereof), (b) against any action, proposal, transaction or agreement
that would result in a breach in any respect of any covenant, representation or
warranty or any other obligation or agreement of the Company under the Purchase
Agreement or of such Stockholder contained in this Agreement, and (c) except as
otherwise agreed to in writing in advance by Acquiror, against any action or
proposal involving the Company that is intended, or could reasonably be
expected, to prevent, impede, interfere with, delay, postpone or adversely
affect the transactions contemplated by the Purchase Agreement. Any
such vote shall be cast or consent shall be given in accordance with such
procedures relating thereto so as to ensure that it is duly counted for purposes
of determining that a quorum is present and for purposes of recording the
results of such vote or consent. During the Voting Period, each Stockholder
agrees not to enter into any written or oral contract, agreement, commitment,
letter of intent, agreement in principle, or understanding with any Person that
violates or conflicts with or could reasonably be expected to violate or
conflict with the provisions and agreements contained in this
Agreement.
Section
2.2.
Grant of Irrevocable Proxy
.
Each Stockholder hereby appoints Acquiror and any designee of Acquiror, and each
of them individually, as such Stockholder’s proxy and attorney-in-fact, with
full power of substitution and resubstitution, to cause such Stockholder’s
shares to be counted as present at any meeting of the Company’s Stockholders
during the Voting Period and to vote or act by written consent during the Voting
Period with respect to the Subject Shares in accordance with Section 2.1.
This proxy is given to secure the performance of the duties of such Stockholder
under this Agreement. Each Stockholder shall promptly cause a copy of this
Agreement to be deposited with the Company at its principal place of business.
Each Stockholder shall take such further action or execute such other
instruments as may be reasonably necessary to effectuate the intent of this
proxy. Each Stockholder hereby revokes all other proxies and powers of attorney
with respect to its Subject Shares that it may have previously granted, in each
case to the extent such prior or subsequent proxies or powers of attorney would
prevent such Stockholder from complying with such Stockholder’s obligations
under this Agreement.
Section
2.3.
Nature of Irrevocable Proxy
.
The proxy and power of attorney granted pursuant to Section 2.2 by each
Stockholder shall be irrevocable during the Voting Period, shall be deemed to be
coupled with an interest sufficient in law to support an irrevocable proxy and
shall revoke any and all prior proxies granted by such Stockholder. The power of
attorney granted by each Stockholder herein is a durable power of attorney and
shall survive the dissolution, bankruptcy, death or incapacity of such
Stockholder. The proxy and power of attorney granted hereunder shall immediately
terminate upon the termination of this Agreement pursuant to Section
5.1.
Section
2.4.
Other
Rights
. Except as provided by this Agreement or the Purchase
Agreement, each Stockholder shall exercise the full rights of a holder of
capital stock of the Company with respect to the Subject Shares and all economic
benefits of and relating to the Subject Shares shall remain vested in and belong
to such Stockholder.
Section
2.5.
Stockholder
Capacity
. Each Stockholder is executing this Agreement
solely in its capacity as an owner of the Subject Shares, and nothing in this
Agreement shall limit or affect any actions taken by such Stockholder in such
Stockholder’s fiduciary capacity as an officer or director of the
Company.
ARTICLE
III
COVENANTS
Section
3.1.
Generally
. Each
Stockholder agrees that during the Voting Period, except as contemplated by the
terms of this Agreement, such Stockholder shall not (i) sell, transfer, tender,
pledge, encumber, assign or otherwise dispose of (collectively, a “
Transfer
”), or enter into any
contract, option or other agreement with respect to, or consent to, a Transfer
of, any or all of the Subject Shares, (ii) grant any proxy, power of attorney,
or other authorization in or with respect to the Subject Shares, or (iii) take
any action that would have the effect of preventing, impeding, interfering with
or adversely affecting its ability to perform its obligations under this
Agreement.
Section
3.2.
Standstill Obligations of
Stockholders
. Each Stockholder covenants and agrees with Acquiror that,
during the Voting Period:
(a) Such
Stockholder shall not, nor shall such Stockholder permit any of its controlled
Affiliates to, nor shall such Stockholder act in concert with or permit any of
its controlled Affiliates to act in concert with any Person to make, or in any
manner participate in, directly or indirectly, a “solicitation” of “proxies” (as
defined in the rules and regulations of the Securities and Exchange Commission)
or powers of attorney or similar rights to vote, or seek to advise or influence
any Person with respect to the voting of, any shares of Common Stock in
connection with any vote or other action on any matter, other than to recommend
that Stockholders of the Company vote in favor of the Acquisition and the
Purchase Agreement and otherwise as expressly provided by Article II of this
Agreement.
(b) Such
Stockholder shall not, nor shall such Stockholder permit any of its controlled
Affiliates to, nor shall such Stockholder act in concert with or permit any of
its controlled Affiliates to act in concert with any Person to, deposit any
shares of Common Stock in a voting trust or subject any shares of Common Stock
to any arrangement or agreement with any Person with respect to the voting of
such shares of Common Stock except as provided by Article II of this
Agreement.
(c) Such
Stockholder shall not, and shall cause its Representatives not to, directly or
indirectly: (i) submit, solicit, initiate, encourage or discuss any
proposal or offer from any Person or enter into any agreement or accept any
offer relating to any Acquisition Proposal, or (ii) furnish any information
with respect to, assist or participate in or facilitate in any other manner an
effort or attempt by any Person to effect or seek to effect any Acquisition
Proposal; provided, that nothing in this Section 3 shall limit or affect any
actions taken by such Stockholder in such Stockholder’s fiduciary capacity as an
officer or director of the Company. Each Stockholder hereby represents that it
is not now engaged in discussions or negotiations with any party other than
Acquiror with respect to any Acquisition Proposal. Each Stockholder
shall (i) promptly notify Acquiror (orally and in writing) if any offer is made
to such Stockholder, any discussions or negotiations are sought to be initiated
with such Stockholder, any inquiry, proposal or contact is made or any
information is requested from such Stockholder with respect to any Acquisition
Proposal, (ii) promptly notify Acquiror of the terms of any proposal that such
Stockholder may receive in respect of any Acquisition Proposal, and the identity
of the prospective purchaser, (iii) promptly provide Acquiror with a copy of any
such offer, if written, or a written summary of such offer, if not in writing,
and (iv) promptly keep Acquiror informed in all material respects of the status
and details (including material amendments or proposed material amendments) of
any such Acquisition Proposal of which such Stockholder is aware.
ARTICLE
IV
REPRESENTATIONS
AND WARRANTIES OF STOCKHOLDER
Each
Stockholder hereby represents and warrants to Acquiror as follows:
Section
4.1.
Authority
. Such Stockholder
has all legal capacity and authority to execute and deliver this Agreement and
to consummate the transactions contemplated hereby. This Agreement
has been duly executed and delivered by such Stockholder and constitutes a valid
and binding obligation of such Stockholder, enforceable in accordance with its
terms.
Section
4.2.
Ownership of Shares
. As of the
date hereof, such Stockholder is the lawful owner of the Owned Shares and has
the sole power to vote (or cause to be voted) and dispose of such Owned
Shares. Such Stockholder holds that number of certificated Owned
Shares and uncertificated Owned Shares, in each case, as identified on
Schedule A
hereto.
Other than the Subject Shares and options to purchase Common Stock, as
identified on
Schedule
A
(which Schedule identifies any such exception by Stockholder), such
Stockholder does not own or hold any right to acquire any additional shares of
any class of capital stock of the Company or other securities of the Company or
any interest therein or any voting rights with respect to any securities of the
Company. The Subject Shares are not subject to any voting trust agreement or
other written or oral contracts, agreement, arrangement, commitment or
understanding to which such Stockholder is party restricting or otherwise
relating to the voting, dividend rights or disposition of the Subject Shares,
other than those created by this Agreement. Such Stockholder has good
and valid title to the Owned Shares, free and clear of any and all pledges,
mortgages, liens, charges, proxies, voting agreements, encumbrances, adverse
claims, options, security interests and demands of any nature or kind
whatsoever, other than those created by this Agreement.
Section
4.3.
No Conflicts
. (a) No filing
with any Governmental Authority, and no authorization, consent or approval of
any other Person is necessary for the execution of this Agreement by such
Stockholder and the consummation by such Stockholder of the transactions
contemplated hereby and (b) none of the execution and delivery of this Agreement
by such Stockholder, the consummation by such Stockholder of the transactions
contemplated hereby or compliance by such Stockholder with any of the provisions
hereof shall (i) result in, or give rise to, a violation or breach of or a
default under any of the terms of any material contract, understanding,
agreement or other instrument or obligation to which such Stockholder is a party
or by which such Stockholder or any of its Subject Shares or assets may be
bound, or (ii) violate any Applicable Law which could reasonably be
expected to adversely affect such Stockholder’s ability to perform its
obligations under this Agreement.
Section
4.4.
Reliance by Acquiror
. Such
Stockholder understands and acknowledges that Acquiror is entering into the
Purchase Agreement in reliance upon the execution and delivery of this Agreement
by such Stockholder.
ARTICLE
V
TERMINATION
Section
5.1.
Termination
. This Agreement
shall terminate, and neither Acquiror nor any Stockholder shall have any rights
or obligations hereunder and this Agreement shall become null and void and have
no effect upon the earliest to occur of (i) the mutual consent of Acquiror and
the Stockholders to terminate this Agreement, (ii) the termination of the
Purchase Agreement in accordance with the terms thereof, (iii) the Closing Date,
and (iv) the first anniversary of the date hereof; provided, however, that the
termination of this Agreement shall not prevent any party hereunder from seeking
any remedies (at law or in equity) against any other party hereto for such
party’s breach of any of the terms of this Agreement. Notwithstanding the
foregoing, Section 6.1 and Sections 6.4 through 6.18, inclusive, of this
Agreement shall survive the termination of this Agreement.
ARTICLE
VI
MISCELLANEOUS
Section
6.1.
Appraisal Rights
. To the
extent permitted by applicable law, each Stockholder hereby waives any rights of
appraisal or rights to dissent from the Acquisition that such Stockholder may
have under applicable law.
Section
6.2.
Publication
.
(a) Each
Stockholder agrees that, during the Voting Period, such Stockholder shall not
issue any public release or announcement concerning the transactions
contemplated by this Agreement and the Purchase Agreement without the prior
consent of Acquiror, except as such release or announcement may, upon the advice
of such Stockholder’s counsel, be required by Applicable Law, in which case such
Stockholder shall inform the Acquiror prior to the issuance thereof and shall
reasonably consult with the Acquiror regarding thereof.
(b) Each
Stockholder hereby permits Acquiror and/or the Company to publish and disclose
in press releases and any other disclosures or filings required by Applicable
Law, its identity and ownership of shares of the Common Stock, the nature of its
commitments, arrangements and understandings pursuant to this Agreement and/or
the entire text of this Agreement.
Section
6.3.
Further Actions
. Each of the
parties hereto agrees that it will use its reasonable best efforts to do all
things reasonably necessary to effectuate this Agreement.
Section
6.4.
Fees and Expenses
. Except as
otherwise provided herein, each of the parties shall be responsible for its own
fees and expenses (including, without limitation, the fees and expenses of
financial consultants, investment bankers, accountants and counsel) in
connection with the entering into of this Agreement and the consummation of the
transactions contemplated hereby and the Purchase Agreement, regardless of
whether the Acquisition is consummated.
Section
6.5.
Amendments, Waivers, etc
. This
Agreement may not be amended, changed, supplemented, waived or otherwise
modified, except upon the execution and delivery of a written agreement executed
by each of the parties hereto. The failure of any party hereto to exercise any
right, power or remedy provided under this Agreement or otherwise available in
respect hereof at law or in equity, or to insist upon compliance by any other
party hereto with its obligations hereunder, and any custom or practice of the
parties at variance with the terms hereof shall not constitute a waiver by such
party of its right to exercise any such or other right, power or remedy or to
demand such compliance.
Section
6.6.
Remedies
.
(a) Each
Stockholder acknowledges that irreparable damage would occur and that it will be
impossible to measure in money the damage to Acquiror if such Stockholder fails
to comply with the obligations imposed by this Agreement, and that, in the event
of any such failure, Acquiror will not have an adequate remedy at law or in
damages. Accordingly, each Stockholder agrees that injunctive relief or any
other equitable remedy, in addition to any remedies at law or damages, is the
appropriate remedy for any such failure and will not oppose the granting of any
such remedy on the basis that Acquiror has an adequate remedy at law. Each
Stockholder agrees not to seek, and agrees to waive any requirement for, the
securing or posting of a bond in connection with Acquiror seeking or obtaining
such equitable relief.
(b) Each
Stockholder also agrees that in the event that such Stockholder fails to comply
with any of its obligations imposed by this Agreement, Acquiror shall be
entitled to recover all costs and expenses incurred by Acquiror or its
Affiliates, including reasonable attorneys’ fees and costs, in addition to any
other remedies to which Acquiror or its Affiliates may be entitled at law or in
equity.
Section
6.7.
Notices
. Any notices or other
communications required or permitted under, or otherwise in connection with this
Agreement shall be in writing and shall be deemed to have been duly given when
delivered in person or upon confirmation of receipt when transmitted by
facsimile transmission (with confirmation) or on receipt after dispatch by
registered or certified mail, postage prepaid, addressed, or on the next
business day if transmitted by national overnight courier, in each case as
follows:
If to
Acquiror, addressed to it at:
Fresenius
USA, Inc.
920
Winter Street
Waltham,
MA 02451-1457
Attn:
Douglas Kott
Facsimile
No. (781) 699-9698
Email:
doug.kott@fmc-na.com
If to a
Stockholder: addressed to such Stockholder as set forth on
Schedule
A
Section
6.8.
Headings
. The headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement.
Section
6.9.
Severability
. If any term or
other provision of this Agreement is invalid, illegal or incapable of being
enforced by any rule of Applicable Law or public policy, all other conditions
and provisions of this Agreement shall nevertheless remain in full force and
effect. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner to the end that
transactions contemplated hereby are fulfilled to the extent
possible.
Section
6.10.
Entire Agreement
. This
Agreement (together with the Purchase Agreement, the schedules and exhibits
thereto and other documents and agreements delivered pursuant to the Purchase
Agreement, to the extent referred to herein) constitutes the entire agreement of
the parties and supersedes all prior agreements and undertakings, both written
and oral, between the parties, or any of them, with respect to the subject
matter hereof.
Section
6.11.
Assignment
. This Agreement
shall not be assigned by operation of law or otherwise without the prior written
consent of each of the parties, except that Acquiror may assign and transfer its
rights and obligations hereunder to any entity that is wholly owned, directly or
indirectly, by Acquiror.
Section
6.12.
Certain Events
. Stockholder
agrees that this Agreement and the obligations hereunder shall attach to the
Subject Shares and shall be binding upon any Person or entity to which legal or
beneficial ownership of such Subject Shares shall pass, whether by operation of
law, or otherwise.
Section
6.13.
Parties in Interest
. This
Agreement shall be binding upon and inure solely to the benefit of each party
hereto and their respective successors and assigns, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
Person any right, benefit or remedy of any nature whatsoever under or by reason
of this Agreement.
Section
6.14.
Mutual
Drafting
. Each party hereto has participated in the drafting
of this Agreement, which each party acknowledges is the result of extensive
negotiations between the parties.
Section
6.15.
Review By
Counsel
. Each Stockholder acknowledges that the Stockholder
(a) has read this Agreement; (b) understands that this Agreement
constitutes certain binding obligations upon the part of the Stockholder;
(c) has been fully advised by legal counsel; and (d) intends to be
bound personally and legally by this Agreement.
Section
6.16.
Governing
Law
. This Agreement and the transactions contemplated hereby,
and all disputes between the parties under or related to the Agreement or the
facts and circumstances leading to its execution, whether in contract, tort or
otherwise, shall be governed by and construed in accordance with the laws of the
State of Delaware, without regard to the application of Delaware principles of
conflicts of law.
Section
6.17.
Counterparts
. This Agreement
may be executed in two or more counterparts, and by the different parties hereto
in separate counterparts, each of which when executed shall be deemed to be an
original but all of which taken together shall constitute one and the same
agreement.
Remainder
of Page Intentionally Left Blank
Signature
Page Follows
IN
WITNESS WHEREOF, Acquiror and the Stockholders have caused this Agreement to be
duly executed as of the day and year first above written.
|
FRESENIUS
USA, INC.
|
|
|
|
By:
|
/s/ Mohsen
Reihany
|
|
Name:
|
Mohsen
Reihany
|
|
Title:
|
Senior
Advisor To Chairman of The
Board
|
|
STOCKHOLDERS:
|
|
|
|
/s/
Terren S.
Peizer
|
|
Terren
S. Peizer
|
|
|
|
|
|
Jay
A. Wolf
|
|
|
|
/s/
Kelly J. McCrann
|
|
Kelly
J. McCrann
|
|
|
|
/s/
Robert
Weinstein
|
|
Robert
Weinstein
|
[Signature
Page to Voting Agreement]
Schedule
A
|
Name of Stockholder (including address)
|
|
Common Stock
|
|
|
Options
|
|
|
Terren
S. Peizer
|
|
|
6,232,596
|
|
|
|
700,000
|
|
|
Kelly
J. McCrann
|
|
|
100,000
|
|
|
|
800,000
|
|
|
Robert
Weinstein
|
|
|
20,000
|
|
|
|
300,000
|
|
ANNEX B
PLAN
OF LIQUIDATION AND
DISSOLUTION
OF XCORPOREAL, INC.
This Plan
of Liquidation and Dissolution (the “Plan”) is intended to accomplish the
dissolution and liquidation of Xcorporeal, Inc., a Delaware corporation (the
“Company”), in accordance with Section 275 and other applicable provisions of
the General Corporation Law of the State of Delaware (“DGCL”).
1. Approval
and Adoption of Plan.
This Plan
shall be effective when all of the following steps have been
completed:
(a)
Resolutions of the Company’s Board
of Directors:
The Company’s Board of Directors (the “ Board ”) shall
have adopted a resolution or resolutions with respect to the
following:
(i)
Complete Liquidation and
Dissolution:
The Board shall deem it advisable for the Company
to be dissolved and liquidated completely.
(ii)
Adoption of the
Plan:
The Board shall approve this Plan as the appropriate
means for carrying out the complete dissolution and liquidation of the
Company.
(iii)
Sale and Distribution of
Assets:
The Board shall determine that, as part of the Plan
(but not as a separate matter arising under Section 271 of the DGCL), it is
deemed expedient and in the best interests of the Company (x) subject to the
approval of the Company’s stockholders at a special or annual meeting of
the stockholders of the Company called for such purpose by the Board (the
“Stockholder Approval”), to sell all or substantially all of the Company’s
assets to Fresenius USA, Inc., a Massachusetts corporation and a wholly-owned
subsidiary of Fresenius Medical Care Holdings, Inc. (the “Asset Sale”), to
approve the adoption of this Plan and to establish the Liquidating Trust (as
defined below) and transfer the proceeds of the Asset Sale and any of the
Company’s assets remaining after the Asset Sale (collectively, the “Remaining
Assets”) and all liabilities and obligations of the Company remaining on the
date of dissolution of the Company (collectively, the “Remaining Liabilities”)
to the Liquidating Trust or (y) if Stockholder Approval is not obtained, to sell
or distribute to stockholders all or substantially all of the Company’s property
and assets, if any, in order to facilitate liquidation and distribution to the
Company’s creditors and stockholders, as appropriate.
(b)
Adoption of this Plan by the
Company’s Stockholders.
This Plan, including the dissolution
of the Company and those provisions authorizing the Board (x) subject to
Stockholder Approval, to proceed with the Asset Sale and transfer to the
Liquidating Trust of the Remaining Assets or (y) to sell or distribute to
stockholders all or substantially all of the Company’s assets in connection
therewith, shall have been approved by the holders of a majority of the voting
power of the outstanding capital stock of the Company entitled to vote thereon
bat a special or annual meeting of the stockholders of the Company called for
such purpose by the Board. The date of such approval shall be referred to in
this Plan as the “ Approval Date .”
2. Dissolution
and Liquidation Period.
Once the
Plan is effective, the steps set forth below shall be completed at such times as
the Board, in its absolute discretion, deems necessary, appropriate or
advisable:
(a) the
filing of a Certificate of Dissolution of the Company (the “Certificate of
Dissolution”) pursuant to Section 275 of the DGCL specifying the date (no later
than ninety (90) days after the filing) upon which the Certificate of
Dissolution shall become effective (the “ Effective Date ”), and the completion
of all actions that may be necessary, appropriate or desirable to dissolve the
Company;
(b) the
cessation of all of the Company’s business activities and the withdrawal of the
Company from any jurisdiction in which it is qualified to do business, except
and insofar as necessary for the sale of its assets and for the proper winding
up of the Company pursuant to Section 278 of the DGCL;
(c) the
negotiation and consummation of sales and conversion of all of the assets and
properties of the Company remaining after the Asset Sale into cash and/or other
distribution form, including the assumption by the purchaser or purchasers of
any or all liabilities of the Company;
(d) the
taking of all actions required or permitted under the dissolution procedures of
Section 281(b) of the DGCL; and
(e) the
(i) payment or making reasonable provision to pay all claims and obligations of
the Company, including all contingent, conditional or unmatured claims known to
the Company; and (ii) making of such provision as will be reasonably likely to
be sufficient to provide compensation for any claim against the Company which is
the subject of a pending action, suit or proceeding to which the Company is a
party; and (iii) making of such provision as shall be reasonably likely to be
sufficient to provide compensation for claims that have not been made known to
the Company or that have not arisen but that, based on facts known to the
Company, are likely to arise or to become known to the Company within ten years
after the date of dissolution. Provided that (x) the Stockholder Approval
shall have been obtained, the Approval Date shall have occurred and a
Certificate of Dissolution shall have been filed with respect to the Company as
provided in Section 275(d) of the DGCL, the Remaining Assets and all Remaining
Liabilities and any unexpended amounts remaining in the Contingency Reserve (as
defined below) shall be transferred to the Liquidating Trust described in
Section 8 below no later than 90 calendar days of the Approval Date for purposes
of satisfying such Remaining Liabilities and the distribution of the funds and
assets of the Company, if any, to its stockholders pursuant to the terms of the
Liquidating Trust, this Plan and the DGCL or (y) if the Stockholder Approval is
not obtained, the Approval Date shall have occurred and a Certificate of
Dissolution shall have been filed with respect to the Company as provided in
Section 275(d) of the DGCL, any unexpended amounts remaining in the Contingency
Reserve (defined below) and the distribution of the remaining funds, assets and
properties of the Company, if any, to its stockholders no later than the tenth
anniversary of the Approval Date (the “
Final Distribution Date
”).
Without
limiting the generality of the foregoing, the Board may instruct the officers of
the Company to delay the taking of any of the foregoing steps until the Company
has performed such actions as the Board or such officers determine to be
necessary, appropriate or advisable for the Company to maximize the value of the
Company’s assets upon liquidation; provided, that such steps may not be delayed
longer than is permitted by applicable law.
In
addition, notwithstanding the foregoing, the Company shall not be required to
follow the procedures described in Section 281(b) of the DGCL, and the adoption
of the Plan by the stockholder of the Company as provided in Section 1 above
shall constitute full and complete authority for the Board and the officers of
the Company, without further stockholder action, to proceed with the dissolution
and liquidation of the Company in accordance with any applicable provision of
the DGCL, including, without limitation, Sections 280 and 281(a)
thereof.
3. Authority
of Officers and Directors.
After the
Effective Date, the Board and the officers of the Company shall continue in
their positions for the purpose of winding up the affairs of the Company as
contemplated by Delaware law. The Board may appoint officers, hire employees and
retain independent contractors and advisors in connection with the winding up
process, and is authorized to pay to the Company’s officers, directors and
employees, or any of them, compensation or additional compensation above their
regular compensation, in money or other property, in recognition of the
extraordinary efforts they, or any of them, shall be required to undertake, or
actually undertake, in connection with the successful implementation of this
Plan. Adoption of this Plan by the stockholders of the Company as provided in
Section 1 above shall constitute the approval by the Company’s stockholders of
the Board’s authorization of the payment of any such compensation.
The
adoption of the Plan by the stockholders of the Company as provided in Section 1
above shall constitute full and complete authority for the Board and the
officers of the Company, without further stockholder action, to do and perform
any and all acts and to make, execute and deliver any and all agreements,
conveyances, assignments, transfers, certificates and other documents of any
kind and character that the Board or such officers deem necessary, appropriate
or advisable: (i) to dissolve the Company in accordance with the laws of the
State of Delaware and cause its withdrawal from all jurisdictions in which it is
authorized to do business; (ii) (x) subject to Stockholder Approval, to proceed
with the Asset Sale and to transfer the Remaining Assets and Remaining
Liabilities to the Liquidating Trust or (y) otherwise to sell, dispose, convey,
transfer and deliver all of the assets and properties of the Company; (iii) to
satisfy or provide for the satisfaction of the Company’s obligations in
accordance with Sections 280 and 281 of the DGCL; and (iv) (x) for the Trustee
or for the Board, as applicable, to distribute any properties and assets of the
Company and all remaining funds
pro
rata
to the stockholders of the Company’s common stock in
accordance with the respective number of shares then held of record as of
Effective Date.
4. Conversion
of Assets Into Cash and/or Other Distributable Form.
Subject
to approval by the Board and the consummation of the Asset Sale, the officers,
employees and agents of the Company shall, as promptly as feasible, proceed to
(i) collect all sums due or owing to the Company, (ii) sell and convert into
cash and/or other distributable form of all the remaining assets and properties
of the Company, if any, and (iii) out of the assets and properties of the
Company, pay, satisfy and discharge or make adequate provision for the payment,
satisfaction and discharge of all debts and liabilities of the Company pursuant
to Section 2 above, including all expenses of the sales of assets and of the
dissolution and liquidation provided for by the Plan.
The
adoption of the Plan by the stockholders of the Company as provided in Section 1
above shall constitute full and complete authority for the Asset Sale, subject
to Stockholder Approval, or for any sale, exchange or other disposition of the
properties and assets of the Company contemplated by the Plan, whether such
sale, exchange or other disposition occurs in one transaction or a series of
transactions, and shall constitute ratification of all such contracts for sale,
exchange or other disposition. The Company may invest in such interim assets as
determined by the Board in its discretion, pending conversion to cash or other
distributable forms.
5. Professional
Fees and Expenses.
It is
specifically contemplated that the Board may authorize the payment of a retainer
fee to a law firm or law firms selected by the Board for legal fees and expenses
of the Company, including, among other things, to cover any costs payable
pursuant to the indemnification of the Company’s officers or members of the
Board provided by the Company pursuant to its Certificate of Incorporation and
Bylaws, as amended and/or restated, or the DGCL or otherwise.
In
addition, in connection with and for the purpose of implementing and assuring
completion of this Plan, the Company may, in the sole and absolute discretion of
the Board, pay any brokerage, agency and other fees and expenses of persons
rendering services, including accountants and tax advisors, to the Company in
connection with the Asset Sale, subject to Stockholder Approval, and the
collection, sale, exchange or other disposition of the Company’s property and
assets and the implementation of this Plan.
6. Indemnification.
The
Company shall continue to indemnify its officers, directors, employees and
agents in accordance with its Certificate of Incorporation and Amended and
Restated Bylaws and any contractual arrangements, for actions taken in
connection with this Plan and the winding up of the affairs of the Company. The
Board, in its sole and absolute discretion, is authorized to obtain and maintain
insurance as may be necessary, appropriate or advisable to cover the Company’s
obligations hereunder, including without limitation directors’ and officers’
liability coverage.
7. Liquidating
Distributions.
Subject
to the terms of Section 8 of this Plan in the event Stockholder Approval is
obtained and the Asset Sale is consummated, liquidating distributions, if any,
shall be made from time to time after the filing of the Certificate of
Dissolution as provided in Section 2 above and adoption of this Plan by the
stockholders to the stockholders of record, at the close of business on such
date (or pursuant to the terms of the Liquidating Trust, to the stockholders of
record as of the close of business on the Effective Date),
pro rata
to stockholders of
the Company’s common stock in accordance with the respective number of shares
then held of record; provided that in the opinion of the Board or the Trustee,
as applicable, adequate provision has been made for the payment, satisfaction
and discharge of all known, unascertained or contingent debts, obligations and
liabilities of the Company (including costs and expenses incurred and
anticipated to be incurred in connection with the sale and distribution of
assets and liquidation of the Company). Liquidation distributions shall be made
in cash or in kind, including in stock of, or ownership interests in,
subsidiaries of the Company and remaining assets of the Company, if any. Such
distributions may occur in a single distribution or in a series of
distributions, in such amounts and at such time or times as the Board or the
Trustee, as applicable, in its absolute discretion, and in accordance with
Section 281 of the DGCL, may determine; provided, however, that the Company
shall complete the distribution of all its properties and assets to its
stockholders as provided in this Section 7 or to the Liquidating Trust as
provided in Section 8 below as soon as practicable following the filing of its
Certificate of Dissolution with the Secretary of State of the State of Delaware
and in any event on or prior to the Final Distribution Date.
If and to
the extent deemed necessary, appropriate or desirable by the Board or the
Trustee, as applicable, in its absolute discretion, the Company may establish
and set aside a reasonable amount of cash and/or property to satisfy claims
against the Company and other obligations of the Company (a “Contingency
Reserve”), including, without limitations, (i) tax obligations, (ii) all
expenses of the sale of the Company’s property and assets, if any, (iii) the
salary, fees and expenses of members of the Board, management and employees,
(iv) expenses for the collection and defense of the Company’s property and
assets, (v) the expenses described in Sections 3, 5 and 6 above and (vi) all
other expenses related to the dissolution and liquidation of the Company and the
winding-up of its affairs. Any unexpended amounts remaining in a Contingency
Reserve shall be transferred to the Liquidating Trust described in Section 8
below or distributed to the Company’s stockholders no later than the Final
Distribution Date.
As
provided in Section 12 below, distributions made pursuant to this Plan shall be
treated as made in complete liquidation of the Company within the meaning of the
Internal Revenue Code of 1986, as amended (the “Code”) and the regulations
promulgated thereunder. Subject to Stockholder Approval, the adoption of the
Plan by the stockholders of the Company as provided in Section 1 above
shall constitute full and complete authority for the making by the Board of all
distributions contemplated in this Section 7.
8. Liquidating
Trusts.
Subject
to Stockholder Approval and the consummation of the Asset Sale, the Company will
transfer the Remaining Assets and all Remaining Liabilities to a
liquidating trust established for the benefit of the Company’s stockholders (the
“Liquidating Trust”), which assets, subject to the satisfaction of all Remaining
Liabilities, would thereafter be sold or distributed on terms approved by the
Trustee (as defined below). In addition, in the event the Company has not
completed the distribution of its assets and properties to stockholders as
provided in Section 7 above on or prior to the Final Distribution Date, all the
remaining funds, properties, and assets of the Company and all interests therein
including any Contingency Reserve shall be distributed pro rata to the Company’s
stockholders of record as of the close of business on the Effective Date. Any
liquidating trusts established pursuant to this Section 8 shall exist for the
principal purpose of liquidating and distributing the assets and properties
transferred to them, and for the sole benefit of the Company’s stockholders.
Notwithstanding the foregoing, to the extent that a distribution or transfer of
any asset or property cannot be effected without the consent of a governmental
authority or third party, no such distribution or transfer shall be effected
without such consent.
The
Liquidating Trust shall be established pursuant to the liquidating trust
agreement to be entered into with one or more directors, officers or third party
individuals or entities appointed by the Board on behalf of the stockholders to
act as trustees thereunder (the “Trustee”) in a form approved by the Board and
compliant in all material respects with applicable Internal Revenue Service
guidelines treating such liquidating trusts as liquidating trusts for U.S.
federal income tax purposes. Any Trustee so appointed, in its capacity as
trustee, shall assume all of the obligations and liabilities of the Company with
respect to the transferred assets, including, without limitation, any
unsatisfied claims and unascertained or contingent liabilities relating to these
transferred assets, and any such conveyances to the Trustee shall be in trust
for the stockholders of the Company. Further, any conveyance of assets to the
Liquidating Trust established pursuant to this Section 8 shall be deemed to be a
distribution of property and assets by the Company to the stockholders holding a
beneficial interest in the Liquidating Trust for the purposes of Section 7 of
this Plan. Any such conveyance to the Liquidating Trust shall be in trust for
the stockholders of the Company holding a beneficial interest in the Liquidating
Trust. Upon a determination by the Trustee of the Liquidating Trust that all of
the trust’s liabilities have been satisfied, but in any event, not more than
three years from the date of the transfer of the Remaining Assets to the
Liquidating Trust (subject to an extension only under certain circumstances),
the Liquidating Trust shall, to the fullest extent permitted by law, make a
final distribution of any remaining assets to the holders of the beneficial
interests of the trust.
(x) With
the exception of the Company having not completed the distribution of its assets
and properties to stockholders as provided in Section 7 above on or prior to the
Final Distribution Date, in which case the adoption of the Plan by approval of
the stockholders of the Company as provided in Section 1 above, or (y) the
adoption of the Plan, the Asset Sale and the Liquidating Trust Agreement by
approval of the stockholders of the Company as provided in Section 1
above, if applicable, shall constitute full and complete appointment of the
Trustee and the transfer of any assets by the Company to the Liquidating Trust
as contemplated in this Section 8.
9. Unallocated
Stockholders.
Any cash
or other property held for distribution to stockholders of the Company who have
not, at the time of the final liquidation distribution, whether made to
stockholders pursuant to Section 7 above or to the Liquidating Trustees pursuant
to Section 8 above, been located shall be transferred to the official of
such state or other jurisdiction authorized by applicable law to receive the
proceeds of such distribution. Such cash or other property shall thereafter be
held by such person(s) solely for the benefit of and ultimate distribution, but
without interest thereon, to such former stockholder or stockholders
entitled to receive such assets, who shall constitute the sole equitable owners
thereof, subject only to such escheat or other laws as may be applicable to
unclaimed funds or property, and thereupon all responsibilities and liabilities
of the Company or any Trustee with respect thereto shall be satisfied and
exhausted. In no event shall any of such assets revert to or become the property
of the Company.
10. Amendment,
Modification or Abandonment of Plan.
If for
any reason the Board determines that such action would be in the best interests
of the Company, it may amend, modify or abandon the Plan and all actions
contemplated thereunder, including the Asset Sale or the proposed dissolution of
the Company, notwithstanding stockholder approval of the Asset Sale or the Plan,
to the extent permitted by the DGCL; provided, however, that the Board shall not
abandon the Plan following the filing of the Certificate of Dissolution without
first obtaining stockholder consent. Upon the abandonment of the Plan, the Plan
shall be void.
11. Cancellation
of Stock and Stock Certificates.
At the
time of the final liquidating distribution, whether made to stockholders of the
Company pursuant to Section 7 above or to the Trustees pursuant to Section 8
above, the Company may call upon the stockholders to surrender to the Company
the certificates that represented their shares of stock. In the event that the
final liquidating distribution is made to a Trustee pursuant to Section 8 above,
at the time of such final liquidating distribution, the Trustee shall generally
notify the record holders of shares of stock on the Effective Date of their
respective percentage beneficial interests in the assets held by the Trustee.
Following the Effective Date, the Company shall no longer permit or effect
transfers of any of its stock.
12. Liquidation
under Code Sections 331 and 336.
It is
intended that this Plan shall be a plan of complete liquidation of the Company
in accordance with the terms of Sections 331 and 336 of the Code. The Plan shall
be deemed to authorize the taking of such action as, in the opinion of counsel
to the Company, may be necessary to conform with the provisions of said Sections
331 and 336 and the regulations promulgated thereunder.
13. Filing
of Tax Forms.
The
appropriate officers of the Company are authorized and directed, within thirty
(30) days after the effective date of the Plan, to execute and file a United
States Treasury Form 966 pursuant to Section 6043 of the Code and such
additional forms and reports with the Internal Revenue Service as may be
necessary or appropriate in connection with this Plan and the carrying out
thereof.
ANNEX C
LIQUIDATING
TRUST AGREEMENT
LIQUIDATING
TRUST AGREEMENT, dated as of _________, 2010, by and among Xcorporeal, Inc., a
Delaware corporation (“Xcorporeal”), Xcorporeal Operations, Inc., a Delaware
corporation and a wholly-owned subsidiary of the Company (“Operations”, and
together with Xcorporeal, the “Company”), and _____________, a California
limited liability company (the “Trustee”).
WHEREAS,
on _________, 2010, each of Xcorporeal’s and Operations’ stockholders approved a
plan of complete liquidation and dissolution of the Company (the “Plan”),
including creation of the Trust (as defined below) pursuant to Section 275 of
the General Corporation Law of the State of Delaware (the “DGCL”).
WHEREAS,
the Company’s Board of Directors (the “Board”) has approved the dissolution of
the Company pursuant to the Plan;
WHEREAS,
pursuant to the Plan, each of Xcorporeal and Operations has filed a Certificate
of Dissolution, effective as of ________, 2010 (the “Final Record Date”),
with the Delaware Secretary of State;
WHEREAS,
the Plan provides, among other things, that the Board will cause the Company to
dispose of all of its Retained Assets, wind up its affairs, pay or adequately
provide for the payment of all of its liabilities and distribute to or for the
benefit of Xcorporeal’s stockholders all of the Company’s assets, including
interests in any liquidating trust established in connection with the complete
liquidation of the Company;
WHEREAS,
the Board believes it to be in the best interest of the Company to complete the
liquidation of the Company by transferring all Retained Assets of the
Company to a liquidating trust (the “Trust”), to be held, administered and
distributed by the Trustee in accordance with the provisions of this Agreement
for the benefit of the stockholders of record of the Company as of the close of
business on the Final Record Date; and
WHEREAS,
the Trust is intended and shall be deemed to be a “successor entity” as defined
in Section 280(e) of the DGCL, and the assignment of the Retained Assets to the
Trust shall not be subject to the consent of any third party, unless otherwise
required by applicable law.
NOW,
THEREFORE, in consideration of these premises and other valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE
I
NAMES
AND DEFINITIONS
1.1 Name.
The Trust shall be known as the Xcorporeal, Inc. Liquidating
Trust.
1.2 Defined
Terms. For all purposes of this Agreement, unless the context
otherwise requires, the following defined terms shall have the meanings as
follows:
(a) “Affiliate”
of any Person means any entity that controls, is controlled by, or is under
common control with such Person. As used herein, “control” means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of such entity, whether through ownership of voting
securities or other interests, by contract or otherwise.
(b) “Agreement”
shall mean this agreement as originally executed or as it may from time to time
be amended pursuant to the terms hereof.
(c) “Asset
Purchase Agreement” shall mean that certain Asset Purchase Agreement, dated as
of December 14, 2009, by and among Fresenius, the Company, Operations and
NQCI, as it may from time to time be amended pursuant to the terms
thereof.
(d) “Beneficial
Interest” shall mean each Beneficiary’s proportionate share of the Trust Assets
initially determined by the ratio of the number of Shares held of record by the
Initial Beneficiary as of the close of business on the Final Record Date over
the total number of Shares issued and outstanding on such Final Record Date and
thereafter shall be determined by the ratio of the number of Units held by such
Beneficiary to the total number of Units held by all Beneficiaries.
(e) “Beneficiary”
shall mean, initially, each Initial Beneficiary and, thereafter, each Initial
Beneficiary who holds Units and each transferee of Units initially held by an
Initial Beneficiary and subsequently transferred to such transferee pursuant to
and in accordance with the terms and conditions of this Agreement.
(f)
“Initial Beneficiary” shall mean each of the
Stockholders.
(g) “Liabilities”
shall mean all of the Company’s unsatisfied debts, claims, liabilities,
commitments, suits and other obligations, whether contingent, fixed or
otherwise, known or unknown arising out of or in connection with the business or
affairs of the Company (including, without limitation, any costs and
expenses incurred or to be incurred in connection with the liquidation of the
Company).
(h) “NQCI”
shall mean National Quality Care, Inc., a
Delaware corporation.
(i) “Person”
shall mean an individual, a corporation, a partnership, an association, a joint
stock company, a limited liability company, a trust, a joint venture, any
unincorporated organization, or a government or political subdivision
thereof.
(j)
“Retained Assets” shall mean all of the Company’s right, title and
interest in, to and under, all of the Company’s assets remaining after the sale
of substantially all of the Company’s assets to Fresenius USA, Inc.
(“Fresenius”) pursuant to the Asset Purchase Agreement, including, without
limitation, its cash and cash equivalents, marketable and other securities, the
Company’s rights under the Asset Purchase Agreement, claims, causes of action,
contingent claims and reserves distributed to the Trustee.
(k) “Shares”
shall mean the shares of common stock of Xcorporeal, $0.0001 par value
per share.
(l)
“Stockholders” shall mean the holders of record of the outstanding Shares
of Xcorporeal at the close of business on the Final Record
Date.
(m) “Transfer
Date” shall mean [__________], 2010.
(n) “Trust”
shall mean the liquidating trust created by this Agreement.
(o) “Trust
Assets” shall mean all the property held from time to time by the Trust under
this Agreement, which initially shall consist of the Retained Assets (excluding
any liquidating distributions declared, but unpaid, having a record date prior
to the Transfer Date), and in addition, shall thereafter include all dividends,
distributions, rents, royalties, income, payments and recoveries of claims,
proceeds and other receipts of, from, or attributable to any assets held by the
Trust, less any of the foregoing utilized by the Trustee to pay expenses of the
Trust, satisfy Liabilities or to make distributions to the Beneficiaries
pursuant to the terms and conditions hereof.
(p) “Trustee”
shall mean the original Trustee under this Agreement and any successors thereto,
pursuant to and in accordance with the terms of this Agreement.
(q) “Units”
shall have the meaning given to such term in Section 3.1(a).
ARTICLE
II
GRANT
TO TRUST AND NATURE OF TRANSFER
2.1 Grant.
Effective on and as of the Transfer Date, the Company grants, delivers,
releases, assigns and conveys to the Trust (as a “successor entity” as defined
in Section 280(e) of the DGCL), to be held in trust and administered and
distributed by the Trustee for the benefit of the Beneficiaries, all of the
Company’s right, title, interest in, to and under, the Retained Assets, for the
uses and purposes stated herein, subject to the terms and provisions set out
below, and the Trust hereby accepts such Retained Assets, subject to the
following terms and provisions.
2.2 Purpose
of Trust.
(a) The
primary purpose of this Agreement and of the appointment of the Trustee
hereunder is to facilitate the dissolution and termination of the Company and
the disposition of the Retained Assets. Nothing contained herein shall be
construed as to constitute the Beneficiaries or their successors in interest as
members of an association. The purposes of the Trust are to hold, manage,
administer and liquidate the Trust Assets, and to collect and distribute to the
Beneficiaries the income and the proceeds of the disposition of the Trust
Assets, to collect amounts owed to the Company, and to pay any Liabilities
of the Company.
(b) The
Trust is established for the sole purpose of winding up the Company’s affairs
and the liquidation of the Retained Assets with no objective to continue the
business of the Company or engage in the conduct of a trade or business, except
as necessary for the orderly liquidation of the Trust Assets.
(c)
It is expected that the Company shall liquidate and dissolve prior
to fully winding up its affairs, including, but not limited to, the collection
of its receivables and payments under the Asset Purchase Agreement and the
payment of any unsatisfied Liabilities of the Company.
(d) The
Retained Assets granted, assigned and conveyed to the Trust shall be held in the
Trust, and the Trustee will (i) further liquidate the Trust Assets to carry out
the purpose of the Trust and facilitate distribution of the Trust Assets, (ii)
allocate, protect, conserve and manage the Trust Assets in accordance with the
terms and conditions hereof, (iii) complete the winding up of the Company’s
affairs, (iv) act for the benefit of the Beneficiaries and (v) distribute the
Trust Assets in accordance with the terms and conditions hereof.
(e) It
is intended that the granting, assignment and conveyance of the Retained Assets
by the Company to the Trust pursuant to the terms hereof shall be treated for
all tax purposes as if the Company made such distributions directly to the
Stockholders who then transferred the Retained Assets to the Trust
pursuant to the terms herein. It is further intended that for Federal,
state and local income tax purposes the Trust shall be treated as a liquidating
trust under Treasury Regulation Section 301.7701-4(d) and any analogous
provision of state or local law, and the Beneficiaries shall be treated as the
owners of their respective share of the Trust pursuant to Sections 671 through
677 of the Internal Revenue Code of 1986, as amended (the “Code”), and any
analogous provision of state or local law, and shall be taxed on their
respective share of the Trust’s taxable income (including both ordinary income
and capital gains) pursuant to Section 671 of the Code and any analogous
provision of state or local law. The Trustee shall file all tax returns required
to be filed with any governmental agency consistent with this position,
including, but not limited to, any returns required of grantor trusts pursuant
to Section 1.671-4(b) of the Income Tax Regulations.
2.3 No
Reversion to the Company. In no event shall any part of the Trust Assets revert
to or be distributed to the Company.
2.4 Instruments
of Further Assurance. Prior to the dissolution of the Company, such Person as
shall have the right and power to so act, will, upon reasonable request of the
Trustee, execute, acknowledge, and deliver such further instruments and do such
further acts as may be necessary or proper to carry out effectively the purposes
of this Agreement, to confirm or effectuate the transfer to the Trust of any
property intended to be held, administered and distributed in accordance with
the provisions of this Agreement, and to vest in the Trustee and its successors
and assigns, the estate, powers, instruments or funds in trust hereunder. Title
to Trust assets may be held in the name of the Trust.
2.5 Payment
of Liabilities. Effective on and as of the Transfer Date, the Trust assumes all
Liabilities and agrees hereafter to pay, discharge and perform when due all of
the Liabilities. Should any Liability be asserted against the Trust as the
transferee of the Trust Assets or as a result of the assumption made in this
Section 2.5, the Trustee may use such part of the Trust Assets as may be
necessary in contesting any such Liability or in payment thereof, but in
no event shall the Trustee, Beneficiaries or employees, agents or
representatives of the Trust be personally liable, nor shall resort be had to
the private property of such Persons, in the event that the Trust Assets are not
sufficient to satisfy the Liabilities.
2.6 Notice
to Unlocated Stockholders. If the Trust holds Trust Assets for unlocated
Stockholders, due notice shall be given to such Stockholders in accordance with
Delaware law.
ARTICLE
III
BENEFICIARIES
3.1 Beneficial
Interests.
(a) The
Beneficial Interest of each Initial Beneficiary shall be determined
in accordance with a certified copy of the Company’s stockholder list as of
the Final Record Date, to be attached as Exhibit B hereto. The
Company’s transfer agent will deliver such a certified copy of the Company’s
stockholder list to the Trustee within a reasonable time after such date. For
ease of administration, the Trustee shall express the Beneficial Interest of
each Beneficiary in terms of units (“Units”). Each record owner of Shares as of
the close of business on the Final Record Date shall receive one Unit for each
Share then held of record. Each record owner of Shares shall have the same pro
rata interest in the Trust Assets as such holder’s pro rata interest in the
aggregate outstanding Shares on the Final Record Date.
(b) All
outstanding Shares shall be deemed cancelled as of the close of business on the
Transfer Date. The rights of Beneficiaries in, to and under the Trust Assets and
the Trust shall not be represented by any form of certificate or other
instrument, and no Beneficiary shall be entitled to such a certificate. The
Trustee shall maintain at its place of business, or at the office of a transfer
agent retained for such purpose, a record of the name and address of each
Beneficiary and such Beneficiary’s aggregate Units in the Trust.
(c) If
any conflicting claims or demands are made or asserted with respect to the
ownership of any Units, or if there is any disagreement between the transferees,
assignees, heirs, representatives or legatees succeeding to all or part of the
interest of any Beneficiary resulting in adverse claims or demands being made in
connection with such Units, then, in any of such events, the Trustee shall be
entitled, at its sole election, to refuse to comply with any such conflicting
claims or demands. In so refusing, the Trustee may elect to make no payment or
distribution with respect to such Units, or to make such payment to a court of
competent jurisdiction or an escrow agent, and in so doing, the Trustee shall
not be or become liable to any of such parties for their failure or refusal
to comply with any of such conflicting claims or demands or to take any other
action with respect thereto, nor shall the Trustee be liable for interest on any
funds which it may so withhold. Notwithstanding anything to the contrary set
forth in this Section 3.1(c), the Trustee shall be entitled to refrain and
refuse to act until either (i) the rights of the adverse claimants have been
adjudicated by a final judgment of a court of competent jurisdiction, (ii) all
differences have been settled by a valid written agreement among all of such
parties, and the Trustee shall have been furnished with an executed counterpart
of such agreement, or (iii) there is furnished to the Trustee a surety bond or
other security satisfactory to the Trustee, as it shall deem appropriate, to
fully indemnify it and the Trust from all such conflicting claims or
demands.
3.2 Rights
of Beneficiaries. Each Beneficiary shall be entitled to participate in the
rights and benefits due to a Beneficiary hereunder according to the
Beneficiary’s Beneficial Interest. Each Beneficiary shall take and hold the
same subject to all the terms and provisions of this Agreement. The interest of
each Beneficiary hereunder is declared, and shall be in all respects, personal
property and upon the death of an individual Beneficiary, the Beneficiary’s
Beneficial Interest shall pass as personal property to the Beneficiary’s legal
representative and such death shall in no way terminate or affect the validity
of this Agreement. A Beneficiary shall have no title to, right to, possession
of, management of, or control of, the Trust Assets except as expressly provided
herein. No widower, widow, heir or devisee of any individual who may be a
Beneficiary shall have any right of dower, homestead, or inheritance, or of
partition, marital property right or any other right, statutory or otherwise, in
any property forming a part of the Trust Assets but the whole title to all
the Trust Assets shall be vested in the Trustee and the sole interest of the
Beneficiaries shall be the rights and benefits given to such Persons under this
Agreement.
3.3 Limitations
on Transfer of Interests of Beneficiaries.
(a) THE
BENEFICIAL INTEREST OF A BENEFICIARY MAY NOT BE TRANSFERRED; PROVIDED THAT (i)
THE BENEFICIAL INTERESTS SHALL BE ASSIGNABLE OR TRANSFERABLE BY WILL, INTESTATE
SUCCESSION, OR OPERATION OF LAW AND (ii) THE EXECUTOR OR ADMINISTRATOR OF THE
ESTATE OF A BENEFICIARY MAY MORTGAGE, PLEDGE, GRANT A SECURITY INTEREST IN,
HYPOTHECATE OR OTHERWISE ENCUMBER, THE BENEFICIAL INTEREST HELD BY THE ESTATE OF
SUCH BENEFICIARY IF NECESSARY IN ORDER TO BORROW MONEY TO PAY ESTATE, SUCCESSION
OR INHERITANCE TAXES OR THE EXPENSES OF ADMINISTERING THE ESTATE OF THE
BENEFICIARY, UPON WRITTEN NOTICE TO, AND WRITTEN CONSENT OF, THE TRUSTEE, WHICH
CONSENT MAY NOT BE UNREASONABLY WITHHELD.
(b) Except
as may be otherwise required by law, the Beneficial Interests of the
Beneficiaries hereunder shall not be subject to attachment, execution,
sequestration or any order of a court, nor shall such interests be subject to
the contracts, debts, obligations, engagements or liabilities of any
Beneficiary, but the interest of a Beneficiary shall be paid by the Trustee to
the Beneficiary free and clear of all assignments, attachments, anticipations,
levies, executions, decrees and sequestrations and shall become the property of
the Beneficiary only when actually distributed by the Trustee to, and received
by such Beneficiary.
3.4 Trustee
as a Beneficiary. The Trustee or successor Trustee may be a Beneficiary or
hold a Beneficial Interest.
ARTICLE
IV
DURATION
AND TERMINATION OF THE TRUST
4.1 Duration.
The Trust shall terminate upon the earliest of (i) the final distribution of all
the Trust Assets as provided in Section 5.9, and (ii) the expiration of a period
of three (3) years from the Transfer Date; provided that the Trustee, in its
discretion, may extend the termination of the Trust pursuant to this
subparagraph (ii) of this Section 4.1 to such later date as it may designate, if
it determines that an extension is reasonably necessary to fulfill the purpose
of the Trust, as specified in this Agreement, and, prior to such extension,
the Trustee shall have requested and received no-action assurance from the
Securities and Exchange Commission regarding the registration and reporting
requirements of the Trust under the Securities Act of 1933, as amended, the
Securities Exchange Act of 1934, as amended, and any other applicable Federal
securities act. The Trust shall not in any event terminate pursuant to
subparagraph (ii) of this Section 4.1 prior to the date on which the Trustee is
permitted to make a final distribution in accordance with Section
5.8.
4.2 Other
Obligations of Trustee upon Termination. Upon termination of the Trust, the
Trustee shall provide for the retention of the books, records, lists of
Beneficiaries, certificates for Shares and files which shall have been delivered
to or created by the Trustee. At the Trustee’s discretion, all of such records
and documents may be destroyed at any time after seven years from the
distribution of all the Trust Assets. Except as otherwise specifically provided
herein, upon the distribution of all the Trust Assets, the Trustee shall have no
further duties or obligations hereunder.
ARTICLE
V
ADMINISTRATION
AND DISTRIBUTION OF TRUST ASSETS
5.1 Sale
of Trust Assets. Subject to the terms and conditions of this Agreement, the
Trustee may, at such times as the Trustee deems appropriate, collect, liquidate,
reduce to cash, transfer, assign, or otherwise dispose of all or any part
of the Trust Assets as it deems appropriate at public auction or at private sale
for cash, securities or other property, or upon credit (either secured or
unsecured as the Trustee shall determine).
5.2 Efforts
to Resolve Claims and Liabilities. Subject to the terms and conditions of this
Agreement, the Trustee will make appropriate efforts to resolve any contingent
or unliquidated claims and outstanding contingent Liabilities for which the
Trust may be responsible, dispose of the Trust Assets, make timely distributions
and not unduly prolong the administration of the Trust.
5.3 Continued
Collection of Property of Trust Assets. All property that is determined to be a
part of the Trust Assets shall continue to be collected by the Trustee and held,
administered and distributed as a part of the Trust, without obligations to
provide for or pay any interest thereon to any Beneficiary, except to the extent
of such Beneficiary’s share of interest actually earned by the Trust after
payment of the Trust’s liabilities and expenses as provided in Section
5.6.
5.4 Transactions
with Related Persons. Notwithstanding any other provision of this Agreement,
other than distributions to the Beneficiaries in accordance with the terms of
this Agreement, the Trustee shall not knowingly, directly or indirectly, sell or
otherwise transfer all or any part of the Trust Assets to, or contract with, (i)
any Trustee, agent or employee (acting in their individual capacities) of the
Trust or the Trustee; or (ii) any Person of which any Trustee, agent or employee
of the Trust or the Trustee is an Affiliate by reason of being a trustee,
director, officer, partner or direct or indirect beneficial owner of 5% or more
of the outstanding capital stock, shares or other equity interest of such Person
unless in each such case, after disclosure of such interest or affiliation such
transaction is approved by the Trustee, if any, who is not interested in the
transaction and the Trustee determines that such transaction is on its terms
fair and reasonable to, and in the best interests of the Beneficiaries, and in
no event less favorable to the Beneficiaries than terms available for a
comparable transaction with unrelated Persons.
5.5 Restriction
on Trust Assets. The Trust shall not receive transfers of any assets prohibited
by Revenue Procedure 82-58, as the same has been and may be amended,
supplemented, or modified (“Revenue Procedure 82-58”), including, but not
limited to, any listed stocks or securities, any readily-marketable assets, any
operating assets of a going business, any unlisted stock of a single issuer
that represents 80% or more of the stock of such issuer or any general or
limited partnership interest. The Trustee shall not retain cash in excess of a
reasonable amount to meet expenses, charges and obligations of the Trust, the
Trust Assets and all Liabilities.
5.6 Payment
of Expenses and Liabilities. The Trustee shall pay from the Trust Assets all
expenses, charges, and obligations of the Trust and of the Trust Assets and all
Liabilities and obligations which the Trust specifically assumes and agrees to
pay pursuant to this Agreement and such transferee liabilities which the Trust
may be obligated to pay as transferee of the Trust Assets, including, but not
limited to, interest, penalties, taxes, assessments and public charges of any
kind or nature and the costs, charges and expenses related to the execution or
administration of the Trust and such other payments and disbursements as are
provided in this Agreement or which may be determined to be a proper charge
against the Trust Assets by the Trustee.
5.7 Interim
Distributions. At such time as may be determined by it in its sole discretion,
the Trustee shall distribute, or cause to be distributed to the Beneficiaries,
in proportion to the number of Units held by each Beneficiary on the record date
for such distribution as determined by the Trustee in its sole discretion, such
cash or other property comprising a portion of the Trust Assets as the Trustee
in its sole discretion determines may be distributed without detriment to the
conservation and protection of the Trust Assets. Consistent with Revenue
Procedure 82-58, the Trustee shall distribute to the Beneficiaries during each
calendar year, in proportion to the number of Units held by each Beneficiary on
the record date(s) for such distribution(s), any proceeds from the sale of
assets and income from investments not needed to be retained to meet claims and
contingent liabilities.
5.8 Final
Distribution. If the Trustee determines that the Liabilities and all other
claims, expenses, charges, and obligations of the Trust have been paid or
discharged or if the Trust shall terminate pursuant to Section 4.1, the
Trustee shall, as expeditiously as is consistent with the conservation and
protection of the Trust Assets, distribute the remaining Trust Assets, if any,
to the Beneficiaries in proportion to the number of Units held by each
Beneficiary. The Trustee shall hold in the Trust and thereafter make disposition
of all liquidating distributions and other payments due any Beneficiaries who
have not been located, in accordance with Delaware law, subject to applicable
state laws regarding escheat and abandoned property.
5.9 Reports
to Beneficiaries and Others.
(a) As
soon as practicable after the Transfer Date, the Trustee shall mail to each
Beneficiary a notice indicating how many Units such Person beneficially owns and
the contact details of the Trustee. As soon as practicable after the end of each
calendar year and after termination of the Trust, but in any event within 90
days after each such event, the Trustee shall submit a written report and
account to the Beneficiaries showing (i) the assets and liabilities of the Trust
at the end of such calendar year or upon termination and the receipts and
disbursements of the Trustee for such calendar year or period, (ii) any
changes in the Trust Assets and Liabilities that it has not previously reported,
and (iii) any action taken by the Trustee in the performance of its duties under
this Agreement that it has not previously reported, and which, in its opinion,
materially affects the Trust Assets or Liabilities.
(b) The
fiscal year of the Trust shall end on December 31 of each year unless the
Trustee deems it advisable to establish some other date as the date on which the
fiscal year of the Trust shall end.
(c) Whenever
a material event relating to the Trust’s Assets occurs, the Trustee shall,
within a reasonable period of time after such occurrence, prepare and mail to
the Beneficiaries an interim report describing such event; provided, that the
Trustee may alternatively use any other means reasonably calculated to
disseminate such interim report to the Beneficiaries, including, without
limitation, use of the Trust’s website. The occurrence of a material event need
not be reported on an interim report if an annual report pursuant to Section
5.9(a) will be issued at approximately the same time that such interim report
would be issued and such annual report describes the material event as it would
be discussed in an interim report. The occurrence of a material event will be
determined solely by the Trustee.
The
Trustee shall also file the annual reports required by Section 5.9(a) with the
Securities and Exchange Commission under the cover of Form 10-K and each
Form 10-K shall include as an exhibit a customary certification of the Trustee
similar in form to those described in a series of no-action letters
issued to similarly situated third parties.
5.10 Federal
Income Tax Information. As soon as practicable after the close of each calendar
year, the Trustee shall mail to each Person who was a Beneficiary at the close
of the year, a statement showing, on a per Unit basis the dates and amount of
all distributions made by the Trustee, income earned on assets held by the
Trust, if any, such other information as is reasonably available to the Trustee
which may be helpful in determining the amount of gross income and expenses
attributable to the Trust that such Beneficiary should include in such Person’s
Federal income tax return, if any, for such year and any other information as
may be required to be furnished under applicable law. In addition, after receipt
of a request in good faith, the Trustee shall furnish to any Person who has been
a Beneficiary at any time during the current or preceding year, at the expense
of such Person and at no cost to the Trust, a statement containing such further
information as is reasonably available to the Trustee which shall be helpful in
determining the amount of taxable income which such Person should include in
such Person’s Federal income tax return.
5.11 Books
and Records. The Trustee shall maintain in respect of the Trust and the holders
of Units books and records relating to the Trust Assets, income and liabilities
of the Trust in such detail and for such period of time as may be necessary to
enable it to make full and proper accounting in respect thereof in accordance
with this Article V and to comply with applicable law. Such books and records
shall be maintained on a basis or bases of accounting necessary to facilitate
compliance with the tax reporting requirements of the Trust and the reporting
obligations of the Trustee under Section 5.9. Except as provided in Section 5.9,
nothing in this Agreement requires the Trustee to file any accounting or seek
approval of any court with respect to the administration of the Trust or as a
condition for managing any payment or distribution out of the Trust Assets.
Beneficiaries shall have the right upon 30 days’ prior written notice delivered
to the Trustee to inspect during normal business hours such books and records
(including financial statements) for a reasonable length of time; provided that,
if so requested, such Beneficiaries shall have entered into a
confidentiality agreement satisfactory in form and substance to the Trustee. For
the avoidance of doubt, nothing in this Agreement shall be interpreted to
require the Trustee to mail or otherwise periodically provide audited financial
statements of the Trust to the Beneficiaries.
5.12 Employment
of Agents, etc.
(a) The
Trustee shall be responsible for the general administration of the Trust
and for the general supervision of the activities conducted by all agents,
representatives, employees, advisors or managers of the Trust. The Trustee shall
have the power to appoint, employ or contract with any Person or Persons as the
Trustee may deem necessary or proper for the administration of the
Trust.
(b) The
Trustee shall have the power to determine the terms and compensation of any
Person whom it may employ or with whom it may contract pursuant to Section
5.12(a), subject to the provisions of Section 5.4.
(c) The
Trustee shall not be required to administer the Trust as its sole and exclusive
function and the Trustee may have other business interests and may engage in
other activities similar or in addition to those relating to the Trust,
including the rendering of advice or services of any kind to investors or any
other Persons and the management of other investments, subject to such Trustee’s
obligations under this Agreement and applicable law.
ARTICLE
VI
POWERS
OF AND LIMITATIONS ON THE TRUSTEE
6.1 Limitations
on Trustee. The Trustee shall not at any time, on behalf of the Trust or
Beneficiaries enter into or engage in any trade or business except as necessary
for the orderly liquidation of the Trust Assets. The Trustee shall be restricted
to the holding, collection and sale of the Trust Assets and the payment and
distribution thereof for the purposes set forth in this Agreement and to the
conservation and protection of the Trust Assets and the administration thereof
in accordance with the provisions of this Agreement. In no event shall the
Trustee take any action which would jeopardize the status of the Trust as a
“liquidating trust” for Federal income tax purposes within the meaning of
Treasury Regulation Section 301.7701-4(d). The Trustee shall not invest any of
the cash held as Trust Assets, except that the Trustee may invest in (i) direct
obligations of the United States of America or obligations of any agency or
instrumentality thereof which mature not later than one year from the date
of acquisition thereof, (ii) money market deposit accounts, checking accounts,
savings accounts, or certificates of deposit, or other time deposit accounts
which mature not later than one year from the date of acquisition thereof which
are issued by a commercial bank or savings institution organized under the laws
of the United States of America or any state thereof, or (iii) other temporary
investments not inconsistent with the Trust’s status as a liquidating trust for
tax purposes. Neither the Trustee nor any Affiliate of the Trustee shall take
any action to facilitate or encourage trading in the Beneficial Interests or in
any instrument tied to the value of the Beneficial Interests such as due bill
trading.
6.2 Specific
Powers of Trustee. Subject to the provisions of the terms and conditions of this
Agreement, the Trustee shall have the following specific powers in addition to
any powers conferred upon it by any other Section or provision of this Agreement
or any statutory laws of the State of Delaware; provided that the enumeration of
the following powers shall not be considered in any way to limit or control the
power of the Trustee to act as specifically authorized by any other Section or
provision of this Agreement and to act in such a manner as the Trustee may deem
necessary or appropriate to conserve and protect the Trust Assets or to confer
on the Beneficiaries the benefits intended to be conferred upon them by this
Agreement:
(a) to
determine the nature and amount of the consideration to be received with respect
to the sale or other disposition of, or the grant of interest in, the Trust
Assets;
(b) to
collect, liquidate or otherwise convert into cash, or such other property as it
deems appropriate, all property, assets and rights in the Trust Assets, and to
pay, discharge, and satisfy all other claims, expenses, charges, Liabilities and
obligations existing with respect to the Trust Assets, the Trust or the Trustee
including paying the Trustee fees under this Agreement;
(c) to
elect, appoint, engage, retain or employ any Persons as agents, representatives,
employees, or independent contractors (including without limitation real estate
advisors, investment advisors, accountants, transfer agents, attorneys,
managers, appraisers, brokers, or otherwise) in one or more capacities, and to
pay reasonable compensation from the Trust Assets for services in as many
capacities as such Person may be so elected, appointed, engaged, retained or
employed (provided that any such agreements or arrangements with a person
or entity affiliated with the Trustee shall be on terms no less favorable to the
Trust than those available to the Trust in similar agreements or arrangements
with unaffiliated third parties, and such agreements or arrangements shall be
terminable, without penalty, on no more than 60 days prior written notice by the
Trustee), to prescribe the titles, powers and duties, terms of service and other
terms and conditions of the election, appointment, engagement, retention or
employment of such Persons and, except as prohibited by law, to delegate any of
the powers and duties of the Trustee to agents, representatives, employers,
independent contractors or other Persons;
(d) to
retain and set aside such funds out of the Trust Assets as the Trustee shall
deem necessary or expedient to pay, or provide for the payment of (i) unpaid
claims, expenses, charges, Liabilities and obligations of the Trust or the
Company; and (ii) the expenses of administering the Trust Assets;
(e) to
do and perform any and all acts necessary or appropriate for the conservation
and protection of the Trust Assets, including acts or things necessary or
appropriate to maintain the Trust Assets pending sale or disposition thereof or
distribution thereof to the Beneficiaries;
(f)
to institute or defend actions or judgments
for declaratory relief or other actions or judgments and to take such other
action, in the name of the Trust or the Company or as otherwise required, as the
Trustee may deem necessary or desirable to enforce any instruments, contracts,
agreements, causes of action, or rights relating to or forming a part of the
Trust Assets;
(g) to
determine conclusively from time to time the value of and to revalue the
securities and other property of the Trust, in accordance with independent
appraisals or other information as it deems necessary or
appropriate;
(h) to
cancel, terminate, enforce, perform under (provided that such performance is
consistent with the purpose of the Trust set forth in Section 2.2(a) and Section
2.2(b) hereof), or amend any instruments, contracts, agreements, obligations, or
causes of action relating to or forming a part of the Trust Assets, and to
execute new instruments, contracts, agreements, obligations or causes of action
notwithstanding that the terms of any such instruments, contracts, agreements,
obligations, or causes of action may extend beyond the term of the
Trust;
(i)
in the event any of the property which is or may
become a part of the Trust Assets is situated in any state or other jurisdiction
in which the Trustee is not qualified to act as Trustee, to nominate and appoint
an individual or corporate trustee qualified to act in such state or other
jurisdiction in connection with the property situated in that state or other
jurisdiction as a trustee of such property and require from such trustee such
security as may be designated by the Trustee. The trustee so appointed shall
have all the rights, powers, privileges and duties and shall be subject to
the conditions and limitations of this Agreement, except as limited by the
Trustee and except where the same may be modified by the laws of such state or
other jurisdiction (in which case, the laws of the state or other jurisdiction
in which such trustee is acting shall prevail to the extent necessary). Such
trustee shall be answerable to the Trustee herein appointed for all monies,
assets and other property which may be received by it in connection with the
administration of such property. The Trustee hereunder may remove such
trustee, with or without cause, and appoint a successor trustee at any time by
the execution by the Trustee of a written instrument declaring such trustee
removed from office, and specifying the effective date of removal;
(j)
to cause any investments of any part of the Trust Assets
to be registered and held in its name or in the names of a nominee or nominees
without increase or decrease of liability with respect thereto;
(k) to
vote by proxy or otherwise on behalf of the Beneficiaries and with full power of
substitution all shares of stock and all securities held as Trust Assets
hereunder and to exercise every power, election, discretion, option and
subscription right and give every notice, make every demand, and to do every act
or thing in respect of any shares of stock or any securities held as Trust
Assets which the Trustee might or could do if it were the absolute owner
thereof;
(l)
to undertake or join in any merger, plan of
reorganization, consolidation, liquidation, dissolution, readjustment or other
transaction of any corporation, any of whose shares of stock or other
securities, obligations, or properties may at any time constitute a part of the
Trust Assets and to accept the substituted shares of stock, bonds,
securities, obligations and properties and to hold the same in trust in
accordance with the provisions hereof;
(m) to
authorize transactions between corporations or other entities whose securities,
or other interests therein (either in the nature of debt or equity) are held as
part of the Trust Assets;
(n) in
connection with the sale or other disposition or distribution of any securities
held by the Trustee, to comply with applicable Federal and state securities
laws, and to enter into agreements relating to the sale or other disposition or
distribution thereof;
(o) to
do and perform any and all acts necessary or appropriate to comply with the
registration and reporting requirements of the Trust under Federal and state
securities laws, if any;
(p) to
terminate and dissolve any entities held as part of the Trust; and
(q) to
perform any act authorized, permitted, or required under any instrument,
contract, agreement, right, obligation, or cause of action relating to or
forming a part of the Trust Assets whether in the nature of an approval,
consent, demand, or notice thereunder or otherwise, unless such act would
require the consent of the Beneficiaries in accordance with the express
provisions of this Agreement.
ARTICLE
VII
CONCERNING
THE TRUSTEE, BENEFICIARIES, EMPLOYEES AND AGENTS
7.1 Generally.
The Trustee accepts and undertakes to discharge the trust created by this
Agreement, upon the terms and conditions hereof, for the benefit of the
Beneficiaries. The Trustee shall exercise such of the rights and powers vested
in it by this Agreement in accordance with applicable law and use the same
degree of care and skill in their exercise as a prudent person would exercise or
use under the circumstances in the conduct of his own affairs. No provision of
this Agreement shall be construed to relieve the Trustee from liability for its
own grossly negligent action, its own grossly negligent failure to act, or its
own fraud or willful misconduct, except that:
(a) the
Trustee shall not be liable to the Beneficiaries for the acts or omissions of an
agent, representative, employee, advisor or manager appointed by the Trustee
hereunder, except where the Trustee specifically directs the act of such Person,
delegates the authority to such Person to act where the Trustee was under a duty
not to delegate, does not use reasonable prudence in the selection or retention
of such Person, does not periodically review such person’s overall performance
and compliance with the terms of such delegation, conceals the act or omission
of such Person or neglects to take reasonable steps to redress any wrong
committed by such Person when the Trustee is aware of such Person’s act or
omission;
(b) the
Trustee shall not be liable except for the performance of such duties and
obligations as are specifically set forth in this Agreement, and no implied
covenants or obligations shall be read into this Agreement against the
Trustee;
(c) in
the absence of bad faith on the part of the Trustee, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon any certificates or opinions furnished to the
Trustee and conforming to the requirements of this Agreement, but in the case of
any such certificates or opinions which are specifically required to be
furnished to the Trustee by any provision hereof, the Trustee shall be under a
duty to examine the same to determine whether or not they conform to the
requirements of this Agreement;
(d) the
Trustee shall not be liable for any reasonable error of judgment made in good
faith; and
(e) the
Trustee shall not be liable with respect to any action taken or omitted to be
taken by such Trustee in good faith in accordance with the terms and conditions
of this Agreement and at the direction of Beneficiaries having aggregate Units
constituting at least two-thirds of the total Units held by all Beneficiaries
relating to the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any right or power conferred upon
the Trustee under this Agreement.
7.2 Reliance
by Trustee. Except as otherwise provided in Section 7.1:
(a) The
Trustee may consult with legal counsel, auditors or other experts to
be selected by it, and the advice or opinion of such counsel, auditors or
other experts shall be full and complete personal protection to the Trustee and
agents of the Trust in respect of any action taken or suffered by the Trustee in
good faith and in reliance on, or in accordance with, such advice or
opinion.
(b) Persons
dealing with the Trustee shall look only to the Trust Assets to satisfy any
liability incurred by the Trustee to such Person in carrying out the terms of
the Trust and the Trustee shall have no personal or individual obligation
whatsoever to satisfy any such liability.
(c) As
far as reasonably practicable, the Trustee shall cause any written instrument
creating an obligation of the Trust Assets to include a reference to this
Agreement and to provide that neither the Beneficiaries, the Trustee nor its
agents, representative, advisors nor employees shall be liable thereunder, and
that the other parties to such instrument shall look solely to the Trust Assets
for the payment of any claim thereunder or the performance thereof; provided
that the omission of such provision from any such instrument shall not render
the Beneficiaries, the Trustee or its agents, representatives, advisors or
employees liable, nor shall the Trustee be liable to anyone for such
omission.
7.3 Limitation
on Liability to Third Persons. No Beneficiary shall be subject to any personal
liability whatsoever, in tort, contract, or otherwise, to any Person in
connection with the Trust Assets or the affairs of the Trust, and neither the
Trustee, nor any employee, agent, representatives or advisor of the Trust
shall be subject to any personal liability whatsoever in tort, contract, or
otherwise, to any Beneficiary or any other Person in connection with the Trust
Assets or the affairs of the Trust, except for gross negligence, fraud or
willful misconduct knowingly and intentionally committed in bad faith by such
Trustee, employee, agent, representative or advisor of the Trust, and all
such other Persons shall look solely to the Trust Assets for satisfaction of
claims of any nature arising in connection with the affairs of the Trust. The
Trustee shall at its sole discretion, at the expense of the Trust, maintain
insurance for the protection of the Trust Assets, the Beneficiaries, the
Trustee, employees, agents, representatives and advisors of the Trust in
such amount as the Trustee shall deem adequate to cover all foreseeable
liability to the extent available at reasonable rates.
7.4 Written
Instruments of Trustee. Any written instrument creating an obligation of the
Trust Assets shall be conclusively taken to have been executed or done by the
Trustee, employee or agent of the Trust only in its capacity as Trustee under
this Agreement, or in its capacity as an employee or agent of the Trust or
Trustee.
7.5 Indemnification.
The Trustee and each Person appointed or employed by the Trustee pursuant to
Section 5.13 or Section 5.14 (including, without limitation, the directors,
officers, employees, agents, representatives and advisors of each such Person
(each an “Indemnified Person” and collectively the “Indemnified
Persons”)), shall be indemnified out of the Trust Assets against all liabilities
and expenses, including amounts paid in satisfaction of judgments, in compromise
or as fines and penalties, and counsel fees, reasonably incurred by the
Indemnified Persons in connection with the defense or disposition of any action,
suit or other proceeding by the Trustee or any other Person, whether civil or
criminal, in which the Indemnified Person may be involved or with which the
Indemnified Person may be threatened: (i) in the case of a Trustee or Person
appointed or employed by the Trustee pursuant to Section 5.13 or 5.14, while in
office or thereafter, by reason of his being or having been such a Trustee,
employee, agent, representative or advisor, including, without limitation, in
connection with or arising out of any action, suit or other proceeding based on
any alleged breach of duty, neglect, error, misstatement, misleading statement,
omission or act of any such Trustee or Person in such capacity; and (ii) in the
case of any director, officer, employee, agent, representative or advisor of any
such Person, by reason of any such Person exercising or failing to exercise any
right or power hereunder; provided that the Indemnified Person shall not be
entitled to such indemnification with respect to any matter as to which the
Indemnified Person shall have been found pursuant to a final non-appealable
judgment of a court of competent jurisdiction to have acted with gross
negligence, fraud or willful misconduct. The rights accruing to any Indemnified
Person under these provisions shall not exclude any other right to which the
Indemnified Person may be lawfully entitled; provided, that no Indemnified
Person may satisfy any right of indemnity or reimbursement granted herein or to
which the Indemnified Person may be otherwise entitled, except out of the Trust
Assets, and no Beneficiary shall be personally liable to any person with respect
to any claim for indemnity or reimbursement or otherwise. The Trustee may make
advance payments in connection with indemnification under this Section 7.5,
provided that the Indemnified Person shall have given a written undertaking to
repay any amount advanced to the Indemnified Person and to reimburse the Trust
in the event that it is subsequently and finally determined that the Indemnified
Person is not entitled to such indemnification. The Trustee shall
purchase such insurance as it believes, in the exercise of its discretion,
adequately insures that each Indemnified Person shall be indemnified against any
such loss, liability, or damage pursuant to this Section 7.5. Nothing contained
herein shall restrict the right of the Trustee to indemnify or reimburse such
Indemnified Person in any proper case, even though not specifically provided for
herein, nor shall anything contained herein restrict the right of any such
Indemnified Person to contribution under applicable law.
7.6 No
Duty Not to Compete. Subject to applicable law, the Trustee, in its individual
capacity, or through Persons that it controls or in which it has an interest,
may directly or indirectly engage in or possess any interest in any business
venture, including, but not limited to, the ownership, financing, management of
or the investment in securities, or the provision of any services in connection
with such activities, whether or not such activities are similar to or in
competition with the business activities of the Company. The Trustee shall have
no duty to present any business opportunity to the Trust before taking advantage
of such opportunity either in such Trustee’s individual capacity or through
participation in any Person.
ARTICLE
VIII
PROTECTION
OF PERSONS DEALING WITH THE TRUSTEE
8.1 Reliance
on Statements by Trustee. Any Person dealing with the Trustee shall be fully
protected in relying upon the Trustee’s certificate, signed by the Trustee, with
respect to the authority that the Trustee has to take any action under this
Agreement. Any Person dealing with the Trustee shall be fully protected in
relying upon the Trustee’s certificate setting forth the facts concerning the
action taken by the Trustee pursuant to this Agreement, including the
aggregate number of Units held by the Beneficiaries causing such action to be
taken.
8.2 Application
of Money Paid or Transferred to Trustee. No person dealing with the Trustee
shall be required to follow the application by the Trustee of any money or
property which may be paid or transferred to the Trustee.
ARTICLE
IX
COMPENSATION
OF TRUSTEE
9.1 Amount
of Compensation. In lieu of commissions or other compensation fixed by law for
trustees, the Trustee shall receive as reasonable compensation for services as
Trustee hereunder the amounts set forth in Exhibit A attached
hereto.
9.2 Dates
of Payment. The compensation payable to the Trustee pursuant to the provisions
of Section 9.1 shall be paid for the time period set forth
in Schedule A attached hereto.
9.3 Expenses.
The Trustee shall be reimbursed from the Trust Assets for all expenses
reasonably incurred, and appropriately documented, by such Trustee in the
performance of its duties in accordance with this Agreement.
ARTICLE
X
TRUSTEES
AND SUCCESSOR TRUSTEES
10.1 Number
and Qualification of Trustees.
(a) Subject
to Section 10.3, there shall be one (1) Trustee of the Trust, who need not
be a citizen or resident of, or a corporation which is incorporated under,
or a limited liability company organized under the laws of the State of
Delaware.
(b) The
Trustee represents that it possesses every license, permit, charter and
authorization (collectively, “Authorizations”) necessary to execute and deliver
this Agreement and perform its obligations hereunder and has given every notice
and taken every action required by applicable law or governmental authorities
and regulatory bodies to perform its obligations hereunder; except where the
failure to possess such Authorizations or the failure to give such notice or
take such action would not have a material adverse effect on the ability of
Trustee to perform its obligations hereunder.
(c) If
a corporate (or its equivalent) Trustee shall ever change its name, or shall
reorganize or reincorporate or shall merge with or into or consolidate with any
other company, such corporate (or its equivalent) trustee shall be deemed to be
a continuing entity and shall continue to act as a trustee hereunder with the
same liabilities, duties, powers, titles, discretions and privileges as are
herein specified for a Trustee.
10.2 Resignation
and Removal. Any Trustee may resign and be discharged from the Trust hereby
created by giving written notice to the Beneficiaries at their respective
addresses as they appear on the records of the Trustee. Such resignation shall
become effective on the date specified in such notice, which date shall be at
least 30 days after the date of such notice, or upon the appointment of such
Trustee’s successor, and such successor’s acceptance of such appointment,
whichever is earlier. Any Trustee may be removed at any time, with cause, by
Beneficiaries having aggregate Units of at least a two-thirds of the total Units
held by all Beneficiaries. Any Trustee may be removed at any time, without
cause, by Beneficiaries having aggregate Units of at least two-thirds of the
total Units held by all Beneficiaries.
10.3 Appointment
of Successor. Should at any time the Trustee die, resign or be removed, or be
adjudged bankrupt or insolvent, a vacancy shall be deemed to exist and the
Beneficiaries may, pursuant to Article XII hereof, call a meeting in order that
Beneficiaries holding at least a majority of the Units represented at the
meeting may appoint a successor Trustee. In the event that the Beneficiaries do
not elect a successor Trustee within 30 days of the resignation, removal,
bankruptcy or insolvency of such Trustee, the successor Trustee shall be
appointed by a court of competent jurisdiction upon application of any
Beneficiary or known creditor of the Trust.
10.4 Acceptance
of Appointment by Successor Trustee. Any successor Trustee appointed hereunder
shall execute an instrument accepting such appointment hereunder and shall
deliver one counterpart, in case of a resignation, to the resigning Trustee.
Thereupon such successor Trustee shall, without any further act, become vested
with all the rights, powers, and duties of its predecessor in the Trust
hereunder with like effect as if originally named therein; but the resigning
Trustee shall nevertheless, when requested in writing by the successor
Trustee, execute and deliver an instrument or instruments conveying and
transferring to such successor Trustee upon the trust herein expressed, all the
rights, powers, and trusts of such resigning Trustee.
10.5 Bond.
Unless required by the Board prior to the Transfer Date or unless a bond is
required by law, no bond shall be required of the original Trustee hereunder.
Unless a bond is required by law and such requirement cannot be waived by or
with approval of the Beneficiaries holding aggregate Units constituting at least
a majority of the total Units held by all Beneficiaries, no bond shall be
required of any successor trustee hereunder. If a bond is required by law, no
surety or security with respect to such bond shall be required unless required
by law and such requirement cannot be waived by or with approval of the
Beneficiaries or unless required by the Board. If a bond is required by the
Board or by law, the Board or the Trustee, as the case may be, shall determine
whether, and to what extent, a surety or security with respect to such bond
shall be required. The cost of any such bond shall be borne by the
Trust.
ARTICLE
XI
CONCERNING
THE BENEFICIARIES
11.1 Evidence
of Action by Beneficiaries. Whenever in this Agreement it is provided that the
Beneficiaries may take any action (including the making of any demand or
request, the giving of any notice, consent, or waiver, the removal of a Trustee,
the appointment of a successor Trustee, or the taking of any other action), the
fact that at the time of taking any such action such Beneficiaries have joined
therein may be evidenced: (i) by any instrument or any number of instruments of
similar tenor executed by the Beneficiaries in person or by agent or attorney
appointed in writing or (ii) by the record of the Beneficiaries voting in favor
thereof at any meeting of Beneficiaries duly called and held in accordance with
the provisions of Article XII.
11.2 Limitation
on Suits by Beneficiaries. No Beneficiary shall have any right by virtue of any
provision of this Agreement to institute any action or proceeding at law or in
equity against any party other than the Trustee upon or under or with respect to
the Trust Assets or the agreements relating to or forming part of the Trust
Assets, and the Beneficiaries (by their acceptance of any distribution made to
them pursuant to this Agreement) waive any such right.
11.3 Requirement
of Undertaking. The Trustee may request any court to require, and any court may
in its discretion require, in any suit for the enforcement of any right or
remedy under this Agreement, or in any suit against the Trustee for any action
taken or omitted to be taken by it as Trustee, the filing by any party litigant
in such suit of an undertaking to pay the costs of such suit, and such court may
in its discretion assess reasonable costs, including reasonable attorneys’ fees,
against any party litigant in such suit, having due regard to the merits and
good faith of the claims or defenses made by such party litigant; provided that
the provisions of this Section 11.3 shall not apply to any suit by the
Trustee.
ARTICLE
XII
MEETING
OF BENEFICIARIES
12.1 Purpose
of Meetings. A meeting of the Beneficiaries may be called at any time and from
time to time pursuant to the provisions of this Article for the purposes of
taking any action which the terms of this Agreement permit Beneficiaries having
a specified aggregate Beneficial Interest to take either acting alone or
with the Trustee.
12.2 Meeting
Called by Trustee. The Trustee may at any time call a meeting of the
Beneficiaries to be held at such time and at such place within or without the
State of Delaware as the Trustee shall determine. Written notice of every
meeting of the Beneficiaries shall be given by the Trustee (except as provided
in Section 12.3), which written notice shall set forth the time and place of
such meeting and in general terms the action proposed to be taken at such
meeting, and shall be mailed not more than 60 nor less than 10 days before such
meeting is to be held to all of the Beneficiaries of record not more than 60
days before the date of such meeting. The notice shall be directed to the
Beneficiaries at their respective addresses as they appear in the records
of the Trust.
12.3 Meeting
Called on Request of Beneficiaries. Within 45 days after written request to the
Trustee by Beneficiaries holding an aggregate of at least a majority of the
total Units held by all Beneficiaries to call a meeting of all Beneficiaries,
which written request shall specify in reasonable detail the action proposed to
be taken, the Trustee shall proceed under the provisions of Section 12.2 to call
a meeting of the Beneficiaries, and if the Trustee fails to call such meeting
within such 45 day period then such meeting may be called by such Beneficiaries,
or their designated representatives, requesting such meeting.
12.4 Persons
Entitled to Vote at Meeting of Beneficiaries. Each Beneficiary shall be entitled
to vote at a meeting of the Beneficiaries either in person or by his proxy duly
authorized in writing. The signature of the Beneficiary on such written
authorization need not be witnessed or notarized. Each Beneficiary shall be
entitled to a number of votes equal to the number of Units held by such
Beneficiary as of the applicable record date.
12.5 Quorum.
At any meeting of Beneficiaries, the presence of Beneficiaries having aggregate
Units sufficient to take action on any matter for the transaction of which such
meeting was called shall be necessary to constitute a quorum, but if less than a
quorum be present, Beneficiaries having aggregate Units of at least a majority
of the total Units held by all Beneficiaries represented at the meeting may
adjourn such meeting with the same effect and for all intents and purposes as
though a quorum had been present. Except to the extent a different percentage is
specified in this Agreement for a particular matter or is required by law, the
approval of Beneficiaries having aggregate Units of at least a majority of the
total Units held by all Beneficiaries shall be required for taking action on any
matter voted on by the Beneficiaries.
12.6 Adjournment
of Meeting. Subject to Section 12.5, any meeting of Beneficiaries may be
adjourned from time to time and a meeting may be held at such adjourned time and
place without further notice.
12.7 Conduct
of Meetings. The Trustee shall appoint the Chairman (or may serve as the
Chairman) and the Secretary of the meeting. The vote upon any resolution
submitted to any meeting of Beneficiaries shall be by written ballot. An
Inspector of Votes, appointed by the Chairman of the meeting, shall count all
votes cast at the meeting for or against any resolution and shall make and
file with the Secretary of the meeting their verified written
report.
12.8 Record
of Meeting. A record of the proceedings of each meeting of Beneficiaries shall
be prepared by the Secretary of the meeting. The record shall be signed and
verified by the Secretary of the meeting and shall be delivered to the Trustee
to be preserved by it. Any record so signed and verified shall be conclusive
evidence of all of the matters therein stated.
ARTICLE
XIII
AMENDMENTS
13.1 Consent
of Beneficiaries. At the written direction or with the written consent of
Beneficiaries holding at least a majority of the total Units held by all
Beneficiaries or such greater or lesser percentage as shall be specified in this
Agreement for the taking of an action by the Beneficiaries under the affected
provision of this Agreement, the Trustee shall promptly make and execute a
declaration amending this Agreement for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of this Agreement
or amendments thereto; provided that no such amendment shall increase the duties
or potential liability of the Trustee hereunder without the written consent of
the Trustee nor reduce the compensation to the Trustee for services
rendered; provided, further, that no such amendment shall permit the Trustee to
engage in any activity prohibited by Section 6.1 hereof or affect the
Beneficiaries’ rights to receive their pro rata shares of the Trust Assets at
the time of any distribution, and that no such amendment shall cause the Trust,
in the opinion of counsel, to be treated for all tax purposes, as other than a
liquidating trust under Treasury Regulation Section 301.7701-4(d), or cause the
Beneficiaries to be treated as other than the owners of their respective shares
of the Trust’s taxable income pursuant to Section 671 through 677 of the Code
and any analogous provision of state or local law.
13.2 Notice
and Effect of Amendment. Promptly after the execution by the Trustee of any such
declaration of amendment, the Trustee shall give notice of the substance of such
amendment to the Beneficiaries or, in lieu thereof, the Trustee may send a copy
of the amendment to each Beneficiary. Upon the execution of any such declaration
of amendment by the Trustee, this Agreement shall be deemed to be modified and
amended in accordance therewith and the respective rights, limitations of
rights, obligations, duties, and immunities of the Trustee and the Beneficiaries
under this Agreement shall thereafter be determined, exercised and enforced
hereunder subject in all respects to such modification and amendments, and all
the terms and conditions of any such amendment shall thereby be deemed to be
part of the terms and conditions of this Agreement for any and all
purposes.
ARTICLE
XIV
MISCELLANEOUS
PROVISIONS
14.1 Filing
Documents. This Agreement shall be filed or recorded in such office or offices
as the Trustee may determine to be necessary or desirable. A copy of this
Agreement and all amendments thereof shall be maintained in the office of the
Trustee and shall be available at all times during regular business hours for
inspection by any Beneficiary or his duly authorized representative. The Trustee
shall file or record any amendment of this Agreement in the same places
where the original Agreement is filed or recorded. The Trustee shall file or
record any instrument which relates to any change in the office of a Trustee in
the same places where the original Agreement is filed or recorded.
14.2 Intention
of Parties to Establish Trust. This Agreement is intended to create a
liquidating trust and is not intended to create, a corporation, association,
partnership or joint venture of any kind for purposes of Federal income taxation
or for any other purpose.
14.3 Beneficiaries
Have No Rights or Privileges as Stockholders of the Company. Except as expressly
provided in this Agreement or under applicable law, the Beneficiaries (by their
vote with respect to the Plan and/or their acceptance of any distributions made
to them pursuant to this Agreement) shall have no rights or privileges
attributable to their former status as stockholders of the Company.
14.4 Laws
as to Construction. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without regard to the
conflicts of law principles thereof. The Trustee, the Company and the
Beneficiaries (by their vote with respect to the Plan and/or their acceptance of
any distributions made to them pursuant to this Agreement) consent and agree
that this Agreement shall be governed by and construed in accordance with such
laws.
14.5 Severability.
In the event any provision of this Agreement or the application thereof to any
Person or circumstances shall be finally determined by a court of proper
jurisdiction to be invalid or unenforceable to any extent, the remainder of this
Agreement, or the application of such provision to persons or circumstances
other than those as to which it is held invalid or unenforceable, shall not be
affected thereby, and each provision of this Agreement shall be valid and
enforced to the fullest extent permitted by law.
14.6 Notices.
Any notice or other communication by the Trustee to any Beneficiary shall be
deemed to have been sufficiently given, for all purposes, if deposited, postage
prepaid, in the post office or letter box addressed to such Person at his
address as shown in the records of the Trust.
All
notices and other communications hereunder shall be in writing and shall be
deemed to have been duly given if delivered personally or sent by cable,
telegram, facsimile to the parties at the following addresses, provided that
facsimile notices are confirmed telephonically or by depositing a copy of such
notice in the mail, or at such other addresses as shall be specified by the
parties by like notice:
(a) If
to the Trustee:
[_________]
[_________]
[_________]
Attn:
[_________]
(b) If
to the Company:
Xcorporeal,
Inc.
80 Empire
Drive
Lake
Forest, CA 92630
Attn: Kelly
J. McCrann
Facsimile
No. (949) ___-____
with a
copy to:
[_________]
[_________]
[_________]
Attn:
[_________]
14.7 Counterparts.
This Agreement may be executed in any number of counterparts, each of which
shall be an original, but such counterparts shall together constitute one and
the same instrument.
IN
WITNESS WHEREOF, Xcorporeal, Inc. and Xcorporeal Operations, Inc. has each
caused this Agreement to be executed by its President and Chief Executive
Officer, and the Trustee herein has executed this Agreement on this
___ day of ________________, 2010.
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XCORPOREAL,
INC.
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By:
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Name:
Kelly J. McCrann
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Title:
Chief Executive Officer
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XCORPOREAL
OPERATIONS, INC.
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By:
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Name:
Kelly J. McCrann
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Title:
Chief Executive Officer
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,
TRUSTEE
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Name:
Kelly J. McCrann
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Title:
Authorized Signatory
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EXHIBIT
A
Compensation
of Trustee
A1. The
Trustee shall receive the following compensation for its services as Trustee
hereunder (the “Services”):
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ten
(10%) percent of the aggregate Royalty Payments (as defined in the Asset
Purchase Agreement) up to 10 million dollars ($10,000,000) received
by the Trust pursuant to the terms of the Asset Purchase Agreement;
and
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five
(5%) percent of the aggregate distributions to Beneficiaries in excess of
10 million dollars ($10,000,000) received by the Trust pursuant to the
terms of the Asset Purchase
Agreement.
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A2. Subject
to Section A1 hereof, the Trustee shall invoice the Trust on a quarterly basis
for Services rendered during the prior month. Payment by the Trust for such
Services, if applicable, relating to such period shall be due as of the date of
receipt by the Trust of its share of the Royalty Payments pursuant the terms of
the Asset Purchase Agreement. Payment by the Trust for such applicable Expenses
(as defined below) relating to such period shall be due as of the date of such
invoice.
A3. In
addition to the compensation to the Trustee set forth above, the Trustee shall
be reimbursed for all reasonable out-of-pocket expenses (“Expenses”) incurred by
Trustee in connection with providing the Services. Expenses shall include,
without limitation:
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fees
and expenses of independent professionals and consultants (such as
attorneys, accountants, environmental experts, etc.) incurred by or on
behalf of the Trust;
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the
costs associated with obtaining the services of certain current directors
and executive and administrative personnel of the Company, as determined
by the Trustee;
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the
costs associated with obtaining the services of accounts receivable
collection personnel, as determined by the
Trustee;
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document
storage costs required to maintain Company and Trust records;
and
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reasonable
out-of-pocket, third party expenses incurred by the Trustee, including
copying, faxes, messenger, postage, costs of forwarding Company phone and
email lines and other direct out-of-pocket
costs.
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Any and
all Expenses incurred in any month by the Trustee shall be included and itemized
in the invoice prepared by the Trustee with respect to such month.
EXHIBIT
B
The
Company’s Stockholder List as of the Final Record Date
ANNEX D
AGREEMENT
This
AGREEMENT (the “
Agreement
”), dated as of
December 14, 2009 (the “
Effective Date
”), is by and
between Fresenius USA, Inc., a Massachusetts corporation with its principal
executive office at 920 Winter Street, Waltham, MA 02451 (the “
FUSA
”), and Xcorporeal, Inc.,
a Delaware corporation with its principal executive office at 80 Empire Drive,
Lake Forest, CA 92630 (“
Xcorporeal
”).
Reference
is made to that certain Asset Purchase Agreement dated as of the Effective Date,
by and among FUSA, Xcorporeal, Xcorporeal Operations, Inc. and National Quality
Care, Inc. (the “
Asset Purchase
Agreement
”), pursuant to which Xcorporeal, Operations and NQCI intend to
sell to FUSA the Purchased Assets. Any capitalized terms not defined
herein shall have the meanings ascribed to them in the Asset Purchase
Agreement.
WHEREAS,
in anticipation of the Closing, FUSA desires to pay Xcorporeal for certain
expenses expected to be incurred by Xcorporeal before the Closing;
and
WHEREAS,
prior to the Closing, FUSA desires to utilize certain consulting services of
Xcorporeal and Xcorporeal desires to provide such consulting services to FUSA;
and
WHEREAS,
in anticipation of the Closing, FUSA has incurred and will continue to incur
certain expenses on behalf of Xcorporeal, and the parties desire to agree upon
the terms and conditions for the repayment of such expenses by Xcorporeal in the
event the Closing fails to take place by February 28, 2010, unless otherwise
agreed to by the Sellers and FUSA.
NOW,
THEREFORE, in consideration of the premises and mutual covenants contained
herein the parties agree as follows:
1.
Lease
. Xcorporeal
is a lessee under that certain Standard Industrial/Commercial Lease dated
October 6, 2008, by and between Xcorporeal and Olen Commercial Realty Corp. (the
“
Lease
”) pertaining to
the premises located at 80 Empire Drive, Lake Forest, California
92630. Subject to the approval of the Lessor, FUSA shall, upon the
Closing Date, assume the Lease and all future obligations arising thereunder,
provided, however, that FUSA shall not assume any liability or obligation
arising, or related to, any period prior to the Closing Date. In
consideration of such assumption, Xcorporeal hereby agrees to pay to FUSA on the
Closing Date the amount of $175,000, representing approximately six (6) months
of rent and common area expenses that are expected to be incurred by FUSA under
the Lease following the Closing Date. Xcorporeal shall be entitled to receive
the return of the Letters of Credit and any other security deposits posted by it
in connection with such Lease and FUSA will reasonably cooperate with Xcorporeal
in any actions requested by Xcorporeal to ensure the return of such items on a
timely basis.
2.
Consulting
Services
. FUSA hereby engages, effective November 16, 2009,
Xcorporeal to perform such consulting, advisory and related services to and for
FUSA as may be reasonably requested from time to time by FUSA and its affiliates
(the “
Services
”), and
Xcorporeal hereby accepts such engagement by FUSA (the “
Engagement
”), on the terms set
forth in this Agreement, for the period beginning on the Effective Date and
ending on the Closing Date, unless sooner terminated in accordance with Section
2(d) hereof (the “
Term
”).
(a)
Key
Personnel
. The parties agree that Dr. Victor J. Gura, Barry
Fulkerson and Mark Smith (collectively, the “
Key Personnel
”) are essential
to the Services to be provided pursuant to the Engagement, and are the only
employees of Xcorporeal that will provide such Services, and that the assignment
of the Key Personnel to perform the Services will be continuous throughout the
term of the Engagement. The parties further agree that should any
such Key Personnel no longer be employed by Xcorporeal during the term of the
Engagement, for whatever reason, FUSA shall have the right to terminate the
Engagement immediately upon notice to Xcorporeal.
(b)
Cooperation
. Xcorporeal
shall use its reasonable commercial efforts in the provision of the Services
pursuant to the Engagement. Xcorporeal shall cooperate with FUSA’s
personnel, shall not interfere with the conduct of FUSA’s business and shall
observe all rules, regulations and security requirements of FUSA concerning the
safety of persons and property to the extent known to Xcorporeal.
(c)
Fee
. For
the Services rendered by Xcorporeal during the Term, FUSA shall pay to
Xcorporeal a fee, payable in cash in semi-monthly installments, at the following
annual rate for the full-time services of each of the Key
Personnel:
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Dr.
Victor J. Gura
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$442,000/year
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Barry
Fulkerson
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$212,000/year
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Mark
Smith
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$167,000/year
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FUSA will
also reimburse Xcorporeal for all reasonable out-of-pocket Denver, CO to Lake
Forest, CA commuting expenses incurred by Xcorporeal on behalf of Barry
Fulkerson and Mark Smith in the course of their performance of duties pursuant
to the Engagement. For purposes of clarification, the amounts above
shall be prorated for the duration of the Term and FUSA shall have no obligation
to pay any amounts other than during the Term. The parties
acknowledge that, notwithstanding the date of this Agreement, FUSA and its
affiliates have previously engaged the services of Barry Fulkerson and Mark
Smith and have paid the required fees for such services. The parties
further agree and acknowledge that any amounts paid by FUSA with respect to the
services provided by Dr. Victor J. Gura (“
Gura
”) pursuant to this
Agreement shall be offset against any capital contributions of FUSA or its
affiliates in connection with any HD WAK joint venture between FUSA or an
affiliate of FUSA and Gura, and potentially others related to the development of
the HD WAK and other related applications as contemplated by the exclusivity
letter between Fresenius Medical Care Holdings, Inc. and Xcorporeal, Inc. dated
as of September 21, 2009.
(d)
Termination
. Notwithstanding
anything to the contrary contained in this Agreement, the Engagement shall
terminate upon the earliest to occur of the following (the “
Termination
Date
”):
(i) At
the election of FUSA, for cause, immediately upon written notice by FUSA to
Xcorporeal. For the purposes of this Section 2(d)(i), cause for
termination shall be deemed to exist upon (a) a good faith finding by FUSA of
the failure of Xcorporeal to perform the Services in accordance with this
Agreement, which failure comes more than thirty (30) days after Xcorporeal’s
receipt of a written notice from FUSA of such failure, (b) bad faith, gross
negligence or willful misconduct of any Key Personnel; (c) the conviction of any
Key Personnel of, or the entry of a pleading of guilty or nolo contendere by any
Key Personnel to, any crime involving moral turpitude or any felony; (d) a
knowing or willful breach by Xcorporeal or any Key Personnel of Section 2(f)(i),
which breach shall not be cured within thirty (30) days after Xcorporeal’s
receipt of a written notice from FUSA of such breach; or (e) a knowing or
willful breach by Xcorporeal or any Key Personnel of Section 2(f)(ii), which
breach shall not be cured within thirty (30) days after Xcorporeal’s receipt of
a written notice from FUSA of such breach;
(ii) The
death or disability of any Key Personnel. As used in this Agreement,
the term “disability” means the inability of Key Personnel with or without
reasonable accommodation as may be required by state or federal law, due to
physical or mental disability, for a period of sixty (60) days, to perform the
Services; and
(iii) February
28, 2010.
(e)
Effect of
Termination
. Upon the termination of the Engagement, FUSA
shall pay Xcorporeal (i) the consulting fees otherwise payable to Xcorporeal
under Section 2(c) through the last day of the Engagement, and (ii) all unpaid
expense reimbursements payable to Xcorporeal pursuant to Section 2(c) (together,
the “
Earned/Accrued
Amounts
”). Following payment of the Earned/Accrued Amounts,
FUSA shall have no further obligation to Xcorporeal pursuant to the
Engagement.
(f)
Inventions and Proprietary
Information
.
(i)
Inventions
.
(1) All
inventions, discoveries, computer programs, data, technology, designs,
innovations and improvements (whether or not patentable and whether or not
copyrightable) related to the business of FUSA (“
Inventions
”) which are made,
conceived, reduced to practice, created, written, designed or developed by Key
Personnel, solely or jointly with others and whether during normal business
hours or otherwise, during the performance of Services for FUSA pursuant to the
Engagement or thereafter if resulting or directly derived from Proprietary
Information (as defined below), shall be the sole property of
FUSA. Xcorporeal hereby assigns, and shall use its best efforts to
cause the Key Personnel to assign, to FUSA all Inventions and any and all
related patents, copyrights, trademarks, trade names, and other industrial and
intellectual property rights and applications therefor, in the United States and
elsewhere and appoints, and shall use its best efforts to cause the Key
Personnel to appoint, any officer of FUSA as its duly authorized attorney to
execute, file, prosecute and protect the same before any government agency,
court or authority. Upon the request of FUSA and at FUSA’s expense,
Xcorporeal shall, and shall use its best efforts to cause the Key Personnel to,
execute such further assignments, documents and other instruments as may be
reasonably necessary or desirable to fully and completely assign all Inventions
to FUSA and to assist FUSA in applying for, obtaining and enforcing patents or
copyrights or other rights in the United States and in any foreign country with
respect to any Invention. Xcorporeal also hereby waives all claims to
moral rights in any Inventions.
(2) Xcorporeal
shall promptly disclose to FUSA all Inventions and will maintain adequate and
current written records (in the form of notes, sketches, drawings and as may be
specified by FUSA) to document the conception and/or first actual reduction to
practice of any Invention. Such written records shall be available to
and remain the sole property of FUSA at all times.
(3) Notwithstanding
the foregoing, Inventions, if any, patented or unpatented, which Xcorporeal
and/or the Key Personnel made prior to the commencement of Xcorporeal’s
engagement as consultant for FUSA are excluded from the scope of this Agreement.
To preclude any possible uncertainty, attached hereto as
Exhibit A
is a
complete list of all Inventions (a) that Xcorporeal and/or the Key Personnel has
or have, alone or jointly with others, conceived, developed or reduced to
practice prior to Xcorporeal’s engagement as a consultant for FUSA, (b) that
Xcorporeal and/or the Key Personnel considers to be its or their property or the
property of third parties, and (c) that Xcorporeal wishes to have excluded from
the scope of this Agreement. If disclosure of any such invention on
Exhibit A
would
potentially cause Xcorporeal to violate a prior confidentiality agreement,
Xcorporeal understands that it is obligated only to describe such invention in
general terms in order to avoid such violation.
(ii)
Proprietary
Information
.
(1) Xcorporeal
acknowledges that its relationship with FUSA is one of high trust and confidence
and that in the course of the Services it will have access to and contact with
Proprietary Information. Subject to Section 2(f)(ii)(3), Xcorporeal
agrees that it will not, during the Term or at any time thereafter, disclose to
others, or use for its benefit or the benefit of others, any Proprietary
Information or Invention.
(2) For
purposes of this Agreement, Proprietary Information shall mean, by way of
illustration and not limitation, all information (whether or not patentable and
whether or not copyrightable) owned, possessed or used by FUSA, including,
without limitation, any Invention, formula, vendor information, customer
information, apparatus, equipment, trade secret, process, research, report,
technical data, know-how, computer program, software, software documentation,
hardware design, technology, marketing or business plan, forecast, unpublished
financial statement, budget, license, price, cost and employee list that is
communicated to, learned of, developed or otherwise acquired by Xcorporeal in
the course of it providing the Services to FUSA.
(3) Xcorporeal’s
obligations under this Section 2(f)(ii) shall not apply to any Proprietary
Information that (a) is or becomes known to the general public under
circumstances involving no unauthorized disclosure by Xcorporeal of the terms of
this Section 2(f)(ii), (b) was available to Xcorporeal or Key Personnel on a
non-confidential basis prior to disclosure by Xcorporeal, (c) is generally
disclosed to third parties by FUSA without confidentiality restrictions on such
third parties, (d) is approved for release by written authorization of an
officer of FUSA or (e) is prepared, conceived or discovered by Xcorporeal or Key
Personnel or their representatives subsequent to the Termination
Date.
(4) Upon
termination of the Engagement or at any other time upon request by FUSA,
Xcorporeal shall promptly deliver to FUSA all records, files, memoranda, notes,
designs, data, reports, price lists, customer lists, drawings, plans, computer
programs, software, software documentation, sketches, laboratory and research
notebooks and other documents (and all copies or reproductions of such
materials) relating to the business of FUSA.
(5) Xcorporeal
represents that its retention as a consultant for FUSA and its performance of
the Engagement does not, and shall not, breach any agreement that obligates
Xcorporeal to keep in confidence any trade secrets or confidential or
proprietary information of Xcorporeal or of any other party or to refrain from
competing, directly or indirectly, with the business of any other party or
otherwise conflict with any of Xcorporeal’s agreements or obligations to any
other party. Xcorporeal shall not disclose to FUSA any trade secrets
or confidential or proprietary information of any other party.
(6) Xcorporeal
acknowledges that FUSA from time to time may have agreements with other persons
or with the United States Government, or agencies thereof, that impose
obligations or restrictions on FUSA regarding inventions made during the course
of work under such agreements or regarding the confidential nature of such
work. Xcorporeal agrees to be bound by all such obligations and
restrictions that are known to Xcorporeal and to take all action reasonably
necessary to discharge the obligations of FUSA under such agreements to the
extent such obligations relate to Xcorporeal.
(iii)
Remedies
. Xcorporeal
acknowledges that any breach of the provisions of this Section 2(f) shall result
in serious and irreparable injury to FUSA for which FUSA cannot be adequately
compensated by monetary damages alone. Xcorporeal agrees, therefore,
that, in addition to any other remedy it may have, FUSA shall be entitled to
enforce the specific performance of Section 2 by Xcorporeal and to seek both
temporary and permanent injunctive relief (to the extent permitted by law)
without the necessity of proving actual damages.
(g)
Non-Competition
. Subject
to the consummation of the transactions contemplated under the Asset Purchase
Agreement, Xcorporeal agrees that during the Term and for two (2) years
immediately thereafter, Xcorporeal will not directly or indirectly for its own
benefit or the benefit of others:
(i) render
services for a competing organization, as an employee, officer, agent, broker,
partner, or stockholder (except that Xcorporeal may own five percent (5%) or
less of the equity securities of any publicly-traded company);
(ii) hire
or seek to persuade any employee of FUSA or any of its affiliates to discontinue
employment or to become employed in any a competing organization or seek to
persuade any independent contractor or supplier to discontinue its relationship
with FUSA or any of its affiliates; and
(iii) solicit,
direct, take away or attempt to take away any business or customers of FUSA or
any of its affiliates.
Nothing
in this Agreement shall preclude Xcorporeal or any Key Personnel from working
for a competitor of FUSA or its affiliates after termination of the Engagement,
provided that
, subject
to the consummation of the transactions contemplated under the Asset Purchase
Agreement, Xcorporeal will not be engaged, directly or indirectly, in
any business in which FUSA or its affiliates are actively engaged upon
termination of the Engagement or in any new business which FUSA or its affiliate
are in the process of setting up and in which Xcorporeal had direct involvement
during the Term.
(h)
Other
Agreements
. Xcorporeal hereby represents that Xcorporeal is
not bound by the terms of any agreement with any other party to refrain from
using or disclosing any trade secret or confidential or proprietary information
relating to the Proprietary Information in the course of Xcorporeal’s
relationship with FUSA, to refrain from competing, directly or indirectly, with
the business of such other party or to refrain from soliciting employees,
customers or suppliers of such other party. Xcorporeal agrees to
furnish FUSA with a copy of any such agreement upon request.
(i)
Independent Contractor
Status
. Xcorporeal shall perform all consulting services under
Section 2 as an “independent contractor” and not as an employee or agent of
FUSA. Xcorporeal is not authorized to assume or create any obligation
or responsibility, express or implied, on behalf of, or in the name of, FUSA or
to bind FUSA in any manner.
3.
Development
Expenses
. Xcorporeal acknowledges and agrees that in the event
the Closing does not take place as a result of Xcorporeal consummating a
Superior Proposal, Xcorporeal shall reimburse FUSA for the following expenses,
to the extent such (other than (d) and (e) below) are reasonably incurred on
Xcorporeal’s behalf for the benefit of Xcorporeal, concurrently with the
consummation of such Superior Proposal:
(a) Tooling;
(b) Prototyping;
(c) IP
Maintenance;
(d) All
reasonably documented third party expenses incurred by FUSA in negotiating and
documenting the transactions contemplated by the Asset Purchase Agreement and
this Agreement, including reasonable attorneys’ fees and expenses;
(e) Consulting
fees; and
(f) Miscellaneous
consulting expenses, i.e. travel.
4.
Notices
. All
notices required or permitted under this Agreement shall be in writing and shall
be provided as set forth in the Asset Purchase Agreement.
5.
Entire
Agreement
. This Agreement (together with the Asset Purchase
Agreement, the schedules and exhibits thereto and other documents and agreements
delivered pursuant to the Asset Purchase Agreement, to the extent referred to
herein) constitutes the entire agreement between the parties and supersedes all
prior agreements and understandings, whether written or oral, relating to the
subject matter of this Agreement.
6.
Amendment
. This
Agreement may be amended or modified only by a written instrument executed by
both FUSA and Xcorporeal.
7.
Governing
Law
. This Agreement shall be construed, interpreted and
enforced in accordance with the laws of the State of Delaware without regard to
its principles or conflicts of laws.
8.
Successors and
Assigns
. This Agreement shall be binding upon, and inure to
the benefit of, both parties and their respective successors and assigns,
including any corporation with which, or into which, FUSA may be merged or which
may succeed to its assets or business, provided, however, that subject to the
last sentence of this Section 8, the obligations of Xcorporeal are personal and
may not be assigned. Xcorporeal may assign its respective rights and obligations
hereunder, including under any agreements contemplated by this Agreement, to a
liquidating trust established for the benefit of Xcorporeal’s stockholders (the
“
Xcorporeal Trust
”) and
the Xcorporeal Trust may assign any or all of it respective rights and
obligations hereunder to any purchaser of a part or all of such trust’s rights,
assets and/or obligations, without the prior written consent of any other
party.
9.
Interpretation
. If
any restriction set forth in Section 9 is found by any court of competent
jurisdiction to be unenforceable because it extends for too long a period of
time or over too great a range of activities or in too broad a geographic area,
it shall be interpreted to extend only over the maximum period of time, range of
activities or geographic area as to which it may be enforceable.
10.
Miscellaneous
.
(a) No
delay or omission by FUSA or Xcorporeal in exercising any right under this
Agreement shall operate as a waiver of that or any other right. A
waiver or consent given by FUSA or Xcorporeal on any one occasion shall be
effective only in that instance and shall not be construed as a bar or waiver of
any right on any other occasion.
(b) The
captions of the sections of this Agreement are for convenience of reference only
and in no way define, limit or affect the scope or substance of any section of
this Agreement.
(c) In
the event that any provision of this Agreement shall be invalid, illegal or
otherwise unenforceable, the validity, legality and enforceability of the
remaining provisions shall in no way be affected or impaired
thereby.
(d) This
Agreement may be executed in two or more counterparts, and by the different
parties hereto in separate counterparts, each of which when executed shall be
deemed to be an original but all of which taken together shall constitute one
and the same agreement.
[Remainder
of Page Intentionally Left Blank]
IN
WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day
and year set forth above.
|
FRESENIUS
USA, INC.
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|
|
|
By:
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/s/ Mohsen
Reihany
|
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Name:
Mohsen Reihany
|
|
Title:
Senior Advisor To Chairman of The Board
|
|
|
|
XCORPOREAL,
INC.
|
|
|
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By:
|
/s/
Kelly J.
McCrann
|
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Name:
Kelly J. McCrann
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Title:
Chief Executive Officer
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ANNEX E
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington
D.C. 20549
Form 10-K
|
(Mark
One)
|
|
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
|
|
For
the fiscal year ended December 31, 2008
|
|
|
or
|
|
|
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|
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For
the transition period
from to
|
Commission
File Number 001-33874
Xcorporeal,
Inc.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
75-2242792
|
|
(State
or other jurisdiction of
Incorporation
or organization)
|
(I.R.S.
Employer
Identification
Number)
|
12121
Wilshire Blvd., Suite 350
Los
Angeles, California 90025
(Address
of principal executive offices and zip code)
Registrant’s
telephone number, including area code:
(310) 923-9990
Securities
registered pursuant to Section 12(b) of the Act:
|
Title of Each Class
|
|
Name of Each Exchange on Which
Registered
|
|
Common
Stock, $0.0001 par value
|
|
NYSE
Amex
|
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
£
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
£
No
x
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
x
No
£
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K(§229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer
£
|
Accelerated
filer
£
|
Non-accelerated
filer
£
(Do
not check if a smaller reporting company)
|
Smaller
reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes
£
No
x
The
aggregate market value of the voting common stock held by non-affiliates of the
registrant computed by reference to the closing price of the registrant’s common
stock on June 30, 2008, as reported on the NYSE Amex, was approximately
$7,288,459. For purposes of this disclosure, shares of common stock held by
persons who hold more than 5% of the outstanding shares of common stock and
shares held by executive officers and directors of the registrant have been
excluded because such persons may be deemed to be affiliates. This determination
of executive officer or affiliate status is not necessarily a conclusive
determination for other purposes.
As of
March 23, 2009, the registrant had issued and outstanding 14,754,687 shares of
common stock, $0.0001 par value per share.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
TABLE
OF CONTENTS
|
Forward
Looking Statements
|
E-4
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|
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PART
I
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|
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Item
1.
|
Business
|
E-5
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Item
1A.
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Risk
Factors
|
E-12
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Item
1B.
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Unresolved
Staff Comments
|
E-21
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|
Item
2.
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Properties
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E-21
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Item
3.
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Legal
Proceedings
|
E-21
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Item
4.
|
Submission
of Matters to a Vote of Security Holders
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E-23
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PART
II
|
|
|
|
Item
5.
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Market
For Registrant’s Common Equity, Related Stockholder Maters and Issuer
Purchases of Equity
|
E-24
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Item
6.
|
Selected
Financial Data
|
E-24
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|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
E-24
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|
Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
|
E-29
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|
Item
8.
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Financial
Statements and Supplementary Data
|
E-30
|
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
E-51
|
|
Item
9A.
|
Controls
and Procedures
|
E-51
|
|
Item
9B.
|
Other
Information
|
E-52
|
|
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PART
III
|
|
|
|
Item
10.
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Directors,
Executive Officers and Corporate Governance
|
E-53
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|
Item
11.
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Executive
Compensation
|
E-55
|
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
E-63
|
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Item
13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
E-64
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Item
14:
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Principal
Accounting Fees and Services
|
E-65
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PART
IV
|
|
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Item
15:
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Exhibits
and Financial Statement Schedules
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E-66
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Signatures
|
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E-67
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FORWARD
LOOKING STATEMENTS
Unless
the context otherwise indicates or requires, as used in this Annual Report on
Form 10-K, or the “Annual Report”, references to “Xcorporeal, ”“we,” “us,” “our”
or the “Company” refer to Xcorporeal, Inc., a Delaware corporation, and prior to
October 12, 2007, the company which is now our subsidiary and known as
Xcorporeal Operations, Inc., or “Operations”.
This
Annual Report contains “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995 with respect to the financial
condition, results of operations, business strategies, operating efficiencies or
synergies, competitive positions, growth opportunities for existing products,
plans and objectives of management, markets for our stock and other matters.
Statements in this Annual Report that are not historical facts are
“forward-looking statements” for the purpose of the safe harbor provided by
Section 21E of the Securities Exchange Act of 1934, as amended, or the “Exchange
Act”, and Section 27A of the Securities Act of 1933, or the “Securities Act”.
Forward-looking
statements reflect our current expectations or forecasts of future events.
Forward-looking statements generally can be identified by the use of
forward-looking terminology such as “may,” “will,” “expect,” “anticipate,”
“intend,” “estimate,” “believe,” “project,” “continue,” “plan,” “forecast,” or
other similar words.
Such forward-looking statements, including, without
limitation, those relating to our future business prospects, revenues and
income, wherever they occur, are necessarily estimates reflecting the best
judgment of our senior management on the date on which they were made, or if no
date is stated, as of the date of this Annual Report. These forward-looking
statements are subject to risks, uncertainties and assumptions, including those
described in the “Risk Factors” described below, that may affect the operations,
performance, development and results of our business. Because the factors
discussed in this Annual Report could cause our actual results or outcomes to
differ materially from those expressed in any forward-looking statements made by
us or on our behalf, you should not place undue reliance on any such
forward-looking statements. New factors emerge from time to time, and it is not
possible for us to predict which factors will arise. In addition, we cannot
assess the impact of each factor on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.
You
should understand that, in addition to those factors discussed in the section
captioned “Risk Factors,” and events discussed in the section captioned
“Business - Recent Developments,” factors that could affect our future results
and could cause our actual results to differ materially from those expressed in
such forward-looking statements, include, but are not limited to:
|
·
|
the
effect of receiving a “going concern” statement in our independent
registered public accounting firm’s report on our 2008 financial
statements;
|
|
·
|
our
significant capital needs and ability to obtain financing both on a
short-term and a long-term basis;
|
|
·
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the
results of the arbitration proceeding with National Quality Care, Inc., or
“NQCI”;
|
|
·
|
our
ability to meet continued listing standards of NYSE Amex (formerly
American Stock Exchange);
|
|
·
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our
ability to successfully research and develop marketable
products;
|
|
·
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our
ability to obtain regulatory approval to market and distribute our
products;
|
|
·
|
anticipated
trends and conditions in the industry in which we operate, including
regulatory changes;
|
|
·
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general
economic conditions; and
|
|
·
|
other
risks and uncertainties as may be detailed from time to time in our public
announcements and filings with the U.S. Securities and Exchange
Commission, or the “SEC”.
|
Although
we believe that our expectations are reasonable, we cannot assure you that our
expectations will prove to be correct. Should any one or more of these risks or
uncertainties materialize, or should any underlying assumptions prove incorrect,
actual results may vary materially from those described in this annual report as
anticipated, believed, estimated, expected or intended.
These
factors are not exhaustive, and new factors may emerge or changes to the
foregoing factors may occur that could impact our business.
Except to the extent
required by law, w
e undertake no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or any other reason. All subsequent forward-looking statements
attributable to us or any person acting on our behalf are expressly qualified in
their entirety by the cautionary statements contained or referred to herein. In
light of these risks, uncertainties and assumptions, the forward-looking events
discussed in this Annual Report may not occur. You should review carefully the
sections captioned “Risk Factors,” “Business - Recent Developments” and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included elsewhere in this Annual Report for a more complete
discussion of these and other factors that may affect our business.
PART
I
Item
1. Business
Overview
We are a
medical device company developing an innovative
extra-corporeal
platform
technology to be used in devices to replace the function of various human
organs. These devices will seek to provide patients with improved, efficient and
cost effective therapy. The platform leads to three initial
products:
|
·
|
A
Portable Artificial Kidney, or “PAK”, for attended care Renal Replacement
Therapy, or “RRT”, for patients suffering from Acute Renal Failure, or
“ARF”
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|
·
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A
PAK for home hemodialysis for patients suffering from End Stage Renal
Disease, or “ESRD”
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|
·
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A
Wearable Artificial Kidney, or “WAK”, for continuous ambulatory
hemodialysis for treatment of ESRD
|
We have
completed functional prototypes of our attended care and home PAKs that we plan
to commercialize after obtaining notification clearance from the Food and Drug
Administration, or “FDA”, under Section 510(k) of the Federal Food, Drug and
Cosmetic, or “FDC”, Act based on the existence of predicate devices, which,
subject to our capital limitations described below, we plan to seek in the
future. We have demonstrated a feasibility prototype of the WAK and we will
determine whether to devote any available resources to the development of the
WAK; commercialization of the WAK will require development of a functional
prototype and likely a full pre-market approval, or “PMA”, by the FDA, which
could take several years or longer. Unless we are able to raise funds to satisfy
our current liabilities and other obligations as they become due and obtain
additional debt or equity financing, as more fully described below in section
captioned “Business - Recent Developments”, we will not be able to submit a
510(k) notification with the FDA for the PAK or the WAK.
Our PAK
for the attended care market is a portable, multifunctional renal replacement
device that will offer cost-effective therapy for those patients suffering from
ARF, causing a rapid decline in kidney function. We have completed our
functional prototype of this product, which is currently undergoing bench
testing, and, subject to our capital limitations described below, plan to submit
a 510(k) filing with the FDA in the future. We plan to commercialize this
product after receiving clearance from the FDA. Timing of FDA clearance is
uncertain at this time. Unless we are able to raise funds to satisfy our current
liabilities and other obligations as they become due and obtain additional debt
or equity financing, we will not be able to submit a 510(k) notification with
the FDA for this product.
Our PAK
for the home hemodialysis market is a device for patients suffering from ESRD,
in whom the kidneys have ceased to function. We have also completed our
functional prototype of this product, which is currently undergoing bench
testing, and, subject to our capital limitations described below, we intend to
submit a 510(k) with the FDA in the future. Unless we are able to raise funds to
satisfy our current liabilities and other obligations as they become due and
obtain additional debt or equity financing, we will not be able to submit a
510(k) notification with the FDA for this product. Clinical trials would be
anticipated to commence after the FDA clearance is received.
Our WAK
is a device for the chronic treatment of ESRD. We have successfully demonstrated
a prototype system that weighs less than 6 kg., is battery operated, and can be
worn by an ambulatory patient. Assuming that the Technology Transaction
described below closes and we are able to raise funds to satisfy our current
liabilities and other obligations as they become due and obtain additional debt
or equity financing, we will evaluate the feasibility of furthering our
development of this product over the next 12 months
.
In 2009,
to the extent we have or are able to obtain sufficient funds to do so, we plan
to continue testing and developing the technology for our
extra-corporeal
platform. We
will also implement our validation and verification strategy including bench
testing, clinical testing and regulatory strategy in the U.S. and
abroad.
While we
may eventually exploit our technology’s potential Congestive Heart Failure, or
“CHF”, applications through licensing or strategic arrangements, we will focus
initially on the renal replacement applications described above.
We have
focused much of our efforts on development of the PAK, which we do not believe
has been derived from the Technology (as defined below) covered by the License
Agreement. As described in the section captioned “Background of the Technology
Transaction,” once the Technology Transaction has closed and the results of the
arbitration proceeding are final, we will determine whether to devote any
available resources to development of the WAK. Because none of our products is
yet at a stage where it can be marketed commercially and because of the capital
limitations that we are experiencing, we are not able to predict what portion of
our future business, if any, will be derived from each of our
products.
We are a
development stage company, have generated no revenues to date and have been
unprofitable since our inception, and will incur substantial additional
operating losses for at least the next twelve months as we continue, to the
extent available, to allocate resources to research, development, clinical
trials, commercial operations, and other activities. We do not believe our
existing cash reserves will be sufficient to satisfy our current liabilities and
other obligations before we achieve profitability. Our ability to meet such
obligations as they become due will depend on our ability to secure debt or
equity financing. Unless we are able to obtain funds sufficient to support our
operations and to satisfy our ongoing capital requirements, as more fully
described below, we will not be able to develop any of our products, submit
510(k) notifications or PMA applications to the FDA, conduct clinical trials or
otherwise commercialize any of our products. We may not be able to
obtain needed funds on acceptable terms, or at all, and there is substantial
doubt of our ability to continue as a going concern. Accordingly, our historical
operations and financial information are not indicative of our future operating
results, financial condition, or ability to operate profitably as a commercial
enterprise.
Our
History
We were
incorporated in the State of Delaware in 1992. As of June 30, 2007, we did not
conduct any active business and were considered a “shell company” as defined in
Rule 12(b)-2 promulgated under the Exchange Act. On August 10, 2007, we entered
into a merger agreement with Xcorporeal, Inc., referred to herein as “pre-merger
Xcorporeal”, which conducted the business described in this Annual Report before
the merger became effective on October 12, 2007. Pre-merger Xcorporeal became
our wholly-owned subsidiary and changed its name to “Xcorporeal Operations,
Inc”, referred to herein as “Operations.” We changed our name from “CT Holdings
Enterprises, Inc.” to “Xcorporeal, Inc.” All of our former officers and
directors resigned, and all of the officers and directors of pre-merger
Xcorporeal became our officers and directors, effective as of October 12,
2007.
On
September 1, 2006, Operations entered into a License Agreement with National
Quality Care, Inc. pursuant to which we obtained the exclusive rights to the
technology relating to our kidney failure treatment, and other medical devices.
As a result, we became a development stage company focused on researching,
developing and commercializing technology and products related to the treatment
of kidney failure. On December 1, 2006, Operations initiated arbitration
proceedings against NQCI for its breach of the License Agreement, which remains
pending. Throughout this Annual Report we refer to the License Agreement with
NQCI as the “License Agreement”. For a complete description of the License
Agreement and the arbitration proceedings please see section captioned “Recent
Developments - Background of the Technology Transaction” below and Item 3 -
Legal Proceedings.
Recent
Developments
Corporate Restructuring
The deterioration of the economy over
the last year, coupled with the prolonged and continuing delay in consummating
the Technology Transaction, has significantly adversely affected our Company.
Many of the expectations on which we had based our 2008 and 2009 business
development plans slowly eroded as a result of the lengthy arbitration
proceeding with NQCI commenced in 2006 and continuing into the second quarter of
2009. The possibility of an adverse decision in the arbitration proceeding with
respect to our ownership right to the Technology has been and continues to be a
major factor in our inability to secure debt or equity financing. Accordingly,
we have had to modify our activities and business. In response to the general
economic downturn affecting the development of our products and liquidity
condition, we have instituted a variety of measures in an attempt to conserve
cash and reduce our operating expenses. Our actions included:
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Reductions
in our labor force – On March 13, 2009, we gave notice of employment
termination to 19 employees. This represents a total work-force reduction
of approximately 73%. We paid accrued vacation benefits of approximately
$70,000 to the terminated employees. The layoffs and our other efforts
focused on streamlining our operations designed to reduce our annual
expenses by approximately $3.5 million to a current operating burn rate of
approximately $200,000 per month. These actions had to be carefully and
thoughtfully executed and we will take additional actions, if necessary.
Most important to us in making these difficult decisions is to give as
much consideration as possible to all of our employees, whom we greatly
value. We hope to be in the financial position in the near future to offer
re-employment to certain of our terminated
employees.
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Refocusing
our available assets and employee resources on the development of the
PAK.
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Continuing
vigorous efforts to minimize or defer our operating
expenses.
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Exploring
various strategic alternatives, which may include the license of certain
of our intellectual property rights, as a means to further develop our
technologies, among other possible transactions and
alternatives.
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Intensifying
our search to obtain additional financing to support our operations and to
satisfy our ongoing capital requirements in order to improve our liquidity
position.
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Continuing
to prosecute our patents and take other steps to perfect our intellectual
property rights.
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In light of the unprecedented economic
slow down, lack of access to capital markets and prolonged arbitration
proceeding with NQCI, we were compelled to undertake the efforts outlined above
in order to remain in the position to continue our operations. We hope to be
able to obtain additional financing to meet our cash obligations as they become
due and otherwise proceed with our business plan. Our ability to execute on our
current business plan is dependent upon our ability to obtain equity or debt
financing, develop and market our products, and, ultimately, to generate
revenue. Unless we are able to raise financing sufficient to support our
operations and to satisfy our ongoing financing requirements, we will not be
able to develop any of our products, submit 510(k) notifications to the FDA,
conduct clinical trials or otherwise commercialize any of our products. We will
make every effort however, to continue the development of the PAK. As a result
of these conditions, there is substantial doubt about our ability to continue as
a going concern. Our ability to continue as a going concern is substantially
dependent on the successful execution of many of the actions referred to above,
on the timeline contemplated by our plans and our ability to obtain additional
financing. We cannot assure you that we will be successful now or in the future
in obtaining any additional financing on terms favorable to us, if at all. The
failure to obtain financing will have a material adverse effect on our financial
condition and operations.
Other Considerations
– Royalty and Other Payments Under
the License Agreement
As
consideration for entering into the License Agreement, we agreed to pay to NQCI
a minimum annual royalty of $250,000, or 7% of net sales. As a result of the
transfer of the Technology (as defined below) to us, we may be able to realize
additional savings of not having to compensate NQCI for any royalty payments
accrued and not yet paid. Although we have asserted that NQCI’s breaches of the
License Agreement excused our obligation to make the minimum royalty payments,
we recorded $583,333 in royalty expenses, covering the minimum royalties, from
commencement of the License Agreement through December 31, 2008. The License
Agreement expires in 2105. If we are able to acquire the Technology from NQCI,
the arbitrator, Richard C. Neal (Ret), has indicated that the License Agreement
would be terminated simultaneously with such acquisition. As a result of the
Technology becoming our sole and exclusive property, among other benefits, we
should be able to discontinue these royalty payments to NQCI and realize
corresponding savings.
The
License Agreement also requires us to reimburse NQCI’s reasonable and necessary
expenses incurred in the ordinary course of business consistent with past
practices, or the “Licensor Expenses”, until the closing or the termination of
the Merger Agreement (as defined below). The Second Interim Award (as defined
below) states that the License Agreement will remain in full force and effect
until the Technology Transaction closes or the arbitrator determines that it
will never close. Although we have contested its right to any further payments,
NQCI has made a claim for reimbursement of approximately $690,000 in alleged
expenses under the License Agreement as of December 31, 2008. As a result of the
Technology becoming our sole and exclusive property, among other benefits, we
may be able to realize additional savings of not having to reimburse NQCI for
any Licensor Expenses accrued and not yet paid. For a complete description of
the License Agreement and the arbitration proceedings please see below section
captioned “Background of the Technology Transaction” and Item 3 - Legal
Proceedings.
Technology
Transaction
Seeking Stockholder Approval
of the Technology Transaction
We are
currently in the process of seeking approval from our stockholders to issue
9,230,000 shares of our common stock to NQCI in order to obtain ownership of the
Technology. The stockholder approval is being sought in accordance with an
Interim Award issued by the arbitrator on June 9, 2008, referred to herein as
the “Interim Award”, in an arbitration proceeding with NQCI, as modified by
later decisions, including the Amended Order Re Interim Relief Etc. issued by
the arbitrator on January 30, 2009, referred to herein as the “Order”, and in
order to minimize the risk that the arbitrator will issue an alternative award
that could have a material adverse effect on our financial condition and
operations. The arbitrator has refused to issue a final award until stockholder
approval has been obtained from our stockholders, which may effectively prevent
us from obtaining effective court review of the arbitrator’s actions. The most
material terms of the proposed transaction are summarized as
follows:
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Subject
to the satisfaction of the terms of the Interim Award, as modified by the
Order, NQCI will grant, transfer and assign to Operations all of the
Technology covered by the License Agreement currently in effect between
NQCI and Operations;
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The
Technology includes all patents and patent applications related to a WAK
and other portable or continuous dialysis methods or
devices;
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Under
the terms of the Interim Award, as modified by the Order, we filed a proxy
statement with the SEC to obtain stockholder approval for the issuance of
shares of our common stock to acquire the Technology and issue to NQCI
9,230,000 shares of our common
stock;
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If
and when we are able to do so, we will issue and deliver to
NQCI 9,230,000 shares of our common stock in consideration for the
Technology. As a result, NQCI will own approximately 39% of our
outstanding common stock and become our largest
stockholder;
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Except
for its definition, indemnification, representation and warranty
provisions, the License Agreement shall thereafter be terminated and be of
no further force or effect; and
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After
the transfer of the Technology by NQCI to us, under the Interim Award, as
modified by the Order, we will be required to file a registration
statement with the SEC to register for resale under the Securities Act the
shares issued to NQCI, referred to herein as the “Registration
Statement”.
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The SEC
is continuing to review our preliminary proxy statement. We cannot predict when
we would be able to hold our stockholder meeting to obtain stockholder approval
of the share issuance.
Background of the Technology
Transaction
On
September 1, 2006, Operations entered into the License Agreement with NQCI
pursuant to which we obtained exclusive rights to the technology relating to the
treatment of kidney failure and other applications, with no geographic
restrictions for a license term of 99 years (or, if earlier, until the
expiration of NQCI's proprietary rights in the Technology) for an annual royalty
of 7% of net sales, with a minimum annual royalty of $250,000. The Technology
relates primarily to the WAK, and also covers “Derivative Works,” such as an
original work that is based upon one or more pre-existing works.
On
September 1, 2006, Operations also entered into a Merger Agreement with NQCI,
referred to herein as the “Merger Agreement”, which contemplated that we would
acquire NQCI as a wholly owned subsidiary pursuant to a triangular merger,
referred to herein as the “NQCI Merger”, or we would issue shares of our common
stock to NQCI stockholders in consideration of the assignment of the Technology,
referred to herein as the “Technology Transaction”. The Merger Agreement
provided that Operations had no obligation to issue or deliver any shares after
December 31, 2006, unless the parties mutually agreed to extend such date, which
they did not. In addition, on December 29, 2006, NQCI served us with written
notice that it was terminating the Merger Agreement, which we accepted.
Accordingly, the NQCI Merger was not consummated.
On
December 1, 2006, Operations initiated an arbitration proceeding against NQCI
for its breach of the License Agreement, which remains pending. NQCI claimed the
License Agreement was terminated, and we sought a declaration that the License
Agreement remained in effect until the closing of the NQCI merger or the
Technology Transaction. We later amended our claims to seek damages for NQCI’s
failure to perform its obligations under the License Agreement. NQCI filed
counterclaims seeking to invalidate the License Agreement and claiming monetary
damages against us. NQCI also filed claims against Victor Gura, M.D.,
our Chief Medical and Scientific Officer, claiming he breached his obligations
to NQCI by agreeing to serve on our Board of Directors. Following a hearing and
extensive briefing, the arbitrator denied both parties’ claims for damages.
Although NQCI never filed an amendment to its counterclaims to seek specific
performance, on June 9, 2008, the arbitrator issued an Interim Award granting
specific performance of the Technology Transaction.
The
Interim Award stated that the total aggregate shares of stock to be received by
NQCI stockholders at the closing of the Technology Transaction should equal 48%
of all Operations shares outstanding as of the date of the Merger Agreement. On
September 1, 2006, there were 10,000,000 shares of Operations common stock
outstanding.
On August
4, 2008, the arbitrator issued the Second Interim Award, referred to herein as
the “Second Interim Award”, modifying the initial Interim Award, stating that,
if we desire to close the Technology Transaction, we must obtain approval from a
majority of our stockholders and issue 9,230,000 shares of our common stock to
NQCI. As a result of our issuances of our common stock subsequent to the date of
the Merger Agreement and following the closing of the Technology Transaction,
NQCI would own approximately 39% of our total outstanding shares, which would
make NQCI our largest stockholder. In addition, pursuant to the terms of the
Second Interim Award, the arbitrator found that, with the exception of
stockholder approval, virtually all conditions to closing the Technology
Transaction have been waived, including virtually all of NQCI’s representations
and warranties concerning the Technology.
The
Second Interim Award also stated that, contrary to the assertions made by NQCI,
the License Agreement will remain in full force and effect until the Technology
Transaction closes or the arbitrator determines that it will never close. Upon
closing of the Technology Transaction and satisfaction of the terms of the
Interim Award, as modified by the Order, the License Agreement will terminate
and we will own all of the Technology.
On
September 4, 2008, the arbitrator ruled that, even though we are not a party to
any of the agreements or the arbitration, our shares of common stock should be
issued to NQCI rather than shares of Operations.
The
arbitrator has not ordered us to close the Technology Transaction. However, the
Second Interim Award states that, if our stockholders fail to approve the
issuance of stock to effectuate the Technology Transaction, all of the
Technology covered by the License shall be declared the sole and exclusive
property of NQCI, and the arbitrator shall schedule additional hearings to
address two questions: whether the PAK technology is included within that
Technology, and whether NQCI is entitled to compensatory damages and the amount
of damages under these circumstances. During the arbitration, NQCI took the
position that we had misappropriated trade secrets regarding the WAK and used
them to create the PAK. The arbitrator found that we had not misappropriated
NQCI’s trade secrets. However, should the Technology Transaction not close for
any reason, and the arbitrator rules that the licensed Technology must be
returned to NQCI, the arbitrator could find that the PAK is derived in whole or
in part from licensed Technology, and could rule that Operations must “return”
the PAK technology to NQCI or that NQCI is entitled to compensatory damages or
both.
The
Second Interim Award required that we file the Registration Statement within 30
days after the closing of the Technology Transaction. The arbitrator
acknowledged that our obligation is to file the Registration Statement and to
use reasonable efforts to have the shares registered and not to guarantee
registration and resultant actual public tradability. However, the arbitrator
nevertheless ordered that the Registration Statement must be declared effective
within 90 days. Pursuant to the terms of the Order, the arbitrator modified the
Second Interim Award by reserving on what the final terms of our obligation to
file the Registration Statement will be and stating that such registration
obligation shall be in accordance with applicable laws, including applicable
U.S. federal securities laws. While the arbitrator also retained jurisdiction to
monitor our compliance with such obligation, to award any appropriate relief to
NQCI if we fail to comply with such obligation and to render a decision on any
other matters contested in this proceeding, the time periods set forth in the
Second Interim Award and summarized in this paragraph are no longer
applicable.
The Order
also provided, among other things, that if we file the Proxy Statement, obtain
stockholder approval to issue to NQCI 9,230,000 shares of our common stock and
issue such shares to NQCI, the arbitrator’s awards requiring specific
performance of the Technology Transaction will be effectuated and the arbitrator
anticipates confirming that all of the Technology covered by the License
Agreement shall be declared our sole and exclusive property and that the
alternate relief NQCI seeks will be moot.
The
arbitrator held a conference call hearing with the Company and NQCI on March 13,
2009 in which the parties discussed the reasons for the difficulties in closing
the Technology Transaction and explored potential alternatives. The parties were
asked to submit letter briefs outlining their suggested alternatives for
consideration by the arbitrator. The parties submitted their respective letter
briefs on March 24, 2009.
As of the
date of this Annual Report, the arbitration proceeding with NQCI continues and
the arbitrator has not yet issued a final award to either party and has not made
a final ruling with respect to whether the closing of the Technology Transaction
shall occur or whether potential alternatives should be pursued.
The
Technology
The
Merger Agreement provides that, at the closing of the Technology Transaction,
NQCI shall absolutely, unconditionally, validly and irrevocably sell, transfer,
grant and assign to Operations all of the Technology, including, but not limited
to, the inventions embodied or described in the Licensor Patents and Patent
Applications as defined in the License Agreement.
“Technology”
includes all existing and hereafter developed Intellectual Property, Know-How,
Licensor Patents, Licensor Patent Applications, Derivative Works, and any other
technology invented, improved or developed by NQCI, or as to which NQCI owns or
holds any rights, arising out of or relating to the research, development,
design, manufacture or use of:
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(a)
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any
medical device, treatment or method as of September 1,
2006;
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(b)
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any
portable or continuous dialysis methods or devices, specifically including
any wearable artificial kidney, or “Wearable Kidney”, and related
devices;
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(c)
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any
device, methods or treatments for congestive heart failure;
and
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(d)
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any
artificial heart or coronary
device.
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“Intellectual
Property” includes:
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(a)
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patents,
patent applications, and patent rights;
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(b)
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trademarks,
trademark registrations and applications;
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(c)
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copyrights,
copyright registrations, and applications; and
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(d)
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trade
secrets, confidential information and
know-how.
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“Licensed
Products” includes all products based on or derived from the Technology,
including, but not limited to the Wearable Kidney and all related devices,
whether now-existing or hereafter developed.
Research
and Development
R&D
Team
We employ an interdisciplinary team of scientists and engineers who
are developing the PAK and a separate, interdisciplinary team developing the
WAK. However, as a result of general economic conditions in 2008 and a
deterioration of our liquidity position, coupled with the prolonged and
continuing delay in our ability to consummate the Technology Transaction, we
have been significantly adversely affected. As a result, on March 13, 2009 we
terminated 19 employees or 73% of our staff. We hope to be in the financial
position in the near future to offer re-employment to certain of our terminated
employees.
In
addition, we had previously retained Aubrey Group, Inc. (“Aubrey”), an
FDA-registered third-party contract developer and manufacturer of medical
devices, to assist with the design and development of subsystems of the PAK,
referred to herein as the “Aubrey Agreement.” As of December 31, 2008, Aubrey
substantially completed its work and we intend to terminate this agreement. A
variation of this device will be developed for chronic home
hemodialysis.
We
incurred $20.9 million and $7.1 million in research and development costs in
fiscal years 2008 and 2007, respectively, including the August 4, 2008, $10.2
million fair value accrual for a potential 9.23 million shares issuance to
effectuate the Technology Transaction in accordance to the Second Interim Award.
Excluding the accrual for shares issuable, we incurred $10.7 million and $7.1
million in research and development costs in fiscal years 2008 and 2007,
respectively.
Portable Artificial
Kidney
The PAK
is a multifunctional device that will perform hemodialysis, hemofiltration and
ultrafiltration under direct medical supervision. A variation of this device
will be developed for chronic home hemodialysis. An initial prototype of the
PAK, capable of performing the basic functions of a hemodialysis machine, and
demonstrating our unique new fluidics circuit, was completed at the end of 2007.
The first physical prototype including industrial design of the PAK was
completed in October 2008. We hope to further refine this prototype by adding to
it safety sensors and electronic controls. Subject to our ability to obtain debt
or equity financing to satisfy our current liabilities and other obligations as
they become due, as more fully described above in the section captioned “Recent
Developments,” we hope to complete the final product design of the PAK. The PAK
units will undergo final verification and validation prior to a 510(k)
submission for clinical use under direct medical supervision. A clinical study
will not be required for this submission.
Wearable Artificial
Kidney
In a
clinical feasibility study conducted in London in March 2007, a research
prototype of the WAK was demonstrated in eight patients with end-stage renal
disease. Patients were treated for up to eight hours with adequate clearances of
urea and creatinine. The device was well tolerated and patients were able to
conduct activities of normal daily living including walking and sleeping. There
were no serious adverse events although clotting of the dialyzer occurred in two
patients. To our knowledge, this is the first successful demonstration of a WAK
in humans. Assuming that the Technology Transaction closes and sufficient
working capital is available to us, we hope to make substantial improvements to
the WAK. This work will result in a WAK Generation 2.0. Pending FDA approval of
an investigational Device Exemption (IDE), additional clinical studies will be
conducted upon completion of the Generation 2.0 WAK prototype.
If we
successfully obtain additional financing, we plan to make improvements to the
WAK design intended to move it from a feasibility prototype to a product
prototype. These include improvement of the heparin pumping system intended to
address the dialyzer clotting problem, the addition of safety sensors required
for commercial dialysis equipment, the addition of electrical controls to
provide a convenient user interface, improvements to the blood flow circuit and
further miniaturization of the device to improve fit to the human body.
Additional clinical studies will be conducted upon completion of the
prototype.
Third-party
Arrangements
In July
2007, we entered into the Aubrey Agreement. The PAK will be designed for
intermittent hemodialysis or Continuous Renal Replacement Therapy (CRRT) in an
attended care setting as well as for treatments in a home setting. As of
December 31, 2008, Aubrey substantially completed its work and we intend to
terminate this agreement. At the inception of the Aubrey Agreement, total labor
and material costs over the term of the agreement were budgeted to amount to
approximately $5.1 million and as of December 31, 2008, the agreement was
substantially completed under the budgeted amount at a cost of $3.2
million.
We also
contract with other third parties to assist in our research and development
efforts and to supplement our internal resources while we continue to grow our
organization.
Government
Regulation
US
Regulation
We are subject to extensive government
regulation relating to the development and marketing of our products. Due to the
relatively early nature of our development efforts, we have not yet confirmed
with the FDA its view of the regulatory status of any of our
products.
To support a regulatory submission,
the FDA may require clinical studies to show safety and effectiveness. While we
cannot currently state the nature of the studies the FDA may require due to our
early stage of product development, it is likely that some products we attempt
to develop will require time-consuming clinical studies in order to secure
approval.
Outside the US, our ability to market
potential products is contingent upon receiving market application
authorizations from the appropriate regulatory authorities. These foreign
regulatory approval processes may involve different requirements from those of
the FDA, but also generally include many, if not all, of the risks associated
with the FDA approval process described above, depending on the country
involved.
In the US, medical devices are
classified into three different classes, Class I, II and III, on the basis of
controls deemed reasonably necessary to ensure the safety and effectiveness of
the device. Class I devices are subject to general controls, including
labelling, pre-market notification and adherence to the FDA’s Good Manufacturing
Practices, or “GMP”, Class II devices are subject to general and special
controls, including performance standards, post-market surveillance, patient
registries and FDA guidelines, and Class III devices are those which must
receive pre-market approval by the FDA to ensure their safety and effectiveness,
that is, life-sustaining, life-supporting and implantable devices, or new
devices, which have been found not to be substantially equivalent to legally
marketed devices. Because of their breakthrough nature, some of our devices may
be considered Class III.
Before new class II medical devices,
such as our current and pipeline products, can be marketed, marketing clearance
must be obtained through a pre-market notification under Section 510(k) of the
FDC Act. Non-compliance with applicable requirements can result in fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, refusal to authorize the marketing of new products or
to allow us to enter into supply contracts and criminal prosecution. A 510(k)
clearance will typically be granted by the FDA if it can be established that the
device is substantially equivalent to a “predicate device,” which is a legally
marketed Class I or II device or a pre-amendment Class III device (that is, one
that has been marketed since a date prior to May 28, 1976), for which the FDA
has not called for PMA. The FDA has been requiring an increasingly rigorous
demonstration of substantial equivalence, which may include a requirement to
submit human clinical trial data. It generally takes 4 to 12 months from the
date of a 510(k) submission to obtain clearance, but it may take
longer.
If clearance or approval is obtained,
any device manufactured or distributed by us will be subject to pervasive and
continuing regulation by the FDA. We will be subject to routine inspection by
the FDA and will have to comply with the host of regulatory requirements that
usually apply to medical devices marketed in the U.S. including labelling
regulations, GMP requirements, Medical Device Reporting (MDR) regulation, which
requires a manufacturer to report to the FDA certain types of adverse events
involving its products, and the FDA’s prohibitions against promoting products
for unapproved or “off-label” uses.
International Organization for
Standards, or “ISO”, standards were developed by the European Community, or
“EC”, as a tool for companies interested in increasing productivity, decreasing
cost and increasing quality. The EC uses ISO standards to provide a universal
framework for quality assurance and to ensure the good quality of products and
services across borders. The ISO standards (now ISO13485) have facilitated trade
throughout the EC, and businesses and governments throughout the world are
recognizing the benefit of the globally accepted uniform standards. Any
manufacturer we utilize for purposes of producing our products (including us, if
we manufacture any of our own products) will be required to obtain ISO
certification to facilitate the highest quality products and the easiest market
entry in cross-border marketing. This will enable us to market our products in
all of the member countries of the EC. We also will be required to comply with
additional individual national requirements that are outside the scope of those
required by the European Economic Area.
Any medical device that is legally
marketed in the US may be exported anywhere in the world without prior FDA
notification or approval. The export provisions of the FDC Act apply only to
unapproved devices. While FDA does not place any restrictions on the export of
these devices, certain countries may require written certification that a firm
or its devices are in compliance with US law. In such instances FDA will
accommodate US firms by providing a Certificate for Foreign Government. In cases
where there are devices which the manufacturer wishes to export during the
interim period while their 510(k) submission is under review, exporting may be
allowed without prior FDA clearance under certain limited
conditions.
Competition
We compete directly and indirectly
with other biotechnology and healthcare equipment businesses, including those in
the dialysis industry. The major competitors for our platform technology are
those companies manufacturing and selling dialysis equipment and supplies. We
anticipate that some of our primary competitors will be companies such as
Baxter, Fresenius, Gambro, NxStage and B Braun. We will compete with these
companies in the critical care markets as well as dialysis clinics, and the home
and wearable application markets. In many cases, these competitors are larger
and more firmly established than we are. In addition, our competitors have
greater marketing and development budgets and greater capital resources than our
company. Others are working on portable and wearable peritoneal dialysis
machines and competitors are working on portable hemodialysis machines, but we
are not aware of any other wearable hemodialysis machines currently under
development.
Patents
and Trademarks
We have
exclusive licenses to three issued U.S. patents, U.S. Patent No. 7,309,323
entitled “Wearable continuous renal replacement therapy device,” No. 7,276,042
entitled “Low hydraulic resistance cartridge,” and No. 6,960,179 entitled
“Wearable continuous renal replacement therapy device.” We also have exclusive
licenses to several pending U.S. patent applications, including U.S. Patent
Application No. 11/500,572 entitled “Dual-ventricle pump cartridge, pump, and
method of use in a wearable continuous renal replacement therapy
device.”
In addition to our exclusive licenses,
we are actively protecting inventions that are commercially important to our
business by developing our own intellectual property and filing and prosecuting
our own patents. We currently have 24 pending U.S. patent applications and 3 PCT
applications.
We also have pending applications to
register our trademarks, “Xcorporeal” and “Xcorporeal WAK.”
Employees
As of December 31, 2008, we had
approximately 24 full-time employees. However, as discussed above in the section
captioned “Recent Developments,” during the first quarter of 2009, we had to
adjust our employee headcount to more closely match our capital availability
and, as a result, terminated the employment of 19 employees. Assuming that we
have sufficient resources, we hope to increase our headcount in the future. We
also utilize, whenever appropriate, contract and part-time professionals in
order to advance our technologies while conserving cash and
resources.
Reports
to Security Holders
Our
Internet address is www.xcorporeal.com. The content on our website is available
for information purposes only. It should not be relied upon for investment
purposes, nor is it incorporated by reference into this Annual
Report.
We
make available free of charge through our Internet website under the heading
“Investors,” our Annual Report on Form 10-K or 10-KSB, Quarterly
Reports on Form 10-Q or 10-QSB, current reports on Form 8-K, Proxy
Statements on Schedule 14A and amendments to those reports and statements after
we electronically file such materials with the SEC. Copies of our key corporate
governance documents, including our Code of Ethics and charters for the
Audit Committee, the Compensation Committee and the Nominating
Committee are also available on our website. Our stockholders may
request free copies of these documents, including a copy of this Annual
Report, without charge by writing us at: Investor Relations, Xcorporeal, Inc,
12121 Wilshire Blvd. Suite 350, Los Angeles, California
90025.
Our
filed Annual and Quarterly Reports, Proxy Statements and other previously filed
SEC reports are also available to the public through the SEC’s website at
http://www.sec.gov. Materials we file with the SEC may also be read and copied
at the SEC’s Public Reference Room at 100 F Street, NE, Washington D.C.
20549. Information on the operation of the Public Reference Room may be obtained
by calling the SEC at 1-800-SEC-0330.
Item
1A. Risk
Factors
You should carefully consider and
evaluate all of the information in this Annual Report, including the risk
factors listed below. While we describe each risk separately, some of these
risks are interrelated and certain risks could trigger the applicability of
other risks described below. Also, the risks and uncertainties described below
are not the only ones that we may face. Additional risks and uncertainties not
presently known to us, or that we currently do not consider significant, could
also potentially impair, and have a material adverse effect on, our business,
results of operations and financial condition. If any of these risks occur, our
business, results of operations and financial condition could be harmed, the
price of our common stock could decline, and future events and circumstances
could differ significantly from those anticipated in the forward-looking
statements contained in this Annual Report.
Risks
Related to Our Business
There
is substantial doubt about our ability to continue as a going
concern.
Our independent registered public
accounting firm has issued a report on our financial statements for the fiscal
year ended December 31, 2008, that states that our recurring losses from
operations and net capital deficiency raise substantial doubt about our ability
to continue as a going concern. Our plans concerning these matters are discussed
in the section captioned “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and in Note 1, “Nature of Operations and
Going Concern Uncertainty” to the financial statements filed as part of this
Annual Report. Our ability to operate is dependent on meeting our cash
obligations as they become due which will depend on our ability to secure debt
or equity financing on acceptable terms or otherwise address these matters. If
we fail to do so for any reason, we would not be able to continue as a going
concern and could potentially be forced to seek relief through a filing under
the U.S. Bankruptcy Code.
We
need financing to continue our ongoing operations and will need additional
financing in the future.
We need
financing to continue our ongoing operations and pay our liabilities and we will
need additional financing to maintain and expand our business, and financing may
not be available on favorable terms, if at all.
We may finance our business through the
private placement or public offering of equity or debt securities. If we raise
additional funds by issuing equity securities, such financing may result in
further dilution to our stockholders. Any equity securities issued also may
provide for rights, preferences or privileges senior to those of holders of our
common stock. If we raise additional funds by issuing additional debt
securities, these debt securities would have rights, preferences and privileges
senior to those of holders of our common stock, and the terms of the debt
securities issued could impose significant restrictions on our operations. If we
raise additional funds through collaborations and licensing arrangements, we
might be required to relinquish significant rights to our technology or
products, or to grant licenses on terms that are not favorable to us. If we need
funds and cannot raise them on acceptable terms, we may not be able to execute
our business plan and our stockholders may lose substantially all of their
investment.
We
expect to continue to incur operating losses, and if we are not able to raise
necessary additional funds we may have to reduce or stop
operations.
We have not generated revenues or
become profitable, may never do so, and may not generate sufficient working
capital to cover the cost of operations. Our existing cash, cash equivalents and
marketable securities may not be sufficient to fund our business until we can
become cash flow positive and we may never become cash flow positive. No party
has guaranteed to advance additional funds to us to provide for any operating
deficits. Until we begin generating revenue, we may seek funding through the
sale of equity, or securities convertible into equity, which could result in
further dilution to our then existing stockholders. If we raise additional
capital through the incurrence of debt, our business may be affected by the
amount of leverage we incur, and our borrowings may subject us to restrictive
covenants. Such funding may not be available to us on acceptable terms, or at
all. If we are unable to obtain adequate financing on a timely basis, we may be
required to delay, reduce or stop operations, any of which would have a material
adverse effect on our business.
An
unfavorable result in the pending arbitration could have a material adverse
effect on our business.
We
consider the protection of our proprietary technology for treatment of kidney
failure, which we have licensed and are developing, to be critical to our
business prospects. We obtained the rights to some of our most significant
patented and patent-pending technologies through a License Agreement with NQCI.
On December 1, 2006, Operations initiated arbitration against NQCI for its
breach of the License Agreement, which remains pending. NQCI subsequently filed
counterclaims seeking to invalidate the License Agreement and claiming monetary
damages against us. On June 9, 2008, the arbitrator issued an Interim Award
granting specific performance of the Technology Transaction in consideration of
NQCI stockholders receiving 48% of all Operations shares outstanding as of the
date of the Merger Agreement. On August 4, 2008, the arbitrator issued a Second
Interim Award, modifying the initial Interim Award, stating that, if we desire
to close the Technology Transaction, we must obtain approval from a majority of
our stockholders and issue 9,230,000 shares of our common stock to NQCI. On
August 15, 2008, the arbitrator awarded NQCI $1.87 million of over $4 million it
claimed in attorneys’ fees and costs. The award has no effect on the additional
amount of approximately $690,000 claimed by NQCI in unpaid royalties and alleged
expenses under the License Agreement. The arbitrator has not yet ruled on this
claim.
On
September 4, 2008, the arbitrator issued an order that we should issue and
deliver the 9,230,000 shares directly to NQCI, rather than directly to NQCI
stockholders, if we obtain stockholder approval and elect to proceed with the
Technology Transaction.
On
January 30, 2009, the arbitrator issued the Order, which provides, among other
things, that if we file the Proxy Statement, obtain stockholder approval to
issue to NQCI 9,230,000 shares of our common stock as consideration for the
closing of the Technology Transaction and issue such shares to NQCI, the
arbitrator anticipates confirming that all of the Technology covered by the
License Agreement shall be declared our sole and exclusive
property.
The
arbitrator held a conference call hearing with the Company and NQCI on March 13,
2009 in which the parties discussed the reasons for the difficulties in closing
the Technology Transaction and explored potential alternatives. The parties were
asked to submit letter briefs outlining their suggested alternatives for
consideration by the arbitrator. The parties submitted their respective letter
briefs on March 24, 2009.
The
arbitrator has stated that he has not yet issued a final award that may be
confirmed or challenged in a court of competent jurisdiction. A party to the
arbitration could challenge the interim award in court, even after stockholders
approve the transaction. In addition, the arbitrator could again change the
award by granting different or additional remedies, even after stockholders
approve the transaction. We cannot guarantee that the arbitrator would order
that stockholders be given another opportunity to vote on the transaction, even
if such changes are material. Arbitrators have broad equitable powers, and
arbitration awards are difficult to challenge in court, even if the arbitrator
makes rulings that are inconsistent or not in accordance with the law or the
evidence.
Should
the arbitrator order a material change to the Second Interim Award, as modified
by the Order, after the vote of our stockholders, and further order that our
stockholders not be given another opportunity to vote on such proposal or on
such material change, such order could conflict with applicable federal
securities laws or NYSE Amex rules to which we are subject. In such event, we
would ask the arbitrator to amend such changed award or attempt to seek review
of the changed award in a court of competent jurisdiction. The closing of the
Technology Transaction may render any court review or appeal moot, effectively
preventing us from challenging any of the arbitrator’s awards in
court.
If the
arbitrator were to further modify any interim awards or orders, or if NQCI were
to prevail on some or all of its claims, we could be prevented from using some
or all of the patented technology we licensed from NQCI. That could
significantly impact our ability to use and develop our technologies, which
would have a material adverse effect on our business and results of
operations.
Our
limited operating history may make it difficult to evaluate our business to date
and our future viability.
We are in the early stage of
operations and development, and have only a limited operating history on which
to base an evaluation of our business and prospects, having commenced operations
in August 2006 in accordance with our new business plan and entry into the
medical devices industry. In addition, our operations and developments are
subject to all of the risks inherent in the growth of an early stage company. We
will be subject to the risks inherent in the ownership and operation of a
company with a limited operating history such as regulatory setbacks and delays,
fluctuations in expenses, competition, the general strength of regional and
national economies, and governmental regulation. Any failure to successfully
address these risks and uncertainties would seriously harm our business and
prospects. We may not succeed given the technological, marketing, strategic and
competitive challenges we will face. The likelihood of our success must be
considered in light of the expenses, difficulties, complications, problems and
delays frequently encountered in connection with the growth of a new business,
the continuing development of new technology, and the competitive and regulatory
environment in which we operate or may choose to operate in the future. We have
generated no revenues to date, and there can be no assurance that we will be
able to successfully develop our products and penetrate our target
markets.
Our
success will depend on our ability to retain our managerial personnel and to
attract additional personnel.
Competition for desirable personnel is
strong, and we cannot guarantee that we will be able to attract and retain the
necessary staff. The loss of members of managerial, sales or scientific staff
could have a material adverse effect on our future operations and on successful
development of products for our target markets. The failure to maintain our
management, particularly Kelly J. McCrann, our Chairman of the Board and Chief
Executive Officer, Robert Weinstein, our Chief Financial Officer and Secretary,
and Victor Gura, M.D., our Chief Medical and Scientific Officer, and to attract
additional key personnel could materially adversely affect our business,
financial condition and results of operations. Although we will provide
incentive compensation to attract and retain our key personnel, we cannot
guarantee that these efforts will be successful.
We will need to expand our finance,
administrative, product development, sales and marketing, and operations staff.
There are no assurances that we will be able to make such hires. However, as
discussed above in the section captioned “Recent Developments,” during the first
quarter of 2009, we had to adjust our employee headcount to more closely match
our capital availability and, as a result, terminated the employment of 19
employees. Assuming that we have sufficient resources, we hope to increase our
headcount in the future. In addition, we may be required to enter into
relationships with various strategic partners and other third parties necessary
to our business. Planned personnel may not be adequate to support our future
operations, management may not be able to hire, train, retain, motivate and
manage required personnel or management may not be able to identify, manage and
exploit existing and potential strategic relationships and market opportunities.
If we fail to manage our growth or personnel needs effectively, it could have a
material adverse effect on our business, results of operations and financial
condition.
We
need to develop our financial and reporting processes, procedures and controls
to support our anticipated growth.
We have begun investing in our
financial and reporting systems. To comply with our public reporting
requirements, and manage the anticipated growth of our operations and personnel,
we will be required to continue to improve existing or implement new operational
and financial systems, processes and procedures, and to expand, train and manage
our employee base. Our current and planned systems, procedures and controls may
not be adequate to support our future operations.
The laws and regulations affecting
public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and
rules adopted or proposed by the SEC, will result in increased costs to us as we
evaluate the implications of any new rules and respond to their requirements.
New rules could make it more difficult or more costly for us to obtain certain
types of insurance, including director and officer liability insurance, and we
may be forced to accept reduced policy limits and coverage or incur
substantially higher costs to obtain the same or similar coverage. In addition,
the need to comply with any new rules and regulations will continue to place
significant demands on our financial and accounting staff, financial, accounting
and information systems, and our internal controls and procedures, any of which
may not be adequate to support our anticipated growth. We cannot predict or
estimate the amount of the additional costs we may incur or the timing of such
costs to comply with any new rules and regulations, or if compliance can be
achieved.
We
cannot assure you that we will be able to complete development and obtain
necessary approvals for our proposed products even if we obtain sufficient
funding.
We will need additional financing to
maintain and expand our business, and such financing may not be available on
favorable terms, if at all. Even if we obtain sufficient funding, no assurance
can be given that we will be able to design or have designed parts necessary for
the manufacture of our products or complete the development of our proposed
products within our anticipated time frames, if at all. Such a situation could
have a material adverse effect upon our ability to remain in business. For
additional risks that we may encounter as a result of our need for additional
financing, please see risk factor below captioned “We need financing to continue
our ongoing operations and will need additional financing in the
future”.
The
success of our business will depend on our ability to develop and protect our
intellectual property rights, which could be expensive.
Patent and other proprietary rights
are essential to our business. Our success and the competitiveness of our
products are heavily dependent upon our proprietary technology and our ability
to obtain and enforce patents and licenses to patent rights, both in the U.S.
and in other countries. We cannot be certain that the patents that we license
from others will be enforceable and afford protection against competitors. We
rely on a combination of trademark and copyright laws, trade secrets and
know-how to develop, confidentiality procedures and contractual provisions to
maintain and strengthen our competitive position. Such means of protecting our
proprietary rights may not be adequate because such laws provide only limited
protection. While we protect our proprietary rights to the extent
possible, we cannot guarantee that third parties will not know, discover or
develop independently equivalent proprietary information or techniques, that
they will not gain access to our trade secrets or disclose our trade secrets to
the public. Therefore, we cannot guarantee that we can maintain and protect
unpatented proprietary information and trade secrets. Misappropriation of our
intellectual property would have an adverse effect on our competitive position,
may cause us to incur substantial litigation costs and could harm our business,
financial condition and results of operations and your investment.
Generally, we enter into
confidentiality and non-disclosure of intellectual property agreements with our
employees, consultants and many of our vendors, and generally control access to
and distribution of our proprietary information. Notwithstanding these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our proprietary information without authorization or to develop similar
information independently.
Additionally, our patent rights may
not provide us with proprietary protection or competitive advantages against
competitors with similar technologies. Even if such patents are valid, we cannot
guarantee that competitors will not independently develop alternative
technologies that duplicate the functionality of our technology. Our competitors
may independently develop similar or superior technology. Policing unauthorized
use of proprietary rights is difficult, and some international laws do not
protect proprietary rights to the same extent as United States laws. Litigation
periodically may be necessary to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. Litigation is costly and may not be successful.
Our failure to protect our proprietary technology or manufacturing processes
could harm our business, financial condition and results of operations and your
investment.
We may be subject to claims that we
infringe the intellectual property rights of others and unfavorable outcomes
could harm our business
.
Our future operations may be subject
to claims, and potential litigation, arising from our alleged infringement of
patents, trade secrets or copyrights owned by other third parties, including
third party rights in patents that have not yet been issued. We
intend to fully comply with the law in avoiding such infringements. However,
within the medical devices industry, established companies have actively pursued
such infringements, and have initiated such claims and litigation, which has
made the entry of competitive products more difficult. We may experience such
claims or litigation initiated by existing, better-funded
competitors.
If we do
infringe, the holder of the patent may seek to cause us to cease using the
technology subject to the patent, or require us to enter into a license or other
similar agreement and pay for our use of the intellectual property. In either
case, such event may have a material negative impact on our performance.
Court-ordered injunctions may prevent us from bringing new products to market,
and the outcome of litigation and any resulting loss of revenues and expenses of
litigation may substantially affect our ability to meet our expenses and
continue operations. Also, since we rely upon unpatented proprietary technology,
there is no assurance that others may not acquire or independently develop the
same or similar technology.
Patent
applications in the United States are maintained in secrecy until patents are
issued, and the publication of discoveries in the scientific literature tends to
lag behind actual discoveries. Therefore, we cannot guarantee that we will be
the first creator of future inventions for which we seek patents or the first to
file patent applications for any of our inventions.
Patent
applications filed in foreign countries are subject to laws, rules and
procedures which differ from those of the United States. We cannot be
certain that:
·
patents
will be issued from future applications;
·
any
future patents will be sufficient in scope or strength to provide meaningful
protection or any commercialadvantage to us;
·
foreign
intellectual property laws will protect our intellectual property;
or
·
others
will not independently develop similar products, duplicate our products or
design around any patentswhich may be issued to us.
Policing
unauthorized use of intellectual property is difficult. The laws of
other countries may afford little or no effective protection of our technology.
We cannot assure you that the steps taken by us will prevent misappropriation of
our technology, which may cause us to lose customers and revenue opportunities.
In addition, pursuing persons who might misappropriate our intellectual property
could be costly and divert the attention of management from the operation of our
business.
We are
not aware and do not believe that any of our technologies or products infringe
the proprietary rights of third parties. Nevertheless, third parties may claim
infringement with respect to our current or future technologies or products or
products manufactured by others and incorporating our technologies. Responding
to any such claims, whether or not they are found to have merit, could be time
consuming, result in costly litigation, cause development delays, require us to
enter into royalty or license agreements, or require us to cease using the
technology that is the intellectual property of a third party. Royalty or
license agreements may not be available on acceptable terms or at all. As a
result, infringement claims could have a material adverse affect on our
business, operating results, and financial condition.
Confidentiality
agreements with employees, licensees and others may not adequately prevent
disclosure of trade secrets and other proprietary information.
In order
to protect our proprietary technology and processes, we rely in part on
confidentiality provisions in our agreements with employees, licensees, and
others. These agreements may not effectively prevent disclosure of confidential
information and may not provide an adequate remedy in the event of unauthorized
disclosure of confidential information. In addition, others may independently
discover trade secrets and proprietary information. Costly and time-consuming
litigation could be necessary to enforce and determine the scope of our
proprietary rights, and failure to obtain or maintain trade secret protection
could adversely affect our competitive business position.
We
compete against other dialysis equipment manufacturers with much greater
financial resources and better established products and customer relationships,
which may make it difficult for us to penetrate the market and achieve
significant sales of our products.
Our proposed products will compete
directly against equipment produced by Fresenius Medical Care AG, Baxter
Healthcare Corporation, Gambro AB, NxStage Medical, Inc., B Braun and others,
each of which markets one or more FDA-cleared medical devices for the treatment
of acute or chronic kidney failure.
Each of these competitors offers
products that have been in use for a longer time than our products and are more
widely recognized by physicians, patients and providers. Most of our competitors
have significantly more financial and human resources, more established sales,
service and customer support infrastructures and spend more on product
development and marketing than we do. Many of our competitors also have
established relationships with the providers of dialysis therapy. Most of these
companies manufacture additional complementary products enabling them to offer a
bundle of products and have established sales forces and distribution channels
that may afford them a significant competitive advantage.
The healthcare business in general, and
the market for our products in particular, is competitive, subject to change and
affected by new product introductions and other market activities of industry
participants, including increased consolidation of ownership of clinics by large
dialysis chains. If we are successful, our competitors are likely to develop
products that offer features and functionality similar to our proposed products.
Improvements in existing competitive products or the introduction of new
competitive products may make it more difficult for us to compete for sales,
particularly if those competitive products demonstrate better safety,
convenience or effectiveness or are offered at lower prices. If we are unable to
compete effectively against existing and future competitors and existing and
future alternative treatments and pharmacological and technological advances, it
will be difficult for us to penetrate the market and achieve significant sales
of our products.
We
have not commissioned or obtained marketing studies which support the likelihood
of success of our business plan.
No independent studies with regard to
the feasibility of our proposed business plan have been conducted by any
independent third parties with respect to our present and future business
prospects and our capital requirements. In addition, there can be no assurances
that our products or our treatment modality for ESRD will find sufficient
acceptance in the marketplace to enable us to fulfil our long and short term
goals, even if adequate financing is available and our products are approved to
come to market, of which there can be no assurance.
Our
ability to utilize net operating loss carry forwards may be
limited.
At
December 31, 2008, we had net operating loss carry forwards (NOLs) for U.S.
federal and state income tax purposes of approximately $24.3 million. These NOLs
may be used to offset future taxable income, to the extent we generate any
taxable income, and thereby reduce or eliminate our future U.S. federal and
California income taxes otherwise payable. Section 382 of the
Internal Revenue Code of 1986, as amended, or the “Code”, imposes limitations on
a corporation’s ability to utilize NOLs if it experiences an “ownership change”
as defined in Section 382 of the Code. In general terms, an ownership
change may result from transactions that have the effect of increasing the
percentage ownership of certain stockholders in the stock of a corporation by
more than 50 percentage points over a three-year period. In the event of an
ownership change, a corporation’s utilization of NOLs generated prior to the
ownership change is subject to an annual limitation determined by multiplying
the value of the corporation at the time of the ownership change by the
“applicable long-term tax-exempt rate,” as defined in the Code. Any unused
annual limitation may be carried over to later years. Our NOLs for federal and
state income tax purposes begin to expire in 2021.
In 2007,
we determined that an ownership change occurred under Section 382. The
utilization of our federal NOLs, capital loss carryforwards and other tax
attributes related to our company prior to the merger with pre-merger Xcorporeal
therefore will be limited to zero. Accordingly, we have reduced our NOLs and
capital loss and minimum tax credit carryforwards to the amount that we estimate
that we would be able to utilize in the future, if profitable, considering the
above limitations. At December 31, 2008, after Section 382 reductions we had
NOLs for U.S. federal income tax purposes of approximately $24.3 million which
NOLs will begin to expire in 2021. $24.3 million of the net NOLs are also valid
for state income tax purposes and will begin to expire in 2021.
The
occurrence of one or more natural disasters or acts of terrorism could adversely
affect our operations and financial performance.
The
occurrence of one or more natural disasters or acts of terrorism could result in
physical damage to or the temporary closure of our corporate office and/or
operating facility. It may also result in the temporary lack of an adequate work
force in a market and/or the temporary or long term disruption in the supply of
materials (or a substantial increase in the cost of those materials) from
suppliers. One or more natural disasters or acts of terrorism could materially
and adversely affect our operations and financial performance. Furthermore,
insurance costs associated with our business may rise significantly in the event
of a large scale natural disaster or act of terrorism.
Terrorist
attacks and other attacks or acts of war may adversely affect the markets on
which our common stock trades, which could have a materially adverse effect on
our financial condition, our results of operations and the price of our common
stock.
On
September 11, 2001, the United States was the target of terrorist attacks of
unprecedented scope. In March 2003, the United States and allied nations
commenced a war in Iraq. These attacks and the war in Iraq caused global
instability in the financial markets. There could be further acts of terrorism
in the United States or elsewhere that could have a similar impact. Armed
hostilities or further acts of terrorism could cause further instability in
financial markets and could directly impact our financial condition, our
results
of
operations and the price of our common stock.
Risks
Related to Our Industry
Our
business will always be strictly regulated by the federal and other governments
and we cannot assure you that we will remain in compliance with all applicable
regulation.
The
healthcare industry is highly regulated and continues to undergo significant
changes as third-party payers, such as Medicare and Medicaid, traditional
indemnity insurers, managed care organizations and other private payers increase
efforts to control cost, utilization and delivery of healthcare services.
Healthcare companies are subject to extensive and complex federal, state and
local laws, regulations and judicial decisions. In addition, clinical testing,
manufacture, promotion and sale of our proposed products are subject to
extensive regulation by numerous governmental authorities in the U.S.,
principally the FDA, and corresponding foreign regulatory agencies. Compliance
with laws and regulations enforced by regulatory agencies who have broad
discretion in applying them may be required for the medical products developed
or used by us. Many healthcare laws and regulations applicable to our business
are complex, applied broadly and subject to interpretation by courts and
government agencies. Regulatory, political and legal action and pricing
pressures could prevent us from marketing some or all of our products and
services for a period of time or permanently. Moreover, changes in existing
regulations or adoption of new regulations or policies could prevent us from
obtaining, or affect the timing of, future regulatory approvals or clearances.
We cannot assure you that we will be able to obtain necessary regulatory
clearances or approvals on a timely basis, or if at all, or that we will not be
required to incur significant costs in obtaining or maintaining such foreign
regulatory approvals. Delays in receipt of, or failure to receive, such
approvals or clearances, the loss of previously obtained approvals or clearances
or the failure to comply with existing or future regulatory requirements could
have a material adverse effect on our business, financial condition and results
of operations.
Any
enforcement action by regulatory authorities with respect to past or future
regulatory non-compliance could have a material adverse effect on our business,
financial condition and results of operations. Non-compliance with applicable
requirements can result in fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, refusal to
authorize the marketing of new products or to allow us to enter into supply
contracts and criminal prosecution.
Even if
our proposed products are approved for sale, we will be subject to continuing
regulation. We continuously will be subject to routine inspection by the FDA and
will have to comply with the host of regulatory requirements that usually apply
to medical devices marketed in the U.S. including labelling regulations, Quality
System requirements, MDR regulations (which requires a manufacturer to report to
the FDA certain types of adverse events involving its products), and the FDA’s
prohibitions against promoting products for unapproved or “off-label” uses. Our
failure to comply with applicable regulatory requirements could result in
enforcement action by the FDA, which could have a material adverse effect on our
business, financial condition and results of operations.
In
addition, foreign laws, regulations and requirements applicable to our business
and products are often vague and subject to change and interpretation. Failure
to comply with applicable international regulatory requirements can result in
fines, injunctions, civil penalties, recalls or seizures of products, total or
partial suspensions of production, refusals by foreign governments to permit
product sales and criminal prosecution. Furthermore, changes in existing
regulations or adoption of new regulations or policies could prevent us from
obtaining, or affect the timing of, future regulatory approvals or clearances.
There can be no assurance that we will be able to obtain necessary regulatory
clearances or approvals on a timely basis, or if at all, or that we will not be
required to incur significant costs in obtaining or maintaining such foreign
regulatory approvals. Delays in receipt of, or failure to receive, such
approvals or clearances, the loss of previously obtained approvals or clearances
or the failure to comply with existing or future regulatory requirements could
have a material adverse effect on our business, financial condition and results
of operations. Any enforcement action by regulatory authorities with respect to
past or future regulatory non-compliance could have a material adverse effect on
our business, financial condition and results of operations.
Our
failure to respond to rapid changes in technology and its applications and
intense competition in the medical devices industry could make our treatment
system obsolete.
The medical devices industry is subject
to rapid and substantial technological development and product innovations. To
be successful, we must respond to new developments in technology, new
applications of existing technology and new treatment methods. Our response may
be stymied if we require, but cannot secure, rights to essential third-party
intellectual property. We may compete against companies offering alternative
treatment systems to ours, some of which have greater financial, marketing and
technical resources to utilize in pursuing technological development and new
treatment methods. Our financial condition and operating results could be
adversely affected if our medical device products fail to compete favorably with
these technological developments, or if we fail to be responsive on a timely and
effective basis to competitors’ new devices, applications, treatments or price
strategies.
Product
liability claims could adversely affect our results of operations.
The risk of product liability claims,
product recalls and associated adverse publicity is inherent in the testing,
manufacturing, marketing and sale of medical products. In an effort to minimize
our liability we purchase product liability insurance coverage. In the future,
we may not be able to secure product liability insurance coverage on acceptable
terms or at reasonable costs when needed. Any liability for mandatory damages
could exceed the amount of our coverage. A successful product liability claim
against us could require us to pay a substantial monetary award. Moreover, a
product recall could generate substantial negative publicity about our products
and business and inhibit or prevent commercialization of other future product
candidates.
Risks
Related to Our Common Stock
If
we fail to meet continued listing standards of NYSE Amex, our common stock may
be delisted which would have a material adverse effect on the price
of our common stock.
Our
common stock is currently traded on the NYSE Amex under the symbol “XCR”. In
order for our securities to be eligible for continued listing on NYSE Amex, we
must remain in compliance with certain NYSE Amex continued listing standards. As
of December 31, 2008 we were not in compliance with Sections 1003(a)(i),
1003(a)(ii) and 1003(a)(iii) of the Amex Company Guide because our stockholders’
equity was below the level required by the NYSE Amex continued listing
standards. Our stockholders’ equity fell below the required standard due to
several years of operating losses. NYSE Amex will normally consider suspending
dealings in, or removing from the listing of, securities of a company under
Section 1003(a)(i) for a company that has stockholders’ equity of less than
$2,000,000 if such company has sustained losses from continuing operations
and/or net losses in two of its three most recent fiscal years, under Section
1003(a)(ii) for a company that has stockholders’ equity of less than $4,000,000
if such company has sustained losses from continuing operations and/or net
losses in three of its four most recent fiscal years or under Section
1003(a)(iii) for a company that has stockholders’ equity of less than $6,000,000
if such company has sustained losses from continuing operations and/or net
losses in its five most recent fiscal years. As of December 31, 2008, our
stockholders' equity was below that required under Sections 1003(a)(i),
1003(a)(ii) and 1003(a)(iii) of the Amex Company Guide and we have sustained net
losses in our five most recent fiscal years. If we receive
notification from the NYSE Amex that we are no longer in compliance with their
minimum listing requirements and if we fail to regain compliance with such
continued listing requirements, our common stock may be delisted
which would have a material adverse affect on the price and liquidity of our
common stock.
Furthermore, we cannot assure you that
we will continue to satisfy other requirements necessary to remain listed on the
NYSE Amex or that the NYSE Amex will not take additional actions to delist our
common stock. As a result of the resignation of Marc Cummins from his positions
of a member of our Board of Directors and a member of the Audit Committee of the
Board of Directors, effective March 6, 2009, we are no longer in compliance with
Section 803(A)(1) of the Amex Company Guide because a majority of the members of
our Board of Directors are not independent directors. In order to fill the
vacancy in the Audit Committee created by such resignation, effective March 26,
2009, Hans-Dietrich Polaschegg, a member of our Board of Directors, was
appointed to the Audit Committee.
If for any reason, our common stock
were to be delisted from the NYSE Amex, we may not be able to list our common
stock on another national exchange or market. If our common stock is not listed
on a national exchange or market, the trading market for our common stock may
become illiquid.
If
we are delisted from NYSE Amex, our common stock may be subject to the “penny
stock” rules of the SEC, which would make transactions in our common stock
cumbersome and may reduce the value of an investment in our stock.
The
SEC has adopted Rule 3a51-1 under the Exchange Act which establishes the
definition of a “penny stock,” for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, Rule 15g-9
requires:
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that a broker or dealer approve a person's account for
transactions in penny stocks; and
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the broker or dealer receive from
the investor a written
agreement to
the transaction, setting forth the
identity and quantity of the penny stock to be
purchased.
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In order
to approve a person's account for transactions in
penny stocks, the broker or dealer must:
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obtain financial information and investment experience
objectives of the person; and
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make
a reasonable determination that the transactions in
penny
stocks are suitable for that person and the person has
sufficient knowledge and experience in
financial matters to be capable of evaluating the risks of
transactions in penny stocks.
|
The
broker or dealer must also deliver, prior to
any transaction in a penny stock, a
disclosure schedule prescribed by the SEC relating to the
penny stock market, which, in highlight form:
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sets forth the
basis on which the broker or dealer made
the suitability determination;
and
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that
the broker or dealer received a
signed, written agreement from the investor prior to
the transaction.
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Generally, brokers may be less willing
to execute transactions in securities subject to the “penny stock” rules. This
may make it more difficult for our investors to dispose of our common stock and
cause a decline in the market value of our stock.
Disclosure also has to be made about
the risks of investing in penny stocks in both public offerings and in secondary
trading and about the commissions payable to both the broker-dealer and the
registered representative, current quotations for the securities and the rights
and remedies available to an investor in cases of fraud in penny stock
transactions. Finally, monthly statements have to be sent to investors
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.
Our
stock price is volatile and accordingly, you could lose all or part of the value
of your shares of our common stock.
Our
common stock is traded on the NYSE Amex and trading volume is often limited and
sporadic. As a result, the trading price of our common stock on NYSE Amex is not
necessarily a reliable indicator of our fair market value. The market price of
our common stock has historically been highly volatile and may continue to
fluctuate significantly due to a number of factors, some of which may be beyond
our control, including:
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the
number of shares available for sale in the
market;
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sales
of our common stock by shareholders because our business profile does not
fit their investment objectives;
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actual
or anticipated fluctuations in our operating
results;
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developments
relating to our products and related proprietary
rights;
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actual
or anticipated announcements of new data and announcements relating to our
operating performance;
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government
regulations and changes thereto and regulatory investigations or
determinations;
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our
ability to meet continued listing standards of NYSE
Amex
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announcements
of our competitors or their success in the biotechnology and healthcare
equipment business, including those in the dialysis
industry;
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recruitment
or departures of key personnel;
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the
gain or loss of significant
customers;
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the
operating and stock price performance of other comparable
companies;
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developments
and publicity regarding our industry;
and
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general
economic and market conditions in our industry and the economy as a
whole.
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In addition, the stock market in
general has experienced volatility that has often been unrelated to the
operating performance of individual companies. These broad market fluctuations
may adversely affect the trading price of our common stock, regardless of our
actual performance, and could enhance the effect of any fluctuations that do
relate to our operating results.
Over
42% of our stock is controlled by a single stockholder which has the ability to
substantially influence the election of directors and the outcome of matters
submitted to our stockholders.
As of December 31, 2008, Consolidated
National, LLC, a limited liability company, or “CNL”, of which Terren S. Peizer,
a member of our Board of Directors, is the sole managing member and beneficial
owner, directly owned approximately 6.23 million shares, representing
approximately 42.2% of our outstanding common stock. As a result, CNL and Mr.
Peizer presently have and are expected to continue to have the ability to
determine the outcome of issues submitted to our stockholders. The interests of
CNL or Mr. Peizer, acting in his capacity as a stockholder, may not always
coincide with our interests or the interests of our other stockholders and they
may act in a manner that advances their best interests and not necessarily those
of our stockholders. The ownership position of CNL and Mr. Peizer may make it
difficult for our stockholders to remove our management from office should they
choose to do so. It could also deter unsolicited takeovers, including
transactions in which our stockholders might otherwise receive a premium for
their shares over then current market prices.
Pursuant
to the terms of the Second Interim Award, as modified by the Order, if we desire
to close the Technology Transaction, we will be required to issue 9,230,000
shares of our common stock to NQCI and a result, NQCI would own approximately
39% of our total outstanding shares, making NQCI our largest stockholder and
giving NQCI the ability to substantially influence the election of directors and
the outcome of matters submitted to our stockholders.
On August 4, 2008, the arbitrator
issued a Second Interim Award, modifying the initial Interim Award, stating
that, if we desire to close the Technology Transaction, we must, among other
things, issue to NQCI 9,230,000 shares of our common stock. Accordingly,
following the closing of the Technology Transaction, NQCI would own
approximately 39% of our total outstanding shares, making NQCI our largest
stockholder. As a result, NQCI would have the ability to determine the outcome
of issues submitted to our stockholders. The interests of NQCI may not always
coincide with our interests or the interests of our other stockholders and it
may act in a manner that advances its best interests and not necessarily those
of our stockholders. The ownership position of NQCI may make it difficult for
our stockholders to remove our management from office should they choose to do
so. It could also deter unsolicited takeovers, including transactions in which
our stockholders might otherwise receive a premium for their shares over then
current market prices.
Sales
of common stock by our large stockholders, or the perception that such sales may
occur, could depress our stock price.
The market price of our common stock
could decline as a result of sales by, or the perceived possibility of sales by,
our large stockholders, including NQCI in the event that the Technology
Transaction closes. Most of our outstanding shares were registered on a Form S-4
registration statement in connection with our merger with pre-merger Xcorporeal,
and are eligible for public resale. As of December 31, 2008, approximately 58%
of our outstanding common stock was held by our officers, directors and
affiliates and may be sold pursuant to an effective registration statement or in
accordance with Rule 144 promulgated under the Securities Act or pursuant to
other exempt transactions. Pursuant to the terms of the Second Interim Award, as
modified by the order, we are required to issue NQCI 9,230,000 shares of our
common stock if we want to close the Technology Transaction. Future
sales of our common stock by our significant stockholders, including NQCI if it
acquires these shares, or the perception that such sales may occur, could
depress the market price of our common stock.
Investors’
interests in our company will be diluted and investors may suffer dilution in
their net book value per share if we issue additional shares of stock or raise
funds through the sale of equity securities.
In the event that we are required to
issue any additional shares of stock or enter into private placements to raise
financing through the sale of equity securities, investors’ interests in our
company will be diluted and investors may suffer dilution in their net book
value per share depending on the price at which such securities are sold. If we
issue any such additional shares, such issuances also will cause a reduction in
the proportionate ownership and voting power of all of our other stockholders.
Further, any such issuance may result in a change in our control of our
company.
We
have never paid cash dividends and do not intend to do so.
We have never declared or paid cash
dividends on our common stock. We currently plan to retain any earnings to
finance the growth of our business rather than to pay cash dividends. Payments
of any cash dividends in the future will depend on our financial condition,
results of operations and capital requirements, as well as other factors deemed
relevant by our Board of Directors.
There
is an increased potential for short sales of our common stock due to the sales
of shares issued upon exercise of the warrants or options, which could
materially affect the market price of the stock.
Downward pressure on the market price of
our common stock that likely will result from sales of our common stock issued
in connection with an exercise of warrants or options could encourage short
sales of our common stock by market participants. Generally, short selling means
selling a security, contract or commodity not owned by the seller. The seller is
committed to eventually purchase the financial instrument previously sold. Short
sales are used to capitalize on an expected decline in the security’s price. As
the holders exercise their warrants or options, we issue shares to the
exercising holders, which such holders may then sell into the market. Such sales
could have a tendency to depress the price of the stock, which could increase
the potential for short sales.
We
became a publicly traded company through a merger with a public shell company,
and we could be liable for unanticipated liabilities of our predecessor
entity.
We became a publicly traded company
through a merger between Xcorporeal, Inc. and CT Holdings Enterprises, Inc., a
publicly traded “shell company” that had previously provided management
expertise including consulting on operations, marketing and strategic planning
and a single source of capital to early stage technology
companies. Although we believe the shell company had substantially no
assets and liabilities as of the merger, we may be subject to claims related to
the historical business of the shell, as well as costs and expenses related to
the merger.
Item
1B. Unresolved
Staff Comments
Not applicable.
Item
2: Properties
Corporate
Office and Operating Facility
As of
February 22, 2008, we entered into a 5 year lease agreement for 4,352 square
feet of corporate office space located in Los Angeles, California. The total
lease payments will be $1,096,878 over the 5 year period with the lease expiring
on February 28, 2013. On October 6, 2008, as modified on October 23, 2008, we
also entered into a 5 year lease agreement, commencing November 27, 2008,
through November 26, 2013, with early possession on October 27, 2008, for our
new operating facility which consists of approximately 21,400 square feet of
office and lab space in Lake Forest, California. The total lease payments will
be $1,367,507 over the lease term. Additionally, we lease two corporate
apartments, approximately 800 and 550 square feet, expiring March 31, 2009 and
April 18, 2009, respectively, located in Irvine, California, for combined
monthly rent of $3,765, which we plan to vacate after the expiration of their
lease terms. All of the space is in good condition and we expect it to remain
suitable to meet our needs for the foreseeable future. Consistent with the
actions undertaken as part of our corporate restructuring described above in
section captioned “Business - Recent Developments”, we intend to consolidate our
offices and sublease our current corporate office located in Los Angeles,
California. For more information, please see Note 11, “Leases” to our financial
statements filed as part of this Annual Report.
Item
3. Legal
Proceedings
From time
to time we may be a defendant or plaintiff in various legal proceedings arising
in the normal course of our business. Except as set forth below, we are
currently not a party to any material pending legal proceedings or government
actions, including any bankruptcy, receivership, or similar proceedings. In
addition, except as set forth below, our management is not aware of any known
litigation or liabilities that could affect our operations. Furthermore, with
the exception of Dr. Gura, our Chief Medical and Scientific Officer, who
according to NQCI’s preliminary Proxy Statement on Schedule 14A, Amendment No.
2, filed with the SEC on February 13, 2009, owns 15,497,250 shares of NQCI’s
common stock which includes 800,000 shares held by Medipace Medical Group, Inc.
an affiliate of Dr. Gura and includes 250,000 shares subject to warrants held by
Dr. Gura which are currently exercisable, or approximately 20.9% of its total
outstanding shares as of January 31, 2009, we do not believe that there are any
proceedings to which any of our directors, officers, or affiliates, any owner of
record who beneficially owns more than five percent of our common stock, or any
associate of any such director, officer, affiliate of the Company, or security
holder is a party adverse to the Company or has a material interest adverse to
the Company.
On
December 1, 2006, Operations initiated arbitration proceedings against NQCI for
its breach of the License Agreement, which remains pending. NQCI claimed the
License Agreement was terminated, and we sought a declaration that the License
Agreement remained in effect until the closing of the Merger or the Technology
Transaction. We later amended our claims to seek damages for NQCI’s failure to
perform its obligations under the License Agreement. NQCI filed counterclaims
seeking to invalidate the License Agreement and claiming monetary damages
against us. NQCI also filed claims against Dr. Gura, claiming he breached his
obligations to NQCI by agreeing to serve on our Board of Directors. Following a
hearing and extensive briefing, the arbitrator denied both parties’ claims for
damages. Although NQCI never filed an amendment to its counterclaims to seek
specific performance, on June 9, 2008, the arbitrator, issued an Interim Award
granting specific performance of the Technology Transaction.
The
Interim Award stated that the total aggregate shares of stock to be received by
NQCI stockholders at the closing should equal 48% of all Operations shares
outstanding as of the date of the Merger Agreement. On September 1, 2006, there
were 10,000,000 shares of Operations common stock outstanding. NQCI proposed
four possible share interest awards, arguing that it was entitled to shares
representing a 48% or 54% interest based on Operations shares outstanding at the
time of the Merger Agreement or our present number of outstanding
shares.
On August
4, 2008, the arbitrator issued a Second Interim Award, modifying the initial
Interim Award, stating that, if we desire to close the Technology Transaction,
we must obtain approval from a majority of our stockholders and issue 9,230,000
shares of our common stock to NQCI. It is our understanding that the arbitrator
based his decision as to the number of shares that we must issue on the factors
set forth below. Our understanding set forth below is derived from the terms of
the Second Interim Award and the Order, which we strongly encourage you to read
and review carefully, copies of which were attached to our Proxy Statement on
Schedule 14A, Amendment No. 5, filed with the SEC on February 10,
2009.
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In
accordance with the second paragraph of page 7 of the Award, under the
Merger Agreement, the number of shares of our common stock which NQCI was
to receive at the closing of the transaction contemplated by the Merger
Agreement was based on the number of shares or our common stock
outstanding as of the date of the Merger Agreement, or 10,000,000
shares.
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If
the Merger Agreement was terminated, resulting in the closing of the
Technology Transaction, (i) pursuant to Section 6(B)(2)(i) of the Merger
Agreement, NQCI was to receive a 48% share of the aggregate amount of our
shares of common stock if we terminated the Merger Agreement for NQCI’s
breach or either party terminated under the December 1 or December 29
deadlines, and (ii) pursuant to Section 6(B)(2)(ii) of the Merger
Agreement, NQCI was to get a 54% share if we terminated for
dissatisfaction with our due diligence, or NQCI terminated for our breach
(as more fully described in the Merger
Agreement).
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The
arbitrator determined that NQCI was not entitled to terminate the Merger
Agreement outright and that its notice of termination was improper.
Therefore, the arbitrator determined that, since NQCI was at fault, NQCI
is entitled to receive the lesser of the two alternatives (48% instead of
54%).
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Therefore,
according to the arbitrator, in order to award a 48% share to NQCI,
assuming that there were 10,000,000 shares of our common stock outstanding
on the date of the Merger Agreement, we must issue to NQCI 9,230,000
shares of our common stock, which would represent 48% of the aggregate
total of 19,230,000 shares of our common stock which would have been
outstanding after giving effect to such
issuance.
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Following
the closing of the Technology Transaction, NQCI would own approximately 39% of
our total outstanding shares, making NQCI our largest stockholder. The
arbitrator found that, with the exception of stockholder approval, virtually all
conditions to closing the Technology Transaction have been waived, including
virtually all of NQCI’s representations and warranties concerning the
Technology.
The
Second Interim Award also stated that, contrary to the assertions made by NQCI,
the License Agreement will remain in full force and effect until the Technology
Transaction closes or the arbitrator determines that it will never close. Upon
closing of the Technology Transaction and satisfaction of the terms of the
Award, as modified by the Order, the License Agreement will terminate and we
will own all of the Technology.
On
January 3, 2008, the arbitrator issued an order denying NQCI’s motion to amend
its counterclaim to add us as a successor company following the Merger. However,
in the Second Interim Award, the arbitrator found that we are the successor to
Operations as a result of the merger, even though we are not a party to any of
the agreements or the arbitration, and ordered that our shares should be issued
to NQCI rather than shares of Operations.
The arbitrator has not ordered us to
close the Technology Transaction. However, the Second Interim Award states that,
if our stockholders fail to approve the issuance of stock to effectuate the
Technology Transaction, all of the Technology covered by the License shall be
declared the sole and exclusive property of NQCI, and the arbitrator shall
schedule additional hearings to address two questions: whether the PAK
technology is included within that Technology, and whether NQCI is entitled to
compensatory damages and the amount of damages under these circumstances. During
the arbitration, NQCI took the position that we had misappropriated trade
secrets regarding the WAK and used them to create the PAK. The arbitrator found
that we had not misappropriated NQCI’s trade secrets. However, should the
Technology Transaction not close for any reason, and the arbitrator rules that
the licensed Technology must be returned to NQCI, the arbitrator could find that
the PAK is derived in whole or in part from licensed Technology, and could rule
that Operations must “return” the PAK technology to NQCI or that NQCI is
entitled to compensatory damages or both.
On August
15, 2008, the arbitrator awarded NQCI $1.87 million of over $4 million it
claimed in attorneys’ fees and costs. The award has no effect on the additional
amount of approximately $690,000 claimed by NQCI in alleged expenses, Licensor
Expenses, under the License Agreement. The arbitrator has not yet ruled on this
claim.
In an
August 29, 2008 Order Re Issuance of Xcorporeal Shares, the arbitrator stated
that the shares should be issued directly to NQCI’s stockholders. However, on
September 4, 2008, the arbitrator issued an order that we should issue and
deliver the 9,230,000 shares directly to NQCI, rather than directly to NQCI
stockholders, if we obtain stockholder approval and elect to proceed with the
Technology Transaction.
The
Second Interim Award required that we file a registration statement under the
Securities Act to register for resale the shares to be issued to NQCI within 30
days after the closing of the Technology Transaction. The arbitrator
acknowledged that our obligation is to file the registration statement and to
use reasonable efforts to have the shares registered and not to guarantee
registration and resultant actual public tradability. However, the arbitrator
nevertheless ordered that the registration statement must be declared effective
within 90 days.
On
January 30, 2009, the arbitrator issued the Order, in which the arbitrator
modified the Second Interim Award by reserving on what the final terms of our
obligation to file the resale registration statement will be and stating that
such registration obligation shall be in accordance with applicable laws,
including applicable U.S. federal securities laws. While the arbitrator also
retained jurisdiction to monitor our compliance with such obligation, to award
any appropriate relief to NQCI if we fail to comply with such obligation and to
render a decision on any other matters contested in this proceeding, the time
periods set forth in the Second Interim Award and summarized in the preceding
paragraph are no longer applicable. The Order also provided, among other things,
that if we file the Proxy Statement, obtain stockholder approval to issue to
NQCI 9,230,000 shares of our common stock as consideration for the closing of
the Technology Transaction and issue such shares to NQCI, the arbitrator
anticipates confirming that all of the Technology covered by the License
Agreement shall be declared our sole and exclusive property.
The
arbitrator held a conference call hearing with the Company and NQCI on March 13,
2009 in which the parties discussed the reasons for the difficulties in closing
the Technology Transaction and explored potential alternatives. The parties were
asked to submit letter briefs outlining their suggested alternatives for
consideration by the arbitrator. The parties submitted their respective letter
briefs on March 24, 2009.
As of the
date of this Annual Report, the arbitration proceeding with NQCI continues and
the arbitrator has not yet issued a final award to either party and has not made
a final ruling with respect to whether the closing of the Technology Transaction
shall occur or whether potential alternatives should be pursued.
Furthermore,
the arbitrator has stated that he has not yet issued a final award that may be
confirmed or challenged in a court of competent jurisdiction. A party to the
arbitration could challenge the interim award in court, even after stockholders
approve the transaction. In addition, the arbitrator could again change the
award by granting different or additional remedies, even after stockholders
approve the transaction. We cannot guarantee that the arbitrator would order
that stockholders be given another opportunity to vote on the transaction, even
if such changes are material. Arbitrators have broad equitable powers, and
arbitration awards are difficult to challenge in court, even if the arbitrator
makes rulings that are inconsistent or not in accordance with the law or the
evidence.
Should
the arbitrator order a material change to the Second Interim Award, as modified
by the Order, after the vote of stockholders on this proposal, and further order
that our stockholders not be given another opportunity to vote on this proposal
or on such material change, such order could conflict with applicable federal
securities laws or NYSE Amex rules to which we are subject. In such event, we
would ask the arbitrator to amend such changed award or attempt to seek review
of the changed award in a court of competent jurisdiction. The closing of the
Technology Transaction may render any court review or appeal moot, effectively
preventing us from challenging any of the arbitrator’s awards in
court.
Item
4. Submission
of Matters to a Vote of Security Holders
None.
PART
II
Item
5. Market
for Registrant’s Common Equity, Related Stockholder Maters and Issuer Purchases
of Equity Securities
Market
Information
Our
common stock is traded on the NYSE Amex (formerly American Stock Exchange) under
the symbol “XCR.” Prior to December 7, 2007, our common stock was quoted on the
Over-The-Counter Bulletin Board under the symbol “XCPL”. Immediately
prior to our merger with the pre-merger Xcorporeal on October 12, 2007, a
one-for-8.27 reverse split of our common stock was executed. Historical stock
prices prior to October 12, 2007 have been adjusted for this reverse stock
split.
As of
March 4, 2009, there were approximately 797 record holders of our common stock,
representing approximately 3,654 beneficial owners.
Following
is a list by fiscal quarters of the split-adjusted closing sales prices of our
common stock. Such prices represent inter-dealer quotations, do not represent
actual transactions, and do not include retail mark-ups, markdowns or
commissions. Such prices were determined from information provided by a majority
of the market makers for the Company’s common stock.
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High
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Low
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Fiscal
Year Ended December 31, 2008
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4
th
Quarter
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$
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0.50
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$
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0.16
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3
rd
Quarter
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1.44
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0.50
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2
nd
Quarter
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4.21
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1.00
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1
ST
Quarter
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4.94
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2.34
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High
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Low
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Fiscal
Year Ended December 31, 2007
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4
th
Quarter
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$
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14.06
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$
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4.27
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3
rd
Quarter
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17.45
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3.39
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2
nd
Quarter
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6.62
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4.30
|
|
|
1
ST
Quarter
|
|
|
13.89
|
|
|
|
2.40
|
|
We did
not pay any cash dividends in 2008 or 2007 and we do not intend to pay cash
dividends in the foreseeable future. It is our present intention to
utilize all available funds for the development of our business. Our future
dividend policy will depend on the requirements of financing agreements to which
we may be a party. Any future determination to pay dividends will be at the
discretion of our Board of Directors and will depend upon, among other factors,
our results of operations, financial condition, capital requirements and
contractual restrictions.
Securities
Authorized For Issuance Under Equity Compensation Plans
The
following table provides information about our common stock that may be issued
upon the exercise of equity instruments under all of our existing equity
compensation plans as of December 31, 2008:
|
|
|
|
|
|
|
|
|
Number
of Securities
|
|
|
|
|
|
|
|
|
|
|
Remaining
Available
|
|
|
|
|
Number
of Securities
|
|
|
|
|
|
for
Future Issuances
|
|
|
|
|
to
be Issued
|
|
|
Weighted-Average
|
|
|
Under
the Equity
|
|
|
|
|
Upon
Exercise of
|
|
|
Exercise
Price of
|
|
|
Compensation
Plans
|
|
|
|
|
Outstanding
Options,
|
|
|
Outstanding
Options,
|
|
|
(Excluding
Securities
|
|
|
Plan
Category
|
|
Warrants and
Rights
|
|
|
Warrants and
Rights
|
|
|
Reflected in
Column(a))
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity
compensation plans approved by security holders
|
|
|
3,877,500
|
|
|
$
|
5.39
|
|
|
|
2,922,500
|
|
|
Equity
compensation plans not approved by security holders
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
Total
|
|
|
3,877,500
|
|
|
$
|
5.39
|
|
|
|
2,922,500
|
|
In connection with our merger with
pre-merger Xcorporeal on October 12, 2007, options to purchase 3,880,000 shares
of common stock that had been granted under pre-merger Xcorporeal’s 2006
Incentive Compensation Plan were assumed by us under the Merger Agreement. Of
these shares, 2,900,000 shares remain outstanding as of December 31, 2008. Any
of our options or warrants that were outstanding prior to the merger with
pre-merger Xcorporeal were cancelled upon effectiveness of the merger. Our 2007
Incentive Compensation Plan was approved by our Board of Directors and a
majority of our stockholders at the same time and in the same manner that the
Merger Agreement was approved, and was ratified by our stockholders on November
26, 2007. As of December 31, 2008, there were 3,900,000 shares of our common
stock authorized for issuance upon the exercise of options granted or to be
granted under our 2007 Incentive Compensation Plan, of which options to purchase
977,500 shares of our common stock have already been granted.
For further information, refer to Note
17, “Stock Options and Warrants” to our financial statements filed as part of
this Annual Report.
Performance
Graph
Not required for smaller reporting
companies.
Unregistered
Sales of Equity Securities and Use of Proceeds from Registered
Securities
Other than set forth below, the
information regarding our sales of our unregistered securities for the fiscal
years ended December 31, 2008 and 2007, has been previously furnished in our
Annual Reports on Form 10-K or 10-KSB, Quarterly Reports on Form 10-Q or 10-QSB
and/or our Current Reports on Form 8-K.
On
November 10, 2008, we issued 50,000 restricted shares of our common stock to
certain third party consultant in consideration of consulting services provided
to us.
The foregoing issuance
was exempt from registration under Section 4(2) of the Securities Act and/or
Rule 506 promulgated thereunder.
Use
of Proceeds from Registered Securities
None.
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers.
None.
Item
6. Selected
Financial Data.
Not required for smaller reporting
companies.
Item
7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
In addition to reviewing this
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” section, you should also carefully review sections captioned
“Business - Recent Developments” and “Risk Factors” above for a more complete
discussion of the current events that are affecting and other factors that may
affect our business.
Recent
Developments
Corporate
Restructuring
The deterioration of the economy over
the last year, coupled with the prolonged and continuing delay in consummating
the Technology Transaction, has significantly adversely affected our Company.
Many of the expectations on which we had based our 2008 and 2009 business
development plans slowly eroded as a result of the lengthy arbitration
proceeding with NQCI commenced in 2006 and continuing into the second quarter of
2009. The possibility of an adverse decision in the arbitration proceeding with
respect to our ownership right to the Technology (as defined below) has been and
continues to be a major factor in our inability to secure debt or equity
financing. Accordingly, we have had to modify our activities and business. In
response to the general economic downturn affecting the development of our
products and liquidity condition, we have instituted a variety of measures in an
attempt to conserve cash and reduce our operating expenses. Our actions
included:
|
·
|
Reductions
in our labor force – On March 13, 2009, we gave notice of employment
termination to 19 employees. This represents a total work-force reduction
of approximately 73%. We paid accrued vacation benefits of approximately
$70,000 to the terminated employees. The layoffs and our other efforts
focused on streamlining our operations designed to reduce our annual
expenses by approximately $3.5 million to a current operating burn rate of
approximately $200,000 per month. These actions had to be carefully and
thoughtfully executed and we will take additional actions, if necessary.
Most important to us in making these difficult decisions is to give as
much consideration as possible to all of our employees, whom we greatly
value. We hope to be in the financial position in the near future to offer
re-employment to certain of our terminated
employees.
|
|
·
|
Refocusing
our available assets and employee resources on the development of the
PAK.
|
|
·
|
Continuing
vigorous efforts to minimize or defer our operating
expenses.
|
|
·
|
Exploring
various strategic alternatives, which may include the license of certain
of our intellectual property rights, as a means to further develop our
technologies, among other possible transactions and
alternatives.
|
|
·
|
Intensifying
our search to obtain additional financing to support our operations and to
satisfy our ongoing capital requirements in order to improve our liquidity
position.
|
|
·
|
Continuing
to prosecute our patents and take other steps to perfect our intellectual
property rights.
|
In light of the unprecedented economic
slow down, lack of access to capital markets and prolonged arbitration
proceeding with NQCI, we were compelled to undertake the efforts outlined above
in order to remain in the position to continue our operations. We hope to be
able to obtain additional financing to meet our cash obligations as they become
due and otherwise proceed with our business plan. Our ability to execute on our
current business plan is dependent upon our ability to obtain equity or debt
financing, develop and market our products, and, ultimately, to generate
revenue. Unless we are able to raise financing sufficient to support our
operations and to satisfy our ongoing financing requirements, we will not be
able to develop any of our products, submit 510(k) notifications to the FDA,
conduct clinical trials or otherwise commercialize any of our products. We will
make every effort however, to continue the development of the PAK. As a result
of these conditions, there is substantial doubt about our ability to continue as
a going concern. Our ability to continue as a going concern is substantially
dependent on the successful execution of many of the actions referred to above,
on the timeline contemplated by our plans and our ability to obtain additional
financing. We cannot assure you that we will be successful now or in the future
in obtaining any additional financing on terms favorable to us, if at all. The
failure to obtain financing will have a material adverse effect on our financial
condition and operations.
Other
Considerations – Royalty and Other Payments Under the License
Agreement
As consideration for entering into the
License Agreement, we agreed to pay to NQCI a minimum annual royalty of
$250,000, or 7% of net sales. As a result of the transfer of the Technology to
us, we may be able to realize additional savings of not having to compensate
NQCI for any royalty payments accrued and not yet paid. Although we have
asserted that NQCI’s breaches of the License Agreement excused our obligation to
make the minimum royalty payments, we recorded $583,333 in royalty expenses,
covering the minimum royalties, from commencement of the License Agreement
through December 31, 2008. The License Agreement expires in 2105. The License
Agreement also requires us to reimburse NQCI’s Licensor Expenses until the
closing or the termination of the Merger Agreement. The Second Interim Award
states that the License Agreement will remain in full force and effect until the
Technology Transaction closes or the arbitrator determines that it will never
close. Although we have contested its right to any further payments, NQCI has
made a claim for reimbursement of approximately $690,000 in alleged expenses
under the License Agreement as of December 31, 2008. If we are able to acquire
the Technology from NQCI, the arbitrator has indicated that the License
Agreement would be terminated simultaneously with such acquisition. As a result
of the Technology becoming our sole and exclusive property, among other
benefits, we should be able to discontinue these royalty payments to NQCI,
realize corresponding savings and we may also be able to realize additional
savings of not having to reimburse NQCI for any Licensor Expenses accrued and
not yet paid.
Basis
of Presentation
This
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” section should be read in conjunction with the accompanying
financial statements which have been prepared assuming that we will continue as
a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Our recurring
losses from operations and net capital deficiency raise substantial doubt about
our ability to continue as a going concern. Our ability to continue as a going
concern is substantially dependent on the successful execution of many of the
actions referred to above and otherwise discussed in this “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
section and in Note 1, “Nature of Operations and Going Concern Uncertainty” to
our financial statements filed as part of this Annual Report, on the timeline
contemplated by our plans and our ability to obtain additional financing. The
uncertainty of successful execution of our plans, among other factors, raises
substantial doubt as to our ability to continue as a going concern. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Results
of Operations for the years ended December 31, 2008 and 2007
We have
not generated any revenues since inception. We incurred a net loss of
$22,987,273 for the year ended December 31, 2008, compared to net loss of
$17,074,051 for the year ended December 31, 2007. The increase in net loss was
primarily due to (i) research, development, and other expenses related to
advancing our kidney failure treatment technologies, (ii) stock compensation
expense related to options and warrants granted to directors, officer, employees
and consultants, and (iii) legal fees, (iv) common stock issuances as
compensation for consulting services, (v) accruals for alleged licensor expenses
and interim awards issued in the arbitration with NQCI, and (vi) increased
company personnel. At December 31, 2008, we had negative working capital of
$805,912 compared to positive working capital of $14,958,099 at the
beginning of the year. At December 31, 2008, our total assets were $4,351,073,
compared to $17,252,546 at the beginning of the year, which consisted primarily
of cash from the sale of our common stock sold in December 2006.
Interest
Income
Interest
income of $320,622 and $1,184,930 was reported for the years ended December 31,
2008 and 2007, respectively.
Liquidity
and Capital Resources
We expect
to incur operating losses and negative cash flows for the foreseeable future.
During the fourth quarter 2006, we raised approximately $27.3 million (net of
placement fees of $2.1 million) through a private placement. Our ability to
execute on our current business plan is dependent upon our ability to develop
and market our products, and, ultimately, to generate revenue.
As of
December 31, 2008, we had cash, cash equivalents, and marketable securities of
approximately $3.4 million. We project to expend approximately $1.9 million
in the first quarter of 2009 and expend cash at a rate of approximately $0.2
million per month based upon the recent restructuring effected by our company
going forward. See above section captioned “Recent Developments”. In addition,
we may become obligated to pay damages, costs or legal fees in connection with
the ongoing arbitration described under Part I, Item 3-Legal Proceedings above,
in an amount of $1.87 million under the Interim Award issued on August 15, 2008.
At present rates, we will have to obtain additional debt or equity financing
during the next several months.
We expect
to incur negative cash flows and net losses for the foreseeable future. In
addition, we may become obligated to pay damages, costs or legal fees in
connection with the ongoing arbitration with NQCI. Based upon our current plans,
we believe that our existing cash reserves will not be sufficient to meet our
operating expenses and capital requirements before we achieve profitability.
Accordingly, we will be required to seek additional funds through public or
private placement of shares of our preferred or common stock or through public
or private debt financing. Our ability to meet our cash obligations as they
become due and payable will depend on our ability to sell securities, borrow
funds, reduce operating costs, or some combination thereof. We may not be
successful in obtaining necessary funds on acceptable terms, if at all. The
inability to obtain financing could require us to curtail our current plans in
order to decrease spending, which could have a material adverse effect on our
plan of operations. Our ability to execute on our current business plan is
dependent upon our ability to obtain equity financing, develop and market our
products, and, ultimately, to generate revenue. As a result of these conditions,
there is substantial doubt about our ability to continue as a going
concern.
Upon
receipt of the approximately $27.3 million raised through the private placement
of our common stock in the fourth quarter of 2006, we strategically began our
operating activities and research and development efforts which resulted in a
net loss of $23.0 million in 2008. In addition, we invested $25.0
million in high grade money market funds and marketable securities of which we
have sold $22.0 million, leaving a balance of $3.0 million as of December 31,
2008.
We have
focused much of our efforts on development of the PAK, which has not been
derived from the technology covered by the License Agreement. Through the
productive research and development efforts of the PAK, we have completed
functional prototypes of our attended care and home PAKs that we plan to
commercialize after 510(k) clearance from the FDA which we plan to submit in
2010. Prior to the 510(k) submission to the FDA for clinical use under direct
medical supervision, the units will undergo final verification and validation.
It generally takes 4 to 12 months from the date of a 510(k) submission to obtain
clearance from the FDA, although it may take longer. We expect that our monthly
expenditures will increase as we shift resources towards developing a marketing
plan for the PAK.
We have
used some of our resources for the development of the WAK and have demonstrated
a feasibility prototype. Commercialization of the WAK will require development
of a functional prototype and likely a full pre-market approval by the FDA,
which could take several years. Our rights to the WAK derive in part from the
License Agreement pursuant to which we obtained the exclusive rights to the
Technology. Once we acquire the Technology and the results of the arbitration
proceeding with NQCI are final, we will determine whether to devote additional
resources to development of the WAK.
If we
ever become obligated to reimburse all or a substantial portion of the $690,000
in NQCI’s alleged expenses related to the License Agreement and $1.87 million in
NQCI’s attorneys’ fees incurred in the arbitration awarded under the interim
award issued on August 15, 2008, these obligations could have a material adverse
effect on our liquidity and financial ability to continue with ongoing
operations as currently planned.
Because
neither the PAK nor the WAK is yet at a stage where it can be marketed
commercially, we are not able to predict the portion of our future business
which will be derived from each.
Research
and Development
Through
March 13, 2009, we employed an interdisciplinary team of scientists and
engineers who were developing the PAK and a separate, interdisciplinary team
developing the WAK. However, as discussed above during the first quarter of
2009, we had to adjust our employee headcount to more closely match our capital
availability and, as a result, terminated the employment of 19 employees. In
addition, we had retained Aubrey Group, Inc., an FDA-registered third-party
contract developer and manufacturer of medical devices, to assist with the
engineering of the PAK. As of December 31, 2008, Aubrey substantially completed
its work and we terminated this agreement. The PAK has been engineered to
perform both hemodialysis, hemofiltration and ultrafiltration under direct
medical supervision. A variation of this device will be developed for chronic
home hemodialysis. An initial laboratory prototype of the PAK, capable of
performing the functions of a hemodialysis machine, and demonstrating our unique
new fluidics circuit, was completed at the end of 2007. The first physical
prototype including industrial design of the PAK was completed in October 2008.
Further refinements to this prototype are now in progress. We hope to complete
the final product design of the PAK and submit the for final verification and
validation prior to a 510(k) submission for clinical use under direct medical
supervision. A clinical study is not required for this submission.
In a
clinical feasibility study conducted in London in March 2007, a research
prototype of the WAK was successfully demonstrated in eight patients with
end-stage renal disease. Patients were successfully treated for up to eight
hours with adequate clearances of urea and creatinine. The device was well
tolerated and patients were able to conduct activities of normal daily living
including walking and sleeping. There were no serious adverse events although
clotting of the dialyzer occurred in two patients. To our knowledge, this is the
first successful demonstration of a WAK in humans.
We
incurred $20.9 million and $7.1 million in research and development costs in the
fiscal years 2008 and 2007, respectively, including the August 4, 2008, $10.2
million fair value accrual for a potential 9.23 million shares issuance to
effectuate the Technology Transaction in accordance to the Second Interim Award
(as defined below). Less the accrual for shares issuable, we incurred $10.7
million and $7.1 million in research and development costs in the fiscal years
2008 and 2007, respectively. The increase in research and development costs in
2008 from 2007 is attributable to our efforts to advance our kidney failure
treatment technologies and an increase in personnel.
Contractual
Obligations and Commercial Commitments
The following table sets forth a
summary of our material contractual obligations and commercial commitments as of
December 31, 2008.
|
Contractual
Obligations:
|
|
Total
|
|
|
Less than 1
year
|
|
|
1 - 3 years
|
|
|
3 - 5 years
|
|
|
More
than 5 years
|
|
|
Capital Lease
Obligations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Operating Lease Obligations
(1)
|
|
|
2,422,931
|
|
|
|
411,845
|
|
|
|
1,677,342
|
|
|
|
333,744
|
|
|
|
-
|
|
|
Research & Development
Contractual Commitments
|
|
|
68,688
|
|
|
|
68,688
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other
Liabilities
|
|
|
34,325
|
|
|
|
34,325
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
2,525,944
|
|
|
$
|
514,858
|
|
|
$
|
1,677,342
|
|
|
$
|
333,744
|
|
|
$
|
-
|
|
(1)
Operating lease commitments for our corporate office, operating facility, Dr.
Gura’s office (a related party transaction), two corporate apartments and
equipment.
Since
Aubrey substantially completed its work under the Aubrey Agreement and we intend
to terminate this agreement, this table excludes any remaining obligations under
the Aubrey Agreement.
As of
December 31, 2008, we had no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
results of operations or cash flows.
Legal
Proceedings
We are
involved in arbitration against NQCI as described above in section captioned
“Item 3 - Legal Proceedings”. From time to time, we may be involved in
litigation relating to claims arising out of our operations in the normal course
of business. As of the date of this Annual Report, we are not currently involved
in any other legal proceeding that we believe would have a material adverse
effect on our business, financial condition or operating results.
Critical
Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations is
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. Generally
accepted accounting principles require management to make estimates, judgments
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, and the disclosure of contingent assets and liabilities.
We base our estimates on experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that may not be readily apparent from other sources. Our actual results may
differ from those estimates.
We
consider our critical accounting policies to be those that involve significant
uncertainties, require judgments or estimates that are more difficult for
management to determine or that may produce materially different results when
using different assumptions. We consider the following accounting policies to be
critical:
Marketable
Securities
We
classify investments with maturity dates greater than three months when
purchased as marketable securities. Investments, including certificates of
deposit with maturity dates greater than three months when purchased and which
have readily determined fair values, are classified as available-for-sale
investments and reflected in current assets as marketable securities at fair
market value. Our investment policy requires that all investments be
investment grade quality and no more than ten percent of our portfolio may be
invested in any one security or with one institution.
As of
December 31, 2008 and 2007, short-term investments classified as
available-for-sale were as follows:
|
|
|
December 31,
2008
|
|
|
|
|
Aggregate
Fair
|
|
|
Gross
Unrealized
|
|
|
Estimated
Fair
|
|
|
|
|
Value
|
|
|
Gains /
(Losses)
|
|
|
Value
|
|
|
Commercial
paper
|
|
$
|
897,993
|
|
|
$
|
-
|
|
|
$
|
897,993
|
|
|
Corporate
securities fixed rate
|
|
|
457,930
|
|
|
|
-
|
|
|
|
457,930
|
|
|
Total
|
|
$
|
1,355,923
|
|
|
$
|
-
|
|
|
$
|
1,355,923
|
|
|
|
|
December
31, 2007
|
|
|
|
|
Aggregate
Fair
|
|
|
Gross
Unrealized
|
|
|
Estimated
Fair
|
|
|
|
|
Value
|
|
|
Gains /
(Losses)
|
|
|
Value
|
|
|
Commercial
paper
|
|
$
|
10,283,818
|
|
|
$
|
-
|
|
|
$
|
10,283,818
|
|
|
Corporate
obligation
|
|
|
2,245,770
|
|
|
|
-
|
|
|
|
2,245,770
|
|
|
Total
|
|
$
|
12,529,588
|
|
|
$
|
-
|
|
|
$
|
12,529,588
|
|
Xcorporeal
reviews impairments associated with the above in accordance with SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity Securities,” and FASB
Staff Position FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments,” to determine the
classification of the impairment as temporary or other-than-temporary.
Xcorporeal considers these investments not to be impaired as of December 31,
2008 and 2007.
There
were no gross unrealized gains or losses as of December 31, 2008 and
2007.
Shares
Issuable
Pursuant
to the Second Interim Award issued on August 4, 2008, which stated that, if the
Technology Transaction is submitted to and approved by our stockholders,
9,230,000 shares of our common stock should be issued to NQCI to effectuate the
transaction, we accrued for the 9,230,000 shares of our common stock. As the
Second Interim Award stated that we must issue 9,230,000 upon the closing of the
Technology Transaction and we have been unable to consummate such transaction,
such contingency is not within our control and we have therefore, recorded the
issuance as a liability, rather than as an equity issuance. Until issuance, the
shares issuable will be recorded at fair value in accordance with EITF 00-19,
with subsequent changes in fair value recorded as non-operating change in fair
value of shares issuable to our statement of operations. The fair value of the
shares will be measured using the closing price of our common stock on the
reporting date. The measured fair value of $10,153,000 for the accrued 9,230,000
shares on August 4, 2008, the date of the Second Interim Award, was accrued
under “Shares issuable” and expensed to “Research and development.” From marking
to market, the fair value of the shares issuable was revalued at $1,569,100 as
of December 31, 2008. The resulting non-operating change in fair value of
$8,583,900 to our statement of operations for the year ended December 31, 2008
was recognized as “Change in fair value of shares issuable.” Stockholder
approval for the issuance of 9,230,000 shares of our common stock to NQCI and
the issuance of such shares are pending to date.
Although
we are seeking stockholder approval for the issuance of 9,230,000 shares of our
common stock to effectuate the Technology Transaction, we are uncertain whether
the SEC will clear its review of the form of our proxy statement that we will
use to solicit stockholder approval of the transaction, whether our stockholders
will vote to approve the transaction, whether shares will be issued to NQCI, or
whether when filed, the SEC will declare effective the registration statement to
register the shares for resale. If the Technology Transaction does not close,
the arbitrator may issue alternative relief. In the event of an alternate
relief, the above accrual may be adjusted and the accrual or the actual
settlement will be recorded to coincide with the alternate award.
Stock-Based
Compensation
Statements
of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
Share-Based Payment
, (SFAS
123(R)) and Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) No. 107 (SAB 107) require the measurement and recognition of compensation
expense for all share-based payment awards made to employees and directors based
on estimated fair values. We have applied the provisions of SAB 107 in its
adoption of SFAS 123(R).
In
determining stock based compensation, we consider various factors in our
calculation of fair value using a black-scholes pricing model. These factors
include volatility, expected term of the options and forfeiture rates. A change
in these factors could result in differences in the stock based compensation
expense.
Recent
Accounting Pronouncements
In
February 2007, the Financial Accounting Standards Board (“FASB”) issued FASB
Statement No. 159,
“The Fair
Value Option for Financial Assets and
Financial Liabilities — Including an
Amendment of FASB Statement No. 115,
Accounting for Certain Investments
in Debt and Equity Securities”
(
“SFAS No.
159”
). SFAS No. 159 permits
an entity to choose to measure many financial instruments and certain items at
fair value. The objective of this standard is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reporting
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. SFAS No. 159 permits all
entities to choose to measure eligible items at fair value at specified election
dates. Entities will report unrealized gains and losses on items for which the
fair value option has been elected in earnings at each subsequent reporting
date. The fair value option: (a) may be applied instrument by instrument, with a
few exceptions, such as investments accounted for by the equity method; (b) is
irrevocable (unless a new election date occurs); and (c) is applied only to
entire instruments and not to portions of instruments. SFAS No. 159 is effective
as of the beginning of an entity’s first fiscal year that begins after November
15, 2007, which for us is our fiscal year beginning January 1, 2008. The
adoption of SFAS No. 159 did not have any effect on our consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
141(R)”). SFAS 141(R) replaces SFAS No. 141, “Business Combinations”, but
retains the requirement that the purchase method of accounting for acquisitions
be used for all business combinations. SFAS 141(R) expands on the disclosures
previously required by SFAS 141, better defines the acquirer and the acquisition
date in a business combination, and establishes principles for recognizing and
measuring the assets acquired (including goodwill), the liabilities assumed and
any non-controlling interests in the acquired business. SFAS 141(R) also
requires an acquirer to record an adjustment to income tax expense for changes
in valuation allowances or uncertain tax positions related to acquired
businesses. SFAS 141(R) is effective for all business combinations with an
acquisition date in the first annual period following December 15, 2008; early
adoption is not permitted. We will adopt this statement as of January 1, 2009.
The impact of SFAS 141(R) will have on our consolidated financial statements
will depend on the nature and size of acquisitions we complete after we adopt
SFAS 141(R).
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51” (SFAS 160). SFAS
160 requires that non-controlling (or minority) interests in subsidiaries be
reported in the equity section of the company’s balance sheet, rather than in a
mezzanine section of the balance sheet between liabilities and equity. SFAS 160
also changes the manner in which the net income of the subsidiary is reported
and disclosed in the controlling company’s income statement. SFAS 160 also
establishes guidelines for accounting for changes in ownership percentages and
for deconsolidation. SFAS 160 is effective for financial statements for fiscal
years beginning on or after December 1, 2008 and interim periods within those
years. The adoption of SFAS 160 is not expected to have a material impact on our
financial position, results of operations or cash flows.
In
March 2008, the FASB issued SFAS No. 161,
Disclosures About Derivative
Instruments and Hedging Activities
, or “SFAS 161”. SFAS 161 enhances the
disclosure requirements for derivative instruments and hedging activities. This
Standard is effective January 1, 2009. Since SFAS 161 requires only
additional disclosures concerning derivatives and hedging activities, adoption
of SFAS 161 will not affect the Company’s financial condition or results of
operation.
In
May 2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted
Accounting Principles
(SFAS 162). SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles in the
United States (the GAAP hierarchy). SFAS 162 will become
effective November 15, 2008. The adoption of SFAS 162 did not have a material
impact on our financial position, results of operations or cash
flows.
In June
2008, the FASB reached a consensus on EITF Issue No. 07-5,
Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity’s Own Stock
, or “EITF
07-5”. EITF 07-5 requires that we apply a two-step approach in evaluating
whether an equity-linked financial instrument (or embedded feature) is indexed
to our own stock, including evaluating the instrument’s contingent exercise and
settlement provisions. EITF 07-5 is effective for fiscal years beginning after
December 15, 2008. We are currently evaluating the effects, if any, that EITF
07-5 will have on our consolidated financial statements.
Item
7A. Quantitative
and Qualitative Disclosures About Market Risk.
Not required for smaller reporting
companies.
Item
8. Financial
Statements and Supplementary Data.
CONTENTS
|
|
PAGE
|
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
E-31
|
|
|
|
|
FINANCIAL
STATEMENTS
|
|
|
|
|
|
BALANCE
SHEETS AS OF DECEMBER 31, 2008 AND 2007
|
E-32
|
|
|
|
|
STATEMENTS
OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007, AND THE
PERIOD FROM INCEPTION (MAY 4, 2001) TO DECEMBER 31, 2008
|
E-33
|
|
|
|
|
STATEMENTS
OF STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2008
AND 2007, AND THE PERIOD FROM INCEPTION (MAY 4, 2001) TO DECEMBER 31,
2008
|
E-34
|
|
|
|
|
STATEMENTS
OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007, AND THE
PERIOD FROM INCEPTION (MAY 4, 2001) TO DECEMBER 31, 2008
|
E-35
|
|
|
|
|
NOTES
TO FINANCIAL STATEMENTS
|
E-36
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders
Xcorporeal,
Inc.
(a
development stage company)
Los
Angeles, California
We have
audited the accompanying consolidated balance sheets of Xcorporeal, Inc. as of
December 31, 2008 and 2007 and the related consolidated statements of
operations, stockholders’ deficit, and cash flows for each of the two years in
the period ended December 31, 2008 and the period from inception (May 4, 2001)
to December 31, 2008. These financial statements are the
responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The Company is
not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Xcorporeal, Inc. at December
31, 2008 and 2007, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 2008 and the period from
inception (May 4, 2001) to December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has suffered recurring losses from operations and has a
net capital deficiency that raise substantial doubt about its ability to
continue as a going concern. Management’s plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ BDO
Seidman, LLP
Los
Angeles, California
March 30,
2009
XCORPOREAL,
INC.
(a
Development Stage Company)
BALANCE SHEETS
|
|
|
Years
ended
|
|
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
407,585
|
|
|
$
|
106,495
|
|
|
Marketable
securities, at fair value
|
|
|
2,955,714
|
|
|
|
16,401,898
|
|
|
Restricted
cash
|
|
|
301,675
|
|
|
|
68,016
|
|
|
Prepaid
expenses & other current assets
|
|
|
260,024
|
|
|
|
408,303
|
|
|
Tenant
improvement allowance receivable
|
|
|
87,658
|
|
|
|
-
|
|
|
Total
current assets
|
|
|
4,012,656
|
|
|
|
16,984,712
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
337,554
|
|
|
|
266,912
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
863
|
|
|
|
922
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
4,351,073
|
|
|
$
|
17,252,546
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
789,827
|
|
|
$
|
1,125,239
|
|
|
Accrued
legal fees & licensing expense
|
|
|
2,873,396
|
|
|
|
312,208
|
|
|
Accrued
royalties
|
|
|
583,333
|
|
|
|
83,333
|
|
|
Accrued
professional fees
|
|
|
211,820
|
|
|
|
113,020
|
|
|
Accrued
compensation
|
|
|
149,664
|
|
|
|
196,541
|
|
|
Accrued
other liabilities
|
|
|
54,429
|
|
|
|
68,946
|
|
|
Payroll
liabilities
|
|
|
7,448
|
|
|
|
11,926
|
|
|
Deferred
rent
|
|
|
148,651
|
|
|
|
-
|
|
|
Other
current liabilities
|
|
|
-
|
|
|
|
115,400
|
|
|
Total
current liabilities
|
|
|
4,818,568
|
|
|
|
2,026,613
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issuable
|
|
|
1,569,100
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
& CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.0001 par value, 10,000,000 shares authorized, none
outstanding
|
|
|
-
|
|
|
|
-
|
|
|
Common
stock, $0.0001 par value, 40,000,000 shares authorized, 14,754,687 and
14,372,472 issued and outstanding on December 31, 2008 and December 31,
2007, respectively
|
|
|
1,475
|
|
|
|
1,437
|
|
|
Additional
paid-in capital
|
|
|
42,547,023
|
|
|
|
36,822,316
|
|
|
Deficit
accumulated during the development stage
|
|
|
(44,585,093
|
)
|
|
|
(21,597,820
|
)
|
|
Total
stockholders' (deficit) equity
|
|
|
(2,036,595
|
)
|
|
|
15,225,933
|
|
|
Total
Liabilities & Stockholders' (Deficit) Equity
|
|
$
|
4,351,073
|
|
|
$
|
17,252,546
|
|
See
accompanying notes to these financial statements.
XCORPOREAL,
INC.
(a
Development Stage Company)
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
May
4, 2001 (Date
|
|
|
|
|
Years
ended
|
|
|
of
Inception) to
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
$
|
9,001,819
|
|
|
$
|
11,084,040
|
|
|
$
|
23,404,511
|
|
|
Research and
development
|
|
|
20,914,825
|
|
|
|
7,141,170
|
|
|
|
29,343,317
|
|
|
Other
expenses
|
|
|
1,871,430
|
|
|
|
-
|
|
|
|
1,871,430
|
|
|
Depreciation and
amortization
|
|
|
104,719
|
|
|
|
32,171
|
|
|
|
136,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before other income, income taxes, and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses
|
|
|
(31,892,793
|
)
|
|
|
(18,257,381
|
)
|
|
|
(54,756,243
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income
|
|
|
323,249
|
|
|
|
1,184,930
|
|
|
|
1,590,479
|
|
|
Change
in fair value of shares issuable
|
|
|
8,583,900
|
|
|
|
-
|
|
|
|
8,583,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes and other expenses
|
|
|
(22,985,644
|
)
|
|
|
(17,072,451
|
)
|
|
|
(44,581,864
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
1,629
|
|
|
|
1,600
|
|
|
|
3,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(22,987,273
|
)
|
|
$
|
(17,074,051
|
)
|
|
$
|
(44,585,093
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(1.57
|
)
|
|
$
|
(1.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
14,604,274
|
|
|
|
14,206,489
|
|
|
|
|
|
See
accompanying notes to these financial statements.
XCORPOREAL,
INC.
(a
Development Stage Company)
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
For
the Period May 4, 2001 (Inception) to December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
During
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Development
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stage
|
|
|
Total
|
|
|
Common
stock issued for cash at $0.01 per share
|
|
|
2,500,000
|
|
|
$
|
250
|
|
|
$
|
24,750
|
|
|
|
|
|
$
|
25,000
|
|
|
Net
Loss for the year ended December 31, 2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(40,255
|
)
|
|
|
(40,255
|
)
|
|
Balance
as of December 31, 2001
|
|
|
2,500,000
|
|
|
|
250
|
|
|
|
24,750
|
|
|
|
(40,255
|
)
|
|
|
(15,255
|
)
|
|
Common
stock issued for cash at $0.05 per share
|
|
|
1,320,000
|
|
|
|
132
|
|
|
|
65,868
|
|
|
|
|
|
|
|
66,000
|
|
|
Net
Loss for the year ended December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,249
|
)
|
|
|
(31,249
|
)
|
|
Balance
as of December 31, 2002
|
|
|
3,820,000
|
|
|
|
382
|
|
|
|
90,618
|
|
|
|
(71,504
|
)
|
|
|
19,496
|
|
|
Net
Loss for the year ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,962
|
)
|
|
|
(12,962
|
)
|
|
Balance
as of December 31, 2003
|
|
|
3,820,000
|
|
|
|
382
|
|
|
|
90,618
|
|
|
|
(84,466
|
)
|
|
|
6,534
|
|
|
Net
Loss for the year ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,338
|
)
|
|
|
(23,338
|
)
|
|
Balance
as of December 31, 2004
|
|
|
3,820,000
|
|
|
|
382
|
|
|
|
90,618
|
|
|
|
(107,804
|
)
|
|
|
(16,804
|
)
|
|
Net
Loss for the year ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,753
|
)
|
|
|
(35,753
|
)
|
|
Balance
as of December 31, 2005
|
|
|
3,820,000
|
|
|
|
382
|
|
|
|
90,618
|
|
|
|
(143,557
|
)
|
|
|
(52,557
|
)
|
|
Common
stock issued for license rights at $0.0001 per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
share
|
|
|
9,600,000
|
|
|
|
960
|
|
|
|
40
|
|
|
|
|
|
|
|
1,000
|
|
|
Capital
stock cancelled
|
|
|
(3,420,000
|
)
|
|
|
(342
|
)
|
|
|
342
|
|
|
|
|
|
|
|
-
|
|
|
Warrants
granted for consulting fees
|
|
|
|
|
|
|
|
|
|
|
2,162,611
|
|
|
|
|
|
|
|
2,162,611
|
|
|
Forgiveness
of related party debt
|
|
|
|
|
|
|
|
|
|
|
64,620
|
|
|
|
|
|
|
|
64,620
|
|
|
Common
stock issued for cash at $7.00, net of placement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fees
of $2,058,024
|
|
|
4,200,050
|
|
|
|
420
|
|
|
|
27,341,928
|
|
|
|
|
|
|
|
27,342,348
|
|
|
Stock-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
264,251
|
|
|
|
|
|
|
|
264,251
|
|
|
Net
loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,380,212
|
)
|
|
|
(4,380,212
|
)
|
|
Balance
as of December 31, 2006
|
|
|
14,200,050
|
|
|
|
1,420
|
|
|
|
29,924,410
|
|
|
|
(4,523,769
|
)
|
|
|
25,402,061
|
|
|
Capital
stock cancelled
|
|
|
(200,000
|
)
|
|
|
(20
|
)
|
|
|
20
|
|
|
|
|
|
|
|
-
|
|
|
Common
stock issued pursuant to consulting agreement at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4.90
per share
|
|
|
20,000
|
|
|
|
2
|
|
|
|
97,998
|
|
|
|
|
|
|
|
98,000
|
|
|
Recapitalization
pursuant to merger
|
|
|
352,422
|
|
|
|
35
|
|
|
|
(37,406
|
)
|
|
|
|
|
|
|
(37,371
|
)
|
|
Warrants
granted for consulting services
|
|
|
|
|
|
|
|
|
|
|
2,917,309
|
|
|
|
|
|
|
|
2,917,309
|
|
|
Stock-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
3,721,485
|
|
|
|
|
|
|
|
3,721,485
|
|
|
Additional
proceeds from the sale of common stock in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
198,500
|
|
|
|
|
|
|
|
198,500
|
|
|
Net
loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,074,051
|
)
|
|
|
(17,074,051
|
)
|
|
Balance
as of December 31, 2007
|
|
|
14,372,472
|
|
|
|
1,437
|
|
|
|
36,822,316
|
|
|
|
(21,597,820
|
)
|
|
|
15,225,933
|
|
|
Common
stock issued as compensation for consulting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
services
at $3.61 per share
|
|
|
200,000
|
|
|
|
20
|
|
|
|
721,980
|
|
|
|
|
|
|
|
722,000
|
|
|
Common
stock issued as compensation for consulting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
services
at $3.80 per share
|
|
|
20,000
|
|
|
|
2
|
|
|
|
75,998
|
|
|
|
|
|
|
|
76,000
|
|
|
Cashless
exercise of warrants
|
|
|
112,215
|
|
|
|
11
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
0
|
|
|
Common
stock issued as compensation for consulting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
services
at $0.32 per share
|
|
|
50,000
|
|
|
|
5
|
|
|
|
15,995
|
|
|
|
|
|
|
|
16,000
|
|
|
Reversal
of liability from the sale of common stock in 2006
|
|
|
|
|
|
|
|
|
|
|
115,400
|
|
|
|
|
|
|
|
115,400
|
|
|
Warrants
granted for consulting services
|
|
|
|
|
|
|
|
|
|
|
91,306
|
|
|
|
|
|
|
|
91,306
|
|
|
Stock-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
4,704,039
|
|
|
|
|
|
|
|
4,704,039
|
|
|
Net
loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,987,273
|
)
|
|
|
(22,987,273
|
)
|
|
Balance
as of December 31, 2008
|
|
|
14,754,687
|
|
|
$
|
1,475
|
|
|
$
|
42,547,023
|
|
|
$
|
(44,585,093
|
)
|
|
$
|
(2,036,595
|
)
|
See
accompanying notes to these financial statements.
XCORPOREAL,
INC.
(a
Development Stage Company)
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
May
4, 2001 (Date
|
|
|
|
|
Years
ended
|
|
|
of
Inception) to
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Cash
flows used in operating activities
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the period
|
|
$
|
(22,987,273
|
)
|
|
$
|
(17,074,051
|
)
|
|
$
|
(44,585,093
|
)
|
|
Adjustments
to reconcile net loss to net cash (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based
compensation
|
|
|
4,704,039
|
|
|
|
3,721,485
|
|
|
|
8,689,775
|
|
|
Non-employee stock based
compensation
|
|
|
91,306
|
|
|
|
2,917,309
|
|
|
|
5,171,226
|
|
|
Common stock issuance for
consulting services rendered
|
|
|
814,000
|
|
|
|
98,000
|
|
|
|
912,000
|
|
|
Increase in shares
issuable
|
|
|
10,153,000
|
|
|
|
-
|
|
|
|
10,153,000
|
|
|
Mark to market of shares
issuable
|
|
|
(8,583,900
|
)
|
|
|
-
|
|
|
|
(8,583,900
|
)
|
|
Depreciation
|
|
|
104,660
|
|
|
|
32,093
|
|
|
|
136,848
|
|
|
Net change in assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in
Receivables
|
|
|
(87,658
|
)
|
|
|
|
|
|
|
(87,658
|
)
|
|
Decrease (increase) in
prepaid expenses and other current assets
|
|
|
148,279
|
|
|
|
(318,075
|
)
|
|
|
(260,024
|
)
|
|
Decrease in other
assets
|
|
|
59
|
|
|
|
78
|
|
|
|
(863
|
)
|
|
Increase (decrease) in
accounts payable and accrued liabilities
|
|
|
2,758,704
|
|
|
|
(144,241
|
)
|
|
|
4,632,546
|
|
|
Increase in deferred
rent
|
|
|
148,651
|
|
|
|
-
|
|
|
|
148,651
|
|
|
Net
cash used in operating activities
|
|
|
(12,736,133
|
)
|
|
|
(10,767,402
|
)
|
|
|
(23,673,492
|
)
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(175,302
|
)
|
|
|
(295,676
|
)
|
|
|
(474,402
|
)
|
|
Restricted
cash
|
|
|
(233,659
|
)
|
|
|
(68,016
|
)
|
|
|
(301,675
|
)
|
|
Purchase of marketable
securities
|
|
|
(8,598,102
|
)
|
|
|
(25,000,000
|
)
|
|
|
(33,598,102
|
)
|
|
Sale
of marketable
securities
|
|
|
22,044,286
|
|
|
|
8,598,102
|
|
|
|
30,642,388
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
13,037,223
|
|
|
|
(16,765,590
|
)
|
|
|
(3,731,791
|
)
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital stock
issued
|
|
|
-
|
|
|
|
-
|
|
|
|
27,549,748
|
|
|
Advances from related
party
|
|
|
-
|
|
|
|
-
|
|
|
|
64,620
|
|
|
Additional proceeds from
the sale of common stock in 2006
|
|
|
-
|
|
|
|
198,500
|
|
|
|
198,500
|
|
|
Net
cash provided by financing activities
|
|
|
-
|
|
|
|
198,500
|
|
|
|
27,812,868
|
|
|
Increase
(decrease) in cash during the period
|
|
|
301,090
|
|
|
|
(27,334,492
|
)
|
|
|
407,585
|
|
|
Cash
at beginning of the period
|
|
|
106,495
|
|
|
|
27,440,987
|
|
|
|
-
|
|
|
Cash
at end of the period
|
|
$
|
407,585
|
|
|
$
|
106,495
|
|
|
$
|
407,585
|
|
|
Supplemental
disclosure of cash flow information; cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Income
taxes
|
|
$
|
1,629
|
|
|
$
|
-
|
|
|
$
|
3,229
|
|
See
accompanying notes to these financial statements.
XCORPOREAL,
INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2008
|
1.
|
NATURE
OF OPERATIONS AND GOING CONCERN
UNCERTAINTY
|
On
October 12, 2007, pursuant to a merger agreement with Xcorporeal, Inc.
(hereinafter referred to as “Operations”), our wholly-owned subsidiary, merged
with and into Operations, which became our wholly-owned subsidiary and changed
its name to “Xcorporeal Operations, Inc.” We changed our name from CT Holdings
Enterprises, Inc. (“CTHE”), to “Xcorporeal, Inc.” and amended our certificate of
incorporation and bylaws to read substantially as Operations. As a result, our
authorized common stock changed from 60,000,000 shares to 40,000,000 common
shares, and our authorized preferred stock changed from 1,000,000 shares to
10,000,000 shares, resulting in total authorized capital stock of 50,000,000
shares.
Immediately
prior to the merger, we caused a one-for-8.27 reverse split of our common stock.
Each share of Operations common stock was then converted into one share of our
common stock. In addition, we assumed all outstanding Operations’ options and
warrants to purchase Operations common stock.
In this
merger, CTHE was considered to be the legal acquirer and Xcorporeal to be the
accounting acquirer. As the former shareholders of Operations owned over 97% of
the outstanding voting common stock of CTHE immediately after the merger and
CTHE was a public shell company, for accounting purposes Operations was
considered the accounting acquirer and the transaction was considered to be a
recapitalization of Operations.
Historical
financial statements prior to the merger were restated to be those of
Operations. The merger was accounted for as if it were an issuance of the common
stock of Operations to acquire our net assets, accompanied by a
recapitalization. Historical stockholders’ equity of Operations was
retroactively restated for the equivalent number of shares received in the
merger, after giving effect to the difference in par value with an offset to
paid-in capital. The assets and liabilities of Operations were carried forward
at their predecessor carrying amounts. Retained deficiency of Operations was
carried forward after the merger. Operations prior to the merger were those of
Operations. Earnings per share for periods prior to the merger were restated to
reflect the number of equivalent shares received by Operations’ stockholders.
The costs of the transaction were expensed to the extent they exceed cash
received from CTHE. References to “we,” “us,” “our” and the “company” after
consummation of the merger include CTHE and Operations.
As a
result of the merger, we transitioned to a development stage company focused on
researching, developing, and commercializing technology and products related to
the treatment of kidney failure.
We expect to incur negative cash flows
and net losses for the foreseeable future. Based upon our current plans, we
believe that our existing cash reserves will not be sufficient to meet our
current liabilities and other obligations as they become due and payable.
Accordingly, we will need to seek to obtain additional debt or equity financing
through a public or private placement of shares of our preferred or common stock
or through a public or private financing. Our ability to meet such obligations
will depend on our ability to sell securities, borrow funds, reduce operating
costs, or some combination thereof. We may not be successful in obtaining
necessary financing on acceptable terms, if at all. As of December 31, 2008, we
had negative working capital of $805,912, accumulative deficit of $44,585,093,
and stockholders’ deficit of $2,036,595. Cash used in 2008 operations was
$12,736,133. As a result of these conditions, there is substantial doubt about
our ability to continue as a going concern. The financial statements filed as
part of this Annual Report do not include any adjustments that might result from
the outcome of this uncertainty.
Upon
receipt of the approximate $27.3 million raised through a private placement of
our common stock which was completed in the fourth quarter of 2006, we
strategically began our operating activities and research and development
efforts which resulted in a net loss of $23.0 million in 2008 and $17.1 million
in 2007, including approximately a net $1.6 million fair value accrual of a
potential 9.23 million shares issuance discussed in Note 4, “Legal Proceedings”
below. In addition, we invested $25.0 million in high grade money market funds
and marketable securities. We sold $22.0 million of these investments leaving a
balance of $3.0 million as of December 31, 2008.
We are a
medical device company developing an innovative
extra-corporeal
platform
technology to be used in devices to replace the function of various human
organs. We hope that the platform will lead to three initial products: (i) a
Portable Artificial Kidney (PAK) for hospital Renal Replacement Therapy, (ii) a
PAK for home hemodialysis and (iii) a Wearable Artificial Kidney (WAK) for
continuous ambulatory hemodialysis. Our rights to the WAK derive in part from
the License Agreement between Operations and NQCI pursuant to which we obtained
the exclusive rights to the Technology. See Note 4, “Legal Proceedings”
below.
We have
focused much of our efforts on development of the PAK, which has not been
derived from the technology covered by the License Agreement. Through our
research and development efforts, we have completed functional prototypes of our
hospital and home PAKs that we plan to commercialize after 510(k) notification
clearance from the Food and Drug Administration (FDA) which we plan to seek in
the future. Prior to the 510(k) submission to the FDA for clinical use under
direct medical supervision, the units will undergo final verification and
validation. It generally takes 4 to 12 months from the date of a 510(k)
submission to obtain clearance from the FDA, although it may take longer. We
hope to begin to shift out of the development and build phase of the prototype
equipment and into product phase, which should help us to reduce the related
spending on research and development costs as well as consulting and material
costs. See Note 19, “Product Development Agreement” below. With this transition,
there will be a shift of resources towards verification and validation of our
devices along with developing a marketing plan for the PAK.
In
addition, we have used some of our resources for the development of the WAK of
which we have demonstrated a feasibility prototype. Commercialization of the WAK
will require development of a functional prototype and likely a full pre-market
approval by the FDA, which could take several years. Once the Technology
Transaction has closed and the results of the arbitration proceeding described
in Note 4, “Legal Proceedings” are final, we will determine whether to devote
available resources to development of the WAK.
Because
neither the PAK nor the WAK is yet at a stage where it can be marketed
commercially, we are not able to predict the portion of our future business
which will be derived from each.
|
2.
|
DEVELOPMENT STAGE
COMPANY
|
We are a
development stage company, devoting substantially all of our efforts to the
research, development, and commercialization of kidney failure treatment
technologies.
Risks and Uncertainties —
We
operate in an industry that is subject to intense competition, government
regulation, and rapid technological change. Our operations are subject to
significant risk and uncertainties including financial, operational,
technological, legal, regulatory, and other risks associated with a development
stage company, including the potential risk of business failure.
|
3.
|
SUMMARY
OF ACCOUNTING POLICIES
|
Cash and Cash Equivalents —
Cash equivalents are comprised of certain highly liquid investments with
original maturities of less than three months.
Marketable Securities —
We
classify investments with maturity dates greater than three months when
purchased as marketable securities. Investments, including certificates of
deposit with maturity dates greater than three months when purchased and which
have readily determined fair values, are classified as available-for-sale
investments and reflected in current assets as marketable securities at fair
market value. Our investment policy requires that all investments be investment
grade quality and no more than ten percent of our portfolio may be invested in
any one security or with one institution.
As of
December 31, 2008 and 2007, short-term investments classified as
available-for-sale were as follows:
|
|
|
December
31, 2008
|
|
|
|
|
Aggregate
Fair
|
|
|
Gross
Unrealized
|
|
|
Estimated
Fair
|
|
|
|
|
Value
|
|
|
Gains
/ (Losses)
|
|
|
Value
|
|
|
Commercial
paper
|
|
$
|
897,993
|
|
|
$
|
-
|
|
|
$
|
897,993
|
|
|
Corporate
securities fixed rate
|
|
|
457,930
|
|
|
|
-
|
|
|
|
457,930
|
|
|
Total
|
|
$
|
1,355,923
|
|
|
$
|
-
|
|
|
$
|
1,355,923
|
|
|
|
|
December
31, 2007
|
|
|
|
|
Aggregate
Fair
|
|
|
Gross
Unrealized
|
|
|
Estimated
Fair
|
|
|
|
|
Value
|
|
|
Gains
/ (Losses)
|
|
|
Value
|
|
|
Commercial
paper
|
|
$
|
10,283,818
|
|
|
$
|
-
|
|
|
$
|
10,283,818
|
|
|
Corporate
obligation
|
|
|
2,245,770
|
|
|
|
-
|
|
|
|
2,245,770
|
|
|
Total
|
|
$
|
12,529,588
|
|
|
$
|
-
|
|
|
$
|
12,529,588
|
|
We review
impairments associated with the above in accordance with SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity Securities,” and FASB
Staff Position FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments,” to determine the
classification of the impairment as temporary or other-than-temporary. We
consider these investments not to be impaired as of December 31, 2008 and
2007.
There
were no gross unrealized gains or losses as of December 31, 2008 and
2007.
Property and Equipment —
Property and equipment are stated at cost less accumulated depreciation
and amortization, which are calculated using the straight-line method over the
shorter of the estimated useful lives of the related assets (generally ranging
from three to five years), or the remaining lease term when applicable. Gains
and losses on disposals are included in results of operations at amounts equal
to the difference between the book value of the disposed assets and the proceeds
received upon disposal. There were no gains or losses on disposals from
inception through the end of 2008. Expenditures for replacements and leasehold
improvements are capitalized, while expenditures for maintenance and repairs are
expensed as incurred.
Research and Development —
Research and development is expensed as incurred. Upfront and milestone
payments made to third parties in connection with research and development
collaborations prior to regulatory approval are expensed as incurred. Payments
made to third parties subsequent to regulatory approval are capitalized and
amortized over the shorter of the remaining license or product patent life. At
December 31, 2008, we had no such capitalized research and development
costs.
Income Taxes —
Under SFAS
109, “Accounting for Income Taxes,” deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the consolidated financial statements and their respective tax basis. Deferred
income taxes reflect the net tax effects of (a) temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts reported for income tax purposes, and (b) tax credit
carry-forwards. We record a valuation allowance for deferred tax assets when,
based on management’s best estimate of taxable income in the foreseeable future,
it is more likely than not that some portion of the deferred income tax assets
may not be realized.
Earnings per Share —
Under
SFAS 128, “Earnings per Share,” basic earnings per share is computed by dividing
net income available to common stockholders by the weighted average number of
common shares assumed to be outstanding during the period of computation.
Diluted earnings per share reflect the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. As we had net losses for all periods presented, basic and
diluted loss per share is the same across the periods and any additional common
stock equivalents would be anti-dilutive.
Share-Based Compensation —
Effective January 1, 2006, we adopted FASB Statement No. 123R,
Share-Based Payment
(“FAS
123R”) (see Note 17, “Stock Options and Warrants”). FAS 123R requires all
share-based payments to employees to be expensed over the requisite service
period based on the grant-date fair value of the awards and requires that the
unvested portion of all outstanding awards upon adoption be recognized using the
same fair value and attribution methodologies previously determined under FASB
Statement No. 123,
Accounting
for Stock-Based
Compensation
. We continue to
use the Black-Scholes valuation method and applied the requirements of FAS 123R
using the modified prospective method. Prior to January 1, 2006, there was no
share-based compensation expense.
Use of Estimates —
The
consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States (“GAAP”) and, accordingly,
include certain amounts that are based on management’s best estimates and
judgments. Estimates are used in determining such items as depreciable and
amortizable lives, amounts recorded for contingencies, share-based compensation,
taxes on income. Because of the uncertainty inherent in such estimates, actual
results may differ from these estimates.
Recently
Issued Accounting Standards
In
February 2007, the Financial Accounting Standards Board (“FASB”) issued FASB
Statement No. 159,
“The Fair
Value Option for Financial Assets and
Financial Liabilities — Including an
Amendment of FASB Statement No. 115,
Accounting for Certain Investments
in Debt and Equity Securities”
(
“SFAS No.
159”
). SFAS No. 159 permits
an entity to choose to measure many financial instruments and certain items at
fair value. The objective of this standard is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reporting
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. SFAS No. 159 permits all
entities to choose to measure eligible items at fair value at specified election
dates. Entities will report unrealized gains and losses on items for which the
fair value option has been elected in earnings at each subsequent reporting
date. The fair value option: (a) may be applied instrument by instrument, with a
few exceptions, such as investments accounted for by the equity method; (b) is
irrevocable (unless a new election date occurs); and (c) is applied only to
entire instruments and not to portions of instruments. SFAS No. 159 is effective
as of the beginning of an entity’s first fiscal year that begins after November
15, 2007, which for us is our fiscal year beginning January 1, 2008. The
adoption of SFAS No. 159 did not have any effect on our consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
141(R)”). SFAS 141(R) replaces SFAS No. 141, “Business Combinations”, but
retains the requirement that the purchase method of accounting for acquisitions
be used for all business combinations. SFAS 141(R) expands on the disclosures
previously required by SFAS 141, better defines the acquirer and the acquisition
date in a business combination, and establishes principles for recognizing and
measuring the assets acquired (including goodwill), the liabilities assumed and
any non-controlling interests in the acquired business. SFAS 141(R) also
requires an acquirer to record an adjustment to income tax expense for changes
in valuation allowances or uncertain tax positions related to acquired
businesses. SFAS 141(R) is effective for all business combinations with an
acquisition date in the first annual period following December 15, 2008; early
adoption is not permitted. We will adopt this statement as of January 1, 2009.
The impact of SFAS 141(R) will have on our consolidated financial statements
will depend on the nature and size of acquisitions we complete after we adopt
SFAS 141(R).
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51” (SFAS 160). SFAS
160 requires that non-controlling (or minority) interests in subsidiaries be
reported in the equity section of the company’s balance sheet, rather than in a
mezzanine section of the balance sheet between liabilities and equity. SFAS 160
also changes the manner in which the net income of the subsidiary is reported
and disclosed in the controlling company’s income statement. SFAS 160 also
establishes guidelines for accounting for changes in ownership percentages and
for deconsolidation. SFAS 160 is effective for financial statements for fiscal
years beginning on or after December 1, 2008 and interim periods within those
years. The adoption of SFAS 160 is not expected to have a material impact on our
financial position, results of operations or cash flows.
In
March 2008, the FASB issued SFAS No. 161,
Disclosures About Derivative
Instruments and Hedging Activities
, or “SFAS 161”. SFAS 161 enhances the
disclosure requirements for derivative instruments and hedging activities. This
Standard is effective as of January 1, 2009. Since SFAS 161 requires only
additional disclosures concerning derivatives and hedging activities, adoption
of SFAS 161 will not affect our financial condition or results of
operation.
In
May 2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted
Accounting Principles
(SFAS 162). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States (the GAAP hierarchy). SFAS 162 became effective
November 15, 2008. The adoption of SFAS 162 did not have a material impact on
our financial position, results of operations or cash flows.
In June
2008, the FASB reached a consensus on EITF Issue No. 07-5,
Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity’s Own Stock
, or “EITF
07-5”. EITF 07-5 requires that we apply a two-step approach in evaluating
whether an equity-linked financial instrument (or embedded feature) is indexed
to our own stock, including evaluating the instrument’s contingent exercise and
settlement provisions. EITF 07-5 is effective for fiscal years beginning after
December 15, 2008. We are currently evaluating the effects, if any, that EITF
07-5 will have on our consolidated financial statements.
On
December 1, 2006, Operations initiated arbitration against NQCI for NQCI's
failure to fully perform its obligations under the License Agreement dated
September 1, 2006. On September 1, 2006, Operations also entered into a Merger
Agreement with NQCI which contemplated that Operations would acquire NQCI as a
wholly owned subsidiary pursuant to a triangular merger, or would issue to NQCI
shares of common stock in consideration of the assignment of the technology
relating to the WAK and other medical devices which, as listed under
“Technology” on the License Agreement, are “all existing and hereafter developed
Intellectual Property, Know-How, Licensor Patents, Licensor Patent Applications,
Derivative Works and any other technology, invented, improved or developed by
Licensor, or as to which Licensor owns or holds any rights, arising out of or
relating to the research, development, design, manufacture or use of (a) any
medical device, treatment or method as of the date of this Agreement, (b) any
portable or continuous dialysis methods or devices , specifically including any
wearable artificial kidney, or “Wearable Artificial Kidney”, and related
devices, (c) any device, methods or treatments for congestive heart failure, and
(d) any artificial heart or coronary device”, collectively referred to herein as
the “Technology Transaction”. The merger was never consummated.
On
January 3, 2008, the arbitrator issued an order denying NQCI’s motion to amend
its counterclaim to add us as a successor company following the merger. However,
in the Second Interim Award, the arbitrator found that we are the successor to
Operations as a result of the merger, even though we are not a party to any of
the agreements or the arbitration, and ordered that our shares should be issued
to NQCI rather than shares of Operations.
On June
9, 2008, the arbitrator issued an Interim Award granting specific performance of
the Technology Transaction. The Interim Award stated that the total aggregate
shares of stock to be received by NQCI at the closing should equal 48% of all
Operations shares outstanding as of the date of the Merger Agreement. On
September 1, 2006, there were 10,000,000 shares of Operations common stock
outstanding.
On August
4, 2008, the arbitrator issued a Second Interim Award, stating that 9,230,000
shares of our common stock should be issued to NQCI to effectuate the Technology
Transaction. As of December 31, 2008, there were 14,754,687 shares of our common
stock issued and outstanding. Accordingly, following closing of the Technology
Transaction, NQCI would be our largest stockholder and would own approximately
39% of our total outstanding shares.
The
arbitrator has not ordered us to close the Technology Transaction. However, the
arbitrator found that, with the exception of shareholder approval, virtually all
conditions to closing the Technology Transaction have been waived. The award
further states that, if we or our stockholders do not approve the issuance of
our stock to effectuate the Technology Transaction, all of the Technology
covered by the License Agreement will be declared the sole and exclusive
property of NQCI, and the arbitrator will schedule additional hearings to
address whether the PAK technology is included within that Technology, and
whether NQCI is entitled to compensatory damages and the amount of damages, if
any, under these circumstances. Upon closing of the Technology Transaction, the
License Agreement will terminate, and we will own all of the
Technology.
The
Second Interim Award also stated that the License Agreement will remain in full
force and effect until the Technology Transaction closes or the arbitrator
determines that it will never close. NQCI has made a claim for reimbursement of
approximately $690,000 in alleged expenses, Licensor Expenses, under the License
Agreement which were accrued under “Accrued legal fees & licensing expense”
as of December 31, 2008. The Licensor Expenses were accrued in the fiscal year
ended December 31, 2008, with the expenditure recorded as Licensing Expense
within research and development operating expenses.
On August
15, 2008, the arbitrator awarded NQCI $1.87 million to settle over $4 million
NQCI claimed in attorneys’ fees and costs which have been accrued under “Accrued
legal fees & licensing expense” as of December 31, 2008. The settlement of
legal fees was accrued in the year ended at December 31, 2008, with the
expenditure recognized as “Other expenses” and payment pending to
date.
The
Second Interim Award required that we file a registration statement under the
Securities Act to register for resale the shares to be issued to NQCI within 30
days after the closing of the Technology Transaction. The arbitrator
acknowledged that our obligation is to file the registration statement and to
use reasonable efforts to have the shares registered and not to guarantee
registration and resultant actual public tradability. However, the arbitrator
nevertheless ordered that the registration statement must be declared effective
within 90 days.
The
Second Interim Award requires that we file a registration statement under the
Securities Act to register for resale the shares to be issued to NQCI within 30
days after the closing of the Technology Transaction. The arbitrator
acknowledged that our obligation is to file the registration statement and to
use reasonable efforts to have the shares registered and not to guarantee
registration and resultant actual public tradability. However, the arbitrator
nevertheless ordered that the registration statement must be declared effective
within 90 days. We have no control over whether the registration statement will
be declared effective by the SEC, and no way to predict what further action, if
any, the arbitrator may order if it is not declared effective.
On
January 30, 2009, the arbitrator issued the Order, in which the arbitrator
modified the Second Interim Award by reserving on what the final terms of our
obligation to file the resale registration statement will be and stating that
such registration obligation shall be in accordance with applicable laws,
including applicable U.S. federal securities laws. While the arbitrator also
retained jurisdiction to monitor our compliance with such obligation, to award
any appropriate relief to NQCI if we fail to comply with such obligation and to
render a decision on any other matters contested in this proceeding, the time
periods set forth in the Second Interim Award and summarized in the preceding
paragraph are no longer applicable. The Order also provided, among other things,
that if we file the proxy statement, obtain stockholder approval to issue to
NQCI 9,230,000 shares of our common stock as consideration for the closing of
the Technology Transaction and issue such shares to NQCI, the arbitrator
anticipates confirming that all of the Technology covered by the License shall
be declared our sole and exclusive property.
The
Technology Transaction will be accounted for as a purchase of the Technology in
exchange for shares of our common stock. In accordance with FASB Concepts
Statement No. 7,
Using Cash
Flow Information and Present Value in Accounting Measurements
, the
Technology Transaction will be measured based on the fair value of the shares
issued, which is clearly more evident than the fair value of the intellectual
property. Through the evaluation of the components of the intellectual property
and information pursuant to the arbitration suggesting it may not be
proprietary, we have determined the intellectual property is not economically
viable. However, continuing research on the technology will be useful in
developing the prototype of our Wearable Artificial Kidney. In accordance with
FASB 2,
Accounting for
Research and Development Costs
, and its related interpretations, we have
expensed the value of the intellectual property, determined in process research
and development, at the date of acquisition. See Note 10,
“
Shares
Issuable
”,
below.
Pursuant
to the Second Interim Award, which stated that, if the Technology
Transaction is submitted to and approved by our stockholders, 9,230,000 shares
of our common stock should be issued to NQCI to effectuate the transaction, we
accrued for the 9,230,000 shares of our common stock. As the Second Interim
Award states that we must issue 9,230,000 upon the closing of the Technology
Transaction and we have been unable to consummate such transaction, such
contingency is not within our control and we have therefore, recorded
the obligation to issue the shares as a liability, rather than as an
equity issuance. The fair value of the 9,230,000 shares was measured using the
closing price of our common stock on August 4, 2008, the date of the Second
Interim Award, and revalued, marked to market, as of the end of the year ending
at December 31, 2008. The fair value of the accrued shares on August 4, 2008,
was $10,153,000 which is reflected in research and development expense. The
obligation to issue the shares was revalued at $1,569,100 as of December 31,
2008, resulting in a $8,583,900 non-operating gain, classified as change in fair
value of shares issuable in the statement of operations for the year ended
December 31, 2008. The net fair value of $1,569,100 was accrued under “Shares
issuable” as of December 31, 2008. Stockholder approval and issuance
of the shares are pending to date.
We are
currently in the process of seeking approval from our stockholders to issue
9,230,000 shares of our common stock in order to obtain ownership of the
Technology. The stockholder approval is being sought in accordance with an
Interim Award issued on June 9, 2008, and in order to minimize the risk that the
arbitrator will issue an alternative award that could have a material adverse
effect on our financial condition and operations. The arbitrator has refused to
issue a final award until this stockholder approval has been obtained from our
stockholders, which may effectively prevent us from obtaining effective court
review of the arbitrator’s actions. If the Technology Transaction does not
close, the arbitrator may issue alternative relief. In the event of an
alternative award, the above accrual may be adjusted and the accrual or the
actual settlement will be recorded to coincide with the alternate
award.
If the
9,230,000 shares are issued pursuant to the approval of our stockholders, then
the $1,569,100 contingent liability recorded on our balance sheet will be
adjusted through earnings to an amount equal to the product of 9,230,000 shares
and the trading price of our common stock on that day and then be
eliminated by increasing the number of our issued and outstanding common shares
by 9,230,000 and increasing our stockholders’ equity by a
corresponding amount.
The
arbitrator held a conference call hearing with the Company and NQCI on March 13,
2009 in which the parties discussed the reasons for the difficulties in closing
the Technology Transaction and explored potential alternatives. The parties were
asked to submit letter briefs outlining their suggested alternatives for
consideration by the arbitrator. The parties submitted their respective letter
briefs on March 24, 2009.
As of the
date of this Annual Report, the arbitration proceeding with NQCI continues and
the arbitrator has not yet issued a final award to either party and has not made
a final ruling with respect to whether the closing of the Technology Transaction
shall occur or whether potential alternatives should be pursued.
The
arbitrator has stated that he has not yet issued a final award that may be
confirmed or challenged in a court of competent jurisdiction. A party to the
arbitration could challenge the interim award in court, even after stockholders
approve the transaction. In addition, the arbitrator could again change the
award by granting different or additional remedies, even after stockholders
approve the transaction. We cannot guarantee that the arbitrator would order
that our stockholders should be given another opportunity to vote on the
transaction, even if such changes are material. Arbitrators have broad equitable
powers, and arbitration awards are difficult to challenge in court, even if the
arbitrator makes rulings that are inconsistent or not in accordance with the law
or the evidence.
|
5.
|
CASH EQUIVALENTS AND MARKETABLE
SECURITIES
|
We invest
available cash in short-term commercial paper, certificates of deposit, money
market funds, and high grade marketable securities. We consider any liquid
investment with an original maturity of three months or less when purchased to
be cash equivalents. Investments, including certificates of deposit with
maturity dates greater than three months when purchased and which have readily
determined fair values, are classified as available-for-sale investments and
reflected in current assets as marketable securities at fair market value. Our
investment policy requires that all investments be investment grade quality and
no more than ten percent of our portfolio may be invested in any one security or
with one institution. At December 31, 2008, all of our cash was held in high
grade money market funds and marketable securities.
Restricted
cash represents deposits secured as collateral for a letter of credit pursuant
to our new operating facility lease agreement at December 31, 2008 and for a
bank credit card program at December 31, 2007.
|
6.
|
FAIR
VALUE MEASUREMENTS
|
Effective
January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements,” (“SFAS
157”). SFAS 157 defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. This statement
does not require any new fair value measurements; rather, it applies to other
accounting pronouncements that require or permit fair value measurements. In
February 2008, FSP FAS 157-2, “Effective Date of FASB Statement
No. 157”, was issued, which delays the effective date of SFAS 157 to
fiscal years and interim periods within those fiscal years beginning after
November 15, 2008 for non-financial assets and non-financial liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). We elected to defer the
adoption of the standard for these non-financial assets and
liabilities.
Fair
value is defined under SFAS 157 as the price that would be received to sell an
asset or paid to transfer a liability in the principal or most advantageous
market in an orderly transaction between market participants on the measurement
date. SFAS 157 also establishes a three-level hierarchy, which requires an
entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value.
Beginning
January 1, 2008, assets and liabilities recorded at fair value in the balance
sheets are categorized based upon the level of judgment associated with the
inputs used to measure their fair value. Level inputs, as defined by SFAS 157,
are as follows:
|
|
·
|
Level
I - inputs are unadjusted, quoted prices for identical assets or
liabilities in active markets at the measurement
date.
|
|
|
·
|
Level
II - inputs, other than quoted prices included in Level I, that are
observable for the asset or liability through corroboration with market
data at the measurement date.
|
|
|
·
|
Level III - unobservable inputs
that reflect management’s best estimate of what market participants would
use in pricing the asset or liability at the measurement
date.
|
The
following table summarizes fair value measurements by level at December 31, 2008
for assets and liabilities measured at fair value on a recurring
basis:
|
|
|
Level
I
|
|
|
Level
II
|
|
|
Level
III
|
|
|
Total
|
|
|
Cash
and cash equivalents
|
|
$
|
407,585
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
407,585
|
|
|
Marketable
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper
|
|
|
897,993
|
|
|
|
-
|
|
|
|
-
|
|
|
|
897,993
|
|
|
Corporate securities fixed
rate
|
|
|
457,930
|
|
|
|
-
|
|
|
|
-
|
|
|
|
457,930
|
|
|
Money market
fund
|
|
|
1,599,791
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,599,791
|
|
|
Restricted
cash
|
|
|
301,675
|
|
|
|
-
|
|
|
|
-
|
|
|
|
301,675
|
|
|
Total
assets
|
|
$
|
3,664,974
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,664,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issuable
|
|
$
|
-
|
|
|
$
|
1,569,100
|
|
|
$
|
-
|
|
|
$
|
1,569,100
|
|
|
Total
liabilities
|
|
$
|
-
|
|
|
$
|
1,569,100
|
|
|
$
|
-
|
|
|
$
|
1,569,100
|
|
Liabilities
measured at market value on a recurring basis include shares issuable resulting
from the Second Interim Award in the arbitration against NQCI. Until issued, the
shares will be marked to market in accordance with Emerging Issues Task Force
No. 00-19,
Accounting for
Derivative Financial Instruments Indexed to and Potentially Settled in, a
Company’s Own Stock
(“EITF 00-19”), with subsequent changes in fair value
recorded as non-operating change in fair value of shares issuable to our
statement of operations. The fair value of the shares will be measured using the
closing price of our common stock on the reporting date. See Note 10, “Shares
Issuable” below, for further additional information related to the shares
issuable.
The
following table sets forth the computation of basic and diluted loss per common
share:
|
|
|
Years
ended
|
|
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(22,987,273
|
)
|
|
$
|
(17,074,051
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average outstanding
shares of common stock
|
|
|
14,604,274
|
|
|
|
14,206,489
|
|
|
Loss per common
share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(1.57
|
)
|
|
|
(1.20
|
)
|
|
Diluted
|
|
$
|
(1.57
|
)
|
|
$
|
(1.20
|
)
|
Diluted
loss per common share for the years ended December 31, 2008 and 2007 does not
include the effect of stock options and warrants (see Note 17, “Stock Options
and Warrants”) since their effect would be anti-dilutive. Options and warrants
outstanding at December 31, 2008 and 2007 were approximately 4.4 million and 4.7
million, respectively. The 9,230,000 shares issuable discussed in Note 10,
“
Shares
Issuable,
”
below, have not been taken into consideration.
The
provision for income taxes for the years ended December 31, 2008 and 2007 are
summarized as follows (in thousands):
|
|
|
2008
|
|
|
2007
|
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
State
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
2
|
|
|
|
2
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
Total income tax
provision
|
|
$
|
2
|
|
|
$
|
2
|
|
Deferred
tax assets (liabilities) are comprised of the following (in
thousands):
|
|
|
2008
|
|
|
2007
|
|
|
Deferred tax
assets:
|
|
|
|
|
|
|
|
Stock based
compensation
|
|
$
|
5,342
|
|
|
$
|
3,611
|
|
|
Accrued
liability
|
|
|
1,145
|
|
|
|
124
|
|
|
Other
|
|
|
78
|
|
|
|
-
|
|
|
Total deferred tax
assets
|
|
|
6,565
|
|
|
|
3,735
|
|
|
Deferred tax
liabilities:
|
|
|
|
|
|
|
|
|
|
Fixed
assets
|
|
|
36
|
|
|
|
6
|
|
|
Prepaid
expenses
|
|
|
62
|
|
|
|
155
|
|
|
Total deferred tax
liabilities
|
|
|
98
|
|
|
|
161
|
|
|
|
|
|
6,467
|
|
|
|
3,574
|
|
|
Net operating
loss
|
|
|
9,660
|
|
|
|
4,834
|
|
|
Research & development
credits
|
|
|
1,446
|
|
|
|
599
|
|
|
|
|
|
17,573
|
|
|
|
9,007
|
|
|
Valuation
allowance
|
|
|
(17,573
|
)
|
|
|
(9,007
|
)
|
|
Net deferred tax assets or
(liabilities)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
Valuation Allowance on Deferred
Taxes
|
|
|
|
|
(in
thousands)
|
|
|
(in
thousands)
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Beginning
balance
|
|
$
|
9,007
|
|
|
$
|
1,917
|
|
|
Additions
|
|
|
8,566
|
|
|
|
7,090
|
|
|
Ending
balance
|
|
$
|
17,573
|
|
|
$
|
9,007
|
|
Rate
Reconciliation for the U.S. federal statuary rate and the effective tax
rate:
|
|
|
Years
ended
|
|
|
|
|
12/31/08
(%)
|
|
|
12/31/07
(%)
|
|
|
Federal statutory
rate
|
|
|
(34.00
|
)
|
|
|
(34.00
|
)
|
|
State and local income taxes, net
of federal tax benefits
|
|
|
(5.83
|
)
|
|
|
(5.83
|
)
|
|
Permanent
differences
|
|
|
5.81
|
|
|
|
0.68
|
|
|
Research & development
credits
|
|
|
(3.68
|
)
|
|
|
(2.72
|
)
|
|
Other
|
|
|
0.45
|
|
|
|
0.00
|
|
|
Effective tax
benefit
|
|
|
(37.25
|
)
|
|
|
(41.87
|
)
|
|
Valuation
allowance
|
|
|
37.25
|
|
|
|
41.87
|
|
|
|
|
|
0.00
|
|
|
|
0.00
|
|
Based
upon our development stage status and history of operating losses, realization
of our deferred tax assets does not meet the criteria under SFAS 109, and
accordingly a valuation allowance for the entire deferred tax asset amount has
been recorded at December 31, 2008 and 2007.
The
valuation allowance had an increase of $8.6 million and $7.1 million in 2008 and
2007, respectively.
Pursuant
to Sections 382 and 383 of the Internal Revenue Code, the utilization of net
operating losses and other tax attributes may be subject to substantial
limitations if certain ownership changes occur during a three-year testing
period (as defined). In 2008, we determined that an ownership change
occurred under Section 382 of the Internal Revenue Code. The utilization of our
federal net operating loss carryforwards, capital loss carryforwards and other
tax attributes related to CTHE will be limited to zero. Accordingly, we have
reduced our net operating loss, capital loss and minimum tax credit
carryforwards to the amount that we estimate that we would be able to utilize in
the future, if profitable, considering the above limitations.
At
December 31, 2008, we had net operating loss carry forwards for Federal purposes
of approximately $24.3 million which begin to expire in 2021. $24.3 million of
the Federal net operating loss carry forwards are also valid for state income
tax purposes and begin to expire in 2021.
In
addition, we had research and development tax credits for Federal and state
income tax purposes of approximately $826,000 and $620,000 respectively. The
federal credits begin to expire in 2026 and state credits do not expire for
California purposes.
During
the year ended December 31, 2007, we adopted FIN 48 which clarifies the
accounting for income taxes by prescribing the minimum threshold a tax position
is required to meet before being recognized in the financial statements as well
as guidance on de-recognition, measurement, classification and disclosure of tax
positions. The adoption of FIN 48 by us did not have an effect on our financial
condition or results of operations and resulted in no cumulative effect of
accounting change being recorded as of January 1, 2007.
Interest and penalties related to income tax matters are included in
the Company's income tax provision.
There was
no significant uncertain tax position identified during the year ended December
31, 2008.
We file income tax returns in the U.S. federal jurisdiction and
various state jurisdictions. Tax years that remain subject to examinations by
tax authorities are 2001 through 2007. There are no current income tax audits in
any jurisdictions for open tax years.
|
9.
|
PROPERTY AND
EQUIPMENT
|
Property
and equipment consist of the following at:
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Property
and equipment
|
|
$
|
474,402
|
|
|
$
|
299,100
|
|
|
Accumulated
depreciation
|
|
|
(136,848
|
)
|
|
|
(32,188
|
)
|
|
Property
and equipment, net
|
|
$
|
337,554
|
|
|
$
|
266,912
|
|
Depreciation expense for the years
ended December 31, 2008, and 2007, was $104,660 and $32,093,
respectively.
Pursuant
to the August 4, 2008, Second Interim Award, which stated that, if the
Technology Transaction is submitted to and approved by our stockholders,
9,230,000 shares of our common stock should be issued to NQCI to effectuate the
transaction, we accrued for the 9,230,000 shares of our common stock. As the
Second Interim Award states that we must issue 9,230,000 upon the closing of the
Technology Transaction and we have been unable to consummate such transaction,
such contingency is not within our control and we have therefore, recorded the
issuance as a liability, rather than as an equity issuance. As of December 31,
2008, we accrued for the 9,230,000 shares of our common stock to be issued to
NQCI in accordance with FASB 5,
Accounting for Contingencies
,
with the initial fair value of the shares measured on August 4, 2008, the date
of the Second Interim Award.
Until issued, the
shares will be marked to market in accordance with Emerging Issues Task Force
No. 00-19,
Accounting for
Derivative Financial Instruments Indexed to and Potentially Settled in, a
Company’s Own Stock
(“EITF 00-19”), with subsequent changes in fair value
recorded as non-operating change in fair value of shares issuable to our
statement of operations. The fair value of the shares will be measured using the
closing price of our common stock on the reporting date. The measured fair value
of $10,153,000 for the accrued 9,230,000 shares on August 4, 2008, the date of
the Second Interim Award, was accrued under “Shares issuable” and expensed to
“Research and development.” From marking to market, the fair value of the shares
issuable was revalued at $1,569,100 as of December 31, 2008. The resulting
non-operating change in fair value of $8,583,900 to the statement of operations
for the year ended December 31, 2008 was recognized as “Change in fair value of
shares issuable.” Stockholder approval and issuance of the shares are pending to
date.
We are in
the process of seeking stockholder approval for the issuance of the 9,230,000
shares of our common stock to effectuate the Technology Transaction. There can
be no assurance, that such stockholder approval will be obtained, whether shares
will be issued to NQCI or whether the SEC will declare effective the
registration statement registering the shares for resale. If the Technology
Transaction does not close, the arbitrator may issue alternative relief. In the
event of an alternative award, the above accrual may be adjusted and the accrual
or the actual settlement will be recorded to coincide with the alternate
award.
As of
February 22, 2008, we entered into a 5-year lease agreement and relocated our
corporate office to a location in Los Angeles, CA. The total lease payments will
be $1,096,878 over the lease term. As of December 31, 2008, our remaining total
lease payments are $957,614.
The
following is a schedule by years of future minimum lease payments required under
the 5-year corporate office lease as of December 31, 2008:
|
Year
ending December 31:
|
|
|
|
|
2009
|
|
$
|
215,859
|
|
|
2010
|
|
|
224,650
|
|
|
2011
|
|
|
233,528
|
|
|
2012
|
|
|
242,842
|
|
|
2013
|
|
|
40,735
|
( 1)
|
|
Total
minimum payments required
|
|
$
|
957,614
|
|
(1)
Initial term of the lease agreement ends February 2013
In
October 2008 we entered into a 5-year lease agreement through November 26, 2013,
for our new operating facility in Lake Forest, CA. The lease agreement includes
a tenant improvement allowance of $363,800 which 50% can be applied to rent
payments with the remaining 50% applied to tenant improvement and related
expenditures. As of December 31, 2008, we expended $87,658 in improvement and
related expenses which we are pending reimbursement in accordance to the tenant
improvement allowance. The $87,658 was recognized under “Tenant improvement
allowance receivable” as of December 31, 2008. The total lease payments,
including the 50% of the tenant improvement allowance applied to rent payments,
will be $1,367,507 over the lease term. As of December 31, 2008, our remaining
total lease payments are $1,340,828.
The
following is a schedule by years of future minimum lease payments required under
the 5-year operating facility lease as of December 31, 2008:
|
Year
ending December 31:
|
|
|
|
|
2009
|
|
|
135,837
|
|
|
2010
|
|
|
293,722
|
|
|
2011
|
|
|
303,994
|
|
|
2012
|
|
|
314,266
|
|
|
2013
|
|
|
293,009
|
(1)
|
|
Total
minimum payments required
|
|
$
|
1,340,828
|
|
(1)
Initial term of the lease agreement ends February 2013
Additionally,
we lease two corporate apartments, approximately 800 and 550 square feet,
expiring March 31, 2009 and April 18, 2009, respectively, located in Irvine, for
combined monthly rent of $3,765, which we plan to vacate after the expiration of
the leases.
All of
the space is in good condition and we expect it to remain suitable to meet our
needs for the foreseeable future. We intend to consolidate our offices and
sublease our current corporate office located in Los Angeles,
California.
|
12.
|
NON-CASH
TRANSACTIONS
|
During
the year ended December 31, 2008, there was a reversal of a non-cash liability
of $115,400.
Investing
and financing activities during the year ended December 31, 2007, that do not
have a direct impact on current cash flows have been excluded from the
statements of cash flows, as follows:
a)
Pre-merger Xcorporeal cancelled 200,000 shares of common stock pursuant to a
settlement agreement with one of our stockholders, and
b)
Immediately prior to the effectiveness of the merger, we caused a reverse split
of our common stock, whereby each 8.27 issued and outstanding shares of our
common stock were converted into one share of common stock.
Interest
income of $320,622 and $1,184,930 was reported for years ended December 31, 2008
and 2007, respectively.
On August
15, 2008, the arbitrator in the NQCI arbitration issued another interim award,
awarding NQCI a total of $1,871,430 in attorney’s fees and costs. Pursuant to
the award, we accrued the liability under “Accrued legal fees & licensing
expense” and captured the expenditure in “Other expenses” in the year ended
December 31, 2008.
|
15.
|
RELATED PARTY
TRANSACTION
|
In
connection with the contribution of the assets to our company, on August 31,
2006
we issued to
Consolidated National, LLC, or “CNL”, of which Terren Peizer, a member of our
Board of Directors, who beneficially owns 42.2% of our outstanding common stock
as of December 31, 2008, is the sole managing member and beneficial owner, an
aggregate of 9,600,000 shares of our common stock of which 6,232,596 shares are
still held by CNL.
Dr.
Victor Gura, our Chief Medical and Scientific Officer, owns 15,497,250 shares of
common stock of National Quality Care, Inc. (or approximately 20.9% of National
Quality Care, Inc.'s common stock outstanding as of January 31, 2009) with whom
we entered into the License Agreement. Such shares include 800,000 shares owned
by Medipace Medical Group, Inc., an affiliate of Dr. Gura (or approximately 1.1%
of NQCI's common stock outstanding as of January 31, 2009), and 250,000 shares
subject to warrants held by Dr. Gura which are currently exercisable (or
approximately 0.3% of NQCI's common stock outstanding as of January 31,
2009).
Pursuant
to a consulting agreement effective December 1, 2007, Daniel S. Goldberger, then
a director, provided consulting services to us as our interim Chief Executive
Officer. In consideration of the services, we paid Mr. Goldberger $15,000 per
month during the first two months and $12,500 per month thereafter during the
term of the consulting agreement. From execution through December 31, 2008, Mr.
Goldberger was compensated $152,500 for his services. Mr. Goldberger resigned as
interim Chief Executive Officer on October 6, 2008, and resigned as a member of
our Board of Directors on October 7, 2008, and remained a strategic consultant
to the Company through December 31, 2008.
Dr. Gura
maintains an office located in Beverly Hills, California. Pursuant to a
reimbursement agreement effective January 29, 2008, we reimburse 50% of the
rental and 50% of his monthly parking. The term of the agreement commenced on
April 23, 2007, the date of the office lease agreement, and continues until the
date on which he ceases to use the remote office to perform his duties as our
Chief Medical and Scientific Officer. From commencement through December 31,
2008, we reimbursed Dr. Gura $1,710 and $37,988 for 50% of the monthly parking
and rental, respectively.
On August
31, 2006, we entered into a Contribution Agreement with CNL. We issued 9,600,000
shares of common stock in exchange for (a) the right, title, and interest to the
name “Xcorporeal” and related trademarks and domain names, and (b) the right to
enter into a License Agreement with NQCI, dated September 1, 2006, pursuant to
which we obtained the exclusive rights to the technology relating to our kidney
failure treatment and other medical devices which, as listed under “Technology”
on the License Agreement, are “all existing and hereafter developed Intellectual
Property, Know-How, Licensor Patents, Licensor Patent Applications, Derivative
Works and any other technology, invented, improved or developed by Licensor, or
as to which Licensor owns or holds any rights, arising out of or relating to the
research, development, design, manufacture or use of (a) any medical device,
treatment or method as of the date of this Agreement, (b) any portable or
continuous dialysis methods or devices, specifically including any Wearable
Artificial Kidney and related devices, (c) any device, methods or treatments for
congestive heart failure, and (d) any artificial heart or coronary device.”
Operations was a shell corporation prior to the transaction. We valued the
License Agreement at the carry-over basis of $1,000. As consideration for being
granted the License, we agreed to pay to NQCI a minimum annual royalty of
$250,000, or 7% of net sales. Although we have asserted that NQCI’s breaches of
the License Agreement excused our obligation to make the minimum royalty
payments, we recorded $583,333 in royalty expenses covering the minimum
royalties from commencement of the License Agreement through December 31, 2008.
The License Agreement expires in 2105.
The
License Agreement also stipulates the reimbursement of reasonable and necessary
expenses incurred in the ordinary course of business consistent with past
practices (“Licensor Expenses”) until the closing or the termination of the
Merger Agreement. The Second Interim Award from the arbitration with NQCI states
that the License Agreement will remain in full force and effect until the
Technology Transaction closes or the arbitrator determines that it will never
close. Although we have contested its right to any further payments, NQCI has
made a claim for reimbursement of approximately $690,000 in alleged expenses
under the License Agreement which were accrued under “Accrued legal fees &
licensing expense” as of December 31, 2008. See Note 4, “Legal Proceedings”
above, for further additional information related to this License
Agreement.
|
17.
|
STOCK OPTIONS AND
WARRANTS
|
Incentive
Compensation Plan
On
October 12, 2007, we adopted the Xcorporeal, Inc. 2007 Incentive Compensation
Plan and the related form of option agreement that is substantially identical to
the 2006 Incentive Compensation Plan that was in effect at Operations
immediately prior to the merger.
The plan
authorizes the grant of stock options, restricted stock, restricted stock units,
and stock appreciation rights. There are 3,900,000 shares of common stock
authorized for issuance under to the 2007 Incentive Compensation Plan (subject
to adjustment in accordance with the provisions of the plan). The plan will
continue in effect for a term of up to ten years. As of December 31, 2008, there
were options to purchase 977,500 shares outstanding and 2,922,500 shares
available for issuance under the 2007 Incentive Compensation Plan.
On
October 12, 2007, we also assumed options to purchase up to 3,880,000 shares of
common stock that were granted by Operations under its 2006 Incentive
Compensation Plan, of which 980,000 have since been forfeited, canceled, or
expired, and therefore, options to purchase 2,900,000 shares remain
outstanding.
Stock
Options to Employees, Officers and Directors
The
Compensation Committee of our Board of Directors determines the terms of the
options granted, including the exercise price, the number of shares subject to
option, and the vesting period. Options generally vest over five years and have
a maximum life of ten years.
We
reported $4,704,039 and $3,721,485 in stock-based compensation expense for
employees, officers, and directors for the years ended December 31, 2008 and
2007, respectively.
All
compensation expense for stock options granted has been determined under the
fair value method using the Black-Scholes option-pricing model with the
following assumptions:
|
|
|
For
the years ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Expected
dividend yields
|
|
zero
|
|
|
zero
|
|
|
Expected
volatility
|
|
|
130-136
|
%
|
|
|
110-136
|
%
|
|
Risk-free
interest rate
|
|
|
3.53-3.81
|
%
|
|
|
4.18-4.68
|
%
|
|
Expected
terms in years
|
|
2.87-8.96
years
|
|
|
6.25-10
years
|
|
Warrants
and Stock Options to Non-Employees
During
the year ended December 31, 2008, there was no issuance of
warrants.
We reported $91,306 and $2,917,309 in
stock-based compensation expenses for consultants for the years ended December
31, 2008 and 2007, respectively.
Compensation
for options granted to non-employees has been determined in accordance with SFAS
No. 123R, EITF 96-18, and EITF 00-18, “Accounting for Equity Instruments that
are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services.” Accordingly, compensation is determined using the
fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measured.
For
options and warrants issued as compensation to non-employees for services that
are fully vested and non-forfeitable at the time of issuance, the estimated
value is recorded in equity and expensed when the services are performed and
benefit is received as provided by Financial Accounting and Standards Board
(“FASB”) Emerging Issues Task Force No. 96-18 “Accounting For Equity Instruments
That Are Issued To Other Than Employees For Acquiring or In Conjunction With
Selling Goods Or Services.”
All
charges for warrants granted have been determined under the fair value method
using the Black-Scholes option-pricing model with the following
assumptions:
|
|
|
For
the years ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Expected
dividend yields
|
|
zero
|
|
|
zero
|
|
|
Expected
volatility
|
|
|
130-136
|
%
|
|
|
117-136
|
%
|
|
Risk-free
interest rate
|
|
|
1.00-4.69
|
%
|
|
|
3.45-4.65
|
%
|
|
Expected
terms in years
|
|
0.88-8.63
years
|
|
|
4.80-9.62
years
|
|
The
following tables summarize information concerning outstanding options at
December 31, 2008 and 2007:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Stock
Options
|
|
|
Exercise Price
|
|
|
Outstanding
at December 31, 2005
|
|
|
-
|
|
|
$
|
-
|
|
|
Granted
|
|
|
1,600,000
|
|
|
|
5.00
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled
or forfeited
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding
at December 31, 2006
|
|
|
1,600,000
|
|
|
|
5.00
|
|
|
Granted
|
|
|
2,872,500
|
|
|
|
7.00
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled
or forfeited
|
|
|
(675,000
|
)
|
|
|
6.41
|
|
|
Outstanding
at December 31, 2007
|
|
|
3,797,500
|
|
|
|
6.26
|
|
|
Granted
|
|
|
905,000
|
|
|
|
2.75
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled
or forfeited
|
|
|
(825,000
|
)
|
|
|
6.52
|
|
|
Outstanding
at December 31, 2008
|
|
|
3,877,500
|
|
|
|
5.39
|
|
|
Exercisable
at December 31, 2006
|
|
|
-
|
|
|
|
-
|
|
|
Exercisable
at December 31, 2007
|
|
|
440,000
|
|
|
|
5.61
|
|
|
Exercisable
at December 31, 2008
|
|
|
1,000,500
|
|
|
$
|
5.94
|
|
The
following tables summarize information concerning outstanding warrants at
December 31, 2008 and 2007:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Outstanding
at December 31, 2005
|
|
|
-
|
|
|
$
|
-
|
|
|
Granted
|
|
|
454,221
|
|
|
|
2.72
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled
or forfeited
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding
at December 31, 2006
|
|
|
454,221
|
|
|
|
2.72
|
|
|
Granted
|
|
|
422,500
|
|
|
|
7.29
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled
or forfeited
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding
at December 31, 2007
|
|
|
876,721
|
|
|
|
4.92
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
(325,000
|
)
|
|
|
1.00
|
|
|
Cancelled
or forfeited
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding
at December 31, 2008
|
|
|
551,721
|
|
|
|
7.24
|
|
|
Exercisable
at December 31, 2006
|
|
|
454,221
|
|
|
|
2.72
|
|
|
Exercisable
at December 31, 2007
|
|
|
754,221
|
|
|
|
4.42
|
|
|
Exercisable
at December 31, 2008
|
|
|
544,221
|
|
|
$
|
7.22
|
|
The
weighted average remaining contractual life of the stock options that are
exercisable as of December 31, 2008, is approximately 8.24 years. The weighted
average remaining contractual life of the warrants that are exercisable as of
December 31, 2008, is approximately 2.52 years.
The
weighted average grant-date estimated fair value of stock options granted in
2008 and 2007 is approximately $0.5 million and $12.7 million or $0.60 and $5.79
per share, respectively. There were no warrants granted in 2008. The weighted
average grant-date estimated fair value of warrants granted in 2007 is
approximately $2.4 million or $5.63 per share. At December 31, 2008 and 2007,
the unamortized compensation charges related to outstanding stock options were
$10,091,802 and $17,818,693, respectively. At December 31, 2008 and 2007, the
unamortized compensation charges related to outstanding warrants were $224 and
$410,049, respectively. In 2008, we issued an aggregate of 112,215 shares of our
common stock pursuant to cashless exercise of warrants by three warrant
holders.
The
following table shows the change in unamortized compensation expense for stock
options and warrants issued to employees, officers, directors and non-employees
during the year ended December 31, 2008:
|
|
|
Stock
Options and
Warrants
|
|
|
Unamortized
Compensation
|
|
|
|
|
Outstanding
|
|
|
Expense
|
|
|
January
1, 2008
|
|
|
4,674,221
|
|
|
$
|
18,228,742
|
|
|
Granted
in the period
|
|
|
905,000
|
|
|
|
542,827
|
|
|
Forfeited
& Cancelled in the period
|
|
|
(825,000
|
)(1)
|
|
|
(2,392,494
|
)
|
|
Expensed
in the period
|
|
|
-
|
|
|
|
(6,287,049
|
)
|
|
Exercised
in the period
|
|
|
(325,000
|
)(2)
|
|
|
-
|
|
|
December
31, 2008
|
|
|
4,429,221
|
|
|
$
|
10,092,026
|
|
(1) One
of our directors voluntarily forfeited his 200,000 options on September 8, 2008.
Due to his continued services as a director on the date of his voluntary
forfeiture, this was treated as a cancellation and all unamortized expense of
$924,021 was fully recognized in the period. Subsequently, on October 7, 2008
the director resigned from our Board of Directors.
(2) The
cashless exercises of the granted 325,000 warrant shares resulted in the
issuance of an aggregate of 112,215 shares of our common stock.
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number
of
|
|
|
Average
|
|
|
|
|
Options
and
|
|
|
Exercise
|
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Stock Options and Warrants
|
|
|
|
|
|
|
|
Balance
at January 1, 2008
|
|
|
4,674,221
|
|
|
$
|
6.01
|
|
|
Granted
|
|
|
905,000
|
|
|
|
2.75
|
|
|
Exercised
|
|
|
(325,000
|
)
|
|
|
1.00
|
|
|
Forfeited
& Cancelled
|
|
|
(825,000
|
)
|
|
|
6.52
|
|
|
Balance
at December 31, 2008
|
|
|
4,429,221
|
|
|
$
|
5.62
|
|
|
18.
|
STOCKHOLDERS’ (DEFICIT)
EQUITY
|
Pursuant
to the terms of the arbitration interim award associated to the Technology
Transaction, we are planning to seek stockholder approval to issue 9,230,000
shares of our common stock directly to NQCI to effectuate the transaction. Upon
issuance and delivery of the proposed shares, NQCI will be our largest
stockholder, owning approximately 39% of our total outstanding
shares.
As a
result of our continued operating losses and the accrual for 9,230,000 shares,
discussed further in Note 4, “Legal Proceedings” and Note 10, “Shares Issuable”
above, “Total Stockholders’ (Deficit) Equity” has a negative balance with our
deficit accumulated during the development stage being greater than our
additional paid in capital as of December 31, 2008.
During
the year ended December 31, 2008, we issued an aggregate of 270,000 shares of
our common stock as compensation for consulting services rendered to us.
Pursuant to cashless exercises of warrants by three warrant holders, we issued
an aggregate of 112,215 shares of our common stock.
During
the year ended December 31, 2007, 200,000 shares of common stock were cancelled
pursuant to a settlement agreement with one of our stockholders. Immediately
prior to the effectiveness of the merger, we caused a reverse split of our
common stock, whereby each 8.27 issued and outstanding shares of our common
stock were converted into one share of common stock. Pursuant to a consulting
agreement, we issued 20,000 shares of our common stock.
|
19.
|
PRODUCT
DEVELOPMENT AGREEMENT
|
In July
2007, we entered into the Aubrey Agreement. The PAK will be designed for
intermittent hemodialysis or Continuous Renal Replacement Therapy (CRRT) in an
attended care setting as well as for treatments in a home setting. As of
December 31, 2008, Aubrey substantially completed its work and we intend to
terminate this agreement. At the inception of the Aubrey Agreement, total labor
and material costs over the term of the agreement were budgeted to amount to
approximately $5.1 million and as of December 31, 2008, the agreement was
substantially completed under the budgeted amount at a cost of $3.2
million.
|
20.
|
SUBSEQUENT EVENTS
(UNAUDITED)
|
Corporate Restructuring
The continuing delay in consummating
the Technology Transaction has significantly adversely affected our Company.
Accordingly, we have had to modify our activities and business. We have
instituted a variety of measures in an attempt to conserve cash and reduce our
operating expenses. Our actions included:
|
·
|
Reductions
in our labor force – On March 13, 2009, we gave notice of employment
termination to 19 employees. This represents a total work-force reduction
of approximately 73%. We paid accrued vacation benefits of approximately
$70,000 to terminated employees. The layoffs and our other efforts focused
on streamlining our operations designed to reduce our annual expenses by
approximately $3.5 million to a current operating burn rate of
approximately $200,000 per month.
|
|
·
|
Refocusing
our available assets and employee resources on the development of the
PAK.
|
|
·
|
Continuing
vigorous efforts to minimize or defer our operating
expenses.
|
|
·
|
Exploring
various strategic alternatives, which may include the license of certain
of our intellectual property rights, as a means to further develop our
technologies, among other possible transactions and
alternatives.
|
|
·
|
Intensifying
our search to obtain additional financing to support our operations and to
satisfy our ongoing capital requirements in order to improve our liquidity
position.
|
|
·
|
Continuing
to prosecute our patents and take other steps to perfect our intellectual
property rights.
|
In light of the unprecedented economic
slow down, lack of access to capital markets and prolonged arbitration
proceeding with NQCI, we were compelled to undertake the efforts outlined above
in order to remain in the position to continue our operations. We hope to be
able to obtain additional financing to meet our cash obligations as they become
due and otherwise proceed with our business plan. Our ability to execute on our
current business plan is dependent upon our ability to obtain equity or debt
financing, develop and market our products, and, ultimately, to generate
revenue. Unless we are able to raise financing sufficient to support our
operations and to satisfy our ongoing financing requirements, we will not be
able to develop any of our products, submit 510(k) notifications to the FDA,
conduct clinical trials or otherwise commercialize any of our products. We will
make every effort however, to continue the development of the PAK. As a result
of these conditions, there is substantial doubt about our ability to continue as
a going concern. Our ability to continue as a going concern is substantially
dependent on the successful execution of many of the actions referred to above,
on the timeline contemplated by our plans and our ability to obtain additional
financing. We cannot assure you that we will be successful now or in the future
in obtaining any additional financing on terms favorable to us, if at all. The
failure to obtain financing will have a material adverse effect on our financial
condition and operations.
We will continue to analyze the effects
of the events described above to determine if any subsequent changes are
required to the accounting treatment of such events.
Other
Considerations – Royalty and Other Payments Under the License
Agreement
As consideration for entering into the
License Agreement, we agreed to pay to NQCI a minimum annual royalty of
$250,000, or 7% of net sales. As a result of the transfer of the Technology to
us, we may be able to realize additional savings of not having to compensate
NQCI for any royalty payments accrued and not yet paid. Although we have
asserted that NQCI’s breaches of the License Agreement excused our obligation to
make the minimum royalty payments, we recorded $583,333 in royalty expenses,
covering the minimum royalties, from commencement of the License Agreement
through December 31, 2008. The License Agreement expires in 2105. The License
Agreement also requires us to reimburse NQCI’s reasonable and necessary expenses
incurred in the ordinary course of business consistent with past practices, or
the “Licensor Expenses”, until the closing or the termination of the Merger
Agreement. The Second Interim Award states that the License Agreement will
remain in full force and effect until the Technology Transaction closes or the
arbitrator determines that it will never close. Although we have contested its
right to any further payments, NQCI has made a claim for reimbursement of
approximately $690,000 in alleged expenses under the License Agreement as of
December 31, 2008. If we are able to acquire the Technology from NQCI, the
arbitrator has indicated that the License Agreement would be terminated
simultaneously with such acquisition. As a result of the Technology becoming our
sole and exclusive property, among other benefits, we would be able to
discontinue these royalty payments to NQCI, realize corresponding savings and we
should be able to realize additional savings of not having to reimburse NQCI for
any Licensor Expenses accrued and not yet paid.
Item
9.
Changes in and Disagreements With
Accountants on Accounting and
Financial
Disclosure.
None.
Item
9A(T).
Controls and
Procedures
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
Annual Report (December 31, 2008), as is defined in Rule 13a-15(e) promulgated
under the Exchange Act. Our disclosure controls and procedures are intended to
ensure that the information we are required to disclose in the reports that we
file or submit under the Exchange Act is (i) recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms and (ii)
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as the principal executive and financial
officers, respectively, to allow timely decisions regarding required
disclosures.
Based on
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this Annual Report, our
disclosure controls and procedures were effective.
Our
management has concluded that the financial statements included in this Annual
Report present fairly, in all material respects our financial position, results
of operations and cash flows for the periods presented in conformity with
generally accepted accounting principles.
It should
be noted that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the
system will be met. In addition, the design of any control system is based in
part upon certain assumptions about the likelihood of future events. Because of
these and other inherent limitations of control systems, there can be
no
assurance
that any design will succeed in achieving its stated goals under all potential
future conditions.
Management’s
Report on Internal Control Over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
our financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the
Exchange Act). Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of
America.
Our
internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our assets,
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America, and that our
receipts and expenditures are being made only in accordance with authorizations
of our management and directors, and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. Our management, with the
participation of our Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period covered by this
Annual Report, our internal control over financial reporting was
effective.
This
Annual Report does not include an audit report of our independent registered
public accounting firm regarding our internal control over financial reporting.
In addition, our management’s report on our internal control over financial
reporting is not subject to attestation by our registered public accounting firm
pursuant to temporary rules of the SEC that permit us to provide only our
management’s report in this Annual Report.
Changes
in Internal Control Over Financial Reporting
In
connection with the evaluation of our internal controls during our last fiscal
quarter, our Chief Executive Officer and Chief Financial Officer concluded that
there has been no change in our internal control over financial reporting during
the fourth quarter ended December 31, 2008, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Item
9B. Other
Information.
None.
PART
III
Item 10.
Directors
,
Executive Officers
and Corporate
Governance
The
names, ages and positions of our executive officers and directors, as of
December 31, 2008, are set forth below. Biographical information for each
of these persons who currently serves as our officer and/or director, as
provided to us by each respective individual also, is presented
below:
|
Name
|
|
Age
|
|
Position
|
|
Director
Since
|
|
|
|
|
|
|
|
|
|
Kelly
J. McCrann
|
|
53
|
|
Chairman
of the Board and Chief Executive Officer
|
|
2007
|
|
Robert
Weinstein
|
|
48
|
|
Chief
Financial Officer and Secretary
|
|
n/a
|
|
Victor Gura, M.D.
|
|
66
|
|
Chief
Medical and Scientific Officer
|
|
n/a
|
|
Terren
S. Peizer
|
|
49
|
|
Director
|
|
2007
|
|
Hans-Dietrich
Polaschegg, Ph.D.
|
|
66
|
|
Director
|
|
2007
|
|
Jay
A. Wolf
|
|
36
|
|
Director
|
|
2007
|
|
Marc
G. Cummins (1)
|
|
49
|
|
Director
|
|
2007
|
(1) Mr.
Cummins resigned as a member of our Board of Directors effective March 6,
2009.
Kelly J. McCrann
was appointed
as a member of Operations’ board of directors in August 2007. In October 2008,
Mr. McCrann was appointed our Chairman of the Board and Chief Executive Officer.
Mr. McCrann is a senior healthcare executive with extensive experience in board
governance, strategic leadership, profit and loss management and strategic
transactions. He was most recently Senior Vice President of DaVita Inc., where
he was responsible for all home based renal replacement therapies for the United
States’ second largest kidney dialysis provider. Prior to that, Mr. McCrann was
the Chief Executive Officer and President of PacifiCare Dental and Vision, Inc.
Mr. McCrann has held positions of increasing responsibility at Professional
Dental Associates, Inc., Coram Healthcare Corporation, HMSS, Inc. and American
Medical International. He is a graduate of the Harvard Business School and began
his career as a consultant for KPMG and McKinsey & Company.
Robert Weinstein
was appointed
our Chief Financial Officer in October 2007. He also serves on the board of
directors of Operations. He was appointed as Chief Financial Officer of
Operations in August 2007. Prior to joining us, Mr. Weinstein served as Vice
President, Director of Quality Control & Compliance of Citi Private Equity
Services (formerly BISYS Private Equity Services) New York, NY, a worldwide
private equity fund administrator and accounting service provider. In 2005, Mr.
Weinstein was the Founder, Finance & Accounting Consultant for EB
Associates, LLC, Irvington, NY, an entrepreneurial service organization. From
December 2002 to November 2004, Mr. Weinstein served as the Chief Financial
Officer for Able Laboratories, Inc., which filed Chapter 11 bankruptcy in July
2005. In 2002, he served as Acting Chief Financial Officer of Eutotech, Ltd.,
Fairfax, VA, a distressed, publicly traded early-stage technology transfer and
development company. Mr. Weinstein received his M.B.A., Finance &
International Business from the University of Chicago, Graduate School of
Business, and a B.S. in Accounting from the State University of New York at
Albany. Mr. Weinstein is a Certified Public Accountant (inactive) in the State
of New York.
Victor Gura, M.D.
became
Operations’ Chief Medical and Scientific Officer in December 2006, and became a
member of the Board in October 2006. He resigned as a director in October 2008.
Dr. Gura continues to serve as a member of our Board of Advisors. He served as
Chief Scientific Officer of National Quality Care, Inc. from 2005 to November
2006. He was formerly its Chairman of the Board, President and Chief Executive
Officer. Dr. Gura is board certified in internal medicine/nephrology. He has
been a director and principal stockholder of Medipace Medical Group, Inc. in Los
Angeles, California, since 1980. Dr. Gura has been an attending physician at
Cedars-Sinai Medical Center since 1984 and the medical director of Los Angeles
Community Dialysis since 1985. He also serves as a Clinical Assistant Professor
at UCLA School of Medicine. He was a fellow at the nephrology departments at Tel
Aviv University Medical School and USC Medical Center. Dr. Gura received his
M.D. from School of Medicine, Buenos Aires University.
Terren S. Peizer
served as our
Executive Chairman until October 2008. He became the Chairman of Operations’
board of directors in August 2006 and our Executive Chairman in August 2007.
From April 1999 to October 2003, Mr. Peizer served as Chief Executive Officer of
Clearant, Inc., which he founded to develop and commercialize a universal
pathogen inactivation technology. He served as Chairman of its board of
directors from April 1999 to October 2004 and a Director until February 2005.
From February 1997 to February 1999, Mr. Peizer served as President and Vice
Chairman of Hollis-Eden Pharmaceuticals, Inc. In addition, from June 1999
through May 2003 he was a Director, and from June 1999 through December 2000 he
was Chairman of the Board, of supercomputer designer and builder Cray Inc., and
remains its largest beneficial stockholder. Mr. Peizer has been the largest
beneficial stockholder and held various senior executive positions with several
technology and biotech companies. In these capacities he has assisted the
companies with assembling management teams, boards of directors and scientific
advisory boards, formulating business and financial strategies, investor and
public relations, and capital formation. Mr. Peizer has been a Director,
Chairman of the Board and Chief Executive Officer of Hythiam, Inc., a healthcare
services management company focused on delivering solutions for those suffering
from alcoholism and other substance dependencies, since September 2003. Mr.
Peizer has a background in venture capital, investing, mergers and acquisitions,
corporate finance, and previously held senior executive positions with the
investment banking firms Goldman Sachs, First Boston and Drexel Burnham Lambert.
He received his B.S.E. in Finance from The Wharton School of Finance and
Commerce.
Hans-Dietrich Polaschegg, PhD.
serves as a consultant to the medical device industry. From 1979 to 1994, Dr.
Polaschegg held positions of increasing responsibility at Fresenius AG, a global
leader in the manufacture of dialysis products. As Head of Research and
Development of the medical systems division of Fresenius, he designed three
hemodialysis machines. Dr. Polaschegg holds 88 medical technology patents and is
credited with inventing electrolyte balancing, thermal energy balancing, safe
dialysate filtering, blood volume monitoring by ultrasound density, and safe
on-line hemodiafiltration. He is a member of several international American and
European standard committees including Chairman of the Extracorporeal
Circulation and Infusion and Technology Committee. Dr. Polaschegg received his
PhD in Nuclear Physics from Technical University of Vienna in
Austria.
Jay A. Wolf
became a member of
Operations’ Board of Directors in November 2006. He has over a decade of
investment and operations experience in a broad range of industries. His
investment experience includes: senior and subordinated debt, private equity
(including leveraged transactions), mergers & acquisitions and public equity
investments. Since 2003, Mr. Wolf has served as a Managing Director of Trinad
Capital. From 1999 to 2003, he served as the Executive Vice President of
Corporate Development for Wolf Group Integrated Communications Ltd. where he was
responsible for our acquisition program. From 1996 to 1999, Mr. Wolf worked at
Canadian Corporate Funding, Ltd., a Toronto-based merchant bank in the senior
debt department and subsequently for Trillium Growth, the firm’s venture capital
Fund. He sits on the boards of Shells Seafood Restaurants, Prolink Holdings
Corporation, Optio Software, Inc. and Starvox Communications, Inc. Mr. Wolf
received a Bachelor of Arts from Dalhousie University.
There are no family relationships, as
defined in Item 401 of Regulation S-K, between any of the officers and/or
directors named above, and there is no arrangement or understanding between any
of the directors named above and any other person pursuant to which he or she
was elected as a director.
No executive officer or director has
been involved, directly or indirectly, in any bankruptcy or insolvency
proceeding of any kind.
No executive officer or
director is currently involved in any litigation nor has such person been
involved in any litigation that would have a bearing on any such person's
fitness or other ability to act and serve as our director or
officer.
Each of our directors serve for a term
of one year or until their respective successors are elected and qualified or
until removed from office in accordance with our bylaws. Our executive
officers are elected annually by the Board of Directors and serve at the
discretion of the Board of Directors.
Information
Regarding Committees
Our Board of Directors has established
three committees: an Audit Committee, a Compensation Committee and
a
Nominating
Committee. The Board of Directors has also adopted written corporate
governance guidelines for the Board and a written committee charter for each of
the Board’s committees, describing the authority and responsibilities delegated
to each committee by the Board. A copy of our Audit Committee Charter,
Compensation Committee Charter and Nominating Committee Charter can be found on
our website at http://www.xcorporeal.com.
Audit Committee
– As of
December 31, 2008, the Audit Committee consisted of Messrs. Cummins and Wolf,
with Mr. Wolf serving as the chairman; however, effective March 6, 2009, Mr.
Cummins resigned from his positions of a member of our Board of Directors and
our Audit Committee. The Board has determined that each of the members of the
Audit Committee is independent as defined under the applicable NYSE Amex
standards, meet the applicable requirements for audit committee members,
including Rule 10A-3(b) under the Securities and Exchange Act of 1934, as
amended, and, that Mr. Wolf qualifies as an “audit committee financial expert”
as such term is defined in Item 407(d)(5) of SEC Regulation S-K. In order
to fill the vacancy in the Audit Committee created by Mr. Cummins’ resignation,
effective March 26, 2009, Hans-Dietrich Polaschegg, a member of our Board of
Directors, was appointed to the Audit Committee.
As a result of Mr. Cummins’ resignation
from his position of a member of our Board of Directors, we are no longer in
compliance with Section 803(A)(1) of the Amex Company Guide because a majority
of the members of our Board of Directors are not independent
directors.
Compensation Committee
–
The Compensation Committee currently consists of Dr. Polaschegg and Mr. Wolf,
with Dr. Polaschegg serving as the chairman, each of whom is independent as
defined under the applicable NYSE Amex standards. The Compensation Committee
reviews and recommends to the Board of Directors for approval the compensation
of our executive officers.
Nominating Committee
–
As of December 31, 2008, the Nominating Committee currently consisted of Messrs.
Cummins and Polaschegg, with Mr. Cummins serving as the chairman; however, Mr.
Cummins resigned as a member of our Board of Directors effective March 6, 2009.
The Board has determined that each of the members of the Audit Committee is
independent as defined under the applicable NYSE Amex standards. The nominating
committee nominates new directors and oversees corporate governance
matters.
Changes
in Nominating Procedures
There
have not been any material changes to the procedures by which our stockholders
may recommend nominees to our Board of Directors since the end of our 2007
fiscal year.
Section
16(a) Beneficial Ownership reporting Compliance
Section 16(a) of the Exchange
Act requires any person who is our director or executive officer or
who beneficially holds more than 10% of any class of our securities which
have been registered with the SEC, to file reports of initial ownership and
changes in ownership with the SEC. These persons are also required under
the regulations of the SEC to furnish us with copies of all Section
16(a)
reports they file.
To our knowledge, based solely on our
review of the copies of the Section 16(a) reports furnished to us, all Section
16(a) filing
requirements
applicable to our directors, executive officers and holders of more than 10% of
any class of our registered securities were timely complied with during the
year ended December 31, 2008.
Upon
effectiveness of the merger between our company and pre-merger Xcorporeal, we
adopted a Code of Ethics that applies to all of our officers, directors and
employees, including our principal executive officer, principal financial
officer, principal accounting officer and controller, and others performing
similar functions. A copy of our Code of Ethics can be found under the
“Company”, sub-category “Corporate Governance”, section of our website at
www.xcorporeal.com, and any waiver from the Code of Ethics will be timely
disclosed on our website as will any amendments to the Code of
Ethics.
Item 11.
Executive
Compensation
COMPENSATION
DISCUSSION AND ANALYSIS
The
following discussion and analysis contains statements regarding future
individual and company performance targets and goals. These targets and goals
are disclosed in the limited context of our compensation programs and should not
be understood to be statements of management's expectations or estimates of
results or other guidance. We specifically caution investors not to apply these
statements to other contexts.
We
believe our long term success is dependent on a leadership team with the
integrity, skills, and dedication necessary to oversee a growing organization on
a day-to-day basis. In addition, the leadership must have the vision to
anticipate and respond to future market and regulatory developments. Our
executive compensation program is designed to enable us to attract, motivate and
retain a senior management team with the collective and individual abilities to
meet these challenges. The program's primary objective is to align executives'
efforts with the long term interests of stockholders by enhancing our
reputation, financial success and capabilities.
General
Executive Compensation Philosophy
We
compensate our executives, including our named executive officers who are
identified in the Summary Compensation Table, through a combination of base
salary, cash bonus incentives, long-term equity incentive compensation, and
related benefits. These components are designed, in aggregate, to be competitive
with comparable organizations and to align the financial incentives for the
executives with the short and long term interests of stockholders.
Our
Compensation Committee receives our management’s recommendations and then
discusses, reviews and considers management's recommendations with respect to
the compensation of those members of senior management whose compensation the
committee considers. The committee then makes its recommendation to the Board of
Directors which discusses and then decides raises, bonuses and
options. Although their advice may be sought and they may be questioned by
the committee, executive members of the Board of Directors do not participate in
the committee’s or the Board of Directors' discussion and vote. Prior to
the committee making its recommendations, the members of the Compensation
Committee have several discussions among themselves and meet to discuss, among
other things, the performance and contributions of each of the members of senior
management whose compensation they are considering as well as expectations (of
the individual for the year and the future and those of our company), results,
responsibilities, and desire to retain such executive. In addition, the
Compensation Committee may have conversations with certain others before making
its recommendations.
Our
philosophy is to provide a compensation package that attracts, motivates and
retains executive talent, and delivers rewards for superior performance as well
as consequences for underperformance. Specifically, our executive
compensation program is designed to:
|
·
|
provide
a competitive total compensation package that is competitive within the
medical device industry in which we compete for executive talent, and will
assist in the retention of our executives and motivate them to perform at
a superior level;
|
|
·
|
link
a substantial part of each of our executive’s compensation to the
achievement of our financial and operating objectives and to the
individual's performance;
|
|
·
|
provide
long-term incentive compensation that focuses our executives' efforts on
building stockholder value by aligning their interests with our
stockholders; and
|
|
·
|
provide
incentives that promote executive
retention.
|
Each
year, our management and the Board of Directors approve financial and
non-financial objectives for our company and our executive officers, which may
be reflected in our executive employment agreements and incentive compensation
plans. We design our incentive compensation plans to reward company-wide
performance. In addition, we also consider the individual performance of each
executive officer and other relevant criteria, such as the accomplishments of
the management team as a whole. In designing and administering our executive
compensation programs, we attempt to strike an appropriate balance among these
elements.
The major
compensation elements for our named executive officers are base salary,
performance-based bonuses, stock options, insurance benefits and perquisites.
Each of these elements is an integral part of and supports our overall
compensation objectives. Base salaries (other than increases), insurance
benefits and perquisites form stable parts of our executive officers’
compensation packages that are not dependent on our performance during a
particular year. We set these compensation elements at competitive levels so
that we are able to attract, motivate and retain highly qualified executive
officers. Consistent with our performance-based philosophy, we reserve the
largest potential compensation awards for performance- and incentive-based
programs. These programs include awards that are based on our financial
performance and provide compensation in the form of both cash and equity to
provide incentives that are tied to both our short-term and long-term
performance. Our performance-based bonus program rewards short-term and
long-term performance, while our equity awards, in the form of stock options,
reward long-term performance and align the interests of management with our
stockholders.
Board of Directors Determination of
Compensation Awards
Our
Compensation Committee recommends and the Board of Directors determines the
compensation awards to be made to our executive officers. Our Compensation
Committee recommends and the Board of Directors determines the total
compensation levels for our executive officers by considering several factors,
including each executive officer's role and responsibilities, how the executive
officer is performing against those responsibilities, our performance, and the
competitive market data applicable to the executive officers’
positions.
In
arriving at specific levels of compensation for executive officers, the Board of
Directors has relied on:
|
·
|
the
recommendations of our management;
|
|
·
|
benchmarks
provided by generally available compensation surveys;
and
|
|
·
|
the
experience of the members of our Board of Directors and their knowledge of
compensation paid by comparable companies or companies of similar size or
generally engaged in the healthcare services
business.
|
We seek
an appropriate relationship between executive pay and our corporate performance.
Our executive officers are entitled to customary benefits generally available to
all of our employees, including group medical, dental and life insurance and a
401(k) plan. We have employment agreements (which include severance
arrangements) with three of our key executive officers to provide them with the
employment security and severance deemed necessary to retain them.
Components
of Executive Compensation
Base salary.
Base salaries
provide our executive officers with a degree of financial certainty and
stability. We seek to provide base salaries sufficient to attract and retain
highly qualified executives. Whenever management proposes to enter into a new
employment agreement or to renew an existing employment agreement, the
Compensation Committee reviews and recommends, and the Board of Directors
determines, the base salaries for such persons, including our chief
executive officer and our other executive officers. Salaries are also reviewed
in the case of executive promotions or other significant changes in
responsibilities. In each case, the Compensation Committee and the Board of
Directors each take into account competitive salary practices, scope of
responsibilities, the results previously achieved by the executive and his or
her development potential.
On an
individual basis, a base salary increase, where appropriate and as contemplated
by the individual's employment agreement, is designed to reward performance
consistent with our overall financial performance in the context of competitive
practice. Performance reviews, including changes in an executive officer's scope
of responsibilities, in combination with general market trends determine
individual salary increases. Aside from contractually provided minimum cost of
living adjustments, no formulaic base salary increases are provided to the named
executive officers.
In
addition to complying with the executive compensation policy and to the
requirements of applicable employment agreements, compensation for each of the
our executive officers for 2008 was based on the executive's performance of his
or her duties and responsibilities, our performance, both financial and
otherwise, and the success of the executive in managing, developing and
executing our business development, sales and marketing, financing and strategic
plans, as appropriate. No merit raises or bonuses were approved or recommended
for our executive officers for 2008.
Bonus.
Executive officers are
eligible to receive cash bonuses based on the degree of our achievement of
financial and other objectives and the degree of achievement by each such
officer of his or her individual objectives. Within such guidelines the amount
of any bonus is discretionary.
The
primary purpose of our performance incentive awards is to motivate our
executives to meet or exceed our company-wide short-term performance objectives.
Our cash bonuses are designed to reward management-level employees for their
contributions to individual and corporate objectives. Regardless of our
performance, the Board of Directors retains the discretion to adjust the amount
of our executives’ bonus based upon individual performance or
circumstances.
At the
beginning of 2008, the management and the Board of Directors established
performance objectives for the payment of incentive awards to each of our named
executive officers and other senior management employees. Performance objectives
were based on corporate objectives established as part of the annual operating
plan process. Year end bonus awards were based on attainment of these
performance objectives as adjusted to reflect changes in our business and
industry throughout the year. Our Compensation Committee recommended and the
Board of Directors determined that bonuses in the amounts set forth in the
Summary Compensation Table below were appropriate. Each individual's bonus
was determined based upon the individual’s attainment of performance objectives
pre-established for that participant by the Board of Directors, senior
management, or the executive's supervisor. Our management and the Board of
Directors established our chief executive officer's performance
objectives.
In
general, each participant set for himself or herself (subject to his or her
supervisor’s review and approval or modification) a number of objectives for
2008 and then received a performance evaluation against those objectives as a
part of the year-end compensation review process. The individual objectives
varied considerably in detail and subject matter depending on the executive's
position. By accounting for individual performance, we were able to
differentiate among executives and emphasize the link between individual
performance and compensation.
Stock options.
Equity
participation is a key component of our executive compensation program. Under
the incentive compensation plan, we are permitted to grant stock options to our
officers, directors, employees and consultants. To date, stock options have been
the sole means of providing equity participation to executive officers. Stock
options are granted to our executive officers primarily based on the officer's
actual and expected contribution to our development. Options are designed to
retain our executive officers and motivate them to enhance our stockholder value
by aligning their financial interests with those of the our stockholders. Stock
options are intended to enable us to attract and retain key personnel and
provide an effective incentive for management to create stockholder value over
the long term since the option value depends on appreciation in the price of our
common stock.
Our
employees, including our executive officers, are eligible to participate in the
award of stock options under our 2007 Incentive Compensation Plan, as
amended. Option grant dates for newly hired or promoted officers and other
eligible employees have typically been approved on the first Board of Directors
meeting date following the date of employment or in the new position. Employees
who have demonstrated outstanding performance during the year may be awarded
options during or following the year. Such grants provide an incentive for
our executives and other employees to increase our market value, as represented
by our market price, as well as serving as a method for motivating and retaining
our executives.
In
determining to provide long-term incentive awards in the form of stock options,
the Board of Directors considered cost and dilution impact, market trends
relating to long-term incentive compensation and other relevant factors. The
Board of Directors determined that an award of stock options more closely aligns
the interests of the recipient with those of our stockholders because the
recipient will only realize a return on the option if our stock price increases
over the term of the option.
Perquisites and Other
Benefits.
We also provide other benefits to our executive
officers that are not tied to any formal individual or our performance criteria
and are intended to be part of a competitive overall compensation program. For
2008, these benefits were solely comprised of an automobile allowance paid to
Dr. Gura. We also offer 401(k) retirement plans and medical plans, for which our
executives are generally charged the same rates as all other of our
employees.
Chief
Executive Officer Compensation
Our
Compensation Committee, at least annually, reviews and recommends to the Board
of Directors the compensation of Kelly McCrann, our Chairman of the Board of
Directors and Chief Executive Officer, in accordance with the terms of his
employment agreement, as well as any variations in his compensation the
committee feels are warranted. Mr. McCrann, as a member of the Board of
Directors, does not participate in and abstains from all discussions and
decisions of the Board of Directors with regard to his compensation. The Board
of Directors believes that in the highly competitive healthcare industry in
which we operate, it is important that Mr. McCrann receive compensation
consistent with compensation received by chief executive officers of competitors
and companies in similar stages of development. Mr. McCrann was a Board of
Directors member and did not receive a bonus in 2008. His base salary for
2008 is currently $325,000, prorated for his October 2, 2008 start date. See
section captioned “Employment Agreements and Termination of Employment and
Change-in-Control Arrangements” below for a description of the material terms
and conditions of Mr. McCrann's employment agreement.
Severance
and Change of Control Arrangements
We have
entered into change of control employment agreements with certain of our named
executive officers, as described in “Employment Agreements.” These agreements
provide for severance payments to be made to our named executive officers if
their employment is terminated under specified circumstances following a change
of control. We also provide benefits to these executive officers upon qualifying
terminations. The agreements are designed to retain our named executive officers
and provide continuity of management in the event of an actual or threatened
change of control and to ensure that our named executive officers’ compensation
and benefits expectations would be satisfied in such event.
Internal
Revenue Code Limits on Deductibility of Compensation
Section 162(m)
generally disallows a Federal income tax deduction to public companies for
certain compensation in excess of $1 million paid to a corporation’s chief
executive officer or any of its four other most highly compensated executive
officers. Qualifying performance-based compensation will not be subject to the
deduction limit if certain requirements are met. The Board of Directors is of
the opinion that our incentive compensation plan has been structured to qualify
the compensation income deemed to be received upon the exercise of stock options
granted under the plans as performance-based compensation. The Board of
Directors will review with appropriate experts or consultants as necessary the
potential effects of Section 162(m) periodically and in the future may decide to
structure additional portions of compensation programs in a manner designed to
permit unlimited deductibility for federal income tax purposes.
We are not currently
subject to the limitations of Section 162(m) because no executive officers
received cash payments during 2008 in excess of $1 million. To the extent that
we may be subject to the Section 162(m) limitation in the future, the effect of
this limitation on earnings may be mitigated by net operating losses, although
the amount of any deduction disallowed under Section 162(m) could increase
alternative minimum tax by a portion of such disallowed amount. For information
relating to our net operating losses, see the consolidated financial statements
included in this Annual Report.
All
members of our Compensation Committee qualify as outside directors. The Board of
Directors considers the anticipated tax treatment to our company and our
executive officers when reviewing executive compensation and our compensation
programs. The deductibility of some types of compensation payments can depend
upon the timing of an executive's vesting or exercise of previously granted
rights. Interpretations of and changes in applicable tax laws and regulations,
as well as other factors beyond the Board of Directors’ control, also can affect
the deductibility of compensation.
While the
tax impact of any compensation arrangement is one factor to be considered, such
impact is evaluated in light of our overall compensation philosophy. The Board
of Directors will consider ways to maximize the deductibility of executive
compensation, while retaining the discretion it deems necessary to compensate
officers in a manner commensurate with performance and the competitive
environment for executive talent. From time to time, the Board of Directors may
award compensation to our executive officers which is not fully deductible if it
determines that such award is consistent with its philosophy and is in our and
our stockholders’ best interests, or as part of initial employment offers, such
as grants of nonqualified stock options.
Sections 280G
and 4999 of the Code impose certain adverse tax consequences on compensation
treated as excess parachute payments. An executive is treated as having received
excess parachute payments for purposes of Sections 280G and 4999 if he or
she receives compensatory payments or benefits that are contingent on a change
in the ownership or control of a corporation, and the aggregate amount of such
contingent compensatory payments and benefits equal or exceeds three times the
executive's base amount. If the executive's aggregate contingent compensatory
payments and benefits equal or exceed three times the executive's base amount,
the portion of the payments and benefits in excess of one times the base amount
are treated as excess parachute payments. Treasury Regulations define the events
that constitute a change in ownership or control of a corporation for purposes
of Sections 280G and 4999 and the executives subject to Sections 280G
and 4999.
An
executive's base amount generally is determined by averaging the executive's
Form W-2 taxable compensation from the corporation and its subsidiaries for
the five calendar years preceding the calendar year in which the change in
ownership or control occurs. An executive's excess parachute payments are
subject to a 20% excise tax under Section 4999, in addition to any
applicable federal income and employment taxes. Also, the corporation's
compensation deduction in respect of the executive's excess parachute payments
is disallowed under Section 280G. If we were to be subject to a change of
control, certain amounts received by our executives (for example, amounts
attributable to the accelerated vesting of stock options) could be excess
parachute payments under Sections 280G and 4999. We provide our chief
executive officer with tax gross up payments in event of a change of
control.
Section 409A
of the Code imposes distribution requirements on nonqualified deferred
compensation plans and arrangements. If a nonqualified deferred compensation
plan or arrangement fails to comply with Section 409A of the Code, an
executive participating in such plan or arrangement will be subject to adverse
tax consequences (including an additional 20% income tax on amounts deferred
under the plan or arrangement). Our nonqualified deferred compensation plans and
arrangements for our executive officers are intended to comply with
Section 409A of the Code, or to be exempt from the requirements of
Section 409A of the Code.
SUMMARY
COMPENSATION TABLE
The
following table sets forth the total compensation received by our named
executive officers during the fiscal years ended December 31, 2008 and
2007:
|
Name and Principal
Position
|
|
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)(1)
|
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
|
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
|
Kelly
J. McCrann,
|
|
2008
|
|
|
80,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,411
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
97,411
|
|
|
Chairman
& CEO (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
Weinstein,
|
|
2008
|
|
|
286,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
449,346
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
735,846
|
|
|
CFO
& Secretary
|
|
2007
|
|
|
100,128
|
|
|
|
21,400
|
|
|
|
—
|
|
|
|
175,564
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
297,092
|
|
|
Victor
Gura
,
|
|
2008
|
|
|
437,600
|
|
|
|
—
|
|
|
|
—
|
|
|
|
858,246
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,000
|
(3)
|
|
|
1,313,846
|
|
|
Chief
Medical &
|
|
2007
|
|
|
455,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
855,901
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,500
|
(3)
|
|
|
1,330,401
|
|
|
Scientific
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel S.
Goldberger
,
|
|
2008
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
152,500
|
(5)
|
|
|
152,500
|
|
|
Former
President,
|
|
2007
|
|
|
219,898
|
|
|
|
—
|
|
|
|
—
|
|
|
|
238,457
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
458,355
|
|
|
COO
& Interim CEO (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents
the dollar amount recognized for financial statement reporting purposes
with respect to fiscal years 2008 and 2007 in accordance with
SFAS 123(R), and includes amounts from awards granted in and prior to
2008 and 2007. Additional information concerning the Company’s
accounting for stock awards may be found in Note 17, “Stock Options and
Warrants” to our financial statements filed as part of this Annual
Report.
|
|
(2)
|
Mr.
McCrann was appointed as the Chairman of the Board of Directors and our
CEO on October 2, 2008.
|
|
(3)
|
Represents
auto allowance that Dr. Gura received in the respective fiscal year
pursuant to his employment agreement
.
|
|
(4)
|
Mr.
Goldberger resigned as our President and COO on August 10, 2007. Mr.
Goldberger also served as our interim CEO from January to October 2008 and
was paid as an independent
consultant.
|
|
(5)
|
Represents
compensation that Mr. Goldberger received pursuant to his consulting
agreement as an independent consultant while serving as our interim CEO
from January to October 2008 and providing consulting services thereafter
until December 31, 2008.
|
GRANTS
OF PLAN-BASED AWARDS FOR FISCAL YEAR 2008
The
following table presents information regarding grants of plan-based awards to
our named executive officers during the fiscal year ended December 31,
2008.
|
|
|
|
|
Estimated Possible Payouts
Under
Non-Equity Incentive Plan
Awards(1)
|
|
|
Estimated Future Payouts
Under
Equity Incentive Plan Awards(2)
|
|
|
All
Other
Stock
Awards:
Number
|
|
|
All
Other
Option
Awards
Number
of
|
|
|
Exercise
|
|
|
Grant
Date
Fair
Value of
|
|
|
Name
|
|
Grant Date
|
|
Threshold
($)
|
|
|
Target
($)
|
|
|
Maximum
($)
|
|
|
Threshold
($)
|
|
|
Target
($)
|
|
|
Maximum
($)
|
|
|
of
Shares of
Stock
or Units
(#)
|
|
|
Securities
Under-
lying
Option
(#)
|
|
|
or Base
Price of
Option
Awards
($/Sh)
|
|
|
Stock
and
Option
Awards
($)(1)
|
|
|
Kelly J.
McCrann,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chairman
& CEO
|
|
10/02/08
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
700,000
|
|
|
|
1.50
|
|
|
|
282,646
|
|
|
(1)
|
Represents
the total grant date fair value determined for financial statement
reporting purposes in accordance with SFAS 123(R) for awards granted in
2008.
|
OUTSTANDING
EQUITY AWARDS AT LAST FISCAL YEAR-END
The
following table sets forth all outstanding equity awards held by our named
executive officers as of December 31, 2008:
|
|
|
|
OPTION AWARDS
|
|
|
Name
|
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
|
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
|
|
|
Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
|
|
|
|
Option
Exercise
Price ($)
|
|
|
Option
Expiration
Date
|
|
|
Kelly
J. McCrann,
Chairman
of the
Board
& CEO
|
|
|
—
|
|
|
|
700,000
|
|
|
|
—
|
|
|
|
1.50
|
|
|
10/02/18
|
|
|
Robert
Weinstein,
CFO
& Secretary
|
|
|
75,000
|
|
|
|
225,000
|
|
|
|
—
|
|
|
|
7.00
|
|
|
08/10/17
|
|
|
Victor
Gura
,
Chief
Medical &
Scientific
Officer
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
—
|
|
|
|
5.00
|
|
|
11/14/16
|
|
|
Daniel S.
Goldberger
,
Former
President, COO & Interim CEO (1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
(1)
|
Mr.
Goldberger resigned as our President and COO on August 10, 2007. From
January to October 2008, Mr. Goldberger served as our interim CEO. Mr.
Goldberger also resigned from his position as a member of the Board of
Directors in October 2008. On September 8, 2008, Mr. Goldberger
voluntarily forfeited his remaining 200,000
options.
|
OPTIONS EXERCISES AND STOCK VESTED IN
2008
No
options were exercised during the fiscal year ended December 31, 2008. During
the fiscal year ended December 31, 2008, an aggregate of 1,544,721 shares of our
common stock underlying our outstanding options, warrants, stock awards,
restricted stock unit awards and similar instruments vested. We granted options
to purchase an aggregate of 905,000 shares of our common stock and options to
purchase an aggregate of 825,000 shares of our common stock were forfeited by
the departed employees and consultants whose services were terminated during the
fiscal year ended December 31, 2008.
PENSION
BENEFITS
We did
not have a defined benefit pension plan or a defined contribution plan and the
named executive officers received no benefits under any retirement plan during
the year ended December 31, 2008.
NON-QUALIFIED
DEFERRED COMPENSATION
We had no
deferred compensation plans during the year ended December 31,
2008.
Employment
Agreements and Termination of Employment and Change-in-Control
Arrangements
The
employment agreements for Dr. Victor Gura, Kelly McCrann, and Robert Weinstein
were in effect during the year ended December 31, 2008, with only Dr. Gura’s and
Mr. Weinstein’s employment agreements in effect during the year ended December
31, 2007.
Chief
Executive Officer
-
On
October 6, 2008, we entered into an employment agreement with Kelly J. McCrann,
effective October 2, 2008, for a term of two years at an initial annual base
salary of $325,000. Mr. McCrann is eligible to receive discretionary bonuses
based on achieving designated individual goals and milestones, overall
performance and profitability. Additionally, Mr. McCrann was granted 700,000
stock options as an exercise price of $1.50 per share under our 2007 Incentive
Compensation Plan, which vests 25% on each of the first, second, third and
fourth anniversaries of the grant date, with anti-dilution protections. He will
be included in our medical, dental, disability and life insurance, pensions and
retirement plans, and other benefit plans and programs. If Mr. McCrann is
terminated without good reason or resigns for good reason, as defined in his
employment agreement, we will be obligated to pay Mr. McCrann twelve month's
base salary (at the rate in effect at the time of termination).
Chief
Financial Officer - On August 10, 2007, Robert Weinstein entered into an
employment agreement with Operations with an initial term of three years, with
automatic one year renewals, which agreement has been assumed by us. His initial
base salary was $275,000. Mr. Weinstein will be entitled to receive an annual
bonus at the discretion of the Board of Directors based on performance goals and
targeted at 50% of his annual salary. In addition to any perquisites and other
fringe benefits provided to other executives, Mr. Weinstein received options to
purchase 300,000 shares of common stock under the Operations 2006 Incentive
Compensation Plan at an exercise price of $7.00 per share and vesting at a rate
of 25% per year, which options have been assumed under our 2007 Incentive
Compensation Plan. In the event Mr. Weinstein is terminated by us without good
cause or he resigns for good reason, as such terms are defined in his employment
agreement, we will be obligated to pay Mr. Weinstein in a lump sum an amount
equal to 12 months salary (at the rate in effect at the time of termination) and
benefits.
Chief
Medical and Scientific Officer - On November 30, 2006, Victor Gura, M.D. entered
into an employment agreement with Operations for a term of four years, which
agreement has been assumed by us. In October 2007, Dr. Gura became our Chief
Medical and Scientific Officer, which position he has held with Operations since
December 2006. Dr. Gura was a member of our Board of Directors from
October 2007 and until October 2008, and was appointed as a member of the board
of directors of Operations in October 2006. His initial annual base
salary was $420,000. Dr. Gura is eligible to receive discretionary bonuses
on an annual basis targeted at 50% of his annual salary. Additionally, Dr. Gura
was granted 500,000 stock options at an exercise price of $5 per share under the
Operations 2006 Incentive Compensation Plan. These options, which were assumed
under our 2007 Incentive Compensation Plan, will vest 25% on each of the first,
second, third, and fourth anniversaries of the original grant date and expire
November 14, 2011. He will also be granted options to purchase an additional
500,000 shares of our common stock upon FDA approval of our first product. Dr.
Gura is eligible to receive reimbursement of reasonable and customary relocation
expenses as well as health, medical, dental insurance coverage and insurance for
accidental death and disability. In the event he is terminated by us without
good cause or if he resigns for good reason, as such terms as are defined in his
employment agreement, we will be obligated to pay Dr. Gura in a lump sum an
amount equal to two year’s salary (at the rate in effect at the time of
termination) plus 200% of the targeted bonus for the year in which termination
occurs. In addition all stock options granted to Dr. Gura will vest
immediately.
Dr.
Gura’s agreement provides for medical insurance and disability benefits,
severance pay if his employment is terminated by us without cause or due to
change in our control before the expiration of the agreement, and allows for
bonus compensation and stock option grants as determined by our Board of
Directors. Dr. Gura’s employment agreement also contains a restrictive covenant
preventing competition with us and the use of confidential business information,
except in connection with the performance of his duties for us, for a period of
two years following the termination of his employment with us.
Confidentiality
Agreements
Each of
our employees is required to enter into a confidentiality agreement. These
agreements provide that for so long as the employee works for us, and after the
employee’s termination for any reason, the employee may not disclose in any way
any of our proprietary confidential information.
Limitation
on Liability and Indemnification Matters
Our
certificate of incorporation and amended and restated bylaws limit the liability
of directors and executive officers to the maximum extent permitted by Delaware
law. The limitation on our directors’ and executive officers’ liability may not
apply to liabilities arising under the federal securities laws. Our certificate
of incorporation and amended and restated bylaws provide that we shall indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to our directors and executive officers pursuant to our certificate of
incorporation and amended and restated bylaws, we have been informed that in the
opinion of the SEC such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
At
present, there is no pending litigation or proceeding involving any of our
directors, officers, employees or agents where indemnification will be required
or permitted. We are not aware of any threatened litigation or proceeding that
might result in a claim for such indemnification.
COMPENSATION
OF DIRECTORS
Compensation.
Some of our
directors have been granted stock options to purchase shares of our common
stock. Our directors also receive cash compensation for their services as
directors. All members of the Board of Directors receive reimbursement for
actual travel-related expenses incurred in connection with their attendance at
meetings of the Board of Directors or its committees.
Options.
Directors are
eligible to receive options under our 2007 Incentive Compensation
Plan.
The
following table provides information regarding compensation that was paid to the
individuals who served as our directors during the year ended December 31, 2008.
Except as set forth in the table, directors did not earn nor receive cash
compensation or compensation in the form of stock awards, stock option awards or
any other form.
The
following table reflects the compensation of our directors for our fiscal year
ended December 31, 2008:
|
Name
|
|
Fees Earned
or Paid in
Cash ($)
|
|
|
Stock
Awards ($)
|
|
|
Option
Awards
($) (1)(7)
|
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
|
|
Change in
Pension Value and
Nonqualified
Deferred
Compensation
Earnings ($)
|
|
|
All Other
Compensation ($)
|
|
|
Total ($)
|
|
|
Terren
S. Peizer
|
|
|
281,250
|
(2)
|
|
|
—
|
|
|
|
822,582
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,103,832
|
|
|
Kelly
J. McCrann
|
|
|
—
|
|
|
|
—
|
|
|
|
120,960
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
120,960
|
|
|
Hans-Dietrich
Polaschegg
|
|
|
60,000
|
(3)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
60,000
|
|
|
Jay
A. Wolf
|
|
|
—
|
|
|
|
—
|
|
|
|
120,818
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
120,818
|
|
|
Daniel
Goldberger (4)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Dr.
Victor Gura (5)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Marc
G. Cummins (6)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
(1)
|
Represents
the dollar amount recognized for financial statement reporting purposes
with respect to fiscal year 2008 in accordance with SFAS 123(R), and
includes amounts from awards granted in and prior to
2008.
|
|
(2)
|
Represents
compensation that Mr. Peizer received for his services as Executive
Chairman. Mr. Peizer was paid pursuant to his Executive Chairman Agreement
and as an independent consultant. Mr. Peizer served as our Executive
Chairman until October 2008.
|
|
(3)
|
Represents
compensation that Dr. Polaschegg received for his research and development
consulting services. Dr. Polaschegg was compensated in accordance with his
month to month consulting agreement and paid as an independent
consultant.
|
|
(4)
|
On
October 6, 2008, Mr. Goldberger resigned as our interim CEO, and on
October 7, 2008, Mr. Goldberger resigned as a member of the Board. Other
than the options granted to him, which he voluntarily forfeited on
September 8, 2008, Mr. Goldberger did not receive any other compensation
for his services as director.
|
|
(5)
|
On
October 7, 2008, Dr. Gura resigned as a member of our Board of
Directors. Dr. Gura did not receive any compensation or options for his
services as a director.
|
|
(6)
|
Mr.
Cummins resigned as a member of our Board of Directors effective March 6,
2009.
|
|
(7)
|
The
aggregate number of option awards outstanding as of December 31, 2008 for
each of our directors serving in such capacity on such date are as
follows: Mr. Peizer’s - 280,000 stock options which were vested and
exercisable within 60 days of March 23, 2009 and 420,000 stock options
which were unvested and unexercisable of such date, Mr. McCrann - 20,000
stock options which were vested and exercisable within 60 days of March
23, 2009 and 780,000 stock options which were unvested and unexercisable
of such date, Dr. Polaschegg - 0, Mr. Wolf - 40,000 stock options which
were vested and exercisable within 60 days of March 23, 2009 and 60,000
stock options which were unvested and unexercisable of such date, Mr.
Goldberger - 0, Dr. Gura - 250,000 stock options which were vested and
exercisable within 60 days of March 23, 2009 and 250,000 stock options
which were unvested and unexercisable of such date, and Mr. Cummins -
0.
|
Compensation
Committee Interlocks and Insider Participation
Not required for smaller reporting
companies.
Compensation
Committee Report
Not required for smaller reporting
companies.
Item 12.
Security Ownership and Certain
Beneficial Owners and Management and Related Stockholder
Matters
Security Ownership of
Certain
Beneficial
Owners and Management
The
following table sets forth certain information regarding the shares of common
stock beneficially owned as of March 23, 2009 by: (i) each person known to
us to be the beneficial owner of more than 5% of our common stock,
(ii) each of our directors, (iii) our chief executive officer and the
two most highly compensated executive officers other than the chief executive
officer, who were serving as executive officers at the end of our last fiscal
year (collectively, the “named executive officers”) and other executive officers
named in the Summary Compensation Table set forth in the “Executive
Compensation” section, and (iv) all such directors and executive officers
as a group.
|
Name and Address
of Beneficial Owner (1)
|
|
Title of Class of Shares
Owned
|
|
Amount and Nature of
Beneficial Ownership
|
|
|
Percent of
Class
|
|
|
Terren
S. Peizer (2)
|
|
common
stock
|
|
|
6,512,596
|
|
|
|
43.3
|
%
|
|
Jay
A. Wolf (3)
|
|
common
stock
|
|
|
397,143
|
|
|
|
2.7
|
%
|
|
Victor
Gura (4)
|
|
common
stock
|
|
|
250,000
|
|
|
|
1.7
|
%
|
|
Kelly
J. McCrann (5)
|
|
common
stock
|
|
|
120,000
|
|
|
|
*
|
|
|
Robert
Weinstein (6)
|
|
common
stock
|
|
|
95,000
|
|
|
|
*
|
|
|
Hans-Dietrich
Polaschegg
|
|
common
stock
|
|
|
—
|
|
|
|
—
|
|
|
Marc
G. Cummins (7)(8)
|
|
common
stock
|
|
|
1,557,158
|
|
|
|
10.6
|
%
|
|
All
directors and named executive officers
as
a group (7 persons)
|
|
common
stock
|
|
|
8,931,897
|
|
|
|
58.9
|
%
|
|
*
|
Represents
beneficial ownership of less than
1%.
|
|
(1)
|
Unless
otherwise indicated, the address of all of the above named persons is c/o
Xcorporeal, Inc., 12121 Wilshire Blvd., Suite 350, Los Angeles, California
90025.
|
|
(2)
|
Includes
6,232,596 shares held of record by Consolidated National, LLC, of which
Mr. Peizer is the sole managing member and beneficial owner. As of
December 31, 2008, shares of our common stock underlying 280,000 stock
options granted to Mr. Peizer’s were vested and exercisable within 60 days
of March 23, 2009.
|
|
(3)
|
Includes
357,143 shares held of record by Trinad Capital Master Fund Ltd. (the
“Master Fund”), that may be deemed to be beneficially owned by Trinad
Management, LLC, the investment manager of the Master Fund and Trinad
Capital LP; a controlling stockholder of the Master Fund; Trinad Advisors
GP, LLC, the general partner of Trinad Capital LP; and Jay Wolf a director
of the issuer and a managing director of Trinad Management, LLC and a
managing director of Trinad Advisors GP, LLC. Mr. Wolf disclaims
beneficial ownership of the reported securities except to the extent of
his pecuniary interest therein. Also includes 40,000 shares of our common
stock underlying stock options issued to Mr. Wolf’s which were vested and
exercisable within 60 days of March 23,
2009.
|
|
(4)
|
Represents
shares of our common stock underlying 250,000 stock option granted to Dr.
Gura which were vested and exercisable within 60 days of March 23,
2009.
|
|
(5)
|
Includes
shares of our common stock underlying 20,000 stock options granted to Mr.
McCrann which were vested and exercisable within 60 days of March 23,
2009.
|
|
(6)
|
Includes
shares of our common stock underlying 75,000 stock options granted to Mr.
Weinstein which were vested and exercisable within 60 days of March 23,
2009.
|
|
(7)
|
Mr.
Cummins resigned as a member of our Board of Directors effective March 6,
2009.
|
|
(8)
|
Represents
shares held of record by Prime Logic Capital, LLC, CPS Opportunities, and
GPC LXI, LLC. Mr. Cummins is a Managing Partner of Prime Capital, LLC. He
disclaims beneficial ownership of the reported securities except to the
extent of his pecuniary interest therein. Excludes warrants to purchase
150,000 shares held by OGT, LLC, an affiliate of Prime Logic, over which
Mr. Cummins disclaims beneficial ownership except to the extent of his
pecuniary interest therein.
|
Unless
otherwise indicated, we believe that all persons named in the above table have
sole voting and investment power with respect to all shares of our common stock
beneficially owned by them. A person is deemed to be the beneficial owner of
securities which may be acquired by such person within 60 days from the date on
which beneficial ownership is to be determined, upon the exercise of options,
warrants or convertible securities. Each beneficial owner’s percentage ownership
is determined by assuming that options, warrants and convertible securities that
are held by such person (but not those held by any other person) and which are
exercisable, convertible or exchangeable within such 60 day period, have been so
exercised, converted or exchanged.
Item 13.
Certain
Relationships
and
Related Transactions
and Director
Independence.
Certain
Relationships and Related Transactions
Related-party
transactions have the potential to create actual or perceived conflicts of
interest between our company and our directors and executive officers or their
immediate family members. The Board reviews such matters as they pertain to
related-party transactions as defined by Item 404(b) of the SEC’s
Regulation S-K. In deciding whether to continue to allow these
related-party transactions involving a director, executive officer, or their
immediate family members, the Board considered, among other
factors:
|
·
|
information
about the services proposed to be or being provided by or to the related
party or the nature of the
transactions;
|
|
·
|
the
nature of the transactions and the costs to be incurred by our company or
payments to us;
|
|
·
|
an
analysis of the costs and benefits associated with the transaction and a
comparison of comparable or alternative services that are available to us
from unrelated parties;
|
|
·
|
the
business advantage that we would gain by engaging in the
transaction; and
|
|
·
|
an
analysis of the significance of the transaction to our company and to the
related party.
|
The Board
determined that the related party transactions disclosed herein are on terms
that are fair and reasonable to us, and which are as favorable to our company as
would be available from non-related entities in comparable transactions. The
Board believes that there is a business interest to our company in supporting
the transactions and the transactions meet the same standards that we apply to
comparable transactions with unaffiliated entities. Although the aforementioned
controls are not written, each determination was made by the Board and reflected
in its minutes.
Below are
the transactions that occurred since the beginning of the fiscal year 2008, or
any currently proposed transactions, in which, to our knowledge, we were or are
a party, in which the amount involved exceeded $120,000, and in which any of our
directors, director nominees, executive officers, holders of more than 5% of any
class of our common stock, or any member of the immediate family of any of the
foregoing persons had or will have a direct or indirect material
interest.
In
connection with the contribution of the assets to our company, on August 31,
2006
we issued to
CNL, of which Terren Peizer, our former Executive Chairman and current member of
the Board, who beneficially owns 43.3% of our outstanding common stock, is the
sole managing member and beneficial owner, an aggregate of 9,600,000 shares of
common stock of which 6,232,596 shares are still held by CNL.
Mr.
Peizer served until October 2008 as our Executive Chairman pursuant to his
Executive Chairman Agreement dated August 10, 2007. In consideration of his
services, commencing July 1, 2007, we paid Mr. Peizer base compensation of
$450,000 per annum with a signing bonus of $225,000. From January 1, 2008
through October 2008, Mr. Peizer received $281,250 for his services under the
agreement. Mr. Peizer voluntarily resigned from his position as Executive
Chairman in October 2008 and remains a member of our Board of
Directors.
Dr. Gura,
our Chief Medical and Scientific Officer, owns 15,497,250 shares of common stock
of NQCI (or approximately 20.9% of NQCI’s common stock outstanding as of January
31, 2009) with whom we entered into the License Agreement. Such shares include
800,000 shares owned by Medipace Medical Group, Inc., an affiliate of Dr. Gura
(or approximately 1.1% of NQCI’s common stock outstanding as of January 31,
2009), and 250,000 shares subject to warrants held by Dr. Gura which are
currently exercisable (or approximately 0.3% of NQCI’s common stock outstanding
as of January 31, 2009).
Pursuant
to a consulting agreement effective December 1, 2007, Daniel S. Goldberger, a
former member of our Board of Directors, provided consulting services as our
interim Chief Executive Officer. In consideration of the services, we paid Mr.
Goldberger $15,000 per month during the first two months and $12,500 per month
thereafter during the term of the consulting agreement. From the date of his
consulting agreement through September 30, 2008, Mr. Goldberger was compensated
$130,000 for his services. Mr. Goldberger resigned as interim Chief Executive
Officer on October 6, 2008, and as a director on October 7, 2008, and remained
as a strategic consultant to our company through the end of 2008. Mr. Goldberger
received an additional $22,500 in compensation for such services.
Dr. Gura
maintains an office located in Beverly Hills, California. Pursuant to a
reimbursement agreement effective January 29, 2008, we reimburse 50% of the
rental and 50% of his monthly parking. The term of the agreement commenced on
April 23, 2007, the date of the office lease agreement, and continue until the
date on which he ceases to use the remote office to perform his duties as our
Chief Medical and Scientific Officer. From commencement through December 31,
2008, we reimbursed our Chief Medical and Scientific Officer $1,710 and $37,988
for 50% of the monthly parking and rental, respectively.
After review of all of the relevant
transactions or relationships of each director and his family members, our
Board of Directors has determined that Messrs. Cummins, Polaschegg and Wolf are
“independent” as that term is defined under the applicable NYSE Amex standards,
including that each such director is free of any relationship that would
interfere with his individual exercise of independent judgment. Each of the
members of our Audit Committee, Compensation Committee and Nominating Committee
were determined by the Board of Directors to be independent under applicable
NYSE Amex standards.
As a result of Mr. Cummins’ resignation
from his position of a member of our Board of Directors effective March 6, 2009,
we are no longer in compliance with Section 803(A)(1) of the Amex Company Guide
because a majority of the members of our Board of Directors are not independent
directors.
Item 14.
Principal
Accounting
Fees and
Services.
BDO
Seidman served as the independent registered public accounting firm for
Operations, and as of the effective date of the merger between us and
pre-merger Xcorporeal, Inc., BDO Seidman has served as our independent
registered public accounting firm.
Audit
Fees
Total
fees for professional services rendered by our principal accountant for the
audit and review of our financial statements included in our Form 10-Q/10-QSBs
and Form 10-K/10-KSBs, and services provided in connection with our other SEC
filings for the years ended December 31, 2007 and 2008 were $303,155 and
$202,174, respectively.
Audit-Related
Fees
Audit-related
fees are for accounting technical consultations and totaled $0 in 2008 and
$24,000 in 2007.
Tax
Fees
We paid
no fees for professional services with respect to tax compliance, tax advice, or
tax planning to our auditor in 2007 or 2008.
All
Other Fees
Our
principal accountant did not bill us any other fees during 2007 or
2008.
Audit
committee’s pre-approval policies and procedures
Our Audit
Committee has responsibility for the approval of all audit and non-audit
services before we engage an accountant. All of the services rendered to us by
BDO Seidman, LLP are pre-approved by our Audit Committee before the engagement
of the auditors for such services. Our pre-approval policy expressly provides
for the annual pre-approval of all audits, audit-related and all non-audit
services proposed to be rendered by the independent auditor for the fiscal year,
as specifically described in the auditor's engagement letter, such annual
pre-approval to be performed by our Audit Committee.
PART
IV
Item
15.
Exhibits and
Financial Statement Schedules.
|
(a)
|
|
The
Following documents are filed as a part of this
report:
|
Our financial statements are as set
forth under Item 8 of this Annual Report on Form 10-K.
|
|
2.
|
|
Financial
Statement Schedules
|
The
auditors’ report with respect to the above-listed financial statement schedule
appears on page 30 of this Annual Report. All other financial statements and
schedules not listed are omitted either because they are not applicable, not
required or the required information is included in the financial
statements.
|
|
3.
|
|
Exhibits
required by Item 601 of Regulation
S-K
|
The
exhibits listed in the Exhibit Index, which appears immediately following the
signature page of this report and is incorporated herein by reference, are filed
as part of this Annual Report.
SIGNATURES
Pursuant
to the requirements of Section 13 of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the date indicated.
XCORPOREAL, INC.
Date: March
31,
2009 By:
/s/
Kelly J.
McCrann
Kelly J. McCrann
Chief Executive Officer
(Principal Executive
Officer)
Date: March
31,
2009 By:
/s/
Robert
Weinstein
Robert Weinstein
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Kelly J. McCrann and Robert Weinstein, or either of
them, his or her attorneys-in-fact, for such person in any and all
capacities, to sign any amendments to this report and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
either of said attorneys-in-fact, or substitute or substitutes, may do or cause
to be done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
|
Signature
|
|
Title(s)
|
|
Date
|
|
|
|
|
|
|
|
/s/
Kelly J.
McCrann
|
|
Chairman
of the Board of Directors
|
|
March
31, 2009
|
|
Kelly
J. McCrann
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Terren S.
Peizer
|
|
Director
|
|
March
31, 2009
|
|
Terren
S. Peizer
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Hans-Dietrich Polaschegg,
Ph.D.
|
|
Director
|
|
March
31, 2009
|
|
Hans-Dietrich
Polaschegg, Ph.D.
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Jay A.
Wolf
|
|
Director
|
|
March
31, 2009
|
|
Jay
A. Wolf
|
|
|
|
|
EXHIBIT
INDEX
|
No.
|
|
Description
|
|
2.1
|
|
Merger
Agreement, dated as of September 1, 2006, by and among Xcorporeal,
Inc., NQCI Acquisition Corporation and National Quality Care,
Inc.(1)
|
|
3.1
|
|
Amended
and Restated Certificate of Incorporation of Xcorporeal, Inc.
(1)
|
|
3.2
|
|
Amended
and Restated Bylaws of Xcorporeal, Inc. (1)
|
|
4.1
|
|
Specimen
of Common Stock certificate (1)
|
|
10.1†
|
|
Form
of Indemnification Agreement for directors (1)
|
|
10.2†
|
|
Xcorporeal,
Inc. 2007 Incentive Compensation Plan (1)
|
|
10.3
|
|
License
Agreement, dated as of September 1, 2006 (1)
|
|
10.4†
|
|
Contribution
Agreement, dated as of August 31, 2006 (1)
|
|
10.5†
|
|
Employment
Agreement, dated as of November 30, 2006, between Xcorporeal, Inc. and
Victor Gura, M.D. (1)
|
|
10.6
|
|
Form
of Innovation, Proprietary Information and Confidentiality Agreement
(1)
|
|
10.7†
|
|
Executive
Chairman Agreement, dated as of August 10, 2007, between Xcorporeal, Inc.
and Terren S. Peizer (1)
|
|
10.8†
|
|
Employment
Agreement of Robert Weinstein (1)
|
|
10.9†
|
|
Consulting
Agreement, dated as of October 1, 2007, between Xcorporeal, Inc. and
Hans-Dietrich Polaschegg (1)
|
|
10.10
|
|
Services
Agreement, dated as of March 22, 2007, between Xcorporeal, Inc. and Aubrey
Group, Inc. (1)
|
|
10.11†
|
|
Employment
Agreement, dated as of November 30, 2006, between Xcorporeal, Inc. and
Kelly J. McCrann. (2)
|
|
10.12†
|
|
Services
Agreement, dated as of January 24, 2008, between Xcorporeal, Inc. and
Daniel S. Goldberger (3)
|
|
10.13
|
|
Lease
for Operating Facility, dated as of October 6, 2008, between Xcorporeal,
Inc. and
Olen
Commercial Realty Corp. (4)
|
|
14.1
|
|
Code
of Ethics (1)
|
|
21.1
|
|
Subsidiaries
of Xcorporeal, Inc.*
|
|
23.1
|
|
Consent
of Independent Registered Public Accounting Firm *
|
|
31.1
|
|
Rule
13a-14(a) Certification of Chief Executive Officer *
|
|
31.2
|
|
Rule
13a-14(a) Certification of Chief Financial Officer *
|
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*
|
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*
|
____________
|
|
† Management
contracts, compensatory plans or
arrangements.
|
(1)
Incorporated by reference to exhibit of the same number to our Quarterly Report
on Form 10-Q filed November 13, 2007.
(2)
Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K
filed October 8, 2008.
(3)
Incorporated
by reference to Exhibit 10.1 to our Current Report on Form 8-K filed January 25,
2008.
(4)
Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q
filed November 19, 2008.
Exhibit
31.1
CERTIFICATION
PURSUANT TO
RULE
13a/15d OF THE SECURITIES EXCHANGE ACT OF 1934,
AS
ADOPTED PURSUANT TO
SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kelly
J. McCrann, certify that:
|
1.
|
I
have reviewed this Annual Report on Form 10-K of Xcorporeal, Inc.
(“registrant”);
|
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(b)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of registrant’s board of directors
(or persons performing the equivalent functions):
(a) All
significant deficiencies and material weakness in the design or operation of
internal controls over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal controls over financial
reporting.
Exhibit
31.2
CERTIFICATION
PURSUANT TO
RULE
13a/15d OF THE SECURITIES EXCHANGE ACT OF 1934,
AS
ADOPTED PURSUANT TO
SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert
Weinstein, certify that:
|
1.
|
I
have reviewed this Annual Report on Form 10-K of Xcorporeal, Inc.
(“registrant”);
|
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(b)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of registrant’s board of directors
(or persons performing the equivalent functions):
(a) All
significant deficiencies and material weakness in the design or operation of
internal controls over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal controls over financial
reporting.
Chief
Financial Officer and Secretary
Exhibit
32.1
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT
OF 2002
In
connection with the Annual Report of Xcorporeal, Inc. (the “Company”) on Form
10-K for the period ending December 31, 2008, as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), I, Kelly J. McCrann,
as Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §
1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002,
that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended; and
(2)
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/
Kelly J.
McCrann
Kelly J.
McCrann
Chief
Executive Officer
Date:
March 31, 2009
This
certification accompanies this Report on Form 10-K pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by
such Act, be deemed filed by the Company for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended.
A signed
original of this written statement required by Section 906, another document
authenticating, acknowledging or otherwise adopting the signature that appears
in typed form within the electronic version of this written statement required
by Section 906, has been provided to the Company and will be retained and
furnished to the Securities and Exchange Commission or its staff upon
request.
Exhibit
32.2
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT
OF 2002
In
connection with the Annual Report of Xcorporeal, Inc. (the “Company”) on Form
10-K for the period ending December 31, 2008, as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), I, Robert Weinstein,
as Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §
1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002,
that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended; and
(2)
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/
Robert
Weinstein
Robert
Weinstein
Chief
Financial Officer
Date:
March 31, 2009
This
certification accompanies this Report on Form 10-K pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by
such Act, be deemed filed by the Company for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended.
A signed
original of this written statement required by Section 906, another document
authenticating, acknowledging or otherwise adopting the signature that appears
in typed form within the electronic version of this written statement required
by Section 906, has been provided to the Company and will be retained and
furnished to the Securities and Exchange Commission or its staff upon
request.
ANNEX F
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
|
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2009
Or
|
¨
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from ___________________to____________________
Commission
file number 001-33874
XCORPOREAL,
INC.
(Exact
name of small business issuer as specified in its charter)
|
Delaware
|
75-2242792
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer Identification No.)
|
12121
Wilshire Blvd., Suite 350, Los Angeles, California 90025
(Address
of principal executive offices) (Zip Code)
(310)
923-9990
(Registrant’s
telephone number, including area code)
Not
applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
R
No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes
¨
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
|
¨
Large accelerated filer
|
¨
Accelerated filer
|
|
|
|
|
¨
Non-accelerated filer (Do not check if a smaller reporting company)
|
þ
Smaller reporting company
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).Yes
¨
No
R
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
|
Class
|
|
Outstanding
as of November 12, 2009
|
|
Common
Stock, $0.0001 par value
|
|
15,154,687
shares
|
INDEX
|
PART
I — FINANCIAL INFORMATION
|
|
F-3
|
|
|
|
|
|
Item
1. Financial Statements
|
|
F-3
|
|
|
|
|
|
Balance
Sheets at September 30, 2009 (unaudited) and December 31,
2008
|
|
|
|
|
|
|
|
Statements
of Operations (unaudited) for the three and nine months ended September
30, 2009 and September 30, 2008 and the period from inception (May 4,
2001) to September 30, 2009
|
|
F-4
|
|
|
|
|
|
Statements
of Cash Flows (unaudited) for the nine months ended September 30, 2009 and
September 30, 2008 and the period from inception (May 4, 2001) to
September 30, 2009
|
|
F-5
|
|
|
|
|
|
Statement
of Stockholders Equity (Deficit) for the nine months ended September 30,
2009 and the period from inception (May 4, 2001) to September 30, 2009
(unaudited)
|
|
F-6
|
|
|
|
|
|
Notes
to the Interim Financial Statements
|
|
F-7
|
|
|
|
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
|
F-19
|
|
|
|
|
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
|
|
F-27
|
|
|
|
|
|
Item
4. Controls and Procedures
|
|
F-28
|
|
|
|
|
|
PART
II — OTHER INFORMATION
|
|
F-29
|
|
|
|
|
|
Item
1. Legal Proceedings
|
|
F-29
|
|
|
|
|
|
Item
1A. Risk Factors
|
|
F-31
|
|
|
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
|
F-33
|
|
|
|
|
|
Item
6. Exhibits
|
|
F-34
|
|
|
|
|
|
Signatures
|
|
F-35
|
PART
I — FINANCIAL INFORMATION
ITEM
1. Financial Statements
XCORPOREAL,
INC.
(a
Development Stage Company)
BALANCE
SHEETS
(Unaudited)
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
35,734
|
|
|
$
|
407,585
|
|
|
Marketable
securities, at fair value
|
|
|
288,703
|
|
|
|
2,955,714
|
|
|
Restricted
cash
|
|
|
305,871
|
|
|
|
301,675
|
|
|
Prepaid
expenses and other current assets
|
|
|
123,351
|
|
|
|
260,024
|
|
|
Expense
receivable
|
|
|
54,641
|
|
|
|
-
|
|
|
Tenant
improvement allowance receivable
|
|
|
43,260
|
|
|
|
87,658
|
|
|
Total
Current Assets
|
|
|
851,560
|
|
|
|
4,012,656
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
246,804
|
|
|
|
337,554
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
819
|
|
|
|
863
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
1,099,183
|
|
|
$
|
4,351,073
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
945,385
|
|
|
$
|
789,827
|
|
|
Accrued
legal fees and licensing expense
|
|
|
1,871,430
|
|
|
|
2,873,396
|
|
|
Accrued
royalties
|
|
|
-
|
|
|
|
583,333
|
|
|
Accrued
professional fees
|
|
|
442,444
|
|
|
|
211,820
|
|
|
Accrued
compensation
|
|
|
143,040
|
|
|
|
149,664
|
|
|
Accrued
other liabilities
|
|
|
72,137
|
|
|
|
54,429
|
|
|
Payroll
liabilities
|
|
|
1,054
|
|
|
|
7,448
|
|
|
Deferred
compensation
|
|
|
171,513
|
|
|
|
-
|
|
|
Deferred
gain
|
|
|
200,000
|
|
|
|
-
|
|
|
Deferred
rent
|
|
|
280,390
|
|
|
|
148,651
|
|
|
Total
Current Liabilities
|
|
|
4,127,393
|
|
|
|
4,818,568
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issuable
|
|
|
-
|
|
|
|
1,569,100
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
& CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.0001 par value, 10,000,000 shares authorized, none
outstanding
|
|
|
-
|
|
|
|
-
|
|
|
Common
stock, $0.0001 par value, 40,000,000 shares authorized, 15,154,687 and
14,754,687 issued and outstanding on September 30, 2009 and December 31,
2008, respectively
|
|
|
1,515
|
|
|
|
1,475
|
|
|
Additional
paid-in capital
|
|
|
44,328,779
|
|
|
|
42,547,023
|
|
|
Deficit
accumulated during the development stage
|
|
|
(47,358,504
|
)
|
|
|
(44,585,093
|
)
|
|
Total
Stockholders' Deficit
|
|
|
(3,028,210
|
)
|
|
|
(2,036,595
|
)
|
|
Total
Liabilities & Stockholders' Deficit
|
|
$
|
1,099,183
|
|
|
$
|
4,351,073
|
|
See
accompanying notes to interim financial statements.
XCORPOREAL,
INC.
(a
Development Stage Company)
STATEMENTS
OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 4, 2001 (Date
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
of Inception) to
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
$
|
924,454
|
|
|
$
|
2,111,578
|
|
|
$
|
3,493,481
|
|
|
$
|
7,756,230
|
|
|
$
|
26,897,992
|
|
|
Research
and development
|
|
|
586,741
|
|
|
|
12,694,055
|
|
|
|
2,415,055
|
|
|
|
18,900,027
|
|
|
|
31,758,372
|
|
|
Other
expenses
|
|
|
-
|
|
|
|
1,871,430
|
|
|
|
-
|
|
|
|
1,871,430
|
|
|
|
1,871,430
|
|
|
Depreciation
and amortization
|
|
|
30,672
|
|
|
|
27,253
|
|
|
|
92,274
|
|
|
|
75,837
|
|
|
|
229,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before other income, income taxes and other expenses
|
|
|
(1,541,867
|
)
|
|
|
(16,704,316
|
)
|
|
|
(6,000,810
|
)
|
|
|
(28,603,524
|
)
|
|
|
(60,757,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction
of liabilities due to arbitrator's ruling & settlement
|
|
|
-
|
|
|
|
-
|
|
|
|
1,647,799
|
|
|
|
-
|
|
|
|
1,647,799
|
|
|
Loss
on disposal
|
|
|
-
|
|
|
|
-
|
|
|
|
(382
|
)
|
|
|
-
|
|
|
|
(382
|
)
|
|
Interest
and other income
|
|
|
915
|
|
|
|
44,871
|
|
|
|
11,657
|
|
|
|
278,941
|
|
|
|
1,602,136
|
|
|
Change
in and reduction of shares issuable
|
|
|
-
|
|
|
|
5,538,000
|
|
|
|
1,569,100
|
|
|
|
5,538,000
|
|
|
|
10,153,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes and other expenses
|
|
|
(1,540,952
|
)
|
|
|
(11,121,445
|
)
|
|
|
(2,772,636
|
)
|
|
|
(22,786,583
|
)
|
|
|
(47,354,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
-
|
|
|
|
300
|
|
|
|
775
|
|
|
|
1,900
|
|
|
|
4,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,540,952
|
)
|
|
$
|
(11,121,745
|
)
|
|
$
|
(2,773,411
|
)
|
|
$
|
(22,788,483
|
)
|
|
$
|
(47,358,504
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(0.10
|
)
|
|
$
|
(0.76
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(1.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
14,759,035
|
|
|
|
14,704,687
|
|
|
|
14,756,152
|
|
|
|
14,561,070
|
|
|
|
|
|
See
accompanying notes to interim financial statements.
XCORPOREAL,
INC.
(a
Development Stage Company)
STATEMENTS
OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
May 4, 2001 (Date
|
|
|
|
|
Nine Months Ended
|
|
|
of Inception) to
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
Cash
flows used in operating activities
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the period
|
|
$
|
(2,773,411
|
)
|
|
$
|
(22,788,483
|
)
|
|
$
|
(47,358,504
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to net cash (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors,
officers, employees stock based compensation
|
|
|
1,718,109
|
|
|
|
3,813,158
|
|
|
|
10,407,884
|
|
|
Consultants
stock based compensation
|
|
|
3,687
|
|
|
|
92,842
|
|
|
|
5,174,913
|
|
|
Common
stock issuance for consulting services rendered
|
|
|
60,000
|
|
|
|
798,000
|
|
|
|
972,000
|
|
|
Increase
in shares issuable
|
|
|
-
|
|
|
|
10,153,000
|
|
|
|
10,153,000
|
|
|
Mark
to market of shares issuable
|
|
|
(1,569,100
|
)
|
|
|
(5,538,000
|
)
|
|
|
(10,153,000
|
)
|
|
Depreciation
|
|
|
92,230
|
|
|
|
75,792
|
|
|
|
229,078
|
|
|
Net
change in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in receivables
|
|
|
(10,243
|
)
|
|
|
-
|
|
|
|
(97,901
|
)
|
|
Decrease
(increase) in prepaid expenses and other current assets
|
|
|
136,673
|
|
|
|
107,830
|
|
|
|
(123,351
|
)
|
|
Decrease
(increase) in other assets
|
|
|
44
|
|
|
|
45
|
|
|
|
(819
|
)
|
|
(Decrease)
increase in accounts payable and accrued liabilities
|
|
|
(1,194,427
|
)
|
|
|
2,859,622
|
|
|
|
3,438,119
|
|
|
Increase
in deferred compensation
|
|
|
171,513
|
|
|
|
-
|
|
|
|
171,513
|
|
|
Increase
in deferred gain
|
|
|
200,000
|
|
|
|
-
|
|
|
|
200,000
|
|
|
Increase
in deferred rent
|
|
|
131,739
|
|
|
|
40,929
|
|
|
|
280,390
|
|
|
Net
cash used in operating activities
|
|
|
(3,033,186
|
)
|
|
|
(10,385,265
|
)
|
|
|
(26,706,678
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(1,480
|
)
|
|
|
(113,629
|
)
|
|
|
(475,882
|
)
|
|
Restricted
cash
|
|
|
(4,196
|
)
|
|
|
228
|
|
|
|
(305,871
|
)
|
|
Purchase
of marketable securities
|
|
|
(22,044,286
|
)
|
|
|
(8,598,102
|
)
|
|
|
(55,642,388
|
)
|
|
Sale
of marketable securities
|
|
|
24,711,297
|
|
|
|
19,243,315
|
|
|
|
55,353,685
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
2,661,335
|
|
|
|
10,531,812
|
|
|
|
(1,070,456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
stock issued
|
|
|
-
|
|
|
|
-
|
|
|
|
27,549,748
|
|
|
Advances
from related party
|
|
|
-
|
|
|
|
-
|
|
|
|
64,620
|
|
|
Additional
proceeds from the sale of common stock in 2006
|
|
|
-
|
|
|
|
-
|
|
|
|
198,500
|
|
|
Net
cash provided by financing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
27,812,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
increase in cash during the period
|
|
|
(371,851
|
)
|
|
|
146,547
|
|
|
|
35,734
|
|
|
Cash
at beginning of the period
|
|
|
407,585
|
|
|
|
106,495
|
|
|
|
-
|
|
|
Cash
at end of the period
|
|
$
|
35,734
|
|
|
$
|
253,042
|
|
|
$
|
35,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information; cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Income
taxes
|
|
$
|
775
|
|
|
$
|
1,900
|
|
|
$
|
4,004
|
|
See
accompanying notes to interim financial statements.
XCORPOREAL,
INC.
(a
Development Stage Company)
STATEMENTS
OF STOCKHOLDERS’ EQUITY (DEFICIT)
For
the Period May 4, 2001 (Inception) to September 30, 2009
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
During
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Development
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stage
|
|
|
Total
|
|
|
Common
stock issued for cash at $0.01 per share
|
|
|
2,500,000
|
|
|
$
|
250
|
|
|
$
|
24,750
|
|
|
|
|
|
$
|
25,000
|
|
|
Net
Loss for the year ended December 31, 2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(40,255
|
)
|
|
|
(40,255
|
)
|
|
Balance
as of December 31, 2001
|
|
|
2,500,000
|
|
|
|
250
|
|
|
|
24,750
|
|
|
|
(40,255
|
)
|
|
|
(15,255
|
)
|
|
Common
stock issued for cash at $0.05 per share
|
|
|
1,320,000
|
|
|
|
132
|
|
|
|
65,868
|
|
|
|
|
|
|
|
66,000
|
|
|
Net
Loss for the year ended December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,249
|
)
|
|
|
(31,249
|
)
|
|
Balance
as of December 31, 2002
|
|
|
3,820,000
|
|
|
|
382
|
|
|
|
90,618
|
|
|
|
(71,504
|
)
|
|
|
19,496
|
|
|
Net
Loss for the year ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,962
|
)
|
|
|
(12,962
|
)
|
|
Balance
as of December 31, 2003
|
|
|
3,820,000
|
|
|
|
382
|
|
|
|
90,618
|
|
|
|
(84,466
|
)
|
|
|
6,534
|
|
|
Net
Loss for the year ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,338
|
)
|
|
|
(23,338
|
)
|
|
Balance
as of December 31, 2004
|
|
|
3,820,000
|
|
|
|
382
|
|
|
|
90,618
|
|
|
|
(107,804
|
)
|
|
|
(16,804
|
)
|
|
Net
Loss for the year ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,753
|
)
|
|
|
(35,753
|
)
|
|
Balance
as of December 31, 2005
|
|
|
3,820,000
|
|
|
|
382
|
|
|
|
90,618
|
|
|
|
(143,557
|
)
|
|
|
(52,557
|
)
|
|
Common
stock issued for license rights at $0.0001 per share
|
|
|
9,600,000
|
|
|
|
960
|
|
|
|
40
|
|
|
|
|
|
|
|
1,000
|
|
|
Capital
stock cancelled
|
|
|
(3,420,000
|
)
|
|
|
(342
|
)
|
|
|
342
|
|
|
|
|
|
|
|
-
|
|
|
Warrants
granted for consulting fees
|
|
|
|
|
|
|
|
|
|
|
2,162,611
|
|
|
|
|
|
|
|
2,162,611
|
|
|
Forgiveness
of related party debt
|
|
|
|
|
|
|
|
|
|
|
64,620
|
|
|
|
|
|
|
|
64,620
|
|
|
Common
stock issued for cash at $7.00, net of placement fees of
$2,058,024
|
|
|
4,200,050
|
|
|
|
420
|
|
|
|
27,341,928
|
|
|
|
|
|
|
|
27,342,348
|
|
|
Consultants
stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
88,122
|
|
|
|
|
|
|
|
88,122
|
|
|
Directors,
officers, employees stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
176,129
|
|
|
|
|
|
|
|
176,129
|
|
|
Net
loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,380,212
|
)
|
|
|
(4,380,212
|
)
|
|
Balance
as of December 31, 2006
|
|
|
14,200,050
|
|
|
|
1,420
|
|
|
|
29,924,410
|
|
|
|
(4,523,769
|
)
|
|
|
25,402,061
|
|
|
Capital
stock cancelled
|
|
|
(200,000
|
)
|
|
|
(20
|
)
|
|
|
20
|
|
|
|
|
|
|
|
-
|
|
|
Common
stock issued pursuant to consulting agreement at $4.90 per
share
|
|
|
20,000
|
|
|
|
2
|
|
|
|
97,998
|
|
|
|
|
|
|
|
98,000
|
|
|
Recapitalization
pursuant to merger
|
|
|
352,422
|
|
|
|
35
|
|
|
|
(37,406
|
)
|
|
|
|
|
|
|
(37,371
|
)
|
|
Consultants
stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
2,917,309
|
|
|
|
|
|
|
|
2,917,309
|
|
|
Directors,
officers, employees stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
3,721,485
|
|
|
|
|
|
|
|
3,721,485
|
|
|
Additional
proceeds from the sale of common stock in 2006
|
|
|
|
|
|
|
|
|
|
|
198,500
|
|
|
|
|
|
|
|
198,500
|
|
|
Net
loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,074,051
|
)
|
|
|
(17,074,051
|
)
|
|
Balance
as of December 31, 2007
|
|
|
14,372,472
|
|
|
|
1,437
|
|
|
|
36,822,316
|
|
|
|
(21,597,820
|
)
|
|
|
15,225,933
|
|
|
Common
stock issued as compensation for consulting services at $3.61 per
share
|
|
|
200,000
|
|
|
|
20
|
|
|
|
721,980
|
|
|
|
|
|
|
|
722,000
|
|
|
Common
stock issued as compensation for consulting services at $3.80 per
share
|
|
|
20,000
|
|
|
|
2
|
|
|
|
75,998
|
|
|
|
|
|
|
|
76,000
|
|
|
Cashless
exercise of warrants
|
|
|
112,215
|
|
|
|
11
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
-
|
|
|
Common
stock issued as compensation for consulting services at $0.32 per
share
|
|
|
50,000
|
|
|
|
5
|
|
|
|
15,995
|
|
|
|
|
|
|
|
16,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal
of liability from the sale of common stock in 2006
|
|
|
|
|
|
|
|
|
|
|
115,400
|
|
|
|
|
|
|
|
115,400
|
|
|
Consultants
stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
91,306
|
|
|
|
|
|
|
|
91,306
|
|
|
Directors,
officers, employees stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
4,704,039
|
|
|
|
|
|
|
|
4,704,039
|
|
|
Net
loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,987,273
|
)
|
|
|
(22,987,273
|
)
|
|
Balance
as of December 31, 2008
|
|
|
14,754,687
|
|
|
|
1,475
|
|
|
|
42,547,023
|
|
|
|
(44,585,093
|
)
|
|
|
(2,036,595
|
)
|
|
Consultants
stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,771
|
|
|
|
|
|
|
|
1,771
|
|
|
Directors,
officers, employees stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
385,848
|
|
|
|
|
|
|
|
385,848
|
|
|
Net
loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(176,830
|
)
|
|
|
(176,830
|
)
|
|
Balance
as of March 31, 2009
|
|
|
14,754,687
|
|
|
$
|
1,475
|
|
|
$
|
42,934,642
|
|
|
$
|
(44,761,923
|
)
|
|
$
|
(1,825,806
|
)
|
|
Consultants
stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,895
|
|
|
|
|
|
|
|
1,895
|
|
|
Directors,
officers, employees stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
661,780
|
|
|
|
|
|
|
|
661,780
|
|
|
Net
loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,055,629
|
)
|
|
|
(1,055,629
|
)
|
|
Balance
as of June 30, 2009
|
|
|
14,754,687
|
|
|
$
|
1,475
|
|
|
$
|
43,598,317
|
|
|
$
|
(45,817,552
|
)
|
|
$
|
(2,217,760
|
)
|
|
Common
stock issued as compensation for consulting services at $0.15 per
share
|
|
|
400,000
|
|
|
|
40
|
|
|
|
59,960
|
|
|
|
|
|
|
|
60,000
|
|
|
Consultants
stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
21
|
|
|
Directors,
officers, employees stock based compensation expense
|
|
|
|
|
|
|
|
|
|
|
670,481
|
|
|
|
|
|
|
|
670,481
|
|
|
Net
loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,540,952
|
)
|
|
|
(1,540,952
|
)
|
|
Balance
as of September 30, 2009
|
|
|
15,154,687
|
|
|
$
|
1,515
|
|
|
$
|
44,328,779
|
|
|
$
|
(47,358,504
|
)
|
|
$
|
(3,028,210
|
)
|
See
accompanying notes to interim financial statements
XCORPOREAL,
INC.
(a
Development Stage Company)
NOTES
TO INTERIM FINANCIAL STATEMENTS
September
30, 2009
(Unaudited)
Note 1 - Interim Reporting
While information presented in the
accompanying interim financial statements is unaudited, it includes normal and
recurring adjustments, which are, in the opinion of management, necessary to
present fairly the financial position, results of operations, and cash flows for
the interim period presented.
The
results of operations for the period ended September 30, 2009 are not
necessarily indicative of the results that can be expected for the year ending
December 31, 2009.
Note
2 – Nature of Operations and Going Concern Uncertainty
On
October 12, 2007, pursuant to a merger agreement with Xcorporeal, Inc.
(hereinafter referred to as “Operations”), our wholly-owned subsidiary, merged
with and into Operations, which became our wholly-owned subsidiary and changed
its name to “Xcorporeal Operations, Inc.” In connection with the merger, we
changed our name from CT Holdings Enterprises, Inc. (“CTHE”), to “Xcorporeal,
Inc.” In this merger, CTHE was considered to be the legal acquirer and
Xcorporeal to be the accounting acquirer. As the former stockholders of
Operations owned over 97% of the outstanding voting common stock of CTHE
immediately after the merger and CTHE was a public shell company, for accounting
purposes Operations was considered the accounting acquirer and the transaction
was considered to be a recapitalization of Operations. As a result of the
merger, we transitioned to a development stage company focused on researching,
developing, and commercializing technology and products related to the treatment
of kidney failure.
As of
November 12, 2009, we had available cash of approximately $120,000, excluding
restricted cash. We currently have a monthly burn rate of approximately
$116,000. Under these current conditions, we will have sufficient cash
approximately through the next 30 days from November 12, 2009, assuming no
further cash injections are received. In addition to previously taken
restructuring efforts, including reduction of personnel, we also reduced our
cash outflows by means of deferring 50% of the monthly compensation for 5 of our
6 active employees effective July 1, 2009 and currently continue to defer 50% of
the monthly compensation for 3 of our 6 active employees. Two of our engineers
are providing consulting services to a certain third party with which we have
agreed to an exclusivity period to negotiate a potential cooperative transaction
and such third party is fully reimbursing us for our employment expenses of our
two engineers including salaries and overhead. As of September 30, 2009, we
deferred approximately a total of $172,000 in employee compensation, recognized
under “Deferred compensation” on our balance sheet. We will consider, if
feasible, further reduction of our costs and expenses. Therefore, we must raise
additional funds to be able to continue our operations. If we are unable to
secure additional capital within the approximately the next 30 days from
November 12, 2009, we will be forced to file for bankruptcy and/or cease our
operations. The accompanying financial statements have been prepared on the
basis of a going concern and do not reflect any adjustments due to these
conditions.
We are
currently actively considering all potential transactions, which may include the
Proposed Transaction (as described below under Note 4, “Legal Proceedings”),
strategic partnership(s), disposition of substantially all or all of our assets
or a business combination with another entity in a transaction where we would
not be the surviving entity. As part of a potential strategic transaction
we have been considering, we have entered into an arrangement with a certain
third party, with which we have agreed to an exclusivity period to negotiate a
potential cooperative transaction, in exchange for a non-refundable payment of
$200,000 made to us by such third party, recognized under “Deferred gain” as of
September 30, 2009 on our balance sheet. The exclusivity period expires upon the
later of 100 calendar days from September 21, 2009 and the termination date of a
definitive agreement entered into with such third party, if any, at which time
the non-refundable exclusivity payment will be earned and recognized as other
income; however, if a definitive agreement for a transaction is entered into
with such third party prior thereto, the exclusivity payment will be credited
against the purchase price in such transaction. During the exclusivity period,
we will provide to the third party access to our employees, properties,
contracts, records and other related materials. In addition, in the mutual
interests of us and such third party and at the direction of the third party, in
connection with the potential strategic transaction, we actively resumed
research and development of our Portable Artificial Kidney product with direct
reimbursement of related expenditures by such third party. As of September 30,
2009, we incurred and expect reimbursement of approximately $43,000, recognized
under “Expense receivable” on our balance sheet and offset as a credit to our
statement of operations for the three months ended September 30, 2009, for these
expenses. Currently, the exclusivity period remains in effect and negotiations
continue. Among other reasons, due to the current economic conditions and those
particularly affecting healthcare related companies and because of our lack of
liquidity, there is no assurance that any such transaction will occur or that it
would be accretive to our stockholders or result in any payment being made to
our stockholders. If we are unsuccessful in obtaining immediate debt or equity
financing on terms acceptable to us or otherwise unsuccessful in addressing our
liquidity concerns or if we are unable to enter into any such transaction, this
could have a material adverse effect on our plan of operation, may result in the
curtailment of our operations and/or require us to file for
bankruptcy.
The approximate total of $55,000 under
“Expense receivable” recognized and offset as a credit to our statement of
operations as of September 30, 2009, consists of an anticipated payroll tax
refund in the amount of approximately $12,000 pursuant to COBRA premium
assistance payments and the reimbursable research and development expenses in
the amount of approximately $43,000 described above.
Effective as of September 4, 2009, our
common stock commenced trading on the Pink Sheets Electronic OTC Market, an
inter-dealer electronic quotation service of securities traded over-the-counter
also known as the Pink Sheets (“Pink Sheets”), under the symbol “XCRP.PK”. In
addition, effective as of the same date, our common stock was suspended from
trading on NYSE Amex LLC (formerly American Stock Exchange) (“Amex”). As part of
our analysis of ways to reduce costs and in light of the high cost of continuing
to be a public reporting company under the Exchange Act and complying with the
Sarbanes-Oxley Act of 2002, we are contemplating exploring and may be required
to explore other alternatives, such as deregistering under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or “going dark” and
having our common stock continue to be quoted on the Pink Sheets without being a
reporting company under Section 12(g) of the Exchange Act. We are
continuing to evaluate our options. Our recent move to the Pink
Sheets has provided meaningful savings to us as a result of the elimination
of fees associated with being listed on a national stock exchange and
deregistering under the Exchange Act would provide substantial savings as a
result of the elimination of the costs of being registered under the Exchange
Act. Analysis of deregistering under the Exchange Act involves not only
reducing costs, but also our expected sources of future capital as well as the
number of record holders of our outstanding common stock. Subject to our
satisfaction of certain conditions, a move to deregister under the Exchange Act
may result in a less liquid market for our shares, but would result in continued
public trading of our common stock by holders wishing to trade.
We expect to incur negative cash flows
and net losses for the foreseeable future. Based upon our current plans, we
believe that our existing cash reserves will not be sufficient to meet our
current liabilities and other obligations as they become due and payable.
Accordingly, within approximately the next 30 days we will need to seek to
obtain additional debt or equity financing through a public or private placement
of shares of our preferred or common stock or through a public or private
financing or we will need to effect a transaction for the sale or license of
substantially all or all of our assets. Our ability to meet such obligations
will depend on our ability to sell securities, borrow funds, reduce operating
costs, effect a transaction for the sale or license of substantially all or all
of our assets or enter into a business combination with another entity in a
transaction where we would not be the surviving entity or some combination
thereof. We may not be successful in obtaining necessary financing on acceptable
terms, if at all. As of September 30, 2009, we had negative working capital of
$3,275,833, accumulated deficit of $47,358,504, and total stockholders’ deficit
of $3,028,210. Cash used in operations for the nine months ended September 30,
2009 was $3,033,186. As a result of these and other conditions described herein,
there is substantial doubt about our ability to continue as a going concern. The
financial statements filed as part of this Quarterly Report on Form 10-Q do not
include any adjustments that might result from the outcome of this
uncertainty.
Our
operating activities and research and development efforts resulted in a net loss
of $23.0 million in 2008 and $2.8 million during the nine months ended September
30, 2009, including a reduction in arbitration liabilities of approximately $1.6
million and change in fair value of shares issuable of approximately $1.6
million as a result of the issuance of the Partial Final Award and the execution
of the Agreement and Stipulation Regarding Partial Final Award entered into
among us, Operations and National Quality Care, Inc. (“NQCI”) on August 7, 2009
in connection with the arbitration proceeding between us and NQCI, as more
fully discussed in Note 4, “Legal Proceedings” below. Both the reduction of
$1.6 million in arbitration liabilities and the change in fair value of $1.6
million were non-cash items. In addition, we invested $25.0 million in high
grade money market funds and marketable securities during the first quarter of
2007 and since then, we sold $24.7 million of these investments, leaving a
balance of $0.3 million as of September 30, 2009.
Pursuant
to the terms of the Partial Final Award issued on April 13, 2009, NQCI was
awarded an amount equal to approximately $1.87 million in attorneys’ fees and
costs consistent with the Arbitrator’s order issued on August 13, 2008 related
to the same and NQCI’s application for interim royalties and expenses was
denied. For a further discussion of the Partial Final Award, see Note 4, “Legal
Proceedings” below. We intend to pay the $1.87 million in attorneys’ fees and
costs due to NQCI from the proceeds received in connection with the consummation
of the Proposed Transaction, or another Transaction (each term as defined below
in Note 4, “Legal Proceedings”), if such transaction is consummated, or upon
raising of additional capital to sufficiently satisfy the award and or other
immediate liquidity requirements, which funds we will need to obtain within
approximately the next 30 days from November 12, 2009. Pursuant to the terms of
the Agreement and Stipulation Regarding Partial Final Award entered into in
connection with the Memorandum, as more fully explained below in Note 4, “Legal
Proceedings”, NQCI agreed not to attempt before December 1, 2009 to execute on
or file any motion, petition or application or commence any proceeding seeking
the collection of such award of attorneys’ fees and costs, which is intended to
allow us, Operations and NQCI a sufficient period within which to execute a
definitive agreement in connection for the Proposed Transaction or a
Transaction. Such period shall automatically be extended for a period of 120
days from December 1, 2009 if the acquisition agreement is executed in full on
or before December 1, 2009. In addition, if the execution of the acquisition
agreement occurs on or before December 1, 2009, the December 1, 2009 deadline
shall automatically be further extended for a period of 60 days for each
amendment to a proxy or information statement related to the transactions
contemplated by such definitive agreement, filed by us in response to comments
made by the Securities and Exchange Commission (the “SEC”). However, there can
be no assurances that the Proposed Transaction or any other Transaction will
occur.
We are a
medical device company that has been engaged in developing an innovative
extra-corporeal
platform
technology to be used in devices to replace the function of various human
organs. We hope that the platform will lead to the following three initial
products: (i) a Portable Artificial Kidney (“PAK”) for attended care Renal
Replacement Therapy, (ii) a PAK for home hemodialysis and (iii) a Wearable
Artificial Kidney (“WAK”) for continuous ambulatory hemodialysis. Our rights to
the WAK derive in part from the License Agreement between Operations and NQCI,
dated as of September 1, 2006 (“License Agreement”), pursuant to which we
obtained a perpetual exclusive license in the Technology. See Note 4, “Legal
Proceedings” below.
We have
focused much of our efforts on development of the PAK, which we do not believe
has been derived from the technology covered by the License Agreement. Through
the productive research and development efforts of the PAK, we have completed
functional prototypes of our attended care and home PAKs that we hope to
commercialize after 510(k) notification clearance from the Food and Drug
Administration (“FDA”) which we hope to submit sometime in the future. Prior to
the 510(k) submission to the FDA for clinical use under direct medical
supervision, the units will undergo final verification and validation. It
generally takes 4 to 12 months from the date of a 510(k) submission to obtain
clearance from the FDA, although it may take longer. We hope to begin to shift
out of the development and build phase of the prototype equipment and into
product phase, which should help us to reduce the related spending on research
and development costs as well as consulting and material costs. See Note 15,
“Product Development Agreement” below. With this transition, we hope to shift
available resources towards verification and validation of our devices along
with developing a marketing plan for the PAK. This plan will be dependant on our
ability to raise funds to satisfy our current liabilities and other obligations
as they become due and obtaining additional debt or equity financing and
otherwise continuing our business operations. If we are unsuccessful in doing
so, we will not be able to submit a 510(k) notification with the FDA for this
product.
In addition, we have used some of our
resources for the development of the WAK of which we have demonstrated a
feasibility prototype. Commercialization of the WAK will require development of
a functional prototype and likely a full pre-market approval by the FDA, which
could take several years. Subject to us continuing our business operations
and/or entering into a transaction for the sale of substantially all or all of
our assets or a business combination with another entity in a transaction where
we would not be the surviving entity, we will determine whether to devote
available resources to the development of the WAK.
Because
neither the PAK nor the WAK is yet at a stage where it can be marketed
commercially, we are not able to predict the portion of our future business
which will be derived from each.
Note 3 – Development Stage
Company
We are a
development stage company, devoting substantially all of our efforts to the
research, development, and commercialization of kidney failure treatment
technologies.
Risks and Uncertainties —
We
operate in an industry that is subject to intense competition, government
regulation, and rapid technological change. Our operations are subject to
significant risk and uncertainties including financial, operational,
technological, legal, regulatory, and other risks associated with a development
stage company, including the potential risk of business failure.
Note
4 – Legal Proceedings
Partial
Final Award
On
December 1, 2006, Operations initiated the arbitration proceeding (the
“Proceeding”) against NQCI for its breach of the License Agreement. On April 13,
2009, the arbitrator (the “Arbitrator”) issued a Partial Final Award (“Partial
Final Award”) which resolved the remaining issues that were pending for
decision in the Proceeding. The Partial Final Award provided that we and
Operations shall have a perpetual exclusive license (“Perpetual License”) in the
Technology (as defined in the Merger Agreement, dated as of September 1, 2006
(the “Merger Agreement”), among us, Operations and NQCI and the License
Agreement) primarily related to the WAK and any other Technology contemplated to
be transferred under the Technology Transaction (as defined in the Merger
Agreement). Under the terms of the Partial Final Award, in consideration of the
Perpetual License to us, NQCI was awarded a royalty of 39% of all net income,
ordinary or extraordinary, received by us (“Royalty”) and NQCI is to receive 39%
of any shares received in any merger transaction to which we or Operations may
become a party. NQCI’s interest as licensor under the Perpetual License shall be
freely assignable. In addition, the Partial Final Award provided that we shall
pay NQCI an amount equal to approximately $1,871,000 in attorneys’ fees and
costs previously awarded by the Arbitrator in an order issued on August 13,
2008, that NQCI’s application for interim royalties and expenses was denied and
that NQCI was not entitled to recover any additional attorneys’ fees. Finally,
the Partial Final Award also provides that the Arbitrator retained jurisdiction
to supervise specific performance of the terms and obligations of the Award
including, but not limited to, any dispute between the parties over the manner
of calculation of the Royalty. The Partial Final Award was issued as a result of
each party’s request for the Arbitrator to order alternative relief due the
parties’ inability to proceed with the Technology Transaction. For a full
description of the Proceeding and the Arbitrator’s interim awards issued in
connection therewith, please see Item 3 - Legal Proceedings of our Annual Report
on Form 10-K for the year ended December 31, 2008 and our subsequent reports
filed with the SEC.
As a result of the award to NQCI under
the terms of the Partial Final Award of approximately $1.87 million in
attorneys’ fees and costs but denial of NQCI’s application of interim expenses,
we reversed the accruals for the related expenses resulting in an approximately
$1.0 million non-operating reduction in arbitration liabilities to the statement
of operations for the nine months ended September 30, 2009. The $1.87
million award of NQCI’s attorneys’ fees and costs was recognized as “Other
expenses” during the year ended December 31, 2008, and remains accrued under
“Accrued legal fees & licensing expense” on our balance sheet as of
September 30, 2009.
Binding
Memorandum of Understanding
On August
7, 2009, to clarify, resolve and settle certain issues and any disputes that
have arisen between us and NQCI with respect to the Final Partial Award and the
Proceeding, we and Operations (collectively, the “Xcorp Parties”) entered into a
Binding Memorandum of Understanding (the “Memorandum”) with NQCI (NQCI, together
with the Xcorp Parties is collectively referred to as the “Parties”). Under the
terms of the Memorandum, among other things, the Parties agreed to: (i) assign
and transfer all of their rights, title and interest in and to
certain technology comprised of a certain U.S. Patent Application and
related intellectual property (as described in the Memorandum) (the “Polymer
Technology”) to a limited liability company to be formed under the laws of the
State of Delaware (the “Joint Venture”), which will be jointly owned by the
Parties and through which the Parties will jointly pursue the development and
exploitation of the Polymer Technology, and (ii) negotiate, execute and deliver
within 60 days following the Stockholder Vote Date (as defined below) an
operating agreement governing the operation of the Joint Venture based on the
terms set forth in the Memorandum (the “Operating Agreement”).
The Xcorp
Parties and NQCI will be the initial two members of the Joint Venture (Xcorp
Parties’ interest shall be held of record by either us or Operations, as
determined by the Xcorp Parties) with NQCI and the Xcorp Parties having a 60%
and 40% membership interest (the “Membership Interests”) in the Joint Venture,
respectively. Subject to such other terms and provisions as the Parties may
agree upon, the Operating Agreement shall include the following
terms:
|
|
·
|
the
Joint Venture shall be managed by a three-member board of managers (the
“JV Board”);
|
|
|
·
|
until
such time as NQCI fails to hold a greater percentage of the Membership
Interests than the Xcorp Parties, two members of the JV Board (each, a “JV
Manager”) shall be designated by NQCI and until such time as the Xcorp
Parties fail to hold at least 10% of the Membership Interests and one JV
Manager shall be designated by the Xcorp
Parties;
|
|
|
·
|
NQCI
shall have the right to appoint a Chairman and/or a Chief Executive
Officer of the Joint Venture, who will have day-to-day management
authority with respect to the Joint Venture, subject to oversight by the
JV Board and the terms and conditions of the Memorandum and the Operating
Agreement, and a Chief Scientific Officer, who may be employed by the
Joint Venture upon customary and reasonable terms and
conditions;
|
|
|
·
|
if
a JV Manager provides additional services to the Joint Venture as an
employee or a consultant, he or she may be compensated by the Joint
Venture as is mutually reasonably approved in writing by the Parties;
provided that with the exception of reimbursement of reasonable expenses
incurred in connection with their services performed for the Joint Venture
in their official officer capacity, neither Robert Snukal, the Chief
Executive Officer of NQCI, nor Kelly McCrann, our Chairman and Chief
Executive Officer (or such other persons as may be appointed or elected in
their place), shall in any event receive a salary or other compensation
from the Joint Venture;
|
|
|
·
|
except
as otherwise required by law, all decisions related to the operations of
the Joint Venture shall be made by a majority of the JV Board, except that
certain actions (as described in the Memorandum) by the Joint Venture or
any of its subsidiaries shall require the affirmative vote or written
consent of the holders of at least 90.1% of the Membership Interests then
outstanding; and
|
|
|
·
|
from
and after August 1, 2009, the Xcorp Parties shall pay 61% and NQCI shall
pay 39% of the reasonable costs and expenses related to protecting,
preserving and exploiting the Licensed Technology (as defined
below).
|
In
addition, the Xcorp Parties agreed to contribute $500,000 in cash to the bank
account established by the Joint Venture, on the later of (x) three business
days of the consummation of the first to occur of the Proposed Transaction or
another Transaction (as such terms are defined below) and (y) the date on which
the Joint Venture establishes such bank account, for which the Parties (or their
representatives) shall be joint signatories. Furthermore, provided that the
Proposed Transaction or a Transaction has been consummated, NQCI agreed to
contribute on the Xcorp Parties’ behalf an additional $500,000 in cash to the
Joint Venture at such time as the JV Board reasonably determines that such funds
are required to facilitate the Joint Venture’s development of the Polymer
Technology. This additional contribution amount will be reimbursed to NQCI by
the Xcorp Parties from the first funds distributed to the Xcorp Parties by the
Joint Venture (other than pursuant to certain quarterly tax related
distributions). Additionally, with respect to the Joint Venture, the Parties
agreed to certain liquidity rights consisting of customary rights of first
refusal and co-sale rights, unlimited piggyback registration rights and the
right to up to two demand registrations (subject to lock-ups and other
underwriter requirements), customary preemptive rights (available to a member of
the Joint Venture for so long as such member holds at least 10% of the
Membership Interests then outstanding), customary anti-dilution protections and
other standard distribution and information rights.
The
Parties also agreed to cooperate as reasonably required by the Xcorp Parties in
order for us to consummate a transaction involving an exclusive license
and/or sale to a third party (the “Proposed Transaction”) of a part,
substantially all or all of our technology and other intellectual property
rights licensed to us under the License Agreement, other than the Polymer
Technology (the “Licensed Technology”), or any other transaction (a
“Transaction”) involving the sale, license or other disposition by us of a part,
substantially all or all of the Licensed Technology. The Parties further agreed
that upon the consummation of a Proposed Transaction, they will allocate any
license fees and any other additional consideration received in such transaction
between the Parties (collectively, the “Transaction Proceeds”), in accordance
with the terms set forth in the Memorandum and summarized below, subject to the
actual terms of the Proposed Transaction, when and if such transaction is
consummated. However, there can be no assurances that the Proposed Transaction
or any other Transaction will occur or that the terms thereof will be similar to
those provided for in the Memorandum and summarized below, and the actual terms
of the Proposed Transaction or another Transaction will be provided for in the
definitive agreement entered into in connection with such
transaction.
|
|
·
|
NQCI
shall receive 36.96% of the Transaction Proceeds (which amount is intended
to represent an amount equal to 39% of the net royalty payments provided
for by the terms of the Partial Final Award following the deduction
therefrom of the Xcorp Parties expenses incurred in connection with
the Proposed Transaction), plus $1,871,430 in attorneys’ fees and costs
payable to NQCI pursuant to the terms of the Partial Final Award
(collectively, the “NQCI Amount”);
|
|
|
·
|
The
third party will pay the Xcorp Parties $250,000 upon the earlier of the
signing of a letter of intent and an acquisition agreement providing for
the Proposed Transaction, approximately 50% (less the foregoing $250,000)
of the Transaction Proceeds payable in cash to the Xcorp Parties upon the
closing of the Proposed Transaction (the “First Installment”),
approximately 25% of such proceeds such number of months after the
consummation of the Proposed Transaction as provided in the documents
governing the Proposed Transaction (the “Second Installment”)
and 25% of such
proceeds after the payment of the Second Installment (the “Third
Installment”, and collectively with the First Installment and the Second
Installment, the “Installments”).
|
|
|
·
|
The
Transaction Proceeds shall be allocated between the Parties as
follows: (i) $250,000 to the Xcorp Parties, payable to the Xcorp
Parties on the earlier of the signing of a letter of intent and an
acquisition agreement providing for the Proposed Transaction, (ii) to
NQCI, an amount equal to the NQCI Amount less the sum of the Second
Installment and the Third Installment, payable to NQCI within seven
business days of receipt of the First Installment, (iii) to the Xcorp
Parties, the remainder of the First Installment, (iv) to NQCI, the amount
of the Second Installment, payable to NQCI within three business days of
receipt of the Second Installment, (v) to NQCI, the amount of the Third
Installment, payable to NQCI within three business days of receipt of the
Third Installment (the “Third NQCI Payment”) and (vi) the remainder
of the Transaction Proceeds shall be retained by the Xcorp Parties;
provided that under no circumstances shall NQCI be entitled to or receive
from the Transaction Proceeds an amount greater than the NQCI
Amount;
|
|
|
·
|
In
the event any of the Installments are paid by the third party in other
than cash, NQCI shall receive its proportionate share of such
consideration in accordance with the terms of the Memorandum;
and
|
|
|
·
|
The
Xcorp Parties shall also pay to NQCI 39% of any royalty or other payments
received by the Xcorp Parties in excess of the Transaction Proceeds in
connection with the Proposed
Transaction.
|
In the event that the timing or the
amount of the payments from the third party under the terms of the Proposed
Transaction (or another Transaction) is other than as contemplated in the
Memorandum, the Parties shall make such equitable adjustments as are required to
preserve, to the maximum extent possible, the intent of the distribution of
Transaction Proceeds provisions of the Memorandum. In the event that the Xcorp
Parties do not consummate the Proposed Transaction or if the terms of the
Proposed Transaction are other than what is contemplated under the Memorandum
and the Xcorp Parties instead consummate an alternative Transaction, the Parties
shall apply the methodology specified in the Memorandum to the maximum extent
possible in order to allocate between them the proceeds of such
Transaction.
Additionally, NQCI agreed to use its
best efforts to enter into an agreement with a certain third party pursuant to
which such third party and NQCI will each (a) confirm and acknowledge (i) their
joint ownership of the Polymer Technology, (ii) the existence and validity of
the exclusive license to NQCI of the medical applications of the Polymer
Technology and (iii) the existence and validity of the exclusive license to such
third party of the non-medical applications of the Polymer Technology; and
(b) agree to prepare, execute and deliver as promptly as practicable upon
request by either of such parties a definitive license agreement reflecting the
terms and conditions of the foregoing exclusive licenses. The Parties also
agreed to certain customary representation and warranty, indemnity and other
miscellaneous terms.
The
foregoing summary of the Memorandum and the transactions contemplated thereby
does not purport to be complete and is subject to, and qualified in its entirety
by, the full text of the Memorandum, annexed as Exhibit 10.1 to our Quarterly
Report on Form 10-Q for the six-month period ended June 30, 2009, filed with the
SEC on August 13, 2009.
Agreement
and Stipulation Regarding Partial Final Award
In
connection with the issuance of the Partial Final Award and the execution of the
Memorandum between the Parties, on August 7, 2009 Operations entered into an
Agreement and Stipulation Regarding Partial Final Award (the “Stipulation”) with
NQCI. Pursuant to the terms of the Stipulation, Operations and NQCI agreed (i)
not to challenge the terms of the Partial Final Award or any portion of such
award, (ii) that any of the Parties may, at any time, seek to confirm all but
not part of the Partial Final Award through the filing of an appropriate
petition or motion with the appropriate court and in response to such action to
confirm the Partial Final Award, no Party will oppose, object to or in any way
seek to hinder or delay the court’s confirmation of the Partial Final Award, but
will in fact support and stipulate to such confirmation, (iii) to waive any and
all right to appeal from, seek appellate review of, file or prosecute any
lawsuit, action, motion or proceeding, in law, equity, or otherwise,
challenging, opposing, seeking to modify or otherwise attacking the confirmed
Partial Final Award or the judgment thereon and (iv) subject to certain
conditions, NQCI will not attempt before December 1, 2009 (the “Non-Execution
Period”) to execute on or file any motion, petition or application or
commence any proceeding seeking the collection of any attorneys’ fees that have
been awarded in NQCI’s favor under the terms of the Partial Final Award, which
is intended to allow the Parties a sufficient period within which to execute a
definitive acquisition agreement (the “Acquisition Agreement”) in connection
with the Proposed Transaction or a Transaction; provided that such period shall
automatically be extended for a period of 120 days from December 1, 2009 (the
“Extension Date”) if the Acquisition Agreement is executed in full on or before
December 1, 2009. If the execution of the Acquisition Agreement occurs on or
before December 1, 2009, the Extension Date shall automatically be further
extended for a period of 60 days for each amendment to a proxy or information
statement related to the transactions contemplated by the Acquisition Agreement,
filed by us in response to comments made by the SEC.
In the
event we enter into an Acquisition Agreement for the Proposed Transaction or a
Transaction, we anticipate that we will call a special or annual meeting of our
stockholders at which our stockholders will be asked to vote on the terms of the
Proposed Transaction or a Transaction, pursuant to a proxy or information
statement that we would file with the SEC in connection therewith (the
“Stockholder Vote Date”). If and when we do file such proxy or information
statement with the SEC, our stockholders and other investors are urged to
carefully read such statement and any other relevant documents filed with the
SEC when they become available, because they will contain important information
about us and the transaction. Copies of such proxy or information statement and
other documents filed by us with the SEC will be available at the Web site
maintained by the SEC at www.sec.gov.
The
foregoing summary of the Stipulation and the transactions contemplated thereby
does not purport to be complete and is subject to, and qualified in its entirety
by, the full text of the Stipulation, annexed as Exhibit 99.2 to our Quarterly
Report on Form 10-Q for the six-month period ended June 30, 2009, filed with the
SEC on August 13, 2009.
As a result of the issuance of the
Partial Final Award and the execution of the Stipulation the Technology
Transaction will not occur, we are no longer obligated to issue the 9,230,000
shares of our common stock (the “Shares”) to NQCI, formerly required pursuant to
the terms of the Second Interim Award issued by the Arbitrator on August 4,
2008, and we are no longer required to file a resale registration statement
under the Securities Act of 1933, as amended, for the Shares. Accordingly, the
net fair value of $1,569,100 for the Shares accrued under “Shares issuable” as
of December 31, 2008 was reversed resulting in an adjustment of $1,569,100 to
non-operating income in the statement of operations, recognized as “Change in
and reduction of shares issuable”, for the nine months ended September 30,
2009.
In addition, pursuant to the terms of
the Stipulation, we reversed the accruals for the minimum royalty under the
terms of the License Agreement, resulting in a $645,833 non-operating reduction
in arbitration liabilities to the statement of operations for the nine months
ended September 30, 2009. See Note 12, “License Agreement” below.
In the event we are unable to comply
with the terms of the Stipulation, this could have a material adverse effect on
our capital structure, business and financial condition.
Note
5 – Cash Equivalents and Marketable Securities
We invest
available cash in short-term commercial paper, certificates of deposit, money
market funds, and high grade marketable securities. We consider any liquid
investment with an original maturity of three months or less when purchased to
be cash equivalents. Investments, including certificates of deposit with
maturity dates greater than three months when purchased, and which have readily
determined fair values, are classified as available-for-sale investments and
reflected in current assets as marketable securities at fair market value.
Historically, we have complied with our investment policy which requires that
all investments be investment grade quality and no more than ten percent of our
portfolio may be invested in any one security or with one institution. However,
recently, our ability to continue to follow this policy has not been practicable
due to the small aggregate amount of investment funds that has been remaining
for investment. As a result, as of September 30, 2009, all of our cash was held
in a high grade money market fund.
Restricted
cash represents deposits secured as collateral for a letter of credit pursuant
to our operating facility lease agreement at September 30, 2009.
Note
6 – Fair Value Measurements
Effective
January 1, 2008, we adopted Accounting Standards Codification (“ASC”) 820
Fair Value Measurements and
Disclosures
(“ASC 820”) (formerly Statement of Financial Standards No.
(“FAS”) 157
Fair Value
Measurements
). ASC 820 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
This statement does not require any new fair value measurements; rather, it
applies to other accounting standards that require or permit fair value
measurements. In February 2008, ASC 820-10-65
Fair Value Measurements and
Disclosures,
subtopic
Overall,
section
Transition and Open Effective Date
Information
(“ASC 820-10-65”) (formerly Financial Accounting Standards
Board (“FASB”) Staff Positions (“FSP”) FAS 157-2
Effective Date of FASB Statement
No. 157
), was issued, which delays the effective date of ASC 820 to
fiscal years and interim periods within those fiscal years beginning after
November 15, 2008 for non-financial assets and non-financial liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). We elected to defer the
adoption of the standard for these non-financial assets and
liabilities.
Fair
value is defined under ASC 820 as the price that would be received to sell an
asset or paid to transfer a liability in the principal or most advantageous
market in an orderly transaction between market participants on the measurement
date. ASC 820 also establishes a three-level hierarchy, which requires an entity
to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value.
Beginning
January 1, 2008, assets and liabilities recorded at fair value in the balance
sheets are categorized based upon the level of judgment associated with the
inputs used to measure their fair value. Level inputs, as defined by ASC 820,
are as follows:
|
|
·
|
Level
I - inputs are unadjusted, quoted prices for identical assets or
liabilities in active markets at the measurement
date.
|
|
|
·
|
Level
II - inputs, other than quoted prices included in Level I, that are
observable for the asset or liability through corroboration with market
data at the measurement date.
|
|
|
·
|
Level
III - unobservable inputs that reflect management’s best estimate of what
market participants would use in pricing the asset or liability at the
measurement date.
|
The
following table summarizes fair value measurements by level at September 30,
2009 for assets and liabilities measured at fair value on a recurring
basis:
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
|
Cash
and cash equivalents
|
|
$
|
35,734
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
35,734
|
|
|
Marketable
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Corporate
securities fixed rate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Money
market fund
|
|
|
288,703
|
|
|
|
-
|
|
|
|
-
|
|
|
|
288,703
|
|
|
Restricted
cash
|
|
|
305,871
|
|
|
|
-
|
|
|
|
-
|
|
|
|
305,871
|
|
|
Total
assets (1)
|
|
$
|
630,308
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
630,308
|
|
(1) The
carrying amount for cash and cash equivalents, marketable securities, and
restricted cash approximates the fair value of such instruments due to the
variable rate of interest and/or the short maturities of these financial
instruments.
ASC
825-10-50
Financial
Instruments,
subtopic
Overall,
section
Disclosure
(“ASC 825-10-50”)
(formerly FAS 107
Disclosures
about Fair Value of Financial Instruments)
, requires disclosure of fair
value information about certain financial instruments for which it is practical
to estimate that value. The carrying amounts reported on our balance sheet for
cash and cash equivalents, marketable securities and restricted cash
approximates the fair value because of the variable rate of interest and/or
short-term maturity of these financial instruments. The total aggregate carrying
value of our cash and cash equivalents, marketable securities and restricted
cash was $630,308 and $3,664,974 as of September 30, 2009 and December 31, 2008,
respectively, which approximates the total aggregate fair value at the end of
the same periods. As considerable judgment is required to develop estimates of
fair value, the estimates are not necessarily indicative of the amounts we could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts.
Short-term
investments classified as available-for-sale were as follows:
|
|
|
September 30, 2009
|
|
|
|
|
Aggregate Fair
Value
|
|
|
Gross Unrealized
Gains / (Losses)
|
|
|
Estimated Fair
Value
|
|
|
Commercial
paper
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Corporate
securities fixed rate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
We review
impairments associated with the above in accordance with ASC 320-10-35
Investments-Debt and Securities,
subtopic
Overall,
section
Subsequent
Measurement
(“ASC 320-10-35”) (formerly FAS 115
Accounting for Certain Investments
in Debt and Equity Securities
and FSP FAS 115-1 and FAS 124-1
The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments
) to determine the
classification of the impairment as temporary or other-than-temporary. However,
due to the small aggregate amount of available investment funds, we did not hold
investments in commercial paper and/or high grade marketable securities, but
rather held our cash in a high grade money market fund as of September 30, 2009.
There were no short-term investments classified as available-for-sale as of
September 30, 2009 and as a result, the related impairments review was not
necessary.
There
were no gross unrealized gains or losses as of September 30, 2009.
Note
7 – Property and Equipment
Property
and equipment consist of the following at September 30, 2009:
|
Property
and equipment
|
|
$
|
474,244
|
|
|
Accumulated
depreciation
|
|
|
(227,440
|
)
|
|
Property
and equipment, net
|
|
$
|
246,804
|
|
Depreciation
expense for the three and nine months ended September 30, 2009 was $30,658 and
$92,230, respectively, compared to $27,238 and $75,792, respectively, for the
same periods in 2008.
During
the three months ended September 30, 2009, we did not dispose of any fixed
assets. During the nine months ended September 30, 2009, we disposed of two
fixed assets decreasing our property and equipment by an aggregate of $2,514 and
as a result, we recognized a total net loss on disposal in the amount of
$382.
In
accordance with ASC 360-10-35
Property, Plant, and Equipment,
subtopic
Overall,
section
Subsequent
Measurement
(“ASC 360-10-35”) (formerly FAS 144
Accounting for the Impairment or
Disposal of Long-Lived Assets)
, we performed a test of recoverability on
our property and equipment as of September 30, 2009. As a result of this test,
we determined our property and equipment not to be impaired and the carrying
value to be recoverable.
Formerly,
pursuant to the terms of the Second Interim Award issued on August 4, 2008,
which stated that the Technology Transaction was required to be submitted for
approval by our stockholders and subject to such approval, the Shares were
required to be issued to NQCI to effectuate the transaction, we accrued for the
issuance of the Shares to NQCI. As the Second Interim Award stated that we had
to issue the Shares upon the closing of the Technology Transaction and we were
unable to consummate the transaction, such contingency not being within our
control, we therefore, recorded the issuance as a liability, rather than as an
equity issuance. As of December 31, 2008, we accrued for the Shares to be issued
to NQCI in accordance with ASC 450
Contingencies
(“ASC 450”)
(formerly FAS 5
Accounting for
Contingencies)
, with the initial fair value of the Shares measured on
August 4, 2008, the date of the Second Interim Award.
Until issued, the
Shares were marked to market in accordance with ASC 815-40
Derivatives and Hedging,
subtopic
Contracts in
Entity’s Own Equity
(“ASC 815-40”) (formerly Emerging Issues Task Force
No. (“EITF”) 00-19
Accounting
for Derivative Financial Instruments Indexed to and Potentially Settled in, a
Company’s Own Stock
), with subsequent changes in fair value recorded as
non-operating change in fair value of shares issuable to our statement of
operations. The fair value of the Shares was measured using the closing price of
our common stock on the reporting date. The measured fair value of $10,153,000
for the accrued Shares on August 4, 2008, the date of the Second Interim Award,
was accrued under “Shares issuable” and expensed to “Research and development.”
From marking to market, the fair value of the Shares was revalued at $1,569,100
as of December 31, 2008. The resulting non-operating adjustment in fair value of
$8,583,900 to the statement of operations for the year ended December 31, 2008
was recognized as “Change in fair value of shares issuable.”
As a
result of the issuance of the Partial Final Award and the execution of the
Stipulation and the Memorandum, see Note 4, “Legal Proceedings” above, the
Technology Transaction will not occur, we are no longer obligated to issue the
Shares to NQCI, we are no longer required to file a resale registration
statement under the Securities Act covering the Shares and the Technology
Transaction will not be submitted to our stockholders for approval. Accordingly,
the net fair value of $1,569,100 for the Shares accrued under “Shares issuable”
as of December 31, 2008, was reversed due to the arbitrator’s Partial Final
Award, resulting in an adjustment of $1,569,100 to non-operating income in the
statement of operations, recognized as “Change in and reduction of shares
issuable”, for the nine months ended September 30, 2009.
As of
February 22, 2008, we entered into a 5-year lease agreement and relocated our
corporate office to a location in Los Angeles, CA. The total lease payments will
be $1,096,878 over the lease term. As of September 30, 2009, our remaining total
lease payments for our corporate office were $796,068.
The
following is a schedule by years of future minimum lease payments required under
the 5-year corporate office lease as of September 30, 2009:
|
Year
ending December 31:
|
|
|
|
|
|
|
2009
|
|
$
|
54,313
|
|
|
( 1
)
|
|
2010
|
|
|
224,650
|
|
|
|
|
2011
|
|
|
233,528
|
|
|
|
|
2012
|
|
|
242,842
|
|
|
|
|
2013
|
|
|
40,735
|
|
|
( 2
)
|
|
|
|
|
|
|
|
|
|
Total
minimum payments required
|
|
$
|
796,068
|
|
|
|
( 1 )
excludes lease payments made through September 30, 2009
( 2 )
initial term of the lease agreement ends February 2013
In
October 2008, we entered into a 5-year lease agreement through November 26,
2013, for our operating facility in Lake Forest, CA. The lease agreement
includes a tenant improvement allowance of $363,800, 50% of which can be applied
to rent payments with the remaining 50% applied to tenant improvement and
related expenditures. As of September 30, 2009, we expended $88,865 in
improvement and related expenses. After the drawdown of the 50% of the tenant
improvement allowance applicable to rent payments, in lieu of reimbursement to
us of cash by the landlord for the incurred improvements, the $88,865 will be
applied to rent payments with $45,605 applied as of September 30, 2009. The
remaining $43,260 was recognized under “Tenant improvement allowance receivable”
on our balance sheet as of September 30, 2009. The total lease payments,
including the 50% of the tenant improvement allowance applied to rent payments,
will amount to $1,367,507 over the lease term. As of September 30, 2009, our
remaining total lease payments for our operating facility are
$1,276,581.
The
following is a schedule, by years, of future minimum lease payments required
under the 5-year operating facility lease as of September 30, 2009:
|
Year
ending December 31:
|
|
|
|
|
|
|
2009
|
|
|
71,590
|
|
|
( 1
)
|
|
2010
|
|
|
293,722
|
|
|
|
|
2011
|
|
|
303,994
|
|
|
|
|
2012
|
|
|
314,266
|
|
|
|
|
2013
|
|
|
293,009
|
|
|
( 2
)
|
|
|
|
|
|
|
|
|
|
Total
minimum payments required
|
|
$
|
1,276,581
|
|
|
|
( 1 )
excludes lease payments made and applied through September 30, 2009
( 2 )
initial term of the lease agreement ends November 2013
All of
the space is in good condition and we expect it to remain suitable to meet our
needs for the foreseeable future. We intend to consolidate our offices and
sublease our current corporate office located in Los Angeles, California. As of
September 30, 2009, we continued to utilize both locations.
Note
10 – Interest Income
Interest
income of $915 and $11,657 and $44,871 and $278,941 was reported for the three
and nine months ended September 30, 2009 and 2008, respectively.
Note
11 – Related Party Transactions
In
connection with the contribution of certain assets to us by Consolidated
National, LLC (“CNL”),
on August
31, 2006
we issued
to CNL of which Terren Peizer, formerly our Executive Chairman and currently a
member of our Board of Directors, who beneficially owned 41.1% of our
outstanding common stock as of September 30, 2009, is the sole managing member
and beneficial owner, an aggregate of 9,600,000 shares of our common stock of
which 6,232,596 shares are still held by CNL.
We
previously entered into an Executive Chairman Agreement with Mr. Peizer for an
initial term of three years, with automatic one-year renewals. Mr. Peizer served
as our Executive Chairman until October 2008. For his services as our Executive
Chairman, Mr. Peizer was (i) scheduled to receive compensation in the amount of
$450,000 per annum as of July 1, 2007, with a signing bonus of $225,000,
(ii) scheduled to receive an annual bonus at the discretion of our Board of
Directors based on our performance goals and targeted at 100% of his base
compensation and (iii) eligible to participate in any of our equity incentive
plans. In the event Mr. Peizer’s position was terminated without good cause
or he resigned for good reason, we were obligated to pay Mr. Peizer a lump
sum in an amount equal to three years’ base compensation plus 100% of the
targeted bonus. Pursuant to the Executive Chairman Agreement, Mr. Peizer was
paid as an independent consultant. On August 19, 2008, Mr. Peizer and we agreed
that Mr. Peizer would cease serving as our Executive Chairman and would defer
cash payments of his compensation until further notice. Pursuant to Mr. Peizer's
non-involvement in operational aspects of the Company, we did not accrue for
related services for the three months ended September 30, 2009; however, Mr.
Peizer continues to be a member of our Board of Directors. As of September 30,
2009, we accrued, under “Accrued professional fees”, $393,750 for his deferred
compensation. We are currently in discussions with Mr. Peizer for the
forgiveness of the entire deferred compensation amount.
Dr.
Victor Gura, our Chief Medical and Scientific Officer, owns 15,497,250 shares of
common stock of NQCI (or approximately 20.9% of NQCI’s common stock outstanding
as of January 31, 2009), the company with which we entered into the License
Agreement. Such shares include 800,000 shares owned by Medipace Medical Group,
Inc., an affiliate of Dr. Gura (or approximately 1.1% of NQCI’s common stock
outstanding as of January 31, 2009), and 250,000 shares subject to warrants held
by Dr. Gura which are currently exercisable (or approximately less than 1.0% of
NQCI’s common stock outstanding as of January 31, 2009).
Dr. Gura
maintains an office located in Beverly Hills, California. Pursuant to a
reimbursement agreement effective January 29, 2008, we reimburse 50% of the
rental and 50% of his monthly parking. The term of the agreement commenced on
April 23, 2007, the date of the office lease agreement, and will continue until
the date on which Dr. Gura ceases to use the remote office to perform his duties
as our Chief Medical and Scientific Officer. From commencement through September
30, 2009, we incurred $2,317 and $59,542, reimbursed Dr. Gura $2,216 and
$55,873, and deferred $101 and $3,669 for the 50% reimbursement of the monthly
parking and rental, respectively.
Note
12 – License Agreement
On August
31, 2006, we entered into a Contribution Agreement with CNL. We issued CNL
9,600,000 shares of common stock in exchange for (a) the right, title, and
interest to the name “Xcorporeal” and related trademarks and domain names, and
(b) the right to enter into a License Agreement with NQCI, pursuant to which we
obtained the exclusive rights to the technology relating to our kidney failure
treatment and other medical devices which, as listed under “Technology” on the
License Agreement, are “all existing and hereafter developed Intellectual
Property, Know-How, Licensor Patents, Licensor Patent Applications, Derivative
Works and any other technology, invented, improved or developed by Licensor, or
as to which Licensor owns or holds any rights, arising out of or relating to the
research, development, design, manufacture or use of (a) any medical device,
treatment or method as of the date of this Agreement, (b) any portable or
continuous dialysis methods or devices, specifically including any Wearable
Artificial Kidney and related devices, (c) any device, methods or treatments for
congestive heart failure, and (d) any artificial heart or coronary device.”
Operations was a shell corporation prior to the transaction. We valued the
License Agreement at the carry-over basis of $1,000. As consideration for being
granted the License, we agreed to pay to NQCI a minimum annual royalty of
$250,000, or 7% of net sales, although we have asserted in the Proceeding that
NQCI’s breaches of the License Agreement excused our obligation to make the
minimum royalty payments. However, as a result of the execution of the
Memorandum and the Stipulation, in the event we enter into the Proposed
Transaction or another Transaction, we will no longer be obligated to pay NQCI
any royalty payments under the License Agreement. For a more detailed discussion
of the Memorandum and the Stipulation, see Note 4, “Legal Proceedings”
above.
Although
under the terms of the Partial Final Award the Arbitrator denied NQCI’s
application for interim royalties, we recorded $645,833 in royalty expenses
covering the minimum royalties from commencement of the License Agreement
through March 31, 2009. Pursuant to the Memorandum and the Stipulation the
parties thereto agreed to forego the interim royalties provided for under the
terms of the Partial Final Award. As a result, we reversed the accruals for the
minimum royalty payments, resulting in a $645,833 non-operating reduction in
arbitration liabilities to the statement of operations for the nine months ended
September 30, 2009. See Note 4, “Legal Proceedings” above.
Note
13 – Stock Options and Warrants
Incentive
Compensation Plan
On
October 12, 2007, we adopted the Xcorporeal, Inc. 2007 Incentive Compensation
Plan and the related form of option agreement that is substantially identical to
the 2006 Incentive Compensation Plan that was in effect at Operations
immediately prior to the merger.
The plan
authorizes the grant of stock options, restricted stock, restricted stock units,
and stock appreciation rights. There are 3,900,000 shares of common stock
authorized for issuance under to the 2007 Incentive Compensation Plan (subject
to adjustment in accordance with the provisions of the plan). The plan will
continue in effect for a term of up to ten years. As of September 30, 2009,
there were outstanding options to purchase 720,000 shares of our common stock
and 3,180,000 shares were available for issuance under the 2007 Incentive
Compensation Plan.
On
October 12, 2007, we also assumed options to purchase up to 3,880,000 shares of
common stock that were granted by Operations under its 2006 Incentive
Compensation Plan, of which 1,635,000 have since been forfeited, canceled, or
expired, and therefore, options to purchase 2,245,000 shares of our common stock
remain outstanding.
Stock
Options to Employees, Officers and Directors
The
Compensation Committee of our board of directors determines the terms of the
options granted, including the exercise price, the number of shares subject to
option, and the vesting period. Options generally vest over five years and have
a maximum life of ten years.
During
the three months ended September 30, 2009, no options were granted, forfeited,
canceled, or exercised.
We
reported $670,481 and $1,718,109 in stock-based compensation expense for
employees, officers, and directors for the three and nine months ended September
30, 2009, respectively. For the three and nine months ended September 30, 2008,
we reported $1,731,200 and $3,813,158, respectively, in stock-based compensation
expense for employees, officers, and directors.
All
compensation expense for stock options granted has been determined under the
fair value method using the Black-Scholes option-pricing model with the
following assumptions:
|
|
|
For the nine months ended
|
|
|
|
|
September 30, 2009
|
|
|
Expected
dividend yields
|
|
zero
|
|
|
Expected
volatility
|
|
|
130%
|
|
|
Risk-free
interest rate
|
|
|
3.53-3.81%
|
|
|
Expected
terms in years
|
|
2.12-9.01
years
|
|
Warrants
and Stock Options to Non-Employees
During
the three months ended September 30, 2009, we did not issue any warrants. As of
September 30, 2009, there were 551,721 warrants outstanding, which were fully
vested and exercisable.
We reported $21 and $3,687 in
stock-based compensation expenses for consultants for the three and nine months
ended September 30, 2009, respectively. We reported $8,097 and $92,842 in
stock-based compensation expense for consultants for the three and nine months
ended September 30, 2008, respectively. The reduction in stock-based
compensation expense was a result of options forfeited as a result of the
termination of consulting services of certain of our consultants and vesting
options and warrants.
Compensation
for options granted to non-employees has been determined in accordance with ASC
718
Compensation-Stock
Compensation
(“ASC 718”) (formerly FAS 123R
Share-Based Payment
) and ASC
505-50
Equity,
subtopic
Equity-Based Payments to
Non-Employees
(“ASC 505-50”) (formerly EITF 96-18
Accounting For Equity Instruments
That Are Issued To Other Than Employees For Acquiring or In Conjunction With
Selling Goods Or Services
and EITF 00-18
Accounting Recognition for Certain
Transaction Involving Equity Instruments Granted to Other Than
Employees)
. Accordingly, compensation is determined using the fair value
of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measured.
For
options and warrants issued as compensation to non-employees for services that
are fully vested and non-forfeitable at the time of issuance, the estimated
value is recorded in equity and expensed when the services are performed and
benefit is received as provided by ASC 505-50.
All
charges for warrants granted have been determined under the fair value method
using the Black-Scholes option-pricing model with the following
assumptions:
|
|
|
For the nine months ended
|
|
|
|
|
September 30, 2009
|
|
|
Expected
dividend yields
|
|
zero
|
|
|
Expected
volatility
|
|
|
130%
|
|
|
Risk-free
interest rate
|
|
|
1.05-3.19%
|
|
|
Expected
terms in years
|
|
0.14-7.62
years
|
|
The
following table shows the change in unamortized compensation expense for stock
options and warrants issued to employees, officers, directors and non-employees
during the nine months ended September 30, 2009:
|
|
|
Stock Options and
Warrants
Outstanding
|
|
|
Unamortized Compensation
Expense
|
|
|
|
|
|
|
|
|
|
|
January
1, 2009
|
|
|
4,429,221
|
|
|
|
10,092,109
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
in the period
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
& Cancelled in the period
|
|
|
(912,500
|
)
(1)
|
|
|
(2,932,478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Expensed
in the period
|
|
|
-
|
|
|
|
(2,167,551
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
in the period
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2009
|
|
|
3,516,721
|
|
|
$
|
4,992,080
|
|
(1) As
part of streamlining our operations, we terminated 19 employees on March 13,
2009 and one employee on April 30, 2009. As a result, the terminated employees’
unvested and unexercised vested options were forfeited. The terminated employees
did not exercise their vested options and therefore, the vested options expired
60 days from their termination date.
|
|
|
Number of
Options and
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Stock Options and Warrants
|
|
|
|
|
|
|
|
Balance
at January 1, 2009
|
|
|
4,429,221
|
|
|
$
|
5.62
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
& Cancelled
|
|
|
(
912,500
|
)
|
|
|
7.00
|
|
|
Balance
at September 30, 2009
|
|
|
3,516,721
|
|
|
$
|
5.26
|
|
Note
14 – Stockholders’ Deficit
Effective
as of September 4, 2009, our common stock commenced trading on the Pink Sheets
Electronic OTC Market, an inter-dealer electronic quotation service of
securities traded over-the-counter also known as the Pink Sheets (“Pink
Sheets”), under the symbol “XCRP.PK”. In addition, effective as of the same
date, our common stock was suspended from trading on NYSE Amex LLC (formerly
American Stock Exchange) (“Amex”).
On
September 30, 2009, 400,000 shares of common stock were granted as compensation
for consulting services rendered to us.
Our
“Total Stockholders’ Deficit” as of September 30, 2009, is a result of our
continued operating losses with our deficit accumulated during the development
stage being greater than our additional paid in capital.
Note
15 – Product Development Agreement
In July
2007, we entered into the Aubrey Agreement for assistance with the development
of the PAK. As of March 31, 2009, the work was completed and we terminated the
agreement with Aubrey.
Note
16 – Subsequent Events
On
October 15, 2009, we paid approximately $76,000, which was non-reimbursable by a
certain third party described above under Note 2, “Nature of Operations and
Going Concern Uncertainty”, of the approximately $172,000 in deferred employee
compensation as of September 30, 2009. As of November 12, 2009, we had
approximately $162,000 in deferred employee compensation recognized under
“Deferred compensation” on our balance sheet.
As of
November 12, 2009, the “Expense receivable” balance of approximately $43,000
formerly existing as of September 30, 2009, described above under Note 2,
“Nature of Operations and Going Concern Uncertainty”, was paid in full. As of
the same date, we had approximately $112,000 in “Expense receivable” which
included approximately $12,000 of an anticipated payroll tax refund pursuant to
COBRA premium assistance payments as of September 30, 2009.
As of
November 12, 2009, the exclusivity negotiation period remains in effect and we
are continuing negotiations with a certain third party, as more fully described
above under Note 2, “Nature of Operations and Going Concern
Uncertainty”.
Our
management has evaluated subsequent events and their impact on the reported
results and disclosures through November 16, 2009, which is the date these
financial statements were issued and filed with the SEC.
ITEM
2.
Management
’
s Discussion and Analysis of
Financial Condition and
Results of Operations.
The
following discussion of our financial condition and results of operations should
be read in conjunction with our interim financial statements and the related
notes, and the other financial information included in this report.
Forward-Looking
Statements
Unless
the context otherwise indicates or requires, as used in this Quarterly Report on
Form 10-Q, or the “Quarterly Report”, references to “Xcorporeal, ”“we,” “us,”
“our” or the “Company” refer to Xcorporeal, Inc., a Delaware corporation, and
prior to October 12, 2007, the company which is now our subsidiary and known as
Xcorporeal Operations, Inc., or “Operations”.
This
Quarterly Report contains “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995 with respect to the financial
condition, results of operations, business strategies, operating efficiencies or
synergies, competitive positions, growth opportunities for existing products,
plans and objectives of management, markets for our stock and other
matters. Statements in this Quarterly Report that are not historical facts are
“forward-looking statements” for the purpose of the safe harbor provided by
Section 21E of the Securities Exchange Act of 1934, as amended, or the “Exchange
Act”, and Section 27A of the Securities Act of 1933, or the “Securities Act”.
Forward-looking statements reflect our current expectations or forecasts of
future events. Forward-looking statements generally can be identified by the use
of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,”
“intend,” “estimate,” “believe,” “project,” “continue,” “plan,” “forecast,” or
other similar words. Such forward-looking statements, including, without
limitation, those relating to our future business prospects, revenues and
income, wherever they occur, are necessarily estimates reflecting the best
judgment of our senior management on the date on which they were made, or if no
date is stated, as of the date of this Quarterly Report. These
forward-looking statements are subject to risks, uncertainties and assumptions,
including those described below in Item 1A - Risk Factors, in the section
captioned “Risk Factors” of our Annual Report on Form 10-K (the “Annual
Report”) filed with the United States Securities and Exchange Commission (the
“SEC”) on March 31, 2009, and in the section captioned “Risk Factors” in
each of our Quarterly Reports on Form 10-Q, filed with the SEC on May 15, 2009
and August 13, 2009 (collectively, the “Quarterly Reports”), that may affect the
operations, performance, development and results of our business. Because these
factors could cause our actual results or outcomes to differ materially from
those expressed in any forward-looking statements made by us or on our behalf,
you should not place undue reliance on any such forward-looking statements.
New factors emerge from time to time, and it is not possible for us to predict
which factors will arise. In addition, we cannot assess the impact of each
factor on our business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements.
You
should understand that, in addition to those factors discussed below in Item 1A
- Risk Factors and in the section captioned “Risk Factors” of our Annual
Report and events discussed below in the section captioned “Recent
Developments,” factors that could affect our future results and could cause our
actual results to differ materially from those expressed in such
forward-looking statements, include, but are not limited to:
|
|
·
|
the
effect of receiving a “going concern” statement in our independent
registered public accounting firm’s report on our 2008 financial
statements included in the Annual
Report;
|
|
|
·
|
our
substantial capital needs and ability to obtain financing both on
immediate, short-term and a long-term
basis;
|
|
|
·
|
the
results of the arbitration proceeding with National Quality Care, Inc., or
“NQCI”, and its impact on our ability to exercise our business plan going
forward;
|
|
|
·
|
our
ability to successfully research and develop marketable
products;
|
|
|
·
|
our
ability to obtain regulatory approval to market and distribute our
products;
|
|
|
·
|
anticipated
trends and conditions in the industry in which we operate, including
regulatory changes;
|
|
|
·
|
general
economic conditions; and
|
|
|
·
|
other
risks and uncertainties as may be detailed from time to time in our public
announcements and filings with the
SEC.
|
Although
we believe that our expectations are reasonable, we cannot assure you that our
expectations will prove to be correct. Should any one or more of these risks or
uncertainties materialize, or should any underlying assumptions prove incorrect,
actual results may vary materially from those described in this Quarterly Report
as anticipated, believed, estimated, expected or intended.
These
factors are not exhaustive, and new factors may emerge or changes to the
foregoing factors may occur that could impact our business. Except to the extent
required by law, we undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or any other reason. All subsequent forward-looking statements
attributable to us or any person acting on our behalf are expressly qualified in
their entirety by the cautionary statements contained or referred to herein. In
light of these risks, uncertainties and assumptions, the forward-looking events
discussed in this Quarterly Report may not occur. You should review carefully
Item 1A - Risk Factors, this Item 2 and the section captioned “Risk Factors”
included in our Annual Report and Quarterly Reports for a more complete
discussion of these and other factors that may affect our business.
Overview
We
are a medical device company that has been engaged in developing an
innovative
extra-corporeal
platform technology to be used in devices to replace the
function of various human organs. These devices will seek to provide patients
with improved, efficient and cost effective therapy. We hope that the platform
will lead to the following three products:
|
|
·
|
A
Portable Artificial Kidney, or “PAK”, for attended care Renal Replacement
Therapy, or “RRT”, for patients suffering from Acute Renal Failure, or
“ARF”
|
|
|
·
|
A
PAK for home hemodialysis for patients suffering from End Stage Renal
Disease, or “ESRD”
|
|
|
·
|
A
Wearable Artificial Kidney, or “WAK”, for continuous ambulatory
hemodialysis for treatment of ESRD
|
Because
of our lack of resources and difficulty in obtaining financing, we have been
unable to continuously engage in our development activities, and therefore, are
evaluating our immediate and substantial liquidity needs as described herein. If
we are unable to obtain the necessary capital for any reason, including through
the sale of all or substantially all of our assets, a business combination with
another entity in a transaction where we would not be the surviving entity or a
combination thereof, we may need to or will be forced to discontinue our
operations and liquidate our assets and/or may be forced to seek protection
under bankruptcy laws. Subject to us first entering into a transaction for the
sale of substantially all or all of our assets or a business combination
with another entity in a transaction where we would not be the surviving entity,
if we are able to obtain necessary capital and otherwise continue our business
operations, (i) we plan to continue testing and developing the technology for
our
extra-corporeal
platform and (ii) while we hope to eventually exploit our technology’s potential
Congestive Heart Failure, or “CHF”, applications through licensing or strategic
arrangements, we intend to focus initially on the renal replacement applications
described below.
We have
completed functional prototypes of our attended care and home PAKs that we hope
to commercialize after obtaining notification clearance from the Food and Drug
Administration, or “FDA”, under Section 510(k) of the Federal Food, Drug and
Cosmetic, or “FDC”, Act based on the existence of predicate devices, which,
subject to our capital limitations described below, we plan to seek in the
future. We have demonstrated a feasibility prototype of the WAK and we will
determine whether to devote any available resources to the development of
the WAK; commercialization of the WAK will require development of a functional
prototype and likely a full pre-market approval, or “PMA”, by the FDA, which
could take several years or longer. Subject to us first entering into a
transaction for the sale of substantially all or all of our assets or a
business combination with another entity in a transaction where we would not be
the surviving entity, unless we are able to raise funds to satisfy our
current liabilities and other obligations as they become due, obtain additional
debt or equity financing and otherwise continue our business operations, we will
not be able to submit a 510(k) notification with the FDA for the PAK or
the WAK.
Our PAK
for the attended care market is a portable, multifunctional renal replacement
device that will offer cost-effective therapy for those patients suffering from
ARF, causing a rapid decline in kidney function. We have completed our
functional prototype of this product, which is currently undergoing bench
testing, and, subject to our capital limitations described below, plan to submit
a 510(k) filing with the FDA in the future. We plan to commercialize this
product after receiving clearance from the FDA. Timing of FDA clearance is
uncertain at this time. Subject to us first entering into a transaction for the
sale of substantially all or all of our assets or a business combination
with another entity in a transaction where we would not be the surviving entity,
unless we are able to raise funds to satisfy our current liabilities and other
obligations as they become due, obtain additional debt or equity financing and
otherwise continue our business operations, we will not be able to submit a
510(k) notification with the FDA for this product.
Our PAK
for the home hemodialysis market is a device for patients suffering from ESRD,
in whom the kidneys have ceased to function. We have also completed our
functional prototype of this product, which is currently undergoing bench
testing, and, subject to our capital limitations described below, we intend
to submit a 510(k) with the FDA in the future. Subject to us first entering into
a transaction for the sale of substantially all or all of our assets or a
business combination with another entity in a transaction where we would not be
the surviving entity, unless we are able to raise funds to satisfy our current
liabilities and other obligations as they become due, obtain additional debt or
equity financing and otherwise continue our business operations, we will not be
able to submit a 510(k) notification with the FDA for this product. Clinical
trials would be anticipated to commence after the FDA clearance is
received.
Our WAK
is a device for the chronic treatment of ESRD. We have successfully demonstrated
a prototype system that weighs less than 6 kg., is battery operated, and can be
worn by an ambulatory patient. Subject to us first entering into a transaction
for the sale of substantially all or all of our assets or a business
combination with another entity in a transaction where we would not be the
surviving entity, assuming we are able to raise funds to satisfy our current
liabilities and other obligations as they become due and obtain additional debt
or equity financing and assuming we continue our business operations, we will
continue to evaluate the feasibility of furthering our development of this
product.
We also
hope to implement our validation and verification strategy including bench
testing, clinical testing and regulatory strategy in the U.S. and
abroad.
We have
focused much of our efforts on development of the PAK, which we do not believe
has been derived from the Technology (as defined below) covered by the License
Agreement (as defined below). As described below under “Recent
Developments,” subject to us first entering into a transaction for the sale
of substantially all or all of our assets or a business combination with
another entity in a transaction where we would not be the surviving entity, we
will determine whether to devote any available resources to development of the
WAK. Because none of our products is yet at a stage where it can be marketed
commercially and because of the capital limitations that we are experiencing, we
are not able to predict what portion of our future business, if any, will be
derived from each of our products.
We are a
development stage company, have generated no revenues to date and have been
unprofitable since our inception, and, unless we consummate a transaction for
the sale of substantially all or all of our assets or a business
combination with another entity in a transaction where we would not be the
surviving entity, will incur substantial additional operating losses for at
least the foreseeable future as we continue, to the extent available, to
allocate our extremely limited resources to ongoing business operations and
other activities. We do not believe our existing cash reserves will be
sufficient to satisfy our current liabilities and other obligations before we
achieve profitability. Our ability to meet such obligations as they become due
will depend on our ability to secure debt or equity financing and/or consummate
a transaction for the sale of substantially all or all of our assets or a
business combination with another entity in a transaction where we would not be
the surviving entity. Unless we are able to obtain funds sufficient to support
our operations and to satisfy our ongoing capital requirements, as more fully
described below, we will not be able to develop any of our products, submit
510(k) notifications or PMA applications to the FDA, conduct clinical trials or
otherwise commercialize any of our products. We may not be able to
obtain needed funds on acceptable terms, or at all, and there is substantial
doubt of our ability to continue as a going concern. Accordingly, our historical
operations and financial information are not indicative of our future operating
results, financial condition, or ability to operate profitably as a commercial
enterprise.
Recent
Developments
Our
Deteriorating Financial Position and Potential Strategic
Transaction
In light
of our ongoing substantially deteriorating financial position and our immediate
need of additional financing, we have continued our efforts to streamline our
operations, including continuing some of the actions outlined below under the
caption “Restructuring Efforts”, in order to conserve any available resources.
Our management also continues to evaluate any possible strategic alternatives,
including entering into a transaction for the sale of substantially all or all
of our assets, a business combination with another entity in a transaction where
we would not be the surviving entity, licensing of certain of our intellectual
property rights, as a means to further develop our technologies, discontinuing
our operations and liquidating our assets and/or seeking protection under
bankruptcy laws.
As part
of a potential strategic transaction we have been considering, we have agreed
with a certain third party to an exclusivity period to negotiate a potential
cooperative transaction, in exchange for a non-refundable payment of $200,000
made to us by such third party. The exclusivity period will expire upon the
later of 100 calendar days from September 21, 2009 and the termination date of a
definitive agreement entered into with such third party, if any. If a definitive
agreement for the transaction is entered into prior thereto, the exclusivity
payment will be credited against the purchase price in such transaction. During
the exclusivity period, we have been providing and will continue to provide to
the third party access to our employees, properties, contracts, records and
other related materials. In addition, in the mutual interests of us and such
third party and at the direction of the third party, in connection with the
potential strategic transaction we have actively resumed research and
development of our Portable Artificial Kidney product with direct reimbursement
of related expenditures by such third party. Currently, the exclusivity period
remains in effect and negotiations continue. Among other reasons, due to the
current economic conditions and those particularly affecting healthcare related
companies, there is no assurance that any such transaction will occur or that it
would be accretive to our stockholders or result in any payment being made to
our stockholders. The financial statements filed as part of this Quarterly
Report on Form 10-Q does not include any adjustments that might result from the
outcome of this transaction, if any.
Trading
on Pink Sheets
Effective
as of September 4, 2009, our common stock commenced trading on the Pink Sheets
Electronic OTC Market, an inter-dealer electronic quotation service of
securities traded over-the-counter also known as the Pink Sheets (“Pink
Sheets”), under the symbol “XCRP.PK”. In addition, effective as of the same
date, our common stock was suspended from trading on NYSE Amex LLC (formerly
American Stock Exchange) (“Amex”).
Restructuring
Efforts
The
deterioration of the economy over the last year, coupled with the prolonged
delay in our ability to reach a resolution with respect to the consummation of
the Technology Transaction, has significantly adversely affected us. Many of the
expectations on which we had based our 2008 and 2009 business development plans
slowly eroded as a result of the lengthy arbitration proceeding with NQCI
commenced in 2006 and continuing into the second quarter of 2009. The
possibility of an adverse decision in the arbitration proceeding with respect to
our ownership right to the Technology has been a major factor in our inability
to secure debt or equity financing. Accordingly, during the first nine months of
2009, we modified certain of our activities and business and instituted a
variety of measures in an attempt to conserve cash and reduce our operating
expenses. Our actions included: termination of employment of 20 of our employees
or a reduction of approximately 77% of our labor force, deferral of compensation
for 5 of our 6 employees with continued deferral for 3 of our 6 employees,
reaching an agreement with the landlord for our operating facility in Lake
Forest, CA, to apply $88,865, in lieu of reimbursement of such amount to us
expended for the incurred improvements at such facility, toward rent payments
with $45,605 applied as of September 30, 2009, refocusing our available assets
and employee resources on the development of the PAK, agreeing to a direct
reimbursement arrangement for PAK related research and development expenses with
a certain third party with which we have agreed to an exclusivity period to
negotiate a potential cooperative transaction, continuing vigorous efforts to
minimize or defer our operating expenses, searching to obtain additional
financing to support our operations and to satisfy our ongoing capital
requirements in order to improve our liquidity position and continuing to
prosecute our patents and take other steps to perfect our intellectual property
rights. In light of the unprecedented economic slow down, lack of access to
capital markets and prolonged arbitration proceeding with NQCI, we were
compelled to undertake the efforts outlined above in order to remain in the
position to continue our operations. For a more detailed discussion of our
restructuring efforts, please see section entitled “Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
— Recent Developments” in our Quarterly Report on Form 10-Q for the six
month period ended June 30, 2009, filed with the SEC on August 13,
2009.
Due to
our continuing substantially deteriorating financial position, we have continued
some of the actions outlined above and will continue our efforts to streamline
our operations in order to conserve any available resources. Our management
continues to evaluate any possible strategic alternatives, including entering
into a transaction for the sale of substantially all or all of our assets, a
business combination with another entity in a transaction where we would not be
the surviving entity, licensing of certain of our intellectual property rights,
as a means to further develop our technologies, discontinuing our operations and
liquidating our assets and/or seeking protection under bankruptcy laws. There is
no assurance that any such sale transaction will occur or that it would be
accretive to our stockholders or result in any payment being made to our
stockholders. Subject to continuing our business operations, we hope to be
able to obtain additional financing to meet our cash obligations as they become
due and otherwise proceed with our business plan. Our ability to execute on our
current business plan is dependent upon us continuing our business operations,
our ability to obtain equity or debt financing, develop and market our products,
and, ultimately, to generate revenue. Subject to continuing our business
operations and unless we are able to raise financing sufficient to support our
operations and to satisfy our ongoing financing requirements, we will not be
able to develop any of our products, submit 510(k) notifications to the FDA,
conduct clinical trials or otherwise commercialize any of our products. We will
make every effort however, to continue the development of the PAK. As a result
of these conditions, there is substantial doubt about our ability to continue as
a going concern. Our ability to continue as a going concern is substantially
dependent on the successful execution of many of the actions referred to above,
on the timeline contemplated by our plans and our ability to obtain
additional financing. We cannot assure you that we will be successful now or in
the future in obtaining any additional financing on terms favorable to us, if at
all. The failure to obtain financing will have a material adverse effect on our
financial condition and operations.
Management’s
Discussion and Analysis
Basis
of Presentation
This
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” section should be read in conjunction with the accompanying
unaudited interim financial statements which have been prepared assuming that we
will continue as a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. Our
recurring losses from operations and net capital deficiency raise substantial
doubt about our ability to continue as a going concern. Our ability to continue
as a going concern is substantially dependent on the successful execution of
many of the actions referred to above and otherwise discussed in this
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” section and in Note 2, “Nature of Operations and Going Concern
Uncertainty” to our unaudited interim financial statements filed as part of this
Quarterly Report, on the timeline contemplated by our plans and our ability to
obtain additional financing. The uncertainty of successful execution of our
plans, among other factors, raises substantial doubt as to our ability to
continue as a going concern. The accompanying unaudited interim financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Results
of Operations for the three and nine months ended September 30,
2009.
We have
not generated any revenues since inception. We incurred a net loss of $1.5
million and $2.8 million for the three and nine months ended September 30, 2009,
respectively, compared to a net loss of $11.1 million and $22.8 million for the
three and nine months ended September 30, 2008, respectively. The decrease in
net loss was primarily due to (i) non-operating income resulting from accrual
reversals resulting from the issuance of the Partial Final Award and the
execution of the Stipulation and the Memorandum entered into with NQCI in
connection with the Proceeding, (ii) corporate restructuring, (iii) completion
and termination of the Aubrey Agreement, (iv) reduced legal fees, (v)
forfeitures of terminated employees’ unvested stock options, (vi) continuous
efforts to minimize current operating expenses, and (vi) an agreement with a
certain third party, with which we have agreed to an exclusivity period to
negotiate a potential cooperative transaction, for the direct reimbursement
of PAK related research and development expenses as well as salaries and
overhead expenses of our two engineers. At September 30, 2009, we had a negative
working capital of $3.3 million compared to a positive working capital of $1.4
million at September 30, 2008. At September 30, 2009, our total assets were $1.1
million compared to $4.4 million at December 31, 2008, which consisted primarily
of cash raised from the sale of our common stock sold in December
2006.
Interest
Income
For the
three and nine months ended September 30, 2009, respectively, we earned
interest income of $915 and $11,657 compared to $44,871 and $278,941 for the
three and nine months ended September 30, 2008, respectively. The decrease
in interest income was due to the depletion of cash held in our investment
account as a result of our use of cash for operations.
Liquidity
and Capital Resources
We expect
to incur operating losses and negative cash flows for the foreseeable future.
During the fourth quarter 2006, we raised approximately $27.3 million (net of
placement fees of $2.1 million) through a private placement. Our ability to
execute on our current business plan is dependent upon our ability to secure
additional funding, develop and market our products, and, ultimately, to
generate revenue.
As of
September 30, 2009, we had cash, cash equivalents and marketable securities of
approximately $0.3 million. We expended $0.2 million and
$3.0 million of cash during the three and nine months ended September 30,
2009, respectively, and we project to expend cash at a rate below
$0.1 million per month for the remainder of the 2009 fiscal year based upon
our restructuring efforts taken to date and planned going forward. However,
should our efforts to further reduce our costs and expenses not materialize, we
project to expend cash at a rate of approximately $0.1 million per month. Some
of these restructuring efforts undertaken included: deferral of compensation for
5 of our 6 employees with continued deferral for 3 of our 6 employees, reaching
an agreement with the landlord for our operating facility in Lake Forest, CA, to
apply $88,865, in lieu of reimbursement of such amount to us expended for the
incurred improvements at such facility, toward rent payments with $45,605
applied as of September 30, 2009 (after the drawdown of the 50% of the tenant
improvement allowance applicable to rent payments), reaching an agreement
with a certain third party with which we have agreed to an exclusivity period to
negotiate a potential cooperative transaction for a direct reimbursement by such
third party of our employment expenses of our two engineers, including salaries
and overhead expenses incurred by us in connection with consulting services
provided by our two engineers to such certain third party, and continuing
vigorous efforts to minimize or defer our operating expenses. For a more
detailed discussion of our restructuring efforts undertaken to date, please see
above section captioned “Recent Developments.” In addition, in accordance with
the terms of the Stipulation and the Memorandum entered into with NQCI in
connection with the Proceeding, we are obligated to pay damages, costs and legal
fees in connection with the Proceeding described above in an amount of $1.87
million.
Based on
our current cash and cash equivalent resources, other current assets, current
monthly operating burn rate, and using assumptions that by nature are imprecise,
our management believes we have available liquidity to fund our limited
restructured operations approximately through the next 30 days from November 12,
2009. We will consider further reduction of our costs and expenses in the near
future, if feasible. Therefore, we must raise additional funds to be able
to continue our operations within approximately the next 30 days from November
12, 2009. We may not be successful in doing so on terms acceptable to us, and
the inability to raise capital will require us to curtail our current plans,
which will have a material adverse effect on our plan of operation or will
result in the curtailment of our operations. Our ability to execute on our
current business plan is dependent upon us continuing our
business operations and our ability to obtain equity financing, develop and
market our products, and, ultimately, to generate revenue.
As of
November 12, 2009, we had available cash of approximately $120,000, excluding
restricted cash. We currently have a monthly burn rate of approximately
$116,000. Under these current conditions, we will have sufficient cash
approximately through the next 30 days from November 12, 2009, assuming no
further cash injections are received. In addition to previously taken
restructuring efforts, including reduction of personnel, we also reduced our
cash outflows by means of deferring 50% of the monthly compensation for 5 of our
6 active employees effective July 1, 2009 and currently continue to defer 50% of
the monthly compensation for 3 of our 6 active employees. Two of our engineers
are providing consulting services to the third party with which we have agreed
to an exclusivity period to negotiate a potential cooperative transaction, and
such third party is fully reimbursing us for our employment expenses of our two
engineers, including salaries and overhead. As of September 30, 2009, we
deferred approximately a total of $172,000 in employee compensation, recognized
under “Deferred compensation” on our balance sheet. We may consider further
reducing our costs and expenses in the near future, if feasible. Therefore,
we must raise additional funds to be able to continue our operations. If we are
unable to secure additional capital within approximately the next 30 days from
November 12, 2009, we will be forced to file for bankruptcy and/or cease our
operations. The accompanying financial statements have been prepared on the
basis of a going concern and do not reflect any adjustments due to these
conditions.
We expect
to incur negative cash flows and net losses for the foreseeable future. In
addition, pursuant to the terms of the Partial Final Award, NQCI was awarded an
amount equal to approximately $1.87 million in attorneys’ fees and costs
consistent with the Arbitrator’s order issued on August 13, 2008 related to the
same and NQCI’s application for interim royalties and expenses was denied. We
intend to pay such attorneys’ fees and costs due to NQCI from the proceeds
received in connection with the consummation of the Proposed Transaction, or
another Transaction, if such transaction is consummated, or upon raising of
additional capital to sufficiently satisfy such award and or other immediate
liquidity requirements, which funds we will need to obtain within approximately
the next 30 days from November 12, 2009. Pursuant to the terms of the
Stipulation, NQCI agreed not to attempt before December 1, 2009 to execute on or
file any motion, petition or application or commence any proceeding seeking the
collection of such award of attorneys’ fees and costs, which is intended to
allow the Parties a sufficient period within which to execute a definitive
agreement in connection with the Proposed Transaction or a Transaction. Such
period shall automatically be extended for a period of 120 days from December 1,
2009 if the definitive agreement is executed in full on or before December 1,
2009. In addition, if the execution of the definitive agreement occurs on or
before December 1, 2009, the December 1, 2009 deadline shall automatically be
further extended for a period of 60 days for each amendment to a proxy or
information statement related to the transactions contemplated by the
acquisition agreement, filed by us in response to comments made by the SEC.
However, there can be no assurances that the Proposed Transaction or any other
Transaction will occur or that it would be accretive to our stockholders or
result in any payment being made to our stockholders.
As part
of a potential cooperative transaction we have been considering with a certain
third party, we have agreed to an exclusivity negotiation period with such third
party in exchange for a non-refundable payment of $200,000 made to us by such
third party, recognized under “Deferred gain” as of September 30, 2009 on our
balance sheet. The exclusivity period expires upon the later of 100 calendar
days from September 21, 2009 and the termination date of a definitive agreement
entered into with such third party, if any. However, if a definitive agreement
for the transaction is entered into prior thereto, the exclusivity payment will
be credited against the purchase price in such transaction. During the
exclusivity period, we will provide to the third party access to our employees,
properties, contracts, records and other related materials. In addition, in the
mutual interests of us and such third party and at the direction of the third
party, in connection with the potential strategic transaction, we actively
resumed research and development of our Portable Artificial Kidney product with
direct reimbursement of related expenditures by such third party. As of
September 30, 2009, we incurred and expect reimbursement of approximately
$43,000, recognized under “Expense receivable” on our balance sheet and offset
as a credit to our statement of operations for the three months ended September
30, 2009, for these expenses. Currently, the exclusivity period remains in
effect and negotiations continue.
If we are
unable to enter into a definitive agreement and otherwise comply with the
deadlines and requirements summarized above, under the terms of the Stipulation,
NQCI will have the right to execute on or file any motion, petition or
application or commence any proceeding seeking the collection of the sum of
approximately $1.87 million in attorneys’ fees and costs that have been awarded
in NQCI’s favor under the terms of the Partial Final Award, which would impact
our ability to use and develop our technologies, would have a material adverse
effect on our business and results of operations and may cause us to cease our
operations and/or file for bankruptcy.
Based
upon our current plans, we believe that our existing cash reserves will not be
sufficient to meet our operating expenses and capital requirements before we
achieve profitability. Accordingly, we need to seek additional funds through
public or private placement of shares of our preferred or common stock or
through public or private debt financing, or to enter into a transaction for the
sale or licensing of our assets, including the sale of substantially all or all
of our assets, or a business combination with another entity in a transaction
where we would not be the surviving entity. Our ability to meet our cash
obligations as they become due and payable depends on our ability to sell
securities, borrow funds, further reduce operating costs, sell or license our
assets, including the sale of substantially all or all of our assets or a
business combination with another entity in a transaction where we would not be
the surviving entity, or some combination thereof. We may not be successful in
obtaining necessary funds on acceptable terms, if at all. The inability to
obtain financing will require us to curtail our current plans, which will have a
material adverse effect on our plan of operations. Our ability to execute on our
current business plan is dependent upon our ability to obtain equity financing,
develop and market our products, and, ultimately, to generate revenue. As a
result of these conditions, there is substantial doubt about our ability to
continue as a going concern.
We are
currently actively considering all potential transactions, which may include the
Proposed Transaction (as described above), strategic partnership(s), disposition
of substantially all or all of our assets, a business combination with another
entity in a transaction where we would not be the surviving entity and/or
licensing of certain of our intellectual property rights, as a means to further
develop our technologies. Because of the current economic conditions and
those particularly affecting healthcare related companies and because of our
lack of liquidity, there is no assurance that any such transaction will occur or
that it would be accretive to our stockholders or result in any payment being
made to our stockholders. If we are unsuccessful in obtaining immediate debt or
equity financing on terms acceptable to us or otherwise unsuccessful in
addressing our liquidity concerns or if we are unable to enter into any such
transaction, this could have a material adverse effect on our plan of operation,
may result in the curtailment of our operations and/or require us to file for
bankruptcy.
As part
of our analysis of ways to reduce costs and in light of the high cost of
continuing to be a public reporting company under the Exchange Act and complying
with the Sarbanes-Oxley Act of 2002, we are contemplating exploring and may be
required to explore alternative platforms, such as deregistering under the
Exchange Act, or “going dark” and having our common stock continue to be quoted
on the Pink Sheets without being a reporting company under Section 12(g) of the
Exchange Act. We are continuing to evaluate our options. Our recent
move to the Pink Sheets has provided meaningful savings to us as a result
of the elimination of fees associated with being listed on a national stock
exchange and deregistering under the Exchange Act would provide substantial
savings as a result of the elimination of the costs of being registered under
the Exchange Act. Analysis of deregistering under the Exchange Act involves
not only reducing costs, but also our expected sources of future capital as well
as the number of record holders of our outstanding common stock. A move to
deregister under the Exchange Act may result in a less liquid market for our
shares, but would result in continued public trading of our common stock by
holders wishing to trade.
Our
operating activities and research and development efforts resulted in a net loss
of $23.0 million in 2008 and $1.5 million and $2.8 during the three and nine
months ended September 30, 2009, respectively. In addition, we invested $25.0
million in high grade money market funds and marketable securities of which we
sold $24.7 million of the investments, leaving a balance of $0.3 million as of
September 30, 2009.
We have
focused much of our efforts on development of the PAK, which has not been
derived from the technology covered by the License Agreement. Through the
productive research and development efforts of the PAK, we have completed
functional prototypes of our attended care and home PAKs that we hope to
commercialize after 510(k) clearance from the FDA which we hope to
submit sometime in the future. Prior to the 510(k) submission to the FDA
for clinical use under direct medical supervision, the units will undergo final
verification and validation. It generally takes 4 to 12 months from the date of
a 510(k) submission to obtain clearance from the FDA, although it may take
longer. We expect that our monthly expenditures will increase as we shift
resources towards developing a marketing plan for the PAK. This plan will be
dependant on our ability to raise funds to satisfy our current liabilities and
other obligations as they become due and obtaining additional debt or equity
financing and otherwise continuing our business operations. If we are
unsuccessful in doing so, we will not be able to submit a 510(k)
notification with the FDA for this product.
We have
used some of our resources for the development of the WAK and have demonstrated
a feasibility prototype. Commercialization of the WAK will require development
of a functional prototype and likely a full pre-market approval by the FDA,
which could take several years. Our rights to the WAK derive in part from the
License Agreement pursuant to which we obtained the exclusive rights to the
Technology. Subject to continuing our business operations and/or entering into a
transaction for the sale of substantially all or all of our assets or a
business combination with another entity in a transaction where we would not be
the surviving entity, we will determine whether to devote additional resources
to the development of the WAK.
Because
neither the PAK nor the WAK is yet at a stage where it can be marketed
commercially, we are not able to predict the portion of our future business
which will be derived from each.
Research
and Development
We
employed an interdisciplinary team of scientists and engineers who were
developing the PAK and a separate, interdisciplinary team developing the WAK. As
a result of general economic conditions in 2008 and a deterioration of our
liquidity position, coupled with the prolonged delay in our ability to reach a
resolution with respect to the consummation of the Technology Transaction, we
have been significantly adversely affected. As a result, as of September 30,
2009 we have terminated 20 employees or 77% of our staff and have deferred
compensation of approximately $172,000. However, our downsized team is
continuing limited development of the PAK and we hope to be able to in the
future to devote any then available resources to the development of the
WAK.
In
addition, in the interest of the potential cooperative transaction with a
certain third party that we are currently considering, we have agreed to an
exclusivity period with such third party to negotiate a potential cooperative
transaction, and in connection therewith, we have actively resumed research and
development of our Portable Artificial Kidney. Such third party has agreed to
reimburse us for our related expenditures as well as salaries and overhead
expenses of our two engineers. As of September 30, 2009, we incurred and expect
reimbursement of approximately $43,000 for these expenses, recognized under
“Expense receivable” and offset as a credit to our statement of operations for
the three months ended September 30, 2009.
The PAK
is a multifunctional device that will perform hemodialysis, hemofiltration and
ultrafiltration under direct medical supervision. A variation of this device
will be developed for chronic home hemodialysis. An initial prototype of the
PAK, capable of performing the basic functions of a hemodialysis machine, and
demonstrating our unique new fluidics circuit, was completed at the end of
2007. The first physical prototype including industrial design of the PAK was
completed in October 2008. We hope to further refine this prototype by adding to
it safety sensors and electronic controls. Subject to our ability to obtain
debt or equity financing to satisfy our current liabilities and other
obligations as they become due, as more fully described above in the section
captioned “Recent Developments,” we hope to complete the final product
design of the PAK. The PAK units will undergo final verification and validation
prior to a 510(k) submission for clinical use under direct medical supervision.
A clinical study will not be required for this submission.
In a
clinical feasibility study conducted in London in March 2007, a research
prototype of the WAK was demonstrated in eight patients with end-stage renal
disease. Patients were treated for up to eight hours with adequate clearances of
urea and creatinine. The device was well tolerated and patients were able
to conduct activities of normal daily living including walking and
sleeping. There were no serious adverse events although clotting of the dialyzer
occurred in two patients. To our knowledge, this is the first successful
demonstration of a WAK in humans. Subject to us continuing our business
operations and further subject to us first consummating the Proposed
Transaction or another Transaction for the sale of substantially all or all of
our assets or a business combination with another entity in a transaction where
we would not be the surviving entity, and further subject to availability
of sufficient working capital to us, we hope to make substantial improvements to
the WAK. This work will result in a WAK Generation 2.0. Pending FDA approval of
an investigational Device Exemption (IDE), additional clinical studies will be
conducted upon completion of the Generation 2.0 WAK prototype.
Subject
to continuing our business operations and/or entering into a transaction for the
sale of substantially all or all of our assets, or a business combination with
another entity in a transaction where we would not be the surviving entity, if
we successfully obtain additional financing, we plan to make improvements to the
WAK design intended to move it from a feasibility prototype to a product
prototype. These include improvement of the heparin pumping system intended to
address the dialyzer clotting problem, the addition of safety sensors required
for commercial dialysis equipment, the addition of electrical controls to
provide a convenient user interface, improvements to the blood flow circuit, and
further miniaturization of the device to improve fit to the human body.
Additional clinical studies will be conducted upon completion of the
prototype.
We
incurred $0.6 million and $2.4 million in research and development costs during
the three and nine months ended September 30, 2009, respectively. This
compares to $12.7 million and $18.9 million incurred during the three and
nine months ended September 30, 2008, respectively. The decrease in research and
development costs is attributable to the completion and termination of the
Aubrey Agreement, our research and development progress, our corporate
restructuring efforts, entry into the Stipulation and the Memorandum with NQCI
and a direct reimbursement of PAK related research and development expenses
arrangement, including salaries and overhead expenses of our two engineers,
agreed to with a certain third party.
Contractual
Obligations and Commercial Commitments
The
following table sets forth a summary of our material contractual obligations and
commercial commitments as of September 30, 2009:
|
Contractual Obligations:
|
|
Total
|
|
|
Less than 1
year
|
|
|
1 - 3 years
|
|
|
3 - 5 years
|
|
|
More than 5
years
|
|
|
Capital
Lease Obligations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Operating
Lease Obligations (1)
|
|
|
2,149,059
|
|
|
|
137,973
|
|
|
|
1,677,342
|
|
|
|
333,744
|
|
|
|
-
|
|
|
Research
& Development Contractual Commitments
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other
Liabilities
|
|
|
6,515
|
|
|
|
1,335
|
|
|
|
5,180
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
2,160,574
|
|
|
$
|
144,308
|
|
|
$
|
1,682,522
|
|
|
$
|
333,744
|
|
|
$
|
-
|
|
Off-Balance
Sheet Arrangements
As of
September 30, 2009, we had no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
results of operations or cash flows.
Critical
Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations is
based upon our unaudited interim financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. Generally accepted accounting principles require management to make
estimates, judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and the disclosure of contingent assets and
liabilities. We base our estimates on experience and on various other
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that may not be readily apparent from other sources.
Our actual results may differ from those estimates.
We
consider our critical accounting policies to be those that involve significant
uncertainties, require judgments or estimates that are more difficult for
management to determine or that may produce materially different results when
using different assumptions. We consider the following accounting policies to be
critical:
Marketable
Securities
We
classify investments with maturity dates greater than three months when
purchased as marketable securities. Investments, including certificates of
deposit with maturity dates greater than three months when purchased, and which
have readily determined fair values, are classified as available-for-sale
investments and reflected in current assets as marketable securities at fair
market value. Historically, we have complied with our investment policy
which requires that all investments be investment grade quality and no more than
ten percent of our portfolio may be invested in any one security or with one
institution. However, recently, our ability to continue to follow this policy
has not been practicable due to the small aggregate amount of investment funds
that has been remaining for investment. As a result, as of September 30, 2009,
all of our cash was held in a high grade money market fund.
Short-term
investments classified as available-for-sale were as follows:
|
|
|
September 30, 2009
|
|
|
|
|
Aggregate Fair
Value
|
|
|
Gross
Unrealized
Gains / (Losses)
|
|
|
Estimated Fair
Value
|
|
|
Commercial
paper
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Corporate
securities fixed rate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
We review
impairments associated with the above in accordance with ASC 320-10-35
Investments-Debt and Securities,
subtopic
Overall,
section
Subsequent
Measurement
(formerly FAS 115
Accounting for Certain Investments
in Debt and Equity Securities
and FSP FAS 115-1 and FAS 124-1
The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments
) to determine the
classification of the impairment as temporary or other-than-temporary. However,
due to the small aggregate amount of available investment funds, we did not hold
investments in commercial paper and/or high grade marketable securities, but
rather held our cash in high grade money market funds as of September 30, 2009.
There were no short-term investments classified as available-for-sale as of
September 30, 2009 and as a result, the related impairments review was not
necessary.
There
were no gross unrealized gains or losses as of September 30, 2009.
Shares
Issuable
Pursuant
to the August 4, 2008, Second Interim Award, stating that, if the Technology
Transaction is submitted to and approved by our stockholders, 9,230,000 shares
of our common stock should be issued to NQCI to effectuate the transaction, we
accrued for the 9,230,000 shares of our common stock. As the Second Interim
Award stated that we must issue 9,230,000 shares upon the closing of the
Technology Transaction and we have been unable to consummate such transaction,
such contingency not being within our control, we have therefore, recorded the
issuance as a liability, rather than as an equity issuance. As of December 31,
2008, we accrued for the 9,230,000 shares of our common stock to be issued to
NQCI in accordance with ASC 450
Contingencies
(formerly FAS 5
Accounting for
Contingencies)
, with the initial fair value of the shares measured on
August 4, 2008, the date of the Second Interim Award.
Until issuance, the
shares were being marked to market in accordance with ASC 815-40
Derivatives and Hedging,
subtopic
Contracts in
Entity’s Own Equity
(formerly EITF 00-19
Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in, a Company’s Own Stock
), with subsequent changes in fair value recorded as non-operating change in
fair value of shares issuable to our statement of operations. The fair value of
the shares was measured using the closing price of our common stock on the
reporting date. The measured fair value of $10,153,000 for the accrued 9,230,000
shares on August 4, 2008, the date of the Second Interim Award, was accrued
under “Shares issuable” and expensed to “Research and development.” From marking
to market, the fair value of the shares issuable was revalued at $1,569,100 as
of December 31, 2008. The resulting non-operating adjustment in fair value of
$8,583,900 to the statement of operations for the year ended December 31, 2008
was recognized as “Change in fair value of shares issuable.”
The Technology
Transaction was not submitted to our stockholders for approval.
As a
result of the issuance of the Partial Final Award and the execution of the
Stipulation and the Memorandum, see Note 4, “Legal Proceedings” above, the
Technology Transaction will not occur and we will no longer be obligated to
issue the Shares to NQCI formerly required pursuant to the terms of the Second
Interim Award issued by the Arbitrator on August 4, 2008, and will no
longer be required to file a resale registration statement under the Securities
Act for the Shares. Accordingly, the net fair value of $1,569,100 for the
9,230,000 issuable shares accrued under “Shares issuable” as of December 31,
2008, was reversed resulting in an adjustment of $1,569,100 to non-operating
income in the statement of operations, recognized as “Change in and reduction of
shares issuable”, for the nine months ended September 30, 2009.
Stock-Based
Compensation
ASC 718
Compensation-Stock
Compensation
(formerly FAS 123R
Share-Based Payment
) and
Securities and Exchange Commission issued Staff Accounting Bulletin No. 107
(“SAB 107”) require the measurement and recognition of compensation expense for
all share-based payment awards made to employees and directors based on
estimated fair values. We have applied the provisions of SAB 107 in its adoption
of ASC 718.
In
determining stock-based compensation, we consider various factors in our
calculation of fair value using a black-scholes pricing model. These factors
include volatility, expected term of the options, and forfeiture rates. A change
in these factors could result in differences in the stock based compensation
expense.
Recent
Accounting Standards
In
April 2009, the FASB released ASC 825-10-65
Financial Instruments,
subtopic
Overall,
section
Transition and
Open Effective Date Information
(“ASC 825-10-65”) (formerly FSP FAS
No. 107-1 and Accounting Principles Board Opinion (“APB”) 28-1
Interim Disclosure about Fair Value
of Financial
Instruments
) which requires interim disclosures regarding the fair values
of financial instruments that are within the scope of ASC 825-10-50
Financial Instruments,
subtopic
Overall,
section
Disclosure
.
Additionally,
ASC 825-10-65 requires disclosure of the methods and significant assumptions
used to estimate the fair value of financial instruments on an interim basis as
well as changes of the methods and significant assumptions from prior periods.
ASC 825-10-65 does not change the accounting treatment for these financial
instruments and is effective for interim and annual periods ending after
June 15, 2009. We adopted ASC 825-10-65 as of June 30,
2009.
In
May 2009, the FASB issued ASC 855
Subsequent Events
(“ASC
855”)
(formerly
FAS 165
Subsequent
E
vents
) which
sets forth the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. ASC 855 will be effective for interim or
annual periods ending after June 15, 2009 and will be applied
prospectively. We adopted the provisions of ASC 855 as of June 30, 2009.
The adoption of ASC 855 did have a material impact on our financial position,
results of operations, and cash flows.
In
June 2009, the FASB issued ASC 105
Generally Accepted Accounting
Principles
(“ASC 105”) (formerly FAS 168
The FASB Accounting Standards
Codification (Codification) and the Hierarchy of GAAP
) which establishes
the Codification as the single source of authoritative U.S. GAAP recognized by
the FASB to be applied by nongovernmental entities. SEC rules and interpretive
releases are also sources of authoritative GAAP for SEC registrants. ASC 105
modifies the GAAP hierarchy to include only two levels of GAAP: authoritative
and non-authoritative. ASC 105 is effective beginning for periods ended after
September 15, 2009. As ASC 105 is not intended to change or alter existing
GAAP, it will not impact the Company’s financial position, results of operations
and cash flows.
In August
2009, the FASB issued Accounting Standard Update (“ASU”) 2009-05 under ASC 820
Fair Value Measurements and
Disclosures
concerning measuring liabilities at fair value. The new
guidance provides clarification that in circumstances in which a quoted price in
an active market for the identical liability is not available, a reporting
entity is required to measure fair value using certain valuation techniques.
Additionally, it clarifies that a reporting entity is not required to
adjust the fair value of a liability for the existence of a restriction that
prevents the transfer of the liability. This new guidance is effective for the
first reporting period after its issuance, however earlier application is
permitted. The adoption of this guidance is not expected to have a material
impact on the Company’s consolidated financial position or results of
operations.
ITEM
3. Quantitative and Qualitative Disclosures
about Market Risk
We invest
our cash in short term high grade commercial paper, certificates of deposit,
money market accounts, and marketable securities. We consider any liquid
investment with an original maturity of three months or less when purchased to
be cash equivalents. We classify investments with maturity dates greater than
three months when purchased as marketable securities, which have readily
determined fair values and are classified as available-for-sale securities. Our
investment policy requires that all investments be investment grade quality and
no more than ten percent of our portfolio may be invested in any one
security or with one institution. Historically, we complied with our
investment diversification policy which states that no more than ten percent of
our total marketable securities will be invested in a single, specific security.
However, our ability to continue to abide by this stipulation has not been
practicable based upon the small total amount of investment funds.
Investments
in both fixed rate and floating rate interest earning instruments carry a degree
of interest rate risk arising from changes in the level or volatility of
interest rates; however, interest rate movements do not materially affect the
market value of our portfolio because of the short-term nature of these
investments. A reduction in the overall level of interest rates may
produce less interest income from our investment portfolio. The market risk
associated with our investments in debt securities is substantially mitigated by
the frequent turnover of our portfolio.
ITEM
4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer and our Chief
Financial Officer, conducted an evaluation of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
Quarterly Report, as is defined in Rules 13a-15(e) and 15d-15(e) promulgated
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our
disclosure controls and procedures are intended to ensure that the information
we are required to disclose in the reports that we file or submit under the
Exchange Act is (i) recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms and (ii) accumulated and
communicated to our management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, as the principal executive and financial
officer, to allow timely decisions regarding required disclosures.
Based on
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this Quarterly Report,
our disclosure controls and procedures were effective. Our management has
concluded that the financial statements included in this Quarterly Report
present fairly, in all material respects our financial position, results of
operations and cash flows for the periods presented in conformity with generally
accepted accounting principles.
It should
be noted that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the
system will be met. In addition, the design of any control system is based in
part upon certain assumptions about the likelihood of future events. Because of
these and other inherent limitations of control systems, there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions.
Changes in
Internal Control over
Financial
Reporting
In
connection with the evaluation of our internal controls during our last fiscal
quarter, our Chief Executive Officer and Chief Financial Officer concluded that
there have been no changes in our internal control over financial reporting, as
defined in Rule 13a-15(f) under the Exchange Act during our most recent fiscal
quarter that have materially affected, or are reasonably likely to materially
affect our internal control over financial reporting.
PART
II — OTHER INFORMATION
ITEM
1. Legal Proceedings.
From time
to time we may be a defendant or plaintiff in various legal proceedings arising
in the normal course of our business. Except as set forth below, we are
currently not a party to any material pending legal proceedings or government
actions, including any bankruptcy, receivership, or similar proceedings. In
addition, except as set forth below, our management is not aware of any known
litigation or liabilities that could affect our operations. Furthermore, with
the exception of Dr. Gura, our Chief Medical and Scientific Officer, who
according to NQCI’s preliminary Proxy Statement on Schedule 14A, Amendment No.
2, filed with the SEC on February 13, 2009, owns 15,497,250 shares of NQCI’s
common stock which includes 800,000 shares held by Medipace Medical Group,
Inc. an affiliate of Dr. Gura and includes 250,000 shares subject to warrants
held by Dr. Gura which are currently exercisable, or approximately 20.9% of its
total outstanding shares as of January 31, 2009, we do not believe that
there are any proceedings to which any of our directors, officers, or
affiliates, any owner of record who beneficially owns more than five percent of
our common stock, or any associate of any such director, officer, affiliate of
ours, or security holder is a party adverse to us or has a material interest
adverse to us.
On
December 1, 2006, Operations initiated the Proceeding against NQCI for its
breach of the License Agreement. On April 13, 2009, the Arbitrator issued a
Partial Final Award which resolved the remaining issues that were pending
for decision in the Proceeding. The Partial Final Award adopted one of the
proposals submitted to the Arbitrator by us and provides that we and Operations
shall have a perpetual exclusive license (the “Perpetual License”) in the
Technology (as defined in the Merger Agreement, dated as of September 1, 2006
(the “Merger Agreement”), among the Company, Operations and NQCI and the License
Agreement, dated as of September 1, 2006 (the “License Agreement”), between the
Company and NQCI) primarily related to the Wearable Artificial Kidney and any
other Technology contemplated to be transferred under the Technology Transaction
(as defined in the Merger Agreement). Under the terms of the Partial Final
Award, in consideration of the Perpetual License to the Company, NQCI was
awarded a royalty of 39% of all net income, ordinary or extraordinary,
received by us (the “Royalty”) and NQCI is to receive 39% of any shares received
in any merger transaction to which the Company or Operations may become a party.
NQCI’s interest as licensor under the Perpetual License shall be freely
assignable. In addition, the Partial Final Award provides that we shall pay NQCI
an amount equal to approximately $1,871,000 in attorneys’ fees and costs
previously awarded by the Arbitrator in an order issued on August 13, 2008, that
NQCI’s application for interim royalties and expenses is denied and that NQCI is
not entitled to recover any additional attorneys’ fees. Finally, the Partial
Final Award also provides that the Arbitrator shall retain jurisdiction to
supervise specific performance of the terms and obligations of the Award
including, but not limited to, any dispute between the parties over the manner
of calculation of the Royalty. The Partial Final Award was issued by the
Arbitrator as a result of each party’s request for the Arbitrator to order
alternative relief due the parties’ inability to proceed with the Technology
Transaction. For a full description of the Proceeding and the Arbitrator’s
interim awards issued in connection therewith, please see Item 3 - Legal
Proceedings of our Annual Report.
On April
17, 2009, NQCI requested that the Arbitrator correct material terms of the
Partial Final Award relating to the meaning and calculation of the Royalty
terms. We opposed the request and on May 1, 2009, the Arbitrator denied NQCI’s
request to modify the language of the Partial Final Award. The Arbitrator
further held that past expenses shall not be included in net income computations
for purposes of the Royalty, that NQCI may make an application to the Arbitrator
requesting a royalty distribution, specifying the amount sought and basis for
the claimed amount, and that NQCI is entitled to audit our financial statements,
books and records to verify our net income, on an annual basis, or more often,
if the Arbitrator permits.
Binding Memorandum of
Understanding
On August
7, 2009, to clarify, resolve and settle certain issues and any disputes that
have arisen between us and NQCI with respect to the Partial Final Award and the
Proceeding, the Xcorp Parties entered into the Memorandum with NQCI. Under the
terms of the Memorandum, among other things, the Parties agreed to: (i) assign
and transfer all of their rights, title and interest in and to the Polymer
Technology to the Joint Venture, which will be jointly owned by the Parties and
through which the Parties will jointly pursue the development and
exploitation of the Polymer Technology, and (ii) negotiate, execute and deliver
within 60 days following the Stockholder Vote Date the Operating Agreement
governing the operation of the Joint Venture based on the terms set forth in the
Memorandum.
The Xcorp
Parties and NQCI will be the initial two members of the Joint Venture (Xcorp
Parties’ interest shall be held of record by either us or Operations, as
determined by the Xcorp Parties) with NQCI and the Xcorp Parties having a 60%
and 40% membership interest (the “Membership Interests”) in the Joint Venture,
respectively. Subject to such other terms and provisions as the Parties may
agree upon, the Operating Agreement shall include the following
terms:
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the
Joint Venture shall be managed by a three-member JV
Board;
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until
such time as NQCI fails to hold a greater percentage of the Membership
Interests than the Xcorp Parties, two members of the JV Board shall be
designated by NQCI and until such time as the Xcorp Parties fail to hold
at least 10% of the Membership Interests and one JV Manager shall be
designated by the Xcorp Parties;
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NQCI
shall have the right to appoint a Chairman and/or a Chief Executive
Officer of the Joint Venture, who will have day-to-day management
authority with respect to the Joint Venture, subject to oversight by the
JV Board and the terms and conditions of the Memorandum and the Operating
Agreement, and a Chief Scientific Officer, who may be employed by the
Joint Venture upon customary and reasonable terms and
conditions;
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if
a JV Manager provides additional services to the Joint Venture as an
employee or a consultant, he or she may be compensated by the Joint
Venture as is mutually reasonably approved in writing by the Parties;
provided that with the exception of reimbursement of reasonable expenses
incurred in connection with their services performed for the Joint Venture
in their official officer capacity, neither Robert Snukal, the Chief
Executive Officer of NQCI, nor Kelly McCrann, our Chairman and Chief
Executive Officer (or such other persons as may be appointed or elected in
their place), shall in any event receive a salary or other compensation
from the Joint Venture;
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except
as otherwise required by law, all decisions related to the operations of
the Joint Venture shall be made by a majority of the JV Board, except that
certain actions (as described in the Memorandum) by the Joint Venture or
any of its subsidiaries shall require the affirmative vote or written
consent of the holders of at least 90.1% of the Membership Interests then
outstanding; and
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from
and after August 1, 2009, the Xcorp Parties shall pay 61% and NQCI shall
pay 39% of the reasonable costs and expenses related to protecting,
preserving and exploiting the Licensed
Technology.
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In
addition, the Xcorp Parties agreed to contribute $500,000 in cash to the bank
account established by the Joint Venture, on the later of (x) three business
days of the consummation of the first to occur of the Proposed Transaction or
another Transaction and (y) the date on which the Joint Venture establishes such
bank account, for which the Parties (or their representatives) shall be joint
signatories. Furthermore, provided that the Proposed Transaction or a
Transaction has been consummated, NQCI agreed to contribute on the Xcorp
Parties’ behalf an additional $500,000 in cash to the Joint Venture at such time
as the JV Board reasonably determines that such funds are required
to facilitate the Joint Venture’s development of the Polymer Technology.
This additional contribution amount will be reimbursed to NQCI by the Xcorp
Parties from the first funds distributed to the Xcorp Parties by the Joint
Venture (other than pursuant to certain quarterly tax related distributions).
Additionally, with respect to the Joint Venture, the Parties agreed to certain
liquidity rights consisting of customary rights of first refusal and co-sale
rights, unlimited piggyback registration rights and the right to up to two
demand registrations (subject to lock-ups and other underwriter requirements),
customary preemptive rights (available to a member of the Joint Venture for so
long as such member holds at least 10% of the Membership Interests then
outstanding), customary anti-dilution protections and other standard
distribution and information rights.
The
Parties also agreed to cooperate as reasonably required by the Xcorp Parties in
order for us to consummate the Proposed Transaction for the sale of the Licensed
Technology or another Transaction involving the sale, license or other
disposition by us of the Licensed Technology. The Parties further agreed that
upon the consummation of a Proposed Transaction, they will allocate the
Transaction Proceeds received in such transaction in accordance with the terms
set forth in the Memorandum and summarized below, subject to the actual terms of
the Proposed Transaction, when and if such transaction is consummated. However,
there can be no assurances that the Proposed Transaction or any other
Transaction will occur or that the terms thereof will be similar to those
provided for in the Memorandum and summarized below, and the actual terms of the
Proposed Transaction or another Transaction will be provided for in the
definitive agreement entered into in connection with such
transaction.
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NQCI
shall receive the NQCI Amount;
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The
third party will pay the Xcorp Parties $250,000 upon the earlier of the
signing of a letter of intent and an acquisition agreement providing for
the Proposed Transaction, approximately 50% (less the foregoing $250,000)
of the Transaction Proceeds payable in cash to the Xcorp Parties as the
First Installment, approximately 25% of such proceeds as the Second
Installment
and 25% of such proceeds as the Third
Installment;
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The
Transaction Proceeds shall be allocated between the Parties as follows:
(i) $250,000 to the Xcorp Parties, payable to the Xcorp Parties on the
earlier of the signing of a letter of intent and an acquisition agreement
providing for the Proposed Transaction, (ii) to NQCI, an amount equal to
the NQCI Amount less the sum of the Second Installment and the Third
Installment, payable to NQCI within seven business days of receipt of the
First Installment, (iii) to the Xcorp Parties, the remainder of the First
Installment, (iv) to NQCI, the amount of the Second Installment, payable
to NQCI within three business days of receipt of the Second Installment,
(v) to NQCI, the amount of the Third Installment, payable to NQCI within
three business days of receipt of the Third Installment and (vi) the
remainder of the Transaction Proceeds shall be retained by the Xcorp
Parties; provided that under no circumstances shall NQCI be entitled to or
receive from the Transaction Proceeds an amount greater than the NQCI
Amount;
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In
the event any of the Installments are paid by the third party in other
than cash, NQCI shall receive its proportionate share of such
consideration in accordance with the terms of the Memorandum;
and
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The
Xcorp Parties shall also pay to NQCI 39% of any royalty or other payments
received by the Xcorp Parties in excess of the Transaction Proceeds in
connection with the Proposed
Transaction.
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In the
event that the timing or the amount of the payments from the third party under
the terms of the Proposed Transaction (or another Transaction) is other than as
contemplated in the Memorandum, the Parties shall make such equitable
adjustments as are required to preserve, to the maximum extent possible, the
intent of the distribution of Transaction Proceeds provisions of the Memorandum.
In the event that the Xcorp Parties do not consummate the Proposed Transaction
or if the terms of the Proposed Transaction are other than what is contemplated
under the Memorandum and the Xcorp Parties instead consummate an alternative
Transaction, the Parties shall apply the methodology specified in the Memorandum
to the maximum extent possible in order to allocate between them the proceeds of
such Transaction.
Additionally,
NQCI agreed to use its best efforts to enter into an agreement with a certain
third party pursuant to which such third party and NQCI will each (a) confirm
and acknowledge (i) their joint ownership of the Polymer Technology, (ii) the
existence and validity of the exclusive license to NQCI of the medical
applications of the Polymer Technology and (iii) the existence and validity of
the exclusive license to such third party of the non-medical applications of the
Polymer Technology; and (b) agree to prepare, execute and deliver as promptly as
practicable upon request by either of such parties a definitive license
agreement reflecting the terms and conditions of the foregoing exclusive
licenses. The Parties also agreed to certain customary representation and
warranty, indemnity and other miscellaneous terms.
The
foregoing summary of the Memorandum and the transactions contemplated thereby
does not purport to be complete and is subject to, and qualified in its entirety
by, the full text of the Memorandum filed as Exhibit 10.1 to our Quarterly
Report on Form 10-Q for the six month period ended June 30, 2009, filed
with the SEC on August 13, 2009.
Agreement and Stipulation
Regarding Partial Final Award
In
connection with the issuance of the Partial Final Award and the execution of the
Memorandum between the Parties, on August 7, 2009 Operations entered into the
Stipulation with NQCI, pursuant to which Operations and NQCI agreed (i) not to
challenge the terms of the Partial Final Award or any portion of such award,
(ii) that any of the Parties may, at any time, seek to confirm all but not part
of the Partial Final Award through the filing of an appropriate petition or
motion with the appropriate court and in response to such action to confirm the
Partial Final Award, no Party will oppose, object to or in any way seek to
hinder or delay the court’s confirmation of the Partial Final Award, but will in
fact support and stipulate to such confirmation, (iii) to waive any and all
right to appeal from, seek appellate review of, file or prosecute any lawsuit,
action, motion or proceeding, in law, equity, or otherwise, challenging,
opposing, seeking to modify or otherwise attacking the confirmed Partial Final
Award or the judgment thereon and (iv) subject to certain conditions, NQCI will
not attempt during the Non-Execution Period to execute on or file any motion,
petition or application or commence any proceeding seeking the collection of any
attorneys’ fees that have been awarded in NQCI’s favor under the terms of the
Partial Final Award, which is intended to allow the Parties a sufficient
period within which to execute an Acquisition Agreement in connection with the
Proposed Transaction or a Transaction; provided that such period shall
automatically be subject to an Extension Date if the Acquisition Agreement is
executed in full on or before December 1, 2009. If the execution of the
Acquisition Agreement occurs on or before December 1, 2009, the Extension Date
shall automatically be further extended for a period of 60 days for each
amendment to a proxy or information statement related to the transactions
contemplated by the Acquisition Agreement, filed by us in response to
comments made by the SEC.
In the
event we enter into an Acquisition Agreement for the Proposed Transaction
or another Transaction, we anticipate that we will call a special or annual
meeting of our stockholders at which our stockholders will be asked to vote on
the terms of such transaction, pursuant to a proxy or information statement that
we would file with the SEC in connection therewith. If and when we do file such
proxy or information statement with the SEC, our stockholders and other
investors are urged to carefully read such statement and any other relevant
documents filed with the SEC when they become available, because they will
contain important information about us and the transaction. Copies of such proxy
or information statement and other documents filed by us with the SEC will be
available at the Web site maintained by the SEC at www.sec.gov.
The
foregoing summary of the Stipulation and the transactions contemplated thereby
does not purport to be complete and is subject to, and qualified in its entirety
by, the full text of the Stipulation, filed as Exhibit 99.2 to our Quarterly
Report on Form 10-Q for the six month period ended June 30, 2009,
filed with the SEC on August 13, 2009.
As a
result of the issuance of the Partial Final Award and the execution of the
Stipulation and the Memorandum, the Technology Transaction will not occur, we
will no longer be obligated to issue the 9,230,000 shares of our common stock,
or the “Shares”, to NQCI and we will no longer be required to file a resale
registration statement under the Securities Act for the Shares.
ITEM
1A.
Risk Factors.
Investing
in our common stock involves a high degree of risk. In addition to the
information set forth in this report, you should carefully consider and evaluate
the risks described under section captioned “Risk Factors” in Part I, Item 1A of
our Annual Report, Part II, Item 1A of our Quarterly Reports and the
updated risk factors noted below. While we describe each risk separately herein
and in the Annual Report, some of these risks are interrelated and certain risks
could trigger the applicability of other risks described below. Also, the risks
and uncertainties described below and in the Annual Report are not the only ones
that we may face. Additional risks and uncertainties not presently known to us,
or that we currently do not consider significant, could also potentially impair,
and have a material adverse effect on, our business, results of operations
and financial condition. If any of these risks occur, our business, results of
operations and financial condition could be harmed, the price of our common
stock could decline, and future events and circumstances could differ
significantly from those anticipated in the forward-looking statements contained
in this Quarterly Report. As a result the trading price of our common stock may
decline, and you might lose part or all of your investment.
Except
for the updated risk factors set forth below, there have been no material
changes in our risk factors from those described in Part 1, Item 1A, “Risk
Factors”, in our Annual Report, other than those risk factors updated in Part
II, Item 1A, “Risk Factors”, in our Quarterly Reports.
We
do not have sufficient cash to fund the development of our products or maintain
our operations. If we are unable to obtain additional financing during 2009, we
will be required to substantially further curtail or cease operations, seek
bankruptcy protection and/or otherwise wind up our business. If we
raise additional funding through sales of equity or equity-based securities,
your shares will be diluted. If we need additional funding for operations and we
are unable to raise it, we may be forced to liquidate assets and/or curtail or
cease operations.
We
anticipate that, based on our current operating plan and our existing cash and
cash equivalents, we will be able to fund our operations approximately through
the next 30 days from November 22, 2009. We are actively managing our liquidity
by limiting our expenses. If we are unable to raise additional capital by such
date and/or consummate a transaction for the sale of all or substantially all of
our assets, we will be required to substantially further curtail or cease
operations, seek bankruptcy protection or otherwise wind up our business. Any of
these actions will materially harm our business, results of operations and any
future prospects.
We have
been engaged in efforts to defer all significant expenditures as well as major
expenditures for the development of all of our products pending additional
financing or partnership support. We continue to evaluate opportunities to
reduce operating expenses. However, there can be no assurance that we will be
successful in these efforts. If we are forced to reduce or cease our operations
we may trigger additional obligations, including severance obligations, which
would further negatively impact our liquidity and capital
resources.
As a
result of our recurring losses from operations and a net capital deficiency, the
report from our independent registered public accounting firm regarding our
consolidated financial statements for the year ended December 31, 2008 includes
an explanatory paragraph expressing substantial doubt about our ability to
continue as a going concern. We need to obtain debt, equity or equity-based
financing (such as convertible debt). Such financing may not be available on
favorable terms, or at all. If we raise additional funds by selling additional
shares of our capital stock, or securities convertible into shares of our
capital stock, the ownership interest of our existing stockholders may be
diluted. The amount of dilution could be increased by the issuance of warrants
or securities with other dilutive characteristics, such as anti-dilution clauses
or price resets. If we need additional funding for operations and we are unable
to raise it, we may be forced to liquidate assets and/or curtail or cease
operations.
We urge
you to review the additional information about our liquidity and capital
resources in the “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” section of this report. If we cease to continue as a
going concern due to lack of available capital or otherwise, you may lose your
entire investment in our company.
We
may need to liquidate in a voluntary or involuntary dissolution under Delaware
law or to seek protection under the provisions of the U.S. Bankruptcy Code, and
in that event, it is unlikely that our stockholders would receive any value for
their shares.
We have
incurred net operating losses every year since our inception. As of September
30, 2009, we had an accumulated deficit of approximately $47.4 million and have
been unable to raise the necessary capital to continue our existing operations.
We are currently evaluating our strategic alternatives with respect to the
development of any of our products and/or a transaction for the sale of a part,
all or substantially all of our assets. We cannot assure our stockholders that
any actions that we take would raise or generate sufficient capital to fully
address the uncertainties of our financial position. As a result, we may be
unable to realize value from our assets and discharge our liabilities in the
normal course of business. If we are unable to settle our obligations to our
creditors or if we are unable to consummate a transaction for the sale of all or
substantially all of our assets or another strategic transaction with respect to
the products that we have been engaged in developing, we would likely need to
liquidate in a voluntary dissolution under Delaware law or to seek protection
under the provisions of the U.S. Bankruptcy Code. In that event, we or a trustee
appointed by the court may be required to liquidate our assets. In either of
these events, we might realize significantly less value from our assets than
their carrying values on our financial statements. The funds resulting from the
liquidation of our assets would be used first to satisfy obligations to
creditors before any funds would be available to our stockholders, and any
shortfall in the proceeds would directly reduce the amounts available for
distribution, if any, to our creditors and to our stockholders.
In the
event we are required to liquidate under Delaware law or the federal bankruptcy
laws, it is highly unlikely that stockholders would receive any value for their
shares.
We
are seeking to maximize the value of our assets, and address our liabilities and
raise additional capital for our existing business. We are attempting to pursue
asset out-licenses, asset sales, mergers or similar strategic transactions with
respect to any of our product that we have been engaged in developing. We may be
unable to satisfy our liabilities and can provide no assurances that we can be
successful in completing any corporate transaction with any third party or
executing a strategic transaction with respect to our assets and/or our products
that we have been engaged in developing.
Due to
our financial position, we are unable to initiate further development of our
products, however, we have actively resumed research and development of the PAK
as a result of the direct reimbursement arrangement of the related expenditures
agreed to with a certain third party
with
which we have agreed to an exclusivity period to negotiate a potential
cooperative transaction. We continue to actively consider this potential
strategic deal, as well as all other strategic alternatives, with respect to our
products that we have been engaged in developing and our assets, with the goal
of maximizing the value of those assets. There are substantial challenges and
risks which will make it difficult to successfully implement any of these
opportunities. Even if we decide to pursue a strategic transaction with respect
to our products that we have been engaged in developing and/or for the sale of
all or substantially all of our assets, we may be unable to do so on acceptable
terms, if at all. There can be no assurances that any such transaction will
occur or that it would be accretive to our stockholders or result in any payment
being made to our stockholders. In the event we are unable to complete a
strategic transaction with respect to our products that we have been engaged in
developing and/or for the sale of a part, all or substantially all of our
assets, we may be forced to liquidate in a voluntary dissolution under Delaware
law or to seek protection under the provisions of the U.S. Bankruptcy
Code.
Stockholders
should recognize that in our efforts to address our liabilities and fund future
operations and development of our products, we may pursue strategic alternatives
that result in our stockholders having little or no continuing interest in our
assets as stockholders or otherwise. In such circumstances we will continue to
evaluate our alternatives in light of our cash position, including the
possibility that we may need to liquidate in a voluntary dissolution under
Delaware law or to seek protection under the provisions of the U.S. Bankruptcy
Code.
As
a result of being delisted from Amex on September 4, 2009 and our common stock
commencing quotation on the Pink Sheets effective as of the same date, the
following risk factor is no longer applicable to us.
“If
we fail to meet continued listing standards of Amex or Amex commences a
proceeding to delist our common stock from the exchange, our common stock may be
delisted from Amex which would have a material adverse effect on the price
of our common stock.
Our
common stock is currently traded on the Amex under the symbol “XCR”. In order
for our securities to be eligible for continued listing on Amex, we must remain
in compliance with certain Amex continued listing standards. As of December 31,
2008, we were not in compliance with Sections
1003(a)(i),
1003(a)(ii)
and 1003(a)(iii) of the Amex Company Guide (the “Company
Guide”) because our stockholders’ equity was below the level required by the
Amex continued listing standards. Our stockholders’ equity fell below the
required standard due to several years of operating losses. Amex will normally
consider suspending dealings in, or removing from the listing of, securities of
a company under Section 1003(a)(i) for a company that has stockholders’ equity
of less than $2,000,000 if such company has sustained losses from continuing
operations and/or net losses in two of its three most recent fiscal years, under
Section 1003(a)(ii) for a company that has stockholders’ equity of less than
$4,000,000 if such company has sustained losses from continuing operations
and/or net losses in three of its four most recent fiscal years or under Section
1003(a)(iii) for a company that has stockholders’ equity of less than $6,000,000
if such company has sustained losses from continuing operations and/or net
losses in its five most recent fiscal years. As of December 31, 2008, our
stockholders' equity was below that required under Sections 1003(a)(i),
1003(a)(ii) and 1003(a)(iii) of the Amex Company Guide and we have sustained net
losses in our five most recent fiscal years.
On May
15, 2009, we received notice (the “Notice”) from the staff of the Amex
indicating that we were not in compliance with certain of Amex’s continued
listing standards as set forth in Part 10 of the Company Guide. Specifically,
according to the Notice, we were not in compliance with
Section 1003(a)(iv) of the Company Guide in that we have “sustained losses
which are so substantial in relation to our overall operations or our existing
financial resources, or our financial condition has become so impaired that it
appears questionable, in the opinion of Amex, as to whether we will be able to
continue operations and/or meet our obligations as they mature.”
In order
to maintain its listing on Amex, we were required to submit a plan of compliance
(a “Plan”) to Amex by June 15, 2009, advising Amex of the actions we have
taken or intend to take to regain compliance with Section 1003(a)(iv)
by November 16, 2009. Subsequently, we submitted a Plan to Amex before the June
15, 2009 deadline and Amex is currently in the process of reviewing the Plan. If
the Plan is not accepted by Amex, we will be subject to delisting proceedings.
If Amex accepts the Plan, then we will be able to continue our listing during
the Plan period, during which time we will be subject to periodic reviews to
determine whether it is making progress consistent with the Plan. Even if the
Plan is accepted, if we are not in compliance with the continued listing
standards of the Company Guide by November 16, 2009, or if we do not make
progress consistent with the Plan during such period, Amex will initiate
delisting proceedings as appropriate.
In
accordance with the terms of the Notice, we have been included in a list of
issuers that are not in compliance with Amex’s continued listing standards,
which is posted at www.amex.com and includes the specific listing standard(s)
with which a company does not comply. Our common stock continues to trade on
Amex. Amex has advised us that Amex is utilizing the financial status
indicator fields in the Consolidated Tape Association’s Consolidated Tape System
(“CTS”) and Consolidated Quote Systems (“CQS”) Low Speed and High Speed Tapes to
identify companies that are noncompliant with NYSE Amex’s continued listing
standards and/or delinquent with respect to a required federal securities law
periodic filing. Accordingly, we have become subject to the trading symbol
extension “.BC” to denote our noncompliance. The indicator will not change our
trading symbol itself, but will be disseminated as an extension of our symbol on
the CTS and CQS whenever our trading symbol is transmitted with a quotation or
trade.
If Amex
does not accept our Plan or we receive notification from the Amex that we are no
longer in compliance with other continued listing requirements and if we fail to
regain compliance with such continued listing requirements, our common
stock may be delisted which would have a material adverse affect on the price
and liquidity of our common stock.
Furthermore, we cannot assure you that
we will continue to satisfy other requirements necessary to remain listed on the
Amex or that the NYSE Amex will not take additional actions to delist our common
stock. If for any reason, our common stock were to be delisted from the Amex, we
may not be able to list our common stock on another national exchange or market.
If our common stock is not listed on a national exchange or market, the trading
market for our common stock may become illiquid.”
ITEM
2. Unregistered Sales of Equity
Securities; Use of Proceeds from Registered Securities.
Except as
set forth below, for the nine months ended September 30, 2009, we did not have
any other unregistered sales of equity securities or use of proceeds from
registered securities.
In
September 2009, we issued 400,000 shares of restricted common stock to a certain
third party as compensation for consulting services. We issued the shares in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act, in a transaction not involving any public offering.
ITEM
6. Exhibits.
|
No.
|
|
Description of
Exhibit
|
|
10.1
|
|
Binding
Memorandum of Understanding, dated August 7, 2009. (1)
|
|
31.1
|
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14 or 15d-14 of the
Securities Exchange Act of 1934, as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.*
|
|
31.2
|
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14 or 15d-14 of the
Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.*
|
|
32.1
|
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.**
|
|
32.2
|
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.**
|
|
99.1
|
|
Agreement
and Stipulation Regarding Partial Final Award, dated August 7, 2009.
(2)
|
______________
|
(1)
|
Incorporated
by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q, filed
with the SEC on August 13, 2009.
|
|
(2)
|
Incorporated
by reference to Exhibit 99.2 of our Quarterly Report on Form 10-Q, filed
with the SEC on August 13, 2009.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
XCORPOREAL,
INC.
|
|
|
|
|
|
Date:
November 16, 2009
|
By:
|
/s/
Robert
Weinstein
|
|
|
|
Robert
Weinstein
|
|
|
|
Chief
Financial Officer
|
|
|
|
(Principal
Financial Officer and
|
|
|
|
Principal
Accounting Officer)
|
Exhibit 31.1
CERTIFICATION
PURSUANT TO
RULE
13a-14/15d-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS
ADOPTED PURSUANT TO
SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kelly
J. McCrann, certify that:
1. I have
reviewed this Quarterly Report on Form 10-Q of Xcorporeal, Inc.
(“registrant”);
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations, and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures as of the end of the period covered by
this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect the
registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a) All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize, and
report financial information; and
(b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial
reporting.
|
Date:
November 16, 2009
|
/
s/
Kelly J.
McCrann
|
|
|
|
Kelly
J. McCrann
|
|
|
|
Chairman
of the Board and
|
|
|
|
Chief
Executive Officer
|
|
Exhibit 31.2
CERTIFICATION
PURSUANT TO
RULE
13a-14/15d-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS
ADOPTED PURSUANT TO
SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert
Weinstein, certify that:
1. I have
reviewed this Quarterly Report on Form 10-Q of Xcorporeal, Inc.
(“registrant”);
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations, and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures as of the end of the period covered by
this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect the
registrant’s internal control over financial reporting; and
5. The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a) All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize, and
report financial information; and
(b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial
reporting.
|
Date:
November 16, 2009
|
/s/
Robert
Weinstein
|
|
|
|
Robert
Weinstein
|
|
|
|
Chief
Financial Officer
|
|
|
|
(Principal
Financial Officer and
|
|
|
|
Principal
Accounting Officer)
|
|
Exhibit 32.1
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report on Form 10-Q of Xcorporeal, Inc. (the
“Company”) for the quarter ended September 30, 2009, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Kelly
J. McCrann, Chairman of the Board and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The
Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended; and
(2) The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
|
/s/
Kelly J.
McCrann
|
|
Kelly
J. McCrann
|
|
Chief
Executive Officer and
|
|
Chairman
of the Board
|
Date:
November 16, 2009
Exhibit
32.2
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report on Form 10-Q of Xcorporeal, Inc. (the
“Company”) for the quarter ended September 30, 2009, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Robert
Weinstein, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The
Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended; and
(2) The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
|
/s/
Robert
Weinstein
|
|
Robert
Weinstein
|
|
Chief
Financial Officer and
|
|
Principal
Accounting Officer)
|
Date:
November 16, 2009
Annex
G
AMENDMENT
NO. 1 TO ASSET PURCHASE AGREEMENT
This
Amendment No. 1 to Asset Purchase Agreement (the “
Amendment
”)
is made and executed
this 8
th
day of
February, 2010 by and among Xcorporeal, Inc., a Delaware corporation (“
Xcorporeal
”), Xcorporeal
Operations, Inc., a Delaware corporation and a wholly owned subsidiary of
Xcorporeal (“
Operations
”), National Quality
Care, Inc., a Delaware corporation (“
NQCI,
” and together with
Xcorporeal, Operations and NQCI, “
Sellers
”) and Fresenius USA,
Inc., a Massachusetts corporation (“
Purchaser
”). Capitalized
terms not otherwise defined herein shall have the meaning set forth in the
Agreement (as defined below).
RECITALS
A. On
December 14, 2009, Sellers and Purchaser entered into that certain Asset
Purchase Agreement (the “
Agreement
”) pursuant to which
Purchaser will acquire certain of the assets of Sellers.
B. The
Agreement provided that any party to the Agreement may terminate the Agreement
if the Closing has not occurred by February 28, 2010 (the “
Deadline
”).
C. On
the terms and subject to the conditions set forth herein, Sellers and Purchaser
are willing to extend the Deadline to permit additional time for
Closing.
AGREEMENT
NOW
THEREFORE, in consideration of the foregoing, and the representations,
warranties, and covenants set forth below, the parties hereto, intending to be
legally bound, hereby agree as follows:
Amendment of
Section 10.1(d).
Section 10.1(d) of the Agreement is hereby
amended and restated in its entirety to be read as follows:
(d) by
Purchaser if the Stockholder Approvals have not been obtained on or before March
31, 2010;
Amendment of
Section 10.1(e)
.
Section 10.1 of the Agreement is hereby amended and restated in its
entirety to be read as follows:
(e) upon
written notice to the other party by Purchaser or any Seller, if the Closing has
not occurred on or before March 31, 2010 and this Agreement has not previously
been terminated, provided, however that the right to terminate the Agreement
under this Section 10.1(e) shall not be available to any party if the failure of
such party to fulfill any of its obligations under this Agreement has been the
cause of, or resulted in, the failure of the Closing to occur on or before such
date.
Miscellaneous
.
Continuing Effect
. Except as
expressly modified or amended by this Amendment, all the terms and provisions of
the Agreement shall remain in full force and effect.
Governing Law
. This Amendment
and all actions arising out of or in connection with this Agreement shall be
governed by and construed in accordance with the laws of the State of Delaware,
without regard to the conflicts of law provisions of the State of Delaware or of
any other state.
Counterparts
. This Agreement
may be executed in one or more counterparts, each of which will be deemed an
original, but all of which together will constitute one and the same agreement.
Facsimile copies of signed signature pages will be deemed binding
originals.
(Signature
Page Follows)
IN
WITNESS WHEREOF, the parties have caused this Amendment No. 1 to Asset Purchase
Agreement to be duly executed and delivered by their proper and duly authorized
officers as of the date and year first written above.
|
SELLERS:
|
|
PURCHASER:
|
|
|
|
|
|
XCORPOREAL,
INC.
|
|
FRESENIUS
USA, INC.
|
|
|
|
|
|
By:
Kelly J.
McCrann
|
|
By:
Mohsen
Reihany
|
|
Name:
Kelly J. McCrann
|
|
Name:
Mohsen Reihany
|
|
Its:
Chairman and CEO
|
|
Its:
Senior Advisor to Chairman of the Board
|
|
|
|
|
|
XCORPOREAL
OPERATIONS, INC.
|
|
|
|
|
|
|
|
By:
Kelly J.
McCrann
|
|
|
|
Name:
Kelly J. McCrann
|
|
|
|
Its:
CEO
|
|
|
|
|
|
|
|
NATIONAL
QUALITY CARE, INC.
|
|
|
|
|
|
|
|
By:
Robert
Snukal
|
|
|
|
Name:
Robert Snukal
|
|
|
|
Its:
CEO
|
|
|
Annex
H
AMENDMENT
NO. 1 TO AGREEMENT
This
Amendment No. 1 to Agreement (the “
Amendment
”) is made and
executed this 11
th
day of February, 2010 by
and between Fresenius USA, Inc., a Massachusetts corporation (“
FUSA
”), and Xcorporeal, Inc.,
a Delaware corporation (“
Xcorporeal
”).
Reference
is made to that certain Asset Purchase Agreement dated as of December 14, 2009,
by and among FUSA, Xcorporeal, Xcorporeal Operations, Inc. and National Quality
Care, Inc. (the “
Asset Purchase
Agreement
”), pursuant to which Xcorporeal, Operations and NQCI intend to
sell to FUSA the Purchased Assets. Any capitalized terms not defined
herein shall have the meanings ascribed to them in the Asset Purchase
Agreement.
RECITALS
A. On
December 14, 2009, FUSA and Xcorporeal entered into a side agreement
(the “
Agreement
”)
pursuant to which: (a) FUSA will pay Xcorporeal for certain expenses to be
incurred by Xcorporeal prior to the Closing; (b) FUSA will utilize certain
consulting services of Xcorporeal; and (c) Xcorporeal will reimburse FUSA for
certain expenses incurred in anticipation of Closing in the event the Closing
does not take place as a result of Xcorporeal consummating a Superior
Proposal.
B. The
Agreement provided that it shall terminate if Closing has not occurred by
February 28, 2010 (the “
Deadline
”).
C. On
the terms and subject to the conditions set forth herein, FUSA and Xcorporeal
are willing to extend the Deadline to permit additional time for
Closing.
AGREEMENT
NOW
THEREFORE, in consideration of the foregoing, and the representations,
warranties, and covenants set forth below, the parties hereto, intending to be
legally bound, hereby agree as follows:
Amendment of
Section 2(d)(iii).
Section 2(d)(iii) of the Agreement is
hereby amended and restated in its entirety to be read as follows:
(iii) March
31, 2010.
Miscellaneous
.
Continuing Effect
. Except as
expressly modified or amended by this Amendment, all the terms and provisions of
the Agreement shall remain in full force and effect.
Governing Law
. This Amendment
and all actions arising out of or in connection with this Amendment shall be
governed by and construed in accordance with the laws of the State of Delaware,
without regard to the conflicts of law provisions of the State of Delaware or of
any other state.
Counterparts
. This Amendment
may be executed in one or more counterparts, each of which will be deemed an
original, but all of which together will constitute one and the same agreement.
Facsimile copies of signed signature pages will be deemed binding
originals.
(Signature
Page Follows)
IN
WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day
and year set forth above.
|
FRESENIUS USA, INC.
|
|
|
|
|
|
By:
/s/ Mohsen
Reihany
|
|
|
Name:
Mohsen Reihany
|
|
|
Its:
Senior Advisor to Chairman of the Board
|
|
|
|
|
XCORPOREAL,
INC.
|
|
|
|
|
|
By:
/s/ Kelly J.
McCrann
|
|
|
Name: Kelly J. McCrann
|
|
|
Its:
Chairman & CEO
|
|
Xcorporeal (CE) (USOTC:XCRP)
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