UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
OR
o TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________.
Commission file number 000-54167
SANOMEDICS INTERNATIONAL HOLDINGS, INC. |
| (Exact name of registrant as specified in its charter) |
| Delaware | | 27-3320809 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| 444 Brickell Avenue, Suite 415, Miami, Florida | | 33131 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code (305) 433-7814
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x.
Indicate by check mark whether the registrant has (1) 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 x No o .
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | Accelerated filer | o |
| Non-accelerated filer | o | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x.
The aggregate market value of the voting common stock held by non-affiliates of the registrant on June 28, 2013, the last business day of the registrant's most recently completed second quarter, was approximately $34.8 million.
The number of shares of Common Stock, $.001 par value, outstanding on April 11, 2014 was 10,361,266 shares.
SANOMEDICS INTERNATIONAL HOLDINGS, INC.
FORM 10-K
For the Fiscal Year Ended December 31, 2013
Table of Contents
| Part I. | | | | |
| | | | | |
| Item 1. | Business. | | | 4 | |
| Item 1A. | Risk Factors. | | | 15 | |
| Item 1B. | Unresolved Staff Comments. | | | 24 | |
| Item 2. | Properties. | | | 24 | |
| Item 3. | Legal Proceedings. | | | 24 | |
| Item 4. | Mine Safety Disclosures. | | | 25 | |
| | | | | | |
| Part II. | | | | | |
| | | | | | |
| Item 5. | Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities. | | | 26 | |
| Item 6. | Selected Financial Data. | | | 27 | |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | | | 28 | |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. | | | 33 | |
| Item 8. | Financial Statements and Supplementary Data. | | | 34 | |
| Item 9. | Change in and Disagreements with Accountants on Accounting and Financial Disclosure. | | | 35 | |
| Item 9A. | Controls and Procedures. | | | 35 | |
| Item 9B. | Other Information. | | | 35 | |
| | | | | | |
| Part III. | | | | | |
| | | | | | |
| Item 10. | Directors, Executive Officers and Corporate Governance. | | | 36 | |
| Item 11. | Executive Compensation. | | | 39 | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters. | | | 43 | |
| Item 13. | Certain Relationships and Related Transactions and Director Independence. | | | 45 | |
| Item 14. | Principal Accounting Fees and Services. | | | 46 | |
| | | | | | |
| Part IV. | | | | | |
| | | | | | |
| Item 15. | Exhibits and Financial Statement Schedules. | | | 47 | |
| | | | | | |
| Signatures | | | | 51 | |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain information included or incorporated herein by reference in this report may be deemed to be “forward-looking statements.” Forward-looking statements may include, but are not limited to, statements relating to our objectives, plans and strategies. All statements (other than statements of historical fact) that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future are forward-looking statements. These statements are often characterized by terminology such as “believe,” “hope,” “may,” “anticipate,” “should,” “intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy” and similar expressions, and are based on assumptions and assessments made by management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in this report, including the risks set forth under “Risk Factors” in Item 1A.
Throughout this report, we refer to Sanomedics International Holdings, Inc., together with its subsidiaries, as “we,” “us,” “our Company” or “the Company.”
All share and per share information in this report gives effect to the 1 for 10 reverse split of our common shares effective on December 23, 2013.
PART 1
Item 1: Business
General Development of Business
Overview
Sanomedics International Holdings, Inc. (the “Company”, “we”, or “us”) is a Delaware corporation which is a medical technology holding Company that focuses on disruptive and game changing products, services and ideas – a place where physicians, entrepreneurs, and medical companies can work together to drive innovative technologies through concept, development, and ultimately commercialization. We plan to grow our current business organically and through strategic acquisitions relating to healthcare technology products and services. We seek to acquire innovative medical device companies and/or healthcare related service operating business, such as medical staffing or ambulatory surgical centers that can be included within our organization. We will also seek acquisition and development opportunities related to other aspects in the healthcare marketplace.
Acquisitions and Growth Strategy
We plan to grow our existing business through strategic acquisition related to healthcare technology and products and services. We seek to acquire innovative medical device companies and/or healthcare related service operating businesses that can be tucked into our operations. We will also seek acquisition and development opportunities related to other aspects of the sleep disorder marketplace. The Company will expect all acquisitions to be accretive to its earnings and fully integrated within ninety (90) days of closing.
With our experience in deal structuring, licensing, and partnering we will pursue investment opportunities within the expansive medical device and services marketplace. Included in this strategy are merger and acquisition opportunities. To that end, we have identified numerous opportunities to further grow our business while adhering to our mission of focusing on large addressable markets, clear competitive advantages, IP protection, and an executable clinical and commercialization plan.
Medical products
We design, develop and market a line of non-contact clinical thermometers principally for the healthcare providers market, which include physician’s offices, medical clinics and nursing homes and other long-term care institutions. Our thermometer was launched during the second quarter of 2012.
Our executive offices are located at 444 Brickell Avenue, Suite 415, Miami, Florida 33131, and our telephone number is (305) 433-7814. Our corporate website is www.sanomedics.com.
Our common stock is currently quoted on the OTCQB tier of the OTC Markets under the symbol “SIMH”.
Organizational History
We were originally incorporated on October 31, 1955 in Idaho under the name “Niagara Mining and Development Co., Inc.” We conducted limited mining operations, and in the 1970s we raised approximately $200,000 in a public offering we made under the Regulation A exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). We filed periodic reports for approximately three years thereafter, but once our total assets were less than $1,000,000 our reporting obligations pursuant to Section 12(g) of the Securities Exchange Act of 1934 ceased, and we stopped filing such reports. Shortly thereafter, as our cash on hand was depleted we curtailed our operations, and ultimately we became inactive. We had our existence administratively dissolved by the State of Idaho for failure to file timely the required annual report, but we were reinstated on April 9, 2007 and again on June 16, 2008, following a similar administrative dissolution on January 4, 2008; however, in 2005, during a period of our dissolution, a third party had formed a new Idaho corporation with the same name as ours, so when we were reinstated on April 9, 2007 our corporate name was no longer available to us and therefore we had to amend our Articles of Incorporation to change our name; and on April 9, 2007, we selected and changed our name to “Grand Niagara Mining and Development Company”. In 2008, when Joseph Meuse and Belmont Partners, LLC acquired control, our sole objective was to identify, evaluate, and acquire an operating business which wanted to become a publicly held entity. As described below under “Acquisition of Sanomedics”, we achieved that goal in July 2009 when we acquired 100% of the outstanding capital stock of Sanomedics International Holdings, Inc. (“Sano-Nevada”), a development stage Nevada corporation with very limited operations formed in January 2009. In connection with this acquisition, in April 2009 we reincorporated in Delaware, changed our name to “Sanomedics International Holdings, Inc.”, recapitalized the Company, effected a 1 for 25 reverse split (the “Reverse Split”) of our common stock, and issued to the former owners of Sano-Nevada common shares representing approximately 98% of our common stock and 100% of our newly authorized Series A preferred stock having majority voting rights. The Sano-Nevada acquisition was accounted for as a “reverse acquisition” as if Sano-Nevada had acquired us, and our financial statements prior to the closing date of acquisition became the historical financial statements of Sano-Nevada. See Item 8, Financial Statements and Supplementary Data. All information in this report relating to our common stock has been adjusted to give effect to the Reverse Split, except where otherwise expressly stated.
Acquisition of Sanomedics
As of July 1, 2009 we acquired 100% of the outstanding capital stock of Sanomedics International Holdings, Inc. (“Sano-Nevada”). Sano-Nevada was an entity formed in Nevada in January 2009 which was still in its development stage, seeking to a launch a business distributing non-contact thermometers to consumers and health care professionals in the United States. On August 26, 2010 we changed the name of Sano-Nevada to Thermomedics Corporation. We acquired Sano-Nevada as follows:
On April 17, 2009, pursuant to a Common Stock Purchase Agreement among us, Belmont Partners, LLC (“Belmont”), which then was our principal shareholder, and Sano-Nevada, among others, Belmont sold to Sano-Nevada 102,200 shares of our common stock, representing 50.001% of the number of our common shares issued and outstanding (the “Sano-Nevada Shares”), for a price of $158,000 in cash (the “Purchase Price”). In addition, (a) Sano-Nevada agreed to become our wholly-owned subsidiary through an exchange of shares described below (the “Acquisition”) no later than 20 days from the closing of such Agreement, and (b) in consideration of the benefits provided to us pursuant to such Agreement, we agreed to issue to Belmont 250,000 shares of our common stock (the “Belmont Shares”) representing 2.5% of our issued and outstanding common stock after giving effect to the closing of our contemplated Acquisition (our shareholders authorized the issuance of the Belmont Shares), and any related reverse split of our common stock. Sano-Nevada’s payment obligations were guaranteed by Keith Houlihan (“Houlihan”), a co-founder and the President of Sano-Nevada. The Purchase Price was paid as follows: On March 24, 2009, Sano-Nevada paid $50,000 to Belmont; and Sano-Nevada paid Belmont the $108,000 balance in installments, the last of which was paid on August 20, 2009, more than 90 days after the expected closing of our Acquisition, thereby incurring an additional $7,150 in late fees, which Sano-Nevada also paid to Belmont.
Pursuant to an April 2, 2009, Acquisition Agreement and Plan of Share Exchange (the “Acquisition Agreement”) among us, Sano-Nevada, Houlihan, Craig Sizer (“Sizer”) and Maria Perez (Ms. Perez married Craig Sizer in 2009, and, accordingly, hereafter she is referred to as “Mrs. Sizer”) (Houlihan, Sizer and Mrs. Sizer, collectively, the “Sano-Nevada Owners”), on July 1, 2009, we acquired Sano-Nevada by issuing to the Sano-Nevada Owners an aggregate of 9,542,000 shares of our common stock and 1,000 shares of our Series A preferred stock, as follows: Houlihan: 2,385,500 common shares and 250 preferred shares; Sizer: 2,385,500 common shares and 250 preferred shares; and Mrs. Sizer: 4,771,000 common shares and 500 preferred shares. On July 1, 2009, we also issued to Belmont, pursuant to the March 19, 2009, Stock Purchase Agreement described above, 250,000 shares of our common stock (representing the Belmont Shares). All these shares were issued in reliance on the exemption provided in Section 4(2) of the Securities Act for non-public offerings.
For accounting purposes this Acquisition transaction was treated as a reverse acquisition, with Sano-Nevada as the acquirer; and therefore, our historical financial statements prior to the closing date are those of Sano-Nevada. After the closing, we relocated our executive offices from Nevada to our current offices in Miami, Florida; and Messrs. Houlihan and Sizer comprised a majority of our Board of Directors and became our senior management and together with Mrs. Sizer, they beneficially owned a substantial majority of our outstanding common stock, had majority voting rights via their ownership of our preferred stock and acquired control of the Company. See Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters, Item 10, Directors, Executive Officers and Corporate Governance, and Item 8, Financial Statements and Supplementary Data - Notes 3 and 6 to the consolidated financial statements.
In connection with the Acquisition, on April 6, 2009, we reincorporated in Delaware under the name “Sanomedics International Holdings, Inc.” and increased our authorized capitalization from 10,000,000 shares of common stock to 250,000,000 shares of common stock and 1,000 shares of Series A preferred stock. The only rights and preferences of the Series A preferred stock, which is not convertible, relate to voting rights: The Series A preferred stock votes together with our common stock as one class, and has that number of votes, collectively, which shall equal 51% of the total number of votes (common stock and preferred stock combined) that may be cast on any and all matters presented to our stockholders, including the election of directors. On April 17, 2009, we effected a 1 for 25 reverse split of our common stock in which each 25 shares of common stock were combined into one share of common stock (the “Reverse Split”), resulting in the number of our outstanding common stock being reduced to 198,769 such shares (including the 102,200 shares Belmont sold to Sano-Nevada on April 17, 2009).
Acquisitions and Rescission of Prime Time Medical
On August 30, 2013, the Company acquired a 100% interest and assumed full financial and operational control of Prime Time Medical Inc. (“Prime Time”) pursuant to a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Prime Time and Mark R. Miklos (“Miklos”), the sole equity holder and seller of Prime Time for a total purchase price of $3,100,000, subject to certain adjustments.. The purchase price consisted of a combination of $1,350,000 in cash, promissory notes of $1,000,000 and shares of the Company’s restricted common stock with a value of $750,000.
The Company, after closing, discovered that the Seller failed to disclose that there were on-going audits with respect to Prime Time’s Medicare and Medicaid billings for periods prior to the consummation of the transaction. These audits have escalated and, as a result, Prime Time can no longer invoice Medicare and Medicaid for any products or services and be paid for such products and services until the outcome of the audits which could last at least two years. Also, as a result of other Medicare and Medicaid audits for periods prior to the consummation of the transaction, Medicare and Medicaid are demanding payments for products that Prime Time was paid prior to the closing of the transaction that were improper. It is estimated that Prime Time may owe Medicare and Medicaid up to $500,000 in improper payments and at least another $500,000 in accounts receivable that will not be paid to Prime Time pending the outcome of the audits.
On March 13, 2014, due to information that came to light subsequent to August 30, 2013, the Board of Directors of the Company determined to pursue a rescission of the completed transaction with Prime Time, after discovering numerous material differences between financial statements reproduced by the Company and the financial statements provided by Miklos in connection with the Stock Purchase Agreement. As a result of the foregoing events and Medicare and Medicaid’s constraint on Prime Time’s business and payment stream, the business could no longer survive and should immediately cease operating. Consequently the Company recorded a loss on rescission of $1,790,000 from its investment and advances in Prime Time in the accompanying consolidated statements of operation for the year ended December 31, 2013. The accompanying balance sheet as of December 31, 2013 also reflects an accrual for payments related to the rescission of $500,000 paid subsequently.. The material misstatements related primarily to the accounting treatment of revenues, accounts receivable and reserves for contractual allowances and inventory valuations.
The Company concluded that the Stock Purchase Agreement was not legally consummated and therefore consolidation was not appropriate. Consequently, the Company should not have presented the consolidated financial statements for the quarter ended September 30, 2013 SEC filing on Form 10-Q dated November 21, 2013. Additionally, the Company evaluated the materiality of the impact of the consolidation in the Company’s financial statements at September 30, 2013 and for the three and nine months ended September 30, 2013 and determined that the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 will be amended accordingly. There was no impact to any other period previously presented.
On March 18, 2014, the Company filed a lawsuit against Miklos alleging breach of contract, fraud in the inducement, fraudulent misrepresentation, unjust enrichment, conversion, breach of fiduciary duty and damages. The Company is seeking judgment against the Seller, restitution, rescission of the Stock Purchase Agreement and Employment Agreement and return of all monies and stock paid to the Seller.
On March 19, 2014 the Company was served with a lawsuit filed by Miklos against the Company and Anovent, Inc., alleging breach of the Employment Agreement entered into with the Company, improper notice of termination, and other action to foreclose a security interest in personal property and intangibles as a result of the alleged defaults under the Security Agreement. The Company believes there is no merit to the Miklos lawsuit and intends to defend itself aggressively.
The rescission was disclosed on the Company’s current report on Form 8-K filed on March 28, 2014.
On July 10, 2013, the Company entered into an Equity Purchase Agreement (the “Purchase Agreement”) with Duke Medical Equipment LLC, a Texas limited liability company (“Duke”) and Vann R. Duke, the sole equity holder of Duke (the “Seller”). Duke is a leading respiratory and sleep disorder provider of treatment equipment and services. It provides medical supplies to patients with sleep apnea with products such as CPAP/BiPAP, respiratory equipment, nasal and oral masks, and pulse oximeters. Duke services patients throughout Houston and Galveston, Texas. Pursuant to the Purchase Agreement, at the closing the Seller would have transferred to the Company all the membership interest of Duke for an aggregate purchase price of $7,000,000, subject to certain adjustments, of which $2,000,000 was to be paid in cash to the Seller at closing. On December 23, 2013, the Seller informed the Company that he no longer desired to sell Duke and the definitive agreement between the parties was terminated, although the Company was in negotiations to secure acquisition financing targeted for the Duke purchase.
On January 9, 2014 the Company entered into a Senior Secured Revolving Credit Facility Agreement (“Credit Agreement”) with TCA Global Credit Master Fund, LP , a Cayman Islands limited partnership (“TCA”). Pursuant to the Credit Agreement, of which we and our subsidiaries are parties as borrowers, TCA extended to us a $5 million revolving credit facility. An initial credit line of $2,300,000 was provided by TCA at closing, with $1,000,000 funded on the date of closing and the remaining $1,300,000 representing delayed for funding of an acquisition we may consummate within 90 days from closing, which has been extended for use through July 9, 2014.
We announced on February 21, 2014, we had entered into a non-binding Letter of Intent to acquire all of the issued and outstanding equity of a national provider of professional health care services and solutions to public and private institutions and multinational corporations throughout the world. We are currently completing due diligence for this proposed acquisition and intend to finance a portion of the purchase price with funding from the TCA credit facility and/or other financing we are in discussions, although there is no assurance of securing the completed financing or in completing the acquisition.
Plan of Operation
For the next 12 months we intend to focus our efforts on implementing the following business strategy:
Raise Substantial Additional Capital.
We currently have a severe cash shortage, and our operating revenues continue to be limited and insufficient to fund our operations. Consequently, Note 2, Summary of Significant Accounting Policies – Going Concern, to our December 31, 2013 consolidated financial statements, as set forth in Item 8, Financial Statements and Supplementary Data, contains an explanatory paragraph to the effect that, as a result of our limited revenue and the losses we are incurring, there exists substantial doubt about our ability to continue as a going concern (See Item 8, Financial Statements and Supplementary Data). Through December 31, 2013 our liquidity had been provided by advances made from time to time which have been memorialized into convertible promissory notes, aggregating approximately $3.5 million to date, with $850,000 in 2013 from an affiliate of Craig Sizer, our former Chief Executive Officer (“CEO”) and our controlling shareholder. During 2013 we raised $883,000through the issuance of convertible promissory notes from third party lenders. These borrowings mature during various periods in 2014 and 2015, and our expectations are they will convert to equity or we will have to secure additional funds through new borrowings if we are to settle the debt with cash funds. On January 9, 2014, we were successful in securing a $5 million line of credit facility from TCA Global Funding LLC, and receiving initial funding of $1 million from this lending. At April 10, 2014, we had approximately $125,000 in cash on hand; and unless our equity offerings or additional debt financing are successful we will be unable to continue to operate.
We currently have limited commitments or arrangements with any person or entity to obtain any equity or debt financing, and there can be no assurance that the additional financing we require would be available on reasonable terms, if at all; and if available, any such financing likely would result in a material and substantial dilution of the equity interests of our current shareholders. The unavailability of such additional financing could require us to delay, scale back or terminate our business activities, which would have a material adverse effect on our viability and prospects. See Item 1A, Risk Factors – We May Be Unable to Continue as a Going Concern; and – The Substantial Additional Capital We Need May Not Be Obtainable, and Item 13, Certain Relationships and Related Transactions, and Director Independence – Transactions with Related Persons - Borrowings.
Improve Existing Operations.
Our operating results have been unsatisfactory, and we have experienced recurring losses. We had a working capital deficit of approximately $3.3 million at December 31, 2013. We had a net loss of approximately $4.3 million and $1.8 million, respectively, for the years ended December 31, 2013 and 2012.
We intend to try to improve cash flow from operations from additional sales generated by expanded marketing and promotions.
Effect Strategic Acquisitions.
We plan to grow our existing business through strategic acquisitions related to medical devices and healthcare technology products and services. We seek to acquire medical device and or healthcare related technology service operating businesses that can be included within our operations. The Company will expect all acquisitions to be accretive to its earnings and fully integrated within ninety (90) days of closing. We have identified one target and of March 27, 2014 it is under letter of intent and undergoing due diligence. We intend to fund the acquisitions of this and any future targets from equity offerings as well as from asset based lending institutions.
Through our extensive experience in deal structuring, licensing, and partnering we will pursue investment opportunities within the expansive medical device and services marketplace. Included in this strategy are merger and acquisition opportunities. To that end, we have identified numerous opportunities to further grow our business while adhering to our mission of focusing on large addressable markets, clear competitive advantages, IP protection, and an executable clinical and commercialization plan.
Medical Technology and Services Companies
Our targeted companies all center on healthcare. We look for mid to late stage disruptive and game changing technology or services that would benefit from our proven leadership, an experienced, multi-disciplinary team, state-of-the-art engineering, and manufacturing relationships supported by an extensive physician network. We provide the optimum professional environment where physicians, entrepreneurs, companies, and investors work together to drive innovative technologies and services through concept, development, and commercialization to profitable continued operation.
Other Opportunities
We also will look at new and complementary products that are in established companies or still in the development stage, whose medical devices we believe we could market to consumers and/or healthcare professionals. We initially are focused on medical devices related to the diagnosis or thermometry measurement for humans.
The criteria identified above are not intended to be exhaustive. Any evaluation relating to the merits of a particular business combination will be based, to the extent relevant, on the above factors as well as other considerations deemed relevant by our management in effecting a business combination consistent with our business objectives. Accordingly, we may enter into a business combination that does not meet any or all of these criteria, if we believe that it has the potential to create significant stockholder value.
We intend to affect our acquisitions by structuring the transaction to require us to pay the purchase price principally, through debt financing and by issuing shares of our common stock to the owners of the target company. If cash is required, we intend to use cash on hand and, if our cash resources are insufficient, either to draw down on our existing credit facilities, if any, or to seek to obtain new funds through private offerings of debt or equity securities.
Develop Thermometer Products for the Professional Markets
We are directing our research and development efforts toward continued innovation in technology and design, which enables us to introduce new products into the healthcare providers market, which include hospitals, physician’s offices, medical clinics and other long-term care institutions. Clinical studies have been completed and we intend to continually update new studies. However, we are still developing hardware and software for all our new models, and further clinical studies still will need to be performed for validation. Potential users in the professional marketplace will conduct their own testing for temperature accuracy and clinical repeatability.
Although we have limited funds, our Chief Technology Officer, Gary O’Hara, is coordinating our own research efforts and the efforts of our several consultants. Mr. O’Hara developed the first infrared tympanic (ear) thermometer for the professional market in the mid-1980’s (the product he developed, FirstTemp Genius, is still being sold today, almost 30 years after his company was sold in 1992 to pharmaceutical giant American Home Products (now part of Pfizer)). He is thoroughly familiar with the current sensor and design technologies and the intellectual property landscape. He also has engaged the following consultants to assist our second generation development efforts: A hardware/software designer who supervises our prototype development; and an experienced thermometry clinical scientist with 20 years of clinical thermometry research experience who can perform clinical studies and data analysis on our products under development; and both worked with Mr. O’Hara in developing an ear thermometer. However, we also need to hire qualified engineers to implement the electro-optics design, electronic circuitry and software design necessary for our next generation thermometers.
Financial Information about Segments
We operate a single line of business and do not operate in segments.
Narrative Description of Business
General
We have launched distribution of our Caregiver® thermometer. Our research efforts continue to focus on the Caregiver® thermometer with improved accuracy; which was introduced during the second quarter of 2012.
Our core business is in the designs, development, and marketing of medical diagnostic equipment for healthcare providers. We are capitalizing on the growing trend of expanded hospital caregivers, assisted living and long term care. We are focused on delivering improved outcomes and preventative practices to control healthcare costs while being an innovative bridge between the healthcare provider and their patient.
Products
We currently market the following product:
Caregiver® Thermometer is the first clinically validated non-contact thermometer for the healthcare providers market, which includes hospitals, physician’s offices, medical clinics and nursing homes and other long-term care institutions and acute care hospitals. Thermomedics line of Professional Non-Contact Thermometers (Caregiver® ) is the first of its kind. Our Caregiver® thermometer with TouchFree™ technology is less likely to transmit infectious disease than those devices that require even a minimum of contact.
Design and Manufacture
The technology and functionality of our current products were co-designed by our new supplier in Taiwan, which, as discussed below, is the manufacturer and the assignor to us of the requisite U.S. governmental pre-marketing approvals for them. We designed the housing of our products, incorporating our extensive thermometry, engineering and clinical expertise. We are in the process of designing and developing all aspects, including technology, of our proposed second generation products.
We do not purchase any of the raw materials or components used in the manufacture of our products. Most components are readily fabricated from commonly available raw materials or are off-the shelf items available from multiple supply sources, although certain items are custom-made to meet our specifications. We believe that alternative sources of supply are available or could be developed within a reasonable period of time. A reduction or interruption in supply, an inability to develop and validate alternative sources if required, or a significant increase in the price of raw materials, or components, could adversely affect our operations and financial condition, particularly materials or components related to our thermometers.
Even if our new sole-source manufacturer was to go out of business, we believe we would be able to obtain within a reasonable time a new offshore manufacturer who could source our products’ components and provide us with saleable merchandise in such a manner as to have a minimal adverse impact on us.
Sales, Marketing and Advertising
We have entered into distribution agreements with three (3) medical equipment suppliers to distribute our Caregiver® thermometer. We will also sell the Caregiver® thermometer under separate agreements with commissioned independent sales representatives and smaller distributors who have non-exclusive territorial agreements.
We are subject to certain indemnification obligations in connection with our distribution agreement. We usually are required to procure and maintain product liability insurance of specified limits per occurrence and in the aggregate, naming the contracting party as an additional insured. Our distributors, resellers, and sales representatives typically agree not to sell competitive products during the term of their agreements with us.
Regulatory Environment
The thermometers that we market are subject to regulation by numerous regulatory bodies, including the Food and Drug Administration (“FDA”) and comparable international regulatory agencies. These agencies require manufacturers of medical devices, such as our manufacturer, to comply with applicable laws and regulations governing the development, testing, manufacturing, labeling, marketing and distribution of medical devices. In addition, the Quality Management System employed by our contract manufacturer must meet the FDA 21 CFR Part 820, and its manufacturing facility is subject to periodic FDA audit. Devices are generally subject to varying levels of regulatory control, the most comprehensive of which requires that a clinical evaluation be conducted before a device receives approval for commercial distribution. Our products are subject to the lowest level of regulation and only require pre-marketing approval, as described below.
In the United States, permission to distribute a new device generally can be met in one of three ways. The process relevant to our products requires that a pre-market notification (“510(k) Submission”) be made to the FDA to demonstrate that the device is as safe and effective as, or substantially equivalent to, a legally marketed device that is not subject to pre-market approval (“PMA”), i.e. , the “predicate” device. An appropriate predicate device for a pre-market notification is one that (i) was legally marketed prior to May 28, 1976, (ii) was approved under a PMA but then subsequently reclassified from class III to class II or I, or (iii) has been found to be substantially equivalent and cleared for commercial distribution under a 510(k) Submission. Applicants must submit descriptive data and, when necessary, performance data to establish that the device is substantially equivalent to a predicate device. (In some instances not relevant to our products, data from human clinical trials must also be submitted in support of a 510(k) Submission. The FDA must issue an order finding substantial equivalence before commercial distribution can occur. Changes to existing devices covered by a 510(k) Submission that do not raise new questions of safety or effectiveness can generally be made without additional 510(k) Submissions. More significant changes, such as new designs or materials, may require a separate 510(k) with data to support that the modified device remains substantially equivalent. The FDA has recently begun to review its clearance process in an effort to make it more rigorous, which may require additional clinical data, time and effort for product clearance.
We have received a 510(K) pre-market approval from the FDA for our thermometers. This 510(K) will allow us to sell our second generation thermometers without additional approvals. However; we may need to obtain recertification, depending on product changes, this recertification may require a complete documentation package, an abbreviated documentation package or an internal documentation package, a determination to be made by guidance documents from the FDA and in concert with our regulatory consultants.
Some countries do not have medical device regulations, but in most foreign countries, medical devices are regulated. Frequently, regulatory approval may first be obtained in a foreign country prior to application in the United States to take advantage of differing regulatory requirements. If we market in foreign countries, such as the European countries, ISO 13485 is the internationally recognized standard for medical devices. Products must comply with ISO 13485 to receive the "CE" mark. We design our products to comply with the requirements of both the FDA and ISO 13485. We intend to conduct audits of our contract manufacturers to ensure compliance with these regulations. If an audit uncovers problems, there is a risk of disruption in product availability.
Patents and Proprietary Rights
Our patent strategy is to file utility and “design” patents to protect various novel aspects of our thermometry products. We can file foreign patent applications similar to our U.S. design patents and patent applications, and we will decide on a case-by-case basis whether to file them after consideration of the markets we intend to serve and after discussion with patent counsel. Given our very limited revenues and cash position, and because there are no foreign countries where our sales volume is material, no patent applications have been filed outside the United States. In addition, foreign countries do not recognize “design” patents, and the patents issued to us in the United States are all “design” patents.
We also rely on a combination of trade secrets and non-disclosure agreements and patents (if issued to or licensed by us), to protect our intellectual property. The patent positions of companies which, like us, design and market medical devices are uncertain and may involve complex legal and factual questions which can be difficult to resolve.
As of March 31, 2011, we had received three “design” patents relating to the housing of our thermometers, all issued in 2010 and expiring in May, June and August 2024. In June 2010 we filed one “utility” patent application relating to various aspects of our non-contact thermometer technology, and we intend to file a corresponding foreign patent application. We are also preparing a second U.S. utility patent application; and we intend to file a corresponding foreign patent application simultaneously with the domestic one. To date, we have not obtained any licenses, whether exclusive or non-exclusive, to any third-party technologies covered by patents or patent applications. We intend to vigorously protect our intellectual property rights as advised by corporate and patent counsel. See Item 3, Legal Proceedings, for a discussion of our pending lawsuit by and against Exergen., an issue in which proceeding is the validity of one of our design patents.
The patent application and issuance process may take several years and involves considerable expense, and there is no assurance that any patent sought by us (or by any business from which we might in the future decide to license the right to manufacture and sell a medical device) will result within a reasonable time, if at all, in the issuance of a patent covering any of the claims made in the application. The coverage claimed in a patent application can be significantly reduced before a patent is issued. Consequently, neither the applicant nor the licensee knows whether any claim contained in a patent application will be allowed and result in the issuance of a patent or, if any patent is issued, whether it will provide meaningful proprietary protection or will be circumvented or invalidated. Since patent applications in the United States are maintained in secrecy, until foreign counterparts, if any, are published, and because publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be absolutely certain that the applicant or licensor was the first inventor of the subject matter covered by the patent application or was the first to file a patent application therefor, or that it would obtain the freedom to practice the claimed inventions. Moreover, priority in filing a patent application for an invention can be overcome by a different party who first practiced the invention. Accordingly, we might have to participate in extensive proceedings in U.S. and/or foreign patent offices or courts, including interference proceedings declared by the U.S. Patent and Trademark Office (the "Patent Office"), to determine priority and/or patent validity. Any such proceeding would be costly and consuming of Management's time. Therefore, there can be no assurance that any patent issued to us would be held valid or sufficiently broad to protect our technology or to provide us with any competitive advantage, or that our products would not be found to infringe patents owned by others. The same applies to any patent rights which we might obtain by license, and to date we have entered into no such license agreements. In the event of a determination that we are infringing a third party's patent, we likely would be required to pay royalties, which could be substantial, to such third party. It is even possible that the third party could refuse to grant us a license in order to keep our product off the market.
We rely on non-disclosure and non-competition agreements with employees, consultants and other parties to protect, in part, trade secrets and other proprietary technology. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, that others will not independently develop equivalent proprietary information or that third parties will not otherwise gain access to our trade secrets and proprietary knowledge.
There has been substantial litigation regarding patent and other intellectual property rights in the medical device industry. We intend to defend ourselves against any claims and legal actions which might be brought against us which allege our infringement of the patent rights of others. However, any adverse determination in any patent litigation could subject us to significant liabilities to third parties, require us seek licenses from third parties and, if licenses are not available, and prevent us from selling the related product, which could have a material adverse effect on our business. Additionally, we may find it necessary to initiate litigation to enforce our patent rights, if any, to protect our trade secrets or know-how and to determine the scope and validity of the proprietary rights of others. Patent litigation can be costly and time-consuming and there can be no assurance that our litigation expenses will not be significant in the future or that the outcome of litigation will be favorable to us. Accordingly, we may seek to settle some or all of any litigation to which we might become a party, particularly to manage risk over time. Settlement may include cross-licensing of the patents that are the subject of the litigation as well as our other intellectual property and may involve monetary payments to or from third parties.
From time to time, third parties may claim, or we may identify, intellectual property rights not owned or licensed by us which we might be infringing. To the extent that such properties are in the public domain, in the first instance we would seek the opinion of patent counsel to avoid claims of willful infringement. In addition, whether or not such properties are in the public domain, after consultation with patent counsel and based on the our evaluation of applicable considerations, including without limitation the potential duration, expense and outcome of an infringement proceeding, the validity or enforceability of such potential claims and other business considerations, we might seek to license such intellectual properties in consideration of our agreement to pay royalties. Although we believe that we should be able to obtain a license to any such patent on commercially reasonable terms, there can be no assurance that we would be able to obtain from third parties any such patent licenses on commercially reasonable terms, if at all.
It is our policy to require our employees and consultants, and parties to collaborative agreements, to execute confidentiality agreements upon the commencement of employment or consulting relationships or the exchange of information prior to collaboration with us. These agreements provide that all confidential information developed or made known during the course of relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees, the agreements provide that all inventions resulting from work performed for us, utilizing our property or relating to our business and conceived or completed by the individual during employment, shall be our exclusive property to the extent permitted by applicable law. Although we rely on these non-disclosure agreements, there can be no assurance that these agreements will provide meaningful protection of our trade secrets or adequate remedies in the event of unauthorized use or disclosure of such information. To the extent that key employees, consultants or third parties apply technological information independently developed by them or by others to any of our proposed projects, disputes may arise as to the proprietary rights to such information, and such disputes may not be resolved in our favor.
We also rely upon trade secret protection for our confidential and proprietary information. There can be no assurance that others will not independently develop substantially equivalent proprietary technology and techniques or otherwise gain access to our trade secrets or disclose such technology or that we can meaningfully protect our trade secrets.
Our trademarks include “Sanomedics”, “Thermomedics”, “Caregiver”, “TouchFree”, "BabyTemp","Temp4sure","Tempmature", "Elitetemp" and “ThermoPet” are registered with the U.S. Patent and Trademark Office. Protecting these intellectual property rights could be costly and time consuming, and any unauthorized use of our intellectual property could make it more expensive for us to do business and which also could harm our operating results.
Risk Management
The testing, marketing and sale of human healthcare products entails an inherent risk of product liability claims. In the normal course of business, product liability claims may be asserted against us in the future related to events unknown at the present time. We have obtained and maintain insurance with respect to product liability claims in amounts we believe are appropriate. However, product liability claims, product recalls, litigation in the future, regardless of outcome, could have a material adverse effect on our business. We believe that our risk management practices are reasonably adequate to protect against reasonable product liability losses. However, unanticipated catastrophic losses could have a material adverse impact on our financial position, results of operations and liquidity.
Competition
To our knowledge we are the only company selling non-contact infrared thermometers for clinical use. Our closest competition would be Welch Allyn, Braun and Exergen which market a line of oral, tympanic and axillary thermometers. They do not have a non-contact thermometer.
As noted above, our research is focused on improved accuracy so we can seek to enter this market with a viable and competitive non-contact product. See “Plan of Operation – Develop Thermometer Products for the Professional Markets” above and “Research and Development” below.
Seasonality; Concentration
Our non-contact thermometer business commenced in July 2009, when we acquired Sano-Nevada. (Sano-Nevada was formed in January 2009 and sold its first products in September 2009). To date, our sales have been extremely limited. Our revenues for the years ended December 31, 2013 and 2012 were approximately $264,000 and $96,000, respectively. We have not yet experienced any seasonal fluctuations, but our sales volume is too low to provide a basis to determine whether or not seasonal fluctuations are to be expected.
Environmental Matters
We are subject to environmental regulation by federal, state and local authorities in the United States. Although we believe we are in compliance with all applicable environmental laws, rules and regulations (“laws”), the field of environmental regulation can change rapidly with the enactment or enhancement of laws and stepped up enforcement of these laws, either of which could require us to change or discontinue our control panel manufacturing activities. At present, we are not involved in any material environmental matters and are not aware of any material environmental matters threatened against us.
Research and Development
We expended $111,500 and $152,825 and for research and development during the years ended December 31, 2013 and 2012, respectively as discussed in detail above under “Plan of Operation – Develop Thermometer Products for the Professional Markets,” our research and development is focused on the continual improvement, addition of new feature sets and next generation thermometers. Clinical testing was completed during the second quarter of 2013 and it was determined that our product performed favorably and met ASTM standards. See “Develop Thermometer Products for the Professional Markets”, above. We also need to hire or retain as consultants qualified engineers to implement the electro-optics design, electronic circuitry and software design necessary for our next generation thermometers. See “Employees” below. We expect to launch these new professional models upon completion and testing, both market and clinical, although there can be no assurance that product development will be completed successfully, if at all, or if completed successfully, that these products will gain market acceptance. If we are unable to develop and launch these products as anticipated, and have these products accepted commercially, our ability to expand our market position in non-contact thermometers for humans and pets may be materially adversely impacted.
Employees
As of April 11, 2014 we employ four (4) persons on a full-time basis. None of our employees are represented by a labor union, and we consider our employee relations to be good. We will need to hire or retain as consultants qualified engineers to implement the electro-optics design, electronic circuitry and software design necessary for our next generation thermometers. However, as a result of our weak financial position, we do not currently have the ability to hire any new employees, including the electrical engineers and engineering personnel we need, since the additional financing we would need to pay them is neither arranged nor committed. See Item 1A, Risk Factors.
Item 1A: Risk Factors.
An investment in our common stock involves a significant degree of risk. You should not invest in our common stock unless you can afford to lose your entire investment. You should consider carefully the following risk factors and other information in this report before deciding to invest in our common stock. If any of the following risks and uncertainties develops into actual events, our business, financial condition or results of operations could be materially adversely affected and you could lose your entire investment in our company.
Risks Relating To Our Business
Revenues and Profits Are Not Assured
We have had a very limited history of operations. Since inception we have relied on loans to fund our operations, and we have incurred significant operating losses. Negative cash flow from operations is expected in the foreseeable future due to limited revenues. There can be no assurance that we will ever achieve any significant revenues or profitable operations.
We May Be Unable To Continue as a Going Concern
Our auditors' report on our December 31, 2013 and 2012 consolidated financial statements, and Note 2 to such financial statements, reflect that there is substantial doubt about our ability to continue as a going concern. Our operating revenues are insufficient to fund our operations and our assets already are pledged to secure our indebtedness to, our senior secured lender TCA Global Master Fund, LLP, management and its affiliates for deferred salary and cash advances, respectively. The unavailability of additional financing could require us to delay, scale back or terminate our acquisition efforts as well as our own business activities, which would have a material adverse effect on the Company and its viability and prospects. As noted above, we plan to increase our revenue by increasing our visibility and the awareness of our company, and our products by engaging in more aggressive sales, marketing and advertising activity. We intend to develop and implement strategies to market our products to new customers. However, we can give no assurance that these plans and efforts will be successful.
The Substantial Additional Capital We Need May Not be Obtainable
We have experienced recurring net losses of $4.3 million for the year ended December 31, 2013 and $1.8 million for the year ended December 31, 2012, and we had a working capital deficit of approximately $3.3 million and $3.2 million at December 31, 2013 and 2012, respectively. Currently we have a severe cash shortage, with only approximately $125,000 of cash on hand on April 10, 2014. Our operating revenues are insufficient to fund our operations for the next twelve months. Therefore, we require substantial additional funds to finance our business activities on an ongoing basis and to implement our acquisition strategy portraying our company as one able to provide a target company not only with cost savings resulting from centralized estimating, accounting and other corporate functions but also with additional working capital to finance and grow its business. During 2014 we were successful in securing a $5 million line of credit that funded us with $1 million in funds for working capital t and are seeking to engage a broker-dealer and member of FINRA to assist us in raising additional funding. However, there are no assurances we will be successful in raising the additional capital and such funding will result in a material and substantial dilution of the equity interests of our current shareholders and such funding will result in a material and substantial dilution of the equity interests of our current shareholders. We do not have any commitments or arrangements with Craig Sizer, our controlling shareholder and former CEO who has already loaned us through his affiliate an aggregate of approximately $3.5 million through March 31, 2014, or with any other person or entity to obtain any such equity capital, and there can be no assurance that the additional financing we require would be available on reasonable terms, if at all. The unavailability of additional financing could require us to delay, scale back or terminate our acquisition efforts as well as our own business activities, which would have a material adverse effect on the Company and its viability and prospects. See also Item 8, Financial Statements and Supplementary.
Cost and Quality Issues Might Arise from Our Dependence on a Third-Party, Sole Source Taiwanese Manufacturer
We currently buy our products from one third-party, sole source supplier who produces our products in its plant in Taiwan. Although we have the right to engage other manufacturers, we have not done so. Accordingly, our reliance on this supplier involves certain risks, including:
| The cost of our products might increase, for reasons such as inflation and increases in the price of the precious metals, if any, or other internal parts used to make them, which could cause our cost of goods to increase and reduce our gross margin and profitability if any; and |
| Poor quality could adversely affect the reliability and reputation of our products. |
Any of these uncertainties also could adversely affect our business reputation and otherwise impair our profitability and ability to compete.
We May Be Unable to Make or Successfully Integrate Acquisitions
Our business and growth strategies depend in large part on our ability to identify and acquire suitable companies. Delays or failures in acquiring new companies would materially and adversely affect our planned growth.
Strategic acquisitions, investments and alliances are intended to expand our ability to offer effective, high quality medical devices. If we are unsuccessful in our acquisitions, investments and alliances, we may be unable to grow our business significantly or may record asset impairment charges in the future. The success of any acquisition, investment or alliance that we may undertake in the future will depend on a number of factors, including:
| our ability to identify suitable opportunities for acquisition, investment or alliance, if at all; |
| · | our ability to finance any future acquisition, investment or alliance on terms acceptable to us, if at all; |
| · | whether we are able to establish an acquisition, investment or alliance on terms that are satisfactory to us, if at all; |
| · | the strength of the other company’s underlying technology and ability to execute; |
| · | intellectual property and pending litigation related to these technologies; |
| · | regulatory approvals and reimbursement levels, if any, of the acquired products, if any; and |
| · | our ability to successfully integrate acquired companies and businesses with our existing business, including the ability to adequately fund acquired in-process research and development projects. |
Any potential future acquisitions we consummate will be dilutive, possibly substantially, to the equity ownership interests of our then shareholders since we intend to pay for such acquisitions by issuing shares of our common stock, and also may be dilutive to our earnings per share, if any.
Our acquisition strategy may not have the desired result, and notwithstanding effecting numerous acquisitions, we still may be unable to achieve profitability or, if profitability should be achieved, to sustain it.
We May Not Be Able to Compete Effectively
Our closest competition would be Welch Allyn, Braun and Exergen, which markets a line of oral, tympanic and axillary thermometers. They do not have a non-contact thermometer. Each competitor has national distribution and a longer operating history than we do; and Welch Allyn, Braun and Exergen have greater brand name recognition and significantly greater financial, technical and sales, marketing, distribution and research and development resources. We may be unable to compete successfully or remain viable.
Our Research and Development May Be Unsuccessful; Our Next Generation Products May Not Be Developed, or If Developed May Fail to Win Commercial Acceptance
Our business is characterized by extensive research and development, and rapid technological change. Developments by other companies of new or improved products or technologies, especially of thermometers for use by consumers may make our products or proposed products obsolete or less competitive and may negatively impact our net sale. We should, subject to having adequate financial resources (which we currently do not possess), devote continued efforts and financial resources to develop or acquire scientifically advanced technologies, apply our technologies cost-effectively across our product lines and markets and, attract and retain skilled electrical engineering and other development personnel. If we fail to develop new products or enhance existing products, it would have a material adverse effect on our business, financial condition and results of operations.
In order to develop new products and improve current product offerings, we are focusing our research and development programs largely on the development of next-generation models intended for the professional human health care markets, principally with greater accuracy than our current models. If we are unable to develop, launch these products as anticipated, and have them accepted commercially, our ability to expand our market position may be materially adversely impacted. Further, we are investigating opportunities to further expand our presence in, and diversify into, medical treatment technologies and other medical devices. Expanding our focus beyond our current business would be expensive and time-consuming. There can be no assurance that we will be able to do so on terms favorable to us, or that these opportunities will achieve commercial feasibility, obtain regulatory approval or gain market acceptance. A delay in the development or approval of these technologies or our decision to reduce our investments my adversely impact the contribution of these technologies to our future growth.
We May Be Unable to Develop Next Generation Products If We Cannot Hire Electrical/Bio-Medical Engineers
Our business depends on our ability to hire and retain engineers and others with highly specialized skills and experience. We need to hire qualified engineers to implement the electro-optics design, electronic circuitry and software design necessary for our next generation thermometers. Many electrical engineers and technicians obtain post-graduate or professional degrees, and the increased educational time required at the post-graduate level further restricts the pool of engineers and technicians available for employment. Our success also depends in large part upon our ability to attract and retain qualified management, marketing and sales personnel. There can be no assurance that we will be successful in hiring or retaining such qualified personnel. If we are not able to hire and retain qualified people to fill these positions, our competitive position would be adversely affected, which would have a material adverse effect on our business, financial condition and results of operations.
Growth, If Any, Could Be Unmanageable
Our strategy anticipates significant growth in the diversity of our operations and in our business, which would place demands on our management and our limited financial and other resources. To manage any such growth, we would be required to attract and train additional qualified managerial, engineering, technical, marketing and financial personnel. If we are unable to effectively manage any such growth, our business, operating results and financial condition could be materially affected.
Product Shortages May Arise if Our Contract Manufacturer Fails to Comply With Government Regulations
Medical device manufacturers are required to register with the FDA and are subject to periodic inspection by the FDA for compliance with its Qualify System Regulation requirements, which require manufacturers of medical devices to adhere to certain regulations, including testing, quality control and documentation procedures. In addition, the Federal Medical Device Reporting regulations require a manufacturer to provide information to the FDA whenever there is evidence that reasonably suggests that a device may have caused or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious injury. Compliance with applicable regulatory requirements is subject to continual review and is monitored rigorously through period inspections by the FDA. Our sole source manufacturer and supplier is International Standards Organization (“ISO”) certified, but if it were to fail to adhere to quality system regulations or ISO requirements, this could delay production of our products and lead to fines, difficulties in obtaining regulatory clearances, recalls, enforcement actions, including injunctive relief or consent decrees, or other consequences, which could, in turn, have a material adverse effect on our financial condition and results of operations.
Our Medical Devices May Not Meet Government Regulations
Our products and development activities are subject to regulation by the FDA pursuant to the Federal Food, Drug and Cosmetic Act (“FDC Act”), and, if we should sell our products abroad, by comparable agencies in foreign countries, and by other regulatory agencies and governing bodies. Under the FDC Act, medical devices must receive FDA clearance or approval before they can be commercially marketed in the U.S. The FDA is reviewing its clearance process in an effort to make it more rigorous, which may require additional clinical data, if any, time and effort for product clearance. In addition, most major markets for medical devices outside the U.S. require clearance, approval or compliance with certain standards before a product can be commercially marketed. The process of obtaining marketing approval or clearance from the FDA for new products, or with respect to enhancements or modifications to existing products, could:
| · | Take a significant period of time; |
| · | Require the expenditure of substantial resources; |
| · | Involve rigorous pre-clinical and clinical testing, as well as increased post-market surveillance; |
| · | Require changes to products; and |
| · | Result in limitations on the indicated uses of products. |
Countries around the world have adopted more stringent regulatory requirements that have added or are expected to add to the delays and uncertainties associated with new product releases, as well as the clinical, if any, and regulatory costs of supporting those releases. Even after products have received marketing approval or clearance, product approvals and clearances by the FDA can be withdrawn due to failure to comply with regulatory standards or the occurrence unforeseen problems following initial approval. There can be no assurance that we will receive the required clearances for new products or modifications to existing products on a timely basis or that any approval will not be subsequently withdrawn or conditioned upon extensive post-market study requirements.
In addition, regulations regarding the development, manufacture and sale of medical devices are subject to future change. We cannot predict what impact, if any, those changes might have on our business. Failure to comply with regulatory requirements could have a material adverse effect on our business, financial condition and results of operations. Later discovery of previously unknown problems with a product could result in fines, delays or suspensions of regulatory clearances, seizures or recalls of products, physician advisories or other field actions, operating restrictions and/or criminal prosecution. We also may initiate field actions as a result of our manufacturer’s failure to strictly comply with our internal quality policies. The failure to receive product approval clearance on a timely basis, suspensions of regulatory clearances, seizures or recalls of products, physician advisories or other field actions, or the withdrawal of product approval by the FDA, could have a material adverse effect on our business, financial condition and results of operations.
Current Economic Conditions May Jeopardize Our Fund-Raising Efforts
The global financial crisis has caused extreme disruption in the financial markets, including severely diminished liquidity and credit availability. There can be no assurance that there will not be further deterioration in the global economy, and these conditions may adversely affect our ability to raise capital or borrow money. Our customers may experience financial difficulties, which may adversely impact their ability or decision to purchase our product or to pay for those of our products they do purchase on a timely basis, if at all. The strength and timing of any economic recovery remains uncertain, and we cannot predict to what extent the global economic slowdown may negatively impact our average selling prices, our net sales and our profit margins. In addition, the current economic conditions may adversely affect our Chinese manufacturer, leading it to experience financial difficulties or to be unable to borrow money to fund its operations, which could cause disruptions in our ability to market our products.
Our Intellectual Property May Not Be Protectable
The medical device market in which we primarily participate is largely technology driven. Consumers historical move quickly to new products and new technologies. As a result, intellectual property rights, particularly patents and trade secrets, play a significant role in product development and differentiation. However, intellectual property litigation is inherently complex and unpredictable. Furthermore, appellate courts can overturn lower court patent decisions.
We Face Intellectual Property Risks that May Negatively Affect Our Brand Names, Reputation, Revenues, and Potential Profitability
In our second generation products we will be depending upon a variety of methods and techniques that we regard as proprietary trade secrets. We are also dependent upon a variety of trademarks and designs to promote brand name development and recognition, and we rely on a combination of trade secrets, patents, trademarks, and unfair competition and other intellectual property laws to protect our rights to such intellectual property. However, to the extent that our products violate the proprietary right of others we may be subject to damage awards or judgments prohibiting the use of our intellectual property. See Item 3, “Legal Proceedings,” for a description of a pending legal proceeding seeking to invalidate one of our design patents. In addition, our rights in our intellectual property, even if registered, may not be enforceable against any prior users of similar intellectual property. Furthermore, if we lose or fail to enforce any of our proprietary rights, our brand names, reputation, revenues and potential profitability may be negatively affected.
In addition, competing parties frequently file multiple suits to leverage patent portfolios across product lines, technologies and geographies and to balance risk and exposure between the parties. In some cases, several competitors may be parties in the same proceeding, or in a series of related proceedings, or litigate multiple features of a single class of devices. These forces frequently drive settlement not only of individual cases, but also of a series of pending and potentially related and unrelated cases. In addition, although monetary and injunctive relief is typically sought, remedies and restitution are generally not determined until the conclusion of the trial court proceeding and can be modified on appeal. Accordingly, the outcomes of individual cases are difficult to time, predict or quantify and are often dependent upon the outcomes of other cases in other geographies.
Patents and other proprietary rights are and will continue to be essential to our business, and our ability to compete effectively with other companies will be dependent upon the proprietary nature of our technologies. We rely upon trade secrets, know-how and continuing technological innovations to develop, maintain and strengthen our competitive position. We pursue a policy of generally seeking patent protection in the U.S. for patentable design or subject matter in our devices and attempt to review third-party patents and patent applications to the extent publicly available in order to develop an effective patent strategy, avoid infringement of third-party patents, identify licensing opportunities and monitor the patent claims of others. We own three U.S. design patents and have one U.S. patent application pending. We are not a party to any license agreements pursuant to which patent rights have been obtained or granted in consideration for cash, cross-licensing rights or royalty payments. No assurance can be made that any pending or future patent application will result in the issuance of patents, or that any future patents issued to, or licensed by, us will not be challenged or circumvented by our competitors. In addition, we may have to take legal action in the future to protect our patents, if any, trade secrets or know-how or to assert them against claimed infringement by others. Any legal action of that type could be costly and time consuming, and no assurances can be given that any lawsuit will be successful.
The invalidation of key patent or proprietary rights that we may own, or an unsuccessful outcome in lawsuits to protect our intellectual property, could have a material adverse effect on our business, financial position and results in operations.
Our Trademarks Are Valuable, and Any Inability to Protect Them Could Reduce the Value of Our Products and Brands.
Our trademarks, trade secrets, and other intellectual property rights are important assets for us. Our trademarks “Sanomedics”, “Thermomedics,” “Babytemp,” “Temp4sure,” Tempmature,” “Elitemp”, “Caregiver”, "TouchFree" and “ThermoPet” are registered with the U.S. Patent and Trademark Office. Protecting these intellectual property rights could be costly and time consuming, and any unauthorized use of our intellectual property could make it more expensive for us to do business and which also could harm our operating results.
Product Warranties and Product Liabilities Could Be Costly
We typically warrant the workmanship and materials used in the products we sell. Failure of the products to operate properly or to meet specifications may increase our costs by requiring replacement or monetary reimbursement to the end user. To the extent we are unable to make a corresponding warranty claim against the manufacturer of the defective product, we would bear the loss associated with such warranties. In the ordinary course of our business, we may be subject to product liability claims alleging that products we sold failed or had adverse effects. We maintain liability insurance at a level which we believe to be adequate. A successful claim in excess of the policy limits of the liability insurance could materially adversely affect our business. There can be no assurance, however, that recourse against a manufacturer would be successful, or that our manufacturer maintains adequate insurance or otherwise would be able to pay such liability.
We May Be Unable to Replace Current Management
Our success is dependent upon the active participation of our Management, Messrs. Keith Houlihan and David C. Langle, and we have entered into employment/consulting agreements with them which expire on December 31, 2015 and 2014, respectively. However, we do not maintain any "key man" insurance on either of their lives. In the event we should lose the services of either of these people, our business would suffer materially. There can be no assurance that we would be able to employ qualified person(s) on acceptable terms to replace them.
Management Actions Could Cause Substantial Dilution and Stock Price Declines and Discourage a Takeover
Our Company is effectively controlled by management, specifically Messrs. Craig Sizer and Keith Houlihan (“Management”), who collectively and beneficially own approximately 18% of our outstanding common stock and have majority voting rights by virtue of their 35% ownership of our preferred stock. While we intend to pursue the business strategy set forth herein, Management has broad discretion to adjust the application and allocation of our cash and other resources, whether in order to address changed circumstances and opportunities or otherwise. As a result of such discretion, our success is substantially dependent upon their judgment. In addition, Management is able to elect our board of directors and to cause the directors to declare or refrain from declaring dividends, to increase our authorized capital, to authorize one or more series of preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights holders of our common stock, to issue additional shares of capital stock, to direct the use of all funds available to us, including accelerating change of control payments, and to cause additional shares of common stock to be issued by accelerating the exercisability and termination of outstanding stock options. Any such preferred stock also could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the company. Any issuance of common or preferred stock could substantially dilute the percentage ownership of the company held by our then current stockholders and cause a precipitous decline in our stock price. Such concentration of ownership may have the additional effect of delaying, deferring or preventing a change of control of the company. Also, this controlling interest may have a negative impact on the market price of our common stock by discouraging third-party investors.
Management Could Terminate Employment, and Our Operations and Viability Would be Hurt, If We Cannot Fund the 2010 Bonuses and Accrued Salaries Which Were Earned
Our Board of Directors determines whether or not our Management has achieved their milestones for their annual bonuses, with each director abstaining from the determination of his own performance. We are obligated to pay to our management, based on our Board’s determination that our executive officers achieved the mutually agreed milestones for fiscal 2010 set forth in their employment agreements, as amended, cash bonuses aggregating $302,000 (Messrs Sizer and Houlihan – $125,000 each, and O’Hara - $52,000 after pro-ration, 25% of which we have the option to pay to Mr. O’Hara in shares of our common stock). No bonuses were incurred for years 2013 and 2012 since milestones were not met or not established. Additionally, officers of the Company have earned approximately $706,000 in salaries in accordance with their employment contracts. We do not have on hand the cash to fund these bonus obligations, and Mr. Sizer’s affiliates will not make additional advances for that purpose; and there is no assurance we will be able to raise the money to make any such bonus payments. In addition, our net income from operations, if any, would be reduced substantially, and could be eliminated, as a result of this additional bonus expense we incurred for fiscal 2010. We also could be in default under our employment agreements with management if we cannot honor any such obligations, as a result of which any and all of these executives could terminate their employment with us, which would have a material adverse effect on our operations and viability. See Item 11 below, Executive Compensation.
Risks Relating to our Common Stock
Our Common Stock is Quoted on the OTC Markets, Which May Discourage Investors from Purchasing It More Than if It Was Listed on a National Exchange
Our common stock is quoted in the over the counter market on the OTC Markets. Quotation of our common stock on the OTC Markets may limit its liquidity and price more than if it was listed on a national securities exchange such as The Nasdaq Stock Market or NYSE MKT. Some investors may perceive an investment in our securities to be less attractive because they are quoted on the OTC Markets. In addition, as an OTC Markets’ quoted company we do not attract the analyst coverage that accompanies companies listed on an exchange. Further, institutional and other investors may have investment guidelines that restrict or prohibit investing in securities quoted on the OTC Markets. These factors may have an adverse impact on the trading and price of our common stock.
Our Common Stock is Illiquid
Trading in stocks quoted on the OTC Markets is often thin and characterized by wide fluctuations in trading prices. Recently, there has been limited trading activity in our common stock on the OTC Markets. There can be no assurance that a more active trading market will commence in our common stock. Further, in the event that an active trading market were to commence on the OTC Markets, there can be no assurance as to the level of any market price of our common stock, whether any such trading market would provide liquidity to investors, or whether any such trading market would be sustained.
The Application of the “Penny Stock” Rules Could Adversely Affect Transactions in our Common Stock and Could Increase Transaction Cost.
Trading in our common stock is subject to material limitations as a consequence of regulations which limits the activities of broker-dealers effecting transactions in "penny stocks." Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock. There can be no assurance that any broker-dealer which initiates quotations for the Common Stock will continue to do so, and the loss of any such broker-dealer likely would have a material adverse effect on the market price of our common stock.
Pursuant to Rule 3a51-1 under the Exchange Act, our common stock is a "penny stock" because it (i) is not listed on any national securities exchange, (ii) has a market price of less than $5.00 per share, and (iii) its issuer (the Company) has net tangible assets less than $2,000,000 (if the issuer has been in business for at least three (3) years) or $5,000,000 (if the issuer has been in business for less than three (3) years). Our common stock is quoted only on the OTC Markets.
Rule 15g-9 promulgated under the Exchange Act imposes limitations upon trading activities on "penny stocks", which makes selling our common stock more difficult compared to selling securities which are not "penny stocks." Rule 15a-9 restricts the solicitation of sales of "penny stocks" by broker-dealers unless the broker first (i) obtains from the purchaser information concerning his financial situation, investment experience and investment objectives, (ii) reasonably determines that the purchaser has sufficient knowledge and experience in financial matters that the person is capable of evaluating the risks of investing in "penny stocks", and (iii) delivers and receives back from the purchaser a manually signed written statement acknowledging the purchaser's investment experience and financial sophistication.
Rules 15g-2 through 15g-6 promulgated under the Exchange Act require broker-dealers who engage in transactions in "penny stocks" first to provide their customers with a series of disclosures and documents, including (i) a standardized risk disclosure document identifying the risks inherent in investing in "penny stocks", (ii) all compensation received by the broker-dealer in connection with the transaction, (iii) current quotation prices and other relevant market data, and (iv) monthly account statements reflecting the fair market value of the securities.
The Price of our Common Stock May Be Very Volatile
The market price of our common stock may change significantly in response to various factors and events beyond our control, including but not limited to the following: (i) the risk factors described herein; (ii) a shortfall in gross sales or net income from that expected by securities analysts, if any, and investors; (iii) changes in prevailing sentiment among securities analysts and investors regarding our operations, business prospects and/or estimates of our financial performance; (iv) general conditions in the economy as a whole; (v) general conditions in the securities markets; (vi) our announcements of significant new product introductions, contracts, or acquisitions; or (vii) additions or departures of key personnel. Some companies that have volatile market prices for their securities have been subject to security class action suits filed against them. If a suit were to be filed against us, regardless of the outcome, it could result in substantial costs and a diversion of our management’s attention and resources. This could have a material adverse effect on our business, results of operations and financial condition.
In the future, we anticipate having our common stock quoted on the Over-The-Counter Bulletin Board. Since the Over-The-Counter Bulletin Board is a dealer system we will have to seek market-makers to provide quotations for our common stock and it is possible that no market-maker will want to provide such quotations. Even if our common stock is quoted on the Over-The-Counter Bulletin Board, the Over-The-Counter Bulletin Board also provides a limited trading market similar to the OTC Markets. The Over-The-Counter Bulletin Board and the OTC Markets are not stock exchanges, and trading of securities on the Over-The-Counter Bulletin Board or the OTC Markets is often more sporadic than the trading of securities listed on a stock exchange such as The Nasdaq Stock Market or NYSE MKT.
Companies quoted for trading on the Over-The-Counter Bulletin Board must be reporting issuers under Section 12 of the Exchange Act and must be current in their reports under Section 13 of the Exchange Act, in order to maintain price quotation privileges on the Over-The-Counter Bulletin Board. If our common stock is quoted on the Over-The-Counter Bulletin Board, and we fail to remain current on our reporting requirements, we could be removed from the Over-The-Counter Bulletin Board. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market. In addition, we may be unable to regain our quotation privileges on the Over-The-Counter Bulletin Board, which may have an adverse material effect on our business.
Accordingly, there can be no assurance as to the liquidity of any present or future markets that may develop for our common stock, the ability of holders of our common stock to sell our common stock, or the prices at which holders may be able to sell our common stock.
A Significant Portion of our Outstanding Shares are Restricted Securities and the Sale of those Shares Will Depress Our Stock Price.
The sale of shares of our common stock which are not registered under the Securities Act, known as “restricted” shares, typically are effected under Rule 144. At April 3, 2014 we had outstanding approximately 7,882,000 shares of restricted common stock. In accordance with the recent amendments to Rule 144, since we formerly were a “shell” company, no shares of our restricted common stock were eligible for sale under Rule 144 until we became subject to the reporting requirements of the Exchange Act, i.e., when this registration statement became effective by operation of law on December 29, 2010, and then such shares could be sold under Rule 144 on and after December 29, 2011 only if during the preceding 12 months we complied with our reporting requirements under the Exchange Act. No prediction can be made as to the effect, if any, that future sales of “restricted” shares of our common stock, or the availability of such shares for future sale, will have on the market price of our common stock or our ability to raise capital through an offering of our equity securities.
The sale of a substantial number of shares of our common stock, or the perception that such sales could occur, could adversely affect prevailing market prices for our common stock. In addition, any such sale or perception could make it more difficult for us to sell equity, or equity related, securities in the future at a time and price that we deem appropriate. If and when this registration statement becomes effective and we become subject to the reporting requirements of the Exchange Act, we might elect to adopt a stock option plan and file a registration statement under the Securities Act registering the shares of common stock reserved for issuance thereunder. Following the effectiveness of any such registration statement, the shares of common stock issued under such plan, other than shares held by affiliates, if any, would be immediately eligible for resale in the public market without restriction.
As an Issuer of a “Penny Stock,” the Protection Provided by the Federal Securities Laws relating to Forward Looking Statements Does Not Apply to Us
Although federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, we will not have the benefit of this safe harbor protection in the event of any legal action based upon a claim that the material provided by us contained a material misstatement of fact or was misleading in any material respect because of our failure to include any statements necessary to make the statements not misleading. Such an action could hurt our financial condition.
We Have Not Paid Dividends in the Past and Do Not Expect to Pay Dividends for the Foreseeable Future. Any Return on Investment May Be Limited to the Value of Our Common Stock, If Any
No cash dividends have been paid on our common stock. We expect that any net income derived from operations will be reinvested in our business. We do not expect to pay cash dividends in the near future. Payment of dividends would depend upon our profitability at the time, cash available for those dividends, and such other factors as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on an investor’s investment would occur only if our stock price was to appreciate, as to which there can be no assurance whatsoever.
Item 1B. Unresolved Staff Comments
This item is not applicable because registrant is a smaller reporting company.
Item 2. Properties
We do not own any real property. On March 19, 2013 we moved our offices from 80 Southwest 8th Street, Suite 2180, Miami, Florida 33130, to 444 Brickell Avenue, Suite 415, Miami, Florida 33131. Pursuant to the lease dated March 19, 2013, we occupy approximately 1,200 square feet of office space. Our monthly base rent is $2,667 effective on April 19, 2013 and increases to $2,746 on April 1, 2014. The lease expires on March 31, 2016. Our lease payment obligations are as follows:
| Period | | Annual Base Rent | |
| 4/1/2013 - 3/31/2014 | | $ | 34,848 | |
| 4/1/2014 - 3/31/2015 | | $ | 32,955 | |
| 4/1/2015 - 3/31/2016 | | $ | 33,938 | |
Item 3. Legal Proceedings
We are not currently a party in any legal proceeding or governmental proceeding nor are we currently aware of any pending legal proceeding or governmental proceeding proposed to be initiated against us except as described below. There are no proceedings in which any of our current directors, executive officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to us.
On October 10, 2012, the Company received a cease and desist demand letter from Exergen Corporation (“Exergen”), claiming that the Company infringed on certain patents relating to the Company's non-contact thermometers. On May 21, 2013 Exergen filed a complaint in the U.S. District Court of the District of Massachusetts against the Company and Thermomedics, Inc ( its’ wholly owned subsidiary). On September 3, 2013, the Company filed its answer to Exergens’ complaint and asserted counterclaims and affirmative defenses for non-infringement and invalidity of certain patents. The Company believes the alleged infringement is without merit and will vigorously defend its rights to market and sell the thermometers.
As a result of discoveries of fraud and misrepresentations in the acquisition of Prime Time by the Company, as disclosed in Note 1 to the consolidated financial statements, on March 18, 2014, the Company filed a civil lawsuit against Mark R. Miklos in the Circuit Court for the 11th Judicial Circuit in and for Miami-Dade County, Florida Case No.14007055CA01, alleging breach of contract, fraud in the inducement, fraudulent misrepresentation, unjust enrichment, conversion, breach of fiduciary duty and damages. The company is seeking judgment against the Seller, restitution, rescission of the Purchase Agreement and Employment Agreement and return of all moneys paid to the Seller.
On March 19, 2014 the Company was served with a lawsuit filed by Mark Miklos against the Company and Anovent, Inc. in the Circuit Court for the 13th Judicial Circuit in and for Hillsborough County, Florida Case No. 14-CA-2520 DIV K, alleging the following: breach of the Employment Agreement entered into with the Company; improper notice of termination; breach of the Short Term Note for $850,000; breach of Promissory Notes A and B for $500,000 each, and further includes an action to foreclose a security interest in personal property and intangibles as a result of the alleged defaults of the Notes and rights under the Security Agreement. The Company believes there is no merit to Mr. Miklos’ lawsuit and intends to defend itself aggressively.
Item 4. Mine Safety Disclosures
Not applicable to our operations.
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is quoted on the OTC Markets under the symbol “SIMH”. The high and low bid information on the OTC Markets for our common stock for each full quarterly period within our two most recent fiscal years is set forth below. These bid quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
| Fiscal year Ending December 31, 2014: | | High | | | Low | |
| First Quarter | | $ | 1.48 | | | $ | 0.64 | |
| Fiscal Year Ending December 31, 2013: | | | | | | | | |
| Fourth Quarter | | | 4.75 | | | | 0.45 | |
| Third Quarter | | | 24.00 | | | | 1.00 | |
| Second Quarter | | | 39.50 | | | | 10.30 | |
| First Quarter | | | 19.80 | | | | 8.00 | |
| | | | | | | | | |
| Fiscal Year Ending December 31, 2012: | | High | | | Low | |
| Fourth Quarter | | $ | 17.10 | | | $ | 15.00 | |
| Third Quarter | | | 24.30 | | | | 24.30 | |
| Second Quarter | | | 19.90 | | | | 19.90 | |
| First Quarter | | | 50.10 | | | | 50.10 | |
On April 11, 2014, the last sale price of our common stock as reported on the OTC Markets was $ 1.05 per share. At April 11, 2014 we had approximately 1,628 record shareholders of our common stock
Dividends
We have never declared or paid any cash dividends on our common stock. The payment by us of dividends, if any, in the future rests within the discretion of our board of directors and will depend, among other things, upon our earnings, capital requirements, debt covenants and financial condition, as well as other relevant factors. We do not intend to pay any cash dividends in the foreseeable future, but intend to retain all earnings, if any, for use in our business. There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends.
Recent sales of unregistered securities
In October and November 2013 in connection with a Securities Purchase Agreement and convertible promissory note (“Note”) in the principal amount of $125,000, the Company converted the Note into a total of 3,220,786 shares of the Company’s common stock at conversion prices of $0.03 and $0.04 per share. The recipient was an accredited investor and the issuances were exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 3(a)(9) of that act.
On October 25, 2013, in connection with two (2) Securities Purchase Agreements and convertible promissory notes (“Notes”) in the total principal amount of $120,250, the Company converted the Notes into a total of 3,250,000 shares of the Company’s common stock at a conversion price of $0.037 per share. . The recipient was an accredited investor and the issuances were exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 3(a)(9) of that act.
On November 20, 2013, pursuant to a portion of Convertible Note due to CLSS originally at $367,000, the Company converted $180,000 portion of the Note into a total of 6,000,000 shares of the Company’s common stock at a value of $0.03 per share.
On December 2, 2013, in connection with a Securities Purchase Agreement and convertible promissory note in the principal amount of $50,000, the Company converted the note into a total of 1,600,000 shares of the Company’s common stock at a conversion price of $0.03 per share. . The recipient was an accredited investor and the issuances were exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 3(a)(9) of that act.
On January 28, 2014 in exchange for a reduction of debt of the Company owed to CLSS Holdings for a share price of $0.10 per share, the Company issued 3,142,278 shares of restricted common stock to various existing individual shareholders designated by the owner of CLSS Holdings.
On February 28, 2014, the Company issued 97,656 shares of common stock to two (2) parties as commissions on the TCA Global financing. The recipients were accredited investors and the issuances were exempt from registration under the Securities Act of 1933 in reliance on exemptions provided by Section 4(2) of that act.
Through March 28, 2014, the Company issued a total of 708,466 shares of restricted common stock to three (3) companies in connection with the conversion of convertible debt held. The recipient was an accredited investor and the issuances were exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 3(a)(9) of that act.
On March 28, 2014 the Company issued 134,454 shares of common stock as payment of advisory fee to TCA Global in connection with the TCA lending facility. The recipients were accredited investors and the issuances were exempt from registration under the Securities Act of 1933 in reliance on exemptions provided by Section 4(2) of that act.
Issuer Purchases of Equity Securities
None.
Item 6. Selected Financial Data.
This item is not applicable because registrant is a smaller reporting company.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
We design, develop and market medical diagnostic equipment for healthcare providers. We are capitalizing on the growing trend of expanded hospital caregivers, assisted living and long term care. We are focused on delivering improved outcomes and preventative practices to control healthcare costs while being an innovative bridge between the healthcare provider and their patient.
Caregiver® Thermometer is the first clinically validated non-contact thermometer for the healthcare providers market, which include hospitals, physician’s offices, medical clinics and nursing homes and other long-term care institutions and acute care hospitals. Thermomedics line of Professional Non-Contact Thermometers ( Caregiver® ) is the first of its kind. Our Caregiver® thermometer with TouchFree™ technology is less likely to transmit infectious disease than those devices that require even a minimum of contact.
Critical Accounting Policies and Estimates
The methods, estimates and judgments we use in applying our accounting policies have a significant impact on the results we report in our financial statements.. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We believe our critical accounting policies are those described below.
Revenue Recognition
The Company recognizes revenue at the time the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured.
Certain product sales are subject to rights of return. Such rights include the right to return defective items within 30 days and with certain large accounts a right to return unsold product. For products sold where the buyer has the right to return the product, the Company recognizes revenue at the time of sale only if (1) the Company’s price to the buyer is substantially fixed or determinable at the date of sale, (2) the buyer has paid the Company, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product, (3) the buyer’s obligation to the Company would not be changed in the event of theft or physical destruction or damage of the product, (4) the buyer acquiring the product for resale has economic substance apart from that provided by the seller, (5) the Company does not have significant obligations for future performance to directly bring about resale of the product by the buyer, and (6) the amount of future returns can be reasonably estimated. The Company recognizes such product revenues when either it has met all the above criteria, including the ability to reasonably estimate future returns, when it can reasonably estimate that the return privilege has expired.
Product Sales — Revenue from sales of the Company’s products is recorded when title and risk of loss have passed to the buyer and provided the criteria for revenue recognition are met. The Company sells its products to individual consumers and resellers upon receipt of a written order. The Company has a limited return policy for defective items that requires that the customer give the Company notice within 30 days after receipt of the product; however, such risk is passed to the manufacturer and therefore, the Company recognizes revenue at the time of delivery without providing any reserve. For sales made by certain large accounts with a right to return unsold items, the Company provides for a reserve for the estimated amount of unsold items.
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out basis) or market value. The stated cost is comprised of finished goods of non-invasive medical devices. Reserves, if necessary, are recorded to reduce inventory to market value based on assumptions about consumer demand, current inventory levels and product life cycles for the various inventory items, as follows:
| · | Current inventory levels – we have approximately 2,200 units remaining as of December 31, 2013. We are attempting to sell the remaining units as quickly and efficiently as possible in order to make room for our second generation professional product. |
| · | Product life cycles –We are marketing our Caregiver line of thermometers |
Stock-Based Compensation
The Company applies the fair value method of Accounting Standards Codification (“ASC”) 718, Share Based Payment, in accounting for its stock based compensation. This standard states that compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period, if any. As the Company does not have sufficient, reliable and readily determinable values relating to its common stock, the Company has used the stock value pursuant to its most recent private sale of stock for purposes of valuing stock based compensation. The Company believes that the market price of the Company's stock is not indicative of value as the stock is not widely held and trades infrequently.
Income Taxes
The Company accounts for income taxes under ASC 740, Income Taxes. Under ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period, which includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
ASC 740 contains a two-step approach to recognizing and measuring uncertain tax positions. This first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.
Based on its evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements. The Company's evaluation was performed for the tax years ended December 31, 2013 and 2012. The Company’s tax returns for the years 2010 through 2013 remain subject to examination by tax jurisdictions as of December 31, 2013.
RESULTS OF OPERATIONS
The following table summarizes our consolidated operating results as a percentage of net sales revenue for the periods indicated:
| | | Year Ended December 31, | |
| | | 2013 | | | 2012 | |
| Net sales revenue | | | 100.0 | % | | | 100.0 | % |
| | | | | | | | | |
| Costs and expenses: | | | | | | | | |
| Cost of goods sold | | | 22.4 | | | | 60.0 | |
| General and administrative | | | 435.6 | | | | 998.4 | |
| Research and development | | | 42.3 | | | | 160.2 | |
| Stock compensation | | | 286.9 | | | | 484.1 | |
| Depreciation and amortization | | | 3.6 | | | | 9.7 | |
| | | | 790.8 | | | | 1,652.5 | |
| | | | | | | | | |
| Loss from operations | | | (690.8 | ) | | | (1,612.4 | ) |
| | | | | | | | | |
| Other income (expense): | | | | | | | | |
| Amortization of debt discount | | | (172.1 | ) | | | - | |
| Derivative expense | | | (15,757.7 | ) | | | - | |
| Unrealized gain on fair value of derivatives | | | 15,725.6 | | | | - | |
| Loss on write-down of disposed patents | | | ( 5.7 | ) | | | - | |
| Loss on rescission | | | (678.7 | ) | | | - | |
| Interest income | | | - | | | | 14.3 | |
| Interest expense | | | (56.2 | ) | | | (262.2 | ) |
| | | | | | | | | |
| Loss before provision for income taxes | | | (1,635.6 | ) | | | (1,860.4 | ) |
| Provision for income taxes | | | — | | | | — | |
| | | | | | | | | |
| Net loss | | | (1,635.6 | )% | | | (1,860.4 | )% |
Results of Operations
Year Ended December 31, 2013 compared to the year Ended December 31, 2012
Revenues: Revenues for the year ended December 31, 2013 were approximately $264,000 as compared to approximately $96,000 for the year ended December 31, 2012, an increase of 172%. This increase is attributable to the continued sales and launching of our new professional models.
Cost of Revenues: Cost of revenues, which consist of product, shipping and other costs totaled approximately $59,000 for the year ended December 31, 2013 as compared to $57,000 of such costs during the same period in 2012. This marginal change in cost of revenues reflects the lower unit prices of the new professional models.
Gross Profit: Gross profit was approximately $205,000 for the year ended as compared to a gross profit of approximately $38,000 for the year ended December 31, 2012. The 2013 increase of $167,000 was primarily the result of the lower unit prices of the new professional models.
Operating Expenses: Operating expenses consist of general and administrative expenses, stock compensation, depreciation and amortization and research and development. For the year ended December 31, 2013, operating expenses totaled approximately $2.1 million as compared to approximately $1.6 million for the same period in 2012. The approximate $.5 million increase (28.6%) was primarily a result of increased professional fees and additional stock compensation expense of approximately $.4 million (-76.5%).
Net Loss: Net loss for the year ended December 31, 2013 was approximately $4.3 million compared to approximately $1.8 million for the year ended December 31, 2012, an increase of approximately $2.5 million (143.0%) primarily as a result of the, loss from rescission and write-off the prior Prime Time Medical acquisition $1.8 million and impact from operating expenses as described above.
Financial Condition
December 31, 2013 compared to December 31, 2012
Assets. At December 31, 2013 our total assets increased by approximately $16,000 or 17.0%, to approximately $106,000. This was primarily attributable to increases of approximately $ 11,000 in accounts receivable and $37,000 in inventory offset by depreciation and patent write-down of approximately $24,000 and the use of $17,000 in cash.
Liabilities. At December 31, 2013, our total liabilities increased by approximately $2 million or 61.0%, to approximately $5.3 million, attributable primarily to the increase of derivative liabilities embedded in convertible debt of approximately $1.1 million , $.5 million from increased borrowings and related interest from an affiliate of Craig Sizer, our former Chairman and CEO and principal shareholder and Keith Houlihan, our President into equity, and $.5 million accrual for contingencies on rescission of Prime Time Medical prior acquisition.
Stockholders’ Deficit. At December 31, 2013, our stockholders’ deficit increased by approximately $2 million, or 61.9%, to approximately $5.2 million, primarily due to our net loss of approximately $4.3 million offset by an increase of approximately $2.4 million in paid-in capital resulting from the issuance of stock to consultants, the Prime Time Medical acquisition and from the conversion of third party debt.
Liquidity and Capital Resources
At December 31, 2013, our cash on hand was approximately $10,000. At April 11, 2014, our cash on hand was approximately $125,000.
Since our inception in 2009, we obtained our liquidity principally from approximately $3.5 million principal amount of cash advances from an affiliate of Craig Sizer, our former Chairman and CEO and one of our principal shareholders. The Company has executed promissory notes and advances totaling approximately $1.4 million as of December 31, 2013, with CLSS Holdings, LLC (“CLSS”). Each note (a) bears annual interest of between 7.5 and 9.0 (20% upon the occurrence, and during the continuance, of an event of default), is convertible into our common stock at a fixed conversion price of between $0.25 and $0.50, and is not pre-payable by us, and (b) is subject to a security agreement under which all of our assets secure our loan repayment obligation. All of the notes mature March 15, 2015. The maturity dates of these notes have been extended by CLSS in the past, but there is no assurance that these will be further extended.
Although we intend to increase our revenue by engaging in more aggressive sales, marketing and advertising activity designed to increase awareness of our products, we still need substantial additional capital to finance our business activities on an ongoing basis, as our revenue is insufficient to fund our operations.
During 2012 we raised $330,500 in a private placement and have engaged a broker-dealer and member of FINRA to assist us in raising additional funding. However, there are no assurances we will be successful in raising the additional capital and such funding will result in a material and substantial dilution of the equity interests of our current shareholders. At March 31, 2014, we had approximately $125,000 in cash on hand; and unless and until we receive additional financing from third parties, which we may never achieve, in the absence of on-going cash infusions on an as needed basis by Mr. Sizer’s affiliate we would be unable to continue to operate.
Even if we are successful in raising the equity financing noted above will require substantial additional funds to finance our business activities and acquisition strategy on an ongoing basis. We have only limited commitments or arrangements with any person or entity to obtain any equity or debt financing, and there can be no assurance that the additional financing we require would be available on reasonable terms, if at all; and if available, any such financing likely would result in a material and substantial dilution of the equity interests of our current shareholders. The unavailability of such additional financing could require us to delay, scale back or terminate our business activities, which would have a material adverse effect on our viability and prospects. See Item 1A, Risk Factors – We May Be Unable to Continue as a Going Concern; and – The Substantial Additional Capital We Need May Not Be Obtainable, and Item 13, Certain Relationships and Related Transactions, and Director Independence – Transactions with Related Persons - Borrowings.
We also intend to have our common stock quoted on the OTC Bulletin Board, which we believe would make it easier for us to raise capital from institutional investors and others. However, we do not have any commitments or arrangements to obtain any additional equity capital, and there can be no assurance that the additional financing we require would be available on reasonable terms, if at all. The unavailability of additional financing could require us to delay, scale back or terminate our acquisition efforts as well as our own business activities, which would have a material adverse effect on our company and its viability and prospects.
Summary of Cash Flow for the year ended December 31, 2013 and 2012
Our cash flows for the years ended December 31, 2013 and 2012, were as follows:
| | | Years Ended December 31, | |
| | | 2013 | | | 2012 | |
Net cash (used) by operating activities | | $ | (1,208,514 | ) | | $ | (692,556 | ) |
Net cash (used) by investing activities | | $ | (540,000 | ) | | $ | - | |
Net cash provided by financing activities | | $ | 1,731,991 | | | $ | 718,640 | |
Operating Activities
Our total cash used by operating activities decreased by approximately $516,000 or 74.5% to approximately $1,208,000 for the year ended December 31, 2013, compared to approximately $693,000 for the year ended December 31, 2012. The increase is primarily due to the increases in accounts receivable, inventory, officer salary accruals and accounts payable compared to the year ended December 31, 2012.
Investing Activities
Our total cash used by investing activities increased by approximately $540,000, or 100% for the year ended December 31, 2013, compared to approximately $ -0- for the year ended December 31, 2012 because of the cash funds paid for the Prime Time Medical acquisition which was subsequently rescinded.
Financing Activities
Our total cash provided by financing activities increased by approximately $1 million, or 141%, to approximately $1,7 million for the year ended December 31, 2013, compared to approximately $719,000 for the year ended December 31, 2012. The increase is primarily due to approximately $883,000 raised from the issuance of convertible notes with 3rd parties and approximately $849,000 borrowed from an affiliate of Craig Sizer, our former Chairman and CEO and principal shareholder.
Current Commitments for Expenditures
Our current cash commitments for expenditures are mainly operational and SEC compliance in nature. We seek to use current revenue to pay vendors for materials for contracts, for payroll, and related employment expenditures (i.e. benefits).
Off-Balance Sheet Arrangements
We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures.
RECENT ACCOUNTING PRONOUNCEMENTS
See Notes to Consolidated Financial Statements included elsewhere herein for disclosure and discussion of new accounting standards.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable for a smaller reporting company.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | Page | |
| Report of Independent Registered Public Accounting Firm | | | F-1 | |
| | | | | |
| Consolidated Balance Sheets as of December 31, 2013 and 2012 | | | F-2 | |
| | | | | |
| Consolidated Statements of Operations for the years ended December 31, 2013 and 2012 | | | F-3 | |
| | | | | |
| Consolidated Statement of Changes in Stockholders’ Deficit for the years ended December 31, 2013 and 2012 | | | F-4 | |
| | | | | |
| Consolidated Statements of Cash Flow for the years ended December 31, 2013 and 2012 | | | F-5 | |
| | | | | |
| Notes to the Consolidated Financial Statements | | | F-6 | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Sanomedics International Holdings, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Sanomedics International Holdings, Inc. and Subsidiaries (the “Company”), as of December 31, 2013 and 2012, and the related consolidated statements of operations, changes in stockholders’ 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 is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 Sanomedics International Holdings, Inc. and Subsidiaries, as of December 31, 2013 and 2012, and the consolidated results of their operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 2 to the consolidated financial statements, the Company had recurring operating losses, lack of sufficient working capital and has been historically dependent on outside financing in order to fund its business. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding those matters are more fully described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Mallah Furman
Miami, Florida
| Sanomedics International Holdings, Inc. |
| Consolidated Balance Sheets |
| | | December 31, | | | December 31, | |
| | | 2013 | | | 2012 | |
| | | | | | | |
| Assets |
| | | | | | | |
| Current Assets | | | | | | |
| Cash | | $ | 9,560 | | | $ | 26,084 | |
| Accounts receivable, net | | | 19,225 | | | | 8,117 | |
| Inventories | | | 39,060 | | | | 2,171 | |
| Prepaid expenses | | | 612 | | | | - | |
| | | | | | | | | |
| Total Current Assets | | | 68,457 | | | | 36,372 | |
| | | | | | | | | |
| Fixed assets, net | | | 12,562 | | | | 17,049 | |
| | | | | | | | | |
| Patents, net | | | 16,816 | | | | 36,796 | |
| | | | | | | | | |
| Deposits | | | 7,999 | | | | - | |
| | | | | | | | | |
| | | | 24,815 | | | | 36,796 | |
| | | | | | | | | |
| Total Assets | | $ | 105,834 | | | $ | 90,217 | |
| | | | | | | | | |
| Liabilities and Stockholders’ Deficit |
| | | | | | | | | |
| Current Liabilities | | | | | | | | |
| Accrued salaries payable | | $ | 705,569 | | | $ | 1,290,516 | |
| Accounts payable and other liabilities | | | 264,848 | | | | 243,836 | |
| Accrued interest payable | | | 362,284 | | | | 217,001 | |
| Accrual for contingencies on rescission | | | 500,000 | | | | - | |
| Convertible notes payable, net of discount, current portion | | | 300,762 | | | | 4,688 | |
| Derivative liabilities | | | 1,070,728 | | | | 40,697 | |
| Due to related parties | | | 152,588 | | | | 65,738 | |
| Notes payable - related parties net of discount, current portion | | | - | | | | 1,379,427 | |
| | | | | | | | | |
| Total Current Liabilities | | | 3,356,779 | | | | 3,241,903 | |
| | | | | | | | | |
| Notes payable - related parties net of discount, net of current portion | | | 1,873,123 | | | | - | |
| Convertible notes payable, net of discount, net of current portion | | | - | | | | 12,500 | |
| | | | | | | | | |
| Total Liabilities | | | 5,229,902 | | | | 3,254,403 | |
| | | | | | | | | |
| Commitments and Contingencies | | | - | | | | - | |
| | | | | | | | | |
| Stockholders’ Deficit | | | | | | | | |
| Preferred stock, $0.001 par value: 1,000 shares authorized, issued and | | | | | | | | |
| outstanding as of December 31, 2013 and 2012, respectively | | | 1 | | | | 1 | |
| Common stock, $0.001 par value: 250,000,000 shares authorized, | | | | | | | | |
| 4,545,119 and 2,040,359 issued and outstanding as of December 31, 2013 and 2012, respectively. | | | 4,545 | | | | 2,040 | |
| Additional paid in capital | | | 8,118,299 | | | | 5,767,055 | |
| Stock subscription receivable | | | (20,000 | ) | | | (20,000 | ) |
| Accumulated deficit | | | (13,226,913 | ) | | | (8,913,282 | ) |
| | | | | | | | | |
| Total Stockholders’ Deficit | | | (5,124,068 | ) | | | (3,164,186 | ) |
| | | | | | | | | |
| Total Liabilities and Stockholders' Deficit | | $ | 105,834 | | | $ | 90,217 | |
See accompanying notes to consolidated financial statements
| Sanomedics International Holdings, Inc. |
| Consolidated Statements of Operations |
| | | For the Years Ended December 31, | |
| | | 2013 | | | 2012 | |
| | | | | | | |
| | | | | | | |
| Revenues, net | | $ | 263,745 | | | $ | 95,376 | |
| | | | | | | | | |
| Cost of goods sold | | | 59,149 | | | | 57,215 | |
| | | | | | | | | |
| Gross profit | | | 204,596 | | | | 38,161 | |
| | | | | | | | | |
| Operating expenses | | | | | | | | |
| General and administrative | | | 1,148,995 | | | | 952,214 | |
| Stock compensation | | | 756,553 | | | | 461,720 | |
| Research and development | | | 111,500 | | | | 152,825 | |
| Depreciation and amortization | | | 9,468 | | | | 9,278 | |
| | | | | | | | | |
| Total operating expenses | | | 2,026,516 | | | | 1,576,037 | |
| | | | | | | | | |
| Loss from operations | | | (1,821,920 | ) | | | (1,537,876 | ) |
| | | | | | | | | |
| Other income (expense) | | | | | | | | |
| Amortization of debt discount | | | (453,894 | ) | | | (17,188 | ) |
| Derivative expense | | | (41,560,208 | ) | | | - | |
| Change in fair value of derivatives | | | 41,475,586 | | | | - | |
| Loss on writedown of disposed patents | | | (15,000 | ) | | | - | |
| Loss on rescission | | | (1,790,000 | ) | | | - | |
| Interest expense | | | (148,195 | ) | | | (232,881 | ) |
| Other income | | | - | | | | 13,615 | |
| | | | | | | | | |
| Total other expense | | | (2,491,711 | ) | | | (236,454 | ) |
| | | | | | | | | |
| Net loss before income taxes | | | (4,313,631 | ) | | | (1,774,331 | ) |
| Income taxes | | | - | | | | - | |
| | | | | | | | | |
| Net loss | | $ | (4,313,631 | ) | | $ | (1,774,331 | ) |
| | | | | | | | | |
| Net income loss per share - basic and diluted | | $ | (2.65 | ) | | $ | (1.17 | ) |
| | | | | | | | | |
| Weighted average number of shares outstanding during the year - basic and diluted | | | 1,629,203 | | | | 1,514,572 | |
See accompanying notes to consolidated financial statements
| Sanomedics International Holdings, Inc. |
| Consolidated Statement of Changes in Stockholders' Deficit |
| | | Preferred Stock, $.001 Par Value | | | Common Stock, $.001 Par Value | | | Additional Paid in | | | | | | Accumulated | | | | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Receivable | | | Deficit | | | Deficit | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance December 31, 2010 | | | 1,000 | | | $ | 1 | | | | 1,363,594 | | | $ | 1,364 | | | $ | 1,439,036 | | | $ | (20,000 | ) | | $ | (3,830,276 | ) | | $ | (2,409,875 | ) |
| Vesting of options to purchase common stock | | | | | | | | | | | | | | | | | | | 143,296 | | | | | | | | | | | | 143,296 | |
| Stock issued to consultant ($1.50 per share) | | | | | | | | | | | 300 | | | | 0 | | | | 4,500 | | | | | | | | | | | | 4,500 | |
| Stock issued to consultants ($2.50 per share) | | | | | | | | | | | 62,000 | | | | 62 | | | | 1,549,938 | | | | | | | | | | | | 1,550,000 | |
| Issuance of warrants to purchase common stock | | | | | | | | | | | | | | | | | | | 5,329 | | | | | | | | | | | | 5,329 | |
| Net loss for the year ended December 31, 2011 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (3,308,675 | ) | | | (3,308,675 | ) |
| Balance December 31, 2011 | | | 1,000 | | | | 1 | | | | 1,425,894 | | | | 1,426 | | | | 3,142,099 | | | | (20,000 | ) | | | (7,138,951 | ) | | | (4,015,425 | ) |
| Vesting of options to purchase common stock | | | | | | | | | | | | | | | | | | | 147,396 | | | | | | | | | | | | 147,396 | |
| Issuance of common stock for cash ($2.50 per share | | | | | | | | | | | 13,220 | | | | 13 | | | | 330,487 | | | | | | | | | | | | 330,500 | |
| Stock issued to consultants ($2.50 per share) | | | | | | | | | | | 5,500 | | | | 6 | | | | 137,495 | | | | | | | | | | | | 137,500 | |
| Issuance of warrants to purchase common stock | | | | | | | | | | | | | | | | | | | 176,864 | | | | | | | | | | | | 176,864 | |
| Conversion of debt to common stock | | | | | | | | | | | 595,745 | | | | 597 | | | | 1,757,714 | | | | | | | | | | | | 1,758,311 | |
| Computed debt discount on convertible notes | | | | | | | | | | | | | | | | | | | 75,000 | | | | | | | | | | | | 75,000 | |
| Net loss for the year ended December 31, 2012 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1,774,331 | ) | | | (1,774,331 | ) |
| Balance December 31, 2012 | | | 1,000 | | | | 1 | | | | 2,040,359 | | | | 2,040 | | | | 5,767,055 | | | | (20,000 | ) | | | (8,913,282 | ) | | | (3,164,186 | ) |
| Stock issued to consultants ($1.15 per share) | | | | | | | | | | | 5,000 | | | | 5 | | | | 57,495 | | | | | | | | | | | | 57,500 | |
| Issuance of stock option to purchase common stock | | | | | | | | | | | | | | | | | | | 147,210 | | | | | | | | | | | | 147,210 | |
| Stock issued to consultants ($1.25 and $1.50 per share) | | | | | | | | | | | 10,090 | | | | 10 | | | | 131,831 | | | | | | | | | | | | 131,843 | |
| Stock issued for investor relations at par | | | | | | | | | | | 600,000 | | | | 600 | | | | 5,400 | | | | | | | | | | | | 6,000 | |
| Stock issued for Prime Time acquisition | | | | | | | | | | | 53,125 | | | | 53 | | | | 749,947 | | | | | | | | | | | | 750,000 | |
| Stock issued to related party | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| to extend maturities on notes payable | | | | | | | | | | | 300,000 | | | | 300 | | | | 419,700 | | | | | | | | | | | | 420,000 | |
| Computed debt discount on convertible notes | | | | | | | | | | | | | | | | | | | 212,961 | | | | | | | | | | | | 212,961 | |
| Conversion of debt to common stock, net of derivative | | | | | | | | | | | 1,536,545 | | | | 1,537 | | | | 626,698 | | | | | | | | | | | | 628,235 | |
| Net loss for the year ended December 31, 2013 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (4,313,631 | ) | | | (4,313,631 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance December 31, 2013 | | | 1,000 | | | $ | 1 | | | | 4,545,119 | | | $ | 4,545 | | | $ | 8,118,299 | | | $ | (20,000 | ) | | $ | (13,226,913 | ) | | $ | (5,124,069 | ) |
See accompanying notes to consolidated financial statements
| Sanomedics International Holdings, Inc. |
| Consolidated Statements of Cash Flows |
| | | For the Years Ended | |
| | | December 31, | |
| | | 2013 | | | 2012 | |
| | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
| Net loss | | $ | (4,313,631 | ) | | $ | (1,774,331 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
| Depreciation and amortization | | | 9,468 | | | | 9,278 | |
| Stock compensation | | | 756,553 | | | | 461,760 | |
| Amortization of debt discount on convertible notes | | | 453,894 | | | | 17,188 | |
| Derivative expense | | | 41,560,208 | | | | - | |
| Change in fair value of derivative liabilities | | | (41,475,586 | ) | | | - | |
| Loss on writedown of disposed patents | | | 15,000 | | | | - | |
| Loss on rescission | | | 1,290,000 | | | | - | |
| Changes in operating assets and liabilities, net of acquisition: | | | | | | | | |
| Accounts receivable | | | (11,108 | ) | | | (5,364 | ) |
| Inventories | | | (36,889 | ) | | | 36,130 | |
| Prepaid expenses | | | (612 | ) | | | - | |
| Deposits | | | (7,999 | ) | | | - | |
| Bank overdraft | | | - | | | | (4,522 | ) |
| Accrued salaries payable | | | 118,393 | | | | 215,385 | |
| Accounts payable and other liabilities | | | 128,161 | | | | 84,273 | |
| Accrued interest payable | | | 145,284 | | | | 232,860 | |
| Accrual for contingencies on rescission | | | 500,000 | | | | - | |
| Due to related parties | | | 86,850 | | | | 34,787 | |
| Net Cash Used In Operating Activities | | | (782,014 | ) | | | (692,556 | ) |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
| Payments on acquisition of investment | | | (540,000 | ) | | | - | |
| Net Cash Used In Investing Activities | | | (540,000 | ) | | | - | |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
| Proceeds from notes payable - related parties | | | 539,490 | | | | 275,640 | |
| Sale of common stock | | | - | | | | 330,500 | |
| Proceeds from convertible notes payable | | | 766,000 | | | | 112,500 | |
| Net Cash Provided By Financing Activities | | | 1,305,490 | | | | 718,640 | |
| | | | | | | | | |
| Net change in cash | | | (16,524 | ) | | | 26,084 | |
| | | | | | | | | |
| Cash - beginning of year | | | 26,084 | | | | - | |
| | | | | | | | | |
| Cash - end of year | | $ | 9,560 | | | $ | 26,084 | |
| | | | | | | | | |
| Supplemental Disclosure of Cash Flow Information | | | | | | | | |
| Cash paid during the year for: | | | | | | | | |
| Income taxes | | $ | - | | | $ | - | |
| | | | | | | | | |
| Interest | | $ | - | | | $ | - | |
| | | | | | | | | |
| | | | | | | | |
| Common stock issued for conversion of debt, | | $ | 847,196 | | | $ | 1,833,310 | |
| Common stock issued for acquisition | | $ | 750,000 | | | $ | - | |
| Accrued salaries payable converted to convertible promissory note payable-officer | | $ | 703,339 | | | $ | - | |
See accompanying notes to consolidated financial statements
SANOMEDICS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Sanomedics International Holdings, Inc. (the “Company”) formerly Grand Niagara Mining and Development Co, Inc. ("Grand Niagara") was originally incorporated in the state of Idaho in 1955 and re-domiciled in the state of Delaware on April 6, 2009. The Company designs, develops, markets and distributes non-invasive infrared thermometers principally for healthcare providers.
Rescission of Prime Time Medical, Inc.
On August 30, 2013, the Company acquired a 100% interest and assumed full financial and operational control of Prime Time Medical Inc. (“Prime Time”) pursuant to a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Prime Time and Mark R. Miklos (“Miklos”), the sole equity holder and seller of Prime Time for a total purchase price of $3,100,000, subject to certain adjustments. The purchase price consisted of a combination of $1,350,000 in cash, promissory notes of $1,000,000 and shares of the Company’s restricted common stock with a value of $750,000.
After assuming control, the Company discovered that the Seller failed to disclose that there were on-going audits with respect to Prime Time’s Medicare and Medicaid billings for periods prior to the consummation of the transaction. These audits have escalated and, as a result, Prime Time can no longer invoice Medicare and Medicaid for any products or services and be paid for such products and services until the outcome of the audits which could last at least two years. Also, as a result of other Medicare and Medicaid audits for periods prior to the consummation of the transaction, Medicare and Medicaid are demanding payments for products that Prime Time was paid prior to the closing of the transaction that were improper. It is estimated that Prime Time may owe Medicare and Medicaid up to $500,000 in improper payments and at least another $500,000 in accounts receivable that will not be paid to Prime Time pending the outcome of the audits.
On March 13, 2014, after discovering numerous material differences between financial statements reproduced by the Company and the financial statements provided by Miklos in connection with the Stock Purchase Agreement, coupled with the foregoing events and Medicare and Medicaid’s constraint on Prime Time’s business and payment stream, the Board of Directors of the Company determined that the business could no longer survive and thus opted to pursue a rescission of the completed transaction with Prime Time. In connection with the contemplated rescission recorded a loss on rescission of $1,790,000 from its investment and advances in Prime Time in the accompanying consolidated statements of operation for the year ended December 31, 2013. The accompanying consolidated balance sheets as of December 31, 2013 also reflect an accrual for payments related to the rescission of $500,000 paid subsequently.
The Company concluded that the Stock Purchase Agreement was not legally consummated and therefore consolidation was not appropriate. Consequently, the Company should not have presented Prime Time in its consolidated financial statements for the quarter ended September 30, 2013 filed with the SEC on Form 10-Q dated November 21, 2013. Additionally, the Company evaluated the materiality of the impact of the consolidation of Prime Time in the Company’s consolidated financial statements at September 30, 2013 and for the three and nine months ended September 30, 2013 and determined that the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 will be amended accordingly. There was no impact to any other period previously presented.
On March 18, 2014, the Company filed a lawsuit against Miklos alleging breach of contract, fraud in the inducement, fraudulent misrepresentation, unjust enrichment, conversion, breach of fiduciary duty and damages. The Company is seeking judgment against the Seller, restitution, rescission of the Stock Purchase Agreement and Employment Agreement and return of all monies and stock paid to the Seller.
On March 19, 2014 the Company was served with a lawsuit filed by Miklos against the Company and Anovent, Inc., alleging breach of the Employment Agreement entered into with the Company, improper notice of termination, and other action to foreclose a security interest in personal property and intangibles as a result of the alleged defaults under the Security Agreement. The Company believes there is no merit to the Miklos lawsuit and intends to defend itself aggressively.
The rescission was disclosed on the Company’s current report on Form 8-K filed on March 28, 2014.
SANOMEDICS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Principles of Consolidation
The Company consolidates its 100% interest in the following entities: Thermomedics, Inc., Sanomedics Development, Inc. and Anovent, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash
For purposes of reporting cash flows, the Company considers all short-term investments with an original maturity of three months or less to be cash equivalents.
Revenue Recognition
Revenue from sales of the Company’s products is recorded when title and risk of loss have passed to the buyer and criteria for revenue recognition is met. The Company sells its products to resellers and healthcare providers upon receipt of a written order. The Company has a limited return policy for defective items that requires that they give the Company notice within 30 days after receipt of the product, however such risk is passed to the manufacturer and therefore, the Company recognizes revenue at the time of delivery without providing any reserve. For sales made by any large account with a right to return unsold items the Company either provides for a reserve for the estimated amount of unsold items, if it can reasonably estimate such returns, or records revenue only when the account provides definitive sales information.
Certain product sales are subject to rights of return. Such rights include the right to return defective items within 30 days and with certain large accounts a right to return unsold product. For products sold where the buyer has the right to return the product, the Company recognizes revenue at the time of sale only if (1) the Company’s price to the buyer is substantially fixed or determinable at the date of sale, (2) the buyer has paid the Company, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product, (3) the buyer’s obligation to the Company would not be changed in the event of theft or physical destruction or damage of the product, (4) the buyer acquiring the product for resale has economic substance apart from that provided by the seller, (5) the Company does not have significant obligations for future performance to directly bring about resale of the product by the buyer, and (6) the amount of future returns can be reasonably estimated. The Company recognizes such product revenues when either it has met all the above criteria, including the ability to reasonably estimate the right of return of unsold items, or when it can reasonably estimate that the return privilege has expired.
Concentration of Credit Risk
Financial instruments which subject the Company to concentrations of credit risk include cash and accounts receivables. The Company maintains its cash in well-known banks selected based upon management's assessment of the banks’ financial stability. The Company extends credit based on an evaluation of the customer's financial condition, generally without collateral. Exposure to losses on receivables is principally dependent on each customer's financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses, as required.
SANOMEDICS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out basis) or market value. The stated cost is comprised of finished goods of non-invasive thermometers. Reserves, if necessary, are recorded to reduce inventory to market value based on assumptions about consumer demand, current inventory levels and product life cycles for the various inventory items. These assumptions are evaluated quarterly and are based on the Company’s business plan and from feedback from customers and the product development team; however, as the Company has a fairly limited operating history, estimates can vary significantly.
Reserves for Warranty
The Company records a reserve at the time product revenue is recorded based on historical rates. The reserve is reviewed during the year and is adjusted, if appropriate, to reflect new product offerings or changes in experience. Actual warranty claims are tracked by product line. The warranty reserve was $1,000 at December 31, 2013 and 2012.
Fixed Assets
Fixed assets are stated at cost, less accumulated depreciation. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets, which is generally 5 to 7 years. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income or expense.
The Company will periodically evaluate whether events and circumstances have occurred that may warrant revision of the estimated useful lives of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs for the years ended December 31, 2013 and 2012 were $25,432 and $14,147, respectively.
Shipping and Handling
Costs incurred by the Company for shipping and handling are included in costs of revenues. Shipping and handling cost for the years ended December 31, 2013 and 2012 were $16,194 and $10,077, respectively.
Income Taxes
The Company accounts for income taxes under ASC 740, Income Taxes. Under ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period, which includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
ASC 740 contains a two-step approach to recognizing and measuring uncertain tax positions. This first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.
Based on its evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements. The Company's evaluation was performed for the tax years ended December 31, 2013 and 2012. The Company’s tax returns for the years 2010 through 2013 remain subject to examination by tax jurisdictions as of December 31, 2013.
SANOMEDICS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Research and Development Expense
Costs related to research and development, which primarily consists of salaries and benefits, stock compensation and consulting fees, are charged to expense as incurred
Patents
We capitalize external cost, such as filing fees and associated attorney fees, incurred to obtain issued patents and patent license rights. We expense cost associated with maintaining and defending patents subsequent to their issuance in the period incurred. We amortize capitalized patent cost for internally generated patents on a straight-line basis over ten years, which represents the estimate useful lives of the patents. The ten year estimated useful life for internally generated patents is based on our assessment of such factors as: the integrated nature of the portfolios being licensed, the overall makeup of the portfolio over time, and the length of license agreements for such patents. We assess the potential impairment to all capitalized net patent cost when events or changes in circumstances indicate that the carrying amount of our patent portfolio may not be recoverable. For the years ended December 31, 2013 and 2012 patents costs, net of amortization of $17,957 and $12,977, respectively, totaled $16,816 and $36,796, respectively and are included in other assets in the accompanying consolidated balance sheets. For 2013 there was an impairment writedown of $15,000 of the patents.
Derivatives
The Company used the Monte Carlo simulation pricing model to determine the fair value of the derivative liability related to embedded conversion features included in the related party convertible note-officer and convertible promissory notes. The Company derived the fair value of the embedded conversion features using the common stock price, the exercise price of the embedded stock, the risk-free interest rate, the historical volatility, and the Company's dividend yield. The Company does not have sufficient historical data to use its historical volatility; therefore the expected volatility is based on the historical volatility of comparable companies. The Company developed scenarios to take into account estimated probabilities of future outcomes. The fair value of the embedded conversion liabilities is classified as Level 3 within the Company's fair value hierarchy.
Convertible Debt
Convertible debt is accounted for under ASC 470, Debt – Debt with Conversion and Other Options. The Company records a beneficial conversion feature (“BCF”) related to the issuance of convertible debt that have conversion features at fixed or adjustable rates that are in-the-money when issued and records the fair value of warrants issued with those instruments. The BCF for the convertible instruments is recognized and measured by allocating a portion of the proceeds to warrants and as a reduction to the carrying amount of the convertible instrument equal to the intrinsic value of the conversion features, which are credited to paid-in-capital. The Company calculates the fair value of warrants issued with the convertible instruments using the Monte Carlo andBlack-Scholes valuation method, using the same assumptions used for valuing employee options for purposes of following ASC Topic 718, Share Based Payment, except that the contractual life of the warrant is used. Under these guidelines, the Company allocates the value of the proceeds received from a convertible debt transaction between the conversion feature and any other detachable instruments (such as warrants) on a relative fair value basis. The allocated fair value is recorded as a debt discount or premium and is amortized over the expected term of the convertible debt to interest expense. For a conversion price change of a convertible debt issue, the additional intrinsic value of the debt conversion feature, calculated as the number of additional shares issuable due to a conversion price change multiplied by the previous conversion price, is recorded as additional debt discount and amortized over the remaining life of the debt.
SANOMEDICS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Basic and Diluted Net Loss Per Share
The Company computes net income (loss) per share in accordance with ASC Topic 260, Earning per Share, which requires presentation of both basic and diluted earnings per share ("EPS") on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) before and after discontinued operations, by the weighted average number of common shares outstanding (denominator) during the period, including contingently issuable shares where the contingency has been resolved. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted loss per share excludes all dilutive potential shares as their effect is anti-dilutive. For the year ended December 31, 2013 and 2012, outstanding stock options, warrants, and shares issuable upon conversion of convertible notes were anti-dilutive because of net losses, and, as such, their effect has not been included in the calculation of diluted net loss per share. Potentially dilutive shares of 1.6 million and 1.3 million, respectively, have been excluded from the denominator in the computation of diluted EPS for the year ended December 31, 2013 and 2012, respectively, because they are anti-dilutive.
Stock Based Compensation
The Company applies the fair value method of ASC 718, Share Based Payment, in accounting for its stock based compensation. This standard states that compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period, if any. As the Company does not have sufficient, reliable and readily determinable values relating to its common stock, the Company has used the stock value pursuant to its most recent private sale of stock by an affiliate of our former CEO, for purposes of valuing stock based compensation. The Company believes that the market price of the Company's stock is not indicative of value as the stock is not widely held and trades infrequently.
Fair Value
FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) establishes a framework for all fair value measurements and expands disclosures related to fair value measurement and developments. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 requires that assets and liabilities measured at fair value are classified and disclosed in one of the following three categories:
Level 1—Quoted market prices for identical assets or liabilities in active markets or observable inputs;
Level 2—Significant other observable inputs that can be corroborated by observable market data; and
Level 3—Significant unobservable inputs that cannot be corroborated by observable market data.
The carrying amounts of cash, accounts receivable, accrued salaries payable, accounts payable and other liabilities, accrued interest payable, due to related parties and notes payable - related party approximate fair value because of the short-term nature of these items.
SANOMEDICS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This update amends ASC 740 to require that in certain cases, an unrecognized tax benefit, or portion of an unrecognized tax benefit, should be presented in the consolidated financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when such items exist in the same taxing jurisdiction. ASU No. 2013-11 is effective for interim and annual reporting periods beginning after December 15, 2013. The adoption of ASU No. 2013-11 is not expected to have a material impact on the Company's Consolidated Financial Statements.
In July 2012, the FASB issued ASU 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This ASU simplifies the guidance for testing the decline in the realizable value (impairment) of indefinite-lived intangible assets other than goodwill. The amendments allow an organization the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. An organization electing to perform a qualitative assessment is no longer required to calculate the fair value of an indefinite-lived intangible asset unless the organization determines, based on a qualitative assessment, that it is “more likely than not” that the asset is impaired. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. When adopted, this ASU will not have a material impact on the Company’s Consolidated Financial Statements as it only impacts the timing of when the Company is required to perform the two-step impairment tests of its indefinite-lived intangible assets other than goodwill.
NOTE 2- LIQUIDITY AND GOING CONCERN
The consolidated financial statements have been prepared on a going concern basis, and do not reflect any adjustments related to the uncertainty surrounding our recurring losses or accumulated deficit.
The Company currently has limited revenue and is incurring losses. These factors raise substantial doubt about its ability to continue as a going concern. Throughout 2013 and 2012 management has financed the Company's operations principally through loans from an affiliate of the Company’s former CEO, who is also one of the principal shareholders and through the issuance of convertible debt instruments in which the Company raised approximately $540,000 during 2013. Additionally on January 9, 2014 the Company borrowed $1 million from a senior secured loan facility with TCA Global Credit Master Fund, LP for working capital purposes (see Note 12).
SANOMEDICS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – LIQUIDITY AND GOING CONCERN (continued)
The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing in addition to those funds provided by the former CEO’s affiliate and attain profitable operations. However, management cannot provide any assurances that the Company will be successful in completing further financing and accomplishing any of its plans. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
NOTE 3 – FIXED ASSETS, NET
Fixed assets, net consist of the following:
| | | December 31, | | | December 31, | |
| | | 2013 | | | 2012 | |
| Furniture and equipment | | $ | 27,715 | | | $ | 27,715 | |
| Less accumulated depreciation | | | 15,153 | | | | 10,666 | |
| | | $ | 12,562 | | | $ | 17,049 | |
Depreciation expense for the years ended December 31, 2013 and 2012 was $4,488 and $4,301, respectively.
NOTE 4 – NOTES PAYABLE -RELATED PARTY
Notes payable to related parties consists of the following:
| | | December 31, 2013 | | | December 31, 2012 | |
| Secured Convertible Promissory Note - CLSS Holdings, LLC, dated September 30, 2010. Note accrues interest at 9% per annum, due and payable on March 30, 2015 (A)(C) | | $ | 50,000 | | | $ | 181,000 | |
| Secured Convertible Promissory Note - CLSS Holdings, LLC, dated March 12, 2011. Note accrues interest at 9% per annum, due and payable on March 30, 2015 (A)(B)(C) | | | 66,750 | | | | 367,000 | |
| Secured Convertible Promissory Note - CLSS Holdings, LLC, dated September 30, 2011. Note accrues interest at 9% per annum, due and payable on March 30, 2015 (A)(C) | | | 95,000 | | | | 220,000 | |
| Secured Convertible Promissory Note - CLSS Holdings, LLC, dated March 12, 2011. Note accrues interest at 8.0% per annum, due and payable on March 30, 2015 (A) | | | 334,787 | | | | 334,787 | |
| Convertible Promissory Note - Officer dated June 17, 2013. Note accrues interest at 9% per annum, due and payable on March 30, 2015 , net of discount of $502,385(A)(E) | | | 200.954 | | | | - | |
| | | | | | | | | |
| Total Notes | | | 747,491 | | | | 1,102,787 | |
| Other advances from CLSS Holdings, Inc, LLC, not evidenced by a promissory Note (D) | | | 1,125,632 | | | | 276,640 | |
| | | | 1,873,123 | | | $ | 1,379,427 | |
| Less: Current portion | | | - | | | | 1,379,427 | |
| | | $ | 1,873,123 | | | $ | - | |
The secured convertible promissory notes above are collateralized by substantially all the assets of the Company and are convertible, at the holder's option, into common shares of the Company at a fixed conversion price ranging from $0.25 to $0.50 per share. CLSS Holdings, LLC is wholly owned by the Company's former CEO who also is a principal shareholder of the Company.
(A) On August 13, 2013, the Company and an affiliate of the Company’s former CEO agreed to extend the maturity dates of the remaining Secured Promissory Notes to mature on March 31, 2015. As consideration for this extension the Company issued 300,000 shares of common stock valued at $0.03 per share to the affiliate.
(B) On November 20, 2013, convertible notes totaling $180,000 were converted into shares of common stock at a conversion prices of $0.03. In connection with this conversion the Company issued 600,000 shares of common stock on November 21, 2012.
(C) During 2013, $556,250 was assigned to four (4) third parties, which subsequently converted to 1,533,632 shares of common stock see Notes 6 and 9.
(D) On February 21, 2014 the Company memorialized the advances from CLSS Holdings into various convertible promissory notes, accruing interest at 9% and mature March 1, 2016.
(E) This note is convertible at a conversion price equal to the discount in the average of the lowest three closing bid prices of the common stock during the 10 day trading days prior to conversion. The embedded conversion features resulted in a derivative liability which has been measured using the Monte Carlo valuation method at December 31, 2013.
SANOMEDICS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – CONVERTIBLE NOTES PAYABLE
Third party convertible notes payable consists of the following:
| | | December 31, | | | December 31, | |
| | | 2013 | | | 2012 | |
| | | | | | | |
Convertible promissory note with interest at 9% per annum, convertible into common shares at fixed price of $0.50 per share. Matures on August 24, 2014, net of unamortized discount of $37,500 and $62,500, respectively. | | $ | 37,500 | | | $ | 12,500 | |
| | | | | | | | | |
Seven (7) convertible promissory notes with interest ranging from 6% to 12% per annum, convertible into common shares at prices ranging from 10% to 50% discount to defined market prices. Maturity ranging from August 6, 2013 through October 25, 2014, net of unamortized discounts of $229,907 and $32,812, respectively (B). | | | 151,519 | | | | 4,688 | |
| | | | | | | | | |
| Two (2) convertible promissory notes with interest at 12% per annum (zero interest first 90 days) plus a 10% original discount interest, convertible into common shares at a conversion price per share of 30% discount to a defined market price. Matures on June 16, and December 9, 2014, net of unamortized discount of $97,587 (A). | | | 111,743 | | | | - | |
| | | | | | | | | |
| | | | 300,762 | | | | 17,188 | |
| Less current portion | | | (300,762 | ) | | | ( 4,688 | ) |
| Long-term portion of convertible debt | | $ | - | | | $ | 12,500 | |
(A) These convertible promissory notes are generally convertible at a conversion price equal to the discount to the average of the lowest three closing bid prices of the common stock during the 10 trading days prior to conversion. The embedded conversion features resulted in a derivative liability which has been measured using the Monte Carlo valuation method at December 31, 2013.
(B) Four of these promissory notes are generally convertible at a conversion price equal to the discount to the average of the lowest three closing bid prices of the common stock during the 10 trading days prior to conversion. The embedded conversion features resulted in a derivative liability which has been measured using the Monte Carlo valuation method at December 31, 2013.
In accordance with ASC 470-20 Debt with Conversion and Other Options, the Company allocated $828,906 and $112,500 of the derivative liability as discounts against the convertible notes . The discounts are being amortized to interest expense over the term of the notes using the effective interest method. The Company recorded $453,894 and $17,188 of interest expense pursuant to the amortization of the note discounts during the years ended December 31, 2013 and 2012, respectively.
SANOMEDICS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – DERIVATIVE LIABILITIES
The Company analyzed the related party convertible note-officer and convertible promissory notes referred to in Notes 4 and 5 based on the provisions of ASC 815-15 and determined that the conversion options of the convertible notes qualify as embedded derivatives.
For the derivative instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then revalued at each reporting date The Company estimates the fair value of the embedded derivatives using a Monte Carlo simulation valuation model that combines expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock price volatility, probability of a change of control and the trading information of our common stock into which the notes are convertible, as appropriate to value the derivative instruments at inception and subsequent valuation dates and the value is reassessed at the end of each reporting period, in accordance with FASB ASC Topic 815-15.
Based on the Monte Carlo simulation, the fair value upon inception of the embedded derivatives were determined to total $42,546,315 and recorded as derivative liabilities. The embedded derivatives are revalued at the end of each reporting period and any resulting gain or loss is recognized as a current period charge to the consolidated statements of operations.
The Company accounts for the embedded conversion features as derivative liabilities. The aggregate fair value of derivative liabilities as of December 31, 2013 and 2012 amounted to $1,070,728 and $40,697, respectively. The net increase of $1,030,031 in the fair value of the derivative liabilities from 2012 has been reflected as unamortized discount of $686,070 reflected in the convertible notes payable to officer and third parties, the amortization of debt discount of $300,036 and the change in fair value of the derivatives between the respective periods is included in other income (expenses) amounting to $84,622.
The assets or liability’s fair value measurement within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement. The following table provides a summary of the assets that are measured at fair value on a recurring basis.
| | | Consolidated Balance Sheet | | | Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) | | | Quoted Prices for Similar Assets or Liabilities in Active Markets (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
| Derivative Liabilities: | | | | | | | | | | | | | | | | |
| December 31, 2013 | | $ | 1,070,728 | | | $ | - | | | $ | - | | | $ | 1,070,728 | |
| December 31, 2012 | | $ | 40,697 | | | $ | - | | | $ | - | | | $ | 40,697 | |
The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis:
| | | For the Year Ended December 31, | |
| | | 2013 | | | 2012 | |
| Beginning balance | | $ | 40,697 | | | $ | - | |
| Aggregate fair value of conversion features upon issuance | | | 42,505,617 | | | | 40,697 | |
| Change in fair value of conversion features | | | (41,475,586 | ) | | | | - |
| Ending balance | | $ | 1,070,728 | | | $ | 40,697 | |
NOTE 7 – EQUITY
Series A Preferred Stock
In connection with the Agreement, the Company issued 1,000 shares of Series A Preferred Shares. The Series A Preferred Shares are not convertible and have no preferences or other rights except that the holders of the Series A Preferred shares shall be entitled to the number of votes that collectively equal 51% of the total number of votes that may be cast by the holders of Common Stock and Preferred Stock voting as one class.
Common Stock
In connection with a private placement for $3,000,000 of common equity at a price of $2.50 per share, during 2012, the Company sold 13,220 shares, of which 3,280 shares of such offering were acquired by an affiliate of the former CEO and Chairman, valued at $330,500. Additionally during 2012 two of the investors were issued a total of 5,500 shares of common stock as consultant fees for services rendered with a fair value of $2.50 per share for stock compensation in the amount of $137,500.
On August 1, 2012, convertible notes owed to an affiliate of the former CEO and Chairman and the current President totaling $1,457,926 and related accrued interest totaling $300,385 were converted into shares of common stock at conversion prices ranging from $0.25 to $0.50. The Company issued 595,745 shares of common stock on November 5, 2012.
On February 9, 2013, the Company issued a total of 5,000 shares of common stock to two consultant for services valued at $1.15 per share. As a result, the Company recorded stock compensation in the amount of $57,500.
As compensation to consultants, on June 28, 2013, the Company issued a total of 2,590 shares of common stock to a public relations firm as settlement of its services valued at $1.50 per share. As a result, the Company recorded stock compensation in the amount of $38,842. Additionally, on September 5, 2013, Redstone Investment Group, LLC was issued 7,500 shares of common stock for consulting services performed valued at $1.24 per share. As a result, the Company recorded stock compensation in the amount of $93,000. In aggregate this amounted to 10,090 shares valued at $131,842.
As compensation for investor relations, on August 12, 2013, pursuant to a portion of convertible notes due to CLSS originally at $220,000 and sold to six (6) third parties by the original holder in the principal amount of $6,000, the Company converted the Note into a total of 600,000 shares of the Company’s common stock and issued to the six (6) parties for investor relation services valued at $6,000. The Company has instructed its transfer agent to place a stop and cancel 125,000 shares for failure of services performed.
On September 3, 2013, the Company issued 53,125 shares of common stock to Mark R. Miklos valued at $750,000 in connection with the acquisition of Prime Time.
On October 29, 2013, the Company’s Board of Directors authorized the issuance of 300,000 shares to CLSS Holdings, LLC, a company wholly owned by a former director and officer of the Company, issued in connection and in partial consideration, for the extension of maturity on certain promissory notes held by the Company in favor of CLSS. The shares were valued at $0.14 per share and recorded as stock compensation amounting to $420,000 in the accompanying consolidated financial statements.
SANOMEDICS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – EQUITY (continued)
Upon conversion of convertible debt into common stock, the following transactions occurred:
On June 11, 2013 and June 28, 2013, in connection with a Securities Purchase Agreement and convertible promissory note in the principal amount of $77,985 the Company converted the note into a total of 2,913 shares of the Company’s common stock at a conversion price of $26.77 per share.
In October and November 2013 in connection with a Securities Purchase Agreement and convertible promissory note (“Note”) in the principal amount of $125,000, the Company converted the Note into a total of 322,079 shares of the Company’s common stock at conversion prices of $0.03 and $0.04 per share.
On September 23, 2013, October 1 and 16, 2013 in connection with a Securities Purchase Agreement and convertible promissory note (“Note”) in the principal amount of $75,000, the Company converted the Note into a total of 126,553 shares of the Company’s common stock at conversion prices ranging from $0.04 to $0.12 per share.
On October 25, 2013, in connection with two (2) Securities Purchase Agreements and convertible promissory notes (“Notes”) in the total principal amount of $120,250, the Company converted the Notes into a total of 325,000 shares of the Company’s common stock at a conversion price of $0.037 per share.
On November 20, 2013, pursuant to a portion of Convertible Note due to CLSS originally at $367,000, the Company converted $180,000 portion of the Note into a total of 600,000 shares of the Company’s common stock at a value of $0.03 per share.
On December 2, 2013, in connection with a Securities Purchase Agreement and convertible promissory note in the principal amount of $50,000, the Company converted the note into a total of 160,000 shares of the Company’s common stock at a conversion price of $0.03 per share.
In aggregate, the totals above amounted to 1,536,545 shares totaling $628,235.
On October 30, 2013, our board of directors approved a 1-for-10 reverse split of our common shares (“Reverse Split”). The Reverse Split became effective on December 23, 2013. As a result of the Reverse Split, each shareholder of record as of May 24, 2011 received one (1) share of common stock for each ten (10) shares of stock they held prior to the Reverse Split. All references to common shares in the consolidated financial statements and accompanying notes to the consolidated financial statements have been retroactively restated to reflect the changes in capital structure resulting from the Reverse Split.
The Company uses the Monte Carlo and Black-Scholes simulation pricing model to determine the fair value of its stock, stock options and warrant issuance. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price, as well as assumptions regarding a number of complex and subjective variables. These variables include the Company’s expected stock price, volatility over the term of the awards, actual employee exercise behaviors, risk-free interest rate and expected dividends. For purposes of valuing stock options, the Company determined the expected volatility factor by comparing itself to the historic volatility of other companies in the same industry. The approximate risk free interest rate was based on the implied yield available on U.S. Treasury zero-coupon issues with remaining terms equivalent to the Company’s expected term on its stock based compensation. The expected term of the Company’s stock options was based on an estimate of future employee exercises. The Company does not intend to pay dividends on its common stock in the foreseeable future. Accordingly, the Company used a dividend yield of zero in its option pricing model. The weighted average fair value of stock compensation granted for the periods ended December 31, 2013 and 2012 was $25 and $5, respectively
SANOMEDICS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – EQUITY (continued)
The fair value was determined based on the assumptions shown in the table below:
| | | 2013 | | | 2012 | |
| Risk-free interest rate | | | 0.10% - 0.27 | % | | | 0.98 | % |
| Expected dividend yield | | | 0 | % | | | 0 | % |
| Expected volatility | | | 33.39% - 55.5 | % | | | 100 | % |
| Expected life | | 2 years | | | 2 years | |
| Expected forfeitures | | | 0 | % | | | 0 | % |
| Fair market value of common stock | | $ | 0.50-$24.70 | | | $ | 0.50-$5 | |
Stock Options
Pursuant to employment contracts entered into between the Company and its executive officers and consultants the Company granted an aggregate of 10 million options on January 6, 2009 and 1.3 million options on August 18, 2010( 450,000 options which expired in 2013) . Each of the options had a four to five year term with an exercise price of $0.50 per share. These options had a fair value of approximately $689,000, based upon the management assumptions stated below using the Black Scholes model as described above.
On March 7, 2013, the Company granted to its Chief Technology Officer 15,000 seven-year stock options with an exercise price of $0.50 per share. The Company determined that the fair value of the options was approximately $147,000 using the Black Scholes method and recorded as stock compensation in the accompanying consolidated financial statements.
SANOMEDICS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – EQUITY (continued)
The following is a summary of the Company’s stock option activity through December 31, 2013:
| | | Stock Options | | | Weighted Average Exercise Price | |
| Outstanding – December 31, 2011 | | | 1,137,200 | | | $ | 1.10 | |
| Exercisable - December 31, 2011 | | | 1,137,200 | | | | 0.90 | |
| Exercised | | | - | | | | - | |
| Forfeited/Cancelled | | | (10,000) | | | | - | |
| Outstanding – December 31, 2012 | | | 1,127,200 | | | | 1.10 | |
| Exercisable - December 31, 2012 | | | | | | | 0.90 | |
| Granted | | | 150,000 | | | | .09 | |
| Exercised | | | - | | | | - | |
| Forfeited/Cancelled | | | | ) | | | - | |
| Outstanding – December 31, 2013 | | | 1,097,200 | | | | 0.90 | |
| Exercisable – December 31, 2013 | | | 1,097,200 | | | | 0.90 | |
| Stock Options Outstanding | | | Stock Options Exercisable | |
Range of Exercise price | | | Number Outstanding | | | Weighted Average Remaining Contractual Life (in years) | | | Weighted Average Exercise Price | | | Number Exercisable | | | Weighted Average Exercise Price | |
| $ | 0.50 to $15. | | | | 1,097,200 | | | 2.11 Years | | | $ | 0.90 | | | | 1,097,200 | | | $ | 0.90 | |
Warrants
In connection with the Company's private placement memorandum dated November 18, 2011, for $3,000,000 of common equity at a price of $2.50 per share, each investor received one warrant to purchase common stock at a strike price of $3.75 for a period of 3 years from the date of the subscription. During 2012, the Company had issued 132,200 warrants pertaining to this memorandum.
The following is a summary of the Company’s warrant activity:
| | | Warrants | | | Weighted Average Exercise Price | |
| Outstanding – December 31, 2011 | | | 25,400 | | | $ | 30.00 | |
| Exercisable - December 31, 2011 | | | 25,400 | | | | 30.00 | |
| Granted | | | 13,220 | | | | 37.50 | |
| Exercised | | | - | | | | - | |
| Forfeited/Cancelled | | | - | | | | - | |
| Outstanding – December 31, 2012 | | | 38,620 | | | | 28.80 | |
| Exercisable - December 31, 2012 | | | 38,620 | | | | 28.80 | |
| Granted | | | - | | | | 12. | |
| Exercised | | | - | | | | - | |
| Forfeited/Cancelled | | | (10,000) | | | | - | |
| Outstanding – December 31, 2013 | | | 28,620 | | | | 34.00 | |
| Exercisable - December 31, 2013 | | | 28,620 | | | | 34.00 | |
| Warrants Outstanding | | | Warrants Exercisable | |
Range of Exercise prices | | | Number Outstanding | | Weighted Average Remaining Contractual Life (in years) | | Weighted Average Exercise Price | | | Number Exercisable | | | Weighted Average Exercise Price | |
| $ | 15.000 – 37.50 | | | | 28,620 | | 1.2 Years | | $ | 34.00 | | | | 28,620 | | | $ | 34.00 | |
SANOMEDICS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – INCOME TAXES
The tax effect of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31, 2013 and 2012 consists of the following:
| | | 2013 | | | 2012 | |
| Gross deferred tax assets: | | | | | | |
| Net operating loss carryforwards | | $ | 2,894,420 | | | $ | 1,089,170 | |
| Amortization of debt discount | | | 170,800 | | | | - | |
| Accrued salaries | | | 860,017 | | | | 639,902 | |
| Accrued interest in convertible notes | | | 259,986 | | | | 194,700 | |
| Total deferred tax assets | | | 4,185,223 | | | | 1,923,772 | |
| Less: valuation allowance | | | (4,185,223 | ) | | | ( 1,923,772 | ) |
| Net deferred tax asset | | $ | - | | | | - | |
The actual tax benefit differs from the expected tax benefit (computed by applying the U.S. Federal Corporate tax rate of 34% to income before taxes and 5.5% for State income taxes, a blended rate of 37.63%) as follows:
| | | 2013 | | | 2012 | |
| | | | | | | |
| Expected tax benefit – Federal | | $ | (1,385,970 | ) | | $ | (570,093 | ) |
| Expected tax benefit – State | | | (237,250 | ) | | | (97,588 | ) |
| Non-deductible stock compensation | | | 284,691 | | | | 173,745 | |
Change in fair value of derivatives, net of derivative expense | | | 31,843 | | | | - | |
| Meals and entertainment | | | 4,256 | | | | 2,629 | |
| Change in Valuation Allowance | | | 1,302,430 | | | | 491,307 | |
| Actual tax expense (benefit) | | $ | - | | | $ | - | |
The Company has a net operating loss carryforward for tax purposes totaling approximately $5.1 million at December 31, 2013, which begin to expire in 2033. Current tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs. Therefore, the amount available to offset future taxable income may be limited. No tax asset has been reported in the financial statements, because the Company believes there is a 50% or greater chance the carry-forwards will expire unused. Accordingly, the potential tax benefits of the loss carry forwards are offset by a valuation allowance of the same amount.
SANOMEDICS INTERNATIONAL HOLDINGS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Litigation:
From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm its business.
On October 10, 2012, the Company received a cease and desist demand letter from Exergen Corporation (“Exergen”), claiming that the Company infringed on certain patents relating to the Company's non-contact thermometers. On May 21, 2013 Exergen filed a complaint in the U.S. District Court of the District of Massachusetts against the Company and Thermomedics, Inc ( its’ wholly owned subsidiary). On September 3, 2013, the Company filed its answer to Exergens’ complaint and asserted counterclaims and affirmative defenses for non-infringement and invalidity of certain patents. The Company believes the alleged infringement is without merit and will vigorously defend its rights to market and sell the thermometers.
As a result of discoveries of fraud and misrepresentations in the acquisition of Prime Time, as disclosed in Note 1 on March 18, 2014, the Company filed a lawsuit against Mark R. Miklos in Miami-Dade County, Florida Case No.14007055CA01, alleging breach of contract, fraud in the inducement, fraudulent misrepresentation, unjust enrichment, conversion, breach of fiduciary duty and damages. The company is seeking judgment against the Seller, restitution, rescission of the Purchase Agreement and Employment Agreement and return of all moneys paid to the Seller.
On March 19, 2014 the Company was served with a lawsuit filed by Mark Miklos against the Company and Anovent, Inc. in Hillsborough County, Florida Case No. 14-CA-2520 DIV K, alleging the following: breach of the Employment Agreement entered into with the Company; improper notice of termination; breach of the Short Term Note for $850,000; breach of Promissory Notes A and B for $500,000 each, and further includes an action to foreclose a security interest in personal property and intangibles as a result of the alleged defaults of the Notes and rights under the Security Agreement. The Company believes there is no merit to Mr. Miklos’ lawsuit and intends to defend itself aggressively.
Employment and Consulting Agreements:
The Company signed employment agreements with three other executive officers: the President, the Chief Operating Officer and its former Chief Technology Officer. Each agreement is for three years effective January 1, 2009, unless terminated, and provides for a base salary which escalates based on time and the satisfaction of certain milestones. All salaries of these executives are deferred until such time as the Company receives financing and or there is a change of control. As of December 31, 2013, the Company has deferred approximately $706,000 in salaries, bonuses and consulting fees as a result of these agreements in the accompanying consolidating financial statements.
SANOMEDICS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – COMMITMENTS AND CONTINGENCIES (continued)
On July 28, 2010, the Company entered into a three year employment contract with its new Chief Technology Officer. The contract, which was amended on December 20, 2010, provides for a base salary of $125,000, a cash bonus of up to $250,000 if the Company meets certain defined milestones and the grant of a stock option to purchase 822,000 common shares of the Company at $0.50 per share. Up to 25% of the bonus maybe paid in common stock of the Company at the discretion of the Board of Directors.
On January 6, 2013, the Company entered into a Consulting Agreement with Langle Business Consulting Inc., a company for which David C. Langle is the owner and President, which memorialized the employment of Mr. Langle as its Chief Financial Officer on a part-time basis. Pursuant to the agreement, the consultant will receive $5,000 per month, which shall be increased to $7,000 per month on the earlier of April 2013 or when the Company closes a financing of at least $1,000,000
On March 7, 2013 the Company entered into a consulting agreement with their former CEO and a major shareholder of the Company. The agreement is for one year and provides for the issuance of 250,000 shares of common stock as payment for unpaid services performed prior to the agreement and, during the term of the agreement cash compensation of $12,500 per month plus the issuance of 250,000 shares of common stock at March 6, 2014 or the earlier termination of the agreement
Rental:
On March 19, 2013 the Company moved its offices and entered into a new lease agreement to occupy approximately 1,200 square feet of office space. The lease provides for monthly base rent of $2,667 effective on April 1, 2013 and increases to $2,746 on April 1, 2014. The lease expires on March 31, 2016.
Minimum lease commitments over the next five years are as follows:
| Year Ended | | Amount | |
| 2014 | | $ | 35,381 | |
| 2015 | | | 33,693 | |
| 2016 | | | 8,485 | |
| | | | | |
| Totals | | $ | 77,558 | |
NOTE 10 – SEGMENT REPORTING AND SIGNIFICANT CONCENTRATIONS
The Company currently operates in one reporting segment, the sale of non-contact thermometers; therefore, no segment data is provided.
Significant Concentrations
For the year ended December 31, 2012, three customers accounted for 92% of the Company’s revenues. At December 31, 2013, the same three customers accounted for 99% of accounts receivable.
SANOMEDICS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – RELATED PARTY DISCLOSURE
During 2013 and 2012, the Company paid accounting fees to the firm of Koutoulas & Relis LLC aggregating $-0- and $30,097, respectively. The accompanying 2013 and 2012 consolidated balance sheets includes approximately $24,000 and $63,500, respectively in accounts payable as owed to Koutoulas & Relis LLC. Approximately $40,000 was disputed by the Company during 2013 and accordingly, written off. Mr. Steven L. Relis, our former Chief Financial Officer and Controller whom resigned as of December 31, 2012, is a member of that accounting firm.
On August 18, 2010, we issued to Mr. Relis an option to purchase 450,000 shares at a price of $0.50 per share until August 18, 2017, in consideration of his agreement to serve as our Chief Financial Officer and Controller. These options are subject to vesting: 33% on each of the first and second anniversaries of the grant date, and 34% on the third anniversary thereof. As a result of Mr. Relis’ resignation the remaining unvested portion of options granted expired as of December 31, 2012.
The accompanying consolidated balance sheets for 2013 and 2012 reflect accrued interest on notes payable due an affiliate of the former CEO of $265,923 and $217,001, respectively.
NOTE 12 – SUBSEQUENT EVENTS
Financing:
On January 9, 2014 , we entered into a Senior Secured Revolving Credit Facility Agreement (the "Credit Agreement") with TCA Global Credit Master Fund, LP, a Cayman Islands limited partnership (“TCA”). Pursuant to the Credit Agreement, of which we and our subsidiaries are parties as borrowers, TCA extended to us a $5 million revolving credit facility. An initial credit line of $2,300,000 was provided by TCA at closing, with $1,000,000 funded on the date of closing and the remaining $1,300,000 representing delayed for funding of an acquisition we may consummate within 90 days from closing, which has been extended to an additional 60 days. As of the date hereof, we are not a party to any pending acquisition for which these funds could be used.
The amounts borrowed pursuant to the Credit Agreement are evidenced by a Revolving Note (the "Note") from us and certain of our subsidiaries in the principal amount of $2,300,000. The Note bears interest at the rate of 11% per annum and matures July 9, 2014. Providing that no event of default exists on the maturity date, we have the right to request one six month extension of the Note maturity date or July 9, 2014. The Note is convertible at the option of TCA into shares of our common stock at a variable conversion price equal to 85% of the lowest daily trading volume weighted average price of our common stock during the five business days preceding the conversion date.
We, including our subsidiaries, granted TCA a first position blanket security interest in our assets and we pledged the stock of our subsidiaries to secure the payment of the loan which are evidenced by a Security Agreement and a Pledge and Escrow Agreement. Certain of our affiliates, including our President and our Chief Financial Officer, also entered into Subordination Agreements.
At closing we also paid TCA an equity advisory fee of $160,000 which was paid through the issuance of 134,454 shares of our common stock.
Other Third Party Debt Financing:
On February 6, 2014 and March 10, 2014, the Company entered into two (2) separate Securities Purchase Agreements and convertible promissory notes (“Notes”) with two (2) companies for total principal amount of $80,000. The Notes, which are due on March 10, 2015 and August 5, 2015, bear interest at 10% and 12% per annum until paid or to maturity. The Note conversions are at the election of the lenders at any time at conversion prices equal to 50% and 70% discount to the average of the lowest two to three closing bid prices of the common stock during the 10 and 20 trading days prior to conversion. One of the notes for $30,000 was converted on February 25, 2014 for 150,000 shares.
SANOMEDICS INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – SUBSEQUENT EVENTS (continued)
Subsequent to December 31, 2013, pursuant to portions of Convertible Notes due to CLSS and sold to four (4) third parties by the original holder in the principal amounts totaling $247,581, the Company entered into six (6) separate Securities Purchase Agreements and convertible promissory notes (“Notes”). The Notes, which are due ranging from July 2014 and October 2014, bear interest ranging from 6% to 12% per annum until paid or to maturity. The Note conversions are at the election of the lenders at any time at conversion prices equal ranging from 50% to 70% discount to the average of the lowest two to three closing bid prices of the common stock during the 10 to 25 trading days prior to conversion. Three of the notes for a total of $139,687 were converted during February 2014 and March 2014 for a total of 572,643 shares of common stock.
On February 21, 2014 the Company converted a Convertible Note due to CLSS for $282,740 into 1,313,750 shares restricted at a price per share of $0.2136.
Equity Issues:
On January 16, 2014, the former CEO and major shareholder assigned 650 shares of preferred stock from his holdings of 750 shares allocating 452 shares to two (2) members of management, 100 shares to its Chairman of the Board and 98 shares to a family member.
On January 28, 2014 in exchange for a reduction of debt of the Company owed to CLSS Holdings for a share price of $0.10 per share, the Company issued 3,142,278 shares of restricted common stock to various existing individual shareholders designated by the owner of CLSS Holdings.
On February 28, 2014, the Company issued 97,656 shares of common stock to two (2) parties as commissions on the TCA Global financing.
Through March 28, 2014, the Company issued a total of 708,466 shares of restricted common stock to three (3) companies in connection with the conversion of convertible debt held.
On March 28, 2014, the Company issued 134,454 shares of common stock as payment of advisory fee to TCA Global in connection with the TCA lending facility.
Management has evaluated the subsequent events through April 15, 2014, the date at which the consolidated financial statements were available for issue.
Item 9. Change In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURE
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Exchange Act that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2013. Based on the evaluation of these disclosure controls and procedures, and in light of the material weaknesses found in our internal controls, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective.
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Under the supervision of our Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2013 using the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
A material weakness is defined as "a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis by the Company's internal controls". In its assessment of the effectiveness of internal control over financial reporting as of December 31, 2013, we determined that control deficiencies existed that constituted material weaknesses, as described below:
| - | Accounting and Finance Personnel Weaknesses: Our current accounting staff is relatively small and we do not have the required infrastructure of meeting the higher demands of being a U.S. public company. This material weakness also relates to a limited lack of personnel with expertise in preparing financial statements in accordance with U.S. GAAP. |
| - | Management did not identify accounting issues, in particular the complex calculations and disclosures related to derivative instruments and, implement appropriate solutions for these technical accounting issues; |
| - | We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act as of the year ending December 31, 2013. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness. |
| - | We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness. |
| - | Effective controls over the control environment were not maintained. This has resulted in inconsistent practices. Although our Board of Directors does currently have one independent member the Company does not have an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness |
| - | There is a risk of management override given that our officers have a high degree of involvement in our day to day operations; |
Management is currently evaluating what steps can be taken in order to address these material weaknesses.
Accordingly, we concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the Company's internal controls.
As a result of the material weaknesses described above, Chief Executive Officer and Chief Financial Officer has concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2013 based on criteria established in Internal Control—Integrated Framework issued by COSO.
This 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 on internal control in this annual report.
Changes in Internal Control over Financial Reporting.
There have been no changes in our internal control over financial reporting during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Our directors and executive officers, and their respective ages, positions and offices, are as follows:
| Name | | Age | | Position |
| | | | | |
| Keith Houlihan | | 45 | | President and Director |
| David C. Langle | | 63 | | Chief Financial Officer |
| Gary J. O’Hara | | 63 | | Chief Technology Officer |
| William Lerner | | 74 | | Director |
Keith Houlihan has been our president and a director since April 2009. He co-founded Sano-Nevada in January 2009 and has served as its president since then. Since March 2005 he has served as president of Meridian Solutions Group, Inc., an executive search and placement firm focused on the healthcare industry which he formed and which became substantially inactive in February 2009. He serves as a director based on his business acumen and experience with the healthcare industry acquired during his tenure at Meridian Solutions.
David C. Langle has served as Chief Financial Officer since January 2013. Mr. Langle has an extensive history as CFO and in other senior management roles for various publicly and privately held companies in the technology, healthcare, manufacturing, and telecommunications industries. Since June 2009 he has been the chief executive officer and a founder of Catenas Holdings, Inc., a private company which he founded to develop, manage and acquire synergistic medical services and health related services. Additionally, from January 2011 to present, he also serves as Interim Chief Financial Officer for Seamless Technology, Inc.(SLSX.PK), a publicly owned holding company that focuses on the acquisition, development and operating of Internet based technology companies. Mr. Langle began his career in finance while serving as a staff accountant with Spicer and Oppenhiem, an international accounting and consulting firm where he concluded his tenure as an audit partner. He earned his Bachelor of Science Degree from the University of Illinois in Chicago and has been a certified public accountant since 1985.
Gary J. O’Hara has been our Chief Technology Officer since July 28, 2010, and prior thereto he consulted for us from March 3, 2010 to July 27, 2010. He had been retired for more than the past five years. Mr. O’Hara brings over 25 years of experience in medical device product innovation and business development. He was the co-founder in 1985 of Intelligent Medical Systems Inc. (“IMS”) He invented the first commercialized infrared tympanic thermometer (First Temp® and Genius® brands) for which he was cited as Inventor of the Year by the San Diego Patent Law Association. In 1993, IMS was acquired by the Fortune 500 pharmaceutical manufacturer American Home Products (now a part of Pfizer). Mr. O’Hara has also been active in the seed and startup phases of many ventures through his involvement with the Tech Coast Angels, an organization of 150 investors that invest in and mentor early stage technology and biomedical companies. Mr. O’Hara holds numerous patents related to medical devices and electronic computer games. He has B.S. and M.S. degrees in Electrical Engineering from the University of Michigan as well as an MBA from Eastern Michigan University.
William Lerner was recently appointed as a Director to our Board on March 8, 2013. Mr. Lerner a graduate of Cornell University and of the New York University School of Law, is a member of the bars of New York and Pennsylvania, with a Peer Rating for more than 25 years of AV (Martindale Hubbell). His career includes service with the U.S. Securities & Exchange Commission, The American Stock Exchange and as General Counsel to a major New York Stock Exchange brokerage/investment banking/financial services firm. Most recently Mr. Lerner has been and is engaged in the private practice of corporate and securities law in New York and in Pennsylvania, and in Toronto, Canada as a Consultant in providing strategic and legal consulting as well as corporate governance and crisis management services to both public and private companies both in the United States and in Canada. Mr. Lerner is also a member of the Board of Trustees (and Chairman of the Compliance Committee) of the Daily Income Fund, a money market mutual fund Mr. Lerner is a director of National Holdings Corporation, a holding company for National Securities Corporation, vFinance Investments, Inc., National Asset Management, Inc. and National Insurance Corporation. National Securities and vFinance are broker-dealers registered with the Securities and Exchange Commission, and members of FINRA and SIPC. National Asset Management is an SEC registered investment adviser, and National Insurance provides a full array of fixed insurance products. (See: www.nhldcorp.com). Mr. Lerner is an adviser to Fiduciary Compliance Associates LLC (formed by Charles Lerner Esq., former Special Counsel to the Division of Enforcement at the SEC in Washington, DC and Director of Enforcement at the Pension and Welfare Benefits Administration at the US Department of Labor). Fiduciary Compliance (www.fiduciaryca.com ) provides full service compliance support to investment advisers, private investment funds, and financial firms in the US and Europe.
Family Relationships
There are no family relationships, or other arrangements or understandings between or among any of the directors, executive officers or other person pursuant to which such person was selected to serve as a director or officer.
Director Qualification
Our Board of Directors is currently comprised of two individuals. Mr. Lerner, who was appointed to our Board of Directors in March 2013, has an extensive background in corporate and securities law and consults with various public and private companies in the areas of legal issues and corporate governance. He also has served and serves as a Director to several public and private companies. Mr. Houlihan as served as our President since 2009 and in such position has a comprehensive understanding of our business. Our Board concluded that as a result of these directors individual experience, qualifications, attributes or skills that such person should be serving as a member of our Board of Directors as of the date of this report in light of our business and structure. In addition to their individual skills and backgrounds which are focused on our industry as well as financial and managerial experience, we believe that the collective skills and experience of our Board members are well suited to guide us as we continue to grow our company. We expect to expand our Board of Directors in the future to include additional independent directors. In adding additional members to our Board, we will consider each candidate’s independence, skills and expertise based on a variety of factors, including the person’s experience or background in management, finance, regulatory matters and corporate governance. Further, when identifying nominees to serve as director, we expect that our Board will seek to create a Board that is strong in its collective knowledge and has a diversity of skills and experience with respect to accounting and finance, management and leadership, vision and strategy, business operations, business judgment, industry knowledge and corporate governance.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics that applies to our President, Chief Executive Officer, Chief Financial Officer or Controller and any other persons performing similar functions. This code provides written standards that we believe are reasonably designed to deter wrongdoing and promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships, and full, fair, accurate, timely and understandable disclosure in reports we file with the Securities Exchange Commission. A copy of the Code of Business Conduct and Ethics is filed as an exhibit to this report.
Committees of our Board of Directors and the Role of our Board in Risk Oversight
Our President is one of two members of our Board of Directors. None of our directors has been designated as Chairman of the Board. Mr. Lerner is considered an independent director, but we do not have a “lead” independent director. The Board of Directors oversees our business affairs and monitors the performance of management. In accordance with our corporate governance principles, the Board of Directors does not involve itself in day-to-day operations. Our independent director keeps himself informed through discussions with our executive officers and by reading the reports and other materials that we send him and by participating in Board of Directors meetings. At the present stage of our company, our Board believes that in the context of risk oversight, with executive officers making up the majority of the Board, the Board gains valuable perspective that combines operational experience of a member of management with the oversight focus of a member of the Board.
We have not established any committees, including an Audit Committee, a Compensation Committee or a Nominating Committee, or any committee performing a similar function. The functions of those committees are being undertaken by the Board of Directors as a whole. Because we only have one independent director, we believe that the establishment of these committees would be more form than substance.
We do not have a policy regarding the consideration of any director candidates which may be recommended by our stockholders, including the minimum qualifications for director candidates, nor has our Board of Directors established a process for identifying and evaluating director nominees. Further, when identifying nominees to serve as director, while we do not have a policy regarding the consideration of diversity in selecting directors, at such time as we expand our Board, our Board will seek to create a Board of Directors that is strong in its collective knowledge and has a diversity of skills and experience with respect to accounting and finance, management and leadership, vision and strategy, business operations, business judgment, industry knowledge and corporate governance. We have not adopted a policy regarding the handling of any potential recommendation of director candidates by our stockholders, including the procedures to be followed. Our Board has not considered or adopted any of these policies as we have never received a recommendation from any stockholder for any candidate to serve on our Board of Directors. Given our relative size, we do not anticipate that any of our stockholders will make such a recommendation in the near future. While there have been no nominations of additional directors proposed, in the event such a proposal is made, all members of our Board will participate in the consideration of director nominees. In considering a director nominee, it is likely that our Board will consider the professional and/or educational background of any nominee with a view towards how this person might bring a different viewpoint or experience to our Board.
None of our directors are considered an “audit committee financial expert” within the meaning of Item 407(d) of Regulation S-K. In general, an “audit committee financial expert” is an individual member of the audit committee or Board of Directors who:
| ● | understands generally accepted accounting principles and financial statements, |
| ● | is able to assess the general application of such principles in connection with accounting for estimates, accruals and reserves, |
| ● | has experience preparing, auditing, analyzing or evaluating financial statements comparable to the breadth and complexity to our financial statements, |
| ● | understands internal controls over financial reporting, and |
| ● | understands audit committee functions. |
Our securities are not quoted on an exchange that has requirements that a majority of our Board members be independent and we are not currently otherwise subject to any law, rule or regulation requiring that all or any portion of our Board of Directors include “independent” directors, nor are we required to establish or maintain an Audit Committee or other committee of our Board of Directors.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors, and persons who beneficially own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common shares and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% stockholders are required by the Securities and Exchange Commission regulations to furnish us with copies of all Section 16(a) reports they file. Based on our review of the copies of such forms received by us, and to the best of our knowledge, all executive officers, directors and persons holding greater than 10% of our issued and outstanding stock have filed the required reports in a timely manner during 2013.
Item 11. Executive Compensation
Executive Compensation
The following table sets forth information about compensation paid or accrued during our last two completed fiscal years, i.e., December 31, 2013 and 2012, to (a) our Chief Executive Officer (principal executive officer), (b) (i) our two most highly compensated executive officers other than our principal executive officer who were serving as executive officers at the end of our last completed fiscal year, and (ii) up to two additional individuals for whom similar disclosure would have been provided but for the fact that the individual was not serving as an executive officer at the end of our last completed fiscal year, provided their respective total compensation exceeded $100,000 during such fiscal year. We refer to all of the persons included in this table, collectively, as our “named executive officers”. The table excludes perquisites and personal benefits for a named executive officer which are less than $10,000 and that are not a reimbursement of taxes owed with respect thereto. The value attributable to any option awards is computed in accordance with FASB ASC Topic 718. The assumptions made in the valuations of the option awards are included in Note 8 of the Notes to our Consolidated Financial Statements for the year ended December 31, 2013 appearing earlier in this report.
Summary Compensation Table
Name and principal position | | Year | | Salary ($) | | | Bonus ($) | | | Stock Awards ($) | | | Option Awards ($) | | | Nonequity incentive plan compen-sation ($) | | | Non-qualified deferred compen-sation earnings ($) | | | All other compen-sation ($) | | | Total ($) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Keith Houlihan, | | 2013 | | | 200,000 | (1) | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | 200,000 | |
| President | | 2012 | | | 200,000 | (1) | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | -0- | | | | 200,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gary J. O’Hara | | 2013 | | | 125,000 | | | | -0- | | | | -0- | | | | 159,395 | (2) | | | -0- | | | | -0- | | | | -0- | | | | 284,395 | |
| Chief Technology Officer | | 2012 | | | 125,000 | | | | -0- | | | | -0- | | | | 96,262 | (2) | | | -0- | | | | -0- | | | | -0- | | | | 221,262 | |
| (1) | Salary to Mr. Houlihan and Mr. Sizer are unpaid and has been accrued and deferred. |
| (2) | Represents the vested portion of 2013 Option Award and previous grants earned during the period, valued in accordance with ASC 718. |
Narrative Disclosure to Summary Compensation Table
Employment and Consulting Agreements with Named Executive Officers
Keith Houlihan, President
On January 5, 2009, we entered into an employment agreement, as amended and restated on August 18, 2010, with Keith Houlihan to serve as our President until August 17, 2013, with successive one year renewal terms unless either party gives at least 30 days prior notice of non-renewal. We agreed to pay him an annual base salary of $200,000 (increased from $160,000, but without the previous 7% per year minimum annual increases or the increase to $250,000 in the event we were to either raise at least $1,000,000 during his employment or achieve annual gross revenues exceeding $1.5 million). Mr. Houlihan originally agreed to defer his right to receive all his salary which was payable on demand; however, we restructured that demand obligation regarding the $239,944 in salary accrued as of June 30, 2010 by delivering to him pursuant to our promissory note in that principal amount, which note is due and payable on August 1, 2011, convertible into shares of our common stock originally at a price equal to the lower of $.50 per share or a 50% discount to the average bid price of our common stock over the three trading days preceding the request for conversion, but, by virtue of a note amendment dated December 20, 2010, convertible now at a fixed conversion price of $.50 per share, and secured by substantially all of our assets. He also has deferred all salary due and payable to him on and after July 1, 2010. On April 2, 2009, we issued to him a five-year option to purchase 5,000,000 shares at a price of $0.05 each, exercisable until January 5, 2011.
Mr. Houlihan is entitled to an annual cash bonus of 1.5% of our annual gross revenues or $125,000 upon the achievement of mutually agreed milestones for the subject fiscal year, whichever is greater, up to a maximum annual bonus amount of $250,000 (prorated on a monthly basis for fiscal 2010). During the first quarter of fiscal 2010 we mutually established six such milestones (the parties waived the requirement that such milestones be fixed within 60 days after the employment agreement was entered into, and the milestones were memorialized in writing on December 20, 2010), and all were achieved, as follows: Identify a minimum of two new suppliers for manufacturing and enter into a contract with at least one of them; identify and recruit a new Chief Financial Officer; identify and recruit a new Chief Operating Officer; identify and recruit a new Chief Technology Officer; identify and recruit a clinical expert; identify and enter into contracts with retailers. Although these milestones are identical to those Mr. Sizer achieved, as described above, all were also deemed to have been achieved by Mr. Houlihan because, although either of them may have initially identified or been made aware of or been introduced to the subject person or company, or the person we hired was introduced to us by a third party (such as Mr. O’Hara, the CTO, who was introduced by our patent counsel), we are such a small company that each executive participated so actively in interviews, meetings and/or negotiations and made such a meaningful contribution to the achievement of each milestone that each executive was considered to have achieved that milestone. Therefore, Mr. Houlihan earned, and we are obligated to pay him, a 2010 bonus in the amount of $125,000. See Item 1A, Risk Factors - Management Could Terminate Employment, and Our Operations and Viability Would be Hurt, If We Cannot Fund the 2010 Bonuses Which Were Earned. In February 2011, the following 2011 milestones were agreed upon: Our entering into a licensing arrangement for our second-generation thermometers; our entering into an agreement with a new thermometer manufacturer; and our hiring of a product/category manager.
Gary J. O’Hara, Chief Technology Officer
On March 3, 2010, we entered into a consulting agreement with Mr. O’Hara to obtain his product development, technology and other advice for a term of five (5) years. We agreed to issue to him 15,000 shares as compensation, and in addition we paid him $10,416 in cash for his services.
On July 28, 2010, we terminated the consulting agreement and entered into an employment agreement with Mr. O’Hara to serve as our Chief Technology Officer for a term of three (3) years, with successive one year renewal terms unless either party gives at least 30 days prior notice of non-renewal. We agreed to pay him an annual base salary of $125,000. He is entitled to an annual cash bonus of 1.5% of our annual gross revenues or up to $250,000 upon the achievement of mutually agreed milestones for the subject fiscal year, whichever is greater, up to a maximum annual bonus amount of $250,000 (prorated on a monthly basis for fiscal 2010). In December 2010 we amended his agreement to provide that, at our option, we can pay 25% of his bonus in shares of our common stock, valued at the per share price of our most recent private placement, if any, made within six months of the bonus payment date and otherwise at the exercise price of the stock option granted to any named executive officer closest in time to such payment date. The following is Mr. O’Hara’s 2010 milestone, which he achieved: To create a prototype of our standalone scanning thermometer, including microprocessor, interface electronics, thermal heat sink design and display, using third party sensor technology and components (other than the plastic housing) which are different from those contained in our current models, in an interim design which would (a) allow collection of trial temperature readings on humans and animals and (b) be able to be configured for different sensor types (with different field-of-views). In February 2011, the following 2011 milestones were agreed upon: (1) Conduct clinical studies which validate, and then design and produce using a new manufacturer a working prototype of, our second generation (a) consumer models for human and pet dogs, and (b) professional models for humans and dogs; (2) launch our new consumer and professional models for humans and dogs; (3) develop one new professional veterinary thermometry technology; and (4) generate at least two patent applications for new designs or utilities. We also granted to him a seven-year option to purchase 822,000 shares of our common stock at a price of $0.50 each, which price shall be reduced to any lower exercise price at which we may grant stock options to other corporate officers during his employment term, vesting as follows: 33%, or 271,260 shares, are immediately exercisable; an additional 33%, or 271,260 shares, are exercisable on the first anniversary of the grant date, provided he has achieved his employment agreement milestones for fiscal year 2010; and on the second anniversary thereof the balance of the options are exercisable, provided he has achieved such milestones for fiscal year 2011.
Outstanding Equity Awards at Fiscal Year-End
The following table summarizes the outstanding equity awards held by each named executive officer at the end of our last completed fiscal year, i.e., December 31, 2013:
Outstanding Equity Awards at Fiscal Year-End
Name | | Number of securities underlying unexercised options (#) exercisable | | | Number of securities underlying unexercised options (#) unexercisable | | | Option exercise price ($) | | Option expiration date |
| | | | | | | | | | | |
| Keith Houlihan | | | 500,000 | (1) | | | 0 | | | | 0.50 | | 4/1/2016 |
| | | | | | | | | | | | | | |
| Gary J. O’Hara | | | 97,200 | (2)(3) | | | 0 | | | | 5.00 | | 7/28/17 |
| (1) | Granted on April 2, 2009, and all options were immediately exercisable. Original expiration date of January 5, 2011 was amended and extended to expire on April 1, 2016. |
| | |
| (2) | Granted on August 18, 2010, pursuant to the terms of his employment agreement; 27,126 options were immediately exercisable and 27,126 options vest on July 28, 2011 and 27,948 vest on July 28, 2012. |
| (3) | 15,000 granted on March 7, 2013 fully vested and immediately exercisable. |
Incentive and Nonqualified Stock Option Plan
On July 26 2010, we adopted the 2010 Stock Option Plan pursuant to which our board of directors (or a committee thereof consisting of “non-employee” and “outside” directors) may grant incentive stock options (within the meaning of the Internal Revenue Code of 1986, as amended (“Code”)) to our employees, and nonqualified stock options to all others, for the purchase of our common stock. The Plan is intended to provide incentives to, and rewards for employees, consultants, officers and directors who are expected to contribute to our growth and success. The option prices are determined by the board or the stock option committee, but option prices for incentive stock options may not be less than 100% of the fair market value of the common stock on the date the option is granted (or 110% thereof for optionees who are 10% shareholders). An aggregate of 3,500,000 shares of common stock has been reserved for issuance under the Plan subject to appropriate adjustments for stock splits, dividends and other transactions or events as described in the Plan. All options may be exercised at such times and in such amounts as may be determined at the time of the granting of the options; provided, however, that no options may be exercised later than ten years after the date upon which they were granted.
Options may be exercised within 30 days, or such longer period as the stock option committee may determine, after retirement, resignation, or termination (other than for Cause) of the option holder's employment or service with us, but only to the extent that they had become exercisable at retirement, resignation or termination. Any unexercised options shall expire in the event of an option holder's retirement or dismissal or otherwise as described above. Under certain circumstances involving change of control of our company, the board of directors may accelerate the exercisability and termination of the option.
The board of directors may, at any time, amend, modify, suspend or terminate the Plan; provided, however, that no amendment, suspension or termination of the Plan may alter or impair any rights or obligations under any option already granted except with the consent of the holder of the option, and no action of the board or the stock option committee may increase the limit on the maximum number of shares which may be issued upon exercise of options, reduce the minimum option price requirements or extend the limit on the period during which options may be granted, without approval by our shareholders given within 12 months before or after such action by the board or the stock option committee.
An employee to whom an incentive stock option which qualifies under Section 422 of the Code is granted will not recognize income at the time of grant or exercise of the option. However, upon the exercise of an incentive stock option, any excess in the fair market price of the common stock over the option price constitutes a tax preference item which may have alternative minimum tax consequences for the employee. If the employee sells the shares more than one year after the date of transfer of the shares and more than two years after the date of grant of the incentive stock option, the employee generally will recognize a long-term capital gain or loss equal to the difference, if any, between the sales price of the shares and the option price. We will not be entitled to a federal income tax deduction in connection with the grant or exercise of any incentive stock option. If the employee does not hold the option shares for the required period, when the employee sells the shares the employee will recognize ordinary compensation income and possibly capital gain or loss (long-term or short-term depending on the holding period of the shares sold) in the amounts as are prescribed by the Code and the regulations thereunder, and we will generally be entitled to a federal income tax deduction in the amount of the ordinary compensation income recognized by the employee.
A person to whom a nonqualified stock option is granted will not recognize income at the time of the option grant. When such person exercises the nonqualified stock option, the person will recognize ordinary compensation income equal to the excess, if any, of the fair market value, as of the date of option exercise, of the shares the person receives upon exercise over the option price. The tax basis of these shares to such employee will be equal to the option price plus, if the person is an employee, the amount, if any, includible in the employee's gross income, and the employee's holding period for the shares will commence on the date on which the employee recognizes taxable income in respect of the shares. Gain or loss upon a subsequent sale of any shares received upon the exercise of a nonqualified stock option generally would be taxed as capital gain or loss (long-term or short-term, depending upon the holding period of the shares sold). Subject to the applicable provisions of the Code and regulations thereunder, we will generally be limited to a federal income tax deduction in respect of a nonqualified stock option in an amount equal to the ordinary compensation income recognized by the optionee. This deduction will, in general, be allowed for our taxable year in which the optionee recognizes the ordinary income.
As of December 31, 2013 and 2012, there were 1,097,200 and 1,272,000 options outstanding under this plan, respectively.
Director Compensation
Our directors do not receive any cash compensation for service on our board of directors or any committee, although we do reimburse directors for their reasonable out-of-pocket expenses associated with attending meetings, and no compensation was paid to any of our employee directors for services as a director during the year ended December 31, 2013 . We do not have any compensation policy governing the issuance of shares of our common stock to non-employee directors, and our directors are not prohibited from receiving restricted stock grants.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
At April 3, 2014, the issued and outstanding Voting Shares consisted of:
• 10,161,266 shares of our common stock, and
• 1,000 shares of our Series A Preferred Stock.
Each share of common stock entitles the holder to one vote. The holders of shares of the Series A Preferred Stock are entitled to the number of votes that collectively equal 51% of the total number of votes that may be cast by the holders of common stock and Series A Preferred Stock voting as one class on all matters submitted to a vote of our stockholders. On April 3, 2014, there were a total of 15,343,512 votes eligible to be cast at any meeting of our stockholders.
The following table contains information regarding record ownership of our Voting Shares as of April 11, 2013 held by:
• persons who own beneficially more than 5% of the outstanding Voting Shares,
• our directors,
• named executive officers, and
• all of our directors and officers as a group.
A person is deemed to be the beneficial owner of securities that can be acquired by such a person within 60 days from April 3, 2014, upon exercise of options, warrants or convertible securities. Each beneficial owner's percentage ownership is determined by assuming that options, warrants and convertible securities that are held by such a person (but not those held by any other person) and are exercisable within 60 days from that date have been exercised. Unless otherwise indicated, the address of each of the listed beneficial owners identified is 444 Brickell Avenue, Suite 415, Miami, Florida 33131.
| | | Amount and Nature of Beneficial Ownership | | | | |
| | | Common Stock | | | Series A Preferred Stock | | | | |
Name | | # of Shares | | | % of Class | | | # of Shares | | | % of Class | | | % of Total Vote | |
| William Lerner | | | 0 | | | | - | | | | 100 | | | | 10 | % | | | 5.1 | % |
Keith Houlihan (1) | | | 822.140 | | | | 7.0 | % | | | 452 | | | | 45 | % | | | 24.8 | % |
Gary J. O’Hara (2) | | | 98,700 | | | | .8 | % | | | - | | | | - | | | ≤1% | |
| David C. Langle | | | 0 | | | | - | | | | 250 | | | | 25 | % | | | 12.7 | % |
All named executive officers and directors as a group (four persons) (1)(2) | | | 920,840 | | | | 7.8 | % | | | 802 | | | | 80 | % | | | 42.6 | % |
Craig Sizer (3) | | | 1,317,280 | | | | 11.2 | % | | | 100 | | | | 10 | % | | | 9.9 | % |
(1) The number of shares of common stock owned by Mr. Houlihan includes:
• 181,472 shares which are presently outstanding; and
• options to purchase 500,000 shares of our common stock which are exercisable at $0.50 per share until April 1, 2016.
• 140,668 shares issuable to Mr. Houlihan in the event he elects to convert his $703,339 principal amount of the convertible promissory note we issued to him in exchange for accrued salaries at a conversion price of $0.50 per share.
Percentage of total vote includes voting rights attributable to 452 shares of Series A Preferred Stock.
(2) The number of shares of common stock owned by Mr. O’Hara includes options to purchase 972,000 shares of our common stock at $5.00 per share until July 27, 2017 and March 6, 2020.
(3) The number of shares of common stock owned by Mr. Sizer includes:
• 172,012 shares held of record by CLSS Holdings LLC, a limited liability company of which he is the sole member;
• 310,834 shares held in his name,
• 334,434 shares issuable to CLSS in the event it elects to convert its $1.6 million principal amount of the notes we issued to it for cash advances we received at a conversion price of $0.50 per share; and
• options to purchase 500,000 shares of our common stock which are exercisable at $0.05 per share until April 1, 2016.
Percentage of total vote includes voting rights attributable to 100 shares of Series A Preferred Stock. Mr. Sizer’s address is 19501 W. Country Club Drive, Aventura, FL 33180.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth securities authorized for issuance under equity compensation plans as of December 31, 2013.
Equity Compensation Plan Information
Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | | | Weighted-average exercise price of outstanding options, warrants and rights (b) | | | Number of securities as remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | |
| | | | | | | | | | |
| Equity compensation plans approved by security holders | | | 1,272,000 | | | $ | 5.00 | | | | 222,800 | |
| | | | | | | | | | | | | |
| Equity compensation plans not approved by holders | | | 1,038,620 | | | $ | 1.60 | | | | 0 | |
| | | | | | | | | | | | | |
| Total | | | 1,165,820 | | | $ | 1.90 | | | | 222,800 | |
Item 13. Certain Relationships and Related Transactions, and Director Independence
Borrowings
During the periods 2009 to 2013 we obtained our liquidity principally from approximately $3.5 million of cash advances we received from time to time, as needed, from an affiliate of Craig Sizer, our former Chairman and CEO and one of our principal shareholders, as follows:
| Description | | Conversion price per share | | | Amount | |
| Secured Convertible Promissory Note - CLSS Holdings, LLC, dated September 8, 2009. Note accrues interest at 9% per annum, due and payable on August 1, 2012 | | $ | 2.50 | | | $ | 407,151 | |
| Secured Convertible Promissory Note - CLSS Holdings, LLC, dated December 7, 2009. Note accrues interest at 9% per annum, due and payable on August 1, 2012 | | | 2.50 | | | | 117,164 | |
| Secured Convertible Promissory Note - CLSS Holdings, LLC, dated April 6, 2010. Note accrues interest at 9% per annum, due and payable on August 1, 2012 | | | 2.50 | | | | 245,116 | |
| Secured Convertible Promissory Note - CLSS Holdings, LLC, dated September 30, 2010. Note accrues interest at 9% per annum, due and payable on August 1, 2012 | | | 2.50 | | | | 223,500 | |
| Secured Convertible Promissory Note - CLSS Holdings, LLC, dated September 30, 2010. Note accrues interest at 9% per annum, due and payable on October 1, 2012 | | | 5.00 | | | | 181,000 | |
| Secured Convertible Promissory Note - CLSS Holdings, LLC, dated March 12, 2011. Note accrues interest at 9% per annum, due and payable on October 1, 2012 | | | 5.00 | | | | 367,000 | |
| Secured Convertible Promissory Note - CLSS Holdings, LLC, dated September 30, 2011. Note accrues interest at 9% per annum, due and payable on September 30, 2012 | | | 5.00 | | | | 220,000 | |
| Secured Convertible Promissory Note - CLSS Holdings, LLC, dated March 12, 2011. Note accrues interest at 7.5% per annum, due and payable on October 1, 2012 | | | 5.00 | | | | 334,787 | |
| Other Advances from CLSS Holdings, LLC evidenced by five (5) Promissory Notes- CLSS Holdings, dated February 21, 2014. Notes accrue interest at 8% per annum, due and payable on March 1, 2016 | | | 5.00 | | | | 1,408,371 | |
| Totals | | | | | | $ | 3,504,088 | |
Each loan is (a) evidenced by a promissory note which bears 9% annual interest (20% [15% in the March 2011 note] upon the occurrence, and during the continuance, of an event of default), convertible into our common stock at a fixed price of $2.50 or $5.00 and not pre-payable by us, and (b) subject to a security agreement under which all of our assets secure our loan repayment obligation.
Director Independence
There is only one member of our board of directors, William Lerner, who would be considered an “independent” director under the definition of “independence” set forth in NASDAQ Rule 5605(a)(2).
Item 14. Principal Accountant Fees and Services
Mallah Furman was engaged to be the Company's auditors for the years ended December 31, 2013 and 2012. Fees incurred are as follows for the periods indicated:
| | | 2013 | | | 2012 | |
| (1) | Audit Fees | | $ | 42,500 | | | $ | 37,000 | |
| | Audit-Related Fees | | | - | | | | - | |
| | Tax Fees | | | - | | | | - | |
| | All Other Fees | | $ | | | | | - | |
(1) Audit fees include the annual audit and quarterly financial statement reviews and procedures required to be performed by the independent auditor to be able to form an opinion on our consolidated financial statements. Audit fees also includes services associated with SEC registration statements, periodic reports and other documents filed with the SEC or other documents issued in connection with securities offerings.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
| (a) | Financial Statements Filed |
INDEX TO FINANCIAL STATEMENTS
| | | Page | |
| Report of Independent Registered Public Accounting Firm | | | F-1 | |
| | | | | |
| Consolidated Balance Sheets as of December 31, 2013 and 2012 | | | F-2 | |
| | | | | |
| Consolidated Statements of Income for the years ended December 31, 2013 and 2012 | | | F-3 | |
| | | | | |
| Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2013 and 2012 | | | F-4 | |
| | | | | |
| Consolidated Statements of Cash Flow for the years ended December 31, 2013 and 2012 | | | F-5 | |
| | | | | |
| Notes to the Consolidated Financial Statements | | | F-6 | |
| Exhibit No. | | Description of Exhibit |
| | | |
| 2.1 | | Common Stock Purchase Agreement dated March 19, 2009 by and among Sanomedics International Holdings, Inc., Belmont Partners, LLC, Niagara Mining & Development Co., Inc. and Escrow, LLC(1) |
| 2.2 | | Acquisition Agreement and Plan of Share Exchange effective as of April 2, 2009 by and among Niagara Mining & Development Co., Inc. & Development Company, Sanomedics International Holdings, Inc., Craig Sizer, Maria Perez Sizer and Keith Houlihan(1) |
| 3.1 | | Certificate of Incorporation, filed April 7, 2009(1) |
| 3.2 | | Certificate of Amendment to Certificate of Incorporation, filed April 7, 2009(1) |
| 3.3 | | Bylaws(1) |
| 3.5 | | Certificate of Amendment to the Certificate of Incorporation (12) |
| 10.1 | | $407,151.26 Secured Convertible Promissory Note dated September 8, 2009 to CLSS Holdings, LLC(1) |
| 10.2 | | Security Agreement with CLSS Holdings LLC dated September 8, 2009(1) |
| 10.3 | | $225,000.00 Secured Convertible Promissory Note dated June 30, 2010 to Craig Sizer(1) |
| 10.4 | | Amended and Restated Employment Agreement with Keith Houlihan, dated August 18, 2010(1) |
| 10.5 | | Employment Agreement with Gary J. O’Hara, dated July 28, 2010(1) |
| 10.6 | | Employment Agreement with Craig Sizer, dated August 18, 2010(1) |
| 10.7 | | Option Agreement with Craig Sizer, dated April 2, 2009(1) |
| 10.8 | | 2010 Stock Option Plan(1) |
| 10.9 | | Warrant issued to ASG, LLC, dated December 7, 2009(1) |
| 10.10 | | Amendment No. 1 to $407,151.26 Secured Convertible Promissory Note dated September 8, 2009 to CLSS Holdings, LLC(1) |
| 10.11 | | Amendment No. 1 to $225,000.00 Secured Convertible Promissory Note dated June 30, 2010 to Craig Sizer(5) |
| 10.12 | | $239,944 Secured Convertible Promissory Note dated June 30, 2010 to Keith Houlihan, as amended December 20, 2010(1) |
| 10.13 | | Manufacturing Agreement with Rycom Electron Technology Limited (portions of the exhibit have been redacted pursuant to a request for confidential treatment)(1) |
| 10.14 | | Amendment No. 1 dated December 17, 2010, to Amended and Restated Employment Agreement with Keith Houlihan(1) |
| 10.15 | | Amendment No. 1 dated December 20, 2010, to Employment Agreement with Gary J. O’Hara(1) |
| 10.16 | | Amendment No. 1 dated December 17, 2010, to Employment Agreement with Craig Sizer(1) |
| 10.17 | | First Amendment to Commercial Lease(1) |
| 10.18 | | Reseller Agreement with Scar-Guard Inc., dated June 1, 2010 (portions of the exhibit have been redacted pursuant to a request for confidential treatment)(1) |
| 10.19 | | $367,000 Secured Convertible Promissory Note dated March 10, 2011 to CLSS Holdings LLC(1) |
| 10.20 | | Security Agreement with CLSS Holdings LLC dated March 10, 2011(1) |
| 10.21 | | Note Extension Agreement with CLSS Holdings LLC dated March 10, 2011(1) |
| 10.23 | | Note Extension Agreement for note dated April 6, 2010 with CLSS Holdings LLC dated August 1, 2011 (2) |
| 10.24 | | Note Extension Agreement for note dated December 7, 2009 with CLSS Holdings LLC dated August 1, 2011 (2) |
| 10.25 | | Note Extension Agreement for note dated June 30, 2010 with CLSS Holdings LLC dated August 1, 2011 (2) |
| 10.26 | | Note Extension Agreement for note dated September 8, 2009 with CLSS Holdings LLC dated August 1, 2011(2) |
10.27 | | Note Extension Agreement with Craig Sizer dated August 1, 2011(2) |
| 10.28 | | Note Extension Agreement with Keith Houlihan dated August 1, 2011 (2) |
| 10.29 | | $220,000 Secured Convertible Promissory Note dated June 30, 2011 to CLSS Holdings LLC (2) |
| 10.30 | | Note Extension Agreement for note dated September 30, 2010 with CLSS Holdings LLC dated October 1, 2011 (3) |
| 10.31 | | Employment Agreement by and between the Company and Dom Gatto dated December 1,, 2011 (4) |
| 10.32 | | Secured Convertible Promissory Note dated December 31, 2011 to CLSS Holdings LLC(5) |
| 10.33 | | Employment Agreement with Dom Gatto, dated November 24, 2011, effective date January 1, 2012 (5) |
| 10.34 | | Note Extension Agreement with CLSS Holdings LLC dated March 11, 2012 (5) |
| 10.35 | | Securities Purchase Agreement dated December 6, 2012 between Sanomedics International Holdings, Inc. and Asher Enterprises, Inc. (6) |
| 10.36 | | Convertible Promissory Note dated December 6, 2012 in the original principal amount of $37,500 payable to Asher Enterprises, Inc. (6) |
| 10.37 | | Consulting Agreement dated January 6, 2013 between Sanomedics International Holdings, Inc. and Langle Business Consulting Inc. (7) |
| 10.38 | | Lease for principal executive office * |
| 10.39 | | Stock Purchase Agreement dated April 26, 2013 by and among Sanomedics International Holdings, Inc., Anovent, Inc., Prime Time Medical, Inc. and Mark R. Miklos (incorporated by reference to the Current Report on Form 8-K as filed on May 3, 2013)(8) |
| 10.40 | | Promissory Note dated May 9, 2013 by and among CLSS Holdings, LLC and Sanomedics International Holdings, Inc.(8) |
| 10.41 | | $500,000 Promissory Note dated June 19, 2013 payable to JMJ Financial Duke (incorporated by reference to the Current Report on Form 8-K as filed on June 24, 2013).(9) |
| 10.42 | | Equity Purchase Agreement dated July 10, 2013 by and among Sanomedics International Holdings, Inc., Anovent, Inc., Duke Medical Equipment LLC and Vann R. Duke (incorporated by reference to the Current Report on Form 8-K as filed on July 16, 2013).(9) |
| 10.43 | | $703,339.33 principal amount Promissory Note dated June 17, 2013 payable to Keith Houlihan(9) |
| 10.44 | | [EXTENSION OF CLSS NOTES](9) |
| 10.45 | | [EXTENSION OF PRIME MEDICAL AGREEMENT](9) |
| 10.46 | | Securities Purchase Agreement dated August 27, 2013 between Sanomedics International Holdings, Inc and Asher Enterprises, Inc.(10) |
| 10.47 | | Convertible Promissory Note dated August 27, 2013 between Sanomedics International Holdings, Inc and Asher Enterprises, Inc.(10) |
| 10.48 | | Convertible Promissory Note dated September 18, 2013 between Sanomedics International Holdings, Inc. and Continental Equities, LLC |
| 10.49 | | Convertible Promissory Note dated September 20, 2013 between Sanomedics International Holdings, Inc. and LG Capital Funding, LLC |
| 10.50 | | Amendment to Stock Purchase Agreement dated August 30, 2013 by and among Sanomedics International Holdings, Inc., Anovent, Inc., Prime Time Medical, Inc. and Mark R. Miklos(11) |
| 10.51 | | Promissory Note dated August 30, 2013 in the principal amount of $850,000 to Mark R. Miklos due September 30, 2013.(11) |
| 10.52 | | Promissory Note dated August 30, 2013 in the principal amount of $500,000 to Mark R. Miklos due April 25, 2015.(11) |
| 10.53 | | Promissory Note dated August 30, 2013 in the principal amount of $500,000 to Mark R. Miklos due April 24, 2016(11) |
| 10.54 | | Security Agreement dated August 30, 2013 by and among Sanomedics International Holdings Inc., Anovent, Inc. and Mark R. Miklos(11) |
| 10.55 | | Employment Agreement dated August 30, 2013 by and among Sanomedics International Holdings, Inc., Anovent, Inc., Prime Time Medical, Inc. and Mark R. Miklos.(11) |
| 10.56 | | Convertible Promissory Note dated October 25, 2013 between Sanomedics International Holdings, Inc. and Auctus Private Equity Fund, LLC |
| 10.57 | | Convertible Promissory Note dated October 22, 2013 between Sanomedics International Holdings, Inc. and Continental Equities, LLC |
| 10.58 | | Convertible Promissory Note dated October 9, 2013 between Sanomedics International Holdings, Inc. and GEL Properties, LLC |
| 10.59 | | Convertible Promissory Note dated September 9, 2013 between Sanomedics International Holdings, Inc. and Zarian Midgley & Johnson PLLC |
| 14.1 | | Code of Business Conduct and Ethics * |
| 31.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
| 31.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
| 32.1 | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
| 32.2 | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
| 99.1 | | 510(k) assignment from Rycom Electron Technology Limited(2) |
| 99.2 | | 510(k) assignment from JXB Co., Ltd(2) |
| 101.INS | | XBRL INSTANCE DOCUMENT ** |
| 101.SCH | | XBRL TAXONOMY EXTENSION SCHEMA ** |
| 101.CAL | | XBRL TAXONOMY EXTENSION CALCULATION LINKBASE ** |
| 101.DEF | | XBRL TAXONOMY EXTENSION DEFINITION LINKBASE** |
| 101.LAB | | XBRL TAXONOMY EXTENSION LABEL LINKBASE ** |
| 101.PRE | | XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE ** |
* filed herewith.
** In accordance with Regulation S-T, the XBRL-formatted interactive data files that comprise Exhibit 101 in this Annual Report on Form 10-K shall be deemed “furnished” and not “filed”.
(1) Incorporated by reference to the registration statement on Form 10 filed on October 29, 2010, as amended.
(2) Incorporated by reference to the Quarterly Report on Form 10-Q for the period ended June 30, 2011.
(3) Incorporated by reference to the Quarterly Report on Form 10-Q for the period ended September 30, 2011.
(4) Incorporated by reference to the Current Report on Form 8-K as filed on December 2, 2011.
(5) Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2011.
(6) Incorporated by reference to the Current Report on Form 8-K as filed on December 11, 2012.
(7) Incorporated by reference to the Current Report on Form 8-K as filed on January 8, 2013.
(8) Incorporated by reference to the Quarterly Report on Form 10-Q for the period ended March 31, 2013.
(9) Incorporated by reference to the Quarterly Report on Form 10-Q for the period ended June 30, 2013.
(10) Incorporated by reference to the Current Report on Form 8-K as filed on September 3, 2013.
(11) Incorporated by reference to the Current Report on Form 8-K as filed on September 6, 2013
(12) Incorporated by reference to the Current Report on Form 8-K/A as filed on December 20, 2013
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | SANOMEDICS INTERNATIONAL HOLDINGS, INC. | |
| | | | |
| Date: April 15, 2014 | By: | /s/ Keith Houlihan | |
| | | Keith Houlihan | |
| | | President | |
| Date: April 15, 2014 | By: | /s/ David C. Langle | |
| | | David C. Langle | |
| | | Chief Financial Officer | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By: | /s/ Keith Houlihan | |
| | Keith Houlihan | |
| | President, Director and Principal Executive Officer | |
| | | |
| Date: April 15 , 2014 | |
| | | |
| | | |
| By: | /s/ David C. Langle | |
| | David C. Langle | |
| | Chief Financial Officer, Principal Financial and Accounting Officer | |
| | | |
| Date: April 15, 2014 | |
| | | |
| By: | /s/ William Lerner | |
| | William Lerner, Director | |
| | | |
| Date: April 15 , 2014 | |
| | | |
| By: | /s/ Gary J. O' Hara | |
| | Gary J. O' Hara, Chief Technology Officer | |
| | | |
| Date: April 15, 2014 | |
