Novint Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
(Unaudited)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the fair value of the Company’s common stock and the fair value of options and warrants to purchase common stock, allowances for doubtful accounts, inventory valuation, return and warranty reserves, accounting for income taxes and uncertainty in income taxes and depreciation and amortization.
Software Development Costs
The Company accounts for its software development costs in accordance with Statement of Financial Accounting Standards (SFAS) Number 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. This statement requires that, once technological feasibility of a developing product has been established, all subsequent costs incurred in developing that product to a commercially acceptable level be capitalized and amortized ratably over the estimated life of the product, which is generally 5 years. The Company has capitalized software development costs in connection with its haptics technology beginning in 2000. Amortization is computed on the straight-line basis over the estimated life (5 years) of the haptics technology. As of June 30, 2008,2009, the Company’s capitalized software development costs totaled $627,413$514,102 (net of $266,919$435,983 of accumulated amortization). The estimated annual amortization expense related to the capitalized software development cost is approximately $155,000 per year. Amortization expense related to software development costs for the three and six months ended June 30, 2009 and 2008 totaled $43,418 and 2007 totaled$86,189, and $39,225 and $76,983, and $18,735 and $34,548, respectively.
The Company follows Statement of Position (SOP) No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which requires capitalization of certain costs incurred during the development of internal use software. Through June 30, 2008,2009, capitalizable costs incurred have not been significant for any development projects. Accordingly, the Company has charged all related costs to research and development expense in the periods incurred.
Property and Equipment
Property and equipment is stated at cost. Depreciation on property and equipment is calculated on a straight-line depreciation method over the estimated useful lives of the assets, which range from 3 to 5 years for software and computer equipment, and 5 years for office equipment. Repairs and maintenance costs are expensed as incurred. Depreciation expense was $13,064 and $31,608, and $26,849 and $51,019, and $11,181 and $17,597$ 51,019 for the three and six months ended June 30, 20082009 and 2007,2008, respectively.
Intangible Assets
Intangible assets consist of licensing agreements of $1,228,044$1,245,543 and patents of $40,706,$50,917, and are carried at cost less accumulated amortization of $414,721.$790,773 at June 30, 2009. Amortization is computed using the straight-line method over the economic life of the assets, which range between 3 and 1220 years. For the three and six months ended June 30, 20082009 and 2007,2008, the Company recognized amortization expense of approximately $92,445 and $184,891, and $52,968 and $90,188, and $38,013 and $56,972, respectively, related to intangible assets.
Novint Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
(Unaudited)
Annual amortization of intangible assets remaining at June 30, 2008,2009, is as follows:
| Year Ended December 31, | | | |
| 2008 | | | 253,562 | |
| 2009 | | | 343,471 | |
| 2010 | | | 253,871 | |
| 2011 | | | 2,500 | |
| 2012 and after | | | 625 | |
| Total | | $ | 854,029 | |
| For the twelve months ending June 30, | | | |
| 2010 | | $ | 348,153 | |
| 2011 | | | 113,553 | |
| 2012 | | | 5,191 | |
| 2013 | | | 2,441 | |
| 2014 and thereafter | | | 36,349 | |
| Total | | $ | 505,687 | |
In August 2008, the Company entered into a licensing agreement for several games, with a guaranteed minimum royalty of $100,000. In March 2009, the Company signed an amendment to reduce the minimum royalty to $15,000 for a total of two games. The Company has accrued for the $15,000 as of December 31, 2008. This amount was paid in March 2009.
The Company follows the provisions of SFAS 142, Goodwill and Other Intangible Assets. SFAS 142 requires intangible assets to be tested for impairment in accordance with SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which has been superseded by SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company performs a periodic review of its identified intangible assets to determine if facts and circumstances exist which indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, the Company assesses the recoverability of identified intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over the remaining lives against the respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. After an impairment loss is recognized, the adjusted carrying amount shall be its new accounting basis. No impairment loss was recorded during the three and six months ended June 30, 2009 or 2008.
Revenue and Cost Recognition
The Company recognizes revenue from the sale of software products under the provisions of SOP 97-2, Software Revenue Recognition, as amended by SOP 98-4 and SOP 98-9. SOP 97-2 generally requires that revenue recognized from software arrangements be allocated to each element of the arrangement based on the relative vendor specific objective evidence of fair values of the elements, such as software products, upgrades, enhancements, post contract customer support, installation or training. Under SOP 97-2, if the determination of vendor specific objective evidence of fair value for each element of the arrangement does not exist, all revenue from the arrangement is deferred until such time that evidence does exist or until all elements of the arrangement are delivered.
SOP 97-2 was amended in December 1998 by SOP 98-9, Modification of SOP 97-2 Software Revenue Recognition with Respect to Certain Transactions. SOP 98-9 clarified what constitutes vendor specific objective evidence of fair value and introduced the concept of the “residual method” for allocating revenue to elements in a multiple element arrangement.
Novint Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
(Unaudited)
The Company’s revenue recognition policy is as follows:
Project revenue consists of programming services provided to unrelated parties under fixed-price contracts. Revenues from fixed price programming contracts are recognized in accordance with SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, and Accounting Research Bulletin (ARB) 45, Long-Term Construction-Type Contracts, using the percentage-of-completion method, measured by the percentage of costs incurred to date compared with the total estimated costs for each contract. The Company accounts for these measurements in the accompanying balance sheets under costs and estimated earnings in excess of billings on contracts, and billings in excess of costs and estimated earnings on contracts. Provisions for estimated losses on uncompleted contracts are made and recorded in the period in which the loss is identified. As of June 30, 2009 and December 31, 2008 the Company did not have any costs and estimated earnings in excess of billings on contracts or any billings in excess of costs and estimated earnings on contracts.
For project revenue that is not under fixed price programming contracts, the Company recognizes revenues as the services are completed.
Revenue from product sales relates to the sale of the Falcon haptics interface, which is a human-computer user interface (the “Falcon”) and related accessories. The Falcon allows the user to experience the sense of touch when using a computer, while holding its interchangeable handle. The Falcons are manufactured by an unrelated party. Revenue from product sales is recognized when the products are shipped to the customer and the Company has earned the right to receive and retain reasonable assured payments for the products sold and delivered. Consequently, if all these revenue from product sales requirements are not met, such sales will be recorded as deferred revenue until such time as all revenue recognition requirements are met.
As of June 30, 2009 and December 31, 2008, the Company had recorded $29,603 and 29,662, respectively, of deferred revenue, which represents fees received for product and project revenues that have not met all revenue recognition requirements.
Emerging Issues Task Force (EITF) 00-10, Accounting for Shipping and Handling Fees and Costs, require amounts billed to a customer in a sales transaction related to shipping and handling, if any, to be classified and accounted for as revenues earned for the goods provided whereas shipping and handling costs incurred by a company are required to be classified as cost of sales. The Company’s costs associated with shipping product items to the Company’s customers are included in the Company’s Cost of Goods Sold, which for the three and six months ended June 30, 2009 and 2008 approximated $23,219 and $29,728, and $16,800 and $24,900, respectively.
Arrangements made with certain customers, including slotting fees and co-operative advertising, are accounted for in accordance with EITF No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products). These incentives are recognized as a reduction in revenue or as a selling, general, and administrative expense, respectively, when payment is made to a customer (or at the time the Company has incurred the obligation, if earlier) unless the Company receives a benefit over a period of time and the Company meets certain other criteria, such as retailer performance, recoverability and enforceability, in which case the incentive is recorded as an asset and is amortized as a reduction of revenue over the term of the arrangement.
EITF 01-14, Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred, requires reimbursements received for out-of-pocket expenses incurred while providing services to be characterized in the statements of operations as revenue. The Company’s out-of-pocket expenses incurred in connection with their project revenues are recognized in revenues based on a computed overhead rate that is included in their project labor costs to derive a project price.
Novint Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
(Unaudited)
In accordance with EITF 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, the Company recognizes its product sales on a gross basis. The Company is responsible for fulfillment, including the acceptability of the product ordered. The Company has risks and rewards of ownership such as the risk of loss for collection, delivery or returns. Title passes to the customer upon receipt of the product by the customer. In accordance with the Company’s agreement with its customer, further obligation is limited to the terms defined in its warranty.
The Company’s customers are provided a one (1) year limited warranty on the Falcon. This warranty guarantees that the products shall be free from defects in material and workmanship. Additionally, the Company offers its customers of the Falcon a 30 day money back guarantee. The Company continually evaluates its reserve accounts for both the limited warranty and 30 day money back guarantee based on its historical activities. As of June 30, 2009 and December 31, 2008, the Company has accrued $15,000 and $17,000, respectively, as warranty reserve.
Loss per Common Share
Statement of Financial Accounting Standards No. 128, Earnings Per Share, (SFAS 128) provides for the calculation of “Basic” and “Diluted” earnings per share. Basic earnings per share includes no dilution and is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding for the period. All contractspotentially dilutive securities have been excluded from the computations since they would be antidilutive. However, these dilutive securities could potentially dilute earnings per share in the future. As of June 30, 2009 and December 31, 2008, the Company had a total of 16,197,109 and 10,783,473 in potentially dilutive securities, respectively.
Stock-Based Compensation
The Company adopted SFAS No. 123 (Revised 2004), Share Based Payment (“SFAS No. 123R”), under the modified-prospective transition method on January 1, 2006. SFAS No. 123R requires companies to measure and recognize the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value. Share-based compensation recognized under the modified-prospective transition method of SFAS No. 123R includes share-based compensation based on the grant-date fair value determined in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation, for all share-based payments granted prior to and not yet vested as of January 1, 2006 and share-based compensation based on the grant-date fair-value determined in accordance with SFAS No. 123R for all share-based payments granted after January 1, 2006.
The Company recognized $22,212 and $142,678, and $114,967 and $237,106 in employee share-based compensation expense for the three and six months ended June 30, 2009 and 2008, respectively. The fair value of the stock options was estimated using the Black-Scholes option pricing model. In calculating the fair value of options for stock based compensation for the three and six months ended June 30, 2009, the following assumptions were 100% completeused: closing price of the common stock at the date of grant, risk-free rates ranging from 4.00% to 5.25%, volatility of the options ranging from 73% to 157%, estimated lives of 3 to 10 years and exercise prices ranging from $0.66 to $1.06 per share. In calculating the fair value of options for stock based compensation for the three and six months ended June 30, 2008, the following assumptions were used: closing price of the common stock at the date of grant, risk-free rates ranging from 4.00% to 5.25%, volatility of the options ranging from 73% to 157%, estimated lives of 3 to 10 years and exercise prices ranging from $0.66 to $1.20 per share.
Stock options and warrants issued to consultants and other non-employees as compensation for services provided to the Company are accounted for based on the fair value of the services provided or the estimated fair market value of the option or warrant, whichever is more reliably measurable in accordance with SFAS 123 and Emerging Issues Task Force No. 96-18, Accounting for Equity Investments That are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services, including related amendments and interpretations. The related expense is recognized over the period the services are provided. For the three and six months ended June 30, 2009 and 2008, stock options and warrants issued to consultants and other non-employees as compensation for services that vested during those periods totaled $47,322 and $6,521, and $147,429 and $282,000, respectively.
Novint Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
(Unaudited)
Research and Development
Research and development costs are expensed as incurred and amounted to $56,835 and $129,673, and $281,405 and $594,931 for the three and six months ended June 30, 2009 and 2008, respectively.
Recently Issued Accounting Pronouncements
The Company has adopted all recently issued accounting pronouncements. The adoption of the accounting pronouncements, including those not yet effective, is not anticipated to have a material effect on the financial position or results of operations of the Company.
NOTE 3 – PREPAID ASSETS
As of June 30, 2009, prepaid expenses totaling $1,658,407 principally consist of prepayments towards marketing costs, insurance premiums, rents and royalties. Prepayments on royalties comprise a significant portion of the prepaid expenses at June 30, 2009 totaling $1,580,513 of which $1,214,430 is considered long-term portion due to the length of the related license and royalty agreements and the expected realization.
NOTE 4 — INTANGIBLE ASSETS
Intangible assets consisted of the following at June 30, 2009:
| | | | |
| Licensing agreements | | $ | 1,245,543 | |
| Patent | | | 50,917 | |
| Less accumulated amortization | | | (790,773 | ) |
| | | $ | 505,687 | |
NOTE 5 – NOTES PAYABLE
In December 2008, the Company issued two promissory notes totaling $300,000 secured by all of the Company’s intellectual property, annual interest rate of eight percent (8%), principal and interest due at maturity, and maturity date of December 4, 2009. If the notes are not paid back by the maturity date, then Novint will have the right but not the obligation to refinance the notes with new notes equaling the interest and principal from the first note, with a new maturity date of December 4, 2010 and an annual interest rate of eight percent (8%). The new notes are convertible into common stock at a rate of $0.50/share. Additionally, the Company issued each note holder a detachable warrant for 150,000 shares of the Company’s common stock for a total of 300,000 shares. The Company has accounted for the warrants to purchase 300,000 shares under Accounting Principles Board Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,” as additional consideration to the promissory notes payable with an estimated fair value of $100,962 valued using the Black-Scholes option pricing model under the following assumptions: stock price volatility of 119%; risk free interest rate of 2.24%; dividend yield of 0% and 5 year term. The face amount of the promissory notes of $300,000 was proportionately allocated to debt and the estimated fair value of the warrants in the amounts of $224,460 and $75,540, respectively. The allocable estimated fair value of the warrants totaling $75,540 has been accounted for as a debt discount that is being amortized and treated as interest expense over the term of the promissory notes. For the three and six months ended June 30, 2009, the Company’s debt discount amortization expense totaled $18,833 and $37,459, respectively. The remaining unamortized debt discount at June 30, 2009 totaled $32,493.
Novint Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
(Unaudited)
In January 2009, the Company issued a promissory note totaling $100,000 secured by all of the Company’s intellectual property, annual interest rate of eight percent (8%), principal and interest due at maturity, and maturity date of December 4, 2009. If the note is not paid back by the maturity date, then Novint will have the right but not the obligation to refinance the note with a new note equaling the interest and principal from the first note, with a new maturity date of December 4, 2010 and an annual interest rate of eight percent (8%). The new note would be convertible into common stock at a rate of $0.50/share. Additionally, the Company issued the note holder a detachable warrant for 100,000 shares of the Company’s common stock. The Company has accounted for the warrant to purchase 100,000 shares under Accounting Principles Board Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,” as additional consideration to the promissory note payable with an estimated fair value of $37,479 valued using the Black-Scholes option pricing model under the following assumptions: stock price volatility of 117%; risk free interest rate of 2.24%; dividend yield of 0% and 5 year term. The face amount of the promissory notes of $100,000 was proportionately allocated to debt and the estimated fair value of the warrants in the amounts of $72,738 and $27,262, respectively. The allocable estimated fair value of the warrants totaling $27,262 has been accounted for as a debt discount that is being amortized and treated as interest expense over the term of the promissory notes. For the three and six months ended June 30, 2009, the Company’s debt discount amortization expense totaled $7,657 and $14,052, respectively. The remaining unamortized debt discount at June 30, 2009 totaled $13,210.
In June 2009, the Company issued a promissory note totaling $200,000 secured by all of the Company’s intellectual property, annual interest rate of eight percent (8%), principal and interest due at maturity, and maturity date of June 18, 2010. If the note is not paid back by the maturity date, then Novint will have the right but not the obligation to refinance the note with a new note equaling the interest and principal from the first note, with a new maturity date of December 4, 2010 and an annual interest rate of ten percent (10%). The new note would be convertible into common stock at a rate of $0.50/share and for every two shares issued on conversion of the convertible note, the holder would receive a warrant to purchase one share of common stock at an exercise price of $0.50 per share. Additionally, the Company issued the note holder a detachable warrant for 300,000 shares of the Company’s common stock. The Company has accounted for the warrant to purchase 300,000 shares under Accounting Principles Board Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,” as additional consideration to the promissory note payable with an estimated fair value of $30,299 valued using the Black-Scholes option pricing model under the following assumptions: stock price volatility of 148%; risk free interest rate of 2.24%; dividend yield of 0% and 5 year term. The face amount of the promissory notes of $300,000 was proportionately allocated to debt and the estimated fair value of the warrants in the amounts of $173,687 and $26,313, respectively. The allocable estimated fair value of the warrants totaling $26,313 has been accounted for as a debt discount that is being amortized and treated as interest expense over the term of the promissory notes. For the three and six months ended June 30, 2009, the Company’s debt discount amortization expense totaled $1,149 and $1,149, respectively. The remaining unamortized debt discount at June 30, 2009 totaled $25,164.
NOTE 6 – ORIGINAL ISSUE DISCOUNT NOTES PAYABLE
During February and March 2009, the Company received $220,000 for three promissory notes totaling $275,000 with 150% warrant coverage. The notes are secured by all of the Company’s assets and intellectual property, no stated interest rate, principal due February 2010. These notes are considered original issue discount notes whereby the discount (difference between the face value of the notes of $275,000 and amounts actually received of $220,000) will be amortized over the lives of the notes. For the three and six months ended June 30, 2009, the Company amortized interest expense totaled $16,972 and $13,750, respectively. The remaining unamortized original issue discount at June 30, 2009 totaled $38,028. If the notes are prepaid, the exercise price of the warrants will adjust to the fair market value of the Company’s stock at the time of prepayment, subject to a floor of $0.02 and a ceiling of $1.00. If an investor sells any shares of our common stock during 120 days prior to the maturity date of the note, the strike price will automatically reset to $2.00. If the notes are not paid back by the maturity date, then the Company will have the right but not the obligation to refinance the notes with new notes equaling the principal and accrued interest from the first note, with a new maturity date one year later and an annual interest rate of five percent (5%). The new note would be convertible into common stock at a rate of $0.0625/share on the principal balance only. The conversion rate is subject to change based upon the provision in the note. The Company has accounted for the 150% warrants coverage to purchase 330,000 shares under Accounting Principles Board Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,” as additional consideration to the promissory notes payable with an estimated fair value of $44,677 valued using the Black-Scholes option pricing model under the following assumptions: stock price volatility ranging from 122% to 142%; risk free interest rate of 2.24%; dividend yield of 0% and 5 year term. The face amount of the promissory notes of $275,000 was proportionately allocated to debt and the estimated fair value of the warrants in the amounts of $236,597 and $38,403, respectively. The allocable estimated fair value of the warrants totaling $38,403 has been accounted for as a debt discount that is being amortized and treated as interest expense over the term of the promissory notes. For the three and six months ended June 30, 2009, the Company’s debt discount amortization expense totaled $9,586 and $12,208, respectively. The remaining unamortized debt discount at June 30, 2009 totaled $26,195.
Novint Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
(Unaudited)
In April 2009, the Company received $50,000 for a promissory note totaling $62,500 with 150% warrant coverage. The note is secured by all of the Company’s assets and intellectual property, no stated interest rate, principal due April 2010. The note is considered original issue discount note whereby the discount (difference between the face value of the note of $62,500 and amount actually received of $50,000) will be amortized over the life of the note. For the three and six months ended June 30, 2009, the Company amortized interest expense totaled $2,604 and $2,604, respectively. The remaining unamortized original issue discount at June 30, 2009 totaled $9,896. If the note is prepaid, the exercise price of the warrants will adjust to the fair market value of the Company’s stock at the time of prepayment, subject to a floor of $0.02 and a ceiling of $1.00. If the investor sells any shares of our common stock during 120 days prior to the maturity date of the note, the strike price will automatically reset to $2.00. If the note is not paid back by the maturity date, then the Company will have the right but not the obligation to refinance the notes with new a note equaling the principal and accrued interest from the first note, with a new maturity date one year later and an annual interest rate of five percent (5%). The new note would be convertible into common stock at a rate of $0.0625/share on the principal balance only.
The conversion rate is subject to change based upon the provision in the note. The Company has accounted for the 150% warrant coverage to purchase 75,000 shares under Accounting Principles Board Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,” as additional consideration to the promissory notes payable with an estimated fair value of $6,889 valued using the Black-Scholes option pricing model under the following assumptions: stock price volatility of 148%; risk free interest rate of 2.24%; dividend yield of 0% and 5 year term. The face amount of the promissory notes of $62,500 was proportionately allocated to debt and the estimated fair value of the warrants in the amounts of $56,295 and $6,205, respectively. The allocable estimated fair value of the warrants totaling $6,205 has been accounted for as a debt discount that is being amortized and treated as interest expense over the term of the promissory notes. For the three and six months ended June 30, 2009, the Company’s debt discount amortization expense totaled $2,060 and $2,060, respectively. The remaining unamortized debt discount at June 30, 2009 totaled $4,145.
In June 2009, the Company issued three promissory notes totaling $184,375 for services received with values totaling $147,500, no stated interest rate, principal due at maturity, and maturity date of June 2010. These notes are considered original issue discount notes whereby the discounts (difference between the face value of the note of $184,375 and amount actually received of $147,500) will be amortized over the lives of these notes. For the three and six months ended June 30, 2009, the Company amortized interest expense totaled $1,024 and $1,024, respectively. The remaining unamortized original issue discount at June 30, 2009 totaled $35,851. Additionally, the Company issued the note holders detachable warrants totaling 221,250 shares of the Company’s common stock. The Company has accounted for the warrants to purchase 221,250 shares under Accounting Principles Board Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,” as additional consideration to the promissory note payable with an estimated fair value of $22,330 valued using the Black-Scholes option pricing model under the following assumptions: stock price volatility of 149%; risk free interest rate of 2.24%; dividend yield of 0%; and 5 year term. The face amount of the promissory notes of $184,375 was proportionately allocated to debt and the estimated fair value of the warrants in the amounts of $164,457 and $19,918, respectively. The allocable estimated fair value of the warrants totaling $19,918 has been accounted for as a debt discount that is being amortized and treated as interest expense over the term of the promissory notes. For the three and six months ended June 30, 2009, the Company’s debt discount amortization expense totaled $546 and $546, respectively The remaining unamortized debt discount at June 30, 2009 totaled $19,372.
Novint Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
(Unaudited)
NOTE 7 – CONVERTIBLE NOTES PAYABLE
In March 2008, the Company closed on a $2,025,000 private placement of debt securities under Regulation D promulgated under the Securities Act of 1933 pursuant to the terms of a subscription agreement among the Company and the subscribers’ signatory thereto (the "Subscription Agreement"). From April 2008 through June 2008, the Company closed an additional $3,210,097 for an aggregate Subscription Agreement amount of $5,235,097. Each Subscriber acquired an unsecured convertible note in the principal amount invested and a warrant to purchase shares of the Company’s common stock with an exercise price of $1.00 per share. In each case, the number of shares of common stock underlying the warrant equals the principal amount of the unsecured convertible note. Each warrant is exercisable for a term of five (5) years. The unsecured convertible notes have a three (3) year maturity, require payment of principal and interest in full on the maturity date, and accrue interest at a rate of seven percent (7%) beginning on the first anniversary of their respective dates of issuance. At the option of the holder, principal outstanding under a note may be converted into common stock at the conversion rate then in effect, initially $1.00 per share. Upon conversion, the holder will receive common stock at the conversion price of $1.00 per share and additional warrants to purchase shares of common stock at an exercise price of $1.50 per share. The number of shares of common stock underlying the additional warrants shall equal one-half (1/2) the principal and interest amounts converted. The additional warrants shall be exercisable for a term of five (5) years. Certain existing shareholders of the Company are entitled to purchase notes and warrants under the terms of the Subscription Agreement and the Company was required to create a second offering of these notes and warrants. The Company has recorded $459,073 as deferred financing costs associated with the closing that occurred on June 9, 2008. This amount represents $197,049 for legal expenses associated with the private placement, $149,403 paid to an investment banking company and $112,621 for the value of warrants to purchase 143,403 shares of the Company’s common stock at $1.00 per share for 5 years owed to the same investment banking company. These amounts are being amortized to interest expense over the term of the notes.
The Company has determined the convertible debenture contains a beneficial conversion feature and qualifies for treatment under Emerging Issues Task Force No. 00-27 and 00-19. The estimated fair value of the detachable warrants of $4,462,663 has been determined using Black-Scholes option pricing model using the following assumptions: stock price volatility of 124% to 125%, risk free interest rate of 3.77%; dividend yield of 0% and 3 year term. The face amount of the convertible debenture of $5,235,097 was proportionately allocated to the debenture and the warrants in the amount of $2,849,425 and $2,385,672, respectively. The convertible debentures’ proportionate allocated value of $2,849,425 was then further allocated between the debenture and the beneficial conversion feature, and the entire remaining value of $2,849,425 was allocated to the beneficial conversion feature. The beneficial conversion feature of $2,849,425 was allocated to the stock due upon conversion of $2,058,623 and the warrants due upon conversion of $790,802. In accordance with EITF 00-27, the beneficial conversion feature attributed to the warrants due upon conversion of $790,802 is recorded as a debt discount and will not be amortized until the notes are converted at which time the entire discount will be expensed. The combined total value of the initial warrant and beneficial conversion feature attributed to the stock of $4,444,295 has been accounted for as a debt discount that is being amortized and treated as interest expense over the term of the convertible debenture under the effective interest method. For the three and six months ended June 30, 2009 and 2008, the Company’s debt discount amortization expense totaled $360,681 and $721,771, and $-0-, and $435,823, respectively. The remaining unamortized debt discount at June 30, 2009 totaled $3,419,325.
As the notes are non-interest bearing for the first year, the Company has imputed interest for the first year. The Company recorded interest expense of $60,226 and $120,465, for the three and six months ended June 30, 2009. As of June 30, 2009 and December 31, 2008 the Company accrued interest of $293,052 and $174,904, respectively.
Novint Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
(Unaudited)
NOTE 8 – STOCKHOLDERS’ EQUITY
In February 2009, the Board of Directors granted employees and directors 6,850,000 options to purchase shares of common stock at an exercise price of $.10 per share as compensation for prior services. The options vest upon grant, and the expense for these options, totaling $582,102, was recorded in the year ended December 31, 2008. The Board of Directors also granted consultants 700,000 options to purchase shares of common stock at an exercise price of $.10 per share as compensation for future services. These options vest equally every six months for two years following the grant.
Also in February 2009, the Board of Directors granted 100,000 options to purchase shares of common stock at an exercise price of $1.00 per share to a consultant for past services, of which $4,389 of the total value of $6,089 was for services performed during 2008. The remaining $1,700 was recorded as expense during the six months ended June 30, 2009. The Board of Directors also approved and the Company issued 250,000 restricted shares of common stock to a consultant for consulting services and recorded an expense for the six month ended June 30, 2009 with a value totaling $25,000. The shares were issued in May 2009.
In May 2009, the Company issued 31,266 shares of common stock to a consultant for compensation relating to accounting services with a total value of $7,890. 8,578 of these shares valued at $4,260 were for services rendered and recorded in 2008. 22,688 of these shares valued at $3,630 were for services rendered in the first quarter of 2009.
In May 2009, the Company issued 25,000 shares of common stock to a consultant for services previously performed with a total value of $12,500. This amount was accrued for as of December 31, 2008.
In May 2009, the Company issued 400,000 shares of common stock as part of the lease settlement for the New Mexico office with a total value of $60,000.
NOTE 9 — COMMITMENTS AND CONTINGENCIES
From time to time, in the normal course of business, the Company is subject to routine litigation incidental to its business. Although there can be no assurances as to the ultimate disposition of any such matters, it is the opinion of management, based upon the information available at this time, that there are no matters, individually or in the aggregate, that will have a material adverse effect on the results of operations and financial condition of the Company.
In February 2009, the Company received a notice of breach of one of their licensing agreements. The Company does not plan to cure this breach. The remaining obligation under this agreement of $200,000 related to the breach will remain as a liability, and all of the prepaid royalties were expensed in 2008.
On March 1, 2009, the Company signed a lease termination agreement for the headquarter office. The Company paid $30,000, forfeited the security deposit of approximately $11,000, transferred title to assets (office furniture, leasehold improvements and a vehicle) with a net book value of $43,894, and issued 400,000 shares of common stock with a fair value of $60,000 in exchange for termination of the original lease obligation and use of one small office and 1500 square feet of storage rent free for at least six months. The shares issued have a provision limiting sales to a percentage of volume.
In February 2009, the Company terminated many of its employees in order to reduce expenses and have retained the personnel necessary to continue key operations to maintain sales. The Company does not anticipate or expect any additional expenses related to the termination other than amounts earned up through the date of termination. Included in accrued payroll related liabilities on the accompanying balance sheet as of June 30, 2009 is $77,680 related to potential severance liabilities owed to these terminated employees. As part of the terminations, the Company allowed the terminated employees to keep their computer equipment with a net book value of $15,579 and accelerated the vesting of certain options.
Novint Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
(Unaudited)
NOTE 10 — RELATED PARTIES
On February 18, 2004, the Company granted to a significant shareholder, for future services, 125,000 options to purchase common stock at an exercise price of $0.66 per share. The options have a 5-year annual vesting provision. Options granted to consultants are valued each reporting period to determine the amount to be recorded as consultant expense in the respective period. As the options vest, they will be valued one last time on the vesting date and an adjustment will be recorded for the difference between the value already recorded and the current value on date of vesting. The remaining options were fully vested on February 18, 2009 and the Company calculated the value of the options using the Black-Scholes model based on the following assumptions: a risk-free rate of 2.24%, volatility of 120%, estimated life of 10 years and a fair market value of $0.20 per share. At March 31, 2004, the Company calculated the initial value of the options using the Black-Scholes model based on the following assumptions: a risk-free rate of 4.05%, volatility of 91%, estimated life of 10 years and a fair market value of $1.00 per share. The vesting schedule is prorated over the reporting period, and $0 and $(1,651), and $6,027 and $10,917, respectively, was recorded as consultant expense during the three and six months ended June 30, 2009 and 2008. The options were fully vested on February 18, 2009.
In March 2004, Normandie New Mexico Corporation, which is owned by the former Chief Executive Officer (CEO) of Manhattan Scientific (a significant shareholder) who is also a member of the Company’s Board of Directors, entered into an agreement with the Company to provide consulting services in relation to business development and marketing support. Fees per the agreement are $6,250 per month. For the three and six months ended June 30, 2009 and 2008, the Company had paid $0 and $0, and $12,500 and $37,500, respectively for these services. All remaining amounts totaling $62,500 owed were settled during the three months ended June 30, 2009 by the issuance of an original issue discount note payable in the amount of $78,125 and the issuance of five year warrants to purchase 93,750 shares of common stock at an exercise price of $1.00. See Note 5.
On June 10, 2004, the Company granted 250,000 options to purchase common stock to one of the members of the Company’s Board of Directors for future consulting services at an exercise price of $0.66 per share. The options have a 5-year annual vesting provision. At June 30, 2004, the Company calculated the initial value of these options using the Black-Scholes model based on the following assumptions: a risk-free rate of 4.81%, volatility of 100%, estimated life of 10 years and a fair market value of $1.00 per share. The remaining options were fully vested on June 10, 2009 and the Company calculated the value of the options using the Black-Scholes model based on the following assumptions: a risk-free rate of 2.24%, volatility of 151%, estimated life of 10 years and a fair market value of $0.10 per share. The vesting schedule is prorated over the reporting period, and approximately $1,078 and $(7,832), and $12,000 and $26,000, respectively, was recorded as consulting expense during the three and six months ended June 30, 2009 and 2008.
On March 9, 2006 the Company granted 250,000 options to purchase common stock to an employee, who is the brother of the Company’s Chief Executive Officer, at an exercise price of $1.00 per share. The options have a ten year term and a vesting schedule of 50,000 shares per year beginning March 9, 2007. At March 9, 2006, the Company calculated the initial value of the options using the Black-Scholes model based on the following assumptions: a risk-free rate of 4.86%, volatility of 36%, estimated life of 10 years and a fair market value of $1.00 per share. The vesting schedule is prorated over the reporting period, and approximately $7,135 and $14,270, and $7,135 and $14,270, respectively, was recorded as consulting expense during the three and six months ended June 30, 2009 and 2008.
In November 2006, the Company granted 1,500,000 options to purchase common stock to one of the members of the Company’s Board of Directors for future consulting services at an exercise price of $0.90 per share. The options have a 2-year annual vesting provision which 750,000 these options vested immediately. At December 31, 2006, the Company calculated the initial value of these options using the Black-Scholes model based on the following assumptions: a risk-free rate of 5.15%, volatility of 146%, estimated life of 10 years and a fair market value of $1.05 per share. The vesting schedule is prorated over the reporting period, and approximately $0 (fully vested as of December 31, 2008) and $61,496 and $122,292, respectively, was recorded as consultant expense during the three and six months ended June 30, 2009 and 2008.
Novint Technologies, Inc.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2009 AND 2008
(Unaudited)
On July 23, 2007, the Company entered into a perpetual employment agreement with an individual who is related with the Chief Executive Officer through family marriage. Under the agreement, the employee is entitled to an annual base salary of $68,000 per year and cash bonus to be determined by the Company, is subject to confidentiality provisions and is entitled to a severance equal to this employee’s base salary for a two week period if this employee is terminated by the Company without cause. Additionally, the employment agreement granted this employee an option for 25,000 shares of common stock with an exercise price of $0.95 per share which vests over a five-year period. In October 2008, this employee was terminated, and 15,000 of the options were cancelled. As of June 30, 2009, there is an accrual of $2,672 for the severance pay that has not yet been issued.
One of the members of the Company’s Board of Directors provides legal services to Company. Total legal expense incurred by the Company for such legal services by this director totaled $21,085 and $33,141, and $68,106 and $100,935 for the three and six months ended June 30, 2009 and 2008, respectively. At the beginning of 2008, the Company granted this board member options to purchase 100,000 shares of common stock with an exercise price of $.89 per share for service performed and to be performed in relation to the Company’s patents. As of June 30, 2009, 10,709 options had vested and the Company has recorded $5,344 in expense related to these vested options. In June 2009, in satisfaction of $50,000 owed for legal services previously accrued, the Company issued an original issue discount note payable in the amount of $62,500 and the issuance of five year warrants to purchase 75,000 shares of common stock at an exercise price of $1.00. See Note 5.
Revenue from product sales relates to the sale of the Falcon haptics interface, which is a human-computer user interface (the “Falcon”) and related accessories. The Falcon allows the user to experience the sense of touch when using a computer while holding its interchangeable handle. The Falcons are manufactured by an unrelated party. Revenue from the product sales is recognized when the products are shipped to the customer and the Company has earned the right to receive and retain reasonable assured payments for the products sold and delivered. Consequently, if all these revenue from product sales requirements are not met, such sales will be recorded as deferred revenue until such time as all revenue recognition requirements are met.
Emerging Issues Task Force (EITF) 00-10, Accounting for Shipping and Handling Fees and Costs, require amounts billed to a customer in a sales transaction related to shipping and handling, if any, to be classified and accounted for as revenues earned for the goods provided whereas shipping and handling costs incurred by a company are required to be classified as cost of sales. The Company’s costs associated with shipping product items to the Company’s customers are included in the Company’s Cost of Goods Sold, which for the three and six months ended June 30, 2008 and 2007 approximated $16,800 and $24,900, and $0 and $0, respectively.