Condensed
Notes to Consolidated Financial Statements
(Unaudited)
NOTE
1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying consolidated financial statements of the Company are unaudited,
other than the consolidated balance sheet at October 31, 2007, and reflect
all
material adjustments, consisting only of normal recurring adjustments, which
management considers necessary for a fair statement of the Company’s financial
position, results of operations and cash flows for the interim periods. The
results of operations for the current interim periods are not necessarily
indicative of the results to be expected for the entire fiscal
year.
These
consolidated financial statements have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission (“SEC”). Certain
information and footnotes normally included in financial statements prepared
in
accordance with generally accepted accounting principles in the United States
of
America have been condensed or omitted pursuant to these rules and regulations.
These consolidated financial statements should be read in conjunction with
the
consolidated financial statements and the notes thereto included in the
Company’s Form 10-K, as filed with the SEC for the fiscal year ended October 31,
2007.
Certain
reclassifications have been made to prior period balances in order to conform
to
the current period presentation.
Management’s
Plans
The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and liquidation of liabilities
in
the normal course of business. The Company has incurred net losses of $4.4
million in the three months ended January 31, 2008, and $21.0 million and $17.1
million for the years ended October 31, 2007 and 2006, respectively. In
addition, the Company has used cash in operations of $3.2 million in the three
months ended January 31, 2008, and $12.3 million and $15.9 million for the
years
ended October 31, 2007 and 2006, respectively. As of January 31, 2008, we
had an accumulated deficit of $152.3 million; cash and cash equivalents of
$8.0
million, and no long-term debt.
Based
on
the Company’s current operating plans, management believes that the Company’s
existing cash resources and cash forecasted by management to be generated by
operations, as well as the Company’s anticipated available lines of credit, will
be sufficient to meet working capital and capital requirements through at least
the next twelve months. In this regard, the Company raised additional financing
in the first quarter of fiscal 2008 to fund our continuing operations, support
the further development and launch of ClearPath™, our unique multicatheter
breast brachytherapy device for Accelerated Partial Breast Irradiation, and
other activities. However, there is no assurance that the Company will be
successful with its plans. If events and circumstances occur such that the
Company does not meet its current operating plans, the Company is unable to
raise sufficient additional equity or debt financing, or the Company’s line of
credit (which expired on February 1, 2008) is not renewed, or is insufficient
or
not available, the Company may be required to further reduce expenses or take
other steps which could have a material adverse effect on our future
performance, including but not limited to, the premature sale of some or all
of
our assets or product lines on undesirable terms, merger with or acquisition
by
another company on unsatisfactory terms, or the cessation of
operations.
The
Company also expects that in future periods new products and services will
provide additional cash flow, although no assurance can be given that such
cash
flow will be realized, and the Company is presently placing an emphasis on
controlling expenses.
Use
of Estimates
In
the
normal course of preparing the financial statements in conformity with generally
accepted accounting principles in the United States of America, management
is
required 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 revenue and
expenses during the reporting period. Actual results could differ from
those amounts.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are recorded at the invoiced amount and do not bear interest. The
allowance for doubtful accounts is the Company’s best estimate of the amount of
probable credit losses in our existing accounts receivable. The Company
determines the allowance based on historical write-off experience and customer
economic data. We review our allowance for doubtful accounts monthly. Past
due
balances over 60 days and over a specified amount are reviewed individually
for
collectibility. Account balances are charged off against the allowance when
the
Company believes that it is probable the receivable will not be recovered.
The
Company does not have any off-balance-sheet credit exposure related to our
customers.
Inventories
Inventories
are valued at the lower of cost or market as determined under the first-in,
first-out method. Costs include materials, labor and manufacturing
overhead.
Equipment
and Leasehold Improvements
Equipment
and leasehold improvements are stated at cost. Maintenance and repair costs
are
expensed as incurred, while improvements are capitalized. Gains or losses
resulting from the disposition of assets are included in income. Depreciation
and amortization are computed using the straight-line method over the estimated
useful lives as follows:
|
Furniture,
fixtures and equipment
|
3-7
years
|
|
Leasehold
improvements
|
Lesser
of the useful life or term of lease
|
Long-Lived
Assets
In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” long-lived assets, such as property, plant, and equipment,
and purchased intangibles subject to amortization, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of
an asset may not be recoverable. Recoverability of assets to be held and used
is
measured by a comparison of the carrying amount of an asset to the estimated
undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized equal to the amount by which the carrying amount
of the asset exceeds the fair value of the asset. Assets to be disposed of
are
separately presented in the consolidated balance sheet and reported at the
lower
of the carrying amount or fair value less costs to sell, and are no longer
depreciated.
Intangible
Assets
License
agreements are amortized on a straight-line basis over periods ranging up to
fifteen years. The amortization periods of patents are based on the lives of
the
license agreements to which they are associated or the approximate remaining
lives of the patents, whichever is shorter. Purchased intangible assets with
finite lives are carried at cost less accumulated amortization and are amortized
on a straight-line basis over periods ranging from three to twelve
years.
The
Company reviews for impairment whenever events and changes in circumstances
indicate that such assets might be impaired. If the estimated future cash flows
(undiscounted and without interest charges) from the use of an asset are less
than the carrying value, a write-down is recorded to reduce the related asset
to
its estimated fair value.
Derivative
Liabilities
The
Company issued warrants in connection with its borrowing activities that
included an uncertain purchase price. The Company evaluated the warrants under
SFAS No. 133 –
Accounting
for Derivative Instruments and Hedging Activities
and
Emerging Issues Task Force Issue 00-19 –
Accounting
for Derivative Financial Indexed to, and Potentially Settled in, a Company’s Own
Stock
and
determined the warrants should be accounted for as derivative liabilities at
estimated fair value, and marked-to-market at subsequent measurement dates.
The
Company used the Black-Scholes option-pricing model to determine the fair value
of the derivative liabilities at each measurement date. Key assumptions of
the
Black-Scholes option-pricing model include applicable volatility rates,
risk-free interest rates and the instruments’ expected remaining life. The
fluctuations in estimated fair value are recorded as Adjustments to Fair Value
of Derivatives in the Statement of Operations. On December 12, 2007, the
uncertain purchase price became certain, and the fair value of the derivatives
were reclassed from liabilities to equity. See further discussion in Note
8 – Derivative Liabilities and Note 9 - Borrowings.
Revenue
Recognition
The
Company sells products for radiation therapy treatment, primarily brachytherapy
seeds used in the treatment of cancer and non-therapeutic sources used in
calibration. The Company applies the provisions of SEC Staff Accounting Bulletin
(“SAB”) No. 104, “
Revenue
Recognition
”
for
the
sale of non-software products. SAB No. 104, which supersedes SAB No. 101,
“
Revenue
Recognition in Financial Statement
s”,
provides guidance on the recognition, presentation and disclosure of revenue
in
financial statements. SAB No. 104 outlines the basic criteria that must be
met to recognize revenue and provides guidance for the disclosure of revenue
recognition policies. In general, the Company recognizes revenue related
to product sales when (i) persuasive evidence of an arrangement exists, (ii)
delivery has occurred, (iii) the fee is fixed or determinable, and (iv)
collectibility is reasonably assured.
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to
taxable income in the years in which those temporary differences are expected
to
be recovered or settled. The Company has recorded 100% valuation allowance
against its deferred tax assets until such time that it becomes more likely
than
not that the Company will realize the benefits of its deferred tax assets.
During the three months ended January 31, 2008, the Company implemented
Financial Accounting Standards Board (“FASB”) Interpretation No. 48,
“
Accounting
for Uncertainty in Income Taxes — An Interpretation of FASB Statement
No. 109
,”
(FIN 48). See Note 2 – Income Taxes.
Stock-based
Compensation
The
Company accounts for its share-based payments under the guidance set forth
in
Statement of Financial Accounting Standards (“SFAS”) No. 123(R),
Share-Based
Payment
(“SFAS
123(R)”), which requires the measurement and recognition of compensation expense
for all share-based payment awards made to employees and directors, including
stock options and employee stock purchases related to the Company’s Employee
Stock Purchase Plan (the “Employee Stock Purchase Plan”), based on their fair
values. The Company also applies the guidance found in SEC
Staff
Accounting Bulletin No. 107
(“SAB
107”) to with respect to share-based payments and SFAS 123(R).
Under
SFAS 123(R), the Company attributes the value of share-based compensation to
expense using the straight-line method. The Company uses a 10% forfeiture
rate under the straight-line method based on historic and estimated future
forfeitures. On March 16, 2006, the Company granted 650,500 stock options that
contain certain market conditions (“2006 Premium Price Awards”) The 2006 Premium
Price Awards are, to the extent provided by law, incentive stock options that
have an exercise price of $3.35 per share, which is equal to 159% of the fair
market value of the Company’s common stock on the grant date. The 2006 Premium
Price Awards also include a condition that provides that such stock options
will
only vest if the closing price of the Company's common stock is equal to or
greater than $3.35 on each day over any consecutive four month period beginning
on any date after the date of grant and ending no later than the third
anniversary of the date of grant. If the market condition is not satisfied
by
the third anniversary of the date of grant, the 2006 Premium Price Awards will
not vest. Subject to the attainment of the market condition by the Company,
the
2006 Premium Price Awards will vest, if at all, in equal annual installments
over a four year period beginning on March 16, 2008, the second anniversary
of
the grant date. The 2006 Premium Price Awards have a term of 8 years from the
date of grant. The 2006 Premium Price Awards, share-based compensation expense
has been estimated using a 40% forfeiture rate and is included in share-based
compensation expense. Share-based compensation expense related to stock options
and employee stock purchases was $168,000 and $178,000, including expense for
the 2006 Premium Price Awards, for the three months ended January 31, 2008
and
2007, respectively, and was recorded in the financial statements as a component
of general and administrative expense.
The
Company uses the Black-Scholes option-pricing model for estimating the fair
value of options granted. The Black-Scholes option-pricing model was developed
for use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions, including the expected
stock
price volatility. The Company uses projected volatility rates, which are based
upon historical volatility rates, trended into future years. Because the
Company’s employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management’s
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company’s options. For purposes of financial
statement presentation and pro forma disclosures, the estimated fair values
of
the options are amortized over the options’ vesting periods.
Net
Loss per Share
Basic
loss per share is computed by dividing the loss by the weighted average number
of shares outstanding for the period.
Diluted
earnings (loss) per share is computed by dividing the net income (loss) by
the
sum of the weighted average number of common shares outstanding for the period
plus the assumed exercise of all dilutive securities by applying the treasury
stock method. Stock options for which the exercise price exceeds the average
market price over the period have an anti-dilutive effect on earnings per share
and, accordingly, are excluded from the calculation. The following table sets
forth the computation of basic and diluted loss per share:
|
|
|
Three months ended January 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Net
loss from continuing operations
|
|
$
|
(4,332,000
|
)
|
$
|
(2,279,000
|
)
|
|
Net
loss from discontinued operations
|
|
|
(63,000
|
)
|
|
(916,000
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(4,395,000
|
)
|
$
|
(3,195,000
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
38,300,957
|
|
|
29,329,016
|
|
|
Dilutive
effect of stock options
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding -diluted
|
|
|
38,300,957
|
|
|
29,329,016
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share from continuing operations
|
|
$
|
(0.11
|
)
|
$
|
(0.08
|
)
|
|
Basic
and diluted loss per share from discontinued operations
(1)
|
|
$
|
—
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(0.11
|
)
|
$
|
(0.11
|
)
|
(1)
2008
per
share amount less than $(0.01)
Stock
options to purchase 4,723,659 common shares and 3,169,562 common shares, and
warrants to purchase 8,888,303 common shares and 594,722 common shares for
the
three months ended January 31, 2008 and 2007, respectively, were not
included in the computation of diluted loss per share for those years because
their effect would have been anti-dilutive.
Significant
Concentrations
As
of
January 31, 2008, there was one customer that made up more than 10% of revenues
and four customers that individually comprised more than 5% of accounts
receivable, and one supplier that made up more than 10% of purchases and three
suppliers that individually comprised more than 5% of accounts payable.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “
Fair
Value Measurements
”,
(“SFAS
No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles (GAAP), and
expands disclosures about fair value measurements. This Statement applies under
other accounting pronouncements that require or permit fair value measurements,
and does not require any new fair value measurements. The application of SFAS
No. 157, however, may change current practice within an organization.
SFAS 157 is effective for fiscal years beginning after November 15,
2007. On February 12, 2008, the FASB issued FASB Staff Position
FSP
157-2
which defers the effective date of SFAS No. 157 for one year for
non-financial assets and non-financial liabilities that are not recognized
or
disclosed at fair value in the financial statements on a recurring basis.
The
Company does not believe that SFAS No. 157 will have a material impact on the
Company’s financial position, results of operations or cash
flows.
In
February 2007, the FASB issued SFAS No. 159,
“The
Fair Value Option for Financial Assets and Financial Liabilities.”
SFAS
159
provides companies with an option to report selected financial assets and
liabilities at fair value. The standard’s objective is to reduce both complexity
in accounting for financial instruments and the volatility in earnings caused
by
measuring related assets and liabilities differently. The standard requires
companies to provide additional information that will help investors and other
users of financial statements to more easily understand the effect of the
company’s choice to use fair value on its earnings. It also requires companies
to display the fair value of those assets and liabilities for which the company
has chosen to use fair value on the face of the balance sheet. The new standard
does not eliminate disclosure requirements included in other accounting
standards, including requirements for disclosures about fair value measurements
included in SFAS 157,
“Fair
Value Measurements,”
and
SFAS
107,
“Disclosures
about Fair Value of Financial Instruments.”
SFAS
159
is effective as of the start of fiscal years beginning after November 15,
2007. Early adoption is permitted. The Company is evaluating this standard
and
therefore have not yet determined the impact that the adoption of SFAS 159
will
have on our financial position, results of operations or cash flows.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "
Business
Combinations
"
("SFAS 141R"). SFAS 141R establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree and the goodwill acquired. SFAS 141R also
establishes disclosure requirements to enable the evaluation of the nature
and
financial effects of the business combination. SFAS 141R is effective for
fiscal years beginning after December 15, 2008.The Company is currently
evaluating the potential impact, if any, of the adoption of SFAS 141R on
its consolidated results of operations and financial condition.
In
December 2007, the FASB issued SFAS No. 160, "
Noncontrolling
Interests in Consolidated Financial Statements—an amendment of Accounting
Research Bulletin No. 51
"
(“SFAS
160”). SFAS 160 establishes accounting and reporting standards for ownership
interests in subsidiaries held by parties other than the parent, the amount
of
consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parent's ownership interest, and the valuation of
retained noncontrolling equity investments when a subsidiary is deconsolidated
SFAS 160
also
establishes disclosure requirements that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners SFAS 160
is
effective for fiscal years beginning after December 15, 2008.The Company is
currently evaluating the potential impact, if any, of the adoption
of
SFAS 160
on its consolidated results of operations and financial
condition.
NOTE
2
–
INCOME TAXES
On
November 1, 2007, the Company adopted
Financial
Accounting Standards Board (“FASB”) Interpretation No. 48, “
Accounting
for Uncertainty in Income Taxes — An Interpretation of FASB Statement
No. 109”
,
(“FIN 48”).
FIN 48 which clarifies the accounting for uncertainty in income taxes by
prescribing the recognition threshold a tax position is required to meet before
being recognized in the financial statements and also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. As a result of the adoption of FIN 48,
the Company reduced the liability for net unrecognized tax benefits, classified
in other assets and accrued liabilities, by $152,000 and $440,000, respectively,
and accounted for this as a cumulative effect of a change in accounting
principle that was recorded as an increase to retained deficit. In implementing
FIN 48, the Company has classified $120,000 as current income taxes
payable, and, reduced to zero, both its short-term and long-term income tax
receivable and long-term income tax payable.
Upon
adoption of FIN 48, the Company recognizes interest expense within Interest
and Other Expenses and penalties within General and Administrative expenses
accrued on unrecognized tax
benefits.
As of the date of adoption of FIN 48, the Company had accrued a nominal
amount for interest and penalties. There was not a material change to this
amount as of January 31, 2008.
As
of
October 31, 2007, the Company had generated $141.0 million and $116.0 million
of
Federal and state Net Operating Loss Carry-forwards (“NOL”), respectively and
$4.8 million of Federal Research & Development Credits (“R&D Credits”)
through its recurring operating losses, and its acquisition of Theseus
Corporation in 2000 and NOMOS Corporation in 2004. The tax effect of the Federal
and state NOL and R&D Credits have been carried as a component of its
deferred tax assets, and completely offset by a valuation allowance. The Federal
NOL and R&D Credits are subject to certain statutory limitations, which
reduce the value of the Federal NOL and R&D Credits that can be used to
offset future income under certain sections of the Internal Revenue Service
Code
Section 382 and Section 383, collectively the “Code”. The statutory limitations
are imposed upon a change of ownership, as defined within the Code. As a result
of the Company’s January 2008 PIPE transaction (See Note 10—Stockholders’
Equity) the Company has experienced a change in ownership under the Code.
Federal statutory limitations under the sections are generally accepted as
limitations by the states in which the Company currently files state returns.
The effect of the change of ownership has been to reduce to $10.2 million the
statutory limit on each of the Federal and State NOL and to eliminate the
R&D Credits available to the Company, as determined under the Code. Based on
its effective tax rate 40%, the Company recorded a $59.9 million decrease to
its
deferred tax assets and its valuation allowance at January 31, 2008 as a result
of the limitation.
Components
of Deferred taxes and the valuation allowance, after giving effect to the
statutory limit on the on the Federal and state NOL and Federal R&D Credits
arising from the change in ownership are:
|
|
|
|
|
|
|
|
Deferred
tax assets :
|
|
|
|
|
|
|
|
|
Accrued
liabilities
|
|
$
|
465,000
|
|
$
|
465,000
|
|
|
Accrued
decommissioning
|
|
|
—
|
|
|
—
|
|
|
Allowance
for doubtful accounts
|
|
|
192,000
|
|
|
192,000
|
|
|
Inventory
reserve and capitalized inventory
|
|
|
163,000
|
|
|
163,000
|
|
|
Other
|
|
|
10,000
|
|
|
10,000
|
|
|
Depreciation
and amortization
|
|
|
1,004,000
|
|
|
1,004,000
|
|
|
Tax
credits
|
|
|
—
|
|
|
4,814,000
|
|
|
Theseus
impairment
|
|
|
1,850,000
|
|
|
1,850,000
|
|
|
Net
operating loss carryforwards
|
|
|
4,066,000
|
|
|
59,173,000
|
|
|
|
|
|
7,750,000
|
|
|
67,671,000
|
|
|
Deferred
tax liabilities (1)
|
|
|
—
|
|
|
—
|
|
|
Net
deferred tax assets
|
|
|
7,750,000
|
|
|
67,671,000
|
|
|
Less:
valuation allowance
|
|
|
(7,750,000
|
)
|
|
(67,671,000
|
)
|
|
|
|
$
|
—
|
|
$
|
—
|
|
(1)
There
were no deferred tax liabilities at the respective dates.
NOTE
3
–
DISCONTINUED OPERATION
NOMOS
On
August
3, 2007, the Company announced its intent to divest its NOMOS Radiation Oncology
business (“NOMOS”), which develops and markets IMRT/IGRT products used during
external beam radiation therapy for the treatment of cancer. The Company expects
that the divestiture of NOMOS will allow it to better utilize financial
resources to benefit the marketing and development of innovative brachytherapy
products for the treatment of cancer. On September 17, 2007, the Company
executed a purchase and sale agreement with Best Medical International, Inc.
(“Best”) to purchase, for $0.5 million, certain assets and to assume certain
liabilities of NOMOS, with a carrying value of $0.4 million, after giving effect
to a $6.7 million impairment write-down in the third quarter of fiscal year
2007. The Company incurred $0.5 million in legal and other closing costs in
connection with the sale. The operations of NOMOS are shown as discontinued
operations for the three months ended January 31, 2008 and 2007.
At
January 31, 2008 and October 31, 2007, the Company has included in its Accounts
Payable and Accrued Liabilities on its Balance Sheet $0.5 million and $1.1
million of retained obligations to its vendors, customers and former employees
of the NOMOS operation, respectively, to be paid in accordance with their terms.
Summarized
statement of earnings data for discontinued operations for the three months
ended:
|
|
|
January 31, 2008
|
|
January 31, 2007
|
|
|
Net
revenue (NOMOS)
|
|
$
|
—
|
|
$
|
3,646,000
|
|
|
Loss
from discontinued operations before income tax benefit
(NOMOS)
|
|
|
(63,000
|
)
|
|
(916,000
|
)
|
|
Income
tax benefit (expense)
|
|
|
—
|
|
|
—
|
|
|
Loss
from discontinued operations
|
|
|
(63,000
|
)
|
|
(916,000
|
)
|
|
Loss
from discontinued operations, per share
|
|
$
|
—
|
|
$
|
(0.03
|
)
|
NOTE
4—ACCOUNTS RECEIVABLE
Accounts
receivable consist of the following:
|
|
|
January 31, 2008
|
|
October 31, 2007
|
|
|
Accounts
receivable - trade
|
|
$
|
2,417,000
|
|
$
|
2,475,000
|
|
|
Less:
allowance for doubtful accounts
|
|
|
(218,000
|
)
|
|
(179,000
|
)
|
|
|
|
$
|
2,199,000
|
|
$
|
2,296,000
|
|
The
provision for doubtful accounts was $35,000 and $176,000 for the three months
ended January 31, 2008 and 2007, respectively.
NOTE
5—INVENTORIES
|
Inventories
consist of the following:
|
|
|
|
|
|
|
January 31, 2008
|
|
October 31, 2007
|
|
|
Raw
materials
|
|
$
|
1,317,000
|
|
$
|
1,358,000
|
|
|
Work
in process
|
|
|
150,000
|
|
|
144,000
|
|
|
Finished
goods
|
|
|
247,000
|
|
|
250,000
|
|
|
Reserve
for obsolete inventory
|
|
|
(205,000
|
)
|
|
(206,000
|
)
|
|
|
|
$
|
1,509,000
|
|
$
|
1,546,000
|
|
The
provision for inventory reserves included in cost of sales was $1,000 for the
three months ended January 31, 2008 and there was no provision recorded for
the three months ended January 31, 2007.
NOTE
6—EQUIPMENT AND LEASEHOLD IMPROVEMENTS
|
Equipment
and leasehold improvements consist of the following:
|
|
|
|
|
|
|
January 31, 2008
|
|
October 31, 2007
|
|
|
Furniture,
fixtures and equipment
|
|
$
|
5,031,000
|
|
$
|
4,913,000
|
|
|
Leasehold
improvements
|
|
|
2,194,000
|
|
|
2,194,000
|
|
|
|
|
|
7,225,000
|
|
|
7,107,000
|
|
|
Less:
accumulated depreciation
|
|
|
(6,343,000
|
)
|
|
(6,216,000
|
)
|
|
|
|
$
|
882,000
|
|
$
|
891,000
|
|
Depreciation
expense was $127,000 and $141,000 for the three months ended January 31,
2008 and 2007, respectively.
NOTE
7—INTANGIBLE ASSETS
|
|
|
January 31, 2008
|
|
October 31, 2007
|
|
|
Amortizable
intangible assets
|
|
|
|
|
|
|
|
|
Purchased
technology
|
|
$
|
98,000
|
|
$
|
98,000
|
|
|
Existing
customer relationships
|
|
|
11,000
|
|
|
11,000
|
|
|
Trademark
|
|
|
19,000
|
|
|
19,000
|
|
|
Patents
and licenses
|
|
|
158,000
|
|
|
158,000
|
|
|
|
|
|
286,000
|
|
|
286,000
|
|
|
Less:
accumulated amortization
|
|
|
(183,000
|
)
|
|
(176,000
|
)
|
|
|
|
$
|
103,000
|
|
$
|
110,000
|
|
Amortization
expense was $7,000 and $7,000, for the three months ended January 31, 2008
and 2007, respectively.
The
estimate of aggregate future amortization expense is as follows:
|
For
the Years Ended October 31,
|
|
|
|
|
2008
(remaining nine months)
|
|
$
|
21,000
|
|
|
2009
|
|
|
28,000
|
|
|
2010
|
|
|
28,000
|
|
|
2011
|
|
|
26,000
|
|
|
|
|
$
|
103,000
|
|
NOTE
8
–
WARRANT DERIVATIVES
Warrant
derivative liabilities were none and $173,000 at January 31, 2008 and October
31, 2007, respectively. The warrant liabilities are recorded at estimated fair
value and are marked-to-market at each subsequent measurement date. The
liabilities were incurred when the Company issued warrants to a lender with
an
uncertain pricing component in connection with its borrowing activities (see
Note 9—Borrowings – Agility Capital LLC). The uncertain pricing component
became certain on December 12, 2007, upon the signing of the Securities Purchase
Agreements with certain Investors, and the Company reclassed the fair value
of
the warrant derivatives from liability to equity. See Note 10—Stockholders’
Equity. The Company has accounted for the warrant derivative liabilities in
accordance with guidance under SFAS No. 133 and EITF 00-19. Changes in the
liability warrants balance for the three months ended January 31, 2008
are:
|
|
|
Agility Capital,
LLC
|
|
|
Balance,
October 31, 2007
|
|
$
|
173,000
|
|
|
Additions:
|
|
|
|
|
|
Fair
Value
–
Warrants issued for Amendment II of the Loan Agreement
|
|
|
161,000
|
|
|
Fair
Value Adjustments during the quarter
|
|
|
311,000
|
|
|
|
|
|
645,000
|
|
|
Less:
Fair value of warrants transferred to permanent equity
|
|
|
(645,000
|
)
|
|
Balance,
January 31, 2008
|
|
$
|
—
|
|
The
fair
value of the warrant issued in connection with Amendment II of the Loan
Agreement has been recorded as Loan Discount Fees and amortized to Interest
and
Other Expense over the term of the loan amendment, and the fair value
adjustments during the quarter have been recorded as Adjustments to Fair Value
of Derivatives in the Statement of Operations for the three months ended January
31, 2008. The fair value of the warrants transferred to permanent equity are
included in Additional Paid-in Capital on the Balance Sheet at January 31,
2008.
NOTE
9
–
BORROWINGS
There
were no borrowings outstanding at January 31, 2008, and borrowings were
$3,241,000 at October 31, 2007, consisting primarily of lines of credit with
a
Bank, and subordinated short-term notes with private lenders. Borrowing
activities for the three months ended January 31, 2008 are:
|
|
|
October
31,
|
|
|
|
|
|
January
31,
|
|
|
|
|
2007
|
|
Borrowings
|
|
Repayments
|
|
2008
|
|
|
Silicon
Valley Bank -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line
of credit
|
|
$
|
1,573,000
|
|
$
|
438,000
|
|
$
|
(2,011,000
|
)
|
$
|
—
|
|
|
Bridge
loan sub-limit
|
|
|
750,000
|
|
|
4,189,000
|
|
|
(4,939,000
|
)
|
|
—
|
|
|
Subordinated
short-term notes -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agility
Capital, LLC
|
|
|
1,000,000
|
|
|
—
|
|
|
(1,000,000
|
)
|
|
—
|
|
|
John
Friede Note
|
|
|
—
|
|
|
250,000
|
|
|
(250,000
|
)
|
|
—
|
|
|
Three
Arch Partners, et al
|
|
|
—
|
|
|
1,000,000
|
|
|
(1,000,000
|
)
|
|
—
|
|
|
Total
borrowings
|
|
|
3,323,000
|
|
|
5,877,000
|
|
|
(9,200,000
|
)
|
|
—
|
|
|
Less
Unamortized loan discount fees.
|
|
|
(82,000
|
)
|
|
(914,000
|
)
|
|
996,000
|
|
|
—
|
|
|
|
|
$
|
3,241,000
|
|
$
|
4,963,000
|
|
$
|
(8,204,000
|
)
|
$
|
—
|
|
Interest
expense was $1,003,000, including $101,000 loan discount fees paid in cash
and
$895,000 fair value of warrants amortized in connection with lending activities,
for the three months ended January 31, 2008. Interest expense was $79,000 for
the three months ended January 31, 2007, primarily from the amortization of
loan
discount fees in connection with lending activities.
Lines
of Credit
Silicon
Valley Bank
On
October 5, 2005, the Company entered into a Loan and Security Agreement (the
“Loan Agreement”)
with
Silicon Valley Bank (the “Bank”), for a secured, revolving line of credit of up
to $5,000,000. The line of credit had an initial term of one year and includes
a
letter of credit sub-facility. Borrowings under the line of credit are subject
to a borrowing base formula. The Company will pay interest on the borrowings
under the line of credit at the Bank’s prime rate, or, if certain financial
tests are not satisfied, at the Bank’s prime rate plus 1.5%. The line of credit
is secured by all of the assets of the Company and is subject to customary
financial and other covenants, including reporting requirements.
On
January 12, 2006, the Company entered into a First Amendment to Loan and
Security Agreement (the “First Amendment”) with the Bank. The First
Amendment revised certain terms of the Loan Agreement to provide an adjustment
to the borrowing base formula and to permit liens in favor of a holder of
subordinated debt that are subordinated to the liens of the Bank. In
addition, the First Amendment decreased the minimum tangible net worth that
must
be maintained by the Company under the Asset Based Terms of the Loan Agreement
from $5 million to $1.5 million and granted the Bank a warrant to purchase
39,683 shares of the Company’s common stock at an exercise price of $1.89 per
share. The warrant will expire in five years unless previously exercised.
The
Company calculated the fair value of the warrant on the date of grant to be
$51,000 using the Black-Scholes model incorporating the following
assumptions:
|
Stock
price
|
|
$
|
1.89
|
|
|
Dividend
yield
|
|
|
0
|
%
|
|
Expected
volatility
|
|
|
63
|
%
|
|
Risk-free
interest rate
|
|
|
4.9
|
%
|
|
Expected
life
|
|
|
5
years
|
|
The
value
of the warrant has been fully amortized over the term of the line of credit
at
$5,100 per month, and is included in Interest and Other Expense on the Income
Statement for the three months ended January 31, 2007.
On
October 31, 2006, the Company entered into a Second Amendment to the Loan
Agreement (the “Second Amendment”) with the Bank. The Second Amendment
extended the term of the line of credit to October 3, 2007 and revised certain
terms of the Loan Agreement. Specifically, the Second Amendment decreased the
amount available under the line of credit from $5 million to $4 million, and
increased the minimum tangible net worth that must be maintained by the Company
from $1.5 million to $5 million. Borrowings under the line of credit continued
to be subject to a borrowing base formula. Borrowings bore interest at the
prime
rate until such time as the Company’s quick ratio, which is defined as the ratio
of unrestricted cash plus the Company’s net accounts receivable to the Company’s
current liabilities, fell below 1.00 to 1.00. At such time as the Company’s
quick ratio fell below 1.00 to 1.00, borrowings bore interest at the prime
rate
plus 1.50%, and the Company paid a fee of 0.50% per annum on the unused portion
of the line of credit, and a collateral handling fee in an amount equal to
$2,000 per month during 2007. The fees are included in Interest and Other
Expenses for the three months ended January 31, 2007.
On
August
24, 2007, the Company entered into a Third Amendment to the Loan Agreement
(the
“Third Amendment”) with the Bank. The Third Amendment added a Bridge Loan
Sub-limit to the Loan Agreement of up to $1,500,000 at an interest rate of
prime
plus 4.0%, subject to a borrowing base formula, and decreased the minimum
tangible net worth that must be maintained by the Company from $5 million to
$2
million. The maturity date of the Bridge Loan Sub-limit shall be the earlier
of
October 3, 2007 or the date the Company closes a private investment public
equity transaction. Concurrent with the Third Amendment, the Company issued
the
Bank a warrant for 300,000 shares of the Company’s common stock at an exercise
price of $0.98, the closing price of the Company’s common stock on August 24,
2007.
The
Company calculated the fair value of the warrant on the date of grant to be
$175,000 using the Black-Scholes model incorporating the following
assumptions:
|
Stock
price
|
|
$
|
0.98
|
|
|
Dividend
yield
|
|
|
0
|
%
|
|
Expected
volatility
|
|
|
67
|
%
|
|
Risk-free
interest rate
|
|
|
4.4
|
%
|
|
Expected
life
|
|
|
5
years
|
|
The
value
of the warrant has been amortized over the term of the line of credit, and
is
included in Interest and Other Expense on the Income Statement for the three
months ended January 31, 2008.
On
September 14, 2007, the Company entered into a Fourth Amendment to the Loan
Agreement (the “Fourth Amendment”) with the Bank. The Fourth Amendment included:
(i) a forbearance by the Bank from exercising its rights and remedies against
the Company, until such time as the Bank determines in its discretion to cease
such forbearance, due to the default under the Loan Agreement resulting from
the
Company failing to comply with the tangible net worth covenant in the Loan
Agreement as of July 31, 2007 and August 31, 2007, and (ii) a consent to a
subordinated debt facility of up to $750,000 with Agility Capital LLC. In
connection with the Fourth Amendment, the Bank consented to the NOMOS
Transaction and released its lien on the NOMOS assets.
On
October 3, 2007, the Company entered into a Fifth Amendment and Forbearance
to
the Loan Agreement (the “Fifth Amendment”) with the Bank. The Fifth Amendment
includes: (i) an extension of the maturity date of the Loan Agreement to
November 9, 2007, and an extension of the maturity date of the Bridge Loan
Sub-limit to the earlier of November 9, 2007 or the date the Company closes
a
private investment public equity transaction, (ii) a forbearance by the Bank
from exercising its rights and remedies against the Company, until such time
as
the Bank determines in its discretion to cease such forbearance, due to the
defaults under the Loan Agreement resulting from the Company failing to comply
with the tangible net worth covenant in the Loan Agreement as of July 31, 2007,
August 31, 2007 and September 30, 2007, and (iii) a consent to an increase
in
the Company’s subordinated debt facility with Agility Capital LLC from $750,000
to up to $1,000,000.
On
October 29, 2007, the Company entered into a Sixth Amendment and Forbearance
to
the Loan Agreement (the “Sixth Amendment”) with the Bank. The Sixth Amendment
includes: (i) an extension of the maturity date of the Loan Agreement to
November 20, 2007, and an extension of the maturity date of the Bridge Loan
Sub-limit to the earlier of November 20, 2007 or the date the Company closes
a
private investment public equity transaction, (ii) a forbearance by the Bank
from exercising its rights and remedies against the Company, until such time
as
the Bank determines in its discretion to cease such forbearance, due to the
defaults under the Loan Agreement resulting from the Company failing to comply
with the tangible net worth covenant in the Loan Agreement as of July 31, 2007,
August 31, 2007 and September 30, 2007, and (iii) a consent to the Company’s
issuing up to $500,000 in unsecured subordinated debt to Mr. John Friede, or
an
entity owned or controlled by Mr. Friede. Mr. Friede is a significant
stockholder of the Company, and was a director of the Company at the date of
the
agreement.
On
November 20, 2007, the Company entered into a Seventh Amendment and Forbearance
to its Loan Agreement (the “Seventh Amendment”) with the Bank. The Seventh
Amendment includes: (i) an extension of the maturity date of the Loan Agreement
to December 20, 2007, and an extension of the maturity date of the Bridge Loan
Sub-limit to the earlier of December 20, 2007 or the date the Company closes
a
private investment public equity transaction, and (ii) a forbearance by the
Bank
from exercising its rights and remedies against the Company, until such time
as
the Bank determines in its discretion to cease such forbearance, due to the
defaults under the Loan Agreement resulting from the Company failing to comply
with the tangible net worth covenant in the Loan Agreement as of July 31, 2007,
August 31, 2007 and September 30, 2007. In connection with the Seventh
Amendment, the Company granted a warrant to the Bank to purchase 90,909 shares
of the Company’s common stock, at a warrant price of $0.55 per share, which is
equal to the closing price of the Company’s common stock on November 20, 2007,
the date the Company’s Board of Directors approved the issuance of this warrant.
The number of shares are subject to adjustment as provided by the terms of
the
warrant. The warrant will expire in five years unless previously exercised.
The
Company calculated the fair value of the warrant on the date of grant to be
$31,000 using the Black-Scholes model incorporating the following
assumptions:
|
Stock
price
|
|
$
|
0.55
|
|
|
Dividend
yield
|
|
|
0
|
%
|
|
Expected
volatility
|
|
|
71
|
%
|
|
Risk-free
interest rate
|
|
|
3.5
|
%
|
|
Expected
life
|
|
|
5
years
|
|
The
value
of the warrant has been amortized over the term of the line of credit, and
is
included in Interest and Other Expense on the Income Statement for the three
months ended January 31, 2008.
On
December 18, 2007, the Company, entered into an Eighth Amendment and Forbearance
to the Loan Agreement (the “Eighth Amendment”) with the Bank. The Eighth
Amendment includes: (i) an extension of the maturity date of the Loan Agreement
to the earlier of February 1, 2008 or the date the Company completes its private
placement, (ii) a forbearance by the Bank from exercising its rights and
remedies against the Company, until such time as the Bank determines in its
discretion to cease such forbearance, due to the defaults under the Loan
Agreement resulting from the Company failing to comply with the tangible net
worth covenant in the Loan Agreement as of July 31, 2007, August 31, 2007,
September 30, 2007 and October 31, 2007 and (iii) a consent from the Bank to
allow the Company to repay its outstanding loan from Mr. John A. Friede in
the
amount of $250,000. In connection with the Eighth Amendment, the Company granted
a warrant to the Bank to purchase 192,308 shares of the Company’s common stock
as determined by dividing the warrant price of $50,000 by the $0.26 warrant
price per share, which is equal to the closing price of the Company’s common
stock on December 18, 2007, the date the Company’s Board of Directors approved
the issuance of this warrant. The number of shares are subject to adjustment
as
provided by the terms of the warrant. The warrant will expire in five years
unless previously exercised.
The
Company calculated the fair value of the warrant on the date of grant to be
$33,000 using the Black-Scholes model incorporating the following
assumptions:
|
Stock
price
|
|
$
|
0.26
|
|
|
Dividend
yield
|
|
|
0
|
%
|
|
Expected
volatility
|
|
|
82
|
%
|
|
Risk-free
interest rate
|
|
|
3.5
|
%
|
|
Expected
life
|
|
|
5
years
|
|
The
value
of the warrant has been amortized over the term of the line of credit, and
is
included in Interest and Other Expense on the Income Statement for the three
months ended January 31, 2008.
The
Company paid the $1,275,000 and $755,000 balance of the Line of Credit and
the
Bridge Sub-Limit, including accrued interest on January 23, 2008. The Line
of
Credit and the Bridge Sub-Limit agreements were terminated in accordance with
their terms upon payment of the outstanding balances.
Subordinated
Short-Term Borrowings
Partners
for Growth, LLC
On
March
28, 2006, the Company entered into a Loan and Security Agreement (the “PFG Loan
Agreement”)
with
Partners for Growth, LLC (“PFG”) for a secured, revolving line of credit of up
to $4,000,000, which supplemented an existing line of credit provided by Silicon
Valley Bank. The line of credit had a term of eighteen months, and earned
interest at prime rate as quoted in
The
Wall
Street Journal
.
Borrowings under the line of credit were subject to a borrowing base formula.
Amounts owing under the line of credit were secured by all of the assets of
the
Company and were subordinated to amounts owing under the line of credit with
Silicon Valley Bank. The line of credit did not contain financial covenants;
however the Company was subject to other customary covenants, including
reporting requirements, and events of default. In connection with the PFG Loan
Agreement, the Company also granted PFG a warrant to purchase 395,000 shares
of
the Company’s common stock at an exercise price of $1.89 per share. As a result
of the private placement of the Company’s common stock completed on June 7,
2006, and pursuant to the anti-dilution terms of the warrant issued to PFG,
the
warrant was amended to increase the number of shares of the Company’s common
stock that PFG can purchase from 395,000 shares to 555,039 shares, and the
exercise price was decreased from $1.89 per share to $1.35 per share. The
warrant will expire in five years unless previously exercised.
The
Company calculated the fair value of the warrant on the date of grant to be
$475,000 using the Black-Scholes model incorporating the following
assumptions:
|
Stock
price
|
|
$
|
2.05
|
|
|
Dividend
yield
|
|
|
0
|
%
|
|
Expected
volatility
|
|
|
63
|
%
|
|
Risk-free
interest rate
|
|
|
4.9
|
%
|
|
Expected
life
|
|
|
5
years
|
|
The
value
of the warrant was deferred and amortized over the life of the loan at $26,500
per month and is included in Interest and Other Expense on the Income Statement.
As of October 31, 2007, the value of the warrant was fully amortized. On August
30, 2007 the Company terminated the PFG Loan Agreement with PFG by mutual
consent. As a result of the termination, PFG released all liens on the Company’s
assets. There were no outstanding borrowings under the PFG Loan Agreement at
the
date of termination.
Agility
Capital, LLC
On
September 21, 2007, the Company entered into a Loan Agreement (the “Agility Loan
Agreement”) with Agility Capital, LLC (“Agility”). The Agility Loan Agreement
provides for advances of up to $750,000 subject to the achievement of certain
milestones. Amounts owing under the Agility Loan Agreement are secured by all
of
the Company's assets, and are subordinated to amounts owing under the line
of
credit with Silicon Valley Bank. The Agility Loan Agreement does not contain
financial covenants; however, the Company is subject to other customary
covenants, including reporting requirements, and events of default. The Company
is obligated to pay interest on borrowings under the Agility Loan Agreement
at
the prime rate, as quoted in The Wall Street Journal, plus 6% . The Agility
Loan
Agreement term was 60 days, and all amounts outstanding thereunder were due
and
payable on November 20, 2007. The Company paid an origination fee of $20,000
to
Agility in connection with the Agility Loan Agreement.
The
origination fee and legal expenses were amortized over the term of the Agility
Loan Agreement at $10,000 per month, and is included in Interest and Other
Expense on the Income Statement. The Company further covered $15,000 of
Agility’s legal fees in connection with the Agility Loan Agreement, which are
recorded as general and administrative expenses.
On
October 18, 2007, the Company entered into a First Amendment (the “First
Amendment”) to the Agility Loan Agreement. The First Amendment provides for
advances of up to $1,000,000. Amounts advanced under the Agility Loan Agreement
are subordinated to the existing line of credit provided by Silicon Valley
Bank.
In addition, within the First Amendment, Agility consented to the Company
incurring up to $500,000 of subordinated unsecured indebtedness to Mr. John
A.
Friede or an entity owned or controlled by him (“Friede”), provided that Friede
executes and delivers to Agility a subordination agreement pursuant to which
the
debt owed by the Company to Friede will be subordinated to the debt owed to
Agility. The Company paid an origination fee of $10,000 to Agility in connection
with the First Amendment.
On
November 20, 2007, the Company executed a Second Amendment to the Agility Loan
Agreement (the “Second Amendment”) with Agility to extend the maturity date of
the Agility Loan Agreement from November 20, 2007 to December 21,
2007.
On
December 20, 2007, the Company executed a Third Amendment to the Agility Loan
Agreement (the “Third Amendment”) with Agility. The Third Amendment includes (i)
an extension of the maturity date of the Loan Agreement to February 1, 2008,
(ii) a loan modification and extension fee of $20,000, paid by the Company
upon
the execution of the amendment, and (iii) a consent from Agility to allow the
Company to repay its outstanding loan from Friede in the amount of $250,000.
The
loan modification and extension fee has been amortized over the term of the
loan
and is included in Interest and Other Expense at January 31, 2008. The Company
has repaid the balance on the Agility Loan Agreement, plus accrued interest
as
of January 31, 2008.
In
connection with the Agility Loan Agreement, on September 21, 2007, the Company
granted Agility a $262,500 warrant to purchase 345,395 shares of the Company’s
common stock at an exercise price of $0.76 per share, as determined by the
closing price of the Company’s common stock on September 20, 2007, the day
immediately preceding the issue date of the warrant (the “Initial Warrant”). The
Initial Warrant will expire in seven years unless previously exercised.
The
Company calculated the fair value of the Initial Warrant on the date of grant
to
be $149,000 using the Black-Scholes model incorporating the following
assumptions:
|
Stock
price
|
|
$
|
0.65
|
|
|
Dividend
yield
|
|
|
0
|
%
|
|
Expected
volatility
|
|
|
69
|
%
|
|
Risk-free
interest rate
|
|
|
4.4
|
%
|
|
Expected
life
|
|
|
7
years
|
|
In
connection with the First Amendment, and in exchange for Agility’s returning to
the Company the Initial Warrant issued on September 21, 2007, the Company
granted Agility a revised $362,500 warrant to purchase 476,974 shares of the
Company’s common stock at an exercise price of $0.76 per share, as determined by
the closing price of the Company’s common stock on September 20, 2007, the day
immediately preceding the issue date of the Initial Warrant (the “Revised
Warrant”). The Revised Warrant will expire in seven years unless previously
exercised.
The
Company calculated the fair value of the Revised Warrant on the date of grant
to
be $253,000 using the Black-Scholes model incorporating the following
assumptions:
|
Stock
price
|
|
$
|
0.76
|
|
|
Dividend
yield
|
|
|
0
|
%
|
|
Expected
volatility
|
|
|
71
|
%
|
|
Risk-free
interest rate
|
|
|
4.3
|
%
|
|
Expected
life
|
|
|
7
years
|
|
The
warrant price per share and the number of shares to be issued under the terms
of
the Revised Warrant will adjust to the price at which the Company next issues
its common stock or other equity-linked securities, provided that any amount
is
outstanding under the Agility Loan Agreement. In evaluating the terms of the
Revised Warrant under EITF 00-19
“Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a
Company’s Own Stock”
(“EITF
00-19”), the Company was unable to determine the price at which it will next
issue its common stock or other equity-linked securities at the date the warrant
was issued. If that next issue price falls below a certain price point, the
Company would not have sufficient authorized shares to settle the warrant after
considering all other commitments that may require the issuance of its common
stock during the life of the Revised Warrant. The Company concluded that the
Revised Warrant is correctly classified as a liability and has been revalued
to
fair value each reporting period. At December 12, 2007, the Company entered
into
a Securities Purchase Agreement to issue shares of its Common Stock at $0.246.
Pursuant to the terms of the Revised Warrant, the Company increased to 1,473,577
the number of shares to be issued under the Revised Warrant, and revalued the
Revised Warrant at that date.
The
Company calculated the fair value of the Revised Warrant to be $394,000 and
$173,000 at December 12, 2007 and October 31, 2007, respectively, using the
Black-Scholes model incorporating the following assumptions:
|
|
|
December 12, 2007
|
|
October 31, 2007
|
|
|
Stock
price
|
|
$
|
0.35
|
|
$
|
0.56
|
|
|
Dividend
yield
|
|
|
0
|
%
|
|
0
|
%
|
|
Expected
volatility
|
|
|
74
|
%
|
|
71
|
%
|
|
Risk-free
interest rate
|
|
|
3.7
|
%
|
|
4.3
|
%
|
|
Expected
life
|
|
|
7
years
|
|
|
7
years
|
|
The
Initial Warrant has been fair valued and classified as a liability at the time
of the grant. The fair value of $148,830 for the Initial Warrant was classified
as debt discount and has been fully amortized to interest and other expense
as
of January 31, 2008. The Revised Warrant has been fair valued and the change
in
the fair value of the Initial Warrant and the Revised Warrant was expensed
as of
October 31, 2007. The subsequent change in the fair value of the Revised Warrant
has been recorded as fair value expense and is included in Interest and Other
Expense at January 31, 2007. The $394,000 fair value of the Revised Warrant
at
December 12, 2007 has been reclassified to permanent equity as Additional
Paid-in Capital as of January 31, 2008 in accordance with the guidance under
EITF 00-19.
In
connection with the Second Amendment, the Company granted Agility a $231,250
warrant to purchase 420,455 shares of the Company’s common stock at an exercise
price of $0.55 per share, as determined by the closing price of the Company’s
common stock on November 19, 2007, the day immediately preceding the issue
date
of the Warrant (the “Agility Second Warrant”). The Agility Second Warrant will
expire in seven years unless previously exercised. Similar to the Revised
Warrant, the warrant price per share and the number of shares to be issued
under
the terms of the Agility Second Warrant will adjust to the price at which the
Company next issues its common stock or other equity-linked securities, provided
that any amount is outstanding under the Agility Loan Agreement. As with the
Revised Warrant, the Company concluded that the Agility Second Warrant is
correctly classified as a liability and has been revalued to fair value each
reporting period. At December 12, 2007, the Company entered into a Securities
Purchase Agreement to issue shares of its Common Stock at $0.246. Pursuant
to
the terms of the Agility Second Warrant, the Company increased to 940,041 the
number of shares to be issued under the Agility Second Warrant, and revalued
the
Agility Second Warrant at that date.
The
Company calculated the fair value of the Agility Second Warrant to be $251,000
and $161,000 at December 12, 2007 and November 20, 2007, respectively, using
the
Black-Scholes model incorporating the following assumptions:
|
|
|
December 12, 2007
|
|
November 20, 2007
|
|
|
Stock
price
|
|
$
|
0.35
|
|
$
|
0.55
|
|
|
Dividend
yield
|
|
|
0
|
%
|
|
0
|
%
|
|
Expected
volatility
|
|
|
74
|
%
|
|
71
|
%
|
|
Risk-free
interest rate
|
|
|
3.7
|
%
|
|
3.7
|
%
|
|
Expected
life
|
|
|
7
years
|
|
|
7
years
|
|
The
Agility Second Warrant has been fair valued and classified as a liability at
the
time of the grant. The $161,000 fair value of the Agility Second Warrant was
classified as debt discount and has been fully amortized to interest and other
expense as of January 31, 2008. The subsequent change in the fair value of
the
Agility Second Warrant has been recorded as fair value expense and is included
in Interest and Other Expense at January 31, 2008. The $251,000 fair value
of
the Agility Second Warrant at December 12, 2007 has been reclassified to
permanent equity as Additional Paid-in Capital as of January 31, 2008 in
accordance with the guidance under EITF 00-19.
In
connection with the Third Amendment, the Company granted Agility a $200,000
warrant (the “Agility Third Warrant”) to purchase 813,008 shares of the
Company’s common stock at an exercise price of $0.246 per share, as determined
by the issue price of the Company’s common stock pursuant to the Securities
Purchase Agreements dated December 12, 2007. The Agility Third Warrant will
expire in seven years unless previously exercised.
The
Company calculated the fair value of the warrant on the date of grant to be
$158,000 using the Black-Scholes model incorporating the following
assumptions:
|
Stock
price
|
|
$
|
0.26
|
|
|
Dividend
yield
|
|
|
0
|
%
|
|
Expected
volatility
|
|
|
79
|
%
|
|
Risk-free
interest rate
|
|
|
3.7
|
%
|
|
Expected
life
|
|
|
7
years
|
|
The
value
of the Agility Third Warrant has been amortized over the term of the line of
credit, and is included in Interest and Other Expense on the Income Statement
for the three months ended January 31, 2008.
The
$158,000 fair value of the Agility Third Warrant at the grant date has been
classified as permanent equity in Additional Paid-in Capital as of January
31,
2008 in accordance with the guidance under EITF 00-19.
In
addition, under the terms of the collective outstanding warrants granted to
Agility, the Company has until July 31, 2008 (the “Filing Date”), to file a
registration statement on Form S-3 or applicable form covering the resale of
the
warrant shares on a registration statement (the “Registration Statement”) with
the Securities Exchange Commission (the “SEC”). The warrant shares, or the
common stock into which the warrant shares are convertible (the “Shares”), shall
be “Registrable Securities”, and the holder shall have the rights of a “Holder”
under such investor rights agreement or registration rights agreement as the
Company may enter into from time to time. If the Registration Statement (i)
has
not been filed with the SEC by the Filing Date, (ii) has not been declared
effective by the SEC within 45 days thereafter, or (iii) after the Registration
Statement is declared effective by the SEC, is suspended by Company or ceases
to
remain continuously effective as to all Shares for which it is required to
be
effective (a “Registration Default”), for any 30-day period (a “Penalty Period”)
during which the Registration Default remains uncured, the holder may acquire
an
additional number of Shares equal to 50,000 shares for each such penalty period,
but not more that 600,000 shares in the aggregate. All expenses incurred in
connection with any registration, qualification, exemption or compliance
pursuant to these provisions shall be borne by Company.
John
Friede Note
On
October 30, 2007, the Company entered into a Loan Agreement (the “Friede Loan
Agreement”) with Friede, a stockholder and former director of the Company.
Subject to the terms of the Friede Loan Agreement, Friede agreed to loan the
Company $500,000 in two installments of $250,000 each. The loan was unsecured
and subordinated to the loan agreements with Silicon Valley Bank and Agility
Capital LLC. On November 1, 2007, the Company executed the promissory note
underlying the loan, and received the first $250,000 installment. The Company
and Friede amended the Friede Loan Agreement on November 20, 2007, prior to
funding of the second $250,000 installment, to extend the maturity date of
the
Friede Loan Agreement from November 20, 2007 to December 20, 2007, and to reduce
the borrowing capacity to $250,000 from $500,000. The loan balance, plus accrued
interest were paid in full on December 20, 2007.
In
connection with the Friede Loan Agreement, the Company agreed to issue to the
Lender a $200,000 Warrant (the “Friede Warrant”) to purchase 307,692 shares of
the Company’s common stock at $0.65 Exercise Price. The Friede Warrant will
expire 7 years from the date of issue unless previously exercised.
The
Company calculated the fair value of the Friede Warrant on the date of grant
to
be $119,000 using the Black-Scholes model incorporating the following
assumptions:
|
Stock
price
|
|
$
|
0.57
|
|
|
Dividend
yield
|
|
|
0
|
%
|
|
Expected
volatility
|
|
|
71
|
%
|
|
Risk-free
interest rate
|
|
|
4.2
|
%
|
|
Expected
life
|
|
|
7
years
|
|
The
value
of the Friede Warrant has been amortized over the term of the line of credit,
and is included in Interest and Other Expense on the Income Statement for the
three months ended January 31, 2008.
The
$119,000 fair value of the Friede Warrant at the grant date has been classified
as permanent equity in Additional Paid-in Capital as of January 31, 2008 in
accordance with the guidance under EITF 00-19.
Three
Arch Capital (et al)
On
December 7, 2007, the Company entered into a Loan Agreement (the “Three Arch
Loan Agreement”) with Three Arch Capital, L.P., TAC Associates, L.P., Three Arch
Partners IV, L.P. and Three Arch Associates IV, L.P. (the “Lenders”). The
Lenders are, collectively, the largest stockholder of the Company, and Dr.
Wilfred Jaeger and Roderick Young, are directors of the Company and affiliates
of the Lenders. The transaction contemplated by the Three Arch Loan Agreement
was approved by a committee of the Company’s Board of Directors consisting only
of disinterested directors.
Under
the
Three Arch Loan Agreement, the Lenders loaned $1.0 million to the Company and
the Company issued notes to the Lender (the “Notes”). The Notes bear interest at
an annual rate equal to the prime rate plus six percent (6%) and are
subordinated to the Company’s indebtedness to Silicon Valley Bank and Agility
Capital LLC. The Notes became due and payable upon the close of the Company’s
pending private investment public equity financing transaction on January 18,
2008. The Company paid $20,000 loan fee in connection with the Three Arch Loan
Agreement, which has been amortized to Interest and Other Expenses as January
31, 2008. The balance of the Three Arch Loan Agreement, plus accrued interest,
were paid in full as of January 31, 2008.
In
connection with the Three Arch Loan Agreement, the Company granted the Lenders
warrants (the “Three Arch Warrants”) to purchase, in the aggregate, 1,025,639
shares of the Company’s common stock at a purchase price of $0.39 per share. The
Three Arch Warrants will expire 7 years from the date of issue unless previously
exercised.
The
Company calculated the fair value of the Three Arch Warrants on the date of
grant to be $329,000 using the Black-Scholes model incorporating the following
assumptions:
|
Stock
price
|
|
$
|
0.44
|
|
|
Dividend
yield
|
|
|
0
|
%
|
|
Expected
volatility
|
|
|
74
|
%
|
|
Risk-free
interest rate
|
|
|
3.8
|
%
|
|
Expected
life
|
|
|
7
years
|
|
The
value
of the Three Arch Warrants has been amortized over the term of the line of
credit, and is included in Interest and Other Expense on the Income Statement
for the three months ended January 31, 2008.
The
$329,000 fair value of the Three Arch Warrants at the grant date has been
classified as permanent equity in Additional Paid-in Capital as of January
31,
2008 in accordance with the guidance under EITF 00-19.
The
following table summarizes the warrant activity and related interest and fair
value impact on the Company’s operations for the three months ended January 31,
2008:
|
|
|
|
|
Statement
of Operations
|
|
|
Warrant
coverage for:
|
|
Number
of
Warrant
Shares
|
|
Interest
Expense
|
|
Fair
Value
Expense
|
|
|
Carry
forward from October 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
loan discount fees amortized in 2008
|
|
|
—
|
|
$
|
64,000
|
|
$
|
—
|
|
|
Issued
in first quarter of 2008:
|
|
|
|
|
|
|
|
|
|
|
|
Silicon
Valley Bank Line of Credit:
|
|
|
|
|
|
|
|
|
|
|
|
Amendment
7
|
|
|
90,909
|
|
|
31,000
|
|
|
—
|
|
|
Amendment
8
|
|
|
192,308
|
|
|
33,000
|
|
|
—
|
|
|
John
Friede Note
|
|
|
307,692
|
|
|
119,000
|
|
|
—
|
|
|
Agility
Capital, LLC Note:
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value change – 2007 warrants
|
|
|
1,473,577
|
|
|
—
|
|
|
221,000
|
|
|
Amendment
2
|
|
|
420,455
|
|
|
161,000
|
|
|
90,000
|
|
|
Amendment
3
|
|
|
813,008
|
|
|
158,000
|
|
|
—
|
|
|
Three
Arch Partners, et al Note
|
|
|
1,025,639
|
|
|
329,000
|
|
|
—
|
|
|
|
|
|
4,323,588
|
|
$
|
895,000
|
|
$
|
311,000
|
|
NOTE
10—STOCKHOLDERS' EQUITY
Preferred
Stock
The
Company has authorized the issuance of 2,000,000 shares of preferred stock;
however, no shares have been issued. The designations, rights and preferences
of
any preferred stock that may be issued will be established by the Board of
Directors at or before the time of such issuance.
Sale
of Common Stock and Warrants
2006
PIPE
Pursuant
to the terms of the Securities Purchase Agreements dated June 6, 2006 (the
“2006
Securities Purchase Agreements”), the Company completed a private placement (the
“2006 Private Placement”) of
12,291,934
shares of the Company’s common stock on June 7, 2006 at a purchase price of
$1.95 per share as well as warrants to purchase an additional 6,145,967 shares
of the Company’s common stock at an exercise price of $2.08 per share (the “2006
Warrants”) for an aggregate consideration of approximately $24.0 million (before
cash commissions and expenses of approximately $2.0 million). The 2006 Warrants
are exercisable beginning 180 days after the date of closing until 7 years
after
the date of closing. The values of the 2006 Warrants and common stock in excess
of par value have been classified as stockholders’ equity in additional paid-in
capital in our consolidated balance sheets. The 2006 Warrants were evaluated
under SFAS 133 and EITF 00-19, and the Company determined that the 2006 Warrants
have been correctly classified as equity.
The
shares of common stock sold to the investors and the shares of common stock
issuable upon the exercise of the warrants are subject to certain registration
rights as set forth in the 2006 Securities Purchase Agreements. Under the 2006
Securities Purchase Agreements, we agreed to file a registration statement
with
the SEC within 45 days after the closing of the transaction to register the
resale of the shares of common stock and the shares of common stock issuable
upon the exercise of the warrants. If we failed to file a registration statement
within such time period or such registration statement was not declared
effective within 90 days after the closing of the transaction, we would have
been liable for certain specified liquidated damages as set forth in the 2006
Securities Purchase Agreements, except that the parties have agreed that the
Company will not be liable for liquidated damages with respect to the warrants
or the warrant shares. We have agreed to maintain the effectiveness of this
registration statement until the earlier of such time as the passage of two
years from the closing date or all of the securities registered under the
registration statement may be sold under Rule 144(k) of the Securities Act
of
1933 or all of the securities registered under the registration statement have
been sold. We will pay all expenses incurred in connection with the
registration, except for underwriting discounts and commissions. Pursuant to
the
terms of the 2006 Securities Purchase Agreement, we filed a registration
statement on Form S-3 with the SEC on July 21, 2006 to register the shares
of
common stock sold to the investors and the shares of common stock issuable
upon
the exercise of the warrants. The registration statement was declared effective
by the SEC on August 4, 2006.
The
2006
Securities Purchase Agreements contain certain customary closing conditions,
as
well as the requirement that we increase the number of members of the Board
of
Directors of the Company (the “Board”) from seven members to nine members. Under
the 2006 Securities Purchase Agreements, Three Arch Partners, one of the
investors, has the right to designate two members to the Board so long as Three
Arch Partners beneficially owns greater than 3,500,000 shares of common stock
(including shares of common stock issuable upon exercise of the warrants, and
as
appropriately adjusted for stock splits, stock dividends and recapitalizations)
and the right to designate one member to the Board so long as Three Arch
Partners beneficially owns greater than 2,000,000 shares of common stock
(including shares of common stock issuable upon exercise of the warrants, and
as
appropriately adjusted for stock splits, stock dividends and recapitalizations).
In accordance with the terms of the 2006 Securities Purchase Agreements, we
increased the number of members of our Board from seven members to nine members
and Three Arch Partners designated Wilfred E. Jaeger, M.D. and Roderick A.
Young
to fill the two vacancies. Our Board elected Dr. Jaeger and Mr. Young to serve
as members of the Board on June 13, 2006.
In
connection with the issuance of the warrants and upon closing of the
transaction, the Company entered into a Warrant Agreement with our transfer
agent relating to the warrant of Three Arch Partners and a different Warrant
Agreement with our transfer agent relating to the warrants of the investors
other than Three Arch Partners. The material differences between the two Warrant
Agreements are described below.
The
Three
Arch Partners Warrant Agreement includes a non-waivable provision that provides
that the number of shares issuable upon exercise of the warrants that may be
acquired by Three Arch Partners will be limited to the extent necessary to
assure that, following such exercise, the total number of shares of common
stock
then beneficially owned by Three Arch Partners and its affiliates does not
exceed 19.9% of the total number of issued and outstanding shares of common
stock as of the date of such exercise (including for such purpose the shares
of
common stock issuable upon such exercise of warrants), unless approved by our
stockholders prior to such exercise. The Warrant Agreement relating to the
warrants of the other investors does not include such a provision.
The
Warrant Agreement relating to the investors other than Three Arch Partners
includes a waivable provision that provides that the number of shares issuable
upon exercise of the warrants that may be acquired by a registered holder of
warrants upon an exercise of warrants will be limited to the extent necessary
to
assure that, following such exercise, the total number of shares of common
stock
then beneficially owned by its holder and its affiliates does not exceed 4.99%
of the total number of issued and outstanding shares of common stock (including
for such purpose the shares of common stock issuable upon such exercise of
warrants). This provision may be waived by a registered holder of warrants
upon,
at the election of such holder, upon not less than 61 days prior notice to
us.
This Warrant Agreement also contains a non-waivable provision that provides
that
the number of shares issuable upon exercise of the warrants that may be acquired
by a registered holder of warrants upon an exercise of warrants will be limited
to the extent necessary to assure that, following such exercise, the total
number of shares of common stock then beneficially owned by such holder and
its
affiliates does not exceed 9.99% of the total number of issued and outstanding
shares of common stock (including for such purpose the shares of common stock
issuable upon such exercise of warrants). The Warrant Agreement relating to
the
warrants of Three Arch Partners does not include such provisions.
2007
PIPE
Pursuant
to the terms of the Securities Purchase Agreements dated December 12, 2007
(the
“2007 Securities Purchase Agreements”), the Company completed a private
placement (the “2007 Private Placement”) of
63,008,140
shares of the Company’s common stock on January 18, 2008
with
Three Arch Partners IV, L.P. and affiliated funds (“Three Arch Partners”), SF
Capital Partners Ltd. (“SF Capital”) and CHL Medical Partners III, L.P. and an
affiliated fund (“CHL,” and together with Three Arch Partners and SF Capital,
the “Investors”)
at a
purchase price of $0.246 per share as well as warrants to purchase an additional
3,150,407 shares of the Company’s common stock (the “2007 Warrants”) at an
exercise price of $0.246 per share for an aggregate consideration of
approximately $15.5 million (before cash commissions and expenses of
approximately $1.5 million).
The
purchase price represents a 40% discount to the volume weighted average price
of
the Common Stock on the Nasdaq Global Market, as reported by Bloomberg Financial
Markets, for the 20 trading day period ending on the trading day immediately
preceding the date of the 2007 Securities Purchase Agreement.
The
Investors purchased the following amounts of securities in the offering:
|
Investor
|
|
Shares
|
|
Warrants
(Shares issuable upon exercise)
|
|
|
Three
Arch Partners
|
|
|
40,650,420
|
|
|
2,032,521
|
|
|
SF
Capital
|
|
|
10,162,600
|
|
|
508,130
|
|
|
CHL
|
|
|
12,195,120
|
|
|
609,756
|
|
Prior
to
the closing of the transaction, Three Arch Partners owned 5,121,638 shares
of
common stock of the Company. After the transaction was consummated, Three Arch
Partners’ percentage ownership of the outstanding common stock increased from
approximately 17.3% to 49.5% (and 43.9% of the common stock on a fully diluted
basis).
The
2007
Warrants are exercisable beginning 180 days after the date of closing until
7
years after the date of closing. The values of the 2007 Warrants and common
stock in excess of par value have been classified as stockholders’ equity in
additional paid-in capital in our consolidated balance sheets. The 2007 Warrants
were evaluated under SFAS 133 and EITF 00-19, and the Company determined that
the 2007 Warrants have been correctly classified as equity.
The
terms
of the 2007 Private Placement were approved by a committee of the Company’s
Board of Directors consisting only of disinterested directors. The Company
received stockholder approval of a majority of stockholders on January 17,
2008
of the 2007 Private Placement and to amendment of its Certificate of
Incorporation to increase the number of shares of common stock it is authorized
to issue to 150,000,000 Shares pursuant to a Consent Solicitation to its
Stockholders on December 31, 2007
Holders
of the shares of common stock sold to the Investors (the “Shares”) and the
shares of common stock issuable upon the exercise of the Warrants (the “Warrant
Shares” and collectively, with the Shares, the “Registrable Securities”) are
entitled to certain registration rights as set forth in the 2007 Securities
Purchase Agreement. Under the 2007 Securities Purchase Agreement, the Company
has agreed to use its reasonable best efforts to prepare and file a registration
statement on Form S-3 or other applicable form available to the Company to
register the resale of the Registrable Securities. If the Company fails to
file
a registration statement or such registration statement is not declared
effective between the time it files its next Annual Report on Form 10-K and
the
180th date after the closing of the 2007 Private Placement, or, if additional
registration statements are required to be filed to register such shares because
of limitations imposed by the staff of the SEC on the number of shares that
may
be registered on behalf of selling stockholders on Form S-3, within 45 days
of
filing each such additional registration statement (or 90 days if such filing
is
reviewed by the SEC), the Company will be liable for certain specified
liquidated damages as set forth in the 2007 Securities Purchase Agreement.
The
Company has agreed to maintain the effectiveness of the registration statement
until the earliest of (i) the second anniversary of the closing of the 2007
Private Placement, (ii) such time as all Registrable Securities have been
sold pursuant to the registration statement or (iii) the date on which all
of the Registrable Securities may be resold by each of the Investors without
registration pursuant to Rule 144(k). The Company will pay all expenses incurred
in connection with the registration, other than fees and expenses, if any,
of
counsel or other advisors to the Investors or underwriting discounts, brokerage
fees and commissions incurred by the Investors, if any, in connection with
an
underwritten offering of the Registrable Securities .
The
2007
Securities Purchase Agreement contains certain customary closing conditions,
as
well as the requirement that the Company decrease the number of members of
the
Board from nine members to seven members at or by the time of its next annual
meeting of stockholders. Under the 2007 Securities Purchase Agreement, Three
Arch Partners has the right to name one member to the Board so long as Three
Arch Partners beneficially owns greater than 5,000,000 shares of common stock
of
the Company (including shares of common stock issuable upon exercise of the
Warrants, and as appropriately adjusted for stock splits, stock dividends and
recapitalizations). Two of the current members of the Board, Dr. Wilfred E.
Jaeger and Roderick A. Young, have been designated by Three Arch Partners.
Under
the 2007 Securities Purchase Agreement, the Company has agreed to add two new
independent members to the Board at or before the Company’s next annual meeting.
In
connection with the issuance of the Warrants and upon closing of the
transaction, the Company entered into warrant agreements with its transfer
agent
relating to the Warrants. The warrant agreement relating to the Warrants issued
to SF Capital contains a non-waivable provision that provides that the number
of
shares issuable upon exercise of the Warrants granted to SF Capital pursuant
to
the 2007 Private Placement will be limited to the extent necessary to assure
that, following such exercise, the total number of shares of common stock of
the
Company then beneficially owned by such holder and its affiliates does not
exceed 14.9% of the total number of issued and outstanding shares of common
stock of the Company (including for such purpose the shares of common stock
issuable upon such exercise of Warrants). The warrant agreement relating to
the
Warrants issued to the other Investors does not contain this provision.
The
sale
of the Shares, the Warrants and the Warrant Shares have not been registered
under the Securities Act of 1933, as amended (the “Securities Act”), or any
state securities laws. The Company is relying upon the exemptions from
registration provided by Section 4(2) of the Securities Act and Regulation
D
promulgated under that section. Each Investor has represented that it is an
accredited investor, as such term is defined in Regulation D under the
Securities Act, and that it was acquiring the Shares and Warrants for its own
account and not with a view to or for sale in connection with any distribution
thereof, and appropriate legends will be affixed to the Shares and Warrants.
Stock
Options
The
Company's 1996 Stock Option Plan ("1996 Plan"), as amended April 6, 2001,
provided for the issuance of incentive stock options to employees of the Company
and non-qualified options to employees, directors and consultants of the Company
with exercise prices equal to the fair market value of the Company's stock
on
the date of grant. Options vest in accordance with their terms over periods
up
to four years and expire ten years from the date of grant. The 1996 Plan expired
on April 1, 2006. As of January 31, 2008, 1,592,293 options underlying shares
of
common stock were outstanding under the 1996 Plan.
On
May 3,
2006, the Company’s stockholders approved the North American Scientific, Inc.
2006 Stock Plan (“2006 Plan”). Under the 2006 Plan, the Company may issue up to
1,700,000 shares, plus any shares from the 1996 Plan that are subsequently
terminated, expire unexercised or forfeited, to employees of the Company through
incentive stock options, non-qualified options, stock appreciation rights,
restricted stock and restricted stock units. Since its inception, 1,516,625
shares have been transferred into the 2006 Plan from the 1996 Plan. The exercise
price of an option is equal to the fair market value of the Company’s stock on
the date of the grant. For the three months ended January 31, 2008, 600,000
stock option awards were granted under the 2006 Plan, and 1,502,155 shares
were
available for grant at January 31, 2008.
In
March 2003, the Company's stockholders approved the 2003 Non-Employee
Directors' Equity Compensation Plan ("Directors' Plan"). The Directors' Plan
supersedes prior provisions for grants of stock options to non-employee
directors contained in the 1996 Plan. Under the Directors' Plan, the Company
may
issue up to 500,000 shares to non-employee directors of the Company through
non-qualified options or restricted stock. The exercise price of an option
is
equal to the fair market value of the Company's stock on the date of grant.
Options and restricted stock vest equally over a three-year period. The options
expire ten years from the date of grant. In the three months ended January
31,
2008, no stock options shares were granted to non-employee directors under
the
Directors’ Plan. At January 31, 2008, there were 15,000 shares available for
grant under the Directors’ Plan.
On
April
23, 2007, the Company granted stock options with respect to 1,800,000 shares
of
its common stock in connection with the employment by the Company of its new
CEO, John B. Rush. Options with respect to 600,000 shares of the Company’s
common stock were issued under the 2006 Plan. Options with respect to the
remaining 1,200,000 shares of the Company’s common stock were issued as a
stand-alone grant outside the 2006 Plan and approved by the written consent
of a
majority of stockholders on April 20, 2007. The stock options have an exercise
price of $1.16, which is equal to the fair market value per share of the
Company’s common stock on the grant date. All of the options have a term of ten
years and vest monthly over a four-year period. The options remain exercisable
until the earlier of the expiration of the term of the option or (i) three
months following Mr. Rush’s date of termination in the case of termination for
reasons other than cause, death or disability (as such terms are defined in
his
employment agreement) or (ii) 12 months following Mr. Rush’s date of termination
in the case of termination on account of death or disability. In the event
that
Mr. Rush is terminated for cause, all outstanding options, whether vested or
not, will immediately lapse.
At
January 31, 2008, a total of 6,508,918 shares of the Company’s common stock were
reserved for issuance. The following table summarizes stock option activity
for
both plans:
|
|
|
|
|
Options
Outstanding
|
|
|
|
|
Options
Available
for
Grant
|
|
Number
Outstanding
|
|
Exercise Price
|
|
|
Balance
at October 31, 2005
|
|
|
1,732,441
|
|
|
2,414,109
|
|
$
|
0.03
- $24.54
|
|
|
Granted
|
|
|
(1,453,000
|
)
|
|
1,453,000
|
|
$
|
1.92
- $ 3.35
|
|
|
Forfeited
and expired
|
|
|
(
194,441
|
)
|
|
(426,618
|
)
|
$
|
1.11
- $16.75
|
|
|
Exercised
|
|
|
—
|
|
|
(2,186
|
)
|
$
|
1.11
- $ 1.12
|
|
|
Additional
shares reserved
|
|
|
1,700,000
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at October 31, 2006
|
|
|
1,785,000
|
|
|
3,438,305
|
|
$
|
0.03
- $24.54
|
|
|
Granted
|
|
|
(2,464,470
|
)
|
|
2,464,470
|
|
$
|
0.93
- $ 1.23
|
|
|
Forfeited
and expired
|
|
|
1,481,275
|
|
|
(1,395,662
|
)
|
$
|
0.70
- $24.24
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Additional
shares reserved
|
|
|
1,200,000
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at October 31, 2007
|
|
|
2,001,805
|
|
|
4,507,113
|
|
$
|
0.03
- $23.50
|
|
|
Granted
|
|
|
(600,000
|
)
|
|
600,000
|
|
$
|
0.27
- $ 0.33
|
|
|
Forfeited
and expired
|
|
|
115,350
|
|
|
(115,350
|
)
|
$
|
2.23
- $16.75
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 31, 2008
|
|
|
1,517,155
|
|
|
4,991,763
|
|
$
|
0.03
- $23.50
|
|
There
were 1,675,421, 1,669,521 and 1,878,663 options exercisable with weighted
average exercise prices of $6.76, $6.94 and $8.57 at January 31, 2008, October
31, 2007 and 2006, respectively.
The
following table summarizes options outstanding at January 31, 2008 and the
related weighted average exercise price and remaining contractual life
information:
|
|
|
Employee
Options Outstanding
|
|
Employee
Options Exercisable
|
|
|
Range
of
Exercise
Prices
|
|
Shares
|
|
Weighted
Avg.
Remaining
Contractual
Life
(Years)
|
|
Weighted
Avg.
Exercise
Price
|
|
Shares
|
|
Weighted
Avg.
Exercise
Price
|
|
|
$0.03
- $0.94
|
|
|
1,121,470
|
|
|
9.74
|
|
$
|
0.59
|
|
|
7,000
|
|
$
|
0.03
|
|
|
$0.95
- $1.16
|
|
|
1,800,000
|
|
|
9.22
|
|
|
1.16
|
|
|
337,500
|
|
|
1.16
|
|
|
$1.17
- $3.97
|
|
|
947,250
|
|
|
6.76
|
|
|
2.56
|
|
|
220,378
|
|
|
2.66
|
|
|
$3.94
- $7.60
|
|
|
581,293
|
|
|
3.94
|
|
|
7.07
|
|
|
568,793
|
|
|
7.06
|
|
|
$7.61
- $23.50
|
|
|
541,750
|
|
|
3.57
|
|
|
11.69
|
|
|
541,750
|
|
|
11.69
|
|
|
|
|
|
4,991,763
|
|
|
7.64
|
|
$
|
3.13
|
|
|
1,675,421
|
|
$
|
6.76
|
|
The
average fair value for accounting purposes of options granted was $0.17, $0.63
and $1.09 for the three months ended January 31, 2008 and for the years ended
October 31, 2007 and 2006, respectively.
The
following table summarizes the weighted average price, weighted average
remaining contractual life and intrinsic value for granted and exercisable
options outstanding as of January 31, 2008 and October 31, 2007:
|
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted Avg.
Remaining
Contractual
Life
(Years)
|
|
Intrinsic Value
|
|
|
As
of October 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Options Outstanding
|
|
|
4,507,113
|
|
$
|
3.52
|
|
|
7.54
|
|
$
|
3,710
|
|
|
Employee
Options Expected to Vest
|
|
|
2,837,592
|
|
$
|
0.56
|
|
|
2.82
|
|
$
|
—
|
|
|
Employee
Options Exercisable
|
|
|
1,669,521
|
|
$
|
6.94
|
|
|
5.26
|
|
$
|
3,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of January 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Options Outstanding
|
|
|
4,991,763
|
|
$
|
3.13
|
|
|
7.64
|
|
$
|
32,240
|
|
|
Employee
Options Expected to Vest
|
|
|
3,316,342
|
|
$
|
1.66
|
|
|
4.12
|
|
$
|
30,000
|
|
|
Employee
Options Exercisable
|
|
|
1,675,421
|
|
$
|
6.76
|
|
|
5.26
|
|
$
|
2,240
|
|
Fair
Value Disclosures
The
Company calculated the fair value of each option grant on the respective date
of
grant using the Black-Scholes option-pricing model as prescribed by
SFAS 123(R) using the following assumptions:
|
|
|
Three months
ended January 31,
|
|
Year Ended October 31,
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
Dividend
yield
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
Expected
volatility
|
|
|
72
|
%
|
|
61
|
%
|
|
63
|
%
|
|
Risk-free
interest rate
|
|
|
3.4
|
%
|
|
4.8
|
%
|
|
4.9
|
%
|
|
Expected
life
|
|
|
5
years
|
|
|
5
years
|
|
|
5
years
|
|
Anti-Dilution
Rights
Option
grants to certain executive officers carry an anti-dilution provision which
has
become effective as a result of the 2007 Private Placement. Options underlying
approximately 4,095,528 will be granted to four executives upon approval by
stockholders at the annual meeting to be held on April 29, 2008. The options
will be granted at a $0.25 exercise price, the price of the Company’s common
stock on the date the 2007 Private Placement was completed. The options will
vest at varying rates over four years.
Stockholders'
Rights Plan
In
October 1998, the Board of Directors of the Company implemented a rights
agreement (the “Rights Agreement”) to protect stockholders' rights in the event
of a proposed takeover of the Company. In the case of a triggering event, each
right entitles the Company's stockholders to buy, for $80, $160 worth of common
stock for each share of common stock held. The rights will become exercisable
only if a person or group acquires, or commences a tender offer to acquire,
15%
or more of the Company's common stock. The rights, which expire in
October 2008, are redeemable at the Company's option for $0.001 per right.
The Company also has the ability to amend the rights, subject to certain
limitations. On May 2, 2007, the Company entered into a Third Amendment to
Rights Agreement, which amended the Rights Agreement to provide, among other
things, that the Board of Directors of the Company may determine that a person
who would otherwise become an Acquiring Person (as defined in the Rights
Agreement) has become such inadvertently, and provided certain conditions are
satisfied, that such person is not an Acquiring Person for any purposes of
the
Rights Agreement.
Employee
Stock Purchase Plan
In
March
2000, the Board of Directors authorized an Employee Stock Purchase Plan ("the
ESPP") under which 300,000 shares of the Company's common stock are reserved
for
issuance. Eligible employees may authorize payroll deductions of up to 15%
of
their salary to purchase shares of the Company's common stock at a discount
of
up to 15% of the market value at certain plan-defined dates. In the three months
ended January 31, 2008 and the years ended October 31, 2007 and 2006, the shares
issued under the ESPP were 32,560, 154,082 shares and 96,489 shares,
respectively. At January 31, 2008 and October 31, 2007, 187,197 shares and
219,757 shares were available for issuance under the ESPP,
respectively.
Common
Stock Repurchase Program
In
October 2001, the Board of Directors authorized a stock repurchase program
to acquire up to $10 million of the Company's common stock in the open
market at any time. The number of shares of common stock actually acquired
by
the Company will depend on subsequent developments and corporate needs, and
the
repurchase of shares may be interrupted or discontinued at any time. As of
January 31, 2008 and October 31, 2007, a cumulative total of 116,995 shares
had been repurchased by the Company at a cost of $227,000, respectively, and
are
reflected as Treasury Stock on the Balance Sheet at the respective
dates.
NOTE
11—COMMITMENTS AND CONTINGENCIES
NASDAQ
Delisting
The
Company received a NASDAQ Stock Market (“Nasdaq”) Staff Deficiency Letter dated
September 21, 2007 indicating that, based on the Quarterly Report on Form 10-Q
for the period ended July 31, 2007, Nasdaq had determined that the Company
was
not in compliance with the minimum $10 million stockholders’ equity requirement
for continued listing on the Nasdaq Global Market set forth in Marketplace
Rule
4450(a)(3). Further, on October 5, 2007, the Company received a notice from
Nasdaq, dated October 5, 2007 indicating that for the last 30 consecutive
business days, the bid price of the Company’s common stock had closed below the
minimum $1.00 per share requirement for continued inclusion under Marketplace
Rule 4450(a)(5). Therefore, in accordance with Marketplace Rule 4450(e)(2),
the
Company has 180 calendar days, or until April 2, 2008, to regain compliance.
If,
at anytime before April 2, 2008, the bid price of the Company’s common stock
closes at $1.00 per share or more for a minimum of 10 consecutive business
days,
Nasdaq’s Staff will provide written notification that the Company has achieved
compliance with the Rule. If the Company does not regain compliance with the
Rule by April 2, 2008, the Company’s common stock will be delisted, a decision
which the Company may appeal to a Nasdaq Listing Qualifications Panel.
On
December 11, 2007, the Company received formal notice that the Nasdaq Listing
Qualifications Panel (the “Panel”) had granted the Company’s request for a
transfer from the Nasdaq Global Market to the Nasdaq Capital Market, and
continued listing on the Nasdaq Capital Market, subject to the following
exception:
|
|
§
|
On
or before January 17, 2008, the Company was required to inform the
Panel
that it has received funds sufficient to put it in compliance with
the
Nasdaq Capital Market shareholders’ equity requirement of $2.5 million.
Within four business days of the receipt of the funds, the Company
was
required to make a public disclosure of receipt of the funds and
file a
Form 8-K with pro forma financial information indicating that it
plans to
report proforma shareholders’ equity of $2.5 million or greater for the
fiscal year ended October 31, 2007. We informed the Panel of receipt
of
sufficient funds on January 18, 2008. The Company publicly disclosed
receipt of such funds in a press release dated January 22, 2008 and
filed
a Form 8-K with respect to this matter on January 25,
2008.
|
|
|
§
|
On
or before January 31, 2008, the Company was required to file its
Annual
Report on Form 10-K for the fiscal year ended October 31, 2007, which
shall demonstrate proforma shareholder’s equity of $2.5 million or
greater. The Company filed its Annual Report on Form 10-K on January
29,
2008.
|
On
February 5, 2008, the Company received notification from NASDAQ that it had
fully complied with the requirements with respect to the Stockholders’ Equity
Requirement. The Company remains subject to delisting pursuant to the minimum
$1.00 share price requirement for continued inclusion under Marketplace Rule
4450(a)(5). (See NOTE 12—SUBSEQUENT EVENTS.)
Contract
Commitments
The
Company has entered into purchase commitments of $0.1 million to suppliers
under
blanket purchase orders. The blanket purchase orders expire when the designated
quantities have been purchased.
Lease
Commitments
The
Company leases facilities and equipment under non-cancelable operating lease
agreements which expire at various dates through November 2008, and may be
renewed by mutual agreement between the Company and the lessors under such
leases. Future minimum lease payments are subject to annual adjustment for
increases in the Consumer Price Index.
Future
minimum lease payments under all operating leases are $305,000 through November
2008.
Third
Party License Agreements
We
license some of the technologies used in our SurTRAK products from IdeaMatrix,
Inc. Minimum royalty payments under the license agreement are payable annually
at $125,000 through 2011.
A
license
agreement with the University of South Florida Research Foundation, Inc.,
covering certain patent processes was terminated on November 9, 2007 by mutual
consent of both parties.
Employment
Agreements
The
Company maintains employment agreements with certain key management. The
agreements provide for minimum base salaries, eligibility for stock options
and
performance bonuses and severance payments.
Litigation
In
November 2005, the Company was served with a complaint filed in U.S. District
Court in Hartford, Connecticut by World Wide Medical Technologies (WWMT). WWMT’s
six count complaint alleges breach of a confidentiality agreement, fraud, patent
infringement, wrongful interference with contractual relations, violation of
the
Connecticut Uniform Trade Secrets Act, and violation of the Connecticut Unfair
Practices Act. WWMT alleges that the Company fraudulently obtained WWMT’s
confidential information during negotiations to purchase WWMT in 2004 and that
once the Company acquired that information, it allegedly learned that Richard
Terwilliger, (our former Vice President of New Product Development) owned
certain patent rights and that the Company began trying to inappropriately
gain
property rights by hiring him away from WWMT. The Company was served with this
matter at approximately the same time Mr. Terwilliger was served with
a lawsuit in state court and with an application seeking a preliminary
injunction declaring plaintiffs to be the sole owners of the intellectual
property at issue and preventing Mr. Terwilliger from effectively serving
as our Vice President of New Product Development. The Company has agreed to
defend Mr. Terwilliger. The Company has removed the state court claim against
Mr. Terwilliger to federal court and the cases have been consolidated. The
defendants have answered both complaints and discovery has commenced
in each matter. In April 2006, WWMT had its hearing for a preliminary injunction
against Mr. Terwilliger heard in U.S. District Court. Plaintiffs abandoned
that portion of their application for preliminary injunction that was based
on
an alleged misappropriation of trade secrets shortly before the hearing. On
August 30, 2006, Magistrate Judge Donna Martinez issued a ruling ordering
that what remained of plaintiffs' motion be denied. Specifically, the
Magistrate Judge found that plaintiffs do not have a reasonable likelihood
of
success on the merits of their claim for declaratory judgment that some or
all
of plaintiffs are the sole owners of the intellectual property at issues, and
she further found that there do not exist sufficiently serious questions
going to the merits of that claim to make them a fair ground for
litigation. The Company denies liability and intends to vigorously
defend itself in this litigation as it progresses. No trial date has
yet been set.
In
October 2007, the Company was served with a demand for arbitration by
AnazaoHealth Corporation (“AnazaoHealth”). AnazaoHealth provides needle loading
services for our Prospera brachytherapy products pursuant to a Services
Agreement dated as of June 1, 2005, as amended (the “Services Agreement”). In
its demand for arbitration, AnazaoHealth is seeking indemnification from the
Company under the Services Agreement for damages arising out of a litigation
filed against AnazaoHealth in the U.S. District Court for the District of
Connecticut (the “Connecticut Litigation”) by Richard Terwilliger, Gary
Lamoureux, World Wide Medical Technologies, LLC, IdeaMatrix, Inc., Advanced
Care
Pharmacy, LLC, Advanced Care Pharmacy, Inc., and Advanced Care Medical, Inc.
The
plaintiffs in the Connecticut Litigation claim that AnazaoHealth’s provision of
services in the brachytherapy field infringes their patent rights, and certain
of the plaintiffs claim that our Prospera products infringes their patent
rights. The Company denies liability and intends to vigorously defend itself
in
this arbitration.
In
February 2008, an individual plaintiff, Richard Hodge, filed a complaint in
the
Multnomah County Circuit Court of the State of Oregon against Bay Area Health
District, North American Scientific, Inc., NOMOS Corporation and Carl Jenson,
M.D., alleging the defendants caused Mr. Hodge to receive excessive radiation
during the course of his IMRT treatment, as a result of a manufacturing and/or
design defect(s) in the Company’s CORVUS and BAT products. The plaintiff is
seeking a judgement of up to $3 million in economic damages and $3 million
of
non-economic damages. The Company denies liability and intends to vigorously
defend itself in this litigation as it progresses. No trial date has
yet been set.
The
Company is also subject to other legal proceedings, claims and litigation
arising in the ordinary course of business. While the outcome of these matters
is currently not determinable, management does not expect that the ultimate
costs to resolve these matters will have a material adverse effect on the
Company's consolidated financial position, results of operations, or cash
flows.
NOTE
12—SUBSEQUENT EVENTS
NASDAQ
Delisting
On
February 5, 2008, the Company received a letter from The Nasdaq Stock Market
(“Nasdaq”) dated February 4, 2008 providing notice that the Company has
demonstrated compliance with Nasdaq Marketplace Rules, and that the Nasdaq
Listing Qualifications Panel has determined to continue the listing of the
Company’s securities on Nasdaq. In addition, the Nasdaq Staff has approved the
Company’s application to list its common stock on The Nasdaq Capital Market. The
Company’s common stock was transferred from The Nasdaq Global Market to The
Nasdaq Capital Market effective February 6, 2008 and will continue to trade
under the symbol “NASI.”
The
Company was also notified by Nasdaq that it continues to remain subject to
delisting as the bid price of its shares of common stock had closed at less
than
$1.00 per share over the previous 30 consecutive business days, and, as a
result, it did not comply with Marketplace Rule 4450(a)(5). Therefore, in
accordance with Marketplace Rule 4450(e)(2), the Company was provided 180
calendar days, or until April 2, 2008 to regain compliance. Upon transfer to
The
Nasdaq Capital Market, the Company will be afforded the remainder of this
compliance period. The Nasdaq Staff also noted that if compliance with the
$1.00
bid price requirement cannot be demonstrated by April 2, 2008, the Company
may
be afforded an additional compliance period, in accordance with Marketplace
Rule
4320(e)(2)(E)(ii).