UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
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| þ | | Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
For the fiscal year endedJuly 31, 2009
2010| | ¨ | |
| o | | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from ____________________ to ____________________
Commission File Number 0-13176
NON-INVASIVE MONITORING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)Commission File Number 0-13176
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| Florida | | 59-2007840 |
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NON-INVASIVE MONITORING SYSTEMS, INC. |
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(Exact name of registrant as specified in its charter) |
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(State or other jurisdiction of
incorporation or organization)
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4400 Biscayne Blvd., Suite 180, Miami, Florida, | | 33137 |
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(Address of principal executive offices) (Zip Code) |
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Registrant’s telephone number, including area code: (305) 575-4200
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Securities registered pursuant to Section 12(b) of the Exchange Act: None
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Securities registered pursuant to Section 12(g) of the Exchange Act: |
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Common Stock, $0.01 par value per share
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(Title of Class)Zip Code) |
Registrant’s telephone number, including area code: (305) 575-4200
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common stock, $0.01 par value per share
(Title of Class)
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.¨o
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.¨o
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yesxþ No¨o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 month (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.xþ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filero | | Accelerated filero | | Non-accelerated filero | | Smaller reporting companyþ |
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes¨o Noxþ
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the average bid and asked price of such common equity, as of January 31, 20092010 was: $14.0$17.9 million
As of October 15, 20092010 there were 68,385,63768,903,165 shares of Common Stock,common stock, $0.01 par value outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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| Document | | Where Incorporated |
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Proxy Statement for the 20102011 Annual Meeting of StockholdersShareholders | | Part III of this Form 10-K |
NON-INVASIVE MONITORING SYSTEMS, INC.
TABLE OF CONTENTS FOR FORM 10-K
PART I | | 5 |
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Item 1. | Business | 5 |
Item 1A. | Risk Factors6 | 13 |
Item 1B. | Unresolved Staff Comments | 18 |
Item 2. | Properties | 18 |
Item 3. | Legal Proceedings | 18 |
Item 4. | Submission of Matters to a Vote of Security Holders | 18 |
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PART II | | 19 | 6 | |
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| Market | | 13 | |
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| 19 | | 20 | |
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| Selected6.Selected Financial Data | | | 20 | |
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| Management’s7.Management’s Discussion and Analysis of Financial Condition and Results of Operations | | | 21 | |
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| Quantitative7A.Quantitative and Qualitative Disclosures About Market Risk | 25 | | 24 | |
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| Financial8.Financial Statements and Supplementary Data | | | 25 | |
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| Changes9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 46 |
Item 9A(T). | Controls and Procedures | 46 |
Item 9B.42 | Other Information | 46 |
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PART III | | 47 | 42 | |
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| Directors, | | 42 | |
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| 47 | | 43 | |
Item 11. | Executive Compensation | 47 | | |
| Security | | 43 | |
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| 47 | | 43 | |
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| Certain13.Certain Relationships and Related Transactions, and Director Independence | 47 |
Item 14. | Principal Accounting Fees and Services | 4743 | |
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PART IV | | 48 | 43 | |
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Item 15. | Exhibits, Financial Statement Schedules | 48 | 44 | |
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SIGNATURES | | 49 | 44 | |
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| Exhibit 21.1 |
| Exhibit 31.1 |
| Exhibit 31.2 |
| Exhibit 32.1 |
| Exhibit 32.2 |
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), about our expectations, beliefs or intentions regarding, among other things, our product development and commercialization efforts, business, financial condition, results of operations, strategies or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipateddescribed in forward-looking statements. These factors include those set forth below as well as those contained in “Item 1A -— Risk Factors” of this Annual Report on Form 10-K.10-K and our other filings with the Securities and Exchange Commission (“SEC”). We do not undertake any obligation to update forward-looking statements, except as required by applicable law. We intend that all forward-looking statements be subject to the safe harbor provisions of the PSLRA, to the extent applicable to an issuer of penny stock.PSLRA. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance.
Risks and uncertainties, the occurrence of which could adversely affect our business, include the following:
| · | We have a history of operating losses and we do not expect to become profitable in the near future. |
| · | The current worldwide economic crisis and concurrent market instability may materially and adversely affect the demand for our products, as well as our ability to obtain credit or secure funds through sales of our stock, which may materially and adversely affect our business, financial condition and ability to fund our operations. |
| · | Healthcare policy changes, including pending proposals to reform the U.S. healthcare system, may have a material adverse effect on us. |
| · | The terms of clearances or approvals and ongoing regulation of our products may limit how we manufacture and market our products, which could materially impair our ability to generate anticipated revenues. |
| · | We rely on third parties to manufacture and supply our products. |
| · | Our competitors may develop and market products that are more effective, safer or less expensive than our products, negatively impacting our commercial opportunities. |
| · | If we are unable to obtain and enforce patent protection for our products, our business could be materially harmed. |
| · | If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected. |
| · | Our commercial success depends significantly on our ability to operate without infringing the patents and other proprietary rights of third parties. |
| · | If we become involved in patent litigation or other proceedings related to a determination of rights, we could incur substantial costs and expenses, substantial liability for damages or be required to stop our product development and commercialization efforts. |
We have a history of operating losses, we do not expect to become profitable in the near future and absent a significant increase in revenue or additional equity or debt financing, we may be unable to continue as a going concern.
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We will likely require additional funding, which may not be available to us on acceptable terms, or at all. In addition, we may need to amend our Articles of Incorporation to increase our number of authorized shares of common stock.We terminated the Product and Supply Agreement with Sing Lin and may potentially be obligated to pay amounts under the agreement.
We rely on third parties to manufacture and supply our products, and we presently have no agreement with any third party to manufacture and supply our products.
The current worldwide economic crisis and concurrent market instability may materially and adversely affect the demand for our products, as well as our ability to obtain credit or secure funds through sales of our stock, which may materially and adversely affect our business, financial condition and ability to fund our operations.
Healthcare policy changes, including recent reforms to the U.S. healthcare system, may have a material adverse effect on us.
The terms of clearances or approvals and ongoing regulation of our products may limit how we manufacture and market our products, which could materially impair our ability to generate anticipated revenues.
Our competitors may develop and market products that are more effective, safer or less expensive than our products, negatively impacting our commercial opportunities.
If we are unable to obtain and enforce patent protection for our products, our business could be materially harmed.
If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.
Our commercial success depends significantly on our ability to operate without infringing the patents and other proprietary rights of third parties.
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| · | We will likely require additional funding, which may not be available to us on acceptable terms, or at all. In addition, we may need to amend our Articles of Incorporation to increase our number of authorized shares of Common Stock. |
If we become involved in patent litigation or other proceedings related to a determination of rights, we could incur substantial costs and expenses, substantial liability for damages or be required to stop our product development and commercialization efforts.
| · | We do not anticipate paying dividends on our Common Stock in the foreseeable future. |
Failure to obtain regulatory approval outside the United States will prevent us from marketing our products abroad.
Non-U.S. governments often impose strict price controls, which may adversely affect our future profitability.
| · | Because our Common Stock is a “penny stock,” it may be more difficult for investors to sell shares of our Common Stock, and the market price of our Common Stock may be adversely affected. |
Our business is subject to economic, political, regulatory and other risks associated with international operations.
We do not anticipate paying dividends on our common stock in the foreseeable future.
| · | Our stock price has been volatile and there may not be an active, liquid trading market for our Common Stock. |
Because our common stock is a “penny stock,” it may be more difficult for investors to sell shares of our Common Stock, and the market price of our common stock may be adversely affected.
Our stock price has been volatile and there may not be an active, liquid trading market for our common stock.
| · | Our quarterly results of operations will fluctuate, and these fluctuations could cause our stock price to decline. |
Our quarterly results of operations will fluctuate, and these fluctuations could cause our stock price to decline.
Shareholders may experience dilution of ownership interests because of the future issuance of additional shares of our common stock and our preferred stock.
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PART I
Item 1. Business.
Non-Invasive Monitoring Systems, Inc. (together with its consolidated subsidiaries, the “Company”“Company,” “NIMS,” “we,” “us” or “NIMS”“our”) was incorporated inunder the laws of the State of Florida on July 16, 1980. The Company’s offices are located at 4400 Biscayne Boulevard, Miami, Florida, 33137 and its telephone number is (305) 575-4200. The Company’s primary business is the research, development, manufacturing and marketing of a line of motorized, non-invasive, whole body, periodic acceleration platforms. These platforms, which are the home, wellness centerintended as aids to improve circulation and clinic versionjoint mobility, relieve minor aches and pains, relieve morning stiffness, relieve troubled sleep and as mechanical feedback devices for slow rhythmic breathing exercise for stress management. Our current products are derivatives of the Company’sour original acceleration platform, the AT-101.AT-101, (described below), and are intended for use in homes, wellness centers and clinics. In addition, we receive royalty revenue from the Company has developed computer assisted,sales of non-invasive diagnostic monitoring devices and related software designed to detect abnormal respiratory, cardiac, and other medical conditions from sensors placed externally on the body’s surface. These diagnostic devices were sold in 1999 to the SensorMedics Division of ViaSys (which is now a unit of Cardinal Health, Inc. (“SensorMedics”)), and to privately held VivoMetrics, Inc. (“VivoMetrics”), both of which are required to pay royalties to NIMS on sales of these products. VivoMetrics ceased operations in July 2009, filed for Chapter 11 bankruptcy protection in October 2009, and has not paid royalties since July 2009.utilizing our intellectual property.
Prior to 2002, our primary business was the development of computer assisted,computer-assisted, non-invasive diagnostic monitoring devices and related software designed to detect abnormal respiratory, cardiac and other medical conditions from sensors placed externally on the body’s surface. We assigned our patents for these ambulatory monitoring devices in 1999 to the SensorMedics for cashDivision of ViaSys (which is now a unit of CareFusion Corporation (“SensorMedics”)), and royalties on sales. We also assigned certain patents to privately-held VivoMetrics, then a related party, for an equity ownership interest in VivoMetrics (now carried at zero value for financial reporting purposes) andInc. (“VivoMetrics”), both of which are required to pay us royalties on sales and leasing of VivoMetrics’ LifeShirt® systems. In April 2002, VivoMetrics received FDA clearance to market the LifeShirt® system, however VivoMetrics stopped selling the LifeShirt® in July 2009.these products. We continue to receive royalties from SensorMedics,SensorMedics; however, VivoMetrics ceased operations in July 2009, filed for Chapter 11 bankruptcy protection in October 2009 and has not paid royalties since July 2009. Under VivoMetrics’ proposed bankruptcy plan of reorganization, our license with VivoMetrics will be assigned to another company; however, there can be no assurance as to the future amount of royalty revenue, if any, that will be derivedwe may derive from this patent assignment.
license or from our existing license with SensorMedics.
In 2002, we began restructuring our operations and business strategy to focusfocusing on the research, development, manufacturing, marketing and sales of non-invasive, motorized, whole body periodic acceleration (“WBPA”) platforms. These therapeutic acceleration platforms are intended for use in the home,homes, wellness centers and clinics as an aid to improve circulation and joint mobility, relieve minor aches and pains, relieve morning stiffness, relieve troubled sleep and as a mechanical feedback device for slow rhythmic breathing exercise for stress management. The Company’sOur first such platform, the AT-101, was initially registered with the United States Food and Drug Administration (the “FDA”) as a Class 1 (exempt) powered exercise device and was sold to physicians and their patients. In January 2005, the FDA disagreed with our device classification, and requested that we cease commercial sales and marketing efforts forof the AT-101 until we received clearance from the FDA to market the device following submission of a 510(k) application incorporating appropriate clinical trial data. Accordingly, the Companywe ceased itsour commercial sales and marketing of therapeutic platforms in 2005, but continued to receive royalty revenue from sales of diagnostic monitoring hardware and software by SensorMedics and VivoMetrics. The Company additionally has received revenues from small research contracts, sales of parts and units sold for research purposes.
In January 2005, we began development of a less costly and more efficient second generation version of the AT-101, the Exer-Rest® (now designated the Exer-Rest® AT). In January 2008, we received ISO 13485 certification for Canada, the United Kingdom and Europe from SGS United Kingdom Ltd., the world’s leading verification and certification body. ISO 13485 certification is recognized and accepted worldwide as a sign of design and manufacturing quality for medical devices. In addition to our ISO certification, NIMS’the Exer-Rest® AT acceleration therapeutic platform (Class IIa) was awarded CE0120 certification, which requires several safety relatedsafety-related conformity tests, including clinical assessment for safety and effectiveness. The CE0120 markingcertification is often referred to as a “passport” that allows manufacturers from anywhere in the world to sell their goods throughout the European market, as well as in many other countries. Prior to obtaining FDA clearanceregistration for the sale of our therapeutic acceleration platforms in the United States, we marketed and sold the Exer-Rest® AT platforms in the United Kingdom, Canada, Europe, India and Latin America.
The CompanyWe entered into a Product Developmentproduct development and Supply Agreementsupply agreement with Sing Lin Technology Co., Ltd. (“Sing Lin”) of Taichung, Taiwan on September 4, 2007. Under this agreement, Sing Lin isbegan manufacturing newthe third generation versions of our patented Exer-Rest® motorized platforms (designated the Exer-Rest® SL AT3800 and the Exer-Rest® TL) AT4700). We filed a 510(k) premarket notification submission with the FDA in October 2008 for approval to market the Exer-Rest® line of platforms in the United States. The submission included 23 investigational and clinical studies on the vasodilatation properties of WBPA, as well as a controlled, four week clinical trial in a group of patients with chronic aches and pains carried out at the Center of Clinical Epidemiology and Biostatistics at the University of Pennsylvania Medical School. The submission supported Exer-Rest® safety and efficacy for the intended uses as an aid to temporarily increase local circulation, to provide temporary relief of minor aches and pains and to provide local muscle relaxation. The FDA granted clearance under the 510(k) applicationinformed us in January 2009 to marketthat the full Exer-Rest® line of products would be registered as Class I (Exempt) Medical Devices as described in the Company’s 510(k) premarket notification submission.submission, at which time we commenced marketing the Exer-Rest in the U.S. In June 2009, the FDA granted clearance to market the Exer-Rest® withnotified us that the additional intended use of the Exer-Rest as an aid to reduce morning stiffness. Accordingly, we have begunstiffness would be added to the Exer-Rest’s FDA registration. We currently market and sell theour Exer-Rest® in the U.S and abroad.
We have determined that it is in the best interest of NIMS and its shareholders to focus the Company’s time and resources on developing and marketing the Exer-Rest® line of acceleration therapeutic platforms. These devices are being marketed and sold by NIMS in the US, Canada, UK, Europe, India and Latin America. Prior to the termination of our development and supply agreement with them, Sing Lin is sellingmarketed and sold the Exer-Rest® platforms exclusively in the Far East as an authorized distributor.certain Asian markets.
The development and commercialization of the Exer-Rest® has necessitated additionalsubstantial expenditures and commitments of capital, and we anticipate experiencing losses through the end of the 2010our 2011 fiscal year as we expect to expand sales in the US, Canada, the UK, Europe, India, Latin America and the Far East. We may be required to raise additional capital to fulfill our business plan, but no commitment to raise such additional capital exists or can be assured. If we are unsuccessful in our efforts to expand sales and/or raise capital, we will not be able to continue operations.
More than thirty peer reviewed scientific publications attest to the benefits of WBPA in animal and human research investigations. According to those studies, the application of this technology causes release of beneficial substances, such as nitric oxide, from the inner lining of blood vessels throughout the vasculature, which improves circulation and reduces inflammation. These findings are not being claimed as an intended use of the device for marketing purposes, but demonstrate a potential mechanism for its benefits. We believe the market for our products is driven by, among other factors:
the increasing number of elderly persons reporting chronic ailments;
an increased awareness of the benefits of exercise, particularly as a form of prevention;
| · | The increasing number of the elderly reporting chronic ailments; |
an increasing portion of the population that is incapable of performing traditional exercise;
the expanding body of research connecting the body’s production of nitric oxide with vasodilatation, reduction of inflammation and improved transmission of neural impulses; and
| · | An increased awareness of the benefits of exercise, particularly as a form of prevention; |
the expanding body of research linking WBPA to production of nitric oxide and related benefits.
| · | An increasing portion of the population that is incapable of performing traditional exercise; |
| · | The expanding body of research connecting the body’s production of Nitric Oxide with vasodilatation, reduction of inflammation and improved transmission of neural impulses; and |
| · | The expanding body of research linking WBPA to production of Nitric Oxide and related benefits. |
Our products are designed for use by people who are unable or unwilling to exercise or infor whom exercise is contraindicated. TheWe market the Exer-Rest® line of platforms has been cleared for the intended uses of temporarily increasing local circulation, relieving minor aches and pains, providing local muscle relaxation and as an aid to reduce morning stiffness. These symptoms are frequently reported by individuals with chronic cardiovascular, neurological or musculoskeletal conditions, such as Multiple Sclerosis, Parkinson’s Disease, Neuropathy, Arthritis and Fibromyalgia.although we do not claim that the Exer-Rest is intended to treat these conditions.
Products
Whole Body Periodic Acceleration (“WBPA”) Therapeutic Vibrators
Devices
The original AT-101 therapeutic vibrator is a comfortable gurney styledgurney-styled device that moves a platform repetitively in a head-to-foot motion similar to the movement used to comfort a child in a baby carriage but at a much more rapid pace. Sales of the AT-101 commenced in October 2002 in Japan and in February 2003 in the United States. QTM Incorporated (“QTM”), an FDA registered manufacturer (Oldsmar, FL)located in Oldsmar, Florida, manufactured the device, which was built in accordance with ISO and FDAcurrent Good Manufacturing Practices. As discussed above, we stoppedceased manufacturing and selling the AT-101 in the United States in January 2005 but continued selling overseas as we began development of the Exer-Rest®.Exer-Rest AT. We ceased manufacturingcontinued selling our existing inventory of AT-101 devices overseas until the AT-101Exer-Rest AT became available in January 2005 andOctober 2007, at which time we no longer market this product.discontinued marketing of the AT-101.
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The Exer-Rest® AT therapeutic vibrator is based upon the design and concept of the AT-101, therapeutic vibrator, but has the dimensions and appearance of a commercial extra long twin bed. The Exer-Rest® AT, which iswas also manufactured by QTM until we stopped production in July 2009, weighs about half as much as the AT-101, has a much more efficient and less costly drive mechanism, has a much lower selling price than the AT-101 and is designed such that the user can utilize and operate it without assistance. The wired hand held controller provides digital values offor speed, travel and time rather than analog values offor speed and arbitrary force values as in the AT-101. Sales of the Exer-Rest® AT began outside the US in October 2007 and in the US in February 2009. We discontinued manufacturing of the Exer-Rest AT in July 2009, and we expect to utilize our remaining inventory of these units primarily for research purposes.
The Exer-Rest® SL AT3800 and Exer-Rest® TL, AT4700, which are beingwere manufactured for us by Sing Lin prior to the termination of our agreement with them, are next generation versions of the Exer-Rest® AT and further advance the acceleration therapeutic platform technology. The SL (“single” bed)AT3800 (38” wide) and TL (“twin” bed)AT4700 (47” wide) models combine improved drive technology for quieter operation, a more comfortable “memory-foam” mattress, more convenient operation with a multi-function wireless remote and a more streamlined look to improve the whole body, periodic accelerationWBPA experience. Sales of the Exer-Rest® SL AT3800 and Exer-Rest® TL AT4700 platforms began outside the US in October 2008, and US sales commenced in February 2009.
LifeShirt®
The Somno-Ease™, a variation of the Exer-Rest® currently in development, is designed to aid patients with sleep disorders as well as provide feedback for slow rhythmic breathing exercises for the relief of stress associated with daily living. The Somno-Ease™ will have a similar appearance to the Exer-Rest® SL and TL models, but produces slower motion over a greater travel distance than Exer-Rest® and is based upon the notion of “rocking” the adult to sleep analogous to rocking a baby to sleep. The Exer-Rest® Plus, which is also in development, will combine the features of both the Exer-Rest® and Somno-Ease™.
LifeShirt®
The LifeShirt® is a patented Wearable Physiological Computer (US Patents 6,551,252 [issued April 22, 2003], 6,413,225 [issued July 2, 2002], 6,047,203 [issued April 4, 2000]) that incorporates four inductive plethysmographic transducers, electrocardiographic electrodes and a two posture sensorsensors into a low turtle neck sleeveless garment. Pulse oximetry is an optional add-on. These transducers are connectedsensors transmit vital and physiological signs to a miniaturized, battery powered,battery-powered, electronic module. This module interfaces withwhich saves the raw waveforms and digital data to the compact flash memory of a Personal Digital Assistant (“PDA”) for collectionattached to the LifeShirt. Users of raw waveforms and digital data. Such data are then transmitted from the flash memory to a Data Collection Center that transforms the data into minute-by-minute median trends of over 30 physical and emotional signs of health and disease. In addition, the monitored patientLifeShirt can enter symptoms with intensity,(with intensity), mood, and medication information directly into the PDA for integration with the physiologic information collected withby the LifeShirt® garment. The flash memory can then be removed from the LifeShirt and the data uploaded and converted into minute-by-minute median trends of more than 30 physical and emotional signs of health and disease. Vital and physiological signs can therefore be obtained non-invasively, continuously, cheaply, and reliably with the comfortably worn LifeShirt® garment system while at rest, during exercise, at work, and during sleep.resting, exercising, working or sleeping. The LifeShirt® was sold exclusively by VivoMetrics, untilbut has not been marketed since VivoMetrics ceased operations in July 2009, and is2009. Under VivoMetrics’ proposed bankruptcy plan of reorganization, our license with VivoMetrics will be assigned to another company; however, there can be no assurance as to the future amount of LifeShirt sales, if any, that may result from this license.
Intellectual Property
We currently not being marketed.
Intellectual Property
The Company currently holdshold five United States patents with respect to both overall design and specific features of itsour present and proposed products, and has submitted applications with respect to an additional United States provisional patent as well as fourcorresponding foreign patents.patents issued or pending in multiple jurisdictions. No assurance can be given as to the scope of protection afforded by any patent issued, whether patents will be issued with respect to any pending or future patent application, that patents issued will not be designed around, infringed or successfully challenged by others, that the Companywe will have sufficient resources to enforce any proprietary protection afforded by itsour patents or that the Company’sour technology will not infringe on patents held by others. The Company believesWe believe that in the event itsour patent protection is materially impaired, a material adverse effect on itsour present and proposed business could result. The following table lists the Company’sour patents, along with their expiration dates (each of which is 20 years from the filing date):
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| US Patent | | Inventors | | Title | | Expiration Date |
| 7,404,221 | | Sackner, Marvin A. | | Reciprocating movement platform for the external addition of pulses to the fluid channels of a subject | | August 4, 2028 |
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7.228,576 | | Inman, D. Michael;
Sackner, Marvin A.
| | Reciprocating movement platform for the addition of pulses of the fluid channels of a subject | | June 12, 2027 |
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| 7,111,346 | | Inman, D. Michael;
Sackner, Marvin A.
| | Reciprocating movement platform for the addition of pulses of the fluid channels of a subject | | May 15, 2023 |
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| 7,090,648 | | Sackner, Marvin A.;
Inman, D. Michael
| | External addition of pulses to fluid channels of body to release or suppress endothelial mediators and to determine effectiveness of such intervention | | September 28, 2021 |
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| 6,155,976 | | Sackner, Marvin A.;
Inman, D. Michael;
Meichner, William J.
| | Reciprocating movement platform for shifting subject to and fro in headwards-footwards direction | | May 24, 2019 |
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With respect to itsour present and proposed product line, the Company has 17we have seven trademarks and trade names which are registered in the United States and in several foreign countries, including the Company’sour principal trademark, Exer-Rest®“Exer-Rest”.
Research and Development
Our strategy is to develop a portfolio of non-invasive products through a combination of internal development and collaborations with external partners. We are also sponsoring or monitoring research investigating the effectiveness of WBPA in treating stroke, fibromyalgia, cystic fibrosis, delayed onset muscle soreness (DOMS), traumatic brain injury, angina, sickle cell disease, asthma, smoking cessation, myocardial infarction and sleep apnea. We are also investigating the expansion of our product line with other non-invasive vibrationperiodic acceleration therapies. For the fiscal years ended July 31, 2009 and 2008, research and development costs were $176,000 and $178,000, respectively.
Competition
Competition
The Company competesWe compete with several entities that market, sell or distribute therapeutic vibratory devices that are registered with FDA as powered exercise devices, or therapeutic vibrators. These include Power Plate of North America, Vibraflex and CERAGEM International, Inc. Inc., all of which are larger than us, have longer operating histories and have financial and personnel resources far greater than those of the Company.ours. We believe that we effectively compete with such competitors based upon the uniqueness of our products and their differentiation on the basis of intended uses and operation.
Government Regulation of our Medical Device Development and Distribution Activities
Healthcare is heavily regulated by the federal government and by state and local governments. The federal laws and regulations affecting healthcare change constantly thereby increasing the uncertainty and risk associated with any healthcare-related venture.
The federal government regulates healthcare through various agencies, including but not limited to the following: (i) the FDA which administers the Food, Drug, and Cosmetic Act (“FD&C Act”), as well as other relevant laws; (ii) the Centers for Medicare & Medicaid Services (“CMS”) which administers the Medicare and Medicaid programs; (iii) the Office of Inspector General (“OIG”), which enforces various laws aimed at curtailing fraudulent or abusive practices including, by way of example, the Anti-Kickback Law, the Anti-Physician Referral Law, commonly referred to as Stark, the Anti-Inducement Law, the Civil Money Penalty Law, and the laws that authorize the OIG to exclude health care providers and others from participating in federal healthcare programs; and (iv) the Office of Civil Rights which administers the privacy aspects of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). All of the aforementioned are agencies within the Department of Health and Human Services (“HHS”). Healthcare is also provided or regulated, as the case may be, by the Department of Defense through its TriCare program, the Department of Veterans Affairs under, among other laws, the Veterans Health Care Act of 1992, the Public Health Service within HHS under the Public Health Service Act, the Department of Justice through the Federal False Claims Act and various criminal statutes, and state governments under the Medicaid program and their internal laws regulating all healthcare activities.
FDA Regulation of the Design, Manufacture and Distribution of Medical Devices
The testing, manufacture, distribution, advertising and marketing of medical devices are subject to extensive regulation by federal, state and local governmental authorities in the United States, including the FDA, and by similar agencies in other countries. Any product that we develop must receive all relevant regulatory clearances or approvals, as the case may be, before it may be marketed in a particular country. Under United States law, a “medical device” (“device”) is an article, which, among other things, is intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment or prevention of disease, in man or other animals. See FD&C Act § 201(h). Substantially all of our products are classified as medical devices and subject to regulation by numerous agencies and legislative bodies, including the FDA and its foreign counterparts.
Devices are subject to varying levels of regulatory control, the most comprehensive of which requires that a clinical evaluation be conducted before a device receives approval for commercial distribution. The FDA classifies medical devices into one of three classes. Class I devices are relatively simple and can be manufactured and distributed with general controls. Class II devices are somewhat more complex and require greater scrutiny. Class III devices are new and frequently help sustain life.
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In the United States, a company generally can obtain permission to distribute a new device in two ways –— through a Section 510(k) premarket notification application (“510(k) submission”), or through a Section 515 premarket approval (“PMA”) application. The 510(k) submission applies to any device that is substantially equivalent to a device first marketed prior to May 1976 or to another device marketed after that date, but which was substantially equivalent to a pre-May 1976 device. These devices are either Class I or Class II devices. Under the 510(k) submission process, the FDA will issue an order finding substantial equivalence to a predicate device (pre-May 1976 or post-May 1976 device that was substantially equivalent to a pre-May 1976 device) and permitting commercial distribution of that device for its intended use. A 510(k) submission must provide information supporting its claim of substantial equivalence to the predicate device. FDA permits certain low risk medical devices to be marketed without requiring the manufacturer to submit a premarket notification. In other instances, FDA may require that a premarket notification not only be submitted, but also be accompanied by clinical data. If clinical data from human experience are required to support the 510(k) submission, these data must be gathered in compliance with investigational device exemption (“IDE”) regulations for investigations performed in the United States. The FDA review process for premarket notifications submitted pursuant to section 510(k) takes on average about 90 days, but it can take substantially longer if the agency has concerns, and there is no guarantee that the agency will “clear” the device for marketing, in which case the device cannot be distributed in the United States. Nor is there any guarantee that the agency will deem the article subject to the 510(k) process, as opposed to the more time-consuming, resource intensive and problematic PMA process described below.
After clearance or approval to market is given, the FDA and foreign regulatory agencies, upon the occurrence of certain events, are authorized under various circumstances to withdraw the clearance or approval or require changes to a device, its manufacturing process or its labeling or additional proof that regulatory requirements have been met.
A manufacturer of a device cleared through a 510(k) submission must submit another premarket notification if it intends to make a change or modification in the device that could significantly affect the safety or effectiveness of the device, such as a significant change or modification in design, material, chemical composition, energy source or manufacturing process. Any change in the intended uses of a 510(k) device requires an approval supplement or cleared premarket notification. Exported devices are subject to the regulatory requirements of each country to which the device is exported, as well as certain FDA export requirements.
As a company that manufactures medical devices, we are required to register with the FDA. As a result, we and any entity that manufactures products on our behalf will be subject to periodic inspection by the FDA for compliance with the FDA’s Quality System Regulation requirements and other regulations. In the European Community, we will be required to maintain certain International Organization for Standardization (“ISO”) certifications in order to sell products and we or our manufacturers undergo periodic inspections by notified bodies to obtain and maintain these certifications. These regulations require us or our manufacturers to manufacture products and maintain documents in a prescribed manner with respect to design, manufacturing, testing and control activities. Further, we are required to comply with various FDA and other agency requirements for labeling and promotion. The Medical Device Reporting regulations require that we provide information to the FDA whenever there is evidence to reasonably suggest that a device may have caused or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious injury. In addition, the FDA prohibits us from promoting a medical device for unapproved indications.
The FDA in the course of enforcing the FD&C Act may subject a company to various sanctions for violating FDA regulations or provisions of the Act, including requiring recalls, issuing Warning Letters, seeking to impose civil money penalties, seizing devices that the agency believes are non-compliant, seeking to enjoin distribution of a specific type of device or other product, seeking to revoke a clearance or approval, seeking disgorgement of profits and seeking to criminally prosecute a company and its officers and other responsible parties.
Recently Enacted Health Care Reform Legislation
Congress recently passed health care reform legislation that President Obama signed into law in March 2010. The package signed into law by the President is considered by some to be the most dramatic change to the country’s health care system in decades.
The principal aim of the law as currently enacted is to expand health insurance coverage to approximately 32 million Americans who are currently uninsured. The law’s most far-reaching changes do not take effect until 2014, including a requirement that most Americans carry health insurance. The effect of these significant coverage expansions on the sales of the Company’s products is unknown and speculative at this point.
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The enacted legislation contains many provisions designed to generate the revenues necessary to fund the coverage expansions. The most relevant of these provisions are those that impose fees or taxes on certain health-related industries, including medical device manufacturers. Beginning in 2013, each medical device manufacturer will have to pay an excise tax (or sales tax) in an amount equal to 2.3 percent of the price for which such manufacturer sells its medical devices. This tax applies to all medical devices, including the Company’s products and product candidates.
The legislation as enacted also provides for increased enforcement of the fraud and abuse regulations discussed below.
Third-Party Payments, Especially payments by Medicare and other Third-Party PaymentsMedicaid
A. Medicare Coverage
Inasmuch as a percentage of the projected patient population that could potentially benefit from our devices is elderly, Medicare would likely be a potential source of reimbursement. Medicare is a federal program that provides certain hospital and medical insurance benefits to persons age 65 and over, certain disabled persons, persons with end-stage renal disease and those suffering from Lou Gehrig’s Disease. In contrast, Medicaid is a medical assistance program jointly funded by federal and state governments and administered by each state pursuant to which benefits are available to certain indigent patients. The Medicare and Medicaid statutory framework is subject to administrative rulings, interpretations and discretion that affect the amount and timing of reimbursement made under Medicare and Medicaid.
Medicare reimburses for medical devices in a variety of ways depending on where and how the device is used. However, Medicare only provides reimbursement if CMS determines that the device should be covered and that the use of the device is consistent with the coverage criteria. A coverage determination can be made at the local level (“Local Coverage Determination”) by the Medicare administrative contractor (formerly called carriers and fiscal intermediaries), a private contractor that processes and pays claims on behalf of CMS for the geographic area where the services were rendered, or at the national level by CMS through a National Coverage Determination. There are statutory provisions intended to facilitate coverage determinations for new technologies under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”) §§ 731 and 942. Coverage presupposes that the device has been cleared or approved by the FDA and, further, that the coverage will be no broader than the FDA approved intended uses of the device (i.e., the device’s label) as cleared or approved by the FDA, but coverage can be narrower. In that regard, a narrow Medicare coverage determination may undermine the commercial viability of a device. It is unclear whether the therapies and treatments that would use our primary products would be covered under Local or National Coverage Determinations.
Seeking to modify a coverage determination, whether local or national, is a time-consuming, expensive and highly uncertain proposition, especially for a new technology, and inconsistent local determinations are possible. On average, according to an industry report, Medicare coverage determinations for medical devices lag 15 months to five years or more behind FDA approval for respective devices. Moreover, Medicaid programs and private insurers are frequently influenced by Medicare coverage determinations. Our inability to obtain a favorable coverage determination may adversely affect our ability to market our products and thus, the commercial viability of our products.
B. Medicare Reimbursement Levels
Even if Medicare coversand other third-party payor programs cover the procedureprocedures that usesuse our devices, the level of reimbursement may not be sufficient for commercial success. The Medicare reimbursement levels for covered procedures are determined annually through two sets of rulemakings, one for outpatient departments of hospitals under the Outpatient Prospective Payment System (“OPPS”) and the other, for procedures in physicians’ offices under the Resource-Based Relative Value Scales (“RBRVS”) (the Medicare fee schedule). If the use of a device is covered by Medicare, a physician’s ability to bill a Medicare patient more than the Medicare allowable amount is significantly constrained by the rules limiting balance billing. For covered services in a physician’s office, Medicare normally pays 80% of the Medicare allowable amount and the beneficiary pays the remaining 20%, assuming that the beneficiary has met his or her annual Medicare deductible and is not also a Medicaid beneficiary. For services performed in an outpatient department of a hospital, the patient’s co-payment under Medicare may exceed 20%, depending on the service and depending on whether CMS has set the co-payment at greater than 20%. If a device is used as part of an in-patient procedure, the hospital where the procedure is performed is reimbursed under the Inpatient Prospective Payment System (“IPPS”). In general, IPPS provides a single payment to the hospital based on the diagnosis at discharge and devices are not separately reimbursed under IPPS.
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Usually, Medicaid pays less than Medicare, assuming that the state covers the service. In addition, private payors, including managed care payors, increasingly are demanding discounted fee structures and the assumption by healthcare providers of all or a portion of the financial risk. Efforts to impose greater discounts and more stringent cost controls upon healthcare providers by private and public payors are expected to continue.
Significant limits on the scope of services covered or on reimbursement rates and fees on those services that are covered could have a material adverse effect on our ability to commercialize our devices and therefore, on our liquidity and financial condition.
Anti-Fraud and Abuse Rule
There are extensive federal and state laws and regulations prohibiting fraud and abuse in the healthcare industry that can result in significant criminal and civil penalties that can materially affect us. These federal laws include, by way of example, the following:
The anti-kickback statute (Section 1128B(b) of the Social Security Act) prohibits certain business practices and relationships that might affect the provision and cost of healthcare services reimbursable under Medicare, Medicaid and other federal healthcare programs, including the payment or receipt of remuneration for the referral of patients whose care will be paid by Medicare or other governmental programs;
| · | The anti-kickback statute (Section 1128B(b) of the Social Security Act) prohibits certain business practices and relationships that might affect the provision and cost of healthcare services reimbursable under Medicare, Medicaid and other federal healthcare programs, including the payment or receipt of remuneration for the referral of patients whose care will be paid by Medicare or other governmental programs; |
The physician self-referral prohibition (Ethics in Patient Referral Act of 1989, as amended, commonly referred to as the Stark Law, Section 1877 of the Social Security Act), which prohibits referrals by physicians of Medicare or Medicaid patients to providers of a broad range of designated healthcare services in which the physicians (or their immediate family members) have ownership interests or with which they have certain other financial arrangements.
The anti-inducement law (Section 1128A(a)(5) of the Social Security Act), which prohibits providers from offering anything to a Medicare or Medicaid beneficiary to induce that beneficiary to use items or services covered by either program;
| · | The physician self-referral prohibition (Ethics in Patient Referral Act of 1989, as amended, commonly referred to as the Stark Law, Section 1877 of the Social Security Act), which prohibits referrals by physicians of Medicare or Medicaid patients to providers of a broad range of designated healthcare services in which the physicians (or their immediate family members) have ownership interests or with which they have certain other financial arrangements. |
The False Claims Act (31 U.S.C. § 3729 et seq.), which prohibits any person from knowingly presenting or causing to be presented false or fraudulent claims for payment to the federal government (including the Medicare and Medicaid programs); and
The Civil Monetary Penalties Law (Section 1128A of the Social Security Act), which authorizes the United States Department of Health and Human Services to impose civil penalties administratively for fraudulent or abusive acts.
| · | The anti-inducement law (Section 1128A(a)(5) of the Social Security Act), which prohibits providers from offering anything to a Medicare or Medicaid beneficiary to induce that beneficiary to use items or services covered by either program; |
| · | The False Claims Act (31 U.S.C. § 3729 et seq.), which prohibits any person from knowingly presenting or causing to be presented false or fraudulent claims for payment to the federal government (including the Medicare and Medicaid programs); and |
| · | The Civil Monetary Penalties Law (Section 1128A of the Social Security Act), which authorizes the United States Department of Health and Human Services to impose civil penalties administratively for fraudulent or abusive acts. |
Sanctions for violating these federal laws include criminal and civil penalties that range from punitive sanctions, damage assessments, monetary penalties, imprisonment, denial of Medicare and Medicaid payments or exclusion from the Medicare and Medicaid programs, or both. These laws also impose an affirmative duty on those receiving Medicare or Medicaid funding to ensure that they do not employ or contract with persons excluded from the Medicare and other government programs.
Many states have adopted or are considering legislative proposals similar to the federal fraud and abuse laws, some of which extend beyond the Medicare and Medicaid programs, to prohibit the payment or receipt of remuneration for the referral of patients and physician self-referrals regardless of whether the service was reimbursed by Medicare or Medicaid. Many states have also adopted or are considering legislative proposals to increase patient protections, such as limiting the use and disclosure of patient specific health information. These state laws also impose criminal and civil penalties similar to the federal laws.
In the ordinary course of their business, medical device manufacturers and suppliers have been and are subject regularly to inquiries, investigations and audits by federal and state agencies that oversee these laws and regulations. Recent federal and state legislation has greatly increased funding for investigations and enforcement actions, which have increased dramatically over the past several years. This trend is expected to continue. Private enforcement of healthcare fraud also has increased due in large part to amendments to the civil False Claims Act in 1986 that were designed to encourage private persons to sue on behalf of the government. These whistleblower suits by private persons, known as qui tam relators, may be filed by almost anyone, including present and former patients or nurses and other employees, as well as competitors. HIPAA, in addition to its privacy provisions, created a series of new healthcare-related crimes.
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As federal and state budget pressures continue, federal and state administrative agencies may also continue to escalate investigation and enforcement efforts to root out waste and to control fraud and abuse in governmental healthcare programs. A violation of any of these federal and state fraud and abuse laws and regulations could have a material adverse effect on a supplier’s liquidity and financial condition. An investigation into the use of a device by physicians may dissuade physicians from either purchasing or using the device. This could have a material adverse effect on our ability to commercialize our devices.
The Privacy Provisions of HIPAA
HIPAA, among other things, protects the privacy and security of individually identifiable health information by limiting its use and disclosure. HIPAA directly regulates “covered entities,” such as healthcare providers, insurers and clearinghouses, and indirectly regulates “business associates,” with respect to the privacy of patients’ medical information. All entities that receive and process protected health information are required to adopt certain procedures to safeguard the security of that information. It is uncertain whether we would be deemed to be a covered entity under HIPAA and it is unlikely that we, based on our current business model, would be a business associate. Nevertheless, we will likely be contractually required to physically safeguard the integrity and security of any patient information that we receive, store, create or transmit. If we fail to adhere to our contractual commitments, then our physician or hospital customers may be subject to civil monetary penalties, which could adversely affect our ability to market our devices. Recent changes in the law wrought by the American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, 123 Stat. 115 (Feb. 17, 2009), may increase the likelihood that we would be treated as a business associate thereby subjecting us to direct government regulation, increasing our compliance costs and our exposure to civil monetary penalties and other government sanctions.
Manufacturing
We have no commercial manufacturing facilities and we do not intend to build commercial manufacturing facilities of our own in the foreseeable future. All of our current manufacturing ishas been performed by Sing Lin, under the aforementioned agreement. Sing LinQTM and other FDA registered contract manufacturers. All of our contract manufacturers and their manufacturing facilities must comply with FDA regulations, current quality system regulations (referred to as QSRs), which include current good manufacturing practices, or cGMPs, and to the extent laboratory analysis is involved, current good laboratory practices, or cGLPs. We notified Sing Lin in June 2010 that we were terminating our manufacturing agreement with them, which termination was effective September 2010. As a result, we currently have no supplier contracted to manufacture our products, and Sing Lin and its suppliers are currently in possession of the tooling required to manufacture our products. If we are unable to enter into a new agreement for the manufacture and supply of our devices, whether with Sing Lin or another supplier, or if we are not able to timely regain possession of our tooling, we may not be able to procure additional inventory on a timely basis, in the quantities we require or at all. We estimate that our existing inventory of Exer-Rest products will be sufficient to meet demand through the end of the 2011 fiscal year.
Sales & Marketing
We have a limited number of dedicated sales and marketing personnel, and our Chief Operating Officer is presently leading our current marketing efforts. Our marketing and sales efforts are currently focused on hospitals, cardiac rehabilitation clinics, physical therapy centers, senior living communities and other healthcare providers, as well as their patients, professional athletes and other individuals. In addition to direct sales efforts by our sales management personnel, our sales and distribution network consists of independent sales representatives distributors, and a storefront demonstration and therapy center in Toronto, Canada.distributors. We intend to expand our distributor and independent sale representative networks and open additional demonstration and therapy centers in the US, Canada and Canada.abroad. There can be no assurance that we will be able to enter into additional distribution and representation agreements on terms acceptable to us or at all, or that our sales and distribution network and demonstration centers will generate significant sales.
Employees
The Company currently employs eightsix employees on a full-time basis. SixFour are engaged in general and administrative, marketing and distribution duties and two in research and development. In addition, certain of our administrative, accounting and legal functions are provided by employees of a related company on a part-time basis under a cost-sharing arrangement under which we reimburse such related company for those services. None of our employees are represented by a collective bargaining agreement, and we believe relations with our employees are good.
Our Executive Officers of the Registrant
Marvin A. Sackner, M.D.Dr. Sackner, 77,78, has served as a Director since he was first elected as our Chairman of the Board, Chief Executive Officer and Director in November 1989 and served as Chairman of the Board from November 1989 until October 2008. He served as CEO from 1989 until 2002 and from December 2007 to the present. Dr. Sackner co-founded Respitrace Corporation, a predecessor to the Company, in 1977 and was the Chairman of its Board from 1981 until October 1989. From 1974 until October 1991, Dr. Sackner was the Director of Medical Services at Mount Sinai in Miami Beach, Florida. From 1973-1996, he served as Professor of Medicine, University of Miami at Mount Sinai. Since 2004, he has been Voluntary Professor of Medicine, Leonard Miller Medical School of University of Miami. From 1979 to 1980, Dr. Sackner was the President of the American Thoracic Society. Dr. Sackner was the Chairman of the Pulmonary Disease Subspecialty Examining Board of the American Board of Internal Medicine from 1977 to 1980. In 2007, he was awarded an Honorary Doctorate Degree for "outstanding“outstanding work in the entire field of pulmonology and sleep disorders,"” by the University of Zurich (Switzerland). Dr. Sackner holds 33 United States Patents and has written 223 scientific papers and four books. Dr. Sackner also serves as a director of Continucare Corporation, a publicly-traded provider of outpatient healthcare services.
Steven B. Mrha.Mr. Mrha, 44,45, was appointed Chief Operating Officer effective January 14, 2008. From 2005 to 2008, Mr. Mrha held the position of Vice President, Sales & Marketing for IVX Animal Health (“IVX”), a subsidiary of Teva Pharmaceuticals, Inc. From 1999 to 2005, Mr. Mrha held the same position with DVM Pharmaceuticals (“DVM”) until the 2005 merger of DVM and Phoenix Scientific which created IVX. From 1991 to 1999, Mr. Mrha held numerous positions at DVM, including Territory Manager, Regional Manager, Director of Corporate Training and Director of Marketing.
Adam S. Jackson. Mr. Jackson, 47,48, was appointed Chief Financial Officer on May 12, 2008. From 2006 to 2008, Mr. Jackson served as Senior Vice President, Finance for Levitt Corporation (“Levitt”), a New York Stock Exchange-traded real estate development company (now Woodbridge Holdings Corp.). From 2003 to 2006, Mr. Jackson served as Levitt’s Senior Vice President, Controller. From 2001 to 2003, Mr. Jackson served as Chief Financial Officer of Romika-USA, Inc., a privately-held consumer goods manufacturing and distribution company. Mr. Jackson has also served since March 2008 as the Chief Financial Officer of SafeStitch Medical, Inc., a publicly-held developmental-stage medical device company, and as Vice President, Finance of Aero Pharmaceuticals, Inc., a privately-held pharmaceutical distribution company.
Item 1A. Risk Factors.
Our future operating results may vary substantially from anticipated results due to a number of factors, many of which are beyond our control. The following discussion highlights some of these factors and the possible impact of these factors on our future results of operations. If any of the following factorsevents actually occur,occurs, our business, financial condition or results of operations could be materially harmed. In that case, the value of our common stock could decline substantially.
Risks Relating to Our Business.
Our financial statements indicate thatWe have a history of operating losses, we do not expect to become profitable in the near future and absent a significant increase in revenue or additional equity or debt financing, we may be unable to continue as a going concern. We have a history of operating losses and we do not expect to become profitable in the near future:
Our consolidated financial statements for the years ended July 31, 20092010 and 20082009 were prepared on a “going concern” basis; however substantial doubt exists about our ability to continue as a going concern as a result of recurring losses and an accumulated deficit. We are not profitable and have been incurring material losses. Our net losses for our fiscal years ended July 31, 2010, 2009 and 2008 and 2007 were $1.8$1.6 million, $1.8 million and $1.4$1.8 million, respectively. As of July 31, 2009,2010, we had an accumulated deficit of $19.8$21.4 million. Our revenues from 2005 through 2008 were primarily derived from royalties on sales of diagnostic monitoring hardware and software licensed to two third parties (one of which is no longer operating) and from sales of parts and services related to acceleration therapeutics platforms used for research purposes. Although we have obtained regulatory clearance to market our principal products in the US and abroad, there can be no assurance that our products will achieve market acceptance. Market acceptance of our products may depend upon:upon, among other things: the timing of market introduction of competitive products; the safety and efficacy of our products; and the potential advantage or disadvantages of alternative treatments. If our products fail to achieve market acceptance, we may not be able to generate significant revenues or be profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Absent a significant increase in revenue or additional equity or debt financing, we may be unable to continue as a going concern, and you may lose all of your investment in us.
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We will likely require additional funding, which may not be available to us on acceptable terms, or at all. In addition, we may need to amend our Articles of Incorporation to increase our number of authorized shares of common stock.
We will likely need to raise additional capital in order for us to continue as a going concern. Until we can generate a sufficient amount of product revenue to finance our cash requirements, which we may never do, we will need to finance future cash needs primarily through public or private equity offerings, debt financings or strategic collaborations. We do not know whether additional funding will be available on acceptable terms, or at all. In order to raise additional capital we may need to amend our Articles of Incorporation to increase our number of authorized shares of common stock, which would require shareholder approval. We cannot assure you that we could obtain such approval. If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of or eliminate our research and development programs and operations. To the extent that we raise additional funds by issuing equity securities, our shareholders may experience significant dilution, and debt financing, if available, may require that we agree to covenants that restrict our operations. To the extent that we raise additional funds through collaboration and licensing arrangements, it may be necessary to relinquish some rights to our product candidates or grant licenses on terms that may not be favorable to us.
We terminated the Product and Supply Agreement with Sing Lin and may potentially be obligated to pay amounts under the agreement.
The now-terminated product and supply agreement with Sing Lin contained obligations to purchase approximately $2.6 million of Exer-Rest units within one year of acceptance of the final product, and an additional $4.1 million and $8.8 million of products in the second and third years following acceptance of the final product, respectively. Under the product and supply agreement, we were required to pay a portion of the product purchase price at the time production orders were placed, with the balance due upon delivery. Through July 31, 2010, we paid Sing Lin $1.7 million in connection with orders placed through that date, and we will be required to make additional payments totaling approximately $60,000 upon taking delivery of the units currently in production. As of July 31, 2010, we had not placed orders sufficient to satisfy the first-year or second-year minimum purchase obligations under the agreement. We notified Sing Lin in June 2010 that we were terminating the agreement effective September 2010, and Sing Lin in July 2010 demanded that we place orders sufficient to fulfill the three year purchase obligations under the agreement. There can be no assurance that Sing Lin will not attempt to enforce its rights under the product and supply agreement, or pursue other available remedies. If Sing Lin seeks to enforce remedies against us, any such remedies could have a material adverse effect on our business, liquidity and results of operations.
We rely on third parties to manufacture and supply our products, and we presently have no agreement with any third party to manufacture and supply our products.
We do not own or operate manufacturing facilities for clinical or commercial production of our products. We have no experience in medical device manufacturing, and we lack the resources and the capability to manufacture any of our products on a commercial scale. We expect to depend on third-party contract manufacturers for the foreseeable future. Our ability to replace an existing manufacturer may be difficult because the number of potential manufacturers is limited, and the FDA must approve any replacement manufacturer before it can begin manufacturing our product. It may be difficult or impossible for us to identify and engage a replacement manufacturer on acceptable terms in a timely manner, or at all.
We entered into an agreement with Sing Lin to, among other things, manufacture all of our acceleration therapeutic platforms. We notified Sing Lin in June 2010 that we were terminating the agreement, which termination was effective September 2010. As a result, we currently have no supplier contracted to manufacture our products, and Sing Lin and its suppliers are currently in possession of the tooling required to manufacture our products. If we are unable to enter into a new agreement for the manufacture and supply of our devices, whether with Sing Lin or another supplier, or if we are not able to timely regain possession of our tooling, we may not be able to procure additional inventory on a timely basis, in the quantities we require or at all, which would have a material adverse effect on our business, liquidity and results of operations.
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The current worldwide economic crisis and concurrent market instability may materially and adversely affect the demand for our products, as well as our ability to obtain credit or secure funds through sales of our stock, which may materially and adversely affect our business, financial condition and ability to fund our operations:
operations.
The current worldwide economic crisis may reduce the demand for new and innovative medical devices, resulting in delayed market acceptance of our products. Such a delay could have a material adverse impact on our business, expected cash flows, results of operations and financial condition.
Additionally, we have funded our operations to date primarily through private sales of our common stock and preferred stock and through borrowings under credit facilities available to us from stockholders and other individuals. The current economic turmoil and instability in the world’s equity and credit markets may materially adversely affect our ability to sell additional shares of our stock and/or borrow cash. There can be no assurance that we will be able to raise additional working capital on acceptable terms or at all, which may materially adversely affect our ability to continue our operations.
Healthcare policy changes, including pending proposals to reformrecently enacted legislation reforming the U.S. healthcare system, may have a material adverse effect on us:
us.
Healthcare costs have risen significantly over the past decade. Theredecade, and there have been and continue to be proposals by legislators, regulators and third-party payors to keep these costs down. Certain proposals, ifCongress recently passed may impose limitationshealth care reform legislation that President Obama signed into law in March 2010. The package signed into law by the President is considered by some to be the most dramatic change to the country’s health care system in decades.
The principal aim of the law as currently enacted is to expand health insurance coverage to approximately 32 million Americans who are currently uninsured. The law’s most far-reaching changes do not take effect until 2014, including a requirement that most Americans carry health insurance. The effect of these significant coverage expansions on the prices wesales of the Company’s products is unknown and speculative at this point.
The enacted legislation contains many provisions designed to generate the revenues necessary to fund the coverage expansions. The most relevant of these provisions are those that impose fees or taxes on certain health-related industries, including medical device manufacturers. Beginning in 2013, each medical device manufacturer will be ablehave to chargepay an excise tax (or sales tax) in an amount equal to 2.3 percent of the price for ourwhich such manufacturer sells its medical devices. This tax applies to all medical devices, including the Company’s products or the amounts of reimbursement available for our products from governmental agencies or third-party payors. These limitations could have a material adverse effect on our financial position and results of operations.product candidates.
Recently, President Obama and members of Congress have proposed significant reformsIn addition to the U.S. healthcare system. Both the U.S. Senate and House of Representatives have conducted hearings about U.S. healthcare reform. In the Obama administration’s fiscal year 2010 federal budget proposal, the administration emphasized maintaining patient choice, reducing inefficiencies and costs, increasing prevention programs, increasing coverage portability and universality, improving quality of care and maintaining fiscal sustainability. The Obama administration’s fiscal year 2010 budget included proposals to limit Medicare payments, reduce drug spending and increase taxes. In addition, some members of Congress have proposed a government health insurance option to compete with private plans and other expanded public healthcare measures. Variousnew legislation discussed above, various healthcare reform proposals have also emerged at the state level. We cannot predict what additional healthcare initiatives, if any, will be implemented at the federal or state level, or the effect any such future legislation or regulation will have on us. However,In addition to the taxes imposed by the new federal legislation, an expansion in government’s role in the U.S. healthcare industry may lower reimbursements for our products, reduce medical procedure volumes and materially adversely affect our business, possibly materially.financial condition and results of operations.
The terms of clearances or approvals and ongoing regulation of our products may limit how we manufacture and market our products, which could materially impair our ability to generate anticipated revenues:
revenues.
Once regulatory clearance or approval has been granted, the cleared or approved product and its manufacturer are subject to continual review. Any cleared or approved product may only be promoted for its indicated uses. Accordingly, it is possible that our products may be cleared or approved for fewer or more limited uses than we request or that clearance or approval may be granted contingent on the performance of costly post-marketing clinical trials. In addition, if the FDA or other non-U.S. regulatory authorities clear or approve our products, the labeling, packaging, adverse event reporting, storage, advertising and promotion for the products will be subject to extensive regulatory requirements. It is possible that the FDA or other non-U.S. regulatory authorities may not approve the labeling claims necessary or desirable for the successful commercialization of our products. Further, regulatory agencies must approve our manufacturing facilities before they can be used to manufacture our products, and these facilities are subject to ongoing regulatory inspection. If we fail to comply with the regulatory requirements of the FDA and other non-U.S. regulatory authorities, or if previously unknown problems with our products, manufacturers or manufacturing processes are discovered, we could be subject to administrative or judicially imposed sanctions.
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In addition, the FDA and other non-U.S. regulatory authorities may change their policies and additional regulations may be enacted that could prevent or delay regulatory clearance or approval of our products. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are not able to maintain regulatory compliance, we would likely not be permitted to market our products and we may not achieve or sustain profitability.
We rely on third parties to manufacture and supply our products:
We do not own or operate manufacturing facilities for clinical or commercial production of our products. We have no experience in medical device manufacturing, and we lack the resources and the capability to manufacture any of our products on a commercial scale. We entered into a Product and Development and Supply Agreement with Sing Lin Technology Co. Ltd. (“Sing Lin”) to, among other things, manufacture all of our acceleration therapeutic platforms. If Sing Lin is unable to produce our products in the amounts that we require, we may not be able to establish a contract and obtain a sufficient alternative supply from another supplier on a timely basis and in the quantities we require. We expect to depend on Sing Lin and other third-party contract manufacturers for the foreseeable future.
Our ability to replace an existing manufacturer may be difficult because the number of potential manufacturers is limited and the FDA must approve any replacement manufacturer before it can begin manufacturing our product. It may be difficult or impossible for us to identify and engage a replacement manufacturer on acceptable terms in a timely manner, or at all.
Our competitors may develop and market products that are more effective, safer or less expensive than our products, negatively impacting our commercial opportunities:
opportunities.
The life sciences industry is highly competitive, and we face significant competition from many medical device companies that are researching and marketing products designed to address the same ailments we are endeavoring to address. The medical devices that we have developed or are developing will compete with other medical devices that currently exist or are being developed. Products we may develop in the future are also likely to face competition from other medical devices and therapies. Many of our competitors have significantly greater financial, manufacturing, marketing and product development resources than we do. If our competitors market products that are more effective, safer, easier to use or less expensive than our products, or that reach the market sooner than our products, we may not achieve commercial success. In addition, the medical device industry is characterized by rapid technological change. It may be difficult for us to stay abreast of the rapid changes in each technology. If we fail to stay at the forefront of technological change, then we may be unable to compete effectively. Technological advances or products developed by our competitors may render our technologies or products obsolete or less competitive. Any of the foregoing may have a material adverse effect on our business, liquidity and results of operations.
If we are unable to obtain and enforce patent protection for our products, our business could be materially harmed:
harmed.
We currently hold fourfive United States patents with respect to overall design and specific features of our present and proposed products and have submitted applications with respect to four foreign patents. The issuance of a patent does not guarantee that it is valid or enforceable. Any patents we have obtained, or obtain in the future, may be challenged, invalidated, unenforceable or circumvented. Moreover, the United States Patent and Trademark Office (the “USPTO”) may commence interference proceedings involving our patents or patent applications. Any challenge to, finding of unenforceability or invalidation or circumvention of, our patents or patent applications would be costly, would require significant time and attention of our management and could have a material adverse effect on our business.
Our pending patent applications may not result in issued patents. The patent position of medical device companies, including ours,us, is generally uncertain and involves complex legal and factual considerations. The standards that the USPTO and its foreign counterparts use to grant patents are not always applied predictably or uniformly and can change. There is also no uniform, worldwide policy regarding the subject matter and scope of claims granted or allowable in medical device patents. Accordingly, we do not know the degree of future protection for our proprietary rights or the breadth of claims that will be allowed in any patents issued to us or to others.
If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected:
affected.
In addition to patent protection, we also rely on other proprietary rights, including protection of trade secrets, know-how and confidential and proprietary information. Adequate remedies may not exist in the event of unauthorized use or disclosure of our confidential information. The disclosure of our trade secrets would impair our competitive position and may materially harm our business, financial condition and results of operations. To the extent that our employees, consultants or contractors use technology or know-how owned by third parties in their work for us, disputes may arise between us and those third parties as to the rights in related inventions.
Our commercial success depends significantly on our ability to operate without infringing the patents and other proprietary rights of third parties:
parties.
Other entities may have or obtain patents or proprietary rights that could limit our ability to manufacture, use, sell, offer for sale or import products or impair our competitive position. In addition, to the extent that a third party develops new technology that covers our products, we may be required to obtain licenses to that technology, which licenses may not be available or may not be available on commercially reasonable terms, if at all. If licenses are not available to us on acceptable terms, we will not be able to market the affected products or conduct the desired activities, unless we challenge the validity, enforceability or infringement of the third party patent or circumvent the third party patent, which would be costly and would require significant time and attention of our management. Third parties may have or obtain valid and enforceable patents or proprietary rights that could block us from developing products using our technology. Our failure to obtain a license to any technology that we require may materially harm our business, financial condition and results of operations.
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If we become involved in patent litigation or other proceedings related to a determination of rights, we could incur substantial costs and expenses, substantial liability for damages or be required to stop our product development and commercialization efforts:
efforts any of which could materially adversely affect our liquidity, business prospects and results of operations.
Third parties may sue us for infringing their patent rights. Likewise, we may need to resort to litigation to enforce a patent issued or licensed to us or to determine the scope and validity of proprietary rights of others. In addition, a third party may claim that we have improperly obtained or used its confidential or proprietary information. The cost to us of any litigation or other proceeding relating to intellectual property rights, even if resolved in our favor, could be substantial, and the litigation would divert our management’s efforts. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. Uncertainties resulting from the initiation and continuation of any litigation could limit our ability to continue our operations.
We will likelyIf any parties successfully claim that our creation or use of proprietary technologies infringes upon their intellectual property rights, we might be forced to pay damages, potentially including treble damages, if we are found to have willfully infringed on such parties’ patent rights. In addition to any damages we might have to pay, a court could require additional funding, whichus to stop the infringing activity or obtain a license. Any license required under any patent may not be made available to us on commercially acceptable terms, orif at all. In addition, such licenses are likely to be non-exclusive and, therefore, our competitors may have access to the same technology licensed to us. If we fail to obtain a required license and are unable to design around a patent, we may needbe unable to amendeffectively market some of our Articles of Incorporationtechnology and products, which could limit our ability to increasegenerate revenues or achieve profitability and possibly prevent us from generating revenue sufficient to sustain our number of authorized shares of Common Stock:operations.
Failure to obtain regulatory approval outside the United States will prevent us from marketing our products abroad.
We will likely needintend to raise additional capitalmarket certain of our products and product candidates in order for us to continue our operations as currently contemplated. Until we can generate a sufficient amount of product revenue to finance our cash requirements, which we may never do, we will need to finance future cash needs primarily through public or private equity offerings, debt financings or strategic collaborations. We do not know whether additional funding will be available on acceptable terms, or at all.non-U.S. markets. In order to raisemarket our existing and future products in the European Union and many other non-U.S. jurisdictions, we must obtain separate regulatory approvals. We have had limited interactions with non-U.S. regulatory authorities, the approval procedures vary among countries and can involve additional capital wetesting, and the time required to obtain approval may needdiffer from that required to amend our Articlesobtain FDA approval. Approval or clearance by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one or more non-U.S. regulatory authorities does not ensure approval by regulatory authorities in other countries or by the FDA. The non-U.S. regulatory approval process may include all of Incorporation to increase our number of authorized shares of Common Stock, which would require shareholder approval.the risks associated with obtaining FDA approval or clearance. We anticipate that shareholder approval of such an amendment would be obtained; however, there can be no absolute assurance that approval will be granted. If we aremay not able to secure additional funding when needed, we may have to delay, reduce the scope of or eliminate our research and development programs and operations. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution, and debt financing,obtain non-U.S. regulatory approvals on a timely basis, if available, may involve restrictive covenants. To the extent that we raise additional funds through collaboration and licensing arrangements, it may be necessary to relinquish some rights to our product candidates or grant licenses on terms thatat all. We may not be favorableable to us.file for non-U.S. regulatory approvals and may not receive necessary approvals to commercialize our existing and future product candidates in any market.
Non-U.S. governments often impose strict price controls, which may adversely affect our future profitability.
We have obtained approval to market certain of our products in one or more non-U.S. jurisdictions, which subjects us to rules and regulations in those jurisdictions relating to our products. In some countries, particularly countries of the European Union, each of which has developed its own rules and regulations, pricing is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a medical device candidate. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our existing and future product candidates to other available products. If reimbursement of our future product candidates is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.
17
Our business is subject to economic, political, regulatory and other risks associated with international operations.
Our business is subject to risks associated with conducting business internationally, in part due to some of our suppliers historically being located outside the U.S. Accordingly, our future results could be harmed by a variety of factors, including:
difficulties in compliance with non-U.S. laws and regulations;
16
changes in non-U.S. regulations and customs;changes in non-U.S. currency exchange rates and currency controls; changes in a specific country’s or region’s political or economic environment;
trade protection measures, import or export licensing requirements or other restrictive actions by U.S. or non-U.S. governments;
negative consequences from changes in tax laws; and
difficulties associated with staffing and managing foreign operations, including differing labor relations.
Risks Relating to Our Stock.
We do not anticipate paying dividends on our Common Stockcommon stock in the foreseeable future:
future.
We have not declared and paid cash dividends on our common stock in the past and we do not anticipate paying any cash dividends in the foreseeable future. We intend to retain all of our earnings, if any, for the foreseeable future to finance the operation and expansion of our business. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases.increases and you sell your shares.
Because our Common Stockcommon stock is a “penny stock,” it may be more difficult for investors to sell shares of our Common Stock,common stock, and the market price of our Common Stockcommon stock may be adversely affected:
affected.
Our Common Stockcommon stock, which trades only on the OTCBB, is a “penny stock” since, among other things, the stock price is below $5.00 per share, it is not listed on a national securities exchange or approved for quotation on the Nasdaq Stock Market or any other national stock exchange, and it has not met certain net tangible asset or average revenue requirements. Broker-dealers who sell penny stocks must provide purchasers of these stocks with a standardized risk-disclosure document prepared by the Securities and Exchange Commission (“SEC”).SEC. This document provides information about penny stocks and the nature and level of risks involved in investing in the penny-stock market. A broker must also give a purchaser, orally or in writing, bid and offer quotations and information regarding broker and salesperson compensation, make a written determination that the penny stock is a suitable investment for the purchaser and obtain the purchaser’s written agreement to the purchase. Broker-dealers must also provide customers that hold penny stock in their accounts with such broker-dealer a monthly statement containing price and market information relating to the penny stock. If a penny stock is sold to an investor in violation of the penny stock rules, the investor may be able to cancel its purchase and get its money back.
If applicable, the penny stock rules may make it difficult for investors to sell their shares of our Common Stock.common stock. Because of the rules and restrictions applicable to a penny stock, there is less trading in penny stocks and the market price of our Common Stockcommon stock may be adversely affected. Also, many brokers choose not to participate in penny stock transactions. Accordingly, investors may not always be able to resell their shares of our Common Stockcommon stock publicly at times and prices acceptable to them.
Our stock price has been volatile and there may not be an active, liquid trading market for our Common Stock:
common stock.
Our stock price has experienced significant price and volume fluctuations and may continue to experience volatility in the future. The price of our common stock has ranged between $0.22 and $0.49 for the 52-week period ended September 30, 2010. Factors that have a significant impact on the price of our common stock, in addition to the other issues described in this report, include results of or delays in our pre-clinical and clinical studies, announcements of technological innovations or new commercial products by us or others, developments in patents and other proprietary rights by us or others, future sales of our common stock by existing stockholders,shareholders, regulatory developments or changes in regulatory guidance, the departure of our officers, directors or key employees, and period-to-period fluctuations in our financial results. Also, you may not be able to sell your shares at the best market price if trading in our stock in not active or if the volume is low. There is no guarantee that an active trading market for our common stock will be maintained on the OTC Bulletin Board Market.OTCBB.
Our quarterly results of operations will fluctuate, and these fluctuations could cause our stock price to decline:
decline.
Our quarterly operating results are likely to fluctuate in the future. These fluctuations could cause our stock price to decline. The nature of our business involves variable factors, such as the timing of the research, development and regulatory submissions of our devices that could cause our operating results to fluctuate. As a result, in some future quarters our clinical, financial or operating results may not meet the expectations of securities analysts and investors which could result in a decline in the price of our stock.
Item 1B. | Unresolved Staff Comments. |
As a smaller reporting company as defined in Rule 12b-2Shareholders may experience dilution of ownership interests because of the Exchange Act,future issuance of additional shares of our common stock and our preferred stock.
In the future, we may issue our authorized but previously unissued equity securities, resulting in the dilution of the ownership interests of our present stockholders. We are currently authorized to issue an aggregate of 101,000,000 shares of capital stock consisting of 100,000,000 shares of common stock and 1,000,000 shares of preferred stock with preferences and rights to be determined by our Board of Directors. As of October 15, 2010, there were outstanding: a) 68,903,165 shares of our common stock, b) 100 shares of our Series B preferred stock, c) 62,048 shares of our Series C preferred stock, each currently convertible into 25 shares of our common stock and d) 2,795 shares of our Series D preferred stock, each currently convertible into 5,000 shares of our common stock. Also as of October 15, 2010, there were outstanding options to purchase 2,505,832 shares of our common stock, and we have reserved 1,551,200 shares of our common stock for issuance upon conversion of our Series C preferred stock and 13,975,000 shares of our common stock for issuance upon conversion of our Series D preferred stock. We may also issue additional shares of our common stock or other securities that are convertible into or exercisable for common stock in connection with hiring or retaining employees, future acquisitions, future sales of our securities for capital raising purposes, or for other business purposes. The future issuance of any such additional shares of our common stock may create downward pressure on the trading price of the common stock. There can be no assurance that we will not be required to include information otherwise required by this item.issue additional shares, warrants or other convertible securities in the future in conjunction with any capital raising efforts, including at a price (or exercise prices) below the price at which shares of our common stock are currently traded on the OTCBB.
Item 2. Properties.
Our principal corporate office is located at 4400 Biscayne Blvd., Miami, Florida. We rent this space from Frost Real Estate Holdings, LLC, which is a company controlled by Dr. Phillip Frost, one of our largest beneficial shareholders. We currently lease approximately 1,800 square feet under the lease agreement, which is for a five-year term that began on January 1, 2008.
We leasehouse our inventory in approximately 5,200 square feet of warehouse space in Hialeah, Florida leased from an entity controlled by Dr. Frost and Dr. Jane Hsiao, our Chairman, to house inventory. We also lease approximately 1,100 square feet of space in Toronto, Canada in which we operate our demonstration and therapy center.Chairman.
Item 3. | Legal Proceedings. |
Item 3. Legal Proceedings.
None.
Item 4. | Submission of Matters to a Vote of Security Holders. |
Item 4. (Removed and Reserved).19
None.
PART II
Item 5. | Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Recent Sales of Unregistered Securities
On July 30, 2009 the Company issued 325,000 shares of its common stock upon exercise of warrants at an exercise price of $0.15 per share for total consideration of $49,000. The proceeds will be used for general working capital purposes. The Company issued
Our common stock is quoted on the above-described Common Stock to an accredited investor in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended and/or Regulation D promulgatedOTCBB under the Securities Act of 1933. The exercised warrants restrict transfer of Common Stock acquired upon exercise thereof unless an applicable exemption exists under the securities laws, and a legend was placed on the stock certificates representing the Common Stock issued upon exercise to the effect that the shares were not registered and absent registration could only be transferred with an appropriate exemption.
Market for Common Stock
symbol NIMU.OB. The table below sets forth, for the respective periods indicated, the high and low bid prices for the Company’s common stock in the over-the-counter market as reported by the OTC Bulletin Board under the symbol NIMU.OB.OTCBB. The following bid pricesquotations represent inter-dealer transactions,prices, without adjustments for retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions.
| | | | | | | | | | |
| | High | | | Low | | | High | | Low | |
| October 31, 2007 | | $ | 1.06 | | | $ | 0.75 | | |
| January 31, 2008 | | $ | 0.81 | | | $ | 0.43 | | |
| April 30, 2008 | | $ | 0.64 | | | $ | 0.41 | | |
| July 31, 2008 | | $ | 0.57 | | | $ | 0.36 | | |
| October 31, 2008 | | $ | 0.61 | | | $ | 0.29 | | | $ | 0.61 | | $ | 0.29 | |
| January 31, 2009 | | $ | 0.46 | | | $ | 0.27 | | | $ | 0.46 | | $ | 0.27 | |
| April 30, 2009 | | $ | 0.40 | | | $ | 0.26 | | | $ | 0.40 | | $ | 0.26 | |
| July 31, 2009 | | $ | 0.40 | | | $ | 0.30 | | | $ | 0.40 | | $ | 0.30 | |
| October 31, 2009 | | | $ | 0.46 | | $ | 0.26 | |
| January 31, 2010 | | | $ | 0.43 | | $ | 0.27 | |
| April 30, 2010 | | | $ | 0.43 | | $ | 0.30 | |
| July 31, 2010 | | | $ | 0.36 | | $ | 0.30 | |
Since our inception, we have not paid any dividends on our Common Stock,common stock, and we do not anticipate that we will pay dividends in the foreseeable future. At July 31, 2009,October 15, 2010, we had 1,5611,506 shareholders of record based on information provided by our transfer agent, American Stock Transfer & Trust Company. We believe that the actual number of beneficial shareholders is considerably higher.
Equity Compensation Plan Information
A majority of our stockholders approved the Non-Invasive Monitoring Systems, Inc. 2000 Stock Option Plan (the “Stock Option Plan”) on March 28, 2001, which is our sole equity compensation plan. We have reserved a total of 2,000,000 shares of our common stock for issuance under the Stock Option Plan, subject to adjustment for a stock split or any future stock dividend or other similar change in our common stock or our capital structure. As of July 31, 2009, 1,251,000 options to purchase shares of common stock have been granted under the Stock Option Plan. A more detailed summary of the Stock Option Plan is contained in Note 4 to our consolidated financial statements set forth under Item 8 to this Annual Report on Form 10-K. The following table provides information about our equity compensation plans as of July 31, 2009:
| | | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | | | Weighted-average exercise price of outstanding options, warrants and rights (b) | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | |
| Equity compensation plans approved by security holders(1) | | | 1,251,000 | | | $ | 0.49 | | | | 749,000 | |
| Equity compensation plans not approved by security holders | | | 1,085,831 | | | $ | 0.66 | | | | – | |
| | | | | | | | | | | | | |
| Total | | | 2,336,831 | | | $ | 0.57 | | | | 749,000 | |
(1) | Non-Invasive Monitoring Systems, Inc. 2000 Stock Option Plan.
|
Item 6. | Selected Financial Data. |
Item 6. Selected Financial Data.
As a smaller reporting company as defined in Rule 12b-2 of the Exchange Act, we are not required to include information otherwise required by this item.
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This Annual Report onForm 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), about our expectations, beliefs or intentions regarding our product development efforts, business, financial condition, results of operations, strategies or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those set forth below as well as those contained in “Item 1A -— Risk Factors” of this Annual Report onForm 10-K.10-K. We do not undertake any obligation to update forward-looking statements, except as required by applicable law. We intend that all forward-looking statements be subject to the safe harbor provisions of the PSLRA, to the extent applicable to issuers of penny stock.PSLRA. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance.
Overview
We are primarily engaged in the development, manufacture and marketing of non-invasive, whole body periodic acceleration (“WBPA”) therapeutic platforms, which are motorized platforms that move a subject repetitively from head to foot. Our acceleration therapeutic platforms are the inventions of Marvin A. Sackner, M.D., our founder, Chief Executive Officer and a director. Twenty-sixOver thirty peer reviewed scientific publications attest to the benefits of whole body periodic acceleration in animal and human research investigations. TheAccording to those studies, the application of this technology causes release of beneficial substances such as nitric oxide from the inner lining of blood vessels tothroughout the same extent as moderate to strenuous exercise.vasculature for improved circulation and the reduction of inflammation. These findings are not being claimed as an intended use of the device for marketing purposes, but demonstrate a potential mechanism for its benefits.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to accounts receivable, inventory, property and equipment, intangible assets, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. A more detailed discussion on the application of these and other accounting policies can be found in Note 2 in the Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K. Actual results may differ from these estimates under different assumptions or conditions.
Results of Operations
In January 2005, we began developing the Exer-Rest® line of acceleration therapeutic platforms, which were designed to be more efficient and less expensive than the AT-101. The Exer-Rest® AT platform was first available for delivery to certain locations outside of the United States in October 2007. Prior to the first export sales of the Exer-Rest® AT, we continued to sell the AT-101 in certain locations outside of the United States. In anticipation of the launch of the Exer-Rest line, in July 2006 we wrote down as obsolete our existing inventory of AT-101 platforms and parts to zero value. Our newest platforms, the Exer-Rest® SL AT3800 and TL,AT4700, which have beenwe developed under our former agreement with Sing Lin, became available for sale in October 2008. TheIn January 2009, the Exer-Rest® line of therapeutic platforms was clearedregistered by the FDA for sale in the United States in January 2009.as Class I (Exempt) Medical Devices. We began our US and international sales activity with aggressive marketing and promotional pricing beginning in February 2009 and2009. We opened our first demonstration and therapy center in Toronto, Canada in April 2009.2009; however we closed that facility in January 2010 to focus our marketing and sales efforts on healthcare providers as well as individuals. We currently market the Exer-Rest to hospitals, cardiac rehabilitation clinics, chiropractic and physical therapy centers, senior living communities and other healthcare providers, as well as to their patients, professional athletes and other individuals.
Year Ended July 31, 20092010 Compared to Year Ended July 31, 20082009
Gross revenues. Gross revenuesRevenue.Total revenue increased from $302,000 for the year ended July 31, 2008 to $546,000 for the year ended July 31, 2009.2009 to $617,000 for the year ended July 31, 2010. This $244,000$71,000 increase primarily resultresulted from a $284,000$124,000 increase in net product sales, offset in part by a $37,000$51,000 decrease in royalty income.revenue. Exer-Rest® platform unit sales duringfor the 20092010 fiscal year increased 900%61% over the 20082009 fiscal year, primarily due to the availability of the new Exer-Rest® SL AT3800 and TLAT4700 models and the clearance to market the Exer-Rest® in the US.for a full year. Royalty revenue infor fiscal 20092010 decreased approximately 14%23% from fiscal 20082009 due to lower product sales by SensorMedics and VivoMetrics.the absence of royalties from VivoMetrics, which ceased operations in July 2009 and filed for Chapter 11 bankruptcy protection in October 2009. We expect fiscal 2010 royalty revenues to be significantly below fiscal 2009 levels.
Cost of sales.Cost of sales increaseddecreased to $243,000 for the year ended July 31, 2010 from $250,000 for the year ended July 31, 2009 from $19,000 for the year ended July 31, 2008,2009. This $7,000 net decrease was primarily due to a $78,000 decrease in inventory valuation adjustments, offset in part by the increased number of units sold during the year. Also included in this $231,000 increase was approximately $113,000 of inventory valuationInventory adjustments for damaged, obsolete and slow moving inventory.inventory for the years ended July 31, 2010 and 2009 totaled approximately $35,000 and $113,000, respectively.
Selling, general and administrative costs and expenses.Selling, general and administrative (“SG&A”) costs and expenses were approximately $2.0$1.9 million for each of the years ended July 31, 20092010 and 2008.2009. The $4,000$50,000 decrease infor the year ended July 31, 20092010 was primarily attributable to lower severance and stock-based compensation costs and reduced travel and other costs associated with international trade shows, offset in part by increased salaries and wages related to a full-year of employment of administrative, sales and financemarketing personnel added during fiscal 20082010. SG&A costs and the March 2009 establishment of the Toronto demonstration center. SG&A expense includes stock basedexpenses include stock-based compensation expense, which totaled $94,000 for fiscal 2010, as compared to $189,000 for fiscal 2009, as compared to $314,000 for fiscal 2008.2009. The decrease in stock-based compensation was primarily due to a decrease in the number of options granted during the year ended July 31, 2009. Also included in fiscal 2008 was $126,000 severance paid to our former Chief Executive Officer.
Research and development costs. Research and development costs decreased $2,000 from $178,000 for the year ended July 31, 2008 to2010.
Research and development costs and expenses.Research and development (“R&D”) costs and expenses decreased $58,000 from $176,000 for the year ended July 31, 2009. Research2009 to $118,000 for the year ended July 31, 2010. R&D costs and development costs in eachexpenses for fiscal 2010 consisted primarily of theresearch related to additional applications of WBPA technology, while fiscal 2009 and 2008 fiscal yearsR&D expenditures consisted primarily of costs related to obtaining FDA clearance to marketregistration for the Exer-Rest® in the US, and the placement of Exer-Rest® unitswhich was obtained in research studies.January 2009.
Total operating costs and expenses.Total operating costs and expenses increased $225,000decreased $115,000 from $2.2 million for the year ended July 31, 2008 to $2.4 million for the year ended July 31, 2009. This increase is primarily attributable2009 to the increase in cost of sales related to higher sales volume, as well as higher SG&A expense and increased research and development expense related to our pursuit of FDA clearance to market the Exer-Rest®.
Other income and expense. Other income increased $49,000 from $12,000$2.3 million for the year ended July 31, 20082010. This decrease is primarily attributable to the decreases in SG&A and R&D costs and expenses described above.
Other income and expense.Other income decreased $42,000 from $61,000 for the year ended July 31, 2009.2009 to $19,000 for the year ended July 31, 2010. The increasedecrease was primarily attributable to $85,000 ofa $47,000 decrease in foreign currency exchange gains at our Canadian subsidiary and a $9,000 increase in net interest expense, offset in part by a $19,000 increase$14,000 decrease in net interest expense and a $17,000 loss onlosses from the disposal of certain Exer-Rest® AT units previously included in fixed assets as demonstration units.assets.
Liquidity and Capital Resources
Our operations have been primarily financed through private sales of our equity securities.securities and advances under credit facilities available to us. At July 31, 2009,2010, we had cash of $886,000$165,000 and working capital of $1.8 million.approximately $364,000. We expect these funds, together with remaining availability under the 2010 Credit Facility described below, will be sufficient to expandsupport our marketing efforts in the US and Canada at leastonly through the remainderend of the 20092010 calendar year. If we are not able to generate significant revenue with these expandedour current marketing efforts, we will likely be required to obtain additional external financing to continue operations beyond the end of the 2010 fiscalcalendar year. No assurance can be given that such additional financing will be available on acceptable terms or at all. Our ability to sell additional shares of our stock and/or borrow cash could be materially adversely affected by the recent economic turmoil in the global equity and credit markets. Current economic conditions have been, and continue to be, volatile and continued instability in these market conditions may limit our ability to access the capital necessary to fund and grow our business and to replace, in a timely manner, maturing liabilities.
Net cash used in operating activities decreased to $1.3 million for the year ended July 31, 2010 from $1.9 million for the year ended July 31, 2009 from $2.2 million for the year ended July 31, 2008.2009. This $364,000$559,000 decrease was principally due to a decrease in inventory expenditures as advances to Sing Lin were applied against inventory purchases.
22
No cash was used or provided by investing activities for the year ended July 31, 2010. Net cash used by investing activities was $232,000 for the year ended July 31, 2009 duewas $232,000. Investing activity in the 2009 fiscal year consisted primarily of $171,000 paid to the payment of the $171,000 balance due on theSing Lin for Exer-Rest® production tooling, $26,000 for website development and $32,000 for leasehold improvements and warehouse equipment. Net cash provided by investing activities was $86,000 for the year ended July 31, 2008, due primarily to the redemption of $400,000 in certificates of deposit held as collateral for bank notes, offset in part by cash payments of $300,000 primarily for Exer-Rest® tooling.
Net cash provided by financing activities increaseddecreased from $1.1 million for the year ended July 31, 2008 to $2.9 million for the year ended July 31, 2009.2009 to $600,000 for the year ended July 31, 2010. This $1.8$2.3 million increasedecrease was principally due to the difference between the $1.5 million raised by the April 2008 Series D Preferred Stock Offering described below and the $2.8 million raised by the December 2008 and January 2009 Series D Preferred Stock Offerings described below. Cash flows from financing activities were also lower in 2008 due tobelow and the repayment of$600,000 advanced under the $500,000 of bank notes secured by the certificates of deposit2010 Credit Facility described above.
below.
Aggregate collections of royalty payments from VivoMetrics and SensorMedics were $167,000 and $248,000 for the years ended July 31, 2010 and $266,000 in 2009, and 2008, respectively. There can be no assurances that the Companywe will continue to receive similar royalty payments, and we expect a decline in royalty revenues in 2010fiscal 2011 to remain well below 2009 levels because VivoMetrics ceased operations in July 2009 and has not made any royalty payments since that time. In 2009, VivoMetrics accounted for approximately $39,000 of our royalty revenue and $56,000 of our royalty collections. VivoMetrics filed for Chapter 11 bankruptcy protection in October 2009. As of October 15, 2009,July 31, 2010, our outstanding receivable from VivoMetrics totaled $10,000, which was fully reserved.
Under theour now-terminated agreement with Sing Lin, we arewere committed to purchase approximately $2.6 million of Exer-Rest® and Somno-Ease™ units within one year of acceptance of the final product, which acceptance occurred in September 2008, and an additional $4.1 million and $8.8 million of products in the second and third years following acceptance of the final product, respectively. Under the Agreement, the Company mustagreement, we were required to pay a portion of the product purchase price at the time production orders arewere placed, with the balance due upon delivery. Through July 31, 2009,2010, we have paid Sing Lin $1.6$1.7 million in connection with orders placed through that date, and we will be required to make additional payments totaling approximately $98,000$60,000 upon taking delivery of the units currently in production. We began taking delivery of units from Sing Lin in October 2008 and we expect such deliveries to continue periodically throughout the 2010 fiscal year. As of October 15, 2009,July 31, 2010, we had not placed orders sufficient to satisfy ourthe first-year or second-year purchase commitmentobligations under the Agreement. Our discussions withagreement. We notified Sing Lin are ongoing,in June 2010 that we were terminating the agreement effective September 2010, and Sing Lin in July 2010 demanded that we expect our commitments underplace orders sufficient to fulfill the Agreement to be modified to reflect current market conditions.three year minimum purchase obligations in the agreement. There can be no assurance that the Agreement will be modified on terms acceptable to us or at all, or that Sing Lin will not attempt to enforce its rights underremedies against us, or pursue other potential remedies. If Sing Lin seeks to enforce remedies against us, any such remedies could have a material adverse effect on our business, liquidity and results of operations. As of July 31, 2010, the Agreement.
Company has net receivables of approximately $200,000 from Sing Lin, and tooling and equipment with a net book value of approximately $283,000 remains in possession of Sing Lin and its suppliers in Asia. The ultimate realization of these assets is dependent on the Company’s ability to resolve the issue with Sing Lin, however there can be no assurance that the value of these assets will be realized.
At July 31, 2009,2010, we had available Federalfederal and Statestate net operating loss carryforwards of approximately $10.7$12.1 million which expire in various years through 2029. The net operating loss carryforwards may be subject to limitation due to change of ownership provisions under Section 382 of the Internal Revenue Code and similar state provisions.2030.
Series D Preferred Stock Offerings.In April 2008, we authorized a new series of our Preferred Stock,preferred stock, par value $1.00 per share (the “Preferred Stock”), designated as Series D Convertible Preferred Stock (the “Series D Preferred Stock”). Each holder of a share of the Series D Preferred Stock has the right, at any time, to convert such share of Series D Preferred Stock into shares of the Company’sour common stock at an initial rate of 5,000 shares of common stock per share of Series D Preferred Stock. The Series D Preferred Stock has a $1,500 per share liquidation preference, and iswas issued at $1,500 per share, which is equivalent to $0.30 per share of Common Stock on an “as-converted” basis.
April 2008 Series D Preferred Stock Offering. On April 7, 2008, we completed the sale of an aggregate of 1,000 shares of our Series D Preferred Stock to certain private investors (collectively, the “Investors”) pursuant to a Stock Purchase Agreement entered into on April 3, 2008 (the “Stock Purchase Agreement”). The Investors include Marvin Sackner, a director and executive officer of the Company who also holds more than 10% of the outstanding Common Stock; Steven Mrha, an executive officer of the Company, and Frost Gamma Investments Trust (“Frost Gamma”), a holder of more than 10% of the outstanding Common Stock (collectively, the “Related Party Investors”). Dr. Jane Hsiao, who became a director and Chairman in October 2008, is trustee of one of the Investors which is not one of the Related Party Investors. The aggregate purchase price for the Series D Preferred Stock was $1.5 million, of which $795,000 was paid by the Related Party Investors. The April 7, 2008 closing price of the Common Stock on the over-the-counter bulletin board was $0.53 per share, resulting in a $1,150 intrinsic value per share of Series D Preferred Stock on the issue date. The $1.2 million aggregate intrinsic value of the Series D Preferred Stock on the issue date was deemed a dividend paid to the Investors on the closing date and as an increase in loss attributable to common shareholders in the financial statements for the period then ended.
December 2008 Series D Preferred Stock Offering.On December 2, 2008, we completed the sale of an aggregate of 491 additional shares of our Series D Preferred Stock to certain investors pursuant to stock purchase agreements entered between December 1, 2008 and December 2, 2008 (the sale of 286 shares closed on December 1, 2008 and the sale of 205 shares closed on December 2, 2008). These investors includeincluded Dr. Sackner, Frost Gamma Investments Trust, a trust controlled by Dr. Phillip Frost, which beneficially owns in excess of 10% of our common stock (“Frost Gamma”), Hsu Gamma Investments, LP (“Hsu Gamma”), an entity controlled by our Chairman, and a director (collectively, the “New Related“Related Party Investors”). The aggregate purchase price for the Series D Preferred Stock was $736,500, of which $382,500 was paid by the New Related Party Investors. Of the $382,500 paid by the New Related Party Investors, $282,200 was paid from the proceeds of their respective interests in the Revolver described below. (See Note 6 to the accompanying consolidated financial statements.) The closing prices of the Common Stockour common stock on the over-the-counter bulletin boardOTCBB on December 1 and 2, 2008 were $0.36 and $0.38 per share, respectively, resulting in a $168,000 aggregate intrinsic value on the issue dates. The $168,000 aggregate intrinsic value of the Series D Preferred Stock on the issue dates was deemed a dividend paid to the investors on the closing dates and as an increase in loss attributable to common shareholders in the financial statements for the period then ended.
23
January 2009 Series D Preferred Stock Offering.On January 28, 2009, we completed the sale of 700 additional shares of our Series D Preferred Stock to each of Frost Gamma and Hsu Gamma (1,400 total shares) for aggregate proceeds of $2.1 million. The January 28, 2009 closing price of the Common Stockour common stock on the over-the-counter bulletin boardOTCBB was $0.43 per share, resulting in a $650 intrinsic value per share of Series D Preferred Stock on the issue date. The $910,000 aggregate intrinsic value of the Series D Preferred Stock on the issue date was deemed a dividend paid to the investors on the closing date and as an increase in loss attributable to common shareholders in the financial statements for the period then ended.
August 2008 Revolver Loan. On August 28, 2008 we entered into a Note and Security Agreement (the “Agreement”) with four persons (the “Lenders”), pursuant to which the Lenders granted us a revolving credit line (the “Revolver”) in the aggregate amount of $300,000, secured by all of the Company’sour personal property. The Lenders included Dr. Sackner, Frost Gamma and Hsu Gamma. We were permitted to borrow and reborrow from time to time under the Revolver until October 31, 2008 (the “Maturity Date”). The interest rate payable by us on amounts outstanding under the Revolver was 11% per annum, and increased to 16% after the Maturity Date or after an Eventevent of Default.default. We were required to repay all amounts owing under the Revolver by the Maturity Date, and amounts outstanding were prepayable at any time. On August 29, 2008 we drew down $300,000 under the Revolver. The Revolver was amended, effective October 31, 2008, to extend the Maturity Date until November 30, 2008. All principal and interest outstanding under the Revolver as of November 30, 2008 was repaid with proceeds from the sale of Series D Preferred Stock on December 1, 2008 as described above. (See Notes 6 and 7 to the accompanying consolidated financial statements.)
2010 Credit Facility.On March 31, 2010, we entered into a new Note and Security Agreement (the “Credit Facility Agreement”) with Frost Gamma and Hsu Gamma (the “2010 Lenders”), pursuant to which the 2010 Lenders granted us a revolving credit line (the “Credit Facility”) in the aggregate amount of up to $1.0 million, secured by all of our personal property. We are permitted to borrow and reborrow from time to time under the Credit Facility until March 31, 2011 (the “Credit Facility Maturity Date”). The interest rate payable on amounts outstanding under the Credit Facility is 11% per annum, and increases to 16% after the Credit Facility Maturity Date or after an event of default. All amounts owing under the Credit Facility are required to be repaid by the Credit Facility Maturity Date, and amounts outstanding are prepayable at any time. As of July 31, 2010, we had drawn an aggregate of $600,000 under the Credit Facility
As of September 30, 2009,2010, we had cash and cash equivalents of approximately $672,000.$192,000, and had $200,000 of availability remaining under the Credit Facility. If we are unable to generate significant revenues from sales of Exer-Rest® platforms, we will have insufficient funds to repay debt and continue operations beyond the end of the 2010 fiscalcalendar year without raising additional capital. There can be no assurance that we will be able to raise such additional capital on terms acceptable to us or at all.
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As a smaller reporting company as defined in Rule 12b-2 of the Exchange Act, we are not required to include the information otherwise required by this item.
24
Item 8. | Financial Statements and Supplementary Data. |
Item 8. Financial Statements and Supplementary Data. Reports | | | | |
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| 29 | | 27 | |
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| 30 | | 28 | |
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| 31 | | 29 | |
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| 32 | | 30 | |
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| 33 | | 31 | |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Non-Invasive Monitoring Systems, Inc.
We have audited the accompanying consolidated balance sheetsheets of Non-Invasive Monitoring Systems, Inc. and subsidiaries as of July 31, 2010 and 2009, and the related consolidated comprehensive statements of operations, changes in shareholders’ equity and cash flows for the year ended July 31, 2009.years then ended. 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.
audits.We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit 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 providesaudits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Non-Invasive Monitoring Systems, Inc. and subsidiaries as of July 31, 2010 and 2009, and the results of their operations and their cash flows for the yearyears then ended July 31, 2009 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in the Note 1 to the consolidated financial statements, the Company has experienced recurring net losses, cash outflows from operating activities and has an accumulated deficit and substantial purchase commitments that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
As further discussed in Notes 10 and 14, during 2010, the Company terminated its agreement with its supplier of products. The supplier has demanded the Company to purchase inventory at levels sufficient to fulfill the minimum three-year purchase obligation under the agreement. The Company is currently unable to fund such a purchase and is attempting to resolve the issue. The Company also has net receivables of approximately $200,000 from the supplier, and tooling and equipment with a net book value of approximately $283,000 is in the possession of the supplier in Asia. The ultimate realization of the assets is dependent on the Company’s ability to resolve the issue with the supplier. The loss of the business relationship with the supplier could also adversely impact the company’s business operations. As the ultimate resolution of these matters will be determined in the future, no amounts have been provided for losses, if any.
| | |
/s/ Morrison, Brown Argiz & Farra, LLP |
Morrison, Brown Argiz & Farra, LLP | | |
Miami, Florida
October 29, 2010 | | |
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Non-Invasive Monitoring Systems, Inc.
We have audited the accompanying balance sheet of Non-Invasive Monitoring Systems, Inc. as of July 31, 2008 and the related statements of operations, changes in shareholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit 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 financial statements referred to above present fairly, in all material respects, the financial position of Non-Invasive Monitoring Systems, Inc. as of July 31, 2008 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in the Note 1 to the financial statements, the Company has experienced recurring net losses, cash outflows from operating activities and has an accumulated deficit and substantial purchase commitments that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NON-INVASIVE MONITORING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| | | | | | | | | | |
| | | | July 31, 2010 | | July 31, 2009 | |
| | | July 31, 2009 | | | July 31, 2008 | | |
| ASSETS | | | | | | | |
| Current assets | | | | | | | |
| Cash | | $ | 886 | | | $ | 86 | | | $ | 165 | | $ | 886 | |
| Royalties and other receivables, net | | 60 | | | 43 | | | 211 | | 60 | |
| Inventories, net | | 911 | | | 173 | | | 766 | | 911 | |
| Advances to contract manufacturer | | 144 | | | 659 | | | 90 | | 144 | |
| Prepaid expenses, deposits, and other current assets | | 75 | | | 28 | | | 57 | | 75 | |
| | | | | | | | | | | | | | |
| | |
| Total current assets | | 2,076 | | | 989 | | | 1,289 | | 2,076 | |
| | | | | | | | | | |
| Tooling and equipment, net | | 460 | | | 470 | | | 342 | | 460 | |
| | | | | | | | | | | | | | |
| | |
| Total assets | | $ | 2,536 | | | $ | 1, 459 | | | $ | 1,631 | | $ | 2,536 | |
| | | | | | | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | |
| | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | |
| Current liabilities | | | | | | | | | |
| Notes payable – other | | $ | 34 | | | $ | 19 | | |
| Notes payable — Related party | | | $ | 600 | | $ | — | |
| Notes payable — other | | | 33 | | 34 | |
| Accounts payable and accrued expenses | | 242 | | | 474 | | | 276 | | 242 | |
| Customer deposits | | 9 | | | – | | | 16 | | 9 | |
| Deferred warranty income | | – | | | 2 | | |
| | | | | | | |
| | | | | | | | | |
| Total current liabilities | | 285 | | | 495 | | | 925 | | 285 | |
| | | | | | | | | | | | | | |
| | | |
| Total liabilities | | $ | 285 | | | $ | 495 | | | $ | 925 | | $ | 285 | |
| | | | | | | |
| | | | | | | | | | |
| Commitments and Contingencies (Note 10) | | – | | | – | | | — | | — | |
| | | | | | | | | | |
| Shareholders' equity | | | | | | | | | |
Shareholders’ equity | | |
| Series B Preferred Stock, par value $1.00 per share; 100 shares authorized, issued and outstanding; liquidation preference $10 | | – | | | – | | | — | | — | |
| Series C Convertible Preferred Stock, par value $1.00 per share; 62,048 shares authorized, issued and outstanding; liquidation preference $62 | | 62 | | | 62 | | | 62 | | 62 | |
| Series D Convertible Preferred Stock, par value $1.00 per share; 5,500 shares authorized; 2,891 and 1,000 shares issued and outstanding, respectively; liquidation preference $4,337 | | 3 | | | 1 | | |
| Common Stock, par value $0.01 per share; 100,000,000 shares authorized; 68,385,637 and 68,039,065 shares issued and outstanding, respectively | | 684 | | | 680 | | |
| Series D Convertible Preferred Stock, par value $1.00 per share; 5,500 shares authorized; 2,828 and 2,891 shares issued and outstanding, respectively; liquidation preference $4,242 | | | 3 | | 3 | |
| Common Stock, par value $0.01 per share; 100,000,000 shares authorized; 68,738,165 and 68,385,637 shares issued and outstanding, respectively | | | 687 | | 684 | |
| Additional paid in capital | | 21,327 | | | 18,256 | | | 21,419 | | 21,327 | |
| Accumulated deficit | | (19,803 | ) | | (18,035 | ) | | | (21,427 | ) | | | (19,803 | ) |
| Accumulated other comprehensive loss | | | (22 | ) | | | – | | | | (38 | ) | | | (22 | ) |
| Total shareholders' equity | | | 2,251 | | | | 964 | | |
| Total liabilities and shareholders' equity | | $ | 2,536 | | | $ | 1,459 | | |
| | | | | | | |
Total shareholders’ equity | | | 706 | | 2,251 | |
| | | | | | | |
Total liabilities and shareholders’ equity | | | $ | 1,631 | | $ | 2,536 | |
| | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
NON-INVASIVE MONITORING SYSTEMS, INC.
CONSOLIDATED COMPREHENSIVE STATEMENTS OF OPERATIONS
Years ended July 31, 20092010 and 20082009
(In thousands, except share and per share data)
| | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2010 | | 2009 | |
| Revenues | | | | | | | |
| Product sales, net | | $ | 325 | | | $ | 41 | | | $ | 449 | | $ | 325 | |
| Royalties | | | 219 | | | | 256 | | | 168 | | 219 | |
| Research, consulting and warranty | | | 2 | | | | 5 | | | — | | 2 | |
| | | | | | | |
| | | | | | | | | |
| Total revenues | | | 546 | | | | 302 | | | 617 | | 546 | |
| | | | | | | | | | |
| Operating costs and expenses | | | | | | | | | |
| | | | | | | | | | |
| Cost of sales | | | 250 | | | | 19 | | | 243 | | 250 | |
| Selling, general and administrative | | | 1,949 | | | | 1,953 | | | 1,899 | | 1,949 | |
| Research and development | | | 176 | | | | 178 | | | 118 | | 176 | |
| | | | | | | | | | | | | | |
| | |
| Total operating costs and expenses | | | 2,375 | | | | 2,150 | | | 2,260 | | 2,375 | |
| | | | | | | |
| | | | | | | | | | |
| Operating loss | | | (1,829 | ) | | | (1,848 | ) | | | (1,643 | ) | | | (1,829 | ) |
| | | | | | | | | | |
| Other income | | | | | | | | | |
| Interest income (expense), net | | | (7 | ) | | | 12 | | | | (16 | ) | | | (7 | ) |
| Other income (expense) | | | 68 | | | | – | | | 35 | | 68 | |
| | | | | | | |
| | |
| Total other income | | | 61 | | | | 12 | | | 19 | | 61 | |
| | | | | | | |
| | | | | | | | | | |
| Net loss | | $ | (1,768 | ) | | $ | (1,836 | ) | | $ | (1,624 | ) | | $ | (1,768 | ) |
| | | | | | | | | | |
| Other comprehensive loss | | | | | | | | | |
| Foreign currency translation adjustment | | | (22 | ) | | | – | | | | (16 | ) | | | (22 | ) |
| | | | | | | | | | | | | | |
| | |
| Comprehensive net loss | | $ | (1,790 | ) | | $ | (1,836 | ) | | $ | (1,640 | ) | | $ | (1,790 | ) |
| | | | | | | |
| | | | | | | | | | |
| Net loss attributable to common shareholders and loss per common share: | | | | | | | | | |
| Net loss | | | (1,768 | ) | | | (1,836 | ) | | | (1,624 | ) | | | (1,768 | ) |
| Deemed dividend on Series D Preferred Stock | | | 1,078 | | | | 1,150 | | | — | | 1,078 | |
| | | | | | | | | | | | | | |
| | |
| Net loss attributable to common shareholders | | $ | (2,846 | ) | | $ | (2,986 | ) | | $ | (1,624 | ) | | $ | (2,846 | ) |
| | | | | | | | | | | | | | |
| Weighted average number of common shares outstanding - basic and diluted | | | 68,050,943 | | | | 67,673,063 | | |
| | | |
| Weighted average number of common shares outstanding — basic and diluted | | | 68,497 | | 68,051 | |
| | | | | | | |
| | | | | | | | | | |
| Basic and diluted loss per common share | | $ | (0.04 | ) | | $ | (0.04 | ) | | $ | (0.02 | ) | | $ | (0.04 | ) |
| | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
NON-INVASIVE MONITORING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years ended July 31, 20092010 and 20082009
(Dollars in Thousands)
| | | Preferred Stock | | | | | | Additional | | | Accum- | | | Accumu- lated Other Compre- | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Series B | | | Series C | | | Series D | | | Common Stock | | | Paid in | | | ulated | | | hensive | | | | | | Accumu- | | | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Deficit | | | Loss | | | Total | | | lated Other | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Preferred Stock | | Additional | | Accum- | | Compre- | | | |
| Balance at July 31, 2007 | | | 100 | | | $ | – | | | | 62,048 | | | $ | 62 | | | | – | | | $ | – | | | | 67,293,734 | | | $ | 673 | | | $ | 16,374 | | | $ | (16,199 | ) | | $ | – | | | $ | 910 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Series B | | Series C | | Series D | | Common Stock | | Paid in | | ulated | | hensive | | | |
| Issuance of series D preferred stock | | | – | | | | – | | | | – | | | | – | | | | 1,000 | | | | 1 | | | | – | | | | – | | | | 1,489 | | | | – | | | | – | | | $ | 1,490 | | |
| Fair value of beneficial conversion feature of Series D Preferred Stock | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1,150 | | | | – | | | | – | | | $ | 1,150 | | |
| Deemed dividend to Series D Preferred Shareholders, charged to additional paid-in-capital in the absence of retained earnings | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | (1,150 | ) | | | – | | | | – | | | $ | (1,150 | ) | |
| Common stock issued for cash on exercise of options | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 195,331 | | | | 2 | | | | 84 | | | | – | | | | – | | | $ | 86 | | |
| Cashless exercise of options | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | 550,000 | | | | 5 | | | | (5 | ) | | | – | | | | – | | | $ | – | | |
| Stock based compensation | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 314 | | | | – | | | | – | | | $ | 314 | | |
| Net loss | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | (1,836 | ) | | | – | | | $ | (1,836 | ) | |
| | | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Capital | | Deficit | | Loss | | Total | |
| | |
| Balance at July 31, 2008 | | | 100 | | | $ | – | | | | 62,048 | | | $ | 62 | | | | 1,000 | | | $ | 1 | | | | 68,039,065 | | | $ | 680 | | | $ | 18,256 | | | $ | (18,035 | ) | | $ | – | | | $ | 964 | | | 100 | | $ | — | | 62,048 | | $ | 62 | | 1,000 | | $ | 1 | | 68,039,065 | | $ | 680 | | $ | 18,256 | | $ | (18,035 | ) | | $ | — | | $ | 964 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of series D preferred stock | | | – | | | | – | | | | – | | | | – | | | | 1,891 | | | | 2 | | | | – | | | | – | | | | 2,835 | | | | – | | | | – | | | $ | 2,837 | | | — | | — | | — | | — | | 1,891 | | 2 | | — | | — | | 2,835 | | — | | — | | $ | 2,837 | |
| Fair value of beneficial conversion feature of Series D Preferred Stock | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 1,078 | | | | – | | | | – | | | $ | 1,078 | | | — | | — | | — | | — | | — | | — | | — | | — | | 1,078 | | — | | — | | $ | 1,078 | |
| Deemed dividend to Series D Preferred Shareholders, charged to additional paid-in-capital in the absence of retained earnings | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | (1,078 | ) | | | – | | | | – | | | $ | (1,078 | ) | | — | | — | | — | | — | | — | | — | | — | | — | | | (1,078 | ) | | — | | — | | $ | (1,078 | ) |
| Common stock issued for cash on exercise of options and warrants | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 338,333 | | | | 4 | | | | 47 | | | | – | | | | – | | | $ | 51 | | | — | | — | | — | | — | | — | | — | | 338,333 | | 4 | | 47 | | — | | — | | $ | 51 | |
| Cashless exercise of 13,333 options | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 8,239 | | | | – | | | | – | | | | – | | | | – | | | $ | – | | | — | | — | | — | | — | | — | | — | | 8,239 | | — | | — | | — | | — | | $ | — | |
| Stock based compensation | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 189 | | | | – | | | | – | | | $ | 189 | | | — | | — | | — | | — | | — | | — | | — | | — | | 189 | | — | | — | | $ | 189 | |
| Foreign currency translation adjustment | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | (22 | ) | | $ | (22 | ) | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | | (22 | ) | | $ | (22 | ) |
| Net loss | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | (1,768 | ) | | | – | | | $ | (1,768 | ) | | — | | — | | — | | — | | — | | — | | — | | — | | — | | | (1,768 | ) | | — | | $ | (1,768 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| Balance at July 31, 2009 | | | 100 | | | $ | – | | | | 62,048 | | | $ | 62 | | | | 2,891 | | | $ | 3 | | | | 68,385,637 | | | $ | 684 | | | $ | 21,327 | | | $ | (19,803 | ) | | $ | (22 | ) | | $ | 2,251 | | | 100 | | $ | — | | 62,048 | | $ | 62 | | 2,891 | | $ | 3 | | 68,385,637 | | $ | 684 | | $ | 21,327 | | $ | (19,803 | ) | | $ | (22 | ) | | $ | 2,251 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock issued for cash on exercise of options and warrants | | | — | | — | | — | | — | | — | | — | | 13,333 | | — | | 1 | | — | | — | | $ | 1 | |
| Cashless Exercise of 39,999 options | | | — | | — | | — | | — | | — | | — | | 24,195 | | — | | — | | — | | — | | $ | — | |
| Conversion of Series D Preferred Stock into Common Stock | | | — | | — | | — | | — | | | (63 | ) | | — | | 315,000 | | 3 | | | (3 | ) | | — | | — | | $ | — | |
| Stock based compensation | | | — | | — | | — | | — | | — | | — | | — | | — | | 94 | | — | | — | | $ | 94 | |
Foreign currency
translation adjustment | | | — | | — | | — | | — | | — | | — | | — | | — | | — | | — | | | (16 | ) | | $ | (16 | ) |
| Net loss | | | — | | — | | — | | — | | — | | — | | — | | — | | — | | | (1,624 | ) | | — | | $ | (1,624 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
Balance at July 31, 2010 | | | 100 | | $ | — | | 62,048 | | $ | 62 | | 2,828 | | $ | 3 | | 68,738,165 | | $ | 687 | | $ | 21,419 | | $ | (21,427 | ) | | $ | (38 | ) | | $ | 706 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
29
NON-INVASIVE MONITORING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended July 31, 20092010 and 20082009
(Dollars in Thousands)
| | | | | | | | | | |
| | | | 2010 | | 2009 | |
| | | 2009 | | | 2008 | | |
| Operating Activities | | | | | | | |
| Net loss | | $ | (1,768 | ) | | $ | (1,836 | ) | | $ | (1,624 | ) | | $ | (1,768 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | |
| Deferred warranty income | | | (2 | ) | | | (4 | ) | | — | | | (2 | ) |
| Depreciation and amortization | | | 114 | | | | 6 | | | 123 | | 114 | |
| Stock based compensation expense | | | 189 | | | | 314 | | |
| Stock-based compensation expense | | | 94 | | 189 | |
| Loss on disposal of assets | | | 17 | | | | – | | | 3 | | 17 | |
| Allowance for doubtful accounts | | | 10 | | | | – | | | — | | 10 | |
| Inventory valuation adjustment | | | 35 | | 113 | |
| Foreign currency transaction gain | | | (85 | ) | | | – | | | | (38 | ) | | | (85 | ) |
| Changes in operating assets and liabilities | | | | | | | | | |
| Accounts and royalties receivable, net | | | (24 | ) | | | 5 | | |
| Accounts and royalties receivable | | | | (150 | ) | | | (24 | ) |
| Inventories, net | | | (711 | ) | | | (173 | ) | | 145 | | | (824 | ) |
| Advances to contract manufacturer | | | 515 | | | | (659 | ) | | 54 | | 515 | |
| Prepaid expenses, deposits and other current assets | | | (47 | ) | | | 1 | | | 19 | | | (47 | ) |
| Accounts payable and accrued expenses | | | (85 | ) | | | 114 | | | 23 | | | (85 | ) |
| Customer deposits | | | 9 | | | | – | | | 7 | | 9 | |
| | | | | | | |
| Net cash used in operating activities | | | (1,868 | ) | | | (2,232 | ) | | | (1,309 | ) | | | (1,868 | ) |
| | | | | | | |
| Investing Activities | | | | | | | | | |
| Fixed asset purchases | | | (232 | ) | | | (314 | ) | | — | | | (232 | ) |
| Certificates of deposit redeemed | | | – | | | | 400 | | |
| Net cash provided by (used in) investing activities | | | (232 | ) | | | 86 | | |
| | | | | | | |
Net cash used in investing activities | | | — | | | (232 | ) |
| | | | | | | | | | | | | | |
| Financing Activities | | | | | | | | | |
| Net proceeds from issuance of common stock and exercise of options and warrants | | | 51 | | | | 86 | | | 1 | | 51 | |
| Net proceeds from issuance of preferred stock | | | 2,837 | | | | 1,490 | | | — | | 2,837 | |
| Net proceeds from issuance of notes payable | | | 363 | | | | – | | | 670 | | 363 | |
| Repayments of notes payable | | | (348 | ) | | | (500 | ) | | | (71 | ) | | | (348 | ) |
| | | | | | | |
| Net cash provided by financing activities | | | 2,903 | | | | 1,076 | | | 600 | | 2,903 | |
| | | | | | | |
| Effect of exchange rate changes on cash | | | (3 | ) | | | – | | | | (12 | ) | | | (3 | ) |
| | | | | | | |
| Net increase (decrease) in cash | | | 800 | | | | (1,070 | ) | | | (721 | ) | | 800 | |
| Cash, beginning of year | | | 86 | | | | 1,156 | | | 886 | | 86 | |
| | | | | | | |
| Cash, end of year | | $ | 886 | | | $ | 86 | | | $ | 165 | | $ | 886 | |
| | | | | | | |
| | | | | | | | | | |
| Supplemental disclosure | | | | | | | | | |
| Cash paid for interest | | $ | 8 | | | $ | 23 | | | $ | — | | $ | 8 | |
| | | | | | | | | | | | | | |
| | | |
| Supplemental schedule of non-cash financing activities | | | | | | | | | |
| (Satisfaction) incurrence of liability for tooling development in progress | | $ | (142 | ) | | $ | 142 | | | $ | — | | $ | (142 | ) |
| | | | | | | |
| Transfer of demonstration units from inventory to fixed assets | | $ | ( 31 | ) | | $ | – | | | $ | (8 | ) | | $ | (31 | ) |
| | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
30
NON-INVASIVE MONITORING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Organization.Non-Invasive Monitoring Systems, Inc., a Florida corporation (together with its consolidated subsidiaries, the “Company” or “NIMS”), began business as a medical diagnostic monitoring company to develop computer-aided continuous monitoring devices to detect abnormal respiratory and cardiac events using sensors on the human body’s surface. It has ceased to operate in this market and has licensed the rights to its technology to the SensorMedics division of ViaSys Healthcare Inc. (which is now a unit of Cardinal Health, Inc.CareFusion Corporation (“SensorMedics”)), and to VivoMetrics, Inc. (“VivoMetrics”). The Company is now focused on developing and marketing its Exer-Rest® line of acceleration therapeutic platforms based upon unique, patented whole body periodic acceleration (“WBPA”) technology. The Exer-Rest® line of acceleration therapeutic platforms currently includes the Exer-Rest® AT, SLAT3800 and TLAT4700 models.
NIMS receivedThe US Food and Drug Administration (“FDA”) clearance in January 2009 to marketregistered the full Exer-Rest® line of products as Class I (Exempt) Medical Devices as described in the Company’s 510(k) premarket notification submission. The submission included 23 investigational and clinical studies on the vasodilatation properties of WBPA, as well as a controlled, four week clinical trial in a group of patients with chronic aches and pains carried out at the Center of Clinical Epidemiology and Biostatistics at the University of Pennsylvania Medical School. The submission supported Exer-Rest® safety and efficacy for the cleared intended uses as an aid to temporarily increase local circulation, to provide temporary relief of minor aches and pains, and local muscle relaxation. The clearanceregistration was based upon the FDA’s determination that the Exer-Rest® line of devices was exempt from the premarket notification requirements of the Federal, Food Drug and Cosmetic Act. In June 2009, the FDA authorized the expansion of intended use claims for the Exer-Rest® to include a claim of reducing morning stiffness. These authorizations to market the Exer-Rest® registrations in the United States complement NIMS’ existing international clearance to market the Exer-Rest® as a class IIa medical device (CE120) in Canada, the United Kingdom, the European Economic Area, India, the Middle East and certain other markets that recognize FDA and/or CE certifications with the intended use described above plus the claim of improving joint mobility.
Business.The Company receives revenue from royalties on sales of diagnostic monitoring hardware and software by SensorMedics and VivoMetrics. Additionally, the Company receives revenues from sales of parts and service and from sales of acceleration therapeutics platforms used for research purposes. In fiscal year 2009, NIMS began commercial sales of its third generation Exer-Rest® therapeutic platforms.
During the calendar years 2005 to 2007, the Company designed, developed and manufactured the first Exer-Rest® platform (now the Exer-Rest® AT), a second generation acceleration therapeutics platform, and updated its operations to promote the Exer-Rest® AT overseas as an aid to improve circulation and joint mobility and to relieve minor aches and pains.
The Company has developed a third generation of Exer-Rest® acceleration therapeutic platforms (designated the Exer-Rest® SLAT3800 and the Exer-Rest® TL)AT4700) that are beinghas been manufactured by Sing Lin Technologies Co. Ltd. (“Sing Lin”) based in Taichung, Taiwan (see Note 10).
NIMS, an ISO 13485 certified company, began marketing operations in the United States in 2009 upon receiving the FDA clearance described above. The Company is also permitted to sell Exer-Rest® in Canada, the United Kingdom, the European Economic Area, India, the Middle East and certain other markets that recognize FDA and/or CE certifications, and began international marketing operations during fiscal 2008.
Sing Lin also has distribution rights to the Company’s acceleration therapeutics platforms in certain Far East markets. The Company has also engaged Sing Lin to build the Somno-Ease™ platform, a variation of the Exer-Rest® that is designed to aid patients with sleep disorders as well as provide feedback for slow rhythmic breathing exercises for the relief of stress associated with daily living. The Company is also developing a further product line extension called Exer-Rest® Plus, a device that combines the features of the Exer-Rest® and Somno-Ease™ for future marketing in the United States and other markets.
The Company’s financial statements have been prepared and presented on a basis assuming it will continue as a going concern. As reflected in the accompanying consolidated financial statements, the Company had net losses in the amount of $1.6 million and $1.8 million, respectively, for each of the years ended July 31, 20092010 and 2008,2009, and has experienced cash outflows from operating activities. The Company also has an accumulated deficit of $19.8$21.4 million as of July 31, 2009,2010, and has substantial purchase commitments at July 31, 20092010 (see note 10). These matters raise substantial doubt about the Company’s ability to continue as a going concern.
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Although the Company has commenced sales of the Exer-Rest® in the United States and has raised approximately $2.8 million fromaccess to funds under the sales of its Series D Preferred Stock in December 2008 and January 20092010 Credit Facility (see Note 7)6), the Company will likely need to generate additional funds during the next 12 months. Absent any significant revenues from product sales, additional debt or equity financing will be required for the Company to continue its business activities, which are currently focused on the production, marketing and commercial sale of the Exer-Rest®.Exer-Rest. It is management’s intention to obtain any additional capital needed to continue its business activities through new debt or equity financing, but there can be no assurance that it will be successful in this regard. The accompanying consolidated financial statements do not include any adjustments that might be necessary from the outcome of this uncertainty.
As further discussed in Note 10, the Company in 2010 terminated its agreement with Sing Lin. As of July 31, 2010, the Company has net receivables of approximately $200,000 from Sing Lin, and tooling and equipment with a net book value of approximately $283,000 remains in possession of Sing Lin and its suppliers in Asia. The ultimate realization of these assets is dependent on the Company’s ability to resolve the issue with Sing Lin, however the accompanying consolidated financial statements do not include any adjustments that might be necessary from the outcome of this uncertainty. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation.The consolidated financial statements for the years ended July 31, 2010 and 2009 include the accounts of the Company for the year ended July 31, 2008 and for the year ended July 31, 2009 also include in consolidation its wholly-owned subsidiaries, Non-Invasive Monitoring Systems of Florida, Inc., which has no current operations, and NIMS of Canada, Inc., a Canadian corporation. All inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates.The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) 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 reported amounts of revenues and expenses during the reporting period. Such items include input variables for stock based compensation. Actual results could differ materially from these estimates.
Cash and Cash Equivalents.The Company considers all highly liquid short-term investments purchased with an original maturity date of three months or less to be cash equivalents. The Company includes overnight repurchase agreements securing its depository bank accounts (sweep accounts) in its cash balances. At July 31, 2009, theThe Company had approximately $125,000 and $821,000 on deposit in such sweep accounts.
accounts at July 31, 2010 and 2009, respectively.Allowances for Doubtful Accounts.The Company provides an allowance for royalties and other receivables it believes it may not collect in full. Receivables are written off when they are deemed to be uncollectible and all collection attempts have ceased. The amount of bad debt recorded each period and the resulting adequacy of the allowance at the end of each period are determined using a combination of the Company’s historical loss experience, customer-by-customer analysis of the Company’s accounts receivable each period and subjective assessments of the Company’s future bad debt exposure.
The Company’s royalties and other receivables as of July 31, 2010 and 2009 in the accompanying consolidated balance sheets are each presented net of an approximately $10,000 allowance for doubtful accounts.Inventories.Inventories are stated at lower of cost or market using the first-in, first-out method, and are evaluated at least annually for impairment. Inventories at July 31, 2010 and 2009 and 2008 primarily consistconsisted of finished Exer-Rest® units and purchased sub-assemblies to be used by the Company’s US-based contract manufacturer in production of the Exer-Rest® AT.accessories. Provisions for potentially obsolete or slow-moving inventory are made based on management’s analysis of inventory levels, historical obsolescence and future sales forecasts.
Tooling and Equipment.These assets are stated at cost and depreciated or amortized using the straight-line method over their estimated useful lives.
Long-lived Assets.The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In performing the review for recoverability, the Company estimates the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of the assets, an impairment loss is recognized as the difference between the fair value and the carrying amount of the asset.
32
Income Taxes.The Company provides for income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”) using an asset and liability based approach. Deferred income tax assets and liabilities are recorded to reflect the tax consequences in future years of temporary differences between the carrying amounts of assets and liabilities for financial statement and income tax purposes. The deferred tax asset for loss carryforwards and other potential future tax benefits has been fully offset by a valuation allowance since it is uncertain whether any future benefit will be realized. The Company files its tax returns as prescribed by the laws of the jurisdictions in which it operates. Tax years ranging from 20052006 to 20082009 remain open to examination by various taxing jurisdictions as the statute of limitations has not expired. It is the Company’s policy to include income tax interest and penalty expense in its tax provision.
Revenue Recognition.Revenue from product sales is recognized when persuasive evidence of an arrangement exists, the goods are shipped and title has transferred, the price is fixed or determinable, and the collection of the sales proceeds is reasonably assured. The Company recognizes royalties as they are earned, based on reports from licensees. Research and consulting revenue and revenue from sales of extended warranties on therapeutic platforms are recognized over the term of the respective agreements.
Advertising Costs.The Company expenses all costs of advertising and promotions as incurred. Advertising and promotional costs for the years ended July 31, 2010 and 2009 totaled $64,000 and 2008 totaled $43,000, and $3,000, respectively, and are included in selling, general and administrative costs and expenses for all periods presented.
Research and Development Costs.Research and development costs are expensed as incurred, and primarily consist of payments to third parties for research and development of the Exer-Rest® device and regulatory testing costs to obtain FDA approval.
Warranties.The Company’s warranties are two years on all Exer-Rest® products sold domestically and one year for products sold outside of the U.S. and are accrued based on management’s estimates and the history of warranty costs incurred. There were no material warranty costs incurred duringfor the years ended July 31, 20092010 and 2008,2009, and management estimates that the Company’s accrued warranty expense at July 31, 20092010 will be sufficient to offset claims made for units under warranty.
Stock-based compensation.The Company follows SFAS No. 123R, “Share Based Payment,” which requiresrecognizes all share-based payments, including grants of stock options, to be recognized in the income statement as an operating expense,expenses, based on their grant date fair values. The fair value of the Company’s stock option awardsStock-based compensation expense is expensedrecognized over the vesting life of the underlying stock options using the graded vesting method, with each tranche of vesting options valued separately. Stock-based compensationand is included in selling, general and administrative costs and expenses in the comprehensive statements of operations for all periods presented.
Fair Value of Financial Instruments.Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of July 31, 20092010 and 2008.2009. The respective carrying value of certain on-balance-sheet financial instruments such as cash and cash equivalents, royalties and other receivables, accounts payable, accrued expenses and notes payable approximate fair values because they are short term in nature or they bear current market interest rates.
Foreign Currency Translation.The functional currency for the Company’s foreign subsidiary is the local currency. Assets and liabilities are translated at exchange rates in effect at the balance sheet date while income and expense amounts are translated at average exchange rates during the period. The resulting foreign currency translation adjustments are disclosed as a separate component of shareholders’ equity and other comprehensive loss. There were $16,000 and $22,000 of foreign currency translation adjustmentslosses for the yearyears ended July 31, 2009.2010 and 2009, respectively.
Comprehensive Income (Loss).Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, including foreign currency translations.
3. INVENTORIES
The Company’s inventory consists of the following (in thousands):
| | | | | | | | | | |
| | | July 31, 2009 | | | July 31, 2008 | | | July 31, 2010 | | July 31, 2009 | |
| Work-in-progress, including sub-assemblies and spare parts | | $ | 11 | | | $ | 66 | | | $ | 5 | | $ | 11 | |
| Finished goods | | | 900 | | | | 107 | | | 761 | | 900 | |
| | | | | | | |
| Total inventories | | $ | 911 | | | $ | 173 | | | $ | 766 | | $ | 911 | |
| | | | | | | |
The Company recorded inventory valuation adjustments to work-in-progressof $35,000 and finished goods inventories of $55,000 and $58,000,$113,000, respectively, duringfor the yearyears ended July 31, 2010 and 2009. This $113,000 total adjustment isThese adjustments are included in cost of sales in the accompanying consolidated comprehensive statements of operations. No inventory valuation adjustments were recorded during the year ended July 31, 2008.
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4. STOCK-BASED COMPENSATION
4. STOCK BASED COMPENSATION
The Company follows SFAS No. 123R, “Share Based Payment,” (“SFAS No. 123R”) which requires a public entity to measuremeasures the cost of employee, officer and director services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The fair value of the Company’s stock option awards is expensed over the vesting life of the underlying stock options using the graded vesting method, with each tranche of vesting options valued separately. The Company recorded stock based compensation of $189,000$94,000 and $314,000,$189,000, respectively, for the years ended July 31, 20092010 and 2008.2009. All stock based compensation is included in the Company’s selling, general and administrative costs and expenses.
The Company’s 2000 Stock Option Plan, as amended (the “Plan”), as amended, provides for a totalthe issuance of up to 2,000,000 shares of Common Stock.the Company’s common stock. The Plan allows the issuance of incentive stock options, stock appreciation rights and restricted stock awards. The exercise price of the options is determined by the compensation committee of the Company’s Board of Directors, but incentive stock options, if any, must be granted at an exercise price not less than the fair market value of the Company’s Common Stockcommon stock as of the grant date or an exercise price of not less than 110% of the fair value for a 10% shareholder. Options expire up to ten years from the date of the grant and are exercisable according to the terms of the individual options agreement.
option agreements.
The Company granted 340,000355,000 and 908,500340,000 stock options, respectively, during the years ended July 31, 20092010 and 2008.2009. The weighted average grant date fair value of the options granted during 20092010 was $0.249$0.339 per share and the weighted average grant date fair value of the options granted during 20082009 was $0.517$0.249 per share. The fair values of options granted are estimated on the date of their grant using the Black-Scholes option pricing model based on the assumptions included in the table below. The expected term of stock option awards granted is generally based upon the “simplified” method for “plain vanilla” options discussed in SEC Staff Accounting Bulletin (“SAB”) No. 107, as amended by SAB No. 110. The expected volatility is derived from historical volatility of the Company'sCompany’s stock on the U.S. over-the-counter bulletin boardOTCBB for a period that matches the expected term of the option. The risk-free interest rate is the yield from a Treasury bond or note corresponding to the expected term of the option. The Company has not paid cash dividends and does not expect to pay cash dividends in the future. Forfeiture rates are based on management’s estimates. The fair value of each option granted during the years ended July 31, 20092010 and 20082009 was estimated using the following assumptions:
| | | | | | |
| | Year ended July 31, 2009 | | Year ended July 31, 2008 | | Year ended July 31, 2010 | | Year ended July 31, 2009 |
| Expected volatility | 91.63% - 110.18% | | 77.00% – 116.96% | | 112.21% – 116.86% | | 91.63% – 110.18% |
| Expected dividend yield | 0.00% | | 0.00% | | 0.00% | | 0.00% |
| Risk-free interest rate | 1.50% - 2.83% | | 2.45% – 4.23% | | 1.93% – 2.51% | | 1.50% – 2.83% |
| Expected life | 4.0 - 5.5 years | | 3.0 – 5.5 years | | 4.0 – 5.5 years | | 4.0 – 5.5 years |
| Forfeiture rate | 0.00% - 2.50% | | 0.00% – 2.50% | | 2.50% | | 0.00% – 2.50% |
A summary of the Company’s stock option activity for the two years ended July 31, 2010 and 2009 is as follows:
| | | | | | | | | | | | | | | | | |
| | | | | | | Weighted | | | Weighted average | | | | |
| | | | | | | Average | | | remaining | | | Aggregate | |
| | | | | | | Exercise | | | contractual term | | | Intrinsic | |
| | | Shares | | | Price | | | (years) | | | Value | |
Options outstanding, July 31, 2008 | | | 2,074,330 | | | $ | 0.593 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Options granted | | | 340,000 | | | $ | 0.338 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Options exercised | | | (26,666 | ) | | $ | 0.150 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Options forfeited | | | (37,500 | ) | | $ | 0.400 | | | | | | | | | |
| | | | | | | | | | | | | | | |
Options outstanding, July 31, 2009 | | | 2,350,164 | | | $ | 0.564 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Options granted | | | 355,000 | | | $ | 0.430 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Options exercised | | | (53,332 | ) | | $ | 0.150 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Options forfeited | | | (106,000 | ) | | $ | 0.501 | | | | | | | | | |
| | | | | | | | | | | | | | | |
Options outstanding, July 31, 2010 | | | 2,545,832 | | | $ | 0.557 | | | | 2.93 | | | $ | 37,633 | |
| | | | | | | | | | | | | |
Options expected to vest, July 31, 2010 | | | 2,511,082 | | | $ | 0.559 | | | | 2.89 | | | $ | 37,436 | |
| | | | | | | | | | | | | |
Options exercisable, July 31, 2010 | | | 2,043,332 | | | $ | 0.594 | | | | 2.12 | | | $ | 35,083 | |
| | | | | | | | | | | | | |
34
| | | Shares | | | Weighted Average Exercise Price | | | Weighted average remaining contractual term (years) | | | Aggregate Intrinsic Value | |
| Options outstanding, July 31, 2007 | | | 2,886,161 | | | $ | 0.376 | | | | | | | |
| Options granted * | | | 908,500 | | | $ | 0.774 | | | | | | | |
| Options exercised | | | (1,296,557 | ) | | $ | 0.321 | | | | | | | |
| Options forfeited | | | (423,774 | ) | | $ | 0.334 | | | | | | | |
| Options outstanding, July 31, 2008 | | | 2,074,330 | | | $ | 0.593 | | | | | | | |
| Options granted | | | 340,000 | | | $ | 0.338 | | | | | | | |
| Options exercised | | | (26,666 | ) | | $ | 0.150 | | | | | | | |
| Options forfeited | | | (50,833 | ) | | $ | 0.334 | | | | | | | |
| Options outstanding, July 31, 2009 | | | 2,336,831 | | | $ | 0.567 | | | | 3.40 | | | $ | 66,166 | |
| Options expected to vest, July 31, 2009 | | | 2,316,290 | | | $ | 0.568 | | | | 3.37 | | | $ | 65,380 | |
| Options exercisable, July 31, 2009 | | | 1,839,831 | | | $ | 0.589 | | | | 2.83 | | | $ | 50,266 | |
* 547,500 options were issued outside of the Company's 2000 Stock Option Plan.
Of the 2,336,8312,545,832 options outstanding at July 31, 2009, 1,251,0002010, 1,500,000 were issued under the 2000 Plan and 1,085,8311,045,832 were issued outside of shareholder approved plans. All of the options exercised forfeited and expired duringin the yearsyear ended July 31, 20092010 were granted outside of shareholder approved plans. All of the options forfeited in the year ended July 31, 2010 were granted under the 2000 Plan. All of the options exercised and 2008forfeited during the year ended July 31, 2009 were granted outside of shareholder approved plans.
DuringFor the year ended July 31, 2010, the Company received $1,000 from an existing option holder for the exercise of options to purchase 13,333 shares of common stock, and 24,195 shares were issued to other option holders upon the cashless exercise of 39,999 options. For the year ended July 31, 2009, the Company received $2,000 from an existing option holder for the exercise of options to purchase 13,333 shares of Common Stock,common stock, and 8,239 shares were issued to another option holder upon the cashless exercise of 13,333 options. DuringThe intrinsic value of the 53,332 options exercised for the year ended July 31, 2008, the Company received $86,000 from existing optionholders for the exercise of options to purchase 195,331 shares of Common Stock. On January 24, 2008, Gary Macleod, the Company’s former Chief Executive Officer and Director, provided the Company with a notice of cashless exercise with respect to options to purchase 1,500,000 shares of common stock issued to him on November 11, 2005, which vested in full upon his termination as Chief Executive Officer in December 2007. On February 29, 2008, the Company entered into a Separation and Release Agreement with Mr. Macleod (the “Separation Agreement”). Pursuant to the Separation Agreement, Mr. Macleod2010 was entitled to exercise options for 1,101,226 shares and received 550,000 shares for such cashless exercise, and forfeited options to purchase 398,774 shares, which if not forfeited would have resulted in an issuance of an additional 199,165 shares. Mr. Macleod also forfeited options to purchase 25,000 shares of the Company’s common stock awarded in October 2007. The intrinsic value of the 26,666 options exercised during the year ended July 31, 2009 was $8,000$13,000 on the dates exercised, and the intrinsic value of the 1,296,55726,666 options exercised duringfor the year ended July 31, 20082009 was $406,000$8,000 on the dates exercised. There was no tax effect on the exercise of options in the consolidated statements of cash flows because the Company has a full valuation allowance against its deferred income tax assets.
A summary of the status of the Company’s non-vested options and changes during the year ended July 31, 2009 is presented below.
| | | | | | Weighted Average Grant Date Fair Value | |
| Unvested at July 31, 2008 | | | 476,000 | | | $ | 0.500 | |
| Options granted | | | 340,000 | | | $ | 0.249 | |
| Options vested | | | (319,000 | ) | | $ | 0.473 | |
| Unvested at July 31, 2009 | | | 497,000 | | | $ | 0.345 | |
As of July 31, 2009,2010, there was approximately $91,000$111,000 of unrecognized costs related to outstanding stock options. These costs are expected to be recognized over a weighted average period of 1.421.94 years.
The following table sets forth the range of exercise prices, number of shares, weighted average exercise price, and remaining contractual lives by groups of similar price as of July 31, 2009:
| | | Options Outstanding | | | | | | Options Exercisable | |
| | | | | | Weighted | | | Weighted | | | | | | | |
| | | Number of | | | Average | | | Average | | | Number of | | | Weighted | |
| Range of | | Underlying | | | Exercise | | | Contractual | | | Underlying | | | Average | |
| Exercise Prices | | Shares | | | Price | | | Life (years) | | | Shares | | | Price | |
| 15¢ - 30¢ | | | 253,331 | | | $ | 0.182 | | | | 3.35 | | | | 253,331 | | | $ | 0.182 | |
| 31¢ - 60¢ | | | 1,126,000 | | | $ | 0.453 | | | | 3.59 | | | | 759,000 | | | $ | 0.491 | |
| 61¢ - 90¢ | | | 957,500 | | | $ | 0.802 | | | | 3.19 | | | | 827,500 | | | $ | 0.803 | |
| Total | | | 2,336,831 | | | $ | 0.567 | | | | 3.40 | | | | 1,839,831 | | | $ | 0.589 | |
5. ROYALTIES
The Company is a party to two licensing agreements and receives royalty income from the sale of its diagnostic monitoring hardware and software from SensorMedics and VivoMetrics.
Royalty income from these licenses amounted to $219,000$168,000 and $256,000$219,000 for the years ended July 31, 20092010 and 2008,2009, respectively. Royalties from SensorMedics amounted to $180,000$168,000 and $184,000$180,000 for the years ended July 31, 20092010 and 2008,2009, respectively. Royalties from VivoMetrics amounted to $39,000 and $72,000 for the yearsyear ended July 31, 2009 and 2008, respectively.2009. VivoMetrics ceased operations in July 2009, and filed for Chapter 11 bankruptcy protection in October 2009. VivoMetrics2009 and has not made a royalty payment since July 2009, and aggregate2009. Aggregate royalties receivable of $15,000 at July 31, 20092010 are net of $14,000 include a $10,000 allowance for doubtful accounts to reserve all outstanding receivables from VivoMetrics.
6. NOTES PAYABLE
The Company refinanced its then-existing bank debt in February 2007 by securing a $500,000 line of credit, which was set to expire in March, 2008. The debt was initially collateralized by certificates of deposit in the amount of $400,000 (which were classified as restricted cash), and bore interest at one percent per annum below prime rate. The Company retired $320,000 of the outstanding debt in March 2008 by redeeming certificates of deposit totaling $320,000. The remaining $180,000 note payable was extended to May 2008, bore interest at a rate of 6.50%, and was collateralized by the remaining $80,000 certificate of deposit in restricted cash. The Company retired this $180,000 balance in April 2008 with $100,000 cash and the proceeds from the redemption of the final $80,000 certificate of deposit in restricted cash.
Revolver.On August 28, 2008, the Company entered into a Note and Security Agreement (the “Agreement”) with four persons (the “Lenders”), pursuant to which the Lenders granted the Company a revolving credit line (the “Revolver”) in the aggregate principal amount of $300,000, secured by all of the Company’s personal property. The Lenders included a holder of more than 10% of the Company’s outstanding Common Stock,common stock, a director and executive officer of the Company who also holds more than 10% of the Company’s outstanding Common Stockcommon stock and an entity controlled by the Company’s Chairman. The Company was permitted to borrow and reborrow from time to time under the Revolver until October 31, 2008 (the “Maturity Date”). The interest rate payable on amounts outstanding under the Revolver was 11% per annum, and increased to 16% after the Maturity Date or after an Eventevent of Default.default. All amounts owing under the Revolver were required to be repaid by the Maturity Date, and amounts outstanding were prepayable at any time. On August 29, 2008, the Company drew down $300,000 under the Revolver. The Revolver was amended, effective October 31, 2008, to extend the Maturity Date until November 30, 2008. All principal and interest outstanding under the Revolver as of November 30, 2008 was repaid with proceeds from the sale of Series D Preferred Stock on December 1, 2008 as described in Note 7 below.
2010 Credit Facility.On March 31, 2010, the Company entered into a new Note and Security Agreement (the “Credit Facility Agreement”) with two of the Lenders (the “2010 Lenders”), pursuant to which the 2010 Lenders granted the Company a revolving credit line (the “Credit Facility”) in the aggregate principal amount of $1.0 million, secured by all of the Company’s personal property. The 2010 Lenders include a holder of more than 10% of the Company’s outstanding common stock and an entity controlled by the Company’s Chairman. The Company is permitted to borrow and reborrow from time to time under the Credit Facility until March 31, 2011 (the “Credit Facility Maturity Date”). The interest rate payable on amounts outstanding under the Credit Facility is 11% per annum, and increases to 16% after the Credit Facility Maturity Date or after an event of default. All amounts owing under the Credit Facility are required to be repaid by the Credit Facility Maturity Date, and amounts outstanding are prepayable at any time. As of July 31, 2010, the Company had drawn down $600,000 under the Credit Facility.
The $34,000$33,000 and $19,000$34,000 notes payable balances at July 31, 20092010 and 2008,2009, respectively, relate to the third-party financing of certain of the Company’s insurance policies. The notes payable outstanding as of July 31, 2009 are2010 relate to self-amortizing 7.69% installment loans which mature at various dates from December 20092010 to January 2010.2011. These loans incur interest at annual rates ranging from 5.94% to 8.49%.
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7. SHAREHOLDERS’ EQUITY
7. SHAREHOLDERS' EQUITY
DuringFor the year ended July 31, 2010, the Company received $1,000 from an existing option holder for the exercise of options to purchase 13,333 shares of common stock, and 24,195 shares were issued to other option holders upon the cashless exercise of 39,999 options. The Company also issued 315,000 shares of common stock for the year ended July 31, 2010 upon the conversion of an aggregate of 63 shares of Series D Preferred Stock pursuant to the terms described below. For the year ended July 31, 2009, the Company received $2,000 from an existing option holder for the exercise of options to purchase 13,333 shares of Common Stock,common stock, and 8,239 shares were issued to another option holder upon the cashless exercise of 13,333 options. The Company also received $49,000 from an existing warrant holder for the exercise of warrants to purchase 325,000 shares of Common Stock duringcommon stock for the year ended July 31, 2009. During the year ended July 31, 2008, the Company received $86,000 from existing optionholders for the exercise of options to purchase 195,331 shares of Common Stock, and issued 550,000 shares of Common Stock to Mr. Macleod pursuant to the cashless exercise described in Note 4, above. No warrants were exercised in the year ended July 31, 2008.
Series D Convertible Preferred Stock.
In April 2008, the Company authorized a new series of its Preferred Stock, par value $1.00 per share (the “Preferred Stock”), designated as Series D Convertible Preferred Stock (the “Series D Preferred Stock”). The Series D Preferred Stock has no preference with respect to dividends to the Company’s common stock, and is entitled to receive dividends when, as and if declared by the Company’s Board of Directors, together with the holders of the common stock, ratably on an “as-converted” basis. Each holder of a share of the Series D Preferred Stock has the right, at any time, to convert such share of Series D Preferred Stock into shares of Common Stock at an initial rate of 5,000 shares of Common Stock per share of Series D Preferred Stock. The holders of the Series D Preferred Stock are entitled to vote, on an “as-converted basis,” together with the holders of the Common Stock and holders of any other series of Preferred Stock or other class of the Company’s capital stock which are granted such voting rights as a single class on all matters, except as otherwise provided by law. In the event of any liquidation, dissolution or winding up of the affairs of the Company, either voluntarily or involuntarily, the holders of the Series D Preferred Stock will be entitled to a liquidation preference of $1,500 per share of Series D Preferred Stock prior to any distribution to the holders of the Common Stock. The Series D Preferred Stock ranks (1) pari passu in respect of the preferences as to dividends, distributions and payments upon the liquidation, dissolution or winding up of the Company to all shares of Series C Preferred Stock, par value $1.00 per share, of the Company and (2) senior in respect of the preferences as to dividends, distributions and payments upon the liquidation, dissolution or winding up of the Company to all shares of Common Stock. The Series D Preferred Stock is not redeemable.
April 2008 Offering. On April 7, 2008, the Company completed the sale of an aggregate of 1,000 shares of Series D Preferred Stock to certain private investors (collectively, the “Investors”) pursuant to a Stock Purchase Agreement entered into on April 3, 2008 (the “Stock Purchase Agreement”). The Investors include an executive officer of the Company, a holder of more than 10% of the outstanding Common Stock and a director and executive officer of the Company who also holds more than 10% of the outstanding Common Stock (collectively, the “Related Party Investors”). Dr. Jane Hsiao, who became a director and Chairman in October 2008, is trustee of one of the Investors which is not one of the Related Party Investors. The aggregate purchase price for the Series D Preferred Stock was $1,500,000, of which $795,000 was paid by the Related Party Investors.
December 2008 Offering. In December 2008, the Company sold an aggregate of 491 additional shares of its Series D Preferred Stock to certain private investors at a price of $1,500 per share pursuant to Stock Subscription Agreements entered between December 1, 2008 and December 2, 2008 (the sale of 286 shares closed on December 1, 2008 and the sale of 205 shares closed on December 2, 2008). The investors in the December 2008 Offering include a director of the Company, an entity controlled by the Company’s Chairman and certain of the Related Party Investors that participated in the April 2008 Offering (collectively, the “December Related Party Investors”). The aggregate purchase price for the Series D Preferred Stock was $736,500, of which $382,500 was paid by the December Related Party Investors. Of the $382,500 paid by the December Related Party Investors, $282,200 was paid from the proceeds of their respective interests in the Revolver described in Note 6 above.
January 2009 Offering. On January 28, 2009, pursuant to Stock Subscription Agreements accepted by the Company on that date, the Company completed the sale of an aggregate of 1,400 additional shares of Series D Preferred Stock at a price of $1,500 per share to certain of the Related Party Investors that participated in the December 2008 offering described above. The aggregate price paid for the shares issued in the January 2009 offering was $2.1 million.
The Series D Preferred Stock was issued in each of the above transactions at $1,500 per share, which is equivalent to $0.30 per share of Common Stock on an “as-converted” basis. The closing price of the Common Stock on the over-the-counter bulletin board was $0.53, $0.36, $0.38 and $0.43, respectively, on each of April 7, 2008, December 1, 2008, December 2, 2008 and January 28, 2009, resulting in beneficial conversion features of $1,150, $300, $400 and $650, respectively, per share of Series D Preferred Stock on the respective issue dates. In accordance with the guidance in FASB Emerging Issues Task Force Issue Nos. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratio,” and 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments,” the $2.2 million aggregate beneficial conversion feature of the Series D Preferred Stock on the issue dates was deemed a discount on the issuance of the shares and was recorded as an increase to additional paid in capital in the consolidated balance sheets. Because the Series D Preferred Stock was immediately convertible to Common Stock, the portion of the $2.2 million aggregate intrinsic value applicable to a closing date is deemed a dividend paid to the investors on such closing date. Such deemed dividends have been recorded as increases in losses attributable to common shareholders and, in the absence of retained earnings, as reductions of additional paid in capital.
The Company has three classes of Preferred Stock. Holders of Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock are entitled to vote with the holders of common stock as a single class on all matters.
Series B Preferred Stock is not redeemable by the Company and has a liquidation value of $100 per share, plus declared and unpaid dividends, if any. Dividends are non cumulative,non-cumulative, and are at the rate of $10 per share, if declared.
Series C Preferred Stock is redeemable by the Company at a price of $0.10 per share upon 30 days prior written notice. This series has a liquidation value of $1.00 per share plus declared and unpaid dividends, if any. Dividends are non-cumulative, and are at the rate of $0.10 per share, if declared. Each share of Series C Preferred Stock is convertible into 25 shares of the Company’s common stock upon payment of a conversion premium of $4.20 per share of common stock. The conversion rate and the conversion premium are subject to adjustments in the event of stock splits, stock dividends, reverse stock splits and certain other events, as defined.
events.
Series D Preferred Stock is not redeemable by the Company. This series has a liquidation value of $1,500 per share, plus declared and unpaid dividends, if any. Each share of Series D Preferred Stock is convertible into 5,000 shares of the Company’s common stock. The conversion rate is subject to adjustments in the event of stock splits, stock dividends, reverse stock splits and certain other events,events.
December 2008 Offering.In December 2008, the Company sold an aggregate of 491 shares of its Series D Preferred Stock to certain private investors at a price of $1,500 per share pursuant to Stock Subscription Agreements entered between December 1, 2008 and December 2, 2008 (the sale of 286 shares closed on December 1, 2008 and the sale of 205 shares closed on December 2, 2008). The investors in the December 2008 Offering included two directors of the Company, an entity controlled by the Company’s Chairman and a holder of more than 10% of the Company’s common stock (collectively, the “Related Party Investors”). The aggregate purchase price for the Series D Preferred Stock was $736,500, of which $382,500 was paid by the Related Party Investors. Of the $382,500 paid by the Related Party Investors, $282,200 was paid from the proceeds of their respective interests in the Revolver described in Note 6 above.
January 2009 Offering.On January 28, 2009, pursuant to Stock Subscription Agreements accepted by the Company on that date, the Company completed the sale of an aggregate of 1,400 additional shares of Series D Preferred Stock at a price of $1,500 per share to certain of the Related Party Investors that participated in the December 2008 offering described above. The aggregate price paid for the shares issued in the January 2009 offering was $2.1 million.
The Series D Preferred Stock was issued in each of the above transactions at $1,500 per share, which is equivalent to $0.30 per share of common stock on an “as-converted” basis. The closing price of the common stock on the OTCBB was $0.36, $0.38 and $0.43, respectively, on each of December 1, 2008, December 2, 2008 and January 28, 2009, resulting in beneficial conversion features of $300, $400 and $650, respectively, per share of Series D Preferred Stock on the respective issue dates. In accordance with GAAP, the $1.1 million aggregate beneficial conversion feature of the Series D Preferred Stock on the issue dates was deemed a discount on the issuance of the shares and was recorded as defined.
an increase to additional paid in capital in the balance sheet. Because the Series D Preferred Stock was immediately convertible to common stock, the portion of the $1.1 million aggregate intrinsic value applicable to a closing date was deemed a dividend paid to the investors on such closing date. Such deemed dividends have been recorded as increases in losses attributable to common shareholders and, in the absence of retained earnings, as reductions of additional paid in capital.
No preferred stock dividends have been declared as of July 31, 2009.2010.
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The Company has no common stock warrants outstanding as of July 31, 2009. At July 31, 2008, the Company had warrants to purchase 325,000 shares of common stock outstanding which had an expiration date of August 17, 2009 and were exercisable at $0.15 per share. All such warrants were exercised on July 30, 2009.
8. BASIC AND DILUTED LOSS PER SHARE
Basic net loss per common share is computed by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed giving effect to all dilutive potential common shares that were outstanding during the period. Diluted potential common shares consist of incremental shares issuable upon exercise of stock options and warrants and conversion of preferred stock. In computing diluted net loss per share for the years ended July 31, 20092010 and 2008,2009, no dilution adjustment has been made to the weighted average outstanding common shares because the assumed exercise of outstanding options and warrants and the conversion of preferred stock would be anti-dilutive.
Potential common shares not included in calculating diluted net loss per share are as follows:
| | | | | | | | | |
| | | July 31, 2010 | | | July 31, 2009 | |
| Stock options | | | 2,545,832 | | | | 2,350,164 | |
| Series C Preferred Stock | | | 1,551,200 | | | | 1,551,200 | |
| Series D Preferred Stock | | | 14,140,000 | | | | 14,455,000 | |
| | | | | | | |
Total | | | 18,237,032 | | | | 18,356,364 | |
| | | | | | | |
| | | | | | | |
| Stock options | | | 2,336,831 | | | | 2,074,330 | |
| Stock warrants | | | – | | | | 325,000 | |
| Series C Preferred Stock | | | 1,551,200 | | | | 1,551,200 | |
| Series D Preferred Stock | | | 14,455,000 | | | | 5,000,000 | |
| Total | | | 18,343,031 | | | | 8,950,530 | |
9. RELATED PARTY TRANSACTIONS
Dr. Marvin A. Sackner, the Company’s CEO and director, formerly leased office space to the Company on a month to month basis in North Bay Village, Florida under an arrangement with the Company which was discontinued effective October 31, 2007. The Company reimbursed Dr. Sackner for the cost of the space monthly. The amount reimbursed to Dr. Sackner by the Company for the year ended July 31, 2008 was $5,000.
The Company signed a five year lease for office space in Miami, Florida with a company controlled by Dr. Phillip Frost, who is the beneficial owner of more than 10% of the Company’s Common Stock.common stock. The current rental payments under the Miami office lease, which commenced January 1, 2008, are approximately $4,000 per month for the first year and escalate 4.5% annually over the life of the lease. InFor the years ended July 31, 20092010 and 2008,2009, the Company recorded rent expense related to the Miami lease of $55,000 and $49,000, and $28,000, respectively.
The Company signed a three year lease for warehouse space in Hialeah, Florida with a company jointly controlled by the Dr. Frost and Dr. Jane Hsiao, the Company’s Chairman. The rental payments under the Hialeah warehouse lease, which commenced February 1, 2009, are approximately $5,000 per month for the first year and escalate 3.5% annually over the life of the lease. The Company recorded $54,000 and $29,000 of rent expense related to the Hialeah lease for the years ended July 31, 2010 and 2009, respectively.
As more fully described in Note 6, the Company entered into a $1.0 million Credit Facility in March 2010 with both an entity controlled by Dr. Frost and an entity controlled by Dr. Hsiao. Advances under the Credit Facility totaled $600,000 and $0 for the years ended July 31, 2010 and 2009, respectively, and $600,000 was outstanding as of July 31, 2010. The Company accrued interest expense related to the Credit Facility of approximately $17,000 for the year ended July 31, 2009.
2010, and such $17,000 interest payable amount remained outstanding as of July 31, 2010. Adam Jackson, theDr. Hsiao, Dr. Frost and directors Steven Rubin and Rao Uppaluri are each significant stockholders, officers and/or directors of SafeStitch Medical, Inc. (“SafeStitch”), a publicly-traded, developmental-stage medical device manufacturer, Aero Pharmaceuticals, Inc. (“Aero”), a privately held pharmaceutical distributor, Cardo Medical, Inc. (“Cardo”), a publicly-traded medical device company, and SearchMedia Holdings Limited (“SearchMedia”), a publicly-traded media company operating primarily in China. The Company’s Chief Financial Officer also serves as the Chief Financial Officer and supervises the accounting staffs of SafeStitch Medical, Inc. (“SafeStitch”), a publicly-traded, developmental-stage medical device manufacturer, and Aero Pharmaceuticals, Inc. (“Aero”),under a privately held pharmaceutical distributor. The Company’s Chairman, Dr. Jane Hsiao, also serves as Chairman of SafeStitch and President of Aero. Director Steven Rubin also serves as a director of SafeStitch and as director and Secretary of Aero, and director Rao Uppaluri also serves as Treasurer of Aero. Theboard-approved cost sharing arrangement whereby the total salaries of the accounting staffs of NIMS, SafeStitch and Aero have been sharedare shared. Since December 2009, the Company’s Chief Legal Officer has served under a similar board-approved cost sharing arrangement since March 2008.as Corporate Counsel of SearchMedia and as the Chief Legal Officer of each of SafeStitch and Cardo. The Company reimbursed Aero and SafeStitch aggregate fees of $42,000 and $15,000 for the years ended July 31, 2009 and 2008, respectively, for the sharing of costs under this arrangement. These amounts have been included inrecorded additions to selling, general and administrative costs and expenses into account for the accompanying consolidated statementssharing of operations.costs under these arrangements of $53,000 and $42,000 for the years ended July 31, 2010 and 2009, respectively. Aggregate accounts payable to SafeStitch and Aero totaled approximately $10,000 and $3,000 at July 31, 2010 and 2009, respectively.
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Dr. Frost and Dr. Marvin Sackner, the Company’s President, Chief Executive Officer and a director, each serves as a director of Continucare Corporation (“Continucare”), a publicly-traded provider of outpatient healthcare services. The Company markets its products to Continucare and other healthcare service providers in the normal course of business. For the year ended July 31, 2010, the Company recorded net product sales revenues to Continucare of approximately $22,000. No such revenues were recorded for the year ended July 31, 2009. These related party sales were approved by the Company’s Audit Committee. No accounts receivable from Continucare were outstanding as of July 31, 2010.
During 2008 and until August 2009, Dr. Hsiao isserved as a director of Great Eastern Bank of Florida, a bank where the Company maintains a bank account in the normal course of business. As of July 31, 2010 and 2009, the Company had approximately $150,000 and $846,000 on deposit with Great Eastern Bank of Florida, including approximatelyFlorida. Approximately $125,000 and $821,000 of these balances were collateralized by repurchase contracts for US Government securities.securities at July 31, 2010 and 2009, respectively.
On January 24, 2008, Mr. Macleod provided the Company with a notice of cashless exercise with respect to options to purchase 1,500,000 shares of common stock issued to him on November 11, 2005, which vested in full upon his termination as Chief Executive Officer in December 2007. Pursuant to the Separation Agreement described in Note 4 above, Mr. Macleod received only 550,000 shares for such cashless exercise, instead of the 749,165 shares to which he would otherwise have been entitled. He also forfeited options to purchase 25,000 shares of our common stock awarded in October, 2007. Pursuant to the Separation Agreement and as provided for in his Employment Agreement dated November 11, 2005, Mr. Macleod was entitled to one year’s severance. Such severance of $126,000 was paid in connection with his termination as Chief Executive Officer in December 2007. Mr. Macleod also agreed to repurchase for approximately $12,000, furniture and equipment previously sold to the Company at that price. The Separation Agreement also contained mutual releases and provided that Mr. Macleod would resign as a Director of the Company, which he did on February 29, 2008.
10. COMMITMENTS
Leases.
Leases.
The Company is obligated under various operating lease agreements for office, warehouse and retail space. Generally, the lease agreements require the payment of base rent plus escalations for increases in building operating costs and real estate taxes. Rental expense under these operating leases amounted to $106,000$129,000 and $82,000$106,000 for the years ended July 31, 20092010 and 2008,2009, respectively. At July 31, 2009,2010, the Company was obligated under non-cancellable operating leases to make future minimum lease payments (excluding sales taxes) as follows:
| | | | | |
| Year Ending July 31, | | | | |
| |
| 2011 | | $ | 130,000 | |
| 2012 | | | 105,000 | |
| 2013 | | | 32,000 | |
| 2014 | | | — | |
| | | | |
| | | $ | 267,000 | |
| | | | |
| | | |
| | | | |
| 2010 | | $ | 123,000 | |
| 2011 | | | 127,000 | |
| 2012 | | | 95,000 | |
| 2013 | | | 24,000 | |
| | | $ | 369,000 | |
Product Development and Supply Agreement.
On September 4, 2007, the Company executedentered into a Product Development and Supply Agreement (the “Agreement”) with Sing Lin Technologies Co. Ltd., a company based in Taichung, Taiwan ("(“Sing Lin"Lin”). Pursuant to the Agreement, the Company consigned to Sing Lin the development and design of the next generation Exer-Rest®, Somno-Ease™ and Exer-Rest® Plusrelated devices. Sing Lin will also manufacture all of the Company’s acceleration therapeutic platforms. The Agreement commenced as of September 3, 2007 and hashad a term that extendsextended three years from the acceptance by NIMS of the first run of production units by NIMS.units. Thereafter, the Agreement automatically renewsrenewed for successive one year terms unless either party sendssent the other a notice of non-renewal. Either party maywas permitted to terminate the Agreement with ninety days prior written notice. Upon termination, each party’s obligations under the Agreement willwere to be limited to obligations related to confirmed orders placed prior to the termination date.
Pursuant to the Agreement, Sing Lin designed, developed and manufactured the tooling required to manufacture the acceleration therapeutic platforms for a total cost to the Company of $471,000. Sing Lin will utilizeutilized the tooling in the performance of its production obligations under the Agreement. The Company paid Sing Lin $150,000 of the tooling cost upon execution of the Agreement and $150,000 upon the Company’s approval of the product prototype concepts and designs. The balance of the final tooling cost became due and payable in September 2008 upon acceptance of the first units produced using the tooling, and was paid in full during the year ended July 31, 2009. These amounts have been recorded as tooling costs, and are included in tooling and equipment, net.
The net book value of the tooling at July 31, 2010 was approximately $283,000.
Under the now-terminated Agreement, the Company also grantsgranted Sing Lin the exclusive distribution rights for the products in certain countries in the Far East, including Taiwan, China, Japan, South Korea, Malaysia, Indonesia and certain other countries. Sing Lin has agreed not to sell the Products outside its geographic areas in the Far East.
38
The Agreement provided for the Company has committed to purchase approximately $2.6 million of Exer-Rest® and Somno-Ease™ units within one year of the September 2008 acceptance of the final product. Additionally,The Agreement further provided for the Company has agreed to purchase $4.1 million and $8.8 million of Exer-Rest®, Exer-Rest® Plus and Somno-Ease™ products in the second and third years following such acceptance, respectively. These minimum purchase commitment amounts arewere based upon current2007 product costs multiplied by volume commitments. Through July 31, 2009,2010, the Company had paid Sing Lin $1.6$1.7 million in connection with orders placed through that date. Of this amount, $144,000$90,000 is included in advances to contract manufacturer in the accompanying consolidated financial statements. As of July 31, 2009,2010, the Company has approximately $110,000 of net receivables from Sing Lin. As of July 31, 2010, aggregate minimum future purchase commitmentspurchases under the Agreement totaled approximately $13.9 million.
As of October 15, 2009,July 31, 2010, the Company had not placed orders sufficient to satisfy its commitmentmeet the first-year or second-year minimum purchase obligations under the Agreement. The Company notified Sing Lin in June 2010 that it was terminating the Agreement effective September 2010, and Sing Lin in July 2010 demanded that the Company place orders sufficient to fulfill the three year minimum purchase a minimum number of unitsobligations in the first year after acceptance of the final product. The Company’s discussions with Sing Lin are ongoing, and the Company expects its commitments under the Agreement to be modified to reflect current market conditions.Agreement. There can be no assurance that the Agreement will be modified on terms acceptable to the Company or at all, or that Sing Lin will not attempt to enforce its rightsremedies under the Agreement.Agreement, or pursue other potential remedies.
11. LONG-LIVED ASSETS
The Company’s long-lived assets include furniture and equipment, computers, tooling, websites and software, leasehold improvements, patents and trademarks and long-term investments.trademarks. Tooling and equipment, net of accumulated depreciation, consisted of the following at July 31, 20092010 and 20082009 (in thousands):
| | | | | | | | | | | | | |
| | | Estimated | | | July 31, | | | July 31, | |
| | | Useful Life | | | 2010 | | | 2009 | |
| Tooling and equipment (Note 10) | | 5 years | | $ | 471 | | | $ | 471 | |
| Furniture and fixtures, leasehold improvements, office equipment and computers | | 3 – 5 years | | | 99 | | | | 94 | |
| Website and software | | 3 years | | | 26 | | | | 26 | |
| | | | | | | | | | | |
| | | | | | | | 596 | | | | 591 | |
| Less accumulated depreciation | | | | | | | (254 | ) | | | (131 | ) |
| | | | | | | | | | | |
| Tooling and equipment, net | | | | | | $ | 342 | | | $ | 460 | |
| | | | | | | | | | | |
| | Estimated Useful Life | | July 31, 2009 | | | July 31, 2008 | |
| Tooling and equipment | 5 years | | $ | 471 | | | $ | 442 | |
| Furniture and fixtures, leasehold improvements, office equipment and computers | 3 – 5 years | | | 94 | | | | 51 | |
| Website and software | 3 years | | | 26 | | | | – | |
| | | | | 591 | | | | 493 | |
| Less accumulated depreciation | | | | (131 | ) | | | (23 | ) |
| Tooling and equipment, net | | | $ | 460 | | | $ | 470 | |
Depreciation expense was $123,000 and $114,000 and $6,000 duringfor the years ended July 31, 20092010 and 2008,2009, respectively. Depreciation on the tooling commenced in August 2008 based upon an estimated useful life of five years. TenThirteen Exer-Rest® SL AT3800 and TLAT4700 demonstration units are included in furniture and fixtures at an aggregate cost of $31,000.$40,000. These units were placed in service in fiscal 2009 and 2010, and are being depreciated based upon a five-year estimated useful life.lives. Five Exer-Rest® AT demonstration units were previously included in furniture and fixtures at an aggregate cost of $23,000. All five of these units were disposed of in the year ended July 31, 2009 and the Company recorded an aggregate $17,000 loss on the disposals, which is included in other expense in the accompanying consolidated comprehensive statements of operations.
As of July 31, 2010, tooling and equipment with a net book value of approximately $283,000 remains in possession of Sing Lin and its suppliers in Asia. The ultimate realization of these assets is dependent on the Company’s ability to resolve the issue with Sing Lin, and no amounts have been provided for potential losses on these assets.
Patents and trademarks havehad been fully amortized as of October 31, 2007. Amortization2007, and the Company did not record any amortization expense was $0 during each offor the fiscal years ended July 31, 20092010 and 2008.
The Company’s long-term investments consisted of 940,000 shares (approximately a 2% interest) of LifeShirt.com, Inc. (now VivoMetrics, Inc.), a privately-held company. These shares were obtained as consideration for the Company’s assignment of all of its rights, title and interest in certain patents and intellectual property as well as a non-exclusive, worldwide license under all of the Company’s patents and intellectual property for use in connection with certain products to VivoMetrics. The shares are carried at zero value in the accompanying consolidated financial statements. The Company was informed that, in July 2008, VivoMetrics entered into a series of debt and equity transactions with its largest creditor to effect a recapitalization which diluted the Company’s holdings to the point where NIMS’ investment became worthless.
12. INCOME TAXES
The Company providesaccounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”) using anthe asset and liability based approach. Deferred incomemethod, the objective of which is to establish deferred tax assets and liabilities are recorded to reflectfor the tax consequences in future years of temporary differences between the carrying amountsfinancial reporting and the tax bases of the Company’s assets and liabilities for financial statement and incomeat enacted tax purposes. SFAS No. 109 provides that the Company recognize income tax benefits for loss carryforwards. The tax benefits recognized mustrates expected to be reduced by ain effect when such amounts are realized or settled. A valuation allowance ifrelated to deferred tax assets is recorded when it is more likely than not that loss carryforwardssome portion or all of the deferred tax assets will expire before the Company is able to realize their benefit, or if future deductibility is uncertain.not be realized.
Effective August 1, 2007, the Company adopted the provisions of the Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertaintyan accounting standard on uncertainty in Income Taxes, an interpretation of FASB Statement No.109” (“FIN 48”). FIN 48income taxes which clarifies the accounting for uncertainties in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109 and prescribes a recognition threshold and measurement attribute for financial disclosure of tax positions taken or expected to be taken on a tax return. In addition, FIN 48this accounting standard provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The application of FIN 48this accounting standard did not impact the Company’s financial position, results of operations or cash flows for the years ended July 31, 20092010 and 2008.2009.
39
The Company files its tax returns in the U.S. federal jurisdiction, Canada federal jurisdiction and with various U.S. states and the Ontario province inof Canada. The Company is subject to tax audits in all jurisdictions for which it files tax returns. Tax audits by their very nature are often complex and can require several years to complete. There are currently no tax audits that have commenced with respect to income tax or any other returns in any jurisdiction. Tax years ranging from 20052007 to 20082009 remain open to examination by various taxing jurisdictions as the statute of limitations has not expired. Because the Company is carrying forward income tax attributes, such as net operating losses and tax credits from 20042006 and earlier tax years, these attributes can still be audited when utilized on returns filed in the future. It is the Company’s policy to include income tax interest and penalties expense in its tax provision.
The difference between income taxes at the statutory federal income tax rate and income taxes reported in the consolidated statements of operations are attributable to the following:
| | | | | | | | | | |
| | | July 31, 2009 | | | July 31, 2008 | | | July 31, 2010 | | July 31, 2009 | |
| Income tax benefit at the federal statutory rate | | | 34.00 | % | | | 34.00 | % | | | 34.00 | % | | | 34.00 | % |
| State and local income taxes, net of effect of federal taxes | | | 3.22 | | | | 3.61 | | | 3.11 | | 3.22 | |
| Expiration of net operating losses | | | (18.33 | ) | | | (33.85 | ) | | | (0.11 | ) | | | (18.33 | ) |
| Other, net | | | (0.40 | ) | | | (0.14 | ) | | | (0.40 | ) | | | (0.40 | ) |
| Increase in valuation allowance | | | (18.49 | ) | | | (3.62 | ) | | | (36.60 | ) | | | (18.49 | ) |
| | | | | | | |
| Provision for income tax | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % |
| | | | | | | |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets consist of the following (in thousands):
| | | | | | | | | | |
| | | July 31, 2009 | | | July 31, 2008 | | | July 31, 2010 | | July 31, 2009 | |
| Federal and State net operating loss | | $ | 4,038 | | | $ | 3,975 | | | $ | 4,568 | | $ | 4,038 | |
Foreign net operating loss | | | 61 | | | | – | | |
| Foreign net operating loss | | | 145 | | 61 | |
| Stock-based compensation and other | | | 359 | | | | 153 | | | 354 | | 359 | |
| | | | 4,458 | | | | 4,128 | | | | | | |
| | | | 5,067 | | 4,458 | |
| Less: Valuation allowance | | | (4,458 | ) | | | (4,128 | ) | | | (5,067 | ) | | | (4,458 | ) |
| | | | | | | |
| Net deferred tax asset | | $ | – | | | $ | – | | | $ | — | | $ | — | |
| | | | | | | |
At July 31, 2009,2010, the Company hashad available Federal and State net operating loss carry forwards of approximately $10.7$12.1 million and Foreign net operating loss carry forwards of approximately $0.2$0.5 million which expire in various years through 2029.2030. Total Federal and State net operating loss carry forwards include approximately $2.0 million generated from the exercise of non-statutory stock options. The net operating loss carry forwards may be subject to limitation due to change of ownership provisions under section 382 of the Internal Revenue Code and similar state provisions.
A valuation allowance is required to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, management has determined that a full $4.5$5.1 million valuation allowance at July 31, 20092010 ($4.14.5 million at July 31, 2008)2009) was necessary. The increases in the valuation allowance for the years ended July 31, 2010 and 2009 were $600,000 and 2008 were $330,000, and $219,000, respectively. Of the total increase in the valuation allowance for the years ended July 31, 2010 and 2009, approximately $5,000 and 2008, approximately $3,000, and $153,000, respectively, was attributed to the exercise of non-statutory stock options.
The Company paid no income taxes in 20092010 or 2008.
2009.
The following table reconciles the Company’s losses before income taxes by jurisdiction (in thousands):
| | | | | | | | | |
| | | Year Ended | | | Year Ended | |
| | | July 31, 2010 | | | July 31, 2009 | |
| U.S. | | $ | (1,395 | ) | | $ | (1,578 | ) |
| Foreign | | | (229 | ) | | | (190 | ) |
| | | | | | | |
| Total | | $ | (1,624 | ) | | $ | (1,768 | ) |
| | | | | | | |
40
| | | Year Ended July 31, 2009 | | | Year Ended July 31, 2008 | |
| U.S. | | $ | (1,578 | ) | | $ | (1,836 | ) |
| Foreign | | | (190 | ) | | | – | |
| Total | | $ | (1,768 | ) | | $ | (1,836 | ) |
13. EMPLOYEE BENEFIT PLANS
Effective July 2008, the Non-Invasive Monitoring Systems 401(k) Plan (the “401k Plan”) permits employees to contribute up to 100% of qualified annual compensation up to annual statutory limitations. Employee contributions may be made on a pre-tax basis to a regular 401(k) account, or on an after-tax basis to a “Roth” 401(k) account. The Company will contribute to the 401k Plan a “safe harbor” match of 100% of each participant’s contributions to the 401k Plan up to a maximum of 4% of the participant’s qualified annual earnings. TheFor the years ended July 31, 2010 and 2009, the Company recorded approximately $15,000 of compensation expense related to matching contributions to the 401k Plan for the year ended July 31, 2009. No matching contributions were included in compensation expense for the year ended July 31, 2008.totaling approximately $19,000 and $15,000, respectively.
14. CONCENTRATIONS OF RISK
Financial instruments that potentially subject the Company to risk consist principally of cash, royalties and other receivables, and purchases and advances to contract manufacturer.
Cash.The Company at times may have cash deposits in excess of the Federal Deposit Insurance Corporation (“FDIC”) limit. The Company maintains its cash with banks and deposits above the FDIC limit are maintained in sweep accounts collateralized by overnight repurchase agreements. The Company has not experienced losses on these accounts and management believes that the Company is not exposed to significant risks on such accounts.
Royalties and Other Receivables.The Company currently grants credit to a limited number of customers, substantially all of whom are corporations and medical providers located throughout the United States and Canada. The Company typically does not require collateral from these customers.
Purchases from and Advances to Contract Manufacturer.Virtually 100% of the Company’s active inventory ishas been acquired from Sing Lin pursuant to the now-terminated Agreement. Advances and accounts payable to Sing Lin at July 31, 20092010 were approximately $144,000$90,000 and $18,000,$41,000, respectively. Should Sing Lin be unable or unwilling to deliver inventory orders to the Company, the loss of funds advanced and delayed product deliveries could have a material adverse effect on the Company’s consolidated financial position, results of operations and liquidity. InThe Company notified Sing Lin in June 2010 that it was terminating the event of a delivery interruption,agreement effective September 2010. If the Company would have the rightis unable to establish a contract and obtain a sufficient alternative supply from Sing Lin or another supplier, it may not be able to procure its products from other vendors, howeveradditional inventory on a timely basis or in the quantities required. Sing Lin and its subcontractors currently maintainsmaintain custody of the Company’s specialized tooling, which could adversely impact the Company’s ability to reallocate production to such other vendors. The Company believes its relationship with
Major Customers.Approximately 28% of the Company’s revenues result from sales to authorized distributors outside the United States. Sales to foreign distributors generally require prepayment or letter of credit guarantees. Because Sing Lin served as both a vendor and a customer prior to the termination of the Agreement, the Company extended credit terms to Sing Lin and offsets collections from Sing Lin for sales against payments to Sing Lin for inventory purchases. For the year ended July 31, 2010, Sing Lin accounted for approximately 25% of the Company’s total revenues, and accounts receivable from Sing Lin at July 31, 2010 were approximately $152,000, representing approximately 72% of total accounts receivable. It is gooduncertain whether Sing Lin will continue to act as the Company’s authorized distributor in Asia, and that it is highly unlikely that it will refuse to fill future orders.
the loss of Sing Lin as a customer could have a material adverse effect on the Company’s consolidated financial position, results of operations and liquidity.
15. RECENT ACCOUNTING PRONOUNCEMENTS
Noncontrolling Interests —Effective August 1, 2008, the Company adopted SFAS 157, which defines fair value, establishes a framework for measuring fair value and requires additional disclosures about fair value measurements. In February 2008, the Financial Accounting Standards Board (“FASB”) delayed the effective date of SFAS 157 for one year for all nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Management has determined that the adoption of SFAS 157 did not have a material impact on the Company’s financial position and results of operations.
In April 2009, the FASB issued FASB Staff Position FAS-157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”). FSP FAS 157-4 provides guidelines for making fair value measurements more consistent with the principles presented in SFAS 157. FSP FAS 157-4 supersedes FSP FAS 157-3 and provides additional authoritative guidance in determining whether a market is active or inactive and whether a transaction is distressed. FSP FAS 157-4 is applicable to all assets and liabilities (i.e. financial and nonfinancial) and will require enhanced disclosures. FSP FAS 157-4 will be effective for the Company’s fiscal year beginning August 1, 2009. The Company does not expect the adoption of FSP FAS 157-4 to have a material impact on its consolidated financial statements.
Effective August 1, 2008, the Company adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities- including an amendment of FASB Statement 115” (“SFAS 159”). This statement provides companies with an option to report selected financial assets and liabilities at fair value. The Company has not elected to use the fair value option allowed by SFAS 159.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Non-Controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS No. 160”). This statement requires that noncontrolling or minority interests in subsidiaries be presented in the consolidated statement of financial position within equity, but separate from the parents’ equity, and that the amount of the consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income. SFAS No. 160 will be effective for the Company’s fiscal year beginning August 1, 2009. Currently, the Company does not anticipate that this statement will have a significant impact on its financial statements.
In June 2007, the FASB ratified Emerging Issues Task Force Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities” (“EITF 07-3”). EITF 07-3 requires non-refundable advance payments for goods and services to be used in future research and development activities to be recorded as an asset and the payments to be expensed when the research and development activities are performed. EITF 07-3 became effective for the Company’s fiscal year beginning August 1, 2008. Management has determined that the application of this standard has not had a significant impact on its financial statements.
In December 2007, the FASB ratified the consensus reached on Emerging Issues Task Force Issue No. 07-1, “Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property” (“EITF 07-1”). EITF 07-1 defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. EITF 07-1 will be effective for the Company’s fiscal year beginning August 1, 2009. The Company is currently evaluating the potential impact of this standard on the financial statements.
In April 2009, the FASB issued FASB Staff Positions FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2”) and (“FSP FAS 124-2”). FSP FAS 115-2 and FSP FAS 124-2 provide additional guidance to provide greater clarity about the credit and noncredit component of an other-than-temporary impairment event and to improve presentation and disclosure of other than temporary impairments in the financial statements. FSP FAS 115-2 and FSP FAS 124-2 will be effective for the Company’s fiscal year beginning August 1, 2009. The Company is currently evaluating the potential impact of the adoption of FSP FAS 115-2 on its consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1”) and (“APB 28-1”). FSP FAS 107-1 amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments”, to require disclosures about fair value of financial instruments in interim as well as in annual financial statements and amends APB Opinion No. 28 “Interim Financial Reporting”, to require those disclosures in interim financial statements. FSP FAS 107-1 and APB 28-1 will be effective for the Company’s fiscal year beginning August 1, 2009. The Company is currently evaluating the potential impact of the adoption of FSP FAS 107-1 on its consolidated financial statements.
Effective July 31, 2009, the Company adopted SFAS No. 165, “Subsequent Events.” SFAS No. 165 establishes generalauthoritative guidance which established accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of accounting for and disclosure of eventsa subsidiary. It clarifies that occur aftera noncontrolling interest in a subsidiary is an ownership interest in the balance sheet date but beforeconsolidated entity that should be reported as equity in the consolidated financial statements are issued or ready to be issued.statements. The adoption of SFAS 165this guidance has not had a material impact on the Company’s consolidated financial statements. The Company has evaluated subsequent events through October 28, 2009, which is the date the financial statements were available to be issued.
Codification —In June 2009, the FASB issued SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)” (‘Consolidation of Variable Interest Entities’) (“SFAS 167”). These amendments primarily include: (i) amending the guidance for determining whether an entity is a variable interest entity (“VIE”); and (ii) amending the criteria for identification of the primary beneficiary of a VIE. SFAS No. 167 also requires the Company to continually reassess whether the Company is the primary beneficiary of a VIE and requires certain enhanced disclosures in the financial statements about the Company’s relationships with VIEs. The amended provisions of SFAS No. 167 are effective for the Company’s financial statements for the period beginning on August 1, 2010, and earlier adoption is prohibited. The Company does not believe that adoption of the amended provisions of SFAS No. 167 will have a material effect on the Company’s consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, “The FASBFinancial Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162”Board (“SFAS No. 168”FASB”). SFAS No. 168 replaces SFAS No. 162 and establishes established the FASB Accounting Standards Codification™ (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with GAAP. All existing accounting standard documents are superseded by the Codification and any accounting literature not included in the Codification will not be authoritative. However, rules and interpretive releases of the SEC issued under the authority of federal securities laws will continue to be sources of authoritative GAAP for SEC registrants. SFAS No. 168 will beThe Codification became effective beginning with the Company’s first fiscal quarter of 2010. Therefore, all references made by it to GAAP in its consolidated financial statements will use the new Codification numbering system. The Codification does not change or alter existing GAAP and, therefore, it ishas not expected to havehad any impact on the Company’s consolidated financial statements.
41
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
The information required by Item 304(a) of Regulation S-K was previously reported. There are no disagreements or reportable events required to be reported under Item 304(b) of Regulation S-K.
Item 9A(T). | Controls and Procedures. |
9A(T). Controls and Procedures.
The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e)) as of July 31, 2009.2010. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of that date, the Company’s disclosure controls and procedures were effective as of the end of the period covered by this annual report. This annual report does not include an attestation report of our registered public accounting firm, Morrison, Brown, Argiz & Farra, LLP, regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
For the period ended July 31, 2009,2010, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, management (with the participation of our principal executive officer and principal financial officer) conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that, as of July 31, 2009,2010, our internal control over financial reporting was effective.
This annual report does not include an attestation report of our registered public accounting firm, Morrison, Brown, Argiz & Farra, LLP, regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Changes in Internal Controls Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the last quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. | Other Information. |
Item 9B. Other Information.
None.
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PART III
Item 10. | Directors, Executive Officers and Corporate Governance. |
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item is incorporated by reference to the definitive proxy statement for our 20102011 Annual Meeting of StockholdersShareholders to be filed with the Securities and Exchange CommissionSEC within 120 days of July 31, 2009.2010.
Item 11. | Executive Compensation. |
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to the definitive proxy statement for our 20102011 Annual Meeting of StockholdersShareholders to be filed with the Securities and Exchange CommissionSEC within 120 days of July 31, 2009.2010.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item is incorporated by reference to the definitive proxy statement for our 20102011 Annual Meeting of StockholdersShareholders to be filed with the Securities and Exchange CommissionSEC within 120 days of July 31, 2009.2010.
Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is incorporated by reference to the definitive proxy statement for our 20102011 Annual Meeting of StockholdersShareholders to be filed with the Securities and Exchange CommissionSEC within 120 days of July 31, 2009.2010.
Item 14. | Principal Accountant Fees and Services. |
Item 14. Principal Accountant Fees and Services.
The information required by this Item is incorporated by reference to the definitive proxy statement for our 20102011 Annual Meeting of StockholdersShareholders to be filed with the Securities and Exchange CommissionSEC within 120 days of July 31, 2009.2010.
43
PART IV
Item 15. | Exhibits, Financial Statement Schedules |
Item 15. Exhibits, Financial Statement Schedules
(a) List of documents filed as part of this report:
1. Financial Statements: The information required by this item is contained in Item 8 of this Annual Report on Form 10-K.
2. Financial Statement Schedules: The information required by this item is included in the consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K.
3. Exhibits: See Index to Exhibits.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | |
| NON-INVASIVE MONITORING SYSTEMS, INC. |
| |
Date: October 28, 200929, 2010 | By: | /s/ Marvin A. Sackner, M.D. | |
| | | Marvin A. Sackner, M.D. | |
| | | Chief Executive Officer and President | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | |
| Signature | | Title | | Date |
| | | | | |
/s/ Marvin A. Sackner, M.D. Marvin A. Sackner, M.D. | | Chief Executive Officer and President (Principal | | October 28, 2009 |
Marvin A. Sackner, M.D. | |
(Principal Executive Officer) | | October 29, 2010 |
| | | | | |
/s/ Jane H. Hsiao, Ph.D. Jane H. Hsiao, Ph.D. | | Chairman of the Board of Directors | | October 28, 2009 |
Jane H. Hsiao, Ph.D. | | | | 29, 2010 |
| | | | | |
/s/ Taffy Gould Taffy Gould | | Director | | October 28, 2009 |
Taffy Gould | | | | 29, 2010 |
| | | | | |
/s/ Morton J. Robinson, M.D. Morton J. Robinson, M.D. | | Director | | October 28, 2009 |
Morton J. Robinson, M.D. | | | | 29, 2010 |
| | | | | |
/s/ Steven D. Rubin Steven D. Rubin | | Director | | October 28, 2009 |
Steven D. Rubin | | | | 29, 2010 |
| | | | | |
/s/ Subbarao Uppaluri Subbarao Uppaluri | | Director | | October 28, 2009 |
Subbarao Uppaluri | | | | 29, 2010 |
| | | | | |
/s/ Adam S. Jackson Adam S. Jackson | | Chief Financial Officer (Principal
(Principal Financial Officer) | | October 28, 2009 |
Adam S. Jackson | | | | 29, 2010 |
45
The following exhibits are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K.
| | | | |
| Exhibit No. | | Description of Exhibits |
| 3.1 | | | Articles of Incorporation, as amended (Incorporated by Reference from Exhibit 3.1 to Form 8-K filed on April 8, 2008) |
| | | |
3.2 | | By-Laws (Incorporated by reference from Exhibit 3(b) to the Company’s Registration Statement on Form S-1 Filed May 15, 1999 (File No. 33-14451)) |
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3.1 | 3.2 | | | Articles of Amendment to Articles of Incorporation (Incorporated by Reference from Exhibit 3.1 to Form 8-K filed on December 3, 2008) |
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| 3.3 | | | Articles of Amendment to Articles of Incorporation (Incorporated by Reference from Exhibit 3.3 to Form 10-Q filed on March 17, 2010) |
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| 3.4 | | | By-Laws, as amended (Incorporated by reference from Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed on December 15, 2009) |
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| 10.1 | | | License Agreement dated as of May 22, 1996 between the Company and SensorMedics Corporation (Incorporated by reference from Exhibit 10.1 to Form 10-KSB/A filed on April 22, 2008) |
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| 10.2 | | | Letter of Agreement dated April 21, 1999 between the Company and SensorMedics Corporation (Incorporated by reference from Exhibit 10.2 to Form 10-KSB/A filed on April 22, 2008) |
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| 10.3 | | | Agreement Regarding Assignment of Patents and Intellectual Property dated August 14, 2000 between the Company and LifeShirt.com, Inc. (Incorporated by reference from Exhibit 10.3 to Form 10-KSB/A filed on April 22, 2008) |
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| 10.4 | | | Amendment to Agreement Regarding Assignment of Patents and Intellectual Property dated December 23, 2000 between the Company and LifeShirt.com, Inc. (Incorporated by reference from Exhibit 10.4 to Form 10-KSB/A filed on April 22, 2008) |
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10.5 | | Form of Stock Purchase Agreement dated as of August 1, 2005 between the Company and various Investors (Incorporated by reference from Exhibit 4.1 to Form 8-K filed on August 18, 2005) |
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10.6 | 10.5 | | Preferred Stock Purchase Agreement dated as of April 3, 2008 between the Company and the Investors named therein (Incorporated by reference from Exhibit 10.1 to Form 8-K filed on April 8, 2008) |
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10.7 | | Form of Preferred Stock Purchase Agreements dated as of December 1and1 and 2, 2008 between the Company and the Investors named therein (Incorporated by reference from Exhibit 10.1 to Form 8-K filed on December 3, 2008) |
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10.8 | 10.6 | | | Preferred Stock Purchase Agreement dated as of January 29, 2009 between the Company and the Investors named therein (Incorporated by reference from Exhibit 10.1 to Form 8-K filed on April 8, 2008) |
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10.9 | 10.7 | | | Product Development and Supply Agreement executed September 4, 2007 between Sing Lin Technologies Ltd and the Company (Incorporated by reference from Exhibit 10.1 to Form 10-QSB/A filed on April 22, 2008) (Confidentiality Treatment has been granted for portions of this Exhibit) |
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10.10 | 10.8 | | | Note and Security Agreement dated as of August 28, 2008 between the Company and various lenders (incorporated by reference from Exhibit 10.1 to the Form 8-K filed on September 12, 2008) |
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10.11 | 10.9 | | | Offer Letter from the Company to Steven B. Mrha dated December 21, 2007 and executed on December 22, 2007 detailing the terms of employment of Mr. Mrha (incorporated by reference from Exhibit 10.1 to the Form 8-K filed on December 27, 2007) |
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10.12 | 10.10 | | | Offer Letter from the Company to Adam S. Jackson dated March 11, 2008 (incorporated by reference from Exhibit 10.1 to the Form 8-K filed on May 15, 2008) |
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10.13 | 10.11 | | | Offer Letter from SafeStitch Medical, Inc. to Adam S. Jackson, dated March 11, 2008 (incorporated by reference to the Current Report on Form 8-K filed by SafeStitch Medical, Inc. on April 4, 2008) |
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10.14 | 10.12 | | | 2000 Stock Option Plan (Incorporated by reference from the Company’s Information Statement on Schedule 14C filed on April 5, 2001)(SEC Accession No.0000950170-01-000484) |
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10.15 | | Separation and Release Agreement delivered February 29, 2008 between the Company and Gary Macleod (incorporated by reference from Exhibit 10.1 to the Form 8-K filed on March 4, 2008) |
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10.16 | 10.13 | | Employment Agreement dated November 10, 2005 between the Registrant and Gary Macleod (Incorporated by reference from Exhibit 10.2 to Form 8-K filed on March 4, 2008). |
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10.17 | * | Lease Agreement dated January 1, 2008 between the Registrant and Frost Real Estate Holdings, LLC.LLC (incorporated by reference from Exhibit 10.17 to Form 10-K filed on October 29, 2009). |
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10.18 | *10.14 | | | Lease Agreement dated February 1, 2009 between the Registrant and Hialeah Warehouse Holdings, LLC.LLC (incorporated by reference from Exhibit 10.18 to Form 10-K filed on October 29, 2009). |
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14.1 | * 10.15 | Code | | First Amendment to Letter of EthicsAgreement, dated as of April 21, 2009 between the Registrant and Cardinal Health 211, Inc. (as successor in interest to SensorMedics Corporation)(incorporated by reference from Exhibit 10.1 to Form 8-K filed on June 9, 2009). |
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16.1 | 10.15 | | Letter from Eisner LLP | Note and Security Agreement dated May 15, 2009 (Incorporatedas of March 31, 2010 between the Company and Frost Gamma Investments Trust and Hsu Gamma Investments, L.P. (incorporated by reference from Exhibit 16.110.1 to Form 8-K filed on May 15,April 6, 2010). |
46
| | | | |
| Exhibit No. | | Description of Exhibits |
| 14.1 | | | Code of Ethics (incorporated by reference from Exhibit 14.1 to Form 10-K filed on October 29, 2009). |
21 | | | | |
| 21.1 | * | | Subsidiaries of the Company |
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| 31.1 | * | | Certification of Periodic Report by Chief Executive Officer pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934. |
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| 31.2 | * | | Certification of Periodic Report by Chief Financial Officer pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934. |
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| 32.1 | * | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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| 32.2 | * | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |