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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 Company’s 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 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 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 receivable—trade, 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 receivable—other

     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   
  

 

 

    

 

 

 

TOTAL OTHER ASSETS

     720,396         627,115   
  

 

 

    

 

 

 

TOTAL ASSETS

   $ 15,072,227       $ 12,516,945   
  

 

 

    

 

 

 

 

-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 payable—related 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   
  

 

 

   

 

 

 

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
  

 

 

   

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

     9,421,169        8,122,135   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 15,072,227      $ 12,516,945   
  

 

 

   

 

 

 

 

-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   
  

 

 

   

 

 

 

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   
  

 

 

   

 

 

 

TOTAL OPERATING EXPENSES

     16,502,983        13,630,130   
  

 

 

   

 

 

 

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   
  

 

 

   

 

 

 

TOTAL OTHER INCOME (EXPENSE), net

     342,045        (29,971
  

 

 

   

 

 

 

NET INCOME (LOSS)

   $ 210,061      $ (1,588,061
  

 

 

   

 

 

 

 

-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
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

BALANCE, December 31, 2011

   $ 313       $ 7,754       $ 3,242       $ 1,362       $ 4,505       $ 22,628,264       $ (13,224,271   $ 9,421,169   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

-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 receivable—trade

     (683,188     (1,267,549

Accounts receivable—other

     (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 payable—related 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   
  

 

 

   

 

 

 

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
  

 

 

   

 

 

 

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     —     
  

 

 

   

 

 

 

NET CASH AND CASH EQUIVALENTS PROVIDED BY FINANCING ACTIVITIES

     1,351,426        3,125,496   
  

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     54,458        314,370   

CASH AND CASH EQUIVALENTS, beginning of year

     1,291,142        976,772   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, end of year

   $ 1,345,600      $ 1,291,142   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

    

Cash paid for interest

   $ 101,658      $ 92,990   
  

 

 

   

 

 

 

NONCASH INVESTMENT AND FINANCING ACTIVITIES

    

Equipment acquired under capital lease obligation

   $ 29,997      $ —     
  

 

 

   

 

 

 

 

-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 receivable—trade 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   
  

 

 

 
   $ 625,057   
  

 

 

 

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   
  

 

 

 
   $ 26,370   
  

 

 

 

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 Company’s 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   
  

 

 

   

 

 

 
     12,039,246        9,071,605   

Less: accumulated depreciation and amortization

     (5,628,383     (3,713,158
  

 

 

   

 

 

 
   $ 6,410,863      $ 5,358,447   
  

 

 

   

 

 

 

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
December 31,

      

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 Company’s 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   
  

 

 

 

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 Company’s 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 Company’s 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     2.5–3.9

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 Company’s 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 Company’s 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 Company’s 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 Company’s 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
  

 

 

   

 

 

 
   $ —        $ —     
  

 

 

   

 

 

 

 

-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-