See notes to financial statements and report of Independent Registered Public Accounting Firm.
See notes to financial statements and report of Independent Registered Public Accounting Firm
NOTES TO FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: CompuMed, Inc. (the Company) is a medical diagnostic product and services company focusing on the diagnosis, monitoring and management of several costly, high incidence diseases, particularly cardiovascular disease and osteoporosis. The Company's primary business is the development and marketing of its osteoporosis testing technology OsteoGram (R) and the computer interpretation of electrocardiograms ("ECGs"). The Company applies advanced computing, medical imaging, telecommunications and networking technologies to provide medical professionals and patients with affordable, point-of-care solutions for disease risk assessment and decision support.
The Company generated negative cash flows from operations and had net losses aggregating $1,804,000 in fiscal years ended September 30, 2007 and 2006. The Company's business strategy includes an expansion in OsteoGram
®
sales through domestic and international marketing and distribution efforts and product improvements as well as an expansion of its ECG service business, OsteoGram
®
into new markets such as the Military, the Federal correctional market, the surgical centers market and others. The Company intends to finance this business strategy by using its current working capital resources and cash flows from existing operations as well as possible future additional equity sales. There can be no assurance that the business expansion will be sufficient to offset related expenses in which case the Company may have to seek additional sources of capital, which may or may not be available, or significantly reduce or restructure its operations.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company's assets and the satisfaction of its liabilities in the normal course of conducting its business. The Company's ability to continue as a going concern is dependent upon various factors including, among others, its ability to generate profits and reduce its operating losses and negative cash flows. No assurance can be given that the Company will be able to accomplish these objectives. The Company uses existing cash and readily available marketable securities balances to fund operating losses and capital expenditures. The Company had raised these funds in 1997 through 2007 through stock issuances and proceeds from the exercise of certain stock options and warrants. The Company also raised funds through an Investment Agreement with Dutchess Private Equities Fund. This Investment Agreement expired March 25, 2007, and was not renewed.
On March 14, 2007, the Company closed a private placement of its securities to an institutional investor pursuant to the Securities Purchase Agreement. The Company sold to the investor 4,167 Units at a price of $480 per Unit resulting in total proceeds of $2,000,000. Each Unit consisted of 1 share of the Companys Class D Preferred Stock as well as 1,000 Common Stock Purchase Warrants with an exercise price of $0.30 per share. Pursuant to the Agreement, the Company issued all 4,167 shares of the authorized Class D Preferred Stock. Each share of Class D Preferred Stock is convertible at any time into 2,000 shares of the Companys common stock. The holder of each issued and outstanding share of Class D Preferred Stock will be entitled to receive a dividend in respect of each such share at the rate per share of $9.60 per annum
,
payable on each of the first, second, third, and fourth anniversaries of March 12, 2007, commencing March 12, 2008. Dividend payments to each holder will be made in shares of the Companys common stock valued at the average Market Price over 20 trading days, as defined in the Certificate of Designation. In the event the dividends may not lawfully be paid by the issuance of the Companys common stock and may be lawfully paid in cash, the dividends will be paid in cash. In the event of any liquidation, dissolution or winding-up, either voluntarily or involuntarily, the holders of shares of the Class D Preferred Stock then issued and outstanding will be entitled to be paid out of the Companys assets available for distribution to its stockholders, whether from capital, surplus or earnings, before any payment shall be made to the holders of shares of the Companys common stock or upon any other series of the Companys Preferred Stock with a liquidation preference subordinate to the liquidation preference of Class D Preferred Stock, an amount per share equal to $480 plus the dollar amount equal to all unpaid and accrued dividends and interest thereon. In addition, a merger or consolidation with or into any other corporation, or a sale, lease, exchange, or transfer of all or any part of the Companys assets will be deemed a liquidation event unless no assets are distributed in respect of any class of the Companys capital stock in connection with, or as a result of, such merger or consolidation. The Class D Preferred Stock has the same voting rights as the Companys common stock except that each share of Class D Preferred Stock is entitled to 2,000 votes for vote allowed a share of the Companys common stock, however such amount will be proportionally adjusted in the event of a reverse or forward split of the Companys common stock.
Management believes the Company will be able to generate sufficient revenue, reduce operating expenses or obtain sources of financing in order to fund ongoing operations for at least the next twelve months. Accordingly, the financial statements do not include any adjustments to reflect the possible future effects on the recoverability or classifications of liabilities that may result from the outcome of this uncertainty.
CASH EQUIVALENTS:
The Company considers investments in all highly liquid debt instruments with maturity of three months or less when purchased, and investments in money market accounts to be cash equivalents. Cash and cash equivalents also consist of cash on hand and demand deposit accounts.
F-7
MARKETABLE SECURITIES:
Marketable securities consist of common stock of publicly traded domestic companies and are stated at market value based on the most recently traded price of these securities at September 30, 2007. All marketable securities are classified as available for sale at September 30, 2007 and 2006. Unrealized gains and losses, determined by the difference between historical purchase price and the market value at each balance sheet date, are recorded as a component of Accumulated Other Comprehensive Income in Stockholders' Equity. Realized gains and losses are determined by the difference between historical purchase price and gross proceeds received when the marketable securities are sold.
As of September 30, 2007, the Company's investments in marketable securities were valued at $494,000. The Company had $24,000 and $0 of realized gain in the fiscal years ended September 30, 2007 and 2006, respectively. As for unrealized loss, the Company recorded $62,000 and $15,000 in the fiscal years ended September 30, 2007 and 2006, respectively (net of reclassifications adjustments of $379,000 and $0 ), net of income taxes of $0 for the years ended September 30, 2007 and 2006
.
At September 30, 2007, the Company recognized $379,000 of unrealized loss on investments in securities because they were permanently impaired. On November 29, 2007, the Company sold securities which captured the loss recorded for FY07 and resulted in a further loss of $29,000 to be recorded in the first quarter of 2008. On September 30, 2007 the Company changed investment managers and modified its investment policy to take less risk with its investmenhts instead of seeking the highest interest or dividends.
ACCOUNTS RECEIVABLE:
The Company maintains an allowance for doubtful accounts for estimated losses that may arise if any of its customers are unable to make required payments. Management specifically analyzes the age of customer balances, historical bad debt experience, customer credit-worthiness, and changes in customer payment terms when making estimates of the uncollectibility of the Company's trade accounts receivable balances. If the Company determines that the financial conditions of any of its customers deteriorated, whether due to customer specific or general economic issues, increases in the allowance may be made. Accounts receivable are written off when all collection attempts have failed.
INVENTORY:
Inventory consists of ECG terminals, component parts and ECG medical supplies and OsteoGram (R) hardware. Inventory, primarily finished goods, is stated at the lower of cost (first-in first-out method) or market.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation and amortization are computed on the straight-line basis over 3 to 5 years. As of September 30, 2007, the property and equipment being leased to customers had a historical cost of $1,233,000. Amortization of assets leased under capital leases is included in Depreciation and Amortization Expenses.
REVENUE RECOGNITION:
ECG sales and services revenue is recognized in accordance with SAB 104 as the following criteria have been met: (1) persuasive evidence of an arrangement exists, (2) the product has been delivered or the services have been rendered, (3) the fee is fixed or determinable, and (4) collectibility of the fee is reasonably assured.
ECG SERVICES are comprised of ECG processing, Overread, Rental and Maintenance. ECG Processing and Overread revenue is recognized monthly on a per-usage basis after the services are performed. Equipment rental and maintenance revenue is recognized monthly over the terms of the customer's agreement.
ECG PRODUCT AND SUPPLIES SALES revenue is recognized upon shipment of the products and passage of title to the customer.
OsteoGram software revenue is recognized in accordance to paragraph 8 of SOP 97-2 as the following criteria have been met: (1) persuasive evidence of an arrangement exits, (2) the software has been delivered, (3) the fee is fixed or determinable, and (4) collectibility of the fee is probable.
OsteoGram PCS revenue is recognized in accordance to paragraph 59 of SOP 97-2 as the Company met the following criteria: (1) the PCS is part of the initial license (software) fee, (2) the PCS period is for one year, (3) the estimated cost of providing the PCS is immaterial, (4) the Company does not offer upgrades and enhancements during the PCS arrangement. The Company's policy is to accrue all estimated costs of providing the PCS services.
PATENTS:
Patents are amortized over 15 years, starting from their approval date.
F-8
INCOME TAXES:
The Company utilizes the liability method to determine the provision for income taxes, whereby deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
PER SHARE DATA:
The Company reports its earnings (loss) per share in accordance with Statement of Financial Accounting Standards No.128, "Accounting forEarnings Per Share" ("FAS 128"). Basic loss per share is calculated using the net loss divided by the weighted average common shares outstanding. Shares from the assumed conversion of outstanding warrants, options and the effect of the conversion of the Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock are omitted from the computations of diluted loss per share because the effect would be antidilutive.
FINANCIAL INSTRUMENTS:
The carrying value of short-term financial instruments such as cash equivalents, accounts receivable, accounts payable, accrued liabilities andcapital leases approximates their fair value based on the short-term maturities of these instruments.
LONG-LIVED ASSETS:
Long-lived assets used in operations are reviewed periodically to determine whether the carrying values are not impaired and, if indications of impairment are present or if long-lived assets are expected to be disposed of, impairment losses are recorded. Any impairment is charged toexpense in the period in which the impairment is determined. The Company has not recorded impairment charges for long lived assets during the years ended September 30, 2007 and 2006.
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities and the 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.
STOCK BASED COMPENSATION:
Prior to October 1, 2006, the Company accounted for employee stock option grants in accordance with APB No. 25, and adopted the disclosure-only provisions of SFAS No.123, Accounting for Stock-Based Compensation, amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure.
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004) Share-Based Payment (SFAS No. 123R), which replaces SFAS No. 123 and supersedes APB No. 25. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first annual period after June 15, 2005. Subsequent to the effective date, the pro forma disclosures previously permitted under SFAS No. 123 are no longer an alternative to financial statement recognition.
Effective October 1, 2006, the Company adopted SFAS No. 123R using the modified prospective method. Under this method, compensation cost recognized during the fiscal year 2007 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of October 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123 amortized over the options' vesting period, and (b) compensation cost for all share-based payments granted subsequent to October 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R amortized on a straight-line basis over the options' vesting period. As a result of adopting SFAS No. 123R on October 1, 2006, our stock-based compensation was $223,000 for the year ended September 30, 2007.
F-9
The table below represents our pro forma net income giving effect to the estimate d compensation expense related to stock options that would have been reported if we had applied the fair value recognition provisions of SFAS No. 123 for the fiscal year ended September 30, 2007.
|
|
|
|
|
Fiscal Year Ended
September 30, 2006
|
Net loss as reported
|
|
(424,000)
|
Basic and diluted loss per share as reported
|
|
(0.02)
|
Add: stock based employee compensation cost included in determination of net loss reported
|
|
15,000
|
Deduct: stock-based employee compensation cost that would have been included in the determination of net loss if the fair value method had been applied to all awards
|
|
(122,000)
|
Pro forma net loss if the fair value based method had been applied to all awards
|
|
(531,000)
|
Basic and diluted pro forma loss per share if the fair value based method had been applied for all awards
|
|
(0.02)
|
Note that the above pro forma disclosure was not presented for the fiscal year ended September 30, 2007 because the stock-based employee compensation expense is included in the condensed consolidated statements of operations using the fair value recognition method under SFAS No. 123R for this period.
CONCENTRATION OF CREDIT RISK:
The Company sells its products throughout the United States and in the international markets. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Credit losses have been within management's expectations. For the year ended September 30, 2007, total revenue from two customers accounted for approximately 33% of the Company total revenue, and one customer accounted for 30% of total accounts receivable at September 30, 2007. The Company maintains cash balance at a financial institution which accounts are insured by the Federal Deposit Insurance Corporation of $100,000. The portion in excess of the federally insured limit amounted to approximately $768,000 at September 30, 2007.
NOTE B - INCOME TAXES
At September 30, 2007, the Company has available for federal income tax purposes, net operating loss carry forwards of approximately $8 million, which expire between 2008 and 2027. The utilization of the above net operating loss carry forwards are subject to significant limitations under the tax codes due to changes in ownership and portions may expire prior to utilization. The difference between the Company's effective income tax rate and the statutory federal rate for the years ended September 30, 2007 and 2006 relates primarily to losses incurred for which no tax benefit was recognized, due to the uncertainty of its realization. The valuation allowance was $2,985,000 and $2,569,000 at September 30, 2007 and 2006, respectively, representing an increase of $416,000 for the year ended September 30, 2007. This increase is mainly explained by loss carry forwards for which no tax effect was recognized due to the uncertainty of its realization, offset by loss carry forwards that expired at September 30, 2007.
Significant components of the deferred tax liabilities and assets as of September 30, 2007 are as follows:
|
|
|
|
|
|
|
|
|
2007
|
|
2006-5
|
Deferred tax liabilities:
|
|
|
0
|
|
|
0
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
|
2,951,000
|
|
|
2,533,000
|
Other asset and liabilities
|
|
|
34,000
|
|
|
36,000
|
Total deferred tax assets
|
|
|
2,985,000
|
|
|
2,569,000
|
Valuation allowance for Deferred tax assets
|
|
|
(2,985,000)
|
|
|
(2,569,000)
|
Net deferred tax assets
|
|
|
0
|
|
|
0
|
Total
|
|
$
|
0
|
|
$
|
0
|
F-10
NOTE C - STOCKHOLDERS' EQUITY
CLASS A $3.50 CUMULATIVE CONVERTIBLE VOTING PREFERRED STOCK:
The holders of Class A Preferred Stock are entitled to receive, when and as declared by the Board of Directors, dividends at an annual rate of $.35 per share, payable quarterly. Dividends are cumulative from the date of issuance. Total cumulated dividends not declared at September 30, 2006 amounted to $19,000. Every two shares of the Class A Preferred Stock are presently convertible, subject to adjustment, into one share of Common Stock. In the event of any liquidation, the holders of the Class A Preferred Stock are entitled to receive $2.00 in cash per share plus accumulated and unpaid dividends out of assets available for distribution to stockholders, prior to any distribution to holders of Common Stock or any other stock ranking junior to the Class A Preferred Stock. The Class A Preferred Stock may be redeemed by the Company, upon 30-days' written notice, at a redemption price of $3.85 per share. Class A Preferred Stock stockholders have the right to convert their shares into Common Stock during such 30-day period.
Shares of Class A Preferred Stock have one vote each. Shares of Class A Preferred Stock vote along with shares of Common Stock and shares of Class B Preferred Stock as a single class on all matters presented to the stockholders for action except as follows: Without the affirmative vote of the holder of a majority of the Class A Preferred Stock then outstanding, voting as a separate class, the Company may not (i) amend, alter or repeal any of the preferences or rights of the Class A Preferred Stock, (ii) authorize any reclassification of the Class A Preferred Stock, (iii) increase the authorized number of shares of Class A Preferred Stock or (iv) create any class or series of shares ranking prior to the Class A Preferred Stock as to dividends or upon liquidation. A total of 4,200 shares of Common Stock are currently issuable upon conversion of the remaining 8,400 shares of the Class A Preferred Stock.
CLASS B $3.50 CONVERTIBLE VOTING PREFERRED STOCK:
In August 1994, the Company issued 52,333 shares of Class B $3.50 Convertible Preferred Stock ("Class B Preferred Stock") in connection with the acquisition of certain property. The holders of Class B Preferred Stock are entitled to receive dividends only, when and as declared by the Board of Directors. Each share of Class B Preferred Stock is convertible, subject to adjustment, into ten shares of Common Stock. In the event of any liquidation, the holders of the Class B Preferred Stock are entitled to receive $3.50 in cash per share plus accumulated and unpaid dividends out of assets available for distribution to stockholders, prior to any distribution to holders of Common Stock or any other stock ranking junior to the Class B Preferred Stock. Each share of Class B Preferred Stock may be redeemed by the Company, upon 30-days' written notice, at a redemption price of $3.85 per share. Class B Preferred Stock stockholders have the right to convert their shares into Common Stock during this 30-day period.
Shares of Class B Preferred Stock are entitled to one vote each. Shares of Class B Preferred Stock vote as a single class on all matters presented to the stockholders for action except as follows: Without the affirmative vote of the holder of a majority of the Class B Preferred Stock then outstanding, voting as a separate class, the Company may not (i) amend, alter or repeal any of the preferences or rights of the Class B Preferred Stock, (ii) authorize any reclassification of the Class B Preferred Stock, (iii) increase the authorized number of shares of Class B Preferred Stock or (iv) create any class or series of shares ranking prior to the Class B Preferred Stock as to dividends or upon liquidation. A total of 3,000 shares of Common Stock are currently issuable upon conversion of the remaining 300 shares of Class B Preferred Stock.
CLASS D PREFERRED STOCK:
On March 14, 2007, the Company closed a private placement of its securities to an institutional investor pursuant to the Securities Purchase Agreement. The Company sold to the investor 4,167 Units at a price of $480 per Unit resulting in total proceeds of $2,000,000. Each Unit consisted of 1 share of the Companys Class D Preferred Stock as well as 1,000 Common Stock Purchase Warrants with an exercise price of $0.30 per share. Pursuant to the Agreement, the Company issued all 4,167 shares of the authorized Class D Preferred Stock. Each share of Class D Preferred Stock is convertible at any time into 2,000 shares of the Companys common stock. The holder of each issued and outstanding share of Class D Preferred Stock will be entitled to receive a dividend in respect of each such share at the rate per share of $9.60 per annum
,
payable on each of the first, second, third, and fourth anniversaries of March 12, 2007, commencing March 12, 2008. Dividend payments to each holder will be made in shares of the Companys common stock valued at the average Market Price over 20 trading days, as defined in the Certificate of Designation. In the event the dividends may not lawfully be paid by the issuance of the Companys common stock and may be lawfully paid in cash, the dividends will be paid in cash. In the event of any liquidation, dissolution or winding-up, either voluntarily or involuntarily, the holders of shares of the Class D Preferred Stock then issued and outstanding will be entitled to be paid out of the Companys assets available for distribution to its stockholders, whether from capital, surplus or earnings, before any payment shall be made to the holders of shares of the Companys common stock or upon any other series of the Companys Preferred Stock with a liquidation preference subordinate to the liquidation preference of Class D Preferred Stock, an amount per share equal to $480 plus the dollar amount equal to all unpaid and accrued dividends and interest thereon. In addition, a merger or consolidation with or into any other corporation, or a sale, lease, exchange, or transfer of all or any part of the Companys assets will be deemed a liquidation event unless no assets are distributed in respect of any class of the Companys capital stock in connection with, or as a result of, such merger or consolidation. The Class D Preferred Stock has the same voting rights as the Companys common stock except that each share of Class D Preferred Stock is entitled to 2,000 votes for vote allowed a share of the Companys common stock, however such amount will be proportionally adjusted in the event of a reverse or forward split of the Companys common stock.
F-11
ISSUANCE OF COMMON STOCK - EQUITY LINE OF CREDIT
On February 25, 2004, the Company entered into a three year Investment Agreement with Dutchess Private Equities Fund, which expired March 25, 2007. The Company did not renew the agreement. That agreement provided that, following notice to Dutchess, the Company may sell to Dutchess up to $5 million in shares of the Company's common stock for a purchase price equal to 95% of the average of the three lowest closing bid prices on the Over-the-Counter Bulletin Board of the Company's common stock during the five day period following that notice. The number of shares that the Company is permitted to sell pursuant to the Investment Agreement is either: (A) two hundred percent of the average daily volume of the Company's common stock for the ten trading days prior to the applicable sale notice, multiplied by the average of the three daily closing best bid prices immediately preceding the day the Company issues the notice, or (B) $25,000; provided that in no event will the sale be more than $1,000,000 with respect to any single sale.
Dutchess' obligation to purchase the Company's common stock was contingent upon certain closing conditions. Such conditions relate to the Investment Agreement and include: (i) that the Company's representations and warranties are true and correct as of the funding date, (ii) that the Company has performed all of its covenants, agreements and conditions required to be performed by it, (iii) that trading of the Company's common stock has not been suspended, (iv) that no statute, rule, regulation, executive order, decree, ruling or injunction is in force against the transactions contemplated in the Investment Agreement, (v) that no pending or threatened litigation exists, and (vi) that the SEC has declared effective a registration statement covering the shares to be purchased by Dutchess.
The aggregate number of shares sold to Dutchess Private Equities Fund from February 25, 2004 to March 25, 2007, pursuant to the Investment Agreement, was 4,126,198 shares at an average of $0.29 per share and the aggregate proceeds were $1,091,000.
On October 28, 2005, we declared a dividend of one Common Stock Purchase Right for each outstanding share of common stock. The dividend is payable to holders of record at the close of business on August 1, 2005. Each Right entitles the registered holder to purchase shares of common stock at a purchase price of $0.40, subject to adjustment.
Initially, the Rights will not be exercisable, certificates for the Rights will not be issued and the Rights will automatically trade with our common stock. Until the close of business on the earlier of (i) the tenth day following the public announcement that a person or group of affiliated or associated persons, together the "Acquiring Person" other than us, our subsidiary or any employee benefit plan or employee stock plan, together an "Exempt Person" has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of our outstanding common stock or (ii) the tenth business day following the commencement by any person, other than an Exempt Person of, or the announcement of the intention to commence, a tender or exchange offer that would result in the ownership of 15% or more of our outstanding common stock with the earlier of such dates in clauses (i) and (ii) being called the "Distribution Date", the Rights will be evidenced, with respect to any of the common stock certificates outstanding as of August 1, 2005, by such common stock certificate, together with a copy of the Summary of Rights. On March 28, 2007, the Board amended the dividend rights to take effect when any person acquires or announces an intention to acquire over 35% ownership.
The Rights are not exercisable until the Distribution Date. The Rights will expire at the close of business on October 28, 2009, unless redeemed or exchanged.
The terms and conditions of the Rights are contained in a Rights Agreement between U.S. Stock Transfer Corporation and us. A copy of the Rights Agreement was filed with the Securities and Exchange Commission as an Exhibit to a Registration Statement on Form 8-A on November 2, 2005. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, as amended from time to time, which is incorporated in this summary description by reference.
NOTE D - STOCK OPTIONS AND WARRANTS
The Company has adopted two non-stockholder approved stock incentive plan, the 2003 Stock Incentive Plan (the "2003 Plan") and the 2006 Stock Incentive Plan (the "2006 Plan"), and two stockholder approved stock options plans, the 1992 Stock Option Plan ("1992 Plan") and the 2002 Stock Option Plan (the "2002 Plan") (collectively, the "Plans"). The 1992 Plan expired in March 2002 and the 2002 Plan was suspended on the effective date of the 2003 Plan in June 2003. Awards are outstanding under the Plans, but awards may be granted in the future only under the 2003 Plan and 2006 Plan. The 2003 Plan provides for the granting of options, stock awards and other forms of equity compensation to key employees, officers and certain individuals. Only nonqualified options may be granted under the 2003 Plan. The 2006 Plan provides for the granting of options and stock awards to any officer, director, employee and certain individuals. Both nonqualified and incentive options may be granted under the 2006 Plan.
Options granted under the Plans generally become exercisable at a rate of 33% of the shares subject to an option one year after the date of grant and the remaining shares generally become exercisable over an additional 24 months. The duration of options may not exceed ten years beyond the date of grant.
F-12
In addition to options issued pursuant to these Plans, the Company has granted non-qualified stock options to certain members of the Board of Directors, management and consultants. Such options have been granted with exercise prices equal to the market prices of the common stock at the date of grant and are for a term of ten years.
During fiscal year ended September 30, 2007, the Company granted to directors, officers and employees options to purchase 5,295,000 shares and consultants 220,000 shares of warrants. The fair value of the options and warrants have been estimated at $558,000, at the date grant, and is based on the assumptions below on the date of grant using the Black-Scholes valuation model.
The expected stock volatility rates are based on the historical stock volatility of the Companys common stock. The risk free interest rates are based on the U.S. Treasury yield curve in effect at the time of the grant for periods corresponding to the expected life of the option. The Company has opted to use the simplified method as allowed by Staff Accounting Bulletin SAB 107 for estimating our expected term to arrive at a term in between the vesting period and the contractual term.
|
|
|
|
|
Fiscal Year Ended
September 30, 2007
|
|
Fiscal Year Ended
September 30, 2006
|
Risk free interest rate
|
4.15 % to 4.96%
|
|
4.47% - 4.88%
|
Stock volatility factor
|
23.5% - 27.8%
|
|
21.8%
|
Weighted average expected option life
|
5 - 6 years
|
|
5 years
|
Expected dividend yield
|
None
|
|
None
|
A summary of the stock option activity, and related information for the years ended September 30 follows:
The pro forma net loss and loss per share had the Company accounted for its options using FAS 123 would have been as follows:
|
|
|
|
|
Twelve Months Ended
September 30,
|
|
|
2006
|
Net loss as reported
|
|
(424,000)
|
asic and diluted loss per share as reported
|
|
(0.02)
|
Add: stock based employee compensation cost included in determination
of net loss reported
|
|
15,000
|
Deduct: stock-based employee compensation cost that would have been included in the determination of net loss if the fair value method had been applied to all awards
|
|
(122,000)
|
Pro forma net loss if the fair value based method had been applied to all awards
|
|
(531,000)
|
Basic and diluted pro forma loss per share if the fair value based method had been applied for all awards
|
|
(0.02)
|
The following summarizes information concerning stock options outstanding at September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Exercise
Shares
|
|
Price
|
Options outstanding, beginning of period
|
|
6,754,828
|
|
$
|
0.29
|
|
6,571,934
|
|
$
|
0.25
|
Options exercised
|
|
(316,229)
|
|
|
0.12
|
|
(825,441)
|
|
|
0.20
|
Options granted
|
|
5,295,000
|
|
|
0.29
|
|
1,500,000
|
|
|
0.45
|
Options forfeited/canceled
|
|
(496,185)
|
|
|
0.48
|
|
(491,665)
|
|
|
0.28
|
Options outstanding, end of period
|
|
11,237,414
|
|
$
|
0.29
|
|
6,754,828
|
|
$
|
0.30
|
Options exercisable, end of period
|
|
4,985,754
|
|
|
0.27
|
|
4,624,834
|
|
|
0.26
|
F-13
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices
|
|
Shares Outstanding
|
|
Weighted
Average
Remaining
Contractual Life
|
|
Weighted
Average
Exercise
Price
of Shares
Outstanding
|
|
Shares
Exercisable
|
|
Weighted
Average
Exercise
Price
of Shares
Exercisable
|
$0.0000 - $0.4250
|
|
10,193,414
|
|
7.83
|
|
$
|
0.25
|
|
4,138,420
|
|
$
|
0.19
|
$0.4251 - $0.8500
|
|
1,034,000
|
|
3.58
|
|
$
|
0.66
|
|
837,334
|
|
$
|
0.66
|
$0.8501 - $1.2750
|
|
10,000
|
|
2.58
|
|
$
|
0.95
|
|
10,000
|
|
$
|
0.95
|
|
|
11,237,414
|
|
7.43
|
|
$
|
0.29
|
|
4,985,754
|
|
$
|
0.27
|
NOTE E - COMMITMENTS AND CONTINGENCIES
The Company has capital leases for machinery and equipment that expire in 2012. The Company is negotiating a new five year lease with LAT Investment to move the facility on the twelfth floor to the third. The new location has 10,949 square feet and a base rent of $13,686 a month for the first year with 3% increase in the ensuing lease years, plus common area and parking expenses. The following is a summary as of September 30, 2007 of future minimum lease payments together with the present value of the net minimum lease payments on capital leases:
|
|
|
|
|
|
|
Capital Lease
|
|
Operating Leases
|
Year Ending September 30
|
|
|
|
|
2008
|
|
98,000
|
|
162,000
|
2009
|
|
95,000
|
|
166,000
|
2010
|
|
44,000
|
|
171,000
|
2011
|
|
14,000
|
|
175,000
|
2012
|
|
-
|
|
174,000
|
Total minimum lease payments
|
|
251,000
|
|
848,000
|
Less amount representing interest
|
|
45,000
|
|
|
Net minimum lease payments
|
|
206,000
|
|
|
Less current portion
|
|
73,000
|
|
|
Present value of net minimum payments, less current portion
|
|
133,000
|
|
|
During the year ended September 30, 2007, the Company entered a capital lease obligation for equipment at the cost of $102,000. This obligation bears an average interest of 15.7 % and a monthly payment of $3,000 and matures in November 2010.
Rental expense under operating leases was $132,000 and $129,000 in fiscal years 2007 and 2006, respectively.
LITIGATION
From time to time the Company is involved in litigation and threatened litigation arising in the ordinary course of business. The Company is not aware of any material unsettled litigation.
EMPLOYMENT AGREEMENT
The Company entered into a long-term agreement with John McLaughlin effective November 2, 2002 through September 30, 2004. This agreement provided a base salary of $150,000 per year and a bonus up to $150,000 based on performance factors including revenue, profit and accomplishment of certain key milestones. In addition, Mr. McLaughlin received standard employee options to purchase 50,000 shares of Common Stock at an exercise price of $0.20 per share upon acceptance of the agreement. On September 24, 2004, the Board passed a resolution to extend this contract for an additional year to 2005. On September 9, 2005 the Board passed a resolution to continue Mr. McLaughlin at a monthly salary of $14,500 starting October 1, 2005. The agreement was ended on June 1, 2007.
F-14
NOTE F - SAVINGS AND RETIREMENT PLANS
The Company has a Savings and Retirement Plan (the "Plan") under which every full-time salaried employee who is 18 years of age or older may contribute up to 100 percent of his or her eligible annual salary to the Plan. For an employee contribution of up to but not exceeding 6 percent of the employee's annual salary the Company makes a matching contribution of $0.25 for every $1.00 of the employee's contribution. The Company's contributions are 100 percent vested after 36 months of contributions to the Plan. Benefits are payable under the Plan upon termination of a participant's employment with the Company or at retirement. The Plan meets the requirements of Section 401(k) of the Internal Revenue Code. The Company's matching contribution, which was charged to expense, was $15,000 and $14,000 for fiscal 2007 and 2006, respectively.
NOTE G - RELATED PARTY TRANSACTIONS
The Company retained the services of John Minnick, who is the principal of Minnick Capital Management and also a member of the Board of Directors, to provide advice on the investment portfolio from August 1999 to September 2007. During fiscal years ended September 30, 2007 and 2006, the Company incurred $7,000 and $3,000 for these services, respectively.
On June 1, 2007, the Company appointed Mr. Vecchione as Interim Chief Executive Officer. Mr. Vecchione is a principal of Synthetica (America), Ltd, to which the Company paid $140,000 and $30,000 in consulting fees during the years ended September 30, 2007 and 2006, respectively.
During the year ended September 30, 2007, the Company retained Anna Yesilevsky to serve as Chief Operating Officer, a non-officer capacity of the Company. Ms. Yesilevsky is also an employee of Boston Avenue Capital, LLC, a shareholder of the Company. During fiscal year 2007, the Company paid AY Capital Management for Ms. Yesilevsky services $28,000.
F-15