UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
HEARTSTAT TECHNOLOGY, INC.
(Name of small business issuer in its charter)
DELAWARE 20-1680252
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
530 WILSHIRE BLVD, #304 SANTA MONICA, CA 90401
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 310-451-7400
Securities to be registered under Section 12(b) of the Act: NONE
Securities to be registered under Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE
(Title of class)
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
INTRODUCTION
HEARTSTAT TECHNOLOGY, Inc., ("HEARTSTAT" or the "Company") is a
Delaware corporation originally incorporated on October 12, 1995, under the name
of "Hospital Software of America, Inc." The Company has undergone name changes
that are described in the history of the company below. Most recently HEARTSTAT
was renamed from Tec Factory, Inc. pursuant to a March, 18, 2004 agreement by
which the technology assets of HEARTSTAT, INC. WERE ACQUIRED BY TEC FACTORY,
INC. Unless otherwise specified, the "Company", "HEARTSTAT", "we", "our" and
"us" refer to HEARTSTAT TECHNOLOGY INC. Our principal executive offices are
located at 530 Wilshire Blvd, Suite 304, Santa Monica, CA 90401 and our
telephone number is 310-451-7400.
HISTORY OF THE COMPANY
HEARTSTAT Technology, Inc. was originally incorporated on October 12,
1995, as Hospital Software of America, Inc. On November 29, 1995, the Company
changed its name to "New Health Technologies, Inc., and at the same time
effected at 10,000 to 1 reverse stock split, reducing the outstanding shares
from 300,000,000 to 30,000.
On August 28, 1996, the Company changed its name to "Pubbs Worldwide,
Inc. and at the same time, effected a 35 to 1 reverse stock split, reducing the
number of issued and outstanding shares from 14,000,000 to 400,000. The Company
changed its name to Pubbs Worldwide, Inc. in order to better reflect its
acquisition of Hubbs Development, Inc., which was in the business of operating
restaurants and retail sales of food, beer, wine and beverages.
On April 5, 1999, the Company changed its name to "Chasen's
International Corporation". The name change was affected in anticipation of a
share exchange agreement between the Company and a group of shareholders, which
owned a controlling interest in Chasen's Restaurant and Jockey Club in Beverly
Hills, California. Management of the Company believed that changing the name of
the Company to Chasen's International Corporation would provide the Company
instant name recognition. The Company affected a stock split of 100 to 1 at this
time.
On July 6, 1999, the Company changed it corporate name to
"Tril-MediaNet.com" after the anticipated share exchange agreement and
acquisition of Chasen's did not materialize. It was believed that the new name
would allow the Company to better continue its software business development and
technology operations and avoid any conflict with the trademarks and ownership
of the name Chasen's.
On November 21, 2000, the Company changed its name to Tec Factory, Inc.
and was planning to purchase Tec Factory Fort Lauderdale, LLC and Tec Factory
Los Angeles, LLC from Web Capital Ventures, Inc. This transaction was not
concluded. The Company had negligible operations between November 2000 and
February 6, 2004.
On February 6, 2006 the Company concluded an agreement to purchase the
technology assets of HEARTSTAT, INC. AND on February 17, 2004 the Company
amended its corporate name to HEARTSTAT Technology, Inc. in anticipation of
closing and Agreement for the Purchase of Assets based on the February 6, 2004
agreement.
On March 18, 2004, the Company concluded a preliminary February 6, 2004
agreement to purchase the technology referred to herein as the "HEARTSTAT
Technology". The HEARTSTAT Technology consists of patents and technology for a
non-invasive monitoring of blood flow, perfusion and other cardiovascular and
heart measures. (See description of HEARTSTAT Technology below.)
2
There were no stock splits or other changes to the Company securities
effected at the time of this name change and subsequent Agreement for the
Purchase of Assets.
The Company's common stock is currently quoted on the National
Association of Securities Dealers' Over the Counter Pink Sheets and has been
trading under the current symbol "HSTA" effective March 1, 2004. From November
28, 2000 the stock previously traded under the symbols "TECF". From August 10,
1999 till November 27, 2000 the stock traded under the symbol "TMDN". From June
4, 1999 till August 9, 1999 the stock traded under the symbol "CIIT" and
previously from June 9, 1998 the stock traded under the symbol "HUBS".
The Agreement for the Purchase of Assets, dated February 6, 2004
provided for the issuance of 38,000,000 shares of common stock and the
assumption of $370,000 of debt plus two royalty agreements as consideration for
the purchase for a 100% ownership of the HEARTSTAT Technology. At February 6,
2004, the Company's board of directors and shareholders approved the terms of
the HeartSTAT Agreement for the Purchase of Assets. This agreement was accounted
for as an arms length transaction.
The Company has also agreed with Interest Holders that they would not
have the ability to sell any of their stock under rule 144 or 144K until the
company delivers its first revenue to market.
As per the terms of Asset Acquisition Agreement there were two
royalties payable by the Company to SolutionMED Ventures of 1.2% and CNPB, Inc.
(owned by the inventor, Ted Russell and his spouse) of 2.2% on all product
revenues related to HEARTSTAT Technology. Complete royalty agreements are
attached hereto as an exhibit to the Agreement for the Purchase of Assets.
Pursuant to the Asset Acquisition Agreement the Company agreed with the
interest holders that Ted W. Russell could exclusively license in perpetuity the
HEARTSTAT Technology for the purpose of financing and concluding product
commercialization activities if the Company (HEARTSTAT Technology, Inc.) were to
fail to raise at least $2,500,000 of net proceeds for product development by
September 6, 2005 with an allowance that the Company has a 90-day period to cure
the financing inadequacy to prevent the license from being effected. The terms
of the license would include a provision that Mr. Russell, or an independent
entity will repay the Company for any actual investment capital received at the
rate of 20% of any net income of Mr. Russell's independent commercial operations
of producing derivative products using the HEARTSTAT Technology. In addition,
the Company would receive a royalty on net revenues of such derivative products
as follows:
1. A royalty equal to 3% of net revenues if at lest $1.3 million of
investment capital was received
2. A royalty equal to 2% of net revenues if at least $650,000 but
less than $1.3 million of investment capital was received, or
3. A royalty equal to 1% of net revenues if less than $650,000 of
investment capital was received.
* Exhibit B disclosing all terms and conditions to of this exclusive
license is attached to the Agreement for the Purchase of Assets.
THE COMPANY
Commencing March 18, 2004 HEARTSTAT Technology, Inc. intends to
complete development of and initiate manufacture and marketing of a product line
of hospital devices for monitoring patient blood flow, perfusion, and other
cardiovascular and heart values. Our system is completely noninvasive and
operates continuously on a heart beat-by-beat basis. It works with a simple
disposable single-patient-use sensor that has several advantages for patient
safety. The system also monitors the patient's blood pressure (BP).
3
Along with its cardiovascular measurement advancements, our system is
uniquely "patient practical". Instead of patient complications that are caused
by present invasive and noninvasive pump-up monitoring devices, we believe ours
is the only known comfortable monitor system. These advantages and the system's
simplicity were created for providing unrestricted preventive monitoring for all
categories of patients. Moreover, the disposable patient sensor was created to
also reduce hospital sepsis, a significant problem of reused blood pressure
cuffs in hospital care.
Our mission involves well over a decade of product development that was
funded with substantial investment. It started with a predecessor continuous
noninvasive blood pressure (CNBP) monitor product system that was invented by
our CEO; cleared for marketing by the FDA in 1986: and test marketed (several
hundred units, by hospital users) in the early 1990s; which we believe this
confirmed the system's practicality and acceptability for critical care
monitoring. Rather than proceed with marketing of that blood pressure product,
our CEO determined that much greater need and market opportunity existed for
blood flow and perfusion monitoring, whereupon he initiated a research and
product development program, based in part on using as the sensing "platform" of
that CNBP system, that led to his inventing our present technology, pursuant to
which he has performed and arranged independent assessment and has applied for
several patents that are pending.
Please read the information under the heading "FORWARD- LOOKING
STATEMENTS AND ASSOCIATED RISKS" below, which describes and refers to some of
the important risks and uncertainties.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Some of the statements in this report or incorporated by reference are
forward-looking, including, without limitation, the statements under the caption
"Management's Discussion and Analysis or Plan of Operation". Forward-looking
statements include those that contain words like "may," "will," "could,"
"should," "project," "believe," "anticipate," "expect," "plan," "estimate,"
"forecast," "potential," "intend," "maintain," "continue" and variations of
these words or comparable words. In addition, all of the non-historical
information herein is forward-looking, including any statement or implication
about a future time, result or other circumstance. Forward-looking statements
are not a guarantee of future performance and involve risks and uncertainties.
Actual results may differ substantially from the results that the
forward-looking statements suggest for various reasons. These forward-looking
statements are made only as of the date of this report. We do not undertake to
update or revise the forward-looking statements, whether as a result of new
information, future events or otherwise.
The forward-looking statements included herein are based on, among
other items, assumptions that we will be able to meet our operating cash and any
debt service requirements, that we will be able to successfully resolve disputes
and other business matters as anticipated, that competitive and technological
conditions within the medical device and electronic component industries will
not affect us materially or adversely, that we will retain key personnel, that
our forecasts will reasonably anticipate market demand for our products, and
that there will be no significant unanticipated cost increases or other material
adverse change in our operations or business. Among the factors that could cause
actual results to differ materially are the following:
o the effect of the dramatic changes taking place in the healthcare
environment;
o the impact of competitive procedures and products and their pricing;
o unforeseen difficulties and delays in the conduct of clinical trials,
regulatory approvals for marketing and product development programs;
o medical insurance reimbursement policies and actions of regulatory
authorities and third-party payers in the United States and overseas;
o uncertainties about the acceptance of a novel therapeutic modality by
the medical community;
o potential effects of inflation;
4
o lack of earnings visibility;
o dependence upon certain customers or markets;
o dependence upon suppliers;
o unforeseen manufacturing problems;
o difficulties in integrating any acquired businesses and realizing cost
savings or productivity gains;
o dependence on key personnel;
o difficulties regarding hiring and retaining qualified personnel in a
competitive labor market; and
o Risks of doing business in international markets.
Other factors that could cause results to vary materially from current
expectations are referred to elsewhere in this report.
Assumptions regarding the foregoing involve judgments that are
difficult to make and future circumstances that are difficult to predict
correctly. Forecasting and other management decisions are subjective in many
respects and thus susceptible to interpretations and periodic revisions based on
actual experience and business developments, the impact of which may cause us to
alter our internal forecasts, and which may in turn affect expectations or
future results. We do not undertake to announce publicly the changes that may
occur in our expectations. Readers are cautioned against giving undue weight to
any of the forward-looking statements. The inclusion of forward-looking
information should not be regarded as a representation by us or any other person
that our objectives or plans will be achieved. We are setting out some of the
more specific risk factors below in full for the convenience of the readers:
WE REQUIRE SUBSTANTIAL FUNDING.
Our funding requirements are significant and may exceed the proceeds of any
new financing. Unless we obtain sufficient funds, either as a result of an
offering of our securities or pursuant to a strategic alliance or license or
sale of our proposed products or technology, we may fail in our business
mission and cease to operate. The principal cash requirements are for
compensating our engineering and other technical employees and consultants,
equipment, working capital, and other expenses:
o Compensation to executive officers;
o Expenses relating to the product development of our system;
o Expenses relating to clinical testing and our submission to the
FDA;
o Patent expenses for protecting our technology in multiple
countries;
o Expenses relating to the start of production and marketing; and
o General and administrative expenses relating to the general
operation of our business.
WE HAVE NOT COMPLETELY DEVELOPED OUR MONITORING SYSTEM AND MAY NEVER COMPLETE
OUR DEVELOPMENT EFFORT OR INTRODUCE A PRODUCT.
We are engaged in the development of products using our hemodynamic
monitoring system that is based on what we believe is a new technology that
we invented. We have two product monitoring models that use the same
physical system under development. Our failure to commercialize either or
both product models, or any future models, or the lack of acceptance thereof
by clinical users could have a material adverse effect upon our business,
financial condition and prospects.
We cannot predict with any certainty the amount of money that will be
required for this development effort due to possible unforeseen technologic
complexities. We may not have anticipated the capital requirements for
developing our system and products. If we do not find raise adequate funds,
we may have to discontinue our development efforts. Even with adequate
funds, we cannot assure you that we will be able to develop a functional
product.
5
HOSPITALS AND THE MEDICAL PROFESSION MAY NOT ACCEPT OUR MONITORING SYSTEM.
Hospitals and the medical profession in general, which constitutes the
potential market for our product system, may never accept our products for a
number of reasons, including:
o Reluctance or failure to accept the principles of our technology as
valid;
o Reluctance to purchase equipment with new technology that is not
widely used in other hospitals because of concerns about potential
adverse consequences;
o Reluctance to purchase equipment from a new, undercapitalized
company, regardless of the validity of theoretical basis for the
monitoring system; and
o Insufficient confidence in our ability to provide ongoing service.
WE HAVE NOT GENERATED ANY REVENUE SINCE OUR ORGANIZATION, AND OUR INDEPENDENT
ACCOUNTANTS HAVE INCLUDED AN EXPLANATORY PARAGRAPH IN THEIR REPORT ON OUR
FINANCIAL STATEMENTS.
The HEARTSTAT system has not produced any revenue to date and our research
and development efforts have been limited in 2004 while we have been raising
final funding and completing this merger transaction. The report of our
independent accountants includes an explanatory paragraph stating that our
continuing losses and accumulated deficit raise substantial doubt as to our
ability to continue as a going concern. We do not expect to generate revenue
prior to obtaining our final FDA clearance. We cannot assure you that we
will ever receive FDA approval or generate revenue.
WE MAY BE DEPENDENT UPON DEVELOPING RELATIONSHIPS WITH STRATEGIC PARTNERS, AND
CANNOT ASSURE YOU WE WILL DERIVE ANY ANTICIPATED BENEFITS FROM SUCH A
RELATIONSHIP.
For market acceptance of our new system, we may establish a relationship
with a company that manufactures or markets medical devices. However, we
cannot give any assurance we will be able to enter into agreements with one
or more of such strategic partners. If we do not enter into such agreements,
our cash resources may be inadequate and result in either an acceleration of
our need for additional funding or a need to reduce our operations. Also, we
would be dependent upon the ability and willingness of the strategic partner
to perform its obligations under the agreement in a timely manner. We cannot
predict the amount and timing of resources that any strategic partner may
devote to our products; this may be affected by factors not within our
control. These factors include:
o A change in management or direction by the strategic partner;
o The introduction or development by the strategic partner or one of
its affiliates of products that may compete with our products; and
o The strategic partner's ongoing perception of the market
acceptability of our products, the fit of our products within the
partner's product line and our patent protection.
If any future strategic partner were to breach or terminate its agreement
with us or not perform its obligations in the manner contemplated by us or
otherwise fails to conduct its collaborative activities with us in a timely
manner, the commercialization of our products could be delayed or
terminated. Any such delay or termination could have a material adverse
effect upon our business.
If we enter into agreements with one or more strategic partners, conflicts
of interest could arise between us and one or more strategic partners which,
depending upon the nature of the conflict, could have a material adverse
effect upon our business, prospects and financial condition. We must
anticipate that any of our strategic partners may have other interests in
related fields. Our strategic partners or their affiliates may develop,
either alone or with others, products in this field or in related fields
that are competitive or have applications which are competitive with those
of our hemodynamic monitoring system. The competing products could affect
the support provided to our products and may result in a withdrawal of
support for our products which could have a material adverse effect upon our
business, prospects and financial condition.
WE PRESENTLY HAVE NO MARKETING CAPABILITY, AND MAY HAVE TO RELY ON OTHERS FOR
THIS.
If we develop and obtain FDA marketing approval for our monitoring system,
we must develop a marketing capability. We presently have no marketing
employees, and the proceeds from a future
6
financing may not be sufficient to develop a satisfactory marketing program.
An intensive marketing program must be implemented in order to educate the
medical profession as to both our technology and our product system. In this
connection, we must demonstrate to the medical profession that our system
will monitor blood pressure and flow parameters at least as accurately as
other methods and will provide other clinical advantages not currently
available. We cannot assure you that we will be able to make such
demonstration.
WE HAVE NO MANUFACTURING CAPABILITY AND WILL RELY ON OTHERS TO PRODUCE PRODUCT
COMPONENTS.
We as yet have no manufacturing facilities and we anticipate that, when we
develop our product monitoring system, our production will consist of
assembly, testing and quality operations, and will rely on vendors and
subcontractors to provide components that we will use in assembling our
products. We cannot assure you that we will be able to produce nor have our
products manufactured.
WE MUST COMMIT RESOURCES TO PRODUCTION PRIOR TO RECEIPT OF PURCHASE COMMITMENTS
AND COULD LOSE SOME OR ALL OF THE ASSOCIATED INVESTMENT.
Our product sales may primarily be pursuant to purchase orders for current
delivery, rather than pursuant to long-term supply contracts. As a result,
we must commit resources to the production of products without advance
purchase commitments from customers. Our inability to sell products could
have a material adverse effect on our financial condition, results of
operations and cash flows.
WE ARE SUBJECT TO GOVERNMENT REGULATIONS AND HAVE NO ASSURANCE OF REGULATORY
APPROVAL.
Medical devices are subject to extensive regulation by the Federal
government, principally the FDA, as well as regulatory bodies in other
countries, including the European Community's International Standards
Association. We cannot market any product in the United States unless
marketing is cleared by the FDA. The marketing of products which receive FDA
clearance to market may be suspended, and recall of products may be ordered
if the FDA determines that we are not complying with applicable regulatory
or performance standards. We cannot assure you that we will receive any
required FDA or other regulatory approval. The failure to obtain FDA
approval could result in a termination of our business. Furthermore, if
additional clinical testing is required, we may not have adequate funds to
have such tests performed.
We also must comply with the manufacturing quality requirements of FDA,
whereby quality assurance procedures are confirmed with FDA inspections.
Although FDA is known to provide reasonable opportunity for other firms to
correct deficiencies relating to non-life-support products like ours, there
can be no assurance that the manufacturing of our products in the United
States would be prohibited until any deficiencies were corrected.
We are also governed by other Federal, state and local laws of general
applicability. These laws include, but are not limited to, those regulating
conditions enforced by the Occupational Safety and Health Administration and
other environmental laws enforced by the United States Environmental
Protection Agency. Various states and countries have comparable laws.
WITHOUT INSURER APPROVAL FOR REIMBURSEMENT FOR NON-HOSPITAL USES OF OUR
PRODUCTS, PHYSICIANS MAY BE RELUCTANT TO PURCHASE OUR SYSTEM.
Although specific reimbursement approval is not known to be necessary for
our principal hospital market, our ability to market our products in
non-hospital markets may depend on our obtaining reimbursement approval from
insurance companies, Medicare and Medicaid for use of our products. We
cannot assure you that such reimbursement will be available.
BECAUSE WE ARE A SMALL COMPANY IN A FIELD DOMINATED BY LARGE INTERNATIONAL
MEDICAL PRODUCT COMPANIES, WE MAY NOT BE ABLE TO COMPETE WITH THESE COMPANIES
EVEN IF WE ARE SUCCESSFUL IN DEVELOPING OUR PRODUCTS.
The market for hospital patient monitoring devices is dominated by major
international companies like Philips Medical, General Electric Medical,
Baxter (Edwards Life Sciences), Siemens, Tyco (Mallincrodt/Nellcor), Abbott
Laboratories, Datascope, and Nihon Kohden. These companies supply
7
conventional blood pressure and pulse oximeter devices and sensors,
multi-parameter monitor systems and cardiac output computers and heart
catheterization components. In addition, small companies existing (MedWave
and Tensys Medical) market continuous noninvasive blood pressure monitors.
The large companies have the financial resources, product recognition,
advertising budgets, distribution arrangements and relationships with
hospitals that could prevent us from developing any meaningful market share
regardless of the capabilities of our products. They also have the financial
ability to develop new competitive products to respond aggressively to any
market success we may realize. As a result, we cannot assure that we will be
able to compete successfully with these dominant companies or develop any
significant market share.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS.
We have applied for patents but have not perfected patent protection for our
technology. We cannot assure you that any patents will be granted or that
any patents that are granted will adequately protect our intellectual
property rights. If we are granted patents, they may not be upheld if
challenged. Any challenge to the validity of our patent rights, regardless
of whether we ultimately prevail, could be expensive and could require us to
expend significant resources in any such litigation, without assurance of
success. Litigation may be necessary to determine the scope and validity of
our proprietary rights. In instances in which we hold any patents or patent
licenses, any patents held by us may be challenged, invalidated or
circumvented, or the rights granted under any patents may not provide us
with competitive advantages. Furthermore, others may design around our
patents and other proprietary technologies. We presently rely upon
non-disclosure agreements with our employees and consultants who are engaged
in our development effort. Any breach of these agreements by any of these
employees or consultants could have a material and adverse effect upon our
business.
WE ARE SUBJECT TO COMPETITIVE CHANGES IN TECHNOLOGY.
The health care field is subject to changes in technology. Advances in
health care sciences create markets for new products while reducing the
market for other products. Accordingly, unless we have access to the most
current technology, we may not be able start or continue to market our
products. We cannot assure you that we will have access to the latest
technological developments, which may impair our ability to market our
products.
WE HAVE POTENTIAL EXPOSURE FOR PRODUCT LIABILITY AND PRODUCT RECALL, AND THE
AVAILABILITY OF INSURANCE HAS NOT BEEN CONFIRMED.
Clinical trials, manufacturing, marketing and sales of our potential
products by us or any strategic partner may expose us to liability claims
resulting from the use of the products. We currently do not carry any
product liability insurance. Despite experience of a five-year record
without claims or complaints for a predecessor prototype system that is
similar to that of our product system, it is possible that we will be unable
to obtain such insurance or, if it can be obtained, that it will not provide
sufficient coverage at a reasonable cost. The inability to obtain sufficient
coverage at an acceptable cost or otherwise to obtain protection against
potential liability could prevent or inhibit the commercialization of our
proposed products. A successful product liability claim or a product recall
may have a material adverse effect upon our business, prospects and
financial condition.
WE ARE DEPENDENT ON OUR PRESIDENT AND CHIEF TECHNOLOGY OFFICER, (TECHNOLOGY
INVENTOR), AND WE NEED ADDITIONAL PERSONNEL.
We are dependent upon the services of Ted W. Russell, our president and
chief technology officer and a principal stockholder. Mr. Russell is the
inventor and principally responsible for the development of our technology.
Prior to our organization, he was chief executive officer of other
companies, including companies engaged in developing and marketing blood
pressure monitoring products. In 1995 in relation to an accident injury and
rehabilitation requirements, Mr. Russell took advantage of protection
afforded by the federal bankruptcy act.
The Company's Chief Executive Officer, James Hudson, is serving on an
interim basis during the Company's research and development phase until a
full time CEO is hired assume the full time
8
position.. We will require the services of other qualified executive,
technical and marketing personnel. In seeking such personnel, we will
compete with many other companies, largely in the health care field, which
are major companies that are better known and capitalized than we are. To
the extent that we are not successful in our efforts to hire qualified
individuals, these work requirements may be performed by Mr. Russell, Mr.
Hudson, or other employees and consultants. Our failure to hire qualified
executive personnel could have a material adverse effect upon our business
and financial condition.
THE VOLATILITY OF OUR STOCK PRICE COULD AFFECT THE VALUE OF AN INVESTMENT IN OUR
STOCK AND OUR FUTURE FINANCIAL POSITION.
The market price of our stock has fluctuated pursuant to the acquisition and
our preparations for developing and marketing our products, and can be
affected by economic and political uncertainties. Declines in the market
price of our stock could adversely affect our ability to retain personnel
with higher-priced stock incentives, to acquire businesses or assets in
exchange for stock and/or to conduct future financing activities with the
sale of stock.
HOSPITAL NEED
Our technology was created to address what we believe are vital
shortcomings of cardiovascular measurement in hospital care, described below:
Invasive monitoring is costly and inherently risky, and noninvasive
flow monitoring has been impractical. Instead, noninvasive blood pressure
("BP"), pulse oximeter and ECG monitoring are used, parameters that inadequately
specify patient condition. ECG ignores hemodynamics and lacks practicality for
preventive monitoring. Pulse oximeter devices measure relative hemoglobin oxygen
content in the blood, but this is often misleading without knowing perfusion,
which is the amount of oxygen being delivered to cell tissue for sustainment.
Noninvasive pump-up BP devices operate every 5 to 15 minutes; an estimated 12
billion BP measurements are taken yearly despite their lacking consistent
accuracy, continuous surveillance, and practicality while causing patient
problems due to pressure cuff inflations.
Patient critical care is hampered by not monitoring blood flow
perfusion and heart load (flow resistance) which are both largely controlled
with arterial elasticity (stiffness and stress). These are earlier and more
relevant markers of patient condition than BP, because blood flow depends on
artery condition and control mechanisms that alter flow in order to keep blood
pressure constant for as long as possible, e.g., until shock occurs. Thus, BP
does not warn of a deteriorating condition, such as blood infection or internal
bleeding until late in the progression when intervention is costly or too late
to save a patient.
Pulse oximeters are often relied on as an indicator of perfusion; this
is misleading because these devices give no indication of reduced blood flow
transport, they continue to display normal measurements even when flow becomes
effectively shut down. Moreover, during periods of reduced blood flow, pulse
oximeter values can be many minutes latent without being recognized as being
potentially erroneous by the anesthesiologist, thus also giving false
indications of respiratory condition.
Although blood flow is generally well accepted as being more clinically
relevant for patient safety, BP and pulse oximeter monitoring are used as a
proxy for measuring flow and cardiovascular disease because flow has been
impractical to measure. Along with delaying intervention, BP is significantly
inaccurate when blood flow is reduced, which is common with disease, as well as
when flow is elevated for real life activity and anxiety. Our hemodynamic
technology enables identifying and correcting BP measurement error that is
related to flow variations. Moreover even when measured accurately, BP yields
little information about its companion blood flow because the relationship
between flow and pressure is unpredictable with cardiovascular disease and other
conditions.
In hospital care, the focus often is moment-to-moment sustainment. The
brain requires uninterrupted "perfusion", or blood flow transport of oxygen and
other nutrients. The body's total blood flow, the "cardiac output", is measured,
but this is ineffective to assess brain flow safety and is performed
9
only on a NON-PREVENTIVE basis for a small percentage of patients because of
heart catheterization and other risks and complexities. With blood flow
measurement being impractical, perfusion has been referred to as a "HOLY GRAIL";
being of highest concern by doctors and nurses, but impractical to measure.
The aforementioned problems in part explain why an estimated quarter of
the population are said to be untreated or treated inappropriately. Exemplifying
effects of monitoring inadequacy in hospital care, authorities "have produced
very convincing evidence that the so-called vital signs of every day medical
care have little to do with the survival of the critically ill patient." (C.
BRYAN-BROWN, BLOOD FLOW TO ORGANS: PARAMETERS FOR SURVIVAL IN CRITICAL ILLNESS,
CRITICAL CARE MEDICINE 16:170, 1988). This recognition is a hint of the high
priority and substantial expenditures that are at stake in achieving early
intervention in preventive monitoring. These are the greatest controllable costs
and patient risks in hospital care, and the need for improvement is well
recognized. A survey by General Electric Medical indicated that most critical
care providers believe "non-invasive hemodynamic monitoring is their number one
unmet need."
THE PRODUCT SYSTEM
Our system was created to improve patient safety and longevity; it is
needed because physicians and other care providers are regularly misled about
abnormal blood flow conditions and cardiovascular diseases. With a simple
noninvasive disposable sensor and science-based technology, we believe our
preventive monitoring will enable earlier intervention in surgery and critical
care. Because of how the body works, blood pressure and pulse oximeter devices
cannot provide critical early warning of patient complications that are the
greatest controllable costs and risks of hospital healthcare. We believe that
our system can be the basis of multiple product models of expanded measurement
capacity because the system measures and computes several parameters, generally
categorized as follows:
BLOOD FLOW ...the basic cardiovascular function; provides early & more specific
warning of problems;
PERFUSION ... for indicating when the brain is at risk of inadequate oxygen in
surgery;
POX LATENCY ... for avoiding false pulse oximeter indications of respiratory
function in surgery;
CONTINUOUS BLOOD PRESSURE (CNBP) ... uniquely price-competitive, simple, &
unlimited practical use;
CARDIAC OUTPUT ... for hemodynamic determinations of heart disease & reducing
heart catheterizations;
HEART LOAD ...for more effective safety in management of anesthesia and coronary
care;
BIOPHYSICAL STRESS ... for quantifying cardiovascular disease and warning of
impending heart attacks.
Our system's blood flow perfusion monitoring is intended for avoiding
brain impairment that occurs for up to 50% of surgery patients with
cardiovascular disease, and for reducing mortality and costly drugs and extended
care related to septic shock, drug interactions and pulmonary catheter
complications. These conditions cause approximately 300,000 patient deaths
annually in U.S. hospitals and great legal malpractice risks. Our system
technology can also be significant for managing the most costly hospital
treatment modality, congestive heart failure ("CHF"). The specific application
needs are:
o BRAIN FUNCTION IMPAIRMENT IN SURGERY. A basic function of anesthesiology
is to "prop-up" the patient's BP, which occurs with drugs that constrict
blood flow in body regions and organs that include a patient's limbs. This
is the variable, high resistance part of the body's total cardiac output
blood flow; in healthy patients before surgery it is approximately
two-thirds of the cardiac output. The high resistance flow is the Blood
Flow Safety Reserve (BFSR) that is critical for maintaining brain flow.
Separate from the reduced flow of anesthesiology, cardiovascular disease
reduces resting BFSR by as much as 60% (SAFAR, CIRC 63:2 1981). Mostly
because of this, up to half of surgery patients with cardiovascular
disease incur "BND" or "Brain Neuropsychiatric Dysfunction" (J. E.
COTTRELL, CHF ANESTH SUNY-BRKLYN, ANESTH NEWS FEB. 1997; S. NEWMAN,
PERFUSION 4:93, 1989; M. NEWMAN, CHIEF THOR ANESTH OF DUKE UNIV PER R.
10
WINSLOW, WSJ 12/8/01; T. MONK, ANESTHESIOLOGY NEWS 4/01; PLC SMITH,
LANCET, 4/86). Pulse oximeter monitoring provides no warning of flow shut
down to less than 5% of normal flow (LAWSON, ANESTH, 10/87). Also, neither
cardiac output (when measured) nor BP is a marker for monitoring the BFSR
that our system measures in a patient's limb. Thus, we believe
anesthesiologists will be able to identify high risk patients and reduce
surgery morbidity and potential malpractice risk by using our system in
pre-surgery assessments and during surgery and recovery.
o SEPTIC SHOCK. Septic shock (systemic inflammatory response syndrome)
afflicts 751,000 and kills 215,000 hospitalized patients annually. (STUDY
OF 1995 HOSPITAL DISCHARGE RECORDS, CRITICAL CARE MEDICINE, REPORTED BY TM
BURTON, WSJ, 9/11/01) Although BP hides this condition until the dangerous
late-stage, we believe that elevated blood flow of this toxic blood
condition can be monitored for early intervention. An authoritative
physician consultant of Siemens Medical estimated our system could
facilitate the prevention of 40% of septic shock cases (M. IMHOFF, PHD.,
STADISCHE KLINIKEN DORTMUND, GERMANY, 7/98).
o DRUG THERAPY COMPLICATIONS. Because blood flow varies more greatly and
earlier than BP, WE anticipate practical flow monitoring can help reduce
the reported U.S. hospital annual death rates of 90,000 due to adverse
drug reactions and drug administration errors that result from 2.1 million
incidents. (B. H. POMERANTZ, PROF. NEUROSCIENCE, UNIV TORONTO, A. P.
4/98).
o CATHETERIZATION GUIDANCE. By continuously monitoring blood flow, BP, and
heart loads, we believe our system can provide screening and safety by
supplementing and/or reducing costly and risky echocardiography and heart
catheterization studies. (A. F. CONNORS, UVA JAMA 275:889, 1997 AND J. E.
DALEN, JAMA 276:11, 1996)
o EMERGENCY USE. We believe continuous blood flow and BP monitoring should
be vital for early intervention to prevent cardiogenic shock due to
internal bleeding in ER and emergency transport.
o SEPSIS MANAGEMENT. A surgically clean or sterile packaged BICS sensor is
intended to improve an important hospital sepsis issue. According to
studies, reusable BP cuffs are a major medium for in-hospital
cross-contaminating infections e.g., (staphylococci) that extend
hospitalization and costs. (MA BEARD, SPHYGMOMANOMETERS - RESERVOIR OF
PATHOGENIC BACTERIA, MED J OF AUSTR, 10/69; ALSO A.J. BERRY, PREVENTION OF
BLOOD-BORNE INFECTIONS (HEPATITIS B & AIDS), ASA NEWSLETTER 7/88.
o THERAPEUTIC MANAGEMENT. In coronary intensive care, we believe the
monitoring of blood flow, heart load and arterial biophysical stresses can
improve the management of heart attack recuperation and congestive heart
failure patients ("CHF"). Because of reduced heart attack mortality, CHF
has become the most costly hospital therapy in at least one leading
hospital, involving numerous and lengthy hospitalizations for many CHF
patients. More effective treatment is needed, especially because the NIH
has estimated the CHF patient population of 4.8 million will grow to 20
million in five years. After assessment with cardiac output studies, we
believe our system can allow early discharge of CHF patients for remote
continuous home monitoring over the internet.
o DISEASE MANAGEMENT. Blood pressure is not a specific measure of
cardiovascular disease. It does not measure the forces that alter and
damage the structure of vessel walls. Instead, scientists indicate that
dynamic (higher frequency) biophysical elastic forces are relevant. (D.A.
MCDONALD, BLOOD FLOW IN ARTERIES, ARNOLD, 1974, P268-82.) Physiologic
simulations with our system technology indicate that the progression of
cardiovascular disease depends upon ongoing worsening stresses that are
produced by heart rate, flow resistance and artery elasticity (stiffness).
For very brief instants during heart beats, artery forces can exceed by
many times the known limits of artery structure. We believe this can be
the underlying impetus of the coronary artery inflammation and end-stage
rupture that triggers 75% of heart attacks. (AS PROMULGATED BY LEADING
RESEARCHERS SUCH AS DR. ERIC TOPOL AND DR. STEVEN NISSEN OF CLEVELAND
CLINIC; SEE NEW STUDIES QUESTION VALUE OF OPENING ARTERIES, G. KOLATA, NY
TIMES, 3/21/04). These biophysical phenomena also reduce blood flow, and
increase flow resistance and heart work. Thus, we believe our system's
practical monitoring of this science based measure can be the means of
valid motivational compliance for insurers and meaningful management by
physicians.
11
TECHNOLOGY
We believe our system technology overcomes obstacles for hospital
preventive monitoring. We believe it is the only system, noninvasive or
invasive, capable of measuring artery blood flow and resistance, heart loads,
perfusion, BP and biophysics. Also, we believe it is the only system known to
avoid invasive and intolerable noninvasive BP measurement methods by lightly
applying a sensor to a patient's limb. Along with noninvasive comfort; the
system design includes reducing inaccuracy caused by patient movement and sensor
misplacement; and its simplicity averts new operator training.
The system uses a disposable noninvasive single-patient sensor cuff,
the "BICS" (biophysic interval cuff sensor). This enables measuring more than
one physiologic variable simultaneously ("multivariate" sensing). The system
also performs a breakthrough solutioning of flow, pressure and elasticity on a
continuous heart beat-by-beat basis. It computes these parameters using FFT
(fast Fourier transform) frequency mathematics that adjust for complex
flow-pressure waveform phasic timing at each physiologic waveform frequency.
These innovations enable the first practical application of a
scientifically famous `WM' technology that determines the pressure forces that
propel the blood flow and derive the flow waveform. Although previously
impractical because the original `WM' application involved two difficult and
risk-prone heart catheterization sensors, it produced unprecedented clinical
accuracy, including for extreme pharmacologically induced vasoactive conditions
in which all other methods are very unreliable. Our system concurrently employs
two independent `WM' applications; one of which enables our system's improved BP
monitoring accuracy and monitoring of cardiac output, heart loads and
biophysics.
COMPETITION
The market leaders are GE, Philips, Datascope, Tyco-Nellcor, Baxter
(Edwards Life Sciences), Siemens and Nihon-Kohden. We believe patient monitoring
systems of these and other smaller companies lack means of early intervention
because they lack blood flow and perfusion monitoring. The only flow monitoring
is by specialized cardiac output systems that mostly involve heart
catheterization and are restricted to use in only approximately five percent
(5%) of the patient population due to risks, costs and complexities. Cardiac
output systems are impractical for preventive monitoring. Cardiac output blood
flow measurement is usually limited to heart procedures and for making fluid
volume adjustments on the sickest patients, whereas we believe our blood flow
monitoring system is specific to vital complications that occur widely and
unpredictably in the critical care patient population, as well as practical for
preventive monitoring of all hospital patients.
FLOW PERFUSION AND BIOPHYSICS: Present cardiac output monitoring
involves heart catheterization and A-line componentry, esophageal ultrasound and
multi-electrode impedance devices. Cardiac output is not cost effective or
otherwise practical for preventive monitoring of approximately 95% of surgery
and critical care patients. We believe that no practical system for monitoring
blood flow, perfusion or biophysic hemodynamics is known of or to be under
development. We expect to prevent competition with strong patents and with our
proprietary sensing system that would involve a complicated long-lead time to
duplicate.
CNBP: For BP monitoring, approximately 12% of patients are measured
continuously with risk-prone direct INVASIVE intra-arterial catheterization that
involves artery cut-down, tubing insertion, infusions, and transducer kits.
Otherwise, monitoring is with NONINVASIVE PUMP-UP CUFF monitors that can measure
intermittently only every 5-15 minutes so as to avoid arm pump-up trauma. The
avoidance of treatment delay and arm nerve palsy are rationale for replacing
these devices with CNBP monitors; however, experience shows these issues are not
so significant as to justify high prices relative to intermittent models. Two
small companies market a CNBP device. We believe these and earlier devices have
suffered from:
o High purchase prices that are twice that of intermittent devices and
sensor replacement costs that are unacceptable. We believe a large market
exists only for a price-competitive CNBP.
12
o Systems suffer from constrictive sensors that impair blood flow and are
not tolerated long by conscious patients, as well as motion insensitivity
and ineffective waveform signal processing compensation. Sensor fragility
and positioning complexity are also impracticalities.
We believe our proprietary sensing (which provides a low cost design
with patient comfort and user simplicity) and our flow-compensated CNBP
monitoring, as our "platform" model; can be a basis for volume sales. Moreover,
we believe that any competitors would not be able to offer an upgrade to blood
flow monitoring, which we believe will be the principal part of our market
success.
INTELLECTUAL PROPERTY / PATENTS
U.S. and worldwide PCT patents were filed in 2001 and 2003 by Mr. Ted
Russell with patent counsel, Dr. David Garrod, J.D., PhD, Esq. at Patterson,
Belknap, Webb & Tyler LLP. These cover the first known practical applications of
the `WM' technology and our invented flow-based elasticity relationship and
solutioning process, as well as our sensor, calibration processes, and
measurement algorithms for blood flow, perfusion, cardiac output, heart loads
and biophysic stress. They also cover multivariate blood pressure monitoring,
waveform display algorithms and expert system artificial intelligence
applications. Based on a comprehensive search, the filed 225 claims (50
independent) are believed novel, patentable and likely to result in many
patents. In June of 2004 the Company has also engaged the services of the firm
Jones Day in connection with its European Patent Office prosecution of most of
its patent applications in various countries.
PRODUCT DEVELOPMENT AND STATUS
The Company is the beneficiary of over $6 million of expenditures for
research and development, clinical studies, FDA clearance and a marketing
introduction that confirmed user acceptability with prior generation CNBP
revenues. During 1980-1993 as Chief Executive Officer and President of Cortronic
Corporation and Cortronic Medical Corporation, Mr. Russell invented and managed
development; testing, FDA clearance and marketing of a CNBP monitor for which no
other claims of ownership exist or is believed could exist. During the period
1994-96 he initially developed various blood flow related technologies that
employ some of the features of the CNBP system. Our cost re-engineered
preproduction unit is in clinical engineering. R&D expenditures continued
through March 18, 2004 by various Interest holders. We plan to finalize product
development within a year when we will complete software, clinical testing and
final product design work. Thereafter, we plan to start manufacturing and
commence marketing of two product models after an additional six months,
depending on timing for FDA clearance (SEE "GOVERNMENT REGULATION").
MARKET FOR OUR PRODUCTS
We estimate from various market information sources that the available
hospital market for our products initially is $1 billion compared to our
estimate of the present market of $2.1 billion of patient monitoring devices and
sensors. We expect that our principal products will be flow perfusion monitors
for surgery and flow models for surgery and critical care; and that a projected
15%-20% of our shipments will be CNBP monitors and 15%-20% of our longer term
shipments will be models with cardiac output and biophysic stress monitoring.
It is estimated that preventive monitoring systems exist at more than
276,000 critical care beds, which is approximately 30% of all US hospital beds.
The first applications for our systems are expected to be surgery and recovery,
followed by relatively near-simultaneous adoption for uses in ICU, coronary
care, catheterization labs, and ER, as well as somewhat later use in dialysis,
electrophysiology (pacemakers), MRI, radiology and congestive heart failure
(CHF) management.
13
STRATEGIES
Our marketing is to emphasize patient safety benefits of
o PERFUSION MONITORING for brain safety and for more reliable pulse oximeter
monitoring in surgery;
o FLOW AND HEART LOAD MONITORING to avoid septic and cardiogenic shock and
manage heart failure; and
o BIOPHYSIC AND HEART LOAD MONITORING to avoid and manage recuperation from
heart attacks.
We believe our system addresses the greatest controllable costs and
risks of hospital healthcare. Adverse complications of septic shock, drug
problems and cardiac output heart catheterization (excluding surgery
complications and CHF management) are estimated by us from studies to cause over
60 unexpected patient deaths and $6 million of costs annually in average 200-bed
hospitals and up to three-times this for large hospitals, excluding malpractice
costs (D.W. BATES, JAMA 277:307, 1997).
Our principal business strategies are:
o GROWTH FACTOR #1: Hospital contract-based sensor purchases (for flow
perfusion systems) that can avoid the delay of hospital capital budgeting.
We plan to also sell a competitively priced CNBP "platform" model and
modules (no sensor required) that can capture existing capital budgets and
also allow users to upgrade to flow monitoring with sensor purchases from
operating funds.
o GROWTH FACTOR #2: We believe a major impetus for market acceptance will be
malpractice risk avoidance when a practical flow perfusion monitor exists,
as was true for the pulse oximeter market. We plan to employ tactics
similar to those that were reportedly employed to accelerate acceptance
and standardization of the Nellcor pulse oximeter system (CONVEYED TO TW
RUSSELL BY LJ LLOYD, PRESIDENT, NELLCOR INC., 1987).
o CAPITAL EFFICIENT MARKETING: We believe the foolproof operational
simplicity of our system is ideal for cost-effective dealer marketing
start up, and for a subsequent transition to direct selling.
o ATTRACTIVE OPERATING MARGINS: We plan to achieve market leadership and
large profit margins. Our third generation design engineering estimates
portend a low-cost, price competitive system unit. Most models are to use
a single system for commonality efficiencies.
o SPECIAL OPPORTUNITIES: We plan to pursue a private-label marketing
partnership with a major supplier, and/or other special opportunities, to
expand our market and benefit our shareholders.
GOVERNMENT REGULATION
The testing, manufacture and sale of our products are subject to
regulation by various governmental authorities, principally the FDA and
corresponding state and foreign agencies. Pursuant to the Federal Food, Drug,
and Cosmetic Act and related regulations, the FDA regulates preclinical and
clinical testing, manufacture, labeling, distribution and promotion of medical
devices. If we do not comply with applicable requirements, we can be subject to,
among other things: fines; injunctions; civil penalties; recall or seizure of
products; total or partial suspension of production; failure of the government
to grant pre-market clearance or approval for devices; withdrawal of marketing
clearances or approvals; and criminal prosecution.
A medical device may be marketed in the United States only if the FDA
gives prior authorization, unless it is subject to a specific exemption. Devices
classified by the FDA as posing less risk than class III devices are categorized
as class I or II and are eligible to seek "510(k) clearance." 510(k) clearance
generally is granted when submitted information establishes that a proposed
device is "substantially equivalent" in intended use and other factors, such as
technological characteristics, to a class I or II device already legally on the
market or to a "pre-amendment" class III device, which is one that has been in
commercial distribution since before May 28, 1976, for which the FDA has not
called for PMA applications which are defined below. For any devices that are
cleared through the 510(k) process, modifications or enhancements that could
significantly affect safety or effectiveness, or constitute a major change in
the intended use of the device, will require new 510(k) submissions. We believe
that presently
14
a minimum of three months are required from the date of submission to obtain
510(k) clearance, but the clearance can take up to six months or substantially
longer. We cannot assure you that any of our devices or device modifications
will receive 510(k) clearance in a timely fashion, or at all.
Our FDA-cleared predecessor CNBP system was classified as a class II
device pursuant to our submission of clinical study data. Outwardly and with
respect to patient safety, our present system operates identically, so that we
believe our clearance will be straightforward. Blood flow and perfusion are not
complex or foreign concepts; substantially different new proposed devices of
other companies, such as a Cerebral Oximeter of Somanetics Corporation, relative
to compared to preexisting "substantially equivalent" devices, receive class II
clearance. We have every reason to believe that our future products will be
categorized as a class II device; although no assurances exist this will be the
case.
A device requiring prior marketing authorization that does not qualify
for 510(k) clearance is categorized as class III, which is reserved for devices
classified by the FDA as posing the greatest risk, such as life-sustaining,
life-supporting or implantable devices, or devices that are not substantially
equivalent to a legally marketed class I or class II device. Class III devices
generally must receive approval pursuant to a pre-market approval, or PMA,
application, which requires proving the safety and effectiveness of the device
to the FDA. The process of obtaining PMA approval can be expensive and
uncertain. This can require from one to three or more years after filing, and
some are never approved.
If human clinical trials of a device are required, whether for a 510(k)
or a PMA application, and the device presents a "significant risk," the sponsor
of the trial, which is usually the manufacturer or the distributor of the
device, will have to file an investigational device exemption, or IDE,
application before beginning human clinical trials. The IDE application must be
supported by data, typically including the results of animal and laboratory
testing. If the IDE application is approved by the FDA and one or more
appropriate Institutional Review Boards, or IRBs, human clinical trials may
begin at a specific number of investigational sites with a specific number of
patients, as approved by the FDA. If the device presents a "nonsignificant risk"
to the patient, a sponsor may begin the clinical trial after obtaining approval
for the study by the IRB at each clinical site without the need for FDA
approval.
In 1986, our predecessor "platform" CNBP model received 510(k)
clearance from the FDA for use on adults and pediatrics. Approximately 1,000
monitors were supplied to dealers and users in Japan, Europe and the US during
1989-92. We may rely on this FDA clearance to market a CNBP monitor if we judge
that the functionality of our CNBP "platform" product is substantially
unchanged. Alternately, we may submit for a new clearance for our CNBP model,
whereby we will submit results of a new clinical study if our system monitoring
algorithms of this initial CNBP "platform" are changed significantly. We believe
that this would involve a comparative hospital clinical accuracy study for 20-30
patients similar to what was submitted for the predecessor system. Such studies,
especially for a comfortable noninvasive device like our system, do not involve
a PMA or IDE and are generally relatively easy to arrange a hospital IRB
approval for (see below) and conduct. We will complete clinical accuracy studies
and submit for a 510(k) clearance for our products that measure blood flow,
perfusion, cardiac output, heart loads and biophysics.
We believe "Grandfathering" advantages are likely to apply. Pursuant to
its evaluation and lacking a CNBP class, the FDA requested a clinical study that
specifically assessed the patient safety of our low pressure cuff sensing; class
II clearance was granted by FDA after such study results were submitted.
Grandfathering provisions enable invoking prior clinical results and experience.
The sensing operation of our system technology is identical to the predecessor
CNBP, so that patient safety aspects are proven because of our predecessor CNBP.
Because the history of use of the cuff sensor system was devoid of any patient
concerns or FDA "incident" reports, we believe expedited "Grandfathering"
criteria will apply for all our monitor system product clearances regarding
safety of our sensing system. Also, after each FDA clearance of each product
model parameter (BP, flow, stress), grandfathering provisions regarding accuracy
for such parameter is expected to should apply to subsequent models that include
same parameters. However, there can be no assurances that grandfathering
advantages will be allowed for us.
15
The Company maintains a relationship with and plans to retain an FDA
consultant, a past FDA director, who is a proven expediter of the FDA clearance
process.
Any devices we manufacture or distribute pursuant to FDA clearances or
approvals are subject to pervasive and continuing regulation by FDA and some
state agencies. Manufacturers of medical devices marketed in the United States
must comply with detailed Quality System Regulation, or QSR, requirements, which
include testing, control, documentation and other quality assurance procedures.
Manufacturers must also comply with Medical Device Reporting requirements. These
requirements require a manufacturer to report to FDA any incident in which its
product may have caused or contributed to a death or serious injury, or in which
its product malfunctioned and, if the malfunction were to recur, would likely
cause or contribute to a death or serious injury. Labeling and promotional
activities are subject to scrutiny by FDA and, in some circumstances, by the
Federal Trade Commission. FDA enforcement policy prohibits promoting approved
medical devices for unapproved uses.
We are subject to routine inspection by the FDA and some state agencies
for compliance with QSR requirements and other applicable regulations. From
experience, we believe our initial FDA QSR inspection will occur within
approximately one year of our initial product shipment. We are also subject to
numerous federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control and disposal of hazardous or potentially hazardous substances.
If any of our current or future FDA clearances or approvals are
rescinded or denied, sale of our applicable products in the United States would
be prohibited during the period we do not have such clearances or approvals. In
such cases we would consider shipping the product internationally and/or
assembling it overseas if permissible and if we determine such product to be
ready for commercial shipment. The FDA's current policy is that a medical device
that is not in commercial distribution in the United States, but which needs
510(k) clearance to be commercially distributed in the United States, can be
exported without submitting an export request and prior FDA clearance provided
that
o the company believes the device can be found to be substantially
equivalent through a 510(k) submission,
o the device is labeled and intended for export only,
o the device meets the specifications of the foreign purchaser, and
o other conditions of the export provisions of the Federal Food, Drug,
and Cosmetic Act and the Export Reform Act are satisfied.
Congress has enacted the Medical Device User Fee Modernization Act of
2002. Among other things, this law has provisions that affect the assessment of
user fees for product approvals and clearances. Given the recent enactment of
this law, the effect of the law on us is unknown.
EMPLOYEES:
The company currently has only one full time employee and one part time
executive employee. The company has a number of contractors in its R&D
operations.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
On February 6, 2004, an agreement was reached whereby Tec Factory, Inc.
would acquire from the various Interest holders HEARTSTAT Technology assets for
use in continuing the HEARTSTAT operations for completing the development and
commercialization of the first known practical system for monitoring blood flow
perfusion (oxygen transport) and other cardiovascular and heart measures.
Effective February 17, 2004 we changed our name to HEARTSTAT Technology, Inc.,
in an effort to reflect changes in our business focus to incorporate the new
acquisition. The Company is proceeding forward with its new business plan
focusing on the HEARTSTAT technology.
This acquisition was accounted for as an acquisition of assets as
opposed to a reverse merger due to the fact that there was no current company
that owned or operated this business or technology in the past 2 years (FOR MORE
INFORMATION ON THE ACCOUNTING POLICIES USED PLEASE CONSULT THE NOTES TO THE
FINANCIAL STATEMENTS). The technology assets had a number of interest holders
besides Mr. Ted Russell the inventor and all interest holders have agreed to
exchange their interest in the technology and future operations for a
proportionate share of restricted 144 stock in the HEARTSTAT Technology, Inc. as
per the provisions of the Agreement for the Purchase of Assets attached as an
exhibit hereto.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates, including those
related to impairment of long-lived assets. We base our estimates on historical
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 value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions; however, we believe that
our estimates, including those for the above-described items, are reasonable.
IMPAIRMENT OF LONG-LIVED ASSETS.
Our long-lived assets include property, equipment and goodwill. We
assess impairment of long-lived assets whenever changes or events indicate that
the carrying value may not be recoverable. In performing our assessment we must
make assumptions regarding estimated future cash flows and other factors to
determine the fair value of the respective assets. If these estimates change in
the future we may be required to record impairment charges against these
respective assets.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED DECEMBER 31, 2003 AND 2002.
HEARTSTAT Technology operated as Tec Factory, Inc. for fiscal 2003 and
fiscal 2002 in which the company had negligible operations during these two
years as it looked for an acquisition and business direction.
Operating expenses consisted of payroll and related expenses for
executive, finance and administrative personnel, recruiting, professional fees
and other general corporate expenses as well as payroll and related expenses for
development personnel and consultants. Operating expenses were $21,000 for each
of the years ended December 31, 2003 and 2002 respectively.
Net loss was $21,000 or ($0.002 per share) for the years ended December
31, 2003 and 2002.
17
On December 31, 2003, the Company had a working capital deficit of
$42,000 compared to a working capital deficit of $21,000 on December 31, 2002.
The Company had no cash balance as of December 31, 2003.
The Company has incurred operating losses and negative cash flows from
its minimal operations for fiscal years ending December 31, 2002 and 2003.
FOR THE SIX MONTHS ENDED JUNE 30, 2004
Company operations increased somewhat in the first and second quarter
of 2004 and, as reflected in the interim statements, in the first quarter the
Company completed its acquisition of the HEARTSTAT technology system and assets
which affected our financial statement assets by $408,000 pursuant to the
assumption of $370,000 of debt and issuance $38,000 of capital stock reflecting
38,000,000 shares issued to the interest holders at $0.001 per share.
On March 18, 2004 the Company completed the acquisition and began its
monthly operations to commercialize and bring to market products based on the
HEARTSTAT Technology.
Operating expenses consist of payroll and related expenses for
executive, finance and administrative personnel, recruiting, professional fees
and other general corporate expenses as well as payroll and related expenses for
development personnel and consultants. Operating expenses were $46,829 for the
six months ended June 30, 2004.
Net loss was $46,829 ($0.0033 per share) for the six months ended June
30, 2004.
On June 30, 2004, the Company had a working capital deficit of
$458,829, as compared to a working capital deficit of $42,000 on December 31,
2003. The Company had no cash balance as of June 30, 2004, but maintains a
agreement with Diamond WorldWide, Inc. a related company, to continue to finance
operations by issuing short term debt.
The Company has continued to incur operating losses for the six months
ended June 30, 2004, mostly due to its expanding operations related to ramping
up the commercialization of the HEARTSTAT technology. Continued losses are
anticipated to occur through the remainder of 2004 and 2005 because of product
development and administrative operating expenses that will be required by the
Company before initial product shipments that are anticipated by the second
quarter of 2006.
The Company has been funded and continues to be funded by Diamond
WorldWide, Inc. which under an arrangement will continue to fund the operating
and development expenses of the company. All monies advanced to HEARTSTAT by
Diamond WorldWide will be accruing interest at 8% per annum. Diamond WorldWide,
Inc. is a related company. (Discuss and disclose)
PLAN OF OPERATION
HEARTSTAT Technology, Inc. has refocused its operations after
completing its acquisition of the technology. Upon the completion of the
acquisition with the interest holders, the Company began the process of
completing a financing and implementing the final commercialization of the
HEARTSTAT Technology. The Company plans a private placement capital financing
approximately of $5,000,000 which will be used for development, clinical trials
for FDA clearance, as well as the launch of manufacturing and marketing and
distribution of products using the HEARTSTAT Technology.
The Company concluded an employment contract with its President and
Chief Technology Officer, Ted Russell, who is preparing to hire necessary
product development personnel to begin the final phase of the development and
commercialization of this technology. The Company plans to lease and commence
operations of its R&D offices near Huntington, NY in the fourth quarter of 2004
and anticipates being fully operational by January of 2005.
18
ITEM 3. DESCRIPTION OF PROPERTY
HEARTSTAT Technology, Inc. currently has its principal executive
offices located at 530 Wilshire Blvd, Suite 304, Santa Monica, CA 90401. This
space represents a portion of the 670 square feet of office space and is
subleased from Diamond WorldWide, Inc. The Company plans to lease a new research
and development center in Long Island, New York, by the end of January 2005.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides certain information as to the officers and
directors individually and as a group, and the holders of more than 5% of the
Common Stock of the Company, as of September 30, 2004:
-----------------------------------------------------------------------------------------------------------------
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP PERCENT OF CLASS (2)
-----------------------------------------------------------------------------------------------------------------
Ted W Russell
44 Middle Beach Rd West
Madison, CT 06443 19,599,997 (3) 40.5%
-----------------------------------------------------------------------------------------------------------------
James Hudson
13674 South Talbot Trail,
Ridgetown, Ontario N0P 2C0 1,000,000 (6) 2.1%
-----------------------------------------------------------------------------------------------------------------
eAngels Syndicate
c/o G.K. Krause
1521 Alton Road, #352 15,000,000 (3)(4)(5) 31.1%
Miami Beach, FL 33139
-----------------------------------------------------------------------------------------------------------------
Patrick A. Maley
15 Codman Drive 50,000 (7) 0.1%
Sudbury, MA 01776
-----------------------------------------------------------------------------------------------------------------
SolutionMed Ventures
C/O G.K. Krause
1521 Alton Road, #352 4,000,000 (3)(4)(5) 8.3%
Miami Beach, FL 33139
-----------------------------------------------------------------------------------------------------------------
FutureVest MicroCap Fund
C/O G.K. Krause
1521 Alton Road, #352 4,000,000 (3)(4)(5) 8.3%
Miami Beach, FL 33139
-----------------------------------------------------------------------------------------------------------------
eAngels Technology Fund
C/O G.K. Krause
1521 Alton Road, #352 3,000,000 (3)(4)(5) 6.2%
Miami Beach, FL 33139
-----------------------------------------------------------------------------------------------------------------
Diamond Ventures
C/O G.K. Krause
1521 Alton Road, #352 4,000,000 (3)(4)(5) 8.3%
Miami Beach, FL 33139
-----------------------------------------------------------------------------------------------------------------
All officers and directors as a group (4 persons)
20,674,997 42.6%
-----------------------------------------------------------------------------------------------------------------
19
(1) To our knowledge, except as set forth in the footnotes to this table
and subject to applicable community property laws, each person named in
the table has sole voting and investment power with respect to the
shares set forth opposite such person's name.
(2) This table is based on 48,402,887 shares of Common Stock outstanding as
of September 30, 2004. If a person listed on this table has the right
to obtain additional shares of Common Stock within sixty (60) days from
September 30, 2004, the additional shares are deemed to be outstanding
for the purpose of computing the percentage of class owned by such
person, but are not deemed to be outstanding for the purpose of
computing the percentage of any other person.
(3) Mr. Ted W. Russell and Mr. G.K. Krause through the eAngels Syndicate
may be deemed to be the "parents" of our company within the meaning of
the rules and regulations of the Securities and Exchange Commission.
(4) Includes 4,000,000 shares owned of record by FutureVest MicroCap Fund;
3,000,000 shares owned by eAngels Technology Fund; 4,000,000 shares
owned by SolutionMed Ventures and 4,000,000 shares owned by Diamond
Ventures.
(5) G. K. Krause is an investment manager that manages equity investments
and partnerships for eAngels Syndicate. Mr. G. K. Krause is deemed the
beneficial owner of a total of 15 million shares or 31.0% of the total
outstanding common stock pursuant to note (4).
(6) Mr. James Hudson is the Chief Executive Officer of HeartSTAT
Technology, Inc.
(7) Represents a total of 50,000 shares issuable upon exercise of stock
options. 50,000 Immediately exercisable by Mr. Maley.
CHANGES IN CONTROL
There are no agreements known to management that may result in a change
of control of our company.
20
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Our executive officers and directors are:
NAME AGE POSITION
James R. Hudson 65 Chief Executive Officer
Ted W. Russell 62 President and Chief Technology Officer
Patrick A. Maley 55 Director
Our directors are elected annually by our shareholders and our officers
are appointed annually by our board of directors. Any vacancies in our board to
be are filled by the board itself. Set forth below are brief descriptions of the
recent employment and business experience of our executive officers and
directors.
JAMES R. HUDSON, CHIEF EXECUTIVE OFFICER & DIRECTOR
JAMES R. HUDSON has been promoted to Interim Chief Executive Officer
since October 15, 2004. Prior to this Mr. Hudson served as interim President
since March 18, 2004. Since November 1986, he has been the chief executive
officer of Hudson Medical Systems Limited, Ridgetown, Ontario, Canada, a
specialty products distribution company he founded in 1986 that supplies medical
device products to acute care hospitals throughout Canada. He has over forty
years of experience in the health care industry. He served as distributor of the
Company's predecessor CNBP blood pressure monitor. From 1983 to 1986, he was
general manager of the Cardiovascular Division of Gould Electronics, Canada. In
1978 he founded and was chief executive officer of Northern Medical Industries
Limited, Mississauga, Ontario, Canada, a company that went public in 1979. In
1970 he became chief executive officer and took public Medicraft Limited in
Rexdale, Ontario. Both Northern Medical and Medicraft were engaged in the
manufacture and sale of intubation products. Previously, he was regional manager
responsible for sales development at C.R. Bard Inc., and was salesman for Ames
Diagnostics, a division of Miles Laboratories.
TED W. RUSSELL, PRESIDENT
TED W. RUSSELL was a member of the Board of Directors until October 8,
2004 and became the President on October 15, 2004. Mr. Russell held the position
of Chief Executive Officer, since July 27, 2004 and employed by the Company as a
consultant from April 1, 2004. Mr. Russell invented the HEARTSTAT technology and
for over twenty years has been managing the development of its system and other
related medical technologies. He has over fifteen years experience as CEO of
computer and medical device companies with corporate governance experience as
board chairman and CFO. Mr. Russell has been working independently on the
technology over the past three years during which he applied for patent
protection for the HEARTSTAT technology and has been completing the technology
platform and coordinating business activities. Mr. Russell was Chief Executive
Officer and President of Rmw/Corlogic, Inc., Madison, CT, since its founding
December 1996 until July 2001. In 1994 through 1996 he conducted research that
involved creating various blood flow related technologies that also employ some
of the technology he previously invented. He was Chief Executive Officer and
President of Cortronic Medical Corporation, Northport, NY, since its founding in
August 1990 until February 1993 (see below), and was Chief Executive Officer and
President of a predecessor Cortronic Corporation, Ronkonkoma NY since its
startup in May 1993. Through these two companies he invented, was an investor
in, and managed development, testing, FDA clearance and marketing of a
continuous noninvasive blood pressure monitor until operations were terminated
pursuant to a February 1993 personal injury and rehabilitation, which resulted
in his having to use the protection of the federal bankruptcy laws in October
1995. From 1981 to 1982, he was Director of Corporate Development of National
Medical Care Inc, Boston, MA; from 1978 to 1980 he was CEO and President of
Medtek Corp, Forest Hills, NY; and from 1977 to 1978 he was Vice President in
Corporate Finance, Venture Capital, Smith Barney Harris Upham, Inc, New York,
NY. From 1975 to 1977, he was a senior general
21
management consultant for Booz, Allen & Hamilton, New York, NY, for which he
conducted major engagements for General Electric, Federal Express and WT Grant.
Earlier, he was CEO of a minority-owned Memorex Corporation affiliate, ILC
Peripherals Corp., New York, NY and before that he directed a new computer
product marketing rollout for Memorex in Santa Clara, CA. Earlier, he held
financial controllership and engineering positions at Eastman Kodak Company,
Rochester, NY. He received and has pending several patents for medical devices.
He received a BSE degree from University of Michigan in 1965 and MBA degree from
Columbia University in 1974.
PATRICK A. MALEY, DIRECTOR
PATRICK A. MALEY has been a director of HEARTSTAT TECHNOLOGY INC. since
September 8, 2004 and previously, of HEARTSTAT INC. since it's founding July
2002. He has been Chief Operating Officer of Biowave, Inc., Norwalk CT, since
September 2002, and previously he served as consultant to other medical device
companies since January 2002. From January 1999 to December 2001, he held the
positions of Vice President of Marketing and Sales and Business Development at
Maritech, Inc. Newton MA. He was Vice President of Sales and Marketing of Zoll
Medical, Burlington, MA, a supplier of heart defibrillator devices between 1995
and 1998, was Vice President of Marketing during 1992-95 at Boston Scientific.
Mr. Maley received his BA and MBA degrees at the University of California. He
has interest in assuming a senior operating or marketing management position in
the company.
CONFLICTS OF INTEREST
Members of our management are associated with other firms involved in a
range of business activities. Consequently, there are potential inherent
conflicts of interest in their acting as officers and directors of our company.
Insofar as the officers and directors are engaged in other business activities,
we anticipate they will devote only a minor amount of time to our affairs.
Our officers and directors are now and may in the future become
shareholders, officers or directors of other companies, which may be formed for
the purpose of engaging in business activities similar to us. Accordingly,
additional direct conflicts of interest may arise in the future with respect to
such individuals acting on behalf of us or other entities. Moreover, additional
conflicts of interest may arise with respect to opportunities which come to the
attention of such individuals in the performance of their duties or otherwise.
Currently, we do not have a right of first refusal pertaining to opportunities
that come to their attention and may relate to our business operations.
Our officers and directors are, so long as they are our officers or
directors, subject to the restriction that all opportunities contemplated by our
plan of operation which come to their attention, either in the performance of
their duties or in any other manner, will be considered opportunities of, and be
made available to us and the companies that they are affiliated with on an equal
basis. A breach of this requirement will be a breach of the fiduciary duties of
the officer or director. If we or the companies with which the officers and
directors are affiliated both desire to take advantage of an opportunity, then
said officers and directors would abstain from negotiating and voting upon the
opportunity. However, all directors may still individually take advantage of
opportunities if we should decline to do so. Except as set forth above, we have
not adopted any other conflict of interest policy with respect to such
transactions.
22
ITEM 6. EXECUTIVE COMPENSATION.
The following table sets forth information the remuneration of our
chief executive officers for the last three completed fiscal years.
SUMMARY COMPENSATION TABLE
-----------------------------------------------------------------------------------------------------------------------
LONG TERM COMPENSATION
--------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------------------------------------------------------------
OTHER RESTRICTED SECURITIES
NAME AND ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL COMPENSA- AWARD(S) OPTIONS/ PAYOUTS COMPENSA-
POSITION YEAR SALARY ($) BONUS ($) TION($) ($) SARS (#) ($) TION($)
-----------------------------------------------------------------------------------------------------------------------
Robert G. 2003 -0- -0- -0- -0- -0- -0- -0-
Taylor 2002 -0- -0- -0- -0- -0- -0- -0-
President (1) 2001 -0- -0- -0- -0- -0- -0- -0-
-----------------------------------------------------------------------------------------------------------------------
(1) Mr. Taylor was the President from January 2001 through February 27,
2004. He had no compensation from the company.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
----------------------------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS
----------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS/SARS GRANTED EXERCISE OR BASE
NAME OPTIONS/SARS GRANTED TO EMPLOYEES IN PRICE ($/SH) EXPIRATION DATE
(#) FISCAL YEAR
----------------------------------------------------------------------------------------------------------------------
Robert G. Taylor -0- -- -- --
----------------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
----------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FISCAL YEAR END (#) FISCAL YEAR END ($)
-----------------------------------------------
SHARES ACQUIRED ON EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE
----------------------------------------------------------------------------------------------------------------------
Robert G. Taylor -0- -0- -0-/-0- -0-/-0-
----------------------------------------------------------------------------------------------------------------------
We will reimburse our officers and directors for reasonable expenses
incurred during the course of their performance.
Ted W. Russell has been under a consulting contract since April 1, 2004
and served as CEO, Chief Technology Officer, Treasurer and interim CFO since
July 27, 2004; under a corporate executive restructure he became President and
Chief Technology Officer October 15, 2004. James Hudson has served as interim
President since March 18, 2004 and will continue as interim CEO and Secretary /
Treasurer from August 15th forward. Hudson will not receive any additional
compensation from the Company for his services with the exception of his
participation in the Stock Option Plan. Mr. Russell has signed a five-year
employment agreement which will start upon commencement of full R&D operations
and he has received a monthly compensation of $5,000 from April 1, 2004 to
September 1, 2004 which will increase to $7,500 monthly beginning October 1,
2004 until the full employment contract provisions begin. The contract provides
that the employment can terminate upon: death or disability, for cause: for
failure to comply with the terms of the agreement, or at any time by company or
employee upon 30 days written notice. This employment agreement is attached as
an exhibit hereto.
The Company is currently in negotiations with Mr. Ted Russell to revise his
current employment contract to represent his new focus as President and CTO. The
Company is considering replacing the current stock option plan with a new
Special Inventor Warrant, which would provide Mr. Russell with warrants to
purchase 4,000,000 shares of stock exercisable at $1.00 per share. These
warrants will immediately 100% vest upon final delivery of an FDA cleared
(approved) product including CNBP and Blood Flow Technologies.
23
STOCK OPTION PLANS
On September 30, 2004, our shareholders adopted a stock option plan,
under which an aggregate of 5,000,000 shares of common stock are reserved for
issuance pursuant to the exercise of stock options. These options may be granted
to our employees, officers, directors, and consultants. We may also make awards
of restricted stock under this plan. Shares issued under this plan are
"restricted" in the sense that they are subject to repurchase by us at cost
during the vesting period.
The plan is designed to (i) induce qualified persons to become
employees, officers, or directors of us; (ii) reward such persons for past
services to us; (iii) encourage such persons to remain in our employ or
associated with us; and (iv) provide additional incentive for such persons to
put forth maximum efforts for the success of our business. Transactions under
the plan are intended to comply with all applicable provisions under the
Securities Exchange Act of 1934. This plan will remain in effect until September
30, 2014, unless soon terminated by the Board of Directors.
Our board of directors administers the plan and determines:
o who will be granted options or awards;
o when options or awards will be granted;
o the number of options or shares to be granted;
o which options may be intended to qualify as incentive stock options
under the Internal Revenue Code of 1986, versus non-qualified options
which are not intended to so qualify;
o the time or times when each option becomes exercisable;
o the duration of the exercise period for options;
o the form or forms of the instruments evidencing options or awards
granted under the plan;
o the purchase price of the shares issued under the plan;
o the period or periods of time during which we will have a right to
repurchase the shares; and
o the terms and conditions of such repurchase.
The board may adopt, amend, and rescind such rules and regulations as
in its opinion may be advisable for the administration of the plan. It may amend
the plan without shareholder approval where such approval is not required to
satisfy any statutory or regulatory requirements. The board also may construe
the plan and the provisions in the instruments evidencing options granted under
the plan to employee and officer participants. The board has the power to make
all other determinations deemed necessary or advisable for the administration of
the plan. The board may not adversely affect the rights of any participant
without the consent of such participant.
The plan contains provisions for proportionate adjustment of the number
of shares for outstanding options and the option price per share in the event of
stock dividends, recapitalizations resulting in stock splits or combinations or
exchanges of shares.
The board may select participants in the plan from employees and
officers of us and our subsidiaries and consultants to us and our subsidiaries.
In determining the persons to whom options and awards will be granted and the
number of shares to be covered by each option, the board will take into account
the duties of the respective persons, their present and potential contributions
to our success, and such other factors as the board deems relevant to accomplish
the purposes of the plan.
STOCK OPTIONS. Only employees of us and our subsidiaries, as the term
"employee" is defined for the purposes of the Internal Revenue Code will be
entitled to receive incentive stock options. The option price of any incentive
stock option may be not less than 100% of the fair market value per share on the
date of grant of the option; provided, however, that any incentive stock option
granted under the plan to a person owning more than ten percent of the total
combined voting power of the common stock will have an option price of not less
than 110% of the fair market value per share on the date of grant of the
incentive stock option. The exercise period of options granted under the plan
may not exceed ten years from the date of grant thereof. Incentive stock options
granted to a person owning more than ten percent
24
of the total combined voting power of our common stock will be for no more than
five years. Except in the case of options granted to disinterested directors who
administer the plan, the board will have the authority to accelerate or extend
the exercisability of any outstanding option at such time and under such
circumstances as it, in its sole discretion, deems appropriate. However, no
exercise period may be extended to increase the term of the option beyond ten
years from the date of the grant.
An option may not be exercised unless the optionee then is an employee,
officer, or consultant of us or our subsidiaries, and unless the optionee has
remained continuously as an employee, officer, or consultant since the date of
grant of the option. If the optionee ceases to be an employee, officer, or
consultant other than by reason of death, disability, or for cause, all options
granted to such optionee, fully vested to such optionee but not yet exercised,
will terminate three months after the date the optionee ceases to be an
employee, officer or consultant. All options that are not vested to an optionee,
under the conditions stated in this paragraph for which employment ceases, will
immediately terminate on the date the optionee ceases employment or association.
If an optionee dies while an employee, officer or consultant, or if the
optionee's employment, officer, or consultant status terminates by reason of
disability, all options theretofore granted to such optionee, whether or not
otherwise exercisable, unless earlier terminated in accordance with their terms,
may be exercised at any time within one year after the date of death or
disability of said optionee, by the optionee or by the optionee's estate or by a
person who acquired the right to exercise such options by bequest or inheritance
or otherwise by reason of the death or disability of the optionee.
Options granted under the plan are not transferable other than by will
or by the laws of descent and distribution or pursuant to a qualified domestic
relations order. Options may be exercised, during the lifetime of the optionee,
only by the optionee and thereafter only by his legal representative. An
optionee has no rights as a shareholder with respect to any shares covered by an
option until the option has been exercised.
Unless otherwise specified in an optionee's agreement, options granted
under the plan will become vested with the optionee over the course of four
years from date of grant under the following schedule: 25% upon the first
anniversary of the option grant and the remaining 75% monthly over the following
36 months.
RESTRICTED STOCK AWARDS. Shares issued under the plan will be evidenced
by a written restricted stock purchase agreement between us and the participant.
Shares issued under the plan are transferable only if the transferee agrees to
be bound by all of the terms of the plan, including our right to repurchase the
shares, and only if such transfer is permissible under federal and state
securities laws. To facilitate the enforcement of the restrictions on transfer,
the board may require the holder of the shares to deliver the certificate(s) for
such shares to be held in escrow during the period of restriction.
OUTSTANDING OPTIONS. As of September 30, 2004 there were 200,000
options granted under this plan.
25
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Other than as disclosed below, none of our present directors, officers
or principal shareholders, nor any family member of the foregoing, nor, to the
best of our information and belief, any of our former directors, senior officers
or principal shareholders, nor any family member of such former directors,
officers or principal shareholders, has or had any material interest, direct or
indirect, in any transaction, or in any proposed transaction which has
materially affected or will materially affect us.
The company currently has its headquarters operations in Santa Monica,
California by subleasing office space from Diamond WorldWide, Inc. Term of the
lease is month to month and the rent is $250 per month and started on July 1,
2004. Diamond WorldWide, Inc. holds the long term debt notes for $350,000 along
with other short term advances to the Company. As of June 30, 2004, a total of
$405,800 was owed to Diamond WorldWide, Inc. in both long term and short term
debt.
As per the terms of Agreement for the Purchase of Assets there were two
royalties payable by the Company to SolutionMED Ventures of 1.2% and CNPB, Inc.
(owned by the inventor, Ted Russell and his spouse) of 2.2% on all product
revenues related to HEARTSTAT Technology. SolutionMED Ventures is a related
company.
G.K. Krause through the eAngels Syndicate is the beneficial owner of
15,000,000 shares through the investment funds; SolutionMed Ventures, FutureVest
MicroCap Fund, eAngels Technology Fund and Diamond Ventures.
As of June 30, 2004, accounts payable of $49,741 of which $40,000 is
due to a Diamond Services a division of Diamond WorldWide, Inc. for audit,
consulting and legal fees. This amount is described on Note G in the year ending
financial statements. G.K. Krause from 2002 to August 2004 was an officer and
director of Diamond WorldWide, Inc.
Concurrent with the Companies acquisition of the HeartSTAT technology,
the Company entered into a Commercialization Partnership agreement with Ted
Russell where Mr. Russell could exclusively license in perpetuity the HEARTSTAT
Technology for the purpose of financing and concluding product commercialization
activities if the Company (HEARTSTAT Technology, Inc.) were to fail to raise at
least $2,500,000 of net proceeds for product development by September 6, 2005
with an allowance that the Company has a 90-day period to cure the financing
inadequacy to prevent the license from being effected. The terms of the license
would include a provision that Mr. Russell, or an independent entity will repay
the Company for any actual investment capital received at the rate of 20% of any
net income of Mr. Russell's independent commercial operations of producing
derivative products using the HEARTSTAT Technology. In addition, the Company
would receive a royalty on net revenues of such derivative products as follows:
1. A royalty equal to 3% of net revenues if at lest $1.3 million of
investment capital was received
2. A royalty equal to 2% of net revenues if at least $650,000 but
less than $1.3 million of investment capital was received, or
3. A royalty equal to 1% of net revenues if less than $650,000 of
investment capital was received.
* Exhibit B disclosing all terms and conditions to of this exclusive
license is attached as part of the Agreement for the Purchase of Assets.
ITEM 8. DESCRIPTION OF SECURITIES
The company currently has the following stock structure:
1. 80,000,000 common voting shares authorized.
2. 5,000,000 preferred convertible shares with the conversion rate
left to be determined by the board of directors upon issuance. To
date there are no preferred shares issued in the corporation.
26
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
Our common stock has been trading on the over-the-counter pink sheet
("Pink Sheets") under the symbol "HSTA" effective March 1, 2004. The common
stock was first listed on June 9, 1998 under the symbol "PUBS" and traded under
that symbol until April 5, 1999. From April 6, 1999 to August 9, 1999, the stock
traded under the symbol "CIIT". From August 10, 1999 to November 27, 2000 the
stock traded under the symbol "TMDN" and from November 28, 2000 to February 29,
2004 the stock traded under the symbol of "TECF". The following table sets forth
the range of high and low bid quotations for each fiscal quarter for the last
two fiscal years. These quotations reflect inter-dealer prices without retail
mark-up, mark-down, or commissions and may not necessarily represent actual
transactions.
FISCAL QUARTER ENDING HIGH BID LOW BID
March 31, 2002......................... $ 0.01 $ 0.01
June 30, 2002.......................... $ 0.03 $ 0.03
September 30, 2002..................... $ 0.005 $ 0.005
December 31, 2002...................... $ 0.005 $ 0.005
March 31, 2003......................... $ 0.01 $ 0.01
June 30, 2003.......................... $ 0.01 $ 0.01
September 30, 2003..................... $ 0.01 $ 0.01
December 31, 2003...................... $ 0.01 $ 0.01
March 31, 2004......................... $ 0.60 $ 0.60
June 30, 2004.......................... $ 0.70 $ 0.70
September, 2004........................ $ 0.80 $ 0.80
On October 15, 2004, the closing price for the common stock was $0.60
As of October 15, 2004, there were 939 record holders of our common
stock. Since our inception, no cash dividends have been declared on our common
stock.
ITEM 2. LEGAL PROCEEDINGS.
HEARTSTAT is not a party to, and its property is not the subject of,
any pending legal proceedings.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Bongiovanni & Associates was appointed as our principal accountants as
of March 15, 2004. On August 10, 2004, our Board of Directors approved the
engagement of Bongiovanni & Associates to audit the financial statements for the
fiscal year ended December 31, 2002 and December 31, 2003. During the two most
recent fiscal years and the subsequent interim period, neither we nor anyone on
our behalf consulted Bongiovanni & Associates regarding the application of
accounting principles to a specific completed or contemplated transaction, or
the type of audit opinion that might be rendered on our financial statements.
On August 10, 2004 the new board of directors authorized Bongiovanni &
Associates to continue to represent HEARTSTAT Technology, Inc. for 2004 and
review the six month statements ending June 30, 2004.
Prior to the engagement of Bongiovanni and Associates the company did
not have an independent auditor of record.
27
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
On March 18, 2004, we issued 38,000,000 shares of our common stock to
acquire the HEARTSTAT Technology which included the patents and assets intended
for launching a product line of hospital devices for monitoring patient blood
flow, perfusion, and other cardiovascular and heart values. The technology
system is noninvasive and operates continuously on a heart beat-by-beat basis.
It works with a simple disposable single-patient-use sensor that has advantages
for patient safety. The system also monitors the patient's blood pressure (BP).
We relied upon the exemption from registration contained in Section 4(2) of the
Securities Act of 1933. The interest holders were deemed to be sophisticated
with respect to the investment in the securities due to their financial
wherewithal and involvement in the Company's business. Restrictive legends were
placed on the stock certificates evidencing the securities issued. No
underwriters were involved in the transaction.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law, Article VI of the
our corporate bylaws and certificate of incorporation permit us to indemnify our
officers and directors and certain other persons against expenses in defense of
a suit to which they are parties by reason of such office, so long as the
persons conducted themselves in good faith and the persons reasonably believed
that their conduct was in our best interests or not opposed to our best
interests, and with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. Indemnification is not
permitted in connection with a proceeding by or in the right of the corporation
in which the officer or director was adjudged liable to the corporation or in
connection with any other proceeding charging that the officer or director
derived an improper personal benefit, whether or not involving action in an
official capacity.
PART F/S
See Audited Financial Statements for 2 years ending December 31, 2003 beginning
with page F-1.
See UnAudited Financial Statements for six months ending June 30, 2004 beginning
with page FF-1
28
PART III
ITEM 1. INDEX TO EXHIBITS.
--------------------------------------------------------------------------------
REGULATION
S-B NUMBER EXHIBIT
--------------------------------------------------------------------------------
2.1 Certificate of Incorporation, as amended
--------------------------------------------------------------------------------
2.2 Bylaws
--------------------------------------------------------------------------------
6.1 Agreement for the Purchase of Assets with the Interest
holders of the HEARTSTAT Technology
--------------------------------------------------------------------------------
6.2 Employment Agreement of Ted Russell
--------------------------------------------------------------------------------
6.3 2004 Stock Option Plan
--------------------------------------------------------------------------------
6.4 SolutionMed Ventures Royalty Agreement
--------------------------------------------------------------------------------
6.5 CNBP, Inc. Royalty Agreement
--------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
HEARTSTAT TECHNOLOGY, INC.
Date: October 18, 2004 By: /s/ JAMES R. HUDSON
--------------------- --------------------------------------
James R. Hudson, CEO
29
------------
AUDITED FINANCIAL STATEMENTS
HEARTSTAT TECHNOLOGY, INC.
(FKA TEC FACTORY, INC.)
DECEMBER 31, 2003
------------
BONGIOVANNI & ASSOCIATES
CERTIFIED PUBLIC ACCOUNTANTS
F-1
TABLE OF CONTENTS
PAGE(S)
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-3
AUDITED FINANCIAL STATEMENTS:
Balance Sheet F-4
Statements of Operations F-5
Statement of Stockholders' Deficit F-6
Statements of Cash Flows F-7
Notes to Audited Financial Statements F-8-F-15
F-2
BONGIOVANNI & ASSOCIATES
CERTIFIED PUBLIC ACCOUNTANTS
17111 Kenton Drive - Suite 204-B
Cornelius, North Carolina 28031
================================================================================
To the Board of Directors and Stockholders:
HeartSTAT Technology, Inc.
FKA Tec Factory, Inc.
3753 Howard Hughes Parkway
Suite 200
Las Vegas, Nevada 89109
We have audited the accompanying balance sheet of HeartSTAT Technology, Inc.
(FKA Tec Factory, Inc.) (a Delaware corporation) as of December 31, 2003 and the
related statements of operations, stockholders' deficit, and cash flows for the
years ended December 31, 2003 and 2002. 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 from material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of HeartSTAT Technology, Inc. (FKA Tec
Factory, Inc.) as of December 31, 2003 and the results of its operations and its
cash flows for the year ended December 31, 2003, in conformity with U.S.
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has suffered recurring losses and
has yet to generate an internal cash flow that raises substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are described in Note D. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
March 15, 2004
/s/ BONGIOVANNI & ASSOCIATES
F-3
HEARTSTAT TECHNOLOGY, INC.
(FKA TEC FACTORY, INC.)
BALANCE SHEET
AT DECEMBER 31,2003
================================================================================
ASSETS
CURRENT ASSETS
Cash $ -
---------------
TOTAL CURRENT ASSETS -
---------------
TOTAL ASSETS $ -
===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 42,000
---------------
TOTAL CURRENT LIABILITIES 42,000
---------------
STOCKHOLDERS' DEFICIT
Common Stock (80,000,000 shares authorized, 10,402,887
shares issued and outstanding, par value $.001) 10,403
Convertible Preferred Stock (5,000,000 shares authorized, no
shares issued and outstanding, par value $.001) -
Retained Deficit (52,403)
---------------
TOTAL STOCKHOLDERS' DEFICIT (42,000)
---------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ -
================
See notes to audited financial statements and auditors' report
F-4
HEARTSTAT TECHNOLOGY, INC.
(FKA TEC FACTORY, INC.)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,2003 AND 2002
2003 2002
------------ ------------
REVENUES:
Sales $ - $ -
Cost of sales - -
------------ ------------
GROSS PROFIT - -
OPERATING EXPENSES:
General and Administrative 21,000 21,000
------------ ------------
TOTAL EXPENSES 21,000 21,000
------------ ------------
OPERATING LOSS (21,000) (21,000)
------------ ------------
NET LOSS $ (21,000) $ (21,000)
============ ============
Basic and Fully Diluted Loss per Share $ (0.002) $ (0.002)
============ ============
Weighted Average Shares Outstanding 10,402,887 10,402,887
============ ============
See notes to audited financial statements and auditors' report
F-5
HEARTSTAT TECHNOLOGY, INC.
(FKA TEC FACTORY, INC.)
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31,2003 AND 2002
Additional
Common Common Paid in Retained
Stock Shares Capital Deficit
------------------------------------------------------
Balance, January 1, 2002 $ 10,403 10,402,887 $ - $ (10,403)
Net loss for year - - - (21,000)
------------------------------------------------------
Balances, December 31, 2002 10,403 10,402,887 - (31,403)
Net loss for year - - - (21,000)
------------------------------------------------------
Balances, December 31, 2003 $ 10,403 10,402,887 $ - $ (52,403)
======================================================
See notes to audited financial statements and auditors' report
F-6
HEARTSTAT TECHNOLOGY, INC.
(FKA TEC FACTORY, INC.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,2003 AND 2002
================================================================================
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (21,000) $ (21,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Increase in operating liabilities:
Accounts payable and accrued expenses 21,000 21,000
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES - -
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS - -
------------ ------------
CASH AND CASH EQUIVALENTS:
Beginning of year - -
------------ ------------
End of year $ - $ -
============ ============
See notes to audited financial statements and auditors' report
F-7
HEARTSTAT TECHNOLOGY, INC.
(FKA TEC FACTORY, INC.)
NOTES TO AUDITED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
================================================================================
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND - HeartSTAT Technology, Inc. (FKA Tec Factory, Inc.) (the Company)
was organized under the laws of the State of Delaware on October 12, 1995 as a
corporation. The original name of the Company was Hospital Software of America,
Inc. On February 13, 2004, the Company legally changed its name to HeartSTAT
Technology, Inc. via a Certificate of Amendment of Certificate of Incorporation
as filed with the State of Delaware. On February 6, 2004, the Company entered
into an Agreement for the Purchase of Assets with the interest holders of a
medical technology for the non invasive monitoring of blood pressure and blood
flow and related assets. Pursuant to the agreement, 38,000,000 shares of the
Company's common stock were issued in exchange for 100% ownership of these
assets and technology. The objective of the purchase was for the Company to
enter into the field of non-invasive monitoring of blood pressure and blood
flow.
The Company has previously operated as a blank check company with no revenues.
BASIS OF PRESENTATION - The financial statements included herein include the
accounts of HeartSTAT Technology, Inc. (FKA Tec Factory, Inc.) prepared under
the accrual basis of accounting.
MANAGEMENT'S USE OF ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that effect the
reported amounts of assets and liabilities, disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS - For purposes of the Statements of Cash Flows, the
Company considers liquid investments with an original maturity of three months
or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of financial
instruments including accounts payable and accrued expenses approximated fair
value because of the immediate short-term maturity of these instruments.
F-8
HEARTSTAT TECHNOLOGY, INC.
(FKA TEC FACTORY, INC.)
NOTES TO AUDITED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
================================================================================
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT')
INCOME TAXES - Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of deferred taxes related
primarily to differences between the basis of certain assets and liabilities for
financial and tax reporting and net operating loss-carry forwards. Deferred
taxes represent the future tax return consequences of those differences, which
will either be taxable or deductible when the assets and liabilities are
recovered or settled.
The income tax benefit consists of taxes currently refundable due to net
operating loss carry back provisions for federal and state governments. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or the entire deferred
tax asset will not be realized. Deferred tax assets and liabilities are adjusted
for the effect of changes in tax laws and rates on the date of enactment.
LOSS PER SHARE - The Company reports earnings (loss) per share in accordance
with Statement of Financial Accounting Standard (SFAS) No.128. This statement
requires dual presentation of basic and diluted earnings (loss) with a
reconciliation of the numerator and denominator of the loss per share
computations. Basic earnings per share amounts are based on the weighted average
shares of common outstanding. If applicable, diluted earnings per share would
assume the conversion, exercise or issuance of all potential common stock
instruments such as options, warrants and convertible securities, unless the
effect is to reduce a loss or increase earnings per share. Accordingly, this
presentation has been adopted for the period presented. There were no
adjustments required to net loss for the period presented in the computation of
diluted earnings per share.
COMPREHENSIVE INCOME (LOSS) - The Company adopted Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 130, "REPORTING
COMPREHENSIVE INCOME", which establishes standards for the reporting and display
of comprehensive income and its components in the financial statements. There
were no items of comprehensive income (loss) applicable to the Company during
the years covered in the financial statements.
F-9
HEARTSTAT TECHNOLOGY, INC.
(FKA TEC FACTORY, INC.)
NOTES TO AUDITED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
================================================================================
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT')
RECENT ACCOUNTING PRONOUNCEMENTS - In June 2001, the Financial Board issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations" which addresses the accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated retirement costs. SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value cannot be made. SFAS
No. 143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002. The Company does not expect SFAS No. 143 to have a material
effect on its financial condition or cash flows.
In April of 2002, Statement of Financial Accounting Standards ("SFAS") No. 145
was issued which rescinded SFAS Statements No. 4, 44 and 64, amended No. 13 and
contained technical corrections. As a result of SFAS No. 145, gains and losses
from extinguishments of debt will be classified as extraordinary items only if
they meet the criteria in APB Opinion No. 30, that they are unusual and
infrequent and not part of an entity's recurring operations. The Company does
not expect SFAS No. 145 to have a material effect on its financial condition or
cash flows. The Company will adopt SFAS 145 on January 1, 2004.
In July 2002, the FASB issued SFAS 146, which addresses significant issues
regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for pursuant to the guidance that the Emerging
Issues Task Force ("EITF") has set forth in EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)". SFAS 146
revises the accounting for certain lease termination costs and employee
termination benefits, which are generally recognized in connection with
restructuring charges. The provisions of SFAS 146 are effective for exit or
disposal activities that are initiated after December 31, 2002. The Company does
not expect SFAS 146 to have an impact its financial statements once adopted on
January 1, 2004.
F-10
HEARTSTAT TECHNOLOGY, INC.
(FKA TEC FACTORY, INC.)
NOTES TO AUDITED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
================================================================================
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT')
RECENT ACCOUNTING PRONOUNCEMENTS (CONT.) - In November 2002, the FASB issued
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantee, Including Indirect Guarantees or Indebtedness of
Others", which addresses the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees.
FIN 45 also requires the recognition of a liability by a guarantor at the
inception of certain guarantees that are entered into or modified after December
31, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment to SFAS No. 123" ("SFAS
No. 148"), which provides alternative methods of transition for companies
voluntarily planning on implementing the fair value recognition provisions of
SFAS No. 123. SFAS No. 148 also revises the disclosure provisions of SFAS No.
123 to require more promineI1t disclosure of the method of accounting for
stock-based compensation, and requiring disclosure of pro forma net income and
earnings per share as if the fair value recognition provisions of SFAS No. 123
had been applied from the original effective date of SFAS No. 123. The Company
adopted the disclosure provisions of SFAS No. 148 for the quarters ending after
December 15, 2002.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities". FIN No. 46 requires the consolidation of entities that cannot finance
their activities without the support of other parties and that lack certain
characteristics of a controlling interest, such as the ability to make decisions
about the entity's activities via voting rights or similar rights. The entity
that consolidates the variable interest entity is the primary beneficiary of the
entity's activities. FIN No. 46 applies immediately to variable interest
entities created after January 31, 2003, and must be applied in the first period
beginning after June 15,2003 for entities in which an enterprise holds a
variable interest entity that it acquired before February 1, 2003. The Company
plans to adopt this Interpretation in the first quarter of fiscal 2004.
In January 2003, the EITF released Issue No. 00-21, ("EITF 00-21"), "Revenue
Arrangements with Multiple Deliveries", which addressed certain aspects of the
accounting by a vendor for arrangement under which it will perform multiple
revenue-generating activities. Specifically, EITF 00-21 addresses whether an
arrangement contains more than one unit of accounting and the measurement and
allocation to the separate units of accounting in the arrangement. EITF 00-21 is
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The adoption of this standard will not have an impact on
the Company's financial statements.
F-11
HEARTSTAT TECHNOLOGY, INC.
(FKA TEC FACTORY, INC.)
NOTES TO AUDITED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
================================================================================
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT')
RECENT ACCOUNTING PRONOUNCEMENTS (CONT.) - In May 2003, the FASB issued SFAS No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The Company does not
believe that there will be any impact on its financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how companies classify and measure certain financial
instruments with characteristics of both liabilities and equity. It requires
companies to classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003. The standard
will not impact the Company's financial statements.
NOTE B - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow information for the years ended December
31, 2003 and 2002 is summarized as follows:
Cash paid during the periods for interest and income taxes:
2003 2002
-------- --------
Income Taxes $ -- $ --
Interest $ -- $ --
NOTE C - INCOME TAXES
The Company has approximately $42,000 of net operating losses available that
expire in various years through the year 2023.
F-12
HEARTSTAT TECHNOLOGY, INC.
(FKA TEC FACTORY, INC.)
NOTES TO AUDITED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
================================================================================
NOTE C - INCOME TAXES (CONT.)
Due to operating losses and the inability to recognize an income tax benefit
there from, there is no provision for current federal or state income taxes for
the years ended December 31, 2003 and 2002.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for federal and state income tax purposes.
The Company's deferred tax asset at December 31, 2003 consists of net operating
loss carry forwards calculated using federal and state effective tax rates
equating to approximately $14,000 less a valuation allowance in the amount of
approximately $14,000 respectively. Because of the Company's lack of earnings
history, the deferred tax asset has been fully offset by a valuation allowance.
The valuation allowance increased by approximately $7,000 and $7,000 for the
years ended December 31, 2003 and 2002.
The Company's total deferred tax asset as of December 31, 2003 is as follows:
Net operating loss carry forwards $ 14,000
Valuation allowance (14,000)
-----------
Net deferred tax asset $ --
===========
The reconciliation of income taxes computed at the federal statutory income tax
rate to total income taxes for the years ended December 31, 2003 and 2002 is as
follows:
2003 2002
-------- --------
Income tax computed at the federal statutory rate 34% 34%
State income taxes, net of federal tax benefit -0-% -0-%
-------- --------
Valuation allowance (34%) (34%)
-------- --------
Net deferred tax asset -0-% -0-%
======== ========
F-13
HEARTSTAT TECHNOLOGY, INC.
(FKA TEC FACTORY, INC.)
NOTES TO AUDITED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
================================================================================
NOTE D - GOING CONCERN
As shown in the accompanying financial statements, the Company has suffered
recurring losses from operations to date. It experienced losses of $21,000 and
$21,000 during 2003 and 2002, had a net deficiency in equity of $42,000 and a
net working capital deficit of $42,000 as of December 31, 2003. These factors
raise substantial doubt about the Company's ability to continue as a going
concern.
Management's plans in regard to this matter are to raise equity capital and seek
strategic relationships and alliances in order to increase sales in an effort to
generate positive cash flow. Additionally, the Company must continue to rely
upon equity infusions from investors in order to improve liquidity and sustain
operations. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
NOTE E - SEGMENT REPORTING
Statement of Financial Accounting Standards No. 131, "DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION" requires companies to report
information about operating segments in interim and annual financial statements.
It also requires segment disclosures about products and services, geographic
areas and major customers. The Company determined that it did not have any
separately reportable operating segments as of December 31, 2003.
NOTE F - COMMITTMENTS
Pursuant to the aforementioned Agreement for the Purchase of Assets, the Company
is committed to 2.2% and 1.2% gross royalty payments to other entities. These
percentages are based on total net revenues (net of product returns) and any
third party license royalties per each of the agreements.
The Company is also committed to an employment agreement with its officer.
Pursuant to the employment agreement, the Company is committed to paying its
officer a base salary of $150,000 per annum only in the event it raises
$750,000. Until this event occurs, the Company is obligated to pay a monthly
consulting fee to this individual of $5,000 through September 30, 2004. This
amount increases to $7,500 per month on October 1, 2004. The term of the
agreement is five years. Also, by the seventy-fifth day of each new fiscal year,
the employee shall be granted a ten year stock option based on the Company's
profit performance for the prior fiscal accounting year. The option is computed
based on a number of factors including the Company's income before taxes,
provided that such pre-tax income exceeds $250,000.
F-14
HEARTSTAT TECHNOLOGY, INC.
(FKA TEC FACTORY, INC.)
NOTES TO AUDITED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
================================================================================
NOTE G - RELATED PARTY TRANSACTIONS
Included in accounts payable in the accompanying balance sheet at December 31,
2003 is a $40,000 payable to Diamond Services a division of Diamond WorldWide,
Inc.
NOTE H - SUBSEQUENT EVENTS
Subsequent to year-end, the Company acquired 100% of the medical technology for
the non invasive monitoring of blood pressure and blood flow and related assets
from certain interest holders. 38,000,000 shares of the Company's common stock
were issued in exchange for 100% ownership of these assets and technology.
The Company also changed its name from Tec Factory, Inc. to HeartSTAT
Technology, Inc. to better reflect the nature of its operations.
Subsequent to year-end, the Company legally amended its Articles of
Incorporation to increase the number of authorized common shares from 25,000,000
to 80,000,000. The par value of $.001 remained the same.
Subsequent to year-end, the Company also legally amended its Articles of
Incorporation to authorize 5,000,000 convertible preferred shares. These shares
have a par value of $.001. The ratio of convertibility has not been determined
by the Company yet.
F-15
------------
FINANCIAL STATEMENTS
HEARTSTAT TECHNOLOGY, INC.
(FKA TEC FACTORY, INC.)
JUNE 30, 2004
------------
BONGIOVANNI & ASSOCIATES
CERTIFIED PUBLIC ACCOUNTANTS
FF-1
TABLE OF CONTENTS
PAGE(S)
INTERIM FINANCIAL STATEMENTS:
Balance Sheet FF-3
Statements of Operations FF-4
Statements of Cash Flows FF-5
Notes to Unaudited Financial Statements FF-6-FF-8
FF-2
HEARTSTAT TECHNOLOGY, INC.
(FKA TEC FACTORY, INC.)
Balance Sheet
AT JUNE 30,2004 (UNAUDITED)
================================================================================
ASSETS
CURRENT ASSETS
Cash $ -
----------------
TOTAL CURRENT ASSETS -
OTHER ASSETS
Goodwill 408,000
----------------
408,000
----------------
TOTAL ASSETS $ 408,000
================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 19,088
Current Portion of Notes Payable
Other Trade Payables - Related Parties 39,741
----------------
TOTAL CURRENT LIABILITIES 58,829
----------------
LONG TERM LIABILITIES
Long Term Notes Payable - Related Parties 400,000
----------------
TOTAL LONG TERM LIABILITIES 400,000
STOCKHOLDERS' DEFICIT
Common Stock (80,000,000 shares authorized, 48,402,887
shares issued and outstanding, par value $.001) 48,403
Convertible Preferred Stock (5,000,000 shares authorized, no
shares issued and outstanding, par value $.001)
Retained Deficit (99,232)
----------------
TOTAL STOCKHOLDERS' DEFICIT (50,829)
----------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 408,000
================
FF-3
HEARTSTAT TECHNOLOGY, INC.
(FKA TEC FACTORY, INC.)
STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,2004 AND 2003 (UNAUDITED)
================================================================================
3 Months 6 Months 3 Months 6 Months
Ended Ended Ended Ended
JUNE 30,2004 JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2003
---------------------------------------------------------------------------
REVENUES:
Sales $ - $ - $ - $ -
Cost of sales - - - -
---------------------------------------------------------------------------
GROSS PROFIT - - - -
OPERATING EXPENSES:
General and Administrative 18,252 26,829 5,250 10,500
Consulting R&D Expenses 15,000 20,000 - -
---------------------------------------------------------------------------
TOTAL EXPENSES 33,252 46,829 5,250 10,500
---------------------------------------------------------------------------
OPERATING LOSS (33,252) (46,829) (5,250) (10,500)
---------------------------------------------------------------------------
NET LOSS $ (33,252) $ (46,829) $ (5,250) $ (10,500)
===========================================================================
Basic and Fully Diluted Loss per Share $ (0.0030) $ (0.0033) $ (0.0005) $ (0.0010)
===========================================================================
Weighted Average Shares Outstanding 11,235,764 14,359,051 10,402,887 10,402,887
===========================================================================
FF-4
HEARTSTAT TECHNOLOGY, INC.
(FKA TEC FACTORY, INC.)
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,2004 AND 2003 (UNAUDITED)
================================================================================
2004 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (46,829) $ (52,079)
Adjustments to reconcile net loss to net
cash used in operating activities:
Increase in operating liabilities:
Accounts payable and accrued expenses 17,088 52,079
Other current liabilities 29,741 -
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES - -
------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS - -
------------- -------------
CASH AND CASH EQUIVALENTS:
Beginning of year - -
------------- -------------
End of year $ - $ -
============= =============
OTHER NON-CASH FINANCING ACTIVITIES:
Incurrence of notes payable for purchase of goodwill $ 350,000 $ -
============= =============
Incurrence of trade accounts payable for purchase of goodwill $ 25,000 $ -
============= =============
FF-5
HEARTSTAT TECHNOLOGY, INC.
(FKA TEC FACTORY, INC.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOR THE QUARTERS ENDED MARCH 31 AND JUNE 30, 2004
================================================================================
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and pursuant to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, the unaudited condensed consolidated financial
statements contain all adjustments consisting only of normal recurring accruals
considered necessary to present fairly the Company's financial position at June
30, 2004, the results of operations for the three and six month periods ended
June 30, 2004 and 2003, and cash flows for the six months ended June 30, 2004
and 2003. The results for the period ended June 30, 2004 are not necessarily
indicative of the results to be expected for the entire fiscal year ending
December 31, 2004. These financial statement should be read in conjunction with
the financial statements and notes for the year ended December 31, 2003
appearing in the Company's annual report on Form 10-SB as filed with the
Securities and Exchange Commission.
MANAGEMENT'S USE OF ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
LOSS PER SHARE - We report loss per share in accordance with Statement of
Financial Accounting Standard (SFAS) No.128. This statement requires dual
presentation of basic and diluted earnings (loss) with a reconciliation of the
numerator and denominator of the loss per share computations. Basic earnings per
share amounts are based on the weighted average shares of common outstanding. If
applicable, diluted earnings per share would assume the conversion, exercise or
issuance of all potential common stock instruments such as options, warrants and
convertible securities, unless the effect is to reduce a loss or increase
earnings per share. There were no adjustments required to net loss for the
period presented in the computation of diluted earnings per share.
FF-6
HEARTSTAT TECHNOLOGY, INC.
(FKA TEC FACTORY, INC.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOR THE QUARTERS ENDED MARCH 31 AND JUNE 30, 2004
================================================================================
NOTE B - ASSET ACQUISITION AGREEMENT
On March 18, 2004 HeartSTAT Technology, Inc. (FKA Tec Factory, Inc.) completed
an asset acquisition agreement whereby the company issued 38,000,000 shares of
its stock to various interest holders in a technology that will lead to the
commercialization and launch of a product line of hospital devices for
monitoring patient blood flow, perfusion, and other cardiovascular and heart
values. The HeartSTAT system is completely noninvasive and operates continuously
on a heart beat-by-beat basis. It works with a simple disposable
single-patient-use sensor that has several advantages for patient safety. The
system also monitors the patient's blood pressure (BP).
The transaction was accounted for in a manner SIMILAR TO a reverse merger under
APB No. 16 because:
1. The assets were purchased from Ted Russell and other individuals,
and not an operating company. How can you audit an individual?
2. There was no material operations/revenue/expenses regarding the
asset purchased per Ted Russell.
The legal and accounting acquirer was Tec Factory based on management's
representations. The transaction was booked in the financial statements as
follows:
1. A debit to goodwill of $38,000 representing the 38,000,000 common
shares issued at legal par value of $.001 with related credit to
common stock.
2. A debit of goodwill for $370,000 and a related credit to notes
payable for assumption of debt in conjunction with the purchase.
There is no impairment of goodwill per inquiry of internal management.
FF-7
HEARTSTAT TECHNOLOGY, INC.
(FKA TEC FACTORY, INC.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOR THE QUARTERS ENDED MARCH 31 AND JUNE 30, 2004
================================================================================
NOTE C - LONG TERM DEBT
The Long Term Debt owed to related parties is as follows:
A. $390,000 of this debt is due to Diamond WorldWide, Inc. and it payable as
follows:
1. $40,000 is payable on December 31, 2005.
2. $300,000 is payable in three annual installments of $100,000 on
December 31, 2006 through December 31, 2008.
This debt is convertible into registered common stock valued at $0.35 per
share at any time by Diamond WorldWide, Inc. and bears an annual interest
rate of 8% to be paid monthly.
B. $ 10,000 of this debt is due to Mr. Ted Russell, CEO and major shareholder
and will be paid in full on December 31, 2006. Again this debt is
convertible into stock valued at $0.35 per share and bears an annual
interest rate of 8% to be paid monthly.
FF-8