AI
April 18th 2006 175 to 1 RS - IMMEDIATELY an S8 and a SB/2 for 9M + AUTH Increased to 2 BILLION shares.
So Os is at least 1.2M + 150K +
Current Capital Change
shs decreased by 1 for 175 split
Pay Date: Apr 18, 2006
http://pinksheets.com/edgar/GetFilingHtml?FilingID=4368388
http://pinksheets.com/edgar/GetFilingHtml?FilingID=4504953
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-134667
ADDISON-DAVIS DIAGNOSTICS, INC.
8,575,000 SHARES OF COMMON STOCK
This prospectus covers the resale by selling shareholders of up to 8,575,000 shares of our common stock, $0.001 par value. The selling shareholders are offering:
o up to 7,975,000 shares of common stock underlying our Original Issue Discount Secured Convertible Notes, of which an aggregate of 3,475,000 shares of common stock are being registered for the remaining, unconverted $685,295 principal amount of such notes issued in September 2005 and up to 4,500,000 shares of common stock are being registered for the $360,000 principal amount of such notes issued in April 2006. The Original Issue Discount Secured Convertible Notes are convertible into shares of common stock at the lower of (i) $0.07 or
(ii) 65% of the average of the three lowest intra-day trading prices for our common stock for the 20 trading days prior to, but not including, the conversion date;
o 600,000 shares of common stock underlying warrants issued to certain of the selling stockholders pursuant to our April 2006 Subscription Agreement. The warrants are exercisable into common stock at price equal to $0.07.
These securities are more fully described in the section of this prospectus titled "Description of Securities to be Registered".
The selling shareholders will sell in accordance with the terms described in the section of this prospectus titled "Plan of Distribution". We will not receive any of the proceeds from the sale of the shares by the selling shareholders. However, we will receive the sale price of any common stock we sell to the selling stockholder upon exercise of the warrants in the amount up to $42,000. We expect to use the proceeds received from the exercise of the warrants, if any, for general working capital purposes.
Our common stock is listed on the Over-The-Counter Bulletin Board. Our trading symbol is "ADSD." The last reported sales price per share of our common stock as reported by the Over-The-Counter Bulletin Board on June 1, 2006, was $.09.
AN INVESTMENT IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE OUR SECURITIES ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE "RISK FACTORS" BEGINNING AT PAGE 6.
The date of this prospectus is July 11, 2006
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ADDISON-DAVIS DIAGNOSTICS, INC.
TABLE OF CONTENTS
Page No.
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Prospectus Summary 5
Risk Factors 6
Description of Securities to be Registered 11
Selling Shareholders 11
Plan of Distribution 15
Use of Proceeds 16
Market for Common Equity and Related Shareholder Matters 16
Directors, Executive Officers, Promoters and Control Persons 18
Executive Compensation 19
Security Ownership of Certain Beneficial Owners and Management 20
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities 21
Certain Relationship and Related Transactions 22
Organization 23
Our Business 23
Description of Property 25
Legal Proceedings 25
Management's Discussion and Analysis of Financial Condition
and Results of Operations 26
Experts 31
Financial Statements F-1 through F-38
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS IMPORTANT INFORMATION ABOUT OUR BUSINESS AND ABOUT THIS OFFERING. BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL THE INFORMATION YOU SHOULD CONSIDER BEFORE INVESTING IN OUR SECURITIES. PLEASE READ THE ENTIRE PROSPECTUS.
ADDISON-DAVIS DIAGNOSTICS, INC.
We are currently the owner of a patent-pending and FDA 510(K) cleared urine specimen rapid drug screening test for drugs-of-abuse called Drug Stop, which we have sold in limited quantities and are preparing to market through wider distribution channels including the grant of a license for over-the-counter sale upon which we will receive a royalty for each unit sold. We had also test-marketed a licensed FDA 510(K) cleared product called EZ F.O.B.T., a fecal occult quick-test for unseen blood in the stool to detect early signs which may lead to colon cancer and other intestinal diseases, however based upon unfavorable results of test-marketing from our distributor we have ceased the marketing effort of EZ F.O.B.T. Outright ownership of our self-regulating urine specimen quick-test for drugs of abuse Drug Stop product results in the addition of a valuable asset that is currently revenue producing, in addition to adding licensed products that are immediately marketable without additional cost is, in management's opinion, the direction which we should pursue.
We also believe that it is in our company's and our shareholder's best interests to license the Drug Stop product for sale and distribution to the over-the-counter (OTC) market because we cannot afford the financial burden of ongoing costs associated with the branding, manufacture, marketing, sale and distribution of such product to the over-the-counter (OTC) market, which we believe could be a major market.
Therefore, in November 2005, we granted an exclusive worldwide License of Intellectual Property ("License") to brand develop, manage, provide sales strategy, manufacture and to sell and distribute our Drug Stop drug-test product for over-the -counter sales. The License shall remain in full force and effect for a period of 5 years and shall automatically be extended for an additional 5 year period so long as neither party causes a termination of the License pursuant to its terms. As consideration for granting the License, we shall receive a royalty equal to 7.5% of the gross revenues derived from sales of the Drug Stop product sold over-the-counter in stores, calling centers, Internet or other over-the-counter means during the term of the License.
In order to contain overhead and eliminate certain distribution costs, we have entered into sales representative and distribution agreements for institutional sales of Drug Stop and to sell and distribute Drug Stop to Federal agencies nationwide.
Management is seeking to license other quick-test biomedical products that do not require significant development costs. Management recognizes that we must generate some additional resources to fund overhead until the eventual achievement of sufficient revenue leading to sustained profitable operations. However, no assurance can be given that debt or equity financing will be available to us on satisfactory terms. Our success is dependent upon numerous items, including further product licensing and successful and effective sales strategies and management believes that revenues generated by these products will lead to future profitability.
For the three months ended March 31, 2006 and 2005, we generated revenue in the amount of $0 and $1,940, respectively, and a net loss of $565,130 and $1,002,707, respectively. For the years ended June 30, 2005 and 2004, we generated revenue in the amount of $5,176 and $192,109 respectively, and a net loss of $3,617,527 and $7,161,005, respectively. As a result of our substantial need for working capital and other factors, our auditors in their report dated September 8, 2005, have expressed substantial doubt about our ability to continue as going concern.
HOW TO CONTACT US
We maintain our principal offices at 143 Triunfo Canyon Road, Suite 104 Westlake Village, CA 91361. Our telephone number at that address is (805)-494-7838 and our facsimile number is 805-494-3213.
THE OFFERING
We are registering 8,575,000 shares of our common stock for sale by the shareholders identified in the section of this prospectus titled "Selling Shareholders". The shares have not yet been, but that may be, issued to designated selling shareholders upon the conversion of our Secured Convertible Original Issue Discount Notes, and/or the exercise of warrants. Information regarding the notes and the warrants is included in the section of this prospectus titled "Description of Securities Being Registered".
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RISK FACTORS
AN INVESTMENT IN OUR SECURITIES IS VERY SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, ALONG WITH THE OTHER MATTERS REFERRED TO IN THIS PROSPECTUS, BEFORE YOU DECIDE TO BUY OUR SECURITIES. IF YOU DECIDE TO BUY OUR SECURITIES, YOU SHOULD BE ABLE TO AFFORD A COMPLETE LOSS OF YOUR INVESTMENT.
RISKS ASSOCIATED WITH OUR BUSINESS
WE ARE A RECENTLY FORMED BUSINESS WITH VERY LITTLE OPERATING HISTORY THEREFORE YOU HAVE NO BASIS ON WHICH TO DETERMINE IF WE CAN BE SUCCESSFUL.
We have a very short history of operations, and we are in the early stages of marketing and selling Drug Stop, currently our only product, which has generated little revenue to date. Although we anticipate significant revenue, we are not certain that Drug Stop or new products, if any, will generate significant or any revenue at all. During the year ended June 30, 2005, we incurred a net loss of $3,617,527 and had only $5,176 of revenues. For the nine months ended March 31, 2006 and 2005, we incurred a net loss of $2,780,375 and $3,194,078, respectively, and had only zero and $1,977 in revenues, respectively. Because we have a short operating history, you will have no basis upon which to accurately forecast our future operations, including sales, or to judge our ability to develop our business. If you purchase our securities, you may lose your entire investment.
BECAUSE WE HAVE EARNED VERY LITTLE IN REVENUES, THE SUCCESS OF OUR BUSINESS REQUIRES CONTINUED FUNDING. IF WE CANNOT RAISE THE MONEY WE NEED TO SUPPORT OUR OPERATIONS UNTIL WE EARN SIGNIFICANT REVENUES, WE MAY BE REQUIRED TO CURTAIL OR TO CEASE OUR OPERATIONS AND YOU COULD LOSE YOUR ENTIRE INVESTMENT.
Our independent registered public accounting firm included an explanatory paragraph in their report on our financial statements set forth in this report stating that because of our significant losses and our working capital deficit there is substantial doubt that we can continue as a going concern. Our ability to develop our business depends upon our receipt of funds to continue our operations while we introduce our Drug Stop product and new products, if any, and they are accepted in the market. If this funding is not received as needed, it is unlikely that we could continue our business, in which case you would lose your entire investment.
During the fiscal year ended June 30, 2005 and for the nine month period ended March 31, 2006, management successfully obtained additional capital through sales and issuance of convertible notes from which we received net proceeds of $1,300,000 and $960,000, respectively. However, we cannot assure you that the proceeds received from the sale and issuance of convertible notes will provide all the additional capital necessary for us to become profitable.
During the next 6 months, if we fail to earn revenues in an amount sufficient to fund our operations, we will have to raise capital through an additional offering of our securities or from additional loans. We cannot guarantee that financing will be available to us, on acceptable terms or at all. If we do not earn revenues sufficient to support our business and we fail to obtain other financing, either through an offering of our securities or by obtaining additional loans, we may be unable to maintain our operations.
If we are unable to obtain additional financing if needed, we may be required to curtail the manufacturing and marketing of our product and possibly cease our operations.
WE ARE SUBJECT TO THE RISKS AND UNCERTAINTIES INHERENT IN NEW BUSINESSES. IF WE FAIL TO ACCURATELY FORECAST OUR CAPITAL NEEDS OR IF OUR PRODUCT DOES NOT EARN SIGNIFICANT REVENUES OUR BUSINESS COULD FAIL AND YOU COULD LOSE YOUR ENTIRE INVESTMENT.
The risks and uncertainties inherent in new businesses include the following:
o Our projected capital needs may be inaccurate, and we may not have enough money to develop our business and bring our products to market as we planned;
o We may experience unanticipated development or marketing expenses, which may make it more difficult to develop our business and bring our products to market; and
o Even if we are able to develop our products and bring them to market, we may not earn enough revenues from the sales of our products to cover the costs of operating our business.
If we are unsuccessful in our efforts to develop our business and if the product we provide does not produce revenues as we project, we are not likely to ever become profitable and we may be required to curtail some or all of our operations. If that happened you could lose your entire investment.
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WE CANNOT ASSURE YOU THAT WE WILL BE SUCCESSFUL IN DEVELOPING AND COMMERCIALIZING OUR NEW PRODUCTS AND/OR OTHER PRODUCTS.
Our ability to successfully acquire or develop any additional products is uncertain. Potential new products may require additional research, development, testing, regulatory approval and additional investment prior to their commercialization, which may not be successful. There can be no assurance that we can develop commercially successful products.
WE COULD BE SUBJECT TO PRODUCT LIABILITY CLAIMS. IF WE ARE REQUIRED TO PAY A CLAIM, OUR BUSINESS AND FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED AND YOUR INVESTMENT MAY DECLINE IN VALUE.
Liability might result from claims made by customers who purchase our products. Although we have received a quote from our insurance broker for product liability insurance, we presently do not carry such insurance since our sales to date are insignificant. We can give no assurance that such insurance will be available when we need it at a reasonable cost or that any insurance policy would be sufficient to meet any liability arising as a result of a claim. The obligation to pay any product liability claim could have a material adverse effect on our business and financial condition.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR PATENTS OR OTHER INTELLECTUAL
PROPERTY OR WE COULD BECOME INVOLVED IN LITIGATION WITH OTHERS REGARDING OUR INTELLECTUAL PROPERTY. EITHER OF THESE EVENTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
We rely on a combination of patent laws, nondisclosure, trade secret and other contractual and technical measures to protect our proprietary rights in our product. However, we cannot assure you that these provisions will be adequate to protect our proprietary rights. In addition, the laws of certain foreign countries do not protect intellectual property rights to the same extent as the laws of the United States.
Although we believe that our intellectual property does not infringe upon the proprietary rights of third parties, others may claim that we have infringed on their products.
If we were to become involved in disputes regarding the use or ownership of intellectual property rights, we could incur substantial costs in defending or prosecuting any such action and the defense or prosecution of the action would likely result in a diversion of management resources. In addition, in order to settle such an action we could be required to acquire licenses from others or to give licenses to others on terms that are not beneficial to us. Any dispute relating to our intellectual property could have a material adverse effect on our business.
OUR CURRENT PRODUCT IS REGULATED BY THE FDA AND, IN THE WORLDWIDE MARKET, GOVERNMENT AGENCIES LIKE THE FDA. WE MAY BE UNSUCCESSFUL IN OBTAINING REGULATORY APPROVALS FOR NEW PRODUCTS, EVEN THOUGH WE MAY INVEST A SIGNIFICANT AMOUNT OF TIME AND MONEY INTO SEEKING SUCH APPROVALS. IF OUR PRODUCTS DO NOT RECEIVE THE REGULATORY APPROVALS WE NEED TO SELL THEM, OUR REVENUES AND OPERATING RESULTS COULD BE ADVERSELY AFFECTED AND THE VALUE OF YOUR INVESTMENT MAY DECLINE.
The manufacture, sale, promotion and marketing of our new products, if any, may be subject to regulation by the FDA and similar government regulatory bodies in other countries.
As we develop or obtain new products, we will be required to determine what regulatory requirements, if any, are required to market and sell our products in the United States and worldwide. The process of obtaining regulatory approval could take years and be very costly, if approval can be obtained at all. If we failed to comply with such a requirement, we could be subjected to an FDA enforcement action. Such an action could take the form of a warning letter, an injunction to stop us from marketing the product at issue or a possible seizure of our assets.
We intend to work diligently to assure compliance with all applicable regulations that impact our business. We cannot assure you, however, that we will be able to obtain regulatory approval for all of our products or that, in the future, additional regulations will not be enacted which might adversely impact our operations. In either case, our revenues and operating results could be adversely effected and the value of your investment may decline.
RISKS RELATING TO OUR CURRENT FINANCING AGREEMENT
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR CONVERTIBLE DEBENTURES, AND WARRANTS THAT MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
As of May 10, 2006, we had 1,270,114 and shares of common stock issued and outstanding, respectively, and convertible debentures outstanding that may be converted into an estimated 5,725,000 shares of common stock at current market prices, and outstanding warrants to purchase 600,000 shares of common stock. In addition, the number of shares of common stock issuable upon conversion of the outstanding convertible debentures may increase if the market price of our stock declines. All of the shares, including all of the shares issuable upon conversion of the debentures and upon exercise of our warrants, may be sold without restriction. The sale of these shares may adversely affect the market price of our common stock.
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THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR CONVERTIBLE NOTES COULD REQUIRE US TO ISSUE A SUBSTANTIALLY GREATER NUMBER OF SHARES TO THE SELLING STOCKHOLDER, WHICH WILL CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS.
Our obligation to issue shares upon conversion of our convertible securities is essentially limitless. The following is an example of the amount of shares of our common stock that is issuable to the selling stockholders, upon conversion of our remaining, unconverted principal amount $685,295 convertible notes issued pursuant to our September 2005 Subscription Agreement and our principal amount $360,000 convertible notes issued pursuant to our April 2006 Subscription Agreements, based on market prices 25%, 50% and 75% below our market price on May 10, 2006 of $0.24.
% Below Price Per With Discount #of Shares % Outstanding
Market Share at 35% Issuable Stock
------- ----------- -------------- ------------ --------------
25% $0.18 $0.117 8,934,145 87.5%
50% $0.12 $0.078 13,401,217 91.3%
75% $0.06 $0.039 26,802,435 95.4%
*Based on 1,270,114 shares outstanding as of May 10, 2006
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR CONVERTIBLE NOTES MAY ENCOURAGE INVESTORS TO MAKE SHORT SALES IN OUR COMMON STOCK, WHICH COULD HAVE A DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON STOCK.
The convertible notes are convertible into shares of our common stock at a conversion price that is equal to the lesser of (i) $0.07 or (ii) the average of the lowest three (3) intra-day trading prices during the twenty (20) trading days immediately prior to the conversion date discounted by thirty-five percent (35%). The significant downward pressure on the price of the common stock as the selling stockholder converts and sells material amounts of common stock could encourage short sales by investors. This could place further downward pressure on the price of the common stock. In addition, not only the sale of shares issued upon conversion or exercise of notes, warrants and options, but also the mere perception that these sales could occur, may lower the market price of the common stock.
THE ISSUANCE OF SHARES UPON CONVERSION OF THE CONVERTIBLE DEBENTURES AND EXERCISE OF OUTSTANDING WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO OUR EXISTING STOCKHOLDERS.
The issuance of shares upon conversion of the convertible notes and exercise of warrants may result in substantial dilution to the interests of other stockholders since the selling stockholder may ultimately convert and sell the full amount issuable on conversion. Although the selling stockholder may not convert its convertible notes and/or exercise their warrants if such conversion or exercise would cause them to own more than 4.99% of our outstanding common stock, this restriction does not prevent the selling stockholder from converting and/or exercising some of their holdings and then converting the rest of their holdings. In this way, the selling stockholder could sell more than this limit while never holding more than this limit. There is no upper limit on the number of shares that may be issued which will have the effect of further diluting the proportionate equity interest and voting power of holders of our common stock, including investors in this offering.
IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING SECURED CONVERTIBLE NOTES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE, OR RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE SECURED CONVERTIBLE NOTES, IF REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE OF SUBSTANTIAL ASSETS.
The secured convertible notes in the principal amount of $360,000 issued under our April 2006 Subscription Agreement and the remaining unconverted principal amount of $685,295 issued under our September 2005 Subscription Agreement due and payable two years from the date of issuance, unless sooner converted into shares of our common stock. Any event of default such as our failure to repay the principal when due, our failure to issue shares of common stock upon conversion by the holder, our failure to timely file a registration statement or have such registration statement declared effective, breach of any covenant, representation or warranty in the Subscription Agreement or related convertible note, the assignment or appointment of a receiver to control a substantial part of our property or business, the filing of a money judgment, writ or similar process against our company in excess of $50,000, the commencement of a bankruptcy, insolvency, reorganization or liquidation proceeding against our company and the delisting of our common stock could require the early repayment of the secured convertible notes, including a default interest rate of 15% on the outstanding principal balance of the notes if the default is not cured with the specified grace period. We anticipate that the full amount of the secured convertible notes will be converted into shares of our common stock, in accordance with the terms of the secured convertible notes. If we were required to repay the secured convertible notes, we would be required to use our limited working capital and raise additional funds. If we were unable to repay the notes when required, the note holders could commence legal action against us and foreclose on all of our assets to recover the amounts due. Any such action would require us to curtail or cease operations.
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IF AN EVENT OF DEFAULT OCCURS UNDER THE SUBSCRIPTION AGREEMENT, SECURED CONVERTIBLE NOTES, WARRANTS, OR SECURITY AGREEMENT, THE INVESTORS COULD TAKE POSSESSION OF ALL OUR GOODS, INVENTORY, CONTRACTUAL RIGHTS AND GENERAL INTANGIBLES, RECEIVABLES, DOCUMENTS, INSTRUMENTS, CHATTEL PAPER, AND INTELLECTUAL PROPERTY.
In connection with the Subscription Agreements we entered into in September 2005 and April 2006, we executed Security Agreements in favor of the investors granting them a second priority security interest in all of our goods, inventory, contractual rights and general intangibles, receivables, documents, instruments, chattel paper, and intellectual property. The Security Agreements state that if an even of default occurs under the Subscription Agreement, Secured Convertible Notes, Warrants or Security Agreements, the investors have the right to take possession of the collateral, to operate our business using the collateral, and have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the collateral, at public or private sale or otherwise to satisfy our obligations under these agreements.
RISKS ASSOCIATED WITH OWNERSHIP OF OUR COMMON STOCK
WE HAVE NOT PAID CASH DIVIDENDS AND IT IS UNLIKELY THAT WE WILL PAY CASH DIVIDENDS IN THE FORESEEABLE FUTURE.
We plan to use all of our earnings, to the extent we have earnings, to fund our operations. We do not plan to pay any cash dividends in the foreseeable future. We cannot guarantee that we will, at any time, generate sufficient surplus cash that would be available for distribution as a dividend to the holders of our Common Stock. You should not expect to receive cash dividends on our Common Stock.
WE MAY RAISE ADDITIONAL CAPITAL THROUGH A SECURITIES OFFERING THAT COULD DILUTE YOUR OWNERSHIP INTEREST.
We require substantial working capital to fund our business. If we raise additional funds through the issuance of equity, equity-related or convertible debt securities, those securities may have rights, preferences or privileges senior to those of the holders of our Common Stock. The issuance of additional Common Stock or securities convertible into Common Stock by our management will also have the effect of further diluting the proportionate equity interest and voting power of holders of our Common Stock.
IF WE FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN THE SECONDARY MARKET.
Companies trading on the OTC Bulletin Board, such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.
WE ARE SUBJECT TO THE PENNY STOCK RULES AND THESE RULES MAY ADVERSELY EFFECT TRADING IN OUR COMMON STOCK.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
o that a broker or dealer approve a person's account for transactions in penny stocks; and
o the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the broker or dealer must:
o obtain financial information and investment experience objectives of the person; and
o make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the suitability determination; and
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o that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
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DESCRIPTION OF SECURITIES BEING REGISTERED
COMMON STOCK AND RIGHTS OF COMMON SHAREHOLDERS
The securities being offered by the selling shareholders are shares of our common stock. We are authorized by our Articles of Incorporation, as amended, to issue 2,000,000,000 shares of common stock, $0.001 par value. As of May 10, 2006, we had 1,270,114 shares of common stock issued and outstanding and approximately 500 holders of our common stock.
Holders of our common stock are entitled to one vote per share on all matters subject to shareholder vote. If the Board of Directors were to declare a dividend out of funds legally available therefore, all of the outstanding shares of common stock would be entitled to receive such dividend. We have never declared dividends and we do not intend to declare dividends in the foreseeable future. If we were liquidated or dissolved, holders of shares of our common stock would be entitled to share ratably in assets remaining after satisfaction of our liabilities. Holders of our common stock do not have cumulative voting rights.
SELLING SHAREHOLDERS
This prospectus relates to the offer and sale by the following selling stockholders of the indicated number of shares, all of which are issuable pursuant to warrants and/or convertible notes held by these selling stockholders. The number of shares set forth in the table for the selling stockholders represents an estimate of the number of shares of common stock to be offered by the selling stockholders. The actual number of shares of common stock issuable upon conversion of the notes and exercise of the related warrants is indeterminate, is subject to adjustment and could be materially less or more than such estimated number depending on factors which cannot be predicted by us at this time including, among other factors, the future market price of the common stock. The actual number of shares of common stock offered in this prospectus, and included in the registration statement of which this prospectus is a part, includes such additional number of shares of common stock as may be issued or issuable upon conversion of the notes and exercise of the related warrants by reason of any stock split, stock dividend or similar transaction involving the common stock, in accordance with Rule 416 under the Securities Act of 1933.
None of the following selling stockholders have held any position or office within our company, nor has had any other material relationship with us in the past three years, other than in connection with transactions pursuant to which the selling stockholders acquired convertible notes and warrants.
None of the following selling stockholders are broker-dealers or affiliates of broker-dealers.
The following table also sets forth the name of each person who is offering the resale of shares of common stock by this prospectus, the number of shares of common stock beneficially owned by each person, the number of shares of common stock that may be sold in this offering and the number of shares of common stock each person will own after the offering, assuming they sell all of the shares offered.
This prospectus covers the resale by selling shareholders of up to 8,575,000 shares of our common stock, $0.001 par value. The selling shareholders are offering:
o up to 7,975,000 shares of common stock underlying our Original Issue Discount Secured Convertible Notes, of which an aggregate of 3,475,000 shares of common stock are being registered for the remaining, unconverted $685,295 principal amount of such notes issued in September 2005 and up to 4,500,000 shares or common stock are being registered for the $360,000 principal amount of such notes issued in April 2006; and
o 600,000 shares of common stock underlying warrants issued to certain of the selling stockholders pursuant to our April 2006 Subscription Agreement.
As filed with the Securities and Exchange Commission on June 28, 2006
An Exhibit List can be found on page __.
Registration No. 333-134667
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1 to
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
ADDISON-DAVIS DIAGNOSTICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 2834 80-0103134
(State or Other Jurisdiction of (Primary Standard (I.R.S. Employer
Incorporation or Organization) Industrial Classification Identification No.)
Code Number)
143 Triumfo Canyon Road, Suite 104
Westlake Village, CA 91361
TELEPHONE: (805)-494-7838
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
CHARLES MISEROY, CHIEF EXECUTIVE OFFICER
143 Triunfo Canyon Road, Suite 104
Westlake Village, CA 91361
TELEPHONE: (805)-494-7838
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
COPIES OF COMMUNICATIONS TO:
DARRIN M. OCASIO, ESQ.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of Americas
New York, New York 10018
Telephone: (212) 930-9700
Telecopier: (212) 930-9725
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. |X|
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. |_|
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CALCULATION OF REGISTRATION FEE
====================================== ============== ================== =================== =================
Amount to be Proposed Proposed
Title of Each Class of Securities to Registered Maximum Offering Maximum Aggregate Amount of
be Registered (1) Price per Unit Offering Price(1) Registration Fee
-------------------------------------- -------------- ------------------ ------------------- -----------------
Common Stock, $0.001 par value 7,975,000(3) $ 0.09(2) $ 717,750 $ 76.80
-------------------------------------- -------------- ------------------ ------------------- -----------------
Common Stock, $0.001 par value 600,000(4) $ 0.07(2) $ 42,000 $ 4.49
-------------------------------------- -------------- ------------------ ------------------- -----------------
TOTAL 8,575,000 $ 759,750 $ 81.29
====================================== ============== ================== =================== =================
(1) Includes shares of our common stock, par value $0.001 per share, which may be offered pursuant to this registration statement, which shares are issuable upon conversion of convertible notes and the exercise of warrants by the selling stockholders. We are also registering such additional shares of common stock as may be issued as a result of stock-splits, stock dividends and similar transactions pursuant to Rule 416. The number of shares of common stock registered hereunder represents a good faith estimate by us of the number of shares of common stock issuable upon conversion of the convertible notes, exercise of the warrants related thereto. For purposes of estimating the number of shares of common stock to be included in this registration statement, we calculated 200% of the number of shares of our common stock issuable upon conversion of the April 2006 convertible notes, 100% of the number of shares of our common stock issuable upon conversion of the September 2005 convertible notes and 100% of the stock underlying the warrant shares. Should the conversion ratio result in our having insufficient shares, we will not rely upon Rule 416, but will file a new registration statement to cover the resale of such additional shares should that become necessary.
(2) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) and Rule 457(g) under the Securities Act of 1933, using (i) the closing price as reported on the Over-The-Counter Bulletin Board on June 1, 2006, which was $0.09; and (ii) $0.07, the exercise price of the warrants.
(3) Includes 100% of the shares underlying our remaining, unconverted principal amount $685,295 convertible notes issued pursuant to our September 2005 Subscription Agreement and 200% of the shares underlying our principal amount of $360,000 convertible notes issued pursuant to our April 2006 Subscription Agreement.
(4) Includes 100% of the shares underlying warrants issued to certain of the selling stockholders pursuant to our April 2006 Subscription Agreement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THIS PROSPECTUS IS INCLUDED IN THE REGISTRATION STATEMENT THAT WAS FILED BY ADDISON-DAVIS DIAGNOSTICS, INC., WITH THE SECURITIES AND EXCHANGE COMMISSION. THE SELLING STOCKHOLDER MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE SALE IS NOT PERMITTED.
PRELIMINARY PROSPECTUS, SUBJECT TO COMPLETION, DATED JUNE 28, 2006
ADDISON-DAVIS DIAGNOSTICS, INC.
8,575,000 SHARES OF COMMON STOCK
This prospectus covers the resale by selling shareholders of up to 8,575,000 shares of our common stock, $0.001 par value. The selling shareholders are offering:
o up to 7,975,000 shares of common stock underlying our Original Issue Discount Secured Convertible Notes, of which an aggregate of 3,475,000 shares of common stock are being registered for the remaining, unconverted $685,295 principal amount of such notes issued in September 2005 and up to 4,500,000 shares of common stock are being registered for the $360,000 principal amount of such notes issued in April 2006. The Original Issue Discount Secured Convertible Notes are convertible into shares of common stock at the lower of (i) $0.07 or
(ii) 65% of the average of the three lowest intra-day trading prices for our common stock for the 20 trading days prior to, but not including, the conversion date;
o 600,000 shares of common stock underlying warrants issued to certain of the selling stockholders pursuant to our April 2006 Subscription Agreement. The warrants are exercisable into common stock at price equal to $0.07.
These securities are more fully described in the section of this prospectus titled "Description of Securities to be Registered".
The selling shareholders will sell in accordance with the terms described in the section of this prospectus titled "Plan of Distribution". We will not receive any of the proceeds from the sale of the shares by the selling shareholders. However, we will receive the sale price of any common stock we sell to the selling stockholder upon exercise of the warrants in the amount up to $42,000. We expect to use the proceeds received from the exercise of the warrants, if any, for general working capital purposes.
Our common stock is listed on the Over-The-Counter Bulletin Board. Our trading symbol is "ADSD." The last reported sales price per share of our common stock as reported by the Over-The-Counter Bulletin Board on June 1, 2006, was $.09.
AN INVESTMENT IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE OUR SECURITIES ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE "RISK FACTORS" BEGINNING AT PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is June __, 2006
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ADDISON-DAVIS DIAGNOSTICS, INC.
TABLE OF CONTENTS
Page No.
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Prospectus Summary 5
Risk Factors 6
Description of Securities to be Registered 11
Selling Shareholders 11
Plan of Distribution 15
Use of Proceeds 16
Market for Common Equity and Related Shareholder Matters 16
Directors, Executive Officers, Promoters and Control Persons 18
Executive Compensation 19
Security Ownership of Certain Beneficial Owners and Management 20
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities 21
Certain Relationship and Related Transactions 22
Organization 23
Our Business 23
Description of Property 25
Legal Proceedings 25
Management's Discussion and Analysis of Financial Condition
and Results of Operations 26
Experts 31
Financial Statements F-1 through F-38
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS IMPORTANT INFORMATION ABOUT OUR BUSINESS AND ABOUT THIS OFFERING. BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL THE INFORMATION YOU SHOULD CONSIDER BEFORE INVESTING IN OUR SECURITIES. PLEASE READ THE ENTIRE PROSPECTUS.
ADDISON-DAVIS DIAGNOSTICS, INC.
We are currently the owner of a patent-pending and FDA 510(K) cleared urine specimen rapid drug screening test for drugs-of-abuse called Drug Stop, which we have sold in limited quantities and are preparing to market through wider distribution channels including the grant of a license for over-the-counter sale upon which we will receive a royalty for each unit sold. We had also test-marketed a licensed FDA 510(K) cleared product called EZ F.O.B.T., a fecal occult quick-test for unseen blood in the stool to detect early signs which may lead to colon cancer and other intestinal diseases, however based upon unfavorable results of test-marketing from our distributor we have ceased the marketing effort of EZ F.O.B.T. Outright ownership of our self-regulating urine specimen quick-test for drugs of abuse Drug Stop product results in the addition of a valuable asset that is currently revenue producing, in addition to adding licensed products that are immediately marketable without additional cost is, in management's opinion, the direction which we should pursue.
We also believe that it is in our company's and our shareholder's best interests to license the Drug Stop product for sale and distribution to the over-the-counter (OTC) market because we cannot afford the financial burden of ongoing costs associated with the branding, manufacture, marketing, sale and distribution of such product to the over-the-counter (OTC) market, which we believe could be a major market.
Therefore, in November 2005, we granted an exclusive worldwide License of Intellectual Property ("License") to brand develop, manage, provide sales strategy, manufacture and to sell and distribute our Drug Stop drug-test product for over-the -counter sales. The License shall remain in full force and effect for a period of 5 years and shall automatically be extended for an additional 5 year period so long as neither party causes a termination of the License pursuant to its terms. As consideration for granting the License, we shall receive a royalty equal to 7.5% of the gross revenues derived from sales of the Drug Stop product sold over-the-counter in stores, calling centers, Internet or other over-the-counter means during the term of the License.
In order to contain overhead and eliminate certain distribution costs, we have entered into sales representative and distribution agreements for institutional sales of Drug Stop and to sell and distribute Drug Stop to Federal agencies nationwide.
Management is seeking to license other quick-test biomedical products that do not require significant development costs. Management recognizes that we must generate some additional resources to fund overhead until the eventual achievement of sufficient revenue leading to sustained profitable operations. However, no assurance can be given that debt or equity financing will be available to us on satisfactory terms. Our success is dependent upon numerous items, including further product licensing and successful and effective sales strategies and management believes that revenues generated by these products will lead to future profitability.
For the three months ended March 31, 2006 and 2005, we generated revenue in the amount of $0 and $1,940, respectively, and a net loss of $565,130 and $1,002,707, respectively. For the years ended June 30, 2005 and 2004, we generated revenue in the amount of $5,176 and $192,109 respectively, and a net loss of $3,617,527 and $7,161,005, respectively. As a result of our substantial need for working capital and other factors, our auditors in their report dated September 8, 2005, have expressed substantial doubt about our ability to continue as going concern.
HOW TO CONTACT US
We maintain our principal offices at 143 Triunfo Canyon Road, Suite 104 Westlake Village, CA 91361. Our telephone number at that address is (805)-494-7838 and our facsimile number is 805-494-3213.
THE OFFERING
We are registering 8,575,000 shares of our common stock for sale by the shareholders identified in the section of this prospectus titled "Selling Shareholders". The shares have not yet been, but that may be, issued to designated selling shareholders upon the conversion of our Secured Convertible Original Issue Discount Notes, and/or the exercise of warrants. Information regarding the notes and the warrants is included in the section of this prospectus titled "Description of Securities Being Registered".
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RISK FACTORS
AN INVESTMENT IN OUR SECURITIES IS VERY SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, ALONG WITH THE OTHER MATTERS REFERRED TO IN THIS PROSPECTUS, BEFORE YOU DECIDE TO BUY OUR SECURITIES. IF YOU DECIDE TO BUY OUR SECURITIES, YOU SHOULD BE ABLE TO AFFORD A COMPLETE LOSS OF YOUR INVESTMENT.
RISKS ASSOCIATED WITH OUR BUSINESS
WE ARE A RECENTLY FORMED BUSINESS WITH VERY LITTLE OPERATING HISTORY THEREFORE YOU HAVE NO BASIS ON WHICH TO DETERMINE IF WE CAN BE SUCCESSFUL.
We have a very short history of operations, and we are in the early stages of marketing and selling Drug Stop, currently our only product, which has generated little revenue to date. Although we anticipate significant revenue, we are not certain that Drug Stop or new products, if any, will generate significant or any revenue at all. During the year ended June 30, 2005, we incurred a net loss of $3,617,527 and had only $5,176 of revenues. For the nine months ended March 31, 2006 and 2005, we incurred a net loss of $2,780,375 and $3,194,078, respectively, and had only zero and $1,977 in revenues, respectively. Because we have a short operating history, you will have no basis upon which to accurately forecast our future operations, including sales, or to judge our ability to develop our business. If you purchase our securities, you may lose your entire investment.
BECAUSE WE HAVE EARNED VERY LITTLE IN REVENUES, THE SUCCESS OF OUR BUSINESS REQUIRES CONTINUED FUNDING. IF WE CANNOT RAISE THE MONEY WE NEED TO SUPPORT OUR OPERATIONS UNTIL WE EARN SIGNIFICANT REVENUES, WE MAY BE REQUIRED TO CURTAIL OR TO CEASE OUR OPERATIONS AND YOU COULD LOSE YOUR ENTIRE INVESTMENT.
Our independent registered public accounting firm included an explanatory paragraph in their report on our financial statements set forth in this report stating that because of our significant losses and our working capital deficit there is substantial doubt that we can continue as a going concern. Our ability to develop our business depends upon our receipt of funds to continue our operations while we introduce our Drug Stop product and new products, if any, and they are accepted in the market. If this funding is not received as needed, it is unlikely that we could continue our business, in which case you would lose your entire investment.
During the fiscal year ended June 30, 2005 and for the nine month period ended March 31, 2006, management successfully obtained additional capital through sales and issuance of convertible notes from which we received net proceeds of $1,300,000 and $960,000, respectively. However, we cannot assure you that the proceeds received from the sale and issuance of convertible notes will provide all the additional capital necessary for us to become profitable.
During the next 6 months, if we fail to earn revenues in an amount sufficient to fund our operations, we will have to raise capital through an additional offering of our securities or from additional loans. We cannot guarantee that financing will be available to us, on acceptable terms or at all. If we do not earn revenues sufficient to support our business and we fail to obtain other financing, either through an offering of our securities or by obtaining additional loans, we may be unable to maintain our operations.
If we are unable to obtain additional financing if needed, we may be required to curtail the manufacturing and marketing of our product and possibly cease our operations.
WE ARE SUBJECT TO THE RISKS AND UNCERTAINTIES INHERENT IN NEW BUSINESSES. IF WE FAIL TO ACCURATELY FORECAST OUR CAPITAL NEEDS OR IF OUR PRODUCT DOES NOT EARN SIGNIFICANT REVENUES OUR BUSINESS COULD FAIL AND YOU COULD LOSE YOUR ENTIRE INVESTMENT.
The risks and uncertainties inherent in new businesses include the following:
o Our projected capital needs may be inaccurate, and we may not have enough money to develop our business and bring our products to market as we planned;
o We may experience unanticipated development or marketing expenses, which may make it more difficult to develop our business and bring our products to market; and
o Even if we are able to develop our products and bring them to market, we may not earn enough revenues from the sales of our products to cover the costs of operating our business.
If we are unsuccessful in our efforts to develop our business and if the product we provide does not produce revenues as we project, we are not likely to ever become profitable and we may be required to curtail some or all of our operations. If that happened you could lose your entire investment.
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WE CANNOT ASSURE YOU THAT WE WILL BE SUCCESSFUL IN DEVELOPING AND COMMERCIALIZING OUR NEW PRODUCTS AND/OR OTHER PRODUCTS.
Our ability to successfully acquire or develop any additional products is uncertain. Potential new products may require additional research, development, testing, regulatory approval and additional investment prior to their commercialization, which may not be successful. There can be no assurance that we can develop commercially successful products.
WE COULD BE SUBJECT TO PRODUCT LIABILITY CLAIMS. IF WE ARE REQUIRED TO PAY A CLAIM, OUR BUSINESS AND FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED AND YOUR INVESTMENT MAY DECLINE IN VALUE.
Liability might result from claims made by customers who purchase our products. Although we have received a quote from our insurance broker for product liability insurance, we presently do not carry such insurance since our sales to date are insignificant. We can give no assurance that such insurance will be available when we need it at a reasonable cost or that any insurance policy would be sufficient to meet any liability arising as a result of a claim. The obligation to pay any product liability claim could have a material adverse effect on our business and financial condition.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR PATENTS OR OTHER INTELLECTUAL
PROPERTY OR WE COULD BECOME INVOLVED IN LITIGATION WITH OTHERS REGARDING OUR INTELLECTUAL PROPERTY. EITHER OF THESE EVENTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
We rely on a combination of patent laws, nondisclosure, trade secret and other contractual and technical measures to protect our proprietary rights in our product. However, we cannot assure you that these provisions will be adequate to protect our proprietary rights. In addition, the laws of certain foreign countries do not protect intellectual property rights to the same extent as the laws of the United States.
Although we believe that our intellectual property does not infringe upon the proprietary rights of third parties, others may claim that we have infringed on their products.
If we were to become involved in disputes regarding the use or ownership of intellectual property rights, we could incur substantial costs in defending or prosecuting any such action and the defense or prosecution of the action would likely result in a diversion of management resources. In addition, in order to settle such an action we could be required to acquire licenses from others or to give licenses to others on terms that are not beneficial to us. Any dispute relating to our intellectual property could have a material adverse effect on our business.
OUR CURRENT PRODUCT IS REGULATED BY THE FDA AND, IN THE WORLDWIDE MARKET, GOVERNMENT AGENCIES LIKE THE FDA. WE MAY BE UNSUCCESSFUL IN OBTAINING REGULATORY APPROVALS FOR NEW PRODUCTS, EVEN THOUGH WE MAY INVEST A SIGNIFICANT AMOUNT OF TIME AND MONEY INTO SEEKING SUCH APPROVALS. IF OUR PRODUCTS DO NOT RECEIVE THE REGULATORY APPROVALS WE NEED TO SELL THEM, OUR REVENUES AND OPERATING RESULTS COULD BE ADVERSELY AFFECTED AND THE VALUE OF YOUR INVESTMENT MAY DECLINE.
The manufacture, sale, promotion and marketing of our new products, if any, may be subject to regulation by the FDA and similar government regulatory bodies in other countries.
As we develop or obtain new products, we will be required to determine what regulatory requirements, if any, are required to market and sell our products in the United States and worldwide. The process of obtaining regulatory approval could take years and be very costly, if approval can be obtained at all. If we failed to comply with such a requirement, we could be subjected to an FDA enforcement action. Such an action could take the form of a warning letter, an injunction to stop us from marketing the product at issue or a possible seizure of our assets.
We intend to work diligently to assure compliance with all applicable regulations that impact our business. We cannot assure you, however, that we will be able to obtain regulatory approval for all of our products or that, in the future, additional regulations will not be enacted which might adversely impact our operations. In either case, our revenues and operating results could be adversely effected and the value of your investment may decline.
RISKS RELATING TO OUR CURRENT FINANCING AGREEMENT
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR CONVERTIBLE DEBENTURES, AND WARRANTS THAT MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
As of May 10, 2006, we had 1,270,114 and shares of common stock issued and outstanding, respectively, and convertible debentures outstanding that may be converted into an estimated 5,725,000 shares of common stock at current market prices, and outstanding warrants to purchase 600,000 shares of common stock. In addition, the number of shares of common stock issuable upon conversion of the outstanding convertible debentures may increase if the market price of our stock declines. All of the shares, including all of the shares issuable upon conversion of the debentures and upon exercise of our warrants, may be sold without restriction. The sale of these shares may adversely affect the market price of our common stock.
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THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR CONVERTIBLE NOTES COULD REQUIRE US TO ISSUE A SUBSTANTIALLY GREATER NUMBER OF SHARES TO THE SELLING STOCKHOLDER, WHICH WILL CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS.
Our obligation to issue shares upon conversion of our convertible securities is essentially limitless. The following is an example of the amount of shares of our common stock that is issuable to the selling stockholders, upon conversion of our remaining, unconverted principal amount $685,295 convertible notes issued pursuant to our September 2005 Subscription Agreement and our principal amount $360,000 convertible notes issued pursuant to our April 2006 Subscription Agreements, based on market prices 25%, 50% and 75% below our market price on May 10, 2006 of $0.24.
% Below Price Per With Discount #of Shares % Outstanding
Market Share at 35% Issuable Stock
------- ----------- -------------- ------------ --------------
25% $0.18 $0.117 8,934,145 87.5%
50% $0.12 $0.078 13,401,217 91.3%
75% $0.06 $0.039 26,802,435 95.4%
*Based on 1,270,114 shares outstanding as of May 10, 2006
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR CONVERTIBLE NOTES MAY ENCOURAGE INVESTORS TO MAKE SHORT SALES IN OUR COMMON STOCK, WHICH COULD HAVE A DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON STOCK.
The convertible notes are convertible into shares of our common stock at a conversion price that is equal to the lesser of (i) $0.07 or (ii) the average of the lowest three (3) intra-day trading prices during the twenty (20) trading days immediately prior to the conversion date discounted by thirty-five percent (35%). The significant downward pressure on the price of the common stock as the selling stockholder converts and sells material amounts of common stock could encourage short sales by investors. This could place further downward pressure on the price of the common stock. In addition, not only the sale of shares issued upon conversion or exercise of notes, warrants and options, but also the mere perception that these sales could occur, may lower the market price of the common stock.
THE ISSUANCE OF SHARES UPON CONVERSION OF THE CONVERTIBLE DEBENTURES AND EXERCISE OF OUTSTANDING WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO OUR EXISTING STOCKHOLDERS.
The issuance of shares upon conversion of the convertible notes and exercise of warrants may result in substantial dilution to the interests of other stockholders since the selling stockholder may ultimately convert and sell the full amount issuable on conversion. Although the selling stockholder may not convert its convertible notes and/or exercise their warrants if such conversion or exercise would cause them to own more than 4.99% of our outstanding common stock, this restriction does not prevent the selling stockholder from converting and/or exercising some of their holdings and then converting the rest of their holdings. In this way, the selling stockholder could sell more than this limit while never holding more than this limit. There is no upper limit on the number of shares that may be issued which will have the effect of further diluting the proportionate equity interest and voting power of holders of our common stock, including investors in this offering.
IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING SECURED CONVERTIBLE NOTES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE, OR RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE SECURED CONVERTIBLE NOTES, IF REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE OF SUBSTANTIAL ASSETS.
The secured convertible notes in the principal amount of $360,000 issued under our April 2006 Subscription Agreement and the remaining unconverted principal amount of $685,295 issued under our September 2005 Subscription Agreement due and payable two years from the date of issuance, unless sooner converted into shares of our common stock. Any event of default such as our failure to repay the principal when due, our failure to issue shares of common stock upon conversion by the holder, our failure to timely file a registration statement or have such registration statement declared effective, breach of any covenant, representation or warranty in the Subscription Agreement or related convertible note, the assignment or appointment of a receiver to control a substantial part of our property or business, the filing of a money judgment, writ or similar process against our company in excess of $50,000, the commencement of a bankruptcy, insolvency, reorganization or liquidation proceeding against our company and the delisting of our common stock could require the early repayment of the secured convertible notes, including a default interest rate of 15% on the outstanding principal balance of the notes if the default is not cured with the specified grace period. We anticipate that the full amount of the secured convertible notes will be converted into shares of our common stock, in accordance with the terms of the secured convertible notes. If we were required to repay the secured convertible notes, we would be required to use our limited working capital and raise additional funds. If we were unable to repay the notes when required, the note holders could commence legal action against us and foreclose on all of our assets to recover the amounts due. Any such action would require us to curtail or cease operations.
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IF AN EVENT OF DEFAULT OCCURS UNDER THE SUBSCRIPTION AGREEMENT, SECURED CONVERTIBLE NOTES, WARRANTS, OR SECURITY AGREEMENT, THE INVESTORS COULD TAKE POSSESSION OF ALL OUR GOODS, INVENTORY, CONTRACTUAL RIGHTS AND GENERAL INTANGIBLES, RECEIVABLES, DOCUMENTS, INSTRUMENTS, CHATTEL PAPER, AND INTELLECTUAL PROPERTY.
In connection with the Subscription Agreements we entered into in September 2005 and April 2006, we executed Security Agreements in favor of the investors granting them a second priority security interest in all of our goods, inventory, contractual rights and general intangibles, receivables, documents, instruments, chattel paper, and intellectual property. The Security Agreements state that if an even of default occurs under the Subscription Agreement, Secured Convertible Notes, Warrants or Security Agreements, the investors have the right to take possession of the collateral, to operate our business using the collateral, and have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the collateral, at public or private sale or otherwise to satisfy our obligations under these agreements.
RISKS ASSOCIATED WITH OWNERSHIP OF OUR COMMON STOCK
WE HAVE NOT PAID CASH DIVIDENDS AND IT IS UNLIKELY THAT WE WILL PAY CASH DIVIDENDS IN THE FORESEEABLE FUTURE.
We plan to use all of our earnings, to the extent we have earnings, to fund our operations. We do not plan to pay any cash dividends in the foreseeable future. We cannot guarantee that we will, at any time, generate sufficient surplus cash that would be available for distribution as a dividend to the holders of our Common Stock. You should not expect to receive cash dividends on our Common Stock.
WE MAY RAISE ADDITIONAL CAPITAL THROUGH A SECURITIES OFFERING THAT COULD DILUTE YOUR OWNERSHIP INTEREST.
We require substantial working capital to fund our business. If we raise additional funds through the issuance of equity, equity-related or convertible debt securities, those securities may have rights, preferences or privileges senior to those of the holders of our Common Stock. The issuance of additional Common Stock or securities convertible into Common Stock by our management will also have the effect of further diluting the proportionate equity interest and voting power of holders of our Common Stock.
IF WE FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN THE SECONDARY MARKET.
Companies trading on the OTC Bulletin Board, such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.
WE ARE SUBJECT TO THE PENNY STOCK RULES AND THESE RULES MAY ADVERSELY EFFECT TRADING IN OUR COMMON STOCK.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
o that a broker or dealer approve a person's account for transactions in penny stocks; and
o the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the broker or dealer must:
o obtain financial information and investment experience objectives of the person; and
o make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the suitability determination; and
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o that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
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DESCRIPTION OF SECURITIES BEING REGISTERED
COMMON STOCK AND RIGHTS OF COMMON SHAREHOLDERS
The securities being offered by the selling shareholders are shares of our common stock. We are authorized by our Articles of Incorporation, as amended, to issue 2,000,000,000 shares of common stock, $0.001 par value. As of May 10, 2006, we had 1,270,114 shares of common stock issued and outstanding and approximately 500 holders of our common stock.
Holders of our common stock are entitled to one vote per share on all matters subject to shareholder vote. If the Board of Directors were to declare a dividend out of funds legally available therefore, all of the outstanding shares of common stock would be entitled to receive such dividend. We have never declared dividends and we do not intend to declare dividends in the foreseeable future. If we were liquidated or dissolved, holders of shares of our common stock would be entitled to share ratably in assets remaining after satisfaction of our liabilities. Holders of our common stock do not have cumulative voting rights.
SELLING SHAREHOLDERS
This prospectus relates to the offer and sale by the following selling stockholders of the indicated number of shares, all of which are issuable pursuant to warrants and/or convertible notes held by these selling stockholders. The number of shares set forth in the table for the selling stockholders represents an estimate of the number of shares of common stock to be offered by the selling stockholders. The actual number of shares of common stock issuable upon conversion of the notes and exercise of the related warrants is indeterminate, is subject to adjustment and could be materially less or more than such estimated number depending on factors which cannot be predicted by us at this time including, among other factors, the future market price of the common stock. The actual number of shares of common stock offered in this prospectus, and included in the registration statement of which this prospectus is a part, includes such additional number of shares of common stock as may be issued or issuable upon conversion of the notes and exercise of the related warrants by reason of any stock split, stock dividend or similar transaction involving the common stock, in accordance with Rule 416 under the Securities Act of 1933.
None of the following selling stockholders have held any position or office within our company, nor has had any other material relationship with us in the past three years, other than in connection with transactions pursuant to which the selling stockholders acquired convertible notes and warrants.
None of the following selling stockholders are broker-dealers or affiliates of broker-dealers.
The following table also sets forth the name of each person who is offering the resale of shares of common stock by this prospectus, the number of shares of common stock beneficially owned by each person, the number of shares of common stock that may be sold in this offering and the number of shares of common stock each person will own after the offering, assuming they sell all of the shares offered.
This prospectus covers the resale by selling shareholders of up to 8,575,000 shares of our common stock, $0.001 par value. The selling shareholders are offering:
o up to 7,975,000 shares of common stock underlying our Original Issue Discount Secured Convertible Notes, of which an aggregate of 3,475,000 shares of common stock are being registered for the remaining, unconverted $685,295 principal amount of such notes issued in September 2005 and up to 4,500,000 shares or common stock are being registered for the $360,000 principal amount of such notes issued in April 2006; and
o 600,000 shares of common stock underlying warrants issued to certain of the selling stockholders pursuant to our April 2006 Subscription Agreement.
-------------------- ------------------- ------------- --------------- ------------ --------------- ------------ --------------
Total
Total Shares of Percentage Percentage
Common Stock of Common Shares of Beneficial of Common
Issuable Upon Stock, Common Stock Beneficial Percentage of Ownership Stock Owned
Conversion of Assuming Included in Ownership Common Stock After the After
Convertible Notes Full Prospectus Before the Owned Before Offering Offering
Name and/or Warrants(1) Conversion Offering* Offering* (2) (2)
-------------------- ------------------- ------------- --------------- ------------ --------------- ------------ --------------
Alpha Capital
Aktiengesellschaft 3,800,000 (3) 74.9% 3,800,000 63,379 4.99% -- --
-------------------- ------------------- ------------- --------------- ------------ --------------- ------------ --------------
Whalehaven Capital 2,700,000 (4) 68.0% 2,700,000 63,379 4.99% -- --
Fund Ltd.
-------------------- ------------------- ------------- --------------- ------------ --------------- ------------ --------------
Ellis International 1,175,000 (5) 48.1% 1,175,000 63,379 4.99% -- --
Ltd.
-------------------- ------------------- ------------- --------------- ------------ --------------- ------------ --------------
Osher Capital, Inc. 900,000 (6) 41.5% 900,000 63,379 4.99% -- --
-------------------- ------------------- ------------- --------------- ------------ --------------- ------------ --------------
* These columns represents the aggregate maximum number and percentage of shares that the selling stockholder can own at one time (and therefore, offer for resale at any one time) due to their 4.99% limitation.
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The number and percentage of shares beneficially owned is determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rule, beneficial ownership includes any shares as to which the selling stockholder has sole or shared voting power or investment power and also any shares, which the selling stockholder has the right to acquire within 60 days. The actual number of shares of common stock issuable upon the conversion of the convertible notes is subject to adjustment depending on, among other factors, the future market price of the common stock, and could be materially less or more than the number estimated in the table.
(1) Includes 100% of the remaining shares issuable upon conversion of the $685,295 remaining balance of convertible notes issued pursuant to our September 2005 Subscription Agreement, 200% of the shares issuable upon conversion of the $360,000 convertible notes issued pursuant to our April 2006 Subscription Agreement and 100% of the shares issuable upon exercise of warrants issued pursuant to our April 2006 Subscription Agreement, based on current market prices. Under the terms of the convertible debentures, if the convertible notes had actually been converted on May 10, 2006, the conversion price would have been $.16. Because the number of shares of common stock issuable upon conversion of the convertible note is dependent in part upon the market price of the common stock prior to a conversion, the actual number of shares of common stock that will be issued upon conversion will fluctuate daily and cannot be determined at this time. However these selling stockholders have contractually agreed to restrict their ability to convert or exercise their warrants and receive shares of our common stock such that the number of shares of common stock held by them and their affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock.
(2) Assumes that all securities registered will be sold.
(3) Represents (i) 2,100,000 shares of common stock underlying an aggregate of $421,500 unconverted principal amount convertible notes issued to the selling stockholder pursuant to our September 2005 Subscription Agreement, (ii) 1,500,000 shares of common stock underlying an aggregate of $120,000 principal amount convertible notes issued to the selling stockholder pursuant to our April 2006 Subscription Agreement, and (iii) 200,000 shares underlying warrants exercisable at $0.07 per share issued to the selling stockholder pursuant to our April 2006 Subscription Agreement. Alpha Capital AG is a private investment fund that is owned by all its investors and managed by Mr. Konrad Ackermann, who may be deemed the control person of the shares owned Alpha Capital.
(4) Represents (i) 1,000,000 shares of common stock underlying an aggregate of $200,000 unconverted principal amount convertible notes issued to the selling stockholder pursuant to our September 2005 Subscription Agreement, (ii) 1,500,000 shares of common stock underlying an aggregate of $120,000 principal amount convertible notes issued to the selling stockholder pursuant to our April 2006 Subscription Agreement, and (iii) 200,000 shares underlying warrants exercisable at $0.07 per share issued to the selling stockholder pursuant to our April 2006 Subscription Agreement. Whalehaven Capital Fund Limited is a private investment fund that is owned by all of its investors and managed by Michael Finkelstein and Bhavesh Singh. Evan Schemenauer, Arthur Jones and Jennifer Kelly may be deemed control persons of the shares owned by such entity, with final voting power and investment control over such shares.
(5) Represents (i) 325,000 shares of common stock underlying an aggregate of $54,882 unconverted principal amount convertible notes issued to the selling stockholder pursuant to our September 2005 Subscription Agreement, (ii) 750,000 shares of common stock underlying an aggregate of $60,000 principal amount convertible notes issued to the selling stockholder pursuant to our April 2006 Subscription Agreement, and (iii) 100,000 shares underlying warrants exercisable at $0.07 per share issued to the selling stockholder pursuant to our April 2006 Subscription Agreement. Mr. Wilhelm Ungar may be deemed the control person of the securities owned by such entity, with final voting power and investment control over such shares.
(6) Represents (i) 50,000 shares of common stock underlying an aggregate of $8,913 unconverted principal amount convertible notes issued to the selling stockholder pursuant to our September 2005 Subscription Agreement, (ii) 750,000 shares of common stock underlying an aggregate of $60,000 principal amount convertible notes issued to the selling stockholder pursuant to our April 2006 Subscription Agreement, and (iii) 100,000 shares underlying warrants exercisable at $0.07 per share issued to the selling stockholder pursuant to our April 2006 Subscription Agreement. Mr. Yisroel Kluger has voting and dispositive control over securities owned by Osher Capital, Inc.
OUR APRIL 11, 2006 ORIGINAL ISSUE DISCOUNT SECURED CONVERTIBLE NOTES SUBSCRIPTION AGREEMENT
On April 12, 2006, we entered into a Subscription Agreement with several accredited and/or qualified institutional investors pursuant to which the investors subscribed to purchase an aggregate principal amount of $360,000 in secured convertible promissory notes for aggregate purchase price of $300,000 and 2 Class A common stock purchase warrants for each one dollar of the purchase price of the secured convertible notes ($300,000).
Each investor shall have the right to convert the secured convertible notes after the date of issuance at any time, until paid in full, at the election of the investor into fully paid and nonassessable shares of our common stock. The conversion price per share shall be the lower of (i) $0.07 or (ii) 65% of the average of the three lowest intra-day trading prices for our common stock for the 20 trading days prior to, but not including, the conversion date as reported by Bloomberg, L.P. on any principal market or exchange where our common stock is listed or traded. The conversion price is adjustable in the event of any stock split or reverse stock split, stock dividend, reclassification of common stock, recapitalization, merger or consolidation. In addition, the conversion price of the secured convertible notes will be adjusted in the event that we spin off or otherwise divest ourselves of a material part of our business or operations or dispose all or a portion of our assets. Our obligation to repay all principal, and accrued and unpaid interest under the convertible notes is secured by all of our assets pursuant to a certain Security Agreement dated as of April 12, 2006.
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We issued an aggregate of 600,000 Class A common stock purchase warrants to the investors, representing and 2 Class A common stock purchase warrants for each one dollar of the purchase price of the secured convertible notes ($300,000). The Class A warrants are exercisable until five years from the closing date at an exercise price of $0.07 per share. The exercise price of the Class A warrants will be adjusted in the event of any stock split or reverse stock split, stock dividend, reclassification of common stock, recapitalization, merger or consolidation. In addition, the exercise price of the warrants will be adjusted in the event that we spin off or otherwise divest ourselves of a material part of our business or operations or dispose all or a portion of our assets.
We are obligated to file a registration statement registering 200% of the shares of our common stock issuable upon conversion of the secured promissory notes and 100% of the shares issuable upon exercise of the Class A warrants no later than 35 days after the closing date and cause it to be declared effective within 120 days after the closing date. If we do not meet the aforementioned filing and effectiveness deadlines, we shall pay to each investor an amount equal to 2% of the purchase price of the secured convertible notes remaining unconverted and purchase price of the shares of our common stock issued upon conversion of the notes for each 30 days or part thereof of the pendency of such non-registration event.
We claim an exemption from the registration requirements of the Act for the private placement of these securities pursuant to Section 4(2) of the Act and/or Regulation D promulgated thereunder since, among other things, the transaction did not involve a public offering, the investors were accredited investors and/or qualified institutional buyers, the investors had access to information about us and their investment, the investors took the securities for investment and not resale, and we took appropriate measures to restrict the transfer of the securities.
OUR SEPTEMBER 16, 2005 ORIGINAL ISSUE DISCOUNT SECURED CONVERTIBLE NOTES SUBSCRIPTION AGREEMENT
On September 16, 2005, we entered into a Subscription Agreement with several accredited institutional investors for the issuance of an aggregate of $900,000 principal amount Original Issue Discount Secured Convertible Notes (the "Convertible Notes") and we received a gross amount of $750,000. The convertible notes are due two years from the date of issuance. The convertible notes are convertible at the option of the holders into shares of our common stock. The conversion price is equal to the lesser of (i) $0.07 (or $12.25 post 1 for 175 reverse stock split effectuated on April 18, 2006) or (ii) the average of the lowest three (3) intra-day trading prices during the twenty (20) trading days immediately prior to the conversion date discounted by thirty-five percent (35%). In connection with the issuance of the convertible notes, the noteholders shall receive warrants to purchase shares of our common stock. Furthermore we entered into a Registration Rights Agreement in order to register the above-referenced securities and are required to register 200% of our common shares underlying the convertible notes and the warrants.
The secured convertible notes mature on two years from the date of issuance. The convertible notes are convertible at any time at the option of the holder into shares of our common stock, provided at no time may a holder of our convertible notes and its affiliates own more than 4.9% of our outstanding common stock. The conversion price of our common stock used in calculating the number of shares issuable upon conversion of the convertible notes, is the lesser of:
o Sixty-five percent of the average of the lowest three intra-day trading prices for our common stock during the twenty trading day period ending one trading day prior to the date the conversion notice is sent by the holder to the borrower; or
o a fixed conversion price of $0.07(or $12.25 post 1 for 175 reverse stock split effectuated on April 18, 2006).
Since the issuance of our convertible notes to the investors of our September 2005 private placement, an aggregate of $685,295principal amount of such notes remain unconverted. We are registering an aggregate of 8,575,000 shares of our common stock underlying such unconverted notes in this prospectus.
The conversion price of the convertible notes are subject to equitable adjustments if we distribute a stock dividend, subdivide or combine outstanding shares of common stock into a greater or lesser number of shares, or take such other actions as would otherwise result in dilution of the selling stockholders' ownership. Also, the convertible notes fixed conversion price gets lowered in the event we issue shares of our common stock or any rights, options, warrants to purchase shares of our common stock at a price less than the market price of our shares as quoted on the OTCBB. The fixed conversion price gets lowered upon such issuance to the amount of the consideration per share received by us.
The convertible notes are secured by a security agreement and an intellectual property security agreement under which we pledged substantially all of our assets, including our goods, fixtures, equipment, inventory, contract rights, receivables and intellectual property.
DESCRIPTION OF WARRANTS
The warrants purchased by the investors pursuant to the September 16, 2005 Subscription Agreement entitle the investors to purchase 1,500,000 shares of our common stock at an exercise price equal to $0.07 per share (or $12.25 post 1 for 175 reverse stock split effectuated on April 18, 2006). The warrants expire five years from the date of issuance. The warrants are subject to exercise price adjustments upon the occurrence of certain events including stock dividends, stock splits, mergers, reclassifications of stock or our recapitalization. The exercise price of the warrants is also subject to reduction if we issue shares of our common stock on any rights, options or warrants to purchase shares of our common stock at a price less than the market price of our shares as quoted on the OTC Bulletin Board.
REGISTRATION RIGHTS
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We are obligated to file a registration statement registering 200% of the shares of our common stock issuable upon conversion of the promissory notes and 100% of the shares of our common stock issuable upon exercise of the Class A warrants no later than 35 days after the initial closing date and cause it to be effective within 90 days after the initial closing date. If we do not meet the aforementioned filing and effectiveness deadlines, we shall pay to each investor an amount equal to 2% for each 30 days or part thereof, thereafter of the purchase price of the notes remaining unconverted and purchase price of the shares of our common stock issued upon conversion of the notes.
Sample Conversion Calculation
The convertible notes in the principal amount of $360,000 issued under our April 2006 Subscription Agreement and in the remaining, unconverted principal amount of $685,295 issued under our September 2005 Subscription Agreement are convertible into the number of our shares of common stock equal to the lesser of
(i) $0.07 or (ii) 65% of the average of the three lowest intra-day trading prices for our common stock for the 20 trading days prior to, but not including, the conversion date. For example, assuming conversion of $1,045,295 of notes on May 10, 2006, a conversion price of $0.16 per share, the number of shares issuable upon conversion would be:
$1,045,295 /$.16 = 6,533,094
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PLAN OF DISTRIBUTION
We are registering a total of 8,575,000shares of our common stock that are being offered by the selling shareholders. As used in this prospectus, "selling shareholders" includes the pledgees, donees, transferees or others who may later hold the selling shareholders' interests in the common stock. We will pay the costs and fees of registering the common shares, but the selling shareholders will pay any brokerage commissions, discounts or other expenses relating to the sale of the common shares. We will not receive the proceeds from the sale of the shares by the selling shareholders. However, some of the shares we are registering will be issued upon the exercise of warrants held by the selling shareholders. Although the selling shareholders are not required to exercise the warrants, if they do so we will receive the proceeds from the exercise, unless those warrants are exercised pursuant to the cashless exercise provisions thereof.
The selling shareholders and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The shares being offered by the selling stockholders or their respective pledgees, donees, transferees or other successors in interest, will be sold from time to time in one or more transactions, which may involve block transactions:
o on the Over-the-Counter Bulletin Board or on such other market on which the common stock may from time to time be trading;
o in privately-negotiated transactions;
o through the writing of options on the shares;
o short sales; or
o any combination thereof.
The sale price to the public may be:
o the market price prevailing at the time of sale;
o a price related to such prevailing market price;
o at negotiated prices; or
o such other price as the selling stockholders determine from time to time.
The selling shareholders may also sell shares under Rule 144 or Regulation S under the Securities Act, if available, rather than under this prospectus. Broker-dealers engaged by the selling shareholders may arrange for other brokers-dealers to participate in sales. The selling stockholders shall have the sole and absolute discretion not to accept any purchase offer or make any sale of shares if they deem the purchase price to be unsatisfactory at any particular time. Broker-dealers may receive commissions or discounts from the selling shareholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The selling shareholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved.
The selling shareholders may from time to time pledge or grant a security interest in some or all of the shares or common stock or warrants owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933, as amended, amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus.
The selling shareholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.
The selling stockholders or their respective pledgees, donees, transferees or other successors in interest, may also sell the shares directly to market makers acting as principals and/or broker-dealers acting as agents for themselves or their customers. Such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the selling stockholders and/or the purchasers of shares for whom such broker-dealers may act as agents or to whom they sell as principal or both, which compensation as to a particular broker-dealer might be in excess of customary commissions. Market makers and block purchasers purchasing the shares will do so for their own account and at their own risk. It is possible that a selling stockholder will attempt to sell shares of common stock in block transactions to market makers or other purchasers at a price per share which may be below the then market price. The selling stockholders cannot assure that all or any of the shares offered in this prospectus will be issued to, or sold by, the selling stockholders. The selling stockholders and any brokers, dealers or agents, upon effecting the sale of any of the shares offered in this prospectus, may be deemed "underwriters" as that term is defined under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, or the rules and regulations under such acts. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. The selling shareholders have informed us that none of them have any agreement or understanding, directly or indirectly, with any person to distribute the common stock.
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We are required to pay all fees and expenses incurred by us incident to the registration of the shares. We have agreed to indemnify the selling stockholders, or their transferees or assignees, against certain liabilities, including liabilities under the Securities Act of 1933, as amended, or to contribute to payments the selling stockholders or their respective pledgees, donees, transferees or other successors in interest, may be required to make in respect of such liabilities.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the common stock offered by the selling shareholders. We will receive proceeds of $0.07 per share from the exercise of warrants by the selling shareholders, or an aggregate of $42,000, unless those warrants are exercised pursuant to the cashless exercise provisions thereof.
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
Our Common Stock trades on the NASD OTC Bulletin Board. Since April 18, 2006 it is currently trading under the symbol ADSD. From November 26, 2004 until April 18, 2006, it traded under the symbol ADDI. From April 26, 2004 until November 26, 2004, it traded under the symbol QTFI. From January 3, 2003 until April 26, 2004, it traded under the symbol QTFV. Prior to January 9, 2003, our Common Stock traded on the NASD OTC Bulletin Board under the symbol MOZN.
The table below sets forth the range of high and low bid quotes of our Common Stock for each quarter for the last two fiscal years as reported by Yahoo Finance. The bid prices represent inter-dealer quotations, without adjustments for retail mark-ups, markdowns or commissions and may not necessarily represent actual transactions. The following prices reflect both the 1 for 10 reverse stock split that was effected on April 26, 2004, and the 1 for 150 reverse stock split that was effected on November 26, 2004, respectively, as footnoted below.
PERIOD HIGH LOW
-------------- ------ ------
Fiscal Year Ended June 30, 2004 First Quarter $0.39 $0.16
Second Quarter $0.15 $0.04
Third Quarter $0.07 $0.01
Fourth Quarter $0.06 $0.01(1)
Fiscal Year Ended June 30, 2005 First Quarter $1.35 $0.06(1)
Second Quarter $0.10 $0.02(2)
Third Quarter $0.07 $0.02(2)
Fourth Quarter $0.08 $0.01(2)
(1) Reflects post 10 for 1 reverse split.
(2) Reflects post 150 for 1 reverse split.
HOLDERS
There were approximately 500 holders of our Common Stock of record as of May 10, 2006.
DIVIDENDS
We have never declared or paid cash dividends on our common stock, and our present policy is not to pay cash dividends on our common stock. Any payment of cash dividends in the future will be wholly dependent upon our earnings, financial condition, capital requirements and other factors deemed relevant by our board of directors. It is not likely that cash dividends will be paid in the foreseeable future.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY INCENTIVE PLANS
Set forth in the table below is information regarding awards made through compensation plans or arrangements through June 30, 2005, the most recently completed fiscal year (reflects post 1 to 175 reverse split that became effective April 18, 2006).
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Number of securities
remaining available for
future issuance under
Number of securities to Weighted average equity compensation
be issued upon exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
Plan Category warrants and rights warrants and rights column 2)
----------------------------------------------------------------------------------------------------------
Equity Compensation Plans
Approved by Security Holders N/A N/A N/A
----------------------------------------------------------------------------------------------------------
Equity Compensation Plans
Not Approved by Security
Holders -- $ -- 1,464
----------------------------------------------------------------------------------------------------------
Our 2000 Stock Option Plan (the "2000 Plan"), as amended, authorizes the issuance of options and common stock to officers, employees, directors and consultants. The common stock reserved for issuance pursuant to the 2000 Plan has been registered on an S-8 Registration Statement. The 2000 Plan allows for the issuance of either incentive stock options (which, pursuant to Section 422 of the Internal Revenue Code, can only be granted to employees) or non-qualified stock options. The 2000 Plan is administered by a committee of two or more members of the Board of Directors or, if no committee is appointed, then by the Board of Directors. The committee, or the Board of Directors if there is no committee, determines the type of option granted, the exercise price, the option term, which may be no more than ten years, terms and conditions of exercisability and methods of exercise. Options must vest within ten-years. Under the 2000 Plan, the exercise price may not be less than fair market value on the date of grant for incentive stock options, and not less than 50% of the fair market value on the date of grant for non-qualified stock options. The 2000 Plan also allows for the granting of Stock Appreciation Rights in conjunction with all or part of any stock option granted. No Stock Appreciation Rights have been granted.
On April 21, 2003 our Board of Directors adopted the 2003 Incentive Equity Stock Plan (the "2003 Plan"). The 2003 Plan authorizes the issuance of options, right to purchase common stock and stock bonuses to officers, employees, directors and consultants. The 2003 Plan is administered by a committee of two or more members of the Board of Directors or, if no committee is appointed, then by the Board of Directors. The 2003 Plan allows for the issuance of incentive stock
As filed with the Securities and Exchange Commission on April 27, 2006
Registration No. 333-___________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-8
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ADDISON-DAVIS DIAGNOSTICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 800103134
--------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
143 Triumfo Canyon Road, Suite 104, Westlake Village, CA 91361
(Address of principal executive offices) (Zip Code)
2003 INCENTIVE EQUITY STOCK PLAN
(Full title of Plan)
Charles Miseroy, Chief Executive Officer
143 Triunfo Canyon Road, Suite 104
Westlake Village, CA 91361
(Name and address of agent for service)
(805) 494-7838
(Telephone number, including area code, of agent for service)
CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Title of Maximum Maximum
Securities Amount Offering Aggregate Amount of
to be to be Price Offering Registration
Registered Registered Per Share(1) Price(1) Fee
---------- ----------- ------------ ---------- -----------
Common Stock,
$0.001 par value 150,000 $0.26 $39,000 $4.17
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(1) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) under the Securities Act of 1933, using the average of the high and low price as reported on the Over-The-Counter Bulletin Board on April 26, 2006.
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PART I
Item 1. Plan Information.
The documents containing the information specified in Item 1 will be sent or given to participants in the Plan as specified by Rule 428(b)(1) of the Securities Act of 1933, as amended (the "Securities Act"). Such documents are not required to be and are not filed with the Securities and Exchange Commission (the "SEC") either as part of this Registration Statement or as prospectuses or prospectus supplements pursuant to Rule 424. These documents and the documents incorporated by reference in this Registration Statement pursuant to Item 3 of Part II of this Form S-8, taken together, constitute a prospectus that meets the requirements of Section 10(a) of the Securities Act.
Item 2. Registrant Information and Employee Plan Annual Information.
Upon written or oral request, any of the documents incorporated by reference in Item 3 of Part II of this Registration Statement (which documents are incorporated by reference in this Section 10(a) Prospectus), other documents required to be delivered to eligible employees, non-employee directors and consultants, pursuant to Rule 428(b) are available without charge by contacting:
Charles Miseroy, Chief Executive Officer 143 Triunfo Canyon Road, Suite 104 Westlake Village, CA 91361 (805) 494-7838
PART II.
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
Item 3. Incorporation of Documents by Reference.
The Registrant hereby incorporates by reference into this Registration Statement the documents listed below. In addition, all documents subsequently filed pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), prior to the filing of a post-effective amendment which indicates that all securities offered have been sold or which deregisters all securities then remaining unsold, shall be deemed to be incorporated by reference into this Registration Statement and to be a part hereof from the date of filing of such documents:
o Reference is made to the Registrant's quarterly report on Form 10-QSB for the quarter ended December 31, 2005, as filed with the SEC on February 21, 2006, which is hereby incorporated by reference.
o Reference is made to the Registrant's quarterly report on Form 10-QSB for the quarter ended September 30, 2005, as filed with the SEC on November 14, 2005, which is hereby incorporated by reference.
o Reference is made to the Registrant's annual report on Form 10-KSB for the year ended June 30, 2005, as filed with the SEC on September 30, 2005, which is hereby incorporated by reference.
o Reference is made to the Registrant's quarterly report on Form 10-QSB for the quarter ended March 31, 2005, as filed with the SEC on May 16, 2005, which is hereby incorporated by reference.
Item 4. Description of Securities.
Not Applicable.
Item 5. Interests of Named Experts and Counsel.
Certain legal matters in connection with this registration statement will be passed upon for the Registrant by Sichenzia Ross Friedman Ference LLP, New York, New York. Certain members or partners of Sichenzia Ross Friedman Ference LLP will receive 80,769 shares of common stock of the Registrant under this registration statement to be issued as compensation for legal services performed on behalf of the Registrant.
Item 6. Indemnification of Directors and Officers.
Our Certificate of Incorporation, as amended and restated, provide to the fullest extent permitted by Section 145 of the General Corporation Law of the State of Delaware, that our directors or officers shall not be personally liable to us or our shareholders for damages for breach of such director's or officer's fiduciary duty. The effect of this provision of our Certificate of Incorporation, as amended and restated, is to eliminate our rights and our shareholders (through shareholders' derivative suits on behalf of our company) to recover damages against a director or officer for breach of the fiduciary duty of care as a director or officer (including breaches resulting from negligent or grossly negligent behavior), except under certain situations defined by statute. We believe that the indemnification provisions in our Certificate of Incorporation, as amended, are necessary to attract and retain qualified persons as directors and officers.
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Our By Laws also provide that the Board of Directors may also authorize us to indemnify our employees or agents, and to advance the reasonable expenses of such persons, to the same extent, following the same determinations and upon the same conditions as are required for the indemnification of and advancement of expenses to our directors and officers. As of the date of this Registration Statement, the Board of Directors has not extended indemnification rights to persons other than directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.
Item 7. Exemption from Registration Claimed.
Not Applicable.
Item 8. Exhibits.
Exhibit Description
------- -------------------------------------------------
4.1 2003 Incentive Equity Stock Plan
5.1 Opinion of Sichenzia Ross Friedman Ference LLP
23.1 Consent of Sichenzia Ross Friedman Ference LLP is
included in Exhibit 5.1
23.2 Consent of Corbin & Company, LLP
23.3 Consent of Armando C. Ibarra, CPA
Item 9. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;
Provided, however, that paragraphs (1)(i), and (1)(ii) do not apply if the Registration Statement is on Form S-8 and if the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the Commission by the Registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
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(5) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:
(A) Each prospectus filed by a Registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and
(B) Each prospectus required to be filed pursuant to Rule 424(b)(2),
(b)(5) or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii) or (x) for the purpose of providing the information required by Section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which the prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date.
(6) That, for the purpose of determining liability of a Registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities, each undersigned Registrant undertakes that in a primary offering of securities of an undersigned Registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned Registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of an undersigned Registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of an undersigned Registrant or used or referred to by an undersigned Registrant;
(iii) The portion of any other free writing prospectus relating to the offering containing material information about an undersigned Registrant or its securities provided by or on behalf of an undersigned Registrant; and
(iv) Any other communication that is an offer in the offering made by an undersigned Registrant to the purchaser.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of an amendment to a filing on Form S-8 and authorized this amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Westlake Village, State of California on April 27, 2006.
ADDISON-DAVIS DIAGNOSTICS, INC.
By: /s/ Charles Miseroy
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Charles Miseroy,
Chief Executive Officer
(Principal Executive Officer) and Acting
Chief Financial Officer (Principal
Accounting and Financial Officer)
In accordance with the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities stated.
Signature Title Date
/s/ Charles Miseroy Chief Executive Officer (Principal April 27, 2006
------------------------ Executive Officer) and Acting Chief
Charles Miseroy Financial Officer (Principal
Accounting and Financial Officer)
/s/ Fred De Luca Secretary and Director April 27, 2006
------------------------
Fred De Luca
/s/ Federico G. Cabo Director April 27, 2006
------------------------
Federico G. Cabo
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EXHIBIT 4.1
ADDISON-DAVIS DIAGNOSTICS, INC.
2003 INCENTIVE EQUITY STOCK PLAN
AS AMENDED ON APRIL 26, 2006
1. PURPOSE.
The purpose of this Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company, and its Parent and Subsidiaries (if any), by offering them an opportunity to participate in the Company's future performance through awards of Options, the right to purchase Common Stock and Stock Bonuses. Capitalized terms not defined in the text are defined in Section 2.
2. DEFINITIONS.
As used in this Plan, the following terms will have the following meanings:
"AWARD" means any award under this Plan, including any Option, Stock Award or Stock Bonus.
"AWARD AGREEMENT" means, with respect to each Award, the signed written agreement between the Company and the Participant setting forth the terms and conditions of the Award.
"BOARD" means the Board of Directors of the Company.
"CAUSE" means any cause, as defined by applicable law, for the termination of a Participant's employment with the Company or a Parent or Subsidiary of the Company.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMPANY" means QT 5, Inc., or any successor corporation.
"COMMITTEE" means that committee appointed by the Board of Directors to administer and interpret the Plan as more particularly described in Section 5 of the Plan; provided, however, that the term Committee will refer to the Board of Directors during such times as no Committee is appointed by the Board of Directors.
"DISABILITY" means a disability, whether temporary or permanent, partial or total, as determined by the Committee.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXERCISE PRICE" means the price at which a holder of an Option may purchase the Shares issuable upon exercise of the Option.
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"FAIR MARKET VALUE" means, as of any date, the value of a share of the Company's Common Stock determined as follows:
(a) if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading;
(b) if such Common Stock is quoted on the NASDAQ National Market or the NASDAQ SmallCap Market, its closing price on the NASDAQ National Market or the NASDAQ SmallCap Market, respectively, on the date of determination;
(c) if such Common Stock is publicly traded but is not listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices on the date of determination, provided however, if at the sole discretion of the Committee, if a active public market does not accurately reflect the bid/ask prices, then the fair market value shall be determined by the Committee in good faith; or
(d) if none of the foregoing is applicable, by the Committee in good faith.
"INSIDER" means an officer or director of the Company or any other person whose transactions in the Company's Common Stock are subject to Section 16 of the Exchange Act.
"OPTION" means an award of an option to purchase Shares pursuant to Section 6.
"PARENT" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of such corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.
"PARTICIPANT" means a person who receives an Award under this Plan.
"PERFORMANCE FACTORS" means the factors selected by the Committee, in its sole and absolute discretion, from among the following measures to determine whether the performance goals applicable to Awards have been satisfied:
(a) Net revenue and/or net revenue growth;
(b) Earnings before income taxes and amortization and/or earnings before income taxes and amortization growth;
(c) Operating income and/or operating income growth;
(d) Net income and/or net income growth;
(e) Earnings per share and/or earnings per share growth;
(f) Total stockholder return and/or total stockholder return growth;
(g) Return on equity;
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(h) Operating cash flow return on income;
(i) Adjusted operating cash flow return on income;
(j) Economic value added; and
(k) Individual business objectives.
"PERFORMANCE PERIOD" means the period of service determined by the Committee, not to exceed five years, during which years of service or performance is to be measured for Stock Awards or Stock Bonuses, if such Awards are restricted.
"PLAN" means this Addison-Davis Diagnostics, Inc. 2003 Incentive Equity Plan, as amended from time to time.
"PURCHASE PRICE" means the price at which the Participant of a Stock Award may purchase the Shares.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SHARES" means shares of the Company's Common Stock reserved for issuance under this Plan, as adjusted pursuant to Sections 3 and 19, and any successor security.
"STOCK AWARD" means an award of Shares pursuant to Section 7.
"STOCK BONUS" means an award of Shares, or cash in lieu of Shares, pursuant to
Section 8.
"SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.
"TERMINATION" or "TERMINATED" means, for purposes of this Plan with respect to a Participant, that the Participant has for any reason ceased to provide services as an employee, officer, director, consultant, independent contractor or advisor to the Company or a Parent or Subsidiary of the Company. An employee will not be deemed to have ceased to provide services in the case of (i) sick leave, (ii) military leave, or (iii) any other leave of absence approved by the Company, provided that such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute or unless provided otherwise pursuant to a formal policy adopted from time to time by the Company and issued and promulgated to employees in writing. In the case of any employee on an approved leave of absence, the Committee may make such provisions respecting suspension of vesting of the Award while on leave from the employ of the Company or a Subsidiary as it may deem appropriate, except that in no event may an Option be exercised after the expiration of the term set forth in the Option agreement. The Committee will have sole discretion to determine whether a Participant has ceased to provide services and the effective date on which the Participant ceased to provide services (the "Termination Date").
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3. SHARES SUBJECT TO THE PLAN.
3.1 Number of Shares Available. Subject to Sections 3.2 and 19, the total aggregate number of Shares reserved and available for grant and issuance pursuant to this Plan shall be 26,150,000 Shares and will include Shares that are subject to: (a) issuance upon exercise of an Option but cease to be subject to such Option for any reason other than exercise of such Option; (b) an Award granted hereunder but forfeited or repurchased by the Company at the original issue price; and (c) an Award that otherwise terminates without Shares being issued. At all times the Company shall reserve and keep available a sufficient number of Shares as shall be required to satisfy the requirements of all outstanding Options granted under this Plan and all other outstanding but unvested Awards granted under this Plan.
3.2 Adjustment of Shares. In the event that the number of outstanding shares is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company without consideration, then (a) the number of Shares reserved for issuance under this Plan, (b) the Exercise Prices of and number of Shares subject to outstanding Options, and (c) the number of Shares subject to other outstanding Awards will be proportionately adjusted, subject to any required action by the Board or the stockholders of the Company and compliance with applicable securities laws; provided, however, that fractions of a Share will not be issued but will either be replaced by a cash payment equal to the Fair Market Value of such fraction of a Share or will be rounded up to the nearest whole Share, as determined by the Committee.
4. ELIGIBILITY.
ISOs (as defined in Section 6 below) may be granted only to employees (including officers and directors who are also employees) of the Company or of a Parent or Subsidiary of the Company. All other Awards may be granted to employees, officers, directors, consultants, independent contractors and advisors of the Company or any Parent or Subsidiary of the Company, provided such consultants, independent contractors and advisors render bona-fide services not in connection with the offer and sale of securities in a capital-raising transaction or promotion of the Company's securities. A person may be granted more than one Award under this Plan.
5. ADMINISTRATION.
5.1 Committee.
(a) The Plan shall be administered and interpreted by a committee consisting of two (2) or more members of the Board.
(b) Members of the Committee may resign at any time by delivering written notice to the Board. Vacancies in the Committee shall be filled by the Board. The Committee shall act by a majority of its members in office. The Committee may act either by vote at a meeting or by a memorandum or other written instrument signed by a majority of the Committee.
(c) If the Board, in its discretion, does not appoint a Committee, the Board itself will administer and interpret the Plan and take such other actions as the Committee is authorized to take hereunder; provided that the Board may take such actions hereunder in the same manner as the Board may
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take other actions under the Certificate of Incorporation and bylaws of the Company generally.
5.2 Committee Authority. Without limitation, the Committee will have the authority to:
(a) construe and interpret this Plan, any Award Agreement and any other agreement or document executed pursuant to this Plan;
(b) prescribe, amend and rescind rules and regulations relating to this Plan or any Award;
(c) select persons to receive Awards;
(d) determine the form and terms of Awards;
(e) determine the number of Shares or other consideration subject to Awards;
(f) determine whether Awards will be granted singly, in combination with, in tandem with, in replacement of, or as alternatives to, other Awards under this Plan or any other incentive or compensation plan of the Company or any Parent or Subsidiary of the Company;
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment of Awards;
(i) correct any defect, supply any omission or reconcile any inconsistency in this Plan, any Award or any Award Agreement;
(j) determine whether an Award has been earned; and
(k) make all other determinations necessary or advisable for the administration of this Plan.
5.3 Committee Discretion. Any determination made by the Committee with respect to any Award will be made at the time of grant of the Award or, unless in contravention of any express term of this Plan or Award, at any later time, and such determination will be final and binding on the Company and on all persons having an interest in any Award under this Plan. The Committee may delegate to one or more officers of the Company the authority to grant an Award under this Plan to Participants who are not Insiders of the Company. No member of the Committee shall be personally liable for any action taken or decision made in good faith relating to this Plan, and all members of the Committee shall be fully protected and indemnified to the fullest extent permitted under applicable law by the Company in respect to any such action, determination, or interpretation.
6. OPTIONS.
The Committee may grant Options to eligible persons and will determine whether such Options will be Incentive Stock Options within the meaning of the Code ("ISO") or Nonqualified Stock Options ("NQSOs"), the number of Shares
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subject to the Option, the Exercise Price of the Option, the period during which the Option may be exercised, and all other terms and conditions of the Option, subject to the following:
6.1 Form of Option Grant. Each Option granted under this Plan will be evidenced by an Award Agreement which will expressly identify the Option as an ISO or an NQSO (hereinafter referred to as the "Stock Option Agreement"), and will be in such form and contain such provisions (which need not be the same for each Participant) as the Committee may from time to time approve, and which will comply with and be subject to the terms and conditions of this Plan.
6.2 Date of Grant. The date of grant of an Option will be the date on which the Committee makes the determination to grant such Option, unless otherwise specified by the Committee. The Stock Option Agreement and a copy of this Plan will be delivered to the Participant within a reasonable time after the granting of the Option.
6.3 Exercise Period. Options may be exercisable within the times or upon the events determined by the Committee as set forth in the Stock Option Agreement governing such Option; provided, however, that no Option will be exercisable after the expiration of ten (10) years from the date the Option is granted; and provided further that no ISO granted to a person who directly or by attribution owns more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any Parent or Subsidiary of the Company
("Ten Percent Stockholder") will be exercisable after the expiration of five (5) years from the date the ISO is granted. The Committee also may provide for Options to become exercisable at one time or from time to time, periodically or otherwise, in such number of Shares or percentage of Shares as the Committee determines, provided, however, that in all events a Participant will be entitled to exercise an Option at the rate of at least 20% per year over five years from the date of grant, subject to reasonable conditions such as continued employment; and further provided that an Option granted to a Participant who is an officer or director may become fully exercisable, subject to reasonable conditions such as continued employment, at any time or during any period established by the Company.
6.4 Exercise Price. The Exercise Price of an Option will be determined by the Committee when the Option is granted and may be not less than 85% of the Fair Market Value of the Shares on the date of grant; provided that: (a) the Exercise Price of an ISO will be not less than 100% of the Fair Market Value of the Shares on the date of grant; and (b) the Exercise Price of any Option granted to a Ten Percent Stockholder will not be less than 110% of the Fair Market Value of the Shares on the date of grant. Payment for the Shares purchased may be made in accordance with Section 9 of this Plan.
6.5 Method of Exercise. Options may be exercised only by delivery to the Company of a written stock option exercise agreement (the "Exercise Agreement") in a form approved by the Committee, (which need not be the same for each Participant), stating the number of Shares being purchased, the restrictions imposed on the Shares purchased under such Exercise Agreement, if any, and such representations and agreements regarding the Participant's investment intent and access to information and other matters, if any, as may be required or desirable by the Company to comply with applicable securities laws, together with payment in full of the Exercise Price for the number of Shares being purchased.
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6.6 Termination. Notwithstanding the exercise periods set forth in the Stock Option Agreement, exercise of an Option will always be subject to the following:
(a) If the Participant's service is Terminated for any reason except death or Disability, then the Participant may exercise such Participant's Options only to the extent that such Options would have been exercisable upon the Termination Date no later than three (3) months after the Termination Date (or such longer time period not exceeding five (5) years as may be determined by the Committee, with any exercise beyond three (3) months after the Termination Date deemed to be an NQSO).
(b) If the Participant's service is Terminated because of the Participant's death or Disability (or the Participant dies within three (3) months after a Termination other than for Cause or because of Participant's Disability), then the Participant's Options may be exercised only to the extent that such Options would have been exercisable by the Participant on the Termination Date and must be exercised by the Participant (or the Participant's legal representative) no later than twelve (12) months after the Termination Date (or such longer time period not exceeding five (5) years as may be determined by the Committee, with any such exercise beyond (i) three (3) months after the Termination Date when the Termination is for any reason other than the Participant's death or Disability, or (ii) twelve (12) months after the Termination Date when the Termination is for Participant's death or Disability, deemed to be an NQSO).
(c) Notwithstanding the provisions in paragraph 6.6(a) above, if the Participant's service is Terminated for Cause, neither the Participant, the Participant's estate nor such other person who may then hold the Option shall be entitled to exercise any Option with respect to any Shares whatsoever, after Termination, whether or not after Termination the Participant may receive payment from the Company or a Subsidiary for vacation pay, for services rendered prior to Termination, for services rendered for the day on which Termination occurs, for salary in lieu of notice, or for any other benefits. For the purpose of this paragraph, Termination shall be deemed to occur on the date when the Company dispatches notice or advice to the Participant that his service is Terminated.
6.7 Limitations on Exercise. The Committee may specify a reasonable minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum number will not prevent the Participant from exercising the Option for the full number of Shares for which it is then exercisable.
6.8 Limitations on ISO. The aggregate Fair Market Value (determined as of the date of grant) of Shares with respect to which ISO are exercisable for the first time by a Participant during any calendar year (under this Plan or under any other incentive stock option plan of the Company, Parent or Subsidiary of the Company) will not exceed $100,000. If the Fair Market Value of Shares on the date of grant with respect to which ISO are exercisable for the first time by a Participant during any calendar year exceeds $100,000, then the Options for the first $100,000 worth of Shares to become exercisable in such calendar year will be ISO and the Options for the amount in excess of $100,000 that become exercisable in that calendar year will be NQSOs. In the event that the Code or the regulations promulgated thereunder are amended after the Effective Date of this Plan to provide for a different limit on the Fair Market Value of Shares permitted to be subject to ISO, such different limit will be automatically incorporated herein and will apply to any Options granted after the effective date of such amendment.
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6.9 Modification, Extension or Renewal. The Committee may modify, extend or renew outstanding Options and authorize the grant of new Options in substitution therefore, provided that any such action may not, without the written consent of a Participant, impair any of such Participant's rights under any Option previously granted. Any outstanding ISO that is modified, extended, renewed or otherwise altered will be treated in accordance with Section 424(h) of the Code. The Committee may reduce the Exercise Price of outstanding Options without the consent of Participants affected by a written notice to them; provided, however, that the Exercise Price may not be reduced below the minimum Exercise Price that would be permitted under Section 6.4 of this Plan for Options granted on the date the action is taken to reduce the Exercise Price.
6.10 No Disqualification. Notwithstanding any other provision in this Plan, no term of this Plan relating to ISO will be interpreted, amended or altered, nor will any discretion or authority granted under this Plan be exercised, so as to disqualify this Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any ISO under Section 422 of the Code.
7. STOCK AWARD.
A Stock Award is an offer by the Company to sell to an eligible person Shares that may or may not be subject to restrictions. The Committee will determine to whom an offer will be made, the number of Shares the person may purchase, the price to be paid (the "Purchase Price"), the restrictions to which the Shares will be subject, if any, and all other terms and conditions of the Stock Award, subject to the following:
7.1 Form of Stock Award. All purchases under a Stock Award made pursuant to this Plan will be evidenced by an Award Agreement (the "Stock Purchase Agreement") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. The offer of a Stock Award will be accepted by the Participant's execution and delivery of the Stock Purchase Agreement (or similar agreement) and payment for the Shares to the Company in accordance with the Stock Purchase Agreement.
7.2 Purchase Price. The Purchase Price of Shares sold pursuant to a Stock Award will be determined by the Committee on the date the Stock Award is granted and may not be less than 85% of the Fair Market Value of the Shares on the grant date, except in the case of a sale to a Ten Percent Stockholder, in which case the Purchase Price will be 100% of the Fair Market Value. Payment of the Purchase Price must be made in accordance with Section 9 of this Plan.
7.3 Terms of Stock Awards. Stock Awards may be subject to such restrictions as the Committee may impose. These restrictions may be based upon completion of a specified number of years of service with the Company or upon completion of the performance goals as set out in advance in the Participant's individual Stock Purchase Agreement. Stock Awards may vary from Participant to Participant and between groups of Participants. Prior to the grant of a Stock Award subject to restrictions, the Committee shall: (a) determine the nature, length and starting date of any Performance Period for the Stock Award; (b) select from among the Performance Factors to be used to measure performance goals, if any; and (c) determine the number of Shares that may be awarded to the
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Participant. Prior to the transfer of any Stock Award, the Committee shall determine the extent to which such Stock Award has been earned. Performance Periods may overlap and Participants may participate simultaneously with respect to Stock Awards that are subject to different Performance Periods and have different performance goals and other criteria.
7.4 Termination During Performance Period. If a Participant is Terminated during a Performance Period for any reason, then such Participant will be entitled to payment (whether in Shares, cash or otherwise) with respect to the Stock Award only to the extent earned as of the date of Termination in accordance with the Stock Purchase Agreement, unless the Committee determines otherwise.
8. STOCK BONUSES.
8.1 Awards of Stock Bonuses. A Stock Bonus is an award of Shares for extraordinary services rendered to the Company or any Parent or Subsidiary of the Company. A Stock Bonus will be awarded pursuant to an Award Agreement (the "Stock Bonus Agreement") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. A Stock Bonus may be awarded upon satisfaction of such performance goals as are set out in advance in the Participant's individual Award Agreement (the "Performance Stock Bonus Agreement") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. Stock Bonuses may vary from Participant to Participant and between groups of Participants, and may be based upon the achievement of the Company, Parent or Subsidiary and/or individual performance factors or upon such other criteria as the Committee may determine.
8.2 Terms of Stock Bonuses. The Committee will determine the number of Shares to be awarded to the Participant. If the Stock Bonus is being earned upon the satisfaction of performance goals pursuant to a Performance Stock Bonus Agreement, then the Committee will: (a) determine the nature, length and starting date of any Performance Period for each Stock Bonus; (b) select from among the Performance Factors to be used to measure the performance, if any; and
(c) determine the number of Shares that may be awarded to the Participant. Prior to the payment of any Stock Bonus, the Committee shall determine the extent to which such Stock Bonuses have been earned. Performance Periods may overlap and Participants may participate simultaneously with respect to Stock Bonuses that are subject to different Performance Periods and different performance goals and other criteria. The number of Shares may be fixed or may vary in accordance with such performance goals and criteria as may be determined by the Committee. The Committee may adjust the performance goals applicable to the Stock Bonuses to take into account changes in law and accounting or tax rules and to make such adjustments as the Committee deems necessary or appropriate to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships.
8.3 Form of Payment. The earned portion of a Stock Bonus may be paid to the Participant by the Company either currently or on a deferred basis, with such interest or dividend equivalent, if any, as the Committee may determine. Payment of an interest or dividend equivalent (if any) may be made in the form of cash or whole Shares or a combination thereof, either in a lump sum payment or in installments, all as the Committee will determine.
9. PAYMENT FOR SHARE PURCHASES.
Payment for Shares purchased pursuant to this Plan may be made in cash (by check) or, where expressly approved for the Participant by the Committee and where permitted by law:
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(a) by cancellation of indebtedness of the Company to the Participant;
(b) by surrender of shares that either: (1) have been owned by the Participant for more than six (6) months and have been paid for within the meaning of SEC Rule 144; or (2) were obtained by the Participant in the public market;
(c) by waiver of compensation due or accrued to the Participant for services rendered;
(d) with respect only to purchases upon exercise of an Option, and provided that a public market for the Company's stock exists:
(1) through a "same day sale" commitment from the Participant and a broker-dealer that is a member of the National Association of Securities Dealers (an "NASD Dealer") whereby the Participant irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or
(2) through a "margin" commitment from the Participant and a NASD Dealer whereby the Participant irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or
(e) by any combination of the foregoing.
10. WITHHOLDING TAXES.
10.1 Withholding Generally. Whenever Shares are to be issued in satisfaction of Awards granted under this Plan, the Company may require the Participant to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such Shares. Whenever, under this Plan, payments in satisfaction of Awards are to be made in cash, such payment will be net of an amount sufficient to satisfy federal, state, and local withholding tax requirements.
10.2 Stock Withholding. When, under applicable tax laws, a participant incurs tax liability in connection with the exercise or vesting of any Award that is subject to tax withholding and the Participant is obligated to pay the Company the amount required to be withheld, the Committee may allow the Participant to satisfy the minimum withholding tax obligation by electing to have the Company withhold from the Shares to be issued that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld, determined on the date that the amount of tax to be withheld is to be determined. All elections by a Participant to have Shares withheld for this purpose will be made in accordance with the requirements established by the Committee and will be in writing in a form acceptable to the Committee.
11. PRIVILEGES OF STOCK OWNERSHIP.
11.1 Voting and Dividends. No Participant will have any of the rights of a stockholder with respect to any Shares until the Shares are issued to the Participant. After Shares are issued to the Participant, the Participant will be a stockholder and will have all the rights of a stockholder with respect to such
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Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares; provided, that if such Shares are issued pursuant to a Stock Award with restrictions, then any new, additional or different securities the Participant may become entitled to receive with respect to such Shares by virtue of a stock dividend, stock split or any other change in the corporate or capital structure of the Company will be subject to the same restrictions as the Stock Award; provided, further, that the Participant will have no right to retain such stock dividends or stock distributions with respect to Shares that are repurchased at the Participant's Purchase Price or Exercise Price pursuant to Section 13.
11.2 Financial Statements. The Company will provide financial statements to each Participant prior to such Participant's purchase of Shares under this Plan, and to each Participant annually during the period such Participant has Awards outstanding; provided, however, the Company will not be required to provide such financial statements to Participants whose services in connection with the Company assure them access to equivalent information.
12. NON-TRANSFERABILITY.
Awards of Shares granted under this Plan, and any interest therein, will not be transferable or assignable by the Participant, and may not be made subject to execution, attachment or similar process, other than by will or by the laws of descent and distribution. Awards of Options granted under this Plan, and any interest therein, will not be transferable or assignable by the Participant, and may not be made subject to execution, attachment or similar process, other than by will or by the laws of descent and distribution, by instrument to an inter vivos or testamentary trust in which the options are to be passed to beneficiaries upon the death of the trustor, or by gift to "immediate family" as that term is defined in 17 C.F.R. 240.16a-1(e). During the lifetime of the Participant an Award will be exercisable only by the Participant. During the lifetime of the Participant, any elections with respect to an Award may be made only by the Participant unless otherwise determined by the Committee and set forth in the Award Agreement with respect to Awards that are not ISOs.
13. REPURCHASE RIGHTS.
At the discretion of the Committee, the Company may reserve to itself and/or its assignee(s) in the Award Agreement a right to repurchase a portion of or all of the unvested Shares held by a Participant following such Participant's Termination Date. Such repurchase by the Company shall be for cash and/or cancellation of purchase money indebtedness and the price per share shall be the Participant's Exercise Price or Purchase Price, as applicable.
14. CERTIFICATES.
All certificates for Shares or other securities delivered under this Plan will be subject to such stop transfer orders, legends and other restrictions as the Committee may deem necessary or advisable, including restrictions under any applicable federal, state or foreign securities law, or any rules, regulations and other requirements of the SEC or any stock exchange or automated quotation system upon which the Shares may be listed or quoted.
15. ESCROW; PLEDGE OF SHARES.
To enforce any restrictions on a Participant's Shares, the Committee may require the Participant to deposit all certificates representing Shares, together with stock powers or other instruments of transfer approved by the
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Committee appropriately endorsed in blank, with the Company or an agent designated by the Company to hold in escrow until such restrictions have lapsed or terminated, and the Committee may cause a legend or legends referencing such restrictions to be placed on the certificates.
16. EXCHANGE AND BUYOUT OF AWARDS.
The Committee may, at any time or from time to time, authorize the Company, with the consent of the respective Participants, to issue new Awards in exchange for the surrender and cancellation of any or all outstanding Awards. The Committee may at any time buy from a Participant an Award previously granted with payment in cash, Shares or other consideration, based on such terms and conditions as the Committee and the Participant may agree.
17. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE.
An Award will not be effective unless such Award is in compliance with all applicable federal and state securities laws, rules and regulations of any governmental body, and the requirements of any stock exchange or automated quotation system upon which the Shares may then be listed or quoted, as they are in effect on the date of grant of the Award and also on the date of exercise or other issuance. Notwithstanding any other provision in this Plan, the Company will have no obligation to issue or deliver certificates for Shares under this Plan prior to: (a) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable; and/or (b) completion of any registration or other qualification of such Shares under any state or federal law or ruling of any governmental body that the Company determines to be necessary or advisable. The Company will be under no obligation to register the Shares with the SEC or to effect compliance with the registration, qualification or listing requirements of any state securities laws, stock exchange or automated quotation system, and the Company will have no liability for any inability or failure to do so.
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18. NO OBLIGATION TO EMPLOY.
Nothing in this Plan or any Award granted under this Plan will confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Parent or Subsidiary of the Company or limit in any way the right of the Company or any Parent or Subsidiary of the Company to terminate Participant's employment or other relationship at any time, with or without cause.
19. CORPORATE TRANSACTIONS.
19.1 Assumption or Replacement of Awards by Successor. In the event of (a) a dissolution or liquidation of the Company, (b) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the stockholders of the Company or their relative stock holdings and the Awards granted under this Plan are assumed, converted or replaced by the successor corporation, which assumption will be binding on all Participants), (c) a merger in which the Company is the surviving corporation but after which the stockholders of the Company immediately prior to such merger (other than any stockholder that merges, or which owns or controls another corporation that merges, with the Company in such merger) cease to own their shares or other equity interest in the Company, (d) the sale of substantially all of the assets of the Company, or (e) the acquisition, sale, or transfer of more than 50% of the outstanding shares of the Company by tender offer or similar transaction, any or all outstanding Awards may be assumed, converted or replaced by the successor corporation (if any), which assumption, conversion or replacement will be binding on all Participants. In the alternative, the successor corporation may substitute equivalent Awards or provide substantially similar consideration to Participants as was provided to stockholders (after taking into account the existing provisions of the Awards). The successor corporation may also issue, in place of outstanding Shares of the Company held by the Participant, substantially similar shares or other property subject to repurchase restrictions no less favorable to the Participant. In the event such successor corporation (if any) refuses to assume or substitute Awards, as provided above, pursuant to a transaction described in this Subsection 19.1, (i) the vesting of any or all Awards granted pursuant to this Plan will accelerate upon a transaction described in this Section 19 and (ii) any or all Options granted pursuant to this Plan will become exercisable in full prior to the consummation of such event at such time and on such conditions as the Committee determines. If such Options are not exercised prior to the consummation of the corporate transaction, they shall terminate at such time as determined by the Committee.
19.2 Other Treatment of Awards. Subject to any greater rights granted to Participants under the foregoing provisions of this Section 19, in the event of the occurrence of any transaction described in Section 19.1, any outstanding Awards will be treated as provided in the applicable agreement or plan of merger, consolidation, dissolution, liquidation, or sale of assets.
19.3 Assumption of Awards by the Company. The Company, from time to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either;
(a) granting an Award under this Plan in substitution of such other company's award; or (b) assuming such award as if it had been granted under this Plan if the terms of such assumed award could be applied to an Award granted under this Plan. Such substitution or assumption will be permissible if the holder of the substituted or assumed award would have been eligible to be granted an Award under this Plan if the other company had applied the rules of
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this Plan to such grant. In the event the Company assumes an award granted by another company, the terms and conditions of such award will remain unchanged (except that the exercise price and the number and nature of Shares issuable upon exercise of any such option will be adjusted appropriately pursuant to
Section 424(a) of the Code). In the event the Company elects to grant a new Option rather than assuming an existing option, such new Option may be granted with a similarly adjusted Exercise Price.
20. ADOPTION AND STOCKHOLDER APPROVAL.
This Plan will become effective on the date on which it is adopted by the Board (the "Effective Date"). Upon the Effective Date, the Committee may grant Awards pursuant to this Plan. The Company intends to seek stockholder approval of the Plan within twelve (12) months after the date this Plan is adopted by the Board; provided, however, if the Company fails to obtain stockholder approval of the Plan during such 12-month period, pursuant to Section 422 of the Code, any Option granted as an ISO at any time under the Plan will not qualify as an ISO within the meaning of the Code and will be deemed to be an NQSO.
21. TERM OF PLAN/GOVERNING LAW.
Unless earlier terminated as provided herein, this Plan will terminate ten (10) years from the date this Plan is adopted by the Board or, if earlier, the date of stockholder approval. This Plan and all agreements thereunder shall be governed by and construed in accordance with the laws of the State of California.
22. AMENDMENT OR TERMINATION OF PLAN.
The Board may at any time terminate or amend this Plan in any respect, including without limitation amendment of any form of Award Agreement or instrument to be executed pursuant to this Plan; provided, however, that the Board will not, without the approval of the stockholders of the Company, amend this Plan in any manner that requires such stockholder approval.
23. NONEXCLUSIVITY OF THE PLAN.
Neither the adoption of this Plan by the Board, the submission of this Plan to the stockholders of the Company for approval, nor any provision of this Plan will be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of stock options and bonuses otherwise than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases.
24. ACTION BY COMMITTEE.
Any action permitted or required to be taken by the Committee or any decision or determination permitted or required to be made by the Committee pursuant to this Plan shall be taken or made in the Committee's sole and absolute discretion.
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EXHIBIT 5.1
SICHENZIA ROSS FRIEDMAN FERENCE LLP
1065 AVENUE OF THE AMERICAS
NEW YORK, NY 10018
TEL 212 930 9700 FAX 212 930 9725
WWW.SRFF.COM
April 27, 2006
VIA ELECTRONIC TRANSMISSION
Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549
Re: Addison-Davis Diagnostics, Inc.
Ladies and Gentlemen:
We refer to the registration statement on Form S-8 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Act"), filed by Addison-Davis Diagnostics, Inc., a Delaware corporation (the "Company"), with the Securities and Exchange Commission on April 27, 2006.
We have examined the originals, photocopies, certified copies or other evidence of such records of the Company, certificates of officers of the Company and public officials, and other documents as we have deemed relevant and necessary as a basis for the opinion hereinafter expressed. In such examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as certified copies or photocopies and the authenticity of the originals of such latter documents.
Based on our examination mentioned above, we are of the opinion that the securities being registered to be sold pursuant to the Registration Statement are duly authorized and will be, when sold in the manner described in the Registration Statement, legally and validly issued, and fully paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement. In giving the foregoing consent, we do not hereby admit that we are in the category of persons whose consent is required under Section 7 of the Act, or the rules and regulations of the Securities and Exchange Commission.
Very truly yours,
/s/ Sichenzia Ross Friedman Ference LLP
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Sichenzia Ross Friedman Ference LLP
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EXHIBIT 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in this Registration Statement of Addison-Davis Diagnostics, Inc. (the "Company") on Form S-8 of our report dated August 19, 2004, on the consolidated financial statements of the Company (formerly known as QT 5, Inc.) for the year ended June 30, 2004, which report is included in the Company's annual report on Form 10-KSB for the year ended September 30, 2005, as filed with the Securities and Exchange Commission on November 14, 2005.
CORBIN & COMPANY, LLP
Irvine, California
April 25, 2006
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EXHIBIT 23.3
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The firm of Armando C. Ibarra, Certified Public Accountants, apc consents to the inclusion of our report dated September 8, 2005, on the audited financial statements of Addison-Davis Diagnostics, Inc., as of June 30, 2005, in any filings that are necessary now or in the near future with the U.S. Securities and Exchange Commission.
/s/ Armando C. Ibarra, CPA
Chula Vista, California 91910
April 25, 2006
So Os is at least 1.2M + 150K +
Current Capital Change
shs decreased by 1 for 175 split
Pay Date: Apr 18, 2006
http://pinksheets.com/edgar/GetFilingHtml?FilingID=4368388
http://pinksheets.com/edgar/GetFilingHtml?FilingID=4504953
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-134667
ADDISON-DAVIS DIAGNOSTICS, INC.
8,575,000 SHARES OF COMMON STOCK
This prospectus covers the resale by selling shareholders of up to 8,575,000 shares of our common stock, $0.001 par value. The selling shareholders are offering:
o up to 7,975,000 shares of common stock underlying our Original Issue Discount Secured Convertible Notes, of which an aggregate of 3,475,000 shares of common stock are being registered for the remaining, unconverted $685,295 principal amount of such notes issued in September 2005 and up to 4,500,000 shares of common stock are being registered for the $360,000 principal amount of such notes issued in April 2006. The Original Issue Discount Secured Convertible Notes are convertible into shares of common stock at the lower of (i) $0.07 or
(ii) 65% of the average of the three lowest intra-day trading prices for our common stock for the 20 trading days prior to, but not including, the conversion date;
o 600,000 shares of common stock underlying warrants issued to certain of the selling stockholders pursuant to our April 2006 Subscription Agreement. The warrants are exercisable into common stock at price equal to $0.07.
These securities are more fully described in the section of this prospectus titled "Description of Securities to be Registered".
The selling shareholders will sell in accordance with the terms described in the section of this prospectus titled "Plan of Distribution". We will not receive any of the proceeds from the sale of the shares by the selling shareholders. However, we will receive the sale price of any common stock we sell to the selling stockholder upon exercise of the warrants in the amount up to $42,000. We expect to use the proceeds received from the exercise of the warrants, if any, for general working capital purposes.
Our common stock is listed on the Over-The-Counter Bulletin Board. Our trading symbol is "ADSD." The last reported sales price per share of our common stock as reported by the Over-The-Counter Bulletin Board on June 1, 2006, was $.09.
AN INVESTMENT IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE OUR SECURITIES ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE "RISK FACTORS" BEGINNING AT PAGE 6.
The date of this prospectus is July 11, 2006
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ADDISON-DAVIS DIAGNOSTICS, INC.
TABLE OF CONTENTS
Page No.
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Prospectus Summary 5
Risk Factors 6
Description of Securities to be Registered 11
Selling Shareholders 11
Plan of Distribution 15
Use of Proceeds 16
Market for Common Equity and Related Shareholder Matters 16
Directors, Executive Officers, Promoters and Control Persons 18
Executive Compensation 19
Security Ownership of Certain Beneficial Owners and Management 20
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities 21
Certain Relationship and Related Transactions 22
Organization 23
Our Business 23
Description of Property 25
Legal Proceedings 25
Management's Discussion and Analysis of Financial Condition
and Results of Operations 26
Experts 31
Financial Statements F-1 through F-38
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS IMPORTANT INFORMATION ABOUT OUR BUSINESS AND ABOUT THIS OFFERING. BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL THE INFORMATION YOU SHOULD CONSIDER BEFORE INVESTING IN OUR SECURITIES. PLEASE READ THE ENTIRE PROSPECTUS.
ADDISON-DAVIS DIAGNOSTICS, INC.
We are currently the owner of a patent-pending and FDA 510(K) cleared urine specimen rapid drug screening test for drugs-of-abuse called Drug Stop, which we have sold in limited quantities and are preparing to market through wider distribution channels including the grant of a license for over-the-counter sale upon which we will receive a royalty for each unit sold. We had also test-marketed a licensed FDA 510(K) cleared product called EZ F.O.B.T., a fecal occult quick-test for unseen blood in the stool to detect early signs which may lead to colon cancer and other intestinal diseases, however based upon unfavorable results of test-marketing from our distributor we have ceased the marketing effort of EZ F.O.B.T. Outright ownership of our self-regulating urine specimen quick-test for drugs of abuse Drug Stop product results in the addition of a valuable asset that is currently revenue producing, in addition to adding licensed products that are immediately marketable without additional cost is, in management's opinion, the direction which we should pursue.
We also believe that it is in our company's and our shareholder's best interests to license the Drug Stop product for sale and distribution to the over-the-counter (OTC) market because we cannot afford the financial burden of ongoing costs associated with the branding, manufacture, marketing, sale and distribution of such product to the over-the-counter (OTC) market, which we believe could be a major market.
Therefore, in November 2005, we granted an exclusive worldwide License of Intellectual Property ("License") to brand develop, manage, provide sales strategy, manufacture and to sell and distribute our Drug Stop drug-test product for over-the -counter sales. The License shall remain in full force and effect for a period of 5 years and shall automatically be extended for an additional 5 year period so long as neither party causes a termination of the License pursuant to its terms. As consideration for granting the License, we shall receive a royalty equal to 7.5% of the gross revenues derived from sales of the Drug Stop product sold over-the-counter in stores, calling centers, Internet or other over-the-counter means during the term of the License.
In order to contain overhead and eliminate certain distribution costs, we have entered into sales representative and distribution agreements for institutional sales of Drug Stop and to sell and distribute Drug Stop to Federal agencies nationwide.
Management is seeking to license other quick-test biomedical products that do not require significant development costs. Management recognizes that we must generate some additional resources to fund overhead until the eventual achievement of sufficient revenue leading to sustained profitable operations. However, no assurance can be given that debt or equity financing will be available to us on satisfactory terms. Our success is dependent upon numerous items, including further product licensing and successful and effective sales strategies and management believes that revenues generated by these products will lead to future profitability.
For the three months ended March 31, 2006 and 2005, we generated revenue in the amount of $0 and $1,940, respectively, and a net loss of $565,130 and $1,002,707, respectively. For the years ended June 30, 2005 and 2004, we generated revenue in the amount of $5,176 and $192,109 respectively, and a net loss of $3,617,527 and $7,161,005, respectively. As a result of our substantial need for working capital and other factors, our auditors in their report dated September 8, 2005, have expressed substantial doubt about our ability to continue as going concern.
HOW TO CONTACT US
We maintain our principal offices at 143 Triunfo Canyon Road, Suite 104 Westlake Village, CA 91361. Our telephone number at that address is (805)-494-7838 and our facsimile number is 805-494-3213.
THE OFFERING
We are registering 8,575,000 shares of our common stock for sale by the shareholders identified in the section of this prospectus titled "Selling Shareholders". The shares have not yet been, but that may be, issued to designated selling shareholders upon the conversion of our Secured Convertible Original Issue Discount Notes, and/or the exercise of warrants. Information regarding the notes and the warrants is included in the section of this prospectus titled "Description of Securities Being Registered".
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RISK FACTORS
AN INVESTMENT IN OUR SECURITIES IS VERY SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, ALONG WITH THE OTHER MATTERS REFERRED TO IN THIS PROSPECTUS, BEFORE YOU DECIDE TO BUY OUR SECURITIES. IF YOU DECIDE TO BUY OUR SECURITIES, YOU SHOULD BE ABLE TO AFFORD A COMPLETE LOSS OF YOUR INVESTMENT.
RISKS ASSOCIATED WITH OUR BUSINESS
WE ARE A RECENTLY FORMED BUSINESS WITH VERY LITTLE OPERATING HISTORY THEREFORE YOU HAVE NO BASIS ON WHICH TO DETERMINE IF WE CAN BE SUCCESSFUL.
We have a very short history of operations, and we are in the early stages of marketing and selling Drug Stop, currently our only product, which has generated little revenue to date. Although we anticipate significant revenue, we are not certain that Drug Stop or new products, if any, will generate significant or any revenue at all. During the year ended June 30, 2005, we incurred a net loss of $3,617,527 and had only $5,176 of revenues. For the nine months ended March 31, 2006 and 2005, we incurred a net loss of $2,780,375 and $3,194,078, respectively, and had only zero and $1,977 in revenues, respectively. Because we have a short operating history, you will have no basis upon which to accurately forecast our future operations, including sales, or to judge our ability to develop our business. If you purchase our securities, you may lose your entire investment.
BECAUSE WE HAVE EARNED VERY LITTLE IN REVENUES, THE SUCCESS OF OUR BUSINESS REQUIRES CONTINUED FUNDING. IF WE CANNOT RAISE THE MONEY WE NEED TO SUPPORT OUR OPERATIONS UNTIL WE EARN SIGNIFICANT REVENUES, WE MAY BE REQUIRED TO CURTAIL OR TO CEASE OUR OPERATIONS AND YOU COULD LOSE YOUR ENTIRE INVESTMENT.
Our independent registered public accounting firm included an explanatory paragraph in their report on our financial statements set forth in this report stating that because of our significant losses and our working capital deficit there is substantial doubt that we can continue as a going concern. Our ability to develop our business depends upon our receipt of funds to continue our operations while we introduce our Drug Stop product and new products, if any, and they are accepted in the market. If this funding is not received as needed, it is unlikely that we could continue our business, in which case you would lose your entire investment.
During the fiscal year ended June 30, 2005 and for the nine month period ended March 31, 2006, management successfully obtained additional capital through sales and issuance of convertible notes from which we received net proceeds of $1,300,000 and $960,000, respectively. However, we cannot assure you that the proceeds received from the sale and issuance of convertible notes will provide all the additional capital necessary for us to become profitable.
During the next 6 months, if we fail to earn revenues in an amount sufficient to fund our operations, we will have to raise capital through an additional offering of our securities or from additional loans. We cannot guarantee that financing will be available to us, on acceptable terms or at all. If we do not earn revenues sufficient to support our business and we fail to obtain other financing, either through an offering of our securities or by obtaining additional loans, we may be unable to maintain our operations.
If we are unable to obtain additional financing if needed, we may be required to curtail the manufacturing and marketing of our product and possibly cease our operations.
WE ARE SUBJECT TO THE RISKS AND UNCERTAINTIES INHERENT IN NEW BUSINESSES. IF WE FAIL TO ACCURATELY FORECAST OUR CAPITAL NEEDS OR IF OUR PRODUCT DOES NOT EARN SIGNIFICANT REVENUES OUR BUSINESS COULD FAIL AND YOU COULD LOSE YOUR ENTIRE INVESTMENT.
The risks and uncertainties inherent in new businesses include the following:
o Our projected capital needs may be inaccurate, and we may not have enough money to develop our business and bring our products to market as we planned;
o We may experience unanticipated development or marketing expenses, which may make it more difficult to develop our business and bring our products to market; and
o Even if we are able to develop our products and bring them to market, we may not earn enough revenues from the sales of our products to cover the costs of operating our business.
If we are unsuccessful in our efforts to develop our business and if the product we provide does not produce revenues as we project, we are not likely to ever become profitable and we may be required to curtail some or all of our operations. If that happened you could lose your entire investment.
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WE CANNOT ASSURE YOU THAT WE WILL BE SUCCESSFUL IN DEVELOPING AND COMMERCIALIZING OUR NEW PRODUCTS AND/OR OTHER PRODUCTS.
Our ability to successfully acquire or develop any additional products is uncertain. Potential new products may require additional research, development, testing, regulatory approval and additional investment prior to their commercialization, which may not be successful. There can be no assurance that we can develop commercially successful products.
WE COULD BE SUBJECT TO PRODUCT LIABILITY CLAIMS. IF WE ARE REQUIRED TO PAY A CLAIM, OUR BUSINESS AND FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED AND YOUR INVESTMENT MAY DECLINE IN VALUE.
Liability might result from claims made by customers who purchase our products. Although we have received a quote from our insurance broker for product liability insurance, we presently do not carry such insurance since our sales to date are insignificant. We can give no assurance that such insurance will be available when we need it at a reasonable cost or that any insurance policy would be sufficient to meet any liability arising as a result of a claim. The obligation to pay any product liability claim could have a material adverse effect on our business and financial condition.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR PATENTS OR OTHER INTELLECTUAL
PROPERTY OR WE COULD BECOME INVOLVED IN LITIGATION WITH OTHERS REGARDING OUR INTELLECTUAL PROPERTY. EITHER OF THESE EVENTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
We rely on a combination of patent laws, nondisclosure, trade secret and other contractual and technical measures to protect our proprietary rights in our product. However, we cannot assure you that these provisions will be adequate to protect our proprietary rights. In addition, the laws of certain foreign countries do not protect intellectual property rights to the same extent as the laws of the United States.
Although we believe that our intellectual property does not infringe upon the proprietary rights of third parties, others may claim that we have infringed on their products.
If we were to become involved in disputes regarding the use or ownership of intellectual property rights, we could incur substantial costs in defending or prosecuting any such action and the defense or prosecution of the action would likely result in a diversion of management resources. In addition, in order to settle such an action we could be required to acquire licenses from others or to give licenses to others on terms that are not beneficial to us. Any dispute relating to our intellectual property could have a material adverse effect on our business.
OUR CURRENT PRODUCT IS REGULATED BY THE FDA AND, IN THE WORLDWIDE MARKET, GOVERNMENT AGENCIES LIKE THE FDA. WE MAY BE UNSUCCESSFUL IN OBTAINING REGULATORY APPROVALS FOR NEW PRODUCTS, EVEN THOUGH WE MAY INVEST A SIGNIFICANT AMOUNT OF TIME AND MONEY INTO SEEKING SUCH APPROVALS. IF OUR PRODUCTS DO NOT RECEIVE THE REGULATORY APPROVALS WE NEED TO SELL THEM, OUR REVENUES AND OPERATING RESULTS COULD BE ADVERSELY AFFECTED AND THE VALUE OF YOUR INVESTMENT MAY DECLINE.
The manufacture, sale, promotion and marketing of our new products, if any, may be subject to regulation by the FDA and similar government regulatory bodies in other countries.
As we develop or obtain new products, we will be required to determine what regulatory requirements, if any, are required to market and sell our products in the United States and worldwide. The process of obtaining regulatory approval could take years and be very costly, if approval can be obtained at all. If we failed to comply with such a requirement, we could be subjected to an FDA enforcement action. Such an action could take the form of a warning letter, an injunction to stop us from marketing the product at issue or a possible seizure of our assets.
We intend to work diligently to assure compliance with all applicable regulations that impact our business. We cannot assure you, however, that we will be able to obtain regulatory approval for all of our products or that, in the future, additional regulations will not be enacted which might adversely impact our operations. In either case, our revenues and operating results could be adversely effected and the value of your investment may decline.
RISKS RELATING TO OUR CURRENT FINANCING AGREEMENT
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR CONVERTIBLE DEBENTURES, AND WARRANTS THAT MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
As of May 10, 2006, we had 1,270,114 and shares of common stock issued and outstanding, respectively, and convertible debentures outstanding that may be converted into an estimated 5,725,000 shares of common stock at current market prices, and outstanding warrants to purchase 600,000 shares of common stock. In addition, the number of shares of common stock issuable upon conversion of the outstanding convertible debentures may increase if the market price of our stock declines. All of the shares, including all of the shares issuable upon conversion of the debentures and upon exercise of our warrants, may be sold without restriction. The sale of these shares may adversely affect the market price of our common stock.
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THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR CONVERTIBLE NOTES COULD REQUIRE US TO ISSUE A SUBSTANTIALLY GREATER NUMBER OF SHARES TO THE SELLING STOCKHOLDER, WHICH WILL CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS.
Our obligation to issue shares upon conversion of our convertible securities is essentially limitless. The following is an example of the amount of shares of our common stock that is issuable to the selling stockholders, upon conversion of our remaining, unconverted principal amount $685,295 convertible notes issued pursuant to our September 2005 Subscription Agreement and our principal amount $360,000 convertible notes issued pursuant to our April 2006 Subscription Agreements, based on market prices 25%, 50% and 75% below our market price on May 10, 2006 of $0.24.
% Below Price Per With Discount #of Shares % Outstanding
Market Share at 35% Issuable Stock
------- ----------- -------------- ------------ --------------
25% $0.18 $0.117 8,934,145 87.5%
50% $0.12 $0.078 13,401,217 91.3%
75% $0.06 $0.039 26,802,435 95.4%
*Based on 1,270,114 shares outstanding as of May 10, 2006
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR CONVERTIBLE NOTES MAY ENCOURAGE INVESTORS TO MAKE SHORT SALES IN OUR COMMON STOCK, WHICH COULD HAVE A DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON STOCK.
The convertible notes are convertible into shares of our common stock at a conversion price that is equal to the lesser of (i) $0.07 or (ii) the average of the lowest three (3) intra-day trading prices during the twenty (20) trading days immediately prior to the conversion date discounted by thirty-five percent (35%). The significant downward pressure on the price of the common stock as the selling stockholder converts and sells material amounts of common stock could encourage short sales by investors. This could place further downward pressure on the price of the common stock. In addition, not only the sale of shares issued upon conversion or exercise of notes, warrants and options, but also the mere perception that these sales could occur, may lower the market price of the common stock.
THE ISSUANCE OF SHARES UPON CONVERSION OF THE CONVERTIBLE DEBENTURES AND EXERCISE OF OUTSTANDING WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO OUR EXISTING STOCKHOLDERS.
The issuance of shares upon conversion of the convertible notes and exercise of warrants may result in substantial dilution to the interests of other stockholders since the selling stockholder may ultimately convert and sell the full amount issuable on conversion. Although the selling stockholder may not convert its convertible notes and/or exercise their warrants if such conversion or exercise would cause them to own more than 4.99% of our outstanding common stock, this restriction does not prevent the selling stockholder from converting and/or exercising some of their holdings and then converting the rest of their holdings. In this way, the selling stockholder could sell more than this limit while never holding more than this limit. There is no upper limit on the number of shares that may be issued which will have the effect of further diluting the proportionate equity interest and voting power of holders of our common stock, including investors in this offering.
IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING SECURED CONVERTIBLE NOTES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE, OR RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE SECURED CONVERTIBLE NOTES, IF REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE OF SUBSTANTIAL ASSETS.
The secured convertible notes in the principal amount of $360,000 issued under our April 2006 Subscription Agreement and the remaining unconverted principal amount of $685,295 issued under our September 2005 Subscription Agreement due and payable two years from the date of issuance, unless sooner converted into shares of our common stock. Any event of default such as our failure to repay the principal when due, our failure to issue shares of common stock upon conversion by the holder, our failure to timely file a registration statement or have such registration statement declared effective, breach of any covenant, representation or warranty in the Subscription Agreement or related convertible note, the assignment or appointment of a receiver to control a substantial part of our property or business, the filing of a money judgment, writ or similar process against our company in excess of $50,000, the commencement of a bankruptcy, insolvency, reorganization or liquidation proceeding against our company and the delisting of our common stock could require the early repayment of the secured convertible notes, including a default interest rate of 15% on the outstanding principal balance of the notes if the default is not cured with the specified grace period. We anticipate that the full amount of the secured convertible notes will be converted into shares of our common stock, in accordance with the terms of the secured convertible notes. If we were required to repay the secured convertible notes, we would be required to use our limited working capital and raise additional funds. If we were unable to repay the notes when required, the note holders could commence legal action against us and foreclose on all of our assets to recover the amounts due. Any such action would require us to curtail or cease operations.
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IF AN EVENT OF DEFAULT OCCURS UNDER THE SUBSCRIPTION AGREEMENT, SECURED CONVERTIBLE NOTES, WARRANTS, OR SECURITY AGREEMENT, THE INVESTORS COULD TAKE POSSESSION OF ALL OUR GOODS, INVENTORY, CONTRACTUAL RIGHTS AND GENERAL INTANGIBLES, RECEIVABLES, DOCUMENTS, INSTRUMENTS, CHATTEL PAPER, AND INTELLECTUAL PROPERTY.
In connection with the Subscription Agreements we entered into in September 2005 and April 2006, we executed Security Agreements in favor of the investors granting them a second priority security interest in all of our goods, inventory, contractual rights and general intangibles, receivables, documents, instruments, chattel paper, and intellectual property. The Security Agreements state that if an even of default occurs under the Subscription Agreement, Secured Convertible Notes, Warrants or Security Agreements, the investors have the right to take possession of the collateral, to operate our business using the collateral, and have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the collateral, at public or private sale or otherwise to satisfy our obligations under these agreements.
RISKS ASSOCIATED WITH OWNERSHIP OF OUR COMMON STOCK
WE HAVE NOT PAID CASH DIVIDENDS AND IT IS UNLIKELY THAT WE WILL PAY CASH DIVIDENDS IN THE FORESEEABLE FUTURE.
We plan to use all of our earnings, to the extent we have earnings, to fund our operations. We do not plan to pay any cash dividends in the foreseeable future. We cannot guarantee that we will, at any time, generate sufficient surplus cash that would be available for distribution as a dividend to the holders of our Common Stock. You should not expect to receive cash dividends on our Common Stock.
WE MAY RAISE ADDITIONAL CAPITAL THROUGH A SECURITIES OFFERING THAT COULD DILUTE YOUR OWNERSHIP INTEREST.
We require substantial working capital to fund our business. If we raise additional funds through the issuance of equity, equity-related or convertible debt securities, those securities may have rights, preferences or privileges senior to those of the holders of our Common Stock. The issuance of additional Common Stock or securities convertible into Common Stock by our management will also have the effect of further diluting the proportionate equity interest and voting power of holders of our Common Stock.
IF WE FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN THE SECONDARY MARKET.
Companies trading on the OTC Bulletin Board, such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.
WE ARE SUBJECT TO THE PENNY STOCK RULES AND THESE RULES MAY ADVERSELY EFFECT TRADING IN OUR COMMON STOCK.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
o that a broker or dealer approve a person's account for transactions in penny stocks; and
o the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the broker or dealer must:
o obtain financial information and investment experience objectives of the person; and
o make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the suitability determination; and
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o that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
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DESCRIPTION OF SECURITIES BEING REGISTERED
COMMON STOCK AND RIGHTS OF COMMON SHAREHOLDERS
The securities being offered by the selling shareholders are shares of our common stock. We are authorized by our Articles of Incorporation, as amended, to issue 2,000,000,000 shares of common stock, $0.001 par value. As of May 10, 2006, we had 1,270,114 shares of common stock issued and outstanding and approximately 500 holders of our common stock.
Holders of our common stock are entitled to one vote per share on all matters subject to shareholder vote. If the Board of Directors were to declare a dividend out of funds legally available therefore, all of the outstanding shares of common stock would be entitled to receive such dividend. We have never declared dividends and we do not intend to declare dividends in the foreseeable future. If we were liquidated or dissolved, holders of shares of our common stock would be entitled to share ratably in assets remaining after satisfaction of our liabilities. Holders of our common stock do not have cumulative voting rights.
SELLING SHAREHOLDERS
This prospectus relates to the offer and sale by the following selling stockholders of the indicated number of shares, all of which are issuable pursuant to warrants and/or convertible notes held by these selling stockholders. The number of shares set forth in the table for the selling stockholders represents an estimate of the number of shares of common stock to be offered by the selling stockholders. The actual number of shares of common stock issuable upon conversion of the notes and exercise of the related warrants is indeterminate, is subject to adjustment and could be materially less or more than such estimated number depending on factors which cannot be predicted by us at this time including, among other factors, the future market price of the common stock. The actual number of shares of common stock offered in this prospectus, and included in the registration statement of which this prospectus is a part, includes such additional number of shares of common stock as may be issued or issuable upon conversion of the notes and exercise of the related warrants by reason of any stock split, stock dividend or similar transaction involving the common stock, in accordance with Rule 416 under the Securities Act of 1933.
None of the following selling stockholders have held any position or office within our company, nor has had any other material relationship with us in the past three years, other than in connection with transactions pursuant to which the selling stockholders acquired convertible notes and warrants.
None of the following selling stockholders are broker-dealers or affiliates of broker-dealers.
The following table also sets forth the name of each person who is offering the resale of shares of common stock by this prospectus, the number of shares of common stock beneficially owned by each person, the number of shares of common stock that may be sold in this offering and the number of shares of common stock each person will own after the offering, assuming they sell all of the shares offered.
This prospectus covers the resale by selling shareholders of up to 8,575,000 shares of our common stock, $0.001 par value. The selling shareholders are offering:
o up to 7,975,000 shares of common stock underlying our Original Issue Discount Secured Convertible Notes, of which an aggregate of 3,475,000 shares of common stock are being registered for the remaining, unconverted $685,295 principal amount of such notes issued in September 2005 and up to 4,500,000 shares or common stock are being registered for the $360,000 principal amount of such notes issued in April 2006; and
o 600,000 shares of common stock underlying warrants issued to certain of the selling stockholders pursuant to our April 2006 Subscription Agreement.
As filed with the Securities and Exchange Commission on June 28, 2006
An Exhibit List can be found on page __.
Registration No. 333-134667
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1 to
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
ADDISON-DAVIS DIAGNOSTICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 2834 80-0103134
(State or Other Jurisdiction of (Primary Standard (I.R.S. Employer
Incorporation or Organization) Industrial Classification Identification No.)
Code Number)
143 Triumfo Canyon Road, Suite 104
Westlake Village, CA 91361
TELEPHONE: (805)-494-7838
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
CHARLES MISEROY, CHIEF EXECUTIVE OFFICER
143 Triunfo Canyon Road, Suite 104
Westlake Village, CA 91361
TELEPHONE: (805)-494-7838
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
COPIES OF COMMUNICATIONS TO:
DARRIN M. OCASIO, ESQ.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of Americas
New York, New York 10018
Telephone: (212) 930-9700
Telecopier: (212) 930-9725
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. |X|
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. |_|
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CALCULATION OF REGISTRATION FEE
====================================== ============== ================== =================== =================
Amount to be Proposed Proposed
Title of Each Class of Securities to Registered Maximum Offering Maximum Aggregate Amount of
be Registered (1) Price per Unit Offering Price(1) Registration Fee
-------------------------------------- -------------- ------------------ ------------------- -----------------
Common Stock, $0.001 par value 7,975,000(3) $ 0.09(2) $ 717,750 $ 76.80
-------------------------------------- -------------- ------------------ ------------------- -----------------
Common Stock, $0.001 par value 600,000(4) $ 0.07(2) $ 42,000 $ 4.49
-------------------------------------- -------------- ------------------ ------------------- -----------------
TOTAL 8,575,000 $ 759,750 $ 81.29
====================================== ============== ================== =================== =================
(1) Includes shares of our common stock, par value $0.001 per share, which may be offered pursuant to this registration statement, which shares are issuable upon conversion of convertible notes and the exercise of warrants by the selling stockholders. We are also registering such additional shares of common stock as may be issued as a result of stock-splits, stock dividends and similar transactions pursuant to Rule 416. The number of shares of common stock registered hereunder represents a good faith estimate by us of the number of shares of common stock issuable upon conversion of the convertible notes, exercise of the warrants related thereto. For purposes of estimating the number of shares of common stock to be included in this registration statement, we calculated 200% of the number of shares of our common stock issuable upon conversion of the April 2006 convertible notes, 100% of the number of shares of our common stock issuable upon conversion of the September 2005 convertible notes and 100% of the stock underlying the warrant shares. Should the conversion ratio result in our having insufficient shares, we will not rely upon Rule 416, but will file a new registration statement to cover the resale of such additional shares should that become necessary.
(2) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) and Rule 457(g) under the Securities Act of 1933, using (i) the closing price as reported on the Over-The-Counter Bulletin Board on June 1, 2006, which was $0.09; and (ii) $0.07, the exercise price of the warrants.
(3) Includes 100% of the shares underlying our remaining, unconverted principal amount $685,295 convertible notes issued pursuant to our September 2005 Subscription Agreement and 200% of the shares underlying our principal amount of $360,000 convertible notes issued pursuant to our April 2006 Subscription Agreement.
(4) Includes 100% of the shares underlying warrants issued to certain of the selling stockholders pursuant to our April 2006 Subscription Agreement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THIS PROSPECTUS IS INCLUDED IN THE REGISTRATION STATEMENT THAT WAS FILED BY ADDISON-DAVIS DIAGNOSTICS, INC., WITH THE SECURITIES AND EXCHANGE COMMISSION. THE SELLING STOCKHOLDER MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE SALE IS NOT PERMITTED.
PRELIMINARY PROSPECTUS, SUBJECT TO COMPLETION, DATED JUNE 28, 2006
ADDISON-DAVIS DIAGNOSTICS, INC.
8,575,000 SHARES OF COMMON STOCK
This prospectus covers the resale by selling shareholders of up to 8,575,000 shares of our common stock, $0.001 par value. The selling shareholders are offering:
o up to 7,975,000 shares of common stock underlying our Original Issue Discount Secured Convertible Notes, of which an aggregate of 3,475,000 shares of common stock are being registered for the remaining, unconverted $685,295 principal amount of such notes issued in September 2005 and up to 4,500,000 shares of common stock are being registered for the $360,000 principal amount of such notes issued in April 2006. The Original Issue Discount Secured Convertible Notes are convertible into shares of common stock at the lower of (i) $0.07 or
(ii) 65% of the average of the three lowest intra-day trading prices for our common stock for the 20 trading days prior to, but not including, the conversion date;
o 600,000 shares of common stock underlying warrants issued to certain of the selling stockholders pursuant to our April 2006 Subscription Agreement. The warrants are exercisable into common stock at price equal to $0.07.
These securities are more fully described in the section of this prospectus titled "Description of Securities to be Registered".
The selling shareholders will sell in accordance with the terms described in the section of this prospectus titled "Plan of Distribution". We will not receive any of the proceeds from the sale of the shares by the selling shareholders. However, we will receive the sale price of any common stock we sell to the selling stockholder upon exercise of the warrants in the amount up to $42,000. We expect to use the proceeds received from the exercise of the warrants, if any, for general working capital purposes.
Our common stock is listed on the Over-The-Counter Bulletin Board. Our trading symbol is "ADSD." The last reported sales price per share of our common stock as reported by the Over-The-Counter Bulletin Board on June 1, 2006, was $.09.
AN INVESTMENT IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE OUR SECURITIES ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE "RISK FACTORS" BEGINNING AT PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is June __, 2006
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ADDISON-DAVIS DIAGNOSTICS, INC.
TABLE OF CONTENTS
Page No.
--------
Prospectus Summary 5
Risk Factors 6
Description of Securities to be Registered 11
Selling Shareholders 11
Plan of Distribution 15
Use of Proceeds 16
Market for Common Equity and Related Shareholder Matters 16
Directors, Executive Officers, Promoters and Control Persons 18
Executive Compensation 19
Security Ownership of Certain Beneficial Owners and Management 20
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities 21
Certain Relationship and Related Transactions 22
Organization 23
Our Business 23
Description of Property 25
Legal Proceedings 25
Management's Discussion and Analysis of Financial Condition
and Results of Operations 26
Experts 31
Financial Statements F-1 through F-38
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS IMPORTANT INFORMATION ABOUT OUR BUSINESS AND ABOUT THIS OFFERING. BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL THE INFORMATION YOU SHOULD CONSIDER BEFORE INVESTING IN OUR SECURITIES. PLEASE READ THE ENTIRE PROSPECTUS.
ADDISON-DAVIS DIAGNOSTICS, INC.
We are currently the owner of a patent-pending and FDA 510(K) cleared urine specimen rapid drug screening test for drugs-of-abuse called Drug Stop, which we have sold in limited quantities and are preparing to market through wider distribution channels including the grant of a license for over-the-counter sale upon which we will receive a royalty for each unit sold. We had also test-marketed a licensed FDA 510(K) cleared product called EZ F.O.B.T., a fecal occult quick-test for unseen blood in the stool to detect early signs which may lead to colon cancer and other intestinal diseases, however based upon unfavorable results of test-marketing from our distributor we have ceased the marketing effort of EZ F.O.B.T. Outright ownership of our self-regulating urine specimen quick-test for drugs of abuse Drug Stop product results in the addition of a valuable asset that is currently revenue producing, in addition to adding licensed products that are immediately marketable without additional cost is, in management's opinion, the direction which we should pursue.
We also believe that it is in our company's and our shareholder's best interests to license the Drug Stop product for sale and distribution to the over-the-counter (OTC) market because we cannot afford the financial burden of ongoing costs associated with the branding, manufacture, marketing, sale and distribution of such product to the over-the-counter (OTC) market, which we believe could be a major market.
Therefore, in November 2005, we granted an exclusive worldwide License of Intellectual Property ("License") to brand develop, manage, provide sales strategy, manufacture and to sell and distribute our Drug Stop drug-test product for over-the -counter sales. The License shall remain in full force and effect for a period of 5 years and shall automatically be extended for an additional 5 year period so long as neither party causes a termination of the License pursuant to its terms. As consideration for granting the License, we shall receive a royalty equal to 7.5% of the gross revenues derived from sales of the Drug Stop product sold over-the-counter in stores, calling centers, Internet or other over-the-counter means during the term of the License.
In order to contain overhead and eliminate certain distribution costs, we have entered into sales representative and distribution agreements for institutional sales of Drug Stop and to sell and distribute Drug Stop to Federal agencies nationwide.
Management is seeking to license other quick-test biomedical products that do not require significant development costs. Management recognizes that we must generate some additional resources to fund overhead until the eventual achievement of sufficient revenue leading to sustained profitable operations. However, no assurance can be given that debt or equity financing will be available to us on satisfactory terms. Our success is dependent upon numerous items, including further product licensing and successful and effective sales strategies and management believes that revenues generated by these products will lead to future profitability.
For the three months ended March 31, 2006 and 2005, we generated revenue in the amount of $0 and $1,940, respectively, and a net loss of $565,130 and $1,002,707, respectively. For the years ended June 30, 2005 and 2004, we generated revenue in the amount of $5,176 and $192,109 respectively, and a net loss of $3,617,527 and $7,161,005, respectively. As a result of our substantial need for working capital and other factors, our auditors in their report dated September 8, 2005, have expressed substantial doubt about our ability to continue as going concern.
HOW TO CONTACT US
We maintain our principal offices at 143 Triunfo Canyon Road, Suite 104 Westlake Village, CA 91361. Our telephone number at that address is (805)-494-7838 and our facsimile number is 805-494-3213.
THE OFFERING
We are registering 8,575,000 shares of our common stock for sale by the shareholders identified in the section of this prospectus titled "Selling Shareholders". The shares have not yet been, but that may be, issued to designated selling shareholders upon the conversion of our Secured Convertible Original Issue Discount Notes, and/or the exercise of warrants. Information regarding the notes and the warrants is included in the section of this prospectus titled "Description of Securities Being Registered".
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RISK FACTORS
AN INVESTMENT IN OUR SECURITIES IS VERY SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, ALONG WITH THE OTHER MATTERS REFERRED TO IN THIS PROSPECTUS, BEFORE YOU DECIDE TO BUY OUR SECURITIES. IF YOU DECIDE TO BUY OUR SECURITIES, YOU SHOULD BE ABLE TO AFFORD A COMPLETE LOSS OF YOUR INVESTMENT.
RISKS ASSOCIATED WITH OUR BUSINESS
WE ARE A RECENTLY FORMED BUSINESS WITH VERY LITTLE OPERATING HISTORY THEREFORE YOU HAVE NO BASIS ON WHICH TO DETERMINE IF WE CAN BE SUCCESSFUL.
We have a very short history of operations, and we are in the early stages of marketing and selling Drug Stop, currently our only product, which has generated little revenue to date. Although we anticipate significant revenue, we are not certain that Drug Stop or new products, if any, will generate significant or any revenue at all. During the year ended June 30, 2005, we incurred a net loss of $3,617,527 and had only $5,176 of revenues. For the nine months ended March 31, 2006 and 2005, we incurred a net loss of $2,780,375 and $3,194,078, respectively, and had only zero and $1,977 in revenues, respectively. Because we have a short operating history, you will have no basis upon which to accurately forecast our future operations, including sales, or to judge our ability to develop our business. If you purchase our securities, you may lose your entire investment.
BECAUSE WE HAVE EARNED VERY LITTLE IN REVENUES, THE SUCCESS OF OUR BUSINESS REQUIRES CONTINUED FUNDING. IF WE CANNOT RAISE THE MONEY WE NEED TO SUPPORT OUR OPERATIONS UNTIL WE EARN SIGNIFICANT REVENUES, WE MAY BE REQUIRED TO CURTAIL OR TO CEASE OUR OPERATIONS AND YOU COULD LOSE YOUR ENTIRE INVESTMENT.
Our independent registered public accounting firm included an explanatory paragraph in their report on our financial statements set forth in this report stating that because of our significant losses and our working capital deficit there is substantial doubt that we can continue as a going concern. Our ability to develop our business depends upon our receipt of funds to continue our operations while we introduce our Drug Stop product and new products, if any, and they are accepted in the market. If this funding is not received as needed, it is unlikely that we could continue our business, in which case you would lose your entire investment.
During the fiscal year ended June 30, 2005 and for the nine month period ended March 31, 2006, management successfully obtained additional capital through sales and issuance of convertible notes from which we received net proceeds of $1,300,000 and $960,000, respectively. However, we cannot assure you that the proceeds received from the sale and issuance of convertible notes will provide all the additional capital necessary for us to become profitable.
During the next 6 months, if we fail to earn revenues in an amount sufficient to fund our operations, we will have to raise capital through an additional offering of our securities or from additional loans. We cannot guarantee that financing will be available to us, on acceptable terms or at all. If we do not earn revenues sufficient to support our business and we fail to obtain other financing, either through an offering of our securities or by obtaining additional loans, we may be unable to maintain our operations.
If we are unable to obtain additional financing if needed, we may be required to curtail the manufacturing and marketing of our product and possibly cease our operations.
WE ARE SUBJECT TO THE RISKS AND UNCERTAINTIES INHERENT IN NEW BUSINESSES. IF WE FAIL TO ACCURATELY FORECAST OUR CAPITAL NEEDS OR IF OUR PRODUCT DOES NOT EARN SIGNIFICANT REVENUES OUR BUSINESS COULD FAIL AND YOU COULD LOSE YOUR ENTIRE INVESTMENT.
The risks and uncertainties inherent in new businesses include the following:
o Our projected capital needs may be inaccurate, and we may not have enough money to develop our business and bring our products to market as we planned;
o We may experience unanticipated development or marketing expenses, which may make it more difficult to develop our business and bring our products to market; and
o Even if we are able to develop our products and bring them to market, we may not earn enough revenues from the sales of our products to cover the costs of operating our business.
If we are unsuccessful in our efforts to develop our business and if the product we provide does not produce revenues as we project, we are not likely to ever become profitable and we may be required to curtail some or all of our operations. If that happened you could lose your entire investment.
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WE CANNOT ASSURE YOU THAT WE WILL BE SUCCESSFUL IN DEVELOPING AND COMMERCIALIZING OUR NEW PRODUCTS AND/OR OTHER PRODUCTS.
Our ability to successfully acquire or develop any additional products is uncertain. Potential new products may require additional research, development, testing, regulatory approval and additional investment prior to their commercialization, which may not be successful. There can be no assurance that we can develop commercially successful products.
WE COULD BE SUBJECT TO PRODUCT LIABILITY CLAIMS. IF WE ARE REQUIRED TO PAY A CLAIM, OUR BUSINESS AND FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED AND YOUR INVESTMENT MAY DECLINE IN VALUE.
Liability might result from claims made by customers who purchase our products. Although we have received a quote from our insurance broker for product liability insurance, we presently do not carry such insurance since our sales to date are insignificant. We can give no assurance that such insurance will be available when we need it at a reasonable cost or that any insurance policy would be sufficient to meet any liability arising as a result of a claim. The obligation to pay any product liability claim could have a material adverse effect on our business and financial condition.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR PATENTS OR OTHER INTELLECTUAL
PROPERTY OR WE COULD BECOME INVOLVED IN LITIGATION WITH OTHERS REGARDING OUR INTELLECTUAL PROPERTY. EITHER OF THESE EVENTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
We rely on a combination of patent laws, nondisclosure, trade secret and other contractual and technical measures to protect our proprietary rights in our product. However, we cannot assure you that these provisions will be adequate to protect our proprietary rights. In addition, the laws of certain foreign countries do not protect intellectual property rights to the same extent as the laws of the United States.
Although we believe that our intellectual property does not infringe upon the proprietary rights of third parties, others may claim that we have infringed on their products.
If we were to become involved in disputes regarding the use or ownership of intellectual property rights, we could incur substantial costs in defending or prosecuting any such action and the defense or prosecution of the action would likely result in a diversion of management resources. In addition, in order to settle such an action we could be required to acquire licenses from others or to give licenses to others on terms that are not beneficial to us. Any dispute relating to our intellectual property could have a material adverse effect on our business.
OUR CURRENT PRODUCT IS REGULATED BY THE FDA AND, IN THE WORLDWIDE MARKET, GOVERNMENT AGENCIES LIKE THE FDA. WE MAY BE UNSUCCESSFUL IN OBTAINING REGULATORY APPROVALS FOR NEW PRODUCTS, EVEN THOUGH WE MAY INVEST A SIGNIFICANT AMOUNT OF TIME AND MONEY INTO SEEKING SUCH APPROVALS. IF OUR PRODUCTS DO NOT RECEIVE THE REGULATORY APPROVALS WE NEED TO SELL THEM, OUR REVENUES AND OPERATING RESULTS COULD BE ADVERSELY AFFECTED AND THE VALUE OF YOUR INVESTMENT MAY DECLINE.
The manufacture, sale, promotion and marketing of our new products, if any, may be subject to regulation by the FDA and similar government regulatory bodies in other countries.
As we develop or obtain new products, we will be required to determine what regulatory requirements, if any, are required to market and sell our products in the United States and worldwide. The process of obtaining regulatory approval could take years and be very costly, if approval can be obtained at all. If we failed to comply with such a requirement, we could be subjected to an FDA enforcement action. Such an action could take the form of a warning letter, an injunction to stop us from marketing the product at issue or a possible seizure of our assets.
We intend to work diligently to assure compliance with all applicable regulations that impact our business. We cannot assure you, however, that we will be able to obtain regulatory approval for all of our products or that, in the future, additional regulations will not be enacted which might adversely impact our operations. In either case, our revenues and operating results could be adversely effected and the value of your investment may decline.
RISKS RELATING TO OUR CURRENT FINANCING AGREEMENT
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR CONVERTIBLE DEBENTURES, AND WARRANTS THAT MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
As of May 10, 2006, we had 1,270,114 and shares of common stock issued and outstanding, respectively, and convertible debentures outstanding that may be converted into an estimated 5,725,000 shares of common stock at current market prices, and outstanding warrants to purchase 600,000 shares of common stock. In addition, the number of shares of common stock issuable upon conversion of the outstanding convertible debentures may increase if the market price of our stock declines. All of the shares, including all of the shares issuable upon conversion of the debentures and upon exercise of our warrants, may be sold without restriction. The sale of these shares may adversely affect the market price of our common stock.
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THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR CONVERTIBLE NOTES COULD REQUIRE US TO ISSUE A SUBSTANTIALLY GREATER NUMBER OF SHARES TO THE SELLING STOCKHOLDER, WHICH WILL CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS.
Our obligation to issue shares upon conversion of our convertible securities is essentially limitless. The following is an example of the amount of shares of our common stock that is issuable to the selling stockholders, upon conversion of our remaining, unconverted principal amount $685,295 convertible notes issued pursuant to our September 2005 Subscription Agreement and our principal amount $360,000 convertible notes issued pursuant to our April 2006 Subscription Agreements, based on market prices 25%, 50% and 75% below our market price on May 10, 2006 of $0.24.
% Below Price Per With Discount #of Shares % Outstanding
Market Share at 35% Issuable Stock
------- ----------- -------------- ------------ --------------
25% $0.18 $0.117 8,934,145 87.5%
50% $0.12 $0.078 13,401,217 91.3%
75% $0.06 $0.039 26,802,435 95.4%
*Based on 1,270,114 shares outstanding as of May 10, 2006
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR CONVERTIBLE NOTES MAY ENCOURAGE INVESTORS TO MAKE SHORT SALES IN OUR COMMON STOCK, WHICH COULD HAVE A DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON STOCK.
The convertible notes are convertible into shares of our common stock at a conversion price that is equal to the lesser of (i) $0.07 or (ii) the average of the lowest three (3) intra-day trading prices during the twenty (20) trading days immediately prior to the conversion date discounted by thirty-five percent (35%). The significant downward pressure on the price of the common stock as the selling stockholder converts and sells material amounts of common stock could encourage short sales by investors. This could place further downward pressure on the price of the common stock. In addition, not only the sale of shares issued upon conversion or exercise of notes, warrants and options, but also the mere perception that these sales could occur, may lower the market price of the common stock.
THE ISSUANCE OF SHARES UPON CONVERSION OF THE CONVERTIBLE DEBENTURES AND EXERCISE OF OUTSTANDING WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO OUR EXISTING STOCKHOLDERS.
The issuance of shares upon conversion of the convertible notes and exercise of warrants may result in substantial dilution to the interests of other stockholders since the selling stockholder may ultimately convert and sell the full amount issuable on conversion. Although the selling stockholder may not convert its convertible notes and/or exercise their warrants if such conversion or exercise would cause them to own more than 4.99% of our outstanding common stock, this restriction does not prevent the selling stockholder from converting and/or exercising some of their holdings and then converting the rest of their holdings. In this way, the selling stockholder could sell more than this limit while never holding more than this limit. There is no upper limit on the number of shares that may be issued which will have the effect of further diluting the proportionate equity interest and voting power of holders of our common stock, including investors in this offering.
IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING SECURED CONVERTIBLE NOTES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE, OR RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE SECURED CONVERTIBLE NOTES, IF REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE OF SUBSTANTIAL ASSETS.
The secured convertible notes in the principal amount of $360,000 issued under our April 2006 Subscription Agreement and the remaining unconverted principal amount of $685,295 issued under our September 2005 Subscription Agreement due and payable two years from the date of issuance, unless sooner converted into shares of our common stock. Any event of default such as our failure to repay the principal when due, our failure to issue shares of common stock upon conversion by the holder, our failure to timely file a registration statement or have such registration statement declared effective, breach of any covenant, representation or warranty in the Subscription Agreement or related convertible note, the assignment or appointment of a receiver to control a substantial part of our property or business, the filing of a money judgment, writ or similar process against our company in excess of $50,000, the commencement of a bankruptcy, insolvency, reorganization or liquidation proceeding against our company and the delisting of our common stock could require the early repayment of the secured convertible notes, including a default interest rate of 15% on the outstanding principal balance of the notes if the default is not cured with the specified grace period. We anticipate that the full amount of the secured convertible notes will be converted into shares of our common stock, in accordance with the terms of the secured convertible notes. If we were required to repay the secured convertible notes, we would be required to use our limited working capital and raise additional funds. If we were unable to repay the notes when required, the note holders could commence legal action against us and foreclose on all of our assets to recover the amounts due. Any such action would require us to curtail or cease operations.
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IF AN EVENT OF DEFAULT OCCURS UNDER THE SUBSCRIPTION AGREEMENT, SECURED CONVERTIBLE NOTES, WARRANTS, OR SECURITY AGREEMENT, THE INVESTORS COULD TAKE POSSESSION OF ALL OUR GOODS, INVENTORY, CONTRACTUAL RIGHTS AND GENERAL INTANGIBLES, RECEIVABLES, DOCUMENTS, INSTRUMENTS, CHATTEL PAPER, AND INTELLECTUAL PROPERTY.
In connection with the Subscription Agreements we entered into in September 2005 and April 2006, we executed Security Agreements in favor of the investors granting them a second priority security interest in all of our goods, inventory, contractual rights and general intangibles, receivables, documents, instruments, chattel paper, and intellectual property. The Security Agreements state that if an even of default occurs under the Subscription Agreement, Secured Convertible Notes, Warrants or Security Agreements, the investors have the right to take possession of the collateral, to operate our business using the collateral, and have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the collateral, at public or private sale or otherwise to satisfy our obligations under these agreements.
RISKS ASSOCIATED WITH OWNERSHIP OF OUR COMMON STOCK
WE HAVE NOT PAID CASH DIVIDENDS AND IT IS UNLIKELY THAT WE WILL PAY CASH DIVIDENDS IN THE FORESEEABLE FUTURE.
We plan to use all of our earnings, to the extent we have earnings, to fund our operations. We do not plan to pay any cash dividends in the foreseeable future. We cannot guarantee that we will, at any time, generate sufficient surplus cash that would be available for distribution as a dividend to the holders of our Common Stock. You should not expect to receive cash dividends on our Common Stock.
WE MAY RAISE ADDITIONAL CAPITAL THROUGH A SECURITIES OFFERING THAT COULD DILUTE YOUR OWNERSHIP INTEREST.
We require substantial working capital to fund our business. If we raise additional funds through the issuance of equity, equity-related or convertible debt securities, those securities may have rights, preferences or privileges senior to those of the holders of our Common Stock. The issuance of additional Common Stock or securities convertible into Common Stock by our management will also have the effect of further diluting the proportionate equity interest and voting power of holders of our Common Stock.
IF WE FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN THE SECONDARY MARKET.
Companies trading on the OTC Bulletin Board, such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.
WE ARE SUBJECT TO THE PENNY STOCK RULES AND THESE RULES MAY ADVERSELY EFFECT TRADING IN OUR COMMON STOCK.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
o that a broker or dealer approve a person's account for transactions in penny stocks; and
o the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the broker or dealer must:
o obtain financial information and investment experience objectives of the person; and
o make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the suitability determination; and
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o that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
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DESCRIPTION OF SECURITIES BEING REGISTERED
COMMON STOCK AND RIGHTS OF COMMON SHAREHOLDERS
The securities being offered by the selling shareholders are shares of our common stock. We are authorized by our Articles of Incorporation, as amended, to issue 2,000,000,000 shares of common stock, $0.001 par value. As of May 10, 2006, we had 1,270,114 shares of common stock issued and outstanding and approximately 500 holders of our common stock.
Holders of our common stock are entitled to one vote per share on all matters subject to shareholder vote. If the Board of Directors were to declare a dividend out of funds legally available therefore, all of the outstanding shares of common stock would be entitled to receive such dividend. We have never declared dividends and we do not intend to declare dividends in the foreseeable future. If we were liquidated or dissolved, holders of shares of our common stock would be entitled to share ratably in assets remaining after satisfaction of our liabilities. Holders of our common stock do not have cumulative voting rights.
SELLING SHAREHOLDERS
This prospectus relates to the offer and sale by the following selling stockholders of the indicated number of shares, all of which are issuable pursuant to warrants and/or convertible notes held by these selling stockholders. The number of shares set forth in the table for the selling stockholders represents an estimate of the number of shares of common stock to be offered by the selling stockholders. The actual number of shares of common stock issuable upon conversion of the notes and exercise of the related warrants is indeterminate, is subject to adjustment and could be materially less or more than such estimated number depending on factors which cannot be predicted by us at this time including, among other factors, the future market price of the common stock. The actual number of shares of common stock offered in this prospectus, and included in the registration statement of which this prospectus is a part, includes such additional number of shares of common stock as may be issued or issuable upon conversion of the notes and exercise of the related warrants by reason of any stock split, stock dividend or similar transaction involving the common stock, in accordance with Rule 416 under the Securities Act of 1933.
None of the following selling stockholders have held any position or office within our company, nor has had any other material relationship with us in the past three years, other than in connection with transactions pursuant to which the selling stockholders acquired convertible notes and warrants.
None of the following selling stockholders are broker-dealers or affiliates of broker-dealers.
The following table also sets forth the name of each person who is offering the resale of shares of common stock by this prospectus, the number of shares of common stock beneficially owned by each person, the number of shares of common stock that may be sold in this offering and the number of shares of common stock each person will own after the offering, assuming they sell all of the shares offered.
This prospectus covers the resale by selling shareholders of up to 8,575,000 shares of our common stock, $0.001 par value. The selling shareholders are offering:
o up to 7,975,000 shares of common stock underlying our Original Issue Discount Secured Convertible Notes, of which an aggregate of 3,475,000 shares of common stock are being registered for the remaining, unconverted $685,295 principal amount of such notes issued in September 2005 and up to 4,500,000 shares or common stock are being registered for the $360,000 principal amount of such notes issued in April 2006; and
o 600,000 shares of common stock underlying warrants issued to certain of the selling stockholders pursuant to our April 2006 Subscription Agreement.
-------------------- ------------------- ------------- --------------- ------------ --------------- ------------ --------------
Total
Total Shares of Percentage Percentage
Common Stock of Common Shares of Beneficial of Common
Issuable Upon Stock, Common Stock Beneficial Percentage of Ownership Stock Owned
Conversion of Assuming Included in Ownership Common Stock After the After
Convertible Notes Full Prospectus Before the Owned Before Offering Offering
Name and/or Warrants(1) Conversion Offering* Offering* (2) (2)
-------------------- ------------------- ------------- --------------- ------------ --------------- ------------ --------------
Alpha Capital
Aktiengesellschaft 3,800,000 (3) 74.9% 3,800,000 63,379 4.99% -- --
-------------------- ------------------- ------------- --------------- ------------ --------------- ------------ --------------
Whalehaven Capital 2,700,000 (4) 68.0% 2,700,000 63,379 4.99% -- --
Fund Ltd.
-------------------- ------------------- ------------- --------------- ------------ --------------- ------------ --------------
Ellis International 1,175,000 (5) 48.1% 1,175,000 63,379 4.99% -- --
Ltd.
-------------------- ------------------- ------------- --------------- ------------ --------------- ------------ --------------
Osher Capital, Inc. 900,000 (6) 41.5% 900,000 63,379 4.99% -- --
-------------------- ------------------- ------------- --------------- ------------ --------------- ------------ --------------
* These columns represents the aggregate maximum number and percentage of shares that the selling stockholder can own at one time (and therefore, offer for resale at any one time) due to their 4.99% limitation.
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The number and percentage of shares beneficially owned is determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rule, beneficial ownership includes any shares as to which the selling stockholder has sole or shared voting power or investment power and also any shares, which the selling stockholder has the right to acquire within 60 days. The actual number of shares of common stock issuable upon the conversion of the convertible notes is subject to adjustment depending on, among other factors, the future market price of the common stock, and could be materially less or more than the number estimated in the table.
(1) Includes 100% of the remaining shares issuable upon conversion of the $685,295 remaining balance of convertible notes issued pursuant to our September 2005 Subscription Agreement, 200% of the shares issuable upon conversion of the $360,000 convertible notes issued pursuant to our April 2006 Subscription Agreement and 100% of the shares issuable upon exercise of warrants issued pursuant to our April 2006 Subscription Agreement, based on current market prices. Under the terms of the convertible debentures, if the convertible notes had actually been converted on May 10, 2006, the conversion price would have been $.16. Because the number of shares of common stock issuable upon conversion of the convertible note is dependent in part upon the market price of the common stock prior to a conversion, the actual number of shares of common stock that will be issued upon conversion will fluctuate daily and cannot be determined at this time. However these selling stockholders have contractually agreed to restrict their ability to convert or exercise their warrants and receive shares of our common stock such that the number of shares of common stock held by them and their affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock.
(2) Assumes that all securities registered will be sold.
(3) Represents (i) 2,100,000 shares of common stock underlying an aggregate of $421,500 unconverted principal amount convertible notes issued to the selling stockholder pursuant to our September 2005 Subscription Agreement, (ii) 1,500,000 shares of common stock underlying an aggregate of $120,000 principal amount convertible notes issued to the selling stockholder pursuant to our April 2006 Subscription Agreement, and (iii) 200,000 shares underlying warrants exercisable at $0.07 per share issued to the selling stockholder pursuant to our April 2006 Subscription Agreement. Alpha Capital AG is a private investment fund that is owned by all its investors and managed by Mr. Konrad Ackermann, who may be deemed the control person of the shares owned Alpha Capital.
(4) Represents (i) 1,000,000 shares of common stock underlying an aggregate of $200,000 unconverted principal amount convertible notes issued to the selling stockholder pursuant to our September 2005 Subscription Agreement, (ii) 1,500,000 shares of common stock underlying an aggregate of $120,000 principal amount convertible notes issued to the selling stockholder pursuant to our April 2006 Subscription Agreement, and (iii) 200,000 shares underlying warrants exercisable at $0.07 per share issued to the selling stockholder pursuant to our April 2006 Subscription Agreement. Whalehaven Capital Fund Limited is a private investment fund that is owned by all of its investors and managed by Michael Finkelstein and Bhavesh Singh. Evan Schemenauer, Arthur Jones and Jennifer Kelly may be deemed control persons of the shares owned by such entity, with final voting power and investment control over such shares.
(5) Represents (i) 325,000 shares of common stock underlying an aggregate of $54,882 unconverted principal amount convertible notes issued to the selling stockholder pursuant to our September 2005 Subscription Agreement, (ii) 750,000 shares of common stock underlying an aggregate of $60,000 principal amount convertible notes issued to the selling stockholder pursuant to our April 2006 Subscription Agreement, and (iii) 100,000 shares underlying warrants exercisable at $0.07 per share issued to the selling stockholder pursuant to our April 2006 Subscription Agreement. Mr. Wilhelm Ungar may be deemed the control person of the securities owned by such entity, with final voting power and investment control over such shares.
(6) Represents (i) 50,000 shares of common stock underlying an aggregate of $8,913 unconverted principal amount convertible notes issued to the selling stockholder pursuant to our September 2005 Subscription Agreement, (ii) 750,000 shares of common stock underlying an aggregate of $60,000 principal amount convertible notes issued to the selling stockholder pursuant to our April 2006 Subscription Agreement, and (iii) 100,000 shares underlying warrants exercisable at $0.07 per share issued to the selling stockholder pursuant to our April 2006 Subscription Agreement. Mr. Yisroel Kluger has voting and dispositive control over securities owned by Osher Capital, Inc.
OUR APRIL 11, 2006 ORIGINAL ISSUE DISCOUNT SECURED CONVERTIBLE NOTES SUBSCRIPTION AGREEMENT
On April 12, 2006, we entered into a Subscription Agreement with several accredited and/or qualified institutional investors pursuant to which the investors subscribed to purchase an aggregate principal amount of $360,000 in secured convertible promissory notes for aggregate purchase price of $300,000 and 2 Class A common stock purchase warrants for each one dollar of the purchase price of the secured convertible notes ($300,000).
Each investor shall have the right to convert the secured convertible notes after the date of issuance at any time, until paid in full, at the election of the investor into fully paid and nonassessable shares of our common stock. The conversion price per share shall be the lower of (i) $0.07 or (ii) 65% of the average of the three lowest intra-day trading prices for our common stock for the 20 trading days prior to, but not including, the conversion date as reported by Bloomberg, L.P. on any principal market or exchange where our common stock is listed or traded. The conversion price is adjustable in the event of any stock split or reverse stock split, stock dividend, reclassification of common stock, recapitalization, merger or consolidation. In addition, the conversion price of the secured convertible notes will be adjusted in the event that we spin off or otherwise divest ourselves of a material part of our business or operations or dispose all or a portion of our assets. Our obligation to repay all principal, and accrued and unpaid interest under the convertible notes is secured by all of our assets pursuant to a certain Security Agreement dated as of April 12, 2006.
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We issued an aggregate of 600,000 Class A common stock purchase warrants to the investors, representing and 2 Class A common stock purchase warrants for each one dollar of the purchase price of the secured convertible notes ($300,000). The Class A warrants are exercisable until five years from the closing date at an exercise price of $0.07 per share. The exercise price of the Class A warrants will be adjusted in the event of any stock split or reverse stock split, stock dividend, reclassification of common stock, recapitalization, merger or consolidation. In addition, the exercise price of the warrants will be adjusted in the event that we spin off or otherwise divest ourselves of a material part of our business or operations or dispose all or a portion of our assets.
We are obligated to file a registration statement registering 200% of the shares of our common stock issuable upon conversion of the secured promissory notes and 100% of the shares issuable upon exercise of the Class A warrants no later than 35 days after the closing date and cause it to be declared effective within 120 days after the closing date. If we do not meet the aforementioned filing and effectiveness deadlines, we shall pay to each investor an amount equal to 2% of the purchase price of the secured convertible notes remaining unconverted and purchase price of the shares of our common stock issued upon conversion of the notes for each 30 days or part thereof of the pendency of such non-registration event.
We claim an exemption from the registration requirements of the Act for the private placement of these securities pursuant to Section 4(2) of the Act and/or Regulation D promulgated thereunder since, among other things, the transaction did not involve a public offering, the investors were accredited investors and/or qualified institutional buyers, the investors had access to information about us and their investment, the investors took the securities for investment and not resale, and we took appropriate measures to restrict the transfer of the securities.
OUR SEPTEMBER 16, 2005 ORIGINAL ISSUE DISCOUNT SECURED CONVERTIBLE NOTES SUBSCRIPTION AGREEMENT
On September 16, 2005, we entered into a Subscription Agreement with several accredited institutional investors for the issuance of an aggregate of $900,000 principal amount Original Issue Discount Secured Convertible Notes (the "Convertible Notes") and we received a gross amount of $750,000. The convertible notes are due two years from the date of issuance. The convertible notes are convertible at the option of the holders into shares of our common stock. The conversion price is equal to the lesser of (i) $0.07 (or $12.25 post 1 for 175 reverse stock split effectuated on April 18, 2006) or (ii) the average of the lowest three (3) intra-day trading prices during the twenty (20) trading days immediately prior to the conversion date discounted by thirty-five percent (35%). In connection with the issuance of the convertible notes, the noteholders shall receive warrants to purchase shares of our common stock. Furthermore we entered into a Registration Rights Agreement in order to register the above-referenced securities and are required to register 200% of our common shares underlying the convertible notes and the warrants.
The secured convertible notes mature on two years from the date of issuance. The convertible notes are convertible at any time at the option of the holder into shares of our common stock, provided at no time may a holder of our convertible notes and its affiliates own more than 4.9% of our outstanding common stock. The conversion price of our common stock used in calculating the number of shares issuable upon conversion of the convertible notes, is the lesser of:
o Sixty-five percent of the average of the lowest three intra-day trading prices for our common stock during the twenty trading day period ending one trading day prior to the date the conversion notice is sent by the holder to the borrower; or
o a fixed conversion price of $0.07(or $12.25 post 1 for 175 reverse stock split effectuated on April 18, 2006).
Since the issuance of our convertible notes to the investors of our September 2005 private placement, an aggregate of $685,295principal amount of such notes remain unconverted. We are registering an aggregate of 8,575,000 shares of our common stock underlying such unconverted notes in this prospectus.
The conversion price of the convertible notes are subject to equitable adjustments if we distribute a stock dividend, subdivide or combine outstanding shares of common stock into a greater or lesser number of shares, or take such other actions as would otherwise result in dilution of the selling stockholders' ownership. Also, the convertible notes fixed conversion price gets lowered in the event we issue shares of our common stock or any rights, options, warrants to purchase shares of our common stock at a price less than the market price of our shares as quoted on the OTCBB. The fixed conversion price gets lowered upon such issuance to the amount of the consideration per share received by us.
The convertible notes are secured by a security agreement and an intellectual property security agreement under which we pledged substantially all of our assets, including our goods, fixtures, equipment, inventory, contract rights, receivables and intellectual property.
DESCRIPTION OF WARRANTS
The warrants purchased by the investors pursuant to the September 16, 2005 Subscription Agreement entitle the investors to purchase 1,500,000 shares of our common stock at an exercise price equal to $0.07 per share (or $12.25 post 1 for 175 reverse stock split effectuated on April 18, 2006). The warrants expire five years from the date of issuance. The warrants are subject to exercise price adjustments upon the occurrence of certain events including stock dividends, stock splits, mergers, reclassifications of stock or our recapitalization. The exercise price of the warrants is also subject to reduction if we issue shares of our common stock on any rights, options or warrants to purchase shares of our common stock at a price less than the market price of our shares as quoted on the OTC Bulletin Board.
REGISTRATION RIGHTS
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We are obligated to file a registration statement registering 200% of the shares of our common stock issuable upon conversion of the promissory notes and 100% of the shares of our common stock issuable upon exercise of the Class A warrants no later than 35 days after the initial closing date and cause it to be effective within 90 days after the initial closing date. If we do not meet the aforementioned filing and effectiveness deadlines, we shall pay to each investor an amount equal to 2% for each 30 days or part thereof, thereafter of the purchase price of the notes remaining unconverted and purchase price of the shares of our common stock issued upon conversion of the notes.
Sample Conversion Calculation
The convertible notes in the principal amount of $360,000 issued under our April 2006 Subscription Agreement and in the remaining, unconverted principal amount of $685,295 issued under our September 2005 Subscription Agreement are convertible into the number of our shares of common stock equal to the lesser of
(i) $0.07 or (ii) 65% of the average of the three lowest intra-day trading prices for our common stock for the 20 trading days prior to, but not including, the conversion date. For example, assuming conversion of $1,045,295 of notes on May 10, 2006, a conversion price of $0.16 per share, the number of shares issuable upon conversion would be:
$1,045,295 /$.16 = 6,533,094
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PLAN OF DISTRIBUTION
We are registering a total of 8,575,000shares of our common stock that are being offered by the selling shareholders. As used in this prospectus, "selling shareholders" includes the pledgees, donees, transferees or others who may later hold the selling shareholders' interests in the common stock. We will pay the costs and fees of registering the common shares, but the selling shareholders will pay any brokerage commissions, discounts or other expenses relating to the sale of the common shares. We will not receive the proceeds from the sale of the shares by the selling shareholders. However, some of the shares we are registering will be issued upon the exercise of warrants held by the selling shareholders. Although the selling shareholders are not required to exercise the warrants, if they do so we will receive the proceeds from the exercise, unless those warrants are exercised pursuant to the cashless exercise provisions thereof.
The selling shareholders and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The shares being offered by the selling stockholders or their respective pledgees, donees, transferees or other successors in interest, will be sold from time to time in one or more transactions, which may involve block transactions:
o on the Over-the-Counter Bulletin Board or on such other market on which the common stock may from time to time be trading;
o in privately-negotiated transactions;
o through the writing of options on the shares;
o short sales; or
o any combination thereof.
The sale price to the public may be:
o the market price prevailing at the time of sale;
o a price related to such prevailing market price;
o at negotiated prices; or
o such other price as the selling stockholders determine from time to time.
The selling shareholders may also sell shares under Rule 144 or Regulation S under the Securities Act, if available, rather than under this prospectus. Broker-dealers engaged by the selling shareholders may arrange for other brokers-dealers to participate in sales. The selling stockholders shall have the sole and absolute discretion not to accept any purchase offer or make any sale of shares if they deem the purchase price to be unsatisfactory at any particular time. Broker-dealers may receive commissions or discounts from the selling shareholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The selling shareholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved.
The selling shareholders may from time to time pledge or grant a security interest in some or all of the shares or common stock or warrants owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933, as amended, amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus.
The selling shareholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.
The selling stockholders or their respective pledgees, donees, transferees or other successors in interest, may also sell the shares directly to market makers acting as principals and/or broker-dealers acting as agents for themselves or their customers. Such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the selling stockholders and/or the purchasers of shares for whom such broker-dealers may act as agents or to whom they sell as principal or both, which compensation as to a particular broker-dealer might be in excess of customary commissions. Market makers and block purchasers purchasing the shares will do so for their own account and at their own risk. It is possible that a selling stockholder will attempt to sell shares of common stock in block transactions to market makers or other purchasers at a price per share which may be below the then market price. The selling stockholders cannot assure that all or any of the shares offered in this prospectus will be issued to, or sold by, the selling stockholders. The selling stockholders and any brokers, dealers or agents, upon effecting the sale of any of the shares offered in this prospectus, may be deemed "underwriters" as that term is defined under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, or the rules and regulations under such acts. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. The selling shareholders have informed us that none of them have any agreement or understanding, directly or indirectly, with any person to distribute the common stock.
15
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We are required to pay all fees and expenses incurred by us incident to the registration of the shares. We have agreed to indemnify the selling stockholders, or their transferees or assignees, against certain liabilities, including liabilities under the Securities Act of 1933, as amended, or to contribute to payments the selling stockholders or their respective pledgees, donees, transferees or other successors in interest, may be required to make in respect of such liabilities.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the common stock offered by the selling shareholders. We will receive proceeds of $0.07 per share from the exercise of warrants by the selling shareholders, or an aggregate of $42,000, unless those warrants are exercised pursuant to the cashless exercise provisions thereof.
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
Our Common Stock trades on the NASD OTC Bulletin Board. Since April 18, 2006 it is currently trading under the symbol ADSD. From November 26, 2004 until April 18, 2006, it traded under the symbol ADDI. From April 26, 2004 until November 26, 2004, it traded under the symbol QTFI. From January 3, 2003 until April 26, 2004, it traded under the symbol QTFV. Prior to January 9, 2003, our Common Stock traded on the NASD OTC Bulletin Board under the symbol MOZN.
The table below sets forth the range of high and low bid quotes of our Common Stock for each quarter for the last two fiscal years as reported by Yahoo Finance. The bid prices represent inter-dealer quotations, without adjustments for retail mark-ups, markdowns or commissions and may not necessarily represent actual transactions. The following prices reflect both the 1 for 10 reverse stock split that was effected on April 26, 2004, and the 1 for 150 reverse stock split that was effected on November 26, 2004, respectively, as footnoted below.
PERIOD HIGH LOW
-------------- ------ ------
Fiscal Year Ended June 30, 2004 First Quarter $0.39 $0.16
Second Quarter $0.15 $0.04
Third Quarter $0.07 $0.01
Fourth Quarter $0.06 $0.01(1)
Fiscal Year Ended June 30, 2005 First Quarter $1.35 $0.06(1)
Second Quarter $0.10 $0.02(2)
Third Quarter $0.07 $0.02(2)
Fourth Quarter $0.08 $0.01(2)
(1) Reflects post 10 for 1 reverse split.
(2) Reflects post 150 for 1 reverse split.
HOLDERS
There were approximately 500 holders of our Common Stock of record as of May 10, 2006.
DIVIDENDS
We have never declared or paid cash dividends on our common stock, and our present policy is not to pay cash dividends on our common stock. Any payment of cash dividends in the future will be wholly dependent upon our earnings, financial condition, capital requirements and other factors deemed relevant by our board of directors. It is not likely that cash dividends will be paid in the foreseeable future.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY INCENTIVE PLANS
Set forth in the table below is information regarding awards made through compensation plans or arrangements through June 30, 2005, the most recently completed fiscal year (reflects post 1 to 175 reverse split that became effective April 18, 2006).
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Number of securities
remaining available for
future issuance under
Number of securities to Weighted average equity compensation
be issued upon exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
Plan Category warrants and rights warrants and rights column 2)
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Equity Compensation Plans
Approved by Security Holders N/A N/A N/A
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Equity Compensation Plans
Not Approved by Security
Holders -- $ -- 1,464
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Our 2000 Stock Option Plan (the "2000 Plan"), as amended, authorizes the issuance of options and common stock to officers, employees, directors and consultants. The common stock reserved for issuance pursuant to the 2000 Plan has been registered on an S-8 Registration Statement. The 2000 Plan allows for the issuance of either incentive stock options (which, pursuant to Section 422 of the Internal Revenue Code, can only be granted to employees) or non-qualified stock options. The 2000 Plan is administered by a committee of two or more members of the Board of Directors or, if no committee is appointed, then by the Board of Directors. The committee, or the Board of Directors if there is no committee, determines the type of option granted, the exercise price, the option term, which may be no more than ten years, terms and conditions of exercisability and methods of exercise. Options must vest within ten-years. Under the 2000 Plan, the exercise price may not be less than fair market value on the date of grant for incentive stock options, and not less than 50% of the fair market value on the date of grant for non-qualified stock options. The 2000 Plan also allows for the granting of Stock Appreciation Rights in conjunction with all or part of any stock option granted. No Stock Appreciation Rights have been granted.
On April 21, 2003 our Board of Directors adopted the 2003 Incentive Equity Stock Plan (the "2003 Plan"). The 2003 Plan authorizes the issuance of options, right to purchase common stock and stock bonuses to officers, employees, directors and consultants. The 2003 Plan is administered by a committee of two or more members of the Board of Directors or, if no committee is appointed, then by the Board of Directors. The 2003 Plan allows for the issuance of incentive stock
As filed with the Securities and Exchange Commission on April 27, 2006
Registration No. 333-___________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-8
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ADDISON-DAVIS DIAGNOSTICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 800103134
--------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
143 Triumfo Canyon Road, Suite 104, Westlake Village, CA 91361
(Address of principal executive offices) (Zip Code)
2003 INCENTIVE EQUITY STOCK PLAN
(Full title of Plan)
Charles Miseroy, Chief Executive Officer
143 Triunfo Canyon Road, Suite 104
Westlake Village, CA 91361
(Name and address of agent for service)
(805) 494-7838
(Telephone number, including area code, of agent for service)
CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Title of Maximum Maximum
Securities Amount Offering Aggregate Amount of
to be to be Price Offering Registration
Registered Registered Per Share(1) Price(1) Fee
---------- ----------- ------------ ---------- -----------
Common Stock,
$0.001 par value 150,000 $0.26 $39,000 $4.17
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(1) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) under the Securities Act of 1933, using the average of the high and low price as reported on the Over-The-Counter Bulletin Board on April 26, 2006.
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PART I
Item 1. Plan Information.
The documents containing the information specified in Item 1 will be sent or given to participants in the Plan as specified by Rule 428(b)(1) of the Securities Act of 1933, as amended (the "Securities Act"). Such documents are not required to be and are not filed with the Securities and Exchange Commission (the "SEC") either as part of this Registration Statement or as prospectuses or prospectus supplements pursuant to Rule 424. These documents and the documents incorporated by reference in this Registration Statement pursuant to Item 3 of Part II of this Form S-8, taken together, constitute a prospectus that meets the requirements of Section 10(a) of the Securities Act.
Item 2. Registrant Information and Employee Plan Annual Information.
Upon written or oral request, any of the documents incorporated by reference in Item 3 of Part II of this Registration Statement (which documents are incorporated by reference in this Section 10(a) Prospectus), other documents required to be delivered to eligible employees, non-employee directors and consultants, pursuant to Rule 428(b) are available without charge by contacting:
Charles Miseroy, Chief Executive Officer 143 Triunfo Canyon Road, Suite 104 Westlake Village, CA 91361 (805) 494-7838
PART II.
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
Item 3. Incorporation of Documents by Reference.
The Registrant hereby incorporates by reference into this Registration Statement the documents listed below. In addition, all documents subsequently filed pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), prior to the filing of a post-effective amendment which indicates that all securities offered have been sold or which deregisters all securities then remaining unsold, shall be deemed to be incorporated by reference into this Registration Statement and to be a part hereof from the date of filing of such documents:
o Reference is made to the Registrant's quarterly report on Form 10-QSB for the quarter ended December 31, 2005, as filed with the SEC on February 21, 2006, which is hereby incorporated by reference.
o Reference is made to the Registrant's quarterly report on Form 10-QSB for the quarter ended September 30, 2005, as filed with the SEC on November 14, 2005, which is hereby incorporated by reference.
o Reference is made to the Registrant's annual report on Form 10-KSB for the year ended June 30, 2005, as filed with the SEC on September 30, 2005, which is hereby incorporated by reference.
o Reference is made to the Registrant's quarterly report on Form 10-QSB for the quarter ended March 31, 2005, as filed with the SEC on May 16, 2005, which is hereby incorporated by reference.
Item 4. Description of Securities.
Not Applicable.
Item 5. Interests of Named Experts and Counsel.
Certain legal matters in connection with this registration statement will be passed upon for the Registrant by Sichenzia Ross Friedman Ference LLP, New York, New York. Certain members or partners of Sichenzia Ross Friedman Ference LLP will receive 80,769 shares of common stock of the Registrant under this registration statement to be issued as compensation for legal services performed on behalf of the Registrant.
Item 6. Indemnification of Directors and Officers.
Our Certificate of Incorporation, as amended and restated, provide to the fullest extent permitted by Section 145 of the General Corporation Law of the State of Delaware, that our directors or officers shall not be personally liable to us or our shareholders for damages for breach of such director's or officer's fiduciary duty. The effect of this provision of our Certificate of Incorporation, as amended and restated, is to eliminate our rights and our shareholders (through shareholders' derivative suits on behalf of our company) to recover damages against a director or officer for breach of the fiduciary duty of care as a director or officer (including breaches resulting from negligent or grossly negligent behavior), except under certain situations defined by statute. We believe that the indemnification provisions in our Certificate of Incorporation, as amended, are necessary to attract and retain qualified persons as directors and officers.
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Our By Laws also provide that the Board of Directors may also authorize us to indemnify our employees or agents, and to advance the reasonable expenses of such persons, to the same extent, following the same determinations and upon the same conditions as are required for the indemnification of and advancement of expenses to our directors and officers. As of the date of this Registration Statement, the Board of Directors has not extended indemnification rights to persons other than directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.
Item 7. Exemption from Registration Claimed.
Not Applicable.
Item 8. Exhibits.
Exhibit Description
------- -------------------------------------------------
4.1 2003 Incentive Equity Stock Plan
5.1 Opinion of Sichenzia Ross Friedman Ference LLP
23.1 Consent of Sichenzia Ross Friedman Ference LLP is
included in Exhibit 5.1
23.2 Consent of Corbin & Company, LLP
23.3 Consent of Armando C. Ibarra, CPA
Item 9. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;
Provided, however, that paragraphs (1)(i), and (1)(ii) do not apply if the Registration Statement is on Form S-8 and if the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the Commission by the Registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
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(5) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:
(A) Each prospectus filed by a Registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and
(B) Each prospectus required to be filed pursuant to Rule 424(b)(2),
(b)(5) or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii) or (x) for the purpose of providing the information required by Section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which the prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date.
(6) That, for the purpose of determining liability of a Registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities, each undersigned Registrant undertakes that in a primary offering of securities of an undersigned Registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned Registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of an undersigned Registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of an undersigned Registrant or used or referred to by an undersigned Registrant;
(iii) The portion of any other free writing prospectus relating to the offering containing material information about an undersigned Registrant or its securities provided by or on behalf of an undersigned Registrant; and
(iv) Any other communication that is an offer in the offering made by an undersigned Registrant to the purchaser.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of an amendment to a filing on Form S-8 and authorized this amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Westlake Village, State of California on April 27, 2006.
ADDISON-DAVIS DIAGNOSTICS, INC.
By: /s/ Charles Miseroy
-----------------------------------------
Charles Miseroy,
Chief Executive Officer
(Principal Executive Officer) and Acting
Chief Financial Officer (Principal
Accounting and Financial Officer)
In accordance with the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities stated.
Signature Title Date
/s/ Charles Miseroy Chief Executive Officer (Principal April 27, 2006
------------------------ Executive Officer) and Acting Chief
Charles Miseroy Financial Officer (Principal
Accounting and Financial Officer)
/s/ Fred De Luca Secretary and Director April 27, 2006
------------------------
Fred De Luca
/s/ Federico G. Cabo Director April 27, 2006
------------------------
Federico G. Cabo
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EXHIBIT 4.1
ADDISON-DAVIS DIAGNOSTICS, INC.
2003 INCENTIVE EQUITY STOCK PLAN
AS AMENDED ON APRIL 26, 2006
1. PURPOSE.
The purpose of this Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company, and its Parent and Subsidiaries (if any), by offering them an opportunity to participate in the Company's future performance through awards of Options, the right to purchase Common Stock and Stock Bonuses. Capitalized terms not defined in the text are defined in Section 2.
2. DEFINITIONS.
As used in this Plan, the following terms will have the following meanings:
"AWARD" means any award under this Plan, including any Option, Stock Award or Stock Bonus.
"AWARD AGREEMENT" means, with respect to each Award, the signed written agreement between the Company and the Participant setting forth the terms and conditions of the Award.
"BOARD" means the Board of Directors of the Company.
"CAUSE" means any cause, as defined by applicable law, for the termination of a Participant's employment with the Company or a Parent or Subsidiary of the Company.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMPANY" means QT 5, Inc., or any successor corporation.
"COMMITTEE" means that committee appointed by the Board of Directors to administer and interpret the Plan as more particularly described in Section 5 of the Plan; provided, however, that the term Committee will refer to the Board of Directors during such times as no Committee is appointed by the Board of Directors.
"DISABILITY" means a disability, whether temporary or permanent, partial or total, as determined by the Committee.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXERCISE PRICE" means the price at which a holder of an Option may purchase the Shares issuable upon exercise of the Option.
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"FAIR MARKET VALUE" means, as of any date, the value of a share of the Company's Common Stock determined as follows:
(a) if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading;
(b) if such Common Stock is quoted on the NASDAQ National Market or the NASDAQ SmallCap Market, its closing price on the NASDAQ National Market or the NASDAQ SmallCap Market, respectively, on the date of determination;
(c) if such Common Stock is publicly traded but is not listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices on the date of determination, provided however, if at the sole discretion of the Committee, if a active public market does not accurately reflect the bid/ask prices, then the fair market value shall be determined by the Committee in good faith; or
(d) if none of the foregoing is applicable, by the Committee in good faith.
"INSIDER" means an officer or director of the Company or any other person whose transactions in the Company's Common Stock are subject to Section 16 of the Exchange Act.
"OPTION" means an award of an option to purchase Shares pursuant to Section 6.
"PARENT" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of such corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.
"PARTICIPANT" means a person who receives an Award under this Plan.
"PERFORMANCE FACTORS" means the factors selected by the Committee, in its sole and absolute discretion, from among the following measures to determine whether the performance goals applicable to Awards have been satisfied:
(a) Net revenue and/or net revenue growth;
(b) Earnings before income taxes and amortization and/or earnings before income taxes and amortization growth;
(c) Operating income and/or operating income growth;
(d) Net income and/or net income growth;
(e) Earnings per share and/or earnings per share growth;
(f) Total stockholder return and/or total stockholder return growth;
(g) Return on equity;
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(h) Operating cash flow return on income;
(i) Adjusted operating cash flow return on income;
(j) Economic value added; and
(k) Individual business objectives.
"PERFORMANCE PERIOD" means the period of service determined by the Committee, not to exceed five years, during which years of service or performance is to be measured for Stock Awards or Stock Bonuses, if such Awards are restricted.
"PLAN" means this Addison-Davis Diagnostics, Inc. 2003 Incentive Equity Plan, as amended from time to time.
"PURCHASE PRICE" means the price at which the Participant of a Stock Award may purchase the Shares.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SHARES" means shares of the Company's Common Stock reserved for issuance under this Plan, as adjusted pursuant to Sections 3 and 19, and any successor security.
"STOCK AWARD" means an award of Shares pursuant to Section 7.
"STOCK BONUS" means an award of Shares, or cash in lieu of Shares, pursuant to
Section 8.
"SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.
"TERMINATION" or "TERMINATED" means, for purposes of this Plan with respect to a Participant, that the Participant has for any reason ceased to provide services as an employee, officer, director, consultant, independent contractor or advisor to the Company or a Parent or Subsidiary of the Company. An employee will not be deemed to have ceased to provide services in the case of (i) sick leave, (ii) military leave, or (iii) any other leave of absence approved by the Company, provided that such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute or unless provided otherwise pursuant to a formal policy adopted from time to time by the Company and issued and promulgated to employees in writing. In the case of any employee on an approved leave of absence, the Committee may make such provisions respecting suspension of vesting of the Award while on leave from the employ of the Company or a Subsidiary as it may deem appropriate, except that in no event may an Option be exercised after the expiration of the term set forth in the Option agreement. The Committee will have sole discretion to determine whether a Participant has ceased to provide services and the effective date on which the Participant ceased to provide services (the "Termination Date").
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3. SHARES SUBJECT TO THE PLAN.
3.1 Number of Shares Available. Subject to Sections 3.2 and 19, the total aggregate number of Shares reserved and available for grant and issuance pursuant to this Plan shall be 26,150,000 Shares and will include Shares that are subject to: (a) issuance upon exercise of an Option but cease to be subject to such Option for any reason other than exercise of such Option; (b) an Award granted hereunder but forfeited or repurchased by the Company at the original issue price; and (c) an Award that otherwise terminates without Shares being issued. At all times the Company shall reserve and keep available a sufficient number of Shares as shall be required to satisfy the requirements of all outstanding Options granted under this Plan and all other outstanding but unvested Awards granted under this Plan.
3.2 Adjustment of Shares. In the event that the number of outstanding shares is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company without consideration, then (a) the number of Shares reserved for issuance under this Plan, (b) the Exercise Prices of and number of Shares subject to outstanding Options, and (c) the number of Shares subject to other outstanding Awards will be proportionately adjusted, subject to any required action by the Board or the stockholders of the Company and compliance with applicable securities laws; provided, however, that fractions of a Share will not be issued but will either be replaced by a cash payment equal to the Fair Market Value of such fraction of a Share or will be rounded up to the nearest whole Share, as determined by the Committee.
4. ELIGIBILITY.
ISOs (as defined in Section 6 below) may be granted only to employees (including officers and directors who are also employees) of the Company or of a Parent or Subsidiary of the Company. All other Awards may be granted to employees, officers, directors, consultants, independent contractors and advisors of the Company or any Parent or Subsidiary of the Company, provided such consultants, independent contractors and advisors render bona-fide services not in connection with the offer and sale of securities in a capital-raising transaction or promotion of the Company's securities. A person may be granted more than one Award under this Plan.
5. ADMINISTRATION.
5.1 Committee.
(a) The Plan shall be administered and interpreted by a committee consisting of two (2) or more members of the Board.
(b) Members of the Committee may resign at any time by delivering written notice to the Board. Vacancies in the Committee shall be filled by the Board. The Committee shall act by a majority of its members in office. The Committee may act either by vote at a meeting or by a memorandum or other written instrument signed by a majority of the Committee.
(c) If the Board, in its discretion, does not appoint a Committee, the Board itself will administer and interpret the Plan and take such other actions as the Committee is authorized to take hereunder; provided that the Board may take such actions hereunder in the same manner as the Board may
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take other actions under the Certificate of Incorporation and bylaws of the Company generally.
5.2 Committee Authority. Without limitation, the Committee will have the authority to:
(a) construe and interpret this Plan, any Award Agreement and any other agreement or document executed pursuant to this Plan;
(b) prescribe, amend and rescind rules and regulations relating to this Plan or any Award;
(c) select persons to receive Awards;
(d) determine the form and terms of Awards;
(e) determine the number of Shares or other consideration subject to Awards;
(f) determine whether Awards will be granted singly, in combination with, in tandem with, in replacement of, or as alternatives to, other Awards under this Plan or any other incentive or compensation plan of the Company or any Parent or Subsidiary of the Company;
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment of Awards;
(i) correct any defect, supply any omission or reconcile any inconsistency in this Plan, any Award or any Award Agreement;
(j) determine whether an Award has been earned; and
(k) make all other determinations necessary or advisable for the administration of this Plan.
5.3 Committee Discretion. Any determination made by the Committee with respect to any Award will be made at the time of grant of the Award or, unless in contravention of any express term of this Plan or Award, at any later time, and such determination will be final and binding on the Company and on all persons having an interest in any Award under this Plan. The Committee may delegate to one or more officers of the Company the authority to grant an Award under this Plan to Participants who are not Insiders of the Company. No member of the Committee shall be personally liable for any action taken or decision made in good faith relating to this Plan, and all members of the Committee shall be fully protected and indemnified to the fullest extent permitted under applicable law by the Company in respect to any such action, determination, or interpretation.
6. OPTIONS.
The Committee may grant Options to eligible persons and will determine whether such Options will be Incentive Stock Options within the meaning of the Code ("ISO") or Nonqualified Stock Options ("NQSOs"), the number of Shares
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subject to the Option, the Exercise Price of the Option, the period during which the Option may be exercised, and all other terms and conditions of the Option, subject to the following:
6.1 Form of Option Grant. Each Option granted under this Plan will be evidenced by an Award Agreement which will expressly identify the Option as an ISO or an NQSO (hereinafter referred to as the "Stock Option Agreement"), and will be in such form and contain such provisions (which need not be the same for each Participant) as the Committee may from time to time approve, and which will comply with and be subject to the terms and conditions of this Plan.
6.2 Date of Grant. The date of grant of an Option will be the date on which the Committee makes the determination to grant such Option, unless otherwise specified by the Committee. The Stock Option Agreement and a copy of this Plan will be delivered to the Participant within a reasonable time after the granting of the Option.
6.3 Exercise Period. Options may be exercisable within the times or upon the events determined by the Committee as set forth in the Stock Option Agreement governing such Option; provided, however, that no Option will be exercisable after the expiration of ten (10) years from the date the Option is granted; and provided further that no ISO granted to a person who directly or by attribution owns more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any Parent or Subsidiary of the Company
("Ten Percent Stockholder") will be exercisable after the expiration of five (5) years from the date the ISO is granted. The Committee also may provide for Options to become exercisable at one time or from time to time, periodically or otherwise, in such number of Shares or percentage of Shares as the Committee determines, provided, however, that in all events a Participant will be entitled to exercise an Option at the rate of at least 20% per year over five years from the date of grant, subject to reasonable conditions such as continued employment; and further provided that an Option granted to a Participant who is an officer or director may become fully exercisable, subject to reasonable conditions such as continued employment, at any time or during any period established by the Company.
6.4 Exercise Price. The Exercise Price of an Option will be determined by the Committee when the Option is granted and may be not less than 85% of the Fair Market Value of the Shares on the date of grant; provided that: (a) the Exercise Price of an ISO will be not less than 100% of the Fair Market Value of the Shares on the date of grant; and (b) the Exercise Price of any Option granted to a Ten Percent Stockholder will not be less than 110% of the Fair Market Value of the Shares on the date of grant. Payment for the Shares purchased may be made in accordance with Section 9 of this Plan.
6.5 Method of Exercise. Options may be exercised only by delivery to the Company of a written stock option exercise agreement (the "Exercise Agreement") in a form approved by the Committee, (which need not be the same for each Participant), stating the number of Shares being purchased, the restrictions imposed on the Shares purchased under such Exercise Agreement, if any, and such representations and agreements regarding the Participant's investment intent and access to information and other matters, if any, as may be required or desirable by the Company to comply with applicable securities laws, together with payment in full of the Exercise Price for the number of Shares being purchased.
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6.6 Termination. Notwithstanding the exercise periods set forth in the Stock Option Agreement, exercise of an Option will always be subject to the following:
(a) If the Participant's service is Terminated for any reason except death or Disability, then the Participant may exercise such Participant's Options only to the extent that such Options would have been exercisable upon the Termination Date no later than three (3) months after the Termination Date (or such longer time period not exceeding five (5) years as may be determined by the Committee, with any exercise beyond three (3) months after the Termination Date deemed to be an NQSO).
(b) If the Participant's service is Terminated because of the Participant's death or Disability (or the Participant dies within three (3) months after a Termination other than for Cause or because of Participant's Disability), then the Participant's Options may be exercised only to the extent that such Options would have been exercisable by the Participant on the Termination Date and must be exercised by the Participant (or the Participant's legal representative) no later than twelve (12) months after the Termination Date (or such longer time period not exceeding five (5) years as may be determined by the Committee, with any such exercise beyond (i) three (3) months after the Termination Date when the Termination is for any reason other than the Participant's death or Disability, or (ii) twelve (12) months after the Termination Date when the Termination is for Participant's death or Disability, deemed to be an NQSO).
(c) Notwithstanding the provisions in paragraph 6.6(a) above, if the Participant's service is Terminated for Cause, neither the Participant, the Participant's estate nor such other person who may then hold the Option shall be entitled to exercise any Option with respect to any Shares whatsoever, after Termination, whether or not after Termination the Participant may receive payment from the Company or a Subsidiary for vacation pay, for services rendered prior to Termination, for services rendered for the day on which Termination occurs, for salary in lieu of notice, or for any other benefits. For the purpose of this paragraph, Termination shall be deemed to occur on the date when the Company dispatches notice or advice to the Participant that his service is Terminated.
6.7 Limitations on Exercise. The Committee may specify a reasonable minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum number will not prevent the Participant from exercising the Option for the full number of Shares for which it is then exercisable.
6.8 Limitations on ISO. The aggregate Fair Market Value (determined as of the date of grant) of Shares with respect to which ISO are exercisable for the first time by a Participant during any calendar year (under this Plan or under any other incentive stock option plan of the Company, Parent or Subsidiary of the Company) will not exceed $100,000. If the Fair Market Value of Shares on the date of grant with respect to which ISO are exercisable for the first time by a Participant during any calendar year exceeds $100,000, then the Options for the first $100,000 worth of Shares to become exercisable in such calendar year will be ISO and the Options for the amount in excess of $100,000 that become exercisable in that calendar year will be NQSOs. In the event that the Code or the regulations promulgated thereunder are amended after the Effective Date of this Plan to provide for a different limit on the Fair Market Value of Shares permitted to be subject to ISO, such different limit will be automatically incorporated herein and will apply to any Options granted after the effective date of such amendment.
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6.9 Modification, Extension or Renewal. The Committee may modify, extend or renew outstanding Options and authorize the grant of new Options in substitution therefore, provided that any such action may not, without the written consent of a Participant, impair any of such Participant's rights under any Option previously granted. Any outstanding ISO that is modified, extended, renewed or otherwise altered will be treated in accordance with Section 424(h) of the Code. The Committee may reduce the Exercise Price of outstanding Options without the consent of Participants affected by a written notice to them; provided, however, that the Exercise Price may not be reduced below the minimum Exercise Price that would be permitted under Section 6.4 of this Plan for Options granted on the date the action is taken to reduce the Exercise Price.
6.10 No Disqualification. Notwithstanding any other provision in this Plan, no term of this Plan relating to ISO will be interpreted, amended or altered, nor will any discretion or authority granted under this Plan be exercised, so as to disqualify this Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any ISO under Section 422 of the Code.
7. STOCK AWARD.
A Stock Award is an offer by the Company to sell to an eligible person Shares that may or may not be subject to restrictions. The Committee will determine to whom an offer will be made, the number of Shares the person may purchase, the price to be paid (the "Purchase Price"), the restrictions to which the Shares will be subject, if any, and all other terms and conditions of the Stock Award, subject to the following:
7.1 Form of Stock Award. All purchases under a Stock Award made pursuant to this Plan will be evidenced by an Award Agreement (the "Stock Purchase Agreement") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. The offer of a Stock Award will be accepted by the Participant's execution and delivery of the Stock Purchase Agreement (or similar agreement) and payment for the Shares to the Company in accordance with the Stock Purchase Agreement.
7.2 Purchase Price. The Purchase Price of Shares sold pursuant to a Stock Award will be determined by the Committee on the date the Stock Award is granted and may not be less than 85% of the Fair Market Value of the Shares on the grant date, except in the case of a sale to a Ten Percent Stockholder, in which case the Purchase Price will be 100% of the Fair Market Value. Payment of the Purchase Price must be made in accordance with Section 9 of this Plan.
7.3 Terms of Stock Awards. Stock Awards may be subject to such restrictions as the Committee may impose. These restrictions may be based upon completion of a specified number of years of service with the Company or upon completion of the performance goals as set out in advance in the Participant's individual Stock Purchase Agreement. Stock Awards may vary from Participant to Participant and between groups of Participants. Prior to the grant of a Stock Award subject to restrictions, the Committee shall: (a) determine the nature, length and starting date of any Performance Period for the Stock Award; (b) select from among the Performance Factors to be used to measure performance goals, if any; and (c) determine the number of Shares that may be awarded to the
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Participant. Prior to the transfer of any Stock Award, the Committee shall determine the extent to which such Stock Award has been earned. Performance Periods may overlap and Participants may participate simultaneously with respect to Stock Awards that are subject to different Performance Periods and have different performance goals and other criteria.
7.4 Termination During Performance Period. If a Participant is Terminated during a Performance Period for any reason, then such Participant will be entitled to payment (whether in Shares, cash or otherwise) with respect to the Stock Award only to the extent earned as of the date of Termination in accordance with the Stock Purchase Agreement, unless the Committee determines otherwise.
8. STOCK BONUSES.
8.1 Awards of Stock Bonuses. A Stock Bonus is an award of Shares for extraordinary services rendered to the Company or any Parent or Subsidiary of the Company. A Stock Bonus will be awarded pursuant to an Award Agreement (the "Stock Bonus Agreement") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. A Stock Bonus may be awarded upon satisfaction of such performance goals as are set out in advance in the Participant's individual Award Agreement (the "Performance Stock Bonus Agreement") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. Stock Bonuses may vary from Participant to Participant and between groups of Participants, and may be based upon the achievement of the Company, Parent or Subsidiary and/or individual performance factors or upon such other criteria as the Committee may determine.
8.2 Terms of Stock Bonuses. The Committee will determine the number of Shares to be awarded to the Participant. If the Stock Bonus is being earned upon the satisfaction of performance goals pursuant to a Performance Stock Bonus Agreement, then the Committee will: (a) determine the nature, length and starting date of any Performance Period for each Stock Bonus; (b) select from among the Performance Factors to be used to measure the performance, if any; and
(c) determine the number of Shares that may be awarded to the Participant. Prior to the payment of any Stock Bonus, the Committee shall determine the extent to which such Stock Bonuses have been earned. Performance Periods may overlap and Participants may participate simultaneously with respect to Stock Bonuses that are subject to different Performance Periods and different performance goals and other criteria. The number of Shares may be fixed or may vary in accordance with such performance goals and criteria as may be determined by the Committee. The Committee may adjust the performance goals applicable to the Stock Bonuses to take into account changes in law and accounting or tax rules and to make such adjustments as the Committee deems necessary or appropriate to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships.
8.3 Form of Payment. The earned portion of a Stock Bonus may be paid to the Participant by the Company either currently or on a deferred basis, with such interest or dividend equivalent, if any, as the Committee may determine. Payment of an interest or dividend equivalent (if any) may be made in the form of cash or whole Shares or a combination thereof, either in a lump sum payment or in installments, all as the Committee will determine.
9. PAYMENT FOR SHARE PURCHASES.
Payment for Shares purchased pursuant to this Plan may be made in cash (by check) or, where expressly approved for the Participant by the Committee and where permitted by law:
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(a) by cancellation of indebtedness of the Company to the Participant;
(b) by surrender of shares that either: (1) have been owned by the Participant for more than six (6) months and have been paid for within the meaning of SEC Rule 144; or (2) were obtained by the Participant in the public market;
(c) by waiver of compensation due or accrued to the Participant for services rendered;
(d) with respect only to purchases upon exercise of an Option, and provided that a public market for the Company's stock exists:
(1) through a "same day sale" commitment from the Participant and a broker-dealer that is a member of the National Association of Securities Dealers (an "NASD Dealer") whereby the Participant irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or
(2) through a "margin" commitment from the Participant and a NASD Dealer whereby the Participant irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or
(e) by any combination of the foregoing.
10. WITHHOLDING TAXES.
10.1 Withholding Generally. Whenever Shares are to be issued in satisfaction of Awards granted under this Plan, the Company may require the Participant to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such Shares. Whenever, under this Plan, payments in satisfaction of Awards are to be made in cash, such payment will be net of an amount sufficient to satisfy federal, state, and local withholding tax requirements.
10.2 Stock Withholding. When, under applicable tax laws, a participant incurs tax liability in connection with the exercise or vesting of any Award that is subject to tax withholding and the Participant is obligated to pay the Company the amount required to be withheld, the Committee may allow the Participant to satisfy the minimum withholding tax obligation by electing to have the Company withhold from the Shares to be issued that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld, determined on the date that the amount of tax to be withheld is to be determined. All elections by a Participant to have Shares withheld for this purpose will be made in accordance with the requirements established by the Committee and will be in writing in a form acceptable to the Committee.
11. PRIVILEGES OF STOCK OWNERSHIP.
11.1 Voting and Dividends. No Participant will have any of the rights of a stockholder with respect to any Shares until the Shares are issued to the Participant. After Shares are issued to the Participant, the Participant will be a stockholder and will have all the rights of a stockholder with respect to such
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Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares; provided, that if such Shares are issued pursuant to a Stock Award with restrictions, then any new, additional or different securities the Participant may become entitled to receive with respect to such Shares by virtue of a stock dividend, stock split or any other change in the corporate or capital structure of the Company will be subject to the same restrictions as the Stock Award; provided, further, that the Participant will have no right to retain such stock dividends or stock distributions with respect to Shares that are repurchased at the Participant's Purchase Price or Exercise Price pursuant to Section 13.
11.2 Financial Statements. The Company will provide financial statements to each Participant prior to such Participant's purchase of Shares under this Plan, and to each Participant annually during the period such Participant has Awards outstanding; provided, however, the Company will not be required to provide such financial statements to Participants whose services in connection with the Company assure them access to equivalent information.
12. NON-TRANSFERABILITY.
Awards of Shares granted under this Plan, and any interest therein, will not be transferable or assignable by the Participant, and may not be made subject to execution, attachment or similar process, other than by will or by the laws of descent and distribution. Awards of Options granted under this Plan, and any interest therein, will not be transferable or assignable by the Participant, and may not be made subject to execution, attachment or similar process, other than by will or by the laws of descent and distribution, by instrument to an inter vivos or testamentary trust in which the options are to be passed to beneficiaries upon the death of the trustor, or by gift to "immediate family" as that term is defined in 17 C.F.R. 240.16a-1(e). During the lifetime of the Participant an Award will be exercisable only by the Participant. During the lifetime of the Participant, any elections with respect to an Award may be made only by the Participant unless otherwise determined by the Committee and set forth in the Award Agreement with respect to Awards that are not ISOs.
13. REPURCHASE RIGHTS.
At the discretion of the Committee, the Company may reserve to itself and/or its assignee(s) in the Award Agreement a right to repurchase a portion of or all of the unvested Shares held by a Participant following such Participant's Termination Date. Such repurchase by the Company shall be for cash and/or cancellation of purchase money indebtedness and the price per share shall be the Participant's Exercise Price or Purchase Price, as applicable.
14. CERTIFICATES.
All certificates for Shares or other securities delivered under this Plan will be subject to such stop transfer orders, legends and other restrictions as the Committee may deem necessary or advisable, including restrictions under any applicable federal, state or foreign securities law, or any rules, regulations and other requirements of the SEC or any stock exchange or automated quotation system upon which the Shares may be listed or quoted.
15. ESCROW; PLEDGE OF SHARES.
To enforce any restrictions on a Participant's Shares, the Committee may require the Participant to deposit all certificates representing Shares, together with stock powers or other instruments of transfer approved by the
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Committee appropriately endorsed in blank, with the Company or an agent designated by the Company to hold in escrow until such restrictions have lapsed or terminated, and the Committee may cause a legend or legends referencing such restrictions to be placed on the certificates.
16. EXCHANGE AND BUYOUT OF AWARDS.
The Committee may, at any time or from time to time, authorize the Company, with the consent of the respective Participants, to issue new Awards in exchange for the surrender and cancellation of any or all outstanding Awards. The Committee may at any time buy from a Participant an Award previously granted with payment in cash, Shares or other consideration, based on such terms and conditions as the Committee and the Participant may agree.
17. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE.
An Award will not be effective unless such Award is in compliance with all applicable federal and state securities laws, rules and regulations of any governmental body, and the requirements of any stock exchange or automated quotation system upon which the Shares may then be listed or quoted, as they are in effect on the date of grant of the Award and also on the date of exercise or other issuance. Notwithstanding any other provision in this Plan, the Company will have no obligation to issue or deliver certificates for Shares under this Plan prior to: (a) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable; and/or (b) completion of any registration or other qualification of such Shares under any state or federal law or ruling of any governmental body that the Company determines to be necessary or advisable. The Company will be under no obligation to register the Shares with the SEC or to effect compliance with the registration, qualification or listing requirements of any state securities laws, stock exchange or automated quotation system, and the Company will have no liability for any inability or failure to do so.
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18. NO OBLIGATION TO EMPLOY.
Nothing in this Plan or any Award granted under this Plan will confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Parent or Subsidiary of the Company or limit in any way the right of the Company or any Parent or Subsidiary of the Company to terminate Participant's employment or other relationship at any time, with or without cause.
19. CORPORATE TRANSACTIONS.
19.1 Assumption or Replacement of Awards by Successor. In the event of (a) a dissolution or liquidation of the Company, (b) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the stockholders of the Company or their relative stock holdings and the Awards granted under this Plan are assumed, converted or replaced by the successor corporation, which assumption will be binding on all Participants), (c) a merger in which the Company is the surviving corporation but after which the stockholders of the Company immediately prior to such merger (other than any stockholder that merges, or which owns or controls another corporation that merges, with the Company in such merger) cease to own their shares or other equity interest in the Company, (d) the sale of substantially all of the assets of the Company, or (e) the acquisition, sale, or transfer of more than 50% of the outstanding shares of the Company by tender offer or similar transaction, any or all outstanding Awards may be assumed, converted or replaced by the successor corporation (if any), which assumption, conversion or replacement will be binding on all Participants. In the alternative, the successor corporation may substitute equivalent Awards or provide substantially similar consideration to Participants as was provided to stockholders (after taking into account the existing provisions of the Awards). The successor corporation may also issue, in place of outstanding Shares of the Company held by the Participant, substantially similar shares or other property subject to repurchase restrictions no less favorable to the Participant. In the event such successor corporation (if any) refuses to assume or substitute Awards, as provided above, pursuant to a transaction described in this Subsection 19.1, (i) the vesting of any or all Awards granted pursuant to this Plan will accelerate upon a transaction described in this Section 19 and (ii) any or all Options granted pursuant to this Plan will become exercisable in full prior to the consummation of such event at such time and on such conditions as the Committee determines. If such Options are not exercised prior to the consummation of the corporate transaction, they shall terminate at such time as determined by the Committee.
19.2 Other Treatment of Awards. Subject to any greater rights granted to Participants under the foregoing provisions of this Section 19, in the event of the occurrence of any transaction described in Section 19.1, any outstanding Awards will be treated as provided in the applicable agreement or plan of merger, consolidation, dissolution, liquidation, or sale of assets.
19.3 Assumption of Awards by the Company. The Company, from time to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either;
(a) granting an Award under this Plan in substitution of such other company's award; or (b) assuming such award as if it had been granted under this Plan if the terms of such assumed award could be applied to an Award granted under this Plan. Such substitution or assumption will be permissible if the holder of the substituted or assumed award would have been eligible to be granted an Award under this Plan if the other company had applied the rules of
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this Plan to such grant. In the event the Company assumes an award granted by another company, the terms and conditions of such award will remain unchanged (except that the exercise price and the number and nature of Shares issuable upon exercise of any such option will be adjusted appropriately pursuant to
Section 424(a) of the Code). In the event the Company elects to grant a new Option rather than assuming an existing option, such new Option may be granted with a similarly adjusted Exercise Price.
20. ADOPTION AND STOCKHOLDER APPROVAL.
This Plan will become effective on the date on which it is adopted by the Board (the "Effective Date"). Upon the Effective Date, the Committee may grant Awards pursuant to this Plan. The Company intends to seek stockholder approval of the Plan within twelve (12) months after the date this Plan is adopted by the Board; provided, however, if the Company fails to obtain stockholder approval of the Plan during such 12-month period, pursuant to Section 422 of the Code, any Option granted as an ISO at any time under the Plan will not qualify as an ISO within the meaning of the Code and will be deemed to be an NQSO.
21. TERM OF PLAN/GOVERNING LAW.
Unless earlier terminated as provided herein, this Plan will terminate ten (10) years from the date this Plan is adopted by the Board or, if earlier, the date of stockholder approval. This Plan and all agreements thereunder shall be governed by and construed in accordance with the laws of the State of California.
22. AMENDMENT OR TERMINATION OF PLAN.
The Board may at any time terminate or amend this Plan in any respect, including without limitation amendment of any form of Award Agreement or instrument to be executed pursuant to this Plan; provided, however, that the Board will not, without the approval of the stockholders of the Company, amend this Plan in any manner that requires such stockholder approval.
23. NONEXCLUSIVITY OF THE PLAN.
Neither the adoption of this Plan by the Board, the submission of this Plan to the stockholders of the Company for approval, nor any provision of this Plan will be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of stock options and bonuses otherwise than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases.
24. ACTION BY COMMITTEE.
Any action permitted or required to be taken by the Committee or any decision or determination permitted or required to be made by the Committee pursuant to this Plan shall be taken or made in the Committee's sole and absolute discretion.
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EXHIBIT 5.1
SICHENZIA ROSS FRIEDMAN FERENCE LLP
1065 AVENUE OF THE AMERICAS
NEW YORK, NY 10018
TEL 212 930 9700 FAX 212 930 9725
WWW.SRFF.COM
April 27, 2006
VIA ELECTRONIC TRANSMISSION
Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549
Re: Addison-Davis Diagnostics, Inc.
Ladies and Gentlemen:
We refer to the registration statement on Form S-8 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Act"), filed by Addison-Davis Diagnostics, Inc., a Delaware corporation (the "Company"), with the Securities and Exchange Commission on April 27, 2006.
We have examined the originals, photocopies, certified copies or other evidence of such records of the Company, certificates of officers of the Company and public officials, and other documents as we have deemed relevant and necessary as a basis for the opinion hereinafter expressed. In such examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as certified copies or photocopies and the authenticity of the originals of such latter documents.
Based on our examination mentioned above, we are of the opinion that the securities being registered to be sold pursuant to the Registration Statement are duly authorized and will be, when sold in the manner described in the Registration Statement, legally and validly issued, and fully paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement. In giving the foregoing consent, we do not hereby admit that we are in the category of persons whose consent is required under Section 7 of the Act, or the rules and regulations of the Securities and Exchange Commission.
Very truly yours,
/s/ Sichenzia Ross Friedman Ference LLP
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Sichenzia Ross Friedman Ference LLP
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EXHIBIT 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in this Registration Statement of Addison-Davis Diagnostics, Inc. (the "Company") on Form S-8 of our report dated August 19, 2004, on the consolidated financial statements of the Company (formerly known as QT 5, Inc.) for the year ended June 30, 2004, which report is included in the Company's annual report on Form 10-KSB for the year ended September 30, 2005, as filed with the Securities and Exchange Commission on November 14, 2005.
CORBIN & COMPANY, LLP
Irvine, California
April 25, 2006
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EXHIBIT 23.3
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The firm of Armando C. Ibarra, Certified Public Accountants, apc consents to the inclusion of our report dated September 8, 2005, on the audited financial statements of Addison-Davis Diagnostics, Inc., as of June 30, 2005, in any filings that are necessary now or in the near future with the U.S. Securities and Exchange Commission.
/s/ Armando C. Ibarra, CPA
Chula Vista, California 91910
April 25, 2006
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