ZYNEX MEDICAL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Nature of Business
Zynex Medical Holdings, Inc. ("Zynex" or the "Company") develops, manufactures, markets and sells its own design of FDA cleared (1) standard electrotherapy medical devices for pain relief / pain management, and (2) the NeuroMove ™ medical device for stroke and spinal cord injury ("SCI") rehabilitation.
2. Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles for interim financial information. In the opinion of management, these condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to fairly state the financial position of the Company as of September 30, 2006 and the results of its operations for the quarters and nine months ended September 30, 2006 and 2005, and its cash flows for the nine months ended September 30, 2006 and 2005.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Furthermore, these financial statements should be read in conjunction with Zynex Medical Holdings, Inc.'s audited financial statements at December 31, 2005 included in the Company's Form 10-KSB filed April 18, 2006.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities as well as disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made to conform previously reported data to the current presentation. These reclassifications have no effect on net income (loss), financial position or cash flows as previously reported. During the quarter ended March 31, 2006 the Company changed its classification of freight out costs from cost of sales and rentals to selling, general and administrative expenses as management considers these costs to be part of its marketing program and thus they believe it is preferable to classify these costs as a component of selling, general and administrative expenses. Freight costs included in selling, general and administrative expenses during the three months ended September 30, 2006 and 2005 are $11,152 and $4,042 respectively, and for the nine months ended September 30, 2006 and 2005 are $31,513 and $16,233 respectively.
ZYNEX MEDICAL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS 123R supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees" and amends SFAS No. 95, "Statement of Cash Flows". SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions and requires all share-based payments to employees, including grants of employee stock options, to be recognized as additional compensation expense in the financial statements based on the calculated fair value of the awards. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation costs to be reported as a financing cash flow. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. We adopted this statement effective for our fiscal year beginning January 1, 2006. We have described the impact of adopting SFAS 123R in our condensed consolidated financial statements below.
In July 2006, the FASB issued Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109". This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes". FIN 48 prescribes a recognition threshold and measurement principles for financial statement disclosure of tax positions taken or expected to be taken on a tax return. This interpretation is effective for
fiscal years beginning after December 15, 2006. The Company is currently assessing the impact the adoption of FIN 48 will have on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact the adoption of SFAS No. 157 will have on its consolidated financial statements.
In September 2006, the SEC issued SAB No. 108 in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. In SAB 108, the SEC staff established an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the company's financial statements and related financial statement disclosures. SAB 108 is effective for fiscal years ending after November 15, 2006. The Company is currently assessing the impact the adoption of SAB No. 108 will have on its consolidated financial statements.
ZYNEX MEDICAL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. Stock Based Compensation
The Company has a 2005 Stock Option Plan (the "Option Plan") and has reserved 3,000,000 shares of common stock for issuance under the Option Plan. Vesting provisions are determined by the Board of Directors. All stock options expire no later than ten (10) years from the date of grant.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), using the modified prospective method. SFAS 123R requires the recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements and is measured based on the grant date fair value of the award. SFAS 123R also requires the stock option compensation expense to be recognized over the period during which an employee is required to provide service in exchange for the award (the vesting period). Prior to our adopting SFAS 123R, we accounted for our stock-based compensation plans under Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25, generally no compensation expense is recorded when the terms of the award are fixed and the exercise price of the employee stock option equals or exceeds the fair value of the underlying stock on the date of grant. We adopted the disclosure-only provision of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
For the three months and nine months ended September 30, 2006, the Company recorded compensation expense related to stock options that decreased both net income from operations and net income by $4,727 and $14,426, respectively. The stock option compensation expense was included in selling, general and administrative expenses in the accompanying condensed consolidated statement of operations.
For the three months ended September 30, 2006 the Company granted 122,000 stock options to employees at an exercise price of $0.27 per share. The fair value of stock options at the date of grant during the three months ended September 30, 2006 and September 30, 2005 was $24,888 and $13,834 The Company used the following assumptions to determine the fair value of stock option grants during the three months ended September 30, 2006 and 2005:
ZYNEX MEDICAL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| | 2006 | 2005 |
| Expected life | 4 years | 4 years |
| Volatility | 111.6% | 122% |
| Risk-free interest rate | 4.71% | 4.95% |
| Dividend yield | 0 | 0 |
The expected life of stock options represents the period of time that the stock options granted are expected to be outstanding based on historical exercise trends. The expected volatility is based on the historical price volatility of our common stock. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life of the related stock options. The dividend yield represents our anticipated cash dividend over the expected life of the stock options.
A summary of stock option activity for the nine months ended September 30, 2006 is presented below: -
| | | Shares Under Option | | Weighted Average Exercise Price | | Weighed Average Remaining Contractual Life | | Aggregate Intrinsic Value |
| Outstanding at January 1, 2006 | | | | | | | | |
| | | | | | | | | |
| Stock option plan | | | 176,670 | | $ | 0.40 | | | | | | |
| Granted | | | 122,000 | | $ | 0.27 | | | | | | |
| Exercised | | | -- | | | -- | | | | | | |
| Forfeited | | | (36,000 | ) | $ | 0.40 | | | | | | |
| Outstanding at September 30, 2006 | | | 262,670 | | $ | 0.34 | | | 9.07 Years | | $ | 240 |
| | | | | | | | | | | | | |
| Exercisable at September 30, 2006 | | | 30,668 | | $ | 0.35 | | | 8.56 Years | | $ | 60 |
| | | | | | | | | | | | | |
ZYNEX MEDICAL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A summary of the status of the Company's non-vested shares as of and for the nine months ended September 30, 2006, is presented below.
| | | Nonvested Shares Under Option | | Weighted Average Grant Date Fair Value |
| Nonvested at January 1, 2006 | | | 176,670 | | $ | 0.26 |
| Granted | | | 122,000 | | $ | 0.20 |
| Vested | | | (30,668 | ) | $ | 0.23 |
| Forfeited | | | (36,000 | ) | $ | 0.36 |
| | | | | | | |
| Nonvested at September 30, 2006 | | | 232,002 | | $ | 0.23 |
| | | | | | | |
As of September 30, 2006, we had $26,544 of unrecognized compensation cost related to stock options that will be recognized over a weighted average period of approximately two years.
Prior to January 1, 2006, we accounted for stock-based compensation plans under APB 25. We adopted the disclosure-only provision of SFAS 123. Had compensation expense for stock option grants been determined based on the fair value at the grant dates consistent with the method prescribed by SFAS 123, our net income and net income per share would have been adjusted to the pro forma amounts for the three and nine months ended September 30, 2005, as indicated below:
ZYNEX MEDICAL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| | | Three Months Ended September 30, 2005 | | Nine Months Ended September 30, 2005 | |
| | | | | as Restated, Note 9 | |
| Net income as reported | | $ | 135,940 | | $ | 386,058 | |
| | | | | | | | |
Deduct: total stock-based employee compensation expense determined under fair value based method for all awards | | | 4,327 | | | 8,463 | |
| | | | | | | | |
| Pro forma net income | | $ | 131,613 | | $ | 377,595 | |
| | | | | | | | |
| Income per share: | | | | | | | |
| | | | | | | | |
| Basic - as reported | | $ | 0.01 | | $ | 0,02 | |
| | | | | | | | |
| Diluted - as reported | | $ | 0.01 | | $ | 0.02 | |
| | | | | | | | |
| Basic - pro forma | | $ | 0.01 | | $ | 0.01 | |
| | | | | | | | |
| Diluted - pro forma | | $ | 0.01 | | $ | 0.01 | |
5. Earnings Per Share
The Company computes net earnings (loss) per share in accordance with SFAS No. 128, "Earnings per Share", which establishes standards for computing and presenting net earnings (loss) per share. Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding and the number of dilutive potential common share equivalents during the period.
ZYNEX MEDICAL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The calculation of basic and diluted earnings (loss) per share for the three and nine months ended September 30, 2006 and 2005 is as follows:
| | Three Months Ended September 30, 2006 | | Three Months Ended September 30, 2005 as Restated, Note 9 | | Nine Months Ended September 30, 2006 | | Nine Months Ended September 30, 2005 as Restated, Note 9 | |
| Net income (loss) applicable to common stockholders | | $ | 22,892 | | $ | 135,940 | | $ | (92,751 | ) | $ | 386,058 | |
| Weighted average shares outstanding - basic | | | 24,095,566 | | | 23,141,330 | | | 23,531,017 | | | 23,095,520 | |
Net income (loss) per share - basic | | $ | 0.00 | | $ | 0.01 | | $ | 0.00 | | $ | 0.02 | |
| | | | | | | | | | | | | | |
| Diluted | | | | | | | | | | | | | |
| Net income (loss) applicable to common stockholders | | $ | 22,892 | | $ | 135,940 | | $ | (92,751 | ) | $ | 386,058 | |
| Weighted average shares outstanding - basic | | | 24,095,566 | | | 23,141.330 | | | 23531,017 | | | 23,095,520 | |
| Dilutive securities, treasury stock method | | | 204,824 | | | 242,545 | | | - | | | 115,310 | |
| Weighted average shares outstanding - diluted | | | 24,300,389 | | | 23,383,878 | | | 23,531,017 | | | 23,210,830 | |
| Net income (loss) per share - diluted | | $ | 0.00 | | $ | 0.01 | | $ | 0.00 | | $ | 0.02 | |
6. Loans from stockholder
Effective March 1, 2006, a previously non interest-bearing loan from Thomas Sandgaard, President and Chief Executive Officer, in the amount of $14,476 was converted to a 15 month, 8.25% term loan of $14,980, including accrued interest, with equal monthly payments of principal and interest commencing March 31, 2006. The loan is current as of September 30, 2006.
During the nine months ended September 30, 2006, Mr. Sandgaard loaned the Company $146,900, of which $50,000 was converted in March 2006 to a 24 month, 8.25% term loan of $50,454, including accrued interest, with equal monthly payments of principal and interest commencing March 31, 2006. The loan is current as of September 30, 2006. The balance of $96,900 is represented by 8.25% demand notes, of which $64,998 was repaid as of September 30, 2006. The remaining $31,902 plus $497 accrued interest will be repaid as the Company’s cash position and its bank covenants allow. At September 30, 2006, a total of $70,896 in loans from Mr. Sandgaard remained outstanding and were current.
ZYNEX MEDICAL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
At January 1, 2006 the Company owed Mr. Sandgaard $2,845 as an account payable for monies advanced by Mr. Sandgaard on the Company’s behalf for operating expenses incurred by the Company. During the nine months ended September 30, 2006. Mr. Sandgaard advanced an additional $40,238 for operating expenses incurred by the Company and was paid back $10,579, leaving a September 30, 2006 non-interest bearing accounts payable balance owing to Mr. Sandgaard of $32,504. Subsequent to September 30, 2006 the accounts payable balance was fully repaid.
7. Stockholders' Equity
For the quarter ended September 30, 2006, the Company issued 339,999 shares of common stock to investor relations consultants for services performed at a price of $0.30 per share. In addition, 156,250 shares of common stock were sold in a non public offering to accredited investors at $0.32 a share. The Company also issued warrants to purchase 125,000 shares to the investors in the non-public offering; these warrants have an exercise price of $0.39 per share and a term expiring June 30, 2011. Additionally, the Company issued 18,651 shares of common stock to the broker-dealer and an investment banker responsible for the non public offering.
Subsequent to the quarter ended September 30, 2006 through November 9, 2006, the Company issued 23,333 shares of common stock to investor relations consultants for services performed at a price of $0.30 per share. In addition, 668,750 shares of common stock were sold in a non public offering to accredited investors at $0.32 a share. The Company also issued warrants to purchase 535,000 shares to the investors in the non-public offering; these warrants have an exercise price of $0.39 per share and a term expiring June 11, 2011. Additionally, the Company issued 78,244 shares of common stock to the broker-dealer and an investment banker responsible for the non public offering. At the date of this report, in the same non public offering we also have proposed sales of 957,375 shares of common stock and warrants to purchase 767,500 common shares to potential investors.
ZYNEX MEDICAL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
At December 31, 2005, the Company had outstanding warrants and non-employee options to purchase 3,245,121 shares of common stock at a weighted average exercise price of $2.04. During the nine months ended September 30, 2006, the Company issued warrants and non-employee options to purchase 437,500 shares of common stock with a weighted average exercise price of $0.39. At September 30, 2006, the Company had outstanding warrants and non-employee options to purchase 3,682,621 shares of common stock at a weighted average exercise price of $1.85.
Additionally, at September 30, 2006, the Company had outstanding 350,000 options to an employee granted in 2005, which were not issued pursuant to the Option Plan. The options have an exercise price of $0.22; have a remaining term at September 30, 2006 of 8 ½ years and have an intrinsic value of $28,000.
8. Subsequent Events - Notes
On October 18, 2006, the Company entered into a loan transaction with Ascendiant Capital Group, LLC (an affiliate of Ascendiant Securities, LLC) and issued to Ascendiant Capital (a) a secured Note in the total principal amount of $275,000 (the "Note") and (b) a five-year warrant to purchase a total of 429,867 shares of our common stock at a fixed exercise price of $0.39 per share. The Note is convertible into common stock at a fixed conversion price of $0.32 per share. Net proceeds of approximately $206,000 from the transaction have been or will be used for general working capital.
The principal and interest on the Note are due in one lump sum on April 18, 2007. However, we may extend the maturity date so that the outstanding principal balance and accrued and unpaid interest become due and payable in six equal monthly installments beginning on the original maturity date and ending on October 18, 2007. Interest on amounts outstanding under the Note are at the rate of 15% per annum through January 17, 2007, 18% per annum from January 18, 2007 to the original maturity date, and, if the maturity date is extended, 21% from the original maturity date to the extended maturity date. Events of default include, among other things, a failure to make payment of principal or interest due under the note and the occurrence of any event of default under an obligation for borrowed money in excess of $50,000. The note is secured by a second priority security interest in all of our assets. We issued the Note with an original issue discount of 5%, and we made a non-refundable prepayment of interest through April 18, 2007. In accordance with the Note, we paid to Ascendiant Capital $10,000 as a reimbursement of expenses in connection with the transaction and a fee of 65,000 shares of common stock. We also paid Ascendiant Securities a placement fee of $22,000 in cash and issued to Ascendiant Securities a five-year warrant for 103,139 shares of common stock at an exercise price of $0.39 per share.
ZYNEX MEDICAL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
We may prepay the convertible note in whole or part at any time provided all accrued but unpaid interest is included in any prepayment. We must redeem the Note within two business days after (1) closing an equity or debt financing or series of such financings resulting in an aggregate gross cash proceeds of $1,000,000 or more within 12 months of the date of the Note or (2) the “Sale of Maker.”
Both the Note and warrant contain anti-dilution provisions. These provisions are not triggered by a decline in the stock price and include, with certain exclusions: in the case of the Note, the issuance of common stock, securities convertible into common stock or rights to acquire common stock at a price below $0.32 per share; and in the case of the warrant, the issuance of options or other rights to acquire common stock at below $0.39 per share. We have provided to Ascendiant Capital piggyback registration rights for the common stock underlying the Note and warrants and for the shares issued as the placement fee.
Ascendiant Capital, Silicon Valley Bank and we have entered into a subordination agreement dated October 17, 2006 in which the security interest and payment rights of the Note are made subordinate to our indebtedness to Silicon Valley Bank. The holder of the Note is not to demand payment or exercise any remedy relating to the Note until our indebtedness to Silicon Valley Bank is fully paid, except that we may pay Ascendiant Capital regularly scheduled payments of interest or principal pursuant to the terms of the Note so long as there is not an event of default under our loan and security agreement with the Bank.
We have also agreed to modify an engagement agreement which we have with Ascendiant Securities for private offerings so that Ascendiant Securities will serve as a Zynex financial advisor to any and all financing transactions that involve investors other than those introduced by Ascendiant Securities, except for certain parties exempt from the provision, during the 12-month period following the closing date. For these services, Ascendiant Securities will earn a fee equal to 3% of gross proceeds associated with the transactions.
ZYNEX MEDICAL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
9. Prior Period Adjustments
On November 13, 2006, the Board of Directors of the Company concluded that (1) the Company’s financial statements for the year ended December 31, 2005, included in its annual report on Form 10-KSB for the fiscal year ended December 31, 2005 and (2) the Company’s financial statements for the quarters ended September 30, 2005, March 31, 2006 and June 30, 2006, included in its quarterly reports on Form 10-QSB for these quarters, should be revised to reflect adjustments to the Company’s inventory as of such dates. The adjustments result from a detailed inventory analysis made in connection with the financial statements of the Company for the quarter ended September 30, 2006.
The Company discovered errors in its accounting for inventory that understated both the value and quantity of its finished goods and the value of its rental products. Accordingly, accumulated deficit at the beginning of 2006 has been adjusted to correct the error. The error had no effect on net income (loss) for the three months and nine months ended September 30, 2006 because the adjustments are reflected in the financial statements for such three and nine month periods. An adjustment was recorded to decrease accumulated deficit and increase inventory at January 1, 2006 by $193,108. Additionally, an adjustment was recorded to decrease cost of sales and rentals by $6,530 and $125,152 for the three and nine months ended September 30, 2005, respectively.
The Company previously reported net income of $129,410, or $0.01 per share and $260,906, or $0.01 per share for the three and nine months ended September 30, 2005 respectively. The restatements resulted in the Company reporting net income of $135,940, or $0.01 per share and net income of $386,058, or $0.02, per share for the three months and nine months ended September 30, 2006, respectively.
The Company will prepare revised financial statements for the year ended December 31, 2005, and for the quarters ended March 31, 2006 and June 30, 2006.
Interest and other income (expense). Interest and other income (expense) was ($11,195) for the quarter ended September 30, 2006, an increase of $7,579 compared to ($3,616) for the same period last year, and ($42,248) for the nine months ended September 30, 2006, an increase of $ 29,533 compared to ($12,715) for the same period last year. The increases resulted primarily from the Company's September 2005 and March 2006 increases in commercial bank debt as well as loans from its majority stockholder, which is described in Note 6 to the unaudited consolidated financial statements in this Report.
Liquidity and Capital Resources. We have limited liquidity. During the third quarter of 2006, we sold in a non-public offering through a broker dealer 156,250 shares of common stock at $0.32 per share resulting in net proceeds to us of $43,425. Subsequent to September 30 we sold another 688,750 shares in the same offering resulting in net proceeds to us of $185,869 We issued warrants in conjunction with the sale of these shares of common stock. We have additional proposed sales in the non-public offering and have not determined when to end the non-public offering. See Note 7 of Notes to the unaudited consolidated financial statements in this Report.
In October, we issued notes to meet cash needs. See Note 8 of Notes to the unaudited consolidated financial statements in this Report. These notes are intended as a temporary financing.
We expect that our cash requirements will increase as our operations expand and to fully implement our business plan. For this reason we may raise additional debt or equity financing in 2007. To achieve this objective from time to time we are in discussions with investment bankers and potential investors that may provide short and long term funding. There can be no assurance that we will be able to raise such additional financing or do so on terms that are acceptable to the Company.
Our limited liquidity is primarily a result of (a) the required high levels of consignment inventory that are standard in the electrotherapy industry, (b) the payment of commissions to salespersons based on sales or rentals prior to reimbursement for such transaction, (c) the high level of outstanding accounts receivable because of the deferred payment practices of third party health payers, and (d) the delayed cost recovery inherent in rental transactions.
Contingencies such as unanticipated shortfalls in revenues or increases in expenses could affect our projected revenue, cash resulting from operations and liquidity.
Cash used in operating activities was $206,397 for the nine months ended September 30, 2006 compared to $76,299 cash provided by operating activities for the nine months ended September 30, 2005. The primary reasons for the decrease in cash flow was the net loss in 2006 compared to 2005, an increase in prepaid expenses, an increase in accounts receivable due to the increase in gross revenue and a slower increase in accounts payable in 2006 than in 2005 made possible by the sale of common stock in the referenced non-public offering, proceeds from a bank note payable and net proceeds from loans from our major stockholder.
Cash used in investing activities for the nine months ended September 30, 2006 was $102,522 compared to cash used in investing activities of $70,362 for the same period in 2005. Cash used in investing activities primarily represents the purchase and in-house production of rental products.
Cash provided by financing activities was $296,530 for the nine months ended September 30, 2006 compared with cash used in financing activities of $9,015 for the nine months ended September 30, 2005. During the nine months ended September 30, 2006 the Company received $151,988 from the sale of common stock in a non-public offering, $240,000 in bank financing, and $55,916 in net loans from Thomas Sandgaard. During the same period the Company repaid $151,374 in notes payable and capital leases.
Our primary sources of capital for the nine months ended September 30, 2006 and through the date of this Report have been collections from our sale and rental activities, net borrowings from Silicon Valley Bank and Thomas Sandgaard, the notes sold in October, 2006 and the non-public offerings described above. For information regarding the borrowings from Silicon Valley Bank and Mr. Sandgaard, see Note 6 and Note 8 to our unaudited consolidated financial statements in this Report and Item 6 in our Form 10-KSB for the year ended December 31, 2005
Recently issued accounting pronouncements:
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS 123R supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees" and amends SFAS No. 95, "Statement of Cash Flows". SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions and requires all share-based payments to employees, including grants of employee stock options, to be recognized as additional compensation expense in the financial statements based on the calculated fair value of the awards. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation costs to be reported as a financing cash flow. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. We adopted this statement effective for our fiscal year beginning January 1, 2006. We have described the impact of adopting SFAS 123R in our condensed consolidated financial statements in Note 4, Stock Based Compensation.
In July 2006, the FASB issued Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109". This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes". FIN 48 prescribes a recognition threshold and measurement principles for financial statement disclosure of tax positions taken or expected to be taken on a tax return. This interpretation is effective for
fiscal years beginning after December 15, 2006. The Company is currently assessing the impact the adoption of FIN 48 will have on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact the adoption of SFAS No. 157 will have on its consolidated financial statements.
In September 2006, the SEC issued SAB No. 108 in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. In SAB 108, the SEC staff established an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the company's financial statements and related financial statement disclosures. SAB 108 is effective for fiscal years ending after November 15, 2006. The Company is currently assessing the impact the adoption of SAB No. 108 will have on its consolidated financial statements.
