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EX-32.1 - INTEGRAL VISION INC | v206149_ex32-1.htm |
EX-31.2 - INTEGRAL VISION INC | v206149_ex31-2.htm |
EX-32.2 - INTEGRAL VISION INC | v206149_ex32-2.htm |
EX-31.1 - INTEGRAL VISION INC | v206149_ex31-1.htm |
United
States Securities and Exchange Commission
Washington,
D.C. 20549
AMENDMENT
NO. 1 TO FORM 10-K
x
|
Annual
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the fiscal year ended December 31, 2008.
|
¨
|
Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the transition period from
to
.
|
Commission
File Number 0-12728
INTEGRAL
VISION, INC.
(Exact
name of registrant as specified in its charter)
Michigan
|
38-2191935
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification Number)
|
49113
Wixom Tech Drive, Wixom, Michigan
|
48393
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant's telephone number,
including area
code: (248)
668-9230
|
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, No Par Value, Stated Value $.20 Per Share
(Title of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes ¨ No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes ¨ No þ
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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 þ No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large accelerated
filer ¨ Accelerated
filer ¨ Non-accelerated
filer ¨ Smaller
reporting company þ
Indicate
by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Act).
Yes ¨ No þ
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter. $4,860,654 as of June 30, 2008.
(APPLICABLE
ONLY TO CORPORATE REGISTRANTS)
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date. 30,750,409 shares of common stock as
of February 28, 2009.
DOCUMENTS
INCORPORATED BY REFERENCE
List
hereunder the following documents if incorporated by reference and the Part of
the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
Portions
of the annual proxy statement for the year ended December 31, 2008 are
incorporated by reference into Part III.
EXPLANATORY
NOTE
The
registrant filed a Form 10-K on March 31, 2009. The registrant is
filing this Amendment No. 1 to Form 10-K with the SEC in order to update our
financial statements and Item 13 of Part III with respect to certain related
party transactions.
2
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains 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. Actual results
could differ materially from those projected in the forward-looking statements
as a result of a number of factors, risks and uncertainties. Generally, the
words “anticipate”, “expect”, “intend”, “believe” and similar expressions
identify forward-looking statements. The information included in this
Form 10-K is as of the filing date with the Securities and Exchange
Commission and future events or circumstances could differ significantly from
the forward-looking statements included herein. Accordingly, we caution readers
not to place undue reliance on such statements.
Part I
ITEM
1. Business
Overview
Integral
Vision, Inc., a Michigan corporation (or the "Company"), was incorporated in
1978. We develop, manufacture and market flat panel display
inspection systems to ensure product quality in the display manufacturing
process. We primarily inspect microdisplays and small flat panel
displays, though the technology used is scalable to allow inspection of full
screen displays and components. Our products primarily use machine
vision to evaluate operating displays for cosmetic and functional defects, but
can also provide electrical testing if required for a given
application. Our customers and potential customers are primarily
large companies with significant investment in the manufacture of
displays. Nearly all of our sales originate in the United States,
Asia, or Europe. Our products are generally sold as capital
goods. Depending on the application, display inspection systems have
an indefinite life and are more likely to require replacement due to possible
technological obsolescence than from physical wear.
Automated
inspection has become a necessity for manufacturers who need to continually
improve production efficiency to meet the increasing demand for high quality
products. Our automatic inspection systems can inspect parts at a
lower cycle time and with greater repeatability than is possible with human
inspectors. While we have several large companies as customers, these
customers are working with new microdisplay technologies. Our success
will be substantially dependant on these customers getting their emerging
display technologies into high volume production.
Products
SharpEye – Our SharpEye
product provides Flat Panel Display (“FPD”) inspection for reflective, emissive
and transmissive display technologies. SharpEye is designed for the
detection of functional and cosmetic defects in LCOS, OLED, MEMS, 3LCD/HTPS, LCD
and other emerging display technologies. These technologies are
applied to consumer products such as camcorders, rear projection computer
monitors, digital still cameras, HDTV, projectors, video headsets and video
telephones. The core technology of SharpEye inspection algorithms is
the ability to quantize data to the level of a single display
pixel. SharpEye can be configured for production inspection or for
display evaluation in a laboratory based on the equipment configuration
selected.
LumenEye – Our LumenEye
product provides an “out of the box” solution designed for a low skill level
user to setup and acquire images from an FPD panel. It is targeted at
manufacturers of FPD products who need to inspect for inherent Image Retention
(“Image Sticking”) defects in their displays prior to shipment. The
software provided with LumenEye will perform an evaluation of the panel based on
the acquired images to VESA 305-2 specification. Integral Vision can
also provide the customer unique Image Retention analysis as part of its
software offering. Custom panel evaluation software is also available
to meet the FPD manufacturer customer test pattern requirements.
IVSee – Our IVSee provides FPD
inspection for applications which still require manual
handling. IVSee is designed for the detection of functional and
cosmetic defects in LCOS, OLED, MEMS, 3LCD/HTPS, LCD and other emerging display
technologies. IVSee is configured to be integrated into existing
manual inspection stations allowing them to receive the benefits of computer
aided optical inspection without the need to modify the manufacturing process to
automate handling of the display. The operator’s interface provides
essential views of results, images, and statistics for production floor
personnel.
3
Marketing
and Sales
We
generally market our vision products to end users, but we have had success
integrating our products with OEM’s in certain
circumstances. Although sales are made worldwide, our strongest
presence is maintained in the US (through Company employees), and in Asia and
Europe (through sales representatives).
Competition
Presently,
most final inspection of small flat panel displays is manual. Higher
resolution, increased brightness, and increased contrast in newer versions of
the displays are stretching human capabilities to do the inspections. Automated
inspection offers a good return on investment as it uses less clean room space,
requires fewer fixtures and hardware because of a faster cycle time, and reduces
the labor required for inspection. Competition for machine vision
based microdisplay and small flat panel display inspection comes primarily from
Westar Display Technologies, Inc.
Production
and Suppliers
Our
production process is principally the assembling of standard electrical,
electronic and optical components and hardware subassemblies purchased from
suppliers into finished products. We generally do not rely on a
single source for parts or subassemblies, although certain components and
subassemblies included in our products may only be available from a limited
number of suppliers. Management believes alternative sources or
designs could be developed for any of the components used in its products
thereby mitigating any exposure to product interruption from shortages of parts
or limited suppliers.
Major
Customers
The
nature of our product offerings may produce sales to one or a limited number of
customers in excess of 10% of total net sales in any one year. It is
possible that the specific customers reaching this threshold may change from
year to year. Loss of any one of these customers could have a
material impact on our results of operations. For 2008, sales to Plastic Logic
GmbH and Qualcomm MEMS Technologies represented 51% and 37% of net sales,
respectively. Approximately $4,000 was due from two of these customers at
December 31, 2008. For 2007, sales to Qualcomm MEMS Technologies,
Samsung, Liquavista B.V., and Texas Instruments represented 31%, 24%, 14% and
10% of net sales, respectively. Approximately $50,000 was due from
two of these customers at December 31, 2007.
Intellectual
Property
Management
believes that the technology incorporated in its products gives it advantages
over its competitors and prospective competitors. Protection of
technology is attempted through a combination of patents, applied for patents,
confidentiality agreements and trade secrets. We presently have 14
U.S. patents. There can be no assurance that we will have the
resources to defend our patents or that patents we hold will be considered valid
if challenged. In addition, it is possible that some patents will be
rendered worthless as the result of technological obsolescence.
Governmental
Approvals and Regulations
We are
not subject to government approvals for any of our primary products or
services. Certain applications using laser technology require
compliance with CDRH Section 21 CFR 1040.
Product
Development
The
market for Machine Vision is characterized by rapid and continuous technological
development and product innovation. We believe that continued and
timely development of new products and enhancements to existing products is
necessary to maintain our competitive position. Accordingly, we
devote a significant portion of our personnel and financial resources to product
development programs and seek to maintain close relationships with customers to
remain responsive to their needs. During the period ended March 31,
2006 we began activity associated with a product development agreement with
Energy Conversion Devices (“ECD”) where we are compensated for a portion of our
costs for the development of online inspection for a continuous web of display
material. This best efforts subcontract with ECD proceeds from a
contract from the United States Display Consortium. Our net
engineering and product development costs amounted to $1.0 million and $1.1
million in 2008 and 2007, respectively. Our current product
development efforts are primarily directed to Flat Panel Display and Component
Inspection products.
4
Environmental
Factors
Our cost
of complying with federal, state and local provisions regulating protection of
the environment are not material.
Employees
As of
February 28, 2009 and February 29, 2008, we had 14 permanent employees, all full
time. None of our employees are represented by a labor
union.
ITEM
2. Properties
We lease
a light industrial building containing approximately 14,000 square feet at 49113
Wixom Tech Drive, Wixom, Michigan. The lease is for a five year period, which
commenced January 1, 2006. Our manufacturing, engineering and administrative
functions are performed at this location. The building is
approxmately 11 years old and is in excellent condition.
ITEM 3. Legal
Proceedings
We are
not currently involved in any litigation other than ordinary routine litigation
that is incidental to our business.
ITEM 4. Submission of
Matters to a Vote of Security Holders
None.
Part II
ITEM 5. Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market
Information
Integral
Vision’s common stock is traded on the Over the Counter Bulletin Board (“OTCBB”)
under the symbol INVI. The table below shows the high and low sales
prices for our common stock for each quarter in the past two
years. These prices reflect inter-dealer prices and do not include
allowance for retail mark-up or mark-down, or commissions and may not
necessarily represent actual transactions.
2007
|
2008
|
|||||||||||||||||||||||||||||||
Mar 31
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Jun 30
|
Sept 30
|
Dec 31
|
Mar 31
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Jun 30
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Sept 30
|
Dec 31
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|||||||||||||||||||||||||
High
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$ | 0.70 | $ | 0.51 | $ | 0.49 | $ | 0.28 | $ | 0.35 | $ | 0.40 | $ | 0.55 | $ | 0.54 | ||||||||||||||||
Low
|
0.49 | 0.28 | 0.28 | 0.06 | 0.09 | 0.14 | 0.21 | 0.12 |
Holders
As of
February 28, 2009, there were approximately 305 holders of record of our Common
Stock. This figure does not reflect the approximately 1,263
beneficial stockholders whose shares are in nominee names.
5
Dividend
Policy
We have
never declared or paid any cash dividends on our Common Stock. We
currently intend to retain any earnings for use in our operations and expansion
of our business and therefore do not anticipate paying any cash dividends in the
foreseeable future.
Issuer
Purchases
We did
not repurchase any equity securities during the years ended December 31, 2008
and 2007.
Information
Regarding Equity Compensation Plans
The
following table sets forth information regarding our equity compensation plans
in effect as of December 31, 2008.
Equity Compensation Plan Information | ||||||||||||
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 for
future issuance under
equity
compensation plans
(excluding securities
reflected in column (a))
|
|||||||||
(a)
|
(b)
|
c
|
||||||||||
Equity
compensation plans approved by security holders
|
3,795,000 | $ | 0.23 | 1,316,000 | ||||||||
Equity
compensation plans not approved by security holders
|
- | - | - | |||||||||
Total
|
3,795,000 | $ | 0.23 | 1,316,000 |
We have
one terminated equity compensation plan which still has active options
outstanding (the “1995 Employee Stock Option Plan”) and three active equity
compensation plans (the “1999 Employee Stock Option Plan”, the “2004 Employee
Stock Option Plan”, and the “Integral Vision, Inc. 2008 Equity Incentive Plan”),
all of which have been approved by our shareholders. Each of the
plans may grant nonqualified stock options or incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as
amended. The plans are administered by the Compensation Committee of
the Board of Directors. Each of the plans terminates after 10 years,
though termination of the plan does not affect the rights of beneficiaries under
options granted prior to the termination of the plan. Options are to
be granted at a price equal to or greater than the closing price of the common
stock on the day the option is granted and may be exercisable for up to 10 years
from the date of grant so long as the beneficiary is employed by the Company,
but terminate 3 months after the beneficiary is no longer employed by the
Company unless due to permanent and total disability in which case the options
terminate 12 months after employment ceases. For further information
on equity compensation see Note I – Share Based Compensation in the Notes to the
Financial Statements.
ITEM 6. Selected
Financial Data
This Item
6 is not applicable to us as, pursuant to Item 301(c) of Regulation S-K, a
smaller reporting company is not required to provide the information required by
Item 301 of Regulation S-K.
6
ITEM 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Overview
Integral
Vision, Inc., a Michigan corporation, develops, manufactures, and markets flat
panel display inspection systems to ensure product quality in the display
manufacturing process. Our revenues are primarily derived from the
sale of flat panel display inspection equipment. Except for the
historical information contained herein, the matters discussed in this document
are forward-looking statements made pursuant to the safe harbor provisions of
Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and
Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). Such statements are based on management’s current expectations
and are subject to a number of factors and uncertainties that could cause actual
results to differ materially from those described in the forward-looking
statements. Such factors and uncertainties include, but are not
limited to: the ability of the company to obtain volume orders from
its larger customers; general economic conditions and conditions in the specific
industries in which we have significant customers; price fluctuations in the
materials we purchase for assembly into final products; competitive conditions
in our markets and the effect of competitive products and pricing; and
technological development by us, our customers and our
competition. As a result, our results may
fluctuate. Additional information concerning risk factors that could
cause actual results to differ materially from those projected in the
forward-looking statements is contained in our filings with the Securities and
Exchange Commission. These forward-looking statements represent our
best estimates as of the date of this document. We assume no
obligation to update such estimates except as required by the rules and
regulations of the Securities and Exchange Commission.
Results
of Operations - Year Ended December 31, 2008, compared to the Year Ended
December 31, 2007
Net
revenues for 2008 decreased $124,000 (10.8%) to $1,027,000 from $1,151,000 in
2007. Revenue is reported net of sales commission expense which was
approximately $27,000 in 2008 compared to approximately $67,000 in
2007. Revenue for 2008 includes $25,000 from Product Development
Agreements compared to $92,000 in 2007. Sales from the flat panel
display inspection product line were $999,000 in 2008, a decrease of $49,000
(4.7%) from $1,048,000 in 2007.
Direct
costs of sales for 2008 decreased $305,000 (34.1%) to $590,000 (approximately
57.4% of sales) from $895,000 (approximately 77.7% of sales) in
2007. This was primarily due to a decrease of $208,000 in costs
related to flat panel display inspection equipment, partially offset by lower
costs of $97,000 for product development agreements. Costs of sales
for product development agreements are recorded in amounts equal to the revenue
recognized and therefore do not contribute significantly to gross
margin. See Note B to the Financial Statements Revenue Recognition
and Note B to the Financial Statements Allocations of General and Adminstrative
Costs and Engineering Costs for further discussion of product development
agreements.
Marketing
costs for 2008 were $673,000, a $65,000 (10.7%) increase over
the $608,000 spent in 2007. This is primarily attributable
to an increase in trade show activity, travel and promotion costs and share
based compensation cost which were offset by a reduction in personnel costs.
Expense allocated to marketing costs for amortization of share based
compensation as required by SFAS 123R was approximately $85,000 for 2008 and
$29,000 for 2007.
General
and administrative costs for 2008 were $1,713,000, a $386,000 (29.1%) increase
over the $1,327,000 spent in 2007. We did not allocate any of our general and
administrative costs to costs of sales for product development agreements in
2008 but we did allocate $8,000 of such costs in 2007. (For more
information on the allocation of certain general and administrative costs to
cost of goods sold, see Note B to the Financial Statements.) Without
this allocation, general and administrative costs would have increased by
$378,000 (28.3%) over 2007 to $1,713,000. The increase was primairly
attributable to an increase in professional fees and share based compensation
cost which were offset by a reduction in personnel benefit
costs. Expense allocated to G&A for amortization of share based
compensation as required by SFAS 123R for 2008 was approximately $401,000
compared to $30,000 in 2007.
Engineering
and product development expenditures decreased $114,000 (10.0%) to
$1,032,000 in 2008 compared to $1,146,000 in 2007. We did not
allocate any of our engineering costs to costs of sales for product development
agreements in 2008 but we did allocate $20,000 of such costs in
2007. (For more information on the allocation of certain engineering
costs to cost of goods sold, see Note B to the Financial
Statements.) Without these allocations, engineering costs would have
decreased by $134,000 (11.5%) to $1,032,000 in 2008 compared to $1,166,000 in
2007. This is primarily attributable to decreases in staffing and
related costs of $180,000, travel costs of $33,000 and outside service costs of
$48,000, partially offset by an increase in share based compensation costs of
$125,000. Expense allocated to engineering and product development costs for the
amortization of share-based compensation as required by SFAS 123R for 2008 was
$163,000 compared to $38,000 in 2007.
7
Other
income increased $16,000 to $29,000 in 2008 compared to $13,000 in
2007. The increase in 2008 is primarily attributeable to not having a loss on
the abandonement of equipment of $16,000.
Interest
expense increased $691,000 to $921,000 in 2008 compared to $230,000 in
2007. The increase is primarily attributable to increased debt of
$2,115,000 in 2008 compared to 2007 and changes in interest rates on Class 2 and
Class 3 Notes. (see Note C to financial statements).
Seasonality
and Quarterly Fluctuations
Integral
Vision’s revenues and operating results have varied substantially from quarter
to quarter and management believes these fluctuations may continue. Our reliance
on large orders has contributed to the variability of our operating
results.
Liquidity
and Capital Resources
Net cash
used in operating activities was $1,766,000 for the year ended December 31,
2008, compared to $2,625,000 for the year ended December 31, 2007. Operating
cash flow for both years primarily reflected net losses of $10,733,000 for 2008
and $3,041,000 for 2007 adjusted for non-cash charges (depreciation,
amortization, warrants issued in settlement of interest, non-cash interest
related to warrant modification, employee share based compensation expense,
issuance of Class 3 Notes in settlement of interest, modification and issuance
of warrants to PIPE Equity Investors, extinguishment loss from modification and
exchange of debt instruments, and changes in working capital). Working capital
changes for 2008 primarily reflected increases in accounts receivable and
inventories as a result of increases in our product sales and increases in
accounts payable and other accrued liabilities as a result of increases in
deferred revenue, and an increase in accrued interest as a result of additional
issuances of Class 2 and Class 3 Notes. Working capital changes for the year
2007 primarily reflected increases in accounts receivable and inventory
resulting from the timing of our sales orders and increases in accounts payable
and other accrued liabilities resulting from increases in deferred revenue and
accrued interest.
Investing
activities for the year ended December 31, 2008 included an increase in computer
equipment of $3,000 and an increase in patents of $8,000. Our
investing activities for the year ended December 31, 2007 included the purchase
of approximately $35,000 of equipment and $8,000 for patents.
Financing
activities for the year ended December 31, 2008 included proceeds of $2,051,000
from the issuance of Class 2 Notes, the payment of $88,000 of principle on Class
2 Notes, a principal payment of $5,000 for Class 3 Notes, and a payment of
$48,000 for financing fees. Our financing activities for the year ended December
31, 2007 included proceeds of $2,675,000 from the issuance of Class 2 Notes and
the payment of $61,000 of principal on Class 2 Notes, and received proceeds from
the exercise of options of $8,000. We paid $32,000 of interest
on Class 3 Notes during the year ended December 31, 2008 and $30,000 during the
year ended December 31, 2007.
On
September 15, 2008, we executed a Waiver and Amendment Agreement with the
parties of a certain Securities Purchase Agreement dated April 12, 2005 (the
“2005 Agreement”). In conjunction with the Waiver and Amendment
Agreement, the Company issued 7,000,000 Warrants with an exercise price of
$0.001 (the “New Warrants”) to purchase its common stock and agreed, pursuant to
a Registration Rights Agreement, to register the resale of the shares underlying
the New Warrants. Each of the Investors received New Warrants in
proportion to their original investment in the Company under the 2005
Agreement. Pursuant to the Waiver and Amendment Agreement, the
parties amended the warrants previously issued under the 2005 Agreement (the
“Old Warrants”) by reducing the exercise price to $0.001 per share, and deleting
a provision therein that restricted equity sales by the Company. The
parties also amended the 2005 Agreement so as to modify certain rights of first
refusal to the Investors on future equity issuances by the Company and to delete
a “most favored nations” clause that gave the Investors the right to exchange
their securities for securities issued by the Company having more favorable
terms. The Investors also consented to the Restructuring of Class 2
and Class 3 Notes described below.
8
On
September 15, 2008, we entered into a series of Exchange Agreements with certain
holders of the Company’s Class 2 Notes and Class 3 Notes. In
conjunction with such Exchange Agreements, such holders of Class 2 Notes agreed
to either amend their Class 2 Notes or exchange their Class 2 Notes for Class 3
Notes. Such holders of Class 3 Notes agreed to either amend their
Class 3 Notes or exchange their Class 3 Notes for Class 2
Notes. Pursuant to the Exchange Agreements:
|
a)
|
The
holders of $1,437,000 of Class 2 Notes issued prior to December 1, 2007
elected to receive 12% interest per annum effective as January 2, 2008 and
to cease warrant accrual as of January 3, 2008. For certain
Class 2 Noteholders, the maturity date for $718,500 of Class 2 Notes was
extended to July 1, 2009 and the maturity date for $718,500 of Class 2
Notes was extended to October 1, 2009. The holders of
$1,477,000 of the Class 2 Notes issued prior to December 1, 2007 elected
to receive 8% interest per annum effective as of January 2, 2008 and to
cease warrant accrual as of January 3,
2008.
|
|
b)
|
The
holders of $1,477,000 of the Class 2 Notes issued prior to December 1,
2007 and of $1,803,000 of Class 2 Notes issued after December 1, 2007 (and
accumulated interest thereon) have exchanged their Class 2 Notes for Class
3 Notes that will mature on July 1, 2010. Such Class 3 Notes
will earn 8% interest per annum and will be convertible into common stock
of the Company at a conversion price of $0.25 per
share.
|
|
c)
|
The
holders of $234,000 of Class 3 Notes agreed to amend the terms of their
Class 3 Notes by extending the maturity date to July 1, 2010 and reducing
the conversion price of their Class 3 Notes from $1.00 per share to $0.25
per share.
|
|
d)
|
The
holders of $69,500 of Class 3 Notes agreed to exchange their Class 3 Notes
for Class 2 Notes that will earn 12% interest per annum and have a
maturity date of July 1, 2009. The holders of $69,500 of Class
3 Notes agreed to exchange their Class 3 Notes for Class 2 notes that will
earn 12% interest per annum and have a maturity date of October 1,
2009.
|
Except as
described above, the payment terms under the Class 2 Notes and Class 3 Notes are
the same as described in the Fifth Amended and Restated Note and Warrant
Purchase Agreement, as filed with the Company’s Form 10-KSB for the year ended
December 31, 2007.
Under the
terms of the Fifth Amended Note and Warrant Purchase Agreement, we can issue a
combined total of $7,000,000 of Class 2 and Class 3 Notes. As of
March 27, 2009 a combined total of $6,447,666 of Class 2 and Class 3 Notes were
outstanding, leaving a balance of $552,334 of Notes available for
issue. The terms of the Waiver and Amendment Agreement limit the
amount of Class 3 Notes that can be issued from that balance without invoking
the Right of First Refusal clause to $429,978. For an explanation of
Class 2 and Class 3 Notes, see Note C – Long Term Debt and Other Financing
Arrangements. The Company’s present cash position requires us to
secure additional funding for the immediate future as well as funding to provide
working capital for anticipated orders. See Note H – Going Concern
Matters for discussion about the amount of funding required and Note I –
Subsequent Events for recent activity associated with Class 2 and Class 3
Notes. Management expects to issue some or all of the available Notes
as part of our plan to raise additional capital in the first and second quarters
of 2009 to fund operations through at least the first quarter of 2010 and
provide working capital for anticipated orders.
For
further discussion regarding our obligations, see Note C – Long Term Debt and
Other Financing Arrangements and Note I – Subsequent Events.
Impact of
Inflation
The
amounts presented in the financial statements do not provide for the effect of
inflation on our operations or our financial position. Amounts shown
for property, plant and equipment and for costs and expenses reflect historical
cost and do not necessarily represent replacement cost or charges to operations
based on replacement cost. Our operations together with other sources
are intended to provide funds to replace property, plant and equipment as
necessary. Net income would be lower than reported if the effects of
inflation were reflected either by charging operations with amounts that
represent replacement costs or by using other inflation
adjustments.
9
Off-Balance
Sheet Arrangements
We have
no significant off-balance sheet arragements that have or are reasonably likely
to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to
investors.
Recently
Issued Accounting Standards
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, “Fair Value Measurements” (“SFAS 157”) which defines fair
value, establishes a framework for measuring fair value in accordance with
accounting principles generally accepted in the United States of America, and
expands disclosures about fair value measurements. In February 2008, the FASB
issued FASB Staff Position (FSP 157-2), “Effective Date of FASB Statement
No. 157”. FSP 157-2 delays the effective date of SFAS 157 for all
non-financial assets and non-financial liabilities that are not re-measured at
fair value on a recurring basis until fiscal years beginning after
November 15, 2008. The Company is currently evaluating the potential impact
of this statement on its non-financial assets and non-financial liabilities
included in its financial statements. For financial assets and financial
liabilities, SFAS 157 was effective for the Company on January 1, 2008
on a prospective basis. The adoption of SFAS 157 to the Company’s financial
assets and financial liabilities did not have a material effect on the Company’s
financial condition or results of operations as of January 1,
2008.
In
October 2008 the FASB issued FASB Staff Position No. FAS 157-3 (“FSP-157-3”),
which clarifies the application of SFAS No. 157 in an inactive market,
including how internal assumptions should be considered when measuring fair
value, how observable market information in a market that is not active should
be considered and how the use of market quotes should be used when assessing
observable and unobservable data. This FSP is effective upon issuance including
prior periods for which financial statements have not been issued. The adoption
of FSP 157-3 did not have a material effect on our financial
statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financials Liabilities Including an Amendment of FASB
Statement No. 115”. This standard permits measurement of certain financial
assets and financial liabilities at fair value. If the fair value option is
elected, the unrealized gains and losses are reported in earnings at each
reporting date. Generally, the fair value option may be elected on an
instrument-by-instrument basis, as long as it is applied to the instrument in
its entirety. The fair value option election is irrevocable, unless a new
election date occurs. SFAS No. 159 requires prospective application and also
establishes certain additional presentation and disclosure requirements. The
standard is effective as of the beginning of the fiscal year that begins after
November 15, 2007. The Company adopted the provisions of SFAS No. 159 as of
January 1, 2008 and has elected not to adopt the fair value option of SFAS No.
159, as of that date. The adoption did not have a material impact on the
consolidated results of operations and financial condition.
In
December 2007, the FASB issued SFAS No. 141(Revised), “Business Combinations”
(“SFAS No. 141(R)”), which replaces SFAS No. 141, “Business Combinations,” and
requires an acquirer to recognize the assets acquired, the liabilities assumed,
and any non-controlling interest in the acquiree at the acquisition date,
measured at their fair values as of that date, with limited exceptions. This
statement also requires the acquirer in a business combination achieved in
stages to recognize the identifiable assets and liabilities, as well as the
non-controlling interest in the acquiree, at the full amounts of their fair
values. SFAS No. 141(R) makes various other amendments to authoritative
literature intended to provide additional guidance or to confirm the guidance in
that literature to that provided in this statement. This statement applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. We expect to adopt this statement on January 1, 2009. SFAS
No. 141(R)’s impact on accounting for business combinations is dependent upon
acquisitions at that time.
10
In
December 2007, FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements,” which amends Accounting Research Bulletin
No. 51, “Consolidated Financial Statements,” to improve the relevance,
comparability, and transparency of the financial information that a reporting
entity provides in its consolidated financial statements. SFAS No. 160
establishes accounting and reporting standards that require the ownership
interests in subsidiaries not held by the parent to be clearly identified,
labeled and presented in the consolidated statement of financial position within
equity, but separate from the parent’s equity. This statement also requires the
amount of consolidated net income attributable to the parent and to the
non-controlling interest to be clearly identified and presented on the face of
the consolidated statement of income. Changes in a parent’s ownership interest
while the parent retains its controlling financial interest must be accounted
for consistently, and when a subsidiary is deconsolidated, any retained
non-controlling equity investment in the former subsidiary must be initially
measured at fair value. The gain or loss on the deconsolidation of the
subsidiary is measured using the fair value of any non-controlling equity
investment. The statement also requires entities to provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the non-controlling owners. This statement applies
prospectively to all entities that prepare consolidated financial statements and
applies prospectively for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. We are currently evaluating the
effect, if any, of this statement on our financial condition and results of
operations.
In May
2008, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 162, “The Hierarchy
of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS
No. 162 identifies the sources of accounting principles and the framework
for selecting the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with GAAP. Any effect
of applying the provisions of these Statements shall be reported as a change in
accounting principle in accordance with SFAS No. 154, “Accounting Changes and Error
Corrections.” This statement is effective 60 days after the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AICPA
Professional Standards AU Section 411, “The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles.” We do not
expect that the adoption of this standard will have a material effect on our
financial position and results of operations.
Management’s
Discussion of Critical Accounting Policies
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting year. The accounting policies
discussed below are considered by management to be the most important to an
understanding of our financial statements, because their application places the
most significant demands on management's judgment and estimates about the effect
of matters that are inherently uncertain. Our assumptions and estimates were
based on the facts and circumstances known at December 31,
2008. Future events rarely develop exactly as forecast; the best
estimates routinely require adjustment. These policies are also discussed in
Note B of the Notes to Financial Statements included in Item 8 of this
report.
Revenue
Recognition
We
recognize revenue in accordance with SOP 97-2, Software Revenue Recognition and
Staff Accounting Bulletin No. 101 (“SAB 101”), and Staff Accounting Bulletin No.
104 (“SAB 104”) Revenue Recognition in Financial Statements. Revenue is
recognized when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the selling price is fixed or
determinable and collectibility is reasonably assured.
We
recognize revenue at the time of shipment for product sales where the customer’s
acceptance criteria can be demonstrated as met prior to shipment and where title
transfers on shipment. We recognize revenue at the time of final
acceptance at the customer site when title does not transfer on shipment or if
acceptance criteria at the customer site are substantially different than
acceptance criteria for shipment. We recognize revenue for product
sales with no specific customer acceptance criteria, including spare parts, on
shipment. Revenue from service contracts is recognized over the term
of the contract. Revenue is reported net of sales
commissions.
11
Revenue
is also derived through business agreements for product
development. We conduct specified product development projects
related to one of our principal technology specializations for an agreed-upon
fee. Typically, the agreements require “best efforts” with no
specified performance criteria. Revenue from product development
agreements, where there are no specific performance terms, is recognized in
amounts equal to the amounts expended on the programs. Generally, the
agreed-upon fees contemplate reimbursing us, after our agreed-upon cost share,
if any, for costs considered to be associated with project
activities. These include expenses for direct product development and
research, operating expenses, general and administrative expenses, and
depreciation. Accordingly, expenses related to product development
agreements are recorded as cost of revenues from product development
agreements.
Inventories
Inventories
are stated at the lower of standard cost, which approximates actual cost
determined on a first-in, first-out basis, or market. Inventories are
recorded net of allowances for unsalable or obsolete raw materials,
work-in-process and finished goods. We evaluate, on a quarterly basis, the
status of our inventory to ensure the amount recorded in the financial
statements reflects the lower of our cost or the value we expect to receive when
the inventory is sold. This estimate is based on several factors, including the
condition and salability of the inventory and the forecasted demand for the
particular products incorporating these components. Based on current backlog and
expected orders, we forecast the upcoming usage of current stock. We record
reserves for obsolete and slow-moving parts ranging from 0% for active parts
with sufficient forecasted demand up to 100% for excess parts with insufficient
demand or obsolete parts. Amounts in work-in-process and finished
goods inventory typically relate to firm orders and, therefore, are not subject
to obsolescence risk.
Impairment
of Long-lived Assets
We review
our long-lived assets, including property, equipment and intangibles, for
impairment whenever events or changes in business circumstances indicate that
the carrying amount of the assets may not be fully recoverable. An impairment
loss would be recognized when estimated undiscounted future cash flows expected
to result from the use of the asset and its eventual disposition are less than
the carrying amount of the asset.
Share-Based
Compensation
We
account for our share based compensation plans according to the provisions of
SFAS 123-R. Accordingly, compensation costs attributable to stock options or
similar equity instruments granted are measured at the fair value at the grant
date, and expensed over the expected vesting period.
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model. The fair value of all awards is
amortized on a straight line basis over the requisite service
periods. The expected life of all awards granted represents the
period of time that they are expected to be outstanding. The expected
life is determined using historical and other information available at the time
of grant. Expected volatilities are based on historical volatility of
our common stock, and other factors. The risk-free rate for periods
within the contractual life of the option is based on the U.S. Treasury yield
curve in effect at the time of grant. We use historical data to
estimate pre-vesting option forfeitures.
Contingencies
and Litigation
We make
an assessment of the probability of an adverse judgment resulting from current
and threatened litigation. We accrue the cost of an adverse judgment if, in
Management’s estimation, an adverse settlement is probable and Management can
reasonably estimate the ultimate cost of such litigation. We have
made no such accruals at December 31, 2008.
12
ITEM 7A. Quantitative
and Qualitative Disclosures about Market Risk
This Item
7A is not applicable to us as, pursuant to Item 305(e) of Regulation S-K, a
smaller reporting company is not required to provide the information required by
Item 305 of Regulation S-K.
ITEM 8. Financial
Statements and Supplementary Data
The
annual financial statements and results of operations are submitted in separate
sections of this report. Pursuant to Item 302(c) of Regulation S-K, a
smaller reporting company is not required to provide the information required by
Item 302 of Regulation S-K.
ITEM 9. Changes in
and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
ITEM 9A.Controls and
Procedures
Management’s
Report on Internal Control over Financial Reporting
Management
is responsible for establishing and maintaining adaquate internal control over
financial reporting for the registrant, as such term is defined in Exchange Act
Rule 13a-15(f). We have designed such internal control over financial
reporting to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles in the United States of
America.
Management
has evaluated the effectiveness of our internal control over financial reporting
using the “Internal Control – Integrated Framework (1992)” created by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)
framework using “SarboxPro”, a commercially available software package designed
to implement the COSO framework in compliance with SEC Release No.
34-55929. Management has determined that internal controls over
financial reporting were effective as of December 31, 2008 (as defined in Item
308T(a)(3) of Regulation S-K). We have also disclosed in this report
any change in our internal control over financial reporting that occurred during
the most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
This
annual report does not include an attestation report of the Company's
independent registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company's independent registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to
provide only management's report in this annual report.
Management’s
Evaluation of Disclosure Controls and Procedures
The
Company’s chief executive officer and chief financial officer have each reviewed
and evaluated the effectiveness of the Company’s disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of
the end of the period covered by this report. Based on that evaluation, the
chief executive officer and chief financial officer have each concluded that the
Company’s current disclosure controls and procedures are
effective. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by an issuer in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the issuer’s management,
including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure.
13
Changes
in Internal Controls
There
have been no changes in the Company’s internal controls over financial reporting
that occurred during the Company’s fourth quarter of the fiscal year that
materially affected, or are reasonably likely to materially affect, the
Company’s internal controls over financial reporting.
ITEM 9B. Other
Information
None
14
Part III
ITEM 10. Directors,
Executive Officers, Promoters, Control Persons and Corporate Governance;
Compliance with Section 16(a) of the Exchange Act
Item 10
is hereby incorporated by reference from the Registrant’s definitive proxy
statement to be filed within 120 days of December 31, 2008.
ITEM 11. Executive
Compensation
Item 11
is hereby incorporated by reference from the Registrant’s definitive proxy
statement to be filed within 120 days of December 31, 2008.
ITEM 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 12
is hereby incorporated by reference from the Registrant’s definitive proxy
statement to be filed within 120 days of December 31, 2008.
ITEM 13. Certain
Relationships and Related Transactions, and Director
Independence
The
following table sumarizes the debt transactions with the Company involving our
Directors and certain shareholders that own more than five percent (5%) of the
outstanding shares of common stock of the Company.
15
Greater
than 5% shareholder
|
Director
|
|||||||||||||||
John
Hunter
|
John
R. Kiely, III.
|
Max
A. Coon
|
Total
|
|||||||||||||
Outstanding
balance as of December 31, 2007
|
||||||||||||||||
Class
2
|
$ | 1,184,000 | $ | 1,050,000 | $ | 250,000 | ||||||||||
Class
3
|
$ | - | $ | - | $ | - | ||||||||||
$ | 1,184,000 | $ | 1,050,000 | $ | 250,000 | $ | 2,484,000 | |||||||||
Largest
aggregate amount of principle outstanding during period
|
||||||||||||||||
2008
|
$ | 1,976,371 | $ | 1,685,266 | $ | 386,137 | ||||||||||
2007
|
$ | 1,184,000 | $ | 1,050,000 | $ | 250,000 | ||||||||||
Aggregate
amount of transactions (See "Related Party Transaction Detail" table
below)
|
||||||||||||||||
2008
|
$ | 792,371 | $ | 635,266 | $ | 136,137 | ||||||||||
2007
|
$ | 1,034,000 | $ | 900,000 | $ | 250,000 | ||||||||||
Outstanding
balance as of December 31, 2008
|
||||||||||||||||
Class
2
|
$ | 667,000 | $ | 525,000 | $ | 125,000 | ||||||||||
Class
3
|
$ | 1,309,371 | $ | 1,160,266 | $ | 261,137 | ||||||||||
$ | 1,976,371 | $ | 1,685,266 | $ | 386,137 | $ | 4,047,774 | |||||||||
Outstanding
balance as of March 31, 2009
|
||||||||||||||||
Class
2
|
$ | 1,781,112 | $ | 710,945 | $ | 125,000 | ||||||||||
Class
3
|
$ | 1,490,167 | $ | 1,321,844 | $ | 298,161 | ||||||||||
$ | 3,271,279 | $ | 2,032,789 | $ | 423,161 | $ | 5,727,229 | |||||||||
Amount
of principal paid during year
|
||||||||||||||||
2008
|
$ | 88,000 | $ | - | $ | - | ||||||||||
2007
|
$ | 61,000 | $ | - | $ | - | ||||||||||
Amount
of interest paid during year
|
||||||||||||||||
Cash
2008
|
$ | 567 | $ | - | $ | - | ||||||||||
Notes
issued in payment of interest 2008
|
$ | 66,370 | $ | 60,267 | $ | 11,137 | ||||||||||
Value
of warrants issued 2008
|
$ | 187,561 | $ | 778 | $ | 55,602 | ||||||||||
Total
2008
|
$ | 254,498 | $ | 61,045 | $ | 66,739 | $ | 382,282 | ||||||||
Cash
2007
|
$ | - | $ | - | $ | - | ||||||||||
Notes
issued in payment of interest 2007
|
$ | - | $ | - | $ | - | ||||||||||
Value
of warrants issued 2007
|
$ | - | $ | 14,099 | $ | - | ||||||||||
Total
2007
|
$ | - | $ | 14,099 | $ | - | $ | 14,099 | ||||||||
Accrued
interest at December 31
|
||||||||||||||||
Cash
2008
|
$ | 167,822 | $ | 151,333 | $ | 39,033 | ||||||||||
Value
of warrants accrued not issued 2008
|
$ | - | $ | - | $ | - | ||||||||||
Total
2008
|
$ | 167,822 | $ | 151,333 | $ | 39,033 | $ | 358,188 | ||||||||
Cash
2007
|
$ | 69,200 | $ | 59,292 | $ | 20,479 | ||||||||||
Value
of warrants accrued not issued 2007
|
$ | 726 | $ | 388 | $ | 215 | ||||||||||
Total
2007
|
$ | 69,926 | $ | 59,680 | $ | 20,694 | $ | 150,300 |
For an
explanation of the terms of the Class 2 Notes, Class 3 Notes, and Warrants,
refer to Note C – Long Term Debt and Other Financing in the notes to the
financial statements.
The
following tables detail debt transactions with the Company involving our
Directors and certain shareholders that own more than five percent (5%) of the
outstanding shares of common stock of the Company for the years ended December
31, 2008 and December 31, 2007.
16
Note
|
Related
Party
Transaction
Detail for
|
Interest
|
Warrant
|
||||||||||||||||||
Number
|
2008
|
Class
2 Note
|
Classs
3 Note
|
Date
|
Date
due
|
rate
|
accrual
rate(8)
|
||||||||||||||
93
|
J.N.
Hunter
|
$ | 125,000 | $ | - |
01/22/08
|
02/15/08
|
12 | % |
None
|
|||||||||||
95
|
J.N.
Hunter
|
$ | 100,000 | $ | - |
03/26/08
|
04/30/08
|
12 | % |
None
|
|||||||||||
96
|
J.N.
Hunter
|
$ | 100,000 | $ | - |
04/24/08
|
05/31/08
|
12 | % |
None
|
|||||||||||
99
|
J.N.
Hunter
|
$ | 100,000 | $ | - |
05/23/08
|
06/30/08
|
12 | % |
None
|
|||||||||||
102
|
J.N.
Hunter
|
$ | 100,000 | $ | - |
06/27/08
|
07/31/08
|
12 | % |
None
|
|||||||||||
109
|
J.N.
Hunter
|
$ | 114,000 | $ | - |
08/26/08
|
09/30/08
|
12 | % |
None
|
|||||||||||
109
|
J.N.
Hunter (1)
|
$ | (13,000 | ) | $ | - |
09/08/08
|
n/a
|
n/a |
n/a
|
|||||||||||
50
|
J.N.
Hunter (2)
|
$ | - | $ | 1,309,371 |
09/15/08
|
07/01/10
|
8 | % |
n/a
|
|||||||||||
Various
|
J.N.
Hunter (3)
|
$ | (1,243,000 | ) | $ | - |
09/15/08
|
n/a
|
n/a |
n/a
|
|||||||||||
118
|
J.N.
Hunter
|
$ | 75,000 | $ | - |
10/28/08
|
11/30/08
|
12 | % |
None
|
|||||||||||
118
|
J.N.
Hunter (1)
|
$ | (75,000 | ) | $ | - |
11/19/08
|
n/a
|
n/a |
n/a
|
|||||||||||
119
|
J.N.
Hunter
|
$ | 100,000 | $ | - |
12/17/08
|
01/23/09
|
12 | % |
None
|
|||||||||||
Total
net transactions
|
$ | (517,000 | ) | $ | 1,309,371 | ||||||||||||||||
92
|
John
R. Kiely, III
|
$ | 175,000 | $ | - |
01/23/08
|
02/15/08
|
12 | % |
None
|
|||||||||||
94
|
John
R. Kiely, III
|
$ | 100,000 | $ | - |
03/26/08
|
04/30/08
|
12 | % |
None
|
|||||||||||
97
|
John
R. Kiely, III
|
$ | 100,000 | $ | - |
04/29/08
|
05/31/08
|
12 | % |
None
|
|||||||||||
98
|
John
R. Kiely, III
|
$ | 100,000 | $ | - |
05/22/08
|
06/30/08
|
12 | % |
None
|
|||||||||||
100
|
John
R. Kiely, III
|
$ | 50,000 | $ | - |
06/19/08
|
07/31/08
|
12 | % |
None
|
|||||||||||
101
|
John
R. Kiely, III
|
$ | 50,000 | $ | - |
06/23/08
|
07/31/08
|
12 | % |
None
|
|||||||||||
51
|
John
R. Kiely, III (4)
|
$ | - | $ | 608,668 |
09/15/08
|
07/01/10
|
8 | % |
n/a
|
|||||||||||
Various
|
John
R. Kiely, III (3)
|
$ | (575,750 | ) | $ | - |
09/15/08
|
n/a
|
n/a |
n/a
|
|||||||||||
52
|
John
R. Kiely, III (5)
|
$ | - | $ | 551,598 |
09/15/08
|
07/01/10
|
8 | % |
n/a
|
|||||||||||
Various
|
John
R. Kiely, III (3)
|
$ | (524,250 | ) | $ | - |
09/15/08
|
n/a
|
n/a |
n/a
|
|||||||||||
Total
net transactions
|
$ | (525,000 | ) |
$
|
1,160,266 | ||||||||||||||||
108
|
Max
A. Coon
|
$ | 125,000 | $ | - |
08/25/08
|
09/30/08
|
12 | % |
None
|
|||||||||||
56
|
Max
A. Coon (6)
|
$ | - | $ | 135,274 |
09/15/08
|
07/01/10
|
8 | % |
n/a
|
|||||||||||
63
|
Max
A. Coon (3)
|
$ | (125,000 | ) | $ | - |
09/15/08
|
n/a
|
n/a |
n/a
|
|||||||||||
58
|
Max
A. Coon (7)
|
$ | - | $ | 125,863 |
09/15/08
|
07/01/10
|
8 | % |
n/a
|
|||||||||||
108
|
Max
A. Coon (3)
|
$ | (125,000 | ) | $ | - |
09/15/08
|
n/a
|
n/a |
n/a
|
|||||||||||
Total
net transactions
|
$ | (125,000 | ) | $ | 261,137 | ||||||||||||||||
Total
net transactions
|
|||||||||||||||||||||
at
December 31,
2008
|
$ | (1,167,000 | ) | $ | 2,730,774 |
(1) Principal
paid with cash.
(2) Includes
$66,370 of interest.
(3) Principal
paid with new note.
(4) Includes
$32,918 of interest.
(5) Includes
$27,348 of interest.
(6) Includes
$10,274 of interest.
(7) Includes
$863 of interest.
(8)
|
Expressed
as warranants/$/year. Note holders elected to receive no warrants and earn
an additional 2% interest.
|
17
Note
Number
|
Related Party
Transaction Detail
for 2007
|
Class 2 Note
|
Classs 3 Note
|
Transaction
Date
|
Date due
|
Interest
rate
|
Warrant
accrual
rate (2)
|
|||||||||||||||
58
|
J.N.
Hunter
|
$ | 50,000 | $ | - |
01/22/07
|
01/11/08
|
10 | 1 | |||||||||||||
59
|
J.N.
Hunter
|
$ | 145,000 | $ | - |
01/22/07
|
01/11/08
|
10 | 1 | |||||||||||||
59
|
J.N.
Hunter (1)
|
$ | (61,000 | ) | $ | - |
02/07/07
|
n/a
|
n/a | N/A | ||||||||||||
62
|
J.N.
Hunter
|
$ | 70,000 | $ | - |
02/22/07
|
01/11/08
|
10 | 1 | |||||||||||||
65
|
J.N.
Hunter
|
$ | 75,000 | $ | - |
03/26/07
|
01/11/08
|
10 | 1 | |||||||||||||
69
|
J.N.
Hunter
|
$ | 112,500 | $ | - |
04/24/07
|
01/11/08
|
10 | 1 | |||||||||||||
70
|
J.N.
Hunter
|
$ | 92,500 | $ | - |
05/23/07
|
01/11/08
|
10 | 1 | |||||||||||||
76
|
J.N.
Hunter
|
$ | 50,000 | $ | - |
07/17/07
|
01/11/08
|
10 | 1 | |||||||||||||
78
|
J.N.
Hunter
|
$ | 100,000 | $ | - |
07/26/07
|
01/11/08
|
10 | 1 | |||||||||||||
81
|
J.N.
Hunter
|
$ | 50,000 | $ | - |
08/23/07
|
01/11/08
|
10 | 1 | |||||||||||||
82
|
J.N.
Hunter
|
$ | 50,000 | $ | - |
08/29/07
|
01/11/08
|
10 | 1 | |||||||||||||
85
|
J.N.
Hunter
|
$ | 75,000 | $ | - |
09/25/07
|
01/11/08
|
10 | 1 | |||||||||||||
87
|
J.N.
Hunter
|
$ | 100,000 | $ | - |
10/25/07
|
01/11/08
|
10 | 1 | |||||||||||||
89
|
J.N.
Hunter
|
$ | 75,000 | $ | - |
11/26/07
|
01/11/08
|
10 | 1 | |||||||||||||
91
|
J.N.
Hunter
|
$ | 50,000 | $ | - |
12/21/07
|
01/11/08
|
12 |
None
|
|||||||||||||
$ | 1,034,000 | $ | - | |||||||||||||||||||
60
|
John
R. Kiely, III
|
$ | 50,000 | $ | - |
01/22/07
|
01/11/08
|
10 | 1 | |||||||||||||
61
|
John
R. Kiely, III
|
$ | 70,000 | $ | - |
02/22/07
|
01/11/08
|
10 | 1 | |||||||||||||
64
|
John
R. Kiely, III
|
$ | 75,000 | $ | - |
03/26/07
|
01/11/08
|
10 | 1 | |||||||||||||
67
|
John
R. Kiely, III
|
$ | 112,500 | $ | - |
04/23/07
|
01/11/08
|
10 | 1 | |||||||||||||
72
|
John
R. Kiely, III
|
$ | 50,000 | $ | - |
05/24/07
|
01/11/08
|
10 | 1 | |||||||||||||
73
|
John
R. Kiely, III
|
$ | 42,500 | $ | - |
05/29/07
|
01/11/08
|
10 | 1 | |||||||||||||
77
|
John
R. Kiely, III
|
$ | 50,000 | $ | - |
07/17/07
|
01/11/08
|
10 | 1 | |||||||||||||
79
|
John
R. Kiely, III
|
$ | 75,000 | $ | - |
08/07/07
|
01/11/08
|
10 | 1 | |||||||||||||
80
|
John
R. Kiely, III
|
$ | 75,000 | $ | - |
08/23/07
|
01/11/08
|
10 | 1 | |||||||||||||
86
|
John
R. Kiely, III
|
$ | 125,000 | $ | - |
09/27/07
|
01/11/08
|
10 | 1 | |||||||||||||
88
|
John
R. Kiely, III
|
$ | 100,000 | $ | - |
10/26/07
|
01/11/08
|
10 | 1 | |||||||||||||
90
|
John
R. Kiely, III
|
$ | 75,000 | $ | - |
11/26/07
|
01/11/08
|
10 | 1 | |||||||||||||
$ | 900,000 | $ | - | |||||||||||||||||||
63
|
Max
A. Coon
|
$ | 250,000 | $ | - |
3/8/2007
|
01/11/08
|
10 | 1 | |||||||||||||
$ | 250,000 | $ | - | |||||||||||||||||||
|
||||||||||||||||||||||
Total
net transactions
at
December
31,
2007
|
$ | 2,184,000 | $ | - |
(1)
|
Principal
paid with cash
|
(2)
|
Expressed as
warranants/$/year. Note holder can elect to receive no warrants and earn
an additional 2% interest.
|
On September 15, 2008,
John Hunter exchanged Class 2 Notes for Class 3 Notes with the right to convert
immediately at $0.25 per share, which was less than the fair market value of the
stock on the date of exchange, which resulted in a beneficial conversion
feature of $1,007,078. This was reflected in the statement of
operations as “Extinguishment loss from modification and exchange of debt
instruments”. On the same date, John R. Kiely, III exchanged Class 2 Notes for
Class 3 Notes with the right to convert immediately at $0.25 per share, which
was less than the fair market value of the stock on the date of exchange, which
resulted in a beneficial conversion feature of $892,397. This was
reflected in the statement of operations as “Extinguishment loss from
modification and exchange of debt instruments”. On the same date, Max
A. Coon exchanged Class 2 Notes for Class 3 Notes with the right to convert
immediately at $0.25 per share, which was less than the fair market value of the
stock on the date of exchange, which resulted in a beneficial conversion feature
of $143,119. This was reflected in the statement of operations as
“Extinguishment loss from modification and exchange of debt
instruments”. The aggregate of these related party transactions was
$2,042,594.
On
September 15, 2008, we modified the strike price of 1,850,000 warrants from
$1.00 to $0.001 and issued 3,600,000 warrants for the purchase of common stock
at $0.001 in the aggregate to Special Situations Cayman Fund, L.P., Special
Situations Private Equity Fund, L.P., Special Situations Technology Fund, L.P.,
and Special Situations Technology Fund II, L.P., and recorded an expense for the
modification and issuance of warrants of $2,186,767. On September 15,
2008, we modified the strike price of 1,250,000 warrants from $1.00 to $0.001
and issued 3,000,000 warrants for the purchase of common stock at $0.001 to
Bonanza Master Fund, Ltd., and recorded an expense for the modification and
issuance of warrants of $1,716,190. There were no such transactions
during the fiscal year ended December 31, 2007. The aggregate amount of these
related party transactions was $3,902,957.
18
The
securities referenced above were obtained from the Company in transactions under
the same terms as concurrent transactions with unrelated
parties. While the Company does not have a written policy regarding
related party transactions, in general, the Company will allow related parties
to participate in transactions under the same terms and conditions as unrelated
parties. Where no unrelated parties are participating, the proposed
transaction is reviewed by the Board to determine whether the terms
of the transaction are fair to, and in the best interest of, the
Company. In this respect, the Board uses the overriding “arms length
transaction” criteria to analyze the following factors, in addition to any other
factors it deems appropriate depending on the circumstances, in determining
whether to approve a related party transaction: (i) fairness of the terms for
the Company as related to market and current industry practice; (ii) whether the
transaction is in the Company’s best interest; (iii) materiality of the
transaction as related to the Company; (iv) role of the related party in the
transaction; (v) structure of the transaction; and (vi) interests of all related
parties in the transaction. Approval of a related party transaction may be
conditioned upon the Company and the related party taking certain recommended
actions that the Board deems appropriate and necessary, including, without
limitation, any or all of the following: (x) limiting the duration or magnitude
of the transaction by changing specific terms; (y) requiring that information
about the related party transaction be documented and that reports reflecting
the nature and amount of the transaction be delivered to the Board on a regular
basis; and (z) appointing a Company representative to monitor various aspects of
the related party transaction.
ITEM 14. Principal
Accounting Fees and Services
Item 14
is hereby incorporated by reference from the Registrant’s definitive proxy
statement to be filed within 120 days of December 31, 2008.
ITEM
15. Exhibits, Financial Statement Schedules
Exhibit
|
||
Number
|
Description of Document
|
|
3.1
|
Articles
of Incorporation, as amended (filed as Exhibit 3.1 to the registrant's
Form 10-K for the year ended December 31, 1995, SEC file 0-12728, and
incorporated herein by reference).
|
|
3.2
|
Bylaws
of the Registrant, as amended (filed as Exhibit 3.2 to the registrant's
Form 10-K for the year ended December 31, 1994, SEC file 0-12728, and
incorporated herein by reference).
|
|
4.1
|
Form
of Fourth Amended Note and Warrant Purchase Agreement including Form of
Integral Vision, Inc. Class 3 Note (filed as Exhibit 4.8 to registrant’s
Form 10-K for the year ended December 31, 2003, SEC file 0-12728, and
incorporated herein by reference).
|
|
4.2
|
Securities
Purchase Agreement, Effective April 12, 2005 (filed as Exhibit 4.(A) to
registrant’s Form 8-K filed April 14, 2005, SEC file 0-12728, and
incorporated herein by reference).
|
|
4.3
|
Form
of Consent to Modifications dated November 14, 2006 modifying the terms of
the Fourth Amended Note and Warrant Purchase Agreement including Form of
Integral Vision, Inc. Class 2 Warrant (filed as Exhibit 4.9 to
registrant’s Form 10-Q for the quarter ended September 30, 2006, SEC file
0-12728, and incorporated herein by reference).
|
|
4.4
|
Form
of Consent to Modifications dated August 13, 2007 modifying the terms of
the Fourth Amended Note and Warrant Purchase Agreement (filed as Exhibit
4.4 to registrant’s Form 10-QSB for the quarter ended June 30, 2007, SEC
file 0-12728, and incorporated herein by reference).
|
|
4.5
|
Form
of Consent to Modifications dated October 10, 2007 modifying the terms of
the Fourth Amended Note and Warrant Purchase Agreement (filed as Exhibit
4.6 to registrant’s Form 10-QSB for the quarter ended September 30, 2007,
SEC file 0-12728, and incorporated herein by
reference).
|
|
4.6
|
Form
of Consent to Modifications dated January 18, 2008 modifying the terms of
the Fourth Amended Note and Warrant Purchase Agreement (filed as Exhibit
4.6 to the registrant’s Form 10-KSB for the year ended December 31, 2007,
SEC file 000-12728, and incorporated herein by
reference).
|
|
4.7
|
Form
of Amended Collateral Assignment of Proprietary Rights dated March 5, 2008
(filed as Exhibit 4.7 to the registrant’s Form 10-KSB for the year ended
December 31, 2007, SEC file 000-12728, and incorporated herein by
reference).
|
19
4.8
|
Form
of Amended Security Agreement dated March 6, 2008 (filed as Exhibit 4.8 to
the registrant’s Form 10-KSB for the year ended December 31, 2007, SEC
file 000-12728, and incorporated herein by reference).
|
|
4.9
|
Form
of Consent to Amend and Replace Agreements dated March 12, 2008 (filed as
Exhibit 4.9 to the registrant’s Form 10-KSB for the year ended December
31, 2007, SEC file 000-12728, and incorporated herein by
reference).
|
|
4.10
|
Form
of Fifth Amended and Restated Note and Warrant Purchase Agreement (filed
as Exhibit 4.10 to the registrant’s Form 10-KSB for the year ended
December 31, 2007, SEC file 000-12728, and incorporated herein by
reference).
|
|
4.11
|
Waiver
and Amendment Agreement, effective September 15, 2008, and the
Registration Rights Agreement and common stock Warrants, made a part
thereof, among the respective parties thereto (filed as Exhibit 4.1 to the
registrant’s Form 8-K filed September 15, 2008, SEC file 0-12728, and
incorporated herein by reference).
|
|
4.12
|
Exchange
Agreements, effective September 15, 2008, among the respective parties
thereto (filed as Exhibit 4.3 to the registrant’s Form 8-K filed September
15, 2008, SEC file 0-12728, and incorporated herein by
reference).
|
|
10.1
|
Integral
Vision, Inc. Employee Stock Option Plan (filed as Exhibit 10.5 to the
registrant's Form 10-Q for the quarter ended September 30, 1995, SEC file
0-12728, and incorporated herein by reference).
|
|
10.2
|
Form
of Confidentiality and Non-Compete Agreement Between the Registrant and
its Employees (filed as Exhibit 10.4 to the registrant's Form 10-K for the
year ended December 31, 1992, SEC File 0-12728, and incorporated herein by
reference).
|
|
10.3
|
Integral
Vision, Inc. 1999 Employee Stock Option Plan (filed as exhibit 10.5 to the
registrant’s Form 10-Q for the quarter ended June 30, 1999 and
incorporated herein by reference).
|
|
10.4
|
Integral
Vision, Inc. 2004 Employee Stock Option Plan (filed as exhibit 10.11 to
the registrant’s Form 10-Q for the quarter ended June 30, 2004 and
incorporated herein by reference).
|
|
10.5
|
Integral
Vision, Inc. 2008 Equity Incentive Plan (filed as Exhibit 10.5 to the
registrant’s Form 10-KSB for the year ended December 31, 2007, SEC file
000-12728, and incorporated herein by reference).
|
|
10.6
|
Amendment
and Restatement of Integral Vision, Inc. 2008 Equity Incentive Plan (filed
as Exhibit 10.6 to the registrant’s Schedule 14A filed March 26, 2009, SEC
file 000-12728, and incorporated herein by reference).
|
|
14
|
Code
of Ethics (filed as Exhibit 14 to the registrant’s Form 10-KSB for the
year ended December 31, 2007, SEC file 000-12728, and incorporated herein
by reference).
|
|
23.1
|
Consent
of Rehmann Robson, independent registered public accounting firm (filed as
Exhibit 23.1 to the registrant’s Form 10-K/A for the year ended December
31, 2008 and filed March 31, 2009, SEC file 000-12728, and incorporated
herein by reference).
|
|
31.1
|
Certification
of Chief Executive Officer of Periodic Report pursuant to Rule 13a-14(a)
or Rule 15d-14(a).
|
|
31.2
|
Certification
of Chief Financial Officer of Periodic Report pursuant to Rule 13a-14(e)
or Rule 15d-14(a).
|
|
32.1
|
Certification by Chief Executive
Officer of Periodic Report Pursuant to 18 U.S.C. Section
1350.
|
|
32.2
|
|
Certification
by Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C.
Section 1350.
|
20
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.
INTEGRAL
VISION, INC.
|
||
By:
|
/S/ CHARLES J. DRAKE
|
|
Charles
J. Drake, Chairman of the Board
and
Chief Executive Officer
|
||
Date:
December 20, 2010
|
||
By:
|
/S/ MARK R. DOEDE
|
|
Mark
R. Doede, President, Chief Operating
Officer,
Chief Financial Officer, and Principal
Accounting
Officer
|
||
Date:
December 20, 2010
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/S/ CHARLES J. DRAKE
|
Chairman
of the Board, Chief
|
Charles
J. Drake
|
Executive
Officer, and Director
|
Date:
December 20, 2010
|
|
/S/ MAX A. COON
|
Vice
Chairman, Secretary and Director
|
Max
A. Coon
|
|
Date:
December
20, 2010
|
|
/S/ VINCENT SHUNSKY
|
Treasurer
and Director
|
Vincent
Shunsky
|
|
Date:
December
20, 2010
|
|
/S/ WILLIAM B. WALLACE
|
Director
|
William
B. Wallace
|
Date:
December 20, 2010
21
Report of
Independent Registered Public Accounting Firm
Stockholders
and Board of Directors
Integral
Vision, Inc.
Wixom,
Michigan
We have
audited the accompanying balance sheets of Integral Vision, Inc. as of December
31, 2008 and 2007, and the related statements of operations,
stockholders' deficit and cash flows for each of the years in the
two-year period 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
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 Integral Vision, Inc. as of
December 31, 2008 and 2007, and the results of its operations and its cash flows
for each of the years in the two-year period then ended, in conformity with
accounting principles generally accepted in the United States of
America.
The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. As described in Note O to the financial
statements, the Company is sustaining recurring losses from operations and is
having difficulties in achieving the necessary sales to attain
profitability. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans
in regard to this matter are also described in Note O. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/S/
Rehmann Robson, P.C.
|
Troy,
Michigan
March 31,
2009
22
Balance
Sheets
Integral
Vision, Inc.
December 31
|
||||||||
2008
|
2007
|
|||||||
(in
thousands)
|
||||||||
Assets
|
||||||||
Current
assets
|
||||||||
Cash
|
$ | 144 | $ | 11 | ||||
Accounts
receivable
|
208 | 75 | ||||||
Inventories
|
325 | 265 | ||||||
Other
current assets
|
131 | 97 | ||||||
Total
current assets
|
808 | 448 | ||||||
Property
and equipment
|
||||||||
Building
improvements
|
4 | 4 | ||||||
Production
and engineering equipment
|
234 | 234 | ||||||
Furniture
and fixtures
|
80 | 80 | ||||||
Computer
equipment
|
191 | 190 | ||||||
Marketing/demonstration
equipment
|
139 | 139 | ||||||
648 | 647 | |||||||
Less
accumulated depreciation
|
491 | 431 | ||||||
Net
property and equipment
|
157 | 216 | ||||||
Other
assets - net of accumulated amortization of $1,519,000 for 2008 and
$1,493,000 for 2007
|
72 | 34 | ||||||
72 | 34 | |||||||
Total
assets
|
$ | 1,037 | $ | 698 | ||||
Liabilities
and Stockholders' Deficit
|
||||||||
Current
liabilities
|
||||||||
Notes
payable
|
$ | 469 | $ | 858 | ||||
Notes
payable to related parties and directors (see Note D)
|
1,317 | 2,484 | ||||||
Accounts
payable
|
141 | 75 | ||||||
Accrued
compensation and related costs
|
283 | 298 | ||||||
Accrued
interest
|
88 | 46 | ||||||
Accrued
interest payable to related parties and directors (see Note
D)
|
358 | 150 | ||||||
Accrued
product warranty
|
84 | 82 | ||||||
Other
accrued liabilities
|
54 | 40 | ||||||
Deferred
revenue
|
656 | - | ||||||
Total
current liabilities
|
3,450 | 4,033 | ||||||
Long-term
debt
|
||||||||
Notes
payable
|
940 | - | ||||||
Notes
Payable to related parties and directors (see Note D)
|
2,731 | - | ||||||
Total
liabilities
|
6,181 | 4,033 | ||||||
Stockholders'
deficit
|
||||||||
Preferred
stock, 400,000 shares authorized; none issued
|
- | - | ||||||
Common
stock, without par value, stated value $.20 per share; 70,000,000 shares
authorized; 29,566,409 shares issued and outstanding
|
5,913 | 5,913 | ||||||
Additional
paid-in capital
|
47,391 | 39,407 | ||||||
Accumulated
deficit
|
(59,388 | ) | (48,655 | ) | ||||
Total
stockholders' deficit
|
(6,084 | ) | (3,335 | ) | ||||
Total
liabilities and stockholders' deficit
|
$ | 97 | $ | 698 |
The
accompanying notes are an integral part of these financial
statements.
23
Statements
of Operations
Integral
Vision, Inc.
Year
Ended December 31,
|
||||||||
2008
|
2007
|
|||||||
|
(In
thousands, except per share data)
|
|||||||
Revenues:
|
||||||||
Net
product sales
|
$ | 1,002 | $ | 1,059 | ||||
Net
revenue from product development agreements
|
25 | 92 | ||||||
Total
net revenues (See Note B)
|
1,027 | 1,151 | ||||||
Costs
of sales:
|
||||||||
Costs
of sales for products
|
573 | 781 | ||||||
Cost
of sales for product development agreements
|
- | 97 | ||||||
Depreciation
and amortization
|
17 | 17 | ||||||
Total
costs of sales
|
590 | 895 | ||||||
Gross
margin
|
437 | 256 | ||||||
Other
costs and expenses:
|
||||||||
Marketing
|
673 | 608 | ||||||
General
and administrative - net
|
1,713 | 1,327 | ||||||
Engineering
and development - net
|
1,032 | 1,146 | ||||||
Total
other costs and expenses
|
3,418 | 3,081 | ||||||
Operating
loss
|
(2,981 | ) | (2,825 | ) | ||||
Other
income
|
29 | 13 | ||||||
Interest
expense
|
(130 | ) | (68 | ) | ||||
Interest
expense related parties and directors (see Note D)
|
(791 | ) | (162 | ) | ||||
Extinguishment
loss from modification and exchange of debt instruments (See Note
C)
|
(602 | ) | - | |||||
Extinguishment
loss from modification and exchange of debt instruments for related
parties (See Notes C and D)
|
(2,042 | ) | - | |||||
Modification
and issuance of warrants to PIPE Equity Investors
|
(314 | ) | - | |||||
Modification
and issuance of warrants to PIPE Equity Investors for related parties (see
Notes C and D)
|
(3,903 | ) | - | |||||
Foreign
currency translation gain
|
1 | 1 | ||||||
Loss
from operations before income taxes
|
(10,733 | ) | (3,041 | ) | ||||
Income
taxes
|
- | - | ||||||
Net
loss
|
$ | (10,733 | ) | $ | (3,041 | ) | ||
Basic
and diluted loss per share
|
$ | (0.36 | ) | $ | (0.10 | ) | ||
Weighted
average number of shares outstanding of common stock and common
stock equivalents, where applicable
|
29,566 | 29,534 |
The
accompanying notes are an integral part of these financial
statements.
24
Statements
of Stockholders' Deficit
Integral
Vision, Inc.
Number of
Common
Shares
Outstanding
|
Common
Stock
|
Preferred
Stock
|
Additional
Paid-In Capital
|
Accumulated
Deficit
|
Total
|
|||||||||||||||||||
(in thousands, except number of common shares outstanding)
|
||||||||||||||||||||||||
Balances
at January 1, 2007
|
29,491,409 | $ | 5,898 | $ | - | $ | 39,296 | $ | (45,614 | ) | $ | (420 | ) | |||||||||||
Net
loss for the year
|
(3,041 | ) | (3,041 | ) | ||||||||||||||||||||
Stock
options exercised
|
75,000 | 15 | (7 | ) | 8 | |||||||||||||||||||
Warrants
issued
|
21 | 21 | ||||||||||||||||||||||
Share-based
compensation
|
97 | 97 | ||||||||||||||||||||||
Balances
at December 31, 2007
|
29,566,409 | $ | 5,913 | $ | - | $ | 39,407 | $ | (48,655 | ) | $ | (3,335 | ) | |||||||||||
Net
loss for the year
|
(10,733 | ) | (10,733 | ) | ||||||||||||||||||||
Issuance
of warrants for settlement of interest on Class 2 Notes (See Note C
)
|
243 | 243 | ||||||||||||||||||||||
Modification
and issuance of warrants to PIPE Equity Investors (See Note I
)
|
4,217 | 4,217 | ||||||||||||||||||||||
Extinguishment
loss from modification and exchange of debt instruments (See Note
C)
|
2,644 | 2,644 | ||||||||||||||||||||||
Modification
of warrants previously issued in settlement of interest (See Note
C)
|
230 | 230 | ||||||||||||||||||||||
Issuance
of restricted stock
|
207 | 207 | ||||||||||||||||||||||
Share-based
compensation
|
443 | 443 | ||||||||||||||||||||||
Balances
at December 31, 2008
|
29,566,409 | $ | 5,913 | $ | - | $ | 47,391 | $ | (59,388 | ) | $ | (6,084 | ) |
The
accompanying notes are an integral part of these financial
statements.
25
Statements
of Cash Flows
Integral
Vision, Inc.
Year
Ended December 31
|
||||||||
2008
|
2007
|
|||||||
(in
thousands)
|
||||||||
Cash
Flows From Operating Activities:
|
||||||||
Net
loss
|
$ | (10,733 | ) | $ | (3,041 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
|
61 | 70 | ||||||
Amortization
|
19 | 11 | ||||||
Provision
for losses on inventory obsolence
|
71 | |||||||
Equipment
abandonment loss
|
- | 16 | ||||||
Warrants
issued in settlement of interest
|
243 | - | ||||||
Warrants
issued in settlement of interest to related parties (1)
|
- | - | ||||||
Non-cash
interest related to warrant modification
|
70 | - | ||||||
Non-cash
interest related to warrant modification to related parties
(1)
|
160 | - | ||||||
Share-based
compensation
|
443 | 97 | ||||||
Issuance
of restricted stock
|
207 | - | ||||||
Issuance
of Class 3 Notes in settlement of interest
|
19 | - | ||||||
Issuance
of Class 3 Notes in settlement of interest to related parties
(1)
|
138 | - | ||||||
Modification
and issuance of warrants to PIPE Equity Investors (See Notes C and
F)
|
314 | - | ||||||
Modification
and issuance of warrants to PIPE Equity Investors to related parties (See
Notes C, D, and F)
|
3,903 | - | ||||||
Extinguishment
loss from modification and exchange of debt instruments (See Notes C and
F)
|
602 | - | ||||||
Extinguishment
loss from modification and exchange of debt instruments to related parties
(See Notes C, D, and F)
|
2,042 | - | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(133 | ) | (54 | ) | ||||
Inventories
|
(131 | ) | 117 | |||||
Other
current assets
|
(34 | ) | 22 | |||||
Accounts
payable and other current liabilities
|
317 | 116 | ||||||
Deferred
revenue
|
656 | - | ||||||
Net
cash used in operating activities
|
(1,766 | ) | (2,646 | ) | ||||
Cash
Flows From Investing Activities:
|
||||||||
Purchase
of property and equipment
|
(3 | ) | (35 | ) | ||||
Additional
patent expenditures
|
(8 | ) | (8 | ) | ||||
Net
cash used in investing activities
|
(11 | ) | (43 | ) | ||||
Cash
Flows From Financing Activities:
|
||||||||
Proceeds
from sale of Class 2 Notes
|
537 | 430 | ||||||
Proceeds
from sale of Class 2 Notes to related parties (1)
|
1,514 | 2,184 | ||||||
Payment
of Class 2 Note
|
- | - | ||||||
Payment
of Class 2 Notes to related parties (1)
|
(88 | ) | (61 | ) | ||||
Payment
of Class 3 Note
|
(5 | ) | - | |||||
Debt
financing fees
|
(48 | ) | - | |||||
Proceeds
from exercise of stock options
|
- | 8 | ||||||
Net
cash provided by financing activities
|
1,910 | 2,561 | ||||||
Increase
(Decrease) in cash
|
133 | (128 | ) | |||||
Cash
at beginning of year
|
11 | 57 | ||||||
Cash
at end of year
|
$ | 144 | $ | (71 | ) | |||
Supplemental
cash flows information:
|
||||||||
Interest
paid
|
$ | 32 | $ | 30 | ||||
Supplemental
noncash investing activity:
|
||||||||
Exchange
of Class 2 Notes for Class 3 Notes
|
$ | 3,280 | $ | - | ||||
Exchange
of Class 3 Notes for Class 2 Notes
|
$ | 139 | $ | - |
(1) See
Note D
The
accompanying notes are an integral part of these financial
statements.
26
Notes
to Financial Statements
Integral
Vision, Inc.
Note A –
Nature of Business
Integral
Vision, Inc. develops, manufactures, and markets flat panel display inspection
systems to ensure product quality in the display manufacturing
process. We primarily inspect Microdisplays and small flat panel
displays, though the technology used is scalable to allow inspection of full
screen displays and components. Our customers and potential customers
are primarily large companies with significant investment in the manufacture of
displays. Nearly all of our sales originate in the United States,
Asia, or Europe. Our products are generally sold as capital
goods. Depending on the application, display inspection systems have
an indefinite life and are more likely to require replacement due to possible
technological obsolescence than from physical wear.
During
the period ended March 31, 2006, we began activity associated with a product
development agreement where we are compensated for a portion of our development
costs for a certain best efforts product development. We may not be able to find
future opportunities similar to this, but remain open to such development
agreements where they facilitate our strategic goals.
Major
Customers
The
nature of our product offerings may produce sales to one or a limited number of
customers in excess of 10% of total net sales in any one year. It is
possible that the specific customers reaching this threshold may change from
year to year. Loss of any one of these customers could have a
material impact on our results of operations. For 2008, sales to Plastic Logic
GmbH and Qualcomm MEMS Technologies represented 51% and 37% of net sales,
respectively. Approximately $4,000 was due from two of these customers at
December 31, 2008. For 2007, sales to Qualcomm MEMS Technologies,
Samsung, Liquavista B.V., and Texas Instruments represented 31%, 24% 14%, and
10% of net sales, respectively. Approximately $50,000 was due from
two of these customers at December 31, 2007.
Note B -
Summary of Significant Accounting Policies
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues
and expenses during the reporting year. Actual results could differ
from those estimates.
Cash
Equivalents
Cash and
cash equivalents consist primarily of cash on deposit, certificates of deposit,
money market accounts, and investment grade commercial paper that are readily
convertible into cash and purchased with original maturities of three months or
less.
Accounts
Receivable
Trade
accounts receivable during the year primarily represent amounts due from
equipment manufacturers and end-users in North America, Asia and
Europe. At times, we maintain an allowance for the inability of our
customers to make required payments. These estimates are based on historical
data, the length of time the receivables are past due and other known
factors. An allowance for doubtful accounts was not required at
December 31, 2008 and 2007.
Inventories
Inventories
are stated at the lower of first-in, first-out (“FIFO”) cost or
market. Cost is computed using currently adjusted standards which
approximates actual costs on a FIFO basis. We assesses the
recoverability of all inventory to determine whether adjustments for impairment
are required. At December 31, 2008, inventories consisted of the
following amounts (net of an obsolescence allowance of $150,000 in 2008 and
$79,000 in 2007):
27
2008
|
2007
|
|||||||
(in thousands)
|
||||||||
Raw
materials
|
$ | 187 | $ | 265 | ||||
Work
in process
|
27 | - | ||||||
Finished
goods
|
111 | - | ||||||
$ | 325 | $ | 265 |
We
periodically perform an analysis of our inventory to determine if its cost
exceeds estimated net realizable value. Over the last several years,
given the market conditions and the direction of the Company, we discontinued
certain product lines and attempted to liquidate the remaining inventory related
to those product lines.
Property
and Equipment
Property
and equipment is stated on the basis of cost. Expenditures for normal
repairs and maintenance are charged to operations as incurred.
Depreciation
is computed by the straight-line method based on the estimated useful lives of
the assets (building improvements - 5 years, other property and equipment - 3 to
10 years).
Capitalized
Computer Software Development Costs
Computer
software development costs are capitalized after the establishment of
technological feasibility of the related technology. These costs are
amortized following general release of products based on current and estimated
future revenue for each product with an annual minimum equal to the
straight-line amortization over the remaining estimated economic life of the
product (not to exceed 5 years). We continually review the net
realizable value of capitalized software costs. At the time that a
determination is made that capitalized software amounts exceed the estimated net
realizable value of amounts capitalized, any amounts in excess of the estimated
realizable amounts are written off.
No
software development costs were capitalized during 2008 or
2007. Costs capitalized prior to 2003 have been fully
amortized. These costs were primarily made up of payroll, fringe
benefits, and other direct expenses such as facilities
allocation. The software amortized over the period is for our
microdisplay inspection software toolbox including vision processing algorithms
and our patented sequence development and execution software. These
software components are used in the products we sell.
Patents
Total
patent costs incurred and capitalized were $8,000 and $8,000 in 2008 and 2007,
respectively. Patents are stated at cost less accumulated
amortization. Amortization of the patents amounted to $12,000 and
$11,000 in 2008 and 2007, respectively. These costs are amortized on
a straight-line basis over the estimated useful lives of the assets (not to
exceed 5 years).
Impairment
of Long-lived Assets
We review
our long-lived assets, including property, equipment and intangibles, for
impairment whenever events or changes in business circumstances indicate that
the carrying amount of the assets may not be fully recoverable. An impairment
loss would be recognized when estimated undiscounted future cash flows expected
to result from the use of the asset and its eventual disposition are less than
the carrying amount of the asset.
Deferred
Revenue
Deferred
revenue represents amounts periodically invoiced for sales orders in excess of
amounts recognized as revenues. At December 31, 2008, there was $656,000 of
deferred revenue. We did not have deferred revenue at December 31,
2007.
28
Fair
Value of Financial Instruments
Our
financial instruments are cash and cash equivalents, accounts receivable,
accounts payable, notes payable, and long-term debt. The recorded values of cash
and cash equivalents, accounts receivable, and accounts payable approximate
their fair values based on their short-term nature. The recorded values of notes
payable and long-term debt approximate their fair values, as interest
approximates market rates.
Revenue
Recognition
We
recognize revenue in accordance with SOP 97-2, Software Revenue Recognition,
Staff Accounting Bulletin No. 101 (“SAB 101”), and Staff Accounting Bulletin No.
104 (“SAB 104”) Revenue Recognition in Financial Statements. Revenue is
recognized when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the selling price is fixed or
determinable and collectibility is reasonably assured.
We
recognize revenue at the time of shipment for product sales where the customer’s
acceptance criteria can be demonstrated as met prior to shipment and where title
transfers on shipment. We recognize revenue at the time of final
acceptance at the customer site when title does not transfer on shipment or if
acceptance criteria at the customer site are substantially different than
acceptance criteria for shipment. We recognize revenue for product
sales with no specific customer acceptance criteria, including spare parts, on
shipment. Revenue from service contracts is recognized over the term
of the contract. Revenue is reported net of sales commissions and was
$27,000 and $67,000 in 2008 and 2007, respectively.
Revenue
is also derived through business agreements for product
development. We conduct specified product development projects
related to one of our principal technology specializations for an agreed-upon
fee. Typically, the agreements require “best efforts” with no
specified performance criteria. Revenue from product development
agreements, where there are no specific performance terms, are recognized in
amounts equal to the amounts expended on the programs. Generally, the
agreed-upon fees contemplate reimbursing us, after our agreed-upon cost share if
any, for costs considered to be associated with project
activities. These include expenses for direct product development and
research, operating expenses, general and administrative expenses, and
depreciation. Accordingly, expenses related to product development
agreements are recorded as cost of revenues from product development
agreements.
Allocations
of General and Administrative Costs and Engineering Costs
We
allocate a portion of general and administrative expense and a portion of
engineering and product development expense to cost of sales from product
development agreements based on a percentage of direct labor
costs. These allocations are limited to the amount of revenues, after
direct expenses, under the applicable agreements.
The
following is a summary of the allocations made for the year ended December
31:
2008
|
2007
|
|||||||
(in thousands)
|
||||||||
Gross
G&A Expense
|
$ | 1,713 | $ | 1,335 | ||||
Less
allocation to cost of sales from product development
agreements
|
- | (8 | ) | |||||
Remaining
G&A Expense
|
$ | 1,713 | $ | 1,327 |
2008
|
2007
|
|||||||
(in thousands)
|
||||||||
Gross
Engineering and Development Expense
|
$ | 1,032 | $ | 1,166 | ||||
Less
allocation to cost of sales from product development
agreements
|
- | (20 | ) | |||||
Remaining
Engineering and Development Expense
|
$ | 1,032 | $ | 1,146 |
29
Concentrations
of Credit and Other Risk
Financial
instruments that potentially subject us to concentrations of credit risk consist
principally of accounts receivable. A significant portion of our
customers are located in Asia, primarily Taiwan and Korea, and in Europe.
Therefore, our sales to these countries may be adversely affected by the overall
health of these economies, including the effects of currency exchange rate
fluctuations and political risks. We generally do not require
collateral for most of our trade accounts receivable. For sales to some of our
customers in certain geographic regions, we require letters of
credit. Substantially all of our revenue is invoiced in U.S. dollars. For 2008
and 2007, sales to four of the Company’s customers represented 96% and79%,
respectively of our total net revenue. We believe our credit
evaluation and monitoring mitigates our credit risk.
Advertising
Advertising
costs are expensed as incurred. Advertising costs were approximately
$27,000 and $14,000 in 2008 and 2007, respectively.
Shipping
and Handling Costs
Our
shipping and handling costs are included in cost of sales for all periods
presented.
Income
Taxes
We
account for income taxes in accordance with FASB Statement No. 109, Accounting for Income Taxes
(“SFAS 109”), which requires the use of the liability method in
accounting for income taxes. Under SFAS 109, deferred tax assets and liabilities
are measured based on differences between the financial reporting and tax bases
of assets and liabilities using enacted tax rates and laws that will be in
effect when differences are expected to reverse. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation
allowance is provided for net deferred tax assets if it is more likely than not
that these items will either expire before we are able to realize their benefit,
or future deductibility is uncertain. All deferred tax assets are
offset by a valuation allowance.
Common
Stock Options
We
account for our share-based compensation plans according to the provisions of
SFAS 123R. Accordingly, compensation costs attributable to stock options or
similar equity instruments granted are measured at the fair value at the grant
date, and expensed over the expected vesting period. SFAS 123R
requires excess tax benefits be reported as a financing cash inflow rather than
as a reduction of taxes paid
Foreign
Currency Transactions
Most
sales are made in US dollars. Occasionally, a sale or purchase may be
made in Euros or Japanese Yen. Any transaction gains and losses are
reflected in operating results and are generally not significant.
Reclassifications
Certain
amounts have been reclassified in prior periods’ presentations to conform to the
current year's presentation.
Contingencies
and Litigation
We make
an assessment of the probability of an adverse judgment resulting from current
and threatened litigation. We accrue the cost of an adverse judgment if, in our
estimation, an adverse settlement is probable and management can reasonably
estimate the ultimate cost of such litigation. We had no such
accruals at December 31, 2008 and 2007.
30
Recently
Issued Accounting Standards
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, “Fair Value Measurements” (“SFAS 157”) which defines fair
value, establishes a framework for measuring fair value in accordance with
accounting principles generally accepted in the United States of America, and
expands disclosures about fair value measurements. In February 2008, the FASB
issued FASB Staff Position (FSP 157-2), “Effective Date of FASB Statement
No. 157”. FSP 157-2 delays the effective date of SFAS 157 for all
non-financial assets and non-financial liabilities that are not re-measured at
fair value on a recurring basis until fiscal years beginning after
November 15, 2008. The Company is currently evaluating the potential impact
of this statement on its non-financial assets and non-financial liabilities
included in its financial statements. For financial assets and financial
liabilities, SFAS 157 was effective for the Company on January 1, 2008
on a prospective basis. The adoption of SFAS 157 to the Company’s financial
assets and financial liabilities did not have a material effect on the Company’s
financial condition or results of operations as of January 1,
2008.
In
October 2008, the FASB issued FASB Staff Position No. FAS 157-3 (“FSP-157-3”),
which clarifies the application of SFAS No. 157 in an inactive market,
including how internal assumptions should be considered when measuring fair
value, how observable market information in a market that is not active should
be considered and how the use of market quotes should be used when assessing
observable and unobservable data. This FSP is effective upon issuance including
prior periods for which financial statements have not been issued. The adoption
of FSP 157-3 did not have a material effect on our financial
statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financials Liabilities Including an Amendment of FASB
Statement No. 115”. This standard permits measurement of certain financial
assets and financial liabilities at fair value. If the fair value option is
elected, the unrealized gains and losses are reported in earnings at each
reporting date. Generally, the fair value option may be elected on an
instrument-by-instrument basis, as long as it is applied to the instrument in
its entirety. The fair value option election is irrevocable, unless a new
election date occurs. SFAS No. 159 requires prospective application and also
establishes certain additional presentation and disclosure requirements. The
standard is effective as of the beginning of the fiscal year that begins after
November 15, 2007. The Company adopted the provisions of SFAS No. 159 as of
January 1, 2008 and has elected not to adopt the fair value option of SFAS No.
159, as of that date. The adoption did not have a material impact on the
consolidated results of operations and financial condition.
In
December 2007, the FASB issued SFAS No. 141(Revised), “Business Combinations”
(“SFAS No. 141(R)”), which replaces SFAS No. 141, “Business Combinations,” and
requires an acquirer to recognize the assets acquired, the liabilities assumed,
and any non-controlling interest in the acquiree at the acquisition date,
measured at their fair values as of that date, with limited exceptions. This
statement also requires the acquirer in a business combination achieved in
stages to recognize the identifiable assets and liabilities, as well as the
non-controlling interest in the acquiree, at the full amounts of their fair
values. SFAS No. 141(R) makes various other amendments to authoritative
literature intended to provide additional guidance or to confirm the guidance in
that literature to that provided in this statement. This statement applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. We expect to adopt this statement on January 1, 2009. SFAS
No. 141(R)’s impact on accounting for business combinations is dependent upon
acquisitions at that time.
In
December 2007, FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements,” (“SFAS No. 160”) which amends Accounting
Research Bulletin No. 51, “Consolidated Financial Statements,” to improve the
relevance, comparability, and transparency of the financial information that a
reporting entity provides in its consolidated financial statements. SFAS No. 160
establishes accounting and reporting standards that require the ownership
interests in subsidiaries not held by the parent to be clearly identified,
labeled and presented in the consolidated statement of financial position within
equity, but separate from the parent’s equity. This statement also requires the
amount of consolidated net income attributable to the parent and to the
non-controlling interest to be clearly identified and presented on the face of
the consolidated statement of income. Changes in a parent’s ownership interest
while the parent retains its controlling financial interest must be accounted
for consistently, and when a subsidiary is deconsolidated, any retained
non-controlling equity investment in the former subsidiary must be initially
measured at fair value. The gain or loss on the deconsolidation of the
subsidiary is measured using the fair value of any non-controlling equity
investment. The statement also requires entities to provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the non-controlling owners. This statement applies
prospectively to all entities that prepare consolidated financial statements and
applies prospectively for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. We are currently evaluating the
effect, if any, of this statement on our financial condition and results of
operations
31
In May
2008, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 162, “The Hierarchy
of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS
No. 162 identifies the sources of accounting principles and the framework
for selecting the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with GAAP. Any effect
of applying the provisions of these Statements shall be reported as a change in
accounting principle in accordance with SFAS No. 154, “Accounting Changes and Error
Corrections.” This statement is effective 60 days after the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AICPA
Professional Standards AU Section 411, “The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles.” We do not
expect that the adoption of this standard will have a material effect on our
financial position and results of operations.
Note C -
Long-Term Debt and Other Financing Arrangements
Class 2
Notes are working capital notes secured by accounts receivable, inventory, and
intellectual property. Class 2 notes have been issued primarily to
related parties. The purchasers of Class 2 Notes receive 10%
interest and the option to earn either warrants for the purchase of our common
stock or additional interest at the annual rate of 2% for the period such Notes
were outstanding. If the warrant option is selected, the holder is
entitled to purchase one share of common stock for each $1 in value of the Class
2 Note multiplied by a fraction, the numerator of which is the number of days
such Class 2 Note is outstanding and the denominator of which is
365. The Board of Directors approved a $1.60 strike price for the
warrants. The anti-dilution terms of the warrants earned provide for
the conversion price on the warrants to be reduced to the price of new
securities sold, but not lower than $0.25.
Class 3
Notes are convertible into common stock at the stated conversion price, bear
interest at 8% per annum that is paid semi-annually, and are secured by our
intellectual property. Class 3 Notes issued prior to September 15,
2008 have a conversion price of $1.00 per share. The anti-dilution
terms of the Class 3 Notes provide for their conversion price to be reduced to
the price of new securities sold, but not lower than $0.25. Class 3
Notes purchased after December 15, 2008 bear interest at 12% per annum that is
paid semi-annually and have a conversion price of $0.15.
Effective
January 2, 2008, certain holders of Class 2 Notes earning 10% interest and
warrants requested that all earned but unissued warrants be issued, resulting in
the issuance of 568,986 warrants with a conversion price of $1.60 per
share. The value of the warrants issued was $1,191 as determined
using the Black-Scholes option-pricing model.
On
January 18, 2008, we amended the terms of the existing Note and Warrant Purchase
Agreement with the consent of the Note Holders to increase the aggregate amount
of Notes allowable from $3,500,000 to $3,700,000.
On March
12, 2008, the Board and the Note Holders approved a Fifth Amended and Restated
Note and Warrant Purchase Agreement. This agreement (i) increased the
total allowable secured debt to $6,000,000; (ii) explicitly allowed for the
exchange of one class of note under the agreement for another class of note
under the agreement; (iii) committed us to request that shareholders authorize
an increase in the number of shares of authorized Common Stock to 70,000,000;
(iv) limits anti-dilution rights the Company can agree to in future capital
raising transactions; (v) prohibits the Company from committing to issuing
securities which exceed or potentially exceed 70,000,000 shares or the current
authorized shares, whichever is greater; (vi) limits the number of shares that
can be issued to existing employees while Class 2 debt is outstanding; (vii)
modifies registration rights to take into account new SEC limitations on
registrable shares; (viii) provides for reimbursement of certain expenses; (ix)
explicitly allows notes to be purchased under separate agreements to a total of
$6,000,000 of aggregate secured debt; and (x) modifies the conditions for
prepayment of Class 3 Notes.
32
As of
March 31, 2008, we had $378,000 in outstanding Class 3 Notes payable that were
convertible into our common stock at $1.00 per share. We paid $5,000 of Class 3
Notes on their maturity date of April 30, 2008.
On
September 15, 2008, we entered into an agreement with the Note
Holders which changed the terms of and/or exchanged certain notes
whereby:
|
a)
|
The
holders of Class 2 Notes earning 10% interest and warrants elected to
receive the additional 2% interest and cease accruing warrants effective
January 2, 2008, and requested that all outstanding earned warrants be
issued as of that date. This resulted in the issuance of
898,610 warrants with a conversion price of $0.25 per share with a value
of $243,163 determined using the Black-Scholes option-pricing
model. See Note I – Share Based Compensation for information on
the re-pricing of previously issued warrants associated with
debt.
|
|
b)
|
The
holders of the Class 2 Notes issued prior to December 2, 2007 (i)
exchanged $1,477,000 of their outstanding Class 2 Notes and associated
accrued interest of $90,800 for Class 3 Notes due July 1, 2010 and
convertible into common stock at $0.25 per share; (ii) amended the
maturity date on $718,500 of their outstanding Class 2 Notes to July 1,
2009; and (iii) amended the maturity date on the remaining $718,500 of
their outstanding Class 2 Notes to October 1, 2009. This
resulted in the issuance of $1,567,800 of Class 3 Notes. The
exchange of the Class 2 Notes for the Class 3 Notes with a right to
convert immediately at $0.25 per share, which was less than the fair
market value of the stock on the date of exchange, resulted in a
beneficial conversion feature of $1,128,817. In accordance with
the Emerging Issues Task Force Issue Number 96-19 (“EITF 96-19”) this is
reflected in the Statement of Operations as “Extinguishment loss from
modification and exchange of debt
instruments”.
|
|
c)
|
The
holders of $1,803,000 of Class 2 Notes issued after December 2, 2007
exchanged their outstanding Notes and associated accrued interest of
$66,846 for Class 3 Notes due July 1, 2010. The exchange of the
Class 2 Notes for the Class 3 Notes with a right to convert immediately at
$0.25 per share, which was less than the fair market value of the stock on
the date of exchange, resulted in a beneficial conversion feature of
$1,346,289. In accordance with EITF 96-19 this is reflected in
the Statement of Operations as “Extinguishment loss from modification and
exchange of debt instruments”.
|
|
d)
|
The
holders $139,000 of Class 3 Notes issued in 2004 exchanged their Class 3
Notes for Class 2 Notes earning 12% interest. $69,500 of these
notes are due July 1, 2009 and $69,500 are due October 1,
2009.
|
|
e)
|
The
holders of $234,000 of Class 3 Notes issued in 2004 amended their terms to
be the same as the newly issued Class 3 Notes. The change in
the strike price to $0.25 with a right to convert immediately resulted in
a beneficial conversion feature of $168,480. In accordance with
EITF 96-19 this is reflected in the Statement of Operations as
“Extinguishment loss from modification and exchange of debt
instruments”. These notes are now due July 1,
2010.
|
For more
information on the agreement please refer to Note I – Share Based
Compensation.
In
addition to the September 15, 2008 transactions listed above, we sold $1,766,000
of Class 2 Notes from January 1, 2008 to September 15, 2008, and $285,000 of
Class 2 notes from September 16, 2008 to December 31, 2008. The
aggregate amount of outstanding Class 2 and Class 3 Notes is $5,457,000 as of
December 31, 2008.
A summary
of the Company’s debt obligations is as follows as of December
31:
33
2008
|
2007
|
|||||||
(in
thousands)
|
||||||||
Short
Term Debt:
|
||||||||
Class
2 Notes
|
$ | 1,786 | $ | 2,964 | ||||
Class
3 Notes
|
- | 378 | ||||||
Net
Short Term Debt
|
$ | 1,786 | $ | 3,342 | ||||
Long
Term Debt:
|
||||||||
Class
3 Notes
|
$ | 3,671 | $ | - | ||||
Total
Long Term Debt
|
$ | 3,671 | $ | - |
Note D -
Related Party Transactions
The
portion of debt described in Note C above that has been issued to Directors and
to certain shareholders that own more than five percent (5%) of the outstanding
shares of common stock of the Company is disclosed in the table
below.
Greater
than 5% shareholder
|
Director
|
|||||||||||||||
John
Hunter
|
John
R. Kiely, III.
|
Max
A. Coon
|
Total
|
|||||||||||||
Outstanding
balance as of December 31, 2007
|
||||||||||||||||
Class
2
|
$ | 1,184,000 | $ | 1,050,000 | $ | 250,000 | ||||||||||
Class
3
|
$ | - | $ | - | $ | - | ||||||||||
$ | 1,184,000 | $ | 1,050,000 | $ | 250,000 | $ | 2,484,000 | |||||||||
Outstanding
balance as of December 31, 2008
|
||||||||||||||||
Class
2
|
$ | 667,000 | $ | 525,000 | $ | 125,000 | ||||||||||
Class
3
|
$ | 1,309,371 | $ | 1,160,266 | $ | 261,137 | ||||||||||
$ | 1,976,371 | $ | 1,685,266 | $ | 386,137 | $ | 4,047,774 | |||||||||
Amount
of principal paid during year
|
||||||||||||||||
2008
|
$ | 88,000 | $ | - | $ | - | ||||||||||
2007
|
$ | 61,000 | $ | - | $ | - | ||||||||||
Amount
of interest paid during year
|
||||||||||||||||
Cash
2008
|
$ | 567 | $ | - | $ | - | ||||||||||
Notes
issued in payment of interest 2008
|
$ | 66,370 | $ | 60,267 | $ | 11,137 | ||||||||||
Value
of warrants issued 2008
|
$ | 187,561 | $ | 778 | $ | 55,602 | ||||||||||
Total
2008
|
$ | 254,498 | $ | 61,045 | $ | 66,739 | $ | 382,282 | ||||||||
Cash
2007
|
$ | - | $ | - | $ | - | ||||||||||
Notes
issued in payment of interest 2007
|
$ | - | $ | - | $ | - | ||||||||||
Value
of warrants issued 2007
|
$ | - | $ | 14,099 | $ | - | ||||||||||
Total
2007
|
$ | - | $ | 14,099 | $ | - | $ | 14,099 | ||||||||
Accrued
interest at December 31
|
||||||||||||||||
Cash
2008
|
$ | 167,822 | $ | 151,333 | $ | 39,033 | ||||||||||
Value
of warrants accrued not issued 2008
|
$ | - | $ | - | $ | - | ||||||||||
Total
2008
|
$ | 167,822 | $ | 151,333 | $ | 39,033 | $ | 358,188 | ||||||||
Cash
2007
|
$ | 69,200 | $ | 59,292 | $ | 20,479 | ||||||||||
Value
of warrants accrued not issued 2007
|
$ | 726 | $ | 388 | $ | 215 | ||||||||||
Total
2007
|
$ | 69,926 | $ | 59,680 | $ | 20,694 | $ | 150,300 |
Interest
expense for the fiscal year ended December 31, 2008 was $921,000, for which
$695,497 and $95,061 were for related parties and Directors,
respectively. Interest expense for the fiscal year ended December 31,
2007 was $230,000, for which $141,710 and $20,479 were for related parties and
Directors, respectively.
34
For more
information on Class 2 and Class 3 notes, see Note C – Long Term Debt and Other
Financing.
On
September 15, 2008, John Hunter exchanged Class 2 Notes for Class 3 Notes with
the right to convert immediately at $0.25 per share, which was less than the
fair market value of the stock on the date of exchange, which resulted in a
beneficial conversion feature of $1,007,078. This was reflected in
the statement of operations as “Extinguishment loss from modification and
exchange of debt instruments”. On the same date, John R. Kiely, III
exchanged Class 2 Notes for Class 3 Notes with the right to convert immediately
at $0.25 per share, which was less than the fair market value of the stock on
the date of exchange, which resulted in a beneficial conversion feature of
$892,397. This was reflected in the statement of operations as
“Extinguishment loss from modification and exchange of debt instruments”. On the
same date, Max A. Coon exchanged Class 2 Notes for Class 3 Notes with the right
to convert immediately at $0.25 per share, which was less than the fair market
value of the stock on the date of exchange, which resulted in a beneficial
conversion feature of $143,119. This was reflected in the statement
of operations as “Extinguishment loss from modification and exchange of debt
instruments”. The aggregate of these related party transactions was
$2,042,594.
On
September 15, 2008, we modified the strike price of 1,850,000 warrants from
$1.00 to $0.001 and issued 3,600,000 warrants for the purchase of common stock
at $0.001 in the aggregate to Special Situations Cayman Fund, L.P.,
Special Situations Private Equity Fund, L.P., Special Situations Technology
Fund, L.P., and Special Situations Technology Fund II, L.P., and recorded an
expense for the modification and issuance of warrants of
$2,186,767. On September 15, 2008, we modified the strike price of
1,250,000 warrants from $1.00 to $0.001 and issued 3,000,000 warrants for the
purchase of common stock at $0.001 to Bonanza Master Fund, Ltd., and recorded an
expense for the modification and issuance of warrants of
$1,716,190. There were no such transactions during the fiscal year
ended December 31, 2007. The aggregate of these related party transactions was
$3,902,957.
Note E -
Income Taxes
The
Company establishes valuation allowances in accordance with the provisions of
FASB Statement No. 109, “Accounting for Income Taxes.” The Company
continually reviews realizability of deferred tax assets and recognizes these
benefits only as reassessment indicates that it is more likely than not that the
benefits will be realized.
As of
December 31, 2008, the Company has cumulative net operating loss carryforwards
approximating $51.0 million (expiring: $6.9 million in 2010, $3.9 million in
2011, $3.8 million in 2012, $2.3 million in 2018, $6.6 million in 2020, $1.9
million in 2021, $5.7 million in 2022, $5.5 million in 2023, $2.7 million in
2024, $2.7 million in 2025, $2.9 million in 2026, $3.0 million in 2027 and $2.9
million in 2028) for federal income tax purposes available to reduce taxable
income of future periods and unused investment, alternative minimum tax, and
research and development tax credits approximating
$331,000. Additionally, the Company’s inactive subsidiary in the
United Kingdom has cumulative net operating loss carryforwards approximating
$3.8 million that do not expire. For financial reporting purposes,
the net operating losses and credits have been offset against net deferred tax
liabilities based upon their expected amortization during the loss carryforward
period. The remaining valuation allowance is necessary due to the
uncertainty of future income estimates. The valuation allowance
increased $2,993,000 in 2008 and $989,000 in 2007.
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31 are as
follows:
35
2008
|
2007
|
|||||||
(in thousands)
|
||||||||
Deferred
tax liabilities:
|
||||||||
Tax
depreciation
|
$ | 21 | $ | 20 | ||||
Total
deferred tax liabilities
|
21 | 20 | ||||||
Deferred
tax assets:
|
||||||||
Net
operating loss carryforwards
|
17,318 | 16,301 | ||||||
Credit
carryforwards
|
331 | 331 | ||||||
Inventory
reserve
|
51 | 27 | ||||||
Accrued
vacation
|
21 | - | ||||||
Warranty
reserve
|
29 | 28 | ||||||
Accrued
interest
|
152 | - | ||||||
Deferred
revenue
|
223 | - | ||||||
Stock
compensation expense
|
221 | - | ||||||
Warrants
issued to PIPE investors
|
1,434 | - | ||||||
Other
|
4 | 103 | ||||||
Total
deferred tax assets
|
19,784 | 16,790 | ||||||
Valuation
allowance for deferred tax assets
|
19,763 | 16,770 | ||||||
Net
deferred tax assets
|
21 | 20 | ||||||
Net
deferred taxes
|
$ | - | $ | - |
The
reconciliation of income taxes computed at the U.S. federal statutory tax rates
to income tax expense (credit) is as follows for the years ended December
31:
2008
|
2007
|
|||||||
(in thousands)
|
||||||||
Net
income (loss)
|
$ | (10,733 | ) | $ | (3,041 | ) | ||
Foreign
net income (loss)
|
- | - | ||||||
U.S.
net income (loss)
|
$ | (10,733 | ) | $ | (3,041 | ) | ||
Tax
provision (benefit) at U.S. statutory rates
|
$ | (3,649 | ) | $ | (1,034 | ) | ||
Change
in valuation allowance
|
2,993 | 989 | ||||||
Extinguishment
loss from exchange of debt
|
898 | - | ||||||
Stock
compensation expense
|
(221 | ) | - | |||||
Other
|
(21 | ) | 45 | |||||
$ | - | $ | - |
There
were no income tax payments made in 2008 or 2007.
On
January 1, 2007, we adopted the provisions of Financial Accounting Standards
Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN
48”), an interpretation of FASB Statement No. 109 (“SFAS 109”). There
was no impact on our financial statements upon adoption. Because of
our historical significant net operating losses, we have not been subject to
income taxes since 1995. There were no unrecognized tax benefits
during the periods presented.
We
classify all interest and penalties as income tax expense. We did not
have any accrued interest and penalties related to uncertain tax positions as of
December 31, 2008 and 2007.
We file
income tax returns in the United States federal jurisdiction and various state
jurisdictions. The tax years 2004 through 2007 remain open to
examination by taxing jurisdictions to which we are subject. As of
December 31, 2008, we did not have any tax examinations in process.
Note F –
Loss per Share
Basic net
loss per common share is computed by dividing net loss applicable to common
shareholders by the weighted-average number of common shares outstanding during
the year. Diluted net loss per common share is determined using the
weighted-average number of common shares outstanding during the year, adjusted
for the dilutive effect of common stock equivalents, consisting of shares that
might be issued upon the exercise of common stock options and purchase
warrants.
36
The
following table sets forth the computation of basic and diluted loss per
share:
2008
|
2007
|
|||||||
(in
thousands,
except
per share data)
|
||||||||
Numerator
for basic and diluted loss per share - loss available to common
stockholders
|
||||||||
Net
loss
|
$ | (10,733 | ) | $ | (3,041 | ) | ||
*there
was no effect of dilutive securities, see below
|
||||||||
Denominator
for basic and diluted loss per share - weighted average
shares
|
29,566 | 29,534 | ||||||
*there
was no effect of dilutive securities, see below
|
||||||||
Basic
and diluted loss per share:
|
||||||||
Net
loss
|
$ | (0.36 | ) | $ | (0.10 | ) |
Warrants
and options outstanding were not included in the computation of diluted earnings
per share because the inclusion of these instruments would have an anti-dilutive
effect. For additional disclosures regarding stock options and
warrants see Note I.
Note G -
Employee Savings Plan
We have
an Employee Savings Plan covering substantially all employees. We
contribute $.20 to the Plan for every dollar contributed by the employees up to
6% of their compensation. The Plan also provides for discretionary
contributions by the Company as determined annually by our Board of
Directors. The contributions we charged to operations under the Plan
were approximately $10,000 and $12,000 for 2008 and 2007,
respectively.
Note H –
Lease Commitments and Contingencies
We use
equipment and office space under operating lease agreements requiring rental
payments approximating $102,000 in 2009, $103,000 in 2010, $4,000 in 2011 and
$3,000 in 2012. Rent expense charged to operations approximated
$105,000 and $104,000 in 2008 and 2007, respectively. Our operating
lease for office and manufacturing space expires January 1, 2011 and an
extension or renewal will need to be negotiated.
Note I –
Share-Based Compensation
We
currently have two active stock option plans, the 1999 and the 2004 stock option
plans (the “Plans”) which provide for options that may be granted to eligible
employees, officers and directors of Integral Vision. We reserved 1,500,000
shares for future issuance under the Plans. As of December 31, 2008,
no shares remain which can be issued under the Plans.
The
purpose of the Plans generally is to retain and attract persons of appropriate
education, experience and ability to serve as our employees, to encourage a
sense of proprietorship of such persons, and to stimulate an active interest in
our development and financial success.
On March
21, 2008, the Board approved the 2008 Integral Vision, Inc. Equity Incentive
Plan (the “Plan”). The shareholders ratified the Plan at our Annual
Shareholder Meeting held on May 14, 2008. The Plan is designed to
promote the interests of the Company and its shareholders by providing a means
by which the Company can grant equity-based incentives to eligible employees of
the Company or any Subsidiary as well as non-employee directors, consultants, or
advisors who are in a position to contribute materially to the Company’s success
(“Participants”). The Plan permits the Compensation Committee of the
Company's Board of Directors to grant Incentive Stock Options, Non-Qualified
Stock Options, Restricted Stock, and Shares. The maximum number of
shares cumulatively available is 4,828,000 plus (i) any shares that are
forfeited or remain unpurchased or undistributed upon termination or expiration
of the awards from the Plan or options from the 2004 Employee Stock Option Plan
(“2004 Plan”) and (ii) any shares exchanged as full or partial payment for the
exercise price of any award under the Plan. As of December 31, 2008, 2,328,000
Stock Option shares and 1,184,000 Restricted Shares have been granted from the
2008 Equity Incentive Plan leaving a balance of 1,316,000 shares available for
future grants.
37
All three
plans are administered by the Compensation Committee of the Board of Directors
(the “Committee”). The Committee determines which eligible employees
will receive awards, the timing and manner of the grant of such option awards,
the exercise price of the stock options (which may not be less than market value
on the date of grant) and the number of shares. We may at any time
amend or terminate the Plans, however no amendment that would impair the rights
of any participant with respect to outstanding grants can be made without the
participant’s prior consent.
The
Compensation Committee of the Board of Directors on January 22, 2008 granted
129,000 options with an exercise price of $0.13 per share to certain officers of
the Company. The issuance resulted in an expense of $11,278, which will be
recognized ratably as compensation expense over the one-year vesting
period.
On
February 15, 2008, the Compensation Committee of the Board of Directors approved
a plan to offer key employees the opportunity to surrender certain 2004 Plan
options in exchange for replacement 2004 Plan options effective February 15,
2008. The replacement options “cliff vest” 50% after 1 year and the
balance after 2 years. The program received 100%
participation. 942,000 options with an average exercise price
of $0.75 were surrendered and 942,000 options with an exercise price of $0.26
were issued as replacements. The exchange resulted in an additional
expense of $53,513 which will be recognized ratably as compensation expense over
the remaining vesting period from February 15, 2008 to February 15, 2010 along
with the remaining $85,438 of unamortized compensation expense for the unvested
portion of the options exchanged.
On April
3, 2008, the Compensation Committee of the Board of Directors approved a plan to
offer key employees the opportunity to surrender 128,000 options in exchange for
replacement options effective April 4, 2008. The replacement options “cliff
vest” 50% after 1 year and the balance after 2 years. The program
received 100% participation. The exchange resulted in an expense of
$13,188, which will be recognized ratably as compensation expense over the
vesting period from April 4, 2008 to April 4, 2010.
On May 1,
2008, the Compensation Committee of the Board of Directors granted options on
97,000 shares with an exercise price of $0.22 to certain key employees of the
Company. The options vest in 1 year and resulted in an expense of
$15,037, which will be recognized ratably as compensation expense over the
vesting period from May 1, 2008 to May 1, 2009.
On May
16, 2008, the Compensation Committee of the Board of Directors granted options
on 1,000,000 shares with an exercise price of $0.17 to certain officers and
employees of the Company. The options vest in 1 year and resulted in an expense
of $119,978, which will be recognized ratably as compensation expense over the
vesting period from May 16, 2008 to May 16, 2009.
On
September 17, 2008, the Compensation Committee of the Board of Directors granted
options on 1,200,000 shares with an exercise price of $0.30 to certain officers
of the Company. On the grant date, 500,000 options immediately vested which
resulted in the recognition of $108,227 of compensation expense. The remaining
700,000 options vest as follows: 1) 500,000 options with a fair value of
$108,227 will be expensed over a four month vesting period through December 31,
2008; 2) 140,000 options with a fair value of $30,303 will be expensed over a
twelve month vesting period through September, 30 2009 and 3) 60,000 options
with a fair value of $12,987 will be expensed over a twenty four month vesting
period through September 30, 2010.
On
September 17, 2008, the Compensation Committee of the Board of Directors granted
1,184,000 shares of restricted stock with a per share value of $0.30 to certain
key officers of the Company. The total compensation expense of $355,200 will be
amortized as compensation expense as follows: 1) 500,000 shares with a value of
$150,000 will be expensed over a four month vesting period through December 31,
2008 and 684,000 shares with a value of $205,200 will be expensed over a twelve
month vesting period through September 30, 2009. The terms of the grant for the
684,000 shares states that the restriction is satisfied upon the Company’s
payment of the Class 2 Notes and accrued interest on the due date of October 1,
2009.
38
We
granted 475,000 options to employees during 2007. There were no
grants of restricted stock during 2007.
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model with the assumptions noted in the following
table. The fair value of all awards is amortized on a straight line basis over
the requisite service periods. The expected life of all awards
granted represents the period of time that they are expected to be
outstanding. The expected life is determined using historical and
other information available at the time of grant. Expected
volatilities are based on historical volatility of our common stock, and other
factors. The risk-free rate for periods within the contractual life
of the option is based on the U.S. Treasury yield curve in effect at the time of
grant. We use historical data to estimate pre-vesting option
forfeitures.
The
values in the table below reflect weighted averages for stock awards made in the
designated years.
Year Ended December 31
|
||||||||
2008
|
2007
|
|||||||
(in thousands)
|
||||||||
Expected
Life (in years)
|
5.0 | 6.0 | ||||||
Expected
volatility
|
198.6 | % | 77.7 | % | ||||
Risk-free
interest rate
|
2.8 | % | 4.1 | % | ||||
Expected
dividend yield
|
0 | % | 0 | % | ||||
Expected
forfeiture rate
|
0 | % | 0 | % |
A summary
of option activity under all plans for the years ended December 31, 2008, and
2007 follows:
2008
|
2007
|
|||||||||||||||
Shares
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average
Exercise
Price
|
|||||||||||||
(number
of shares in thousands)
|
||||||||||||||||
Outstanding
at January 1
|
1,496 | $ | 0.71 | 1,309 | $ | 0.95 | ||||||||||
Granted
|
3,496 | 0.24 | 475 | 0.36 | ||||||||||||
Exercised
|
0 | 0.00 | (75 | ) | 0.10 | |||||||||||
Expired
|
(1,197 | ) | 0.75 | (213 | ) | 1.53 | ||||||||||
Outstanding
at December 31 ($.10 to $1.71 per share)
|
3,795 | $ | 0.23 | 1,496 | $ | 0.71 | ||||||||||
Exercisable
($.10 to $.30 per share)
|
1,299 | $ | 0.27 | 846 | $ | 0.80 |
A summary
of the status of our nonvested shares as of December 31, 2008, and changes
during years ended December 31, 2008, and December 31, 2007, is presented
below:
39
2008
|
2007
|
|||||||||||||||
Shares
|
Weighted
Average Grant-
Date Fair Value
|
Shares
|
Weighted
Average Grant-
Date Fair Value
|
|||||||||||||
Nonvested
at January 1
|
650,000 | $ | 0.42 | 210,000 | $ | 0.60 | ||||||||||
Granted
|
3,496,000 | 0.24 | 475,000 | 0.36 | ||||||||||||
Forfeited
|
(650,000 | ) | 0.73 | (35,000 | ) | 0.60 | ||||||||||
Vested
|
(1,000,000 | ) | 0.30 | 0 | 0.00 | |||||||||||
Nonvested
at December 31
|
2,496,000 | $ | 0.27 | 650,000 | $ | 0.42 |
The
weighted average grant date fair value of options granted during 2008 and 2007
was $0.24 and $0.36, respectively.
The
following table summarizes share-based compensation expense for the years ended
December 31, 2008 and 2007 related to share-based awards under SFAS No. 123R as
recorded in the statement of operations in the following expense
categories:
2008
|
2007
|
|||||||
(in thousands)
|
||||||||
Marketing
|
$ | 85 | $ | 29 | ||||
Engineering
and Development
|
163 | 38 | ||||||
General
and Administrative
|
401 | 30 | ||||||
Total
share-based compensation expense
|
$ | 649 | $ | 97 |
As of
December 31, 2008, we had $137,110 of unrecognized expense related to un-vested
share-options and $148,200 of unrecognized expense related to restricted share
based compensation, which will be recognized ratably as compensation expense
over the remaining vesting period from October 2008 through September
2010.
Additional
information regarding the range of exercise prices and weighted average
remaining life of options outstanding at December 31, 2008 and 2007
follows:
2008
|
2007
|
|||||||||||||||||||||||
Range of
Exercise
Prices
|
Number
Outstanding
|
Weighted
Average
Remaining
Life
|
Number
Exercisable
|
Number
Outstanding
|
Weighted
Average
Remaining
Life
|
Number
Exercisable
|
||||||||||||||||||
(number of shares in thousands)
|
(number of shares in thousands)
|
|||||||||||||||||||||||
$0.10
to $0.60
|
3,795 | 8.9 | 1,299 | 1,009 | 7.6 | 359 | ||||||||||||||||||
$1.03 to $1.71
|
- | - | - | 487 | 5.3 | 487 | ||||||||||||||||||
$0.10 to $1.71
|
3,795 | 8.9 | 1,299 | 1,496 | 6.8 | 846 |
On
September 15, 2008, we entered into certain agreements with the
holders of securities issued under the Securities Purchase Agreement dated April
12, 2005 (the “PIPE Equity Investors”), and the holders of Class 2 and Class 3
Notes (the “Note Holders”), whereby:
|
a)
|
The
strike price on 3,500,000 outstanding and immediately exercisable warrants
was changed from $1.60 to $0.001 resulting in a value of $1,273,392 as
determined using the Black-Scholes option-pricing model. This
is reflected in the Statement of Operations for 2008 as “Modification and
issuance of warrants to PIPE Equity
Investors.”
|
40
|
b)
|
7,000,000
new and immediately exercisable warrants were issued with a strike price
of $0.001 resulting in a value of $2,943,283 as determined using the
Black-Scholes option-pricing model. This is reflected in the
Statement of Operations for 2008 as “Modification and issuance
of warrants to PIPE Equity
Investors.”
|
|
c)
|
The
strike price on 1,209,542 outstanding and immediately exercisable warrants
issued to the Note Holders was reduced from $1.00 to $0.25 resulting in a
value of $229,048 which was determined using the Black-Scholes
option-pricing model. This is reflected as “Interest Expense”
in the Statement of Operations for
2008.
|
For more
information on the agreements please refer to Note C – Long Term Debt and Other
Financing Arrangements.
A summary
of the outstanding warrants, options, and shares available upon the conversion
of debt at December 31, 2008 and 2007 is as follows:
2008
|
2007
|
|||||||||||||||||||||||||||||||
Weighted
Average
Exercise
Price
|
Number
Outstanding
|
Weighted
Average
Remaining
Life
|
Number
Exercisable
|
Weighted
Average
Exercise
Price
|
Number
Outstanding
|
Weighted
Average
Remaining
Life
|
Number
Exercisable
|
|||||||||||||||||||||||||
(number of shares in thousands)
|
(number of shares in thousands)
|
|||||||||||||||||||||||||||||||
Warrants
|
$ | 0.001 | 10,500 | 3.57 | 10,500 | $ | 1.60 | 3,500 | 2.28 | 3,500 | ||||||||||||||||||||||
Class
2 Note Warrants
|
$ | 0.25 | 2,090 | 2.82 | 2,090 | $ | 1.31 | 657 | 2.43 | 657 | ||||||||||||||||||||||
Class
3 Convertible Notes
|
$ | 0.25 | 14,687 | 1.50 | 14,687 | $ | 1.00 | 378 | 0.25 | 378 | ||||||||||||||||||||||
1995
Employee Stock Option Plan
|
$ | 0.17 | 184 | 2.95 | 184 | $ | 0.54 | 312 | 3.08 | 312 | ||||||||||||||||||||||
1999
Employee Stock Option Plan
|
$ | 0.17 | 290 | 7.19 | 115 | $ | 0.28 | 205 | 4.53 | 205 | ||||||||||||||||||||||
2004
Employee Stock Option Plan
|
$ | 0.25 | 993 | 9.13 | - | $ | 0.78 | 979 | 8.52 | 329 | ||||||||||||||||||||||
2008
Equity Compensation Plan
|
$ | 0.24 | 2,328 | 9.54 | 1,000 | $ | - | - | - | - | ||||||||||||||||||||||
$ | 0.16 | 31,072 | 3.20 | 28,576 | $ | 1.30 | 6,031 | 3.30 | 5,381 |
Note J –
Contingencies and Litigation
Product
Warranties
We
provide standard warranty coverage for most of our products, generally for one
year from the date of customer acceptance. We record a liability for estimated
warranty claims based on historical claims and other factors. We review these
estimates on a regular basis and adjust the warranty reserves as actual
experience differs from historical estimates or other information becomes
available. This warranty liability primarily includes the anticipated cost of
materials, labor and travel, and shipping necessary to repair and service the
equipment.
The
following table illustrates the changes in our warranty liability for the years
ended December 31, 2008 and 2007:
41
2008
|
2007
|
|||||||
(in thousands)
|
||||||||
Balance
as of January 1
|
$ | 82 | $ | 49 | ||||
Charges/(credits)
to expense
|
9 | 40 | ||||||
Utilization/payment
|
(7 | ) | (7 | ) | ||||
Balance
as of December 31
|
$ | 84 | $ | 82 |
Note K –
Operations by Geographic Area
Statement
of Financial Accounting Standards ("SFAS") No. 131, Disclosures about Segments
of an Enterprise and Related Information established standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to stockholders. It also established standards for related
disclosures about products and services, and geographic
areas. Operating segments are defined as components of the enterprise
about which separate financial information is available that is evaluated
regularly by management in deciding how to allocate resources and in assessing
performance.
We are
engaged in one business segment, vision-based inspection
products. The following presents information by geographic
area.
Year Ended December 31
|
||||||||
2008
|
2007
|
|||||||
(in thousands)
|
||||||||
Net
revenues by geographic area:
|
||||||||
North
America
|
$ | 527 | $ | 528 | ||||
Europe
|
500 | 166 | ||||||
Asia
|
- | 457 | ||||||
$ | 1,027 | $ | 1,151 |
*
Geographic areas that are considered individually material are listed (more than
10% of net revenues), all others are included in North America and in total are
considered immaterial.
Note L –
Royalty Payments
The
Company earned approximately $23,000 in royalties in each of the
years 2008 and 2007.
Note M –
Capitalized Software Costs
Management
has focused its development, sales and marketing efforts on the Company’s
inspection systems for the flat panel display (“FPD”)
industry. Industry sources indicate that this market will be
substantial once fully developed. The Company has developed
inspection solutions for the leading technologies used in the FPD industry
including liquid crystal on silicon (“LCOS”), organic light emitting diodes
(“OLED” and “PolyOLED”), electroluminescent (“EL”), high temperature polysilicon
(“HTPS”), low temperature polysilicon (“LTPS”), liquid crystal display (“LCD”),
and microelectromechanical systems (“MEMS”).
Management
periodically performs an analysis of the net realizable value of capitalized
software costs.
Note N –
Market for the Company’s Common Stock
Information
on the current quotes on the stock, which will continue to use the ticker symbol
INVI, are available at the OTCBB's website, www.otcbb.com and most financial
information portals, such as that provided at http://finance.yahoo.com or
http://quote.bloomberg.com. Integral Vision expects to continue to provide
information through filings with the Securities and Exchange Commission (“SEC”)
as required for continued listing on the OTCBB. These filings can be found at
the SEC's website at www.sec.gov.
42
Note O –
Going Concern Matters
The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. As shown in the financial
statements, we incurred losses from operations in the the years of 2008 and 2007
of $10.7 million and $3.0 million, respectively. The continuing
losses raise substantial doubt about our ability to continue operating as
a going concern.
We are
currently working with a number of large customers who are using our
technologies to evaluate their microdisplay production or are evaluating our
technology for the inspection of LCD displays and components. We
expect that additional sales orders will be placed by these customers throughout
2009 and into 2010 provided that markets for these products continue to grow and
the customers continue to have interest in our technology-assisted inspection
systems. Ultimately, our ability to continue as a going concern will
be dependent on these large companies getting their emerging display technology
products into high volume production and placing sales orders with us for
inspection products to support that production. However, there can be
no assurance that we will be succesful in securing sales orders sufficient to
continue operating as a going concern.
From
November 2006 through March 27, 2009, we have used $6,447,666 of Class 2 and
Class 3 Notes to fund operations. $3,991,666 of these are Class 3
Notes which mature July 1, 2010; $1,576,000 are Class 2 Notes which mature July
1, 2009; and the balance are Class 2 Notes which mature on June 15,
2009. We will need to raise additional funds in the second quarter of
2009 to pay these notes as they mature or negotiate the extension of their due
date. Taking into account existing and anticipated orders, we expect
that we may need to raise an additional $500,000 to fund operations through the
first quarter of 2010. If the anticipated orders do not materialize
as expected, we will need to raise additional capital.
For
further information regarding our obligations, see Note C – Long Term Debt and
Other Financing Arrangements and Note P – Subsequent Events in the Notes to
Condensed Financial Statements.
The
financial statements do not include any adjustments that might be necessary
should we be unable to continue as a going concern.
Note P –
Subsequent Events
On
February 2, 2009, we amended the terms of the existing Note and Warrant Purchase
Agreement with the consent of the Note Holders to a) increase the aggregate
amount of Notes allowable from $6,000,000 to $7,000,000, b) to allow for the
accrual rate of warrants earned by Class 2 notes to be set by the Board of
Directors, c) to allow for a minimum accrual period of 30 days for Class 2 Notes
earning warrants, d) and to allow the Company to elect to issue, or the Class 2
note holder to elect to receive, warrants accrued once every 30
days. The Board of Directors further authorized the rate of warrant
accrual to be set at five (5) warrants per year per dollar invested at an
exercise price of $0.15 per share.
From
January 1, 2009 through March 27, 2009, we issued an aggregate of $989,733 of
new Class 2 and Class 3 Notes to pay interest obligations and to fund
operations. We also exchanged $110,289 of Class 2 notes issued in
2007 and associated interest for an equal amount of Class 3 notes. As
of March 27, 2009, the aggregate amount of Class 2 and Class 3 Notes
outstanding is $6,447,666.
43
Corporate
Officers
|
Corporate
Directory
|
|
Charles J. Drake, 68, is
CEO and Chairman of the Board of Integral Vision, Inc. Mr.
Drake founded the Company (originally known as Medar) in 1969 and has
served as Chief Executive Officer since 1978.
|
Corporate
Headquarters
49113
Wixom Tech Drive
Wixom,
MI 48393
+1
(248) 668-9230
+1
(248) 668-9384 fax
|
|
Mark R. Doede, 51, is
President, Chief Operating Officer, and Chief Financial Officer of
Integral Vision Inc. Mr. Doede has served as an officer since
1989.
|
Independent
Auditors
Rehmann
Robson
Troy,
MI
|
|
General
Counsel
|
||
Jeffrey J. Becker, 47,
is Senior Vice President of Integral Vision, Inc.
|
J.M.
Warren Law Offices, P.C.
Lansing,
MI
|
|
Andrew Blowers, 41, is
Chief Technical Officer of Integral Vision, Inc.
|
Stock
Trading
Over
the Counter Bulletin Board (OTCBB)
Symbol: INVI
|
|
Paul Zink, 43, is Vice
President of
|
||
Applications
of Integral Vision, Inc.
|
Stock Registrar and Transfer
Agent
Registrar
and Transfer Company
Cranford,
NJ
+1
(908) 497-2300
|
|
Board
of Directors
|
||
Form
10-K
|
||
Charles
J. Drake
Chairman
of the Board of Directors, Integral Vision, Inc.
|
Interested
stockholders may obtain, without charge, a copy of the Company’s Annual
Report on Form 10-K,
|
|
Chief
Executive Officer, Integral Vision, Inc.
|
as
filed with the Securities and Exchange Commission, upon written request
to:
|
|
Max
A. Coon
|
||
Vice
Chairman and Secretary of the Board of
|
Investor
Relations
|
|
Directors,
Integral Vision, Inc.
|
Integral
Vision, Inc.
|
|
President
and Chairman of the Board, Maxco, Inc.
|
49113
Wixom Tech Drive
|
|
Wixom,
MI 48393
|
||
Vincent
Shunsky
|
||
Director,
Integral Vision, Inc.
|
Investor/Analyst
Information
|
|
Treasurer,
Integral Vision, Inc.
|
Stockholder
and analyst inquiries concerning the Company should be addressed
to:
|
|
William
B. Wallace
|
Investor
Relations
|
|
Director,
Integral Vision, Inc.
|
Integral
Vision, Inc.
|
|
Senior
Managing Director, Equity Partners Ltd.
|
49113
Wixom Tech Drive
|
|
Wixom,
MI 48393
|
||
Guerrant
Associates
|
||
Laura
Guerrant
|
||
+1
(808) 882-1467
|
||
E-Mail
Investor Relations
|
||
cdrake@iv-usa.com
|
||
lguerrant@guerrantir.com
|
||
On
the World Wide Web
|
||
|
www.iv-usa.com
|
44
Exhibits
to Form 10-K
Integral
Vision, Inc.
Year
Ended December 31, 2008
Commission
File Number 0-12728
45
Exhibit
Number
|
Exhibit Index Description
|
|
31.1
|
Certification
of Chief Executive Officer of periodic report pursuant to Rule 13a-14(a)
or Rule 15d-14(a).
|
|
31.2
|
Certification
of Chief Financial Officer of periodic report pursuant to Rule 13a-14(a)
or Rule 15d-14(a).
|
|
32.1
|
Certification
by Chief Executive Officer of Periodic Report Pursuant to 18 U.S.C.
Section 1350.
|
|
32.2
|
|
Certification
by Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C.
Section
1350.
|
46