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EX-31.2 - Center for Wound Healing, Inc. | v162480_ex31-2.htm |
EX-31.1 - Center for Wound Healing, Inc. | v162480_ex31-1.htm |
EX-32.1 - Center for Wound Healing, Inc. | v162480_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB/A
(Amendment
No. 1)
x ANNUAL REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the
fiscal year ended June 30, 2008
¨ TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
Commission
file number: 000-5137
THE
CENTER FOR WOUND HEALING, INC.
(Name of
Small Business Issuer in Its Charter)
Nevada
|
87-0618831
|
|
(State
or jurisdiction of Incorporation or
organization
|
(IRS
Employer ID
Number)
|
155
White Plains Road
|
||
Tarrytown,
NY
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10591
|
|
(Address
of principal executive offices)
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(Zip
Code)
|
Issuer's
telephone number, including area code: (914)
372-3150
Securities
registered under Section 12(b) of the Exchange Act:
None
Securities
registered under Section 12(g) of the Exchange Act:
Common
Stock, $0.001 par value per share
(Title of
Class)
Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports); and (2) has been subject
to such filing requirements for the past 90 days. Yes ¨ No x
Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this form 10-KSB or any amendment to
this Form 10-KSB. x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No
x
The
issuer's revenues for the year ended June 30, 2008 were
$26,357,619.
The
aggregate market value of the registrant's common stock held by non-affiliates
as of September 19, 2008 was approximately $8,190,333.
State the
number of shares outstanding of each of the issuer's classes of equity
securities, as of the latest practicable date. As of September 19, 2008, there
were 23,373,281 shares of common stock issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE: None.
Transitional
Small Business Disclosure Format (check one): Yes ¨ No x
EXPLANATORY
NOTE
We filed
our Annual Report on Form 10-KSB for fiscal year ended June 30, 2008
with the Securities and Exchange Commission (the “SEC”) on September
25, 2008. We are filing this Amendment No. 1 on the Form 10-KSB/A on October
9th, 2009 to amend and restate our financial statements for fiscal year ended
June 30, 2008 and the related footnote disclosures to reflect the correction of
an accounting error, all as more fully described in the following
paragraph.
During
the preparation of its consolidated financial statements for the fiscal year
ended June 30, 2009, the Company discovered that the initial recording of a
financing transaction entered into on March 31, 2008 had incorrectly accounted
for certain elements of the transaction related to the pricing of warrants to
purchase shares of the Company’s common stock, the amortization of costs
associated with such financing, and the issuance of appropriate number of
warrants to a former debt holder and to Bison Capital Equity Partners II-A, L.P.
and Bison Capital Equity Partners II-B, L.P. (collectively, the “Bison Capital
Entities”), with which the Company consummated a financing transaction on March
31, 2008 (the “Bison Note”). As it effects the June 30, 2008 filing, it was
determined that the shareholders’ equity was understated and interest expense,
long-term liabilities and other assets were overstated. In conjunction
with its review of its accounting for warrants as described above, the Company
has issued warrants to purchase an additional 3,093,750 shares of common stock
to the former debt holder, which warrants were required to be issued as a result
of a January 2008 private financing that the Company undertook with other
investors, and the exercise price of all of the warrants held by such former
debt holder has been adjusted to $2.00 per share, and the Company also issued
warrants to purchase an additional 773,438 shares of common stock to the Bison
Capital Entities in accordance with the warrant agreement between the Bison
Capital Entities and the Company.
This
amendment No. 1 to our Annual Report on Form 10-KSB for the fiscal year ended
June 30, 2008 amends only the following items:
PART II,
Item 5 – Market for Common Equity, Related Stockholder Matters and Small
Business Issuer Purchases of Equity Securities
PART II,
Item 6 – Management’s Discussion and Analysis or Plan of Operation was amended
to reflect the corrections to the Company’s reported operating results and
financial position.
PART II,
Item 7 – Consolidated Financial Statements, and the Notes to the Consolidated
Financial Statements
2
THE
CENTER FOR WOUND HEALING, INC.
Report
on Form 10-KSB/A
For
the Fiscal Year Ended June 30, 2008
TABLE
OF CONTENTS
PAGE
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PART
I
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Item
1.
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Description
of Business
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4
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Item
2.
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Description
of Property
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12
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Item
3.
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Legal
Proceedings
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12
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Item
4.
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Submission
of Matters to Vote of Security Holders
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12
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PART
II
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|||
Item
5.
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Market
for Common Equity, Related Stockholder Matters and Small Business Issuer
Purchases of Equity Securities
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13
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|
Item
6.
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Management’s
Discussion and Analysis or Plan of Operation
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17
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Item
7.
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Financial
Statements
|
24
|
|
Item
8.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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50
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Item
8A.
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Controls
and Procedures
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50
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Item
8B.
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Other
Information
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51
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PART
III
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|||
Item
9.
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Directors,
Executive Officers, Promoters and Control Persons; Compliance with Section
16(a) of the Exchange Act
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51
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Item
10.
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Executive
Compensation
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54
|
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Item
11.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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58
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Item
12.
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Certain
Relationships and Related Transactions, and Director
Independence
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59
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Item
13.
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Exhibits
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60
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Item
14
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Principal
Accountant Fees and Services
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61
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Signatures
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63
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3
Forward-Looking
Statements
This
Report contains, in addition to historical information, forward-looking
statements regarding The Center for Wound Healing, Inc. (the “Company” or
“CFWH”), which represent the Company’s expectations or beliefs including, but
not limited to, statements concerning the Company’s operations, performance,
financial condition, business strategies, and other information and that involve
substantial risks and uncertainties. The Company’s actual results of operations,
some of which are beyond the Company’s control, could differ materially. For
this purpose, any statements contained in this Report that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the generality of the foregoing, words such as “may,” “will,” “expect,”
“believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue” or the
negative or other variations thereof or comparable terminology are intended to
identify forward-looking statements. Factors that could cause or contribute to
such difference include, but are not limited to; limited history of operations;
need for additional financing; competition; dependence on management; and other
factors discussed herein and in the Company’s other filings with the Securities
and Exchange Commission.
PART
I
ITEM
1. DESCRIPTION OF
BUSINESS
As used
in this annual report, "we", "us", "our", "CFWH", "Company" or "our company"
refers to The Center for Wound Healing, Inc. and all of its subsidiaries and
affiliated companies.
Business
Development:
The
Center for Wound Healing, Inc. (“CFWH” or the “Company”), formerly known as
American Hyperbaric, Inc., was organized in the State of Florida on May 25,
2005. CFWH develops and manages comprehensive wound care centers, which are
marketed as “THE CENTER FOR WOUND HEALING tm” in
hospitals throughout the United States. These centers render the specialized
service of comprehensive wound care and hyperbaric medicine, and are developed
in partnerships with acute care hospitals. CFWH can be contracted to startup and
manage the wound care program or offer a turnkey operation including the
furnishing of hyperbaric oxygen chambers to hospitals. On December 9, 2005, CFWH
completed a “reverse acquisition” transaction with Kevcorp Services, Inc.
(“Kevcorp”), a publicly-held Nevada corporation, in which Kevcorp acquired all
the assets and assumed all of the liabilities of CFWH, in consideration for the
issuance of a majority of Kevcorp’s shares of common stock pursuant to an
Agreement and Plan of Reorganization. The transaction was a tax-free
reorganization. Following the reorganization, CFWH became a wholly-owned
subsidiary of Kevcorp. After this transaction closed, in December 2005 CFWH
amended its Articles of Incorporation and changed its name to The Center for
Wound Healing, Inc. CFWH is headquartered in Tarrytown, New York. Our principal
executive office is located at 155 White Plains Road, Suite 200, Tarrytown, NY
10591.
On April
7, 2006, we acquired the majority membership interests in 12 individual limited
liability companies (the “Twelve LLCs”) from the holders of these companies’
majority members (the “Majority Members”) pursuant to the rights granted to us
by the Majority Members of the Twelve LLCs in December 2005. As a condition
precedent to the purchase contract we closed on a financing transaction
resulting in $5,500,000 and $4,912,500 in gross and net cash proceeds,
respectively, to fulfill our operational and expansion plans.
On April
7, 2006, the Company simultaneously received $5.5 million in gross proceeds (the
“Secured Convertible Debenture” or “Debenture”) ($4,912,500 after placement
agent fees and other offering costs, plus an additional 150,000 common shares
issued to the placement agent), in exchange for its secured convertible
debenture issued to DKR Sound Shore Oasis Holding Fund Ltd (“Oasis”) ($5.1
million) and Harborview Master Fund LP ($0.4 million), together the
“Bondholders”. The Debenture was originally due on April 7, 2007. As provided in
the agreement, the due date was extended to September 7, 2007 since the shares
underlying the Oasis warrants were not registered. The debentures were
convertible at the option of the Bondholders into common shares, at $3 per
common share (subject to adjustment) at any time and in any amount prior to
maturity. As originally issued, the debenture bore interest at 8% per annum,
payable in cash or in common shares at the conversion price (subject to certain
eligibility requirements). $2,000,000 of the proceeds of the debenture was paid
to the Majority Members as partial consideration for the simultaneous
acquisitions of the Twelve LLCs previously discussed.
The
debenture agreement contained EBITDA (Earnings before Interest, Taxes,
Depreciation and Amortization) targets which, if not met, would result in a
downward adjustment to the conversion price although the conversion price could
not be less than $2.00 per share. As the Company failed to meet the
EBITDA targets as specified under the debenture, the conversion price was
reduced to its minimum of $2.00 per share.
Issuance
of the warrants to the holders of the $1.6 million of notes triggered certain
anti-dilution provisions under the warrant agreement related to 2,750,000
warrants outstanding at June 30, 2007. As the result, the Company issued
an additional 3,093,750 warrants to purchase shares of its common stock and
reduced the exercise price for all of the warrants to $2 per share.
In
addition, each Bondholder received a series of five year common stock purchase
warrants with exercise prices ranging from $4.00 to $5.00 per share (subject to
adjustment downward upon the occurrence of certain specified events) for an
aggregate of 2,750,000 common shares. If the Company failed to file a
registration statement by April 7, 2007, which it did, the holders of the
warrants received the option to exercise the warrants on a “cashless”
basis
4
Of these
warrants, 916,667, exercisable at $4.00 per common share, were exercisable on
their 11 month anniversary of issuance and were callable at the option of the
Company until exercisable. Since the Company did not exercise its call right,
the due date of the convertible debenture was extended to September 7, 2007. All
other warrants are immediately exercisable.
Because
the senior convertible debentures were immediately convertible, and could be
converted at a price on the date of sale ($3.00 per share) which was less than
the market value of the shares on that date ($4.00 per share), this transaction
included a beneficial conversion feature. In addition, the corresponding
warrants attached were determined to have fair values utilizing the
Black-Scholes option-pricing model in excess of the notes’ proceeds of
$5,500,000. Consequently, $2,108,240 was allocated to the beneficial conversion
feature and $3,391,760 to the warrants, using a relative valuation method to the
value of the senior convertible note and credited to additional paid-in capital.
The beneficial conversion feature, the fair value of the immediately convertible
warrants, and those warrants exercisable as of June 30, 2007, were charged to
interest expense and accreted to the senior convertible debenture in the
accompanying financial statements. As of June 30, 2007, there was no remaining
unamortized discount.
As part
of this agreement, the Company was required to file a Registration Statement
within 60 days of the date of closing of the shares and warrants associated with
the aforementioned $5.5 million 8% Secured Debenture. Since the Company failed
to do so, it incurred damages payable to each Bondholder equivalent to 1.5% of
the aggregate purchase price paid by each Bondholder for each month the
Registration Statement was not filed up to a maximum of 9% per Bondholder. The
maximum damages amounted to $495,000, which was fully accrued for in fiscal
2007.
On
February 28, 2007 Oasis issued a Default Notice to the Company because of the
Company’s failure to timely file its June 30, 2006 annual report on Form 10-KSB,
the cessation of the Company’s securities being listed or quoted on the
Over-the-Counter Bulletin Board of the NASD, and the Company’s failure to file a
Registration Statement within 60 days of the Registration Rights Agreement. As a
result of these defaults the Company incurred a $1,650,000 penalty (30% of the
principal amount of the debenture), as provided for in the Debenture Agreement.
On May 29, 2007 the Company, its debenture holders and Signature Bank negotiated
a restructuring of the Company’s senior secured loan and the secured debenture.
Among other things, the debenture holders withdrew their default notice and all
alleged defaults under both agreements were waived.
The restructured subordinated
debentures increased the principal amount of debentures for accrued interest on
the debentures through May 29, 2007 by $504,778 and the $495,000 in damages
referred to above. The interest rate on the restructured $6,499,778 in
indebtedness was increased from 8% to 9%. The revised debt required a $1,000,000
payment to the bondholders of which $800,000 was a principal reduction and
$200,000 was a “consent fee” to restructure the debentures; this payment was
made on June 21, 2007. The bondholders received an additional $1,650,000 as
“additional consideration” for amending the agreements. The consent fee and the
additional consideration were charged to operations as additional interest from
the restructure date to December 31, 2007, the initial maturity date of the
debentures. On the initial maturity date the Company exercised its option to
extend the maturity date to March 31, 2008 by paying a $1,200,000 in principal
payments and an additional consent fee of $300,000.
Pursuant
to the Third Amendment to the credit facility effective May 29, 2007, and to
three subsequent amendments, the bank extended the line’s maturity to April 15,
2008, and increased the revolving credit line to $6,500,000 at substantially the
same interest rates and secured by the same collateral. The Company also
received the proceeds from a $1,500,000 term loan payable in equal monthly
principal installments of $33,333 commencing September 1, 2007, with the balance
due April 15, 2008.
The
amended agreement required the Company to maintain certain financial covenants
and ratios, limited capital expenditures and additional indebtedness, and
prohibited dividends and distributions to minority interest without prior
approval. The Company was required to assign the aggregate proceeds of key man
life insurance of $7,500,000 on the life of the Company’s CEO, and two directors
personally guaranteed the bank debt.
On March
31, 2008, the Company completed a $20 million 15% senior secured subordinated
financing agreement with Bison Equity Capital Partners (“Bison”) (the “Bison
Note”) (the “Bison Financing”). The Company received $17.5 million, net of a
$2.5 million discount, and after providing for transaction fees, approximately
$12.8 million was used to retire in its entirety the Secured Convertible
Debenture, accrued interest and penalty; the Signature Bank term loan; the CFWH
Mezzanine loan and accrued interest, the December 2007 and January 2008 Bridge
Loan and accrued interest; and certain extended accounts payable and other
obligations.
As part
of the May 29, 2007 refinancing agreement with the Bondholders, the Company
agreed to pay the Bondholders $800,000 in principal and $200,000 as a consent
fee within 21 days of the agreement becoming effective. In order to raise
capital to effectuate this payment, the Company formed a new limited liability
company, CFWH Mezzanine, LLC (“Mezzanine”) and sold an aggregate total of 25% of
the membership interests in Mezzanine to private investors for an aggregate sum
of $1 million. The Company contributed to Mezzanine its rights to the proceeds
of certain specifically identified wound care centers the Company contemplated
opening in the near term and the minority investors were entitled to receive 25%
of the earnings of such centers. At the time the Company called for the
redemption of the minority ownership interests in Mezzanine, each investor had
the option to either receive payment for the principal or may convert his or her
principal investment into the Company’s common stock at a conversion price of $2
per share. The Mezzanine loan was retired in full from the proceeds of the Bison
Financing.
5
On June
16, 2006, the Company closed on a contribution agreement, effective June 1,
2006, to acquire Far Rockaway Hyperbaric, (“Far Rockaway”) for $5 million. The
consideration consisted of $1,000,000 in cash on closing, 615,385 shares of the
Company’s common stock valued at $3.25 per share, which carry piggyback
registration rights, based upon the closing price of the stock on the date of
the acquisition, a two year promissory note in the amount of $1,350,000 bearing
interest at 8% per annum, and a 60 day promissory note in the amount of $650,000
bearing interest at 8% per annum. The 60 day note was repaid on August 9, 2006,
and the two year note was retired in full on June 14, 2008.
Business
of Issuer:
Hyperbaric
Oxygen Treatment (“HBOT”) is a medical treatment administered by delivering
one-hundred percent (100%) oxygen at pressures greater than atmospheric (sea
level) pressure to a patient inside an enclosed chamber. This means that the
pressure is typically 2½ times greater than normal atmospheric pressure, causing
blood to carry larger amounts of oxygen, which is delivered to organs and
tissues in the body. The increased pressure combined with the increased oxygen
dissolves oxygen in the blood and throughout all body tissues and fluids at up
to 20 times normal concentration. By doing so, wounds, particularly infected
wounds, heal more quickly.
Hyperbaric
oxygen acts as a drug, eliciting varying levels of response at different
treatment depths, durations and dosages and has been proven effective as
adjunctive therapy for specifically indicated conditions. The amount of pressure
increase and the length of time under pressure are determined by the conditions
being treated. Treatment pressures are usually between two and three-times
atmospheric pressure and usually last from one to two hours at full
pressure.
The US
Food and Drug Administration (“FDA”) has approved HBOT to treat decompression
sickness, gangrene, brain abscess, air bubbles in the blood, and injuries in
which tissues are not getting enough oxygen. Oxygen is considered to be a drug
by the FDA that must be prescribed by a physician or a licensed health care
provider in order to help treat illnesses or health conditions.
HBOT does
not compete with or replace other treatment modalities, however, it is now
increasingly being used on an adjunctive basis in the management of a variety of
disorders refractory to standard medical and surgical care and has been shown to
be particularly effective in treating problem wounds, chronic bone infections,
and radiation injury. In general, people are using HBOT to help themselves heal
faster from surgeries and injuries.
We contract with hospitals to supply
hyperbaric oxygen chambers and manage wound care facilities offering the
services related to this treatment. Generally for each center we are provided
with appropriate space requirements by the institution. We are responsible for
the complete management of our services for each treatment scheduled including
non-medical staff and billing of patient services directly through the hospital
for inclusion in a patient’s overall billing. We also are responsible for
designing and installing the necessary leasehold improvements of the
hospital-provided space and supplying the appropriate number of hyperbaric
chambers, based upon anticipated demand. We generally either acquire the
chambers under three year lease financing transactions with $1 buyout
arrangements (treated as capitalized leases in our accompanying condensed
consolidated financial statements) or we rent the units from third parties for
which we pay a per use (treatment) fee. This has allowed us to leverage our
resources and maximize the number of centers that we can support. As our
operation grows, we have the ability to transfer chambers between institutions
in order to balance demand and maximize the use of our
resources.
CFWH has
entered into separate multi-year operating agreements to startup and manage the
wound care programs in 38 hospitals, which offer turnkey operations including
the furnishing of hyperbaric oxygen chambers to each hospital. For the period
ending June 30, 2008, CFWH had 35 of the 38 agreements operational; however, in
September 2008 we determined to close one underperforming center, which resulted
in a loss on abandonment accrual of $190,000 as of June 30, 2008. Although there
can be no assurance that we will be successful in each instance, our plan at
each center requires a multi-year committed contract term with a fixed and or
variable fee schedule based on paid hyperbaric treatments and wound care
procedures. This fee is adequate for us to recover our investment in leasehold
improvements (a sunk cost and non-transferable asset), our start-up costs,
including recruiting and training of personnel, and the amortization of chamber
lease financing.
CFWH is a
provider of contract services for wound care and hyperbaric medicine in the
United States. Through medical leadership based upon a multi-disciplinary team
of physicians and defined clinical standards, CFWH is committed to achieving
patient results while simultaneously providing both physicians and hospitals
professional and economic opportunities.
The goal
of present management and the physician-founders of CFWH is to bring HBOT into
the mainstream of wound and non-emergent treatment modalities. At the time of
CFWH’s inception, hyperbaric therapy was already well regarded in certain
emergency medical applications but was not a recognized modality in the
treatment of non-healing wounds, particularly within the vascular community.
CFWH has begun to form strong bonds with the vascular and podiatric communities
in order to integrate HBOT as a core modality.
CFWH’s
individualized therapies, established protocols and proactive care and case
management has proven successful in treating chronic wounds that have previously
resisted healing with outcomes exceeding national averages. In all of its
centers, CFWH utilizes a best practice model enhanced by nationally accepted
wound care algorithms to significantly improve the medical results for patients
with chronic non-healing wounds.
6
In
addition to wound healing management, CFWH also provides Hyperbaric Oxygen
Therapy as an adjunct treatment modality to enhance the body’s natural healing
abilities and to strengthen the body’s immune system. This is resulting in more
rapid and comprehensive healing powers for patients. HBOT is a simple,
non-invasive, painless treatment that has been proven to benefit patients
presenting with Center for Medicare and Medicaid Services approved indications,
including:
|
·
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Acute arterial
insufficiency
|
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·
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Osteomyelitis
|
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·
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Radiation
injury/necrosis
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·
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Necrotizing
infection
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·
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Compromised skin grafts and
flaps
|
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·
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Diabetic wounds of the lower
extremities
|
To
measure the effectiveness of our wound management program, CFWH has developed a
functional assessment scoring system to measure the healing of a wound. In
addition, CFWH has developed a proprietary tracking software and database of
over 1,000 patient outcomes that have been collected over the past four years.
In reviewing the data collected, CFWH has registered healing rates of close to
80% in 5-6 weeks of combination local wound care and HBOT. This group of
patients falls within the high risk category that would otherwise require
amputation. Instead, less than eight percent of this patient population will
undergo amputation. This is well below national benchmarks consistently
reporting amputation rates over 20% in the high risk group.
Competition:
Our
principal competition in the chronic wound care market consists of specialty
clinics that have been established by some hospitals or physicians.
Additionally, there are a number of private companies that provide wound care
services through an HBOT program format. In the market for disease management
products and services, we face competition from other disease management
entities, general health care facilities and service providers,
biopharmaceutical companies, pharmaceutical companies and other competitors.
Many of these companies have substantially greater capital resources and
marketing staffs, and greater experience in commercializing products and
services than we have. In addition, recently developed technologies, or
technologies that may be developed in the future, are or may be the basis for
products which compete with our chronic wound program. There can be no assurance
that we will be able to enter into co-marketing arrangements with respect to
these products or that we will be able to compete effectively against such
companies in the future.
As the
FDA issues formal approvals of HBOT as treatment for specific illness, both
physician and patient awareness will continue to increase as to the benefits of
using HBOT.
Marketing:
CFWH
conducts market awareness programs and advertising to promote the utilization of
its centers among medical professional, care givers, and patients. A
multifaceted marketing approach is used to create awareness of the Center’s
capabilities and to secure appropriate referrals. This approach is implemented
over several months and features:
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·
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Educational lectures and dinners
with homecare agencies, nursing homes and physicians (both individual and
group practices)
|
|
·
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Grand opening
ceremonies
|
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·
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Outcome data presented at annual
vascular conferences
|
|
·
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Sponsored healthcare events for
the community
|
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·
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Distribution of collateral
materials
|
|
·
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Media advertising –both radio and
print
|
|
·
|
Sponsorship of local and national
podiatry society meetings and
lectures
|
|
·
|
Efforts to secure patients from
other local hospital’s medical
staffs
|
|
·
|
Efforts to establish substantial
business key physicians in the area particularly major PCP
groups
|
7
Government
Regulation:
Our
operations and the marketing of our services are subject to extensive regulation
by numerous federal and state governmental authorities in the United States. We
believe that we are currently in substantial compliance with applicable laws,
regulations and rules. However, we cannot assure you that a governmental agency
or a third party will not contend that certain aspects of our business are
either subject to or are not in compliance with such laws, regulations or rules
or that the state or federal regulatory agencies or courts would interpret such
laws, regulations and rules in our favor. The sanctions for failure to comply
with such laws, regulations or rules could include denial of the right to
conduct business, significant fines and criminal and civil penalties.
Additionally, an increase in the complexity or substantive requirements of such
laws, regulations or rules could have a material adverse effect on our
business.
Any
change in current regulatory requirements or related interpretations by or
positions of, state officials where we operate could adversely affect our
operations within those states. In states where we are not currently located, we
intend to utilize the same approaches adopted elsewhere for achieving state
compliance. However, state regulatory requirements could adversely affect our
ability to establish operations in such other states.
Various
state and federal laws apply to the operations of health care providers
including, but are not limited to, the following:
Licensure:
Certain
health care providers are required to be licensed by various state regulatory
bodies. However, if we are found to not be in compliance, we could be subject to
fines and penalties or ordered to cease operations which could have an adverse
effect on our business.
False
Claims Act:
The Federal False Claims Act and some
state laws impose requirements in connection with the submission of claims for
payment for health care services and products, including prohibiting the knowing
submission of false or fraudulent claims and submission of false records or
statements to the United States government or state government. Such
requirements would apply to the hospital customers to which we provide wound
care management services. Not only are government agencies active in
investigating and enforcing actions with respect to applicable health laws, but
also health care providers are often subject to actions brought by individuals
on behalf of the government. As such "whistleblower" lawsuits are generally
filed under seal with a court to allow the government adequate time to
investigate and determine whether it will intervene in the action, health care
providers affected are often unaware of the suit until the government has made
its determination and the seal is lifted. The Federal False Claims Act provides
for penalties equal to three (3) times the actual amount of any overpayments
plus $11,000 per claim.
Fraud
and Abuse Laws:
The Anti-Kickback
Law
The
federal Anti-Kickback law prohibits the solicitation, payment, receipt or
offering of any direct or indirect remuneration in exchange for the referral of
Medicare and Medicaid patients or for purchasing, arranging for or recommending
the purchasing, leasing or ordering of Medicare or Medicaid covered services,
items or equipment. The Anti-Kickback law is an intent based statute, which
means that it is violated only if the party intends to induce the referral of
Medicare or Medicaid patients or the purchase, lease, or ordering of a good,
item, or services reimbursable by Medicare or Medicaid. Nevertheless, federal
courts have broadly construed the intent standard and held that it is satisfied
even if only one purpose of the referral is to induce a prohibited
referral.
The
Center for Medicare and Medicaid Studies (“CMS”) has promulgated regulations
containing “safe harbors” which protect certain activities from prosecution
under the federal Anti-Kickback law. A safe harbor immunizes from criminal or
civil penalties certain payment or business practices that are prohibited by the
Anti-Kickback law. In order to have protection under the safe harbor, a party
must comply with each requirement of the applicable safe harbor.
However,
falling outside a safe harbor does not mean the arrangement is illegal, but
means that the arrangement will be evaluated based on a facts and circumstances
test to determine whether the party intends to induce the referral of Medicare
or Medicaid patients or the purchase, lease, or ordering of a good, item or
service reimbursable by Medicare or Medicaid. While we believe that our
operations and marketing are in compliance with the Anti-Kickback law and
certain of the safe harbors, there are no assurances that the Office of
Inspector General ("OIG") OIG or other governmental authority will agree with
that belief.
The OIG
from time to time publishes its interpretations on various fraud and abuse
issues and about fraudulent or abusive activities OIG deems suspect and
potentially in violation of the federal laws, regulations and rules. If our
actions are found to be inconsistent with OIG's interpretations, such actions
could have a material adverse effect on our business.
8
Violations of these fraud and abuse
laws may result in fines and penalties as well as civil or criminal penalties
for individuals or entities, including exclusion from participation in the
Medicare or Medicaid programs. Several states have adopted similar laws that
cover patients in both private and government programs. Because the fraud and
abuse laws have been broadly interpreted, they limit the manner in which we can
operate our business and market our services to, and contract for services with,
other health care providers.
The
Stark Law:
Federal
and some state laws prohibit physician referrals to an entity in which the
physician or his or her immediate family members have a financial interest for
provision of certain designated health services that are reimbursed by Medicare
or Medicaid. Outpatient prescription drugs are one of the designated services.
We believe we have structured our operations to comply with these provisions but
no assurances can be given that a federal or state agency charged with
enforcement of the Stark Law, its regulations, or similar state laws might not
assert a contrary position. In addition, periodically, there are efforts to
expand the scope of these referral restrictions from its application to
government health care programs to all payors and to additional health services.
Certain states are considering adopting similar restrictions or expanding the
scope of existing restrictions. We cannot assure you that the federal
government, or other states in which we operate, will not enact similar or more
restrictive legislation or restrictions or interpret existing laws and
regulations in a manner that could harm our business.
Professional
Fee Splitting:
The laws
of many states prohibit physicians from sharing professional fees with
non-physicians and prohibit entities not solely owned by physicians, including,
us, from practicing medicine and from employing physicians to practice medicine.
The laws in most states regarding the corporate practice of medicine have been
subjected to judicial and regulatory interpretation and while we have attempted
to structure our relationships with physicians and our operations in a manner
that complies with these requirements, there is no assurance that various state
regulators will agree that we are in compliance.
Professional
Licenses:
State
laws prohibit the practice of medicine without a license. We believe that our
arrangements with physicians and physician groups are structured in a manner
that precludes a determination that we are practicing medicine. Nevertheless, a
state could consider our activities to constitute the practice of medicine. If
we are found to have violated these laws, we could face civil and criminal
penalties and be required to reduce, restructure or even cease our business in
that state.
HIPAA:
The Health Insurance Portability and
Accountability Act of 1996 (“HIPAA”) broadened the scope of certain fraud and
abuse laws by adding several criminal provisions for health care fraud offenses
that apply to all health benefit programs. HIPAA also added a prohibition
against incentives intended to influence decisions by Medicare beneficiaries as
to the provider from which they will receive services. In addition, HIPAA
created new enforcement mechanisms to combat fraud and abuse, including the
Medicare Integrity Program and an incentive program under which individuals can
receive up to $1,000 for providing information on Medicare fraud and abuse that
leads to the recovery of at least $100 of Medicare funds. Federal enforcement
officials now have the ability to exclude from Medicare and Medicaid any
investors, officers, and managing employees associated with business entities
that have committed health care fraud, even if the officer or managing employee
had no knowledge of the fraud.
HIPAA
also contains certain administrative simplification provisions that require the
use of uniform electronic data transmission standards for certain health care
claims and payment transactions submitted or received electronically. The United
States Department of Health and Human Services (“HHS”) has issued regulations
implementing the HIPAA administrative simplification provisions and compliance
with these regulations became mandatory for our facilities on October 16, 2003.
Although HHS temporarily agreed to accept noncompliant Medicare claims, CMS
stopped processing non-HIPAA-compliant Medicare claims beginning October 1,
2005. We believe that the cost of compliance with these regulations has not had
and is not expected to have a material adverse effect on our business, financial
condition, results of operations, and cash flows.
The
Administrative Simplification Provisions of HIPAA require HHS to adopt standards
to protect the security and privacy of health-related information. In February
2002, HHS issued final rules concerning the security standards, do not require
the use of specific technologies, e.g., no specific hardware or software is
required, but instead require health plans, health care clearinghouses and
health care providers to comply with certain minimum security procedures in
order to protect data integrity, confidentiality and availability. The
compliance deadline was April 2005.
9
With respect to the privacy standards,
HHS published final rules in December of 2000. However, on August 14, 2002, HHS
published final modifications to the privacy standards. The final modifications
eliminate the need for patient consent when the protected information is
disclosed for treatment payment issues or health care operations. In addition,
the final modifications clarified the requirements related to the
authorizations, marketing and minimum necessary disclosures of information. All
health care providers were required to be compliant with the new federal privacy
requirements no later than April 14, 2003. HIPAA privacy standards contain
detailed requirements regarding the use and disclosure of individually
identifiable health information. Improper use or disclosure of identifiable
health information covered by HIPAA privacy regulations can result in the
following fines and/or imprisonment: (i) civil money penalties for HIPAA privacy
violations are $100 per incident, up to $25,000, per person, per year, per
standard violated; (ii) a person who knowingly and in violation of HIPAA privacy
regulations obtains individually identifiable health information or discloses
individually identifiable health information to another person may be fined up
to $50,000 and imprisoned up to one year, or both; (iii) if the offense is
committed under false pretenses, the fine may be up to $100,000 and imprisonment
for up to five years; and (iv) if the offense is done with the intent to sell,
transfer or use individually identifiable health information for commercial
advantage, personal gain or malicious harm, the fine may be up to $250,000 and
imprisonment for up to ten years. We must meet the various HIPAA
standards by the deadlines noted above. The decentralized nature of our
operations could represent significant challenges to us in the implementation of
these standards. If we are found to not be in compliance, we could be subject to
fines, penalties and other actions which could have an adverse effect on our
business.
Confidentiality:
Under
federal and state laws, we must adhere to stringent confidentiality regulations
intended to protect the confidentiality of patient records. We believe our
operations are in compliance with these laws but we could be subject to claims
from patients as well as charges of violations from regulators and such claims
or charges could have a material adverse effect on our business.
Ongoing
Investigations:
Federal
and state investigations and enforcement actions continue to focus on the health
care industry, scrutinizing a wide range of items such as joint venture
arrangements and referral and billing practices. We believe our current and
planned activities are substantially in compliance with applicable legal
requirements. We cannot assure you, however, that a governmental agency or a
third party will not contend that certain aspects of our business are subject
to, or are not in compliance with, such laws, regulations or rules, or that
state or federal regulatory agencies or courts would interpret such laws,
regulations and rules in our favor, or that future interpretations of such laws
will not require structural or organizational modifications of our existing
business or have a negative impact on our business. Applicable laws and
regulations are very broad and complex, and, in many cases, the courts interpret
them differently, making compliance difficult. Although we try to comply with
such laws, regulations and rules, a violation could result in denial of the
right to conduct business, significant fines and criminal penalties.
Additionally, an increase in the complexity or substantive requirements of such
laws, regulations or rules, or reform of the structure of health care delivery
systems and payment methods, could have a material adverse effect on our
business.
Intellectual
Property:
Our
success depends in part on our ability to maintain trade secret protection and
operate without infringing on or violating the proprietary rights of third
parties. In addition, we also rely, in part, on trade secrets, proprietary
know-how and technological advances which we seek to protect by measures, such
as confidentiality agreements with our employees, consultants and other parties
with whom we do business. We cannot assure you that these agreements will not be
breached, that we will have adequate remedies for any breach or that our trade
secrets and proprietary know-how will not otherwise become known, be
independently discovered by others or found to be unprotected.
10
Our
Subsidiaries:
Name of Subsidiary
|
Jurisdiction of Incorporation
of
Organization
|
|
Atlantic
Associates, LLC
|
Delaware
|
|
Atlantic
Hyperbaric, LLC
|
New
York
|
|
Bayonne
Hyperbaric, LLC
|
New
Jersey
|
|
CEF
Products, LLC
|
New
York
|
|
CFWH
Mezzanine, LLC
|
New
Jersey
|
|
CMC
Hyperbaric, LLC
|
Pennsylvania
|
|
EIN
Hyperbaric, LLC
|
New
York
|
|
Elise
King, LLC
|
New
York
|
|
Far
Rockaway Hyperbaric, LLC
|
New
York
|
|
Forest
Hills Hyperbaric, LLC
|
New
York
|
|
Greater
Bronx Hyperbaric LLC
|
New
York
|
|
JFK
Hyperbaric LLC
|
New
Jersey
|
|
Lowell
Hyperbaric LLC
|
Massachusetts
|
|
Maimonides
Hyperbaric, LLC
|
New
York
|
|
Massachusetts
Hyperbaric, LLC
|
Massachusetts
|
|
Meadowlands
Hyperbaric, LLC
|
New
Jersey
|
|
Muhlenberg
Hyperbaric LLC
|
New
Jersey
|
|
New
York Hyperbaric & Wound Care Centers LLC
|
New
York
|
|
New
York Hyperbaric & Wound Care Centers LLC
|
Delaware
|
|
Newark
BI LLC
|
New
Jersey
|
|
NJ
Hyperbaric, LLC
|
New
Jersey
|
|
NY
Hyperbaric, LLC
|
New
York
|
|
Passaic
Hyperbaric, LLC
|
New
Jersey
|
|
Pennsylvania
Hyperbaric, LLC
|
Pennsylvania
|
|
Raritan
Bay Hyperbaric, LLC
|
New
Jersey
|
|
Scranton
Hyperbaric LLC
|
Pennsylvania
|
|
South
N Hyperbaric LLC
|
New
York
|
|
South
Nassau Hyperbaric, LLC
|
New
York
|
|
St.
Josephs Hyperbaric LLC
|
New
York
|
|
The
Center For Wound Healing I, LLC
|
New
Jersey
|
|
The
Center For Wound Healing II, LLC
|
New
York
|
|
The
Square Hyperbaric, LLC
|
New
York
|
|
Trenton
Hyperbaric, LLC
|
New
Jersey
|
|
VB
Hyperbaric, LLC
|
New
York
|
Employees
The
Company consists of over 183 full-time employees coming from various
backgrounds. In addition to over 100 physicians accredited in hyperbaric
medicine, including some of the top physicians practicing in vascular surgery
today, the Company boasts a number of ex-hospital executives, registered nurses,
financial professionals, and business executives. To ensure and facilitate the
successful planning, implementation and continued operations of our numerous
wound care centers, our team also utilizes architects, engineers, contractors,
and healthcare attorneys. Currently, CFWH provides management and operations for
35 hospital-based hyperbaric and wound programs.
11
ITEM
2. Description of Properties:
Prior to
December 2007, our headquarters were located in Iselin, NJ. The corporate office
was moved to Tarrytown, NY in December 2007. The lease at the new facility
extends through November 30, 2012 at a starting base rate of $6,480 per
month.
Minimum
payments under non-cancelable operating lease obligations for office space at
June 30, 2008 are as follows:
Years Ending June 30,
|
||||
2009
|
$
|
140,201
|
||
2010
|
108,084
|
|||
2011
|
105,133
|
|||
2012
|
98,978
|
|||
2013
|
35,100
|
Rent
expense under all operating leases in fiscal year ended June 30, 2008 was
$225,925 and $234,440 in 2007. In August 2007, the company entered into a lease
with Ephrata Community Hospital for the Hyperbaric Wound Care Services. This
lease will add lease obligations of $24,133 for 2009, $24,133 for 2010, $24,133
for 2011 and $16,088 for 2012. As of September 1, 2008, a new lease agreement
was entered in with Woodbridge Place Association. The remaining three years of
the existed lease was brought out for $100,000, and was replaced with a one year
lease for $25,809.
ITEM 3.
|
Legal
Proceedings:
|
There is
no action, suit, proceeding, inquiry or investigation before or by any public
board, government agency, self-regulatory organization or body pending or, to
the knowledge of the executive officers of our company or any of our
subsidiaries, threatened against or affecting our company, our common stock, any
of our subsidiaries or of our company's or our company’s subsidiaries’ officers
or directors in their capacities as such, in which an adverse decision could
have a material adverse effect.
ITEM 4.
|
Submission of Matters to a Vote
of Security Holders:
|
No matters were submitted to
shareholders for the quarter ended June 30, 2008.
12
PART
II
ITEM 5.
|
Market for Registrant's Common
Equity and Related Stockholder Matters and Small Business Issuer Purchases
of Equity Securities:
|
From
December 5, 2005 through November 15, 2006 our common stock was quoted on the
Over-The-Counter Bulletin Board system and the Financial Industry Regulatory
Authority (“FINRA”) Electronic Bulletin Board under the symbol "CFWH.PK." On
November 16, 2006, The Center for Wound Healing, Inc., as a result of being
unable to timely file its annual report on Form 10-KSB, was no longer being
quoted on the OTCBB. Our stock has continued to be reported on the “Pink Sheets”
under the symbol “CFWH.PK.”
The
closing price of our common stock on September 12, 2008, as reported on the
“Pink Sheets,” was $1.06 per share.
Quarter Ended
|
High
|
Low
|
||||||
September
2006
|
$ | 5.10 | $ | 5.10 | ||||
December
2006
|
$ | 5.25 | $ | 2.75 | ||||
March
2007
|
$ | 3.75 | $ | 3.75 | ||||
June
2007
|
$ | 2.75 | $ | 2.75 | ||||
September
2007
|
$ | 2.75 | $ | 2.50 | ||||
December
2007
|
$ | 2.50 | $ | 2.50 | ||||
March
2008
|
$ | 3.00 | $ | 1.40 | ||||
June
2008
|
$ | 3.50 | $ | 0.76 |
The
quotations set forth above reflect inter-dealer prices, without retail markup,
markdown, or commission, and may not necessarily represent actual
transactions.
Holders:
As of
September 19, 2008, there were approximately 64 shareholders of record of our
common stock.
Dividends:
We have
never declared or paid any cash dividends on our capital stock and do not
anticipate paying any cash dividends on our capital stock in the foreseeable
future. Instead, we intend to retain our earnings, if any, to finance the
expansion of our business. The declaration and payment of dividends in the
future, if any, will be determined by the board of directors in light of
conditions then existing, including our earnings, financial condition, capital
requirements and other factors.
13
Recent
sales of unregistered securities:
During
the period covered by this annual report, we have sold securities pursuant to
the following transactions, all of which were exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Securities
Act").
|
·
|
CFWH Mezzanine
Financing
|
In June
2007, the Company received the proceeds from $1,000,000 in securities
(“Mezzanine Loan”) from various investors (“Investors”). These securities were
classified as liabilities in the financial statements since the Company could
repay the Investors as described below. The securities gave the Investors an
aggregate 25% share of a newly formed entity, CFWH Mezzanine, LLC (“Mezzanine”).
Mezzanine operates a Hyperbaric and Wound Care facility at each of 10 new
hospitals (as determined by the Company). The Company contributed the hospital
contracts for these 10 facilities, manages Mezzanine and will pay any net
profits to Mezzanine, of which the Investors will receive a 25%
share.
The
Investors’ shares in Mezzanine were redeemable by the Company if the Company
paid the Investors 125% of the original subscription price within 180 days from
the signing of the agreement, or pays 130% of the original subscription price
within 210 days, or paid 150% of the original subscription price within 270
days, or 200% of the original subscription price within one year. If the Company
did not redeem the interest in Mezzanine within one year, the Company would have
lost the right to redeem the Investors interest in Mezzanine, and no money would
have been due to the Investors. The Investors had the option to convert their
interest in Mezzanine to shares of the Company’s stock at a conversion rate of
$2.00 invested per share, or 500,000 shares for a two year period expiring in
June 2009. After the closing on the Bison Note, the Company retired the
Mezzanine Loan.
In April
and May 2008 the Company issued 187,500 shares of its common stock in payment of
accrued interest on the above mezzanine loan.
|
·
|
December 2007
and January 2008 Financing
|
In
December, 2007 and January, 2008 the Company raised a total of $1.6 million from
individual investors in the form of a short term unsecured note, (the “Bridge
Financing Note”) the terms of which provided the lenders with interest paid in
cash or in lieu of cash, warrants with an exercise price of $2. These funds were
used to fund the $1.5 million payment due the Bondholders on or before January
31, 2008 (of the $1.5 million, $1.2 million was used to retire principal and
$300 thousand was paid for a consent fee). Prior to the payment in full of the
Bondholders on March 31, 2008, the $1.6 million was held by an escrow agent and
shown as Restricted Cash on the Company’s balance sheet. Certain members of the
Company’s board of directors and officers of the Company participated in this
Bridge Financing and lent the Company $600 thousand of the total $1.6 million
raised.
On
January 25, 2008 the Company used $1.5 million of the Bridge Financing Note to
pay the Bondholders and $100 thousand for working capital purposes. On March 31,
2008 the entire $1.6 million Bridge Financing Note was paid in full from the
proceeds of the Bison financing.
|
·
|
In May 2008 a bridge financing
note holder purchased 200,000 shares of the Company’s common stock for
$400,000 in cash.
|
|
·
|
15% Senior
Secured Subordinated Promissory
Note.
|
On March
31, 2008, the Company entered into a financing agreement with Bison Capital
Equity Partners II-A, L.P. and Bison Capital Equity Partners II-B, L.P. and
issued a $20 million senior collateralized subordinated promissory note (“Senior
Collateralized Subordinated Note” or “Bison Note”). The Company
received proceeds of $17.5 million, net of a $2.5 million discount, and incurred
approximately $3.1 million of expenses related to this
transaction. The Company used proceeds to retire certain debts with
accrued interest, certain accounts payable and other obligations.
The
financial terms of the Bison Note are summarized as follows:
|
·
|
The Note is a five year note
maturing March 31, 2013.
|
|
·
|
Under
the terms of the Bison Note, the Company has to pay monthly cash interest
at 12% per annum starting from October 2008 and 6% non-cash interest,
which is added to the principal amount. Upon fulfillment by the
Company of certain conditions, the non-cash interest is reduced to 3% and,
provided no event of default has occurred, the Company can further defer
scheduled payments of cash interest for up to 12 months. The
Company met the required conditions in September 2008 and therefore the
non-cash interest rate reset at 3% and payments of cash interest were
deferred until October 31, 2009. The interest rate increases by
2% upon an event of default and if such default is not cured within a
certain period of time or waived by the Bison Note holders, the
outstanding principal balance and accrued interest become due and
payable.
|
14
|
·
|
The
Bison Note is redeemable by annual payments of $2.5 million starting from
the second anniversary and until the fifth year at which point the Company
is required to retire the remaining balance. The Bison Note and
other obligations under the security purchase agreement are collateralized
by a lien granted by the Company and its subsidiaries on substantially all
of their assets, including all stock held by either the Company or its
subsidiaries. The Bison Note is subordinated to the Bank
Debt.
|
|
·
|
Additionally,
the Company entered into a common stock warrant agreement with the holders
of the Bison Note and issued warrants to purchase 7,941,926 shares of its
common shares with an exercise price of $5 per share and a seven year
term. 4,765,156 or 60% of the warrants vested immediately and
the remaining warrants vest monthly over a three year
period. Under the terms of the common stock warrant agreement,
part of the unvested warrants might be canceled, provided the Company
meets certain EBITDA targets and required Bison Note redemption
conditions.
|
15
|
·
|
The
Company determined the relative fair value of warrants to be $8,391,893
and recorded such amortization as a discount to the Bison Note in addition
to $2.5 million cash discount. Additionally, based on the
relative fair values of the Bison Note and warrants the Company allocated
$3.1 million of expenses related to the transaction as follows: $1.7
million to deferred expenses and $1.4 million to additional paid-in
capital. The Company amortizes the deferred financing cost, and
debt discount and records interest expense using the interest method rate,
which it determined to approximate
37%.
|
The offer
and sale of such shares of our common stock were effected in reliance on the
exemptions for sales of securities not involving a public offering, as set forth
in Rule 506 promulgated under the Securities Act and in Section 4(2) of the
Securities Act, based on the following: (a) the investors confirmed to us that
they were “accredited investors,” as defined in Rule 501 of Regulation D
promulgated under the Securities Act and had such background, education and
experience in financial and business matters as to be able to evaluate the
merits and risks of an investment in the securities; (b) there was no public
offering or general solicitation with respect to the offering; (c) the investors
were provided with certain disclosure materials and all other information
requested with respect to our company; (d) the investors acknowledged that all
securities being purchased were “restricted securities” for purposes of the
Securities Act, and agreed to transfer such securities only in a transaction
registered under the Securities Act or exempt from registration under the
Securities Act; and (e) a legend was placed on the certificates representing
each such security stating that it was restricted and could only be transferred
if subsequent registered under the Securities Act or transferred in a
transaction exempt from registration under the Securities Act.
Equity
Compensation Plan Information
The
following table gives information about our common stock that may be issued upon
the exercise of options, warrants or rights under our existing equity
compensation plan, the 2006 Stock Option Plan. The information in this table is
as of June 30, 2008.
Plan Category
|
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
|
Weighted average
exercise price of
outstanding options,
warrants, and rights
|
Number of
securities
remaining
available
|
||||
Equity
compensation plans approved by security holders (1)
|
1,857,667
|
$
|
3.37
|
5,642,333
|
|||
Equity
compensation plans not approved by security holders
|
-
|
-
|
-
|
||||
Total
|
1,857,667
|
$
|
3.37
|
5,642,333
|
(1)
|
Our 2006 Stock Option Plan
permits the issuance of restricted stock, stock appreciation rights,
options to purchase our common stock, deferred stock and other stock-based
awards, not to exceed 7,500,000 shares of our common stock, to employees,
outside directors, and
consultants.
|
16
ITEM 6. Management's Discussion and Analysis
of Financial Condition and Results of Operations
GENERAL
OVERVIEW
The
following Management’s Discussion and Analysis (“MD&A”) is intended to help
the reader understand our company. The MD&A is provided as a supplement to,
and should be read in conjunction with, our financial statements and the
accompanying notes (“Notes”).
FORWARD-LOOKING
INFORMATION
This
Annual Report on Form 10-KSB/A includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to known and unknown
risks, uncertainties and assumptions about us that may cause our actual results,
levels of activity, performance or achievements to be materially different from
any future results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as “may,” “should,” “could,”
“would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” or
the negative of such terms or other similar expressions. Actual operations and
results may differ materially from present plans and projections due to changes
in economic conditions, new business opportunities, changed business conditions,
and other developments. Other factors that could cause results to differ
materially are described in our filings with the Securities and Exchange
Commission.
There are
several factors that could cause actual results or events to differ materially
from those anticipated, and include, but are not limited to, general economic,
financial and business conditions, changes in and compliance with governmental
laws and regulations, including various state and federal government
regulations, our ability to obtain additional financing from outside investors
and/or bank and mezzanine lenders, and our ability to generate revenues
sufficient to achieve positive cash flow.
Readers
are cautioned not to place undue reliance on the forward-looking statements
contained herein, which speak only as of the date hereof. We believe the
information contained in this Form 10-KSB/A to be accurate as of the date
hereof. Changes may occur after that date. We will not update that information
except as required by law in the normal course of its public disclosure
practices.
Additionally,
the following discussion regarding our financial condition and results of
operations should be read in conjunction with the financial statements and
related notes contained in Item 7 of Part II of this Form
10-KSB/A.
17
GENERAL
The
Company develops and manages comprehensive wound care centers, which are
marketed as “THE CENTER FOR WOUND HEALING tm”
(“CFWH”) in hospitals throughout the United States. These centers render the
specialized service of hyperbaric medicine and are developed in partnerships
with acute care hospitals. We enter into separate multi-year operating
agreements to startup and manage the wound care program as well as offer a
turnkey operation including the furnishing of hyperbaric oxygen chambers to
hospitals. Although there can be no assurance that we will be successful in each
instance, our plans for each hospital center requires a multi-year committed
contract term adequate for us to recover our investment in leasehold
improvements (a sunk cost and non-transferable asset); our start-up costs,
including recruiting and training of personnel; and the amortization of chamber
lease financing. Generally, the hospital provides us with appropriate space for
each of our centers.
We are
responsible for the development and management of the wound care and hyperbaric
centers, including providing direct staff and billing support to ensure
hospitals are reimbursed appropriately. We also are responsible, at our expense,
for designing and installing necessary leasehold improvements of the
hospital-provided space and to supply the appropriate number of hyperbaric
chambers, which is based upon the anticipated demand for this type of treatment.
We acquire the chambers under both operating and capitalized lease financing
transactions with $1 buyout arrangements (treated as capitalized leases in our
accompanying audited consolidated financial statements). As our operation grows,
we have the ability to transfer chambers between institutions to balance demand
and maximize the use of our resources.
RESULTS
OF OPERATIONS:
The
Company was formed on May 25, 2005, and as discussed previously, began
operations with six centers on July 1, 2005. As more fully described in the
notes to our audited consolidated financial statements, the Company acquired the
interests of two additional LLCs effective January 1, 2006, and 12 additional
LLCs effective April 1, 2006. Our revenues vary based on the demand for
treatments and the utilization of wound care centers and hyperbaric chambers.
The demand from the hospitals for our services is dependent upon their abilities
to attract patients and their reputation in the medical communities and the
geographic areas they serve, as well as on the allowable rates and frequency of
reimbursement by health care insurance providers, managed care providers,
Medicare, Medicaid and others. We conduct market awareness programs and
advertising to promote the utilization of our centers among medical
professionals, care-givers and patients. Revenues fluctuate monthly with the
number of days per month that the hospitals in which we operate our centers are
open.
18
2007
RESTRUCTURING CHARGE
During
fiscal 2008 and fiscal 2007 management undertook a detailed evaluation of the
Company’s contracts and operations and concluded that in fiscal 2007 several
partnerships and joint ventures to which it was a party were not generating
sufficient earnings to merit the Company’s continued participation. Accordingly,
management decided to sever its involvement in these ventures and negotiated the
termination of its relationship with its joint venture partners. As a result of
its evaluation the Company recorded a noncash charge to operations of $2,076,266
in fiscal 2007. The major components of these noncash, nonrecurring charges
include:
|
·
|
The termination of the Company’s
participation in a contract with its former joint venture partner to
provide hyperbaric treatment services at a facility in Southampton, NY,
$259,622;
|
|
·
|
The termination by the Company of
several contracts the Company maintained with one individual in the form
of several joint ventures. The major components of this write-off include
the termination of the Company’s interest in a contract to operate a
hyperbaric treatment center at Victory Memorial Hospital (“Victory”), one
of the hospitals identified for closure by the Berger Commission, $51,025;
the termination of a joint venture to develop a hyperbaric treatment
facility at Peninsula Hospital, another institution identified for
possible closure by the Berger Commission; the termination of its
participation at a free-standing hyperbaric and sleep treatment facility
in New Jersey; and the termination of a consulting contract with the
principal of the joint venture partner, collectively, $365,648; the final
write-off component is the termination of the Company’s participation in a
free-standing hyperbaric treatment facility in New York, $83,333. During
the fourth quarter of 2008 an independent third party expressed interest
in acquiring Victory. The possible ownership change caused management,
along with the minority interest owner of the Victory operating contract,
to reconsider its position and decided to continue to operate the facility
during the discussions and possibly
thereafter.
|
|
·
|
Management concluded that its
contract with Interfaith Hospital, acquired as part of the Far Rockaway
acquisition, which was consummated June 1, 2006, had no value to the
Company. The Company’s centers are located in hospitals that have large
Medicare populations. Management determined that the Medicare population
served by that hospital was of insufficient size to warrant the
maintenance and expense of a wound care and hyperbaric center at the
hospital. At the time of the transaction a firm was engaged to issue a
valuation of the Interfaith Hospital contract and a value of $1.1 million
was assigned to it. It is this value, a noncash intangible asset, which
management has elected to write-off together with $63,400 of leasehold
improvements the Company made at the wound care center after it was
acquired in 2006.
|
|
·
|
The Company wrote-off an
additional $240,700 of leasehold improvements relating to: the termination
of the Warminster Hospital contract, $47,400 (the hospital was acquired by
a competing hospital that has its own wound care program); the
aforementioned Interfaith Hospital termination, $63,400; and $129,000 of
improvements at Mercy Nanticoke Hospital, a contract the Company decided
to terminate prior to its term because treatment volumes at the hospital
were not meeting
expectations.
|
19
|
·
|
In September 2008, management
determined that its contract with one hospital was impaired. Management
will move the furniture, fixtures and equipment at this facility to a new
facility in the second quarter of fiscal 2009 and abandon the remaining
assets at the hospital. A charge for the abandonment of assets of
approximately $190,000 was charged to operations in the fourth quarter of
fiscal 2008.
|
REVENUES:
Revenues
for the years ended June 30, 2008 and 2007 were $26.4 million and $19.8 million,
respectively. The $6.6 million increase is attributable to revenues from centers
opened during the year and increased revenues from existing
centers.
OPERATING
EXPENSES:
Cost of services:
Cost of services, which are comprised principally of payroll and payroll related
costs for professional and nursing staff required to administer treatments at
our centers as well as depreciation relating to hyperbaric medical chambers and
leasehold improvements, was $13.2 million or 49.9% of total revenues for the
year ended June 30, 2008 compared with $11.6 million or 58.7% in the year ended
June 30, 2007. The increase of $1.5 million or 13.0% is primarily attributable
to the increased depreciation costs associated with the leasehold improvements
and the addition of the intangible asset amortization for the six wound care
centers opened during the year; and the change of terms for the amortization of
intangible assets related to two hospital contracts from nine years to the
remaining lives of the contracts of 4.5 years. The 8.8% decrease in cost of
services as a percent of revenue is a result of more efficient use of medical
chambers.
Sales and marketing:
Sales and marketing expense was $180 thousand or approximately 0.7% of total
revenues for the year ended June 30, 2008, approximately $100 thousand or 37.2%
less than the prior year. The decrease is mainly due to advertising programs
that were undertaken in 2007 and were not repeated in 2008.
General and
administrative: General and administrative expenses are comprised
primarily of payroll and payroll related costs, insurance and professional fees,
including legal, accounting and systems implementation costs. Fiscal 2008
general and administrative costs were $8.5 million, approximately 32.1% of total
revenues, compared with $11.8 million and 59.4% in fiscal 2007. The $3.3 million
or 28.2% year-over-year decrease in general and administrative costs is due to a
reduction in the use of consultants and temporary accounting services through
the establishment of an accounting department, and a reduction in noncash
compensation amortization from fewer options being granted in
2008.
20
Depreciation and
amortization: Depreciation and amortization expense related to our
corporate leasehold improvements aggregated $400 thousand or 1.7% of revenues in
fiscal 2008 compared with $60 thousand or 0.3% of revenues in the prior fiscal
year. The increase was mainly due to the amortization expense for the
development of the new electronic medical records application, and the
accounting system the Company has deployed.
Depreciation
related to hyperbaric medical chambers, contracts and leasehold improvements at
the facilities totaled $3.6 million or 13.7% of revenues in 2008 and $2.1
million or 10.6% in 2007. These costs are classified in Cost of
Services.
Bad debt expense: Bad
debt expense was $800 thousand or 3.0 % of total revenues for the year ended
June 30, 2008 compared with $1.0 million or 4.9% of fiscal 2007 total revenues.
The reduction was due to the Company having greater control of its accounts
receivable, the result of much greater focus during the year than in fiscal
2007.
Abandonment
and Impairment Loss: Abandonment and Impairment Loss was $190 thousand or 0.7%
of total revenues for fiscal 2008 compared with $2.1 million or 10.5% of fiscal
2007 total revenues. The decrease of $1.9 million is attributable to the company
having performed a detailed analysis in 2008 and 2007 resulting in the
elimination of several ventures that were not generating sufficient earnings to
merit further participation. Two of the centers eliminated in 2007 resulted in a
write-off of $1.5 million of intangible assets for the value of the contracts at
those centers.
OTHER
INCOME (EXPENSE):
Interest expense: The
Company incurred interest expense of $6.8 million or 25.7% of total revenues for
the year ended June 30, 2008 compared with $3.6 million and 18.1% in the fiscal
year ended June 30, 2007. The increase of $3.2 million is mostly attributable to
$2.0 million in financing costs paid to the 8% secured convertible debenture
holders, $600 thousand of interest charged for the Mezzanine Loan, $700 thousand
of interest charged for the Bridge Financing Note and $100 thousand of
amortization of the discount of the 15% Senior Secured Subordinated Promissory
Note, inclusive of related debt issuance cost amortization.
Minority interest in net
income or loss of consolidated subsidiaries: Minority interest was $154
thousand or 0.6% of total revenues for the year ended June 30, 2008 compared to
a $172 thousand or 0.9% income benefit in the prior fiscal year. This expense
varies directly with the results of operations of the entities having minority
interests.
Loss on disposal of property
and equipment: The loss on disposal of property and equipment was $69
thousand or 0.3% of total revenues compared with a loss of $29 thousand or 0.1%
in fiscal 2007.
Other Expense: Other
expenses in 2007 were comprised primarily of liquidating damages associated with
the prior secured debentures, which were retired in full on March 31,
2008.
INCOME
TAXES:
Income
tax for fiscal year 2008 was $20 thousand compared to income benefit of $1.5
million in fiscal 2007.
NET
LOSS:
For the
fiscal year ended June 30, 2008, the Company lost $3.9 million or $0.17 cents
per diluted share compared with a net loss of $9.4 million or $0.41 cents per
year loss incurred in fiscal 2007. The $5.5 million reduction is the result of
the aforementioned revenues and expense differences between the two fiscal
years.
LIQUIDITY
AND CAPITAL RESOURCES:
Operating Activities:
Net cash provided by operating activities was $2.2 million for the year ended
June 30, 2008. While our net loss was $3.9 million, substantial noncash expenses
were incurred during the year such as (a) depreciation and amortization of $4.0
million related to equipment, leasehold improvements, and certain hospital
contracts, (b) interest charged for the amortization of deferred financing costs
of $2.0 million, (c) interest accrued for convertible debenture and notes
payable of $1.1 million, (d) amortization of stock options of $1.5 million, (e)
interest charged for the beneficial conversion features of 8% senior convertible
debentures of $0.9 million, (f) warrants issued in payment of interest expense
of $0.56 million, and (g) $0.2 million for the abandonment of leasehold
improvements at one hospital that management determined was underperforming and
will be closed within the next several months. In addition, the allowance for
bad debts increased $0.7 million to a total of $2.9 million. Gross accounts
receivable increased $4.5 million for the year ended June 30, 2008, which was
anticipated as the number of centers operated by the Company increased from the
prior year. The growth in accounts payable and accrued expenses experienced
during the prior year ending June 30, 2007 was partially reversed in the current
year by $1.5 million. These impacts were partially offset by income tax refunds
collected of $0.9 million.
21
Investing Activities:
Net cash used in investing activities was $3.3 million for the year ended June
30, 2008. The primary use of cash was for the purchase of property and equipment
for new centers, including chambers and leasehold improvements.
Financing Activities:
Net cash provided by financing activities was $1.0 million for the year ended
June 30, 2008. As described in Part II, Item 5, the Company refinanced certain
existing debt on March 31, 2008 through the issuance of a 15% Senior Secured
Subordinated Promissory Note with Bison Equity Capital Partners from which we
received approximately $16 million in net proceeds after consideration of
related debt issuance costs. Additional proceeds were received from notes
payable of $1.6 million and $0.4 million from the issuance of common stock. The
total proceeds were used by (a) deferred financing costs of $1.6 million, (b)
repayment of $7.4 million of principal, interest and penalties associated with
the 8% senior convertible debentures, (c) repayment of certain notes and loans
of $5.0 million, and (d) repayment of the bank line of credit of $1.3 million.
In addition, we made disbursements of $1.7 million for the year ended June 30,
2008, of which $1.3 million was for payments on capital lease obligations and
$0.4 million was for distributions to minority members.
We participate in a working capital
accounts receivable financing and term loan arrangement with Signature Bank,
which matures March 31, 2010. The use of these funds will be required to support
our operations in the future and will be dependent upon satisfying borrowing
base requirements, among other covenants. We were in full compliance with all
the terms of the bank financing as of June 30, 2008. As of June 30, 2009, the
Company was in compliance with all required covenants except for the minimum
effective tangible net worth covenant, for which the Company has received a
waiver from the lender.
We
believe that the cash flows from operations and borrowings under the senior bank
line of credit will provide sufficient liquidity for the Company to be able to
finance our operations for at least the next 12 months from the date of filing
this Form 10-KSB/A, on October 9, 2009.
RECENT
ACCOUNTING PRONOUNCEMENTS
In May
2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement), which specifies that issuers of convertible debt instruments
that may be settled in cash upon conversion should separately account for the
liability and equity components in a manner reflecting their nonconvertible debt
borrowing rate when interest costs are recognized in subsequent
periods. FSP APB 14-1 is effective for interim periods and fiscal
years beginning after December 15, 2008. The Company will adopt FSP
APB 14-1 effective July 1, 2009. The Company is currently assessing
the impact of FSP APB 14-1 on its financial statements.
In June
2008, the FASB ratified Emerging Issues Task Force Issue No. (“EITF”) 07-5,
“Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an
Entity’s Own Stock” (EITF 07-5). EITF 07-5 provides that an entity should use a
two step approach to evaluate whether an equity-linked financial instrument (or
embedded feature) is indexed to its own stock, including evaluating the
instrument’s contingent exercise and settlement provisions. It also clarifies on
the impact of foreign currency denominated strike prices and market-based
employee stock option valuation instruments on the evaluation. EITF 07-5 is
effective for fiscal years beginning after December 15, 2008. The Company is
currently assessing the impact of EITF 07-5 on its consolidated financial
position and results of operations.
In
June 2008, the FASB issued FSP Emerging Issues Task Force
(EITF) No. 03-6-1, “Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities.” Under
the FSP, unvested share-based payment awards that contain rights to receive
nonforfeitable dividends (whether paid or unpaid) are participating securities,
and should be included in the two-class method of computing EPS. The FSP is
effective for fiscal years beginning after December 15, 2008, and interim
periods within those years. The Company does not expect the adoption of FSP EITF
No. 03-6-1 to have a material effect on its consolidated financial
statements.
In
September 2007, 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 accordance with generally accepted
accounting principles, and expands disclosures about fair value measurements.
This statement does not require any new fair value measurements; rather, it
applies under other accounting pronouncements that require or permit fair value
measurements. The provisions of this statement are to be applied prospectively
as of the beginning of the fiscal year in which this statement is initially
applied, with any transition adjustment recognized as a cumulative-effect
adjustment to the opening balance of retained earnings. The provisions of SFAS
No. 157 are effective for the fiscal years beginning after
November 15, 2007; therefore, the Company anticipates adopting this
standard as of July 1, 2008. The Company does not believe adoption of SFAS
157 will have a material impact on its 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. Under the provisions of SFAS
No. 159, the Company may choose to carry many financial assets and
liabilities at fair values, with changes in fair value recognized in earnings.
The company will adopt the pronouncement effective for periods beginning after
July 1, 2008. The Company is currently evaluating the impact of adopting
this pronouncement on its consolidated financial statements, but does not expect
it to have a material effect.
22
In
December 2007, the FASB issued SFAS NO. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51”. The
objective of this Statement is to improve the relevance, comparability, and
transparency of the financial information that a reporting entity provides in
its consolidated financial statements by establishing accounting and reporting
standards that require the following changes. The ownership interests in
subsidiaries held by parties other than the parent be clearly identified,
labeled, and presented in the consolidated statement of financial position
within equity, but separate from the parent’s equity. The amount of consolidated
net income attributable to the parent and to the noncontrolling interest must be
clearly identified and presented on the face of the consolidated statement of
income. When a subsidiary is deconsolidated, any retained noncontrolling equity
investment in the former subsidiary is initially measured at fair value. The
gain or loss on the deconsolidation of the subsidiary is measured using the fair
value of any noncontrolling equity investment rather than the carrying amount of
that retained investment and entities provide sufficient disclosures that
clearly identify and distinguish between the interest of the parent and the
interest of the noncontrolling owners. The changes to current practice resulting
from the application of SFAS No. 160 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. The adoption of SFAS No. 160 before
December 15, 2008 is prohibited. The Company has not determined the effect
that may result from the adoption of SFAS No. 160 on its financial
statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations – Revised” that improves the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial reports about a business combination and its effects.
To accomplish that, this statement establishes principles and requirements how
the acquirer recognizes and measures in its financial statement the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree, recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase, and determines what information
to disclose to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. The changes to current
practice resulting from the application of SFAS No. 141(R) are effective
for financial statements issued for fiscal years beginning after
December 15, 2008. The adoption of SFAS No. 141(R) before
December 15, 2008 is prohibited. The Company has not determined the effect,
if any, that may result from the adoption of SFAS No. 141(R) on its
financial statements.
Management
does not believe that any other recently issued but not yet effective accounting
pronouncement, if adopted, would have a material effect on the accompanying
financial statements.
23
ITEM 7. FINANCIAL
STATEMENTS
THE
CENTER FOR WOUND HEALING, INC.
Report
of Independent Registered Public Accounting Firm
|
26
|
|
Consolidated
Balance Sheets as of June 30, 2008 and 2007
|
27
|
|
Consolidated
Statements of Operations for the Years Ended June 30, 2008 and
2007
|
28
|
|
Consolidated
Statement of Cash Flows for the Years Ended June 30, 2008 and
2007
|
29,
30
|
|
Consolidated
Statements of Changes in Stockholders' Equity for the
|
||
Years
Ended June 30, 2008 and 2007
|
31
|
|
Notes
to Consolidated Financial Statements
|
32
– 50
|
24
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of The Center for Wound Healing, Inc
We have
audited the accompanying consolidated balance sheets of The Center for Wound
Healing, Inc. as of June 30, 2008 (as restated) and 2007, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
each of the years in the two-year period ended June 30, 2008. The Center for
Wound Healing, Inc.’s management is responsible for these consolidated financial
statements. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Center for
Wound Healing, Inc. as of June 30, 2008 (as restated) and 2007, and the
consolidated results of its operations, stockholders’ equity and its cash flows
for each of the years in the two-year period ended June 30, 2008, in conformity
with accounting principles generally accepted in the United States of
America.
As
described in Note 2 “Restatement of Consolidated Financial Statements” to the
financial statements, the Company has restated its June 30, 2008 consolidated
financial statements.
/s/ Raich
Ende Malter & Co. LLP
|
Raich
Ende Malter & Co. LLP
|
New
York, NY
|
September
24, 2008, except for Notes 2 and 12, as to which the date is October 9,
2009
|
25
THE
CENTER FOR WOUND HEALING, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEET
AS OF
JUNE 30,
2008
|
2007
|
|||||||
(As Restated)
|
||||||||
ASSETS
|
||||||||
CURRENT ASSETS
|
||||||||
Cash
in bank
|
$ | 55,139 | $ | 216,458 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $2,941,917 and
$2,202,510 respectively
|
14,563,325 | 10,754,557 | ||||||
Notes
Receivable
|
460,872 | 367,484 | ||||||
Income
tax refunds receivable
|
2,090 | 883,596 | ||||||
Prepaid
expenses and other current assets
|
398,631 | 157,801 | ||||||
Total
current assets
|
15,480,057 | 12,379,896 | ||||||
Notes
Receivable
|
134,295 | 385,478 | ||||||
Property
and equipment, net
|
8,886,005 | 7,970,325 | ||||||
Invesment
in unconsolidated affiliates
|
- | 75,702 | ||||||
Intangible
assets
|
4,402,495 | 3,131,184 | ||||||
Goodwill
|
751,957 | 447,531 | ||||||
Other
assets
|
1,507,192 | 1,959,717 | ||||||
TOTAL
ASSETS
|
$ | 31,162,001 | $ | 26,349,833 | ||||
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
||||||||
CURRENT LIABILITIES
|
||||||||
Accounts
payable and accrued expenses
|
$ | 4,105,548 | $ | 5,867,893 | ||||
Current
maturities of capital leases
|
526,107 | 1,530,862 | ||||||
Short-term
borrowings
|
4,200,000 | 5,500,000 | ||||||
Notes
payable
|
939,856 | 2,429,260 | ||||||
8%
Secured convertible debentures
|
- | 6,485,601 | ||||||
Payable
to former Majority Members
|
618,033 | 771,357 | ||||||
Total
current liabilities
|
10,389,544 | 22,584,973 | ||||||
15%
senior secured note payable
|
9,968,740 | - | ||||||
Notes
payable, net of current maturities
|
782,133 | 65,254 | ||||||
Capital
lease obligations, net of current maturities
|
131,774 | 498,688 | ||||||
Minority
interest in consolidated subsidiaries
|
580,558 | 908,202 | ||||||
TOTAL
LIABILITIES
|
21,852,749 | 24,057,117 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
STOCKHOLDERS' EQUITY
|
||||||||
Preferred
stock, $0.001 par value; 10,000,000 shares authorized and
unissued
|
- | - | ||||||
Common
stock, $0.001 par value; 290,000,000 shares authorized; 23,373,281 and
22,655,781 issued and outstanding at June 30, 2008 and 2007,
respectively
|
23,373 | 22,656 | ||||||
Additional
paid-in capital
|
29,764,982 | 18,866,478 | ||||||
Accumulated
deficit
|
(20,479,103 | ) | (16,596,418 | ) | ||||
TOTAL
STOCKHOLDERS' EQUITY
|
9,309,252 | 2,292,716 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 31,162,001 | $ | 26,349,833 |
The
accompanying notes are an integral part of these financial
statements.
26
THE
CENTER FOR WOUND HEALING, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the
years ended June 30,
2008
|
2007
|
|||||||
(As Restated)
|
||||||||
REVENUES
|
||||||||
Treatment
fees
|
$ | 26,357,619 | $ | 19,842,064 | ||||
OPERATING EXPENSES
|
||||||||
Cost
of Services
|
13,157,728 | 11,642,333 | ||||||
Sales
and marketing
|
180,367 | 287,060 | ||||||
General
and administration
|
8,466,779 | 11,785,313 | ||||||
Abandonment
& and Impairment Loss
|
189,992 | 2,076,266 | ||||||
Depreciation
and amortization
|
443,581 | 59,917 | ||||||
Bad
debt expense
|
796,027 | 965,553 | ||||||
TOTAL
OPERATING EXPENSES
|
23,234,474 | 26,816,442 | ||||||
OPERATING
INCOME (LOSS)
|
3,123,145 | (6,974,378 | ) | |||||
OTHER EXPENSE (INCOME)
|
||||||||
Interest
expense
|
6,783,110 | 3,595,044 | ||||||
Interest
income
|
(41,344 | ) | (25,281 | ) | ||||
Minority
interest in net loss (income) of consolidated subsidiaries
|
154,254 | (172,390 | ) | |||||
Loss
on disposal of property and equipment
|
68,880 | 29,270 | ||||||
Other
expenses
|
20,865 | 432,500 | ||||||
TOTAL
OTHER EXPENSE
|
6,985,765 | 3,859,143 | ||||||
(LOSS)
BEFORE INCOME TAXES
|
(3,862,620 | ) | (10,833,521 | ) | ||||
PROVISION
(BENEFIT) FOR INCOME TAXES
|
||||||||
Current
taxes
|
20,065 | (356,511 | ) | |||||
Deferred
taxes
|
- | (1,094,984 | ) | |||||
TOTAL
PROVISION (BENEFIT) FOR INCOME TAXES
|
20,065 | (1,451,495 | ) | |||||
NET
(LOSS)
|
$ | (3,882,685 | ) | $ | (9,382,026 | ) | ||
NET
(LOSS) PER COMMON SHARE - BASIC AND DILUTED
|
$ | (0.17 | ) | $ | (0.41 | ) | ||
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC AND
DILUTED
|
22,997,476 | 22,655,781 |
The
accompanying notes are an integral part of these financial
statements.
27
THE
CENTER FOR WOUND HEALING, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For
The Years Ended June 30,
2008
|
2007
|
|||||||
(as
Restated)
|
||||||||
CASH FLOWS FROM OPERATING
ACTIVITIES
|
||||||||
Net
loss
|
$ | (3,882,685 | ) | $ | (9,382,026 | ) | ||
Adjustments
to reconcile net loss to net cash provided by operating
activities
|
||||||||
Depreciation
and amortization
|
4,046,018 | 2,164,956 | ||||||
Abandonment
and impairment loss
|
189,992 | 2,076,266 | ||||||
Interest
charged for beneficial conversion features of 8% senior convertible
debebtures
|
912,524 | |||||||
Interest
charged for fair valuation of warrants issued in connection with 8%
senior
|
||||||||
convertible
and other debentures
|
- | 1,959,915 | ||||||
Interest
charged for amortization of deferred financing costs
|
2,141,561 | 1,269,701 | ||||||
Bad
debts
|
796,027 | 965,553 | ||||||
Deferred
income taxes
|
- | (1,094,984 | ) | |||||
Minority
interest in net income of consolidated subsidiaries
|
154,254 | (172,390 | ) | |||||
Loss
on disposal of property and equipment
|
68,880 | 29,270 | ||||||
Interest
accrued for convertible debenture and notes payable
|
1,135,634 | 13,889 | ||||||
Amortization
of stock options
|
1,516,604 | 2,787,240 | ||||||
Warrants
issued in payment of interest expense
|
564,659 | - | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
and notes receivable
|
(4,447,000 | ) | (2,508,318 | ) | ||||
Prepaid
expenses and other current assets
|
(357,981 | ) | 30,046 | |||||
Other
assets
|
- | 27,194 | ||||||
Accounts
payable and accrued expenses
|
(1,517,287 | ) | 3,484,862 | |||||
Income
taxes
|
881,506 | (1,685,596 | ) | |||||
Payments
to former majority members
|
(45,330 | ) | 149,089 | |||||
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
2,157,377 | 114,667 | ||||||
CASH FLOWS FROM INVESTING
ACTIVITIES
|
||||||||
Purchases
of property and equipment
|
(3,385,296 | ) | (2,577,325 | ) | ||||
Proceeds
from sale of property and equipment
|
45,000 | 68,222 | ||||||
(Increase)
decrease in security deposits
|
(460 | ) | - | |||||
Investment
in unconsolidated affiliates
|
- | (105,000 | ) | |||||
NET
CASH USED IN INVESTING ACTIVITIES
|
(3,340,756 | ) | (2,614,103 | ) | ||||
CASH FLOWS FROM FINANCING
ACTIVITIES
|
||||||||
Principal
payments on capital lease obligations
|
(1,309,079 | ) | (1,955,179 | ) | ||||
Advances
from affiliates
|
25,948 | 100,870 | ||||||
Net
(repayment) proceeds from bank line of credit
|
(1,300,000 | ) | 2,300,000 | |||||
Proceeds
from issuance of 15% senior secured subordinated note
payable
|
17,500,000 | - | ||||||
Deferred
financing costs
|
(3,138,306 | ) | (522,831 | ) | ||||
Repayment
of notes and loans
|
(4,990,268 | ) | (1,940,240 | ) | ||||
Repayment
of minority member loans
|
- | (70,943 | ) | |||||
Repayment
of 8% senior convertible debentures
|
(7,398,125 | ) | - | |||||
Proceeds
from issuance of common stock
|
400,000 | - | ||||||
Proceeds
from notes payable
|
1,600,000 | 1,000,000 | ||||||
Distributions
to LLC members
|
(368,109 | ) | -- | |||||
NET
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
1,022,060 | (1,088,323 | ) | |||||
NET
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
(161,319 | ) | (3,587,759 | ) | ||||
CASH AND CASH EQUIVALENTS – BEGINNING
OF YEAR
|
216,458 | 3,804,218 | ||||||
CASH AND CASH EQUIVALENTS – END OF
YEAR
|
$ | 55,139 | $ | 216,459 |
The
accompanying notes are an integral part of these financial
statements.
28
THE
CENTER FOR WOUND HEALING, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For
The Years Ended June 30,
2008
|
2007
|
|||||||
(as
Restated)
|
||||||||
SUPPLEMENTAL
DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
|
||||||||
Cash
paid during the year:
|
||||||||
Interest
|
$ | 2,029,146 | $ | 739,260 | ||||
Income
taxes
|
$ | 22,405 | $ | 1,230,451 | ||||
Non
-cash financing and investing activities:
|
||||||||
Equipment
acquired through capital lease obligation
|
$ | 217,148 | $ | 213,410 | ||||
Discount
of convertible debenture for fair value of beneficial conversion
feature
|
$ | - | $ | 912,524 | ||||
Warrants
and common stock issued in payment of accrued interest
|
$ | 839,659 | $ | - | ||||
Issuance
of common stock in connection with MedAir
settlement
|
$ | 825,000 | $ | - | ||||
Issuance
of common stock in connection with Warantz
settlement
|
$ | 75,000 | $ | - | ||||
Debt
issued in connection with Intangible asset acquired
|
$ | 2,617,744 | $ | - | ||||
Warrants
issued in connection with Bison financing
|
$ | 8,391,893 | $ | - |
The
accompanying notes are an integral part of these financial
statements.
29
THE
CENTER FOR WOUND HEALING, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE
YEARS ENDED JUNE 30, 2008 AND 2007
(As
Restated)
Common Stock
|
Additional
Paid-
|
Accumulated
|
||||||||||||||||||
Shares
|
Amount
|
in Capital
|
Deficit
|
Total
|
||||||||||||||||
Balance
at July 1, 2006
|
22,655,781 | $ | 22,656 | $ | 15,362,539 | $ | (7,214,392 | ) | $ | 8,170,803 | ||||||||||
Share-Based
Compensation
|
- | - | 2,439,328 | - | 2,439,328 | |||||||||||||||
Net
effect of increased relative fair value of beneficial conversion feature
of 2006 convertible debentures due to extension
|
- | - | 1,064,611 | - | 1,064,611 | |||||||||||||||
Net
loss
|
- | - | - | (9,382,026 | ) | (9,382,026 | ) | |||||||||||||
Balance
at June 30, 2007
|
22,655,781 | 22,656 | 18,866,478 | (16,596,418 | ) | 2,292,716 | ||||||||||||||
Share-Based
Compensation
|
- | - | 1,783,527 | - | 1,783,527 | |||||||||||||||
Issuance
of common stock in connection with MedAir settlement
|
300,000 | 300 | 824,700 | - | 825,000 | |||||||||||||||
Issuance
of common stock in connection with Warantz settlement
|
30,000 | 30 | 74,970 | - | 75,000 | |||||||||||||||
Issuance
of warrants in connection with Bison refinancing
|
- | - | 6,976,035 | - | 6,976,035 | |||||||||||||||
Issuance
of warrants in Connection with Bridge Financing
|
- | - | 564,659 | - | 564,659 | |||||||||||||||
Issuance
of shares for cash
|
200,000 | 200 | 399,800 | - | 400,000 | |||||||||||||||
Issuance
of Shares in Connection with Mezzanine Loan
|
187,500 | 188 | 274,813 | - | 275,000 | |||||||||||||||
Net
loss
|
- | - | - | (3,882,685 | ) | (3,882,685 | ) | |||||||||||||
Balance
at June 30, 2008
|
23,373,281 | $ | 23,373 | $ | 29,764,982 | $ | (20,479,103 | ) | $ | 9,309,252 |
The
accompanying notes are an integral part of these financial
statements.
30
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008 AND 2007
Note
1 - Organization and Nature of Business
The
Center for Wound Healing, Inc. (“CFWH” or the “Company”) (formerly known as
American Hyperbaric, Inc.) was organized in the State of Florida on May 25,
2005. CFWH develops and manages comprehensive wound care centers, which are
marketed as “THE CENTER FOR WOUND HEALING tm” primarily in the mid-Atlantic and
northeastern parts of the country. These centers render the specialized service
of hyperbaric medicine. They are developed in partnerships with acute care
hospitals. CFWH can be contracted to startup and manage the wound care program
as well as offer a turnkey operation including the furnishing of hyperbaric
oxygen chambers to hospitals.
As of
June 30, 2008, CFWH operates thirty-five (35) wound care and hyperbaric centers
with various institutions. Such centers operate as either a wholly-owned limited
liability company of CFWH or CFWH owns the majority interest in the limited
liability company. CFWH is headquartered in Tarrytown, New York. Currently, the
Company has signed agreements to open and manage three (3) additional wound care
and hyperbaric centers.
Note
2 - Summary of Significant Accounting Policies
a.
Principles of
Consolidation. The accompanying consolidated financial statements include
the accounts of CFWH and its wholly-owned and majority-owned subsidiaries
(collectively, the "Company"). Acquisitions of entities under common control are
accounted for under the pooling method of accounting at their historical costs
in accordance with Statement of Financial Accounting Standards (“SFAS”) No.141,
“Business Combinations”. All other acquisitions of majority ownership interests
are accounted for under the purchase method of accounting and reflect the fair
value of net assets acquired at the date of acquisition. All intercompany
profits, transactions, and balances have been eliminated. Minority interests in
the net assets and earnings or losses of the Company’s majority-owned
subsidiaries are reflected in the caption “Minority interest in consolidated
subsidiaries” in the accompanying consolidated balance sheet and the caption
“Minority interest in net loss of consolidated subsidiaries” in the accompanying
consolidated statement of operations. Minority interest adjusts the Company's
consolidated results of operations to reflect only the Company's share of the
earnings or losses of the majority owned LLCs and adjust the Company’s net
assets to reflect only the Company’s share of the net assets of the
majority-owned LLCs.
Investments
in unconsolidated affiliates are accounted for using the equity method of
accounting. Under the equity method, the Company recognizes its share of the
earnings and losses of the unconsolidated affiliates as they accrue. The equity
method is used when the Company holds more than a 20% interest in the
affiliates, but does not have significant control. The Company had a 40%
ownership interest in an entity, Bayonne Hyperbaric LLC, which it accounted for
under the equity method. In August 2007, the Company acquired the additional 40%
of Bayonne Hyperbaric LLC (See Note 15 – Subsequent Events). A third
individual own the remaining 20% interest in Bayonne Hyperbaric LLC. The Company
had a 49% interest in one affiliate that it consolidates because it has
significant control over the entity. This entity, Raritan Bay Hyperbaric LLC,
was owned 51% by two individuals who were also the majority members who sold
their Far Rockaway Hyperbaric, LLC interest to the Company effective June 1,
2006 In addition, the Company had several consulting/lease agreements with these
two individuals which were terminated as part of a settlement agreement
effective August, 2007(See Note 14 – Commitments and Contingencies and Note
15 – Subsequent Events).
b. Restatement
of Consolidated Financial Statements:
The condensed consolidated financial statements have been
restated for the year ended June 30, 2008 to reflect the correction
of errors in the accounting for the warrant issuance and warrant valuation, and
the debt issuance costs associated with the Company’s 15% Senior Secured
Subordinated Promissory Note (the “Bison Note”).
The
number of warrants to be issued were initially reported to be 7,168,488, and
included a fair-value of $0.48 per warrant, were exercisable at $5.00 per share,
used a ten year life in their fair-value computation and carried standard
anti-dilution and registration rights provisions yielding a total warrant
valuation of $3,431,341, which served to discount the Bison Note and
correspondingly increase additional paid-in capital for the same amount. The
number of warrants issuable and their fair-value have been properly calculated
in this amended filing at 7,941,926 and $8,391,893 (prior to the reduction for
allocation of amended debt issuance costs of $1,180,368),
respectively. Additionally, the amended filing adjusted the warrants
contractual life to the correct term of 7 years (See the tables set forth below
and Note 12 for additional information on the restatement). During the year
ended June 30, 2008, the Company had originally recorded $2,717,064, in deferred
expenses, in relation to the debt issuance costs associated with the Bison Note.
This amended filing records a reduction to the previously capitalized debt
issuance costs of $1,180,368 attributable to the warrant’s relative fair value
as a component of the total debt proceeds received, effectively restating the
deferred debt issuance costs to $1,536,696.
31
The
effect of the restatement on the Company’s consolidated financial statements as
of June 30, 2008, and for the fiscal year ended June 30, 2008 are shown
below:
As
of June 30, 2008
|
||||||||||||
(As
Previously
|
||||||||||||
Reported)
|
(Adjustments)
|
(Restatement)
|
||||||||||
ASSETS
|
||||||||||||
CURRENT
ASSETS
|
||||||||||||
Total
current assets
|
$ | 15,480,057 | $ | - | $ | 15,480,057 | ||||||
Notes
receivable
|
134,295 | - | 134,295 | |||||||||
Property
and equipment, net
|
8,886,005 | - | 8,886,005 | |||||||||
Intangible
assets
|
4,402,495 | - | 4,402,495 | |||||||||
Goodwill
|
751,957 | - | 751,957 | |||||||||
Other
assets
|
2,822,687 | (1,315,495 | ) | 1,507,192 | ||||||||
TOTAL
ASSETS
|
$ | 32,477,496 | $ | (1,315,495 | ) | $ | 31,162,001 | |||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||||||
CURRENT
LIABILITIES
|
||||||||||||
Total
current liabilities
|
$ | 10,389,544 | $ | - | $ | 10,389,544 | ||||||
15%
senior secured subordinated promissory note
|
15,291,782 | (5,323,042 | ) | 9,968,740 | ||||||||
Notes
payable, net of current maturities
|
782,133 | - | 782,133 | |||||||||
Capital
lease obligations, net of current maturities
|
131,774 | - | 131,774 | |||||||||
Minority
interest in consolidated subsidiaries
|
558,205 | 22,353 | 580,558 | |||||||||
TOTAL
LIABILITIES
|
27,153,438 | (5,300,689 | ) | 21,852,749 | ||||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||||||
STOCKHOLDERS'
EQUITY
|
||||||||||||
Common
Stock
|
23,373 | - | 23,373 | |||||||||
Additional
paid-in capital
|
26,220,288 | 3,544,694 | 29,764,982 | |||||||||
Accumulated
deficit
|
(20,919,603 | ) | 440,500 | (20,479,103 | ) | |||||||
TOTAL
STOCKHOLDERS' EQUITY
|
5,324,058 | 3,985,194 | 9,309,252 | |||||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 32,477,496 | $ | (1,315,495 | ) | $ | 31,162,001 |
32
June 30, 2008
|
||||||||||||
(As
Previously
|
||||||||||||
Reported)
|
(Adjustments)
|
(Restatement)
|
||||||||||
REVENUES
|
||||||||||||
Treatment
fees
|
$ | 26,357,619 | $ | - | $ | 26,357,619 | ||||||
TOTAL
OPERATING EXPENSES
|
23,234,474 | - | 23,234,474 | |||||||||
OPERATING
INCOME (LOSS)
|
$ | 3,123,145 | $ | - | $ | 3,123,145 | ||||||
OTHER
EXPENSE (INCOME)
|
||||||||||||
Interest
expense
|
$ | 7,245,963 | $ | (462,853 | ) | $ | 6,783,110 | |||||
Interest
income
|
(41,344 | ) | - | (41,344 | ) | |||||||
Minority
interest in net loss (income) of consolidated subsidiaries
|
131,901 | 22,353 | 154,254 | |||||||||
Loss
on disposal of property and equipment
|
68,880 | - | 68,880 | |||||||||
Other
expenses
|
20,865 | - | 20,865 | |||||||||
TOTAL
OTHER EXPENSE
|
7,426,266 | (440,500 | ) | 6,985,766 | ||||||||
(LOSS)
BEFORE INCOME TAXES
|
(4,303,121 | ) | 440,500 | (3,862,621 | ) | |||||||
PROVISION
(BENEFIT) FOR INCOME TAXES
|
||||||||||||
Current
taxes
|
20,065 | - | 20,065 | |||||||||
Deferred
taxes
|
- | - | - | |||||||||
TOTAL
PROVISION (BENEFIT) FOR INCOME TAXES
|
20,065 | - | 20,065 | |||||||||
NET
(LOSS)
|
$ | (4,323,185 | ) | $ | 440,500 | (3,882,685 | ) | |||||
NET
(LOSS) PER COMMON SHARE - BASIC AND DILUTED
|
$ | (0.19 | ) | $ | 0.02 | $ | (0.17 | ) | ||||
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC AND
DILUTED
|
22,997,476 | - | 22,997,476 |
33
June 30, 2008
|
||||||||||||
(As
Previously
|
||||||||||||
Reported)
|
(Adjustments)
|
(Restatement)
|
||||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
Net
loss
|
$ | (4,323,185 | ) | $ | 440,500 | $ | (3,882,685 | ) | ||||
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities
|
||||||||||||
Depreciation
and amortization
|
4,046,018 | - | 4,046,018 | |||||||||
Abandonment
and impairment loss
|
189,992 | - | 189,992 | |||||||||
Interest
charged for beneficial conversion features of 8% senior convertible
debebtures
|
912,524 | - | 912,524 | |||||||||
Interest
charged for amortization of deferred financing costs
|
2,099,399 | 42,162 | 2,141,561 | |||||||||
Bad
debts
|
796,027 | - | 796,027 | |||||||||
Deferred
income taxes
|
- | |||||||||||
Minority
interest in net income of consolidated subsidiaries
|
131,901 | 22,353 | 154,254 | |||||||||
Loss
on disposal of property and equipment
|
68,880 | - | 68,880 | |||||||||
Interest
accrued for convertible debenture and notes payable
|
1,184,030 | (48,396 | ) | 1,135,634 | ||||||||
Amortization
of 15% convertible debenture original issue discount
|
142,526 | (142,526 | ) | - | ||||||||
Amortization
of stock options
|
1,516,604 | - | 1,516,604 | |||||||||
Warrants
issued in payment of interest expense
|
736,226 | (171,567 | ) | 564,659 | ||||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Accounts
and notes receivable
|
(4,447,000 | ) | - | (4,447,000 | ) | |||||||
Prepaid
expenses and other current assets
|
(357,981 | ) | - | (357,981 | ) | |||||||
Other
assets
|
- | - | - | |||||||||
Accounts
payable and accrued expenses
|
(1,517,287 | ) | - | (1,517,287 | ) | |||||||
Income
taxes
|
881,506 | - | 881,506 | |||||||||
Payments
to former majority members
|
(45,330 | ) | - | (45,330 | ) | |||||||
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
2,014,851 | 142,526 | 2,157,377 | |||||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
NET
CASH USED IN INVESTING ACTIVITIES
|
(3,340,756 | ) | - | (3,340,756 | ) | |||||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
Principal
payments on capital lease obligations
|
(1,309,079 | ) | - | (1,309,079 | ) | |||||||
Advances
from affiliates
|
25,948 | - | 25,948 | |||||||||
Net
(repayment) proceeds from bank line of credit
|
(1,300,000 | ) | - | (1,300,000 | ) | |||||||
Proceeds
from issuance of 15% senior secured subordinated note
payable
|
17,500,000 | - | 17,500,000 | |||||||||
Deferred
financing costs
|
(2,995,780 | ) | (142,526 | ) | (3,138,306 | ) | ||||||
Repayment
of notes and loans
|
(4,990,268 | ) | - | (4,990,268 | ) | |||||||
Repayment
of 8% senior convertible debentures
|
(7,398,125 | ) | - | (7,398,125 | ) | |||||||
Proceeds
from issuance of common stock
|
400,000 | - | 400,000 | |||||||||
Proceeds
from notes payable
|
1,600,000 | - | 1,600,000 | |||||||||
Distributions
to LLC members
|
(368,109 | ) | - | (368,109 | ) | |||||||
NET
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
1,164,586 | (142,526 | ) | 1,022,060 | ||||||||
NET
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
(161,319 | ) | - | (161,319 | ) | |||||||
CASH
AND CASH EQUIVALENTS – BEGINNING OF YEAR
|
216,458 | - | 216,458 | |||||||||
CASH
AND CASH EQUIVALENTS – END OF YEAR
|
$ | 55,139 | $ | - | $ | 55,139 |
34
June 30, 2008
|
||||||||||||
(As
Previously
|
||||||||||||
Reported)
|
(Adjustments)
|
(Restatement)
|
||||||||||
SUPPLEMENTAL
DISCLOSURES OF NON-CASH INVESTING AND
|
||||||||||||
FINANCING
ACTIVITIES:
|
||||||||||||
Cash
paid during the year:
|
||||||||||||
Interest
|
$ | 2,029,146 | - | $ | 739,260 | |||||||
Income
taxes
|
$ | 22,405 | - | $ | 1,230,451 | |||||||
Non
-cash financing and investing activities:
|
||||||||||||
Equipment
acquired through capital lease obligation
|
$ | 217,148 | $ | 213,410 | ||||||||
Discount
of convertible debenture for fair value of beneficial conversion
fea
|
$ | - | $ | 912,524 | ||||||||
Warrants
and common stock issued in payment of accrued interest
|
$ | 839,659 | $ | - | ||||||||
Issuance
of common stock in connection with MedAir settlement
|
$ | 825,000 | $ | - | ||||||||
Issuance
of common stock in connection with Warantz settlement
|
$ | 75,000 | $ | - | ||||||||
Debt
issued in connection with Intangible asset acquired
|
$ | 2,617,744 | $ | - | ||||||||
Warrants
issued in connection with Bison financing
|
$ | 3,431,341 | $ | 4,960,552 | $ | 8,391,893 |
b.
Revenue
Recognition. Patient service revenue is recognized when the service is
rendered and the amount due is estimable, in accordance with the terms of the
individual contracts with hospitals. Generally, the contracts provide for a flat
fee per patient treatment, which may be derived from amounts allowable by third
party payers. Although revenue is recognized at the time of service, the
hospitals are usually not billed for the service until the hospital is paid by
the third party payers. As a result, the accounts receivable of the Company
include amounts not yet billed to the hospitals. As of June 30, 2008 and 2007
approximately $9.7 million and $5.6 million of Accounts Receivable were
unbilled, respectively.
c.
Cash and Cash
Equivalents. Cash equivalents are defined as short-term investments with
original maturities of three months or less.
d.
Property and
Equipment. Property and equipment are recorded at cost. The Company
provides for depreciation of property and equipment over their estimated useful
lives using the straight-line method. Hyperbaric chambers are depreciated over
seven years. Leasehold improvements, primarily located at hospitals, are
amortized on a straight-line basis over the lesser of the remaining term of the
hospital contract or the economic life of the improvement.
Hospital
chamber installation costs are included in Other Assets until the chambers are
operational. When chambers become operational, the total costs are transferred
to Property and Equipment and depreciated.
Maintenance
and repairs are charged to operating expenses as they are incurred. Improvements
and betterments which extend the lives of the assets are capitalized. The cost
and accumulated depreciation of assets retired or otherwise disposed of are
relieved from the appropriate accounts and any profit or loss on the sale or
disposition of such assets is credited or charged to income.
e.
Leases. Leases
are classified as capital leases or operating leases in accordance with the
terms of the underlying lease agreements. Capital leases are recorded as assets
and the related obligations as liabilities at the lower of fair market value or
present value. Such assets are amortized on a basis consistent with the
provisions of Statement of Financial Accounting Standards Board No. 13,
“Accounting for Leases,” as amended. The lease payments under capital leases are
applied as a reduction of the obligation and interest expense. Assets associated
with capitalized leases are included in property and equipment.
The lease
expense for rent, which may have a rent holiday included, is straight lined over
the initial life of the rent agreement.
f.
Long-Lived
Assets. The Company adopted the provisions of Financial Accounting
Standards Board Statement No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” which requires management to review the Company’s long-lived
assets for impairment whenever events or changes in circumstances indicate the
carrying value may not be recoverable. Impairment is measured by comparing the
carrying value of the long-lived assets to the estimated undiscounted future
cash flows expected to result from use of the assets and their ultimate
disposition. In December 2006, management determined that its interest in
Southampton Hyperbaric, LLC was valueless and both the Company and the other
members abandoned the facility which resulted in a charge to operation of
approximately $260,000. Additionally, management’s review of its long-lived
assets resulted in an additional impairment loss of $1,817,000 charge to
operations in the fourth quarter of fiscal 2007.
35
g.
Advertising
Costs. Advertising costs are expensed as incurred. Advertising expense
incurred for the twelve months ended June 30, 2008 and 2007 were $15 thousand
and $81 thousand, respectively.
h.
Accounts
Receivable. Accounts receivable have been reduced for all known bad debts
and allowances. In accordance with terms of the underlying contracts, CFWH
records revenues upon rendering of patient services. Generally, the hospital is
invoiced by CFWH when the hospital has collected its related fee from the
patient or third party payers. Earned revenues not yet billed to a hospital are
also reflected in accounts receivable. An allowance for doubtful accounts has
been recorded in the accompanying consolidated financial statements based on
historical trends and management estimates. Accounts are written off only after
exhaustive efforts at collection.
i.
Income Taxes.
The Company uses the asset and liability method of accounting for income taxes
in accordance with FAS 109, “Accounting for Income Taxes”. Under the asset and
liability method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities.
A valuation allowance against deferred tax assets is provided when it is more
likely than not that the deferred tax asset will not be fully
realized.
j.
Use of
Estimates. 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
the disclosure of commitments and contingencies, if any, at the date of the
financial statements, and revenue and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates made by
management include the collectability of accounts receivable, the impairment of
long-lived and intangible assets, and the fair value of stock and warrants
issued.
k.
Concentrations.
The Company places its temporary cash investments primarily with one high
credit-quality financial institution. At June 30, 2008 such investments were in
excess of the FDIC insurance limit by approximately $15,000.
There are
a limited number of manufacturers of hyperbaric chambers. All hyperbaric
chambers to date have been supplied by one vendor.
l.
Fair Value of
Financial Instruments. The carrying amounts of current assets and current
liabilities approximate fair value due to the short-term maturities of the
instruments. The carrying amounts of capital lease obligations approximate their
fair values and the current interest rates on such instruments approximate
current market interest rates on similar instruments. See Notes 10 and 11 on the
carrying value of debt issued.
m.
Stock Based
Compensation. The Company applies FASB Statement No. 123 R, "Share Based
Payment" in accounting for its stock-based compensation plans. Statement 123R
requires all share payments to employees, including grants of employee stock
options, to be recognized as an expense based on fair values measured on award
grant dates. The compensatory amount of stock options issued to employees that
was charged to operations was $1.5 million in 2008 and $2.3 million in
2007.
n.
Earnings Per
Share. Basic net earnings (loss) per share is calculated based on the
weighted average number of common shares outstanding for each period. Common
shares issuable upon the exercise of warrants and options outstanding that could
potentially dilute basic EPS in the future were not included in the computation
of diluted EPS because to do so would have been anti-dilutive for the periods
presented.
o.
Deferred Financing
Costs . All costs associated with the placement of Company debt is
deferred and written off over the term of the debt.
p.
Goodwill.
Goodwill in the amount of $447,531 was acquired as a result of the June 1, 2006
acquisition of Far Rockaway. In December 2007, as part of the Warantz settlement
(see Note 10), the company recorded additional goodwill of $304,426. In
accordance with SFAS 142, “Goodwill and Other Intangible Assets”, Goodwill is
not amortized but reviewed for possible impairment at least annually or more
frequently upon the occurrence of an event or when circumstances indicate that a
reporting unit’s carrying amount may be greater than its fair value. As of the
fiscal year ended June 30, 2008, no impairment of Goodwill has
occurred.
q.
Amortization of
Intangibles. The intangibles with finite lives are amortized over the
estimated useful lives of these assets. The Company’s major intangible assets
are comprised of hospital and treatment center contracts acquired by the
Company. These contracts are amortized over a period of two to nine years
representing the lives of the contract. Results for the years ending June 30,
2008 and 2007 include $1,613,150 and $503,615, respectively, in amortization
expense. These assets are evaluated by management at least annually. In 2008,
management completed a review of its intangibles and determined that one
hospital’s contract was impaired, resulting in a charge to operations of
$189,992. During fiscal 2007, management conducted a review of all its
intangible assets and determined that contracts at five hospitals were deemed
impaired and will cease operations at those locations. The intangibles at these
locations were charged to operations in 2007 as part of the $2.1 million loss on
abandonments. Included in the 2007 charge is $233,000 for the contract with
Victory Memorial Hospital.
36
RECENT
ACCOUNTING PRONOUNCEMENTS
In May
2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement), which specifies that issuers of convertible debt instruments
that may be settled in cash upon conversion should separately account for the
liability and equity components in a manner reflecting their nonconvertible debt
borrowing rate when interest costs are recognized in subsequent
periods. FSP APB 14-1 is effective for interim periods and fiscal
years beginning after December 15, 2008. The Company will adopt FSP
APB 14-1 effective July 1, 2009. The Company is currently assessing
the impact of FSP APB 14-1 on its financial statements.
In June
2008, the FASB ratified Emerging Issues Task Force Issue No. (“EITF”) 07-5,
“Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an
Entity’s Own Stock” (EITF 07-5). EITF 07-5 provides that an entity should use a
two step approach to evaluate whether an equity-linked financial instrument (or
embedded feature) is indexed to its own stock, including evaluating the
instrument’s contingent exercise and settlement provisions. It also clarifies on
the impact of foreign currency denominated strike prices and market-based
employee stock option valuation instruments on the evaluation. EITF 07-5 is
effective for fiscal years beginning after December 15, 2008. The Company is
currently assessing the impact of EITF 07-5 on its consolidated financial
position and results of operations.
In
June 2008, the FASB issued FSP Emerging Issues Task Force
(EITF) No. 03-6-1, “Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities.” Under
the FSP, unvested share-based payment awards that contain rights to
receive nonforfeitable dividends (whether paid or unpaid) are participating
securities, and should be included in the two-class method of computing EPS. The
FSP is effective for fiscal years beginning after December 15, 2008, and
interim periods within those years. The Company does not expect the adoption of
FSP EITF No. 03-6-1 to have a material effect on its consolidated financial
statements.
In
September 2007, 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 accordance with generally accepted
accounting principles, and expands disclosures about fair value measurements.
This statement does not require any new fair value measurements; rather, it
applies under other accounting pronouncements that require or permit fair value
measurements. The provisions of this statement are to be applied prospectively
as of the beginning of the fiscal year in which this statement is initially
applied, with any transition adjustment recognized as a cumulative-effect
adjustment to the opening balance of retained earnings. The provisions of SFAS
No. 157 are effective for the fiscal years beginning after
November 15, 2007; therefore, the Company anticipates adopting this
standard as of July 1, 2008. The Company does not believe adoption of SFAS
157 will have a material impact on its 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. Under the provisions of SFAS
No. 159, the Company may choose to carry many financial assets and
liabilities at fair values, with changes in fair value recognized in earnings.
The company will adopt the pronouncement effective for periods beginning after
July 1, 2008. The Company is currently evaluating the impact of adopting
this pronouncement on its consolidated financial statements, but does not expect
it to have a material effect.
In
December 2007, the FASB issued SFAS NO. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51”. The
objective of this Statement is to improve the relevance, comparability, and
transparency of the financial information that a reporting entity provides in
its consolidated financial statements by establishing accounting and reporting
standards that require the following changes. The ownership interests in
subsidiaries held by parties other than the parent be clearly identified,
labeled, and presented in the consolidated statement of financial position
within equity, but separate from the parent’s equity. The amount of consolidated
net income attributable to the parent and to the noncontrolling interest must be
clearly identified and presented on the face of the consolidated statement of
income. When a subsidiary is deconsolidated, any retained noncontrolling equity
investment in the former subsidiary is initially measured at fair value. The
gain or loss on the deconsolidation of the subsidiary is measured using the fair
value of any noncontrolling equity investment rather than the carrying amount of
that retained investment and entities provide sufficient disclosures that
clearly identify and distinguish between the interest of the parent and the
interest of the noncontrolling owners. The changes to current practice resulting
from the application of SFAS No. 160 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. The adoption of SFAS No. 160 before
December 15, 2008 is prohibited. The Company has not determined the effect
that may result from the adoption of SFAS No. 160 on its financial
statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations – Revised” that improves the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial reports about a business combination and its effects.
To accomplish that, this statement establishes principles and requirements how
the acquirer recognizes and measures in its financial statement the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree, recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase, and determines what information
to disclose to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. The changes to current
practice resulting from the application of SFAS No. 141(R) are effective
for financial statements issued for fiscal years beginning after
December 15, 2008. The adoption of SFAS No. 141(R) before
December 15, 2008 is prohibited. The Company has not determined the effect,
if any, that may result from the adoption of SFAS No. 141(R) on its
financial statements.
37
Management
does not believe that any other recently issued but not yet effective accounting
pronouncement, if adopted, would have a material effect on the accompanying
financial statements.
Note 3 – Private Placements and
Common Stock
a.
In July 2006, two individuals were granted 50,000 options each in connection
with agreeing to serve as members of the Company’s Board of
Directors.
b.
In August 2006, 50,000 options were granted to a company with whom the Company
entered into a consulting agreement.
c.
During the period, August through November 2006, four employees were granted a
total of 245,000 options in connection with accepting employment with the
Company; one of those employees subsequently resigned which resulted in the
expiration of 175,000 options.
d.
In January 2007, the Company issued an aggregate of 1,000,000 options to its
CEO. The options vest in varying amounts over varying terms. Part of these
options requires the attainment of certain performance goals by the Company. The
fair value of the options at the date of grants, as determined by the
Black-Scholes option pricing model, is $2,721,447 which is being charged to
operations ratably over the period the grants vest. $975,185 and $1,338,045 was
charged to operations in 2008 and 2007. On July 21, 2008 the Company’s board of
directors approved the CEO’s Amended and Restated Employment Agreement. As part
of that Agreement, the CEO was granted an additional 750,000 options at the then
fair market value. In addition, the aforementioned 1,000,000 options were
re-priced to the fair market value as of July 21, 2008. There is no effect of
the option re-pricing on the Company’s June 30, 2008 financial results; the
noncash costs of these options will be reflected in the Company’s September 30,
2008 10Q report.
e.
In March 2007, 42,667 options were granted to an independent contractor in
connection with its marketing activities on behalf of the Company.
f.
In June 2007, the Company received the proceeds from $1,000,000 in securities
(“Mezzanine Loan”) from various investors (“Investors”). These securities were
classified as liabilities in the financial statements since the Company could
repay the Investors as described below. The securities gave the Investors an
aggregate 25% share of a newly formed entity, CFWH Mezzanine, LLC (“Mezzanine”).
Mezzanine operates a Hyperbaric and Wound Care facility at each of 10 new
hospitals (as determined by the Company). The Company contributed the hospital
contracts for these 10 facilities, manages Mezzanine and will pay any net
profits to Mezzanine, of which the Investors will receive a 25%
share.
The
Investors’ shares in Mezzanine were redeemable by the Company if the Company
paid the Investors 125% of the original subscription price within 180 days from
the signing of the agreement, or pays 130% of the original subscription price
within 210 days, or paid 150% of the original subscription price within 270
days, or 200% of the original subscription price within one year. If the Company
did not redeem the interest in Mezzanine within one year, the Company would have
lost the right to redeem the Investors interest in Mezzanine, and no money would
have been due to the Investors. The Investors had the option to convert their
interest in Mezzanine to shares of the Company’s stock at a conversion rate of
$2.00 invested per share, or 500,000 shares for a two year period expiring in
June 2009. After the closing on the Bison Note (see Note 12), the Company
retired the Mezzanine Loan.
In April
and May 2008 the Company issued 187,500 shares of its common stock in payment of
accrued interest on the above mezzanine loan.
g.
In December, 2007 and January, 2008 the Company raised a total of $1.6 million
from individual investors in the form of a short term unsecured note, (the
“Bridge Financing Note”) the terms of which provided the lenders with interest
paid in cash or in lieu of cash, warrants with an exercise price of $2. These
funds were used to fund the $1.5 million payment due the Bondholders on or
before January 31, 2008 (of the $1.5 million, $1.2 million was used to retire
principal and $300 thousand was paid for a consent fee). Prior to the payment in
full of the Bondholders on March 31, 2008, the $1,600,000 was held by an escrow
agent and shown as Restricted Cash on the Company’s balance sheet. Certain
members of the Company’s board of directors and officers of the Company
participated in this Bridge Financing and lent the Company $600,000 of the total
$1.6 million raised.
On
January 25, 2008 the Company used $1.5 million of the Bridge Financing Note to
pay the Bondholders and $100 thousand for working capital purposes. On March 31,
2008 the entire $1.6 million Bridge Financing Note was paid in full from the
proceeds of the Bison financing. In May 2008 a bridge financing note holder
purchased 200,000 shares of the Company’s common stock for $400,000 in
cash.
h. On
March 31, 2008, the Company entered into a financing agreement with Bison
Capital Equity Partners II-A, L.P. and Bison Capital Equity Partners II-B, L.P.
and issued a $20 million senior collateralized subordinated promissory note
(“Senior Collateralized Subordinated Note” or “Bison Note”). The
Company received proceeds of $17.5 million, net of a $2.5 million discount, and
incurred approximately $3.1 million of expenses related to this
transaction. The Company used proceeds to retire certain debts with
accrued interest, certain accounts payable and other
obligations.
38
Under the
terms of the Bison Note, the Company has to pay monthly cash interest at 12% per
annum starting from October 2008 and 6% non-cash interest, which is added to the
principal amount. Upon fulfillment by the Company of certain
conditions, the non-cash interest is reduced to 3% and, provided no event of
default has occurred, the Company can further defer scheduled payments of cash
interest for up to 12 months. The Company met the required conditions
in September 2008 and therefore the non-cash interest rate reset at 3% and
payments of cash interest were deferred until October 31, 2009. The
interest rate increases by 2% upon an event of default and if such default is
not cured within a certain period of time or waived by the Bison Note holders,
the outstanding principal balance and accrued interest become due and
payable.
The Bison
Note is redeemable by annual payments of $2.5 million starting from the second
anniversary and until the fifth year at which point the Company is required to
retire the remaining balance. The Bison Note and other obligations
under the security purchase agreement are collateralized by a lien granted by
the Company and its subsidiaries on substantially all of their assets, including
all stock held by either the Company or its subsidiaries. The Bison
Note is subordinated to the Bank Debt.
Additionally,
the Company entered into a common stock warrant agreement with the holders of
the Bison Note and issued warrants to purchase 7,941,926 shares of its common
shares with an exercise price of $5 per share and a seven year
term. 4,765,156 or 60% of the warrants vested immediately and the
remaining warrants vest monthly over a three year period. Under the
terms of the common stock warrant agreement, part of the unvested warrants might
be canceled, provided the Company meets certain EBITDA targets and required
Bison Note redemption conditions.
The
Company determined the relative fair value of warrants to be $7,055,355 and
recorded such amortization as a discount to the Bison Note in addition to $2.5
million discount. Additionally, based on the relative fair values of
the Bison Note and warrants the Company allocated $3.1 million of expenses
related to the transaction as follows: $1.7 million to deferred expenses and
$1.4 million to additional paid-in capital. The Company amortizes the
deferred financing cost, and debt discount and records interest expense using
the interest method rate, which it determined to be 37%.
The
following table summarizes the assumptions used in valuing options issued by us
during the periods ended June 30, 2008 and 2007.
For the Year Ended
June 30, 2008
|
For the Year Ended
June 30, 2007
|
|||||
Average expected life (years)
|
4.6
|
8.5
|
||||
Average risk free interest rate
|
4.3
|
%
|
4.73
|
%
|
||
Expected volatility
|
153
|
%
|
144
|
%
|
||
Expected dividend rate
|
0
|
%
|
0
|
%
|
||
Expected forfeiture rate
|
1
|
%
|
1
|
%
|
The
following is a summary of our stock options and warrant activity for the years
shown below:
|
Number of
Shares
|
Weighted
Average
Exercise Price
|
Number
of
Shares
|
Weighted
Average
Exercise Price
|
||||||||||||
|
Stock Options
|
Warrants
|
||||||||||||||
Outstanding, at June 30,
2006
|
410,000 | $ | 3.39 | 2,750,000 | $ | 2.00 | ||||||||||
Granted
|
1,437,667 | $ | 3.23 | - | ||||||||||||
Exercised
|
- | - | ||||||||||||||
Forfeited/expired
|
(175,000 | ) | $ | (3.50 | ) | - | ||||||||||
Outstanding, at June 30,
2007
|
1,672,667 | $ | 3.39 | 2,750,000 | $ | 2.00 | ||||||||||
Granted
|
255,000 | $ | 3.41 | 11,335,676 | $ | 4.10 | ||||||||||
Exercised
|
- | - | ||||||||||||||
Forfeited/expired
|
(70,000 | ) | $ | (3.93 | ) | - | ||||||||||
Outstanding, at June 30,
2008
|
1,857,667 | $ | 3.37 | 14,085,676 | $ | 3.69 | ||||||||||
Exercisable at June 30,
2008
|
1,137,667 | $ | 3.33 | 10,908,906 | $ | 3.31 |
39
The
number and weighted average exercise prices of all common shares and common
share equivalents issuable and stock purchase options and warrants outstanding
as of June 30, 2008 is as follows:
Stock Options & Warrants Outstanding
|
Stock Options & Warrants
Exercisable
|
||||||||||||||
Exercise Prices |
Number of
Shares
|
Weighted
Average
Remaining
Life
(Yrs)
|
Weighted
Average
Exercise Price
|
Number of
Shares
|
Weighted
Average
Exercise
Price
|
||||||||||
$
|
2.00
|
6,143,750
|
2.94
|
$
|
2.00
|
6,143,750
|
$
|
2.00
|
|||||||
$
|
3.00
|
260,000
|
2.32
|
$
|
3.00
|
260,000
|
$
|
3.00
|
|||||||
$
|
3.10
|
1,000,000
|
8.55
|
$
|
3.10
|
500,000
|
$
|
3.10
|
|||||||
$
|
3.50
|
300,000
|
2.49
|
$
|
3.50
|
180,000
|
$
|
3.50
|
|||||||
$
|
3.75
|
42,667
|
3.75
|
$
|
3.75
|
42,667
|
$
|
3.75
|
|||||||
$
|
4.00
|
105,000
|
2.82
|
$
|
4.00
|
105,000
|
$
|
4.00
|
|||||||
$
|
5.00
|
8,091,926
|
7.00
|
$
|
5.00
|
4,815,156
|
$
|
5.00
|
|||||||
Total
– June 30, 2008
|
15,943,343
|
5.43
|
$
|
3.65
|
12,046,573
|
$
|
3.31
|
Note
4 - Property and Equipment
Property
and equipment consists of the following at June 30, 2008 and 2007:
2008
|
2007
|
|||||||
Medical
chambers and equipment, including $2,352,934 for 2008 and $6,198,646 for
2007 under capital leases
|
$ | 7,945,838 | $ | 7,294,518 | ||||
Furniture,
fixtures and computers
|
2,084,382 | 829,724 | ||||||
Leasehold
improvements
|
4,807,466 | 4,005,954 | ||||||
Autos
and Vans
|
494,051 | 459,639 | ||||||
15,331,737 | 12,589,835 | |||||||
Less:
Accumulated depreciation and amortization – including $780,025and
$1,303,911 for medical chambers and equipment under capital
lease
|
6,445,732 | 4,619,510 | ||||||
$ | 8,886,005 | $ | 7,970,325 |
Depreciation
expense for fiscal 2008 is $2,432,890 of which $2,108,107 is included in cost of
services and 2007 was $1,661,341 with cost of services amounted to
$1,601,424.
Note
5 - Intangible Assets
Intangible
Assets consist of the following as of June 30:
2008
|
2007
|
|||||||
Hospital
Contracts Acquired
|
$ | 6,444,123 | $ | 3,559,661 | ||||
Treatment
Center Contract
|
- | - | ||||||
Total
intangible assets with finite lives
|
6,144,123 | 3,559,661 | ||||||
Less:
Accumulated amortization
|
2,041,628 | 428,477 | ||||||
Net
intangible assets with finite lives
|
4,402,495 | 3,131,184 | ||||||
Goodwill
|
751,957 | 447,531 | ||||||
Total
Intangible Assets
|
$ | 5,154,452 | $ | 3,578,715 |
Amortization
of intangibles of $1,494,355 and $503,615 was charged to cost of services in
2008 and 2007, respectively.
As part
of the settlement agreement with the Greenbergs (see Note 10), the Greenbergs
agreed not to compete with the Company for a five year period through August
2012 in exchange for $600,000, including imputed interest of $51,850, payable in
52 bi-weekly installments. Additionally, as part of a settlement with another
related party (see Note 10), the Company agreed to pay $658,337 for a covenant
not to solicit and compete for 36 months ending August 2010.
40
Furthermore,
as part of the settlement with Warantz as disclosed in Note 10, the Company
recorded goodwill in the amount of $304,426.
Management
has adjusted the remaining useful lives of hospital contracts downward from
their useful lives as determined by independent appraisers when the contracts
were acquired because management is unable to determine that it is more likely
than not that the contract will be renewed. The new periods over which the
contracts are being amortized are the remaining lives of the contracts. The
effect of this change in estimate increased amortization in the current year by
$420,000 and will increase such expense in each subsequent year by approximately
$560,000 until the contracts are fully amortized.
The
following represents the estimated future amortization of the Hospital and
Treatment Center Contracts over the next five years:
Year or Period Ending June 30,
|
||||
2009
|
$
|
1,845,970
|
||
2010
|
$
|
1,845,970
|
||
2011
|
$
|
573,517
|
||
2012
|
$
|
109,629
|
||
2013
|
$
|
27,409
|
Note
6 - Other Assets
Other
Assets consist of the following as of June 30:
2008
|
2008
|
2008
|
2007
|
|||||||||||||
(As
Previously
Reported)
|
(Adjustment)
|
(As
Restated)
|
|
|||||||||||||
Subordination
& Consent Fee, net of amortization of $1,850,000 and
$264,286.
|
$ | - | $ | - | $ | - | $ | 1,585,715 | ||||||||
Deferred
Financing Costs, net of amortization of $513,685(As Previously
reported) and $47,265 (restated) and
$1,206,500
|
2,804,926 | (1,315,495 | ) | 1,489,431 | 322,831 | |||||||||||
Equipment
Lease Fees
|
0 | 0 | 0 | 12,500 | ||||||||||||
Security
Deposit
|
17,760 | - | 17,760 | 38,67138 | ||||||||||||
Total
Other Assets
|
$ | 2,822,686 | $ | (1,315,495 | ) | $ | 1,507,191 | $ | 2,822,687 |
Amortization
of the consent fee and deferred financing costs of $2,099,399 and $1,068,619 is
included in interest expense in fiscal 2008 and 2007, respectively.
Note
7 - Obligations under Capital Leases
The
Company leases medical and other equipment under capital lease agreements with
annual interest rates ranging from 4.09% to 15.21% over three to seven year
terms. Most leases are guaranteed by certain Company stockholders.
Summary
of obligations under capital leases as of June 30,
2008
|
2007
|
|||||||
Total
obligations under capital leases
|
$ | 657,881 | $ | 2,029,550 | ||||
Less:
Current installments
|
526,107 | 1,530,862 | ||||||
$ | 131,774 | $ | 498,688 |
41
The
following is a schedule by years of future minimum lease payments under capital
leases, together with the present value of the net minimum lease payments as of
June 30, 2008:
2009
|
$
|
587,841
|
||
2010
|
138,292
|
|||
2011
|
5,006
|
|||
Total
minimum lease payments amount
|
731,139
|
|||
Less:
Amounts representing interest
|
73,258
|
|||
Present
value of minimum lease payments
|
$
|
657,881
|
Note
8 - Related Party Transactions
a. In
December, 2007 and January, 2008 the Company raised a total of $1.6 million from
individual investors in the form of a short term unsecured note, (the “Bridge
Financing Note”) the terms of which provided the lenders with interest paid in
cash or in lieu of cash, warrants with an exercise price of $2. These funds were
used to fund the $1.5 million payment due the Bondholders on or before January
31, 2008 (of the $1.5 million, $1.2 million was used to retire principal and
$300 thousand was paid for a consent fee). Prior to the payment in full of the
Bondholders on March 31, 2008, the $1.6 million was held by an escrow agent and
shown as Restricted Cash on the Company’s balance sheet. Certain members of the
Company’s board of directors and officers of the Company participated in this
Bridge Financing and lent the Company $600,000 of the total $1.6 million
raised.
On
January 25, 2008 the Company used $1.5 million of the Bridge Financing Note to
pay the Bondholders and $100 thousand for working capital purposes. On March 31,
2008 the entire $1.6 million Bridge Financing Note was paid in full from the
proceeds of the Bison financing with the exception of the $100 thousand interest
due the Company’s board of directors and officers who participated in the
financing.
b.
Certain advances are made to and from affiliates in the ordinary course of
business. The balances due to and from affiliates are noninterest bearing and
due on demand. The amounts owing to the affiliates at June 30, 2008 and 2007
were $261,006 and $206,082, respectively.
Note
9 – Short-term Borrowings
The
Company entered into a three-year $5.0 million bank line of credit with
Signature Bank on June 17, 2005, as amended on April 7, 2006. The original
termination date of the bank line was June 16, 2006. Pursuant to an amendment
entered into on April 7, 2006, the termination date of the bank line became
February 1, 2007, and pursuant to an amendment entered into on April 7, 2007,
the termination date became May 2, 2007.
Pursuant
to the Third Amendment to the credit facility effective May 2, 2007, the bank
extended the line’s maturity to February 29, 2008, and increased the revolving
credit line to $6.0 million at substantially the same interest rates and secured
by the same collateral. The Company also received the proceeds from a $1.5
million term loan payable in six equal monthly principal installments of $33,333
commencing September 1, 2007, with the balance due February 29,
2008.
The
amended agreement required the Company to maintain certain financial covenants
and ratios, limits capital expenditures and additional indebtedness, and
prohibits dividends and distributions to minority interest without prior
approval. The Company assigned the aggregate proceeds of key man life insurance
of $7.5 million on the life of the Company’s CEO.
The
Company negotiated the Fourth and Fifth Amendments to the credit facility that,
among other things, increased the availability under its revolving line of
credit. The Sixth Amendment, executed March 19, 2008 and effective February 29,
2008, provided for the extension of the credit facility to April 15, 2008. On
March 31, 2008 the Company entered into a new two year agreement with the bank
(the “Seventh Amendment”) that includes a $5.5 million revolving line of credit
and a $1 million term loan. The term loan matures March 31, 2009 and has 12
monthly principal amortization payments of $83,333. The Company agreed to pay
off the $1.3 million balance of the existing term loan, was able to reduce the
amount of key man insurance the bank had required be in place (naming the bank
as the beneficiary), and removed the personal guarantees two of the Company’s
directors had provided to the bank.
For the
year ended June 30, 2008 the average debt outstanding under the working capital
line of credit was $5,187,525 at an average interest rate of 8.7%. The highest
balance outstanding under the working capital line was $6,500,000 and the
Company was charged interest of $449,712 during the year.
42
Note
10 – Notes Payable
a.
The Company periodically buys vans for courtesy transportation of patients to
the hyperbaric centers for treatment. These vans are financed by traditional
automotive financing. Rates on these loans range to a high of 8%. As of June 30,
2008, the Company has an outstanding balance due on these loans of $65,255. For
the 12 months ended June 30, 2008, average monthly principal payments were
approximately $5,447.
b.
As part of the acquisition of Far Rockaway LLC, the Company issued a $650,000
note, which was paid in August 2006 and a $1,350,000 promissory note, which was
paid off in full on June 13, 2008.
c.
Effective September 30, 2007 the Company negotiated the termination of Ms.
Greenberg’s five year employment with the Company, in which all of the Company’s
obligations under the employment agreement were concluded, as well as the
termination of a consulting agreement with Ms. Greenberg’s spouse, in which JD
Keith LLC, the spouse’s consulting firm, was to be paid $10,000 per month for
five years as well as commissions and other compensation. As part of the
settlement, the Company entered into a non-compete and non-solicitation
agreement with the Greenbergs. Among other things, the Greenbergs agreed to a
five year non-compete with the Company. The Company will pay JD Keith LLC
approximately $600,000 in 52 bi-weekly installments during the first two years
of the five year non-compete agreement. The present value of the payments
aggregated $548,150 which is included in the accompanying financial statements
as an intangible asset and is being amortized over its five year life. As of
June 30, 2008 the balance due JD Keith, LLC was $359,824.
d.
In June 2007, the Company received the proceeds from $1.0 million in securities
(“Mezzanine Loan”) from various investors (“Investors”). These securities were
classified as liabilities in the financial statements since the Company could
repay the Investors as described below. The securities gave the Investors an
aggregate 25% share of a newly formed entity, CFWH Mezzanine, LLC (“Mezzanine”).
Mezzanine operates a Hyperbaric and Wound Care facility at each of 10 new
hospitals (as determined by the Company). The Company contributed the hospital
contracts for these 10 facilities, manages Mezzanine and will pay any net
profits to Mezzanine, of which the Investors will receive a 25%
share.
The
Investors’ shares in Mezzanine were redeemable by the Company if the Company
paid the Investors 125% of the original subscription price within 180 days from
the signing of the agreement, or pays 130% of the original subscription price
within 210 days, or paid 150% of the original subscription price within 270
days, or 200% of the original subscription price within one year. If the Company
did not redeem the interest in Mezzanine within one year, the Company would have
lost the right to redeem the Investors interest in Mezzanine, and no money would
have been due to the Investors. The Investors had the option to convert their
interest in Mezzanine to shares of the Company’s stock at a conversion rate of
$2.00 per share, or 500 thousand shares for a two year period expiring in June
2009. After the closing on the Bison Note (see Note 12), the Company retired the
Mezzanine Loan.
e.
Effective August 8, 2007, the Company entered into an agreement with
Med-Air Consultants, Inc. (“Med-Air”) whereby the Company terminated several
joint venture and consulting agreements with Med-Air. The key elements of this
agreement include the Company’s purchase of the 51% of the membership interest
of Raritan Bay LLC and the 40% of the membership interest of Bayonne LLC owned
by Med-Air, the elimination of Med-Air’s right to participate in a certain
number of wound care centers the Company anticipates opening over several years,
the elimination of fees associated with treatments at three of the Company
treatment centers, and Med-Air’s covenant not to compete with or solicit
employees of the Company. The purchase price paid by the Company was 300,000
shares of the Company’s common stock, whose fair value at the date of issuance
was $825,000; a non-interest bearing 36 month note of $1,692,000, net of 9%
imputed interest of $202,000; and its interest in Southampton LLC. The purchase
price note also includes all amounts due under capital leases for six chambers,
approximately $232,667 at June 30, 2008, and the option to acquire the chambers
for $1 each. The total assets acquired aggregated $2,411,312 of which $658,312
is for the non-solicitation agreement and hospital contracts of $1,753,000. The
balance remaining on the note as of June 30, 2008 was $1,019,683.
f.
Effective October 1, 2007, the Company entered into an agreement with Warantz
Healthcare Group Inc., Rapid Recovery of America, Inc. Millennium Healthcare
LLC, SMWNJ, Inc. SMWNY, Inc and Modern Medical Specialties, LLC (“Warantz”)
whereby the Company terminated several joint venture and consulting agreements
with Warantz. The key elements of this agreement includes the Company acquiring,
for $431,000 and 30 thousand restricted shares of common stock, whose fair value
was $75 thousand, the 40% interest in Modern Medical, LLC that it did not own.
The Company recorded a Notes Payable in the amount of $377,665, which is net of
imputed interest of $45,002. As of June 30, 2008 the balance outstanding was
$277,228. The settlement also provided for the termination of a joint venture
for two stand-alone healthcare facilities for total cash consideration of
$96,000, and the elimination of its joint venture participation in a potential
hospital-based healthcare facility that the Company believes may compete with an
existing wound care center. Payment requirements for these negotiated agreements
range from six to 33 months.
g.
In December, 2007 the Company received $800 thousand from individual lenders in
the form of a short term unsecured note, (the “Bridge Financing Note”) the terms
of which provided the lenders with interest paid in cash or in lieu of cash,
warrants with an exercise price of $2 per share. These funds were used to fund
the $1.5 million payment due the Bondholders on or before January 31, 2008 (of
the $1.5 million, $1.2 million was used to retire principal and $300 thousand
was paid for a consent fee).
In
January, 2008 the Company raised an additional $800 thousand according to the
same terms as described above, bringing the total Bridge Financing Note to $1.6
million. On January 25, 2008 the Company used $1.5 million of the Bridge
Financing Note to pay the Bondholders and $100 thousand for working capital
purposes. After the closing on the Bison Note (see Note 12), the Company retired
the Bridge Financing Note.
43
Summary –
Notes Payable, including the 15% senior secured note payable, as of June 30,
2008 and 2007 consists of the following:
Maturities
of the long-term portion of notes payable as of June 30, 2008 are as
follows:
(As
Previously Reported)
|
Adjustment
|
As
Restated**
|
2007
|
|||||||||||||
Notes
Payable
|
$ | 21,213,771 | $ | (5,323,042 | ) | $ | 15,890,729 | $ | 7,994,514 | |||||||
Less:
Current portion
|
5,139,856 | 5,139,856 | 7,929,260 | |||||||||||||
$ | 16,073,915 | $ | (5,323,042 | ) | $ | 10,750,873 | $ | 65,254 |
Year
Ending June 30,
|
Reported
|
|||
2009
|
$
|
5,139,856
|
||
2010
|
3,282,133
|
|||
2011
|
2,500,000
|
|||
2012
|
2,500,000
|
|||
2013
|
12,500,000
|
|||
$
|
25,921,989
|
** The
difference between the maturity table amortization and the restated notes
payable is attributable to 15% note discount accreting to note payable over its
five year maturity span.
Note
11 - 8% Secured Convertible Debenture
On April
7, 2006, the Company received $5,500,000 in gross proceeds ($4,912,500 after
placement agent fees and other offering costs, plus an additional 150,000 common
shares issued to the placement agent), in exchange for its secured convertible
debenture issued to DKR Sound Shore Oasis Holding Fund Ltd. ($5.1 million) and
Harborview Master Fund LP ($0.4 million), together the “Bondholders.” The
debenture was originally due on April 7, 2007. As provided in the agreement, the
due date was extended to September 7, 2007 since the Company did not exercise
its rights to call certain warrants. The debenture is convertible at the option
of the Bondholders into common shares at $3 per common share (subject to
adjustment) at any time and in any amount prior to maturity; however, the
debenture is subordinated to the Signature Bank line of credit. This debenture
bears interest at 8% per annum, payable in cash or in common shares at the
conversion price (subject to certain eligibility requirements). $2,000,000 of
the proceeds of the debenture was paid to the Majority Members as partial
consideration for the simultaneous acquisitions of the Twelve LLCs previously
discussed.
As the
Company failed to meet EBITDA (Earnings before Interest, Taxes, Depreciation and
Amortization) targets as specified under the debenture, the conversion price was
reduced to its minimum of $2.00 per share.
Issuance
of the warrants to the holders of the $1.6 million of notes triggered certain
anti-dilution provisions under the warrant agreement related to 2,750,000
warrants outstanding at June 30, 2007. As the result, the Company issued
an additional 3,093,750 warrants to purchase shares of its common stock and
reduced the exercise price for 2,750,000 warrants to $2 per share.
In
addition, each Bondholder received a series of five year common stock purchase
warrants with exercise prices ranging from $4.00 to $5.00 per share (subject to
adjustment downward upon the occurrence of certain specified events) for an
aggregate of 2,750,000 common shares. Since the Company failed to file a
registration statement by April 7, 2007, the holders of the warrants received
the option to exercise the warrants on a “cashless” basis. Of these warrants,
916,667, exercisable at $4.00 per common share, were exercisable on their 11
month anniversary of issuance and are callable at the option of the Company
until exercisable. Since the Company did not exercise its call right, the due
date of the convertible debenture was extended to September 7, 2007. All other
warrants are immediately exercisable.
Because
the senior convertible debentures were immediately convertible, and can be
converted at a price on the date of sale ($3.00 per share), which was less than
the market value of the shares on that date ($4.00 per share), this transaction
included a beneficial conversion feature. In addition, the corresponding
warrants attached were determined to have fair values utilizing the
Black-Scholes option-pricing model in excess of the notes’ proceeds of
$5,500,000. Consequently, $2,108,240 was allocated to the beneficial conversion
feature, and $3,391,760 to the warrants, using a relative valuation method to
the value of the senior convertible note and credited to additional paid-in
capital. The beneficial conversion feature, the fair value of the immediately
convertible warrants, and those warrants exercisable as of June 30, 2006 were
charged to interest expense and accreted to the senior convertible debenture in
the accompanying financial statements. For the nine months ended March 31, 2007,
$842,863 was charged to operations, and this amount was amortized to expense to
the un-extended maturity date of the senior convertible debenture of April 7,
2007.
44
As part
of this agreement, the Company was required to file a Registration Statement
within 60 days of the date of closing of the shares and warrants associated with
the aforementioned $5.5 million 8% Secured Debenture. Since the Company failed
to do so, it has incurred damages payable to each Bondholder equivalent to 1.5%
of the aggregate purchase price paid by each Bondholder for each month the
Registration Statement is not filed up to a maximum of 9% per Bondholder. The
maximum damages amount to $495 thousand. As of March 31, 2008 and 2007, the
Company recorded an accrual for damages amounting to $0 and $495,000,
respectively. Another condition of the agreement requires the Company to reserve
up to 2,333,333 of its unissued common shares of stock to satisfy an
anti-dilution provision of the debenture agreement. These shares are reserved
for issuance to the Majority Members if the debentures’ conversion options are
exercised by Oasis.
On
February 28, 2007, Oasis issued a Default Notice to the Company because of the
Company’s failure to timely file this annual report on Form 10KSB, the cessation
of the Company’s securities being listed or quoted on the Over-the-Counter
Bulletin Board of the NASD, and the Company’s failure to file a Registration
Statement within 60 days of the Registration Rights Agreement. On March 1, 2007,
Signature Bank issued a “blocking letter” that, among other things, precluded
the debenture holders exercising any of the remedies as provided for as provided
for in the Debenture Agreement. On May 29, 2007 the Company, its debenture
holders and Signature Bank negotiated a restructuring of the Company’s senior
secured loan and the secured debentures. Among other modifications, the
debenture holders withdrew their default notice and all alleged defaults under
both agreements were waived.
The
restructured subordinated debentures increased the principal amount of
debentures for accrued interest on the debentures through May 29, 2007 by
$504,778 and the $495,000 in damages referred to in the second preceding
paragraph. The interest rate on the restructured $6,499,778 in indebtedness was
increased from 8% to 9%. The revised debt required a $1.0 million payment to the
bondholders on June 21, 2007 of which $800 thousand was principal reduction and
$200 thousand was a “consent fee” to restructure the debentures; this payment
was made on June 20, 2007. The bondholders will receive an additional $1,650,000
after the indebtedness and interest thereon has been repaid in full as
“additional consideration” for amending the agreements. The consent fee and the
additional consideration were charged to operations as additional interest from
the restructure date to March 31, 2008, the initial maturity date of the
debentures. On the initial maturity date, the Company had the option to repay
the outstanding principal and accrued interest thereon, or to extend the
maturity to March 31, 2008 if it has paid an additional $1.2 million in
principal payments and an additional consent fee of $300 thousand. On December
21, 2007 the Company and the bondholders agreed to extend until January 31, 2008
the date by which the Company had to make the $1.5 million payment. The Company
exercised this maturity extension option on January 25, 2008 and the remaining
outstanding principal and accrued interest, and the additional consideration
payment of $1.65 million, was paid in full on March 31, 2008 from the proceeds
of the Bison Financing.
Note
12 – 15% Senior Secured Subordinated Promissory Note.
On March
31, 2008, the Company entered into a financing agreement with Bison Capital
Equity Partners II-A, L.P. and Bison Capital Equity Partners II-B, L.P. and
issued a $20 million senior collateralized subordinated promissory note (“Senior
Collateralized Subordinated Note” or “Bison Note”). The Company
received proceeds of $17.5 million, net of a $2.5 million discount, and incurred
approximately $3.1 million of expenses related to this
transaction. The Company used proceeds to retire certain debts with
accrued interest, certain accounts payable and other obligations.
The
financial terms of the Bison Note are summarized as follows:
|
·
|
The
Note is a five year note maturing March 31,
2013.
|
|
·
|
Under
the terms of the Bison Note, the Company has to pay monthly cash interest
at 12% per annum starting from October 2008 and 6% non-cash interest,
which is added to the principal amount. Upon fulfillment by the
Company of certain conditions, the non-cash interest is reduced to 3% and,
provided no event of default has occurred, the Company can further defer
scheduled payments of cash interest for up to 12 months. The
Company met the required conditions in September 2008 and therefore the
non-cash interest rate reset at 3% and payments of cash interest were
deferred until October 31, 2009. The interest rate increases by
2% upon an event of default and if such default is not cured within a
certain period of time or waived by the Bison Note holders, the
outstanding principal balance and accrued interest become due and
payable.
|
|
|
|
·
|
The
Bison Note is redeemable by annual payments of $2.5 million starting from
the second anniversary and until the fifth year at which point the Company
is required to retire the remaining balance. The Bison Note and
other obligations under the security purchase agreement are collateralized
by a lien granted by the Company and its subsidiaries on substantially all
of their assets, including all stock held by either the Company or its
subsidiaries. The Bison Note is subordinated to the Bank
Debt.
|
45
|
·
|
Additionally,
the Company entered into a common stock warrant agreement with the holders
of the Bison Note and issued warrants to purchase 7,941,926 shares of its
common shares with an exercise price of $5 per share and a seven year
term. 4,765,156 or 60% of the warrants vested immediately and
the remaining warrants vest monthly over a three year
period. Under the terms of the common stock warrant agreement,
part of the unvested warrants might be canceled, provided the Company
meets certain EBITDA targets and required Bison Note redemption
conditions.
|
46
|
·
|
The
Company determined the relative fair value of warrants to be $8,391,893
and recorded such amortization as a discount to the Bison Note in addition
to $2.5 million discount. Additionally, based on the relative
fair values of the Bison Note and warrants the Company allocated $3.1
million of expenses related to the transaction as follows: $1.7 million to
deferred expenses and $1.4 million to additional paid-in
capital. The Company amortizes the deferred financing cost, and
debt discount and records interest expense using the interest method rate,
which it determined to be 37%.
|
Note
13 – Income taxes
The
Company’s domestic effective income tax rate for the years presented is based on
management’s estimate of the Company’s effective tax rate for the applicable
year and differs from the federal statutory income tax rate primarily due to
nondeductible permanent differences, state income taxes and changes in the
valuation allowance for deferred income taxes. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible.
The
Company maintains a full valuation allowance on its deferred tax assets.
Accordingly, the Company has not recorded a benefit for income
taxes.
The
Company adopted the provisions of FIN 48 on July 1, 2007. FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with SFAS No. 109, “Accounting for Income
Taxes”, and prescribes a recognition threshold and measurement process for
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The adoption of FIN 48 did not have a
material effect on the Company's consolidated financial position or results of
operation. We classify interest and penalties, if any, associated with our
uncertain tax positions as a component of income tax expense. No interest and
penalties related to uncertain tax positions were accrued at June 30,
2008.
During
the year ended June 30, 2008, the Company recognized no adjustments for
uncertain tax benefits. The Company is subject to U.S. federal and state
examinations by tax authorities for all years since its inception. The Company
does not expect any significant changes to its unrecognized tax positions during
the next 12 months.
The
Company has a federal tax operating loss carry-forward of $1,312,000 at June 30,
2008 which expires through 2028.
The
components of the net deferred tax asset (liability) at June 30, 2008 and 2007
consist of the following
2008
|
2007
|
|||||||
Deferred
tax assets:
|
||||||||
Allowance
for doubtful accounts
|
$ | 986,000 | $ | 1,035,000 | ||||
Property
assets
|
273,000 | 80,000 | ||||||
Bridge
Loan Interest
|
40,000 | - | ||||||
Intangibles
|
- | 472,000 | ||||||
Accrued
expenses
|
283,000 | 371,000 | ||||||
Stock
option compensation
|
1,787,000 | 1,315,000 | ||||||
Net
operating loss
|
1,539,000 | 153,000 | ||||||
Total
deferred tax asset
|
4,908,000 | 3,426,000 | ||||||
Less
valuation allowance
|
(4,908,000 | ) | (3,426,000 | ) | ||||
Net
deferred assets (liabilities)
|
$ | 0 | $ | 0 |
47
The
provision (benefit) for income taxes is comprised of the following:
For the Year Ended
June 30, 2008
|
For the Year Ended
June 30, 2007
|
|||||||
Current:
|
||||||||
Federal
|
$ | - | $ | (832,388 | ) | |||
State
|
20,065 | 475,877 | ||||||
20,065 | (356,511 | ) | ||||||
Deferred:
|
||||||||
Federal
|
- | (872,281 | ) | |||||
State
|
- | (222,703 | ) | |||||
- | (1,094,984 | ) | ||||||
Net
provision (benefit)
|
$ | 20,065 | $ | (1,451,495 | ) |
A
reconciliation of the statutory income tax effective rate to the actual
provision shown in the financial statements is as follows:
For the Year Ended
June 30, 2008
|
For the Year Ended
June 30, 2007
|
|||||||
Computed
tax benefit
|
(34.0 | )% | (34.0 | )% | ||||
State
and local taxes, net of federal benefit
|
(6.8 | ) | (4.7 | ) | ||||
Minority
interest
|
(2.0 | ) | 0.9 | |||||
Non
deductible interest expense
|
0.0 | 3.1 | ||||||
Other
|
9.0 | 0.2 | ||||||
NOL
valuation reserve
|
52.3 | 21.6 | ||||||
Total
tax benefit
|
0.5 | % | (12.9 | )% |
Note
14 - Defined Contribution Plan
The
Company maintains a defined 401(k) Contribution Plan which all employees, over
the age of 21, are eligible to participate in after three months of employment.
The Company does not match employee contributions. Currently there are thirteen
employees who are enrolled in this program. The 401(k) Contribution Plan is
administered by a third party.
Note
15 - Commitments and Contingencies
a.
Effective on December 1, 2005, the Company entered into short-term and long-term
employment agreements with Dr. Phillip Forman, Dr. John Capotorto and Elise
Greenberg. The terms and conditions of each agreement are identical except for
the salary levels.
The short
term employment agreements were for terms commencing December 1, 2005 and
terminating March 31, 2006. The arrangements for Dr. Forman and Dr. Capotorto
provided for aggregate salaries of $25,000 per month. Ms. Greenberg’s agreement
provided for a salary of $7,500 per month.
The long
term employment agreements were for terms commencing April 1, 2006 and
terminating April, 2011. The arrangements for Dr. Forman and Dr. Capotorto
provided for aggregate salaries of $50,000 per month. Ms. Greenberg provided for
a salary of $15,000 per month. The agreements provide for participation in the
Company paid health insurance, life and disability insurance plans, a 401(k)
plan, stock option plan, incentive compensation and stock purchase plans and
similar plans as may now exist or as may be adopted by the Company in the
future. Each employee is to be provided with additional perquisites at an annual
cost of not in excess of $25,000. These agreements provide for certain
additional compensation in the event of a change in control or other termination
not for cause. Ms. Greenberg’s employment with the Company, and all contractual
obligations to her, ceased effective September 30, 2007
Each
officer is subject to usual and customary non disclosure of confidential
information and a covenant not-to-compete during the term of the agreement and
for a five year period thereafter with respect to the non-disclosure
requirements and three years thereafter with respect to the covenant
not-to-compete.
b.
In April 2006, the Company entered into a three year agreement with David Walz
in which Mr. Walz will receive a base salary of $200,000 per annum, receive an
annual guarantee bonus of $50,000, an $800 monthly car allowance, 210,000
options to purchase common stock (110,000 at $3.00 per share, vested June 1,
2006; 50,000 options at $3.00 per share, vesting January 1, 2007; 50,000 options
at $4.00 per share, vesting January 1, 2008) and other executive benefits
consistent with the Company's personnel policies. The agreement also includes an
incentive related to new business referrals. The agreement provides for certain
additional compensation in the event of a change in control or other termination
not for cause.
48
c.
In May 2006, the Company entered into a three year agreement with Paul Toomey,
in which Mr. Toomey will receive a base salary of $200,000 per annum, a sign on
bonus of $50,000, receive an annual guarantee bonus of $50,000, a $500 monthly
car allowance, 150,000 options to purchase common stock at $5.00 per share
(50,000 options will vest two years from date of agreement; 100,000 will vest
upon the Company having an EBITA of $14,000,000) and other executive benefits
consistent with the Company's personnel policies. The agreement provides for
certain additional compensation in the event of a change in control or other
termination not for cause.
d.
In August 2006, the Company entered into an agreement with its former CFO,
Donald T. Kelly, which terminated upon his resignation on February 13,
2007.
e.
On January 3, 2007, Andrew G. Barnett was appointed by the Board of Directors of
CFWH as Chief Executive Officer, effective January 19, 2007. Mr. Barnett,
pursuant to the terms and condition of his three year employment agreement, will
receive a base salary of $320,000 per annum, 1,000,000 ten year options to
purchase common stock of CFWH at $3.10 per share (such options will vest
incrementally based on time and performance criteria), incentive awards, and
standard benefits. Effective February 13, 2007, Mr. Barnett assumed the chief
financial officer title and role in addition to his role as the Company’s chief
executive officer. On July 21, 2008, the Company approved an Amended and
Restated Employment Agreement that provides for an increase to $375,000 in Mr.
Barnett’s base salary effective March 31, 2008, cash bonuses that relate to the
achievement of several performance goals, the re-pricing to $1.05 per share (the
fair market value as of July 21, 2008) of the aforementioned 1,000,000 stock
options; and the grant of an additional 750,000 stock options at $1.05 per share
(the fair market value as of July 21, 2008), the vesting of which depend upon
the Company’s achievement of annual EBITDA targets.
f.
The Company entered into a five year sales representative agreement with an
entity owned by a shareholders’ spouse, as of December 7, 2006. The sales
representative is to receive $10,000 per month plus a commission for serving as
one of the Company’s non-exclusive representatives for introducing the Company
to potential clients for the purpose of the Company establishing a business
relationship. The representative will also receive a commission payment, as
determined in the agreement, for each successful business relationship
introduced. In September 2007, this agreement was terminated and replaced with a
five-year non-compete agreement.
g.
Minimum payments under non-cancelable operating lease obligations for office
space at June 30, 2008 are as follows:
Year Ending June 30,
|
||||
2009
|
$
|
140,201
|
||
2010
|
108,084
|
|||
2011
|
105,133
|
|||
2012
|
98,978
|
|||
2013
|
35,100
|
|||
Thereafter
|
0
|
In
September 2008, a new lease agreement was entered into for our administrative
office in New Jersey. The remaining three years of the existed lease was bought
out for $100,000, which was charged to operations in 2008. The old lease was
replaced with a new one year lease requiring payment of $25,809. Rent expense
under all operating leases in fiscal year ended June 30, 2008 was $225,925 and
$234,440 in 2007.
h.
Effective August 8, 2007 the Company entered into an agreement with Med-Air
Consultants, Inc. (“Med-Air”) whereby the Company terminated several joint
venture and consulting agreements with Med-Air. The key elements of this
agreement includes the Company’s purchase of the 51% of the Raritan Bay LLC and
40% of Bayonne LLC owned by Med-Air, the elimination of Med-Air’s right to
participate in a certain number of wound care and hyperbaric treatment centers
the Company anticipates opening over several years, the elimination of fees
associated with treatments at three of the Company treatment centers, and
Med-Air’s covenant not to compete with or solicit employees of the Company. The
purchase price paid by the Company was 300 thousand shares of the Company’s
common stock, whose fair value at the date of issuance was $825 thousand, a
non-interest bearing 36 month note of $1,655,000 – net of 9% imputed interest of
$239 thousand, and its interest in Southampton LLC. The purchase price note also
includes all amounts due under capital leases for six chambers, approximately
$232,667 at June 30, 2008, and the option to acquire the chambers for $1
each.
i.
In fiscal 2008 the Company signed contracts to open three (3) additional wound
care and hyperbaric centers. The estimated cost for leasehold improvements in
preparation for the opening of the facilities that will be occur in fiscal 2009,
exclusive of leased chambers, is approximately $650,000.
j.
In September 2006, the Company entered into an independent contractor agreement
with AMT, LLC and Boyer Marketing Associates, Inc. (collectively the
“Representative”) to serve as the Company’s non-exclusive business development
representative for several geographic regions of the country through April 30,
2009. The Representative is paid a base compensation and an incentive predicated
on the opening of new wound care and hyperbaric treatment centers that the
Representative has identified and with whom the Company enters into contractual
relationships.
49
k.
Effective September 30, 2007, the Company negotiated the termination of Ms.
Greenberg’s five year employment with the Company, in which all of the Company’s
obligations under the employment agreement were concluded, as well as the
termination of a consulting agreement with Ms. Greenberg’s spouse, in which JD
Keith LLC, the spouse’s consulting firm, was to be paid $10 thousand per month
for five years as well as commissions and other compensation. Instead, the
Company entered into a five year non-compete and non-solicitation agreement with
the Greenbergs. Among other things, the Greenbergs agreed to a five year
non-compete with the Company; the Company will pay total compensation to the
Greenbergs of approximately $320 thousand for each of the first two years of the
five-year non-compete agreement after which point all payments from the Company
to the Greenbergs cease.
l.
In August 2007, the Company negotiated the termination of a consulting agreement
in with a firm in which the Company agreed to pay $45 thousand and options to
purchase 50 thousand shares of the Company’s stock at $3.00 per share. The fair
value of the options utilizing the Black-Scholes option pricing model of
$266,913 as well as the $45 thousand cash payment was charged to operations in
2007.
m.
Effective October 1, 2007 the Company negotiated the termination of several
joint venture and consulting agreements with Warantz Healthcare and related
parties in which the Company acquired, for $275 thousand and 30 thousand
restricted shares of common stock, the 40% share of the Modern Medical hospital
contract that it did not own; the termination of a joint venture for two
stand-alone healthcare facilities, for total cash consideration of $96 thousand;
and the elimination of its joint venture participation in a potential
hospital-based healthcare facility that the Company believes may compete with an
existing wound care and hyperbaric treatment center. Payment requirements for
these negotiated agreements range from six to 33 months.
n.
At June 30, 2008, four officers or directors of the Company are owed an
aggregate of $100,000 for interest on the Bridge Financing Note (see Note
10).
Note
16 - Subsequent Events
In July
2008, Andrew Barnett’s employment agreement was amended as discussed ( in Note 15 e.)
above.
In
September 2008 the Board of Directors approved
|
·
|
The issuance of options to
acquire 60,000 and 100,000 shares of the Company’s common stock to Messrs.
Basmajian and Meyrowitz, respectively, for services to rendered through
December 2008. The Board also approved the repricing of the options to
acquire 50,000 shares previously issued to these two
directors;
|
|
·
|
The
Amended and Restated Employment Agreement for David Walz, the Company’s
president. Among other changes, the exercise price of the options
previously granted to Mr. Walz were repriced to the fair market value as
of the September board meeting; Mr. Walz was granted an additional 375,000
options with an exercise price set as of the grant date, 225,000 of which
vest when and if certain performance criteria are met and the balance vest
upon the anniversary date of the confirmation of the terms of Mr. Walz’s
Amended Employment Agreement; and an increase in Mr. Walz’s base
compensation to $285,000 per annum. In addition, Mr. Walz will be eligible
for incentive compensation if certain performance targets are
met.
|
ITEM 8. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure:
We have
not had any disagreements with our accountants on accounting and financial
disclosures during our two recent fiscal years or any later interim
period.
Item
8A(T). Controls and Procedures:
(a)
Evaluation of Disclosure Controls and Procedures.
The
Company’s management carried out an evaluation, conducted by its chief executive
officer and chief financial officer, on the effectiveness of the design and
operation of the Company’s disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30,
2008, pursuant to Exchange Act Rule 13a-15. Such disclosure controls and
procedures are designed to ensure that information required to be disclosed by
the Company is accumulated and communicated to the appropriate management on a
basis that permits timely decisions regarding disclosure. Based upon that
evaluation, the Company’s chief executive officer and chief financial officer
concluded that the Company’s disclosure controls and procedures as of June 30,
2008 were not effective.
(b)
Changes in Internal Control over Financial Reporting.
During
the year ended June 30, 2008, there was no change in our internal control over
financial reporting (as such term is defined in Rule 13a-15(f) under the
Exchange Act) that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. The Company
has now established appropriate controls and procedures with respect to the use
of corporate funds and is in the process of installing a company-wide accounting
and financial reporting application suite.
50
Management’s
Report on Internal Control over Financial Reporting
Under
Section 404 of the Sarbanes-Oxley Act of 2002, our management is required to
assess the effectiveness of the Company’s internal control over financial
reporting as of the end of each fiscal year and report, based on that
assessment, whether the Company’s internal control over financial reporting is
effective.
Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting. The Company’s internal control over financial
reporting is designed to provide reasonable assurance as to the reliability of
the Company’s financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles.
Internal
control over financial reporting, no matter how well designed, has inherent
limitations. Therefore, internal control over financial reporting determined to
be effective can provide only reasonable assurance with respect to financial
statement preparation and may not prevent or detect all misstatements. Moreover,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
The
Company’s management has assessed the effectiveness of the Company’s internal
control over financial reporting as of June 30, 2008. In making this assessment,
the Company used the criteria established by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in “Internal Control-Integrated
Framework.” These criteria are in the areas of control environment, risk
assessment, control activities, information and communication, and monitoring.
The Company’s assessment included extensive documenting, evaluating and testing
the design and operating effectiveness of its internal control over financial
reporting.
Based on
the Company’s processes and assessment, as described above, management has
concluded that, as of June 30, 2008, the Company’s internal control over
financial reporting was not effective.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to the attestation by the Company’s
registered public accounting firm pursuant to temporary rules of the SEC that
permit the Company to provide only management’s report in this annual
report.
Item 8B. Other
Information:
None.
PART
III
ITEM 9. Directors, Executive Officers,
Promoters and Control Persons; Compliance with Section 16(a) of the Exchange
Act:
Our
directors, executive officers and control persons their respective ages as of
September 15, 2008 are as follows:
Name
|
Age
|
Position
|
||
Andrew G. Barnett
|
54
|
CEO, CFO, Secretary, Director
|
||
David Walz
|
47
|
President, Treasurer
|
||
John Capotorto, MD
|
48
|
Director
|
||
David H. Meyrowitz
|
62
|
Director
|
||
Paul Basmajian
|
50
|
Director
|
||
John DeNobile
|
35
|
Director
|
||
Dr. Phillip Forman
|
50
|
Director
|
||
Douglass Trussler
|
37
|
Director
|
||
Louis Bissette
|
39
|
Director
|
Business
Experience of Current Officers and Directors:
All of
our directors serve a one year term until their successors are elected and
qualified by our shareholders, or until their earlier death, retirement,
resignation or removal. The following is a brief description of the business
experience of our executive officers, director and significant
employees:
Andrew G.
Barnett has been our Chief Executive Officer since January 19, 2007, our
Chief Financial officer since February 13, 2007 and is also our Corporate
Secretary. From January 1, 2001 through January, 2007, Andrew G. Barnett was a
principal of Morris Anderson & Associates, Ltd., a financial and management
consulting firm. Mr. Barnett brings extensive expertise in the development and
implementation of strategic plans, and operational and financial strategies. Mr.
Barnett has served in advisory and senior management capacities as CEO, COO, and
CFO to both publicly and privately held companies. Mr. Barnett has acted in such
capacities in many companies including a $1 billion tobacco and HBA distributor,
a $100 million outdoor security lighting company, a $150 million periodicals
agency, a $90 million consumer products company, a $100 million financial
services company, a $100 million industrial parts distributor, and a $50 million
professional services firm. Mr. Barnett has served a broad range of clients with
operations throughout the United States as well as in Europe, the Middle East
and Asia. Industry experience includes retail, manufacturing, consumer products,
publishing, financial services, wholesale distribution and professional
services.
51
David J.
Walz was named President on September 27, 2006 and is also our Treasurer.
Mr. Walz joined the predecessor company in November 2003 as Executive Vice
President and Chief Operating Officer. Mr. Walz is an executive with over
twenty-one years of experience in hospital operations, financial management,
business development and strategic planning within complex healthcare
organizations. From November 2000 to September 2003, Mr. Walz was Executive
Director/Vice President of Operations at St. John’s Queens Hospital, a teaching
division of Saint Vincent’s Catholic Medical Centers in New York, where he was
responsible for the day-to-day operations. Prior to this role, Mr. Walz held
various positions in finance, including director of finance for a four-hospital
system. Mr. Walz has a Bachelors degree in Finance, Banking and Investments and
also holds a Master Degree in Healthcare Administration. Mr. Walz is a Fellow
(“FHFMA”) and a Certified Managed Care Professional (“CMCP”) in the Healthcare
Financial Management Association
Phillip Forman,
DPM , who serves as the Company’s Co-Chief Compliance Officer, was the
Medical Director of the New York Hyperbaric, the predecessor to American
Hyperbaric, Inc., since 2001 and, from July, 2005 through January 18, 2007,
served as the chief executive officer of American Hyperbaric, Inc. Prior to
joining New York Hyperbaric, he was a private practitioner. He received his
doctor degree of Podiatric Medicine from the Pennsylvania College of Podiatric
Medicine. His degree is a Diplomat, American Board of Podiatric Surgery. His
academic appointments include Podiatric Attending, Staten Island University
Hospital and Associate Director, Residency Program, Staten Island University
Hospital. Dr. Forman has extensive experience in wound care. He has participated
in numerous clinical trials involving diabetic foot infections, novel
antibiotics and new biopharmaceuticals for problem and non-healing wounds of the
lower extremities. He has participated in trials with Merck & Co., Inc.,
Pharmacia, OrthoBiotech, Novartis/Organogenesis, Johnson & Johnson,
Monsanto, Ortho-McNiel, Alpha Therapeutics and Ortec International. In addition
to his clinical trial participation, Dr. Forman has several research projects
underway involving Osteomyelitis and Vascular Disease in patients with
Diabetes.
John V.
Capotorto, M.D ., who serves as the Company’s Co-Chief Compliance
Officer, was the Chief Medical Director of New York Hyperbaric, the predecessor
to American Hyperbaric, Inc., since 2001 and from July, 2005 through January 18
was the Vice President of American Hyperbaric, Inc. Prior to joining New York
Hyperbaric Dr. Capotorto was an attending physician in Adult and Pediatric
Endocrinology and was a clinical assistant professor at SUNY HSCB since 1996. He
holds board certification in Internal Medicine, Pediatrics, Adult and Pediatric
Endocrinology and Metabolism, and is accredited in Hyperbaric Medicine.
Additionally, he is the Medical Director of the Diabetes Treatment Center at
Staten Island University Hospital and has extensive experience in both wound
care and hyperbaric medicine. Dr. Capotorto graduated from Vassar College in
1981 and studied Medicine at the University of Bologna. He returned to New York
where he completed a combined medical and pediatric internship and residency.
Dr. Capotorto was a Research Fellow in Islet Cell Transplantation at the Joslin
Diabetes Center and a clinical fellow in Adult and Pediatric Endocrinology at
both the Joslin Diabetes Center and Children’s Hospital, part of the Harvard
Medical School system. In addition to his medical training, Dr. Capotorto has
completed an Executive MBA program at the Baruch College. He is a member of the
Beta Gamma Sigma Honor Society and has used his combined medical and business
knowledge towards developing and opening comprehensive Hyperbaric and Wound Care
Centers.
David H.
Meyrowitz was appointed to the Board of Directors on June 19, 2006. Mr.
Meyrowitz received his Jurist Doctor from Brooklyn Law School in 1970 and was
admitted to the New York Bar in 1971. He received his Bachelor of Science
degree, majoring in accounting, from the University of Bridgeport in 1967. Mr.
Meyrowitz is a partner in the law firm of Kamerman Meyrowitz & Soniker, P.C.
located in New York City. Mr. Meyrowitz was appointed as Advisor to Registrants
for the United States Selective Service System and served as such through the
end of the Viet Nam War. Mr. Meyrowitz was also appointed by then Governor Carey
to be a member of the counsel of the State University Agricultural and Technical
College at Farmingdale where he served as such for approximately 10 years. Mr.
Meyrowitz also acts as special collection counsel to the New York City Housing
authority. Mr. Meyrowitz is a member of the New York County Lawyers Association
and the Bar Association of Nassau County. He is a member of the United States
Customs Court.
Paul
Basmajian was appointed to the board of directors on July 20, 2006. Mr.
Basmajian has 24 years servicing global asset management and plan sponsor
communities. He is a Senior Managing Partner and member of the Board of
Directors of BNY ESI & Co., subsequently acquired by the Bank of New York in
1998. Currently, Mr. Basmajian serves as the director of trading operations for
BNY Brokerage and part of senior management team for the Bank of New
York.
John
DeNobile founded American Hyperbaric in May 2005. From April 2002 through
May, 2005, Mr. DeNobile invested in real estate development projects, from
pre-construction through rental phase, as well as acting as a consultant to
emerging companies. From 1995 through April 2002, Mr. DeNobile was a licensed
stock broker at Winchester Investment Securities, Inc. Mr. DeNobile is currently
president of Axcess, Inc., a company dedicated to providing state of the art
imaging, diagnostic and interventional services and education to meet the
vascular access needs of the hemodialysis community.
Douglas B.
Trussler co-founded Bison Capital in 2001 and is a partner and serves as
its president. Previously, he was at Windward Capital Partners LP, and at
Credit Suisse First Boston. Mr. Trussler is currently a member of the Board of
Directors of GTS Holdings, Inc., Performance Team Freight Systems, Inc., Royal
Wolf Australia Ltd., Royal Wolf Trading New Zealand Limited, Precision
Assessment Technology Corporation, and Big Rock Sports, LLC. He was formerly a
member of the Board of Directors of Twin Med, LLC and Helinet Aviation, Inc. Mr.
Trussler earned a BA with honors in Business Administration from the University
of Western Ontario in Canada.
52
Louis
Bissette is a partner of Bison Capital, having joined the firm in 2005 to
head its east coast operations based in Charlotte, NC. Previously, he was
a General Partner at Brentwood Associates, a leading Los Angeles-based middle
market private equity firm. Prior to Brentwood, he worked in the corporate
finance department of Morgan Stanley & Co., where his primary coverage
responsibilities included the firm's private equity clients. Mr. Bissette
is a member of the Board of Directors of Big Rock Sports, LLC. Mr. Bissette
graduated with a degree in Economics from the University of North Carolina at
Chapel Hill, where he was a John Motley Morehead Scholar.
Directors
are elected at the Company’s annual meeting of stockholders and serve for one
year until the next annual Stockholders’ meeting or until their successors are
elected and qualified. Officers are elected by the Board of Directors and their
terms of office are, except to the extent governed by employment contract, at
the discretion of the Board. The Company reimburses all directors for their
expenses in connection with their activities as directors of the Company.
Directors of the Company who are also employees of the Company will not receive
additional compensation for their services as directors.
Family
Relationships:
There are
no family relationships between any two or more of our former or current
directors or executive officers. There is no arrangement or understanding
between any of our former or current directors or executive officers and any
other person pursuant to which any director or officer was or is to be selected
as a director or officer, and there is no arrangement, plan or understanding as
to whether non-management shareholders will exercise their voting rights to
continue to elect the current board of directors. There are also no
arrangements, agreements or understandings to our knowledge between
non-management shareholders that may directly or indirectly participate in or
influence the management of our affairs.
Board
Committees and Independence:
All of
the directors serve until the next annual meeting of common shareholders and
until their successors are elected and qualified by our common shareholders, or
until their earlier death, retirement, resignation or removal. Our bylaws set
the authorized number of directors at not less than one or more than nine, with
the actual number fixed by our board of directors. Our bylaws authorized the
Board of Directors to designate from among its members one or more committees
and alternate members thereof, as they deem desirable, each consisting of one or
more of the directors, with such powers and authority (to the extent permitted
by law and these Bylaws) as may be provided in such resolution.
The
entire board of directors will perform the function of the Audit Committee until
we appoint directors to serve on the Audit Committee. The principal functions of
the Audit Committee are to recommend the annual appointment of the Company’s
auditors concerning the scope of the audit and the results of their examination,
to review and approve any material accounting policy changes affecting the
Company’s operating results and to review the Company’s internal control
procedures. The principal functions of the Compensation Committee are to review
and recommend compensation and benefits for the executives of the
Company.
The
entire board performs the functions of the Compensation Committee until we
appoint directors to serve on the Compensation Committee.
Compliance
with Section 16(a) of the Exchange Act
Section
16(a) of the Exchange Act requires our directors, executive officers and persons
who own more than 10% of a required class of our equity securities, to file with
the SEC initial reports of ownership and reports of changes in ownership of
common stock and other equity securities of our company. Officers, directors and
greater than 10% shareholders are required by SEC regulation to furnish us with
copies of all Section 16(a) forms they file.
To our
knowledge, based upon a review of the copies of such reports furnished to us and
based upon written representations that no other reports were required, all
Section 16(a) filing requirements applicable to our officers, directors and
greater than 10% beneficial owners were complied with for the fiscal year ended
June 30, 2008.
Code
of Ethics
A code of
ethics relates to written standards that are reasonably designed to deter
wrongdoing and to promote:
1)
Honest and ethical conduct, including the ethical handling of actual or apparent
conflicts of interest between personal and professional
relationships;
2)
Full, fair, accurate, timely and understandable disclosure in reports and
documents that are filed with, or submitted to the Securities and Exchange
Commission and in other public communications made by the company;
3)
Compliance with applicable government laws, rules and regulations;
4)
The prompt internal reporting of violations of the code to an appropriate person
or persons identified in the code; and
53
5)
Accountability for adherence to the code.
The
company adopted a formal code of ethics statement that is designed to deter
wrong doing and to promote ethical conduct and full, fair, accurate, timely and
understandable reports that the company files or submits to the SEC and others.
A copy of the code of ethics is filed as an exhibit to the Annual Report filed
with the SEC on September 24, 2004, and may be obtained from the Company upon
request.
ITEM 10. Executive
Compensation:
FISCAL
2008 SUMMARY COMPENSATION TABLE
The
following table summarizes the compensation of the Named Executive Officers for
the fiscal years ended June 30, 2008 and 2007. The Named Executive Officers
are the Company’s Chief Executive Officer and Chief Financial Officer and the
Company’s President. These are the only two executive officers that served
during the year ended June 30, 2008.
Name and Principal Position
|
Fiscal
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)(1)
|
Non-Equity
Incentive Plan
Compensation
($)
|
All Other
Compensation
($)
|
Total
($)
|
||||||||||||||||||||||
Andrew
G. Barnett (2)
|
2008
|
335,880 | — | — | 975,185 | 125,000 | (3) | 22,075 | (4) | 1,458,140 | ||||||||||||||||||||
Chief
Executive Officer and
|
2007
|
136,615 | — | — | 1,338,045 | — | 6,600 | 1,481,260 | ||||||||||||||||||||||
Chief
Financial Officer
|
|
|||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||
David
J. Walz (5)
|
2008
|
215,385 | 42,308 | — | 204,172 | — | 16,306 | (4) | 478,171 | |||||||||||||||||||||
President
|
2007
|
218,469 | 50,000 | — | 204,172 | — | 9,600 | 482,241 |
(1)
|
The values for option awards in
this column represent the cost recognized for financial statement
reporting purposes for fiscal year 2008 and 2007, respectively, in
accordance with FAS 123R. However, pursuant to SEC rules these values
are not reduced by an estimate for the probability of forfeiture. The
assumptions used to value these awards can be found in Note 3 to the
financial statements in this Form
10-K.
|
|
|
(2)
|
Mr. Barnett entered into an
employment agreement on January 3, 2007, with an effective date of
January 19, 2007, to serve as Chief Executive Officer.
Mr. Barnett assumed the role of Chief Financial Officer on
February 13, 2007.
|
|
|
(3)
|
Pursuant to the terms of his
employment agreement, Mr. Barnett earned $75,000 for the successful
implementation of a new accounting system during fiscal 2008 and $50,000
for the successful closing of a transaction with Bison Capital Equity
Partners II-B, L.P. during fiscal
2008.
|
(4)
|
We reimbursed automobile expenses
for Messrs. Barnett and Walz in the amounts of $14,400 and $8,631,
respectively, and health benefit expenses for both named executive
officers in the amount of
$7,675.
|
|
|
(5)
|
Mr. Walz was appointed as
our president on September 27,
2006.
|
Employment
Agreements with the Named Executive Officers
Employment
Agreement for Andrew G. Barnett
On July
21, 2008, the Company entered into an employment agreement (the amended and
restated employment agreement) with Andrew G. Barnett, effective as of March 31,
2008, which amended and restated the employment agreement dated January 3, 2007
(the 2007 employment agreement). Pursuant to the amended and restated employment
agreement Mr. Barnett agreed to serve as our Chief Executive Officer and
Chief Financial Officer. The initial term of the amended and restated employment
agreement commenced on March 31, 2008 and ends on June 30, 2011, and will
automatically be renewed for an additional 12 months unless Mr. Barnett or the
Company provides written notice of the intent not to renew on or before June 30,
2010. After each 12 month extension, the term will continue to renew for
successive 12 month periods unless Mr. Barnett or the Company provides written
notice of the intent not to renew no less than 180 days prior to the end of the
renewal term.
Under the
terms of the agreement, Mr. Barnett will receive an annual base salary of
$375,000 beginning March 31, 2008, which salary will be reviewed annually by the
board of directors. In addition, Mr. Barnett has earned (1) a one-time
cash bonus of $75,000 for successfully implementing a new accounting system (the
“accounting bonus”) that will be paid to him upon the filing of certain reports
with the Securities and Exchange Commission; and (2) a one-time cash bonus
of $50,000 for closing the transaction with Bison Capital Equity Partners II-B,
L.P. (the “closing bonus”) that will be paid to him on or before September 15,
2008. He is eligible to earn annual cash performance bonuses based on the
Company’s achievement of certain adjusted EBITDA targets for fiscal years 2008
through 2013 and thereafter. The amount of the annual cash performance bonus, if
earned, will be set by the Board in its sole discretion, but will be no less
than $50,000 and no greater than 50% of his then-existing base salary.
Mr. Barnett is also eligible for all employee benefits made available
generally to other senior executive officers, including participation in medical
and life insurance programs and profit sharing plans, and is entitled to
reimbursement for automobile expenses, provided such expenses do not exceed
$15,000 per year and $3,000 per month. We have agreed to establish a long-term
incentive plan no later than September 30, 2008, in which Mr. Barnett will be
entitled to participate. If Mr. Barnett is subject to an excise tax under
the Internal Revenue Code of 1986, as amended, he will be entitled to a gross-up
payment.
54
On
January 3, 2007 Mr. Barnett was granted the option to purchase 1,000,000
shares of our common stock pursuant to the Center for Wound Healing, Inc. 2006
Stock Option Plan under the 2007 Employment Agreement. Six hundred thousand of
these options are time vesting options and 400,000 are performance vesting
options. With respect to the 600,000 shares of time vesting options, 400,000 are
fully vested, 100,000 shares will vest on the second anniversary of the date of
grant and 100,000 shares will vest on the third anniversary of the date of
grant, provided for each vestment that Mr. Barnett has remained
continuously employed by us during those terms. With respect to the 400,000
performance vesting options, 100,000 options are fully vested and
Mr. Barnett will vest in his option to purchase the remaining 300,000
options (100,000 options in each of fiscal years 2009, 2010 and 2011) if we meet
certain financial targets during fiscal years 2009, 2010 and 2011 as set forth
in his agreement. These options will expire ten years from the date of grant.
Effective July 21, 2008, the exercise price for these options was reduced from
$3.10 per share to $1.05 per share.
Under the
amended and restated employment agreement, on July 21, 2008 Mr. Barnett is
granted an additional 750,000 performance vesting options at an exercise price
of $1.05 per share. These performance vesting options will vest 33 1/3% per year
if we meet certain quarterly Adjusted EBITDA targets during fiscal years 2009,
2010 and 2011. Mr. Barnett’s options will vest upon a change of control as
described below. Mr. Barnett’s option to purchase such shares of our common
stock will remain outstanding for 10 years following the date of its
grant.
The
agreement provides that we may terminate Mr. Barnett for cause at any time
upon written notice. For purposes of the agreement, cause means any of the
following: (1) Mr. Barnett’s material breach of the agreement, breach
of fiduciary duty having a material adverse impact on our Company, material
breach of our employment policies applicable to him, or refusal to follow the
lawful directives of our board of directors that is not corrected (to the extent
correctable) within 10 days after delivery of written notice to Mr. Barnett
with respect to such breach; (2) Mr. Barnett’s breach of a fiduciary
duty to us, material breach of our employment policies applicable to him,
refusal to follow the lawful directives of our board of directors, or repeated
breach of the same provision of the agreement, each on more than two occasions,
regardless of whether such breach has been or may be corrected;
(3) Mr. Barnett’s indictment for or conviction of a felony or any
crime involving fraud; (4) Mr. Barnett’s misappropriation of our funds
or material property; or (5) Mr. Barnett’s material dishonesty,
disloyalty or willful misconduct. In addition, we may terminate
Mr. Barnett’s employment without cause upon 30 days’ prior written notice.
A failure by us to renew the amended and restated employment agreement is a
termination without cause.
Pursuant
to the agreement, Mr. Barnett may terminate his employment for good reason
at any time upon written notice to us. Mr. Barnett may also terminate his
employment without good reason upon 45 days’ prior written notice. For purposes
of the agreement, good reason means the occurrence of: (1) a material
change in Mr. Barnett’s duties, reporting responsibilities, titles or
elected or appointed offices as in effect immediately prior to the effective
date of such change, provided, however that Mr. Barnett’s ceasing to be our
chief financial officer does not constitute good reason; (2) any reduction
or failure to pay when due any compensation to which Mr. Barnett is
entitled; (3) our breach of any material provisions of the amended and
restated agreement; (4) the relocation of our corporate offices more than
100 miles away from Mr. Barnett’s current residence; (5) us hiring,
retaining or promoting any employee or consultant whose base salary is or
becomes greater than Mr. Barnett’s base salary; or (6) we fail to elect Mr.
Barnett a member of the board of directors.
In
addition, Mr. Barnett may terminate his employment within 60 days of a
change of control, defined to occur at such time as (1) any person is or
becomes the beneficial owner of securities representing 45% or more of the
combined voting power for election of directors of our then outstanding
securities, subject to certain exceptions; (2) during any period of two
years or less, individuals who at the beginning of such period constitute the
board of directors cease to constitute at least a majority of the board of
directors; (3) the consummation of a sale or disposition of 50% or more of
our assets or business; or (4) the consummation of any reorganization,
merger, consolidation or share exchange, subject to certain
exceptions.
If we
terminate Mr. Barnett’s employment without cause or if Mr. Barnett
terminates his employment for good reason, then Mr. Barnett is entitled to:
(1) his then-existing base salary through the end of the term of the
amended and restated agreement, or for two years, whichever is longer;
(2) the full amount of the Accounting Bonus and the Closing Bonus, to the
extent that they have not been paid as of the date of termination; (3) a
pro-rata amount of any annual bonus for which he is eligible and (4) the
continuation of his health or medical benefit plans for a period of two years.
However, if his employment is terminated as a result of our failure to renew the
initial term of his amended and restated employment agreement, then he is
generally entitled to receive the continuation of his base salary and his health
or medical benefit plans for a period of one year. In addition, any unvested
time vesting stock options to which Mr. Barnett may have been entitled will
immediately vest. The performance vesting options will vest if the adjusted
EBITDA for the quarter meets the adjusted EBITDA targets. If Mr. Barnett
terminates his employment pursuant to a change of control, Mr. Barnett will
be entitled to receive the payments described above, as well as a cash payment
of $800,000 if the average price per-share sale price resulting in the change of
control is less than $7.50.
Mr. Barnett
may not disclose any confidential information about us, including our financial
condition, our products and services, and information concerning the identity of
individuals affiliated with us, during the term of his employment and for a
period of five years thereafter.
55
Mr. Barnett
agrees not to manage, operate, participate in, be employed by or perform
consulting services for our competitors listed in the amended and restated
employment agreement during the term of his employment, and during any period
which he is receiving the continuation payments from us as described above.
During this period, Mr. Barnett agrees to abstain from soliciting any
individual, partnership, corporation, association, or entity who, within the 36
month period prior to Mr. Barnett’s termination of employment, contracted
with us or was solicited by us for business, and to abstain from soliciting any
of our officers, managers or salespersons.
To the
fullest extent permitted by law, we agree to indemnify Mr. Barnett pursuant
to our standard indemnification agreement and by any directors’ and officers’
liability insurance we maintain. We also agree to maintain directors’ and
officers’ liability insurance in appropriate amounts for the benefit of
Mr. Barnett throughout the term of his employment with us, and for a period
of three years thereafter.
Employment
Agreement for David Walz
In April
2006, we entered into an employment agreement with David Walz, pursuant to which
Mr. Walz agreed to serve as our Executive Vice President. The term of the
agreement is three years, commencing April 1, 2006 and ending
March 31, 2009. Under the terms of the agreement, Mr. Walz will
receive a base salary of $200,000 per year, an annual guarantee bonus of
$50,000, and profit sharing opportunities in each of the limited liability
companies and hospitals listed in the agreement. In addition, Mr. Walz will
receive 210,000 options to purchase common stock, which will vest as follows:
110,000 at $3.00 per share, vested June 1, 2006; 50,000 options at $3.00
per share, vested January 1, 2007; and 50,000 options at $4.00 per share,
vesting January 1, 2008. Mr. Walz will also receive other executive
benefits consistent with our personnel policies, as well as an $800 monthly
automobile allowance.
Pursuant
to the terms of the agreement, Mr. Walz may terminate his employment upon 60
days’ prior written notice to us and upon 30 days’ written notice if the
termination is for good reason. We may terminate his employment upon written
notice without cause, or immediately upon written notice for cause. For purposes
of the agreements, cause means (1) conviction of any felony; (2) the
commission of an act of fraud, theft, dishonesty or breach of trust upon our
company; (3) the intentional and wrongful disclosure to others, outside our
company, of any secret or confidential information; or (4) willful refusal
or gross neglect to perform the duties assigned to them, or to otherwise comply
with the material provisions of the agreements. Good reason means (1) our
material breach of the agreement that is not cured within 20 days after written
notice to us; or (2) any failure by a successor of us to assume the
obligations of the agreements.
Upon
termination of employment for cause, or if Mr. Walz elects to terminate his
employment without good reason, then he shall receive his accrued but unpaid
base salary through the effective date of termination. If he is terminated
without cause, or if either elects to terminate his employment for good reason,
then he is entitled to his accrued but unpaid base salary through the effective
date of termination, as well as an amount equal to 50% or his base
salary.
In the
event of a termination arising from a change in control, Mr. Walz is
entitled to payment of accrued but unpaid base salary through the effective date
of termination, payment of an amount equal to two times the then-base
compensation, any vested amounts or benefits owed to him at the effective date
of termination and the vesting of all options that would have become vested
during the term of employment but for the termination of the officer. In the
event of a change of control, Mr. Walz can elect to voluntarily terminate his
employment and be entitled to this payment. For purposes of this agreement,
change of control means (1) the sale of all or substantially all of our
assets and business; or (2) any merger or consolidation involving our
company, or sale or exchange of our capital stock, or similar transaction if,
immediately following such transaction, 50% or more of the voting rights of the
security holders of the surviving entity are held by a single holder who was not
immediately prior to such transaction a holder of 50% or more of our voting
securities.
Mr. Walz
is bound by restrictive covenants pursuant to which he may not, during the term
of the agreements or for a period of 24 months thereafter, be engaged in any
capacity with any business that competes with our Company. In addition, he may
not solicit any business from any of our customers or prospective customers, or
solicit any of our employees, agents or contractors to terminate their
relationship with us. He is also bound by nondisclosure of confidential
information provisions, whereby he is prohibited from disclosing any of our
confidential or proprietary information for the term of his employment or at any
time following the termination of his employment.
Mr. Walz
is entitled to indemnification from us to the fullest amount provided for in our
certificate of incorporation and by-laws. Their right to indemnification
survives the termination of the employment agreements.
OUTSTANDING
EQUITY AWARDS AT 2008 FISCAL YEAR END
The
following table shows the number of shares covered by exercisable and
unexercisable options held by the Company’s Named Executive Officers on
June 30, 2008. All options were granted under the Center for Wound Healing
2006 Stock Option Plan, formerly called the Kevcorp Services Inc. 2006 Stock
Option Plan.
There were no stock awards outstanding on June 30, 2008.
56
|
Option
Awards
|
||||||||||||||||||
Name
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
Equity
Incentive
Plan Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
Option
Exercise
Price
($)
|
Option
Grant
Date
|
Option
Expiration
Date
|
|||||||||||||
Andrew
G. Barnett
|
400,000 | 200,000 | (1) |
|
3.10 | (2) |
January
3, 2007
|
January
3,
2017
|
|||||||||||
100,000 | 300,000 | (3) | 3.10 | (2) |
January
3, 2007
|
|
January
3, 2017
|
||||||||||||
David
J. Walz
|
160,000 | 3.00 |
April
1, 2006
|
April
1,
2016
|
|||||||||||||||
50,000 | 4.00 |
April
1, 2006
|
April
1,
2016
|
(1)
|
Of these options, 100,000 will
vest on January 3, 2009 and 100,000 will vest on January 3,
2010.
|
(2)
|
In accordance with the terms of
the 2007 employment agreement, effective July 21, 2008 the exercise price
for Mr. Barnett’s options was reduced from $3.10 per share to $1.05 per
share.
|
(3)
|
100,000 of these options will
vest if the Company meets certain financial targets during fiscal 2009,
100,000 of these options will vest if the Company meets certain financial
targets during fiscal 2010 and 100,000 of these options will vest if the
Company meets certain financial targets during fiscal
2011.
|
|
|
FISCAL
2008 DIRECTOR COMPENSATION
The
following table sets forth the compensation paid to our non-executive officer
directors in fiscal year 2008. Mr. Barnett’s compensation is set forth in the
Fiscal 2008 Summary Compensation Table.
Name
|
Fees
Earned
or
Paid
in
Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)(1)
|
Non-Equity
Incentive
Plan
Compensation
($)
|
All
Other
Compensation
($)
|
Total
($)
|
|||||||||
Paul
Basmajian
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||
Louis
Bissette
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||
John
Capotorto, M.D.
|
—
|
—
|
—
|
—
|
325,000
|
(2)
|
325,000
|
||||||||
John
DeNobile
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||
Phillip
Forman, M.D.
|
—
|
—
|
—
|
—
|
325,000
|
(2)
|
325,000
|
||||||||
David
H. Meyrowitz
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||
Douglas
B. Trussler
|
—
|
—
|
—
|
—
|
—
|
—
|
(1)
|
As of June 30, 2008, each of
Messrs. Basmajian and Meyrowitz held 50,000 vested options that expire on
July 18, 2012. These are the only outstanding equity awards held by
the directors listed in the table. In September 2008, the Board of
Directors approved the re-pricing of the vested options to the current
market value at the re-price date. The Board also issued an additional
60,000 options to Mr. Basmajian and 100,000 options to Mr.
Meyrowitz.
|
(2)
|
Drs. Capotorto and Forman
received $300,000 in salary and $25,000 for a car allowance for their
service as Medical Director, a non-executive officer position. The
employment agreements are described
below.
|
57
Employment
Agreements for John Capotorto and Phillip Forman
We have
employment agreements with two of our directors that continue to serve as
non-executive officers of the Company.
On
December 1, 2005, our predecessor, American Hyperbaric, Inc., entered into
short-term and long-term employment agreements with Dr. Phillip Forman and Dr.
John Capotorto pursuant to which Dr. Forman agreed to serve as our Chief
Executive Officer and Dr. Capotorto agreed to serve as our Chairman and Medical
Director. The term of the short-term agreements was four months, commencing on
December 1, 2005
and
ending on April 1, 2006. The term of the long-term agreements is five years,
commencing on April 1, 2006 and ending on April 1, 2011. Both the short-term and
long-term agreements are subject to earlier termination. As of January 3, 2007,
Dr. Forman resigned as our Chief Executive Officer, although he remains a member
of our board of directors.
Under the
terms of the agreements, Doctors Forman and Capotorto received a base salary at
the rate of $150,000 per year during the term of the short-term agreements, and
will receive $300,000 per year during the term of the long-term agreements. In
addition, Doctors Forman and Capotorto are eligible for all employee benefits
made available generally to other senior executive officers, including
participation in medical and life insurance programs and profit sharing plans,
and may lease or purchase an automobile at our expense, provided such purchase
or lease does not exceed $25,000 per year.
The
agreements provide that we may terminate the employment of Doctors Forman and
Capotorto for cause upon 15 days’ written notice. For the purpose of the
agreements, cause means (1) conviction for fraud or a felony; (2) embezzlement;
(3) willful and continued material failure to perform the duties and services
required under the employment agreements for a continued period of 45 days
following written notice thereof from us; or (4) the employee voluntarily
leaving our employ other than for good reason. The employment agreements also
provide that we may terminate the employment of Dr. Forman or Dr. Capotorto
without cause, upon 30 days’ prior written notice to that employee. In addition,
Dr. Forman or Dr. Capotorto may terminate his own employment, upon prior written
notice to us, for good reason. For the purpose of the agreements, good reason
means (1) a material adverse change in the employee’s title,
responsibilities or assignment of duties inconsistent with, or adverse to, his
current duties; (2) any failure by us to comply with the terms of the
employment agreements; (3) any requirement by us that the employee’s office
be located more than 15 miles from his or her current office; (4) any
requirement that the employee travel in connection with his duties to any
location located more than 15 miles from his or her current office
location; or (5) 30 days following a material breach by us of our
obligations under the employment agreements that is not cured within 15 days
following receipt of written notice from the employee specifying such
breach.
Upon a
change of control of our Company, if (1) an employee is terminated by us at
any time subsequent to a change of control, other than for cause; or (2) an
employee voluntarily terminates such employment within one 180 subsequent to a
change of control, then, in addition to any other amounts we may be obligated to
pay that employee, we agree to pay to the employee within 10 days after such
termination a lump sum payment in cash in an amount equal to 2.99 times the
employee’s base salary. For purposes of the employment agreements, a change of
control occurs if (1) any person or group of persons becomes the beneficial
owner of more than 35% of our outstanding voting securities; or (2) when
individuals who are members of the board of directors at any one time shall,
within a period of 13 months thereafter, cease to constitute a majority of
the board of directors except where such change is approved by a majority of
such members of the board of directors who both are then serving as such and
were serving as such at the beginning of the period.
Each of
Doctors Forman and Capotorto is bound by a nondisclosure of confidential
information provision included in the employment agreements, pursuant to which
they may not disclose any confidential information about us, including our
financial condition, our products and services, and information concerning the
identity of individuals affiliated with us, during the term of his employment
and for a period of five years thereafter. In addition, Doctors Forman and
Capotorto agree to abide by the provisions of the covenants not to compete found
in the employment agreements, pursuant to which they agree, during the period of
employment with us and for a period of three years thereafter, not to engage as,
among other things, an officer, director, employee, shareholder (other than
ownership of less than 5% of the issued and outstanding stock of a public
company) or consultant for any entity which is engaged in providing services in
competition with our business.
Under the
terms of the employment agreements, we agree to indemnify Dr. Forman, Dr.
Capotorto to the maximum extent permitted by law against all claims, judgments,
fines, penalties, liabilities, losses, costs and expenses (including reasonable
attorneys’ fees) arising from their position as executive officers, or from acts
or omissions made in the course of performing their duties for us. However, such
indemnity does not apply to acts or omissions which constitute willful
misconduct, gross negligence, or which resulted in an improper personal benefit
for the employee. In addition, we agree to maintain directors’ and officers’
liability insurance on behalf of the employees.
ITEM
11. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters:
The
following table sets forth certain information with respect to the beneficial
ownership of The Center for Wound Healing’s Common Stock as of September 1, 2008
by each director and named executive officer of the Company, all executive
officers and directors as a group, and each person known to the Company to own
beneficially more than 5% of the Common Stock.
58
NAME AND ADDRESS OF BENEFICIAL OWNER(1)
|
AMOUNT OF
OWNERSHIP(2)(3)
|
PERCENTAGE
OF CLASS(4)
|
||||||
Andrew G. Barnett
|
500,000 | 2.1 | % | |||||
Paul Basmajian
|
166,667 | * | ||||||
Louis Bissette
|
– | * | ||||||
John Capotorto, M.D.
|
4,409,292 | 18.9 | % | |||||
John DeNobile
|
1,976,297 | 8.5 | % | |||||
Phillip Forman, M.D.
|
3,909,292 | 16.7 | % | |||||
David H. Meyrowitz
|
70,000 | * | ||||||
Douglas B. Trussler
|
– | * | ||||||
David Walz
|
210,000 | * | ||||||
Directors and executive officers
as a group (9 persons)
|
11,574,660 | 49.5 | % | |||||
|
||||||||
The Elise Trust
|
4,021,294 | 17.2 | % |
* Less
than 1%
(1)
Unless otherwise indicated, the address of each beneficial owner is c/o The
Center for Wound Healing, Inc., 155 White Plains Road, Suite 200, Tarrytown, NY
10591.
(2) Under
the rules of the Securities and Exchange Commission, a person is deemed to be
the beneficial owner of a security if that person, directly or indirectly has or
shares the powers to direct the voting of the security or the power to dispose
or direct the disposition of the security. Accordingly, more than one person may
be deemed to be a beneficial owner of the same securities. A person is also
deemed to be a beneficial owner of any securities with respect to which that
person has the right to acquire beneficial ownership within 60 days of September
1, 2008. Unless otherwise indicated by footnote, the named individuals have sole
voting and investment power with respect to the shares of stock beneficially
owned.
(3)
Includes shares which may be acquired through stock options exercisable through
October 30, 2008 in the following amounts: Barnett - 500,000; Basmajian -
50,000; Meyrowitz - 50,000; and Walz - 210,000.
(4) Based
on 23,373,281 shares of Common Stock issued and outstanding as of September 1,
2008.
ITEM 12. Certain Relationships and Related
Transactions:
In
December 2007 and January 2008 the Company raised a total of $1.6 million from
individual investors in the form of a short term unsecured note, (the “Bridge
Financing Note”) the terms of which provided the lenders with interest paid in
cash or in lieu of cash, warrants with an exercise price of $2. These funds were
used to fund the $1.5 million payment due the Bondholders on or before January
31, 2008 (of the $1.5 million, $1.2 million was used to retire principal and
$300 thousand was paid for a consent fee). Prior to the payment in full of the
Bondholders on March 31, 2008, the $1.6 million was held by an escrow agent and
shown as Restricted Cash on the Company’s balance sheet. John Capotorto, the
Company’s Co-Chief Compliance Officer and chairman of the board of directors;
David Meyrowitz and Paul Basmajian, directors of the Company; and Andrew Barnett
and Dave Walz, respectively, the chief executive officer and president of the
Company collectively loaned the Company $600 thousand of the total $1.6 million
raised. On January 25, 2008 the Company used $1.5 million of the Bridge
Financing Note to pay the Bondholders and $100 thousand for working capital
purposes. On March 31, 2008 the entire $1.6 million Bridge Financing Note was
paid in full from the proceeds of the Bison financing.
59
ITEM 13. Exhibits:
The
following exhibits are included as part of this Annual Report.
Exhibit No.
|
Description of Exhibit
|
|
2.1
|
Agreement
and Plan of Reorganization dated October 28, 2005 between Kevcorp
Services, Inc. and American Hyperbaric, Inc. (incorporated by reference to
Exhibit 10 to Form 10-QSB/A filed on November 1, 2005)
|
|
2.2
|
First
Amended and Restated Contribution Agreement dated as of June 16, 2006
between the Company, Joel Macher, Alan Richer, Braintree Hyperbaric, LLC
and Far Rockaway Hyperbaric LLC (incorporated by reference to Exhibit 2.1
to Form 8-K filed on June 22, 2006)
|
|
3.1
|
Amended
and Restated Articles of Incorporation (incorporated by reference to
Exhibit 3(i) to Form 10-KSB filed on April 10, 2008)
|
|
3.2
|
Amended
and Restated By-Laws (incorporated by reference to Exhibit 3.1 to Form 8-
filed on July 25, 2008)
|
|
4.1†
|
Securities
Purchase Agreement dated as of April 7, 2006 among the Company and the
purchasers named therein with respect to $5.5 million principal amount of
Debentures and Warrants to purchase common stock of the Company, including
the form of Common Stock Purchase Warrant
|
|
4.2†
|
8%
Secured Convertible Debenture due April 7, 2007
|
|
4.3
|
Securities
Purchase Agreement dated as of March 31, 2008 among the Company and Bison
Capital Equity Partners II-A, L.P. and Bison Capital Equity Partners II-B,
L.P. (“Bison”) (incorporated by reference to Exhibit 4.1 to Form 8-K filed
on April 7, 2008)
|
|
4.4
|
15%
Senior Secured Subordinated Promissory Note in the principal amount of $20
million due March 31, 2013 (incorporated by reference to Exhibit 4.2 to
the Current Report on Form 8-K filed on April 7, 2008)
|
|
4.5
|
Common
Stock Warrant Agreement dated as of March 31, 2008 among the Company and
Bison, and the related Series W-1 and W-2 Warrants (incorporated by
reference to Exhibits 4.3, 4.4 and 4.5 to the Current Report on Form 8-K
filed on April 7, 2008)
|
|
4.6
|
Registration
Rights Agreement dated as of March 31, 2008 among the Company and Bison
(incorporated by reference to Exhibit 4.6 to the Current Report on Form
8-K filed on April 7, 2008)
|
|
9.1
|
Form
of Voting Agreement dated as of March 31, 2008 among the Company, Bison
and certain shareholders of the Company (incorporated by reference to
Exhibit 4.7 to the Current Report on Form 8-K filed on April 7,
2008)
|
|
10.1*
|
Employment
Agreement between American Hyperbaric, Inc. and Dr. John Capotorto dated
December 1, 2005 (incorporated by reference to Exhibit 10.4 to Form 10-QSB
filed February 21, 2006)
|
|
10.2*
|
Employment
Agreement between American Hyperbaric, Inc. and Dr. Phillip Forman dated
December 1, 2005 (incorporated by reference to Exhibit 10.5 to Form 10-QSB
filed February 21, 2006)
|
|
10.3*
|
Employment
Agreement between The Center for Wound Healing, Inc. and David Walz, dated
April 1, 2006 (incorporated by reference to Exhibit 10.6 to Form 10-KSB
filed on April 10, 2008)
|
|
10.4*
|
Employment
Agreement between The Center for Wound Healing, Inc. and Andrew Barnett,
dated January 3, 2007 (incorporated by reference to Exhibit 10.8 to Form
10-KSB filed on April 10, 2008)
|
|
10.5*†
|
Amended
and Restated Employment Agreement between The Center for Wound Healing,
Inc. and Andrew Barnett executed July 21, 2008
|
|
10.6†
|
2006
Stock Option Plan, as Amended and Restated July 21,
2008
|
|
10.7†
|
Settlement
Agreement between the Company and Keith Greenberg, Elise Greenberg, the
Elise Trust, Raintree Development, LLC, JD Keith LLC and Braintree
Properties LLC dated September 21,
2007
|
60
10.8†
|
Settlement
Agreement between the Company and Med-Air Consultants, Inc., Alan Richer
and Joel Macher dated August 9, 2007
|
|
10.9†
|
Third
Amendment and Waivers to Amended and Restated Loan Agreement dated May 29,
2007 by and among the Company, certain borrowers named therein and
Signature Bank
|
|
10.10†
|
Seventh
Amendment to Amended and Restated Loan Agreement dated March 31, 2008 by
and among the Company, certain borrowers named therein and Signature
Bank
|
|
14.1
|
Code
of Ethics (incorporated by reference to Exhibit 99.1 to Form 10-KSB filed
on September 24, 2004)
|
|
21.1†
|
Subsidiaries
|
|
31.1†
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act.
|
|
31.2†
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act.
|
|
32.1†
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley
Act.
|
†
Filed herewith
*
Management contract
Item
14. Principal Accounting Fees and Services:
Fiscal Year Ended
2008
(a) Audit Fees:
Our
principal accountant, RAICH ENDE MALTER & Co. LLP, billed us aggregate fees
in the amount of approximately $668,000 for the fiscal year ended June 30, 2008.
These amounts were billed for professional services that Raich Ende Malter &
Co. LLP provided for the audit of our annual financial statements, review of our
interim financial information and other services typically provided by an
accountant in connection with statutory and regulatory filings or engagements
for this fiscal year.
(c) Tax Fees:
RAICH
ENDE MALTER & Co. LLP billed us aggregate fees in the amount of $150,000 for
the fiscal year ended June 30, 2008 for tax
compliance.
(d) All Other Fees:
RAICH
ENDE MALTER & Co. LLP billed us aggregate fees in the amount of $0 for the
fiscal year ended June 30, 2008 for all other fees.
Fiscal Year Ended
2007
(a) Audit Fees:
Our
principal accountant, RAICH ENDE MALTER & Co. LLP, billed us aggregate fees
in the amount of approximately $1,000,000 for the fiscal year ended June 30,
2007. These amounts were billed for professional services that Raich Ende Malter
& Co. LLP provided for the audit of our annual financial statements, review
of our interim financial information and other services typically provided by an
accountant in connection with statutory and regulatory filings or engagements
for this fiscal year.
(c) Tax Fees:
RAICH
ENDE MALTER & Co. LLP billed us aggregate fees in the amount of $150,000 for
the fiscal year ended June 30, 2007 for tax compliance.
(d) All Other Fees:
RAICH
ENDE MALTER & Co. LLP billed us aggregate fees in the amount of $0.00 for
the fiscal year ended June 30, 2007 for all other fees.
61
The Board
of Directors has reviewed and discussed with the Company's management and
auditors the audited consolidated financial statements of the Company contained
in the Company's Annual Report on Form 10-KSB/A for the Company's 2008 fiscal
year. The Board has also discussed with the auditors the matters required to be
discussed pursuant to SAS No. 61 (Codification of Statements on Auditing
Standards, AU Section 380), which includes, among other items, matters related
to the conduct of the audit of the Company's consolidated financial
statements.
Based on
the review and discussions referred to above, the Board approved the inclusion
of the audited consolidated financial statements be included in the Company's
Annual Report on Form 10-KSB/A for its 2008 fiscal year for filing with the
SEC.
The Board
pre-approved all fees described above.
62
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Signature
|
Title
|
Date
|
||
/s/
Andrew G. Barnett
|
Chief
Executive Officer; Chief
|
October
9th, 2009
|
||
Andrew
G. Barnett
|
Financial
Officer;
|
In
accordance with the requirements of the Exchange Act, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
Signature
|
Title
|
Date
|
||
/s/
Andrew G. Barnett
|
Chief
Executive Officer; Chief
|
October
9, 2009
|
||
Andrew
G. Barnett
|
Financial
Officer; Director
|
|||
/s/
John DeNobile
|
Director
|
October
9, 2009
|
||
John
DeNobile
|
||||
/s/
Dr. John Capotorto
|
Director
|
October
9, 2009
|
||
Dr.
John Capotorto
|
||||
/s/
David H. Meyrowitz
|
Director
|
October
9, 2009
|
||
David
H. Meyrowitz
|
||||
/s/
Paul Basmajian
|
Director
|
October
9, 2009
|
||
Paul
Basmajian
|
||||
/s/
Dr. Phillip Forman
|
Director
|
October
9, 2009
|
||
Dr.
Phillip Forman
|
||||
/s/Douglas
B. Trussler
|
Director
|
October
9, 2009
|
||
Douglas
B. Trussler
|
||||
/s/Louis
Bissette
|
Director
|
October
9, 2009
|
||
Louis
Bissette
|
63