UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| R | ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008
| £ | TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-16781
microHelix, Inc.
(Exact Name of Registrant as Specified in Its Charter)
| Oregon | 91-1758621 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
| | |
5300 SW Meadows, Suite 400, Lake Oswego, Oregon | 97035 |
| (Address of Principal Executive Offices) | (Zip Code) |
(Issuer's Telephone Number, Including Area Code):
(503) 419-3564
Securities registered under Section 12(g) of the Exchange Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes £ No R
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes R No £
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes £ No R
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained in this form, 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 amendments to this Form 10-K.
þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
| | Large accelerated filer ¨ | Accelerated filer ¨ |
| | Non-accelerated filer ¨ | Smaller reporting company R |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes R No £
The aggregate market value of the voting and non-voting common equity held by non-affiliates, as of December 31, 2008, was approximately $96,634 based upon the last sale price reported for such date on the NASDAQ OTC Market.
There were 1,973,421 shares of the issuer's Common Stock outstanding as of December 31, 2008.
At a special meeting of the shareholders on March 19, 2008, the Company's Amended and Restated Articles of Incorporation, as amended, were amended to affect a reverse split of the Company's Common Stock in which every 15 shares of Common Stock held by a shareholder were reduced to one share of Common Stock. The consolidated financial statements, notes, and other references to share and per share data contained in this Annual Report have been retroactively restated to reflect such reverse stock split for all periods presented.
Transitional Small Business Disclosure Format: Yes £ No R
PART I
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. Such statements reflect management's current view and estimates of future economic and market circumstances, industry conditions, company performance and financial results. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are subject to risks and uncertainties that could cause our future results to differ materially from the results discussed herein. Factors that might cause such a difference include, but are not limited to, those discussed elsewhere in this Annual Report on Form 10-K. We do not intend, and undertake no obligation, to update any such forward-looking statements to reflect events or circumstances that occur after the date of this filing.
Item 1. Business
Overview
microHelix, Inc. ("we," "us," "our," "microHelix" or the "Company") began in 1991 in Portland, Oregon as a grant and private equity funded research company, formed to develop manufacturing techniques for medical device interconnect systems. In the years that followed we established a foundation of proprietary processes and intellectual property in the areas of ultra-thin wall pinhole free wire, micro-interconnect technology, advanced laser micro-machining, specialty connectors and flex circuits. The Company was a manufacturer of complex cable assemblies for the medical and commercial original equipment manufacturer ("OEM") markets. The Company served a segment of the quick turn, high mix, and low volume cable assembly market generally referred to as the custom cable assembly market. Typical cable assemblies included cable, connectors, flex reliefs, housings and printed circuit boards ("PCBs") and are critical sub-components of medical devices and commercial electronic systems.
Continuing deterioration of the Company's financial condition during April and May 2007 caused the Company to voluntarily surrender its assets to its secured creditors on May 31, 2007 and winding up its affairs. In connection with the windup, the Company stopped paying its unsecured creditors for goods and services provided prior to May 21, 2007. The Company and its wholly owned subsidiary, Moore Electronics, Inc. ("Moore"), operated for the benefit of the secured creditors until September 2007, at which time it ceased manufacturing operations and became a shell company. See Note 1 to the Consolidated Financial Statements – "Going Concern."
The Company’s current business objective is to locate appropriate opportunities for a business combination. The Company does not currently engage in any activity that provides cash flow. The Company anticipates incurring costs related to the filing of Exchange act reports, officers’ and directors’ salaries and transaction costs related to a business combination. There is no assurance that the Company will be able to raise sufficient capital to cover those expenses. Until the Company consummates a business combination, it does not anticipate any future expenditures for research and development or the purchase or sale of any property, plant, or equipment.
Certain types of business combination transactions may be completed without having to first submit the transaction to our shareholders for approval. If a business combination transaction is structured such that approval by the Company’s shareholders is not required, our shareholders will not be provided with financial or other information relating to the other party to the business combination prior to the completion of the transaction.
Because of the disposition of substantially all of our assets and the subsequent winding up of business, the Company has no ongoing operations. Our Board of Directors has determined to maintain the Company as a public "shell" corporation, which will seek suitable business combination opportunities. Our Board of Directors believes that a business combination with an operating company has the potential to create value for the Company's shareholders.
"Shell" Company Status
Due to our shell company status, holders of restricted securities issued while we are a shell company may not re-sell them pursuant to SEC Rule 144 for a period of one year after we cease to be a shell and have filed the necessary report with the Securities Exchange Commission to that effect.
Patents and Intellectual Property
The Company had no patents or patent applications pending as of the date of this report.
The Company currently owns the trademark "MICROHELIX" that is listed on the principal register of the United States Patent and Trademark Office. The Company's intellectual property also includes common law trademarks, service marks and trade names.
Employees
The Company had no full-time employees and one part-time employee in the United States as of April 1, 2009.
Where You Can Find More Information
On June 11, 2007, the Company filed a Form 15 with the Securities and Exchange Commission terminating is registration under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and suspending of its duty to file reports under Sections 13 and 15(d) of the Exchange Act. On March 25, 2009, the Company voluntarily filed its annual and quarterly reports for 2007 and quarterly reports for 2008 with the Securities and Exchange Commission.
The Company is not currently subject to the information requirements of the Securities Exchange Act of 1934, as amended. However, we voluntarily file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. You may inspect and copy any document we file with the SEC at the SEC's public reference rooms in Washington, D.C. at 100 F Street, N.W., Washington, D.C. 20549, on official business days from 10:00 a.m. to 3:00 p.m. You may obtain information on the operation of the SEC's public reference rooms by calling (800) SEC-0330. You may also purchase copies of our SEC filings by writing to the SEC, Public Reference Section, 100 F Street, N.W., Washington, D.C. 20549. Our SEC filings are also available on the SEC's website at http://www.sec.gov.
Item 1A. Risk Factors
Risk Factors
We are subject to various risks that could have a negative effect on the Company and its financial condition, including without limitation the following:
Minimal assets
The Company has no significant assets or financial resources. It is likely the Company will sustain operating expenses without corresponding revenues until it consummates a business combination with a target company. There is no assurance that we can identify such a target company and consummate such a business combination.
Adequate financing may not be available when needed
Additional sources of funding will be required for us to continue operations. There is no assurance that the Company can raise working capital or if any capital will be available at all. Failure to obtain financing when needed could result in curtailing operations, acquisitions or mergers and investors could lose some or all of their investment.
Speculative nature of the Company's proposed operations
The success of the Company's proposed plan of operation will depend to a great extent on the operations, financial condition and management of the identified target company. While management will prefer business combinations with entities having established operating histories, there can be no assurance that we will be successful in locating candidates meeting such criteria. In the event the Company completes a business combination, of which there can be no assurance, the success of the Company's operations will be dependent upon management of the target company and numerous other factors beyond our control.
Scarcity of and competition for business opportunities and combinations
The Company is and will continue to be an insignificant participant in the business of seeking mergers with and acquisitions of business entities. A large number of established and well-financed entities, including venture capital firms, are active in mergers and acquisitions of companies which may be merger or acquisition target candidates for the Company. Nearly all such entities have significantly greater financial resources, technical expertise and managerial capabilities than we do. The Company will therefore be at a competitive disadvantage in identifying possible business opportunities and successfully completing a business combination. Moreover, we will also compete with numerous small public companies in seeking merger or acquisition candidates.
No agreement for business combination or other transaction – No standards for business combination
As of this filing, the Company has not reached any definitive understanding with any person or entity concerning a merger or acquisition. There can be no assurance that we will be successful in identifying and evaluating suitable business opportunities or in concluding a business combination. Management has not identified any particular industry or specific business within an industry for evaluation by the Company. There is no assurance that the Company will be able to negotiate a business combination on terms favorable to the Company. We have not established a specified level of earnings, assets, net worth or other criteria that we will require a target company to have achieved, or that would prevent us from considering a business combination with such business entity. Accordingly, the Company may enter into a business combination with a business entity having no significant operating history, losses, limited or no potential for immediate earnings, limited assets, negative net worth or other negative characteristics.
Continued management control, limited time availability
While seeking a business combination, our officers anticipate devoting only a limited amount of time per month to our business. Our ability to attract and retain key personnel is critical to our future success. There is no guarantee that we will be able to hire and retain qualified officers.
Conflicts of interest
The Company's officers and directors participate in other business ventures which may compete directly with the Company.
Reporting requirements may delay or preclude acquisitions
Section 13 of the Securities Exchange Act of 1934 (the "Exchange Act") requires companies subject thereto to provide certain information about significant acquisitions including certified financial statements for the company acquired covering one or two years, depending on the relative size of the acquisition. The time and additional costs that may be incurred by some target companies to prepare such financial statements may significantly delay or essentially preclude consummation of an otherwise desirable acquisition by the Company. Acquisition prospects that do not have or are unable to obtain the required audited financial statements may not be appropriate for acquisition if the reporting requirements of the Exchange Act are applicable to us.
No public trading market
There is no public trading market for our securities and there can be no assurance that a trading market for our securities will develop if we complete a business combination. Until such time as our securities are eligible for quotation on a public market, we will be at a competitive disadvantage with other companies, including shell companies, who have publicly traded securities, in attracting suitable candidates to participate in a business combination with us.
Lack of diversification
Our activities will be limited to the operations engaged in by the business entity with which we merge or acquire. Our inability to diversify our activities into a number of areas may subject us to economic fluctuations within a particular business or industry and therefore increase the risks associated with our operations.
Regulation under Investment Company Act
Although the Company will be subject to regulation under the Exchange Act, management believes the Company will not be subject to regulation under the Investment Company Act of 1940, as amended (the “1940Act”) because we will not be engaged in the business of investing or trading in securities. In the event the Company engages in business combinations which result in the Company holding passive investment interests in a number of entities, the Company could be subject to regulation under the 1940 Act. In such event, we would be required to register as an investment company and could be expected to incur significant registration and compliance costs. We have not obtained a formal determination from the Securities and Exchange Commission as to our status under the 1940 Act. Consequently, any violation of the 1940 Act could subject the Company to material adverse consequences.
Possible change in control and management
A business combination involving the issuance of the Company's equity securities could result in shareholders of a target company obtaining a controlling interest in the Company. Any such business combination may require our shareholders to sell or transfer all or a portion of the Company's equity securities held by them. The resulting change in control will likely result in removal of the present officers and directors of the Company and a corresponding reduction in or elimination of their participation in the future affairs of the Company.
Reduction of percentage share ownership following business combination
The Company's primary plan of operation is based upon a business combination with a business entity which, in all likelihood, will result in our issuing securities to shareholders of such business entity. The issuance of previously authorized and unissued equity securities of the Company would result in reduction in percentage of shares owned by our present shareholders and would most likely result in a change in control or management of the Company.
Taxation
Federal and state tax consequences will, in all likelihood, be major considerations in any business combination we may undertake. Currently, such transactions may be structured so as to result in tax-free treatment to both companies, pursuant to various federal and state tax provisions. We intend to structure any business combination so as to minimize the federal and state tax consequences to both the Company and the target company; however, there can be no assurance that such business combination will meet the statutory requirements of a tax-free reorganization or that the parties will obtain the intended tax-free treatment upon a transfer of stock or assets. A non-qualifying reorganization could result in the imposition of both federal and state taxes which may have an adverse effect on both parties to the transaction.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties
After the Company surrendered its assets to its secured creditors and wound up its affairs, it terminated the lease for the space it previously occupied. The Company does not currently maintain an executive office.
Item 3. Legal Proceedings
From time to time the Company may become involved in ordinary, routine, or regulatory legal proceedings incidental to the Company's business.
The Company is not engaged in any other legal proceedings nor is the Company aware of any pending or threatened legal proceedings that, singly or in the aggregate, could have a material adverse effect on the Company's business, financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held a special meeting of shareholders on March 19, 2009 at which the shareholders voted to elect two additional individuals as members of the Company’s board of directors. The following votes were cast for or withheld as to the nominee for the position of director:
| Director Nominee | | Votes For | | | Votes Withheld | |
| Thomas Sidley | | | 1,249,555 | | | | 0 | |
| Donald Megrath | | | 1,249,555 | | | | 0 | |
The nominees for director were elected by the shareholders. There were no abstentions or broker non-votes with regard to this matter.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
There is no established public trading market for the Company's securities. As of the date of this report the Company's Common Stock trades on the Pink Sheets under the symbol MHLN.PK. The table below sets forth for the periods indicated the high and low bid prices for the Common Stock as reported by the Pink Sheets from January 1, 2007 through December 31, 2008. The prices in the table are the high and low bid prices as reported by the Pink Sheets, adjusted to reflect the impact of the 1 for 15 reverse stock split of the Company's Common Stock, which was not reflected by the Pink Sheets until the end of 2008. The prices shown represent interdealer prices without adjustments for retail mark-ups, mark-downs or commissions and consequently may not represent actual transactions.
Common Stock "MHLN.PK"
| 2008 Fiscal Quarters | | High | | | Low | |
| First Quarter | | $ | 4.500 | | | $ | 1.800 | |
| Second Quarter | | $ | 3.375 | | | $ | 3.375 | |
| Third Quarter | | $ | 9.000 | | | $ | 2.700 | |
| Fourth Quarter | | $ | 6.750 | | | $ | 0.030 | |
| 2007 Fiscal Quarters | | High | | | Low | |
| First Quarter | | $ | 5.250 | | | $ | 2.250 | |
| Second Quarter | | $ | 5.250 | | | $ | 7.875 | |
| Third Quarter | | $ | 15.750 | | | $ | 5.625 | |
| Fourth Quarter | | $ | 11.250 | | | $ | 1.575 | |
Holders of shares of Common Stock are entitled to receive such dividends, if any, as may be declared by the Company's Board of Directors out of funds legally available therefor and, upon the Company's liquidation, dissolution or winding up, are entitled to share ratably in all net assets available for distribution to such shareholders. The Company has not, to date, declared or paid any cash dividends to its Common Stock holders.
Recent Sales of Unregistered Securities
Other than as reported in our quarterly reports on Form 10-Q and current reports on Form 8-K, we did not sell any equity securities that were not registered under the Securities Act of 1933 during the year ended December 31, 2008.
Shareholders of Record
As of December 31, 2008, there were approximately 60 shareholders of record of the Company's Common Stock. There is one shareholder of record of the Company's Series C Preferred Stock.
Securities Authorized for Issuance Under Equity Compensation Plans
The Company's Board of Directors determined in 2005 that the cost of maintaining the equity compensation plans outweighed the perceived benefits received from the Company's employees under those plans. Therefore, these equity compensation plans were terminated. The Company expects that for the foreseeable future any equity compensation grants to the employees and directors will be in the form of grants of shares of Common Stock. Such grants may be restricted or unrestricted.
Item 6. Selected Financial Data
Not Applicable
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
All of the references to share and per share data below have been retroactively restated to reflect the reverse stock split for all periods presented due to the 1 for 15 reverse stock split approved by the Company's shareholders at a special meeting of shareholders on March 19, 2008.
Overview
microHelix, Inc. ("we," "us," "our," "microHelix" or the "Company") began in 1991 in Portland, Oregon as a grant and private equity funded research company, formed to develop manufacturing techniques for medical device interconnect systems. In the years that followed we established a foundation of proprietary processes and intellectual property in the areas of ultra-thin wall pinhole free wire, micro-interconnect technology, advanced laser micro-machining, specialty connectors and flex circuits. The Company was a manufacturer of complex cable assemblies for the medical and commercial original equipment manufacturer ("OEM") markets. The Company served a segment of the quick turn, high mix, and low volume cable assembly market generally referred to as the custom cable assembly market. Typical cable assemblies included cable, connectors, flex reliefs, housings and printed circuit boards ("PCBs") and are critical sub-components of medical devices and commercial electronic systems.
Continuing deterioration of the Company's financial condition during April and May 2007 caused the Company to voluntarily surrender its assets to its secured creditors on May 31, 2007 and begin winding up its affairs. In connection with the windup, the Company stopped paying its unsecured creditors for goods and services provided prior to May 21, 2007. The Company and its wholly owned subsidiary, Moore Electronics, Inc. ("Moore"), operated for the benefit of the secured creditors until September 2007, at which time it ceased manufacturing operations and the Company became a shell company. See Note 1 to the Consolidated Financial Statements – "Going Concern."
Because of the disposition of substantially all of our assets and the subsequent winding up of business, the Company has no ongoing operations. The Company’s Board of Directors has determined to maintain the Company as a public "shell" corporation, which will seek suitable business combination opportunities. The Company’s Board of Directors believes that a business combination with an operating company has the potential to create value for the Company's shareholders.
The Company's current business objective is to locate appropriate opportunities for a business combination. The Company does not currently engage in any activity that provides cash flow. The Company may require additional funds to cover the costs of investigating and analyzing a business combination or to fund general and administrative expenses.
The Company anticipates incurring costs related to the filing of Exchange Act reports, officer's and director's salaries and transaction costs related to a business combination in the next 12 months. There is no assurance that the Company will be able to raise sufficient capital to cover those expenses. Until the Company consummates a business combination, it does not anticipate any future expenditures for research and development or the purchase or sale of any property, plant or equipment.
Critical Accounting Policies and Estimates
The discussion and analysis of the Company’s financial condition and results of operations is based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Because Moore continued to operate during the windup period, management continued to evaluate its estimates for Moore on a going concern basis that assumed continued operations, including those related to product returns, bad debts, inventories, prepaid expenses, intangible assets, income taxes, warranty obligations and other contingencies. The Company's MicroCoax Assembly Division’s assets were evaluated for impairment and the value of its remaining assets was adjusted to $17,000, which is the value the Company received from the sale of the MicroCoax assets to an unrelated third party on July 12, 2007. The Company based the estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which formed the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. The Company believes the following critical accounting policy and related judgments and estimates affect the preparation of the Company's consolidated financial statements. See also Note 1 to the Consolidated Financial Statements.
Revenue Recognition—The Company recognized revenue from commercial sales of cables, connectors, customized cable assemblies, wire harnesses, and mechanical assemblies when title passed, which was upon shipment. Commercial sales were made F.O.B. point of shipment and the products must have been physically shipped from the factory. Returns were limited to nonconforming products and the volume of returns was insignificant. The Company does not establish reserves for returns because returns were minimal.
Results of Operations
The following table presents the Company's historical operating results for the periods indicated as a percentage of sales:
| | | Year Ended December 31, | |
| | | 2007 | |
| Sales | | | 100 | % |
| Cost of sales | | | 89 | |
| Gross profit (loss) | | | 11 | |
| Operating expenses: | | | | |
| Sales and marketing | | | 3 | |
| General and administrative | | | 14 | |
| Total operating expenses | | | 17 | |
| Loss from operations | | | (6 | ) |
| Other income (expense) | | | (10) | |
| Net loss before benefit for income taxes | | | (16 | ) |
| Income tax benefit | | | 4 | |
| Net loss | | | (12 | )% |
Year ended December 31, 2008 compared with year ended December 31, 2007
One principal event affected the Company's financial results in 2008 and 2007. Despite the Company's efforts to restructure its debts, continuing deterioration of the Company's financial condition during April and May 2007 caused the Board of Directors to approve a voluntary surrender of the Company's assets to its secured creditors and begin winding up its affairs. See Item 1 – Overview.
Total sales in 2008 were $0, compared to $8,014,892 in 2007. Gross profit in 2008 was $0 compared to gross profit of $850,942 in 2007. The decreases in sales and gross profit were due to the loss of the Redmond, Washington facility of Physio-Control, Inc., a subsidiary of Medtronic, Inc. and a key customer of the Company, due to regulatory actions taken by the United States FDA against Physio-Control, Inc. that were unrelated to the Company; the closure and sale of the MicroCoax Assembly Solutions division and the wind down of microHelix, Inc., and the wind down and sale of the assets of Moore.
Total operating expenses in 2008 were $4,061,564 compared to $1,319,039 in 2007. The increase was due primarily to warrants issued for financial advisory services and was offset by head count reductions that reduced salary and related benefits expenses, reduced consultant expenses, the closure and sale of the MicroCoax Assembly Solutions division and the wind down of Moore and microHelix, Inc., and the wind down and sale of the assets of Moore.
Sales and marketing expenses for 2008 were $0 compared to $217,379 in 2007. This decrease is due to head count reductions that reduced salary and related benefits expenses, reduced consultant expenses, the closure and sale of the MicroCoax Assembly Solutions division and the wind down of microHelix, Inc., and the wind down and sale of the assets of Moore.
General and administrative expenses for 2008 were $4,061,564 compared to $1,101,660 in 2007. The increase was due to warrants issued for financial advisory services and was offset by head count reductions that reduced salary and related benefits expenses, reduced consultant expenses, the closure and sale of the MicroCoax Assembly Solutions division and the wind down of the Company and the wind down and sale of the assets of Moore.
Net other expense for 2008 was $352,715 compared to net other expense of $781,169 for 2007. The difference was the higher income in 2007 associated with debt forgiveness and change in the warrant valuation offset by the higher amortization of note discount, loan restructuring expenses, higher interest rates, impairment of intangible assets (including goodwill), and the loss on disposal of equipment.
Net loss for 2008 was $4,413,279 compared to a net loss of $951,121 in 2007.
Liquidity and Capital Resources
As of December 31, 2008, the Company had $98,433 of cash. Cash used in operating activities during 2008 was $291,907 compared to cash provided by operating activities of $3,117,188 in the same period a year ago. The use of funds included a net loss of $4,413,279, debt forgiveness of $329,742, and a net decrease in accounts payable of $57,786, offset by an increase in accrued liabilities of $289,853, warrants issued for advisory services of $3,598,971, and amortization of debt discount of $659,981.
For the twelve-month period ending December 31, 2008 the Company had cash provided by financing activities of $384,543 as compared to $3,244,071 from financing activities during the twelve months ended December 31, 2007. The primary source of cash from financing activities for the twelve month period ending December 31, 2008 was advances on notes payable from the Company’s secured creditor.
During April and May 2007, the Company's financial condition deteriorated significantly from the loss of a major customer (due to regulatory actions taken against that customer by the United States FDA that were unrelated to the Company), loss of key personnel, and continuing and accelerating operating deficits. On May 31, 2007 the Company surrendered its assets to its secured creditors and began winding up its affairs. The Company's secured lenders sold the assets of the MicroCoax Assembly division during July 2007 and the assets of Moore to an unrelated third party in September 2007. Proceeds from these sales and the liquidation of accounts receivable and other assets were used to partially repay the amounts due under various secured lending agreements. At the conclusion of business operations in September 2007, the Company still owed its secured lenders approximately $365,536. In connection with the asset surrender, the Company stopped paying its unsecured creditors for goods and services provided prior to May 21, 2007. To ensure an orderly transition, the Company's customers agreed to a substantial price increase, provided raw materials and subsidized certain expenses which allowed Moore to fill its backlog, collect its accounts receivable and cure certain outstanding deficiencies in rent payments and benefits plans. On September 28, 2007, Moore and the Company discontinued all manufacturing operations and sold their remaining assets to an unrelated third party.
The following description of the Company's principal debt at March 31, 2009 should be read in the context of the foregoing paragraph. See also Notes 2, 6 and 12 to the Company's Consolidated Financial Statements.
On March 12, 2007, the Company obtained an additional loan from MH Financial Associates, LLC (“MH Financial”) of $750,000. In connection with the additional loan, the original note (the "Original Note") evidencing then-existing debt owed to MH Financial was amended (the "Amended Note") to reflect a revised principal amount of $1,778,964, which bore interest at a rate of 12% per annum ("Current Interest"). The Amended Note replaced and superseded the Original Note. Additional interest accrued on the Amended Note at a rate of 8% per annum, which was compounded quarterly and was payable at maturity ("Deferred Interest"). The Company made separate payments with respect to $1,006,086 of the principal under the Original Note ("Loan 1") and with respect to $750,000 of the principal added in the Amended Note ("Loan 2"). Beginning April 19, 2007 and on the same day of each subsequent month, microHelix was to pay $20,000 per month to be applied to Current Interest and principal on Loan 1 and $7,500 per month of Current Interest on Loan 2. On September 30, 2007, the Company was to make an additional payment of accrued Current Interest through that date with regard to Loan 2. Beginning on October 31, 2007, and on the last day of each subsequent month through and including May 31, 2008, the Company was to pay $87,555 per month to be applied against the Current Interest and principal balance of Loan 2. All amounts outstanding under the Amended Note, including the Deferred Interest, were due and payable on June 30, 2008.
The Amended Note continues to be secured by a lien against substantially all of the assets of microHelix and Moore, including all of the outstanding Common Stock of Moore. MH Financial may accelerate all amounts due under the Amended Note in the event of default. In addition, all amounts outstanding under the Amended Note are due and payable upon the sale of all or substantially all of our assets to anyone other than MH Financial, or upon the transfer of ownership of more than 50% of the stock.
The Company used $153,698 of the proceeds from Loan 2 of the Amended Note to pay in full a promissory note previously issued to James M. Williams, one of the Company's former directors. The remaining proceeds were used to make payments to certain vendors and to fund operating costs. In connection with Loan 2, microHelix issued warrants to MH Financial to purchase 666,667 shares of Common Stock at an initial exercise price of $0.015 per share. All but 13,332 of these warrants were exercised in 2008. The remaining warrants to purchase 13,332 shares of our Common Stock expire on March 11, 2010. In connection with the Amended Note, the right to convert the Original Note into shares of our Common Stock was cancelled.
As additional consideration to MH Financial for extending additional credit to the Company in connection with the Amended Note, the Board of Directors approved (subject to approval by the shareholders) the sale (the "Sale") to MH Financial or its assigns of all of the MicroCoax division's assets, which comprise substantially all of the operating assets, and all issued and outstanding shares of Moore. The closing date for the sale was to be no later than September 30, 2007, and would be subject to certain terms and conditions, including approval by microHelix's shareholders. Shareholder approval for the Sale was not requested and the Sale did not occur.
The Company also agreed to use commercially reasonable efforts to obtain shareholder approval at the 2007 annual meeting for the Sale and for an increase of the authorized capital stock to 75,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock. Such approval was obtained at a special meeting of shareholders on January 15, 2008.
On March 12, 2007 the Company was in default under the Original Note. On that date, the Company and MH Financial entered into a Forbearance and Waiver Agreement (the "Forbearance Agreement") under which MH Financial agreed to forbear with respect to the Company’s defaults and agreed to waive certain of the obligations to register shares of Common Stock owned by MH Financial pursuant to the Registration Rights Agreement dated October 19, 2006 between us and MH Financial. As consideration for the Forbearance Agreement, we issued warrants to MH Financial to purchase 193,333 shares of Common Stock at an exercise price of $0.015 per share. All of these warrants were exercised in 2008. As additional consideration for the Forbearance Agreement, the Company also agreed to reduce the exercise price to $0.015 per share for warrants to purchase 188,741 shares of our Common Stock issued to MH Financial pursuant to the Original Note. After giving effect to the additional warrants issued in connection with the Amended Note and the Forbearance Agreement, MH Financial is the beneficial holder of approximately 55% of the Company's voting capital stock.
On June 27, 2008 the Company refinanced the Amended Note from MH Financial by issuing a note payable to MH Financial in the amount of $977,743. The loan amount included $477,743 that was owed to MH Financial as of June 27, 2008 and an additional loan of up to $500,000. The Company was advanced $200,000 on June 27, 2008, $100,000 on December 31, 2008, $100,000 on February 25, 2009, and has received no additional advances against the $500,000 loan amount. Effective as of the date of the loan, interest will accrue on the outstanding principal balance of the loan at a rate of 20% per annum. The original due date of the loan was December 27, 2008 and, as a condition of the December 31, 2008 advance, the due date was extended to December 27, 2009. As an additional consideration for the initial disbursement on June 30, 2008, the Company also issued warrants to purchase 7,466,666 shares of Common Stock at $0.001 per share to MH Financial Associates, LLC. MH Financial Associates, LLC has agreed to assign certain of its warrants to investors as follows: (i) Aequitas Catalyst Fund LLC: warrants to purchase 1,166,601 shares; (ii) Thurman Holdings 1, Limited Partnership: warrants to purchase 2,822,867 shares; (iii) Fiserv Trust Company fbo Robert J. Jesnik: warrants to purchase 59,958 shares and (iv) CTK Capital Corporation, a corporation controlled by James M. Williams, former Chairman of the Company’s Board of Directors: warrants to purchase 332,384 shares. The warrants expire June 27, 2013.
As additional consideration for the $100,000 advance on December 31, 2008, the Company issued warrants to purchase 1,066,667 shares of Common Stock at $0.001 per share.
As additional consideration for the $100,000 advance on February 27, 2009, the Company issued warrants to purchase 1,066,667 shares of Common Stock at $0.001 per share.
In all of the above cases, warrants to purchase Common Stock were issued in reliance on Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"), and we obtained representations from the investors as to their status as "accredited investors" as that term is defined in Regulation D.
Off Balance Sheet Arrangements
The Company does not have any off balance sheet arrangements.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | Page |
| Report of Peterson Sullivan LLP - Independent Registered Public Accounting Firm | | 13 |
| Consolidated Balance Sheets as of December 31, 2007 and 2008 | | 14 |
| Consolidated Statements of Operations for the Years Ended December 31, 2007 and 2008 | | 15 |
| Consolidated Statements of Shareholders' Deficit for the Years Ended December 31, 2007 and 2008 | | 16 |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2007 and 2008 | | 17 |
| Notes to Consolidated Financial Statements | | 19 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
microHelix, Inc.
Lake Oswego, Oregon
We have audited the accompanying consolidated balance sheets of microHelix, Inc. and Subsidiary, ("the Company") as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders' deficit, and cash flows for the 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 audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included 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 audits 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 microHelix, Inc. and Subsidiary, as of December 31, 2008 and 2007, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has experienced recurring losses and negative cash flows from operations. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding this matter are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/S/ PETERSON SULLIVAN LLP
Seattle, Washington
April 9, 2009
microHelix, Inc.
CONSOLIDATED BALANCE SHEETS
December 31, 2008 and 2007
| | | 2007 | | | 2008 | |
| Assets | | | | | | |
| Current Assets: | | | | | | |
| Cash | | $ | 5,797 | | | $ | 98,433 | |
| Prepaid expenses | | | 22,917 | | | | — | |
| Total current assets | | | 28,714 | | | | 98,433 | |
| | | | | | | | | |
| Total assets | | $ | 28,714 | | | $ | 98,433 | |
| Liabilities and Shareholders' Deficit | | | | | | | | |
| Current Liabilities: | | | | | | | | |
| Accounts payable | | $ | 1,068,933 | | | $ | 744,542 | |
| Accrued liabilities | | | 250,886 | | | | 257,515 | |
| Current maturities of notes payable | | | 198,739 | | | | 694,161 | |
| Common stock warrant liability | | | 62,822 | | | | — | |
| Total current liabilities | | | 1,581,380 | | | | 1,696,218 | |
| | | | | | | | | |
| Shareholders' Deficit: | | | | | | | | |
| Preferred stock, convertible, no par value, 10,000,000 shares authorized, 279,070 Series C Preferred stock issued and outstanding, liquidation preference of $600,000 | | | 533,000 | | | | 533,000 | |
| Common stock, no par value, 75,000,000 shares authorized, 1,973,421 and 966,339 shares issued and outstanding at December 31, 2008 and 2007 respectively | | | 17,462,823 | | | | 17,477,917 | |
| Additional paid-in capital | | | 5,989,455 | | | | 10,342,521 | |
| Accumulated deficit | | | (25,537,944 | ) | | | (29,951,223 | ) |
| Total shareholders' deficit | | | (1,552,666 | ) | | | (1,597,785 | ) |
| | | | | | | | | |
| Total liabilities and shareholders' deficit | | $ | 28,714 | | | $ | 98,433 | |
The accompanying notes are an integral part of these consolidated financial statements.
microHelix, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | Year Ended December 31, | |
| | | 2007 | | | 2008 | |
| | | | | | | |
| Sales, net | | $ | 8,014,892 | | | $ | — | |
| Cost of Sales | | | 7,163,950 | | | | — | |
| Gross profit | | | 850,942 | | | | — | |
| | | | | | | | | |
| Operating Expenses: | | | | | | | | |
| Sales and marketing | | | 217,379 | | | | — | |
| General and administrative | | | 1,101,660 | | | | 4,061,564 | |
| Total operating expenses | | | 1,319,039 | | | | 4,061,564 | |
| | | | | | | | | |
| Loss from operations | | | (468,097 | ) | | | (4,061,564 | ) |
| | | | | | | | | |
| Other income (expense): | | | | | | | | |
| Other income | | | — | | | | 30,785 | |
| Impairment expense-intangible assets | | | (242,658 | ) | | | — | |
| Loan restructuring expense | | | (989,079 | ) | | | — | |
| Warrant valuation gain | | | 1,755,378 | | | | 62,822 | |
| Debt forgiveness | | | 1,107,854 | | | | 329,742 | |
| Impairment expense-goodwill | | | (732,365 | ) | | | — | |
| Loss on disposal of equipment | | | (545,721 | ) | | | — | |
| Interest expense | | | (1,134,578 | ) | | | (775,064 | ) |
| Total other income (expense) | | | (781,169 | ) | | | (351,715 | ) |
| | | | | | | | | |
| Loss before benefit for income taxes | | | (1,249,266 | ) | | | (4,413,279 | ) |
| | | | | | | | | |
| Benefit for Income Taxes | | | 298,145 | | | | — | |
| Net loss | | $ | (951,121 | ) | | $ | (4,413,279 | ) |
| | | | | | | | | |
| Loss per common share — basic and diluted | | $ | (.98 | ) | | $ | (2.42 | ) |
| Weighted average number of shares outstanding — basic and diluted | | | 966,275 | | | | 1,825,346 | |
The accompanying notes are an integral part of these consolidated financial statements.
microHelix, Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
Years Ended December 31, 2007 and 2008
| | | | | | | | | | | | Additional | | | | | | | |
| | | Common Stock | | | Preferred | | | Paid-in | | | Accumulated | | | | |
| | | Shares | | | Amount | | | Stock Series C | | | Capital | | | Deficit | | | Total | |
| Balance, December 31, 2006 | | | 965,672 | | | $ | 17,462,823 | | | $ | 533,000 | | | $ | 6,292,850 | | | $ | (24,586,823 | ) | | $ | (298,150 | ) |
| Common stock issued for services | | | 667 | | | | | | | | | | | | 2,500 | | | | | | | | 2,500 | |
| Warrants issued with troubled debt restructuring | | | | | | | | | | | | | | | 606,239 | | | | | | | | 606,239 | |
| Change in strike price for warrants | | | | | | | | | | | | | | | 354,096 | | | | | | | | 354,096 | |
| Warrants issued in conjunction with debt | | | | | | | | | | | | | | | 551,970 | | | | | | | | 551,970 | |
| Common stock warrant liability | | | | | | | | | | | | | | | (1,818,200 | ) | | | | | | | (1,818,200 | ) |
| Net loss for the year | | | | | | | | | | | | | | | | | | | (951,121 | ) | | | (951,121 | ) |
| Balance, December 31, 2007 | | | 966,339 | | | $ | 17,462,823 | | | $ | 533,000 | | | $ | 5,989,455 | | | $ | (25,537,944 | ) | | $ | (1,552,666 | ) |
| Common stock issued for exercise of warrants | | | 1,006,229 | | | | 15,094 | | | | | | | | | | | | | | | | 15,094 | |
| Additional shares issued upon final calculation of reverse stock split | | | 853 | | | | | | | | | | | | | | | | | | | | | |
| Warrants issued in conjunction with debt | | | | | | | | | | | | | | | 754,095 | | | | | | | | 754,095 | |
| Warrants issued for advisory services | | | | | | | | | | | | | | | 3,598,971 | | | | | | | | 3,598,971 | |
| Net Loss for the year | | | | | | | | | | | | | | | | | | | (4,413,279 | ) | | | (4,413,279 | ) |
| Balance , December 31, 2008 | | | 1,973,421 | | | $ | 17,477,917 | | | $ | 533,000 | | | $ | 10,342,521 | | | $ | (29,951,223 | ) | | $ | (1,597,785 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
microHelix, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | Year Ended December 31, | |
| | | 2007 | | | 2008 | |
| Cash Flows Provided By (Used In) Operating Activities: | | | | | | |
| Net loss | | $ | (951,121 | ) | | $ | (4,413,279 | ) |
| Adjustments to reconcile net loss to cash provided by (used in) operating activities: | | | | | | | | |
| Depreciation-property and equipment | | | 266,510 | | | | — | |
| Goodwill impairment | | | 732,365 | | | | — | |
| Amortization-intangible assets | | | 107,454 | | | | — | |
| Intangible assets impairment | | | 242,658 | | | | — | |
| Change in provision for doubtful accounts | | | (3,206 | ) | | | — | |
| Change in provision inventory reserves | | | (404,476 | ) | | | — | |
| Common stock issued for services | | | 2,500 | | | | — | |
| Benefit from deferred income taxes | | | (298,145 | ) | | | — | |
| Debt forgiveness | | | (1,107,854 | ) | | | (329,742 | ) |
| Loan restructuring costs | | | 992,270 | | | | — | |
| Warrants issued for advisory services | | | — | | | | 3,598,971 | |
| Warrant valuation gain | | | (1,755,378 | ) | | | (62,822 | ) |
| Loss on disposal of equipment | | | 545,721 | | | | — | |
| Interest expense-amortization | | | 706,322 | | | | 659,981 | |
| Change in operating assets and liabilities: | | | | | | | | |
| (Increase) Decrease in assets: | | | | | | | | |
| Accounts receivable | | | 1,908,866 | | | | — | |
| Inventories | | | 2,004,879 | | | | — | |
| Prepaid expenses and other current assets | | | 20,775 | | | | 22,917 | |
| Increase (Decrease) in liabilities: | | | | | | | | |
| Accounts payable | | | 473,993 | | | | (57,786 | ) |
| Accounts payable-related parties | | | (8,232 | ) | | | — | |
| Accrued liabilities | | | (358,713 | ) | | | 289,853 | |
| Net cash provided by (used in) operating activities | | | 3,117,188 | | | | (291,907 | ) |
| | | | | | | | | |
| Cash Flows Provided by Investing Activity: | | | | | | | | |
| Proceeds from sale of equipment | | | 92,000 | | | | — | |
| Net cash provided by investing activity | | | 92,000 | | | | — | |
| | | | | | | | | |
| Cash Flows Provided by (Used in) Financing Activities: | | | | | | | | |
| Proceeds from (repayments of) line of credit , net | | | (1,897,432 | ) | | | — | |
| Payments on notes payable | | | (1,817,242 | ) | | | — | |
| Proceeds from exercise of warrants | | | — | | | | 15,094 | |
| Payment on notes payable to shareholders | | | (150,000 | ) | | | — | |
| Checks issued in excess of bank balances | | | (129,397 | ) | | | — | |
| Proceeds from issuance of notes payable to shareholders | | | 750,000 | | | | 369,449 | |
| Net cash provided by (used in) financing activities | | | (3,244,071 | ) | | | 384,543 | |
| Change in cash | | | (34,883 | ) | | | 92,636 | |
| Cash, beginning of year | | | 40,680 | | | | 5,797 | |
| Cash, end of year | | $ | 5,797 | | | $ | 98,433 | |
The accompanying notes are an integral part of these consolidated financial statements.
MICROHELIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, (CONTINUED)
Years Ended December 31, 2007 and 2008
| | | Year Ended December 31, | |
| | | 2007 | | | 2008 | |
| | | | | | | |
| Supplemental disclosure of cash flow information — Cash paid for interest | | $ | 205,089 | | | $ | — | |
| | | | | | | | | |
| Supplemental disclosure of non-cash Financing Activities: | | | | | | | | |
| Common stock warrant liability | | $ | 1,818,200 | | | $ | — | |
| Warrants issued to lenders-recorded as debt discount | | $ | 551,970 | | | $ | 754,095 | |
| Reclassification of note payable to accounts payable | | $ | — | | | $ | 63,137 | |
| Refinance of accrued interest to note payable | | $ | — | | | $ | 283,224 | |
The accompanying notes are an integral part of these consolidated financial statements.
MICROHELIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Operations— Until September 28, 2007, when microHelix, Inc (“the Company”) suspended manufacturing operations and concluded the disposition of its assets to its secured creditors, the Company was a manufacturer of custom cable assemblies and mechanical assemblies for the medical and commercial original equipment manufacturer (OEM) markets. On May 31, 2007, the Company surrendered substantially all its assets to its secured creditors and concluded the disposition of all the Company's assets September 28, 2007, after which microHelix became a shell company (see "Going Concern") that will seek out suitable business combinations. Management believes that presentation of discontinued operations would not be appropriate since substantially all of the Company’s operations have been discontinued.
On June 27, 2008 the Company entered into an advisory services agreement with Aequitas Capital Management, Inc. (“Aequitas”) under which Aequitas began to provide strategy development, strategic planning, marketing, corporate development and other such advisory services that the Company reasonably requests from time to time, under direction of the Company’s Board of Directors for a monthly fee of $10,000 and reimbursement of expenses. In addition a warrant for 1,066,667 shares of Company stock with an exercise price of $0.001 per share was issued to Aequitas in 2008 on the inception of Aequitas service on June 27, 2008 (see Note 9). Under a separate agreement the Company has obligation to pay Aequitas $5,000 per month for certain services related to occupancy of Aequitas facilities and information technology support related thereto. In addition to advising and servicing the Company, Aequitas is also manager of MH Financial Associates, LLC and Aequitas Catalyst, LLC which are two of the Company’s largest shareholders.
Principles of Consolidation—The consolidated financial statements include the accounts of microHelix, Inc. (including its MicroCoax Assembly Solutions division) and its wholly owned subsidiary, Moore Electronics, Inc. (“Moore”). All intercompany transactions have been eliminated.
Use of Estimates — The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Going Concern — Despite the Company's efforts to restructure its debts, continuing deterioration of the Company's financial condition during April and May 2007 caused the Board of Directors to conclude that the Company's creditors and shareholders would be best served by allowing the secured creditors to foreclose on the Company's assets. The Company agreed to voluntarily surrender its assets on May 31, 2007 and began winding up its affairs. In connection with the windup, the Company stopped paying its unsecured creditors for goods and services provided prior to May 21, 2007. To ensure an orderly transition, the Company's customers agreed to substantial price increases, provided raw materials and subsidized certain expenses which allowed Moore to fill its backlog, collect its receivables and cure outstanding deficiencies in rent payments and benefits plans. The Company applied the proceeds from filling these orders to the outstanding balances due to its secured creditors.
These consolidated financial statements reflect the shutdown (discontinuance) of the MicroCoax Assembly Solutions division which occurred May 23, 2007. The division's assets were sold to an unrelated third party for $17,000 during July 2007. The Company's Moore subsidiary continued to operate for the benefit of the secured creditors through September 28, 2007 after which its assets were sold to an unrelated third party for $75,000. These sales resulted in a $545,721 loss on disposal of equipment.
These consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred recurring net losses, had an accumulated deficit of $29,951,223 at December 31, 2008, and has no current business operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that may be necessary should the Company be unable to continue as a going concern.
Cash Equivalents — For the purpose of the statements of cash flows, cash equivalents include all highly liquid debt instruments with original maturities of three months or less which are not securing any debt or obligations. The Company maintains its cash in bank accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.
Goodwill and Other Intangible Assets — Goodwill represented the excess of the purchase price over the estimated fair value of the net identified tangible and intangible assets of the acquired business. Goodwill must be tested for impairment at least on an annual basis, or more frequently when a significant event occurs or circumstances change.
During April and May 2007, the Company's financial condition deteriorated significantly from the loss of a major customer (due to regulatory actions taken against that customer), loss of personnel, and continuing operating deficits. On May 31, 2007 the Company surrendered its assets to its secured creditors and began winding up its affairs. In connection with the windup, the Company determined that its Goodwill was impaired and recorded a charge of $732,365 as of June 30, 2007, writing down the value of its Goodwill to $0.
As a result of the Company's purchase of Moore in April 2005, the Company acquired identifiable defined life intangible assets such as customer contacts and lists and manufacturing process technology. The customer lists and contacts were amortized on a straight-line basis over a three-year period and the manufacturing process technology was amortized over a five-year period on a straight-line basis. The Company continued to amortize these identifiable intangible assets over these lives until the quarter ending June 30, 2007 when the Company, for the reasons listed in the previous paragraph, recorded a charge of $242,658 reducing the value of its intangible assets to $0. The impairment was calculated using the discounted cash flows expected to be derived from the remaining use of the assets in 2007.
Revenue Recognition — The Company recognized revenues from commercial sales of cable assemblies and related supplies when title passed (which was upon shipment); persuasive evidence of an agreement existed, the price was fixed or determinable, and collectability was probable. Commercial sales were made F.O.B. point of shipment. Returns were limited to nonconforming products. The Company expensed shipping and handling costs as incurred, which were included in operating expense. Shipping costs recovered from customers, if any, were included in net sales.
Income Taxes — The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards, No. 109, Accounting for Income Taxes. Deferred income taxes result primarily from temporary differences between financial and tax reporting. Deferred tax assets and liabilities are determined based on the differences between the financial statement bases and tax bases of assets and liabilities using enacted tax rates. A valuation allowance is recorded to reduce a deferred tax asset to that portion of the deferred tax asset that is expected to more likely than not be realized.
The Company accounts for unrecognized tax benefits in accordance with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (FIN 48). The Company has not recorded any liabilities for uncertain tax positions or any related interest or penalties.
Fair Value of Financial Instruments — The carrying value of the Company's accounts payable, other accrued liabilities, and notes payable approximate their estimated fair values due to the relatively short maturities of those instruments.
Comprehensive Loss — The Company has no components of Other Comprehensive Income (Loss) and, accordingly, no Statement of Comprehensive Income (Loss) has been included in the accompanying consolidated financial statements.
Net Loss per Share — The Company uses SFAS No. 128, "Earnings per Share" for calculating the basic and diluted loss per share. Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding. Because the Company recorded a loss for the years ended December 31, 2008 and 2007 the issuance of shares from the conversion of preferred stock or warrants would be anti-dilutive. Basic and diluted losses per common share were identical for these periods. The Company computed dilutive shares using the treasury method.
For the year ended December 31, 2008, the outstanding number of potentially dilutive common shares totaled 9,843,510 shares of Common Stock, consisting of Series C Preferred Stock convertible into 186,047 shares of Common Stock, and warrants to purchase 9,657,464 shares of Common Stock. At December 31, 2007, the outstanding number of potentially dilutive common shares totaled 1,250,985 shares of Common Stock, consisting of Series C Preferred Stock convertible into 186,047 shares of Common Stock and warrants to purchase 1,064,938 shares of Common Stock.
Operating Segments and Reporting Units — The Company operated as a single business segment and reporting unit. For the year ended December 31, 2007, substantially all revenues had been derived from domestic operations.
2. Terms of Troubled Debt Modification
At December 31, 2006, the Company's Original Note payable to MH Financial, with an outstanding principal balance of $1,006,086 was outstanding. The Original Note was due in July 2007. Effective March 12, 2007 the Company and MH Financial modified the terms of the Original Note as follows:
| | (a) | MH Financial loaned the Company an additional $750,000; |
| | (b) | The due date of the Original Note was extended to June 30, 2008; |
| | (c) | MH Financial's right to convert the Original Note into shares of Company Common Stock was cancelled; |
| | (d) | The Company issued MH Financial a warrant to purchase 666,667 shares of the Common Stock with an exercise price of $0.015 per share; |
| | (e) | The exercise price on warrants to purchase 153,102 shares of Common Stock previously issued to MH Financial was reduced from $4.50 to $0.015 per share; and |
| | (f) | The Company issued MH Financial a warrant to purchase 193,333 shares of the Company's Common Stock with an exercise price of $0.015 per share, as consideration for MH Financial's forbearance of certain defaults under the Original Note. |
The foregoing modifications to the Original Note resulted in an effective interest rate of 54.7% to be applied prospectively to the carrying amount of the debt. Interest expense through the revised maturity date of June 30, 2008 was increased accordingly. For accounting and financial reporting purposes, this modification is characterized as troubled debt restructuring. Accordingly, the costs associated with this modification have been expensed in the period of the restructuring. There was no gain implicit in this restructuring because total principal and interest payments under the modified debt terms exceed the net carrying value of the original debt.
As additional consideration to, and as a requirement of, MH Financial extending additional credit to microHelix and modifying the Original Note, the Company’s Board of Directors approved the Sale (“the Sale”) to MH Financial or its assigns of all of microHelix’s MicroCoax Assembly Solutions division’s assets, which comprised substantially all of the Company’s operating assets, and all issued and outstanding shares of Moore. The closing date for the Sale was to be no later than September 30, 2007, and would be subject to certain terms and conditions, including approval by microHelix's shareholders. Shareholder approval for the Sale was not requested and the Sale did not occur.
3. Summary of Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations", which replaces SFAS No. 141. SFAS No. 141(R) establishes principles and requirements for how an acquiror recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. SFAS 141 (R) is effective for fiscal years beginning after December 15, 2008. The adoption of SFAS 141(R) will have an impact on accounting for business combinations once adopted, but the effect is dependent upon the acquisitions at that time.
In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements-an amendment of Accounting Research Bulletin No. 51", which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the non-controlling interest, changes in a parent's ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interest of the parent and the interests of the non-controlling owners. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The Company is evaluating the potential impact of SFAS No. 160 will have on its consolidated financial statements.
4. Major Customers
In 2007, sales to four customers represented 49% of the Company’s total sales. No other customer in 2007 accounted for more than 10% of sales.
On January 16, 2007, one of the Company’s major customers informed the Company that one of its divisions had temporarily suspended shipments of products manufactured at its production facility to customers in the United States. According to the customer, the decision to suspend U.S. product shipments was made to address quality system issues in its production facility that had been identified by the customer and the U.S. Food and Drug Administration and were unrelated to the Company, the closure and sale of the MicroCoax Assembly Solutions division, and the wind down of the Moore Electronics wholly owned subsidiary.
The Company had no customers in 2008.
5. Line of Credit
The Company had a revolving line of credit with an asset-based lender. The line of credit was fully secured by accounts receivable and inventory. All amounts owing under the line of credit were paid in 2007.
6. Notes Payable
A summary of the Company's notes payable outstanding as of December 31, 2008 and 2007 is as follows:
| | | 2008 | | | 2007 | |
| MH Financial Associates, LLC | | $ | 777,743 | | | $ | 125,070 | |
| EPICOR Software Corporation | | | — | | | | 63,137 | |
| Other | | | 10,532 | | | | 10,532 | |
| Total Notes Payable | | | 788,275 | | | | 198,739 | |
| Debt discounts | | | | | | | | |
| Warrants issued with MH Financial note | | | ( 94,114 | ) | | | — | |
| | | | | | | | | |
| Notes Payable, net | | | 694,161 | | | | 198,739 | |
| Current maturities | | | (694,161 | ) | | | (198,739 | ) |
| | | $ | — | | | $ | — | |
The note payable to EPICOR Software Corporation at December 31, 2007 was partially settled and reclassified to accounts payable in 2008.
The Original MH Financial Note required the Company to make monthly payments of $20,000 (including interest at 10% until July 19, 2007 and 14% thereafter). All principal and unpaid interest was due at maturity on July 19, 2008. The Original Note was secured by substantially all of the Company's assets. As of December 31, 2006, the Original Note was convertible into 228,663 shares of Common Stock based on a stated conversion rate of $4.50. After giving value to warrants issued in conjunction with the Original Note (see Note 9), the effective conversion rate was less than the market price of the common stock at the commitment date. The resulting beneficial conversion feature was valued at $37,729. The conversion feature of the Original Note was cancelled in March 2007 (see Note 2).
On March 12, 2007 the Company modified the Original Note owed to MH Financial by executing the Amended Note. See Note 2 - Terms of Troubled Debt Modification.
On June 27, 2008 the Company refinanced the Amended Note from MH Financial by issuing a new note payable in the amount of $977,743. The loan amount included $477,743 that was owed to MH Financial as of June 27, 2008 and an additional loan of up to $500,000. The Company was advanced $200,000 on June 27, 2008, and $100,000 on December 31, 2008. Effective as of the date of this loan, interest will accrue on the outstanding principal balance of the loan at a rate of 20% per annum on the outstanding principal balance. The original due date of the loan was December 27, 2008 and, as a condition of the December 31, 2008 advance, the due date was extended to December 27, 2009.
7. Liability for Potentially Dilutive Securities in Excess of Authorized Number of Common Shares
In accordance with EITF 00-19, the Company accounts for potential shares that can be converted to Common Stock, which are in excess of authorized shares, as a liability that is recorded at fair value. Total potential outstanding Common Stock exceeded the Company’s authorized shares on March 12, 2007 when the Company restructured its debt with MH Financial. In this process the Company issued 860,000 warrants. At that time total warrants and convertible preferred stock allowed the holder to purchase approximately 579,867 shares over the current authorized amount. The fair value of the warrants in excess of the authorized shares at March 12, 2007 was $1,818,200 and was recognized as a liability on March 12, 2007. This liability is required to be evaluated at each reporting date with any change in value included in the other income/(expense) until such time as enough shares are authorized to cover all potentially convertible instruments. As of December 31, 2007 the Company had recorded $1,755,378 in income related to the change in the fair value of its potential liability. As discussed in Note 9, the Company increased its authorized shares in 2008 such that the potentially dilutive securities no longer exceeded the authorized number of common shares. As such the Company reversed the remaining $62,822 liability to income.
8. Income Taxes
Deferred income taxes, reflecting the net tax effects of temporary differences between the carrying amount of assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes, are based on tax laws currently enacted.
The components of deferred tax asset are as follows:
| | | For the year ended December 31, | |
| | | 2007 | | | 2008 | |
| Federal net operating loss carry forwards | | $ | 6,674,000 | | | $ | 7,512,000 | |
| State net operating loss carry forwards | | | 1,298,000 | | | | 637,000 | |
| Deferred tax asset | | | 7,972,000 | | | | 8,149,000 | |
| Valuation allowance | | | (7,972,000 | ) | | | (8,149,000 | ) |
| Net deferred tax asset | | $ | — | | | $ | — | |
As of December 31, 2008 the Company had federal and state net operating loss carry forwards of approximately $22.1 million and $14.6 million respectively, expiring during the years 2013 through 2028.
The utilization of the tax net operating loss carry forwards may be limited due to ownership changes that have occurred as a result of substantial exercises of warrants.
The Company’s tax returns are open to audit for the years ended December 31, 2005 to 2008.
A benefit for income taxes of $298,145 has been recorded for the year ended December 31, 2007, due to the Company's amortization of its deferred tax liability related to the acquisition of Moore and in accordance with FASB 109. The differences between the benefit for income taxes and income taxes computed using the U.S. federal income tax rate was as follows:
| | | For the year ended December 31, | |
| | | 2007 | | | 2008 | |
| Benefit computed using statutory rate (34%) | | $ | (425,000 | ) | | $ | (1,501,000 | ) |
| Change in Valuation Allowance | | | 632,000 | | | | 177,000 | |
| Change in net operating loss carry forwards based on filed income tax returns | | | — | | | | 1,036,000 | |
| Goodwill and Other Intangibles Impairment (permanent difference) | | | 417,000 | | | | — | |
| Common Stock Warrant Valuation Gain (permanent difference) | | | (597,000 | ) | | | 597,000 | |
| Other Permanent Differences | | | 76,000 | | | | (18,000 | ) |
| Amortization of Deferred Tax Liability | | | (298,145 | ) | | | — | |
| State Income Taxes | | | (103,000 | ) | | | (291,000 | ) |
| Benefit for Income Taxes | | $ | (298,145 | ) | | $ | — | |
SFAS No. 109, Accounting for Income Taxes, requires that the tax benefit of net operating losses, temporary differences, and credit carry forwards be recorded as an asset to the extent that management assesses that realization is "more likely than not." Realization of the future tax benefits is dependent on the Company's ability to generate sufficient taxable income within the carry forward period. Because of the Company's current operating losses, management has provided a 100% valuation allowance for its net deferred tax assets.
9. Shareholders' Deficit
Preferred Stock — As of December 31, 2008 the Company was authorized to issue 10,000,000 shares of preferred stock, 279,070 of which are designated Series C Preferred Stock, no par value ("Series C Preferred Stock"), all of which are issued and outstanding.
The Series C Preferred Stock is owned by MH Financial. Each share of Series C Preferred Stock is initially convertible into 0.66667 shares of Common Stock. If the Series C Preferred Stock were converted using the initial conversion ratio, microHelix would issue 186,047 shares of Common Stock.
Stock Warrants — Prior to 2007, the Company issued 44,131 warrants which are still exercisable as follows:
| Warrants | | | Exercise Price | | Expiration Date |
| 31,867 | | | | $ | 3.75 | | | April 2015 |
| 4,861 | | | | $ | 7.20 | | | June 2016 |
| 6,667 | | | | $ | 7.50 | | | July 2011 |
| 736 | | | | $ | 407.70 | | | March 2012 |
On March 12, 2007 the Company modified its note payable owed to MH Financial. See Note 2 - Terms of Troubled Debt Modification. In connection with such modification, the Company issued warrants that grant MH Financial the right to purchase 666,667 shares of Common Stock of the Company at an exercise price of $0.015 per share. All but 13,332 of these warrants were exercised in 2008. The remaining warrants expire on March 11, 2010. The warrants had a fair value relative to the fair value of the associated debt of $551,970 calculated using the Black-Scholes option pricing model with the following assumptions:
| Expected life (in years) | | | 1 | |
| Expected volatility | | | 75.94 | % |
| Risk-free interest rate | | | 4.96 | % |
| Expected dividend | | | — | |
Also on March 12, 2007, the Company issued warrants that grant MH Financial the right to purchase 193,333 shares of Common Stock with an exercise price of $0.015 per share as consideration under a forbearance agreement. All of these warrants were exercised in 2008. The warrants had a fair value of $606,239 (recorded as loan restructure expense) calculated using the Black-Scholes option pricing model with the following assumptions:
| Expected life (in years) | | | 1 | |
| Expected volatility | | | 75.94 | % |
| Risk-free interest rate | | | 4.96 | % |
| Expected dividend | | | — | |
Also on March 12, 2007, the Company agreed to reduce the exercise price from $4.50 to $0.015 on warrants to purchase 153,102 shares of Common Stock previously granted to MH Financial. All of these warrants were exercised in 2008. The change in the fair value of the warrants of $354,096 (recorded as loan restructure expense) had been calculated using the Black-Scholes option pricing model with the following assumptions:
| Expected life (in years) | | | 1 | |
| Expected volatility | | | 75.94 | % |
| Risk-free interest rate | | | 4.96 | % |
| Expected dividend | | | — | |
As described in Note 6, on June 27, 2008 the Company refinanced the Amended Note from MH Financial by issuing a new note payable in the amount of $977,743. As a condition of the initial disbursement on June 30, 2008, the Company also issued warrants to purchase 7,466,666 shares of Common Stock at $0.001 per share. The warrants expire June 27, 2013. The warrants have a fair value relative to the fair value of the associated debt of $659,981 calculated using the Black-Scholes option pricing model with the following assumptions:
| Expected life (in years) | | | 1 | |
| Expected volatility | | | 202.46 | % |
| Risk-free interest rate | | | 1.15 | % |
| Expected dividend | | | — | |
The Company also issued warrants on June 27, 2008 that grant Aequitas Capital Management the right to purchase 1,066,667 shares of Common Stock with an exercise price of $0.001 per share as consideration for financial advisory services. The warrants expire on June 27, 2013. The warrants have a fair value of $3,598,971 (recorded as general and administrative expense) calculated using the Black-Scholes option pricing model with the following assumptions:
| Expected life (in years) | | | 1 | |
| Expected volatility | | | 202.46 | % |
| Risk-free interest rate | | | 1.15 | % |
| Expected dividend | | | — | |
On December 31, 2008 the Company received a $100,000 advance against the loan the Company obtained from MH Financial on June 27, 2008. As additional consideration for this $100,000 disbursement, the Company also issued warrants to purchase 1,066,667 shares of Common Stock at $0.001 per share. The warrants expire December 31, 2013. The warrants have a fair value relative to the fair value of the associated debt of $94,114 calculated using the Black-Scholes option pricing model with the following assumptions:
| Expected life (in years) | | | 1 | |
| Expected volatility | | | 285.29 | % |
| Risk-free interest rate | | | 0.37 | % |
| Expected dividend | | | — | |
Common Stock-During 2007 the Company issued 667 shares of Common Stock to various members of the Board of Directors for services rendered valued at $2,500.
During 2008, MH Financial and its affiliates exercised warrants to purchase 1,006,229 shares of Common Stock for $15,094.
On January 15, 2008 at a special meeting the shareholders, the Company's shareholders voted to amend the Company’s Amended Articles of Incorporation, as amended (the “Articles”) to increase the number of shares of Common Stock the Company is authorized to issue to 75,000,000 and the number of shares of Preferred Stock the Company is authorized to issue to 10,000,000.
On March 19, 2008 at a special meeting of the shareholders the Company's shareholders voted to amend the Articles to effect a reverse split of the Company's Common Stock in which every 15 shares of Common Stock held by a shareholder was reduced to one share of Common Stock. The consolidated financial statements, notes, and other references to share and per share data in this Annual Report on Form 10-K have been retroactively restated to reflect the reverse stock split for all periods presented.
10. Related-Party Transactions
There are no transactions with the affiliates or related parties that impact sales.
On June 27, 2008 the Company entered into an advisory services agreement with Aequitas Capital Management, Inc. (“Aequitas”) under which Aequitas began to provide strategy development, strategic planning, marketing, corporate development and other such advisory services that the Company reasonably requests from time to time, under direction of the Company’s Board of Directors for a monthly fee of $10,000 and reimbursement of expenses. During the twelve month period ending December 31, 2008 the Company recorded $90,000 of expense for advisory services. In addition a warrant for 1,066,667 shares of Company stock with an exercise price of $0.001 per share was issued to Aequitas in 2008 on the inception of Aequitas service on June 27, 2008 (see Note 9). Under a separate agreement the Company has obligation to pay Aequitas $5,000 per month for certain services related to occupancy of Aequitas facilities and information technology support related thereto. During the twelve month period ending December 31, 2008 the Company recorded $60,000 of expense for office rent and information technology support. In addition to advising and servicing the Company, Aequitas is also manager of MH Financial Associates, LLC and Aequitas Catalyst, LLC which are two of the Company’s largest shareholders. Included in accounts payable at December 31, 2008 is $90,000 due to Aequitas for advisory services, facilities occupancy, and information technology support.
11. Commitments and Contingencies
Operating Leases — As of December 31, 2008 the Company had no long-term leases for office space and/or equipment.
For the years ended December 31, 2008 and 2007, the Company incurred rent expense of $60,000 and $193,962, respectively.
Litigation — From time to time, the Company is involved as a defendant in litigation in the ordinary course of business, the outcome of which cannot be predicted with certainty. As of December 31, 2008, the Company is not aware of any legal proceedings or claims against the Company.
12. Subsequent Events.
On February 25, 2009 the Company received a $100,000 advance against the loan the Company obtained from MH Financial on June 27, 2008. As additional consideration for this $100,000 disbursement, the Company also issued warrants to purchase 1,066,667 shares of Common Stock at $0.001 per share.
Item 9. Changes in and Disagreement With Accountants on Accounting and Financial Disclosure
Not Applicable
Item 9T. Controls and Procedures
Attached as exhibits to this Annual Report on Form 10-K are certifications (the "Certifications") of the Company's principal executive officer and principal financial officer, which are required pursuant to Rule 13a-14 of the Exchange Act. This Item 9(T) of this Annual Report on Form 10-K includes information concerning the controls and controls evaluation referenced in the Certifications. This Item 9(T) of this Annual Report on Form 10-K should be read in conjunction with the Certifications for a more complete understanding of the matters presented.
Evaluation of disclosure controls and procedures
The Company's President and Chief Financial Officer evaluated the effectiveness of its disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of December 31, 2008. Based on that evaluation, the Company’s President and Chief Financial Officer concluded that its disclosure controls and procedures are not designed at a reasonable assurance level nor are they effective to give reasonable assurance that the information the Company must disclose in reports filed with the Securities and Exchange Commission are properly recorded, processed, summarized, and reported as required, and that such information is not accumulated and communicated to its management, including its President and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Based on the evaluation, the Company’s President and Chief Financial Officer, after evaluating the effectiveness of its “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), have concluded that, subject to the inherent limitations noted below, as of December 31, 2008, the Company’s disclosure controls and procedures were not effective due to the existence of several material weaknesses in its internal control over financial reporting, as discussed below. The Company's disclosure controls and procedures are subject to material weaknesses resulting from the Company's loss of key personnel. Because of the limited number of personnel available for accounting duties, there is an inadequate segregation of duties related to accounting controls. The accounting department consists only of the Company’s Chief Financial Officer. Due to the Company's current lack of financial resources it has not been reasonable or cost beneficial for the Company to hire extra accounting personnel who would have no other purpose, duties, or workload than to provide formal segregation of duties under internal control principles.
Management’s annual report on internal control over financial reporting
Management is responsible for establishing and maintaining internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s management evaluated, under the supervision and with the participation of our President and Chief Financial Officer, the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008.
Based on its evaluation under the framework in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission, the Company’s management concluded that its internal control over financial reporting was not effective as of December 31, 2008, due to the existence of significant deficiencies constituting material weaknesses, as described in greater detail below. A material weakness is a control deficiency, or combination of control deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this annual report.
Limitations on Effectiveness of Controls
The Company’s management, including our President and Chief Financial Officer, does not expect that the Company's disclosure controls or its internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additional controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Material Weaknesses Identified
In connection with the preparation of the Company’s financial statements for the year ended December 31, 2007, certain significant deficiencies in internal control became evident to management that, in the aggregate, represent material weaknesses. These weaknesses were still present at December 31, 2008, and include:
| 1. | Insufficient segregation of duties in the Company’s finance and accounting functions due to limited personnel. During the year ended December 31, 2008, the Company had one person on staff that performed nearly all aspects of the Company’s financial reporting process, including, but not limited to, access to the underlying accounting records and systems, the ability to post and record journal entries and responsibility for the preparation of the financial statements. This creates certain incompatible duties and a lack of review over the financial reporting process that would likely result in a failure to detect errors in spreadsheets, calculations, or assumptions used to compile the financial statements and related disclosures as filed with the SEC. These control deficiencies could result in a material misstatement to our interim or annual consolidated financial statements that would not be prevented or detected. |
| 2. | Lack of financial expertise. The Company does not have an employee with adequate financial expertise properly account for and disclose the kinds of complex transactions that occur within the Company such as financial instrument issuances and income tax provisions. This lack of financial expertise resulted in material auditor adjustments during the quarterly reviews and annual audit. |
| 3. | Insufficient corporate governance policies. Although the Company does have a code of ethics which provides broad guidelines for corporate governance, its corporate governance activities and processes are not always formally documented. |
| 4. | Inadequate approval and control over transactions and commitments made on the Company’s behalf by related parties. Specifically, during the year certain related party transactions were not effectively communicated to all internal personnel who needed to be involved to account for and report the transaction in a timely manner. This resulted in material adjustments during the quarterly reviews and annual audit, respectively, that otherwise would have been avoided if effective communication and approval processes had been maintained. |
As part of the communications by Peterson Sullivan, LLP, (“Peterson Sullivan”), with the Company’s Audit Committee with respect to Peterson Sullivan’s audit procedures for fiscal 2008, Peterson Sullivan informed the audit committee that these deficiencies constituted material weaknesses, as defined by Auditing Standard No. 5, “An Audit of Internal Control Over Financial Reporting that is Integrated with an Audit of Financial Statements and Related Independence Rule and Conforming Amendments,” established by the Public Company Accounting Oversight Board (“PCAOB”).
Plan for Remediation of Material Weaknesses
The Company intends to take appropriate and reasonable steps to make the necessary improvements to remediate the deficiencies described above. The Company intends to consider the results of its remediation efforts and related testing as part of its year-end 2009 assessment of the effectiveness of its internal control over financial reporting.
Changes in Internal Controls over Financial Reporting
There were no significant changes in internal control over financial reporting during the fourth quarter of 2008 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financing reporting.
Item 9B. Other Information
None.
Part III
Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Act.
The following table sets forth the names of the directors and officers of the Company. Also set forth is certain information with respect to each such person's age at December 31, 2008, principal occupation or employment during at least the past five years, the periods during which he or she has served as a director of microHelix and positions currently held with microHelix.
| Name | | Age | | Position | |
| Thomas Sidley | | 52 | | Chairman of the Board | |
| Donald Megrath | | 47 | | Director | |
| James E. Horswill | | 59 | | President and Chief Financial Officer of microHelix and of Moore, Director | |
Thomas Sidley has an extensive 20-year background in finance, banking, and asset securitization. He has successfully started and built two financial services companies, as well as managed the sale and divestiture of a large national mortgage company. His corporate banking experience includes senior and subordinated debt facilities, structured finance, and commercial real estate. Mr. Sidley is currently Senior Managing Director of Aequitas Capital Management, Inc., which is the manager of a shareholder of the Company. Mr. Sidley has a B.S. degree in Business Administration from Portland State University and an M.B.A. with High Honors in Finance from Boston University.
Donald Megrath is an experienced financial and operations executive with more than 18 years of collective consulting experience in media and technology services companies before his involvement in the investment banking and fund management business over the last four years. He has served as VP Finance and CFO in private and public companies. Mr. Megrath is currently a Senior Associate at Aequitas Capital Management, Inc., which is the manager of a shareholder of the Company. Mr. Megrath has a B.A. degree in Telecommunications and an M.B.A. from George Fox University.
James E. Horswill was appointed Corporate Controller in July 2005, Chief Financial Officer in February 2007, Secretary in April 2007, and President and Chief Executive Officer in June 2007. He has been a director since November 2007. From 1998 through 2003, Mr. Horswill was the Accounting Manager of Komatsu Silicon America, Inc, where he also served as Controller from 2003 through July 2005. Mr. Horswill received his Bachelor of Science in Business Administration from Linfield College and his M.B.A. from George Fox University.
Officers serve at the discretion of the Board of Directors. There are no family relationships among any of our directors and executive officers.
Audit Committee
The members of the Audit Committee during 2008 were Thomas Sidley and Donald Megrath.
Section 16(a) Beneficial Ownership Reporting Compliance
The Company does not currently have a class of its equity securities registered pursuant to Section 12 of the Exchange Act.
Code of Ethics
microHelix adopted a code of ethics on April 6, 2005 that applies to its directors, officers and employees. A copy of the code of ethics is attached as an exhibit to this Annual Report on Form 10-K.
Nominees for Board of Directors
During 2008, there were no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors.
Item 10. Executive Compensation.
Summary Compensation Table
The following table sets forth certain information regarding compensation paid during the last two fiscal years to our President and Chief Financial Officer. No other executive officer received compensation in excess of $100,000.
| Name and Principal Position | | Year | | Salary ($) | | Bonus ($) | | Stock Awards ($) | | | All Other Compensation ($) | | | Total ($) | |
James E. Horswill President and Chief Financial Officer | | 2008 | | $ | 0 | | | | | | | $ | 59,875 | (1) | | $ | 59,875 | |
| | | 2007 | | $ | 81,439 | | | | | | | $ | 28,300 | (1) | | $ | 109,739 | |
Option Grants in Last Fiscal Year
No options were granted in 2008 to our named executive officers.
Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
None of our named executive officers held any outstanding stock options at December 31, 2008. No stock options were exercised by our named executive officers during 2008.
Director Compensation
Outside directors are eligible to be paid a $2,000 annual retainer, $350 for each Board of Directors meeting attended and $200 for each committee meeting attended. The Chairman of the Board, the Compensation Committee Chair and the Audit Committee Chair each are eligible to be paid an additional $1,000 retainer. Each of the outside directors received in 2007 a grant of 667 shares of the Company's Common Stock. Outside directors are reimbursed for their out-of-pocket expenses incurred on behalf of the Company. Employee directors do not receive any compensation for serving on the Board of Directors.
Due to the financial condition of the Company, no payments or stock grants were made to the members of the Board of Directors during 2008.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth information, as of March 31, 2009, with respect to the beneficial ownership of the Common Stock and Series C Preferred Stock of the Company by: (i) each shareholder known by us to be the beneficial owner of more than 5% of the Common Stock and of our Series C Preferred Stock; (ii) each of our directors; (iii) our President and Chief Financial Officer and our other executive officers; and (iv) all executive officers and directors as a group. Unless otherwise indicated, the address of each person listed below is: c/o microHelix, Inc., P.O. Box 1030, Tualatin, OR 97071. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of Common Stock issuable on exercise of currently exercisable or convertible securities or securities exercisable or convertible within 60 days of March 31, 2009 are deemed beneficially owned and outstanding for purposes of computing the percentage owned by the person holding such securities, but are not considered outstanding for purposes of computing the percentage of any other person, except with respect to Series C Preferred. Since each share of Series C Preferred is immediately convertible into 0.66667 shares of Common Stock it has been assumed for purposes of calculating a person's total beneficial ownership that all shares of Series C Preferred have been converted into shares of Common Stock. Unless otherwise noted, each shareholder named in the table has sole voting and investment power with respect to the shares set forth opposite that shareholder's name. The shares held have been converted to account for the 1 for 15 reverse stock split approved by the Company's shareholders on March 19, 2008.
| | | Shares Beneficially Owned | |
| Name of Beneficial Owner | | Common Stock | | | Series C Preferred | | | Total | | | Percent | |
| MH Financial Associates, LLC | | | 10,172,895 | (1) | | | 186,047 | | | | 10,359,302 | | | | 88.12 | % |
| Aequitas Capital Managment Inc. | | | 1,066,667 | (2) | | | 0 | | | | 1,066,667 | | | | 33.06 | % |
| Aequitas Catalyst Fund LLC | | | 259,420 | | | | 0 | | | | 259,420 | | | | 13.15 | % |
| Thurman Holdings 1, Limited Partnership | | | 153,332 | | | | 0 | | | | 153,332 | | | | 7.77 | % |
| Yee Ling Hayden(3) | | | 148,986 | | | | 0 | | | | 148,986 | | | | 7.55 | % |
| Paulson Investment Company Inc. (4) | | | 119,189 | | | | 0 | | | | 119,189 | | | | 6.04 | % |
| | | 959 | | | | 0 | | | | 959 | | | | * | |
| Thomas Sidley | | | 0 | | | | 0 | | | | 0 | | | | * | |
| | | 0 | | | | 0 | | | | 0 | | | | * | |
| Directors and Officers as a Group (3 Persons) | | | 959 | | | | 0 | | | | 959 | | | | * | |
*Less than 1%
(1) Includes warrants to purchase 48,546,666 shares of Common Stock. MH Financial Associates, LLC has agreed to assign certain of its warrants to investors as follows: (i) Aequitas Catalyst Fund LLC: warrants to purchase 1,166,601 shares; (ii) Thurman Holdings 1, Limited Partnership: warrants to purchase 2,822,867 shares; (iii) Fiserv Trust Company fbo Robert J. Jesnik: warrants to purchase 59,958 shares and (iv) CTK Capital Corporation, a corporation controlled by James M. Williams, former Chairman of the Company’s Board of Directors: warrants to purchase 332,384 shares.
(2) Includes warrants to purchase 1,066,667 shares of common stock.
(3) Business address is 7103 S. Revere Parkway, Englewood, Colorado, 30112
(4) Business address is 811 SW Naito Parkway, Suite 200, Portland, Oregon, 97204
There are no known arrangements the operation of which may at a subsequent date result in a change in control of the Company.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
On March 12, 2007, MH Financial loaned an additional $750,000 to the Company by adding that amount to the Original Note, which was amended to become the Amended Note, for a total principal amount of $1,778,964. The Amended Note bears current interest at a rate of 12% per annum ("Current Interest"). Additional interest accrues on the Amended Note at a rate of 8% per annum, which is compounded quarterly and is payable at maturity ("Deferred Interest"). microHelix was to make separate payments with respect to $1,006,086 of the principal under the Loan 1 and with respect to $750,000 of the principal added in Loan 2. Beginning April 19, 2007 and on the same day of each subsequent month, microHelix was to pay $20,000 per month to be applied to Current Interest and principal on Loan 1 and $7,500 per month of Current Interest on Loan 2. On September 30, 2007, microHelix was to make an additional payment of accrued Current Interest through that date with regard to Loan 2. Beginning on October 31, 2007, and on the last day of each subsequent month through and including May 31, 2008, microHelix was to pay $87,555 per month to be applied against the Current Interest and principal balance of Loan 2. All amounts outstanding under the Amended Note, including the Deferred Interest, were due and payable on June 30, 2008. James M. Williams, who was a director during these transactions, is an indirect investor in MH Financial through a retirement plan and a corporation controlled by Mr. Williams.
On June 27, 2008 the Company entered into an advisory services agreement with Aequitas Capital Management, Inc. (“Aequitas”) under which Aequitas began to provide strategy development, strategic planning, marketing, corporate development and other such advisory services that the Company reasonably requests from time to time, under direction of the Company’s Board of Directors for a monthly fee of $10,000 and reimbursement of expenses. During the twelve month period ending December 31, 2008 the Company recorded $90,000 of expense for advisory services. In addition a warrant for 1,066,667 shares of Company stock with an exercise price of $0.001 per share was issued to Aequitas in 2008 on the inception of Aequitas service on June 27, 2008 (see Note 9). Under a separate agreement the Company has obligation to pay Aequitas $5,000 per month for certain services related to occupancy of Aequitas facilities and information technology support related thereto. During the twelve month period ending December 31, 2008 the Company recorded $60,000 of expense for office rent and information technology support. In addition to advising and servicing the Company, Aequitas is also manager of MH Financial Associates, LLC and Aequitas Catalyst, LLC which are two of the Company’s largest shareholders. Included in accounts payable at December 31, 2008 is $90,000 due to Aequitas for advisory services, facilities occupancy, and information technology support. Mr. Sidley and Mr. Megrath, two of the Company’s directors, are employees of Aequitas.
On December 28, 2006, microHelix issued a note to James M. Williams in the principal amount of $150,000, together with interest on the unpaid principal at the rate of 15% per annum. microHelix used the proceeds from the note for working capital. On March 12, 2007, microHelix repaid the entire principal balance and accrued but unpaid interest.
The terms of the above transactions were as favorable to us as those generally available from unaffiliated third parties. Each transaction was ratified by a majority of our directors who did not have an interest in the transactions and who had access, at our expense, to our legal counsel or independent legal counsel.
Item 14. Principal Accounting Fees and Services.
On September 25, 2006, the Company approved the engagement of Peterson Sullivan LLP to serve as the Company's independent registered public accountants for the fiscal years ending December 31, 2006, 2007, and 2008. During the fiscal years ended December 31, 2006 and 2007 and through the date hereof, the Company did not consult Peterson Sullivan LLP with respect to the application of accounting principles to a specified transaction, either completed or proposed, the type of audit opinion that might be rendered on the Company's consolidated financial statements, or any other matters or events.
Peterson Sullivan LLP has been selected as the Company's independent public accountants for the fiscal year ending December 31, 2007 and 2008.
The following table shows the fees paid or accrued by the Company for the audit and other services provided by Peterson Sullivan LLP for 2007 and 2008.
| | | 2007 | | | 2008 | |
| Audit Fees | | $ | 52,000 | | | $ | 30,000 | |
| Audit-Related Fees | | | - | | | | | |
| Tax Fees | | | - | | | | 10,000 | |
| All Other Fees | | | - | | | | | |
| | | | | | | | | |
| Totals | | $ | 52,000 | | | $ | 40,000 | |
Audit Fees. Audit services of Peterson Sullivan LLP for 2008 and 2007 consisted of examination of the consolidated financial statements of the Company, quarterly reviews of the financial statements and services related to the filings made with the SEC.
Tax Fees. Tax preparation services were provided in 2008 by Geffen Mesher & Company, P.C. Tax fees included in 2008 relate to filing the required tax reports for the fiscal years ended December 31, 2006 and 2007.
All Other Fees. There were no fees billed by Peterson Sullivan LLP for services other than as described under "Audit Fees" for the years ended December 31, 2007 or December 31, 2008.
All of the services described above were approved by the Audit Committee. The Audit Committee has not adopted formal pre-approval policies, but has the sole authority to engage the Company's outside auditing and tax preparation firms and must approve all tax consulting and auditing arrangements with the independent accounting firms prior to the performance of any services. Approval for such services is evaluated during Audit Committee meetings and must be documented by signature of an Audit Committee member on the engagement letter of the independent accounting firm.
Item 15. Exhibits, Financial Statement Schedules
Exhibit Number | | Description |
| 3.1(1) | | Amended and Restated Articles of Incorporation of microHelix, Inc., as amended November 16, 2001, December 5, 2003, April 8, 2005, October 28, 2005 and October 17, 2006. |
| 3.2(8) | | Amendments to the Company's Amended and Restated Articles of Incorporation as amended January 16, 2008 and March 19, 2008. |
| 3.3(2) | | Bylaws of microHelix, Inc. |
| 10.1(3) | | Form of Warrant dated April 8, 2005 issued by microHelix, Inc. to financial advisors. |
| 10.2(3) | | Security Agreement dated April 8, 2005 among microHelix, Inc., Moore Electronics, Inc. and Marti D. Lundy. |
| 10.3(4) | | Form of Warrant dated October 19, 2006 issued by microHelix, Inc. to MH Financial Associates, LLC, as amended on March 12, 2007. |
| 10.4(4) | | Registration Rights Agreement dated October 19, 2006 between microHelix, Inc. and MH Financial Associates, LLC, as amended on March 12, 2007. |
| 10.5(5) | | Form of Warrant dated November 2, 2006 issued by microHelix, Inc. to MH Financial Associates, LLC, as amended on March 12, 2007. |
| 10.6(6) | | Second Agreement Regarding Amendment of Promissory Note dated March 12, 2007 between microHelix, Inc. and MH Financial Associates, LLC. |
| 10.7(6) | | Second Amended and Restated Promissory Note dated March 12, 2007 issued by microHelix, Inc. to MH Financial Associates, LLC. |
| 10.8(6) | | Form of Warrant dated March 12, 2007 issued by microHelix, Inc. to MH Financial Associates, LLC. |
| 10.9(6) | | Forbearance and Waiver Agreement dated March 12, 2007 between microHelix, Inc. and MH Financial Associates, LLC. |
| 10.10(6) | * | Independent Contractor Agreement effective February 12, 2007 between Moore Electronics, Inc. and Steve Ashton. |
| 10.11(8) | * | Independent Contractor Agreement effective September 21, 2007 between microHelix, Inc. and James E. Horswill. |
| 10.12(8) | | Third Agreement Regarding Amendment of Promissory Note dated December 31, 2008 between microHelix, Inc. and MH Financial Associates, LLC. |
| 10.13(8) | | Third Amended and Restated Promissory Note dated December 31, 2008 issued by microHelix, Inc. to MH Financial Associates, LLC. |
| 10.14(8) | | Advisory Services Agreement dated June 27, 2008 between microHelix, Inc, and Aequitus Capital Management, Inc. |
| 10.15(8) | | Warrant to Purchase Shares of Common Stock dated June 27, 2008 between microHelix, Inc. and MH Financial Associates, LLC. |
| 10.16(8) | | Registration Rights Agreement dated June 27, 2008 between microHelix, Inc and MH Financial Associates, LLC. |
| 10.17(8) | | Loan Modification Agreement dated December 31, 2008 between microHelix, Inc and MH Financial Associates, LLC. |
| 14.1(7) | | Policy on Business Ethics for Directors, Officers and Employees. |
| 21.1(7) | | Subsidiaries. |
| 31.1(8) | | Certification of Principal Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1(8) | | Certification of Principal Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| (1) | Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2004, and to the Company's Forms 8-K filed on April 14, 2005, October 31, 2005 and October 19, 2006. |
| (2) | Incorporated by reference to the Company's Form SB-2 filed on July 26, 2001. |
| (3) | Incorporated by reference to the Company's Form 8-K filed on April 14, 2005 and October 20, 2006. |
| (4) | Incorporated by reference to the Company's Forms 8-K filed on October 20, 2006 and March 16, 2007. |
| (5) | Incorporated by reference to the Company's Form 8-K filed on March 16, 2007. |
| (6) | Incorporated by reference to the Company's Form 8-K filed on March 16, 2007. |
| (7) | Incorporated by reference to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2004. |
* Management contract or compensatory plan or arrangement.
SIGNATURES
In accordance with 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 this behalf by the undersigned; thereunto duly authorized, on April 14, 2009.
| | | |
| | MICROHELIX, INC. |
| | | |
| | By: | /s/ James E. Horswill |
| | | |
| | James E. Horswill |
| | Principal Executive and Chief Executive Officer |
In accordance with 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/ Thomas Sidley | | Chairman and Director | | April 14, 2009 |
| Thomas Sidley | | | | |
| | | | | |
| /s/ Donald Megrath | | Director | | April 14, 2009 |
| Donald Megrath | | | | |
| | | | | |
| /s/ James E. Horswill | | Director | | April 14, 2009 |
| James E. Horswill | | | | |
| | | | | |
| | | | | |
