Item 1.
Business
General
Scivanta Medical Corporation (“Scivanta”), originally incorporated in New Jersey on November 29, 1982, is currently a Nevada corporation headquartered in Spring Lake, New Jersey. Scivanta currently does not sell any products or technologies.
From our inception through the fiscal year ended October 31, 2004, our business included, at one time or another, the distribution of over the counter medical devices and supplies, such as condoms and alcohol preparation pads, and generic and name brand pharmaceuticals. Our business also included the sale of a hormone replacement therapy drug, which was manufactured and supplied to us by a third party manufacturer. Our products generally were sold by distributors or wholesalers to pharmacies or directly to customers through mail order. During this time period we also were developing safety syringes that were intended to reduce accidental needle sticks of medical service providers. Due to vendor disputes, low profit margins and/or minimal market opportunities, we ceased selling and/or developing all of the aforementioned products.
On November 10, 2006, we acquired the exclusive world-wide rights to develop, manufacture and distribute the Scivanta Cardiac Monitoring System (the “SCMS”), a minimally invasive two-balloon esophageal catheter system used to monitor cardiac performance. The SCMS is currently in the development stage. See “Item 1. Business - Strategy for Business Development - SCMS.”
Strategy for Business Development
Scivanta is currently operating on a limited basis as we continue to seek additional financing. If we are able to secure additional financing, then it is our intent to follow the strategy for business development as described below.
SCMS
The SCMS will provide the primary measurements of cardiac performance, including left atrial pressure, which is a crucial measurement in monitoring cardiac challenged patients. The essential hardware, software and catheter components for the SCMS have been completed. Scivanta currently has a fully assembled SCMS device that has been used in initial clinical trials. The two major items remaining in the development of the SCMS are the completion of the clinical trials and the design and engineering of the production model of the SCMS.
We conducted an initial clinical trial for the SCMS in Buffalo, New York at Kaleida Health/Millard Fillmore Hospital. This initial clinical trial commenced in October 2008 and was completed in March 2009. The initial clinical trial was designed to obtain data concerning the safety and efficacy of the SCMS by comparing data obtained from the SCMS with that generated during a left heart catheterization performed by a cardiologist in the cardiac catheterization unit. In particular, the initial clinical trial focused on comparing the mean left atrial pressure measurements detected with the SCMS to left ventricular end-diastolic pressure readings measured in a simultaneous left heart catheterization procedure. These measurements of cardiac performance are used by physicians in the critical evaluation of a patient’s cardiac health.
In five patients enrolled in the initial clinical trial, the mean left atrial pressure as determined by the SCMS matched the left ventricular end-diastolic pressure as determined by the left heart catheterization procedure within 0.1mmHg to 0.5mmHg, which translates into a maximum deviation of 3.3% when compared to the left heart catheterization data. These results for the SCMS are considered by Scivanta to be highly accurate. Two additional patients enrolled in the initial clinical trial, but the data collected was incomplete and therefore not considered relevant. There were no adverse events reported during the course of the initial clinical trial.
Subject to the receipt of additional funding, we expect to test a minimum of 40 additional patients in clinical trials at approximately three additional sites. These multi-center clinical trials are expected to take approximately two months to complete from the date they commence. The length of time and the number of patients tested in the clinical trials could change depending on the rate of patient recruitment and the data results produced.
The design and engineering of the production model will run concurrent with the clinical trials. In addition, we must also receive the appropriate regulatory approvals before the SCMS can be marketed in the United States or abroad. Scivanta will submit its 510(k) premarket notification for the SCMS to the United States Food and Drug Administration (“FDA”) once it has obtained sufficient clinical data for the SCMS. Upon completion of the SCMS production model, we will also seek European Union market approval (CE mark).
We will not be able to complete the clinical trials or the design and engineering of the production model of the SCMS without obtaining additional cash through an equity and/or debt financing or through corporate partnerships. We continue to pursue potential investors and have engaged placement agents to assist in this endeavor. No assurances can be given that we will be able to obtain sufficient capital to finish the development of the SCMS through any corporate partnerships and/or through equity and/or debt financing. In addition, no assurances can be given that if we successfully develop and market the SCMS, such product will become profitable.
Depending upon our ability to secure additional financing, the length of the clinical trials and the length of the FDA’s review, Scivanta estimates that it could have 510(k) premarket notification clearance from the FDA for the SCMS within twelve months of obtaining sufficient financing, which will allow Scivanta to commence sales of the SCMS in the United States shortly thereafter. Scivanta estimates that it will commence European sales within three months following the commencement of sales in the United States.
Other Potential Product Acquisitions
In addition to developing the SCMS, our strategy for business development, once sufficient funding is obtained, will focus on the acquisition, through licensing or purchasing, of technologies or products that are sold or are capable of being sold in a specialty or niche market. Technologies or products of interest include, but are not limited to, medical devices, pharmaceuticals and other proprietary technologies or patented products. Specialty or niche-market technologies or products, in comparison to commodities, generally offer greater operating margins. These products are distributed through specialty distributor networks or manufacturer representatives to the original equipment manufacturer market, supplier and provider markets and to the general marketplace.
Annual sales, if any, of the prospective technologies and products that we will evaluate are generally less than $5 million. We believe that these technologies or products generally are not attractive to larger companies because they do not represent opportunities for revenues and earnings that would be material to those companies. We will consider technologies and products that generally experience lower sales or lack of development because of inadequate distribution channels, lack of companion products or insufficient capital.
Below is a listing of criteria we intend to utilize in identifying and evaluating potential technology or product acquisitions:
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Whether the technology or product is a specialty or niche-market product which is distributed through specialty distributors.
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Whether the technology or product is unique or patented.
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Whether the technology or product has, or is capable of achieving, an attractive gross margin, usually in excess of 35%.
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Whether the prospective seller is receptive to receiving equity as part of the purchase price.
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Whether the market for the technology or product is expanding, but not to such a degree as to attract larger manufacturers or result in the technology or product achieving commodity status.
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Whether we can access marketing channels to market and distribute the technology or product.
No assurances can be given that we will have the financial and other resources necessary for us to acquire additional technologies or products or implement any part of our business development strategy. In addition, no assurances can be given that any technology or product that we acquire as part of our business development strategy will be profitable.
Principal Product
The SCMS is a minimally invasive cardiac monitoring device that will provide the primary measurements of cardiac performance, including left atrial pressure, which is a crucial measurement in monitoring cardiac challenged patients. The SCMS uses a two-balloon esophageal catheter, which is attached to a specialized computer and monitor containing proprietary software. The SCMS is designed to provide continuous, long-term cardiac performance monitoring in a cost effective manner with minimal risk to the patient.
The SCMS two balloon catheter is inserted into the esophagus and capitalizes on the anatomic relationship of the left atrium and aortic arch proximate to the esophagus. Once positioned, the catheter’s balloons are inflated. The wall motion in the left atrium and the aorta generates pressure changes in the respective balloons. The electronic monitoring system captures and processes signals from these pressure changes as well as data from an electrocardiogram, phonocardiogram and automated blood pressure cuff. The monitoring system then translates this raw data into relevant, real-time clinical measurements utilizing a proprietary software algorithm.
The SCMS provides the following cardiac measurements:
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mean left atrial pressure;
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left ventricular contractility during isovolumic contraction;
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cardiac output by pulse contour;
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arterial pulse wave velocity;
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left atrial transmural pressure;
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pleural pressure; and
·
systolic time interval.
The current standard of care for monitoring critically ill cardiac challenged patients suffering from various cardiovascular conditions is an invasive procedure known as pulmonary artery catheterization. That procedure requires an incision into a patient’s neck or groin and the insertion of a pulmonary artery catheter, commonly known as a Swan-Ganz catheter, into the right atrium and ventricle of the heart, and then into a pulmonary artery. That procedure must be performed within a hospital’s cardiac catheterization lab or intensive care unit.
Unlike the Swan-Ganz catheter, the SCMS does not require a catheterization lab or intensive care unit to be inserted into a patient, providing Scivanta with an expanded market opportunity when compared to the Swan-Ganz. We believe that the SCMS will be used throughout a hospital including surgical suites, emergency departments and post-surgical settings. We also believe that the SCMS will ultimately be used on an outpatient basis within a physician’s office and/or surgical centers. In addition, the SCMS also provides clinical measurements of left ventricular contractility, left atrial transmural pressure and pleural pressure, which the Swan-Ganz does not provide. We believe that the measure of contractility during isovolumic contraction is an important advance offered by the SCMS, and is a distinct advantage over the Swan-Ganz catheter. Measurement of left ventricular contractility is potentially a new standard for monitoring the treatment of congestive heart failure.
For additional information on the status of the SCMS development and clinical trials, see “Item 1. Business - Strategy for Business Development - SCMS.”
Scivanta Agreements
Original SCMS License Agreement
On November 10, 2006, we entered into a technology license agreement (the “License Agreement”) with The Research Foundation of State University of New York, for and on behalf of the University at Buffalo (the “Foundation”), Donald D. Hickey, M.D. (“Hickey”) and Clas E. Lundgren (“Lundgren”). The Foundation, Hickey and Lundgren shall be collectively referred to herein as the “Licensor.” The License Agreement was amended on June 29, 2007, October 24, 2008, January 6, 2009 and October 29, 2009. Pursuant to the License Agreement, the Licensor granted Scivanta the exclusive world-wide rights to develop, manufacture and distribute the SCMS, a minimally invasive two-balloon esophageal catheter system used to monitor cardiac performance.
Scivanta agreed to make an initial payment of $264,300 which was subsequently reduced to $262,957 pursuant to the first amendment to the License Agreement dated June 29, 2007. Scivanta paid $40,900 on November 16, 2006, $80,000 on October 31, 2007 and was required to pay $142,057 on November 1, 2008. Pursuant to the second amendment to the License Agreement dated October 24, 2008, the $142,057 payment was restructured as follows: (a) $39,101 was paid in cash to Hickey on October 24, 2008; (b) $34,567 was paid in cash to Lundgren on October 24, 2008; (c) $33,822 was paid by issuing 187,900 shares of our common stock to the Foundation on October 28, 2008; and (d) $34,567 was paid in cash to Lundgren on February 4, 2009.
Further, pursuant to the second amendment to the License Agreement dated October 24, 2008, any milestone payments that Scivanta was required or may have been required to pay to the Licensor under the original terms of the License Agreement were eliminated in exchange for the following: (a) a one-time cash payment by Scivanta to Hickey of $158,438 due on December 31, 2009; (b) the issuance of 224,960 shares of our common stock to the Foundation on October 28, 2008; (c) the issuance of 162,500 shares of our common stock to Hickey on October 28, 2008 and (d) the issuance of 426,560 shares of our common stock to Lundgren on October 28, 2008.
Pursuant to the fourth amendment to the License Agreement, the payment of $158,438 that was due to Hickey on December 31, 2009 was restructured as follows: (a) a cash payment of $50,000 was made to Hickey on February 28, 2010 and (b) a cash payment of $108,438 was due to Hickey on October 31, 2010. The cash payment of $108,438 due to Hickey on October 31, 2010 was restructured pursuant to an amended and restated technology license agreement dated February 14, 2011, as discussed below.
Amended and Restated SCMS License Agreement
On February 14, 2011, Scivanta entered into an amended and restated technology license agreement (the “Amended and Restated License Agreement”) with the Licensor. The Amended and Restated License Agreement replaced the License Agreement.
Pursuant to the Amended and Restated License Agreement, the Licensor granted Scivanta the exclusive world-wide rights to develop, manufacture and distribute the SCMS. The term of the Amended and Restated License Agreement ends on the later of (a) the expiration date of the last to expire patent right related to the SCMS, which is currently May 1, 2027, or (b) 17 years from the sale of the first licensed product on a country by country basis.
Scivanta was obligated to pay Hickey $108,438 on October 31, 2010 under the License Agreement. Pursuant to the Amended and Restated License Agreement, the payment of $108,438 was restructured and Scivanta agreed to pay Hickey an additional $26,562 as consideration for the extension of timeframes relating to the completion of certain performance based milestones as required by the License Agreement. The aggregate $135,000 due to Hickey pursuant to the Amended and Restated License Agreement was paid or is required to be paid as follows: a) a cash payment of $30,000 was made to Hickey on June 3, 2011 and (b) a cash payment of $105,000 is due to Hickey on the date that is thirty (30) days after the first commercial sale of a product utilizing the licensed technology, but no later than July 31, 2012.
Pursuant to the Amended and Restated License Agreement, Scivanta is required to pay the Licensor a royalty of 5% on annual net sales, as defined in the Amended and Restated License Agreement, subject to certain reductions as detailed in the Amended and Restated License Agreement. Beginning with the first full year of sales of the SCMS in the United States and for two years thereafter, Scivanta is required to pay an annual minimum royalty of $100,000 to the Licensor against which any royalty on net sales paid in the same calendar year for sales in the United States will be credited. Further, beginning with the first full year of sales of the SCMS outside the United States and for two years thereafter, Scivanta is required to pay an annual minimum royalty of $100,000 to the Licensor against which any royalty on net sales paid in the same calendar year for sales outside the United States will be credited. Scivanta is also required to pay the Licensor 25% of all sublicensing revenue, as defined in the Amended and Restated License Agreement, received by Scivanta in connection with Scivanta’s sublicense of the rights granted to Scivanta under the Amended and Restated License Agreement.
The Amended and Restated License Agreement also requires Scivanta to use commercially reasonable efforts to develop and market the SCMS within certain timeframes, subject to specified exceptions. Further, the Amended and Restated License Agreement contains standard provisions regarding indemnification, termination and patent prosecution.
Other Potential Development Agreements
In the event that we are able to secure additional financing, we will enter into development agreements with third parties to assist in the final development and commercialization of the catheter, software and hardware components of the SCMS. We currently intend to negotiate a development agreement with Ethox International, Inc. (“Ethox”), a former contract partner of Scivanta, related to the catheter component of the SCMS. In addition, we currently intend to negotiate a development agreement with Applied Sciences Group (“ASG”), a former contract partner of Scivanta, related to the software component of the SCMS. We also currently intend to negotiate an agreement with Rivertek Medical Systems, Inc. (“Rivertek”), a former contract partner of Scivanta, to assist in the development of the hardware component of the SCMS and to assist in the management of the development of the software and catheter components of the SCMS. Although we intend to negotiate new agreements with each of the aforementioned parties, no assurances can be given that we will reach mutually acceptable agreements. If we cannot reach agreement with any of the aforementioned parties, we will seek a new third party to provide the required services.
Patents and Copyrights
The SCMS is the subject of seven United States patents and other corresponding patents in major international markets, including Canada, the European Union, Japan and India. The patents cover the important facets of the SCMS, including catheter design and construction, catheter positioning, monitor design, algorithms and balloon inflation techniques. The United States patents include United States Patent and Trademark Office numbers: 5,551,439; 5,570,671; 5,697,375; 6,120,442; 6,238,349; 6,432,059; and 7,527,599. In addition, the software that converts the pressure signals into useful clinical information is the subject of copyright.
Manufacturing and Principal Suppliers
We currently intend to outsource the manufacturing of the components for the SCMS. No formal manufacturing agreements have been entered into at this time.
Distribution, Sales and Marketing
We currently do not maintain a dedicated sales force and currently do not sell any products. We currently intend to outsource the distribution and sales requirements related to the SCMS. No formal distribution or sales agreements have been entered into at this time.
Competition
There are four primary types of devices that are used to measure cardiac performance and it is anticipated that such devices would compete with the SCMS for market share. The four types are: (a) pulmonary artery catheter (e.g. Swan-Ganz catheter); (b) trans-esophageal echocardiography; (c) pulsed doppler sonography; and (d) impedance cardiography.
The pulmonary artery catheter, otherwise known as the Swan-Ganz catheter, is the established tool for monitoring cardiac performance and left atrial pressure. The Swan-Ganz catheter is inserted through a vein into the right atrium and ventricle of the heart, and threaded into the pulmonary artery. Due to the invasive nature of the Swan-Ganz catheter, it must be inserted within a hospital’s catheterization lab or intensive care unit and is not recommended for long-term cardiac monitoring. The major distributor of the Swan-Ganz catheter is Edwards Lifesciences Corporation.
Trans-esophageal echocardiography, pulsed doppler sonography and impedance cardiography are all considered to be non-invasive or minimally invasive methods to measure cardiac performance. None of these products have been as successful as the Swan-Ganz catheter primarily due to the fact that these devices cannot provide cardiac measurements as precisely as a Swan-Ganz catheter.
Trans-esophageal echocardiography devices measure the aortic diameter and the movement of red blood cells to determine the velocity and direction of blood flow to calculate stroke volume and thus cardiac performance. Trans-esophageal echocardiography is thought to generate inconsistent results, is dependent on technician skill and technique, is limited in the kinds of patients it can address and is time intensive. Trans-esophageal echocardiography is an imaging modality, and, accordingly, is not generally used as a device for monitoring cardiac performance. Major distributors of echocardiography devices include Siemens Medical Solutions Inc. and Philips Medical Systems.
Pulsed doppler sonography utilizing a doppler transducer have been utilized to generate echocardiographic images from an extracorporeal position in close proximity to the heart. This method also has not met with widespread clinical acceptance for reasons of accuracy and clinical value of the data generated. This device is not a monitoring technology, but rather an imaging technology. Arrow International, Inc. markets this type of device.
Impedance cardiography uses the heart’s electrical characteristics in order to measure the heart’s mechanical, or blood flow, characteristics. The procedure is inaccurate in many circumstances, such as in patients with septic shock and/or severe aortic valve regurgitation and/or irregular heartbeats. In addition, measurements can be inaccurate if the patient moves excessively while monitoring. SonoSite, Inc. markets this type of device.
Government Regulation
As a developer and possible future distributor of medical devices, we are subject to regulation by, among other governmental entities, the FDA, and the corresponding agencies of the states and foreign countries in which we may sell our products. These regulations govern the introduction of new medical devices, the observance of certain standards with respect to the manufacture, testing and labeling of such devices, the maintenance of certain records, the tracking of devices, and other matters. These regulations could have a material impact on our future operations in the event we successfully develop the SCMS and implement our strategy for business development and acquire or develop additional medical devices and related products.
All medical device manufacturing establishments are required to be registered with the FDA. Similarly, all categories of medical devices marketed by a company in the United States are required to be listed. This listing information must be updated pursuant to FDA regulations. The FDA can take regulatory action against a company that does not provide or update its registration and listing information. Pursuant to the Food, Drug and Cosmetic Act (the “FDC Act”), medical devices intended for human use are classified into three categories, Classes I, II and III, on the basis of the controls deemed necessary by the FDA to reasonably assure their safety and effectiveness. Class I devices are subject to general controls (for example, labeling, pre-market notification and adherence to good manufacturing practice regulations) and Class II devices are subject to general and special controls (for example, performance standards, post-market surveillance, patient registries, and FDA guidelines). Generally, Class III devices are those which must receive pre-market approval (“PMA”) from the FDA to ensure their safety and effectiveness (for example, life-sustaining, life-supporting and implantable devices, or new devices which have not been found substantially equivalent to legally marketed devices).
Some Class I devices and most Class II devices require pre-market notification (510(k)) clearance pursuant to Section 510(k) of the FDC Act. Most Class III devices are required to have an approved PMA application. Obtaining PMA approval can take up to several years or more and involve preclinical studies and clinical testing. In contrast, the process of obtaining a 510(k) premarket notification clearance typically requires the submission of substantially less data and generally involves a shorter review period. A 510(k) premarket notification clearance indicates that the FDA agrees with an applicant’s determination that the product for which clearance has been sought is substantially equivalent in terms of safety and effectiveness to another medical device that has been previously marketed, but does not indicate that the product is safe and effective.
In addition to requiring clearance or approval for new products, the FDA may require clearance or approval prior to marketing products that are modifications of existing products. FDA regulations provide that new 510(k) premarket notification clearances are required when, among other things, there is a major change or modification in the intended use of the device or a change or modification to a legally marketed device that could significantly affect its safety or effectiveness. The developer and/or manufacturer is expected to make the initial determination as to whether a proposed change to a cleared device or to its intended use is of a kind that would necessitate the filing of a new 510(k) premarket notification.
In order to conduct clinical trials of an uncleared or unapproved device, companies generally are required to comply with the FDA’s Investigational Device Exemptions regulations. For significant risk devices, the Investigational Device Exemptions regulations require FDA approval of an investigational device before a clinical study may begin. In its approval letter for significant risk investigational device studies, the agency may limit the number of patients that may be treated with the device and/or the number of institutions at which the device may be used. Device studies subject to the Investigational Device Exemption regulations, including both significant risk and non-significant risk device studies, are subject to various restrictions imposed by the FDA. Patients must give informed consent to be treated with an investigational device. The institutional review board of each institution where a study is being conducted must also approve the clinical study. The device generally may not be advertised or otherwise promoted. Unexpected adverse experiences must be reported to the FDA. The company sponsoring the investigation must ensure that the investigation is being conducted in accordance with the Investigational Device Exemptions regulations.
Pursuant to the FDA’s Good Manufacturing Practices under the Quality System Regulations, a medical device manufacturer must manufacture products and maintain records in a prescribed manner with respect to manufacturing, testing and control activities. Further, the manufacturer, distributor and/or owner of a medical device is required to comply with FDA requirements for labeling and promotion of its medical devices. For example, the FDA prohibits cleared or approved devices from being marketed or promoted for uncleared or unapproved uses. The medical device reporting regulations require that a company provide information to the FDA whenever there is evidence to reasonably suggest that one of the company’s devices may have caused or contributed to a death or serious injury, or that there has occurred a malfunction that would be likely to cause or contribute to a death or serious injury if the malfunction were to recur. Additionally, the FDA imposes other requirements on medical device manufacturers, including reporting and record keeping requirements for device corrections and removals (recalls).
Medical device manufacturers and distributors are generally subject to periodic inspections by the FDA. If the FDA determines that a company is not in compliance with applicable laws and regulations, it can, among other things, issue a warning letter apprising the company of violative conduct, detain or seize products, issue a recall, enjoin future violations and assess civil and criminal penalties against the company, its officers or its employees. In addition, it is possible that clearances or approvals could be withdrawn in certain circumstances. Failure to comply with regulatory requirements or any adverse regulatory action could have a material adverse effect on our future business, financial condition and results of operations.
Medical device laws and regulations are also in effect in many of the countries in which we may conduct business outside the United States. These range from comprehensive device approval requirements for certain medical device products to simple requests for product data or certifications. The number and scope of these requirements are increasing. Medical device laws and regulations are also in effect in many of the states in which we may conduct business in the future. State and foreign medical device laws and regulations may have a material impact on us. In addition, international sales of certain medical devices manufactured in the United States, but not cleared or approved by the FDA for distribution in the United States, are subject to the FDA export requirements and policies, including a policy whereby we provide a statement to the FDA certifying that the product to be exported meets certain criteria and FDA issues a certificate to facilitate device export.
Federal, state and foreign laws and regulations regarding the manufacture, sale and distribution of medical devices are subject to future changes. For example, Congress enacted the Medical Device User Fee and Modernization Act of 2002, which included several significant amendments to the prior law governing medical devices. Additionally, the FDA made significant changes to its Good Manufacturing Practices under the Quality System Regulations in 1996 and may make changes to other regulations as well. We cannot predict what impact, if any, such changes might have on our future business; however, such changes could have a material impact on us and our business, financial condition and operating results.
If the FDA does not grant us a 510(k) premarket notification clearance for the SCMS, we would be required to apply for a PMA from the FDA which could significantly increase the amount of time required to receive the FDA’s approval to market the SCMS. No assurance can be given that the FDA will ultimately approve the SCMS for sale. See “Item 1. Business - Strategy for Business Development - SCMS.”
When offering for sale medical devices, we may also have to comply with federal and state anti-kickback and other healthcare fraud and abuse laws. Moreover, approval may be required for a medical device by comparable governmental regulatory authorities in foreign countries prior to the commencement of clinical trials and subsequent marketing of such medical device in those countries. The approval procedure varies from country to country, and the time required may be longer or shorter than that required for FDA approval.
The regulatory policies of the FDA and other regulatory bodies may change and additional governmental regulations may be enacted which could prevent or delay regulatory approval of the products we may distribute in the future. We cannot predict the likelihood, nature or extent of adverse governmental regulation that might arise from future legislative or administrative action, within the United States or abroad.
Insurance
We maintain insurance in such amounts and against such risks as we deem prudent, although no assurance can be given that such insurance will be sufficient under all circumstances to protect us against significant claims for damages. The occurrence of a significant event not fully-insured could materially and adversely affect our business, financial condition and results of operations. Moreover, no assurance can be given that we will be able to maintain adequate insurance in the future at commercially reasonable rates or on acceptable terms.
Employees
David R. LaVance, President and Chief Executive Officer, and Thomas S. Gifford, Executive Vice President, Chief Financial Officer and Secretary are currently the only two employees of Scivanta. We have not experienced any work stoppages to date and we believe that our relationship with these employees is good.
Item 1A.
Item 1A.
Risk Factors
Scivanta is a smaller reporting company and is therefore not required to provide this information.
Item 1B.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Item 2.
Properties
Scivanta’s principal office is located at 215 Morris Avenue, Spring Lake, New Jersey 07762. Scivanta rents approximately 2,000 square feet of office space at this location from Century Capital Associates LLC (“Century Capital”) pursuant to a sublease agreement. David R. LaVance, Scivanta’s Chairman, President and Chief Executive Officer, and Thomas S. Gifford, the Scivanta’s Executive Vice President, Chief Financial Officer and Secretary, are principals of Century Capital. This sublease agreement has a month to month term that requires sixty days written notice to terminate and a monthly rental fee of $5,000. Scivanta is responsible for all operating costs associated with the office space, including utilities, maintenance and property taxes.
Item 3.
Item 3.
Legal Proceedings
None.
Item 4.
Item 4.
(Removed and Reserved)
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is quoted on the NASDAQ OTC Bulletin Board under the ticker symbol “SCVM.” Since secondary market activity for shares of our common stock has been limited and sporadic, such quotations may not actually reflect the price or prices at which purchasers and sellers would currently be willing to purchase or sell such shares.
The following table shows the range of high and low closing bid prices for our common stock for the period commencing November 1, 2009 through October 31, 2011 as reported by the OTC Bulletin Board. These quotations represent prices between dealers and may not include retail markups, markdowns or commissions and may not necessarily represent actual transactions.
The NASDAQ OTC Bulletin Board is generally considered to be a less active and efficient market than the NASDAQ Global Market, the NASDAQ Capital Market or any national exchange and will not provide investors with the liquidity that the NASDAQ Global Market, the NASDAQ Capital Market or a national exchange would offer. As of January 27, 2012, we had one market maker for our common stock which was Rodman and Renshaw, LLC.
Stockholders
As of January 27, 2012, the approximate number of registered holders of our common stock was 440; the number of issued and outstanding shares of our common stock was 31,116,913; and there were 3,953,000 shares of common stock subject to outstanding warrants, 2,495,332 shares of common stock subject to outstanding stock options, and 4,166,667 shares of common stock subject to outstanding convertible debentures.
Dividends
It is anticipated that cash dividends will not be declared on our common stock in the foreseeable future. Our dividend policy is subject to the discretion of our board of directors and depends upon a number of factors, including operating results, financial condition and general business conditions. Holders of our common stock are entitled to receive dividends as, if and when declared by our board of directors out of funds legally available therefor. We may pay cash dividends if net income available to stockholders fully funds the proposed dividends, and the expected rate of earnings retention is consistent with capital needs, asset quality and overall financial condition.
Sales of Unregistered Securities for the Fiscal Year Ended October 31, 2011
There were no sales of unregistered securities during the fiscal year ended October 31, 2011, other than those set forth below or otherwise reported on Forms 10-Q and/or 8-K filed by Scivanta during the fiscal year ended October 31, 2011.
Repurchases of Securities
We did not repurchase any securities within the fourth quarter of the fiscal year covered by this report.
Item 6.
Item 6.
Selected Financial Data
Scivanta is a smaller reporting company and is therefore not required to provide this information.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operation
We have provided below information about Scivanta’s financial condition and results of operations for the fiscal years ended October 31, 2011 and 2010. This information should be read in conjunction with Scivanta’s audited financial statements for the fiscal years ended October 31, 2011 and 2010 and the related notes thereto, which begin on page of this report.
Background
Scivanta is a Nevada corporation headquartered in Spring Lake, New Jersey. Scivanta currently does not sell any products or technologies. See “Item 1. Business - General.”
On November 10, 2006, we acquired the exclusive world-wide rights to develop, manufacture and distribute the SCMS, a minimally invasive two-balloon esophageal catheter system used to monitor cardiac performance. The SCMS is currently in development stage. See “Item 1. Business - Strategy for Business Development - SCMS.”
Critical Accounting Policies
The discussion and analysis of our financial condition is based upon the financial statements contained elsewhere herein, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements required us to make estimates and judgments that affect the reported amounts of assets, liabilities, expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, income taxes, contingencies and litigation. We based our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect the more significant judgments and estimates used in preparation of the financial statements contained elsewhere herein.
Grant Revenue
Revenue from grants to support product development is recognized when costs and expenses reimburseable under the grants have been incurred and payments under the grants become contractually due.
Income Taxes
Scivanta accounts for income taxes under Accounting Standard Codification (“ASC”) 740, “Income Taxes” (“ASC 740”). ASC 740 requires that we recognize a current tax liability or asset for current taxes payable or refundable and a deferred tax liability or asset for the estimated future tax effects of temporary differences and carryforwards to the extent they are realizable. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While Scivanta has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize the deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, deferred tax assets are reduced by a valuation allowance, when in our opinion, it is more likely than not that some portion or all of the deferred tax asset will not be realized.
Stock Based Compensation
Scivanta accounts for stock-based payments to employees in accordance with ASC 718, “Stock Compensation” (“ASC 718”). All stock-based payments to employees are grants of stock options that are recognized in the statement of operations based on their fair values at the date of grant.
Scivanta accounts for stock-based payments to non-employees in accordance with ASC 718 and Topic 505-50, “Equity-Based Payments to Non-Employees.” All stock-based payments to non-employees are issuances of warrants that are recognized in the statement of operations based on the value of the vested portion of the warrant issuance as measured at its then-current fair value as of each financial reporting date.
Scivanta calculates the fair value of option grants and warrant issuances utilizing the Black-Scholes pricing model. The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. ASC 718 requires forfeitures to be estimated at the time stock options are granted and warrants are issued and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or expirations” and represents only the unvested portion of the surrendered stock option or warrant. Scivanta estimates forfeiture rates for all unvested awards when calculating the expense for the period. In estimating the forfeiture rate, Scivanta monitors both stock option and warrant exercises as well as employee and non-employee termination patterns.
The resulting stock-based compensation expense for employee awards is generally recognized on a straight-line basis over the requisite service period of the award.
Recent Accounting Pronouncements Applicable to Scivanta
Scivanta does not believe there are any recently issued, but not yet effective, accounting standards that would have a significant impact on Scivanta’s financial position or results of operations.
Results of Operations
Grant Revenue. On October 29, 2010, the Company was awarded a Qualifying Therapeutic Discovery Project (“QTDP”) grant pursuant to a program created by the U.S. Patient Protection and Affordable Care Act of 2010. Under the QTDP grant, the Company was awarded $131,979 for its fiscal year ended October 31, 2011 and $112,500 for its fiscal year ended October 31, 2010.
Net Sales. Scivanta discontinued all product sales during the fiscal year ended October 31, 2004 and currently does not have any recurring revenue.
Research and Development. For the fiscal year ended October 31, 2011, research and development expenses were $41,511, as compared to $16,112 for the fiscal year ended October 31, 2010. The $25,399, or 158%, increase in research and development expenses for the fiscal year ended October 31, 2011 was primarily due to a $26,562 increase in license costs associated with the Amended and Restated License Agreement.
The amount of research and development expense to be incurred by us during the fiscal year ending October 31, 2012 will depend upon our ability to secure additional capital through an equity and/or debt financing or corporate partnerships. In the event that we are able to obtain additional capital sufficient to fund our research and development program, we would expect research and development expenses for the fiscal year ending October 31, 2012 to significantly increase. If we are unable to obtain additional capital sufficient to fund our research and development program, we would expect research and development expenses for the fiscal year ending October 31, 2012 to decrease as a result of a reduction in license costs related to the Amended and Restated License Agreement.
General and Administrative. For the fiscal year ended October 31, 2011, general and administrative expenses were $728,187, as compared to $899,069 for the fiscal year ended October 31, 2010. The $170,882, or 19%, decrease in general and administrative expenses for the fiscal year ended October 31, 2011 was primarily due to a $119,809 decrease in employee payroll and related tax and benefit costs primarily related to salary and staff reductions, a $27,076 decrease in stock based compensation expense primarily related to stock options granted to employees and directors, a $12,733 decrease in office related expenses and a $5,038 decrease in legal expenses due to a decrease in costs associated with securities reporting and other corporate activities. These decreases in general and administrative expenses for the fiscal year ended October 31, 2011 were partially offset by a $4,097 increase in SEC and various state filing fees and a $4,034 increase in consulting related fees.
The amount of general and administrative expense to be incurred by us during the fiscal year ending October 31, 2012 will depend upon our ability to secure additional capital through an equity and/or debt financing or corporate partnerships. In the event that we are able to obtain additional capital sufficient to fund our development and marketing of the SCMS, we would expect general and administrative expenses for the fiscal year ending October 31, 2012 to increase as we build the administrative infrastructure necessary to support the development and marketing of the SCMS. If we are unable to obtain additional capital sufficient to fund our development and marketing of the SCMS, we would expect general and administrative expenses for the fiscal year ending October 31, 2012 to decrease as we continue to reduce our operating activities.
Operating Income. During the fiscal year ended October 31, 2011, we recognized a gain on the settlement of accounts payable related to certain vendor obligations of $48,434. During the fiscal year ended October 31, 2010, we recognized a gain of $49,146 on the settlement of accounts payable and accrued expenses related to certain vendor obligations.
Other Income (Expenses). During the fiscal years ended October 31, 2011 and 2010, we incurred interest expense of $24,199 and $21,033, respectively, primarily related to convertible debentures. The $3,166, or 15%, increase in interest expense for the fiscal year ended October 31, 2011 was primarily due to the interest associated with the convertible debenture issued in May 2011.
Net Loss. For the fiscal year ended October 31, 2011, Scivanta had a net loss of $613,484, or $0.02 per share (basic and diluted), as compared to a net loss of $774,568 or $0.03 per share (basic and diluted), for the fiscal year ended October 31, 2010.
Liquidity and Capital Resources
As of October 31, 2011, Scivanta had working capital deficiency of $553,374 and cash on hand of $46,245. The $35,120 decrease in cash on hand from October 31, 2010 was primarily due to the $30,000 payment on the Hickey note payable pursuant to the Amended and Restated License Agreement and our continuing operating expenses, offset by the receipt of $100,000 of gross proceeds related to the convertible debenture issued in May 2011, the receipt of $112,500 of gross proceeds related to the QTDP grant and the receipt of $25,000 of proceeds from the private placement of a common stock unit.
During the past several years, Scivanta has generally sustained recurring losses and negative cash flows from operations. We currently do not generate any revenue from operations. Our operations most recently have been funded through a combination of the sale of our convertible debentures and common stock and proceeds received from the QTDP grant.
On November 26, 2010 and January 31, 2011, we received $50,000 and $62,500, respectively, of proceeds related to the QTDP grant. On February 9, 2011, we received $25,000 of proceeds from the private placement of a common stock unit and on May 20, 2011, we received $100,000 of proceeds from the private placement of a convertible debenture. On November 25, 2011, we received $131,979 of proceeds related to the QTDP grant.
As of January 27, 2012, our cash position was approximately $102,000. Without any additional financing, we will only be able to continue our administrative operations, on a limited basis, for approximately five months from the filing date of this annual report on Form 10-K. We have reduced operating expenses and effective November 1, 2011, each of the Company’s officers agreed to waive the annual base salary due to them and each of the Company’s directors agreed to waive the annual retainer and meeting fees due to them until the Company is able to raise sufficient capital that would provide the Company with the ability to pay cash compensation to its officers and directors. Further, pursuant to an agreement with the Company’s officers, the amount previously accrued for officers’ salaries and bonuses was reduced by $834,064 and recorded as additional paid-in capital and the payment of the remaining $200,000 of accrued salary due to the officers was deferred until Scivanta secures sufficient additional financing. In addition, pursuant to an agreement with Scivanta’s directors and a to former director, the amount previously recorded in accounts payable for annual retainers and meeting fees was reduced by $77,000 and recorded as additional paid-in capital and the payment of the remaining $17,000 due to the directors and a former director was deferred until Scivanta secures sufficient additional financing. We have also settled certain vendor obligations which resulted in a $48,434 reduction in accounts payable and deferred certain other vendor payments until Scivanta secures sufficient additional financing. Our independent registered public accounting firm included an emphasis of a matter paragraph in their report included in this annual report on Form 10-K, which expressed substantial doubt about our ability to continue as a going concern. Our financial statements included herein do not include any adjustments related to this uncertainty.
We currently do not have any lending relationships with commercial banks and do not anticipate establishing such relationships in the foreseeable future due to our limited operations and assets. We believe that our focus should be on obtaining additional capital through the private placement of our securities. We are pursuing potential equity and/or debt investors and have engaged placement agents to assist us in this initiative. While we are pursuing the opportunities and actions described above, there can be no assurance that we will be successful in our efforts. If we are unable to secure additional capital, we will explore other strategic alternatives, including, but not limited to, the sale of Scivanta. Any additional equity financing may result in substantial dilution to our stockholders.
Expenditures related to the development of the SCMS are at our discretion. Assuming that we are successful in obtaining additional financing, we estimate that we could potentially spend approximately $1,000,000 related to the development of the SCMS over the twelve month period following the financing.
Inflation and Seasonality
Inflation has had no material effect on the operations or financial condition of our business. In addition, our operations are not considered seasonal in nature.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Scivanta is a smaller reporting company and is therefore not required to provide this information.
Item 8.
Item 8.
Financial Statements and Supplementary Data
The financial statement and supplementary data of Scivanta called for by this item are submitted under a separate section of this report. Reference is made to the Index of Financial Statements contained on page of this annual report on Form 10-K.
Item 9.
Item 9.
Changes In and Disagreements with Accountants on Accounting andFinancial Disclosure
None.
Item 9A.
Item 9A.
Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, as of the end of the period covered by this annual report on Form 10-K, Scivanta carried out an evaluation of the effectiveness of the design and operation of Scivanta's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of Scivanta's management, including Scivanta's President and Chief Executive Officer and Scivanta’s Executive Vice President, Chief Financial Officer and Secretary, who concluded that Scivanta's disclosure controls and procedures are effective. There has been no change in Scivanta’s internal control over financial reporting during Scivanta’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, Scivanta's internal control over financial reporting.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in Scivanta's reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Scivanta's reports filed under the Exchange Act is accumulated and communicated to management, including Scivanta's Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting.
The management of Scivanta is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal controls over financial reporting include those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of Scivanta; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of Scivanta are being made only in accordance with authorizations of management and directors of Scivanta; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Scivanta’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of Scivanta’s internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Scivanta’s internal control over financial reporting was effective as of October 31, 2011.
Changes in Internal Control Over Financial Reporting
There has been no change in Scivanta’s internal control over financial reporting during Scivanta’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, Scivanta's internal control over financial reporting.
Item 9B.
Item 9B.
Other Information
Issuance of Common Stock as Payment on February 2007 Convertible Debentures
On January 11, 2012, Scivanta issued, in a private placement, 500,000 shares of common stock at $0.10 per share as full payment of $50,000 of outstanding principal on certain convertible debentures issued as of February 1, 2007 and 52,372 shares of common stock at a per share prices ranging between $0.07 and $0.08 as full payment of $3,729 of accrued and unpaid interest related to those convertible debentures.
In connection with the issuance of these shares, Scivanta relied on the exemption from registration for a private transaction not involving a public distribution provided by Section 4(2) of the Securities Act.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance
Directors
Each director serves for a term set to expire at the next annual meeting of stockholders of Scivanta. The name, age, principal occupation or employment and biographical information of each member of the board of directors of Scivanta who served as of October 31, 2011 are set forth below:
There are no family relationships among the current executive officers and directors of Scivanta. At any time during the past five years, none of the current executive officers or directors of Scivanta have served as directors of any company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of the Exchange Act or any company registered as an investment company under the Investment Company Act of 1940, as amended, except for Mr. LaVance who serves as the chairman of Hologic, Inc. (NASDAQ: HOLX) and also serves as the chairman of Integrated Environmental Technologies, Ltd. (OTC: IEVM) and Mr. Levy, who serves as a director of Hologic, Inc. (NASDAQ: HOLX).
Biographical Information
David R. LaVance: Mr. LaVance has served as Scivanta’s President and Chief Executive Officer and the Chairman of its Board of Directors since March 21, 2003. He also is the President and co-founder of Century Capital which was founded in 1997. Since May 2011, he has also served as the Chairman, President and Chief Executive Officer of Integrated Environmental Technologies, Ltd. (OTC: IEVM), a publicly traded company that develops and manufactures proprietary equipment which it uses to produce and distribute environmentally friendly disinfecting and cleaning solutions. Mr. LaVance was a Managing Director of KPMG Health Ventures, an advisory group providing investment banking services to healthcare companies from 1995 through 1997. Prior to joining KPMG Health Ventures, Mr. LaVance was a founder of Physicians Data Corporation, a health informatics company formed in 1994, and served as the President of Nuclear Care, Inc., a nuclear imaging clinical services provider from 1992 through 1995. Before founding Nuclear Care, Mr. LaVance held a series of operating positions with Dornier MedTech America, Inc., a medical device company that specializes in lithotriptors and other medical devices, ultimately serving as the President of Dornier MedTech in Japan from 1990 to 1992. Mr. LaVance currently is the chairman of the board of directors of Hologic, Inc. (NASDAQ: HOLX), a publicly traded medical device company specializing in digital imaging. Mr. LaVance received a B.A. degree from Furman University and a J.D. degree from Washington College of Law of the American University.
Thomas S. Gifford: Mr. Gifford has served as Scivanta’s Executive Vice President, Chief Financial Officer and as a director since March 21, 2003, and has served as the Secretary of Scivanta since July 22, 2003. Mr. Gifford is also the Vice President and co-founder of Century Capital. Since May 2011, he has also served as the Executive Vice President, Chief Financial Officer and Secretary of Integrated Environmental Technologies, Ltd. (OTC: IEVM), a publicly traded company that develops and manufactures proprietary equipment which it uses to produce and distribute environmentally friendly disinfecting and cleaning solutions. He is a licensed attorney in New York and New Jersey and is a Certified Public Accountant. He was formerly a Manager and Associate Director of KPMG Health Ventures. Prior to KPMG Health Ventures, Mr. Gifford was an accountant for KPMG Peat Marwick LLP from 1990 through 1994, where he provided auditing and financial due diligence services to various publicly traded and privately held emerging technology companies. Mr. Gifford currently serves on the board of directors of Maloy Risk Services, Inc., a privately held insurance brokerage. Mr. Gifford received a B.S. degree from Rutgers University and a J.D. degree from Seton Hall University School of Law.
Lawrence M. Levy: Mr. Levy has served as a director of Scivanta since March 15, 2007. He retired from the position of Senior Counsel at Brown Rudnick LLP, an international law firm, in January 2011. Mr. Levy had been Senior Counsel at Brown Rudnick since February 2005 and, for more than 30 years before that, had been a Partner at Brown Rudnick, specializing in corporate and securities law. Mr. Levy is also a member of the boards of directors of Hologic, Inc. (NASDAQ: HOLX), a publicly traded medical device company specializing in digital imaging, Option N.V. of Belgium, a broadband wireless company specializing in data cards, embedded wireless modules, fixed mobile devices and related software and the Facing History and Ourselves National Foundation. Mr. Levy received a B.A. from Yale University and a L.L.B. from Harvard Law School.
Anthony Giordano, III: Mr. Giordano has served as a director of Scivanta since March 15, 2007. He is currently the President and Chief Executive Officer and a director of Colonial American Bank based in Horsham, Pennsylvania. From January 1, 2005 through November 30, 2010, Mr. Giordano served as the Senior Executive Vice President, Chief Financial Officer, Treasurer and Assistant Secretary of Central Jersey Bancorp (formerly Monmouth Community Bancorp), a publicly traded bank holding company (NASDAQ: CJBK), and its wholly-owned subsidiary, Central Jersey Bank, N.A. (formerly Monmouth Community Bank, N.A.), from January 1, 2005 through date of the consummation of the merger of Central Jersey Bancorp and Kearny Financial Corp. on November 30, 2010. Prior to the consummation of the combination of Monmouth Community Bancorp and Allaire Community Bank on January 1, 2005, he served as an Executive Vice President and the Chief Financial Officer, Treasurer and Secretary of Monmouth Community Bancorp and its bank subsidiary, Monmouth Community Bank, N.A. Prior to joining Monmouth Community Bank, N.A. in May 1998, Mr. Giordano was employed by PNC Bank (formerly Midlantic Bank), where he served as Real Estate Banking Officer from 1996 to 1998 and Senior Accountant/Financial Analyst from 1994 to 1996. From 1988 to 1994, Mr. Giordano served in various positions at Shadow Lawn Savings Bank, including Budget and Financial Planning Manager and Financial Analyst. Mr. Giordano received an M.B.A. degree from Monmouth University and a B.S. degree in finance from Kean University.
Executive Officers
The executive officers serve in accordance with Scivanta’s bylaws and at the discretion of Scivanta’s board of directors. The name, age, current position and biographical information of each executive officer of Scivanta are set forth below:
For the biographical information for David R. LaVance and Thomas S. Gifford, see “Item 10. Directors, Executive Officers and Corporate Governance - Directors.”
Corporate Governance
Meetings and Committees of the Board of Directors
The board of directors conducts business through meetings of the board or by unanimous written consents of the board. In addition, the board sometimes conducts business through its committees, including an audit committee and compensation committee. Until September 10, 2011, the board for fiscal 2011 consisted of David R. LaVance, Thomas S. Gifford, Richard E. Otto, Lawrence M. Levy and Anthony Giordano, III. Effective September 10, 2011, Mr. Otto resigned from the board. Each of Mr. Levy and Mr. Giordano qualify, and Mr. Otto qualified, as independent directors in accordance with NASDAQ’s definition of “independent director” and the rules and regulations of the SEC.
Audit Committee
Until September 10, 2011, the audit committee for fiscal 2011 consisted of Richard E. Otto, Lawrence M. Levy and Anthony Giordano, III. Following Mr. Otto’s resignation from the board, the audit committee consisted of Mr. Levy and Mr. Giordano, who is the chairman of the audit committee. Each of Mr. Giordano and Mr. Levy qualify, and Mr. Otto qualified, as an independent director in accordance with the rules of NASDAQ and the rules and regulations of the SEC. In addition, the board has determined that Mr. Giordano qualifies as a financial expert pursuant to SEC rules. The audit committee’s primary responsibility is to assist the board in fulfilling its oversight responsibilities with respect to financial reports and other financial information, as well as such other responsibilities set forth in the amended and restated charter of the audit committee which was adopted on May 14, 2004.
Compensation Committee
Until September 10, 2011, the compensation committee consisted of Richard E. Otto, Lawrence M. Levy and Anthony Giordano, III. Following Mr. Otto’s resignation from the board, the compensation committee consisted of Mr. Levy and Mr. Giordano. Mr. Otto was the chairman of the compensation committee until his resignation from the board. There is currently no chairman of the compensation committee. Each of Mr. Giordano and Mr. Levy qualify, and Mr. Otto qualified, as an independent director in accordance with the rules of NASDAQ and the rules and regulations of the SEC. The compensation committee does not have a formal charter. The compensation committee is responsible for determining whether Scivanta’s compensation and benefits packages are suitable and do not provide excessive benefits or result in material financial loss to Scivanta. The compensation committee is also responsible for approving or recommending to the Board compensation packages and plans for senior management and directors. These compensation packages include salaries, bonuses, vacations, termination benefits, profit-sharing plans, contributions to employee pension plans, stock option and stock purchase plans, indemnification agreements and employment/change of control contracts. When reviewing the proposed compensation packages, the compensation committee will consider: (1) the combined value of all cash and noncash benefits provided to the individual or individuals; (2) the compensation history of the individual or individuals as compared to other individuals with comparable expertise at Scivanta; (3) the financial condition of Scivanta; (4) comparable compensation packages at similar institutions based upon such factors as asset size, geographic location and the services provided; (5) the projected total cost and benefit to Scivanta for post employment benefits; and (6) any connection between the individual and any fraudulent act or omission, breach of trust of fiduciary duty or insider abuse with regard to Scivanta.
Section 16 Compliance
Section 16(a) of the Exchange Act requires Scivanta’s directors, executive officers and persons who own more than 10% of Scivanta’s common stock on Forms 3, 4 and 5 with the SEC. Executive officers, directors and greater than 10% beneficial owners are required by SEC regulations to furnish Scivanta with copies of all Forms 3, 4 and 5 reports they file.
Scivanta believes that all filings required to be made by its directors, executive officers and persons who own more than 10% of Scivanta’s common stock pursuant to Section 16(a) of the Exchange Act have been filed within the time periods prescribed.
Chief Executive and Senior Financial Officer Code of Ethics
The chief executive and senior financial officers of Scivanta are subject to high standards of honest and ethical conduct when conducting the affairs of Scivanta. All such individuals must act ethically at all times in accordance with the policies contained in Scivanta's Chief Executive and Senior Financial Officer Code of Ethics. The Chief Executive and Senior Financial Officer Code of Ethics is available on Scivanta’s website at www.scivanta.com.
Item 11.
Item 11.
Executive Compensation
The following table sets forth information concerning the annual and long-term compensation for services in all capacities to Scivanta for the fiscal years ended October 31, 2011 and 2010 of any person who served as Scivanta’s President and Chief Executive Officer during the fiscal year ended October 31, 2011 and each other executive officer of Scivanta whose total annual salary and bonus for the fiscal year ended October 31, 2011 exceeded $100,000 (the “Named Executive Officers”).
SUMMARY COMPENSATION TABLE
(1)
For the fiscal year 2011, $200,000 of salary for the Named Executive Officer was accrued. Effective October 31, 2011, all $200,000 was forfeited by the Named Executive Officer.
(2)
For the fiscal year 2010, $190,627 of the salary for the Named Executive Officer was accrued. Effective October 31, 2011, $90,627 of this amount was forfeited by the Named Executive Officer with the remaining $100,000 to be paid upon Scivanta receiving sufficient additional funding to pay such accrued salary, as determined by the board of directors.
(3) Amounts shown do not reflect compensation actually received by the Named Executive Officer. Instead, the amounts shown are the compensation costs we recognized in the fiscal years 2011 and 2010 in accordance with ASC 718. The accounting for stock based compensation and the assumptions used to calculate the value of the option grants are set forth under Note 3 “Summary of Significant Accounting Policies - Stock Based Compensation” and Note 8 “Stockholders’ Equity,” respectively, of our audited financial statements for the fiscal years ended October 31, 2011 and 2010 and the related notes thereto, which begin on page of this annual report on Form 10-K.
Employment Agreements
On January 1, 2008, Scivanta entered into an executive employment agreement with each of David R. LaVance, Scivanta’s President and Chief Executive Officer, and Thomas S. Gifford, Scivanta’s Executive Vice President, Chief Financial Officer and Secretary (collectively, the “Employment Agreements”). The term of each of the Employment Agreements commenced on January 1, 2008 and ends on December 31, 2012, but can be renewed for successive one year periods unless terminated as provided in the Employment Agreements. Pursuant to the original terms of the Employment Agreements, both Messrs. LaVance and Gifford were to be paid an annual base salary of $275,000. In addition, both Messrs. LaVance and Gifford shall participate in the Company’s benefit programs and shall be eligible to receive an annual performance bonus based on the achievement of certain performance objectives as determined by the compensation committee of the Company’s board of directors.
Effective February 1, 2010, each of Messrs. LaVance and Gifford agreed to reduce the annual base salary due to each of them to $200,000. Effective November 1, 2011, each of Messrs. LaVance and Gifford agreed to reduce the annual base salary due to them to $0 until Scivanta has raised sufficient capital that would provide Scivanta the ability to pay either the original base salary of $275,000 or the reduced base salary of $200,000 or some other amount as mutually agreed upon by each of Mr. LaVance and/or Mr. Gifford and the Company’s board of directors.
In the event that Mr. LaVance or Mr. Gifford is terminated without Good Cause (as defined in the Employment Agreements and used herein), or Mr. LaVance or Mr. Gifford terminates his employment for Good Reason (as defined in the Employment Agreements and used herein), Mr. LaVance or Mr. Gifford, as the case may be, will be entitled to receive a severance payment equal to his annual base salary in effect on the date of termination.
In addition, in the event that within one-hundred eighty days of a Change of Control (as defined in the Employment Agreements and used herein) of Scivanta, the employment of Mr. LaVance or Mr. Gifford is terminated by Scivanta or its successor without Good Cause, or Mr. LaVance or Mr. Gifford terminates his employment with Scivanta or its successor for Good Reason, Mr. LaVance or Mr. Gifford, as the case may be, shall be paid a severance payment; provided however, that if the termination of employment occurs prior to the Change of Control, the Change of Control must have been considered by Scivanta at the time of termination for Mr. LaVance or Mr. Gifford to be entitled to the severance payment. The amount of the severance payment will be equal to two times the sum of Mr. LaVance’s or Mr. Gifford’s annual base salary in effect immediately prior to the termination of Mr. LaVance’s or Mr. Gifford’s employment and an amount which is the lesser of (1) $150,000 and (2) the aggregate amount of any bonuses paid to Mr. LaVance or Mr. Gifford during the twelve months prior to the earlier of (A) the effective date of the Change of Control and (B) the date Mr. LaVance’s or Mr. Gifford’s employment terminates with Scivanta.
Pursuant to the Employment Agreements, any severance payment to be paid by Scivanta to Mr. LaVance or Mr. Gifford is subject to Scivanta and Mr. LaVance or Mr. Gifford entering into and not revoking a release of claims in favor of Scivanta.
Each of Mr. LaVance and Mr. Gifford has agreed that (a) during the term of his employment with Scivanta and (b) for one year after the termination of his employment with Scivanta, he will not, directly or indirectly, be employed by, provide consulting services to or have any ownership interest (as a stockholder, partner or otherwise) in any Competing Business (as defined in the Employment Agreements), except for as permitted in the Employment Agreements.
Each of Mr. LaVance and Mr. Gifford has also agreed that (a) during the term of his employment with Scivanta, and (b) for a period of three years after the termination of his employment with Scivanta, he will not recruit any employee of Scivanta or solicit, divert or take away the business or patronage of any of the clients, customers or accounts of Scivanta that were served by Scivanta while he was employed by Scivanta.
Outstanding Equity Awards at Fiscal Year-End
The following table provides information about all equity compensation awards held by the Named Executive Officers at October 31, 2011.
(1)
Represents 200,000 shares subject to the warrant issued on May 14, 2004 to Century Capital to purchase a total of 700,000 shares of Scivanta’s common stock. Mr. LaVance and Mr. Gifford are principals of Century Capital. Each of Mr. LaVance and Mr. Gifford disclaims beneficial ownership of these shares except to the extent of his ownership interest in Century Capital.
(2)
On February 5, 2007, Scivanta granted a non-qualified stock option to purchase 500,000 shares of its common stock pursuant to the 2002 Equity Incentive Plan to each of Messrs. LaVance and Gifford. An aggregate amount of 1,000,000 shares of Scivanta’s common stock could be issued pursuant to these options. Each option has a ten year term and is exercisable at $0.20 per share.
(3)
On January 1, 2008, Scivanta granted a non-qualified stock option to purchase 100,000 shares of its common stock under the 2007 Equity Incentive Plan to each of Messrs. LaVance and Gifford. An aggregate of 200,000 shares of Scivanta’s common stock could be purchased pursuant to these options. Each option has a ten year term and is exercisable at $0.14 per share. The shares of common stock underlying each of these options have vested.
(4)
On January 21, 2009, Scivanta granted a non-qualified stock option to purchase 250,000 shares of Scivanta’s common stock under the 2007 Equity Incentive Plan to each of Messrs. LaVance and Gifford. An aggregate of 500,000 shares of Scivanta’s common stock could be purchased pursuant to these options. Each option has a ten year term and is exercisable at $0.14 per share. The shares of common stock underlying each option vest or vested as follows: 83,333 shares vested on each of December 31, 2010 and 2009 and 83,334 shares vest on December 31, 2011.
Directors’ Compensation
The following table sets forth information concerning the compensation of the board of directors who are not Named Executive Officers for the fiscal year ended October 31, 2011.
(1)
Effective January 1, 2008, compensation for Scivanta’s independent directors as approved by the compensation committee was as follows: (a) annual retainer of $10,000; (b) in-person daily meeting fee of $2,000; and (c) telephonic meeting fee of $500. During fiscal 2011, the Company accrued fees to each director as follows: Richard E. Otto - $10,667; Lawrence M Levy - $13,667; and Anthony Giordano, III - $13,667, that in the aggregate totaled $38,001 and were forfeited by each director effective October 31, 2011.
(2)
Option awards consist of warrants issued and options granted to purchase Scivanta common stock. Amounts shown do not reflect compensation actually received by the director. Instead, the amounts shown are the compensation costs we recognized in the fiscal year 2010 in accordance with ASC 718. The accounting for stock based compensation and the assumptions used to calculate the value of the warrant issuances and option grants are set forth under Note 3 “Summary of Significant Accounting Policies - Stock Based Compensation” and Note 8 “Stockholders’ Equity,” respectively, of our audited financial statements for the fiscal years ended October 31, 2010 and 2009 and the related notes thereto, which begin on page of this annual report on Form 10-K.
(3)
As of October 31, 2011, the aggregate number of shares of Scivanta common stock underlying warrants issued and options granted to each director were as follows: Richard E. Otto - 273,000 shares; Lawrence M. Levy - 165,000 shares; and Anthony Giordano, III - 177,000 shares.
(4)
Effective September 10, 2011, Mr. Otto resigned from the Company’s board of directors.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of January 27, 2012, with respect to the beneficial ownership (as defined in Rule 13d-3 of the Exchange Act) of Scivanta’s common stock, which is the only class of Scivanta capital stock with shares issued and outstanding, by (1) each director and nominee for director of Scivanta, (2) each of the Named Executive Officers, (3) each person or group of persons known by Scivanta to be the beneficial owner of greater than 5% of Scivanta’s outstanding common stock, and (4) all directors and executive officers of Scivanta as a group. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Except as indicated by footnote, the persons named in the table below have sole voting power and investment power with respect to the shares of Scivanta common stock shown as beneficially owned by them.
* Represents less than 1% of the issued and outstanding shares of Scivanta’s common stock.
(1)
In accordance with Rule 13d-3 of the Exchange Act, a person is deemed to be the beneficial owner, for purposes of this table, of any shares of Scivanta’s common stock if he, she or it has voting or investment power with respect to such shares. This includes shares (a) subject to options and warrants exercisable within sixty days of January 27, 2012, and (b) (1) owned by a spouse, (2) owned by other immediate family members, or (3) held in trust or held in retirement accounts or funds for the benefit of the named individuals, over which shares the person named in the table may possess voting and/or investment power.
(2)
Such person serves as Scivanta’s President and Chief Executive Officer.
(3)
Such person serves as a director of Scivanta and maintains a mailing address of 215 Morris Avenue, Spring Lake, New Jersey 07762.
(4)
Includes 850,000 shares currently available for purchase under the options granted by Scivanta to Mr. LaVance on February 5, 2007, January 1, 2008 and January 21, 2009. Also, includes 310,938 shares held by the LaVance Trust for Children, a trust established for the benefit of Mr. LaVance’s children. Mr. LaVance disclaims beneficial ownership of the shares held in trust.
(5)
Includes 200,000 shares currently available for purchase under the warrant issued on May 14, 2004 to Century Capital. Mr. LaVance and Mr. Gifford are the principals of Century Capital. Each of Mr. LaVance and Mr. Gifford disclaims beneficial ownership of these shares except to the extent of his ownership in Century Capital.
(6)
Such person serves as Scivanta’s Executive Vice President, Chief Financial Officer and Secretary.
(7)
Includes 850,000 shares currently available for purchase under the options granted by Scivanta to Mr. Gifford on February 5, 2007, January 1, 2008 and January 21, 2009. Also includes 310,938 shares held by the LaVance Trust for Children. Mr. Gifford is the trustee for the LaVance Trust for Children. Mr. Gifford disclaims beneficial ownership of the shares held in trust.
(8)
Represents the shares currently available for under the warrant issued by Scivanta to Mr. Levy on March 15, 2007 and the options granted by Scivanta to Mr. Levy on January 1, 2008 and January 21, 2009.
(9)
Represents the shares currently available for purchase under the warrant issued by Scivanta to Mr. Giordano on March 15, 2007 and the options granted by Scivanta to Mr. Giordano on January 1, 2008 and January 21, 2009.
(10)
CMD Investment Group maintains a mailing address at 12 Perrine Circle, Perrineville, New Jersey 08535.
(11)
Includes 2,500,000 shares currently available for purchase under the warrant issued on June 18, 2010 to CMD Investment Group.
(12)
Zanett Opportunity Fund, Ltd. maintains a mailing address at Appleby Spurling, Canon’s Court, 22 Victoria Street, P.O. Box HM 1179 Hamilton, HM EX, Bermuda.
(13)
Includes 3,333,333 shares available upon the conversion, at the current conversion price $0.03 per share, of an 8% convertible debenture issued to Zanett Opportunity Fund, Ltd. on May 20, 2011.
(14)
Mr. Rimer maintains a mailing address at 17 Chemin De La Sapinere, 1253 Vandoeuvres, Geneva, Switzerland.
Stock Option Plans
Scivanta currently has two stock option plans in place: the 2002 Equity Incentive Plan and the 2007 Equity Incentive Plan (collectively, the “Equity Incentive Plans”). The 2002 Equity Incentive Plan was approved by the stockholders on July 5, 2002. The aggregate number of shares of common stock which could have been awarded under the 2002 Equity Incentive Plan was 2,000,000. As of October 31, 2011, options to purchase 1,470,000 shares of Scivanta’s common stock were outstanding under the 2002 Equity Incentive Plan. As a result of the adoption of the 2007 Equity Incentive Plan, no further awards are permitted under the 2002 Equity Incentive Plan.
On May 31, 2007, the stockholders approved Scivanta’s 2007 Equity Incentive Plan. The aggregate number of shares of common stock which may be awarded under the 2007 Equity Incentive Plan is 3,000,000, subject to adjustment as provided in the 2007 Equity Incentive Plan. As of October 31, 2011, options to purchase 1,025,332 shares of Scivanta’s common stock were outstanding under the 2007 Equity Incentive Plan.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of October 31, 2011 on the number of shares of Scivanta’s common stock to be issued upon the exercise of outstanding options under the Equity Incentive Plans and upon the exercise of outstanding warrants issued by Scivanta as compensation outside of the Equity Incentive Plans and the number of shares of Scivanta’s common stock remaining available for future issuance under the Equity Incentive Plans.
(1)
Scivanta currently has two equity compensation plans, the 2002 Equity Incentive Plan and the 2007 Equity Incentive Plan. Both of these plans are described herein and each has been approved by Scivanta’s stockholders. As a result of the adoption of the 2007 Equity Incentive Plan, no further awards are permitted under the 2002 Equity Incentive Plan.
(2)
Represents warrants to purchase common stock which were issued and outstanding as of October 31, 2011. See discussion below for additional information.
Equity Compensation Arrangements Not Approved by the Security Holders
Warrants Issued to Consultants Dated October 23, 2008
On October 23, 2008, Scivanta issued warrants to purchase an aggregate of 120,000 shares of common stock to Donald D. Hickey, M.D. and Clas E. Lundgren, M.D., Ph.D. as consideration for their service as product development consultants to Scivanta. Each of the warrants has a five year term and is exercisable at $0.20 per share. As of October 31, 2011, all 120,000 shares underlying the warrants were available for purchase.
Warrant Issued to Consultant Dated April 28, 2008
On April 28, 2008, Scivanta issued a warrant to purchase 125,000 shares of common stock to Rivertek Medical Systems, Inc. as partial consideration for its services as a product development consultant to Scivanta. The warrant has a five year term and is exercisable at $0.13 per share. As of October 31, 2011, all 125,000 shares underlying the warrant were available for purchase.
Warrant Issued to Consultant Dated April 1, 2008
On April 1, 2008, Scivanta issued a warrant to purchase 150,000 shares of common stock to Catalyst Financial Resources LLC (“Catalyst”) as partial consideration for the services to be provided by Catalyst to Scivanta as an investor relations consultant. The warrant has a five year term. As of October 31, 2011, 75,000 shares underlying the warrant were available for purchase (37,500 exercisable at $0.20 per share and 37,500 exercisable at $0.25 per share) and 75,000 shares underlying the warrant were cancelled.
Warrants Issued to Consultants Dated November 1, 2007
On November 1, 2007, Scivanta issued warrants to purchase an aggregate of 160,000 shares of common stock to Harvey Sacks, MD, Andrew D. Shaw, MD and Paul Sierzenski, MD as partial consideration for their service as medical consultants to Scivanta. Each of the warrants has a five year term and is exercisable at $0.13 per share. As of October 31, 2011, all 160,000 shares underlying the warrants were available for purchase.
Warrants Issued to Directors Dated March 15, 2007
On March 15, 2007, Scivanta issued warrants to purchase an aggregate of 214,000 shares of common stock to Lawrence M. Levy and Anthony Giordano, III as consideration for their service as members of the board of directors and related committees in 2007. Each of the warrants has a five year term and is exercisable at $0.25 per share. As of October 31, 2011, all 214,000 shares underlying the warrant were available for purchase.
Warrant Issued to Former Director Dated February 5, 2007
On February 5, 2007, Scivanta issued a warrant to purchase 209,000 shares of common stock to Richard E. Otto, a former director, as consideration for his service as a member of the board of directors and related committees of Scivanta in 2006 and 2007. The warrant has a five year term and is exercisable at $0.20 per share. As of October 31, 2011, all 209,000 shares underlying the warrant were available for purchase.
Warrant Issued to Former Director Dated February 5, 2007
On February 5, 2007, Scivanta issued a warrant to purchase 100,000 shares of common stock to John A. Moore, a former director, as consideration for his service as a member of the board of directors and related committees of Scivanta in 2006. The warrant has a five year term and is exercisable at $0.20 per share. As of October 31, 2011, all 100,000 shares underlying the warrant were available for purchase.
Warrant Issued to Consultant Dated January 1, 2007
On January 1, 2007, Scivanta issued a warrant to purchase 125,000 shares of common stock to the principal owner of the Investors Relations Group in connection with an investor relations and public relations consulting agreement entered into by Scivanta and the Investors Relations Group. The warrant has a five year term and is exercisable at $0.25 per share until December 31, 2012. As of October 31, 2011, 93,750 shares underlying the warrant were available for purchase and 31,250 shares underlying the warrant were cancelled.
Warrant Issued to Century Capital Dated May 14, 2004
On May 14, 2004, Scivanta issued a warrant to purchase 700,000 shares of common stock to Century Capital as partial consideration for consulting services. The warrant has a ten year term and is exercisable at $0.04 per share. As of October 31, 2011, 500,000 shares underlying the warrant had been purchased and 200,000 shares underlying the warrant were available for purchase.
Item 13.
Item 13.
Certain Relationships and Related Transactions and Director Independence
Certain Relationships and Related Transactions
David R. LaVance, Scivanta’s Chairman, President and Chief Executive Officer, and Thomas S. Gifford, the Scivanta’s Executive Vice President, Chief Financial Officer and Secretary, are principals of Century Capital, a consulting firm. Effective February 1, 2007, Scivanta and Century Capital entered into a Sublease Agreement pursuant to which Scivanta rents office space approximating 2,000 square feet inside Century Capital’s existing offices. In addition, Scivanta rents office furniture and other equipment from Century Capital. This agreement has a month to month term that requires sixty days written notice to terminate and a monthly rental fee of $5,000. Scivanta is responsible for all operating costs associated with the office space, including utilities, maintenance and property taxes.
During the fiscal year ended October 31, 2011, Scivanta was billed $69,926 pursuant to the terms of the Sublease Agreement. As of October 31, 2011, Scivanta owed Century Capital $40,000 for rent due under the Sublease Agreement and $1,302 for other expenses, which amounts are included in accounts payable - related party. Subsequent to October 31, 2011, $16,302 of the amounts due to Century Capital were paid by the Company.
Director Independence
Lawrence M. Levy and Anthony Giordano, III each qualify as independent directors in accordance with NASDAQ’s definition of “independent director” and the rules and regulations of the SEC. Messrs. Levy and Giordano also serve on the audit committee and qualify as independent directors for the audit committee in accordance with NASDAQ’s definition of “independent director” and the rules and regulations of the SEC.
Item 14.
Item 14.
Principal Accountant Fees and Services
Audit Fees. Scivanta was billed $55,000 by WeiserMazars LLP for audit fees in each of Scivanta’s fiscal years ended October 31, 2011 and 2010. Audit fees incurred in each of the fiscal years ended October 31, 2011 and 2010 consisted of fees for the audit of Scivanta’s annual financial statements and review of quarterly financial statements.
Audit Related Fees. Scivanta did not incur any fees associated with audit related services with WeiserMazars LLP, or any other accounting firm, relating to fiscal years ended October 31, 2011 and 2010. Audit-related fees are fees for assurance and related services, including primarily employee benefit plan audits, due diligence related to acquisitions, accounting consultations in connection with acquisitions, consultation concerning financial accounting and reporting standards and consultation concerning matters related to Section 404 of the Sarbanes Oxley Act of 2002.
Tax Fees. Scivanta did not incur any fees associated with tax services relating to the fiscal years ended October 31, 2011 and 2010.
All Other Fees. Scivanta did not incur any fees associated with non-audit services with WeiserMazars LLP, or any other accounting firm, relating to fiscal years ended October 31, 2011 and 2010.
Pre-Approval Policies and Procedures. The audit committee is responsible for appointing, setting compensation and overseeing the work of the independent registered public accounting firm. In accordance with its charter, the audit committee approves, in advance, all audit and permissible non-audit services to be performed by the independent registered public accounting firm. Such approval process ensures that the independent registered public accounting firm does not provide any non-audit services to Scivanta that are prohibited by law or regulation.
PART IV
Item 15.
Item 15.
Exhibits and Financial Statement Schedules
(a)
Exhibits
Reference is made to the Index of Exhibits beginning on page E-1 of this report.
(b)
Financial Statement Schedules
Reference is made to the Index of Financial Statements on page of this report. No schedules are included with the financial statements because the required information is inapplicable or is presented in the financial statements or notes thereto.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DATE: SCIVANTA MEDICAL CORPORATION
January 30, 2012
By:
/s/ David R. LaVance
David R. LaVance
Chairman of the Board of Directors,
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures
Title
Date
/s/ David R. LaVance
Chairman of the Board of
January 30, 2012
David R. LaVance
Directors, President and
Chief Executive Officer
/s/ Thomas S. Gifford
Executive Vice President,
January 30, 2012
Thomas S. Gifford
Chief Financial Officer,
Secretary and Director
/s/ Lawrence M. Levy
Director
January 30, 2012
Lawrence M. Levy
/s/ Anthony Giordano, III
Director
January 30, 2012
Anthony Giordano, III
Scivanta Medical Corporation
Financial Statements
Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Scivanta Medical Corporation
We have audited the accompanying balance sheets of Scivanta Medical Corporation (the “Company”), as of October 31, 2011 and 2010 and the related statements of operations, stockholders’ deficiency and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based upon our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged, to perform an audit of its internal control over financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Scivanta Medical Corporation as of October 31, 2011 and 2010 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred significant recurring operating losses, negative cash flows from operations and has a working capital deficiency. The Company also has no lending relationships with commercial banks and is dependent on the completion of a financing in order to continue operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ WeiserMazars LLP
Edison, New Jersey
January 30, 2012
Scivanta Medical Corporation
Balance Sheets
Scivanta Medical Corporation
Statements of Operations
Scivanta Medical Corporation
Statements of Stockholders’ Deficiency
For the Years Ended October 31, 2011 and 2010
Scivanta Medical Corporation
Statements of Cash Flows
Scivanta Medical Corporation
Notes to the Financial Statements
1.
Organization and Description of Business
Scivanta Medical Corporation (“Scivanta” or the “Company”), originally incorporated in New Jersey on November 29, 1982, is currently a Nevada corporation headquartered in Spring Lake, New Jersey. The Company ceased selling all products during the fiscal year ended October 31, 2004.
On November 10, 2006, the Company acquired the exclusive world-wide rights to develop, manufacture and distribute certain proprietary technologies known as the Scivanta Cardiac Monitoring System (the “SCMS”), a minimally invasive two-balloon esophageal catheter system used to monitor cardiac performance. The SCMS will provide the primary measurements of cardiac performance, including left atrial pressure, which is a crucial measurement in monitoring cardiac challenged patients. The essential hardware, software and catheter components for the SCMS have been completed. Scivanta currently has a fully assembled SCMS device that has been used in initial clinical trials. The two major items remaining in the development of the SCMS are the completion of the clinical trials and the design and engineering of the production model of the SCMS.
The Company will not be able to complete the clinical trials or the design and engineering of the production model of the SCMS without obtaining additional cash through an equity and/or debt financing or through corporate partnerships. The Company is actively pursuing potential investors and continues to engage placement agents to assist in this endeavor. No assurances can be given that the Company will be able to obtain sufficient capital to finish the development of the SCMS through any corporate partnerships and/or through equity and/or debt financing. In addition, no assurances can be given that if the Company successfully develops and markets the SCMS, such product will become profitable.
2.
Basis of Presentation
The accompanying financial statements have been prepared assuming that Scivanta will continue as a going concern. The Company has incurred significant recurring operating losses, negative cash flows from operations, has a working capital deficiency and an accumulated deficit of $23,123,521 as of October 31, 2011. The Company also has no lending relationships with commercial banks and is dependent on the completion of a financing in order to continue operations. The current economic slowdown could make financing more difficult to obtain. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company continues to seek equity and or debt investors and continues to engage several placement agents to assist the Company in this initiative. The Company has reduced operating expenses and effective November 1, 2011, each of the Company’s officers agreed to waive the annual base salary due to them and each of the Company’s directors agreed to waive the annual retainer and meeting fees due to them until the Company is able to raise sufficient capital that would provide the Company with the ability to pay cash compensation to its officers and directors. Further, pursuant to an agreement with the Company’s officers, the amount previously accrued for officers’ salaries and bonuses was reduced by $834,064 and recorded as additional paid-in capital and the payment of the remaining $200,000 of accrued salary due to the officers has been deferred until the Company secures sufficient additional financing. In addition, pursuant to an agreement with the Company’s directors and a former director, the amount previously recorded in accounts payable for annual retainers and meeting fees was reduced by $77,000 and recorded as additional paid-in capital and the payment of the remaining $17,000 due to the directors and to a former director has been deferred until the Company secures sufficient additional financing. The Company has also settled certain vendor obligations which resulted in a $48,434 reduction in accounts payable and deferred certain other vendor payments until the Company secures sufficient additional financing.
The Company currently does not have any lending relationships with commercial banks and does not anticipate establishing such relationships in the foreseeable future due to our limited operations and assets. The Company believes that its focus should be on obtaining additional capital through the private placement of its securities. The Company is pursuing potential equity and/or debt investors and has engaged placement agents to assist it in this initiative. While the Company is pursuing the opportunities and actions described above, there can be no assurance that it will be successful in its efforts. If the Company is unable to secure additional capital, it will explore other strategic alternatives, including, but not limited to, the sale of the Company. Any additional equity financing may result in substantial dilution to our stockholders.
3.
Summary of Significant Accounting Policies
Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Although the Company regularly assesses these estimates, actual results could differ materially from these estimates. Changes in estimates are recorded in the period in which they become known. The Company based its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from management’s estimates if past experience or other assumptions do not turn out to be substantially accurate. All of these estimates reflect management's best judgment about current economic and market conditions and their effects based on information available as of the date of these financial statements. If such conditions persist longer or deteriorate further than expected, it is reasonably possible that the judgments and estimates could change.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, grant receivable, accounts payable and accrued expenses, approximate their fair values due to their short maturities.
The fair value of the convertible debentures and the notes payable approximate fair value since these investments are at market rates currently available to the Company.
Concentration of Credit Risk
The Company has no significant off balance sheet risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. The Company’s financial instruments that are exposed to concentration of credit risks consist primarily of cash and cash equivalents. The Company maintains its cash and cash equivalents in bank accounts which, at times, exceed federally-insured limits.
Grant Revenue
Revenue from grants to support product development is recognized when costs and expenses reimburseable under the grants have been incurred and payments under the grants become contractually due.
Income Taxes
The Company accounts for income taxes under Accounting Standard Codification (“ASC”) 740, “Income Taxes” (“ASC 740”). ASC 740 requires that the Company recognize a current tax liability or asset for current taxes payable or refundable and a deferred tax liability or asset for the estimated future tax effects of temporary differences and carryforwards to the extent they are realizable. The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company was to determine that it would be able to realize the deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, deferred tax assets are reduced by a valuation allowance, when in the Company’s opinion, it is more likely than not that some portion or all of the deferred tax asset will not be realized.
Research and Development
The Company expenses research and development costs as incurred. Initial and milestone payments made to third parties in connection with technology license agreements are also expensed as incurred as research and development costs, up to the point of regulatory approval. Payments made to third parties subsequent to regulatory approval will be capitalized and amortized over the estimated remaining useful life of the related product. The SCMS is currently in the development stage and has not received regulatory approval.
Stock Based Compensation
The Company accounts for stock-based payments to employees in accordance with ASC 718, “Stock Compensation” (“ASC 718”). All stock-based payments to employees are grants of stock options that are recognized in the statement of operations based on their fair values at the date of grant.
The Company accounts for stock-based payments to non-employees in accordance with ASC 718 and Topic 505-50, “Equity-Based Payments to Non-Employees.” All stock-based payments to non-employees are issuances of warrants that are recognized in the statement of operations based on the value of the vested portion of the warrant issuance as measured at its then-current fair value as of each financial reporting date.
The Company calculates the fair value of option grants and warrant issuances utilizing the Black-Scholes pricing model. The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. ASC 718 requires forfeitures to be estimated at the time stock options are granted and warrants are issued to employees and non-employees, and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered stock option or warrant. Scivanta estimates forfeiture rates for all unvested awards when calculating the expense for the period. In estimating the forfeiture rate, Scivanta monitors both stock option and warrant exercises as well as employee termination patterns.
The resulting stock-based compensation expense for employee awards is generally recognized on a straight-line basis over the requisite service period of the award.
During the fiscal years ended October 31, 2011 and 2010, the Company recorded general and administrative stock-based compensation expense of $21,001 and $48,077, respectively, related to stock options granted to employees.
Net Loss Per Common Share
Basic net loss per share is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the impact of common shares issuable upon exercise of stock options and warrants and conversion of convertible debt that are not deemed to be anti-dilutive. The dilutive effect of the outstanding stock options and warrants is computed using the treasury stock method.
For the fiscal year ended October 31, 2011, diluted net loss per share did not include the effect of 2,495,332 shares of common stock issuable upon the exercise of outstanding options, 4,046,750 shares of common stock issuable upon the exercise of outstanding warrants and 4,375,000 shares of common stock issuable upon the conversion of convertible debt, as their effect would be anti-dilutive.
For the fiscal year ended October 31, 2010, diluted net loss per share did not include the effect of 2,537,000 shares of common stock issuable upon the exercise of outstanding options, 3,796,750 shares of common stock issuable upon the exercise of outstanding warrants and 1,041,677 shares of common stock issuable upon the conversion of convertible debt, as their effect would be anti-dilutive.
Recent Accounting Pronouncements Applicable to the Company
The Company does not believe there are any recently issued, but not yet effective, accounting standards that would have a significant impact on the Company’s financial position or results of operations.
4.
License and Development Agreements
SCMS License Agreement
On November 10, 2006, Scivanta entered into a technology license agreement (the “License Agreement”) with The Research Foundation of State University of New York, for and on behalf of the University at Buffalo (the “Foundation”), Donald D. Hickey, M.D. (“Hickey”) and Clas E. Lundgren (“Lundgren”). The Foundation, Hickey and Lundgren shall be collectively referred to herein as the “Licensor.” The License Agreement was amended on June 29, 2007, October 24, 2008, January 6, 2009 and October 29, 2009. Pursuant to the License Agreement, the Licensor granted Scivanta the exclusive world-wide rights to develop, manufacture and distribute the SCMS, a minimally invasive two-balloon esophageal catheter system used to monitor cardiac performance.
Scivanta agreed to make an initial payment of $264,300 which was subsequently reduced to $262,957 pursuant to the first amendment to the License Agreement dated June 29, 2007. Scivanta paid $40,900 on November 16, 2006, $80,000 on October 31, 2007 and was required to pay $142,057 on November 1, 2008. Pursuant to the second amendment to the License Agreement dated October 24, 2008, the $142,057 payment was restructured as follows: (a) $39,101 was paid in cash to Hickey on October 24, 2008; (b) $34,567 was paid in cash to Lundgren on October 24, 2008; (c) $33,822 was paid by issuing 187,900 shares of our common stock to the Foundation on October 28, 2008; and (d) $34,567 was paid in cash to Lundgren on February 4, 2009.
Further, pursuant to the second amendment to the License Agreement dated October 24, 2008, any milestone payments that Scivanta was required or may have been required to pay to the Licensor under the original terms of the License Agreement were eliminated in exchange for the following: (a) a one-time cash payment by Scivanta to Hickey of $158,438 due on December 31, 2009; (b) the issuance of 224,960 shares of our common stock to the Foundation on October 28, 2008; (c) the issuance of 162,500 shares of our common stock to Hickey on October 28, 2008 and (d) the issuance of 426,560 shares of our common stock to Lundgren on October 28, 2008.
Pursuant to the fourth amendment to the License Agreement, the payment of $158,438 that was due to Hickey on December 31, 2009 was restructured as follows: (a) a cash payment of $50,000 was made to Hickey on February 28, 2010 and (b) a cash payment of $108,438 was due to Hickey on October 31, 2010. The cash payment of $108,438 due to Hickey on October 31, 2010 was restructured pursuant to an amended and restated technology license agreement dated February 14, 2011, which replaced the License Agreement, as discussed below.
Amended and Restated SCMS License Agreement
On February 14, 2011, the Company entered into an Amended and Restated technology license agreement (the “Amended and Restated License Agreement”) with Licensor. The Amended and Restated License Agreement replaced the License Agreement.
Pursuant to the Amended and Restated License Agreement, the Licensor granted Scivanta the exclusive world-wide rights to develop, manufacture and distribute the SCMS. The term of the Amended and Restated License Agreement ends on the later of (a) the expiration date of the last to expire patent right related to the SCMS, which is currently May 1, 2027, or (b) 17 years from the sale of the first licensed product on a country by country basis.
Scivanta was obligated to pay Hickey $108,438 on October 31, 2010 under the License Agreement. Pursuant to the Amended and Restated License Agreement, the payment of $108,438 was restructured and Scivanta agreed to pay Hickey an additional $26,562 as consideration for the extension of timeframes relating to the completion of certain performance based milestones as required by the License Agreement. The Company recorded this additional consideration as a component of research and development expense. The aggregate $135,000 due to Hickey pursuant to the Amended and Restated License Agreement was paid or is required to be paid as follows: a) a cash payment of $30,000 was made to Hickey on June 3, 2011 and (b) a cash payment of $105,000 is due to Hickey on the date that is thirty (30) days after the first commercial sale of a product utilizing the licensed technology, but no later than July 31, 2012.
Pursuant to the Amended and Restated License Agreement, Scivanta is required to pay the Licensor a royalty of 5% of annual net sales, as defined in the Amended and Restated License Agreement, subject to certain reductions as detailed in the Amended and Restated License Agreement. Beginning with the first full year of sales of the SCMS in the United States and for two years thereafter, Scivanta is required to pay an annual minimum royalty of $100,000 to the Licensor against which any royalty on net sales paid in the same calendar year for sales in the United States will be credited. Further, beginning with the first full year of sales of the SCMS outside the United States and for two years thereafter, Scivanta is required to pay an annual minimum royalty of $100,000 to the Licensor against which any royalty on net sales paid in the same calendar year for sales outside the United States will be credited. The Company is also required to pay the Licensor 25% of all sublicensing revenue, as defined in the Amended and Restated License Agreement, received by the Company in connection with the Company’s sublicense of the rights granted to the Company under the Amended and Restated License Agreement.
The Amended and Restated License Agreement also requires Scivanta to use commercially reasonable efforts to develop and market the SCMS within certain timeframes, subject to specified exceptions. Further, the Amended and Restated License Agreement contains standard provisions regarding indemnification, termination and patent prosecution.
5.
Grant Receivable
On October 29, 2010, the Company was awarded a Qualifying Therapeutic Discovery Project (“QTDP”) grant pursuant to a program created by the U.S. Patient Protection and Affordable Care Act of 2010. The entire grant equaled $244,479 and was disbursed over a two year period. Under the QTDP grant, the Company was awarded an initial amount of $112,500 for its fiscal year ended October 31, 2010 and was awarded the remainder of the grant, amounting to $131,979, for its fiscal year ending October 31, 2011. The Company has recorded a grant receivable of $131,979 at October 31, 2011, which amount was paid in full to the Company subsequent to the fiscal year ended October 31, 2011. The Company has no further performance obligations to meet relating to the $244,479 awarded under the grant for its fiscal years ended October 31, 2011 and 2010.
6.
Income Taxes
The difference between the statutory federal income tax rate on the Company’s pre-tax loss and the Company’s effective income tax rate is summarized as follows:
Significant components of the Company’s deferred tax assets as of October 31, 2011 and 2010 are shown below. In determining whether the deferred tax assets will be realized, the Company considered numerous factors, including historical profitability, estimated future taxable income and the industry in which it operates. As of October 31, 2011 and 2010, a valuation allowance was recorded to fully offset the net deferred tax asset, as it was determined by management that the realization of the deferred tax asset was not likely to occur in the foreseeable future. The valuation allowance decreased $66,915 during the fiscal year ended October 31, 2011, attributable primarily to the tax treatment of the settlement of accrued officer compensation and the tax treatment of the settlement of accounts payable related to director fees offset by the Company’s continuing operating losses for the fiscal year ended October 31, 2011 and the Company’s belief that its remaining net operating losses would not be realized.
The tax effects of temporary differences and net operating loss carryforwards that give rise to deferred taxes consist of the following:
As of October 31, 2011, the Company had federal and state operating losses of approximately $15,707,000 and $2,281,000, respectively. The federal operating losses begin to expire in the years 2022 through 2030 and the state operating losses begin to expire in the years 2015 through 2017.
Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and similar state provisions. The Company has not performed a detailed analysis to determine whether an ownership change under Section 382 of the Internal Revenue Code occurred. The effect of an ownership change would be the imposition of an annual limitation on the use of net operating loss carryforwards attributable to periods before the change.
The Company’s fiscal 2008, 2009 and 2010 federal and state income tax returns are open for examination by the applicable governmental authorities.
7.
Related Party Transactions
Sublease Agreement
David R. LaVance, the Company’s Chairman, President and Chief Executive Officer, and Thomas S. Gifford, the Company’s Executive Vice President, Chief Financial Officer and Secretary, are Principals of Century Capital Associates LLC (“Century Capital”). Effective February 1, 2007, the Company and Century Capital entered into a Sublease Agreement pursuant to which the Company rents office space approximating 2,000 square feet inside Century Capital’s existing offices. In addition, the Company rents office furniture and other equipment from Century Capital. This agreement has a month to month term that requires sixty days written notice to terminate and a monthly rental fee of $5,000. The Company is responsible for all operating costs associated with the office space, including utilities, maintenance and property taxes.
During the fiscal year ended October 31, 2011, the Company was billed $69,926 pursuant to the terms of the Sublease Agreement. As of October 31, 2011, the Company owed Century Capital $40,000 for rent due under the Sublease Agreement and $1,302 for other expenses, which amounts are included in accounts payable - related party. Subsequent to October 31, 2011, $16,302 of the amount due to Century Capital was paid by the Company.
During the fiscal year ended October 31, 2010, the Company was billed $73,141 pursuant to the terms of the Sublease Agreement.
Forgiveness of Accrued Officer Compensation and Director Fees
Effective October 31, 2011, Mr. LaVance and Mr. Gifford agreed to forfeit an aggregate of $824,170 of accrued compensation, which the Company recorded as additional paid-in capital for the fiscal year ended October 31, 2011. In addition, effective October 31, 2011, the Company’s directors and a former director agreed to forfeit an aggregate $77,000 of accrued director fees, which the Company recorded as additional paid-in capital for the fiscal year ended October 31, 2011.
8.
Stockholders’ Equity
Stock Option Plans
The Company currently has two stock option plans in place: the 2002 Equity Incentive Plan and the 2007 Equity Incentive Plan (collectively, the “Equity Incentive Plans”). The 2002 Equity Incentive Plan was approved by the stockholders on July 5, 2002. The aggregate number of shares of common stock which could have been awarded under the 2002 Equity Incentive Plan was 2,000,000. As of October 31, 2011, options to purchase 1,470,000 shares of the Company’s common stock were outstanding under the 2002 Equity Incentive Plan. As a result of the adoption of the Company’s 2007 Equity Incentive Plan, no further awards are permitted under the 2002 Equity Incentive Plan.
On May 31, 2007, the stockholders approved the Company’s 2007 Equity Incentive Plan. The 2007 Equity Incentive Plan was placed into effect in order to encourage and enable employees and directors of the Company to acquire or increase their holdings of common stock and to promote these individual’s interests in the Company thereby enhancing the efficiency, soundness, profitability, growth and stockholder value of the Company. The 2007 Equity Incentive Plan provides for awards in the form of restricted shares, incentive stock options, non-qualified stock options and stock appreciation rights. The aggregate number of shares of common stock which may be awarded under the 2007 Equity Incentive Plan is 3,000,000, subject to adjustment as provided in the 2007 Equity Incentive Plan. As of October 31, 2011, options to purchase 1,025,332 shares of the Company’s common stock were outstanding under the 2007 Equity Incentive Plan and up to 1,974,668 additional shares of the Company’s common stock can be awarded under the 2007 Equity Incentive Plan.
Stock option awards under the Equity Incentive Plans were granted at prices as determined by the Company’s compensation committee, but such prices were not less than the fair market value of the Company's common stock on the date of grant. Stock options granted and outstanding include only non-qualified options and vest over a period of up to five years and have a maximum term of ten years from the date of grant.
A summary of stock option transactions for employees and directors under the Equity Incentive Plans during the fiscal years ended October 31, 2011 and 2010 were as follows:
No stock options were granted during the fiscal years ended October 31, 2011 or 2010.
Information with respect to outstanding options and options exercisable as of October 31, 2011 that were granted to employees is as follows:
A summary of the nonvested shares subject to options granted under the Equity Incentive Plans as of October 31, 2011 and 2010 is as follows:
As of October 31, 2011, there was $3,714 of total unrecognized compensation cost related to nonvested share based compensation arrangements granted under the Equity Incentive Plans. That cost is expected to be recognized over a weighted average period of two months.
Warrants to Purchase Common Stock
A summary of warrant transactions during the fiscal years ended October 31, 2011 and 2010 is as follows:
Warrants issued by the Company contain exercise prices as determined by the Company’s board of directors, but such exercise prices were not less than the fair market value of the Company's common stock on the date of issuance. Warrants issued may vest over a period of up to five years and have a maximum term of ten years from the date of issuance.
Information with respect to outstanding warrants and warrants exercisable at October 31, 2011 is as follows:
A summary of the nonvested shares subject to warrants as of October 31, 2011 and 2010 is as follows:
As of October 31, 2011, there was no unrecognized compensation cost related to nonvested share based compensation arrangements involving warrants.
Issuance of Common Stock and Warrant to Purchase Common Stock
On June 18, 2010, the Company sold to a private investor a common stock unit that consisted of 2,500,000 shares of the Company’s common stock and a warrant to purchase 2,500,000 shares of the Company’s common stock. The gross proceeds received in connection with this private placement were $250,000. The warrant has a two year term, is exercisable at $0.10 per share and was fully vested at the date of issuance. The quoted market price of the Company’s common stock on the date of closing the transaction was $0.07 per share. The Company incurred offering costs of $33,750 in connection with this transaction, which were recorded as an offset to additional paid-in capital.
On February 9, 2011, the Company sold to a private investor a common stock unit that consisted of 250,000 shares of the Company’s common stock and a warrant to purchase 250,000 shares of the Company’s common stock. The gross proceeds received in connection with this private placement were $25,000. The warrant has a two year term, is exercisable at $0.10 per share and were exercisable at the date of issuance. The quoted market price of the Company’s common stock on the date of closing the transaction was $0.03 per share. The Company incurred offering costs of $2,875 in connection with this transaction, which were recorded as an offset to additional paid in capital.
Stock Purchase Deposit
During the fiscal year ended October 31, 2010, the Company received $100,000 related to potential stock purchases from investors who had elected to participate in the Company’s on-going private placement of common stock units. This amount was recorded at October 31, 2010 as restricted cash - stock purchase with a corresponding liability as deposit - stock purchase. During the fiscal year ended October 31, 2011, the Company returned the $100,000 to the investors since the investors decided not to participate in the private placement.
9.
Convertible Debentures
February 2007 Convertible Debentures
On February 8, 2007, the Company closed on a private placement of 8% convertible debentures dated February 1, 2007 (the “February 2007 Debentures”). The gross proceeds received in connection with this private placement were $250,000. The February 2007 Debentures originally had a three year term, maturing on January 31, 2010. In January 2010, the holders agreed to amend the February 2007 Debentures. Pursuant to this amendment, the holders agreed to a new maturity date of January 31, 2012, extending the term of the February 2007 Debentures for an additional two year period (see Note 12). The February 2007 Debentures bear interest at a rate of 8% per annum. Interest is payable in annual installments, beginning on February 1, 2008, in cash or, at the option of the Company, in shares of the Company’s common stock. If the Company elects to pay the interest in shares of the Company’s common stock, the number of shares issued as payment will be equal to the quotient of the unpaid interest divided by the market price of the Company’s common stock as defined in the February 2007 Debentures.
Up to 50% of the aggregate principal amount of the February 2007 Debentures is convertible into shares of the Company’s common stock at the option of the holders at a conversion price of $0.20 per share. The remaining 50% of the aggregate principal amount of the February 2007 Debentures is convertible at the option of the holders at a conversion price of $0.30 per share. The fair value of the Company’s common stock as of February 1, 2007 was $0.20 per share. An aggregate amount of 1,041,667 shares of common stock can be issued pursuant to the February 2007 Debentures. The February 2007 Debentures also contain demand registration rights upon the request of the holders of more than 50% of the aggregate principal amount of the then outstanding February 2007 Debentures or the securities issuable upon the conversion of the February 2007 Debentures. The Company has determined that the value attributable to the demand registration rights is de minimis.
Effective February 1, 2010, the Company issued 333,333 shares of its common stock to the February 2007 Debenture holders in satisfaction of $20,000 of interest due for the period February 1, 2009 through January 31, 2010. The number of shares issued as payment of the interest due was calculated based on the market price of the Company’s common stock ($0.06 per share) as defined in the February 2007 Debentures.
On June 7, 2011, the Company issued 500,000 shares of its common stock to the February 2007 Debenture holders in satisfaction of $20,000 of interest due for the period February 1, 2010 through January 31, 2011. The number of shares issued as payment of the interest due was calculated based on the market price of the Company’s common stock ($0.04 per share) as defined in the February 2007 Debentures.
For each of the fiscal years ended October 31, 2011 and 2010, the Company recorded a total of $20,000 of interest expense related to the February 2007 Debentures. As of October 31, 2011, $15,000 of interest due on the February 2007 Debentures was accrued and is included as a component of accrued expense.
May 2011 Convertible Debenture
On May 20, 2011, the Company issued an 8% convertible debenture to an institutional investor (the “May 2011 Debenture”). The gross proceeds received in connection with this private placement were $100,000. The May 2011 Debenture has a three year term maturing on May 20, 2014 and bears interest at a rate of 8% per annum. Interest is payable in annual installments, beginning on May 20, 2012, in cash or, at the option of the Company, in shares of the Company’s common stock. If the Company elects to pay the interest in shares of the Company’s common stock, the number of shares issued as payment will be equal to the quotient of the unpaid interest divided by the market price of the Company’s common stock as defined in the May 2011 Debenture.
The entire principal amount of the May 2011 Debenture is convertible at any time into shares of the Company’s common stock at the option of the holder at a conversion price of $0.03 per share. In addition, at the option of the Company and subject to certain restrictions provided in the May 2011 Debenture, the entire principal amount of the May 2011 Debenture is convertible into shares of the Company’s common stock at a conversion price of $0.03 per share upon the occurrence of: (a) a merger or acquisition of the Company or (b) the closing of a financing involving the Company’s common stock that results in gross proceeds to the Company, on a cumulative basis, of at least $600,000. The quoted market price of the Company’s common stock as of May 20, 2011 was $0.01 per share. An aggregate of 3,333,333 shares of common stock can be issued pursuant to the May 2011 Debenture.
For the fiscal year ended October 31, 2011, the Company recorded a total of $3,595 of interest expense related to the May 2011 Debentures. As of October 31, 2011, $3,595 of interest due on the May 2011 Debentures was accrued and is included as a component of accrued expense.
10.
Notes Payable
Note Payable - Hickey
The Company was obligated to pay Hickey a cash payment of $108,438 on October 31, 2010 under the License Agreement. Pursuant to the Amended and Restated License Agreement (see Note 4), the payment of the $108,438 was restructured and the Company agreed to pay Hickey an additional $26,562 as consideration for the extension of timeframes relating to the completion of certain performance based milestones as required by the License Agreement. The aggregate $135,000 due to Hickey pursuant to the Amended and Restated License Agreement was paid or is required to be paid as follows: (a) a cash payment of $30,000 was made to Hickey on June 3, 2011 and (b) a cash payment of $105,000 is due to Hickey on the date that is thirty (30) days after the first commercial sale of a product utilizing the licensed technology, but no later than July 31, 2012. As of October 31, 2011 and October 31, 2010, the Company recorded the amounts due to Hickey of $105,000 and $108,438, respectively, as a note payable.
Notes Payable - Insurance
On July 29, 2009, the Company entered into a finance agreement with AICCO, Inc. (“AICCO”). Pursuant to the terms of this finance agreement, AICCO loaned the Company the principal amount of $4,899, which amount would accrue interest at a rate of 12.24% per annum, in order to partially fund the payment of the premium of the Company’s workers compensation and general liability insurance. For the fiscal year ended October 31, 2010, the Company recorded $167 of interest expense related to this finance agreement. As of October 31, 2010, the principal balance related to this finance agreement had been paid in full by the Company.
On January 13, 2010, the Company entered into a finance agreement with AICCO. Pursuant to the terms of this finance agreement, AICCO loaned the Company the principal amount of $27,025, which amount would accrue interest at a rate of 9.5% per annum, in order to partially fund the payment of the premium of the Company’s director and officer liability insurance. For the fiscal year ended October 31, 2010, the Company recorded $867 of interest expense related to this finance agreement. As of October 31, 2010, the principal balance related to this finance agreement had been paid in full by the Company.
On January 3, 2011, the Company entered into a finance agreement with Imperial Credit Corporation (“Imperial”). Pursuant to the terms of this finance agreement, Imperial loaned the Company the principal amount of $15,867, which amount would accrue interest at a rate of 9.05% per annum, in order to partially fund the payment of the premium of the Company’s director and officer liability insurance. The finance agreement required the Company to make nine monthly payments of $1,830, including interest, with the first payment due on January 31, 2011. For the fiscal year ended October 31, 2011, the Company recorded a total of $604 of interest expense related to this finance agreement. As of October 31, 2011, the principal balance related to this finance agreement had been paid in full by the Company.
11.
Commitments and Contingencies
Executive Employment Agreements
On January 1, 2008, the Company entered into an executive employment agreement with each of David R. LaVance, the Company’s President and Chief Executive Officer, and Thomas S. Gifford, the Company’s Executive Vice President, Chief Financial Officer and Secretary (collectively, the “Employment Agreements”). The term of each of the Employment Agreements commenced on January 1, 2008 and ends on December 31, 2012, but can be renewed for successive one year periods unless terminated as provided in the Employment Agreements. Pursuant to the original terms of the Employment Agreements, both Messrs. LaVance and Gifford were to be paid an annual base salary of $275,000. In addition, both Messrs. LaVance and Gifford shall participate in the Company’s benefit programs and shall be eligible to receive an annual performance bonus based on the achievement of certain performance objectives as determined by the compensation committee of the Company’s board of directors.
Effective February 1, 2010, each of Messrs. LaVance and Gifford agreed to reduce the annual base salary due to each of them to $200,000. Effective November 1, 2011, each of Messrs. LaVance and Gifford agreed to waive the salary due to them until the Company is able to raise sufficient capital that will enable it to pay cash compensation to Messrs. LaVance and Gifford.
In the event that Mr. LaVance or Mr. Gifford is terminated without Good Cause (as defined in the Employment Agreements and used herein), or Mr. LaVance or Mr. Gifford terminates his employment for Good Reason (as defined in the Employment Agreements and used herein), Mr. LaVance or Mr. Gifford, as the case may be, will be entitled to receive a severance payment equal to his annual base salary in effect on the date of termination.
In addition, in the event that within one-hundred eighty days of a Change of Control (as defined in the Employment Agreements and used herein) of the Company, the employment of Mr. LaVance or Mr. Gifford is terminated by the Company or its successor without Good Cause, or Mr. LaVance or Mr. Gifford terminates his employment with the Company or its successor for Good Reason, Mr. LaVance or Mr. Gifford, as the case may be, shall be paid a severance payment; provided however, that if the termination of employment occurs prior to the Change of Control, the Change of Control must have been considered by the Company at the time of termination for Mr. LaVance or Mr. Gifford to be entitled to the severance payment. The amount of the severance payment will be equal to two times the sum of Mr. LaVance’s or Mr. Gifford’s annual base salary in effect immediately prior to the termination of Mr. LaVance’s or Mr. Gifford’s employment and an amount which is the lesser of (1) $150,000 and (2) the aggregate amount of any bonuses paid to Mr. LaVance or Mr. Gifford during the twelve months prior to the earlier of (A) the effective date of the Change of Control and (B) the date Mr. LaVance’s or Mr. Gifford’s employment terminates with the Company.
Effective October 31, 2011, Messrs. LaVance and Gifford agreed to forfeit an aggregated $824,170 of accrued compensation due to under the Employment Agreements, which the Company recorded as additional paid-in capital for the fiscal year ended October 31, 2011. Of this amount, $741,670 related to salary payments due to Messrs. LaVance and Gifford and $82,500 related to bonus payments due to Messrs. LaVance and Gifford for the fiscal year ended October 31, 2008. After giving effect to the above forfeitures of accrued compensation, as of October 31, 2011, the Company had accrued $200,000 of compensation payments related to the Employment Agreements.
12.
Subsequent Events
February 2007 Debentures
Issuance of Common Stock as Full Payment on Principal and Accrued Interest
On January 11, 2012, the Company issued, in a private placement, 500,000 shares of common stock at $0.10 per share as full payment of $50,000 of outstanding principal on certain February 2007 Debentures and 52,372 shares of common stock at a per share prices ranging between $0.07 and $0.08 as full payment of $3,729 of accrued and unpaid interest related to those February 2007 Debentures.
Extension of Term
During January 2012, holders aggregating $175,000 of outstanding principal of the February 2007 Debentures agreed to a new maturity date of January 31, 2014, which amount was classified as a long-term liability as of October 31, 2011.
Note Payable - Insurance
On January 4, 2012, the Company entered into a finance agreement with Imperial. Pursuant to the terms of this finance agreement, Imperial loaned the Company the principal amount of $15,867 which amount would accrue interest at a rate of 9.3% per annum, in order to partially fund the payment of the premium of the Company’s director and officer liability insurance. The finance agreement required the Company to make nine monthly payments of $1,832, including interest, with the first payment due on January 31, 2012.
INDEX OF EXHIBITS
Exhibit
Number
Description of Exhibit
3.2
Amended and Restated Bylaws of the Registrant (Incorporated by reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended January 31, 2006, filed with the SEC on January 29, 2007).
4.2
Form of Convertible Debenture, dated as of February 1, 2007, issued to the following persons and in the following amounts: Jesse H. Austin, III ($50,000); Andrew O. Whiteman and Gwen C. Whiteman, JTWROS ($25,000); Alan Eicoff ($25,000); Jack W. Cumming ($25,000); Scott C. Withrow ($25,000); Terrence McQuade ($25,000); Steven J. Olsen ($25,000); Robert P. Reynolds ($12,500); Chartwell Partners, LLP ($12,500); and Marc G. Robinson and Joshua Goldfarb ($25,000) (Incorporated by reference to Exhibit 4.8 to the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended January 31, 2007, filed with the SEC on March 14, 2007).
4.4
8% Convertible Debenture, dated as of May 20, 2011, issued to Zanett Opportunity Fund, Ltd. (Incorporated by reference to Exhibit 4.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2011, filed with the SEC on June 14, 2011).
10.2
Sublease Agreement, dated February 1, 2007, between the Registrant and Century Capital Associates LLC (Incorporated by reference to Exhibit 10.14 to the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended January 31, 2007, filed with the SEC on March 14, 2007).
E-1
Exhibit
Number
Description of Exhibit
10.5
Second Addendum to the Technology License Agreement dated November 10, 2006, between the Registrant and The Research Foundation of State University of New York, for and on behalf of the University at Buffalo, and Donald D. Hickey, M.D. and Clas E. Lundgren, dated October 24, 2007 (Incorporated by reference to Exhibit 10.25 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 28, 2008).
10.7
Fourth Addendum to the Technology License Agreement dated November 10, 2006, between the Registrant and The Research Foundation of State University of New York, for and on behalf of the University at Buffalo, and Donald D. Hickey, M.D. and Clas E. Lundgren, dated October 29, 2009 (Incorporated by reference to Exhibit 10.31 to the Registrant’s Current Report on Form 8-K filed with the SEC on October 30, 2008).
10.9*
Stock Option Agreement and Notice of Grant, dated February 5, 2007, pursuant to which David R. LaVance was granted a non-qualified stock option to purchase up to 500,000 shares of common stock of the Registrant (Incorporated by reference to Exhibit 10.16 to the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended January 31, 2007, filed with the SEC on March 14, 2007).
E-2
Exhibit
Number
Description of Exhibit
10.11*
Warrant to purchase 105,000 shares of common stock of the Registrant, dated March 15, 2007, issued to Lawrence M. Levy (Incorporated by reference to Exhibit 10.19 to the Registrant’s Current Report on Form 8-K filed with the SEC on March 19, 2007).
10.13
Registrant’s 2007 Equity Incentive Plan, adopted and effective May 31, 2007 (Incorporated by reference to Appendix to the Registrant’s definitive proxy statement, filed with the SEC on April 27, 2007).
10.15*
Stock Option Agreement and Notice of Grant, dated January 1, 2008, pursuant to which Thomas S. Gifford was granted a non-qualified stock option to purchase up to 100,000 shares of common stock of the Registrant (Incorporated by reference to Exhibit 10.22 to the Registrant’s Current Report on Form 8-K filed with the SEC on January 2, 2008).
10.17*
Stock Option Agreement and Notice of Grant, dated January 1, 2008, pursuant to which Lawrence M. Levy was granted a non-qualified stock option to purchase up to 25,000 shares of common stock of the Registrant (Incorporated by reference to Exhibit 10.24 to the Registrant’s Current Report on Form 8-K filed with the SEC on January 2, 2008).
E-3
Exhibit
Number
Description of Exhibit
10.20*
Executive Employment Agreement, dated as of January 1, 2008, between the Registrant and Thomas S. Gifford (Incorporated by reference to Exhibit 10.27 to the Registrant’s Current Report on Form 8-K filed with the SEC on January 2, 2008).
10.22*
Amendment No. 1 dated as of June 18, 2010 to the Executive Employment Agreement, dated as of January 1, 2008, between the Registrant and Thomas S. Gifford (Incorporated by reference to Exhibit 10.28 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2010, filed with the SEC on June 21, 2010).
10.24*
Amendment No. 2 dated as of January 3, 2012 to the Executive Employment Agreement, dated as of January 1, 2008, between the Registrant and Thomas S. Gifford.
10.26*
Stock Option Agreement and Notice of Grant, dated January 21, 2009, pursuant to which Thomas S. Gifford was granted a non-qualified stock option to purchase up to 250,000 shares of common stock of the Registrant (Incorporated by reference to Exhibit 10.33 to the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended October 31, 2008, filed with the SEC on January 29, 2009).
E-4
Exhibit
Number
Description of Exhibit
10.29*
Stock Option Agreement and Notice of Grant, dated January 21, 2009, pursuant to which Anthony Giordano, III was granted a non-qualified stock option to purchase up to 39,000 shares of common stock of the Registrant (Incorporated by reference to Exhibit 10.36 to the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended October 31, 2008, filed with the SEC on January 29, 2009).
31.1
Section 302 Certification of Chief Executive Officer.
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
* Constitutes a management contract
E-5