U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 1 TO FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ELAST TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
NEVADA 3845 88-0380544
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
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2505 Rancho Bel Air, Las Vegas, Nevada 89107
(Address of registrant's principal executive offices) (Zip Code)
702.878.8310
(Registrant's Telephone Number, Including Area Code)
Thomas E. Stepp, Jr.
Stepp & Beauchamp LLP
1301 Dove Street, Suite 460
Newport Beach, California 92660
949.660.9700
Facsimile 949.660.9010
(Name, Address and Telephone Number of Agent for Service)
Approximate date of proposed sale to the public: From time to time after this
Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] _______
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act of 1933, check the following box and list the Securities Act
of 1933registration statement number of the earlier effective registration
statement for the same offering. [_] _______
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
[_] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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Title of each class Amount Proposed maximum Proposed maximum
of securities to be offering price aggregate Amount of
to be registered registered per share offering price registration fee
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value 1,000,000 shares $4.00 $4,000,000.00 $1,056.00
Common Stock, $.001 par value 640,000 shares $1.9375(1) $1,240,000.00(1) $327.36
====================================================================================================================================
Total Registration Fees: $1,383.36
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(1) Selling Shareholders' stock registration fee was calculated pursuant to Rule
457(c) of Regulation C using the average of the bid and ask prices per share of
the Registrant's common stock, as reported on the OTC Bulletin Board for
February 4, 2000.
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until this Registration Statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
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Preliminary Prospectus
ELAST TECHNOLOGIES, INC.,
a Nevada corporation
1,640,000 Shares of $.001 Par Value Common Stock
This prospectus ("Prospectus") relates to 1,640,000 shares (the "Shares") of
$.001 par value common stock of Elast Technologies, Inc., a Nevada corporation
(the "Company"). 640,000 of the Shares are issued and outstanding shares of
common stock owned by the persons specified in this Prospectus under the caption
"Selling Stockholders." Those Shares were acquired by the Selling Stockholders
in private placement transactions which were exempt from the registration and
prospectus delivery requirements of the Securities Act of 1933, as amended (the
"1933 Act"). Additionally, we are registering 1,000,000 Shares to be offered by
the Company on a "best efforts" basis.
The Selling Stockholders may from time to time sell the Shares on the OTC
Bulletin Board, on any other national securities exchange or automated quotation
system on which our common stock may be listed or traded, in negotiated
transactions or otherwise, at prices then prevailing or related to the then
current market price or at negotiated prices. The Shares may be sold directly or
through brokers or dealers.
We will receive no part of the proceeds from any sale of the 640,000 Shares
owned by the Selling Stockholders. We will receive proceeds from the sale of the
remaining 1,000,000 Shares we are registering by this Registration Statement and
those proceeds will be used for our working capital and to fund our continuing
research and development activities. All expenses of registration incurred in
connection with this offering will be paid by the Company, but all selling and
other expenses incurred by the Selling Stockholders will be paid by the Selling
Stockholders.
The Selling Stockholders and any broker-dealers participating in the
distribution of the Shares may be deemed to be "underwriters" within the meaning
of the 1933 Act, and any commissions or discounts given to any such
broker-dealer may be regarded as underwriting commissions or discounts under the
1933 Act.
The Shares have not been registered for sale by the Selling Stockholders under
the securities laws of any state as of the date of this Prospectus. Brokers or
dealers effecting transactions in the Shares should confirm the registration
thereof under the securities laws of the states in which transactions occur or
the existence of any exemption from registration.
The Company participates in the OTC Bulletin Board, an electronic quotation
service for securities not traded on an established securities exchange. Our
common stock trades on the OTC Bulletin Board under the trading symbol ESTG. On
February 4, 2000, the closing bid and asked prices of our common stock as
reported on the OTC Bulletin Board were $1.75 and $2.125, respectively.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is February 15, 2000
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Item 3. Summary Information and Risk Factors.
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS
PROSPECTUS, WHICH CONTAINS MORE DETAILED INFORMATION WITH RESPECT TO EACH OF THE
MATTERS SUMMARIZED IN THIS PROSPECTUS AS WELL AS OTHER MATTERS NOT COVERED IN
THE SUMMARY. ALL PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW THE ENTIRE
CONTENTS OF THE PROSPECTUS AND THE EXHIBITS ATTACHED HERETO, INDIVIDUALLY AND
WITH THEIR OWN TAX, LEGAL AND BUSINESS ADVISORS.
The Company: Our principal business address is 2505 Rancho Bel Air,
Las Vegas, Nevada 89107; our main business telephone
number is 702.878.8310.
Business of the
Company: The Company is a Nevada corporation which was
originally incorporated to engage in any lawful act or
activity for which corporations may be organized under
the General Corporation Law of Nevada. We intend to
manufacture and market medical devices, and we are
presently continuing research and development
activities relating to a patented allergy-testing
device (the "ELAST Device", U.S. Patent No. 5413113,
issued on or about May 9, 1995) which the Company owns
the rights to develop, test, manufacture and market. We
believe our current cash resources are sufficient to
fund our research and development activities relating
to the ELAST Device over the next 6 months. It may be
necessary to raise additional funds to complete
prototype development and limited clinical trials of
the ELAST Device. However, if the ELAST Device performs
as anticipated, we believe that we will be able to
raise the funds necessary to begin production of the
ELAST Devices - for the North American and
international clinical trials and the Food and Drug
Administration ("FDA") approval process - by the sale
of the Company's capital stock, debt, or licensing
certain proprietary rights. Should the development of
the prototype or clinical testing of the prototype take
more time than anticipated, or if the results of
testing require significant modifications to the ELAST
Device, sufficient funds may not be available to enable
the ELAST Device to be completed and brought to market
during the next 6 months. We are currently negotiating
proposed marketing agreements for the territories of
Australia, New Zealand and Japan; and we plan to
negotiate and enter into additional marketing
agreements with appropriate distributors and marketing
agents. Other than the ELAST Device, we do not
currently have any plans to develop other products. We
may acquire the right to sell or distribute existing
products, or obtain licensing, marketing, distribution
or other rights to compatible products. Therefore,
other than costs related to the continued development
of the ELAST Device, we do not anticipate significant
expenditures on acquisition or development of other
products during the current fiscal year. We will focus
our initial marketing and distribution efforts on
development and commercial exploitation of the ELAST
Device. The present plan is to lease or license the
ELAST Device. This plan could minimize variable costs
and create an informed and updated client base. In the
last six months, significant developments in the ELAST
Device's capabilities have resulted from our research
and development efforts. Specifically, we believe our
recent tests demonstrate that the ELAST Device is
capable of successfully isolating the electrical energy
signal emanating from the human body.
To further advance the research and development of the
ELAST Device, and to validate the scientific principle
of bio-voltage measurement, an extensive period of
testing will commence in conjunction with an academic
facility. We are conducting discussions with the
University of California at Irvine ("UCI") and San
Diego State University. The
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process of collaboration needs to be reviewed by the
Company's Board of Directors, after acceptance of a
testing program by one of the faculties of these
institutions. UCI and San Diego State University have
both expressed faculty interest in testing the ELAST
Device.
Once the initial testing of the ELAST Device is
completed, we will manufacture, or cause to be
manufactured, about 10 units of the ELAST Device, which
will be provided to a selected group of physicians and
scientists. Our operating plan is to develop the ELAST
Device as a stand-alone device which is user-friendly
and fully self-contained. Once the ELAST Device gains
acceptance in the medical community, we anticipate that
a patient home-testing unit may be developed.
State of
organization of the
Company: The Company was incorporated pursuant to the provisions
of the General Corporation Law of Nevada on November 5,
1996 under the name Med Mark, Inc. Pursuant to a Plan
of Merger filed with the Delaware Secretary of State,
on or about June 30, 1998, Elast Technologies
Corporation, a Delaware corporation, merged with and
into Elast Merger, Inc., a Nevada corporation, which
was a wholly-owned subsidiary of Med Mark, Inc.
Shareholders who formerly held stock in Elast
Technologies Corporation received four (4) shares of
Med Mark, Inc. common stock for each share of their
Elast Technologies Corporation common stock, with the
result that the former shareholders of Elast
Technologies Corporation held a controlling interest in
Med Mark, Inc. immediately after the merger. On or
about October 27, 1998, a Certificate of Amendment to
the Articles of Incorporation of Med Mark, Inc. was
filed with the Nevada Secretary of State changing the
Company's name from Med Mark, Inc. to Elast
Technologies, Inc.
Risk Factors: A purchase of the Common Stock involves various risks
that must be considered carefully by any potential
purchaser. Those risks include, but are not necessarily
limited to, (i) there can be no assurance that our
products and services will achieve significant market
acceptance, and that acceptance, if achieved, will be
sustained for any significant period or that product
and service life cycles will be sufficient (or
substitute products and services developed) to permit
us to recover associated costs; (ii) the Company has a
limited operating history upon which an evaluation of
our prospects can be made; (iii) the officers and
directors of the Company may be subject to various
conflicts of interest; (iv) substantially all of our
products and services are subject to significant
regulation, and, therefore, our ability to generate
significant revenues will depend upon, among other
things, our ability to comply with all such
regulations, laws and statutes, both in the United
States and in other countries; (v) we may be required
to raise substantial funds in order to implement our
business plans and objectives; (vi) we have significant
competition from other medical device manufacturers,
suppliers, and distributors; (vii) our results of
operations may vary from period to period as a result
of a variety of factors; (viii) the market for our
products and services is characterized by continuous
development and introduction of new products and
services; (ix) changing political, economic and
regulatory influences may affect our business practices
and operations; (x) we are dependent on our key
personnel and management; (xi) we do not anticipate
paying dividends on our Common Stock in the foreseeable
future; and (xii) there can be no assurance that our
operations will become profitable. See "RISK FACTORS".
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The Shares: 640,000 of the Shares offered hereby are issued and
outstanding shares of our common stock and are now
owned by the persons specified in this Prospectus under
the caption "Selling Stockholders." The Shares were
acquired by the Selling Stockholders in various
transactions, all of which were exempt from the
registration provisions of the 1933 Act. Specifically,
on July 7, 1999, the Company, in a limited offering to
non-U.S. persons outside the United States of America
pursuant to the provisions of Regulation S promulgated
by the Securities and Exchange Commission, sold units
of ownership interest in the Company consisting of an
aggregate 500,000 shares of the Company's $.001 par
value common stock and five-year warrants to purchase
an additional 500,000 shares of the Company's common
stock at an exercise price of $2.40 per share to
certain Australian investors. In July, 1999, the
Company received payment of $250,000 and recorded a
common stock receivable of $250,000. The common stock
receivable was collected in October, 1999. On or about
November 9, 1998, the Company issued 15,000 shares of
the Company's common stock to Thomas E. Stepp, Jr. as
compensation for legal services performed for the
Company.
We are filing this registration statement to register
those shares of our common stock with the Securities
and Exchange Commission. Additionally, we are
registering 1,000,000 Shares to be offered on a "best
efforts" basis.
Estimated use of
proceeds: We will receive as much as $4,000,000 if all of the
1,000,000 Shares offered by us on a "best efforts"
basis at $4.00 per Share are purchased at that price,
and we intend to use any proceeds from such sale for
working capital and to fund our continuing research and
development activities. We will not receive any of the
proceeds from the sale of the Shares offered by the
Selling Stockholders. See "Selling Stockholders."
RISK FACTORS
In addition to the other information specified in this Prospectus, the following
risk factors should be considered carefully in evaluating the Company and our
business before purchasing any of the Shares. A purchase of the Shares is
speculative in nature and involves numerous risks. No purchase of the Shares
should be made by any person who cannot afford to lose the entire amount of such
investment.
THIS PROSPECTUS SPECIFIES FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SPECIFIED IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS
PROSPECTUS. PROSPECTIVE PURCHASERS OF SHARES MUST BE PREPARED FOR THE POSSIBLE
LOSS OF THEIR ENTIRE INVESTMENTS IN THE COMPANY. THE ORDER IN WHICH THE
FOLLOWING RISK FACTORS ARE PRESENTED IS ARBITRARY, AND PROSPECTIVE PURCHASERS OF
SHARES SHOULD NOT CONCLUDE, BECAUSE OF THE ORDER OF PRESENTATION OF THE
FOLLOWING RISK FACTORS, THAT ONE RISK FACTOR IS MORE SIGNIFICANT THAN THE OTHER
RISK FACTORS.
Information specified in this Prospectus contains "forward looking statements"
which can be identified by the use of forward-looking terminology such as
"believes", "could", "possibly", "probably", "anticipates", "estimates",
"projects", "expects", "may", "will", or "should" or the negative thereof or
other variations thereon or comparable
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terminology. Such statements are subject to certain risks, uncertainties and
assumptions. No assurances can be given that the future results anticipated by
the forward looking statements will be achieved. The following matters
constitute cautionary statements identifying important factors with respect to
such forward-looking statements, including certain risks and uncertainties, that
could cause actual results to vary materially from the future results covered in
such forward-looking statements. Among the key factors that have a direct
bearing on the Company's results of operations are the effects of various
governmental regulations, the fluctuation of the Company's direct costs and the
costs and effectiveness of the Company's operating strategy. Other factors could
also cause actual results to vary materially from the future results covered in
such forward-looking statements.
We Have a Limited Operating History. We have a very limited operating history
upon which an evaluation of our prospects can be made. We are currently engaged
primarily in research and development activities. We have not generated any
revenues and do not anticipate generating any revenues in our current fiscal
year. Our prospects must be considered speculative, considering the risks,
expenses, and difficulties frequently encountered in the establishment of a new
business, specifically the risks inherent in the development of medical devices.
There can be no assurance that unanticipated technical or other problems will
not occur which would result in material delays in future product and service
commercialization or that our efforts will result in successful product and
service commercialization. There can be no assurance that we will be able to
achieve profitable operations.
Regulatory Approvals May Not Be Granted. A "medical device" is defined by
Section 201(h) of the Food, Drug and Cosmetic Act, Title 21 United States Code
Section 321 as an instrument, apparatus, or machine which is intended for use in
the diagnosis of disease or other conditions, or in the cure, mitigation,
treatment, or prevention of disease in man and other animals. Confusion
sometimes exists between unregulated consumer products and medical devices.
Products are not considered medical devices if they have general utility and are
not dedicated to medical applications. Such products are subject to the Consumer
Product Safety Act.
Human therapeutic products are subject to rigorous pre-clinical and clinical
testing and other approval procedures. The FDA and other similar government
regulatory agencies require laboratory and clinical testing and other costly and
time-consuming procedures before medical products such as the ELAST Device can
be marketed, including, but not limited to, premarket notification to the FDA.
Various federal, state and foreign statutes may also govern or affect the
manufacturing, safety, labeling, storage, and marketing of such products, as
well as record-keeping incidental to such marketing. The ELAST Device may be
subject to (i) the Medical Device Amendments of 1976 to the Federal Food, Drug
and Cosmetic Act, cited above; (ii) the Medical Device Reporting Rule
implemented by the FDA in 1984; (iii) the standards for medical device
manufacturers promulgated by the FDA; and (iv) other rules and regulations
developed, implemented and enforced by the Center for Devices and Radiological
Health, an FDA sub-agency. However, the FDA Modernization Act of 1997 ("1997
Act") exempts from premarket notification devices that do not present a
potential unreasonable risk of illness or injury. The 1997 Act also directs the
FDA to concentrate its postmarket surveillance on higher risk devices. Moreover,
the 1997 Act expanded the FDA's pilot program pursuant to which the FDA
accredits third party experts to conduct the initial review of all
low-to-intermediate risk devices. The Company believes that the ELAST Device is
such a low-to-intermediate risk device and, therefore, may be subject to the
exemptions from premarket notification specified in the 1997 Act. If such is not
the case, the ELAST Device may be subject to premarket notification and,
therefore, subject to significant delay before being offered for sale, which
would have a material adverse effect on the financial condition of the Company.
Obtaining such approvals and maintaining ongoing compliance with these
requirements can require the expenditure of significant resources. We have not
yet determined what procedures, if any, will be required in this regard and we
have not begun any of these procedures. We are currently investigating the
possibility that the ELAST Device falls in a category for which FDA approval has
already been given. We anticipate that the ELAST Device may be included in such
a category, but we are still researching the appropriate regulatory
requirements. In addition, regulatory testing and approval would require
significant funding. In the event that such funding exceeded our present
financial resources, we would have to receive additional capital to market the
ELAST Device. An inability to obtain additional financing may have a material
adverse effect on the Company, including the possibility that we would be forced
to curtail our operations significantly or to cease our operations altogether.
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We Are in a Very Competitive Industry. Because the ELAST Device is based on a
new concept in diagnostics and is patented, there are currently no direct
competitors marketing a similar product. However, competition in the medical
products industry, generally, is intense. We compete directly with other
companies and businesses that have developed and are in the process of
developing technologies and products which will be competitive with our
products. There can be no assurance that other technologies or products which
are functionally equivalent or similar to our technologies and products have not
been developed or are not in development. We expect that companies or businesses
which may have developed or are developing such technologies and products as
well as other companies and businesses which have the expertise which would
encourage them to develop and market products directly competitive with those
developed and marketed by the Company. Many of these competitors have greater
financial and other resources, and more experience in research and development,
than the Company.
For example, according to its 1994 Annual Report, Bayer Corporation (formerly
Miles, Inc.) holds over 50% of the worldwide allergy testing market, exclusive
of in vitro testing. In 1994, Pharmacia (now Pharmacia & Upjohn, Inc.) held
approximately 73% of the worldwide market share for in vitro allergy tests. The
Company's additional competitors in this area include Sanofi, Ciba Corning and
Diagnostic Products Corporation.
There can be no assurance that competitors have not or will not succeed in
developing technologies and products that are more effective than any which have
been or are being developed by the Company or which would render our products
obsolete and noncompetitive. Most of our competitors have substantially greater
experience, financial and technical resources and production, marketing and
development capabilities than we do. If we begin commercial sales of our
products, we will also be competing with respect to manufacturing efficiency and
sales and marketing capabilities. To the extent that customers exhibit loyalty
to the supplier that first supplies them with a particular service or
technology, our competitors may have an advantage over us with respect to
services and technologies first developed by such competitors. As a result of
their size and breadth of their service offerings, certain of these competitors
have been and will be able to establish managed accounts by which they seek to
gain a disproportionate share of users for their services and technologies. Such
managed accounts present significant competitive barriers to the Company. There
can be no assurance that competitors have not or will not succeed in developing
technologies and services that are more effective than any which have been or
are being developed by us or which would render our products obsolete and
noncompetitive.
We Must Comply with Environmental Laws. Our management believes that no toxic or
hazardous materials will be byproducts of the manufacturing processes of the
ELAST Device; accordingly, we believe that the Company will not incur unforeseen
material expenditures related to the cost of compliance with applicable
environmental laws, rules or regulations. We believe that we are presently in
compliance with all applicable federal, state, and local environmental laws,
rules and regulations. Furthermore, in the event we license the manufacturing
rights of the ELAST Device to third parties, we will not become subject to any
such restrictions. However, at some time in the future, our research,
development, manufacturing and production processes may involve the controlled
use of hazardous materials. We may be subject to various laws and regulations
governing the use, manufacture, storage, handling, and disposal of such
materials and certain waste products. The risk of accidental contamination or
injury from hazardous materials cannot be completely eliminated. In the event of
such an accident, we could be held liable for any damages that result, and any
such liability could exceed our financial resources. In addition, there can be
no assurance that in the future we will not be required to incur significant
costs to comply with environmental laws and regulations relating to hazardous
materials. We cannot estimate the potential costs of complying with local,
state, and federal environmental laws.
We Have No Product Liability Insurance. Our business will expose us to potential
product liability risks that are inherent in the testing, manufacturing and
marketing of medical products. We do not have product liability insurance, and
there can be no assurance that we will be able to obtain or maintain such
insurance on acceptable terms or, if obtained, that such insurance will provide
adequate coverage against potential liabilities. We face an inherent business
risk of exposure to product liability and other claims in the event that the
development or use of our technology or products is alleged to have resulted in
adverse effects. Such risk exists even with respect to those products that are
manufactured in licensed and regulated facilities or that otherwise possess
regulatory approval for commercial sale. There can be no assurance that the
Company will avoid significant product liability exposure. There can be no
assurance that insurance coverage will be available in the future, on
commercially reasonable terms; or that such insurance will be adequate to cover
potential product liability claims;
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or that a loss of insurance coverage would not materially adversely affect our
business, financial condition and results of operations. While we have taken,
and will continue to take, what we believe are appropriate precautions, there
can be no assurance that we will avoid significant liability exposure. An
inability to obtain product liability insurance at acceptable cost or to
otherwise protect against potential product liability claims could prevent or
inhibit the commercialization of products we develop. A product liability claim
could have a material adverse effect on our business, financial condition and
results of operations.
Future Capital Needs and Uncertainty of Additional Funding. The medical products
industry is rapidly changing through the continuous development and introduction
of new products. Our strategy for growth is substantially dependent upon our
ability to successfully introduce the ELAST Devices. Accordingly, our ability to
compete may be dependent upon our ability to enhance our products continually.
There can be no assurance that competitors will not develop technologies or
products that render our products obsolete or less marketable. We may be
required to adapt to technological changes in the industry and develop products
to satisfy evolving industry or customer requirements, any of which could
require the expenditure of significant funds. At this time, we do not have a
source of commitment for such funds. Continued refinement and improvement costs
are risks inherent in new product development, including unanticipated technical
or other problems which could result in material delays in product
commercialization.
During the year ended December 31, 1999, the Company received approximately
$808,250 from the sale of common stock. At December 31, 1999, the Company had
cash resources of $205,715. The cash and equivalents constitute our present
internal sources of liquidity. Because we are not generating any revenues from
the sale or licensing of our products, our only external source of liquidity is
the sale of our capital stock. We believe our current cash resources are
sufficient to complete prototype development and limited clinical trials of the
ELAST Device. If the ELAST Device performs as anticipated, we believe that we
will be able to raise the funds necessary to begin production of the ELAST
Devices - for the North American and international clinical trials and the FDA
approval process - through the sale of equity, debt, or licensing. Should the
development of the prototype or clinical testing of the prototype take more time
than anticipated, or if the results of testing require significant modifications
to the ELAST Device, sufficient funds may not be available to enable the ELAST
Device to be completed and brought to market during the time period currently
anticipated by the Company. Failure to complete our research and development
program will have a significant adverse affect on our business operations.
Limited Protection of Proprietary Technology. We will attempt to protect our
proprietary technology through the enforcement of our patent and by applying for
additional patent protection when appropriate. We exclusively own any and all
software and other technology that we develop and we regard such technology as
proprietary. We may rely on a combination of patent, trademark and trade secret
laws, as well as contractual restrictions on disclosure, copying and
distribution (including but not limited to confidentiality agreements with our
employees and subcontractors), to attempt to protect our intellectual property
rights in our products and services. There is a possibility that such patent,
trademark and trade secret laws, as well as such confidentiality agreements, may
not be enforceable in certain jurisdictions. It may be possible for unauthorized
third parties to copy our products or to reverse engineer or obtain and use
information that we regard as proprietary. There can be no assurance that our
competitors will not independently develop technologies that are substantially
equivalent or superior to our technologies. In addition, because we anticipate
distributing our products internationally, the laws of certain countries in
which our products and services are or may be distributed or utilized may not
protect our products and intellectual rights to the same extent as the laws of
the United States. There can be no assurance that third parties will not assert
infringement claims against us in the future or that any such assertion will not
result in costly litigation or require us to obtain a license to intellectual
property rights of third parties. If we are required to obtain such licenses,
there can be no assurance that such licenses will be available on reasonable
terms, or at all. Moreover, in the event we were forced to sue third parties for
patent infringement or unfair competition, such litigation can be extremely
costly and time consuming, and may have a significant adverse affect on our
business and operations, even if we prevail in such lawsuit.
We Must Adapt to Rapid Technological Change. The medical devices industry is
characterized by rapidly changing technology, resulting in short product life
cycles and rapid price declines. We must continuously update our existing and
planned products and services to keep them current with changing technologies
and must develop new products and services, to take advantage of new
technologies that could render our existing products and services obsolete. Our
future prospects
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are highly dependent on our ability to increase the functionality of our
products and services in a timely manner and to develop new products that
address new technologies and achieve market acceptance. There can be no
assurance that we will be successful in these efforts. If we were unable to
develop and introduce such products and services in a timely manner, due to
resource constraints or technological or other reasons, this inability could
have a material adverse effect on our results of operations. In particular, the
introduction of new products and services are subject to the inherent risk of
development delays and delays in obtaining regulatory approvals, all of which
are beyond our control.
We Rely on Our Key Personnel. Our future success will depend on the service of
our key personnel and, additionally, our ability to identify, hire and retain
additional qualified personnel. There is intense competition for qualified
personnel in the medical products field, and there can be no assurance that we
will be able to continue to attract and retain such personnel necessary for the
development of our business. Because of the intense competition, there can be no
assurance that we will be successful in adding personnel as needed to satisfy
our staffing requirements. Failure to attract and retain key personnel could
have a material adverse effect on the Company.
Conflicts of Interest. The persons serving as our officers and directors may
have existing responsibilities and, in the future, may have additional
responsibilities, to provide management and services to other entities in
addition to the Company. As a result, conflicts of interest between the Company
and the other activities of those persons may occur from time to time, in that
those persons shall have conflicts of interest in allocating time, services, and
functions between the other business ventures in which those persons may be or
become involved and, also, the affairs of the Company .
Limitation on Liability of Officers and Directors of the Company. The Articles
of Incorporation of the Company includes a provision eliminating or limiting the
personal liability of the officers and directors of the Company to the Company
and its shareholders for damages for breach of fiduciary duty as a director or
officer. Accordingly, the officers and directors of the Company may have no
liability to the shareholders of the Company for any mistakes or errors of
judgment or for any act of omission, unless such act or omission involves
intentional misconduct, fraud, or a knowing violation of law or results in
unlawful distributions to the shareholders of the Company. DISCLOSURE OF
POSITION OF COMMISSION REGARDING INDEMNIFICATION FOR SECURITIES ACT LIABILITIES:
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF
1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE COMPANY
PURSUANT TO THE FOREGOING PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT IN THE
OPINION OF THE SECURITIES AND EXCHANGE COMMISSION THAT SUCH INDEMNIFICATION IS
AGAINST PUBLIC POLICY AS EXPRESSED IN THE 1933 ACT AND IS, THEREFORE,
UNENFORCEABLE.
Penny Stock Regulation. The Securities and Exchange Commission has adopted rules
that regulate broker-dealer practices in connection with transactions in "penny
stocks". Penny stocks generally are equity securities with a price of less than
$5.00 (other than securities registered on certain national securities exchanges
or quoted on the Nasdaq system, provided that current price and volume
information with respect to transactions in such securities is provided by the
exchange or system). The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from those rules, deliver a
standardized risk disclosure document prepared by the Securities and Exchange
Commission, which specifies information about penny stocks and the nature and
significance of risks of the penny stock market. The broker-dealer also must
provide the customer with bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction, and
monthly account statements showing the market value of each penny stock held in
the customer's account. In addition, the penny stock rules require that prior to
a transaction in a penny stock not otherwise exempt from those rules the
broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the trading activity in the secondary market for a stock that
becomes subject to the penny stock rules. While our common stock is subject to
the penny stock rules, purchasers of Shares may find it more difficult to sell
their Shares.
9
<PAGE>
Control by Existing Stockholders; Anti-Takeover Provisions. Our directors,
officers and principal (greater than 5%) stockholders, taken as a group,
together with their affiliates, beneficially own, in the aggregate,
approximately 55.8% of the Company's outstanding common stock. Certain principal
stockholders are directors or executive officers of the Company. As a result of
such ownership, these stockholders may be able to exert significant influence,
or even control, matters requiring approval by the stockholders of the Company,
including the election of directors. In addition, certain provisions of Nevada
law and of the Company's Articles of Incorporation and Bylaws could have the
effect of making it more difficult or more expensive for a third party to
acquire, or of discouraging a third party from attempting to acquire, control of
the Company.
Securities Market Factors. Our common stock is quoted on the OTC Bulletin Board.
However, no assurance can be given that an active public market will develop or
be sustained. Factors such as announcements of the introduction of new or
enhanced products by the Company or its competitors and quarter-to-quarter
variations in the Company's results of operations, as well as market conditions
in the technology and emerging growth company sector, may have a significant
impact on the market price of our common stock. Further, the stock market has
experienced extreme volatility that has particularly affected the market prices
of equity securities of many high technology companies and that often has been
unrelated or disproportionate to the operating performance of such companies.
These market fluctuations may adversely affect the price of our common stock.
No Foreseeable Dividends. We do not anticipate paying dividends on our common
stock in the foreseeable future; but, rather, we plan to retain earnings, if
any, for the operation and expansion of our business.
No Assurances of Revenue or Operating Profits. There can be no assurance that we
will be able to develop consistent revenue sources or that our operations will
become profitable.
Federal Income Tax Consequences. We have obtained no ruling from the Internal
Revenue Service and no opinion of counsel with respect to the federal income tax
consequences of the purchase or sale of Shares by the Selling Stockholders.
Consequently, investors must evaluate for themselves the income tax implications
which attach to their purchase, and any subsequent sale, of the Shares.
Impact of the Year 2000. The Year 2000 (commonly referred to as "Y2K") issue
resulted from the fact that many computer programs were written using two,
rather than four, digits to identify the applicable year. As a result, many
people were concerned that computer programs with time-sensitive software might
recognize a two digit code for any year in the next century as related to this
century. For example, "00", entered in a date-field for the year 2000, might be
interpreted as the year 1900, resulting in system failures or miscalculations
and disruptions of operations, including, among other things, a temporary
inability to process transactions or engage in other normal business activities.
While companies and governments in the United States spent an estimated $150
billion to $225 billion repairing the problem, countries like Russia and China,
which spent relatively minor amounts, seemed to clear the New Year's Day hurdle
with equal success. Major news media in the United States are reporting that,
after years of work and billions of dollars spent repairing the Year 2000
computer glitch, the technological tranquility of New Year's Day has raised a
new concern that the United States overreacted to this problem. While it is
still too soon to state positively that the Y2K transition has passed without
mishap, we believe that Y2K issues will not have a material adverse affect on
our business.
Item 4. Use of Proceeds
We will not receive any proceeds from the sale of Shares offered by the Selling
Stockholders. We will receive up to $4,000,000 if all of the 1,000,000 Shares
offered by us on a "best efforts" basis at $4.00 per share are purchased at that
price, and we intend to use any proceeds from such sale for working capital and
to fund our continuing research and development activities.
10
<PAGE>
Item 5. Determination of Offering Price
Price Range of Common Stock. The Company's stock is quoted on the OTC Bulletin
Board (trading symbol:ESTG). Prior to the Company's participation on the OTC
Bulletin Board, there was no public market for the Company's common stock. The
Company's common stock has closed at a low of $0.75 and a high of $2.875 for the
52-week period ended February 4, 2000. This market is extremely limited and the
prices for the Company's common stock quoted by brokers is not necessarily a
reliable indication of the value of the Company's common stock.
The offering price of the Selling Stockholders' Shares was calculated pursuant
to Rule 457(c) of Regulation C using the average of the bid and asked price of
the Company's common stock, as reported on the OTC Bulletin Board as of a
specified date within 5 business days prior to the date of the filing of this
Registration Statement, specifically, as of February 4, 2000. On February 4,
2000, the closing bid and asked prices of the Common Stock as reported on the
OTC Bulletin Board were $1.75 and $2.125, respectively.
The offering price of the 1,000,000 Shares being offered on a "best efforts"
basis has been determined primarily by the capital requirements of the Company
and has no relationship to any established criteria of value, such as book value
or earnings per share. Additionally, because we have no significant operating
history and have not generated any revenues to date, the price of the Shares is
not based on past earnings, nor is the price of the Shares indicative of current
market value for the assets owned by the Company. No valuation or appraisal has
been prepared for the business and potential business expansion of the Company.
Item 6. Dilution
The Company has been a reporting company since May 2, 1999, which was the
effective date of the Registration Statement on Form 10-SB which the Company
filed with the Commission on March 3, 1999. We are offering for sale 1,000,000
Shares on a "best efforts" basis at a price significantly higher than the
current bid and asked prices for our common stock as quoted on the OTC Bulletin
Board. The following table sets forth the difference between the offering price
of the Shares being offered by the Company, the net tangible book value per
share, and the net tangible book value per share after giving effect to the
offering by the Company, assuming that all of the Shares offered by the Company
are sold. Net tangible book value per share represents the amount of total
tangible assets less total liabilities divided by the number of shares
outstanding as of December 31, 1999.
Offering Price $4.00 per share
Net tangible book value at 12/31/99 $0.02 per share
Net tangible book value after giving
effect to the offering $0.46 per share
Per Share Dilution to New Investors $3.54 per share
Percent Dilution to New Investors 88.5%
The 640,000 Shares being offered for sale by the Selling Stockholders are
outstanding shares of Common Stock and, therefore, do not contribute to
dilution.
Item 7. Selling Stockholders
The following table sets forth the number of Shares which may be offered for
sale from time to time by the Selling Stockholders. The Shares offered for sale
constitute all of the Shares known to the Company to be beneficially owned by
the Selling Stockholders. None of the Selling Stockholders has held any position
or office with the Company, except as specified in the following table. Other
than the relationships described below, none of the Selling Stockholders had or
have any material relationship with the Company.
11
<PAGE>
Riverplate Securities Pty Ltd. 375,000
Leominster Ltd. 75,000
Edward L. Hamilton and his spouse, P.L. Hamilton(1) 25,000
Edward L. Hamilton(1) 75,000
Nicholas Spencer(2) 25,000
Melissa O'Sullivan(3) 50,000
Thomas E. Stepp, Jr. (4) 15,000
(1) Mr. Hamilton was formerly a Senior Vice President and a director of the
Company.
(2) Mr. Spencer is a director of the Company and an affiliate of Riverplate
Securities Pty Ltd .
(3) Ms. O'Sullivan is Mr. Hamilton's daughter.
(4) Mr. Stepp is a partner in Stepp & Beauchamp LLP, counsel to the Company.
Pursuant to the agreements by which certain of the Selling Stockholders acquired
their Shares, the Company agreed to use its best efforts to file a registration
statement for the resale of such Shares and to use its best efforts to cause
such registration statement to be declared effective. Pursuant to those
agreements, the Company will pay all expenses in connection with the
registration and sale of the Shares, except any selling commissions or discounts
allocable to sales of the Shares, fees and disbursements of counsel and other
representatives of the Selling Stockholders, and any stock transfer taxes
payable by reason of any such sale.
Item 8. Plan of Distribution
We are registering 1,000,000 Shares in contemplation of a "best efforts"
offering of our $.001 par value common stock. Subsequent to year end, the
Company initiated an offering of 1,000,000 shares of its $.001 par value common
stock on a best efforts basis pursuant to a Registration Statement on Form SB-2
filed with the Securities and Exchange Commission. On or about February 23,
2000, the Company was informed by the Securities and Exchange Commission that
its Registration Statement on Form SB-2 was effective and placed 800,000 of
those shares in CEDE & Company through DTC, one of the world's largest
securities depository and a national clearinghouse for the settlement of trades
in corporate and municipal securities. DTC is a limited purpose trust company
under New York Banking Law, a member of the Federal Reserve System, and a
registered clearing agency with the Securities and Exchange Commission.
Additionally, the Company placed (i) 50,000 of those shares with Xcell
Associates, a market maker; (ii) 50,000 of those shares with NC Capital, a
market maker; and (iii) 33,334 of those shares with ARDT, an investment banker.
On or about March 7, 2000, the Company was informed by the Securities and
Exchange Commission that the financial statements filed with the Company's
Registration Statement on Form SB-2 were not current, and that the Company must
file a Post-Effective Amendment containing more recent financial statements and
a Consent of Auditors to use those more recent financial statements. The Company
directed that the 800,000 shares in DTC be returned to certificate form and none
of those shares were delivered to any prospective purchaser. As of March 13,
2000, the shares placed with Xcell Associates, NC Capital and ARDT had not been
sold or distributed to any person.
The Selling Stockholders may from time to time sell all or a portion of their
Shares in the over-the-counter market, or on any other national securities
exchange on which the common stock is or becomes listed or traded, in negotiated
transactions or otherwise, at prices then prevailing or related to the then
current market price or at negotiated prices. The Shares will not be sold in an
underwritten public offering. The Shares may be sold directly or through brokers
or dealers. The methods by which the Shares may be sold include: (a) a block
trade (which may involve crosses) in which the broker or dealer so engaged will
attempt to sell the securities as agent but may position and resell a portion of
the block as principal to facilitate the transaction; (b) purchases by a broker
or dealer as principal and resale by such broker or dealer for its account
pursuant to this Prospectus; (c) ordinary brokerage transactions and
transactions in which the broker solicits purchasers; and (d) privately
negotiated transactions. In effecting sales, brokers and dealers engaged by
Selling Stockholders may arrange for other brokers or dealers to participate.
Brokers or dealers may receive commissions or discounts from Selling
Stockholders (or, if any such broker-dealer acts as agent for the purchaser of
such shares, from such purchaser) in amounts to be negotiated which are not
expected to exceed those customary in the types of transactions involved.
Broker-dealers may agree with the Selling Stockholders to sell a specified
number of such shares at a stipulated price per share, and, to the extent such
broker-dealer is unable to do so acting as agent for a Selling Stockholder, to
purchase as principal any unsold shares at the price required to fulfill the
broker-dealer commitment to such Selling Stockholder. Broker-dealers who acquire
shares as principal may thereafter resell such shares from time to time in
transactions (which may involve crosses and block transactions and sales to and
through other broker-dealers, including transactions of the nature described
above) in the over-the-counter market or otherwise at prices and on terms then
prevailing at the time of sale, at prices then related to the then-current
market price or in negotiated transactions and, in connection with such resales,
may pay to or receive from the purchasers of such shares commissions as
described above.
In connection with the distribution of the Shares, the Selling Stockholders may
enter into hedging transactions with broker-dealers. In connection with such
transactions, broker-dealers may engage in short sales of the Shares in the
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course of hedging the positions they assume with the Selling Stockholders. The
Selling Stockholders may also sell the Shares short and redeliver the Shares to
close out the short positions. The Selling Stockholders may also enter into
option or other transactions with broker-dealers which require the delivery to
the broker-dealer of the Shares. The Selling Stockholders may also loan or
pledge the Shares to a broker-dealer and the broker-dealer may sell the Shares
so loaned or upon a default the broker-dealer may effect sales of the pledged
shares. In addition to the foregoing, the Selling Stockholders may enter into,
from time to time, other types of hedging transactions.
The Selling Stockholders and any broker-dealers participating in the
distributions of the Shares may be deemed to be "underwriters" within the
meaning of Section 2(11) of the 1933 Act and any profit on the sale of Shares by
the Selling Stockholders and any commissions or discounts given to any such
broker-dealer may be deemed to be underwriting commissions or discounts under
the 1933 Act. The Shares may also be sold pursuant to Rule 144 under the 1933
Act beginning two years after the Shares were issued, provided such date is at
least 90 days after the date of this Prospectus.
We have filed the Registration Statement, of which this Prospectus forms a part,
with respect to the sale of the Shares.
Under the Securities Exchange Act of 1934 ("Exchange Act") and the regulations
thereunder, any person engaged in a distribution of the Shares offered by this
Prospectus may not simultaneously engage in market making activities with
respect to the common stock of the Company during the applicable "cooling off"
periods prior to the commencement of such distribution. In addition, and without
limiting the foregoing, the Selling Stockholders will be subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder, which
provisions may limit the timing of purchases and sales of common stock by the
Selling Stockholders. We will pay all of the expenses incidental to the offering
and sale of the Shares, other than commissions, discounts and fees of
underwriters, dealers or agents.
We have advised the Selling Stockholders that, during such time as they may be
engaged in a distribution of any of the Shares we are registering by this
Registration Statement, they are required to comply with Regulation M
promulgated under the Securities Exchange Act of 1934. In general, Regulation M
precludes any Selling Stockholder, any affiliated purchasers and any
broker-dealer or other person who participates in such distribution from bidding
for or purchasing, or attempting to induce any person to bid for or purchase,
any security which is the subject of the distribution until the entire
distribution is complete. Regulation M defines a "distribution" as an offering
of securities that is distinguished from ordinary trading activities by the
magnitude of the offering and the presence of special selling efforts and
selling methods. Regulation M also defines a "distribution participant" as an
underwriter, prospective underwriter, broker, dealer, or other person who has
agreed to participate or who is participating in a distribution.
Regulation M prohibits any bids or purchases made in order to stabilize the
price of a security in connection with the distribution of that security, except
as specifically permitted by Rule 104 of Regulation M. These stabilizing
transactions may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. We have advised the Selling
Stockholders that stabilizing transactions permitted by Regulation M allow bids
to purchase our common stock so long as the stabilizing bids do not exceed a
specified maximum, and that Regulation M specifically prohibits stabilizing that
is the result of fraudulent, manipulative, or deceptive practices. Selling
stockholders and distribution participants will be required to consult with
their own legal counsel to ensure compliance with Regulation M.
Item 9. Legal Proceedings
There are no legal actions pending against the Company nor are any such legal
actions contemplated, except as specified below:
There is presently a dispute regarding the validity of certain stock options
relating to the purchase of certain shares of common stock of Elast Technologies
Corporation, a Delaware corporation ("Elast Delaware"), a subsidiary of the
Company. On or about May 14, 1999, Dr. Gary Marrone, the former Secretary of
Elast Delaware and a former Director of Elast
13
<PAGE>
Delaware, notified the Company that he believed that the unexercised Elast
Delaware stock options held by each Director of Elast Delaware had been
converted into options to purchase as many as 400,000 shares of the Company's
common stock at a significantly reduced price as a result of the Plan of Merger.
The Company believes that Dr. Marrone's claim is without merit. The Company
further believes that Dr. Marrone may take legal action with regard to this
matter. The Company intends to vigorously oppose any such action.
Certain disputes have arisen between and among the present management of the
Company, on the one hand, and Edward L. Hamilton, a former officer and director
of the Company, on the other hand. Specifically, on or about December 30, 1999,
the holders of at least two-thirds (2/3) of the Company's issued and outstanding
shares of $.001 par value common stock provided the Company's Secretary with
written consents approving the removal of Edward L. Hamilton as a member of the
Company's Board of Directors. The Company's Board of Directors also terminated
Mr. Hamilton's employment as an officer of the Company on or about the same
date.
The Company anticipates that Mr. Hamilton may take legal action with regard to
this matter. The Company is currently engaging in settlement discussions with
Mr. Hamilton. The Company intends to oppose vigorously any action by Mr.
Hamilton in regard to this matter, but will also consider a reasonable
settlement if the Company's Board of Directors determines that the terms and
conditions of such a settlement are in the best interests of the Company.
Certain disputes have developed between David Phillips, a former consultant to
the Company, on the one hand, and the Company, on the other hand, regarding the
Company's research and development activities. Specifically, Mr. Phillips'
consulting services initially focused on the measurement of electrical
resistance by the ELAST Device (U.S. Patent No. 5413113, issued on or about May
9, 1995) which the Company owns the rights to develop, test, manufacture and
market. Before providing the Company with consulting services, Mr. Phillips had
developed a means to measure electrical potential, as opposed to electrical
resistance. In or about April, 1999, Mr. Phillips' consulting services to the
Company were terminated. By that time, however, he had, while working as a
consultant to the Company, developed a prototype diagnostic machine which
incorporated technology to detect variances in electrical potential. The Company
anticipates seeking further patent protection for a diagnostic machine which,
among other things, detects variances in electrical potential; however, the
Company is continuing to develop its own technology and processes and has
already replaced the analog system favored by Mr. Phillips with a digital
system. The Company is informed and, therefore, believes that Mr. Phillips may
claim that the Company's patent application infringes on existing patents or, in
the alternative, may claim to have certain rights to the use or ownership of the
technology on which the Company's patent application is based.
Patent infringement occurs when a person or business "makes, uses, or sells" a
patented invention. The language specifying particular patent rights, typically
referred to as the "patent claims", allows a patent owner to prohibit any
unauthorized manufacture, use or sale of products which utilize the patent
owner's patented technology.
When two or more persons work together to make an invention, they are joint
inventors and a patent will be issued to them jointly on the basis of a proper
patent application. If, on the other hand, one of these persons has provided all
of the ideas of the invention, and the other person has only followed
instructions in making that invention, the person who contributed the ideas is
the sole inventor and the patent application and patent shall be in his or her
name alone. Moreover, if one person furnishes all of the ideas to make an
invention and another person employs him or her or furnishes the money for
building and testing the invention, the patent application must be signed by the
true inventor, and filed in the Patent and Trademark Office, in the inventor's
name. This is the person who furnishes the ideas, not the employer or the person
who furnishes the money.
At this time, Mr. Phillips' potential claim against the Company is that he is a
joint inventor (or even the "true" or sole inventor) of the Elast Device, as
presently constructed. Mr. Phillips has indicated that he would contest any
patent applications, by the Company, relating to diagnostic machines based on
technology which detects variances in electrical potential. If Mr. Phillips
claims that the Company's patent application infringed on any patent or
technology in which he had an ownership interest, he could sue for relief in the
appropriate federal court. He could ask the court for an injunction to prevent
the continuation of that infringement and could also ask the court for an award
of damages because of that
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<PAGE>
infringement. In the event he prevailed, Mr. Phillips could force the Company to
pay him a royalty for making, using or selling the Elast Device, or could
prevent the Company from making, using or selling the Elast Device.
Because the right conveyed by a patent is the right to prohibit a certain action
related to the patented invention, most patent infringement claims must be
settled by filing a suit against the party who is violating a patent holder's
rights. Mr. Phillips' potential claim is not a claim that the Company is
infringing on a patent which he holds; rather, as specified above, he has
indicated that he would challenge the Company's patent application itself and
seek to prevent the issuance of a patent to the Company because he is a
co-inventor (or sole inventor) of the Elast Device. The Company believes that
Mr. Phillips' potential claim is without merit because (i) the Elast Device was
patented long before Mr. Phillips became a consultant to the Company, (ii) the
Company's research and development activities have resulted in the development
of new technology significantly different from the technology claimed by Mr.
Phillips; and (iii) the general concept of measuring electrical potential is
not, in and of itself, patentable. Challenges to patent applications occur
frequently as part of the patent application process and, as the Company is
continuing to refine its technology, it is too early to determine the validity
of any such potential challenge. The Company intends to pursue patent protection
for its technology vigorously and will respond in an appropriate manner to any
challenges by any party, including, but not limited to, Mr. Phillips, to any
patent applications filed by the Company relating to the Elast Device or its
derivatives.
Item 10. Directors, Executive Officers, Promoters and Control Persons.
The directors and principal executive officers of the Company are as specified
on the following table:
<TABLE>
<CAPTION>
Name Age Position
==========================================================================================================
<S> <C> <C>
Thomas Krucker 60 President and Director
- - ----------------------------------------------------------------------------------------------------------
Robert D. Milne, M.D. 53 Chairman of the Board of Directors
==========================================================================================================
Nicholas Spencer 38 Director
==========================================================================================================
Dr. Eduardo Daniel Jimenez 58 Director
Gonzalez
==========================================================================================================
</TABLE>
Thomas Krucker is the President, Chief Executive Officer, and a director of the
Company. Mr. Krucker graduated from the University of Arizona in 1962 and
received a Juris Doctorate degree from Pepperdine University in 1969. Mr.
Krucker served with Toyota USA for approximately 20 years. Mr. Krucker was
formerly the chief operating officer of Fun City Popcorn, Inc., a Nevada
corporation which recently changed its name to Tone Products. Mr. Krucker left
Tone Products to accept the office of President of the Company.
Robert D. Milne, M.D. is the Chairman of the Board of Directors of the Company.
Dr. Milne is a board-certified family practice physician with extensive
experience in allergy testing and preventative medicine. He is also the inventor
of the ELAST Device. Before starting his own practice at the Milne Medical
Center in Las Vegas, Nevada, Dr. Milne was Medical Director at the Omni Medical
Center and also practiced medicine at the Nevada Clinic after previous
assignments in emergency medicine and a family practice. Dr. Milne is the author
of numerous papers in the medical field and has authored several books,
including The Definitive Guide to Headaches and The Photon Connection - Energy
for the New Millennium.
Nicholas Spencer is a director of the Company. Mr. Spencer has more than 15
years experience in starting, managing, and improving business performance and
now specializes in business planning and start-up companies with a special
emphasis on marketing and development. Mr. Spencer currently serves on the Board
of Directors of Medsearch Pty. Limited, Sydney, New South Wales, and also serves
as Chairman of the Board for that company.
15
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Dr. Eduardo Daniel Jimenez Gonzalez is an international banker and Mexican
attorney who specializes in immigration, civil, and criminal matters in the
Republic of Mexico and who provides international consulting services regarding
finance, credit, commerce, industrial and tourist development, import and export
matters, and administrative management. Dr. Gonzalez is a Fullbright Scholar who
received a Master of Arts Degree from John Hopkins University, School of
Advanced International Studies, in Washington, D.C. and who has studied
International Economics at Harvard University and American Civilization at
Georgetown University. Dr. Gonzalez has served as a counselor at the Mexican
Embassy in Washington, D.C., as a Mexican Minister in Bonn, as Ambassador at
Large for Mexico in Oslo, Norway and Islandia, and as private secretary for a
former President of Mexico. He has served as Managing Director for Latin
American Investment Banking for First Chicago Bank in Panama, Colombia,
Venezuela, Ecuador and Peru, as as First Chicago Bank's Vice-President for the
Western Hemisphere. He is an international lecturer on economic development and
an International Law Professor at the University of Mexico.
There is no family relationship between any of the officers or directors of the
Company. There are no orders, judgments, or decrees of any governmental agency
or administrator, or of any court of competent jurisdiction, revoking or
suspending for cause any license, permit or other authority to engage in the
securities business or in the sale of a particular security or temporarily or
permanently restraining any officer or director of the Company from engaging in
or continuing any conduct, practice or employment in connection with the
purchase or sale of securities, or convicting such person of any felony or
misdemeanor involving a security, or any aspect of the securities business or of
theft or of any felony, nor are any of the officers or directors of any
corporation or entity affiliated with the Company so enjoined.
Section 16(a) Beneficial Ownership Reporting Compliance. The Company's
Registration Statement on Form 10-SB became effective on or about May 2, 1999
and cleared comments from the Securities and Exchange Commission on or about
September 1, 1999 . To the Company's knowledge, all of the officers, directors,
and principal shareholders have filed all reports required to be filed by those
persons on, respectively, Form 3 ( Initial Statement of Beneficial Ownership of
Securities), a Form 4 (Statement of Changes of Beneficial Ownership of
Securities), or a Form 5 (Annual Statement of Beneficial Ownership of
Securities).
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial
ownership of the Company's common stock as of December 31, 1999, by (i) each
person or entity known by the Company to be the beneficial owner of more than 5%
of the outstanding shares of common stock, (ii) each of the Company's directors
and named executive officers, and (iii) all directors and executive officers of
the Company as a group. The number of shares outstanding of the issuer's only
class of Common Stock, $.001 par value, was 7,961,481 on December 31, 1999.
(a) Security Ownership of Certain Beneficial Owners. Other than officers and
directors, no persons are beneficial owners of 5% or more of the Company's
issued and outstanding common stock.
(b) Security Ownership of Management. The directors and principal executive
officers of the Company directly or beneficially own, in the aggregate,
4,445,308 shares of the Company's common stock, or approximately 55.8 % of the
issued and outstanding common shares, as set forth on the following table
(percentages are rounded off to the nearest one-tenth of one percent).
Associates and family members residing with directors and principal executive
officers also own shares of the Company's common stock, as specified under the
heading entitled Beneficial Ownership immediately below the table.
<TABLE>
<CAPTION>
Title of Class Name and Address Amount and Percent of
-------------- of Owner Nature of Class (approx.)
---------------- Owner ---------------
----------
<S> <C> <C> <C>
$.001 par value Dr. Robert Milne(1) 4,029,976 50.6%
Common Stock 2432 Greens Ave. Secretary and Director
Henderson, NV 89014
</TABLE>
16
<PAGE>
<TABLE>
<S> <C> <C> <C>
$.001 par value Thomas Krucker(2) 390,332 4.9%
Common Stock 2505 Rancho Bel Air President and Director
Las Vegas, NV 89107
$.001 par value Nicholas Spencer 25,000 0.3%
Common Stock 13 Edinburgh Road Director
N.S.W., Australia
Total shares beneficially
owned by all officers and directors
as a group 4,445,308 55.8%
</TABLE>
Beneficial Ownership. Beneficial ownership is determined in accordance with the
rules of the Commission and generally includes voting or investment power with
respect to securities. In accordance with Commission rules, shares of the
Company's common stock which may be acquired upon exercise of stock options or
warrants which are currently exercisable or which become exercisable within 60
days of the date of the table are deemed beneficially owned by the optionees.
Subject to community property laws, where applicable, the persons or entities
named in the table above have sole voting and investment power with respect to
all shares of the Company's common stock indicated as beneficially owned by
them.
(1) Shares of the Company's common stock are held by (i) Dr. Milne; (ii) Dr.
Milne's spouse, Julie Milne; (iii) immediate family members Drew Milne, Meredith
Milne and Brook Milne, who reside with Dr. Milne; (iv) a Milne family trust; and
(v) the Milne Medical Center, an affiliate of Dr. Milne.
(2) Shares of the Company's common stock are held by (i) Mr. Krucker; (ii) a
trust in the name of Mr. Krucker's spouse, Katherine; and (iii) Katherine
Krucker as custodian for his daughter, Kimberly, who resides with him.
On or about October 18, 1999, the Company issued a press release which specified
that Dr. Milne had agreed to retire 1.5 million shares of the Company's common
stock held in his name in exchange for stock options to purchase up to 1.5
million shares of the Company's common stock at $1.68 per share. Subsequent to
that press release, the Company's Board of Directors determined that Dr. Milne
had not received consideration for the retirement of those shares; therefore,
those shares were not retired, and the stock options were never issued.
Changes in Control. Management of the Company is not aware of any arrangements
which may result in "changes in control" as that term is defined by the
provisions of Item 403(c) of Regulation S-B. Pursuant to a Plan of Merger filed
with the Delaware Secretary of State, in June, 1998, Elast Technologies
Corporation, a Delaware corporation (previously defined in this Registration
Statement as "Elast Delaware"), merged with and into Elast Merger, Inc., a
Nevada corporation, which was a wholly-owned subsidiary of the Company.
Shareholders who formerly held stock in Elast Delaware received 4 shares of the
Company's common stock for each share of their Elast Delaware stock on or about
June 30, 1998, with the result that the former shareholders of Elast Delaware
now hold a controlling interest in the Company, and Elast Delaware is now a
wholly-owed subsidiary of the Company. The Company changed its name from Med
Mark, Inc. to Elast Technologies, Inc. on or about October 27, 1998.
Item 12. Description of Securities
The Company is authorized to issue 25,000,000 shares of common stock, $.001 par
value, each share of common stock having equal rights and preferences, including
voting privileges. The shares of $.001 par value common stock of the Company
constitute equity interests in the Company entitling each shareholder to a pro
rata share of cash distributions made to shareholders, including dividend
payments. The Bylaws of the Company specify how the cash available for
distribution, whether occurring from operations or sales or refinancing, is to
be shared among the shareholders. The holders of the Company's common stock are
entitled to one vote for each share of record on all matters to be voted on by
shareholders. There is no cumulative voting with respect to the election of
directors of the Company or any other matter, with the result
17
<PAGE>
that the holders of more than 50% of the shares voted for the election of those
directors can elect all of the Directors. The holders of the Company's common
stock are entitled to receive dividends when, as and if declared by the
Company's Board of Directors from funds legally available therefor; provided,
however, that cash dividends are at the sole discretion of the Company's Board
of Directors. In the event of liquidation, dissolution or winding up of the
Company, the holders of common stock are entitled to share ratably in all assets
remaining available for distribution to them after payment of liabilities of the
Company and after provision has been made for each class of stock, if any,
having preference in relation to the Company's common stock. Holders of the
shares of Company's common stock have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to the
Company's common stock. All of the outstanding shares of Company's common stock
are duly authorized, validly issued, fully paid and non-assessable.
Dividend Policy. The Company has never declared or paid a cash dividend on its
capital stock and does not expect to pay cash dividends on its Common Stock in
the foreseeable future. The Company currently intends to retain its earnings, if
any, for use in its business. Any dividends declared in the future will be at
the discretion of the Board of Directors and subject to any restrictions that
may be imposed by the Company's lenders.
Item 13. Interest of Named Experts and Counsel.
No "expert", as that term is defined pursuant to Regulation Section 228.509(a)
of Regulation S-B, or the Company's "counsel", as that term is defined pursuant
to Regulation Section 228.509(b) of Regulation S-B, was hired on a contingent
basis, or will receive a direct or indirect interest in the Company, or was a
promoter, underwriter, voting trustee, director, officer, or employee of the
Company, at any time prior to the filing of this Registration Statement;
provided, however, that in 1998 Thomas E. Stepp, Jr., received 15,000 shares of
the Company's common stock as compensation for legal services performed for the
benefit of the Company.
Item 14. Disclosure of Commission Position on Indemnification for Securities Act
Liabilities
IN THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION, INDEMNIFICATION FOR
LIABILITIES ARISING PURSUANT TO THE SECURITIES ACT OF 1933 IS CONTRARY TO PUBLIC
POLICY AND, THEREFORE, UNENFORCEABLE.
Item 15. Organization Within Last Five Years
Transactions with Promoters. Thomas Krucker and Dr. Milne were the promoters of
the Company. Mr. Krucker received 50,000 shares of common stock of the Company
for his management and organizational services provided to the Company. Dr.
Milne received all of his shares of common stock of the Company pursuant to the
licensing agreement for the ELAST Device.
Additional information about certain relationships and related transactions is
specified more completely under the portion of this Prospectus entitled Certain
Relationships and Related Transactions at Item 19 below.
Item 16. Description of Business.
Development of the Company. Med Mark, Inc., a Nevada corporation ("Company"),
was incorporated in the State of Nevada on November 5, 1996. On or about June
29, 1998, the Company filed a Certificate of Amendment to its Articles of
Incorporation changing the name of the Company to Elast Technologies, Inc. The
executive offices of the Company are located at 2505 Rancho Bel Air, Las Vegas,
Nevada 89107. The Company's telephone number is 702.878.8310.
Business of the Company. The Company was organized to engage in the business of
manufacturing and marketing medical equipment and supplies, as well as health
related products, including vitamins and nutritional supplements. The Company
plans to develop its own products and may also obtain marketing and distribution
rights to existing products or products currently in development by others.
18
<PAGE>
On or about June 30, 1998, the Company acquired all of the issued and
outstanding capital stock of Elast Technologies Corporation, a Delaware
corporation ("Elast Delaware"), and, as specified above, changed the Company's
name from Med Mark, Inc. to Elast Technologies, Inc. The Company entered into a
licensing agreement with Dr. Robert D. Milne and acquired the rights to develop,
test, manufacture, and market Dr. Milne's patented allergy-testing device
("ELAST Device", U.S. Patent No. 5413113, issued on or about May 9, 1995). Dr.
Milne is a board-certified family practice physician with extensive experience
in allergy testing and preventative medicine. The Company has spent significant
amounts of time during its last two fiscal years on research and development
activities relating to the ELAST Device.
The licensing agreements relating to the ELAST Device are specified more
completely herein at Item 19, under the subsection entitled Licensing Agreements
Were Not the Result of Arms-Length Negotiations,
The ELAST Device is based on the clinical observation that the human body loses
energy (that is, the body's normal electrical flow is interrupted) when exposed
to a substance to which that body is sensitive or allergic. The energy loss is
rapid and is measured in micro-voltage. The ELAST Device measures the body's
energy loss and documents it graphically, providing the treating physician with
an accurate assessment of a patient's sensitivity. The Company intends to
clinically test the device under the direction of Dr. Milne. After clinical
testing, the ELAST Device will be submitted to the United States Food and Drug
Administration ("FDA") for approval.
Human therapeutic products are subject to rigorous pre-clinical and clinical
testing and other approval procedures. The FDA and comparable foreign government
regulatory agencies require laboratory and clinical testing and other costly and
time- consuming procedures before medical products such as the ELAST Device can
be marketed. Various federal, state and foreign statutes also govern or affect
the manufacturing, safety, labeling, storage, and marketing of such products, as
well as record-keeping incidental to such marketing. Obtaining such approvals,
and maintaining ongoing compliance with these requirements can require the
expenditure of significant resources. To date, the Company has not determined
what procedures, if any, will be required in this regard and has not begun any
of these procedures. The Company is currently investigating the possibility that
the ELAST Device falls under a category for which FDA approval has already been
given. The Company anticipates that the ELAST Device may be included in such a
category, but research is currently being done by the Company to determine
regulatory requirements. In addition, regulatory testing and approval would
require significant funding and, in the event that such funding exceeded the
present financial resources of the Company, the Company would have to raise
additional capital to market the ELAST Device.
In the event the FDA or other domestic or foreign regulatory agency requires
approval and testing of the ELAST Device, prior to its commercial exploitation,
the Company cannot provide any assurances that testing procedures will be
successfully completed, or if completed, demonstrate that the ELAST Device is
safe and efficacious. Further, there can be no assurances that any required
government approvals will be obtained. Accordingly, there can be no assurance
that the Company will be able to market the ELAST Device in the United States or
any foreign country. Any failure by the Company, its subsidiary, collaborators
or licensees to obtain any required regulatory approvals or licenses would
adversely affect the ability of the Company to market its products and would
have a significant adverse affect on the Company's revenues.
Employees. The Company currently has 3 employees. Management of the Company
anticipates using consultants for business, accounting, engineering, and legal
services on an as-needed basis. Because the Company anticipates entering into
licensing and manufacturing agreements with third parties, the Company
anticipates that it will require few additional employees during the next fiscal
year.
Competition. Because the ELAST Device is based on a new concept in diagnostics
and is patented, there are currently no direct competitors with a similar
product in the marketplace. Once the ELAST Device gains product acceptance in
the medical community, the Company anticipates physicians could prescribe
home-testing.
However, competition in the medical products industry, generally, is intense.
The Company and its subsidiary compete directly with other companies and
businesses that have developed and are in the process of developing technologies
and products which will be competitive with the products developed and offered
by the Company and its subsidiary. There can
19
<PAGE>
be no assurance that other technologies or products which are functionally
equivalent or similar to the technologies and products of the Company and its
subsidiary have not been developed or are not in development. The Company
expects that companies or businesses which may have developed or are developing
such technologies and products as well as other companies and businesses which
have the expertise which would encourage them to develop and market products
directly competitive with those developed and marketed by the Company. Many of
these competitors have greater financial and other resources, and more
experience in research and development, than the Company.
For example, according to its 1994 Annual Report, Bayer Corporation (formerly
Miles, Inc.) holds over 50% of the worldwide allergy testing market, exclusive
of in vitro testing. In 1994, Pharmacia (now Pharmacia & Upjohn, Inc.) held
approximately 73% of the worldwide market share for in vitro allergy tests. The
Company's additional competitors in this area include Sanofi, Ciba Corning and
Diagnostic Products Corporation.
There can be no assurance that competitors have not or will not succeed in
developing technologies and products that are more effective than any which have
been or are being developed by the Company or which would render the products of
the Company obsolete and noncompetitive. Many of the competitors of the Company
have substantially greater experience, financial and technical resources and
production, marketing and development capabilities than the Company. If the
Company commences commercial sales of its products, it will also be competing
with respect to manufacturing efficiency and sales and marketing capabilities.
Compliance with Environmental Laws. The Company's management believes that no
toxic or hazardous materials will be byproducts of the manufacturing processes
of the ELAST Device; accordingly, management of the Company believes that the
Company will not incur unforeseen material expenditures related to the cost of
compliance with applicable environmental laws, rules or regulations. The Company
believes that it is presently in compliance with all applicable federal, state,
and local environmental laws, rules and regulations. Furthermore, in the event
the Company licenses the manufacturing rights, of the ELAST Device, to third
parties, the Company will not become subject to any such restrictions. However,
at some time in the future, the research, development, manufacturing and
production processes of the Company may involve the controlled use of hazardous
materials. The Company may be subject to various laws and regulations governing
the use, manufacture, storage, handling, and disposal of such materials and
certain waste products. The risk of accidental contamination or injury from
hazardous materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any damages that result and any
such liability could exceed the financial resources of the Company. In addition,
there can be no assurance that in the future the Company will not be required to
incur significant costs to comply with environmental laws and regulations
relating to hazardous materials. The Company cannot estimate the potential costs
of complying with local, state, and federal environmental laws.
Item 17. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THIS PROSPECTUS SPECIFIES FORWARD-LOOKING STATEMENTS OF MANAGEMENT OF THE
COMPANY ("FORWARD-LOOKING STATEMENTS") INCLUDING, WITHOUT LIMITATION,
FORWARD-LOOKING STATEMENTS REGARDING OUR EXPECTATIONS, BELIEFS, INTENTIONS AND
FUTURE STRATEGIES. FORWARD-LOOKING STATEMENTS ARE STATEMENTS THAT ESTIMATE THE
HAPPENING OF FUTURE EVENTS AND ARE NOT BASED ON HISTORICAL FACTS.
FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY THE USE OF FORWARD-LOOKING
TERMINOLOGY, SUCH AS "COULD", "MAY", "WILL", "EXPECT", "SHALL", "ESTIMATE",
"ANTICIPATE", "PROBABLE", "POSSIBLE", "SHOULD", "CONTINUE", "INTEND" OR SIMILAR
TERMS, VARIATIONS OF THOSE TERMS OR THE NEGATIVE OF THOSE TERMS. THE
FORWARD-LOOKING STATEMENTS SPECIFIED IN THIS PROSPECTUS HAVE BEEN COMPILED BY
MANAGEMENT OF THE COMPANY ON THE BASIS OF ASSUMPTIONS MADE BY MANAGEMENT AND
CONSIDERED BY MANAGEMENT TO BE REASONABLE. FUTURE OPERATING RESULTS OF THE
COMPANY, HOWEVER, ARE IMPOSSIBLE TO PREDICT AND NO REPRESENTATION, GUARANTY, OR
WARRANTY IS TO BE INFERRED FROM THOSE FORWARD-LOOKING STATEMENTS.
20
<PAGE>
THE ASSUMPTIONS USED FOR PURPOSES OF THE FORWARD-LOOKING STATEMENTS REPRESENT
ESTIMATES OF FUTURE EVENTS AND ARE SUBJECT TO UNCERTAINTY AS TO POSSIBLE CHANGES
IN ECONOMIC, LEGISLATIVE, INDUSTRY, AND OTHER CIRCUMSTANCES. AS A RESULT, THE
IDENTIFICATION AND INTERPRETATION OF DATA AND OTHER INFORMATION AND THEIR USE IN
DEVELOPING AND SELECTING ASSUMPTIONS FROM AND AMONG REASONABLE ALTERNATIVES
REQUIRE THE EXERCISE OF JUDGMENT. TO THE EXTENT THAT THE ASSUMED EVENTS DO NOT
OCCUR, THE OUTCOME MAY VARY SUBSTANTIALLY FROM ANTICIPATED OR PROJECTED RESULTS,
AND, ACCORDINGLY, NO OPINION IS EXPRESSED ON THE ACHIEVABILITY OF THOSE
FORWARD-LOOKING STATEMENTS. NO ASSURANCE CAN BE GIVEN THAT ANY OF THE
ASSUMPTIONS RELATING TO THE FORWARD-LOOKING STATEMENTS SPECIFIED IN THIS REPORT
ARE ACCURATE, AND WE ASSUME NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING
STATEMENTS.
General. The Company intends to manufacture and market medical devices. We are
currently negotiating proposed marketing agreements and plans to negotiate and
enter into marketing agreements with appropriate distributors and marketing
agents. Other than the ELAST Device, we do not currently have any plans to
develop other products. We may, however, acquire the right to sell or distribute
existing products, or obtain licensing, marketing, distribution or other rights
to compatible products. Therefore, other than costs related to the continued
development of the ELAST Device, we do not anticipate significant expenditures
on acquisition or development of other products during the current fiscal year.
On February 1, 2000, the Company relocated its research and development
facilities to San Diego's Center for Applied Competitive Technologies ("CACT").
Established in 1990, CACT is one of twelve advanced technology centers
designated by the State of California to serve firms in the manufacture of
biomedical and bio-technical products and to assist such companies in
transitioning from research and development activities to manufacturing their
products. CACT is a member of the National Coalition of Advanced Technology
Centers and has served since 1992 as a regional affiliate of the National
Institute for Standards and Technology's Manufacturing Extension Centers. Since
1997, CACT has been a Regional Affiliate of the National Aeronautics and Space
Administration's Far West Regional Technology Transfer Center.
We will focus our initial marketing and distribution efforts on development and
commercial exploitation of the ELAST Device. Our present plan is to lease or
license the ELAST Device. We believe that such a plan minimizes variable costs
and creates an informed and updated client base.
Our business will expose us to potential product liability risks that are
inherent in the testing, manufacturing and marketing of medical products. We do
not have product liability insurance, and there can be no assurance that we will
be able to obtain or maintain such insurance on acceptable terms or, if
obtained, that such insurance will provide adequate coverage against potential
liabilities. We face an inherent business risk of exposure to product liability
and other claims in the event that the development or use of our technology or
products is alleged to have resulted in adverse effects. Such risk exists even
with respect to those products that are manufactured in licensed and regulated
facilities or that otherwise possess regulatory approval for commercial sale.
There can be no assurance that we will avoid significant product liability
exposure. There can be no assurance that insurance coverage will be available in
the future, on commercially reasonable terms; or that such insurance will be
adequate to cover potential product liability claims; or that a loss of
insurance coverage would not materially adversely affect our business, financial
condition and results of operations. While we have taken, and will continue to
take, what we believe are appropriate precautions, there can be no assurance
that we will avoid significant liability exposure. An inability to obtain
product liability insurance at acceptable cost or to otherwise protect against
potential product liability claims could prevent or inhibit the
commercialization of products developed by the Company. A product liability
claim could have a material adverse effect on our business, financial condition
and results of operations.
Our strategy for growth is substantially dependent upon our ability to market
and distribute products successfully. Other companies, including those with
substantially greater financial, marketing and sales resources, compete with the
Company, and have the advantage of marketing existing products with existing
production and distribution facilities. There can be no assurance that we will
be able to market and distribute products on acceptable terms, or at all. Our
failure to market our products successfully could have a material adverse effect
on our business, financial condition or results of operations.
21
<PAGE>
The medical products industry has been under increasing scrutiny by various
state and federal regulatory agencies. While we do not presently require any
government approval to create, develop or manufacture the ELAST Device, we may
be subject to various forms of government regulations, including consumer safety
laws and environmental safety laws. Any future violation of, or the cost of
compliance with, these laws and regulations could have a material adverse effect
on our business, financial condition and results of operations.
The medical products industry is rapidly changing through the continuous
development and introduction of new products. Our strategy for growth is
substantially dependent upon our ability to successfully introduce the ELAST
Device. Accordingly, our ability to compete may be dependent upon our ability to
enhance and improve our products continually. There can be no assurance that
competitors will not develop technologies or products that render our products
obsolete or less marketable. We may be required to adapt to technological
changes in the industry and develop products to satisfy evolving industry or
customer requirements, any of which could require the expenditure of significant
funds. At this time, we do not have a source of commitment for such funds.
Continued refinement and improvement costs are risks inherent in new product
development, including unanticipated technical or other problems which could
result in material delays in product commercialization.
Liquidity and Capital Resources. During the year ended December 31, 1999, the
Company received approximately $808,250 from the sale of common stock. At
December 31, 1999, the Company had cash resources of $205,715. The cash and
equivalents constitute our present internal sources of liquidity. Because we are
not generating any revenues from the sale or licensing of our products, our only
external source of liquidity is the sale of our capital stock.
The Company believes these cash resources are sufficient to complete prototype
development and limited clinical trials of the ELAST Device. If the ELAST Device
performs as anticipated, the Company believes that it will be able to raise the
funds necessary to begin production of the ELAST Devices - for the North
American and international clinical trials and the FDA approval process -
through the sale of equity, debt, or licensing. Should the development of the
prototype or clinical testing of the prototype take more time than anticipated,
or if the results of testing require significant modifications to the ELAST
Device, sufficient funds may not be available to enable the ELAST Device to be
completed and brought to market during the time period currently anticipated by
the Company.
Manufacturing and Marketing the Company's Products. The Company does not
anticipate any supply problems. As this time, the Company does not require
manufacturing facilities. As the principal components of the ELAST Device
consist of electronic parts that are readily available, the Company does not
anticipate that its manufacturer will have any supply problems. The Company's
operations are not effected by any seasonal factors.
Once the initial testing of the ELAST Device is completed, the Company will
manufacture, or cause to be manufactured, about 10 units of the ELAST Device,
which will be provided to a selected group of physicians, including eye, ear,
nose and throat specialists, chemical ecologists, and allergy specialist
doctors, naturopaths, and chiropractors. Thereafter, the ELAST Device will be
marketed to physicians and hospitals to test patients for prescription drug
compatibility, to avoid drug-related illnesses. The Company's operating plan is
to market the ELAST Device as a stand-alone device that can be attached to
"medical environment" computers. Once the ELAST Device gains acceptance in the
medical community, the Company anticipates that a patient home-testing unit may
be developed.
Impact of the Year 2000. The Year 2000 (commonly referred to as "Y2K") issue
resulted from the fact that many computer programs were written using two,
rather than four, digits to identify the applicable year. As a result, computer
programs with time-sensitive software might recognize a two digit code for any
year in the 21st century as related to the 20th century. For example, "00",
entered in a date-field for the year 2000, may be interpreted as the year 1900,
resulting in system failures or miscalculations and disruptions of operations,
including, among other things, a temporary inability to process transactions or
engage in other normal business activities. While companies and governments in
the United States spent an estimated $150 billion to $225 billion repairing the
problem, countries like Russia and China, which spent relatively minor amounts,
seemed to clear the New Year's Day hurdle with equal success. Major news media
in the United States are reporting that, after years of work and billions of
dollars spent repairing the Year 2000 computer glitch, the technological
tranquility of New Year's Day has raised a new concern that the United States
overreacted to this problem. While it is still too soon to
22
<PAGE>
state positively that the Y2K transition has passed without mishap, we believe
that Y2K issues will not have a material adverse affect on our business.
Item 18. Description of Property
Property held by the Company. The consolidated financial statements filed as
exhibits to this Registration Statement include the accounts of the Company and
its wholly-owned subsidiary, Elast Technologies Corporation, a Delaware
corporation (previously defined in this Registration Statement as "Elast
Delaware"). All significant intercompany transactions have been eliminated. As
of the dates specified in the following table, the Company held the following
property:
<TABLE>
<CAPTION>
===================================================================================================================
Property Dec. 31, 1999 Dec. 31,1998
-------- ------------- ------------
<S> <C> <C>
Cash and equivalents $205,715.00 $226,818.00
- - -----------------------------------------------------------------------------------------------------------------
License to use Patent No. 5413113 $240.00 $400.00
- - -----------------------------------------------------------------------------------------------------------------
Property and Equipment $10,672.00 $3,434.00
===================================================================================================================
</TABLE>
The Company defines cash equivalents as all highly liquid investments with a
maturity of 3 months or less when purchased. The Company's property and
equipment consists of computers with an expected useful life of 5 years.
Item 19. Certain Relationships and Related Transactions
Related Party Transactions. Dr. Milne, the Chairman of the Board of the Company,
provides office space and services to the Company, at no cost to the Company. At
such time as the Company begins receiving revenue from operations, management of
the Company anticipates that the Company will begin paying rent for 800 square
feet of this office space, at a rate of $1,200 per month.
Also in 1999, Edward L. Hamilton, who was, at the time, an officer and director
of the Company, was provided housing in a residence owned by Thomas Krucker. The
Company paid Mr. Krucker $15,000 for the housing and that cost was included in
Mr. Hamilton's compensation for 1999.
Licensing Agreement Was Not the Result of Arms-Length Negotiations. As set forth
above, on or about June 12, 1996, Elast Delaware acquired a license from Robert
D. Milne, M.D., who was, at that time, Chairman of the Board of Directors and a
major shareholder of Elast Delaware, whereby Elast Delaware acquired the
exclusive right to develop, manufacture and market the ELAST Device. Elast
Delaware issued to Dr. Milne 3,200,000 shares of its common stock to acquire the
licensing rights. The Company believes that the fair market value of 3,200,000
shares of Elast Delaware's common stock at the time of the transaction was
$800.00, and, therefore, the Company determined that 3,200,000 shares of Elast
Delaware's common stock was fair consideration for the license agreement with
Dr. Milne. Because modifications may be made during the development and testing
of the ELAST Device, it is not certain that the final technology developed by
Elast Delaware will be protected by the original patent.
Item 20. Market for Common Equity and Related Stockholder Matters
Reports to Security Holders. The Company is a reporting company with the
Securities and Exchange Commission ("SEC"). The public may read and copy any
materials filed with the SEC at the SEC's Public Reference Room at 450 Fifth
Street N.W., Washington, D.C. 20549. The public may also obtain information on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy and information
statements,
23
<PAGE>
and other information regarding issuers that file electronically with the SEC.
The address of that site is http://www.sec.gov. The Company currently maintains
its own Internet address at www.elast.com.
The Company participates in the OTC Bulletin Board, an electronic quotation
medium for securities traded outside the Nasdaq Stock Market. The Company's
common stock trades on the OTC Bulletin Board under the trading symbol "ESTG".
This market is extremely limited and the prices for the Company's common stock
quoted by brokers is not necessarily a reliable indication of the value of the
Company's common stock. The Company was listed with Standard & Poor's
Corporation Records by publication on or about December 3, 1998.
There have been no cash dividends declared on the Company's common stock since
the Company's inception. Dividends will be declared at the sole discretion of
the Company's Board of Directors.
The Company's Board of Directors has approved and adopted a stock option plan
("Stock Option Plan"), pursuant to which 5,000,000 shares of the Company's $.001
par value common stock will be reserved for issuance to satisfy the exercise of
options. The Stock Option Plan will be designed to retain qualified and
competent officers, employees, and directors of the Company. The Company's Board
of Directors, or a committee thereof, shall administer the Stock Option Plan and
will be authorized, in its sole and absolute discretion, to grant options
thereunder to all eligible employees of the Company, including officers, and to
the Company's directors, whether or not those directors are also employees of
the Company. Options will be granted pursuant to the provisions of the Stock
Option Plan on such terms, subject to such conditions and at such exercise
prices as shall be determined by the Company's Board of Directors. Options
granted pursuant to the Stock Option Plan shall not be exercisable after the
expiration of ten years from the date of grant.
21. Executive Compensation - Remuneration of Directors and Officers.
Any compensation received by officers, directors, and management personnel of
the Company will be determined from time to time by the Board of Directors of
the Company. Officers, directors, and management personnel of the Company will
be reimbursed for any out-of-pocket expenses incurred on behalf of the Company.
Officers' compensation, in the aggregate, increased from $203,682 during the
year ended 1998 to $344,737 during the year ended 1999. Compensation to the
Company's officers is specified on the following chart:
<TABLE>
<CAPTION>
Cash Auto Meals & Total
Compensation Expense Insurance Entertainment Travel Housing Compensation
------------------------------------------------------------------------------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
T. Krucker $66,040 $16,269 $8,397 $69,004 $20,184 $ -- $179,894
T. Hamilton 110,894 8,470 1,701 -- -- 15,000 136,065
Dr. Milne 28,778 -- -- -- -- -- 28,778
------------------------------------------------------------------------------------ --------
Totals $205,712 $24,739 $10,098 $69,004 $69,004 15,000 $344,737
=================================================================================== ========
</TABLE>
During 1999, the Company also granted options to purchase up to 150,000 shares
of the Company's common stock to two members of the Board of Directors; however,
because the exercise price of the options equaled or exceeded the fair value of
the Company's common stock at the date of grant, no compensation expense was
recognized in connection with the issuance of these options. In 1999 the Company
paid $11,000 to an officer and major shareholder for rental and purchase of a
vehicle. Of the amount paid, $2,700 represented automobile rental and $8,300
represented the purchase price. The automobile was used for business purposes
and subsequently sold to an independent party for $5,000. The Company recognized
a $2,608 loss from the sale of the asset. Other expenditures for travel,
entertainment, insurance, car leases, and miscellaneous expenses were also
categorized as compensation to officers during fiscal 1999.
Shares Issued as Compensation for Services. In 1998, the Company issued 270,000
shares of its $.001 par value common stock as compensation for consulting and
engineering services, and employee compensation, as follows:
(i) Consultants were issued 115,000 shares of the Company's $.001 par value
common stock as additional compensation for their services to the Company. Those
shares were valued at what the Company believes was the fair market value at the
time of issuance, which was $1.50 per share.
24
<PAGE>
(ii) Third party engineers were issued 55,000 shares of the Company's $.001
par value common stock as additional compensation for their services to the
Company. Those shares were valued at what the Company believes was the fair
market value at the time of issuance, which was $1.54 per share.
(iii) Dr. Milne, an officer, director and major shareholder of the Company,
was issued 100,000 shares of the Company's $.001 par value common stock as
additional compensation for his services to the Company; specifically, his
continuing efforts related to the development of certain technology which will
be utilized by the Company in its business operations. Those shares were valued
at what the Company believes was the fair market value at the time of issuance,
which was $1.50 per share.
In 1999, the Company issued shares of its $.001 par value common stock as
compensation for services provided to the Company, and employee compensation, as
follows: 13,400 shares to Gerald Klein; 4,700 shares to Ron Almadova; 4,700
shares to William Milne; 3,333 shares to Hope Lane; 25,000 shares to Jim
Woodens; and 25,000 shares to John Martinez.
Item 22. Financial Statements
Elast Technologies, Inc.
(A Company in the Development Stage)
Consolidated Financial Statements
As of December 31, 1999 and 1998 and
For Each of the Two Years in the Period Ended December 31, 1999 and
For the Period from June 12, 1996 (Inception) to December 31, 1999
25
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Index to the Consolidated Financial Statements
As of December 31, 1999 and 1998 and
For Each of the Two Years in the Period Ended December 31, 1999 and
For the Period from June 12, 1996 (Inception) to December 31, 1999
- - --------------------------------------------------------------------------------
Report of Independent Auditors
Consolidated Financial Statements of Elast Technologies, Inc.: 27
Consolidated Balance Sheets,
December 31, 1999 and 1998 28
Consolidated Statements of Operations for
Each of the Two Years in the Period
ended December 31, 1999 and for the
Period from June 12, 1996 (Inception) to
December 31, 1999 29
Consolidated Statements of Shareholders'
Equity for Each of the Two Years in the Period
ended December 31, 1999 and for
the Period from June 12, 1996 (Inception) to
December 31, 1999 30
Consolidated Statements of Cash Flows for
Each of the Two Years in the Period
ended December 31, 1999 and for the
Period from June 12, 1996 Inception) to
December 31, 1999 33
Notes to the Consolidated Financial Statements 36
26
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Elast Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Elast
Technologies, Inc. (a company in the development stage) as of December 31, 1999
and 1998, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the two years in the period ended December
31, 1999 and for the period from June 12, 1996 (inception) to December 31, 1999.
These consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Elast
Technologies, Inc. (a development stage company) as of December 31, 1999 and
1998, and the consolidated results of operations and cash flows for the years
ended December 31, 1999 and 1998 and for the period from June 12, 1996
(inception) to December 31, 1999, in conformity with generally accepted
accounting principles.
Kelly & Company
Kelly & Company
Newport Beach, California
March 1, 2000
27
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Consolidated Balance Sheets
December 31, 1999 and 1998
- - --------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current assets:
Cash and equivalents $ 205,715 $ 226,818
----------- -----------
Total current assets 205,715 226,818
Property and equipment, net 10,672 3,434
License, net 240 400
----------- -----------
Total assets $ 216,627 $ 230,652
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 14,613 $ 8,617
Accrued payroll and payroll taxes 38,898 4,375
----------- -----------
Total liabilities 53,511 12,992
----------- -----------
Shareholders' equity:
Common stock, $.001 par value;
25,000,000 shares authorized;
7,961,481 and 7,179,448 shares
issued and outstanding at December 31, 1999
and 1998, respectively 7,961 7,179
Additional paid-in capital 2,130,488 1,413,886
Additional paid-in capital for warrants 205,000 --
Deficit accumulated during the
development stage (2,180,333) (1,203,405)
Total shareholders' equity 163,116 217,660
----------- -----------
Total liabilities and shareholders' equity $ 216,627 $ 230,652
=========== ===========
</TABLE>
28
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Consolidated Statements of Operations
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
For the For the June 12, 1996
Year Ended Year Ended (Inception) to
December 31, 1999 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Operating costs:
Officers compensation $ 344,737 $ 203,682 $ 548,419
Research and development 329,684 108,161 506,065
Legal and professional 111,812 502,231 638,377
Investor relations 86,082 238,759 324,841
Financing consulting fee 60,000 -- 60,000
Other operating costs and expenses 54,842 63,107 133,913
--------------- --------------- ---------------
Total operating costs (987,157) (1,115,940) (2,211,615)
--------------- --------------- ---------------
Interest income 10,229 13,566 31,282
--------------- --------------- ---------------
Net loss $ (976,928) $ (1,102,374) $ (2,180,333)
=============== =============== ===============
Loss per common share - basic and diluted $ (0.13) $ (0.19) $ (0.40)
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
29
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Consolidated Statements of Shareholders' Equity
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Elast Technologies Elast Technologies, Inc.
Corporation (Formerly Med Mark, Inc.)
(A Delaware Corporation) (A Nevada Corporation) Detachable
------------------------ ------------------------ Price Additional Stock
Common Common Common Common Per Paid-in Purchase
Shares Stock Shares Stock Share Capital Warrants
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 12, 1996 (inception) -- -- -- -- -- --
Shares issued for the medical device
license 3,200,000 $ 3,200 -- -- $ (2,400) --
Shares issued for legal services 21,332 21 -- -- $ 0.31 6,698 --
Contribution of funds expended by the major
shareholder on the Company's behalf -- -- -- -- 4,167 --
Shares issued in private placement 546,672 547 -- -- 0.38 204,453 --
Net loss from inception
to December 31, 1996 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------
Balance, December 31, 1996 3,768,004 3,768 -- -- 212,918 --
Contribution of funds expended by the major
shareholder on the Company's behalf -- -- -- -- 1,500 --
Net loss for the year ended December 31, 1997 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 1997 3,768,004 3,768 -- -- 214,418 --
========= ========= ========= ========= ========= ========= =========
<CAPTION>
Deficit Less:
Accumulated Common
During the Stock
Development Subscription
Stage Subtotal Receivable Total
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Balance, June 12, 1996 (inception) -- -- -- --
Shares issued for the medical device
license -- $ 800 -- $ 800
Shares issued for legal services -- 6,719 -- 6,719
Contribution of funds expended by the major
shareholder on the Company's behalf -- 4,167 -- 4,167
Shares issued in private placement -- 205,000 $ (10,000) 195,000
Net loss from inception
to December 31, 1996 (38,309) (38,309) -- (38,309)
--------- --------- --------- ---------
Balance, December 31, 1996 (38,309) 178,377 (10,000) 168,377
Contribution of funds expended by the major
shareholder on the Company's behalf -- 1,500 -- 1,500
Net loss for the year ended December 31, 1997 (62,722) (62,722) -- (62,722)
--------- --------- --------- ---------
Balance, December 31, 1997 (101,031) 117,155 (10,000) 107,155
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
30
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Consolidated Statements of Shareholders' Equity
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Elast Technologies Elast Technologies, Inc.
Corporation (Formerly Med Mark, Inc.)
(A Delaware Corporation) (A Nevada Corporation) Detachable
------------------------ ------------------------ Price Additional Stock
Common Common Common Common Per Paid-in Purchase
Shares Stock Shares Stock Share Capital Warrants
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 3,768,004 $ 3,768 -- -- $ 214,418 --
Shares outstanding prior to the
reorganization -- -- 1,220,000 $ 1,220 29,506 --
Shares issued in private placement 394,000 394 -- -- $ 0.50 196,606 --
Payment of receivable arising
from issuance of common stock -- -- -- -- -- --
Shares issued on the exercise of warrants 506,640 507 -- -- 0.38 189,483 --
Shares issued to consultant in
connection with the reorganization 1,007,472 1,007 -- -- 0.38 376,791 --
Shares issued and surrendered in the
acquisition of Elast Technologies, Inc. (a
Nevada Corporation) (reverse merger) (5,676,116) (5,676) 5,676,116 5,676 -- --
Shares issued for consulting services,
engineering services, and employee
compensation -- -- 270,000 270 1.51 407,095 --
Shares issued to an existing
shareholder to correct a stock
issuance error -- -- 13,332 13 (13) --
Net loss for the year ended
December 31, 1998 -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------- ---------
Balance, December 31, 1998 -- -- 7,179,448 $ 7,179 $1,413,886 --
========= ========= ========= ========= ========= ========== =========
<CAPTION>
Deficit Less:
Accumulated Common
During the Stock
Development Subscription
Stage Subtotal Receivable Total
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 $ (101,031) $ 117,155 $ (10,000) $ 107,155
Shares outstanding prior to the
reorganization -- 30,726 -- 30,726
Shares issued in private placement -- 197,000 -- 197,000
Payment of receivable arising
from issuance of common stock -- -- 10,000 10,000
Shares issued on the exercise of warrants -- 189,990 -- 189,990
Shares issued to consultant in
connection with the reorganization -- 377,798 -- 377,798
Shares issued and surrendered in the
acquisition of Elast Technologies, Inc. (a
Nevada Corporation) (reverse merger) -- -- -- --
Shares issued for consulting services,
engineering services, and employee
compensation -- 407,365 -- 407,365
Shares issued to an existing
shareholder to correct a stock
issuance error -- -- -- --
Net loss for the year ended
December 31, 1998 (1,102,374) (1,102,374) -- (1,102,374)
----------- ---------- --------- -----------
Balance, December 31, 1998 $(1,203,405) $ 217,660 -- $ 217,660
=========== ========== ========= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
31
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Consolidated Statements of Shareholders' Equity
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Elast Technologies Elast Technologies, Inc.
Corporation (Formerly Med Mark, Inc.)
(A Delaware Corporation) (A Nevada Corporation) Detachable
-------------------------- ------------------------- Price Additional Stock
Common Common Common Common Per Paid-in Purchase
Shares Stock Shares Stock Share Capital Warrants
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 -- -- 7,179,448 $ 7,179 $ 1,413,886 --
Shares issued in private placement -- -- 205,900 $ 206 $ 1.50 308,044 --
Shares issued in private placement -- -- 500,000 500 0.59 294,482 $ 205,000
Shares issued for consulting services -- -- 26,133 26 1.54 40,126 --
Shares issued for research
and development services -- -- 50,000 50 1.48 73,950 --
Net loss for the year
ended December 31, 1999 -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 -- -- 7,961,481 $ 7,961 $ 2,130,488 $ 205,000
=========== =========== =========== =========== =========== =========== ===========
<CAPTION>
Deficit Less:
Accumulated Common
During the Stock
Development Subscription
Stage Subtotal Receivable Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 $(1,203,405) $ 217,660 -- $ 217,660
Shares issued in private placement -- 308,250 -- 308,250
Shares issued in private placement -- 499,982 -- 499,982
Shares issued for consulting services -- 40,152 -- 40,152
Shares issued for research
and development services -- 74,000 -- 74,000
Net loss for the year
ended December 31, 1999 (976,928) (976,928) -- (976,928)
----------- ----------- ----------- -----------
Balance, December 31, 1999 $(2,180,333) $ 163,116 -- $ 163,116
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
32
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Consolidated Statements of Cash Flows
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
For the For the June 12, 1996
Year Ended Year Ended (Inception) to
December 31, 1999 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (976,928) $(1,102,374) $(2,180,333)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 2,706 770 3,476
Issuance of stock for services 114,152 785,163 906,034
Loss on sale of asset 2,608 -- 2,608
Increase (decrease) in liabilities:
Accounts payable, trade 5,997 8,617 14,614
Accounts payable, officer -- (1,925) --
Accrued payroll taxes 34,523 4,375 38,898
----------- ----------- -----------
Cash used in operating activities (816,942) (305,374) (1,214,703)
----------- ----------- -----------
Cash flows used in investing activities:
Purchase of equipment (17,393) (3,804) (21,197)
Sale of equipment 5,000 -- 5,000
----------- ----------- -----------
Cash used in investing activities (12,393) (3,804) (16,197)
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
33
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Consolidated Statements of Cash Flows
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
For the For the June 12, 1996
Year Ended Year Ended (Inception) to
December 31, 1999 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows provided by financing activities:
Acquisition of MedMark, Inc. -- $ 30,726 $ 30,726
Proceeds from the exercise of warrants -- 189,990 189,990
Payment of common stock subscription receivable -- 10,000 10,000
Proceeds from the issuance of common stock $ 808,232 197,000 1,200,232
Contribution to additional paid-in capital -- -- 5,667
Cash provided by financing activities 808,232 427,716 1,436,615
----------- ----------- -----------
Net increase (decrease) in cash (21,103) 118,538 205,715
Cash at beginning of period 226,818 108,280 --
----------- ----------- -----------
Cash at end of period $ 205,715 $ 226,818 $ 205,715
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
34
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Consolidated Statements of Cash Flows
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- - --------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
Period from
For the For the June 12, 1996
Year Ended Year Ended (Inception) to
December 31, 1999 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Interest paid -- -- $ 1,375
Income taxes paid $ 170 $ 1,403 $ 1,973
Supplemental Schedule of Non-Cash Investing and Financing Activities
Assets acquired in non-cash transactions:
Acquisition of medical device license -- -- $ 800
Increase in common stock subscription receivable -- -- $ 10,000
Issuance of common stock -- -- $ (10,800)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
35
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- - --------------------------------------------------------------------------------
1. Development Stage Operations
Elast Technologies, Inc. (a company in the development stage) has a
limited operating history with no revenues and no products or operable
technology ready for the market. The Company is engaged in the ongoing
development of its first product, a non-invasive medical device to test for
allergies with real time, quantifiable, visually displayed results.
Management's efforts to date have focused primarily on the development of
the medical device and the raising of equity capital. As such, the Company
is subject to the risks and uncertainties associated with a new business.
The success of the Company's future operations is dependent, in part, upon
the Company's ability to successfully market its yet to be developed
products and obtain additional capital. Management's plans are discussed
further in Note 11.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Elast Technologies, Inc. (a Nevada corporation) (the "Company") and its
subsidiary, Elast Technologies Corporation (a Delaware corporation) ("Elast
Delaware"). All significant intercompany transactions have been eliminated.
Prior to June 10, 1998, the Company was named Med Mark, Inc. ("Med Mark").
The name change was in conjunction with the reverse merger acquisition
(Note 10).
Revenue Recognition
Revenue will be recognized when the Company's goods are shipped.
Cash and Equivalents
The Company invests portions of its excess cash in highly liquid
investments. Cash and equivalents include time deposits and commercial
paper with original maturities of three months or less. In addition, the
Company has no compensating balance requirements. The Company maintains its
cash in bank accounts, which exceeded federally insured limits by $104,334
and $131,886 at December 31, 1999 and 1998, respectively. The Company has
not experienced any losses in such accounts. The Company believes it is not
exposed to any significant credit risk on cash.
36
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- - --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies, Continued
Property and Equipment
The Company records property and equipment at cost. Significant
improvements, which extend the life of the underlying asset, are
capitalized, and expenditures for normal maintenance and repairs are
charged to operations. Depreciation is provided for property and equipment
using the straight-line method over the expected useful lives. The
Company's property and equipment consists of computers with an expected
useful life of 5 years.
Intangible Asset
The Company recorded its intangible asset at cost. The intangible asset is
amortized on a straight-line method over the shorter of its estimated
useful live or its contractual term, whichever is shorter.
Research and Development Costs
Research and development expenditures are charged to operations as they are
incurred.
Impairment of Long-Lived Assets
The Company annually evaluates its long-lived assets, including its
intangible asset, described as a license to patented technology, for
potential impairment. When circumstances indicate that the carrying amount
of the asset is not recoverable, as demonstrated by the projected
undiscounted cash flows, an impairment loss will be recognized. The
Company's management has determined that there was no such impairment
present at December 31, 1999 and 1998.
Income Taxes
The Company accounts for income taxes using the liability method. Under the
liability method, deferred income taxes are determined based on differences
between the financial reporting and tax bases of assets and liabilities.
They are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse. The Company is
required to adjust its deferred tax liabilities in the period when tax
rates or the provisions of the income tax laws change. Valuation allowances
are established to reduce deferred tax assets to the amounts expected to be
realized.
37
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- - --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies, Continued
Disclosures about Fair Value of Financial Instruments
The Company accounts for the value of financial instruments using the fair
value method.
Stock Based Compensation
Statement of Financial Account Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation ("SFAS No. 123"), established accounting and
disclosure requirements using a fair value based method of accounting for
stock-based employee compensation plans. As permitted by SFAS No. 123, the
Company will continue to account for stock-based compensation using the
intrinsic value method as prescribed in Accounting Principles Board Opinion
("APB") No. 25, Accounting for Stock Issued to Employees ("APB No. 25").
Compensation cost from stock options, if any, is measured as the excess of
the quoted market price of the Company's stock at the date of grant over
the amount an employee must pay to acquire the stock. Compensation cost is
amortized over the requisite vesting periods.
Common Shares and Per Share Amounts
All common shares and per share amounts have been adjusted to give
retroactive effect, where applicable to the one for four reverse stock
split.
Earnings per Common Share
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings Per Share. This pronouncement replaced the previously reported
primary and fully diluted earnings per share with basic and diluted
earnings per share ("EPS"), respectively. Loss per share for the years
ended December 31, 1999 and 1998, and for the period from June 12, 1996
(Inception) to December 31, 1999 have been calculated in accordance with
this pronouncement.
Basic EPS is computed by dividing income or loss available to common
shareholders by the weighted average number of common shares outstanding
for the year. Diluted EPS is similar to basic EPS except that the weighted
average of common shares outstanding is increased to include the number of
additional common shares that would have been outstanding if potentially
dilutive common shares had been issued.
38
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- - --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies, Continued
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Reclassification
Certain reclassifications have been made to the 1998 financial statements
in order to conform to the 1999 financial statement presentation.
3. Property and Equipment
Property and equipment at December 31, 1999 and 1998 consist of the
following:
1999 1998
------- ------
Computers $12,896 $3,804
Less: accumulated depreciation (2,224) (370)
------- ------
Total property and equipment, net $10,672 $3,434
======= ======
Depreciation expense for the years ended December 31, 1999 and 1998 were
$2,546 and $370, respectively.
39
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- - --------------------------------------------------------------------------------
4. Income Taxes
At December 31, 1999 and 1998, the components of the provision for income
taxes are as follows:
1999 1998
--------- ---------
Current tax expense:
Federal -- --
State -- --
--------- ---------
-- --
Deferred tax expense:
Federal -- --
State -- --
--------- ---------
-- --
--------- ---------
Total provision -- --
========= =========
Significant components of the Company's deferred income tax assets and
liabilities at December 31, 1999 and 1998 are as follows:
1999 1998
Deferred income tax asset:
--------- ---------
Capitalized expenses $ 719,707 $ 399,012
Tax credits 48,684 15,716
--------- ---------
Total deferred income tax asset 768,391 414,728
Valuation allowance (768,391) (414,728)
--------- ---------
Net deferred income tax liability -- --
========= =========
The Company, based upon its history of losses during its development stage
and management's assessment of when operations are anticipated to generate
taxable income, has concluded that it is more likely than not that none of
the net deferred income tax assets will be realized through future taxable
earnings and has established a valuation allowance for them.
40
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- - --------------------------------------------------------------------------------
4. Income Taxes, Continued
Reconciliation of the effective income tax rate to the U.S. statutory rate
is as follows:
1999 1998
---- ----
Tax expense at the U.S. statutory income tax rate 34.0% 34.0%
Increase in the valuation allowance (36.2) (34.2)
Other 2.2 (0.2)
---- ----
Effective income tax rate -- (0.4)%
==== ====
As of December 31, 1999, the Company has a federal research and
experimentation credit carryover of $48,684. The credits w ill begin to
expire in 2011.
5. Related Party Transactions
Licensing Agreement
In 1996 the Company entered into a licensing agreement with an individual
who is an officer and major shareholder whereby the Company received the
exclusive right to develop, manufacture, and market an allergy detection,
non-invasive, medical device (Electronic Allergo-Sensitivity Test Device,
U.S. Patent No. 5413113). The Company issued 3,200,000 shares of Company
common stock with a value of $800. The licensing agreement does not require
any royalty payments. The licensing agreement is for a term of five years,
with the Company holding options to extend the agreement for two additional
five-year terms at no additional cost.
Vehicle Acquisition
In 1999 the Company paid $11,000 to an officer and major shareholder for
rental and purchase of a vehicle. Of the amount paid, $2,700 represented
automobile rental and $8,300 represented the purchase price. The automobile
was used for business purposes and subsequently sold to an independent
party for $5,000. The Company recognized a $2,608 loss from the sale of the
asset.
41
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- - --------------------------------------------------------------------------------
5. Related Party Transactions, Continued
Housing Expenses
In 1999, an officer was provided housing in a residence owned by a
different officer who is a major shareholder. The Company paid $15,000 for
the housing and the cost was included in lessee officer's compensation.
6. Commitments and Contingencies
Patent Technology
In 1996, the Company entered into a technology licensing agreement that
provided for its use of certain intellectual property described by a United
States patent. Since obtaining the license rights, the Company has expended
significant research and development efforts in conjunction with the
intellectual property that has resulted in significant modifications and
enhancements. The Company's efforts to date, plus its anticipated efforts
in the future, raise doubt that the final technology involved in the
medical device will be protected by the original patent.
Stock Options Dispute
A dispute between the Company and a former director exists relating to
options to purchase common stock granted by Elast Delaware, prior to its
merger with the Company. The former director claims the 100,000 options
granted to him by Elast Delaware are options to purchase shares of the
Company. The Company has reviewed this matter and the relevant
documentation and believes the former director's claim is without merit,
and plans to vigorously defend itself in the event legal action is
commenced.
Employment Taxes
The Company, in its fiduciary capacity as an employer, has the primary
responsibility for deducting and remitting both the employer and employee
portions of payroll related taxes to the appropriate governmental agencies.
Since inception, the Company paid $548,419 in compensation to three of its
officers upon which taxes were not withheld from these employees nor
remitted to the appropriate governmental authorities. If, as a result of
not withholding employment taxes, the employees incur an income tax
liability that ultimately
42
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- - --------------------------------------------------------------------------------
6. Commitments and Contingencies, Continued
Employment Taxes, Continued
results in a deficiency, the Company becomes contingently responsible, if
the employees cannot or do not satisfy that liability. Since inception, the
Company is contingently liable for these taxes, penalties, and interest,
which approximate $207,000. The employer portion of the payroll related
taxes has been recorded as a liability by the Company.
Termination Dispute
A dispute exists between the Company and another former officer and
director of the Company. In December 1999, this former officer and director
was removed from the Board of Directors and terminated as an officer. The
Company anticipates legal action may result from this matter. The Company
intends to vigorously oppose any such action. The Company is engaged in
discussions with this individual and may consider settlement of this matter
provided the terms of such settlement are reasonable and in the best
interests of the Company. However, an estimate of any settlement or amount
of loss, if any, from an unfavorable outcome from litigation cannot be made
at this time.
Operating Leases
The Company leases an automobile under an operating lease with a fixed term
through June 2002.
Future minimum lease payments at December 31, 1999 are as follows:
2000 $ 8,396
2001 8,396
2002 4,198
------------
Total minimum lease payments $ 20,990
============
7. Stock Based Compensation
During 1999, the Company's Board of Directors granted options to purchase
150,000 shares of the Company's common stock to two members of the Board of
Directors. The options
43
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- - --------------------------------------------------------------------------------
7. Stock Based Compensation, Continued
were issued with an exercise price of $1.50 with 100,000 expiring in March
2003 and 50,000 expiring in July 2002. As the directors are employees of
the Company, the options were accounted for under APB No. 25. The exercise
price of the options equaled or exceeded the fair value of the Company's
common stock at the date of grant. Consequently, no compensation expense
was recognized in connection with the issuance of these options.
On February 13, 1998, the Board of Directors of Elast Delaware granted
100,000 options to purchase common stock to each of the three members of
the Board of Directors of Elast Delaware in recognition of their service to
it. The 300,000 options have a three year term are exercisable at $2.00 per
share. Two of the Directors were employees of Elast Delaware, and their
options were accounted for under APB No. 25. The options were granted at
prices which equaled or exceeded the fair value of Elast Delaware's common
stock at the date of grant. Consequently, no compensation expense was
recognized in connection with the issuance of these 200,000 options. The
100,000 options issued to the nonemployee director were valued in
accordance with the provision of SFAS No. 123 and determined to have no
value, therefore no compensation expense was recognized.
The following summarizes information about stock options of the Company
granted and outstanding at December 31, 1999 and 1998, and changes during
the years then ended:
1999 1998
----------------- -----------------
Exercise Exercise
Options Price Options Price
------- ------- ------- -------
Outstanding at beginning
of year -- -- -- --
Granted 150,000 $ 1.50 -- --
Exercised -- -- -- --
Forfeited -- -- -- --
------- ------- ------- -------
Outstanding at end of year 150,000 $ 1.50 -- --
======= ======= ======= =======
44
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- - --------------------------------------------------------------------------------
7. Stock Based Compensation, Continued
The following summarizes information about the stock options of Elast
Delaware granted and outstanding at December 31, 1999 and 1998, and changes
during the years then ended:
1999 1998
------------------- -------------------
Exercise Exercise
Options Price Options Price
------- ------- ------- -------
Outstanding at beginning
of year 300,000 $ 2.00 -- --
Granted -- -- 300,000 $ 2.00
Exercised -- -- -- --
Forfeited -- -- -- --
------- ------- ------- -------
Outstanding at end of year 300,000 $ 2.00 300,000 $ 2.00
======= ======= ======= =======
The Company continues to account for stock-based compensation to employees
using the intrinsic value method as prescribed in APB No. 25 under which no
compensation cost for options is recognized for options granted at or above
fair market value of the Company's common stock at the date of grant. Had
the compensation expense for options awards been determined based upon fair
values at the grant dates in accordance with SFAS No. 123, the Company's
pro forma net loss and net loss per share for the year ended December 31,
1999 would have been the amount indicated in the following schedule. There
was no effect on the Company's pro forma net loss and net loss per share
for the year ended December 31, 1998.
The Black-Scholes Option Pricing Model was developed for use in estimating
the fair value of traded options. The Company's employee stock options have
characteristics significantly different from those of traded options, such
as vesting restriction and extremely limited transferability. In addition,
the assumptions used in option valuation models are highly subjective,
particularly the expected stock price volatility of the underlying stock.
Because changes in these subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not provide a reliable single measure of the fair value of its employee
stock options.
45
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- - --------------------------------------------------------------------------------
7. Stock Based Compensation, Continued
The pro forma effect on net loss for the year ended December 31, 1999 may
not be representative of the actual results had the Company accounted for
the stock options using the fair value method.
Net loss, as reported $(976,928)
Pro forma net loss $(1,134,928)
Basic loss per share $(0.13)
Pro forma net loss per share $(0.15)
For purposes of the above pro forma calculation, the fair value of options
granted in 1999 and 1998 is estimated using the BSOPM with the weighted
average assumptions listed below.
1999 1998
-------- --------
Risk-free interest rate 4.850% 5.000%
Expected stock dividend yield -- --
Expected stock price volatility 0.834 0.834 --
Expected life in years 1.000 3.000
Summary information about the Company's options outstanding at October 31,
1999:
The Subsidiary
Company (Elast Delaware)
------- ----------------
Exercise price $ 1.50 $ 2.00
Options outstanding, December 31, 1999 150,000 300,000
Weighted average remaining contractual life
1.1 years 1.1 years
Weighted average exercise price $ 1.50 $ 2.00
Options exercisable, December 31, 1999 150,000 300,000
Weighted average exercise price $ 1.50 $ 2.00
46
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- - --------------------------------------------------------------------------------
8. Stock Purchase Warrants
The Company's private placement offering of stock in 1999 was accomplished
with the sale of 500,000 units comprised of one share of common stock and
one stock purchase warrants The stock purchase warrants were immediately
exercisable upon issuance. The stock purchase warrants provide for an
exercise price of $2.40 and expire in July 2004. To date, none of the stock
purchase warrants have been exercised.
At December 31, 1999 and 1998, the Company had outstanding warrants to
purchase 500,000 and 40,032 shares of the Company's common stock, at prices
of $2.40 and $.38 per share, respectively. Warrants to purchase 40,032
shares expired on September 30, 1999. At December 31, 1999 and 1998,
500,000 and 40,032 shares of common stock, respectively, were reserved for
this purpose.
9. Loss Per Common Share
In the year ended December 31, 1997, the Company adopted SFAS No. 128,
Earnings per Share. Loss per common share has been calculated in accordance
with this statement.
Basic and diluted loss per common share have been computed by dividing the
loss available to common shareholders by the weighted-average number of
common shares for the period.
The computations of basic and diluted loss per common share for the years
ended December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Period from
For the For the June 12, 1996
Year Ended Year Ended (Inception) to
December 31, 1999 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net loss available to common stockholders $ (976,928) $(1,102,374) $(2,185,333)
Weighted-average shares, basic and diluted 7,711,880 5,798,194 5,446,490
----------- ----------- -----------
Loss per common share, basic and diluted $ (0.13) $ (0.19) $ (0.40)
=========== =========== ===========
</TABLE>
47
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- - --------------------------------------------------------------------------------
9. Loss Per Common Share, Continued
The effect of the potentially dilutive securities listed below was not
included in the computation of diluted loss per share because to do so
would have been antidilutive for the periods presented.
<TABLE>
<CAPTION>
Period from
For the For the June 12, 1996
Year Ended Year Ended (Inception) to
December 31, 1999 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Shares of common stock issuable under:
Stock options of the Company 150,000 -- 150,000
Stock options of consolidated subsidiary 300,000 300,000 300,000
Stock purchase warrants of the Company 500,000 40,032 500,000
--------------- --------------- ---------------
950,000 340,032 950,000
=============== =============== ===============
</TABLE>
10. Stock Transactions
Shares Issued to Acquire a License Agreement
In 1996, the Company issued 3,200,000 shares of its stock for $800 to
obtain a licensing agreement from an individual, who is an officer of the
Company (Note 5).
Shares Issued for Services
In 1996, the Company issued 21,332 shares for legal services related to
corporate formation and preparation of the Company's private placement
memorandum. The shares of Company stock were issued for legal services
valued at $6,719.
In 1998 the Company issued 270,000 shares for consulting and engineering
services and employee compensation as follows:
Consultants were issued 115,000 shares as additional recognition of
their services to the Company. The shares were valued at their fair
value at the time of issuance, $1.50 per share.
48
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- - --------------------------------------------------------------------------------
10. Stock Transactions, Continued
Shares Issued for Services, Continued
An outside engineer was issued 55,000 shares as additional recognition
of his services to the Company. The shares were valued at fair value
at the date of their issuance, $1.54 per share.
An officer and major shareholder was issued 100,000 shares as
additional recognition of his continuing efforts related to the
development of the technology. The shares were valued at their fair
value at the date of issuance, $1.50 per share.
In 1999 the Company issued 76,133 shares for consulting and research and
development services as follows:
Consultants were issued 26,133 shares as additional recognition of
their services to the Company. The shares were valued at their fair
value at the time of issuance, $1.54 per share.
Research and development engineers were issued 50,000 shares as
additional recognition of their services to the Company. The shares
were valued at fair value at the time of issuance, $1.48 per share.
Private Placement Offerings
In 1996, the Company, in a private placement offering, sold 546,672 units
consisting of one share of common stock and one stock purchase warrant (the
"warrants") at an exercise price of $0.38 per share. The warrants were
redeemable at $0.38 per warrant immediately upon issuance, and expired on
September 30, 1999.
In 1998, the Company, in a private placement offering, sold 394,000 shares
of common stock at $0.50 per share.
49
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- - --------------------------------------------------------------------------------
10. Stock Transactions, Continued
Private Placement Offerings, Continued
In 1999, the Company, in a private placement offering, sold 500,000 units
at $1.00 per unit consisting of one share of common stock and one stock
purchase warrant ("warrants") at an exercise price of $2.40 per share. The
warrants are exercisable immediately and they will expire in July 2004. The
proceeds of from the sale of the units were allocated between the common
stock and warrants based on their relative market values.
In 1999, the Company, in a private placement offering, sold 205,900 shares
of common stock at $1.50 per share.
Common Shares Issued for Warrants Exercised
During 1997, 506,640 warrants were exercised resulting in the issuance of
506,640 shares of common stock.
Shares Issued for Raising Capital
In 1998, the Company issued 1,007,472 shares of stock for consulting
services related to the acquisition of Med Mark, Inc. (a reverse merger).
One of the individuals who received 200,000 shares for the
acquisition-related consulting services is an officer of the Company. The
shares were valued at $0.38 per share.
Acquisition of Med Mark, Inc. (Reverse Merger)
On June 10, 1998, the Company acquired all of the outstanding common stock
of Elast Delaware in a business combination accounted for as a purchase.
For accounting purposes, the acquisition has been treated as the
acquisition of the Company by Elast Delaware with Elast Delaware as the
acquiror (reverse acquisition). The effective purchase price was 1,220,000
shares of the Company's common stock. The Company, formerly known as Med
Mark, had no operations as of the acquisition date. No goodwill has been
recorded as a result of this transaction. As this transaction is treated as
a reverse merger acquisition, the historical financial statements prior to
June 10, 1998 are those of Elast Delaware.
50
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- - --------------------------------------------------------------------------------
10. Stock Transactions, Continued
Stock Issued to Correct a Stock Issuance Error
In 1998, the Company issued 13,332 shares to correct an error on a previous
stock issuance.
11. Management's Plan, (Unaudited)
The Company is presently continuing research and development activities
relating to a non-invasive, patented allergy-testing device (the "device"),
which the Company owns the rights to develop, test, manufacture and market.
To further advance the research and development of the device, and to
validate the scientific principle of bio-voltage measurement, an extensive
period of testing will commence in conjunction with the University of
California at San Diego.
Once the initial testing of the device is completed, the Company intends to
have approximately 10 units of the device manufactured, which will be
provided to a selected group of physicians and scientists. The operating
plan is to develop the device on a stand-alone basis, which is
user-friendly and fully self-contained. Once the device gains acceptance in
the medical community, the Company anticipates that a patient home-testing
unit may be developed.
The Company plans to negotiate and enter into marketing agreements with
appropriate distributors and marketing agents. In addition, it may acquire
the right to sell or distribute existing products, or obtain licensing,
marketing, distribution or other rights to compatible products. However,
other than costs related to the continued development of the device, the
Company does no anticipate significant expenditures on acquisition or
development of other products during the next year. The Company will focus
its initial marketing and distribution efforts on development and
commercial exploitation of the device. The present plan is to lease or
license the device to minimize costs and create an informed and updated
client base.
It may be necessary to raise additional funds to complete prototype
development and limited clinical trials of the device. However, if the
device performs as anticipated, the Company's management believes that they
will be able to raise the funds necessary to begin production of the
devices for clinical trials and the Food and Drug Administration approval
process by the sale of the Company's capital stock, debt, and/or licensing
certain proprietary rights. Should
51
<PAGE>
Elast Technologies, Inc.
(A Company in the Development Stage)
Notes to Consolidated Financial Statements, Continued
For Each of the Two Years in the Period Ended December 31, 1999
And for the Period from June 12, 1996 (Inception) to December 31, 1999
- - --------------------------------------------------------------------------------
11. Management's Plan, (Unaudited), Continued
the development of the prototype or clinical testing of the prototype take
more time than anticipated, or if the results of testing require
significant modifications to the device, sufficient funds may not be
available to enable the device to be completed and brought to market.
12. Subsequent Events (Unaudited)
Subsequent to year end, the Company initiated an offering of 1,000,000
shares of its $.001 par value common stock on a best efforts basis pursuant
to a Registration Statement on Form SB-2 filed with the Securities and
Exchange Commission. On or about February 23, 2000, the Company was
informed by the Securities and Exchange Commission that its Registration
Statement on Form SB-2 was effective and placed 800,000 of those shares in
CEDE & Company through DTC, one of the world's largest securities
depository and a national clearinghouse for the settlement of trades in
corporate and municipal securities. DTC is a limited purpose trust company
under New York Banking Law, a member of the Federal Reserve System, and a
registered clearing agency with the Securities and Exchange Commission.
Additionally, the Company placed (i) 50,000 of those shares with Xcell
Associates, a market maker; (ii) 50,000 of those shares with NC Capital, a
market maker; and (iii) 33,334 of those shares with ARDT, an investment
banker. On or about March 7, 2000, the Company was informed by the
Securities and Exchange Commission that the financial statements filed with
the Company's Registration Statement on Form SB-2 were not current, and
that the Company must file a Post-Effective Amendment containing more
recent financial statements and a Consent of Auditors to use those more
recent financial statements. The Company directed that the 800,000 shares
in DTC be returned to certificate form and none of those shares were
delivered to any prospective purchaser. As of March 13, 2000, the shares
placed with Xcell Associates, NC Capital and ARDT had not been sold or
distributed to any person.
52
<PAGE>
Item 23. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no changes in or disagreements with the Company's accountants
since the formation of the Company required to be disclosed pursuant to Item 304
of Regulation S-B.
LEGAL MATTERS
The validity of the issuance of shares of the Company's common stock offered
hereby has been passed upon for the Company by Stepp & Beauchamp LLP, located in
Newport Beach, California.
EXPERTS
The financial statements of the Company as of December 31, 1999 and 1998 and for
each of the two years in the period ended December 31, 1999 and for the period
from June 12, 1996 (inception) to December 31, 1999 appearing in this Prospectus
and Registration Statement have been audited by Kelly & Company, Certified
Public Accountants, and are included in reliance upon such reports given upon
the authority of Kelly & Company as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form SB-2 with the Commission
pursuant to the 1933 Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement on Form SB-2 and the exhibits and schedules to the Registration
Statement on Form SB-2 and the Pre-Effective and Post-Effective Amendments
thereto. For further information with respect to the Company and its common
stock offered hereby, reference is made to the Registration Statement on Form
SB-2 and the exhibits and schedules filed as a part of the Registration
Statement on Form SB-2 and the Pre-Effective and Post-Effective Amendments
thereto. Statements contained in this Prospectus concerning the contents of any
contract or any other document referred to are not necessarily complete, and
reference is made in each instance to the copy of such contract or document
filed as an exhibit to the Registration Statement on Form SB-2. Each such
statement is qualified in all respects by such reference to such exhibit.
On March 3, 1999, the Company filed a Registration Statement on Form 10-SB,
which cleared comments with the Commission on or about September 1, 1999. The
Company is now a reporting company with the Commission, and will provide an
annual report to its security holders, which will include audited financial
statements. The public may read and copy any materials filed with the
Commission, including the Company's Registration Statement on Form SB-2 and the
Registration Statement on Form 10-SB, and all exhibits and schedules thereto, at
the Commission's Public Reference Room at 450 Fifth Street N.W., Washington,
D.C. 20549. Copies of all or any part thereof may be obtained from such office
after payment of fees prescribed by the Securities and Exchange Commission. The
public may also obtain information on the operation of the Public Reference Room
by calling the Commission at 1-800-SEC-0330. The Commission maintains an
Internet site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the Commission. The
address of that site is http://www.sec.gov.
53
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Number Caption Page
- - ----------- ------- ----
<S> <C> <C>
3. Summary Information..............................................................................................3
Risk Factors.....................................................................................................5
We Have a Limited Operating History.....................................................................6
Regulatory Approvals May Not Be Granted.................................................................6
We Are in a Very Competitive Industry ..................................................................7
We Must Comply with Environmental Laws..................................................................7
We Have No Product Liability Insurance..................................................................7
Future Capital Needs and Uncertainty of Additional Funding..............................................8
Limited Protection of Proprietary Technology............................................................8
We Must Adapt to Rapid Technological Change............................................................ 8
We Rely on Our Key Personnel........................................................................... 9
Conflicts of Interest.................................................................................. 9
Limitation of Liability of Officers and Directors...................................................... 9
Penny Stock Regulation................................................................................. 9
Control by Existing Shareholders; Anti-Takeover Provisions.............................................10
Securities Market Factors..............................................................................10
No Foreseeable Dividends...............................................................................10
No Assurances of Revenue or Operating Profits..........................................................10
Federal Income Tax Consequences........................................................................10
Impact of the Year 2000 (Y2K Issues)...................................................................10
4. Use of Proceeds................................................................................................ 10
5. Determination of Offering Price.................................................................................11
6. Dilution........................................................................................................11
7. Selling Stockholders............................................................................................11
8. Plan of Distribution............................................................................................12
9. Legal Proceedings...............................................................................................13
10. Directors, Executive Officers, Promoters and Control Persons....................................................15
11. Security Ownership of Certain Beneficial Owners and Management..................................................16
12. Description of Securities.......................................................................................17
13. Interest of Named Experts and Counsel...........................................................................18
14. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.............................18
15. Organization Within Last Five Years.............................................................................18
16. Description of Business.........................................................................................18
17. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................................................20
18. Description of Property.........................................................................................23
19. Certain Relationships and Related Transactions ...........................................................23
20. Market for Common Equity and Related Stockholder Matters........................................................23
21. Executive Compensation..........................................................................................24
22. Financial Statements............................................................................................25
23. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................................................................53
Legal Matters...................................................................................................53
Experts.........................................................................................................53
Additional Information..........................................................................................53
</TABLE>
54
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Article Twelfth of the Company's Articles of Incorporation provides that no
director or officer of the Company shall be personally liable to the Company or
any of its stockholders for damages for breach of fiduciary duty as a director
or officer involving any act or omission of any such director or officer;
provided, however, that the foregoing provision does not eliminate or limit the
liability of a director or officer for acts or omissions which involve
intentional misconduct, fraud or a knowing violation of law, or the payment of
dividends in violation of Section 78.300 of the Nevada Revised Statutes.
The Company will enter into indemnification agreements with each of its
executive officers pursuant to which the Company agrees to indemnify each such
person for all expenses and liabilities, including criminal monetary judgments,
penalties and fines, incurred by such person in connection with any criminal or
civil action brought or threatened against such person by reason of such person
being or having been an officer or director or employee of the Company. In order
to be entitled to indemnification by the Company, such person must have acted in
good faith and in a manner such person believed to be in the best interests of
the Company and, with respect to criminal actions, such person must have had no
reasonable cause to believe his or her conduct was unlawful.
Item 25. Other Expenses of Issuance and Distribution
The Company will pay all expenses in connection with the registration and sale
of the Shares, except any selling commissions or discounts allocable to sales of
the Shares, fees and disbursements of counsel and other representatives of the
Selling Stockholders, and any stock transfer taxes payable by reason of any such
sale. The estimated expenses of issuance and distribution are set forth below.
Registration Fees Approximately $1,383.36
Transfer Agent Fees Approximately $200.00
Costs of Printing and Engraving Approximately $300.00
Legal Fees Approximately $25,000.00
Accounting Fees Approximately $15,000.00
Item 26. Recent Sales of Unregistered Securities
There have been no sales of unregistered securities within the last three (3)
years which would be required to be disclosed pursuant to Item 701 of Regulation
S-B, except for the following:
On or about December 9, 1996, Elast Delaware sold 136,668 units, at $1.50 per
unit, in a private placement transaction in reliance upon the exemptions from
the registration and prospectus delivery requirements of the Securities Act of
1933, as amended, which exemptions are specified in Section 4(2) of the
Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated by
the Securities and Exchange Commission. Specifically, the offer was made to
"accredited investors", as that term is defined under applicable federal and
state securities laws, and no more than 35 non-accredited investors. Each unit
was comprised of one share of Elast Delaware's unregistered and restricted one
mill ($.001) par value common stock and one warrant to purchase an additional
unregistered and restricted share of Elast Delaware's common stock at a price of
$1.50 per share. The offering price for the units was arbitrarily set by Elast
Delaware and had no relationship to assets, book value, revenues or other
established criteria of value. The warrants and the shares of common stock
issuable upon its exercise were non-transferrable and were restricted securities
as defined by Rule 144 of the Securities Act of 1933. The proceeds of the
offering were used to pay for past expenses incurred in designing the ELAST
Device and for costs incurred to refine, engineer and test the ELAST Device and
also to pay Elast Delaware's start-up costs, including legal fees and equipment
and office expenses. There were 136,668 warrants issued as a result of the 1996
private placement offering which expire on September 30, 1999. As of June 30,
1998, 126,668 of the warrants have been exercised at $1.50. There were no
commissions paid on the sale of the units.
55
<PAGE>
On July 7, 1999, the Company, in a private placement offering to certain
Australian investors, sold units of ownership interest in the Company consisting
of an aggregate 500,000 shares of the Company's $.001 par value common stock and
five-year warrants to purchase an additional 500,000 shares of the Company's
common stock at an exercise price of $2.40 per share. In July, 1999, the Company
received payment of $250,000 and recorded a common stock receivable of $250,000.
The common stock receivable was collected on or about October 15, 1999. The
shares were or will be issued in reliance upon the exemption from the
registration requirements of the Securities Act of 1933 set forth in Regulation
S promulgated by the Securities and Exchange Commission. Specifically, the offer
was made to "non U.S. persons outside the United States of America", as that
term is defined under applicable federal and state securities laws. The offering
price for the shares was arbitrarily set by the Company and had no relationship
to assets, book value, revenues or other established criteria of value.
Item 27. Exhibits.
Copies of the following documents are filed with this Post-Effective
Amendment No. 1 to Registration Statement, Form SB-2, as exhibits:
Exhibit No.
- - -----------
1 Underwriting Agreement
(not applicable)
2 Plan of Merger*
3.1 Articles of Incorporation*
(Charter Document)
3.2 Certificate of Amendment to Articles of Incorporation*
(Charter Document)
3.3 Bylaws*
5. Opinion Re: Legality*
8. Opinion Re: Tax Matters (not applicable)
9. Voting Trust Agreement (not applicable)
11 Computation of Per Share Earnings**
10.1 Agreement with RiverPlate Securities Pty Ltd.***
(material contract)
15. Letter on Unaudited Interim Financial Information -Not applicable
21. Subsidiaries of the Registrant**
23.1 Consent of Auditors
23.2 Consent of Counsel
24. Power of Attorney****
27. Financial Data Schedule****
56
<PAGE>
*Previously filed as exhibits to Amendment No. 1 to Registration Statement on
Form 10-SB filed with the SEC on August 2, 1999.
**Included in financial statements
***Previously filed as an exhibit to the Company's Quarterly Report on Form
10-QSB on November 12, 1999.
****Previously filed as an exhibit to the Company's Form SB-2 filed with the SEC
on December 7, 1999.
Item 28. Undertakings.
A. Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
B. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the 1933 Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) (Section 230.424(b) of
Regulation S-B) if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective Registration
Statement; and
(iii) To include any additional or changed material information with
respect to the plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the 1933 Act,
each such post-effective amendment shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
57
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SIGNATURES
In accordance with the requirements of the 1933 Act, as amended, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing this Post-Effective Amendment No. 1 to Form SB-2 and
authorized this Registration Statement to be signed on its behalf by the
undersigned, in the City of Newport Beach, California, on March 13, 2000.
Elast Technologies, Inc.,
a Nevada corporation
By: /s/
-----------------------
Thomas Krucker
Its: President and Secretary
In accordance with the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to Form SB-2 was signed by the following persons
in the capacities and on the dates stated.
ELAST TECHNOLOGIES, INC.
/s/ March 13, 2000
- - ----------------------------
Director
/s/ March 13, 2000
- - ----------------------------
Director
/s/ March 13, 2000
- - ----------------------------
Director
58
Exhibit 5
Opinion of Counsel and Consent of Counsel
Board of Directors
Elast Technologies, Inc.
Re: Registration Statement on Form SB-2
Gentlemen: As counsel to Elast Technologies, Inc., a Nevada corporation (the
"Company"), we have participated in the preparation of the Company's
Registration Statement on Form SB-2 filed with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended, relating to a
best efforts offering as many as 1,000,000 shares of the Company's $.001 par
value Common Stock (the "Shares"). As counsel to the Company, we have examined
such corporate records, certificates and other documents of the Company, and
made inquiries of such officers of the Company, as we have deemed necessary or
appropriate for purposes of this opinion. Based upon such examinations, we are
of the opinion that the Shares, when sold in the manner set forth in the
Registration Statement, will be duly authorized, validly issued, fully paid and
non-assessable shares of the Common Stock of the Company. We hereby consent to
the inclusion of this opinion as an exhibit to the Registration Statement on
Form SB-2 filed by the Company and the reference to our firm contained therein
under "Legal Matters."
Sincerely,
/s/ Stepp & Beauchamp LLP
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this registration statement Post-Effective
Amendment No. 1 to Form SB-2/A (File No. 550956) of our report dated March 1,
2000, on our audits of the financial statements and financial statements
schedules of Elast Technologies, Inc. We also consent to the references to our
firm under the captions "Experts".
/s/
- - --------------------------
Kelly & Company
March 13, 2000
