Attached files
file | filename |
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8-K/A - FORM 8-K AMANDMENT - Wright Medical Group N.V. | d449407d8ka.htm |
EX-99.3 - UNAUDITED PRO FORMA FINANCIAL INFORMATION - Wright Medical Group N.V. | d449407dex993.htm |
EX-23.1 - CONSENT OF SS&G, INC., INDEPENDENT AUDITORS - Wright Medical Group N.V. | d449407dex231.htm |
EX-99.1 - UNAUDITED INTERIM FINANCIAL STATEMENTS OF ORTHOHELIX SURGICAL DESIGNS - Wright Medical Group N.V. | d449407dex991.htm |
Exhibit 99.2
ORTHOHELIX SURGICAL DESIGNS, INC.
TABLE OF CONTENTS
Page | ||||
INDEPENDENT AUDITORS REPORT |
1 | |||
FINANCIAL STATEMENTS |
||||
Balance Sheets |
2-3 | |||
Statements of Income |
4 | |||
Statements of Changes in Stockholders Equity |
5 | |||
Statements of Cash Flows |
6-7 | |||
Notes to Financial Statements |
8-21 |
INDEPENDENT AUDITORS REPORT
To the Board of Directors and Stockholders
OrthoHelix Surgical Designs, Inc.
Medina, Ohio
We have audited the accompanying balance sheets of OrthoHelix Surgical Designs, Inc. as of December 31, 2011 and 2010, and the related statements of income, changes in stockholders equity and cash flows for the years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes 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 Companys 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 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 financial statements referred to above present fairly, in all material respects, the financial position of OrthoHelix Surgical Designs, Inc. as of December 31, 2011 and 2010, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ SS&G, Inc.
April 20, 2012
-1-
ORTHOHELIX SURGICAL DESIGNS, INC.
BALANCE SHEETS
DECEMBER 31, | ||||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
CURRENT ASSETS |
||||||||
Cash and cash equivalents |
$ | 1,345,600 | $ | 1,291,142 | ||||
Accounts receivabletrade, net of allowance for doubtful accounts of $276,558 and $183,741 at December 31, 2011 and 2010, respectively |
3,802,104 | 3,229,803 | ||||||
Accounts receivableother |
385,533 | 250,533 | ||||||
Inventory, net |
2,035,561 | 1,563,195 | ||||||
Prepaid expenses and other current assets |
372,170 | 196,710 | ||||||
|
|
|
|
|||||
TOTAL CURRENT ASSETS |
7,940,968 | 6,531,383 | ||||||
PROPERTY AND EQUIPMENT, net |
6,410,863 | 5,358,447 | ||||||
OTHER ASSETS |
||||||||
Computer software, net of accumulated amortization of $118,330 and $110,331 at December 31, 2011 and 2010, respectively |
39,433 | 6,533 | ||||||
Deposits |
29,536 | 29,536 | ||||||
Intangible assets, net of accumulated amortization of $489,290 and $282,614 at December 31, 2011 and 2010, respectively |
651,427 | 591,046 | ||||||
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|
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TOTAL OTHER ASSETS |
720,396 | 627,115 | ||||||
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TOTAL ASSETS |
$ | 15,072,227 | $ | 12,516,945 | ||||
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-2-
ORTHOHELIX SURGICAL DESIGNS, INC.
BALANCE SHEETS
DECEMBER 31, | ||||||||
2011 | 2010 | |||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES |
||||||||
Line of credit |
$ | 750,000 | $ | 900,000 | ||||
Current portion of capital lease obligation |
18,531 | | ||||||
Current portion of long-term debt |
727,272 | 503,909 | ||||||
Accounts payable |
1,139,197 | 710,332 | ||||||
Accounts payablerelated parties |
105,236 | 55,891 | ||||||
Accrued expenses |
373,122 | 383,981 | ||||||
Accrued payroll and commissions |
1,561,213 | 1,186,522 | ||||||
Accrued royalties |
188,607 | 150,266 | ||||||
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|
|
|
|||||
TOTAL CURRENT LIABILITIES |
4,863,178 | 3,890,901 | ||||||
LONG-TERM DEBT, net of current portion |
787,880 | 503,909 | ||||||
STOCKHOLDERS EQUITY |
||||||||
Preferred stock |
||||||||
Series D, $960,321 aggregate liquidation preference as of December 31, 2011 (excluding accrued and unpaid dividends) |
313 | | ||||||
Series C, $21,052,034 aggregate liquidation preference as of December 31, 2011 and 2010 (excluding accrued and unpaid dividends) |
7,754 | 7,754 | ||||||
Series B, $6,483,890 aggregate liquidation preference as of December 31, 2011 and 2010 (excluding accrued and unpaid dividends) |
3,242 | 3,242 | ||||||
Series A, $1,770,000 aggregate liquidation preference as of December 31, 2011 and 2010 (excluding accrued and unpaid dividends) |
1,362 | 1,362 | ||||||
|
|
|
|
|||||
12,671 | 12,358 | |||||||
Common stock |
4,505 | 4,187 | ||||||
Additional paid-in capital |
22,628,264 | 21,539,922 | ||||||
Accumulated deficit |
(13,224,271 | ) | (13,434,332 | ) | ||||
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|
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TOTAL SHAREHOLDERS EQUITY |
9,421,169 | 8,122,135 | ||||||
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
$ | 15,072,227 | $ | 12,516,945 | ||||
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-3-
ORTHOHELIX SURGICAL DESIGNS, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED | ||||||||
DECEMBER 31, | ||||||||
2011 | 2010 | |||||||
REVENUES |
$ | 22,179,483 | $ | 16,478,430 | ||||
COST OF GOODS SOLD |
5,808,484 | 4,406,390 | ||||||
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|
|
|
|||||
GROSS PROFIT |
16,370,999 | 12,072,040 | ||||||
OPERATING EXPENSES |
||||||||
General and administrative |
3,551,298 | 3,029,050 | ||||||
Sales and marketing |
10,988,774 | 8,980,319 | ||||||
Research and development |
1,962,911 | 1,620,761 | ||||||
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|
|||||
TOTAL OPERATING EXPENSES |
16,502,983 | 13,630,130 | ||||||
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|
|||||
LOSS FROM OPERATIONS |
(131,984 | ) | (1,558,090 | ) | ||||
OTHER INCOME (EXPENSE), net |
||||||||
Interest expense |
(104,100 | ) | (91,471 | ) | ||||
Interest income |
246 | 1,563 | ||||||
Miscellaneous income, net |
445,899 | 59,937 | ||||||
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|
|||||
TOTAL OTHER INCOME (EXPENSE), net |
342,045 | (29,971 | ) | |||||
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|
|||||
NET INCOME (LOSS) |
$ | 210,061 | $ | (1,588,061 | ) | |||
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-4-
ORTHOHELIX SURGICAL DESIGNS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
Series D Preferred stock |
Series C Preferred stock |
Series B Preferred stock |
Series A Preferred stock |
Common stock |
Additional paid-in capital |
Accumulated deficit |
Total | |||||||||||||||||||||||||
BALANCE, January 1, 2010 |
$ | | $ | 6,396 | $ | 3,242 | $ | 1,362 | $ | 4,099 | $ | 19,000,370 | $ | (11,846,271 | ) | $ | 7,169,198 | |||||||||||||||
Issuance of stock |
| 1,358 | | | 88 | 2,476,005 | | 2,477,451 | ||||||||||||||||||||||||
Issuance of stock options |
| | | | | 63,547 | | 63,547 | ||||||||||||||||||||||||
Net loss |
| | | | | | (1,588,061 | ) | (1,588,061 | ) | ||||||||||||||||||||||
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BALANCE, December 31, 2010 |
| 7,754 | 3,242 | 1,362 | 4,187 | 21,539,922 | (13,434,332 | ) | 8,122,135 | |||||||||||||||||||||||
Issuance of stock |
313 | | | | 318 | 1,014,483 | | 1,015,114 | ||||||||||||||||||||||||
Issuance of stock options |
| | | | | 73,859 | | 73,859 | ||||||||||||||||||||||||
Net income |
| | | | | | 210,061 | 210,061 | ||||||||||||||||||||||||
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BALANCE, December 31, 2011 |
$ | 313 | $ | 7,754 | $ | 3,242 | $ | 1,362 | $ | 4,505 | $ | 22,628,264 | $ | (13,224,271 | ) | $ | 9,421,169 | |||||||||||||||
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-5-
ORTHOHELIX SURGICAL DESIGNS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED | ||||||||
DECEMBER 31, | ||||||||
2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income (loss) |
$ | 210,061 | $ | (1,588,061 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
2,266,864 | 1,484,827 | ||||||
Bad debt expense |
110,887 | 80,747 | ||||||
Change in fixed asset reserve |
82,712 | (38,279 | ) | |||||
Issuance of stock options |
73,859 | 63,547 | ||||||
(Increase) decrease in: |
||||||||
Accounts receivabletrade |
(683,188 | ) | (1,267,549 | ) | ||||
Accounts receivableother |
(135,000 | ) | (250,533 | ) | ||||
Inventory |
(472,366 | ) | 130,225 | |||||
Prepaid expenses and other current assets |
(175,460 | ) | 88 | |||||
Deposits |
| (1,427 | ) | |||||
Intangible assets |
(257,501 | ) | (239,765 | ) | ||||
Increase (decrease) in: |
||||||||
Accounts payable |
428,865 | 96,389 | ||||||
Accounts payablerelated party |
49,345 | 22,262 | ||||||
Accrued expenses |
(10,859 | ) | 130,360 | |||||
Accrued payroll and commissions |
374,691 | 433,339 | ||||||
Accrued royalties |
38,341 | 58,240 | ||||||
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|||||
NET CASH AND CASH EQUIVALENTS PROVIDED BY (USED IN) OPERATING ACTIVITIES |
1,901,251 | (885,590 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Purchases of property and equipment |
(3,157,320 | ) | (1,922,703 | ) | ||||
Purchases of computer software |
(40,899 | ) | (2,833 | ) | ||||
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|||||
NET CASH AND CASH EQUIVALENTS USED IN INVESTING ACTIVITIES |
(3,198,219 | ) | (1,925,536 | ) |
-6-
ORTHOHELIX SURGICAL DESIGNS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED | ||||||||
DECEMBER 31, | ||||||||
2011 | 2010 | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Net (repayments) borrowings on line of credit |
$ | (150,000 | ) | $ | 900,000 | |||
Proceeds from long-term debt |
2,000,000 | | ||||||
Repayments on capital lease obligation |
(11,466 | ) | | |||||
Repayments on long-term debt |
(1,492,666 | ) | (251,955 | ) | ||||
Proceeds from issuance of capital stock |
1,015,114 | 2,477,451 | ||||||
Payments for loan fees |
(9,556 | ) | | |||||
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NET CASH AND CASH EQUIVALENTS PROVIDED BY FINANCING ACTIVITIES |
1,351,426 | 3,125,496 | ||||||
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NET INCREASE IN CASH AND CASH EQUIVALENTS |
54,458 | 314,370 | ||||||
CASH AND CASH EQUIVALENTS, beginning of year |
1,291,142 | 976,772 | ||||||
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CASH AND CASH EQUIVALENTS, end of year |
$ | 1,345,600 | $ | 1,291,142 | ||||
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
||||||||
Cash paid for interest |
$ | 101,658 | $ | 92,990 | ||||
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NONCASH INVESTMENT AND FINANCING ACTIVITIES |
||||||||
Equipment acquired under capital lease obligation |
$ | 29,997 | $ | | ||||
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-7-
ORTHOHELIX SURGICAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A Nature of operations and summary of significant accounting policies
Nature of operations
OrthoHelix Surgical Designs, Inc. (the Company) was incorporated in 2004 to develop a comprehensive set of instruments and implants for use in reconstructive and trauma surgery for extremities. The Company deals specifically with orthopedic surgeons and podiatrists who surgically repair small bones.
Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash deposits and accounts receivable trade. The Company places its cash in banks at levels that, at times, may exceed federally insured limits. As of December 31, 2011 and 2010, the Company had no concentrations with respect to its accounts receivable trade.
In addition, the Company had purchases from three and four suppliers that comprised 67% and 76% of total purchases during the years ended December 31, 2011 and 2010, respectively. As of December 31, 2011 and 2010, the Company had no other significant concentrations.
Cash and cash equivalents
For purposes of the statements of cash flows, the Company considers its short-term cash investments, which have an original maturity of three months or less, to be cash equivalents.
Accounts receivable trade and allowance for doubtful accounts
The Company recognizes an allowance for losses on accounts receivabletrade in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis of historical bad debt experience, current receivables aging, and expected future write-offs, as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible. The expense associated with the allowance for doubtful accounts is recognized as general and administrative expense.
Accounts receivable other
During 2011 and 2010, the Company was awarded grants from the State of Ohio. As of December 31, 2011 and 2010, the Company was due $385,000 and $250,000, respectively, for costs to be reimbursed under the grant agreements. For the years ended December 31, 2011 and 2010, the Company recognized income of $664,584 and $250,000, respectively, related to the grants. These amounts are included in miscellaneous income, net on the accompanying statements of income.
Inventory
Inventory, which consists of finished goods, is valued at the lower of cost or market. Specific inventory lots are identified and the cost of each lot is determined on the first-in, first-out (FIFO) method. Except when the Company has planned future use for such inventory, the Company generally considers quantities of inventory in excess of a twelve-month supply to be of no value. In 2011 and 2010, the Company reduced its inventory and net income by $452,147 and $491,300, respectively, as a result of applying this policy.
-8-
ORTHOHELIX SURGICAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A Nature of operations and summary of significant accounting policies, continued
Property and equipment
Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, which generally range from three to seven years. Maintenance and repairs are charged to expense as incurred.
Long-lived assets are reviewed annually for impairment whenever events or circumstances indicate the carrying amount may not be recoverable. An asset is considered impaired when the future net undiscounted cash flows generated by the asset are less than its carrying value. In 2011 and 2010, the Company recorded a change in the reserve of $82,712 and $(38,279), respectively. The reserve is based on the amount by which the carrying value of the asset exceeds its fair value. For the years ended December 31, 2011 and 2010, the change is included in cost of goods sold on the accompanying statements of income.
Intangible assets
At December 31, 2011 and 2010, intangible assets consist of patents and loan fees. Intangible assets are recorded at cost and are subject to amortization. During 2011 and 2010, the Company capitalized costs incurred for submitting applications to the United States Patent and Trademark office. As of December 31, 2011 and 2010, capitalized patent costs amounted to $1,072,509 and $815,008, respectively, and accumulated amortization amounted to $447,452 and $263,232, respectively. For the years ended December 31, 2011 and 2010, amortization expense was $184,220 and $137,392, respectively. Amortization expense is expected to be as follows:
Years Ending December 31, |
||||
2012 |
$ | 214,502 | ||
2013 |
181,152 | |||
2014 |
122,383 | |||
2015 |
74,232 | |||
2016 |
32,788 | |||
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$ | 625,057 | |||
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|
In December 2009, the Company entered into a loan agreement with Square 1 Bank (see Notes D and F). The loan agreement has been amended a number of times since 2009 to allow for increased borrowing availability. Loan costs related to the loan and amendments amounted to $68,208 and $58,652 as of December 31, 2011 and 2010, respectively. Beginning January 2010, the loan costs are amortized using the straight-line method over the term of the loan. As of December 31, 2011 and 2010, accumulated amortization of loan fees was $41,838 and $19,382, respectively. Amortization expense was $22,456 and $19,382 for the years ended December 31, 2011 and 2010, respectively. Amortization expense is expected to be as follows:
-9-
ORTHOHELIX SURGICAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A Nature of operations and summary of significant accounting policies, continued
Intangible assets, continued
Years Ending December 31, |
||||
2012 |
$ | 22,737 | ||
2013 |
3,633 | |||
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|
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$ | 26,370 | |||
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|
Revenue recognition
On January 2, 2010, the Company changed its policy to recognize revenue upon order. In all prior years, revenue was recognized when the product was used by the surgeon and a purchase order was received from the hospital. Management believes recognizing revenue upon order more accurately matches current costs against current revenues in the income statement. The change decreased the 2010 net loss by $53,040. There is no cumulative effect on beginning retained earnings and pro forma results of operations for the prior year are not significant.
Shipping and handling costs
Shipping and handling costs are included in cost of goods sold.
Research and development
Research and development costs are expensed as incurred.
Advertising
All costs related to marketing the Companys products are expensed in the period incurred, and amounted to $513,560 and $533,967 for the years ended December 31, 2011 and 2010, respectively.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Reclassifications
Certain December 31, 2010 items have been reclassified to conform to the December 31, 2011 financial statement presentation.
Events occurring after reporting date
The Company has evaluated events and transactions that occurred between December 31, 2011 and April 20, 2012 which is the date that the financial statements were available to be issued, for possible recognition or disclosure in the financial statements.
-10-
ORTHOHELIX SURGICAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE B Property and equipment
Property and equipment consisted of the following at December 31, 2011 and 2010:
2011 | 2010 | |||||||
Machinery and equipment |
$ | 675,061 | $ | 540,614 | ||||
Furniture and fixtures |
433,736 | 408,720 | ||||||
Computer equipment |
252,233 | 211,745 | ||||||
Leasehold improvements |
78,031 | 61,785 | ||||||
Trays and instruments, net of reserve |
10,600,185 | 7,848,741 | ||||||
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12,039,246 | 9,071,605 | |||||||
Less: accumulated depreciation and amortization |
(5,628,383 | ) | (3,713,158 | ) | ||||
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|
|||||
$ | 6,410,863 | $ | 5,358,447 | |||||
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|
Depreciation expense amounted to $2,052,189 and $1,318,380 in 2011 and 2010, respectively, a portion of which has been included in cost of sales.
NOTE C Computer software
Computer software costs are being amortized using the straight-line method over three years. Amortization expense was $7,999 and $9,673 for the years ended December 31, 2011 and 2010, respectively.
Expected future amortization expense as of December 31, 2011 is as follows:
Years Ending |
||||
2011 |
$ | 15,503 | ||
2012 |
13,880 | |||
2013 |
10,050 | |||
|
|
|||
$ | 39,433 | |||
|
|
NOTE D Line of credit
During 2010, the Company had a line of credit with a bank whereby the Company could request advances in an aggregate principal amount not to exceed the lesser of $1,250,000 or the borrowing base equal to 80% of eligible accounts receivable. Advances on the line bore interest at the greater of 2.25% above prime or 5.50% (prime was 3.25% at December 31, 2010), but could be increased to the greater of 3.25% above prime if the Companys liquidity ratio, as defined in the line of agreement, was reduced to 1.10:1.00. The line of credit was collateralized by substantially all assets of the Company, and the Company was subject to certain financial covenants. As of December 31, 2010, outstanding borrowings amounted to $900,000.
-11-
ORTHOHELIX SURGICAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE D Line of credit, continued
In January 2011, formula line availability increased to $2,500,000. Advances on the line bear interest at the greater of 1.75% above prime or 5.00% (prime was 3.25% at December 31, 2011). The line of credit is collateralized by substantially all assets of the Company. In addition, the Company is subject to certain financial covenants. As of December 31, 2011, outstanding borrowings amounted to $750,000.
This agreement was amended in January 2012, at which time the availability was increased to $3,500,000.
NOTE E Capital lease obligation
During 2011, the Company entered into a capital lease obligation for equipment. The assets acquired under capital lease arrangements at December 31, 2011 are included on the accompanying balance sheet as follows:
Machinery and equipment |
$ | 29,997 | ||
Less: accumulated depreciation |
(5,316 | ) | ||
|
|
|||
$ | 24,681 | |||
|
|
At December 31, 2011, future minimum payments under the capital lease obligation amounted to $18,851. The remaining balance of the capital lease will be repaid during 2012.
NOTE F Long-term debt
During 2010, the Company had a term loan (Term Loan A) with a bank in the amount of $1,259,773. The loan bore interest at the greater of 4.00% above prime or 7.25% (prime was 3.25% at December 31, 2010). The loan was payable in 30 equal monthly installments of principal and interest which commenced July 31, 2010 and was collateralized by substantially all assets of the Company. As of December 31, 2010, the outstanding balance of the Term Loan A was $1,007,818.
During 2011, the Company obtained an amended term loan (Term Loan B) with the same bank in the amount of $2,000,000, the proceeds of which were used to pay off the Term Loan A principal and accrued interest. The remaining proceeds were used for general working capital purposes and capital expenditures. The loan bears interest at the greater of 3.00% above prime or 6.25% (prime was 3.25% at December 31, 2011). The loan is payable in 33 equal monthly installments of principal plus interest which commenced May 2011, and is collateralized by substantially all assets of the Company. In addition, the Company is subject to certain financial covenants pursuant to the loan agreement. As of December 31, 2011, the Company is in compliance with such covenants, and the outstanding balance of the Term Loan B was $1,515,152.
-12-
ORTHOHELIX SURGICAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE F Long-term debt, continued
Maturities of long-term debt at December 31, 2011 are as follows:
Years Ending December 31, |
||||
2012 |
$ | 727,272 | ||
2013 |
727,272 | |||
2014 |
60,608 | |||
|
|
|||
$ | 1,515,152 | |||
|
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NOTE G Capital stock
Common stock
The number of shares of $0.001 par value common stock authorized, issued and outstanding as of December 31, 2011 and 2010 is as follows:
2011 | 2010 | |||||||||||||||
Issued and | Issued and | |||||||||||||||
Authorized | Outstanding | Authorized | Outstanding | |||||||||||||
Voting |
18,000,000 | 4,184,668 | 18,000,000 | 4,030,126 | ||||||||||||
Nonvoting |
625,000 | 227,882 | 625,000 | 157,452 |
In addition, the Company has authorized 6,375,000 shares of common stock to be designated as voting or nonvoting at the discretion of the Companys Board of Directors as of December 31, 2011 and 2010.
During 2011, stock options for 55,430 shares of common stock and warrants for 15,000 shares of common stock were exercised. In addition, in 2010, stock options for 88,000 shares of common stock were exercised. See Note H.
Series D participating convertible preferred stock
During 2011, the Company authorized 500,000 shares of $0.001 par value Series D participating convertible preferred stock (the Series D Preferred), with 312,808 shares issued and outstanding (convertible into equal respective shares of common stock) as of December 31, 2011. The Series D Preferred accrues an annual cumulative dividend of 6% per annum, compounded annually, payable in cash upon liquidation or redemption or if and when declared by the Board of Directors from legally available funds. The Series D Preferred is senior to all other classes or series of stock with respect to dividends.
-13-
ORTHOHELIX SURGICAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE G Capital stock, continued
Series D participating convertible preferred stock, continued
Upon a liquidation event, each holder of Series D Preferred will receive a distribution prior to all other classes or series of stock equal to the original purchase per share plus any accrued and unpaid dividends and be entitled to participate with holders of all other classes or series of stock in the sharing of the remaining liquidation proceeds on an as-converted basis. No dividends have been declared or paid and the aggregate and per-share amounts of arrearages in cumulative preferred dividends amounted to $53,941 and $0.17, respectively, at December 31, 2011.
At the election of the majority of the Series D Preferred stockholders, any time on or after January 5, 2013, the Company may be required to redeem all Series D Preferred at a per share price equal to the liquidation preference as described above.
Each holder of Series D Preferred shall be entitled to a number of votes equal to the number of shares issuable upon its conversion into common stock.
Series D Preferred will be automatically converted into common stock at the election of a majority of the Series D Preferred stockholders or upon the closing of a firm commitment for an underwritten public offering with a price per share of not less than five times the Series C Preferred purchase price and net proceeds to the Company of not less than $50,000,000.
Series C participating convertible preferred stock
As of December 31, 2011 and 2010, the Company has authorized 10,500,000 shares of $0.001 par value Series C participating convertible preferred stock (the Series C Preferred), with 7,753,972 shares issued and outstanding (convertible into equal respective shares of common stock) as of December 31, 2011 and 2010. The Series C Preferred accrues an annual cumulative dividend of 8% per annum, compounded annually, payable in cash or additional Series C Preferred shares (at the original issue price) upon liquidation or redemption or if and when declared by the Board of Directors from legally available funds. The Series C Preferred is senior to the Series B Preferred, Series A Preferred, and common stock with respect to dividends.
Upon a liquidation event, each holder of Series C Preferred will receive a distribution prior to holders of the Series B Preferred and the Series A Preferred and common stock equal to one and one-half times the original purchase per share plus any accrued and unpaid dividends and be entitled to participate with holders of all other classes or series of stock in the sharing of the remaining liquidation proceeds on an as-converted basis. No dividends have been declared or paid and the aggregate and per-share amounts of arrearages in cumulative preferred dividends amounted to $3,788,399 and $0.49, respectively, at December 31, 2011, and $2,468,170 and $0.32, respectively, at December 31, 2010.
At the election of the majority of the Series C Preferred stockholders, any time after four years from issuance of the Series B Preferred, the Company may be required to redeem all Series C Preferred at a per share price equal to the liquidation preference as described above.
-14-
ORTHOHELIX SURGICAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE G Capital stock, continued
Series C participating convertible preferred stock, continued
Each holder of Series C Preferred shall be entitled to a number of votes equal to the number of shares issuable upon its conversion into common stock.
Series C Preferred will be automatically converted into common stock at the election of a majority of the Series C Preferred stockholders or upon the closing of a firm commitment for an underwritten public offering with a price per share of not less than five times the Series C Preferred purchase price and net proceeds to the Company of not less than $50,000,000.
Series B participating convertible preferred stock
As of December 31, 2011 and 2010, the Company has authorized 3,500,000 shares of $0.001 par value Series B participating convertible preferred stock (the Series B Preferred), with 3,241,945 shares issued and outstanding (convertible into equal respective shares of common stock) as of either year end. The Series B Preferred accrues an annual cumulative dividend of 8% per annum, payable upon liquidation or redemption or if and when declared by the Board of Directors from legally available funds. The Series B Preferred is senior to the Series A Preferred and common stock with respect to dividends.
Upon a liquidation event, each holder of Series B Preferred will receive a distribution prior to holders of the Series A Preferred and common stock, equal to two times the original purchase price per share plus any accrued and unpaid dividends and be entitled to participate with holders of all other classes or series of stock in the sharing of the remaining liquidation proceeds on an as-converted basis. No dividends have been declared or paid and the aggregate and per-share amounts of arrearages in cumulative preferred dividends amounted to $1,269,095 and $0.39, respectively, at December 31, 2011, and $1,009,740 and $0.31, respectively, at December 31, 2010.
At the election of the majority Series B Preferred stockholders, any time after four years from issuance, the Company may be required to redeem all shares of Series B Preferred at a per share price equal to the liquidation preference as described above.
Each holder of Series B Preferred shall be entitled to a number of votes equal to the number of shares issuable upon its conversion into common stock.
Series B Preferred will be automatically converted into common stock at the election of a majority of the Series B Preferred stockholders or upon the closing of a firm commitment for an underwritten public offering with a price per share of not less than five times the Series C Preferred purchase price and net proceeds to the Company of not less than $50,000,000.
Series A participating convertible preferred stock
As of December 31, 2011 and 2010, the Company has authorized 2,500,000 shares of $0.001 par value Series A participating convertible preferred stock (the Series A Preferred), with 1,361,539 shares issued and outstanding (convertible into 1,500,000 shares of common stock) as of either year end. The Series A Preferred accrues an annual cumulative dividend of 6% per annum, payable upon liquidation or redemption or if and when declared by the Board of Directors from legally available funds. The Series A Preferred is senior to common stock with respect to dividends.
-15-
ORTHOHELIX SURGICAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE G Capital stock, continued
Series A participating convertible preferred stock, continued
Upon a liquidation event, each holder of Series A Preferred will receive a distribution prior to any distribution to common stockholders equal to the original purchase price per share plus any accrued and unpaid dividends and be entitled to participate with holders of all other classes or series of stock in the sharing of the remaining liquidation proceeds on an as-converted basis. No dividends have been declared or paid and the aggregate and per-share amounts of arrearages in cumulative preferred dividends amounted to $625,682 and $0.46, respectively, at December 31, 2011, and $519,482 and $0.38, respectively, at December 31, 2010.
At the election of the majority of Series A Preferred stockholders, any time after seven years from issuance, the Company may be required to redeem all Series A Preferred stock at a per share price equal to the liquidation preference as described above.
Each holder of Series A Preferred shall be entitled to a number of votes equal to the number of shares issuable upon its conversion into common stock.
Series A Preferred will be automatically converted into common stock at the election of a majority of the Series A Preferred stockholders or upon the closing of a firm commitment for an underwritten public offering with a price per share of not less than five times the original Series C Preferred purchase price and net proceeds to the Company of not less than $50,000,000.
NOTE H Share-based compensation
Stock options
The Company has granted 2,847,025 and 2,520,525 stock options to certain employees, outside consultants, independent contractors and board members pursuant to incentive stock option agreements and non-qualifying stock option agreements to purchase shares of the Companys stock as of December 31, 2011 and 2010, respectively. As of December 31, 2011 and 2010, the exercise price ranges from $0.15 to $1.95 per share, which is equal to the estimated fair value of the stock on the date of the grant. The vesting periods in all shares range from 18 to 60 months. Management anticipates the average term of the options will be four years. In addition, management has reserved a pool of common shares to be issued when the options are exercised.
The Company accounts for its stock options in accordance with Accounting Standards Codification (ASC) 718 Compensation Stock Compensation. Pursuant to this guidance, stock options are valued at fair value on the grant date and compensation cost is expensed ratably over the vesting period. Using the Black-Scholes-Merton option pricing model, management has determined that the options have a value of $0.01 to $1.39 per share, resulting in an original total compensation cost of $690,535 and $555,450 at December 31, 2011 and 2010, respectively. Due to employee terminations, this compensation cost has been adjusted
-16-
ORTHOHELIX SURGICAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE H Share-based compensation, continued
Stock options, continued
to $581,250 and $446,165 as of December 31, 2011 and 2010, respectively. Compensation cost will be expensed over the requisite service period. Prior to 2010, the Company expensed $246,083 in compensation cost relating to these options. For the years ended December 31, 2011 and 2010, the Company expensed $73,859 and $63,547 as compensation cost relating to the options. The remaining compensation cost of $197,761 will be expensed over the next four years.
The assumptions used and the calculated fair value of the options issued in 2011 and 2010 are as follows:
2011 | 2010 | |||||||
Expected dividend yield |
0.0 | % | 0.0 | % | ||||
Risk-free interest rate |
2.0%3.6 | % | 2.53.9 | % | ||||
Expected volatility |
41.0 | % | 32.0 | % | ||||
Average expected life in years |
4.0 | 4.0 | ||||||
Weighted average calculated value of options granted in the current year |
$ | 0.41 | $ | 0.09 |
The following is an analysis of options to purchase shares of the Companys stock issued and outstanding as of December 31, 2011 and 2010:
2011 | 2010 | |||||||||||||||
Total Options |
Weighted Average Exercise Price |
Total Options |
Weighted Average Exercise Price |
|||||||||||||
Options outstanding, beginning of year |
1,747,021 | $ | 0.40 | 1,629,021 | $ | 0.41 | ||||||||||
Granted |
326,500 | 1.17 | 269,000 | 0.29 | ||||||||||||
Exercised |
(55,430 | ) | 0.35 | (88,000 | ) | 0.23 | ||||||||||
Expired/cancelled |
(10,000 | ) | 1.30 | (63,000 | ) | 0.26 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Options outstanding, end of year |
2,008,091 | $ | 0.49 | 1,747,021 | $ | 0.40 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Options exercisable, end of year |
1,132,212 | $ | 0.37 | 833,434 | $ | 0.47 | ||||||||||
|
|
|
|
|
|
|
|
-17-
ORTHOHELIX SURGICAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE H Share-based compensation, continued
Stock options, continued
2011 | 2010 | |||||||||||||||
Total Options |
Weighted Average Exercise Price |
Total Options |
Weighted Average Exercise Price |
|||||||||||||
Nonvested options, beginning of year |
913,587 | $ | 0.34 | 1,065,254 | $ | 0.35 | ||||||||||
Granted |
326,500 | 1.17 | 269,000 | 0.29 | ||||||||||||
Vested |
(364,208 | ) | 0.33 | (360,667 | ) | 0.35 | ||||||||||
Forfeited |
| | (60,000 | ) | 0.32 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Nonvested options, end of year |
875,879 | $ | 0.64 | 913,587 | $ | 0.34 | ||||||||||
|
|
|
|
|
|
|
|
Options for 1,132,212 and 833,434 shares at a weighted average exercise price of $0.37 and $0.47 were vested and exercisable as of December 31, 2011 and 2010, respectively. At December 31, 2011 and 2010, compensation cost of approximately $170,772 and $109,818, respectively, has not yet been recognized on nonvested awards. The weighted average period over which it is expected to be recognized is two years.
During 2011, 55,430 options were exercised at a weighted average price of $0.35 per share. During 2010, 88,000 options were exercised at a price of $0.23 per share.
Warrants
During 2011, the Company granted warrants to a bank in conjunction with the line of credit and term loan agreements (see Notes D and F) to purchase up to 8,080 shares of Series D Preferred at a price of $3.07 per share. A warrant to purchase 35,221 shares of Series C Preferred at a price of $2.71 per share was previously granted to the same bank and was outstanding as of December 31, 2011. For the years ended December 31, 2011 and 2010, there was no expense associated with these warrants.
In conjunction with the Series D Preferred financing, investors who contributed in excess of their pro-rata allocation were granted warrants to purchase up to 31,957 shares of additional Series D Preferred at a price of $3.07 per share. For the year ended December, 31, 2011, there was no expense associated with these warrants.
In addition, the Company has previously granted warrants to a board member in conjunction with a termination agreement to purchase up to 15,000 shares of common stock at a price of $0.65 per share. In 2011, these warrants were exercised.
-18-
ORTHOHELIX SURGICAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE I Related party transactions
The Company provided a loan to an employee in the amount of $40,000, with an annual interest rate of 5%. Pursuant to the terms of the note receivable, the Company will forgive the loan in four equal installments of $11,280, including interest, beginning April 4, 2006. As of December 31, 2011 and 2010, $22,106 was due from the employee, which includes $787 of accrued interest. During 2007, the employee was terminated and the Company determined that this note may not be collectible. Accordingly, the balance of the note was reserved for in full at December 31, 2011 and 2010.
During 2011 and 2010, the Company had sales amounting to $3,175,711 and $2,515,967, respectively, which were the result of surgical procedures performed by certain officers, directors and stockholders of the Company.
During 2011 and 2010, the Company purchased $268,378 and $354,829 of legal and consulting services from two and three vendors, respectively, who are stockholders. In addition, in 2011 and 2010, the Company paid $72,805 and $167,682, respectively, to a sales agent who is also a holder of the Companys Series C Preferred stock. During 2011 and 2010, the Company paid $451,071 and $300,065, respectively, in commission payments to option holders, and $114,654 and $105,327, respectively in interest and fees to a bank that holds warrants for the Companys Series C Preferred and Series D Preferred.
The Company also has royalty and consulting agreements with certain shareholders. During 2011 and 2010, royalty payments, consulting fees and related reimbursed expenses amounted to $614,906 and $413,133, respectively. As of December 31, 2011 and 2010, accrued royalties to these shareholders amounted of $153,788 and $122,003, respectively.
NOTE J Income taxes
Deferred income taxes are recorded for timing differences between financial and income tax reporting and relate primarily to inventory reserves, depreciation expense and operating loss carryforwards. The Companys net deferred tax asset was $0 at December 31, 2011 and 2010, and was comprised of the following:
2011 | 2010 | |||||||
Deferred tax assets |
$ | 6,461,000 | $ | 5,938,000 | ||||
Deferred tax liabilities |
1,686,600 | 945,100 | ||||||
|
|
|
|
|||||
Net deferred tax asset |
4,774,400 | 4,992,900 | ||||||
Less: valuation allowance |
(4,774,400 | ) | (4,992,900 | ) | ||||
|
|
|
|
|||||
$ | | $ | | |||||
|
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-19-
ORTHOHELIX SURGICAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE J Income taxes, continued
As of December 31, 2011 and 2010, the Company has net operating loss carryforwards amounting to $12,793,006 and $12,208,406, respectively. Substantially all of the net operating loss carryforwards expire between 2026 to 2031.
The Company follows the accounting guidance for uncertainty in income taxes using the provisions of ASC 740 Income Taxes. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities.
As of December 31, 2011, the Company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. Tax years that remain subject to examination are the years ended December 31, 2008, 2009 and 2010.
The Company recognizes interest and penalties related to uncertain tax positions in the provision for income taxes. However, no such interest and penalties were recorded in 2011 and 2010.
NOTE K Operating leases
The Company leases its facilities and certain equipment under various leasing arrangements. Future minimum lease payments due under these agreements are as follows:
Years Ending December 31, |
||||
2012 |
$ | 305,739 | ||
2013 |
287,085 | |||
2014 |
153,753 | |||
2015 |
39,704 | |||
|
|
|||
$ | 786,281 | |||
|
|
For the years ended December 31, 2011 and 2010, rental expense was $301,816 and $235,496, respectively.
NOTE L Profit sharing plan
The Company sponsors a 401(k) savings plan covering substantially all of its employees. Pursuant to the Plan document, there are no Company matching contributions and discretionary contributions are allowed. For the years ended December 31, 2011 and 2010, there were no discretionary contributions made to plan participants.
-20-
ORTHOHELIX SURGICAL DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE M Commitments and contingencies
In the ordinary course of business, the Company is the subject of, or party to, pending or threatened litigation, assessments, and claims. While it is not possible to predict with certainty the outcome of such matters individually or in the aggregate, management believes that any ultimate result will not have a materially adverse effect on the financial position and result of operations of the Company.
NOTE N Subsequent event
In January 2012, the Company obtained an amended term loan (Term Loan C) with a bank in the amount of $3,500,000, the proceeds of which were used to pay off the Term Loan B (see Note F) principal and accrued interest. The remaining proceeds are to be used for general working capital purposes and capital expenditures. The loan bears interest at the greater of 3.00% above prime or 6.25%. The loan is payable in 45 equal monthly installments of principal plus interest which will commence in May 2012, and is collateralized by substantially all assets of the Company. In addition, the Company is subject to certain financial covenants pursuant to the loan agreement.
In conjunction with this amendment, the Company granted warrants to the bank to purchase up to 10,403 shares of Series D Preferred at a price of $4.77 per share.
-21-