NON INVASIVE MONITORING SYSTEMS INC /FL/ - Quarter Report: 2010 April (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-Q
(Mark One)
| þ | Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
for the Quarterly Period ended April 30, 2010
or
| o | Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
for the Transition Period from to
Commission File Number 000-13176
NON-INVASIVE MONITORING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
| Florida | 59-2007840 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. employer identification no.) |
4400 Biscayne Blvd., Suite 180, Miami, Florida 33137
(Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code: (305) 575-4200
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ 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 during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes o No o
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 þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
68,738,165 shares of the Company’s common stock, par value $0.01 per share, were outstanding
as of June 10, 2010.
NON-INVASIVE MONITORING SYSTEMS, INC.
TABLE OF CONTENTS FOR FORM 10-Q
PART I. FINANCIAL INFORMATION |
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ITEM 1. FINANCIAL STATEMENTS |
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NON-INVASIVE MONITORING SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| April 30, 2010 | July 31, 2009 | |||||||
| (Unaudited) | ||||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash |
$ | 149 | $ | 886 | ||||
Royalties and other receivables, net |
228 | 60 | ||||||
Inventories, net |
852 | 911 | ||||||
Advances to contract manufacturer |
90 | 144 | ||||||
Prepaid expenses, deposits, and other current assets |
73 | 75 | ||||||
Total current assets |
1,392 | 2,076 | ||||||
Tooling and equipment, net |
371 | 460 | ||||||
Total assets |
$ | 1,763 | $ | 2,536 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Current liabilities |
||||||||
Notes payable — related party |
$ | 300 | $ | — | ||||
Notes payable — other |
54 | 34 | ||||||
Accounts payable and accrued expenses |
268 | 242 | ||||||
Customer deposits |
— | 9 | ||||||
Total current liabilities |
622 | 285 | ||||||
Total liabilities |
$ | 622 | $ | 285 | ||||
Commitments (Note 10) |
— | — | ||||||
Shareholders’ equity |
||||||||
Series B Preferred Stock, par value $1.00 per share; 100 shares authorized, issued and outstanding; liquidation preference $10 |
— | — | ||||||
Series C Convertible Preferred Stock, par value $1.00 per share; 62,048 shares authorized, issued and outstanding; liquidation preference $62 |
62 | 62 | ||||||
Series D Convertible Preferred Stock, par value $1.00 per share; 5,500 shares authorized; 2,828 and 2,891 shares issued and outstanding, respectively; liquidation preference $4,242 |
3 | 3 | ||||||
Common Stock, par value $0.01 per share; 100,000,000 shares authorized; 68,738,165 and 68,385,637 shares issued and outstanding, respectively |
687 | 684 | ||||||
Additional paid-in-capital |
21,396 | 21,327 | ||||||
Accumulated deficit |
(20,964 | ) | (19,803 | ) | ||||
Accumulated other comprehensive loss |
(43 | ) | (22 | ) | ||||
Total shareholders’ equity |
1,141 | 2,251 | ||||||
Total liabilities and shareholders’ equity |
$ | 1,763 | $ | 2,536 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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NON-INVASIVE MONITORING SYSTEMS, INC.
CONDENSED CONSOLIDATED COMPREHENSIVE STATEMENTS OF OPERATIONS
— Unaudited
(In thousands, except per share amounts)
| Three months ended April 30, | Nine months ended April 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues |
||||||||||||||||
Product sales, net |
$ | 86 | $ | 149 | $ | 394 | $ | 271 | ||||||||
Royalties |
33 | 20 | 120 | 177 | ||||||||||||
Research, consulting and warranty |
— | — | — | 2 | ||||||||||||
Total revenues |
119 | 169 | 514 | 450 | ||||||||||||
Operating costs and expenses |
||||||||||||||||
Cost of sales |
23 | 57 | 173 | 118 | ||||||||||||
Selling, general and administrative |
484 | 494 | 1,473 | 1,438 | ||||||||||||
Research and development |
31 | 77 | 86 | 168 | ||||||||||||
Total operating costs and expenses |
538 | 628 | 1,732 | 1,724 | ||||||||||||
Operating loss |
(419 | ) | (459 | ) | (1,218 | ) | (1,274 | ) | ||||||||
Interest expense, net |
(3 | ) | — | (2 | ) | (8 | ) | |||||||||
Other income (expense), net |
58 | (9 | ) | 59 | (9 | ) | ||||||||||
Net loss |
$ | (364 | ) | $ | (468 | ) | $ | (1,161 | ) | $ | (1,291 | ) | ||||
Other comprehensive (loss) income
Currency translation adjustment |
(21 | ) | 6 | (21 | ) | 6 | ||||||||||
Comprehensive net loss |
$ | (385 | ) | $ | (462 | ) | $ | (1,182 | ) | $ | (1,285 | ) | ||||
Loss per common share: |
||||||||||||||||
Net loss |
$ | (364 | ) | $ | (468 | ) | $ | (1,161 | ) | $ | (1,291 | ) | ||||
Deemed dividend on Series D Preferred Stock |
— | — | — | 1,078 | ||||||||||||
Net loss attributable to common shareholders |
$ | (364 | ) | $ | (468 | ) | $ | (1,161 | ) | $ | (2,369 | ) | ||||
Weighted average number of common
shares outstanding — Basic and diluted |
68,473 | 68,061 | 68,416 | 68,047 | ||||||||||||
Basic and diluted loss per common share |
$ | (0.01 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.03 | ) | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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NON-INVASIVE MONITORING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
— Unaudited
For the nine months ended April 30, 2010
(Dollars in Thousands)
| Accumu- | ||||||||||||||||||||||||||||||||||||||||||||||||
| lated Other | ||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Additional | Accum- | Compre- | |||||||||||||||||||||||||||||||||||||||||||||
| Series B | Series C | Series D | Common Stock | Paid-in- | ulated | hensive | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Total | |||||||||||||||||||||||||||||||||||||
Balance at July 31, 2009 |
100 | $ | — | 62,048 | $ | 62 | 2,891 | $ | 3 | 68,385,637 | $ | 684 | $ | 21,327 | $ | (19,803 | ) | $ | (22 | ) | $ | 2,251 | ||||||||||||||||||||||||||
Common stock issued for cash on exercise of options and warrants |
— | — | — | — | — | — | 13,333 | — | 1 | — | — | 1 | ||||||||||||||||||||||||||||||||||||
Cashless Exercise of 39,999 options |
— | — | — | — | — | — | 24,195 | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Conversion of Series D Preferred Stock into Common Stock |
— | — | — | — | (63 | ) | — | 315,000 | 3 | (3 | ) | — | — | — | ||||||||||||||||||||||||||||||||||
Stock-based compensation |
— | — | — | — | — | — | — | — | 71 | — | — | 71 | ||||||||||||||||||||||||||||||||||||
Currency translation adjustment |
— | — | — | — | — | — | — | — | — | — | (21 | ) | (21 | ) | ||||||||||||||||||||||||||||||||||
Net loss |
— | — | — | — | — | — | — | — | — | (1,161 | ) | — | (1,161 | ) | ||||||||||||||||||||||||||||||||||
Balance at April 30, 2010 |
100 | $ | — | 62,048 | $ | 62 | 2,828 | $ | 3 | 68,738,165 | $ | 687 | $ | 21,396 | $ | (20,964 | ) | $ | (43 | ) | $ | 1,141 | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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NON-INVASIVE MONITORING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
— Unaudited
(Dollars in thousands)
Nine months ended April 30, 2010 and 2009
| 2010 | 2009 | |||||||
Operating activities |
||||||||
Net loss |
$ | (1,161 | ) | $ | (1,291 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities |
||||||||
Deferred warranty income |
— | (2 | ) | |||||
Depreciation and amortization |
93 | 74 | ||||||
Stock-based compensation expense |
71 | 146 | ||||||
Loss on disposal of assets |
3 | 9 | ||||||
Foreign currency transaction gain |
(62 | ) | — | |||||
Changes in operating assets and liabilities |
||||||||
Accounts and royalties receivable, net |
(166 | ) | (32 | ) | ||||
Inventories, net |
106 | (579 | ) | |||||
Advances to contract manufacturer |
54 | 357 | ||||||
Prepaid expenses, deposits and other current assets |
3 | (66 | ) | |||||
Accounts payable and accrued expenses |
13 | (24 | ) | |||||
Customer deposits |
(9 | ) | 9 | |||||
Net cash used in operating activities |
(1,055 | ) | (1,399 | ) | ||||
Investing activities |
||||||||
Fixed asset purchases |
— | (227 | ) | |||||
Net cash used in investing activities |
— | (227 | ) | |||||
Financing activities |
||||||||
Net proceeds from issuance of common stock and exercise of options |
1 | 2 | ||||||
Net proceeds from issuance of Series D Preferred Stock |
— | 2,837 | ||||||
Proceeds from issuance of notes payable |
370 | 363 | ||||||
Repayments of notes payable |
(50 | ) | (326 | ) | ||||
Net cash provided by financing activities |
321 | 2,876 | ||||||
Effect of exchange rate changes on cash |
(3 | ) | 1 | |||||
Net (decrease) increase in cash |
(737 | ) | 1,251 | |||||
Cash, beginning of period |
886 | 86 | ||||||
Cash, end of period |
$ | 149 | $ | 1,337 | ||||
Supplemental disclosure |
||||||||
Cash paid for interest |
$ | — | $ | 8 | ||||
Supplemental schedule of non-cash activities |
||||||||
Reversal of accrual for tooling development in progress |
$ | — | $ | 142 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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NON-INVASIVE MONITORING SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
April 30, 2010
The condensed consolidated balance sheet as of July 31, 2009, which has been derived from
audited financial statements, and the unaudited condensed interim financial statements included
herein have been prepared by Non-Invasive Monitoring Systems, Inc. (together with its
consolidated subsidiaries, the “Company” or “NIMS”) in accordance with accounting principles
generally accepted in the United States (“GAAP”) for interim financial information and the
instructions to the quarterly report on Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by GAAP for complete financial
statements. These statements reflect adjustments, all of which are of a normal, recurring
nature, and which are, in the opinion of management, necessary to present fairly the Company’s
financial position as of April 30, 2010, and results of operations and cash flows for the
interim periods ended April 30, 2010 and 2009. The results of operations for the three and nine
months ended April 30, 2010 are not necessarily indicative of the results for a full year.
Certain information and footnote disclosure normally included in financial statements prepared
in accordance with GAAP have been condensed or omitted. The Company’s accounting policies
continue unchanged from July 31, 2009. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company’s annual report on Form
10-K for the year ended July 31, 2009.
1. ORGANIZATION AND BUSINESS
Organization. Non-Invasive Monitoring Systems, Inc., a Florida corporation (together with
its consolidated subsidiaries, the “Company” or “NIMS”), began business as a medical diagnostic
monitoring company to develop computer-aided continuous monitoring devices to detect abnormal
respiratory and cardiac events using sensors on the body’s surface. It has ceased to operate in
this market and has licensed the rights to its technology to the SensorMedics division of ViaSys
Healthcare Inc. (which is now a unit of Cardinal Health, Inc. (“SensorMedics”), and to
VivoMetrics, Inc. (“VivoMetrics”). The Company is now focused on developing and marketing its
Exer-Rest® line of acceleration therapeutic platforms based upon unique, patented
whole body periodic acceleration (“WBPA”) technology. The Exer-Rest® line of
acceleration therapeutic platforms currently includes the Exer-Rest® AT, SL and TL
models.
NIMS received US Food and Drug Administration (“FDA”) clearance in January 2009 to market the
full Exer-Rest® line of products as Class I (Exempt) Medical Devices as described in
the Company’s 510(k) premarket notification submission. The submission included 23
investigational and clinical studies on the vasodilatation properties of WBPA, as well as a
controlled, four week clinical trial in a group of patients with chronic aches and pains carried
out at the Center of Clinical Epidemiology and Biostatistics at the University of Pennsylvania
Medical School. The submission supported Exer-Rest® safety and efficacy for the
cleared intended uses as an aid to temporarily increase local circulation, to provide temporary
relief of minor aches and pains, and local muscle relaxation. The clearance was based upon the
FDA’s determination that the Exer-Rest® line of devices was exempt from the premarket
notification requirements of the Federal, Food Drug and Cosmetic Act. In June 2009, the FDA
authorized the expansion of intended use claims for the Exer-Rest® to include a claim
of reducing morning stiffness. These authorizations to market the Exer-Rest® in the
United States complement NIMS’ existing international clearance to market the
Exer-Rest® as a class IIa medical device (CE120) in Canada, the United Kingdom, the
European Economic Area, India, the Middle East and certain other markets that recognize FDA
and/or CE certifications with the intended use described above plus the claim of improving joint
mobility.
Business. The Company receives revenue from royalties on sales of diagnostic monitoring
hardware and software by SensorMedics. Additionally, the Company receives revenues from
sales of parts and service and from sales of acceleration therapeutics platforms used for
research purposes. In fiscal year 2009, NIMS began commercial sales of its third generation
Exer-Rest® therapeutic platforms.
During the calendar years 2005 to 2007, the Company designed, developed and manufactured the
first Exer-Rest® platform (now the Exer-Rest® AT), a second generation
acceleration therapeutics platform, and updated its operations to promote the Exer-Rest®
AT overseas as an aid to improve circulation and joint mobility, and to relieve minor
aches and pains.
The Company has developed a third generation of Exer-Rest® acceleration therapeutic
platforms (designated the Exer-Rest® SL and the Exer-Rest® TL) that are
being manufactured by Sing Lin Technologies Co. Ltd. (“Sing Lin”) based in Taichung, Taiwan (see
Note 10).
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NON-INVASIVE MONITORING SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
April 30, 2010
NIMS, an ISO 13485 certified company, began marketing operations in the United States
in 2009 upon receiving the FDA clearance described above. The Company is also permitted to sell
Exer-Rest® in Canada, the United Kingdom, the European Economic Area, India, the
Middle East and certain other markets that recognize FDA and/or CE certifications, and began
international marketing operations during 2008.
Sing Lin has distribution rights to the Company’s acceleration therapeutics platforms in certain
Far East markets. The Company has also engaged Sing Lin to build the Somno-Ease™
platform, a variation of the Exer-Rest® that is designed to aid patients with sleep
disorders as well as provide feedback for slow rhythmic breathing exercises for the relief of
stress associated with daily living. The Company is also developing a further product line
extension called Exer-Rest® Plus, a device that combines the features of the
Exer-Rest® and Somno-Ease™ for future marketing in the United States and
other markets.
The Company’s financial statements have been prepared and presented on a basis assuming it will
continue as a going concern. As reflected in the accompanying financial statements, the Company
had net losses in the amount of $1.2 million and $1.3 million for the nine month periods ended
April 30, 2010 and 2009, respectively, and has experienced cash outflows from operating
activities. As of April 30, 2010, the Company has an accumulated deficit of $21.0 million,
outstanding notes payable of $354,000 and has substantial purchase commitments (see Notes 6 and
10). As of April 30, 2010, the Company had cash of approximately $149,000 and working capital
of approximately $770,000. These matters raise substantial doubt about the Company’s ability to
continue as a going concern.
Although the Company has commenced sales of the Exer-Rest® in the United States, has
raised approximately $2.8 million from the sales of its Series D Preferred Stock in December
2008 and January 2009 (see Note 7), and has access to a $1.0 million credit facility with two of
its significant shareholders, the Company will need to generate additional funds during the next
12 months to continue operations. Absent significant increases in product sales, additional
debt or equity financing will be required for the Company to continue its business activities
beyond December 31, 2010. It is management’s intention to obtain additional capital as needed
to continue its business activities through new debt or equity financing, but there can be no
assurance that it will be successful in this regard. The accompanying condensed consolidated
financial statements do not include any adjustments that might be necessary from the outcome of
this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation. The unaudited condensed consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries, Non-Invasive Monitoring Systems
of Florida, Inc., which has no current operations, and NIMS of Canada, Inc., a Canadian
corporation. All inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting period. Such
items include input variables relating to valuation of stock-based compensation and other
financial instruments. Actual results could differ from these estimates.
Cash and Cash Equivalents. The Company considers all highly liquid short-term investments
purchased with an original maturity date of three months or less to be cash equivalents. The
Company includes overnight repurchase agreements securing its depository bank accounts (sweep
accounts) in its cash balances. At April 30, 2010 and July 31, 2009, the Company had
approximately $108,000 and $821,000, respectively, on deposit in such sweep accounts.
Allowances for Doubtful Accounts. The Company provides an allowance for royalties and other
receivables it believes it may not collect in full. Receivables are written off when they are
deemed to be uncollectible and all collection attempts have ceased. The amount of bad debt
recorded each period and the resulting adequacy of the allowance for doubtful accounts at the
end of each period are determined using a combination of the Company’s historical loss
experience, customer-by-customer analysis of the Company’s accounts receivable each period and
subjective assessments of the Company’s future bad debt exposure.
Inventories. Inventories are stated at lower of cost or market using the first-in, first-out
method, and are evaluated at least annually for impairment. Inventories at April 30, 2010 and
July 31, 2009 primarily consist of finished Exer-Rest® units and purchased
sub-assemblies to be used by the Company’s US-based contract manufacturer in production of the
Exer-Rest® AT. Provisions for potentially obsolete or slow-moving inventory are made
based on management’s analysis of inventory levels, historical obsolescence and future sales
forecasts.
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NON-INVASIVE MONITORING SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
April 30, 2010
Tooling and Equipment. These assets are stated at cost and depreciated or amortized using
the straight-line method, over their estimated useful lives.
Long-lived Assets. The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be recoverable. In
performing the review for recoverability, the Company estimates the future undiscounted cash
flows expected to result from the use of the asset and its eventual disposition. If the sum of
the expected future cash flows is less than the carrying amount of the assets, an impairment
loss is recognized as the difference between the fair value and the carrying amount of the
asset.
Income Taxes. The Company provides for income taxes using an asset and liability based
approach. Deferred income tax assets and liabilities are recorded to reflect the tax
consequences in future years of temporary differences between the carrying amounts of assets and
liabilities for financial statement and income tax purposes. The Company recognizes income tax
benefits for loss carryforwards, however these tax benefits are reduced by a valuation allowance
if it is more likely than not that loss carryforwards will expire before the Company is able to
realize their benefit, or if future deductibility is uncertain. For financial statement
purposes, the deferred tax asset for loss carryforwards has been fully offset by a valuation
allowance since it is uncertain whether any future benefit will be realized.
As of July 31, 2009, the Company had net Federal and State operating loss carry forwards of
approximately $10.7 million and Foreign operating loss carry forwards of $0.2 million available
to offset future taxable income. The net operating loss carryforwards expire in various years
through 2029 and may be subject to limitation due to change of ownership provisions under
Section 382 of the Internal Revenue Code and similar state provisions.
The Company files its tax returns as prescribed by the laws of the jurisdictions in which it
operates. Tax years ranging from 2005 to 2009 remain open to examination by various taxing
jurisdictions as the statute of limitations has not expired. It is the Company’s policy to
include income tax interest and penalties expense in its tax provision.
Revenue Recognition. Revenue from product sales is recognized when persuasive evidence of an
arrangement exists, the goods are shipped and title has transferred, the price is fixed or
determinable, and the collection of the sales proceeds is reasonably assured. The Company
recognizes royalties as they are earned, based on reports from licensees. Research and
consulting revenue and revenue from sales of extended warranties on therapeutic platforms are
recognized over the term of the respective agreements.
Advertising Costs. The Company expenses all costs of advertising as incurred. Advertising and
promotional costs are included in selling, general and administrative costs and expenses for all
periods presented, and totaled $7,000 and $61,000, respectively, for the three and nine months
ended April 30, 2010. Advertising and promotional costs and expenses totaled $5,000 and
$10,000, respectively, for the three and nine months ended April 30, 2009.
Research and Development Costs. Research and development costs are expensed as incurred, and
primarily consist of payments to third parties for research and development of the
Exer-Rest® device and regulatory testing and other costs to obtain FDA approval.
Warranties. The Company’s warranties are two years on all Exer-Rest® products sold
domestically and one year for products sold outside of the U.S. and are accrued based on
management’s estimates and the history of warranty costs incurred. There were no material
warranty costs incurred during the nine months ended April 30, 2010 and 2009, and management
estimates that the Company’s accrued warranty expense at January 31, 2010 will be sufficient to
offset claims made for units under warranty.
Stock-based compensation. The Company recognizes all share-based payments, including grants of
stock options, as an operating expense, based on their grant date fair values. Stock-based
compensation expense is recognized over the vesting life of the underlying option and is
included in selling, general and administrative costs and expenses in the comprehensive
statements of operations for all periods presented.
Fair Value of Financial Instruments. Fair value estimates discussed herein are based upon
certain market assumptions and pertinent information available to management as of April 30,
2010 and July 31, 2009. The respective carrying value of certain on-balance-sheet financial
instruments such as cash, royalties and other receivables, accounts payable, accrued expenses
and notes payable approximate fair values because they are short term in nature or they bear
current market interest rates.
Foreign Currency Translation. The functional currency for the Company’s foreign subsidiary is
the local currency. Assets and liabilities are translated at exchange rates in effect at the
balance sheet date while income and expense amounts are translated at average exchange rates
during the period. The resulting foreign currency translation adjustments are disclosed as a
separate component of stockholders’ equity and other comprehensive loss in the unaudited
condensed consolidated financial statements.
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NON-INVASIVE MONITORING SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
April 30, 2010
Comprehensive Income (Loss). Comprehensive income (loss) is defined as the change in
equity of a business enterprise during a period from transactions and other events and
circumstances from non-owner sources, including foreign currency translations.
3. INVENTORIES
The Company’s inventory consisted of the following at April 30, 2010 and July 31, 2009 (in
thousands):
| April 30, 2010 | July 31, 2009 | |||||||
Work-in-progress, including sub-assemblies and spare parts |
$ | 11 | $ | 11 | ||||
Finished goods |
841 | 900 | ||||||
Total inventories |
$ | 852 | $ | 911 | ||||
The inventory balances above are net of a $55,000 valuation adjustment to work-in-progress
and a $58,000 valuation adjustment to finished goods.
4. STOCK-BASED COMPENSATION
The Company measures the cost of employee, officer and director services received in
exchange for an award of equity instruments based on the grant-date fair value of the award.
The fair value of the Company’s stock option awards is expensed over the vesting life of the
underlying stock options using the graded vesting method, with each tranche of vesting options
valued separately. The Company recorded stock-based compensation of $18,000 and $71,000,
respectively, for the three and nine months ended April 30, 2010, and $41,000 and $146,000
respectively, for the three and nine months ended April 30, 2009. All stock-based compensation
is included in the Company’s selling, general and administrative costs and expenses.
The Company’s 2000 Stock Option Plan (the “2000 Plan”), as amended, provides for a total of
2,000,000 shares of Common Stock. The 2000 Plan allows the issuance of incentive stock options,
stock appreciation rights and restricted stock awards. The exercise price of the options is
determined by the compensation committee of the Company’s Board of Directors, but incentive
stock options must be granted at an exercise price not less than the fair market value of the
Company’s Common Stock as of the grant date or an exercise price of not less than 110% of the
fair value for a 10% shareholder. Options expire up to ten years from the date of the grant and
are exercisable according to the terms of the individual option agreements.
The Company granted 355,000 stock options during the nine months ended April 30, 2010 and
granted 340,000 stock options during the nine months ended April 30, 2009. The weighted average
grant date fair value of the options granted during the nine months ended April 30, 2010 and
2009 was $0.34 and $0.25 per share, respectively. The fair values of options granted are
estimated as of the date of their grant using the Black-Scholes option pricing model based on
the assumptions included in the table below. The expected term of stock option awards granted
is generally based upon the “simplified” method for “plain vanilla” options discussed in SAB No.
107, as amended by SEC Staff Accounting Bulletin No. 110. The expected volatility is derived
from historical volatility of the Company’s stock on the U.S. over-the-counter bulletin board
for a period that matches the expected term of the option. The risk-free interest rate is the
yield from a Treasury bond or note corresponding to the expected term of the option. The
Company has not paid cash dividends and does not expect to pay cash dividends in the future.
Forfeiture rates are based on management’s estimates. The fair value of each option granted
during the nine months ended April 30, 2010 and 2009 was estimated using the following
assumptions:
| Nine months ended | Nine months ended | |||||||
| April 30, 2010 | April 30, 2009 | |||||||
Expected volatility |
112.21-116.86% | 91.63-110.18% | ||||||
Expected dividend yield |
0.00% | 0.00% | ||||||
Risk-free interest rate |
1.93%-2.51% | 1.50%-2.83% | ||||||
Expected life |
4.0-5.5 years | 4.0-5.5 years | ||||||
Forfeiture rate |
2.50% | 0.00%-2.50% | ||||||
10
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NON-INVASIVE MONITORING SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
April 30, 2010
A summary of the Company’s stock option activity for the nine months ended April 30, 2010
is as follows:
| Weighted | ||||||||||||||||
| Weighted | average | |||||||||||||||
| Average | remaining | Aggregate | ||||||||||||||
| Exercise | contractual | intrinsic | ||||||||||||||
| Shares | Price | term (years) | Value | |||||||||||||
Options outstanding, July 31, 2009 |
2,350,164 | $ | 0.56 | |||||||||||||
Options granted |
355,000 | $ | 0.43 | |||||||||||||
Options exercised |
(53,332 | ) | $ | 0.15 | ||||||||||||
Options forfeited or expired |
(106,000 | ) | $ | 0.50 | ||||||||||||
Options outstanding, April 30, 2010 |
2,545,832 | $ | 0.56 | 3.18 | $ | 65,733 | ||||||||||
Options expected to vest, April 30, 2010 |
2,509,834 | $ | 0.56 | 3.14 | $ | 64,945 | ||||||||||
Options exercisable, April 30, 2010 |
2,038,332 | $ | 0.59 | 2.37 | $ | 55,533 | ||||||||||
Of the 2,545,832 options outstanding at April 30, 2010, 1,500,000 were issued under the
2000 Plan and 1,045,832 were issued outside of shareholder approved plans. All of the options
exercised and expired during the three and nine month periods ended April 30, 2010 and 2009 were
originally granted outside of shareholder approved plans. The 106,000 options forfeited during
the three and nine month periods ended April 30, 2010 were originally granted under the 2000
Plan.
As of April 30, 2010, there was $133,000 of unrecognized costs related to outstanding stock
options. These costs are expected to be recognized over a weighted average period of 2.07
years.
5. ROYALTIES
The Company is a party to two licensing agreements and receives royalty income from the
sale of its diagnostic monitoring hardware and software from SensorMedics and VivoMetrics.
Royalty income from these licenses amounted to $33,000 and $120,000, respectively, for the three
and nine months ended April 30, 2010, and $20,000 and $177,000, respectively, for the three and
nine months ended April 30 2009. VivoMetrics ceased operations in July 2009 and filed for
Chapter 11 bankruptcy protection in October 2009. All of the Company’s royalty income for the
three and nine months ended April 30, 2010 was from SensorMedics. Royalties from VivoMetrics
amounted to $(8,000) and $42,000, respectively, for the three and nine months ended April 30,
2009, while royalties from SensorMedics amounted to $28,000 and $135,000, respectively, for the
three and nine months ended April 30, 2009. The $8,000 reduction of royalties from VivoMetrics
in the three months ended April 30, 2009 primarily resulted from revisions to previously
reported royalty obligations reported by VivoMetrics during the period. VivoMetrics has not
made a royalty payment since July 2009, and aggregate royalties receivable at April 30, 2010 of
$12,000 are net of a $10,000 allowance for doubtful accounts to reserve all outstanding
receivables from VivoMetrics.
6. NOTES PAYABLE
The $54,000 notes payable balance at April 30, 2010 relates to the third-party financing of
certain of the Company’s insurance policies. These notes are self-amortizing installment loans
maturing in November and December 2010 bearing interest at 8.49% and 7.69%, respectively.
2008 Revolver. On August 28, 2008, the Company entered into a Note and Security Agreement (the
“Agreement”) with four persons (the “Lenders”), pursuant to which the Lenders granted the
Company a revolving credit line (the “Revolver”) in the aggregate amount of $300,000, secured by
all of the Company’s personal property. The Lenders included a holder of more than 10% of the
outstanding Common Stock, a director and executive officer of the Company who also holds more
than 10% of the outstanding Common Stock and an entity controlled by the Company’s Chairman.
The Company was permitted to borrow and reborrow from time to time under the Revolver until
October 31, 2008 (the “Maturity Date”). The interest rate payable on amounts outstanding under
the Revolver was 11% per annum, and increased to 16% after the Maturity Date or after an Event
of Default. All amounts owing under the Revolver were required to be repaid by the Maturity
Date, and amounts outstanding were prepayable at any time. On August 29, 2008, the Company drew
down $300,000 under the Revolver. The Revolver was amended, effective October 31, 2008, to
extend the Maturity Date until November 30, 2008. All principal and interest outstanding under
the Revolver as of November 30, 2008 was repaid with proceeds from the sale of Series D
Preferred Stock on December 1, 2008, as described in Note 7 below.
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NON-INVASIVE MONITORING SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
April 30, 2010
2010 Credit Facility. On March 31, 2010, the Company entered into a new Note and Security
Agreement (the “Credit Facility Agreement”) with two of the Lenders (the “2010 Lenders”),
pursuant to which the 2010 Lenders granted the Company a revolving credit line (the “Credit
Facility”) in the aggregate amount of $1.0 million, secured by all of the Company’s personal
property. The 2010 Lenders include a holder of more than 10% of the outstanding Common Stock
and an entity controlled by the Company’s Chairman. The Company is permitted to borrow and
reborrow from time to time under the Credit Facility until March 31, 2011 (the “Credit Facility
Maturity Date”). The interest rate payable on amounts outstanding under the Credit Facility is
11% per annum, and increases to 16% after the Credit Facility Maturity Date or after an Event of
Default. All amounts owing under the Credit Facility are required to be repaid by the Maturity
Date, and amounts outstanding are prepayable at any time. On March 31, 2010, the Company drew
down $300,000 under the Credit Facility.
7. SHAREHOLDERS’ EQUITY
The Company received $1,000 from existing option holders during the nine months ended April
30, 2010 for the exercise of options to purchase 13,333 shares of Common Stock, and 24,195
shares were issued to other existing option holders upon the cashless exercise of 39,999
options. During the nine months ended April 30, 2009, the Company received $2,000 from existing
option holders for the exercise of options to purchase 13,333 shares of Common Stock, and 8,239
shares were issued to other existing option holders upon the cashless exercise of 13,333
options.
Series D Convertible Preferred Stock.
In April 2008, the Company authorized a new series of its Preferred Stock, par value $1.00 per
share (the “Preferred Stock”), designated as Series D Convertible Preferred Stock (the “Series D
Preferred Stock”). The Series D Preferred Stock has no preference with respect to dividends to
the Company’s common stock, and is entitled to receive dividends when, as and if declared by the
Company’s Board of Directors, together with the holders of the common stock, ratably on an
“as-converted” basis. Each holder of a share of the Series D Preferred Stock has the right, at
any time, to convert such share of Series D Preferred Stock into shares of Common Stock at an
initial rate of 5,000 shares of Common Stock per share of Series D Preferred Stock. The holders
of the Series D Preferred Stock are entitled to vote together with the holders of the Common
Stock and holders of any other series of Preferred Stock or other class of the Company’s capital
stock which are granted such voting rights as a single class on all matters, except as otherwise
provided by law. In the event of any liquidation, dissolution or winding up of the affairs of
the Company, either voluntarily or involuntarily, the holders of the Series D Preferred Stock
will be entitled to a liquidation preference of $1,500 per share of Series D Preferred Stock
prior to any distribution to the holders of the Common Stock. The Series D Preferred Stock
ranks (1) pari passu in respect of the preferences as to dividends, distributions and payments
upon the liquidation, dissolution or winding up of the Company to all shares of Series C
Preferred Stock, par value $1.00 per share, of the Company and (2) senior in respect of the
preferences as to dividends, distributions and payments upon the liquidation, dissolution or
winding up of the Company to all shares of Common Stock. The Series D Preferred Stock is not
redeemable.
December 2008 Offering. In December 2008, the Company sold an aggregate of 491 shares of its
Series D Preferred Stock to certain private investors at a price of $1,500 per share pursuant to
Stock Subscription Agreements entered between December 1, 2008 and December 2, 2008 (the sale of
286 shares closed on December 1, 2008 and the sale of 205 shares closed on December 2, 2008).
The investors in the December 2008 Offering include two directors of the Company, an entity
controlled by the Company’s Chairman and a holder of more than 10% of the Company’s Common Stock
(collectively, the “Related Party Investors”). The aggregate purchase price for the Series D
Preferred Stock was $736,500, of which $382,500 was paid by the Related Party Investors. Of the
$382,500 paid by the Related Party Investors, $282,200 was paid from the proceeds of their
respective interests in the Revolver described in Note 6 above.
January 2009 Offering. On January 28, 2009, pursuant to Stock Subscription Agreements accepted
by the Company on that date, the Company completed the sale of an aggregate of 1,400 additional shares of Series D Preferred Stock at a price of $1,500 per share to certain of the Related
Party Investors that participated in the December 2008 offering described above. The aggregate
price paid for the shares issued in the January 2009 offering was $2.1 million.
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NON-INVASIVE MONITORING SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
April 30, 2010
The Series D Preferred Stock was issued in each of the above transactions at $1,500 per
share, which is equivalent to $0.30 per share of Common Stock on an “as-converted” basis. The
closing price of the Common Stock on the over-the-counter bulletin board was $0.36, $0.38 and
$0.43, respectively, on each of December 1, 2008, December 2, 2008 and January 28, 2009,
resulting in beneficial conversion features of $300, $400 and $650, respectively, per share of
Series D Preferred Stock on the respective issue dates. In accordance with GAAP, the $1.1
million aggregate beneficial conversion feature of the Series D Preferred Stock on the issue
dates was deemed a discount on the issuance of the shares and was recorded as an increase to
additional paid in capital in the balance sheet. Because the Series D Preferred Stock was
immediately convertible to Common Stock, the portion of the $1.1 million aggregate intrinsic
value applicable to a closing date is deemed a dividend paid to the investors on such closing
date. Such deemed dividends have been recorded as increases in losses attributable to common
shareholders and, in the absence of retained earnings, as reductions of additional paid in
capital.
The Company issued 315,000 shares of Common Stock during the nine months ended April 30, 2010
upon the conversion of an aggregate of 63 shares of Series D Preferred Stock pursuant to the
terms described above.
8. BASIC AND DILUTED LOSS PER SHARE
Basic net loss per common share is computed by dividing net loss attributable to common
shareholders by the weighted average number of common shares outstanding during the period.
Diluted net loss per common share is computed giving effect to all dilutive potential common shares that were outstanding during the period. Diluted potential common shares consist of
incremental shares issuable upon exercise of stock options and warrants and conversion of
preferred stock. In computing diluted net loss per share for the three and nine months ended
April 30, 2010 and 2009, no dilution adjustment has been made to the weighted average
outstanding common shares because the assumed exercise of outstanding options and warrants and
the conversion of preferred stock would be anti-dilutive.
Potential common shares not included in calculating diluted net loss per share are as follows:
| April 30, 2010 | April 30, 2009 | |||||||
Stock options |
2,545,832 | 2,350,164 | ||||||
Stock warrants |
— | 325,000 | ||||||
Series C Preferred Stock |
1,551,200 | 1,551,200 | ||||||
Series D Preferred Stock |
14,140,000 | 14,455,000 | ||||||
Total |
18,237,032 | 18,681,364 | ||||||
9. RELATED PARTY TRANSACTIONS
The Company signed a five year lease for office space in Miami, Florida with a company
owned by Dr. Phillip Frost, who is the beneficial owner of more than 10% of the Company’s Common
Stock. The current rental payments under the Miami office lease, which commenced January 1,
2008, are approximately $4,000 per month and escalate 4.5% annually over the life of the lease.
The Company recorded rent expense related to the Miami lease of approximately $13,000 and
$40,000, respectively, in the three and nine months ended April 30, 2010, and approximately
$14,000 and $36,000, respectively, in the three and nine months ended April 30, 2009.
The Company signed a three year lease for warehouse space in Hialeah, Florida with a company
jointly controlled by Dr. Frost and Dr. Jane Hsiao, the Company’s Chairman. The rental payments
under the Hialeah warehouse lease, which commenced February 1, 2009, are approximately $5,000
per month for the first year and escalate 3.5% annually over the life of the lease. In the
three and nine months ended April 30, 2010, the Company recorded approximately $15,000 and
$39,000, respectively of rent expense related to the Hialeah warehouse. In the three and nine
months ended April 30, 2009, the Company recorded $9,000 and $9,000, respectively of rent
expense related to the Hialeah warehouse.
As more fully described in Note 6, the Company entered into a $1.0 million Credit Facility in
March 2010 with both an entity controlled by Dr. Frost and an entity controlled by Dr. Hsiao.
Advances under the Credit Facility totaled $300,000 and $0 for the nine months ended April 30,
2010 and 2009, respectively, and $300,000 was outstanding as of April 30, 2010. The Company
recognized interest expense related to the Credit Facility of approximately $3,000 for the three
months ended April 30, 2010.
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NON-INVASIVE MONITORING SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
April 30, 2010
Dr. Hsiao, Dr. Frost and directors Steven Rubin and Rao Uppaluri are each significant
stockholders, officers and/or directors of SafeStitch Medical, Inc. (“SafeStitch”), a
publicly-traded, developmental-stage medical device manufacturer, Aero Pharmaceuticals, Inc.
(“Aero”), a privately held pharmaceutical distributor, Cardo Medical, Inc. (“Cardo”), a
publicly-traded medical device company, and SearchMedia Holdings Limited (“SearchMedia”), a
publicly-traded media company operating primarily in China. The Company’s Chief Financial
Officer also serves as the Chief Financial Officer and supervises the accounting staffs of
SafeStitch and Aero under a board-approved cost sharing arrangement whereby the total salaries
of the accounting staffs of the NIMS, SafeStitch and Aero are shared. Since December 2009, the
Company’s Chief Legal Officer has served under a similar board-approved cost sharing arrangement
as Corporate Counsel of SearchMedia and as the Chief Legal Officer of each of SafeStitch and
Cardo. The Company recorded selling, general and administrative costs and expenses to account
for the sharing of costs under these arrangements of $14,000 and $33,000, respectively, for the
three and nine months ended April 30, 2010, and $10,000 and $22,000, respectively, for the three
and nine months ended April 30, 2009. Accounts payable to SafeStitch related to these
arrangements totaled approximately $4,000 and $3,000, respectively, at April 30, 2010 and July
31, 2009.
Dr. Frost and Dr. Marvin Sackner, the Company’s President, Chief Executive Officer and a
director, each serves as a director of Continucare Corporation (“Continucare”), a
publicly-traded provider of outpatient healthcare services. The Company markets its products to
Continucare and other healthcare service providers in the normal course of business. During the
three and nine months ended April 30, 2010, the Company recorded product sales revenues to
Continucare of approximately $22,000. These related party sales were approved by the Company’s
Audit Committee. As of April 30, 2010, accounts receivable from Continucare totaled
approximately $22,000.
During 2008 and until August 2009, Dr. Hsiao served as a director of Great Eastern Bank of
Florida, a bank where the Company maintains a bank account in the normal course of business. As
of April 30, 2010 and July 31, 2009, the Company had approximately $133,000 and $846,000,
respectively, on deposit with Great Eastern Bank of Florida. Approximately $108,000 and
$821,000 of these balances were collateralized by repurchase contracts for US Government
securities at April 30, 2010 and July 31, 2009, respectively.
10. COMMITMENTS
Leases.
The Company signed a five year lease for office space in Miami, Florida commencing January 1,
2008. The current rental payments under the Miami office lease are approximately $4,000 per
month and escalate 4.5% annually over the life of the lease. The Company signed a three year
lease for warehouse space in Hialeah, Florida commencing February 1, 2009. The current rental
payments under this warehouse lease are approximately $5,000 per month for the first year and
escalate 3.5% annually over the life of the lease. The Company signed a three year lease for
retail space in Toronto, Canada to create a product demonstration center, commencing March 1,
2009. In February 2010, the Company terminated the Toronto lease effective March 31, 2010, and
recorded the related $7,000 termination charge to Selling, General and Administrative costs and
expenses during the nine months ended April 30, 2010 in the accompanying unaudited condensed
consolidated financial statements. The Company has no further obligation with regard to the
Toronto facility.
Product Development and Supply Agreement.
On September 4, 2007, the Company executed a Product Development and Supply Agreement (the
“Agreement”) with Sing Lin Technologies Co. Ltd., a company based in Taichung, Taiwan (“Sing
Lin”). Pursuant to the Agreement, the Company consigned to Sing Lin the development and design
of the next generation Exer-Rest®, Somno-Ease™ and Exer-Rest® Plus
devices. Sing Lin will also manufacture all of the Company’s acceleration therapeutic
platforms. The Agreement commenced as of September 3, 2007 and has a term that extends three
years from the acceptance of the first run of production units by NIMS. Thereafter, the
Agreement automatically renews for successive one year terms unless either party sends the other
a notice of non-renewal at least ninety days before the end of the then-current term. Either
party may terminate the Agreement with ninety days prior written notice. Upon termination, each
party’s obligations under the Agreement will be limited to obligations related to confirmed
orders placed prior to the termination date.
Pursuant to the Agreement, Sing Lin designed, developed and manufactured the tooling
required to manufacture the acceleration therapeutic platforms for a total cost to the Company
of $471,000. Sing Lin will utilize the tooling in the performance of its production obligations
under the Agreement. The Company paid Sing Lin $150,000 of the tooling cost upon execution of
the Agreement and $150,000 upon the Company’s approval of the product prototype concepts and
designs. The balance of the final tooling cost became due and payable in September 2008 upon
acceptance of the first units produced using the tooling, and was paid in full. These amounts
have been recorded as tooling costs, and are included in tooling and equipment, net.
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NON-INVASIVE MONITORING SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
April 30, 2010
Under the Agreement, the Company also grants Sing Lin the exclusive distribution rights for
the products in certain countries in the Far East, including Taiwan, China, Japan, South Korea,
Malaysia, Indonesia and certain other countries. Sing Lin has agreed not to sell the Products
outside its geographic areas in the Far East.
The Company has committed to purchase approximately $2.6 million of Exer-Rest® and
Somno-Ease™ units within one year of the September 2008 acceptance of the final product.
Additionally, the Company has agreed to purchase $4.1 million and $8.8 million of
Exer-Rest®, Exer-Rest® Plus and Somno-Ease™ products in the second and
third years following such acceptance, respectively. These purchase commitment amounts are
based upon estimated per product costs at the time the Sing Lin Agreement was executed
multiplied by volume commitments. Through April 30, 2010, the Company had paid Sing Lin $1.7
million in connection with orders placed through that date. Of this amount, $90,000 is included
in advances to contract manufacturer in the accompanying unaudited condensed consolidated
financial statements. As of April 30, 2010, aggregate future purchase commitments under the
Agreement totaled approximately $13.9 million. As of June 10, 2010, the Company had not placed
orders sufficient to satisfy its commitment to purchase a minimum number of units in the first
year after acceptance of the final product. Sing Lin has made demands that the Company comply
with the minimum purchase requirements under the Sing Lin Agreement. The Company is exploring
its options under the Sing Lin Agreement and continues to discuss with Sing Lin various
scenarios to resolve the matter. There can be no assurance that the Sing Lin Agreement will be
modified on terms acceptable to the Company or at all, or that Sing Lin will not attempt to
enforce its rights under the Agreement, or pursue all other available remedies
11. LONG-LIVED ASSETS
The Company’s long-lived assets include furniture and equipment, office equipment and
computers, tooling, websites and software, leasehold improvements, patents and trademarks.
Tooling and equipment, net of accumulated depreciation, consists of the following at April 30,
2010 and July 31, 2009 (in thousands):
| Estimated | ||||||||||||
| Useful Life | April 30, 2010 | July 31, 2009 | ||||||||||
Tooling and equipment |
5 years | $ | 471 | $ | 471 | |||||||
Furniture and fixtures, leasehold improvements, office equipment and computers |
3 - 5 years | 98 | 94 | |||||||||
Website and software |
3 years | 26 | 26 | |||||||||
| 595 | 591 | |||||||||||
Less accumulated depreciation |
(224 | ) | (131 | ) | ||||||||
Tooling and equipment, net |
$ | 371 | $ | 460 | ||||||||
Depreciation expense was $93,000 and $74,000 during the nine months ended April 30, 2010
and 2009, respectively. Depreciation on the tooling commenced in August 2008 based upon an
estimated useful life of five years. Thirteen Exer-Rest® SL and TL demonstration
units are included in furniture and fixtures at an aggregate cost of $40,000.
All patents and trademarks have been fully amortized since October 31, 2007.
15
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NON-INVASIVE MONITORING SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
April 30, 2010
12. RECENT ACCOUNTING PRONOUNCEMENTS
Noncontrolling Interests — Effective August 1, 2009, the Company adopted authoritative
guidance which established accounting and reporting standards for the noncontrolling interest in
a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. The adoption of this guidance has
not had a material impact on the Company’s consolidated financial statements.
Business Combinations — Effective August 1, 2009, the Company adopted authoritative guidance
which established principles and requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed
and any noncontrolling interest in the acquiree. This guidance also established principles for
recognizing and measuring the goodwill acquired in a business combination and determining what
information to disclose to enable users of the financial statements to evaluate the nature and
financial effects of a business combination. In April 2009, the FASB amended and clarified this
guidance regarding the initial recognition and measurement, subsequent measurement and
accounting, and related disclosures arising from contingencies in a business combination. Under
the amended guidance, assets acquired and liabilities assumed in a business combination that
arise from contingencies should be recognized at fair value on the acquisition date if fair
value can be determined during the measurement period. If fair value cannot be determined,
acquired contingencies should be accounted for using existing guidance. The adoption of this
guidance applies to business combinations for which the acquisition date is on or after August
1, 2009, and has not had a material impact on the Company’s consolidated financial statements.
Codification — In June 2009, the Financial Accounting Standards Board (“FASB”) established the
FASB Accounting Standards Codification™ (“Codification”) as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements in accordance with GAAP. All existing accounting standard
documents are superseded by the Codification and any accounting literature not included in the
Codification will not be authoritative. However, rules and interpretive releases of the SEC
issued under the authority of federal securities laws will continue to be sources of
authoritative GAAP for SEC registrants. The Codification became effective beginning with the
Company’s first fiscal quarter of 2010. The Codification does not change or alter existing GAAP
and, therefore, has not had any impact on the Company’s consolidated financial statements.
Subsequent Events — Effective August 1, 2009, the Company adopted authoritative guidance which
establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued. This guidance defines (1) the
period after the balance sheet date during which a reporting entity’s management should evaluate
events or transactions that may occur for potential recognition or disclosure in the financial
statements, (2) the circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and (3) the disclosures an
entity should make about events or transactions that occurred after the balance sheet date. The
adoption of this guidance has not had a material impact on the Company’s consolidated financial
statements. In February 2010, the FASB issued additional guidance to remove the requirement for
SEC filers to disclose the date through which an entity has evaluated subsequent events. This
change removes potential conflicts with current SEC guidance. The FASB’s additional guidance
also clarifies the intended scope of the reissuance disclosure provisions. The additional
guidance was effective upon issuance and had no impact on the Company’s consolidated financial
statements.
16
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Cautionary Statement Regarding Forward-looking Statements.
This Interim Report on Form 10-Q contains, in addition to historical information, certain
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995 (“PLSRA”), Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and
section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) regarding
Non-Invasive Monitoring Systems, Inc. (the “Company” or “NIMS,” also referred to as “us”, “we” or
“our”). These forward-looking statements represent our expectations or beliefs concerning the
Company’s operations, performance, financial condition, business strategies, and other information
and that involve substantial risks and uncertainties. For this purpose, any statements contained
in this Report that are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the generality of the foregoing, words such as “may,” “will,”
“expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue” or the negative or
other variations thereof or comparable terminology are intended to identify forward-looking
statements. The Company’s actual results of operations, some of which are beyond the Company’s
control, could differ materially from the activities and results implied by the forward-looking
statements. Factors that could cause or contribute to such differences include, but are not
limited to the Company’s: history of operating losses and accumulated deficit; immediate and
long-term need for additional financing; dependence on future sales of the Exer-Rest®
and Somno-Ease™ motion platforms; current and future purchase commitments; the
enforceability of any purchase commitments; competition; dependence on management; changes in
healthcare rules and regulations; risks related to proprietary rights; government regulation; other
factors described herein as well as the factors contained in “Item 1A — Risk Factors” of our Annual
Report on Form 10-K for the year ended July 31, 2009. We do not undertake any obligation to update
forward-looking statements, except as required by applicable law. We intend that all
forward-looking statements be subject to the safe harbor provisions of the PSLRA. These
forward-looking statements are only predictions and reflect our views as of the date they are made
with respect to future events and financial performance.
Overview
We are primarily engaged in the development, manufacture and marketing of non-invasive,
whole body periodic acceleration (“WBPA”) therapeutic platforms, which are motorized platforms that
move a subject repetitively from head to foot. Our acceleration therapeutic platforms are the
inventions of Marvin A. Sackner, M.D., our founder, Chief Executive Officer, President and a
director. Numerous peer reviewed scientific publications attest to the benefits of whole body
periodic acceleration in animal and human research investigations. The application of this
technology causes release of beneficial substances such as nitric oxide from the inner lining of
blood vessels to the same extent as moderate to strenuous exercise. These findings are not being
claimed as an intended use of the device for marketing purposes, but demonstrate a potential
mechanism for its benefits.
Prior to 2002, our primary business was the development of computer assisted, non-invasive
diagnostic monitoring devices and related software designed to detect abnormal respiratory,
cardiac, and other medical conditions from sensors placed externally on the body’s surface. We
assigned our patents for these ambulatory monitoring devices to the SensorMedics division of ViaSys
Healthcare Inc. (which is now a unit of Cardinal Health, Inc. (“SensorMedics”), for cash and
royalties on sales. We also assigned the patents to VivoMetrics, Inc. (“VivoMetrics”), then a
related party, for an equity ownership interest in VivoMetrics (now carried at zero value for
financial reporting purposes) and royalties on sales and leasing of VivoMetrics’
LifeShirt® systems. In April 2002, VivoMetrics received United States Food and Drug
Administration (“FDA”) clearance to market the LifeShirt® system; however VivoMetrics
ceased operations in July 2009 and filed a Chapter 11 petition for bankruptcy protection in October
2009. We continue to receive royalties from SensorMedics, however there can be no assurance as to
the amount of future royalty revenue that will be derived from these patent assignments.
VivoMetrics is no longer marketing the LifeShirt® system; the Company therefore does not
expect any future royalties from VivoMetrics and has recorded a $10,000 reserve against outstanding
receivables from VivoMetrics.
In 2002, we began restructuring our operations and business strategy to focus on the research,
development, manufacturing, marketing, and sales of non-invasive, motorized, WBPA platforms. These
acceleration therapeutic platforms are intended for use in the home, wellness centers and clinics
as an aid to improve circulation and joint mobility, relieve minor aches and pains, relieve
troubled sleep and as a mechanical feedback device for slow rhythmic breathing exercise for stress
management. These platforms are targeted for use by individuals who have physical limitations and
are incapable of exercising or using traditional exercise equipment. The platforms are also
targeted to healthy individuals who are unwilling to exercise or wish to implement WBPA therapy in
conjunction with a regular exercise routine. The Company’s first such platform, the AT-101, was
initially registered with the FDA as a Class 1 (exempt) powered exercise device and was sold to
physicians and their patients. In January 2005, the FDA disagreed with our device classification,
and requested that we cease commercial sales and marketing efforts for the AT-101 until we received
a Class 1Therapeutic Vibrator approval from the FDA. Accordingly, we ceased sales and marketing
efforts in the U.S. for this platform pending FDA approval.
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In January 2005, we began development of a less costly and more efficient second generation
version of the AT-101, the Exer-Rest® (now designated the Exer-Rest® AT).
The Company entered into a Product and Development and Supply Agreement with Sing Lin Technology
Co., Ltd. (“Sing Lin”) of Taichung, Taiwan on September 4, 2007. Under this agreement, Sing Lin
will manufacture new third generation versions of our patented Exer-Rest® motorized
platforms (designated the Exer-Rest® SL and the Exer-Rest® TL). In January
2008, we received ISO 13485 certification for Canada, the United Kingdom and Europe from SGS United
Kingdom Ltd., one of the world’s leading verification and certification bodies. ISO 13485
certification is recognized and accepted worldwide as a sign of design and manufacturing quality
for medical devices. In addition to our ISO certification, NIMS’ Exer-Rest® AT
acceleration therapeutic platform (Class IIa) was awarded CE0120 certification, which requires
several safety related conformity tests including clinical assessment for safety and effectiveness.
The CE0120 marking is often referred to as a “passport” that allows manufacturers from anywhere in
the world to sell their goods throughout the European market as well as in many other countries.
We believe that it is in the best interest of NIMS and its shareholders to focus the Company’s
time and resources on developing and marketing the Exer-Rest® line of acceleration
therapeutic platforms. These devices are being marketed and sold by NIMS in the US, Canada, the
UK, Europe, India and Latin America, and by Sing Lin in certain Far East markets. In January 2009,
NIMS received FDA approval to market the Exer-Rest® in the United States as a Class I
Exempt medical device, and we commenced sales and deliveries of Exer-Rest® units in the
US in February 2009.
The development of the Exer-Rest® has necessitated additional expenditures and
commitments of capital, and we anticipate experiencing losses through the end of the 2010 fiscal
year as we expand marketing activities, primarily in the US. If we are unsuccessful in achieving
significant revenues from these efforts, we will likely need to raise additional capital to fulfill
our business plan, but no commitment to raise such additional capital exists or can be assured. If
we are unsuccessful in our efforts to raise such additional capital, if required, we may not be
able to continue operations.
Products
Exer-Rest®Therapeutic Platforms. The Exer-Rest® AT therapeutic
platform is based upon the design and concept of our original AT-101 therapeutic platform, but has
the dimensions and appearance of a commercial extra long twin bed, is more efficient, less costly
and priced lower. QTM Incorporated (“QTM”), an FDA registered manufacturer (Oldsmar, FL)
manufactured the device, which was built in accordance with ISO and FDA Good Manufacturing
Practices. Sales of the Exer-Rest ® AT began overseas in October 2007. The
Exer-Rest® SL and Exer-Rest® TL, which are being manufactured by Sing Lin,
further advance the acceleration therapeutic platform technology. The SL and TL models combine
improved drive technology for quieter operation, a more comfortable “memory-foam” mattress, more
convenient operation with a multi-function wireless remote and a more streamlined look to improve
the WBPA experience. Overseas deliveries of Exer-Rest® SL and Exer-Rest® TL
platforms began in October 2008, and US deliveries of these models began in February 2009. The
Somno-Ease™, a variation of the Exer-Rest® currently in development, is
designed to aid patients with sleep disorders as well as provide feedback for slow rhythmic
breathing exercises for the relief of stress associated with daily living. The
Exer-Rest® Plus, which is also in development, will combine the features of both the
Exer-Rest® and Somno-Ease™.
LifeShirt®. The LifeShirt® is a patented Wearable Physiological Computer
that incorporates transducers, electrodes and sensors into a low turtle neck sleeveless garment.
These transducers are connected to a miniaturized, battery powered, electronic module for
collection of respiratory and cardiac data. In addition, the monitored patient can enter symptoms
with intensity, mood, and medication information for integration with the physiologic information
collected with the LifeShirt® garment. Such data can be transmitted to a Data
Collection Center for quality control, generation of reports, and database storage. Vital and
physiological signs can be obtained non-invasively, continuously, cheaply, and reliably with the
comfortably worn LifeShirt® garment system while at rest, during exercise, at work, and
during sleep. The LifeShirt® was sold exclusively by VivoMetrics until July 2009, and
has not been marketed since VivoMetrics ceased operations and filed for bankruptcy protection.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations set forth
below under “Results of Operations” and “Liquidity and Capital Resources” should be read in
conjunction with our financial statements and notes thereto appearing elsewhere in this Form 10-Q.
The preparation of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including
those related to royalties, inventory, tooling and equipment and contingencies. We base our
estimates on historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources. A
more detailed discussion on the application of these and other accounting policies can be found in
Note 2 in the Notes to the Financial Statements set forth in Item 8 of our Annual Report on Form
10-K for the year ended July 31, 2009. Actual results may differ from these estimates.
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Results of Operations
The newest Exer-Rest® SL and TL platforms, which have been developed under our
agreement with Sing Lin, became available for sale overseas in October 2008 and in the U.S. in
February 2009. We expect to increase our sales activity throughout fiscal 2010 in North America by
enhancing our visibility with the addition of dedicated sales personnel and focused advertising and
marketing campaigns. We expect to increase our sales activity in international markets through the
enlistment of local distributors.
Three and Nine months ended April 30, 2010 Compared to Three and Nine months Ended April 30, 2009
Revenue. Total revenue for the three months ended April 30, 2010 was $119,000, as
compared to $169,000 for the three months ended April 30, 2009. The $50,000 decrease was due to a
$63,000 decrease in product sale revenue in the 2010 period, partially offset by a $13,000 increase
in royalty revenue. Total revenues increased from $450,000 for the nine months ended April 30,
2009 to $514,000 for the nine months ended April 30, 2010. This $64,000 increase was primarily the
result of an $123,000 increase in product sales offset by a $57,000 decrease in royalties.
Exer-Rest® platform unit sales during the three months ended April 30, 2010
decreased approximately 52% from the three months ended April 30, 2009. Unit deliveries in the
three months ended April 30, 2009 included fulfillment of back orders upon receipt of FDA
notification in February 2009 that the Exer-Rest® was not subject to the marketing
restrictions under rule 510(k). Unit sales during the nine months ended April 30, 2010 increased
approximately 68% over the nine months ended April 30, 2009, primarily due to nine full months of
sales activity in the US, coupled with sales to Sing Lin for delivery in Asia.
Combined royalty revenue from VivoMetrics and SensorMedics was $33,000 and $120,000 for the
three and nine months ended April 30, 2010, respectively and was $20,000 and $177,000 for the three
and nine months ended April 30, 2009, respectively. The $13,000 increase during the three months
ended April 30, 2010 was attributable to increased sales activity by SensorMedics. Net royalties
from VivoMetrics in the three months ended April 30, 2009 were $(8,000) due to revisions to
previously reported royalty obligations reported by VivoMetrics during the period. The $57,000
decrease for the nine months ended April 30, 2010 was primarily attributable to the loss of royalty
revenue from VivoMetrics due to their cessation of operations. We do not expect any future
royalties from VivoMetrics and expect fiscal 2010 royalty revenue to be significantly below fiscal
2009.
Cost of Sales. Cost of sales for the three months ended April 30, 2010 was $23,000, as
compared to $57,000 for the three months ended April 30, 2009. This $34,000 decrease was directly
attributable to the decrease in unit sales over the period. Cost of sales for the nine months
ended April 30, 2010 was $173,000, as compared to $118,000 for the nine months ended April 30,
2009. This $55,000 increase was also directly attributable to the increase in unit sales over the
nine month period.
Selling, general and administrative costs and expenses. Selling, general and administrative
(“SG&A”) costs and expenses decreased to $484,000 for the three months ended April 30, 2010, from
$494,000, for the three months ended April 30, 2009. This $10,000 decrease was primarily due to
lower stock-based compensation expense, offset in part by increases in payroll expenses. SG&A
costs and expenses increased to approximately $1.5 million for the nine months ended April 30,
2010, from approximately $1.4 million for the nine months ended April 30, 2009. This $35,000
increase was primarily attributable to increases in payroll, advertising, rent and marketing and
sales expenses, offset in part by reduced auditing fees, international travel and stock-based
compensation expense. The increases in payroll and rent expense were primarily attributable to the
February 2009 establishment and staffing of our Hialeah, Florida warehouse, the March 2009
establishment and staffing of our Toronto demonstration center and the January 2010 addition of
sales and marketing personnel. SG&A costs and expenses include stock-based compensation expense,
which totaled $71,000 for the nine months ended April 30, 2010, as compared to $146,000 for the
nine months ended April 30, 2009. The decrease in stock-based compensation was primarily due to a
decrease in the number of unvested stock options during the first nine months of fiscal 2010. We
expect SG&A costs and expenses to increase throughout the 2010 fiscal year as we add administrative
and sales and marketing personnel and expand our other sales and marketing programs, offset in part
by savings realized from the closing of the Toronto demonstration center in January 2010.
Research and development costs and expenses. Research and development costs and expenses
decreased $46,000 from $77,000 for the three months ended April 30, 2009 to $31,000 for the three
months ended April 30, 2010. Research and development costs and expenses decreased $82,000 from
$168,000 for the nine months ended April 30, 2009 to $86,000 for the nine months ended April 30,
2010. The higher costs and expenses in the 2009 fiscal periods were primarily related to costs
incurred in pursuit of FDA clearance to market the Exer-Rest® in the US, which
clearances were granted in January and June 2009.
Total operating costs and expenses. Total operating costs and expenses decreased $90,000 from
$628,000 for the three months ended April 30, 2009 to $538,000 for the three months ended April 30,
2010 due to the factors cited above. Total operating costs and expenses for the nine months ended
April 30, 2010 and 2009 remained constant at approximately $1.7 million.
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Interest income (expense), net. Net interest expense was $3,000 and $2,000, respectively, in
the three and nine month periods ended April 30, 2010, as compared to $0 and $8,000 for the three
and nine months ended April 30, 2009, respectively. The net interest expense in the 2009 periods
was related to balances outstanding under the Note and Security Agreement described in Note 6 to
the accompanying unaudited condensed consolidated financial statements.
Other income (expense), net. Net other income for the three and nine months ended April 30,
2010, was $58,000 and $59,000, respectively. This income primarily resulted from approximately
$62,000 of aggregate foreign currency exchange gains on accounts payable held by our foreign
subsidiary denominated in US Dollars, offset in part by a $3,000 loss on the disposal of leasehold
improvements from the closing of the Toronto demonstration center. Net other expense was $9,000 in
each of the three and nine months ended April 30, 2009, which
consisted of the loss recognized on the disposal of four
Exer-Rest®
AT units previously included in fixed assets as demonstration units.
Liquidity and Capital Resources
Our operations have been primarily financed through private sales of our equity
securities and advances under credit facilities available to us. At April 30, 2010, we had cash of
approximately $149,000 and working capital of approximately $770,000. If we are not able to
generate significant additional revenue, we will be required to obtain additional external
financing to continue operations beyond the end of the 2010 calendar year. No assurance can be
given that such additional financing will be available on acceptable terms or at all. Our ability
to sell additional shares of our stock and/or borrow cash could be materially adversely affected by
the recent economic turmoil in the Global equity and credit markets. Current economic conditions
have been, and continue to be, volatile and continued instability in these market conditions may
limit our ability to access the capital necessary to fund and grow our business and to replace, in
a timely manner, maturing liabilities.
Net cash used in operating activities was $1.1 million and $1.4 million for nine months ended
April 30, 2010 and 2009, respectively. Increased use of cash to finance accounts receivable was
offset by reduced payments to Sing Lin for inventory purchases and reductions in inventory levels.
No cash was used in investing activities during the nine months ended April 30, 2010. Of the
$227,000 cash used for investing activities in the nine months ended April 30, 2009, $171,000
consisted of payments to Sing Lin for production tooling to be used in the manufacture of
Exer-Rest® platforms.
Net cash provided by financing activities was $321,000 for the nine months ended April 30,
2010, primarily from advances under the Credit Facility and the financing of insurance premiums
described in Note 6 to the accompanying unaudited condensed consolidated financial statements. Net
cash provided by financing activities was $2.9 million for the nine months ended April 30, 2009,
primarily from the $2.8 million proceeds from the December 2008 and January 2009 issuances of
Series D Preferred Stock described in Note 7 to the accompanying unaudited condensed consolidated
financial statements.
Under the agreement with Sing Lin, we were committed to purchase approximately $2.6 million of
Exer-Rest® and Somno-Ease™ units within one year of acceptance of the final
product, which acceptance occurred in September 2008, and an additional $4.1 million and $8.8
million of products in the second and third years following acceptance of the final product,
respectively. Under the Sing Lin Agreement, the Company must pay a portion of the product purchase
price at the time production orders are placed, with the balance due upon delivery. The Sing Lin
Agreement can be terminated for any reason by either party with 90 days’ notice. Through April 30,
2010, we have paid Sing Lin $1.7 million in connection with orders placed through that date, and we
will be required to make additional payments totaling approximately $60,000 upon taking delivery of
the units currently in production. We began taking delivery of units from Sing Lin in October 2008
and we expect such deliveries to continue periodically throughout the 2010 fiscal year. As of June
10, 2010, we had not placed orders sufficient to satisfy our first-year purchase commitment under
the Agreement and Sing Lin has made demands that the Company comply with the minimum purchase
requirements under the Sing Lin Agreement. The Company is exploring its options under the
agreement and continues to discuss with Sing Lin various scenarios to resolve the matter. There
can be no assurance that the Sing Lin Agreement will be modified on terms acceptable to us or at
all, or that Sing Lin will not attempt to enforce its rights under the Sing Lin Agreement, or
pursue all other available remedies.
Series D Preferred Stock Offerings. In April 2008, we authorized a new series of our
Preferred Stock, par value $1.00 per share (the “Preferred Stock”), designated as Series D
Convertible Preferred Stock (the “Series D Preferred Stock”). Each holder of a share of the Series
D Preferred Stock has the right, at any time, to convert such share of Series D Preferred Stock
into shares of the Company’s common stock at an initial rate of 5,000 shares of common stock per
share of Series D Preferred Stock. The Series D Preferred Stock has a $1,500 per share liquidation
preference, and is issued at $1,500 per share, which is equivalent to $0.30 per share of Common
Stock on an “as-converted” basis.
December 2008 Series D Preferred Stock Offering. On December 2, 2008, we completed the sale
of an aggregate of 491 shares of our Series D Preferred Stock to certain investors pursuant to
stock purchase agreements entered between December 1, 2009 and December 2, 2008 (the sale of 286
shares closed on December 1, 2008 and the sale of 205 shares closed on December 2, 2008). These
investors include Dr. Marvin Sackner, a director and executive officer of the Company who also
holds more than 10% of the outstanding Common Stock, Frost Gamma Investments Trust (“Frost Gamma”),
a holder of more than 10% of the outstanding Common Stock, Hsu Gamma Investments, LP (“Hsu Gamma”),
an entity controlled by our Chairman, and a director (collectively, the “Related Party Investors”).
The aggregate purchase price for the Series D Preferred Stock was $736,500, of which $382,500 was
paid by the Related Party Investors. Of the $382,500 paid by the Related Party Investors, $282,200
was paid from the proceeds of their respective interests in the Revolver described in Note 6 to the
accompanying financial statements. The closing prices of the Common Stock on the over-the-counter
bulletin board on December 1 and 2, 2008 were $0.36 and $0.38 per share, respectively, resulting in
a $168,000 aggregate intrinsic value on the issue dates. The $168,000 aggregate intrinsic value of
the Series D Preferred Stock on the issue dates was deemed a dividend paid to the investors on the
closing dates and as an increase in loss attributable to common shareholders in the financial
statements for the period then ended.
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January 2009 Series D Preferred Stock Offering. On January 28, 2009, we completed the
sale of 700 additional shares of our Series D Preferred Stock to each of Frost Gamma and Hsu Gamma
(1,400 total shares) for aggregate proceeds of $2.1 million. The January 28, 2009 closing price of
the Common Stock on the over-the-counter bulletin board was $0.43 per share, resulting in a $65,000
intrinsic value per share of Series D Preferred Stock on the issue date. The $910,000 aggregate
intrinsic value of the Series D Preferred Stock on the issue date was deemed a dividend paid to the
investors on the closing date and as an increase in loss attributable to common shareholders in the
financial statements for the period then ended.
The Company’s financial statements have been prepared and presented on a basis assuming it
will continue as a going concern. As reflected in the accompanying unaudited condensed
consolidated financial statements, the Company had net losses in the amount of $364,000 and
$468,000, respectively, for the three months ended April 30, 2010 and 2009, and $1.2 million and
$1.3 million for the nine months ended April 30, 2010 and 2009, respectively. In addition, the
Company has an accumulated deficit of $21.0 million as of April 30, 2010, and has substantial
purchase commitments at April 30, 2010 (see Note 10 to the accompanying unaudited condensed
consolidated financial statements). These matters raise substantial doubt about the Company’s
ability to continue as a going concern.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Not required for smaller reporting companies as defined in Rule 12b-2 of the Exchange Act.
| ITEM 4. | CONTROLS AND PROCEDURES. |
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 our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this
report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures as of April 30, 2010 were effective to ensure
that information required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the Securities and Exchange Commission’s rules and forms.
There were no material changes in our internal controls over financial reporting or in other
factors that could materially affect, or are reasonably likely to affect, our internal controls
over financial reporting during the quarter ended April 30, 2010. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
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PART II. OTHER INFORMATION
| Item 1. | Legal Proceedings |
None.
| Item 1A. | Risk Factors |
None.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
| Item 3. | Defaults upon Senior Securities |
None.
| Item 4. | [Removed and Reserved.] |
| Item 5. | Other Information |
None.
| Item 6. | Exhibits |
| 31.1 | Certification of Chief Executive Officer pursuant to Rules 13a—14 and 15d-14 under the Securities
Exchange Act of 1934. |
|||
| 31.2 | Certification of Chief Financial Officer pursuant to Rules 13a—14 and 15d-14 under the Securities
Exchange Act of 1934. |
|||
| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350 as enacted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
|||
| 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350 as
enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
In accordance with the requirements of the Exchange Act the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Dated: June 14, 2010 | By: | /s/ Dr. Marvin A. Sackner | ||
| Dr. Marvin A. Sackner, Chief Executive Officer | ||||
| Dated: June 14, 2010 | By: | /s/ Adam S. Jackson | ||
| Adam S. Jackson, Chief Financial Officer | ||||
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