Notes
to Consolidated Financial Statements
1. Description
of Business and Basis of Presentation
Avitar,
Inc. (“Avitar” or the “Company”), through its wholly-owned subsidiary Avitar
Technologies, Inc. (“ATI”) designs, develops, manufactures markets and sells
diagnostic test products and proprietary hydrophilic polyurethane foam
disposables for medical, diagnostic and consumer use. Avitar sells its products
and services to employers, diagnostic test distributors, large medical supply
companies, governmental agencies, and corporations.
Through
its wholly owned subsidiary, BJR Security, Inc. (‘BJR”), the Company provided,
until April 30, 2007, specialized contraband detection and education
services.
The Company operates in one reportable segment.
The
Company’s one for fifty (1 for 50) reverse split of its common stock that was
authorized by the Company’s shareholders at their annual meeting held on January
18, 2006 became effective on February 17, 2006. Accordingly, the
numbers of common stock shares and related data presented herein reflect
the
results of the reverse split for current and prior reporting
periods.
In
December 2003, Avitar consummated the sale of the business and net assets,
excluding cash, of its wholly-owned subsidiary, United States Drug Testing
Laboratories, Inc. (“USDTL”). The Company received $500,000 in cash
upon the closing of the sale and was entitled to receive an additional $500,000
if the buyer of USDTL achieved certain revenue targets. In November
2005, the Company negotiated an agreement with the new owners of USDTL to
settle
all outstanding matters related to the sale of USDTL (see Note 3). The USDTL
business has been treated as a discontinued operation.
Due
to the current financial condition at Avitar, the Company has been considering
selling assets and/or operations. On May 1, 2007, Avitar consummated a sale
of
the business of its BJR subsidiary for $40,000, payable no later than April
30,
2012. Due to the length of the payment period, payments will be
recorded as income when they are received (see Note 3). The USDTL and
BJR businesses have been treated as discontinued operations.
The
Company’s consolidated financial statements have been presented on the basis
that it is a going concern, which contemplates the realization of assets
and the
satisfaction of liabilities in the normal course of business. The
Company has suffered recurring losses from operations and has a working capital
deficit of $3,823,193 and a stockholders’ deficit of $9,845,711 as of
September 30, 2007. During fiscal 2007, the Company raised gross
proceeds of $1,895,000 from
long-term
convertible notes.
Subsequent
to September 30, 2007, the Company raised gross proceeds of $650,000 from
long-term convertible notes executed in November and December 2007 (see Note
19).
The Company is working with placement agents and investment fund
mangers to obtain additional equity or debt financing. Based upon
cash flow projections, the Company believes the anticipated cash flow from
operations and most importantly, the expected net proceeds from future equity
financings will be sufficient to finance the Company's operating needs until
the
operations achieve profitability. There can be no assurances that
forecasted results will be achieved or that additional financing will be
obtained. The financial statements do not include any adjustments
relating to the recoverability and classification of asset amounts or the
amounts and classification of liabilities that might be necessary should
the
Company be unable to continue as a going concern.
2. Summary
of Significant Accounting Policies
Concentration
of
Credit Risk and Significant
Customers
.
Financial
instruments that subject the Company to credit risk consist primarily of
cash,
cash equivalents and trade accounts receivable. The Company places its cash
and
cash equivalents in established financial institutions. The Company has no
significant off-balance-sheet concentration of credit risk such as foreign
exchange contracts, options contracts or other foreign hedging arrangements.
The
Company’s accounts receivable credit risk is not concentrated within any one
geographic area. The Company has not experienced any significant losses related
to receivables from any individual customers or groups of customers in any
specific industry or by geographic area. Due to these factors, no additional
credit risk beyond amounts provided for collection losses is believed by
management to be inherent in the Company’s accounts receivable.
Accounts
receivable are customer obligations due under normal trade terms. The Company
sells its products to employers, distributors and OEM customers. The Company
generally requires signed sales agreements, non-refundable advance payments
and
purchase orders depending upon the type of customer, and letters of credit
may
be required in certain circumstances. Accounts receivable is stated at the
amount billed to the customer less a valuation allowance for doubtful
accounts.
Senior
management reviews accounts receivable on a monthly basis to determine if
any
receivables could potentially be uncollectible. The Company includes specific
accounts receivable balances that are determined to be uncollectible in its
overall allowance for doubtful accounts. After all attempts to collect a
receivable have failed, the receivable is written off against the allowance.
Based on available information, the Company believes its allowance for doubtful
accounts as of September 30, 2007 of $4,700 is adequate.
See
Note
15 for information on customers that individually comprise greater than 10%
of
total revenues.
Estimates
and Assumptions.
The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the financial statements and the reported amounts of revenues
and
expenses during the reporting period. Actual results could differ
from those estimates.
Principles
of Consolidation.
The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
significant inter-company balances and transactions have been
eliminated.
Revenue
Recognition.
The Company recognizes revenue from
product sales upon shipment and delivery with delivery being made F.O.B.
to the
carrier. Revenue from the sales of services is recognized in the
period the services are provided. These revenues are recognized
provided that a purchase order has been received or a contract has been
executed, there are no uncertainties regarding customer acceptance, the sales
price is fixed or determinable and collection is reasonably assured. If
uncertainties regarding customer acceptance exist, the Company recognizes
revenue when those uncertainties are resolved. Amounts collected or billed
prior
to satisfying the above revenue recognition criteria are recorded as deferred
revenue. The Company does not offer its customers or distributors the
right to return product once it has been delivered in accordance with the
terms
of sale. Product returns, which must be authorized by the Company,
occur mainly under the warranties associated with the product. The
Company maintains sufficient reserves to handle warranty costs. Price
discounts for products are reflected in the amount billed to the customer
at the
time of delivery. Rebates and payments have not been material and are
adequately covered by established allowances.
Cash
Equivalents.
The Company considers all highly liquid investments
and interest-bearing certificates of deposit with original maturities of
three
months or less to be cash equivalents
Inventories.
Inventories
are recorded at the lower of cost (determined on a first-in, first-out basis)
or
market. The inventories of the ORALscreen products and some
components of the foam products are subject to expiration
dating. Senior management reviews the inventories on a periodic basis
to insure that adequate reserves have been established to cover product
obsolescence and unusable inventory. These decisions are based on the
levels of inventories on hand in relation to the estimated forecast of product
demand, production requirements over the next twelve months and the expiration
dates of the raw materials and finished goods. Forecasting of product
demand can be a complex process, especially for ORALscreen instant drug
tests. Although every effort is made to insure the accuracy of these
forecasts of future product demand, any significant unanticipated changes
in
demand could have a significant impact on the carrying value of the Company’s
inventories and reported operating results.
Property
and Equipment.
Property and equipment (including
equipment under capital leases) is recorded at cost at the date of
acquisition. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets (three to seven
years). Leasehold improvements are amortized over the shorter of
their estimated useful life or lease term. Expenditures for repairs
and maintenance are expensed as incurred.
Goodwill
and Long-lived Assets.
The Company evaluates its
long-lived assets under the provisions of Statement of Financial Accounting
Standards (“SFAS”) No. 144, “Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of.” SFAS No. 144
establishes accounting standards for the impairment of long-lived assets
and
certain identifiable intangibles to be held and used and for long-lived assets,
and certain identifiable intangibles to be disposed of.
In
assessing the recoverability of its long-lived assets, the Company must make
assumptions in determining the fair value of the asset by estimating future
cash
flows and considering other factors, including significant changes in the
manner
or use of the assets, or negative industry reports or economic conditions.
If
those estimates or their related assumptions change in the future, the Company
may be required to record impairment charges for those assets.
Effective
October 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other
Intangible Assets”. SFAS No. 142 requires among other things, that
companies no longer amortize goodwill, but test goodwill for impairment at
least
annually. In addition, SFAS 142 requires that the Company identify reporting
units for the purpose of assessing potential future impairments of goodwill,
reassess the useful lives of other existing recognized intangible assets,
and
cease amortization of intangible assets with an indefinite useful
life. An intangible asset with an indefinite useful life should be
tested for impairment in accordance with guidelines in SFAS 142. SFAS
142 is required to be applied to all goodwill and other intangible assets
regardless of when those assets were initially recognized.
The
Company
recognizes impairments of goodwill when the fair value of the acquired business
is determined to be less than the carrying amount of the goodwill. If
the Company determines that the goodwill has been impaired, the measurement
of
the impairment is equal to the excess of the carrying amount of the goodwill
over the amount of the fair value of the asset. The Company reflects
the impairments through a reduction in the carrying value of
goodwill.
Based on the limited operating results of the
acquired BJR business and the estimates of its fair value, the Company recorded
an impairment of goodwill for $138,120 in fiscal 2006 (see Note
6). At September 30, 2007, goodwill was $0.
Patents.
Patent
costs are being amortized over their estimated useful lives of 5 – 7 years by
the straight-line method.
Research
and Development.
Research and development costs are
expensed as incurred.
Stock
Options.
The Company adopted SFAS No. 123 (Revised
2004), “Share-Based Payment” (‘SFAS 123R”), effective October 1,
2006. SFAS 123R requires the recognition of fair value of stock-based
compensation as an expense in the calculation of net loss. The
Company recognizes stock-based compensation ratably over the vesting period
of
the individual equity instruments. All unvested stock awards
outstanding on October 1, 2006, or issued after that date, have been
accounted for as equity instruments based on the provisions of SFAS
123R. Prior to October 1, 2006, the Company followed the Accounting
Principles Board (“APB”) Opinion 25, “Accounting for Stock Issued to Employees”,
and the related interpretations in accounting for stock-based
compensation.
The
Company elected the modified prospective transition method for adopting SFAS
123R. Under this method, the provisions of SFAS 123R apply to all
stock-based awards granted or other awards granted that are subsequently
reclassified into equity. The unrecognized expense of awards not yet
vested as of September 30, 2006, the date of adoption of SFAS 123R by the
Company, is now being recognized as expense in the calculation of net income
(loss) using the same valuation method (Black-Scholes) and assumptions used
prior to the adoption of SFAS 123R.
Under
the
provisions of SFAS 123R, the Company recorded $122,007 of stock based
compensation expense on its consolidated statement of operations for the
year
ended September 30, 2007.
During
the year ended September 30, 2007, no options were granted under stock option
plans and no shares subject to purchase under the employee stock purchase
plan
were issued.
The
unamortized fair value of stock options as of September 30, 2007 was
$146,388
which
is
expected to be recognized over the weighted average remaining period of 1.9
years.
The
following table summarizes activity under all stock option plans for the
year ended September 30, 2007:
|
|
|
Shares
Available
for
Grant
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Exercise
Price
Per
Share
|
|
|
Weighted
Average Remaining Contractual
Term
(years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Balance
at September 30, 2005
|
|
|
1,049,000
|
|
|
|
194,115
|
|
|
|
19.00
|
|
|
|
6.1
|
|
|
$
|
0.00
|
|
|
Options
authorized
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Options
granted
|
|
|
(7,000
|
)
|
|
|
7,000
|
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
|
Options
exercised
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Options
forfeited/expired
|
|
|
0
|
|
|
|
(22,036
|
)
|
|
|
5.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2006
|
|
|
1,042,000
|
|
|
|
179,079
|
|
|
$
|
19.77
|
|
|
|
4.6
|
|
|
$
|
0.00
|
|
|
Options
authorized
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Options
granted
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Options
exercised
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Options
forfeited/expired
|
|
|
0
|
|
|
|
(20,451
|
)
|
|
|
8.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2007
|
|
|
1,042,000
|
|
|
|
158,628
|
|
|
$
|
21.20
|
|
|
|
3.7
|
|
|
$
|
0.00
|
|
|
Exercisable
at September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.4
|
|
|
$
|
0.00
|
|
SFAS
123R
requires the presentation of pro forma information for the comparative period
prior to the adoption as if the Company had accounted for all employee stock
options under the fair value method of the original SFAS 123. The
following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of SFAS 123R for
stock-based employee compensation to the prior-year period.
|
|
|
2006
|
|
|
Net
loss
|
|
$
|
(3,703,165
|
)
|
|
Add:
stock based employee compensation
expense
included in reported net loss,
net of tax
|
|
|
-
|
|
|
Deduct:
total stock based employee
compensation
expense determined
under
the fair value based method for
all
awards, net of tax
|
|
|
(111,766
|
)
|
|
Pro forma net loss
|
|
$
|
(3,814,931
|
)
|
|
Loss per share:
|
|
|
|
|
|
Basic and diluted - as reported
|
|
$
|
(.80
|
)
|
|
Basic and diluted - pro forma
|
|
$
|
(.79
|
)
|
In
determining the pro forma amounts above, the Company estimated the fair value
of
each option granted using the Black-Scholes option pricing model with the
following assumptions:
2006
Risk
free interest
rate 4.3%
Expected
dividend
yield -
Expected
lives
10 years
Expected
volatility
80%
Options
granted during year ended September 30, 2006 totaled 7,000. The
weighted average fair value of options granted in fiscal 2006 was
$.42.
Income
Taxes.
Income taxes are accounted for using the
liability method as set forth in SFAS No. 109, “Accounting for Income
Taxes.” Under this method, deferred income taxes are provided on the
differences in basis of assets and liabilities between financial reporting
and
tax returns using enacted rates. Valuation allowances have been
recorded (see Note 14).
Fair
Value of Financial Instruments.
The carrying amounts of
cash, accounts receivable and accounts payable approximate fair value because
of
the short-term nature of these items. The current fair values of the
short-term and long-term debt approximate fair value because their interest
rates approximate prevailing market rates. The fair value of
derivative instruments is based on valuations using a market value
approach. This approach determines the fair value of the securities
sold by the Company by using one or more methods that compare these securities
to similar securities that have been sold.
Advertising.
The Company expenses advertising costs as incurred. No
advertising
expense
was recorded in fiscal 2007 or 2006
Principal
Supplier Risk.
The
Company does not have written agreements with most of its suppliers of raw
materials and laboratory supplies. While the Company purchases some
product components from single sources, most of the supplies used can be
obtained from more than one source. Avitar acquires the same key
component for its customized foam products and Hydrasorb wound dressings from
a
single supplier. The Company
also purchases a main component of its
ORALscreen products from one source. Avitar’s current suppliers
of such key components are the only
vendors
which presently meet Avitar’s specifications for such
components. The loss of these suppliers would, at a minimum, require
the Company to locate other satisfactory vendors, which would result in a period
of time during which manufacturing and sales of products utilizing such
components may be suspended and could have a material adverse effect on Avitar’s
financial condition and operations. Avitar believes that alternative
sources could be found for such key components and expects that the cost of
such
components from an alternative source would be similar. The Company
also believes that alternative sources of supply are available for its remaining
product components and that the loss of any such supplier would not have a
material adverse effect upon Avitar’s business.
Derivatives.
The
Company has issued and outstanding convertible debt and certain convertible
equity instruments with embedded derivative features. The Company
analyzes these financial instruments in accordance with SFAS No. 133 and EITF
Issue Nos. 00-19 and 05-02 to determine if these hybrid contracts have embedded
derivatives which must be bifurcated. In addition, free-standing
warrants are accounted for as equity or liabilities in accordance with the
provisions of EITF Issue No. 00-19. As of September 30, 2007,
the Company could not be sure it had adequate authorized shares for the
conversion of all outstanding instruments due to certain conversion rates which
vary with the fair value of the Company
’
s
common stock and therefore all embedded derivatives and freestanding warrants
are recorded at fair value, marked-to-market at each reporting period, and
are
carried on separate lines of the accompanying balance sheet. If there
is more than one embedded derivative, their value is considered in the
aggregate. As of September 30, 2007, the fair value was $388,653 for
the embedded derivatives and $296,599 for the warrants.
New
Accounting Pronouncements.
In July 2006, the
Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes - an Interpretation of FASB
Statement No. 109”. FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in a company’s financial statements in accordance with
FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48
prescribes the recognition and measurement of a tax position taken or expected
to be taken in a tax return. It also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company is currently
evaluating the effect that the adoption of FIN 48 will have on its consolidated
financial statements but does not expect that it will have a material
impact.
In
February 2006, the FASB issued SFAS 155, “Accounting for Certain Hybrid
Financial Instruments” which amends SFAS 133, “Accounting for Derivative
Instruments and Hedging Activities” and SFAS 140, “Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities.”
SFAS 155 simplifies the accounting for certain derivatives embedded in
other financial instruments by allowing them to be accounted for as a whole
if
the holder elects to account for the whole instrument on a fair value basis.
SFAS 155 also clarifies and amends certain other provisions of
SFAS 133 and SFAS 140. SFAS 155 is effective for all financial
instruments acquired, issued or subject to a remeasurement event occurring
in
fiscal years beginning after September 15, 2006 and therefore, was
effective for the Company beginning October 1, 2006. The adoption of
SFAS 155 by the Company has not had a material impact on its consolidated
financial statements.
In
March
2006, the FASB issued EITF 06−03, “How Taxes Collected from Customers and
Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That is, Gross versus Net Presentation)” that clarifies how a company discloses
its recording of taxes collected that are imposed on revenue-producing
activities. EITF 06−03 was effective for the Company beginning January 1,
2007. The adoption of EITF 06-03 has not had a material impact on its
consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements”.
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in U.S. generally accepted accounting
principles, and expands disclosures about fair value
measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. The FASB has issued a one-year deferral of SFAS 157’s fair
value measurement requirement for non-financial assets and liabilities that
are
not required or permitted to be measured at fair value on a recurring
basis. The Company is currently evaluating the impact that SFAS
No. 157 will have on its results of operations or financial
position.
In
December 2006, the FASB issued FASB Staff Position Number 00-19-2, “Accounting
for Registration Payment Arrangements” ("FSP EITF 00-19-2"). FSP EITF
00-19-2 addresses an issuer’s accounting for registration payment arrangements.
FSP EITF 00-19-2 specifies that the contingent obligation to make future
payments or otherwise transfer consideration under a registration payment
arrangement, whether issued as a separate agreement or included as a provision
of a financial instrument or other agreement, should be separately recognized
and measured in accordance with FASB Statement No. 5, “Accounting for
Contingencies”. FSP EITF 00-19-2 is effective immediately for registration
payment arrangements and the financial instruments subject to those arrangements
that are entered into or modified subsequent to the date of issuance of FSP
EITF
00-19-2 (December 21, 2006). For registration payment arrangements and
financial instruments subject to those arrangements that were entered into
prior
to the issuance of FSP EITF 00-19-2, this guidance shall be effective for
financial statements issued for fiscal years beginning after December 15, 2006,
and interim periods within those fiscal years. The adoption of FSP EITF
00-19-2 by the Company has not had an impact on its consolidated financial
statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities — Including an Amendment of FASB
No 115”
.
This Statement provides companies with an option to measure,
at specified election dates, many financial instruments and certain other items
at fair value that are not currently measured at fair value. The standard also
establishes presentation and disclosure requirements designed to facilitate
comparison between entities that choose different measurement attributes for
similar types of assets and liabilities. If the fair value option is elected,
the effect of the first remeasurement to fair value is reported as a cumulative
effect adjustment to the opening balance of retained earnings. The statement
is
to be applied prospectively upon adoption. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007. The Company is currently
evaluating the effect that the adoption of SFAS No. 159 will have on its
consolidated financial statements but does not expect that it will have a
material impact.
3. Discontinued
Operations
On
December 16, 2003, the Company consummated a sale of USDTL’s business and net
assets, excluding cash. Under the terms of that sale, the Company
received $500,000 in cash upon the closing of the sale and was entitled to
receive an additional $500,000 if the buyer of USDTL achieved certain revenue
targets. In November 2005, the Company negotiated an agreement with the new
owners of USDTL to settle all outstanding matters related to the sale of
USDTL. Under the terms of this settlement, the Company received an
immediate lump sum payment of $120,000 rather than waiting for the 10 to 14
years that the Company believed it would take to collect the entire $500,000
from uncertain future revenues of USDTL. The accompanying financial statements
reflect USDTL as a discontinued operation. The $120,000 was recorded
as income from discontinued operations in 2006.
On
May 1, 2007, the
Company consummated the sale of BJR’s business. Under the
terms
of
the sale, the Company will be paid $40,000 no later than April 30,
2012. Due
to
the
length of the payment period, payments will be recorded as income when they
are
received.
The
following is a summary of the
results of discontinued operations for the year ended September 30, 2007 and
2006:
|
|
|
Year
Ended
September
30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Sales-BJR
|
|
$
|
231,839
|
|
|
$
|
405,731
|
|
|
Operating
expenses-BJR
|
|
|
288,299
|
|
|
|
541,825
|
|
|
Goodwill
impairment (Note 6)
|
|
|
-
|
|
|
|
138,120
|
|
|
Other
income (expense)
|
|
|
(796
|
)
|
|
|
120,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued
operations
|
|
$
|
(57,256
|
)
|
|
$
|
(154,214
|
)
|
4. Inventories
Inventories
consist of the following:
|
September
30
,
|
|
2007
|
|
|
Raw
materials
|
|
$
|
92,847
|
|
|
Work-in-process
|
|
|
72,351
|
|
|
Finished
goods
|
|
|
59,958
|
|
|
Total
|
|
$
|
225,156
|
|
5. Property
and Equipment
Property
and equipment consists of the following:
|
September
30
,
|
|
2007
|
|
|
Equipment
|
|
$
|
1,347,322
|
|
|
Furniture
and fixtures
|
|
|
270,491
|
|
|
Leasehold
improvements
|
|
|
170,770
|
|
|
|
|
|
1,788,583
|
|
|
Less:
accumulated depreciation
and
amortization
|
|
|
1,566,273
|
|
|
|
|
$
|
222,310
|
|
Depreciation
expense was $113,711 and $118,964 for fiscal 2007 and fiscal 2006,
respectively.
6. Goodwill
As
of
October 1, 2005, the Company’s goodwill was $138,120 which was associated with
the acquisition of BJR in 2001. In fiscal 2006, an impairment
adjustment to eliminate the remaining goodwill associated with the BJR
acquisition was deemed necessary. Based on the limited operating
results of the business and the estimates of its fair value, the Company
recorded an impairment of goodwill for $138,120 in fiscal 2006.
7. Other
Assets
Other
assets consist of the following:
|
September
30
,
|
|
2007
|
|
|
Patents
|
|
$
|
149,966
|
|
|
Deposits
|
|
|
1,333
|
|
|
Deposit
for Letter of Credit (Note 12)
|
|
|
150,000
|
|
|
Deferred
Financing Costs
|
|
|
1,201,899
|
|
|
Deferred
Financing Costs
|
|
|
1,503,198
|
|
|
Less
accumulated amortization
|
|
|
611,690
|
|
|
Other
assets, net
|
|
$
|
891,508
|
|
Included
in the above are patent costs of $149,966 with related
accumulation
amortization costs of $148,995. The patents have a weighted average
amortization period of 7 years. Amortization expense related to the
patents was $4,800 and $24,974 for fiscal 2007 and 2006,
respectively. Also included in the above are deferred financing costs
of $1,201,899 for the convertible notes executed from September 2005 through
August 2007 (see Note 9 and 11). Amortization expense related to the
deferred financing costs amounted to $332,535 for fiscal 2007 and $212,304
for
fiscal 2006.
Estimated
amortization expense for the next three years is as follows:
|
September
30,
|
|
Patents
|
|
|
Deferred
Financing
Costs
|
|
|
Total
|
|
|
2008
|
|
$
|
971
|
|
|
$
|
373,359
|
|
|
$
|
374,330
|
|
|
2009
|
|
|
-
|
|
|
|
283,213
|
|
|
|
283,213
|
|
|
2010
|
|
|
-
|
|
|
|
82,624
|
|
|
|
82,632
|
|
|
Thereafter
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
8. Short-Term
Debt
Short-term
debt consists of the following:
|
September
30
,
|
|
2007
|
|
|
Note
payable to insurance company, interest at 8.5%, payable in
monthly
principal installments of $2,935 plus accrued interest
through
October 2007.
|
|
$
|
2,935
|
|
|
Notes
payable to insurance company, interest at 8.00%,
payable
in monthly principal installments of $6,844 plus
accrued
interest through April 2008.
|
|
|
48,236
|
|
|
Notes
payable to individual, interest at 1% per month
that
were due in installments of $25,000 per month
from
January 2006 to February 2006 and $16,667 per
month
from April 2006 to September 2006
|
|
|
125,000
|
|
|
Total
notes payable
|
|
$
|
176,171
|
|
These
notes are
past due and the Company is still accruing interest on the outstanding balance.
Under the terms of the $125,000 notes payable to individual,
the entire
unpaid principal balance and accrued interest shall become due and payable
upon
the occurrence of any default by the Company in the payment of interest and
principal on the due date thereof and any such default that remains unremedied
for twenty business day following written notice to the Company by the
holder. No written notice of default from the holder of these notes
has been received by the Company.
Convertible
notes payable to individual, interest at
10%,
that were due in variable monthly installments plus
accrued
interest from October 1, 2005 to June
2006 650,000
Total
convertible notes
payable $650,000
From
April to August 2005, the Company executed convertible notes
with
an
individual in the total principal amount of $650,000 with interest at
10%. Each note has a maturity date of six months from the date of the
note and is payable in ten monthly installments plus accrued interest commencing
on the maturity date of the note. These notes are past due and the
Company is still accruing interest on the outstanding balance. Under
the terms of the notes, the entire unpaid principal balance and accrued interest
shall become due and payable upon the occurrence of any default by the Company
in the payment of interest and principal on the due date thereof and any such
default that remains unremedied for twenty business day following written notice
to the Company by the holder. No written notice of default from the
holders of these notes has been received by the Company. The Company issued
warrants to purchase 650,000 shares of common stock at $1.65 to $.4.95 per
share
for three years in connection with these notes. In addition, the
entire principal plus accrued interest associated with these notes is
convertible into the Company’s common stock
at
a conversion price of
the
lesser of the closing price of the common stock on the date of the loan or
85%
of the average closing price of the common stock for the five trading days
preceding the notice of conversion. In no event shall the conversion
price be lower than 50% of the closing price of the common stock on the date
of
the loan. A discount to debt totaling $172,930 ($156,800 for the value of the
conversion feature of these notes and $16,130 for the value of the warrants
issued in connection with these notes) was recorded during fiscal year 2005
and
was fully amortized over the term of the notes. A liability of
approximately $173,000 was recorded for the fair value of the warrants issued
in
connection with the $650,000 of notes and the conversion feature, which was
reduced to its market value of $0 at September 30, 2007.
Current
portion of convertible long-term notes payable (face value of
$606,127
less unamortized discount of $63,524) to investors maturing
September
2008, outstanding principal payable at maturity, interest
at
8% payable
quarterly. 542,603
Total
convertible notes
payable $542,603
See
Note
9.
9. Long-Term
Debt
|
Long-term
debt consists of the following:
September
30,
2007
|
|
|
|
Convertible
notes payable (face value of $5,165,000 less
unamortized
discount of $1,268,548) to investors, maturing
from
October 2008 through August 2010, outstanding
principal
payable at maturity, interest at 8%, payable quarterly.
$3,896,452
Long-term
debt
$3,896,452
From
September 2005 through August 2007 the Company executed notes payable
with
AJW Partners, LLC, AJW Offshore, Ltd., AJW Qualified Partners, LLC,
New
Millennium Capital Partners II, LLC and AJW Master Fund in the total
principal amount of $6,165,000 which are payable at maturity dates
from
September 2008 to August 2010. Interest on these notes is at 8%
per annum and is payable quarterly in cash or the Company’s common stock
at the option of the Company. The total amount of these notes
issued in fiscal 2007 amounted to $1,895,000. The Company
originally issued warrants to purchase 100,000 shares of common stock
at
$12.50 per share for five years in connection with the notes executed
from
September 2005 to April 2006. In conjunction with the notes
executed in May 2006, the outstanding warrants were cancelled and
replaced
with warrants to purchase 3,000,000 shares of common stock at $1.25
per
share for seven years. For the notes executed from July
2006 through September 2006, the Company issued warrants to purchase
a
total of 3,000,000 shares of common stock at $.15 to $.22 per share
for
seven years. For the notes executed during fiscal 2007, the Company
issued
warrants to purchase a total of 62,500,000 shares of common stock
at $.01
to $.15 per share for seven years. Non-cash interest expense of
$605,000 representing the fair value of the warrants issued as replacement
for the outstanding warrants in May 2006 was recorded in fiscal 2006.
Fees
of approximately $1,202,000 incurred in connection with securing
these
loans were recorded as a deferred financing charge. In addition,
the
entire unpaid and unconverted principal plus any accrued and unpaid
interest associated with these notes is convertible, at the holder’s
option, into the Company’s common stock
at
a conversion
price of
65% for notes issued through February 2006 and 55% for notes executed
after February 2006 of the average of the three lowest intraday trading
prices of the common stock for the twenty trading days preceding
the date
that the holders elect to convert. A discount to debt totaling
$2,288,222 ($1,477,616 for the fair value of the conversion feature
of
these notes and $810,606 for the incremental fair value of the warrants
issued in connection with these notes) was recorded during fiscal
2005,
2006 and 2007 and is being amortized over the terms of the
notes. The unamortized discount was $1,332,072 ($63,524 for
note maturing September 2008 and $1,268,548 for the remainder of
the
notes) as of September 30, 2007. The collateral pledged by the
Company to secure these notes includes all assets of the Company.
A
liability of approximately $2,893,000 was recorded for the fair value
of
the warrants issued in connection with the $6,165,000 of notes and
the
conversion feature, which was reduced to its market value of approximately
$471,000 at September 30, 2007. Through September 30, 2007,
notes totaling $393,873 were converted into 25,305,763 shares of
common
stock.
10. Deferred
Lessor Incentive
As
an incentive to renew the lease of its facility in Canton, MA for
a period
of five years (see Note 12), the Lessor provided the Company with
leasehold improvements of approximately $67,000. Accordingly,
the Company recorded a deferred lessor incentive and is amortizing
it as a
reduction to rent expense over the term of the lease. In 2007,
$13,400 of the deferred incentive was amortized. As of
September 30, 2007, the remaining balance was $36,850, of which $13,400
was classified as current.
11. Redeemable
Convertible Preferred Stock and Convertible Preferred
Stock
As
of September 30, 2007, the Company had the following redeemable
convertible
and
convertible preferred stock outstanding:
Less Costs
and
Proceeds
Allocated
to Warrants Accretion
Number and To Accretion
of Face
Conversion Redemption of
Carrying
Instrument
Shares Value
Features Value Dividends
Value
Series
E
Redeemable
Convertible
Preferred
Stock
538,350 $538,350
$390,124 $390,124 $ 78,740
$ 617,090
Series
C
Convertible
Preferred
Stock 28,608
145,000
- - -
145,000
6%
Convertible
Preferred
Stock
2,000 2,000,000
-
- 454,344
2,454,344
Total $
533,084 $3,216,434
The
Series C and 6% Convertible preferred stock is carried on the balance
sheet outside permanent equity as the Company cannot be sure it has
adequate authorized shares for their conversion as of September 30,
2007. Upon the occurrence of specific events, the holders of
the Series E Redeemable Convertible Preferred Stock are entitled
to redeem
these shares under certain provisions of the agreement covering the
purchase of the preferred stock. Accordingly, these securities
were not classified as permanent equity.
In
April and June 2005, the Company raised net proceeds of approximately
$1,335,000 from the sale of 1,500,000 shares of Series E Redeemable
Convertible Preferred Stock with a face value of $1,500,000 and warrants
to purchase 3,000 shares of the Company’s common stock. The
1,500,000 shares of Series E Preferred Stock are convertible into
Common
Stock at the lesser of $4.00 per share or 80% of the average of the
three
lowest closing bid prices for the ten trading days immediately prior
to
the notice of conversion, subject to adjustments and limitations,
and the
warrants are exercisable at $4.20 per share for a period of three
years. The warrants and the conversion feature resulted in a
deemed dividend of $1,087,000 being recorded and included in the
earnings
per share calculation for the year ended September 30, 2005. A liability
of approximately $1,087,000 was recorded for the original fair value
of
the warrants and the conversion feature, which was reduced to its
market
value of approximately $124,000 at September 30, 2007. As of
September 30, 2007, 961,650 shares of this preferred stock had been
converted into 18,778,346 shares of common stock and 538,350 were
outstanding.
In
December 2004, the Company sold 1,285 shares of Series A Redeemable
Convertible Preferred Stock and warrants to purchase 12,000 shares
of
common stock for which it received net proceeds of approximately
$1,160,000. The Series A Redeemable Convertible Preferred Stock,
with a
face value of $1,285,000, was convertible into common stock at the
lesser
of $6.00 per share or 85% of the average of the three lowest closing
bid
prices, as reported by Bloomberg, for the ten trading days immediately
prior to the notice of conversion subject to adjustments and floor
prices. The warrants are exercisable at $6.30 per
share. The warrants and the conversion feature resulted in a
deemed dividend of $1,058,260 being recorded and included in the
earnings
per share calculation for the year ended September 30, 2005. A liability
of approximately $1,058,260 was recorded for the original fair value
of
the warrants and the conversion feature, which was reduced to its
market
value of $36 at September 30, 2007. As of September 30, 2007, 1,135
shares
of this preferred stock had been converted into 452,156 shares of
common
stock and the remaining 150 shares of Series A redeemable convertible
preferred stock, with a face value of $150,000, were redeemed by
the
Company in October 2005 for $155,417 which included accrued dividends
of
$5,417.
The
28,608 shares of Series C convertible preferred stock entitle the
holder
of each share, on each anniversary date of the investment, to convert
into
the number of shares of common stock derived by dividing the purchase
price paid for each share of the preferred stock by the average price
of
the Company’s common stock for the five trading days prior to conversion
subject to anti-dilution provisions and receive royalties of 5% of
revenues related to disease diagnostic testing from the preceding
fiscal
year. There were no royalties earned for the years ended
September 30, 2007 or 2006. After one year from the date
of issuance, the Company may redeem all or any portion of this preferred
stock by the issuance of the Company’s common stock, the number of shares
of which shall be derived by dividing the redemption price, as defined,
by
the average closing price of the Company’s common stock for the five
trading days prior to the redemption date, and liquidating distributions
of an amount per share equal to the amount of unpaid royalties due
to the
holder in the event of liquidation. During 2006, 8,333 of these
shares were converted into 90,910 shares of common stock. None
of these shares was converted into common stock during 2007.
The
2,000 shares of 6% convertible preferred stock entitle the holder
to
convert, at any time, $1,000,000 invested in 2004 and $1,000,000
invested
in 2003 into shares of common stock at a conversion price of $10.80
and
$7.50 per share, respectively, subject to anti-dilution provisions
and to
receive annual cash dividends of 6%, payable semi-annually when,
as and if
declared by the Company’s Board of Directors. Warrants to purchase 92,593
and 133,333 shares of common stock at exercise prices of $6.75 and
$2.50
per share, respectively, that were issued in connection with the
preferred
stock and the beneficial conversion feature resulted in a deemed
dividend
totaling $2,000,000, of which $1,000,000 was recorded and included
in the
loss per share calculation for each of the years ended September
30, 2004
and September 30, 2003. At September 30, 2004, all the warrants
issued in connection with the 6% convertible preferred stock were
exercised on a cashless basis into 135,802 shares of common stock.
Undeclared and unpaid dividends totaled $454,344 at September 30,
2007. No dividends were paid on these shares in 2007 or
2006.
|
12. Commitments
Leases.
ATI
leases office space under a non-cancelable operating lease which
expires
in 2010. In July 2005, the Company renewed the lease for ATI’s
facility at Canton, MA for a period of five (5) years. Under the
terms of
the renewal, the lessor provided the Company with leasehold improvements
of approximately $67,000 (see Note 10). In addition, the
Company spent $18,243 for leasehold improvements. Certain additional
costs
are incurred in connection with the leases and the leases may be
renewed
for additional periods.
Rental
expense under all operating leases charged to operations for the
years
ended September 30, 2007 and 2006 totaled approximately $312,855 in
each year.
|
|
2008
|
|
$
|
330,781
|
|
|
2009
|
|
|
348,906
|
|
|
2010
|
|
|
271,875
|
|
|
Total minimum lease payments
|
|
$
|
951,562
|
|
Employment
Agreements. The Company entered into Employment Agreements (the
“Employment Agreements”) with its two principal executives, which payments
thereunder were subsequently assigned to a related party. Pursuant to
the Employment Agreements, if Messrs. Phildius and/or Scott are terminated
without "Cause" (as such term is defined in the Employment Agreements)
by the
Company or if Messrs. Phildius and/or Scott terminate their employment
as a
result of a breach by the Company of its obligations under such Agreements,
he
will be entitled to receive his annual base salary ($200,000 for Mr. Phildius
and $180,000 for Mr. Scott) for a period of up to 18 months following such
termination. In addition, if there is a "Change of Control" of the
Company (as such term is defined in the Employment Agreements) and, within
two
years following such "Change of Control", either of Messrs. Phildius or
Scott is
terminated without cause by the Company or terminates his employment as
a result
of a breach by the Company, such executive will be entitled to certain
payments
and benefits, including the payment, in a lump sum, of an amount equal
to up to
two times the sum of (i) the executive's annual base salary and (ii) the
executive's most recent annual bonus (if any). In addition, pursuant
to the Employment Agreements, Messrs. Phildius and Scott are each entitled
to
annual bonus payments of up to $150,000 if the Company achieves certain
levels
of pre-tax income (as such term is defined in such Agreements) or alternative
net income objectives established by the Board of
Directors. The agreements renew automatically on an
annual basis and may be terminated upon 60 days written notice by either
party. Expenses under these agreements totaled approximately $361,000
in fiscal 2007 and $380,000 in fiscal 2006. The lower amount for
fiscal 2007 reflects a salary reduction program for all salaried personnel
implemented in April 2007.
Retirement
Plan.
In February 1998, the Company adopted a defined
contribution retirement plan which qualifies under Section 401(k) of the
Internal Revenue Code, covering substantially all
employees. Participant contributions are made as defined in the Plan
agreement. Employer contributions are made at the discretion of the
Company. No Company contributions were made in 2007 or
2006.
Letter
of Credit.
As security for full and faithful
performance of all provisions of the lease renewal for the facility at Canton,
MA, the Company furnished the landlord an irrevocable letter of credit in
the
amount of $150,000. The letter of credit was obtained from a bank
that requires the Company to maintain $150,000 on deposit with the bank as
full
collateral for the letter of credit.
13. Stockholders’
Equity (Deficit)
|
Preferred
Stock.
Preferred stock shares outstanding consist
of the following:
Series
B
5,689
|
The
5,689 shares of Series B
convertible preferred stock issued and outstanding entitle the holder of each
share to: convert it, at any time, at the option of the holder, into ten shares
of common stock subject to antidilution provisions and receive dividends
amounting to an annual 8% cash dividend or 10% stock dividend payable in shares
of Series B preferred stock computed on the amount invested, at the discretion
of the Company. After one year from the date of issuance, the Company
may redeem, in whole or in part, the outstanding shares at the offering price
in
the event that the average closing price of ten shares of the Company’s common
stock shall equal or exceed 300% of the offering price for any 20 consecutive
trading days prior to the notice of redemption; and liquidating distributions
of
an amount per share equal to the offering price. During 2007 and
2006, none of these shares was converted into shares of common stock. Undeclared
and unpaid dividends amounted to $9,981 and $8,203 at September 30, 2007
and 2006, respectively. No dividends were paid in 2007 or
2006.
Common
Stock Purchase Warrants.
The Company has
outstanding warrants entitling the holders to purchase common stock at the
applicable exercise price. In fiscal 2007, no warrants were exercised
and warrants covering 27,500 shares expired. During fiscal 2006, no
warrants were exercised and warrants covering 201,889 shares expired or were
cancelled. In fiscal 2007 and 2006, warrants covering 83,665,501 and
9,138,205 shares were issued, respectively, primarily in connection with
convertible notes. The fair value of the warrants for the right to purchase
shares of common stock issued in 2007 and 2006 related to debt transactions
amounted to approximately $736,336 and $547,304, respectively, and was recorded
as debt discount and deferred financing costs. The fair value of these
outstanding warrants is included on a separate line on the accompanying balance
sheets. The following is a summary of outstanding warrants (all of
which are exercisable) at September 30, 2007. At September 30,
2007, the Company did not have enough authorized shares for all of these
warrants.
|
|
|
Exercise
Price
|
|
|
Shares
Issuable
|
|
|
Expiration
Date
|
|
|
Fair
Value
|
|
|
Warrants issued to placement agent in connection
with sales of preferred stock in 2003
|
|
$
|
10.00
|
|
|
|
2,000
|
|
|
2008
|
|
|
$
|
0
|
|
|
Warrants
issued in connection with deferred rent
costs associated with restructure of facility lease in
2003
|
|
$
|
10.00
|
|
|
|
30,000
|
|
|
2013
|
|
|
|
83
|
|
|
Warrants
issued in connection with preferred stock
sales in 2004
|
|
$
|
4.75-$6.30
|
|
|
|
4,500
|
|
|
2009
|
|
|
|
1
|
|
|
Warrants
issued to placement agent in connection
with sales of preferred stock in 2004
|
|
$
|
4.75-$6.30
|
|
|
|
2,700
|
|
|
2009
|
|
|
|
0
|
|
|
Warrants
issued in connection with preferred stock
sales in 2005
|
|
$
|
4.20-6.30
|
|
|
|
15,000
|
|
|
2008-2009
|
|
|
|
36
|
|
|
Warrants
issued to placement agent in connection
with sales of preferred stock in 2005
|
|
$
|
6.30
|
|
|
|
1,542
|
|
|
2009
|
|
|
|
0
|
|
|
Warrants issued in connection with issuance of
notes payable and convertible notes payable
|
|
$
|
1.65-$5.50
|
|
|
|
18,000
|
|
|
2008
|
|
|
|
0
|
|
|
Warrants
issued in connection with issuance of
long-term
convertible notes payable from 2005
o
2007
|
|
$
|
.01-$1.25
|
|
|
|
68,500,00
|
|
|
2013-2014
|
|
|
|
205,500
|
|
|
Warrants
issued to placement agent in connection
with
issuance of long-term convertible notes payable
from
2005-2007
|
|
$
|
.01-$12.50
|
|
|
|
24,287,039
|
|
|
2012-2014
|
|
|
|
90,979
|
|
|
Total Shares Issuable
|
|
|
|
|
|
|
92,860,781
|
|
|
|
|
|
|
$
|
296,599
|
|
|
Stock
Options.
The Company has stock option plans providing for
the granting of
incentive
stock options for up to 750,000 shares of common stock to certain
employees to
purchase
common stock at not less than 100% of the fair market value on the
date of
grant. Each
option granted under the plan may be exercised only during
the
continuance
of the optionee’s employment with the Company or during certain additional
periods
following the death or termination of the optionee. Options
granted before fiscal
1999
under the Plan vest after the completion of two years of continuous
service to the
Company
or at a rate of 50% per year. Beginning in fiscal 1999, options
granted vest at
a
rate of 20% per year. As of September, there were 1,042,000
shares available for future
grants.
During
fiscal 1995, the Company adopted a directors’ plan, (the “Directors’
Plan”). Under the Directors’ Plan, each non-management director
is to be granted options covering 5,000 shares of common stock initially
upon election to the Board, and each year in which he/she is elected
to
serve as a director. In fiscal 2001, the Company adopted a
compensation plan for outside directors that provides for each
non-management director to receive options covering 100,000 shares
of
common stock upon initial election to the Board and to receive annual
grants of options covering 30,000 shares of common stock at the fair
market value on the date of grant which vest over three years. In
September 2004, the Company increased the annual grants to 75,000
per year
for a non-management director. There were no options issued to
outside directors in fiscal 2007 and 2006.
|
|
During
fiscal 2007 and 2006, options to purchase 0 and 7,000 common shares,
respectively,
were granted primarily to employees of the Company with exercise
prices
equal
to the stock’s fair value on the grant date. During fiscal 2007
and 2006, options to
purchase
20,451 and 22,036 shares, respectively, held by employees of the
Company
were
forfeited
or expired and no options held by employees were
exercised.
|
|
|
|
|
Loss
Per
Share.
The following data shows the amounts used
in computing loss per share:
|
September
30,
|
|
2007
|
|
|
2006
|
|
|
Loss
from continuing operations
|
|
$
|
(2,202,373
|
)
|
|
$
|
(3,548,951
|
)
|
|
Less:
Preferred
stock
dividends
|
|
|
(151,980
|
)
|
|
|
(162,021
|
)
|
|
Loss
attributable to common stockholders
from
continuing operations
|
|
|
(2,354,353
|
)
|
|
|
(3,710,972
|
)
|
|
Less:
Loss
from discontinued
operations
|
|
|
(57,256
|
)
|
|
|
(154,214
|
)
|
|
Net
loss attributable to common shareholders
|
|
$
|
(2,411,609
|
)
|
|
$
|
(3,865,186
|
)
|
|
Weighted
average number of common
shares
outstanding
|
|
|
26,479,234
|
|
|
|
4,850,608
|
|
The
following is the basic and diluted loss per share calculation:
|
September
30,
|
|
2007
|
|
|
2006
|
|
|
Loss
per share attributable to common
shareholders
before discontinued
operations
|
|
$
|
(0.09
|
)
|
|
$
|
(.77
|
)
|
|
Impact
of discontinued operations
|
|
|
-
|
|
|
|
(.03
|
)
|
|
Basic
and diluted net loss per share
attributable
to common shareholders
|
|
$
|
(0.09
|
)
|
|
$
|
(.80
|
)
|
The following table summarizes securities that were
outstanding as of September 30, 2007 and 2006 but not reflected in the
calculation of diluted net loss per share because such shares are
anti-dilutive:
|
September
30,
|
2007
|
|
|
2006
|
|
|
Stock
options
|
|
158,628
|
|
|
|
179,079
|
|
|
Stock
warrants
|
|
92,860,781
|
|
|
|
9,222,780
|
|
|
Redeemable
convertible preferred stock
and
convertible preferred
stock
|
|
235,021,633
|
|
|
|
26,426,906
|
|
|
Convertible
notes payable
|
|
2,647,028,761
|
|
|
|
159,106,153
|
|
The calculation of the shares above for the
redeemable convertible
preferred stock and convertible preferred stock and the convertible notes were
based on the market price of the common stock as of September 30,
2007. The number of shares required exceeds the number of authorized
shares as of September 30, 2007
14. Income
Taxes
No
provision for federal income taxes has been made for the years ended
September 30, 2007 or 2006, due to the Company’s operating
losses. At September 30, 2007, the Company has unused net
operating loss carryforwards of approximately $56,000,000 including
approximately $11,000,000 acquired from ATI which expire at various dates
through 2024. Most of this amount is subject to annual limitations
due to various “changes in ownership” that have
occurred. Accordingly, most of the net operating loss carryforwards
will not be available to use in the future.
As
of
September 30, 2007, the deferred tax assets related to the net operating
loss carryforwards have been fully offset by valuation allowances, since the
utilization of such amounts is uncertain.
15. Major
Customers and Suppliers
Customers
in excess of 10% of total sales are:
Years
ended September
30,
2007
2006
Customer
A
$
*
$1,006,100
* Not
in excess of 10%.
At
September 30, 2007, accounts receivable from customers in excess of 10% of
total
accounts receivable were approximately $0 from Customer A and $62,000 from
two
other customers.
16. Interest
Expense and Financing Costs
|
|
|
2007
|
|
|
2006
|
|
|
Interest
on short-term and long-term debt
|
|
$
|
476,594
|
|
|
$
|
331,342
|
|
|
Deferred
financing costs on equity credit line
|
|
|
-
|
|
|
|
83,325
|
|
|
Discount
and deferred financing costs on
long-term
debt (Notes 8 & 9)
|
|
|
959,707
|
|
|
|
441,146
|
|
|
Discount
on short-term notes payable
|
|
|
-
|
|
|
|
71,898
|
|
|
Replacement
of warrants for long-term debt
|
|
|
-
|
|
|
|
605,000
|
|
|
Total
interest and financing costs
|
|
$
|
1,436,301
|
|
|
$
|
1,532,711
|
|
17. Related
Party Payable
At
September 30, 2007, the Company owed approximately $123,000 to Phildius, Kenyon
and Scott that represents the Company’s payroll tax and fringe benefit
obligation for Peter Phildius and Douglas Scott, officers of the Company, for
the past sixty months. The aggregate of salaries, fringe benefits and
reimbursement of expenses paid to PK&S by the Company on behalf of Messrs.
Phildius and Scott for fiscal years 2007 and 2006 totaled $389,578 and $408,628
respectively.
18. Accrued
Expenses
Accrued
expenses at September 30, 2007 consisted of:
Interest
payable $782,438
Vendor
dispute
322,339
Professional
fees
336,182
Compensation
and
compensation-related
124,193
Deferred
rent 77,031
Warranty
reserve 18,195
Other
78,471
Total
$1,738,849
19. Subsequent
Events
From
October 1 through December 11, 2007, $55,838 of long-term convertible debt
was
converted into 35,940,971 shares of common stock.
On
November 14, 2007 and December 13, 2007, the Company executed additional notes
payable with AJW Partners, AJW Master Fund, Ltd. and New Millennium Capital
Partners II, LLC in the total principal amount of $650,000. Interest
on these notes is at 8% per annum and is payable quarterly in cash or the
Company’s common stock at the option of the Company. The Company
issued warrants to purchase 55,000,000 shares of common stock at $.01 per share
for seven years in connection with these notes. The entire principal
plus any accrued and unpaid interest associated with these notes is convertible,
at the holder’s option, into the Company’s common stock
at
a conversion price of
40% of
the average of the three lowest intraday trading prices of the common stock
for
the twenty trading days preceding the date that the holders elect to
convert. As part of this financing, the conversion price related to
all previously issued and outstanding notes to AJW Partners, AJW Master Fund,
Ltd., AJW Qualified Partners, and New Millennium Capital Partners II, LLC was
changed to from 55% or 65% to 40%. This will result in a new
measurement date and an interest charge that could be material.
On
December 18, 2007, the shareholders approved an increase in authorized shares
of
common stock from 100 million to 800 million shares.