UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended July 31, 2008
or
o
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
Commission
File Number 0-26670
NORTH
AMERICAN SCIENTIFIC, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
51-0366422
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
20200
Sunburst Street, Chatsworth, CA 91311
(Address
of principal executive offices)
(818)
734-8600
(Registrant's
telephone number, including area code)
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.
x
Yes
o
No
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
definition of “large accelerated filer” and “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.
Large Accelerated Filer
o
Accelerated Filer
o
Non-Accelerated Filer
o
Smaller
Reporting Company
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.
o
Yes
x
No
The
number
of shares of Registrant's Common Stock, $.01 par value, outstanding as of
September 2, 2008 was 19,112,003 shares.
NORTH
AMERICAN SCIENTIFIC, INC.
Index
|
|
|
|
Page
|
|
|
|
|
|
Part
I – Financial Information
|
|
Item
1.
|
|
Financial
Statements
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets as of July 31, 2008 (unaudited) and October 31,
2007
|
|
3
|
|
|
Consolidated
Statements of Operations for the three and nine months ended July
31, 2008
and 2007 (unaudited)
|
|
4
|
|
|
Consolidated
Statements of Cash Flows for the nine months ended July 31, 2008
and 2007
(unaudited)
|
|
5
|
|
|
Condensed
Notes to the Consolidated Financial Statements (unaudited)
|
|
7
|
|
|
|
|
|
Item
2.
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
37
|
|
|
|
|
|
Item
3.
|
|
Quantitative
and Qualitative Disclosures about Market Risk
|
|
46
|
|
|
|
|
|
Item
4.
|
|
Controls
and Procedures
|
|
46
|
|
|
|
|
|
Part
II – Other Information
|
|
Item
1.
|
|
Legal
Proceedings
|
|
47
|
|
|
|
|
|
Item
1A.
|
|
Risk
Factors
|
|
47
|
|
|
|
|
|
Item
6.
|
|
Exhibits
|
|
59
|
|
|
|
|
|
|
|
Signatures
|
|
60
|
PART
I – FINANCIAL INFORMATION
Item
1. Financial Statements
NORTH
AMERICAN SCIENTIFIC, INC.
Consolidated
Balance Sheets
(in
thousands, except share data)
|
|
July 31,
|
|
October 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,667
|
|
$
|
609
|
|
Accounts
receivable, net of reserves
|
|
|
2,359
|
|
|
2,296
|
|
Inventories,
net of reserves
|
|
|
909
|
|
|
984
|
|
Prepaid
expenses and other current assets
|
|
|
770
|
|
|
724
|
|
Assets
held for sale
|
|
|
609
|
|
|
636
|
|
Total
current assets
|
|
|
6,314
|
|
|
5,249
|
|
Equipment
and leasehold improvements, net
|
|
|
1,507
|
|
|
824
|
|
Intangible
assets, net
|
|
|
105
|
|
|
103
|
|
Total
assets
|
|
$
|
7,926
|
|
$
|
6,176
|
|
Liabilities
and Stockholders’ Equity
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Lines
of credit, net of discount
|
|
$
|
—
|
|
$
|
3,241
|
|
Short-term
portion of long-term debt
|
|
|
417
|
|
|
—
|
|
Warrant
derivative
|
|
|
—
|
|
|
173
|
|
Accounts
payable
|
|
|
1,912
|
|
|
2,564
|
|
Accrued
expenses
|
|
|
3,171
|
|
|
3,110
|
|
Total
current liabilities
|
|
|
5,500
|
|
|
9,088
|
|
|
|
|
|
|
|
|
|
Long-term
borrowings, net
|
|
|
924
|
|
|
—
|
|
Long-term
severance liability
|
|
|
662
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity (Deficit)
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value, 2,000,000 shares authorized,
|
|
|
|
|
|
|
|
no
shares issued
|
|
|
—
|
|
|
—
|
|
Common
stock, $0.01 par value, 150,000,000 and 100,000,000 shares
|
|
|
|
|
|
|
|
authorized,
18,544,868 and 5,920,270 shares issued; and 18,503,644 and 5,879,066
shares outstanding as of July 31, 2008 and October 31, 2007,
respectively
|
|
|
185
|
|
|
59
|
|
Additional
paid-in capital
|
|
|
161,533
|
|
|
145,774
|
|
Treasury
stock, at cost – 41,204 common shares as of July 31, 2008
and
|
|
|
|
|
|
|
|
October
31, 2007
|
|
|
(227
|
)
|
|
(227
|
)
|
Accumulated
deficit
|
|
|
(160,651
|
)
|
|
(148,518
|
)
|
Total
stockholders’ equity (deficit)
|
|
|
840
|
|
|
(2,912
|
)
|
Total
liabilities and stockholders’ equity (deficit)
|
|
$
|
7,926
|
|
$
|
6,176
|
|
The
accompanying condensed notes are an integral part of the unaudited consolidated
financial statements.
NORTH
AMERICAN SCIENTIFIC, INC.
Consolidated
Statements of Operations
(Unaudited)
(in
thousands, except share and per share data)
|
|
Three months ended July 31,
|
|
Nine months ended July 31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenue –
net
|
|
$
|
3,418
|
|
$
|
2,702
|
|
$
|
10,589
|
|
$
|
8,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
2,244
|
|
|
2,098
|
|
|
7,077
|
|
|
6,128
|
|
Gross
profit
|
|
|
1,174
|
|
|
604
|
|
|
3,512
|
|
|
2,028
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
1,168
|
|
|
985
|
|
|
3,382
|
|
|
2,713
|
|
General
and administrative expenses
|
|
|
2,229
|
|
|
2,072
|
|
|
7,634
|
|
|
6,516
|
|
Research
and development
|
|
|
843
|
|
|
518
|
|
|
3,282
|
|
|
1,282
|
|
Severance
|
|
|
1,064
|
|
|
—
|
|
|
1,410
|
|
|
—
|
|
Total
operating expenses
|
|
|
5,304
|
|
|
3,575
|
|
|
15,708
|
|
|
10,511
|
|
Loss
from operations
|
|
|
(4,130
|
)
|
|
(2,971
|
)
|
|
(12,196
|
)
|
|
(8,483
|
)
|
Interest
and other income (expense), net
|
|
|
(10
|
)
|
|
(69
|
)
|
|
(958
|
)
|
|
(98
|
)
|
Adjustment
to fair value of derivatives
|
|
|
—
|
|
|
—
|
|
|
(311
|
)
|
|
—
|
|
Loss
before provision for income taxes
|
|
|
(4,140
|
)
|
|
(3,040
|
)
|
|
(13,465
|
)
|
|
(8,581
|
)
|
Provision
for income taxes
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Loss
from continuing operations
|
|
|
(4,140
|
)
|
|
(3,040
|
)
|
|
(13,465
|
)
|
|
(8,581
|
)
|
Income
(loss) from discontinued operations, net of income tax
effect
|
|
|
162
|
|
|
(7,648
|
)
|
|
741
|
|
|
(8,482
|
)
|
Net
loss
|
|
$
|
(3,978
|
)
|
$
|
(10,688
|
)
|
$
|
(12,724
|
)
|
$
|
(17,063
|
)
|
Basic
and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share from continuing operations
|
|
$
|
(
0.22
|
)
|
$
|
(0.52
|
)
|
$
|
(
0.91
|
)
|
$
|
(
1.46
|
)
|
Basic
and diluted earnings (loss) per share from discontinued
operations
|
|
$
|
—
|
|
$
|
(
1.30
|
)
|
$
|
0.05
|
|
$
|
(
1.45
|
)
|
Basic
and diluted loss per share
|
|
$
|
(0.22
|
)
|
$
|
(
1.82
|
)
|
$
|
(
0.86
|
)
|
$
|
(
2.91
|
)
|
Weighted
average number of shares outstanding
|
|
|
18,488,827
|
|
|
5,863,411
|
|
|
14,852,304
|
|
|
5,865,412
|
|
The
accompanying condensed notes are an integral part of the unaudited consolidated
financial statements.
NORTH
AMERICAN SCIENTIFIC, INC.
Consolidated
Statements of Cash Flows
(Unaudited)
(in
thousands, except share data)
|
|
Nine months ended July 31,
|
|
|
|
2008
|
|
2007
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(12,724
|
)
|
$
|
(17,063
|
)
|
Net
earnings (loss) from discontinued operations
|
|
|
741
|
|
|
(8,482
|
)
|
Net
loss from continuing operations
|
|
|
(13,465
|
)
|
|
(8,581
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
364
|
|
|
414
|
|
Amortization
of warrants
|
|
|
895
|
|
|
238
|
|
Change
in fair value of warrant derivative liability
|
|
|
311
|
|
|
—
|
|
Share-based
compensation expense
|
|
|
672
|
|
|
490
|
|
Provision
for doubtful accounts
|
|
|
78
|
|
|
(213
|
)
|
Provision
for inventory adjustments
|
|
|
(11
|
)
|
|
88
|
|
Loss
on sale of equipment
|
|
|
—
|
|
|
4
|
|
Changes
in assets and liabilities, net of discontinued operation:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(141
|
)
|
|
921
|
|
Inventories
|
|
|
86
|
|
|
(369
|
)
|
Prepaid
and other current assets
|
|
|
16
|
|
|
(26
|
)
|
Accounts
payable
|
|
|
(38
|
)
|
|
8
|
|
Accrued
expenses
|
|
|
549
|
|
|
40
|
|
Long-term
severance
|
|
|
662
|
|
|
—
|
|
Net
cash used in continuing operations
|
|
|
(10,022
|
)
|
|
(6,986
|
)
|
Net
cash provided by (used in) discontinued operation
|
|
|
218
|
|
|
(1,699
|
)
|
Net
cash used in operating activities
|
|
|
(9,804
|
)
|
|
(8,685
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Proceeds
from maturity of marketable securities
|
|
|
—
|
|
|
8,419
|
|
Proceeds
from sale of equipment
|
|
|
—
|
|
|
15
|
|
Capital
expenditures
|
|
|
(1,026
|
)
|
|
(139
|
)
|
Investment
in patents
|
|
|
(23
|
)
|
|
—
|
|
Net
cash (used in) provided by continuing operations
|
|
|
(1,049
|
)
|
|
8,295
|
|
Net
cash used in discontinued operation
|
|
|
(4
|
)
|
|
(102
|
)
|
Net
cash (used in) provided by investing activities
|
|
|
(1,053
|
)
|
|
8,193
|
|
Cash
flow from financing activities:
|
|
|
|
|
|
|
|
Net
(payment) borrowings on lines of credit
|
|
|
(3,323
|
)
|
|
1,363
|
|
Net
proceeds from long-term borrowing
|
|
|
1,500
|
|
|
—
|
|
Net
proceeds from private placement of common stock and
warrants
|
|
|
13,768
|
|
|
—
|
|
Proceeds
from exercise of stock options and stock purchase plan
|
|
|
23
|
|
|
137
|
|
Fees
paid to effect reverse stock split
|
|
|
(12
|
)
|
|
—
|
|
Loan
origination fees
|
|
|
(41
|
)
|
|
—
|
|
Purchase
of stock for treasury
|
|
|
—
|
|
|
(94
|
)
|
Net
cash provided by financing activities
|
|
|
11,915
|
|
|
1,406
|
|
Net
increase in cash and cash equivalents
|
|
|
1,058
|
|
|
914
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
609
|
|
|
903
|
|
Cash
and cash equivalents at end of period
|
|
$
|
1,667
|
|
$
|
1,817
|
|
Supplemental
disclosure:
Cash
paid
for interest was $115 and $9 for the nine months ended July 31, 2008 and 2007,
respectively. Cash paid for income taxes was $4 and $13 for the nine months
ended July 31, 2008 and 2007, respectively.
In
the
nine months ended July 31, 2008, the Company issued warrants with estimated
fair
values of $118 to a bank as consideration for entering into and amending Loan
Agreements. See Note 8 to the Financial Statements.
In
the
nine months ended July 31, 2008 and 2007, there was no cash provided by or
used
in financing activities from discontinued operations.
The
accompanying condensed notes are an integral part of the unaudited consolidated
financial statements.
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
N
OTE
1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying consolidated financial statements of the Company are unaudited,
other than the consolidated balance sheet at October 31, 2007, and reflect
all
material adjustments, consisting only of normal recurring adjustments, which
management considers necessary for a fair statement of the Company’s financial
position, results of operations and cash flows for the interim periods. The
results of operations for the current interim periods are not necessarily
indicative of the results to be expected for the entire fiscal
year.
These
consolidated financial statements have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission (“SEC”). Certain
information and footnotes normally included in financial statements prepared
in
accordance with generally accepted accounting principles in the United States
of
America have been condensed or omitted pursuant to these rules and regulations.
These consolidated financial statements should be read in conjunction with
the
consolidated financial statements and the notes thereto included in the
Company’s Form 10-K, as filed with the SEC for the fiscal year ended October 31,
2007.
Certain
reclassifications have been made to prior period balances in order to conform
to
the current period presentation.
On
April
29, 2008, the Company’s stockholders approved a one share for five shares
reverse split of the Company’s common stock, which became effective on May 1,
2008. The number of shares and the per share amounts as of October 31, 2007
and
July 31, 2007 have been retrospectively restated for the effect of the reverse
stock split. The reverse stock split had no effect on the par value of the
Company’s common stock or the total authorized shares.
Management’s
Plans
The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and liquidation of liabilities
in
the normal course of business. The Company has incurred net losses of
$12.7 million in the nine months ended July 31, 2008, and $21.0 million and
$17.1 million for the years ended October 31, 2007 and 2006, respectively.
In
addition, the Company has used cash in operations of $9.8 million in the nine
months ended July 31, 2008, and $12.3 million and $15.9 million for the years
ended October 31, 2007 and 2006, respectively. As of July 31, 2008, we had
an accumulated deficit of $160.7 million; cash and cash equivalents of $1.7
million, and long-term debt of $1.6 million.
Based
on
the Company’s current operating plans, management believes that the Company’s
existing cash resources and cash forecasted by management to be generated by
operations, as well as the Company’s short-term and long-term borrowings, lines
of credit and its ability to raise capital through the sale of its common stock
and /or securities convertible to common stock, will be sufficient to meet
working capital and capital requirements through at least the next twelve
months. In this regard, the Company raised additional financing in the first
quarter of fiscal 2008 to fund our continuing operations, support the further
development and launch of ClearPath™, our unique multicatheter breast
brachytherapy device for Accelerated Partial Breast Irradiation, and other
activities. In addition, subsequent to April 30, 2008, the Company negotiated
a
$3.0 million term loan, renewed its expired line of credit for $3.0 million
with
a bank, and most recently, negotiated a sale of certain assets as described
in
Note 3 -Discontinued Operations. However, there is no assurance that the Company
will be successful with its plans. If events and circumstances occur such that
the Company does not meet its current operating plans, the Company is unable
to
raise sufficient additional equity or debt financing, or such financing is
insufficient or not available, the Company may be required to further reduce
expenses or take other steps which could have a material adverse effect on
our
future performance, including but not limited to, the premature sale of some
or
all of our assets or product lines on undesirable terms, merger with or
acquisition by another company on unsatisfactory terms, or the cessation of
operations.
The
Company also expects that in future periods new products and services will
provide additional cash flow, although no assurance can be given that such
cash
flow will be realized, and the Company is presently placing an emphasis on
controlling expenses.
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
Use
of Estimates
In
the
normal course of preparing the financial statements in conformity with generally
accepted accounting principles in the United States of America, management
is
required to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the financial statements and reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those amounts.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are recorded at the invoiced amount and do not bear interest. The
allowance for doubtful accounts is the Company’s best estimate of the amount of
probable credit losses in our existing accounts receivable. The Company
determines the allowance based on historical write-off experience and customer
economic data. We review our allowance for doubtful accounts monthly. Past
due
balances over 60 days and over a specified amount are reviewed individually
for
collectibility. Account balances are charged off against the allowance when
the
Company believes that it is probable the receivable will not be recovered.
The
Company does not have any off-balance-sheet credit exposure related to our
customers.
Inventories
Inventories
are valued at the lower of cost or market as determined under the first-in,
first-out method. Costs include materials, labor and manufacturing
overhead.
Equipment
and Leasehold Improvements
Equipment
and leasehold improvements are stated at cost. Maintenance and repair costs
are
expensed as incurred, while improvements are capitalized. Gains or losses
resulting from the disposition of assets are included in income. Depreciation
and amortization are computed using the straight-line method over the estimated
useful lives as follows:
Furniture,
fixtures and equipment
|
3-7
years
|
Leasehold
improvements
|
Lesser
of the useful life or term of lease
|
Long-Lived
Assets
In
accordance with SFAS No. 144, “
Accounting
for the Impairment or Disposal of Long-Lived Assets
,”
long-lived assets, such as property, plant, and equipment, and purchased
intangibles subject to amortization, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured
by
a comparison of the carrying amount of an asset to the estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount
of an asset exceeds its estimated future cash flows, an impairment charge is
recognized equal to the amount by which the carrying amount of the asset exceeds
the fair value of the asset. Assets to be disposed of are separately presented
in the consolidated balance sheet and reported at the lower of the carrying
amount or fair value less costs to sell, and are no longer
depreciated.
Intangible
Assets
License
agreements are amortized on a straight-line basis over periods ranging up to
fifteen years. The amortization periods of patents are based on the lives of
the
license agreements to which they are associated or the approximate remaining
lives of the patents, whichever is shorter. Purchased intangible assets with
finite lives are carried at cost less accumulated amortization and are amortized
on a straight-line basis over periods ranging from three to twelve
years.
The
Company reviews for impairment whenever events and changes in circumstances
indicate that such assets might be impaired. If the estimated future cash flows
(undiscounted and without interest charges) from the use of an asset are less
than the carrying value, a write-down is recorded to reduce the related asset
to
its estimated fair value.
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
Derivative
Liabilities
The
Company issued warrants in connection with its borrowing activities that
included an uncertain purchase price. The Company evaluated the warrants under
SFAS No. 133 -
Accounting
for Derivative Instruments and Hedging Activities
and
Emerging Issues Task Force Issue 00-19 -
Accounting
for Derivative Financial Indexed to, and Potentially Settled in, a Company’s Own
Stock
and
determined the warrants should be accounted for as derivative liabilities at
estimated fair value, and marked-to-market at subsequent measurement dates. The
Company used the Black-Scholes option-pricing model to determine the fair value
of the derivative liabilities at each measurement date. Key assumptions of
the
Black-Scholes option-pricing model include applicable volatility rates,
risk-free interest rates and the instruments’ expected remaining life. The
fluctuations in estimated fair value are recorded as Adjustments to Fair Value
of Derivatives in the Statement of Operations. On December 12, 2007, the
uncertain purchase price became certain, and the fair value of the derivatives
were reclassed from liabilities to equity. See further discussion in Note
8 - Warrant Derivatives and Note 9 - Borrowings.
Revenue
Recognition
The
Company sells products for radiation therapy treatment, primarily brachytherapy
seeds used in the treatment of cancer. The Company applies the provisions of
SEC
Staff Accounting Bulletin (“SAB”) No. 104, “
Revenue
Recognition
”
for
the
sale of non-software products. SAB No. 104, which supersedes SAB No. 101,
“
Revenue
Recognition in Financial Statemen
t
s
”,
provides guidance on the recognition, presentation and disclosure of revenue
in
financial statements. SAB No. 104 outlines the basic criteria that must be
met to recognize revenue and provides guidance for the disclosure of revenue
recognition policies. In general, the Company recognizes revenue related
to product sales when (i) persuasive evidence of an arrangement exists, (ii)
delivery has occurred, (iii) the fee is fixed or determinable, and (iv)
collectibility is reasonably assured.
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to
taxable income in the years in which those temporary differences are expected
to
be recovered or settled. The Company has recorded 100% valuation allowance
against its deferred tax assets until such time that it becomes more likely
than
not that the Company will realize the benefits of its deferred tax assets.
On
November 1, 2007, the Company implemented Financial Accounting Standards Board
(“FASB”) Interpretation No. 48, “
Accounting
for Uncertainty in Income Taxes — An Interpretation of FASB Statement
No. 109
,”
(FIN 48). See Note 2 - Income Taxes.
Share-based
Compensation
The
Company accounts for its share-based payments under the guidance set forth
in
Statement of Financial Accounting Standards (“SFAS”) No. 123(R),
Share-Based
Payment
(“SFAS
123(R)”), which requires the measurement and recognition of compensation expense
for all share-based payment awards made to employees and directors, including
stock options and employee stock purchases related to the Company’s Employee
Stock Purchase Plan (the “Employee Stock Purchase Plan”), based on their fair
values. The Company also applies the guidance found in SEC
Staff
Accounting Bulletin No. 107
(“SAB
107”) to with respect to share-based payments and SFAS 123(R).
Under
SFAS 123(R), the Company attributes the value of share-based compensation to
expense using the straight-line method. The Company uses a 10% forfeiture
rate under the straight-line method based on historic and estimated future
forfeitures. On March 16, 2006, the Company granted 130,100 stock options that
contain certain market conditions (“2006 Premium Price Awards”) The 2006 Premium
Price Awards are, to the extent provided by law, incentive stock options that
have an exercise price of $16.75 per share, which is equal to 159% of the fair
market value of the Company’s common stock on the grant date. The 2006 Premium
Price Awards also include a condition that provides that such stock options
will
only vest if the closing price of the Company's common stock is equal to or
greater than $16.75 on each day over any consecutive four month period beginning
on any date after the date of grant and ending no later than the third
anniversary of the date of grant. If the market condition is not satisfied
by
the third anniversary of the date of grant, the 2006 Premium Price Awards will
not vest. Subject to the attainment of the market condition by the Company,
the
2006 Premium Price Awards will vest, if at all, in equal annual installments
over a four year period beginning on March 16, 2008, the second anniversary
of
the grant date. The 2006 Premium Price Awards have a term of 8 years from the
date of grant. The 2006 Premium Price Awards, share-based compensation expense
has been estimated using a 40% forfeiture rate and is included in share-based
compensation expense.
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
On
February 15, 2008, the Company’s Board of Directors approved, subject to the
approval of the Company’s stockholders, a plan to reprice certain existing
employee stock options at $2.05 per share, the closing price of the Company’s
common stock on February 15, 2008. The 2006 Premium Price Awards were re-priced
to $3.25 per share, which is equal to 159% of the re-priced fair value of the
Company’s common stock. In addition, the Company’s Board of Directors also
approved, subject to the approval of the Company’s stockholders, a plan to
exchange options held by directors of the Company for a one-time stock option
grant at $2.10 per share, the closing price of the Company’s stock on February
13, 2008. The Company’s stockholders approved both the employee stock option
re-pricing plan and the director exchange plan at the annual meeting held on
April 29, 2008. (See Note 10 – Stockholders’ Equity for further
discussion). The re-pricing exercise of employee stock options generated $332
incremental share-based compensation for un-vested and re-priced stock options,
which is being recognized over the vesting period of the new employee stock
options. The exchange exercise for the options held by directors of the Company
generated $166 incremental share-based compensation for un-vested and exchanged
options, which is being recognized over the three-year vesting period of the
newly issued director stock options.
Share-based
compensation expense related to stock options and employee stock purchases,
including the amortized portion of the incremental share-based compensation
for
the re-priced employee stock options, the exchanged director stock options
and
the 2006 Premium Price Awards, of $237 and $176 for the three months ended
July
31, 2008 and 2007, respectively, and $672 and $490 for the nine months ended
July 31, 2008 and 2007, respectively, was recorded in the financial statements
as a component of general and administrative expense.
The
Company uses the Black-Scholes option-pricing model for estimating the fair
value of options granted. The Black-Scholes option-pricing model was developed
for use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions, including the expected
stock
price volatility. The Company uses projected volatility rates, which are based
upon historical volatility rates, trended into future years. Because the
Company’s employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management’s
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company’s options. For purposes of financial
statement presentation and pro forma disclosures, the estimated fair values
of
the options are amortized over the options’ vesting periods.
Net
Loss per Share
Basic
loss per share is computed by dividing the loss by the weighted average number
of shares outstanding for the period.
Diluted
earnings (loss) per share is computed by dividing the net income (loss) by
the
sum of the weighted average number of common shares outstanding for the period
plus the assumed exercise of all dilutive securities by applying the treasury
stock method. Stock options for which the exercise price exceeds the average
market price over the period have an anti-dilutive effect on earnings per share
and, accordingly, are excluded from the calculation. The following table sets
forth the computation of basic and diluted loss per share:
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
|
|
Three months ended July 31,
|
|
Nine months ended July 31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss from continuing operations
|
|
$
|
(4,140
|
)
|
$
|
(3,040
|
)
|
$
|
(13,465
|
)
|
$
|
(8,581
|
)
|
Net
income (loss) from discontinued operations
|
|
|
162
|
|
|
(7,648
|
)
|
|
741
|
|
|
(8,482
|
)
|
Net
loss
|
|
|
(3,978
|
)
|
|
(10,688
|
)
|
|
(12,724
|
)
|
|
(17,063
|
)
|
Weighted
average shares outstanding - basic
|
|
|
18,488,227
|
|
|
5,863,411
|
|
|
14,852,304
|
|
|
5,865,412
|
|
Dilutive
effect of stock options and warrants
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted
average shares outstanding -diluted
|
|
|
18,488,227
|
|
|
5,863,411
|
|
|
14,852,304
|
|
|
5,865,412
|
|
Basic
and diluted loss per share from continuing operations
|
|
$
|
(0.22
|
)
|
$
|
(0.52
|
)
|
$
|
(0.91
|
)
|
$
|
(1.46
|
)
|
Basic
and diluted loss per share from discontinued operations
(1)
|
|
$
|
—
|
|
$
|
(1.30
|
)
|
$
|
0.05
|
|
$
|
(1.45
|
)
|
Basic
and diluted loss per share
|
|
$
|
(0.22
|
)
|
$
|
(1.82
|
)
|
$
|
(0.86
|
)
|
$
|
(2.91
|
)
|
(1)
2008
Q3 per share amount less than $(0.01)
Stock
options to purchase 2,379,029 common shares and 909,920 common shares, and
warrants to purchase 1,876,998 common shares and 118,944 common shares for
the
three months ended July 31, 2008 and 2007, respectively, and stock options
to
purchase 1,879,898 common shares and 743,474 common shares, and warrants to
purchase 1,876,998 common shares and 118,944 common shares for the nine months
ended July 31, 2008 and 2007, respectively, were not included in the computation
of diluted loss per share for those periods because their effect would have
been
anti-dilutive.
Significant
Concentrations
As
of
July 31, 2008, there was one customer that made up more than 10% of revenues
and
three customers that individually comprised more than 5% of accounts receivable,
and two suppliers that made up more than 10% of purchases and four suppliers
that individually comprised more than 5% of accounts payable.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “
Fair
Value Measurements
”,
(“SFAS
No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles (GAAP), and
expands disclosures about fair value measurements. This Statement applies under
other accounting pronouncements that require or permit fair value measurements,
and does not require any new fair value measurements. The application of SFAS
No. 157, however, may change current practice within an organization.
SFAS 157 is effective for fiscal years beginning after November 15,
2007. On February 12, 2008, the FASB issued FASB Staff Position
FSP
157-2
which defers the effective date of SFAS No. 157 for one year for
non-financial assets and non-financial liabilities that are not recognized
or
disclosed at fair value in the financial statements on a recurring basis. The
Company does not believe that SFAS No. 157 will have a material impact on the
Company’s financial position, results of operations or cash
flows.
In
February 2007, the FASB issued SFAS No. 159,
“The
Fair Value Option for Financial Assets and Financial
Liabilities.”
SFAS 159
provides companies with an option to report selected financial assets and
liabilities at fair value. The standard’s objective is to reduce both complexity
in accounting for financial instruments and the volatility in earnings caused
by
measuring related assets and liabilities differently. The standard requires
companies to provide additional information that will help investors and other
users of financial statements to more easily understand the effect of the
company’s choice to use fair value on its earnings. It also requires companies
to display the fair value of those assets and liabilities for which the company
has chosen to use fair value on the face of the balance sheet. The new standard
does not eliminate disclosure requirements included in other accounting
standards, including requirements for disclosures about fair value measurements
included in SFAS 157,
“Fair
Value Measurements,”
and SFAS
107,
“Disclosures
about Fair Value of Financial Instruments.”
SFAS 159
is effective as of the start of fiscal years beginning after November 15,
2007. Early adoption is permitted. The Company is evaluating this standard
and
therefore has not yet determined the impact that the adoption of SFAS 159 will
have on our financial position, results of operations or cash
flows.
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "
Business
Combinations
"
("SFAS 141R"). SFAS 141R establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree and the goodwill acquired. SFAS 141R also
establishes disclosure requirements to enable the evaluation of the nature
and
financial effects of the business combination. SFAS 141R is effective for
fiscal years beginning after December 15, 2008.The Company is currently
evaluating the potential impact, if any, of the adoption of SFAS 141R on
its consolidated results of operations and financial condition.
In
December 2007, the FASB issued SFAS No. 160, "
Noncontrolling
Interests in Consolidated Financial Statements—an amendment of Accounting
Research Bulletin No. 51
"
(“SFAS
160”). SFAS 160 establishes accounting and reporting standards for ownership
interests in subsidiaries held by parties other than the parent, the amount
of
consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parent's ownership interest, and the valuation of
retained noncontrolling equity investments when a subsidiary is deconsolidated
SFAS 160
also
establishes disclosure requirements that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners SFAS 160
is
effective for fiscal years beginning after December 15, 2008.The Company is
currently evaluating the potential impact, if any, of the adoption
of
SFAS
160
on its consolidated results of operations and financial
condition.
In
March
2008, the FASB issued SFAS No. 161,
Disclosures
about Derivative Instruments and Hedging Activities – an amendment of FASB
Statement No. 133
.
The new
standard is intended to improve financial reporting about derivative instruments
and hedging activities by requiring enhanced disclosures to enable investors
to
better understand their effects on an entity’s financial position, financial
performance, and cash flows. Entities are required to provide enhanced
disclosures about: (a) how and why an entity uses derivative instruments;
(b) how derivative instruments and related hedged items are accounted for
under SFAS No. 133 and its related interpretations; and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. This standard is effective
for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008, with early application encouraged. The Company is
currently evaluating the impact, if any, SFAS No. 161 will have on its
consolidated financial position, results of operations or cash flows.
In
March
2007, the FASB ratified Emerging Issues Task Force Issue 06-11,
Accounting
for Income Tax Benefits of Dividends on Share-Based Payment Awards
,
(“EITF
Issue 06-11” ). Beginning January 1, 2008, the Company adopted EITF Issue
06-11. In accordance with the EITF Issue, the Company records a credit to
additional paid-in capital for tax deductions resulting from a dividend payment
on non-vested share awards the Company expects to vest. The adoption of EITF
Issue 06-11 did not have any impact on the Company’s consolidated financial
statement during the quarter ended July 31, 2008.
In
May
2008, the FASB issued SFAS No. 162, “
The
Hierarchy of Generally Accepted Accounting Principles”, (“SFAS No.
162”
).
SFAS
No. 162 identifies the sources of accounting principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP)
in
the United States (the GAAP hierarchy). This Statement is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles”. The Company currently adheres to the
hierarchy of GAAP as presented in SFAS No. 162, and does not expect its adoption
will have a material impact on its consolidated results of operations and
financial condition.
In
June
2008, the FASB issued Financial Accounting Standards Board Staff Position EITF
03-6-1,
Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities
(“FSP
EITF 03-6-1”). The FSP provides that unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend equivalents (whether
paid
or unpaid) are participating securities and shall be included in the computation
of earnings per share pursuant to the two-class method in accordance with SFAS
128, Earnings per Share. The FSP is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those years. Upon adoption, the Company is required to retrospectively adjust
its earnings per share data to conform with the provisions in this FSP. Early
application of this FSP is prohibited. The Company is currently evaluating
the
impact this FSP will have on its consolidated financial statements.
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
NOTE
2 – INCOME TAXES
On
November 1, 2007, the Company adopted FIN 48. FIN 48 which
clarifies the accounting for uncertainty in income taxes by prescribing the
recognition threshold a tax position is required to meet before being recognized
in the financial statements and also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. As a result of the adoption of FIN 48, the
Company reduced the liability for net unrecognized tax benefits, classified
in
other assets and accrued liabilities, by $152 and $440, respectively, and
accounted for this as a cumulative effect of a change in accounting principle
that was recorded as an increase to retained deficit. In implementing
FIN 48, the Company has classified $120 as current income taxes payable,
and, reduced to zero, both its short-term and long-term income tax receivable
and long-term income tax payable.
Upon
adoption of FIN 48, the Company recognizes interest expense within Interest
and Other Expenses and penalties within General and Administrative expenses
accrued on unrecognized tax
benefits.
As of the date of adoption of FIN 48, the Company had accrued a nominal
amount for interest and penalties. There was not a material change to this
amount as of July 31, 2008.
As
of
October 31, 2007, the Company had generated $141.0 million and $116.0 million
of
Federal and state Net Operating Loss Carry-forwards (“NOL”), respectively and
$4.8 million of Federal Research & Development Credits (“R&D Credits”)
through its recurring operating losses, and its acquisition of Theseus
Corporation in 2000 and NOMOS Corporation in 2004. The tax effect of the Federal
and state NOL and R&D Credits have been carried as a component of its
deferred tax assets, and completely offset by a valuation allowance. The Federal
NOL and R&D Credits are subject to certain statutory limitations, which
reduce the value of the Federal NOL and R&D Credits that can be used to
offset future income under certain sections of the Internal Revenue Service
Code
Section 382 and Section 383, collectively the “Code”. The statutory limitations
are imposed upon a change of ownership, as defined within the Code. As a result
of the Company’s January 2008 PIPE transaction (See Note 10—Stockholders’
Equity) the Company has experienced a change in ownership under the Code.
Federal statutory limitations under the sections are generally accepted as
limitations by the states in which the Company currently files state returns.
The effect of the change of ownership has been to reduce to $10.2 million the
statutory limit on each of the Federal and State NOL and to eliminate the
R&D Credits available to the Company, as determined under the Code. Based on
its effective tax rate 40%, the Company recorded a $59.9 million decrease to
its
deferred tax assets and its valuation allowance at July 31, 2008 as a result
of
the limitation.
NOTE
3 – DISCONTINUED OPERATIONS
August
29, 2008, the Company entered into an agreement relating to the sale of the
Company’s non-therapeutic product line to Eckert & Ziegler Isotope Products,
Inc. (“EZIP”). The sale was completed on September 5, 2008. The Company expects
its departure from the non-therapeutic business will allow it to concentrate
on
its core business of brachytherapy products and to provide necessary working
capital. The agreement for the sale will transfer inventory, certain fixed
assets and intellectual property with a carrying value of $0.6 million to
EZIP.
in
return
for a purchase price of up to $6.0 million, to be paid $3.0 million at closing
and $2.0 million in January 2009. An additional $1.0 million may be paid to
the
Company upon the achievement of certain milestones in September 2009. The
carrying value of the assets to be included in the sale are shown as Assets
Held
for Sale on the Company’s Consolidated Balance Sheet as follows:
Assets
held for sale consist of the following:
|
|
July 31, 2008
|
|
October 31, 2007
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
591
|
|
$
|
561
|
|
Fixed
Assets, net of accumulated depreciation of $444 and $385 at July
31, 2008
and October 31, 2007, respectively
|
|
|
12
|
|
|
68
|
|
Intellectual
property, net of accumulated amortization of $6 and $5 at July 31,
2008
and October 31, 2007, respectively
|
|
|
6
|
|
|
7
|
|
|
|
$
|
609
|
|
$
|
636
|
|
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
On
August
3, 2007, the Company announced its intent to divest its NOMOS Radiation Oncology
business (“NOMOS”), which develops and markets IMRT/IGRT products used during
external beam radiation therapy for the treatment of cancer. The Company expects
that the divestiture of NOMOS will allow it to better utilize financial
resources to benefit the marketing and development of innovative brachytherapy
products for the treatment of cancer. On September 17, 2007, the Company
executed a purchase and sale agreement with Best Medical International, Inc.
(“Best”) to purchase, for $0.5 million, certain assets and to assume certain
liabilities of NOMOS, with a carrying value of $0.4 million, after giving effect
to a $6.7 million impairment write-down in the third quarter of fiscal year
2007. The Company incurred $0.5 million in legal and other closing costs in
connection with the sale. The operations of NOMOS are shown as discontinued
operations for the nine months ended July 31, 2008 and 2007.
At
July
31, 2008 and October 31, 2007, the Company has included in its Accounts Payable
and Accrued Liabilities on its Balance Sheet $0.5 million and $1.1 million
of
retained obligations to its vendors, customers and former employees of the
NOMOS
operation, respectively, to be paid in accordance with their terms.
Summarized
statement of earnings data for discontinued operations for the:
|
|
Three months ended July 31,
|
|
Nine months ended July 31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-therapeutic
Product Line
|
|
$
|
845
|
|
$
|
735
|
|
$
|
2,650
|
|
$
|
2,983
|
|
Nomos
Operations
|
|
|
—
|
|
|
3,065
|
|
|
—
|
|
|
9,136
|
|
Total
net revenue
|
|
|
845
|
|
|
3,800
|
|
|
2,650
|
|
|
12,119
|
|
Income
(loss) from discontinued operations before income tax
benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-therapeutic
Product Line
|
|
|
177
|
|
|
70
|
|
|
869
|
|
|
1,188
|
|
Nomos
Operations
|
|
|
(15
|
)
|
|
(7,718
|
)
|
|
(128
|
)
|
|
(9,670
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit (expense)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
income (loss) from discontinued operations
|
|
|
162
|
|
|
(7,648
|
)
|
|
741
|
|
|
(8,482
|
)
|
Basic
and diluted earnings (loss) from discontinued operations, per share
(1)
|
|
$
|
—
|
|
$
|
(1.30
|
)
|
$
|
0.05
|
|
$
|
(1.45
|
)
|
(1)
2008
Q3 per share amount less than $(0.01)
NOTE
4—ACCOUNTS RECEIVABLE
Accounts
receivable consist of the following:
|
|
July 31, 2008
|
|
October 31, 2007
|
|
Accounts receivable - trade
|
|
$
|
2,624
|
|
$
|
2,475
|
|
Less:
allowance for doubtful accounts
|
|
|
(265
|
)
|
|
(179
|
)
|
|
|
$
|
2,359
|
|
$
|
2,296
|
|
The
provision for doubtful accounts was $21 and $103 expense reduction for the
three
months ended July 31, 2008 and 2007, respectively, and $79 expense and $213
expense reduction for the nine months ended July 31, 2008 and 2007,
respectively.
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
NOTE
5—INVENTORIES
Inventories
consist of the following:
|
|
July 31, 2008
|
|
October 31, 2007
|
|
Raw materials
|
|
$
|
866
|
|
$
|
891
|
|
Work in
process
|
|
|
62
|
|
|
98
|
|
Finished
goods
|
|
|
175
|
|
|
185
|
|
Reserve
for excess inventory
|
|
|
(194
|
)
|
|
(190
|
)
|
|
|
$
|
909
|
|
$
|
984
|
|
The
provision for inventory reserves included in cost of sales was $24 and $10
for
the three months and nine months ended July 31, 2008 and $88 for the three
months and nine months ended July 31, 2007.
NOTE
6—EQUIPMENT AND LEASEHOLD IMPROVEMENTS
|
|
July 31, 2008
|
|
October 31, 2007
|
|
Furniture, fixtures and equipment
|
|
$
|
5,040
|
|
$
|
4,461
|
|
Leasehold
improvements
|
|
|
2,625
|
|
|
2,194
|
|
|
|
|
7,665
|
|
|
6,655
|
|
Less:
accumulated depreciation
|
|
|
(6,158
|
)
|
|
(5,831
|
)
|
|
|
$
|
1,507
|
|
$
|
824
|
|
Depreciation
expense was $124 and $114 for the three months ended July 31, 2008 and 2007,
respectively, and $347 and $392 for the nine months ended July 31, 2008 and
2007, respectively.
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
NOTE
7—INTANGIBLE ASSETS
|
|
July 31, 2008
|
|
October 31, 2007
|
|
Amortizable
intangible assets
|
|
|
|
|
|
|
|
Purchased
technology
|
|
$
|
158
|
|
$
|
98
|
|
Existing
customer relationships
|
|
|
11
|
|
|
11
|
|
Trademark
|
|
|
19
|
|
|
19
|
|
Patents
and licenses
|
|
|
108
|
|
|
146
|
|
|
|
|
296
|
|
|
274
|
|
Less:
accumulated amortization
|
|
|
(191
|
)
|
|
(171
|
)
|
|
|
$
|
105
|
|
$
|
103
|
|
Amortization
expense was $7 for the three months ended July 31, 2008 and 2007, respectively
and $21 for the nine months ended July 31, 2008 and 2007,
respectively.
The
estimate of aggregate future amortization expense is as follows:
For
the Years Ended October 31,
|
|
|
|
|
|
|
|
2008
(remaining three months)
|
|
$
|
7
|
|
2009
|
|
|
33
|
|
2010
|
|
|
33
|
|
2011
|
|
|
31
|
|
Thereafter
|
|
|
8
|
|
|
|
$
|
112
|
|
NOTE
8 – WARRANT DERIVATIVES
There
were no warrant derivative liabilities outstanding at July 31, 2008, and warrant
derivative liabilities were $173 at October 31, 2007. The warrant derivative
liabilities are recorded at estimated fair value and are marked-to-market at
each subsequent measurement date. The liabilities were incurred when the Company
issued warrants to a lender with an uncertain pricing component in connection
with its borrowing activities (see Note 9—Borrowings – Agility Capital
LLC). The uncertain pricing component became certain on December 12, 2007,
upon
the signing of the Securities Purchase Agreements with certain Investors, and
the Company reclassed the fair value of the warrant derivatives from liability
to equity. See Note 10—Stockholders’ Equity. The Company has accounted for the
warrant derivative liabilities in accordance with guidance under SFAS No. 133
and EITF 00-19. Changes in the liability warrants balance for the nine months
ended July 31, 2008 are:
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
|
|
Agility Capital,
LLC
|
|
Balance,
October 31, 2007
|
|
$
|
173
|
|
Additions:
|
|
|
|
|
Fair
Value – Warrants issued for Second Amendment to the Loan
Agreement
|
|
|
161
|
|
Fair
Value Adjustments during the period
|
|
|
311
|
|
|
|
|
645
|
|
Less:
Fair value of warrants transferred to permanent equity
|
|
|
(645
|
)
|
Balance,
July 31, 2008
|
|
$
|
—
|
|
The
fair
value of the warrant issued in connection with the Second Amendment to the
Loan
Agreement with Agility Capital, LLC has been recorded as Loan Discount Fees
and
amortized to Interest and Other Expense over the term of the loan amendment,
and
the fair value adjustments during the period have been recorded as Adjustments
to Fair Value of Derivatives in the Statement of Operations for the nine months
ended July 31, 2008. The fair value of the warrants transferred to permanent
equity are included in Additional Paid-in Capital on the Balance Sheet at July
31, 2008.
NOTE
9 – BORROWINGS
The
borrowings were $1,341, net of discount at July 31, 2008, and $3,241 at October
31, 2007, consisting of a loan and lines of credit with a bank, and subordinated
short-term notes with private lenders. Borrowing activities for the nine months
ended July 31, 2008 are:
|
|
October 31,
|
|
|
|
|
|
July 31,
|
|
|
|
2007
|
|
Borrowings
|
|
Repayments
|
|
2008
|
|
Silicon Valley Bank -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line
of credit
|
|
$
|
1,573
|
|
$
|
438
|
|
$
|
(2,011
|
)
|
$
|
—
|
|
Bridge
loan sub-limit
|
|
|
750
|
|
|
4,189
|
|
|
(4,939
|
)
|
|
—
|
|
Short-term
portion of long-term debt
|
|
|
—
|
|
|
417
|
|
|
—
|
|
|
417
|
|
Subordinated
short-term notes -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agility
Capital, LLC
|
|
|
1,000
|
|
|
—
|
|
|
(1,000
|
)
|
|
—
|
|
John
Friede Note
|
|
|
—
|
|
|
250
|
|
|
(250
|
)
|
|
—
|
|
Three
Arch Partners, et al
|
|
|
—
|
|
|
1,000
|
|
|
(1,000
|
)
|
|
—
|
|
Total
borrowings
|
|
|
3,323
|
|
|
6,294
|
|
|
(9,200
|
)
|
|
417
|
|
Less
Unamortized loan discount fees.
|
|
|
(82
|
)
|
|
(914
|
)
|
|
996
|
|
|
—
|
|
Total
short-term borrowings
|
|
$
|
3,241
|
|
$
|
5,380
|
|
$
|
(8,204
|
)
|
$
|
417
|
|
Long-Term
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth
Capital Loan
|
|
|
—
|
|
|
1,083
|
|
|
—
|
|
|
1,083
|
|
Less
Unamortized loan discount fees.
|
|
|
—
|
|
|
(159
|
)
|
|
—
|
|
|
(159
|
)
|
Total
long-term borrowings
|
|
$
|
—
|
|
$
|
924
|
|
|
—
|
|
|
924
|
|
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
Interest
expense was $7, excluding $41 loan discount fees paid in cash and $118 fair
value of warrants issued in connection with lending activities, for the nine
months ended July 31, 2008. Interest expense was $246 for the nine months ended
July 31, 2007, primarily from the amortization of loan discount fees in
connection with lending activities.
Lines
of Credit
Silicon
Valley Bank
On
October 5, 2005, the Company entered into a Loan and Security Agreement (the
“Loan Agreement”)
with
Silicon Valley Bank (the “Bank”), for a secured, revolving line of credit of up
to $5,000. The line of credit had an initial term of one year and includes
a
letter of credit sub-facility. Borrowings under the line of credit are subject
to a borrowing base formula. The Company paid interest on the borrowings under
the line of credit at the Bank’s prime rate, or, if certain financial tests are
not satisfied, at the Bank’s prime rate plus 1.5%. The line of credit was
secured by all of the assets of the Company and is subject to customary
financial and other covenants, including reporting requirements.
On
January 12, 2006, the Company entered into a First Amendment to Loan and
Security Agreement (the “First Amendment”) with the Bank. The First
Amendment revised certain terms of the Loan Agreement to provide an adjustment
to the borrowing base formula and to permit liens in favor of a holder of
subordinated debt that are subordinated to the liens of the Bank. In
addition, the First Amendment decreased the minimum tangible net worth that
must
be maintained by the Company under the Asset Based Terms of the Loan Agreement
from $5 million to $1.5 million and granted the Bank a warrant to purchase
7,936
shares of the Company’s common stock at an exercise price of $9.45 per
share. The warrant will expire in five years unless previously exercised.
The Company calculated the fair value of the warrant on the date of grant to
be
$51 using the Black-Scholes model incorporating the following
assumptions:
Dividend
yield
|
|
|
0
|
%
|
Expected
volatility
|
|
|
63
|
%
|
Risk-free
interest rate
|
|
|
4.9
|
%
|
Expected
life
|
|
|
5
years
|
|
The
value
of the warrant has been fully amortized over the term of the line of credit
at
$5 per month, and is included in Interest and Other Expense on the Income
Statement for the nine months ended July 31, 2007.
On
October 31, 2006, the Company entered into a Second Amendment to the Loan
Agreement (the “Second Amendment”) with the Bank. The Second Amendment
extended the term of the line of credit to October 3, 2007 and revised certain
terms of the Loan Agreement. Specifically, the Second Amendment decreased the
amount available under the line of credit from $5.0 million to $4.0 million,
and
increased the minimum tangible net worth that must be maintained by the Company
from $1.5 million to $5.0 million. Borrowings under the line of credit continued
to be subject to a borrowing base formula. Borrowings bore interest at the
prime
rate until such time as the Company’s quick ratio, which is defined as the ratio
of unrestricted cash plus the Company’s net accounts receivable to the Company’s
current liabilities, fell below 1.00 to 1.00. At such time as the Company’s
quick ratio fell below 1.00 to 1.00, borrowings bore interest at the prime
rate
plus 1.50%, and the Company paid a fee of 0.50% per annum on the unused portion
of the line of credit, and a collateral handling fee in an amount equal to
$2
per month during 2007. The fees are included in Interest and Other Expenses
for
the three months ended January 31, 2007.
On
August
24, 2007, the Company entered into a Third Amendment to the Loan Agreement
(the
“Third Amendment”) with the Bank. The Third Amendment added a Bridge Loan
Sub-limit to the Loan Agreement of up to $1.5 million at an interest rate of
prime plus 4.0%, subject to a borrowing base formula, and decreased the minimum
tangible net worth that must be maintained by the Company from $5.0 million
to
$2.0 million. The maturity date of the Bridge Loan Sub-limit was the earlier
of
October 3, 2007 or the date the Company closed a private investment public
equity transaction. Concurrent with the Third Amendment, the Company issued
the
Bank a warrant for 60,000 shares of the Company’s common stock at an exercise
price of $4.90, the closing price of the Company’s common stock on August 24,
2007. The Company calculated the fair value of the warrant on the date of grant
to be $175 using the Black-Scholes model incorporating the following
assumptions:
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
Dividend
yield
|
|
|
0
|
%
|
Expected
volatility
|
|
|
67
|
%
|
Risk-free
interest rate
|
|
|
4.4
|
%
|
Expected
life
|
|
|
5
years
|
|
The
value
of the warrant has been amortized over the term of the line of credit, and
is
included in Interest and Other Expense on the Income Statement for the nine
months ended July 31, 2008.
On
September 14, 2007, the Company entered into a Fourth Amendment to the Loan
Agreement (the “Fourth Amendment”) with the Bank. The Fourth Amendment included:
(i) a forbearance by the Bank from exercising its rights and remedies against
the Company, until such time as the Bank determines in its discretion to cease
such forbearance, due to the default under the Loan Agreement resulting from
the
Company failing to comply with the tangible net worth covenant in the Loan
Agreement as of July 31, 2007 and August 31, 2007, and (ii) a consent to a
subordinated debt facility of up to $750 with Agility Capital LLC. In connection
with the Fourth Amendment, the Bank consented to the divestiture of NOMOS and
released its lien on the NOMOS assets.
On
October 3, 2007, the Company entered into a Fifth Amendment and Forbearance
to
the Loan Agreement (the “Fifth Amendment”) with the Bank. The Fifth Amendment
includes: (i) an extension of the maturity date of the Loan Agreement to
November 9, 2007, and an extension of the maturity date of the Bridge Loan
Sub-limit to the earlier of November 9, 2007 or the date the Company closes
a
private investment public equity transaction, (ii) a forbearance by the Bank
from exercising its rights and remedies against the Company, until such time
as
the Bank determines in its discretion to cease such forbearance, due to the
defaults under the Loan Agreement resulting from the Company failing to comply
with the tangible net worth covenant in the Loan Agreement as of July 31, 2007,
August 31, 2007 and September 30, 2007, and (iii) a consent to an increase
in
the Company’s subordinated debt facility with Agility Capital LLC from $750 to
up to $1.0 million.
On
October 29, 2007, the Company entered into a Sixth Amendment and Forbearance
to
the Loan Agreement (the “Sixth Amendment”) with the Bank. The Sixth Amendment
includes: (i) an extension of the maturity date of the Loan Agreement to
November 20, 2007, and an extension of the maturity date of the Bridge Loan
Sub-limit to the earlier of November 20, 2007 or the date the Company closes
a
private investment public equity transaction, (ii) a forbearance by the Bank
from exercising its rights and remedies against the Company, until such time
as
the Bank determines in its discretion to cease such forbearance, due to the
defaults under the Loan Agreement resulting from the Company failing to comply
with the tangible net worth covenant in the Loan Agreement as of July 31, 2007,
August 31, 2007 and September 30, 2007, and (iii) a consent to the Company’s
issuing up to $500 in unsecured subordinated debt to Mr. John Friede, or an
entity owned or controlled by Mr. Friede. At the time, Mr. Friede was a
significant stockholder of the Company, and was a director of the Company at
the
date of the agreement.
On
November 20, 2007, the Company entered into a Seventh Amendment and Forbearance
to its Loan Agreement (the “Seventh Amendment”) with the Bank. The Seventh
Amendment includes: (i) an extension of the maturity date of the Loan Agreement
to December 20, 2007, and an extension of the maturity date of the Bridge Loan
Sub-limit to the earlier of December 20, 2007 or the date the Company closes
a
private investment public equity transaction, and (ii) a forbearance by the
Bank
from exercising its rights and remedies against the Company, until such time
as
the Bank determines in its discretion to cease such forbearance, due to the
defaults under the Loan Agreement resulting from the Company failing to comply
with the tangible net worth covenant in the Loan Agreement as of July 31, 2007,
August 31, 2007 and September 30, 2007. In connection with the Seventh
Amendment, the Company granted a warrant to the Bank to purchase 18,181 shares
of the Company’s common stock, at a warrant price of $2.75 per share, which is
equal to the closing price of the Company’s common stock on November 20, 2007,
the date the Company’s Board of Directors approved the issuance of this warrant.
The number of shares are subject to adjustment
as
provided by the terms of the warrant. The warrant will expire in five years
unless previously exercised. The Company calculated the fair value of the
warrant on the date of grant to be $31 using the Black-Scholes model
incorporating the following assumptions:
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
Dividend
yield
|
|
|
0
|
%
|
Expected
volatility
|
|
|
71
|
%
|
Risk-free
interest rate
|
|
|
3.5
|
%
|
Expected
life
|
|
|
5
years
|
|
The
value
of the warrant has been amortized over the term of the line of credit, and
is
included in Interest and Other Expense on the Income Statement for the nine
months ended July 31, 2008.
On
December 18, 2007, the Company, entered into an Eighth Amendment and Forbearance
to the Loan Agreement (the “Eighth Amendment”) with the Bank. The Eighth
Amendment includes: (i) an extension of the maturity date of the Loan Agreement
to the earlier of February 1, 2008 or the date the Company completes its private
placement, (ii) a forbearance by the Bank from exercising its rights and
remedies against the Company, until such time as the Bank determines in its
discretion to cease such forbearance, due to the defaults under the Loan
Agreement resulting from the Company failing to comply with the tangible net
worth covenant in the Loan Agreement as of July 31, 2007, August 31, 2007,
September 30, 2007 and October 31, 2007 and (iii) a consent from the Bank to
allow the Company to repay its outstanding loan from Mr. John A. Friede in
the
amount of $250. In connection with the Eighth Amendment, the Company granted
a
warrant to the Bank to purchase 38,461 shares of the Company’s common stock as
determined by dividing the warrant price of $50 by the $1.30 warrant price
per
share, which is equal to the closing price of the Company’s common stock on
December 18, 2007, the date the Company’s Board of Directors approved the
issuance of this warrant. The number of shares are subject to adjustment as
provided by the terms of the warrant. The warrant will expire in five years
unless previously exercised. The Company calculated the fair value of the
warrant on the date of grant to be $33 using the Black-Scholes model
incorporating the following assumptions:
Dividend
yield
|
|
|
0
|
%
|
Expected
volatility
|
|
|
82
|
%
|
Risk-free
interest rate
|
|
|
3.5
|
%
|
Expected
life
|
|
|
5
years
|
|
The
value
of the warrant has been amortized over the term of the line of credit, and
is
included in Interest and Other Expense on the Income Statement for the nine
months ended July 31, 2008.
The
Company paid the $1,275 and $755 outstanding balance of the Line of Credit
and
the Bridge Sub-Limit, including accrued interest on January 23, 2008. The Bridge
Sub-Limit agreement was terminated in accordance with its terms upon payment
of
the outstanding balance.
On
May
28, 2008, the Company entered into a Ninth Amendment to the Loan Agreement
(the
“Ninth Amendment”) with the Bank. The Ninth Amendment renews the revolving
credit facility under which the Company may borrow an additional $3.0 million
based upon eligible receivables. The revolving credit facility is payable
monthly and carries interest at prime plus 0.50%, and is subject to certain
financial covenants. The revolving credit facility expires 24 months from the
date of execution of the Ninth Amendment.
The
Ninth
Amendment also includes a $3.0 million Growth Capital Loan which provides for
an
advance period during which $1.5 million was advanced to the Company on June
7,
2008, and $1.5 million may be advanced to the Company no later than September
30, 2008. The Growth Capital Loan provides for interest only payments through
the advance period at prime plus 2.25%, and 36 month repayment including
principal and interest. At July 31, 2008, $0.5 million and $0.9 million, net
of
loan origination fees of $0.1 million is included in the Balance Sheet as
short-term and long-term borrowings, respectively. Interest expense on the
Growth Capital Loan amounted to $17 through July 31, 2008, and is included
in
interest and other expenses on the Statement of Operations.
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
In
connection with the Ninth Amendment, the Company granted a warrant to the Bank
to purchase 99,337 shares of the Company’s common stock as determined by
dividing the warrant price of $150 by the $1.51 warrant price per share, which
is equal to the closing price of the Company’s common stock on May 19, 2008, the
date the Company’s Board of Directors approved the issuance of this warrant. The
number of shares are subject to adjustment as provided by the terms of the
warrant. The warrant will expire in five years unless previously exercised.
The
Company calculated the fair value of the warrant on the date of grant to be
$118
using the Black-Scholes model incorporating the following
assumptions:
|
|
|
|
Dividend
yield
|
|
|
0
|
%
|
Expected
volatility
|
|
|
89
|
%
|
Risk-free
interest rate
|
|
|
3.3
|
%
|
Expected
life
|
|
|
5
years
|
|
The
total
debt discount of $118 is recorded as net to the total borrowings in the Ninth
Amendment. The debt discount of $59 related to the revolving line of credit
facility is amortized over the life of the facility. The remaining debt discount
related to the Growth Capital Loan is determined through allocation based on
the
relative fair value of the loan and the relative fair value of the warrant.
The
amount allocated to the warrant, accounted for as debt discount, is amortized
over the life of the Growth Capital Loan.
At
July 31, 2008, the Company was not in compliance with
the Tangible Net Worth covenant as defined in the Ninth Amendment. On September
11, 2008, the Company and the Bank executed the Tenth Amendment to the Loan
Agreement which provides a waiver to the Company for its non-compliance with
the
Tangible Net Worth Covenant for an indefinite period.
Subordinated
Short-Term Borrowings
Partners
for Growth, LLC
On
March
28, 2006, the Company entered into a Loan and Security Agreement (the “PFG Loan
Agreement”)
with
Partners for Growth, LLC (“PFG”) for a secured, revolving line of credit of up
to $4,000, which supplemented an existing line of credit provided by the Bank.
The line of credit had a term of eighteen months, and earned interest at prime
rate as quoted in
The
Wall
Street Journal
.
Borrowings under the line of credit were subject to a borrowing base formula.
Amounts owing under the line of credit were secured by all of the assets of
the
Company and were subordinated to amounts owing under the line of credit with
the
Bank. The line of credit did not contain financial covenants; however the
Company was subject to other customary covenants, including reporting
requirements, and events of default. In connection with the PFG Loan Agreement,
the Company also granted PFG a warrant to purchase 79,000 shares of the
Company’s common stock at an exercise price of $9.45 per share. As a result of
the private placement of the Company’s common stock completed on June 7, 2006,
and pursuant to the anti-dilution terms of the warrant issued to PFG, the
warrant was amended to increase the number of shares of the Company’s common
stock that PFG can purchase from 79,000 shares to 111,007 shares, and the
exercise price was decreased from $9.45 per share to $6.75 per share. The
warrant will expire in five years unless previously exercised. The Company
calculated the fair value of the warrant on the date of grant to be $475 using
the Black-Scholes model incorporating the following
assumptions:
|
|
|
|
Dividend
yield
|
|
|
0
|
%
|
Expected
volatility
|
|
|
63
|
%
|
Risk-free
interest rate
|
|
|
4.9
|
%
|
Expected
life
|
|
|
5
years
|
|
The
value
of the warrant was deferred and amortized over the life of the loan at $27
per
month and is included in Interest and Other Expense on the Income Statement.
As
of October 31, 2007, the value of the warrant was fully amortized. On August
30,
2007 the Company terminated the PFG Loan Agreement with PFG by mutual consent.
As a result of the termination, PFG released all liens on the Company’s assets.
There were no outstanding borrowings under the PFG Loan Agreement at the date
of
termination.
Agility
Capital, LLC
On
September 21, 2007, the Company entered into a Loan Agreement (the “Agility Loan
Agreement”) with Agility Capital, LLC (“Agility”). The Agility Loan Agreement
provided for advances of up to $750 subject to the achievement of certain
milestones. Amounts owing under the Agility Loan Agreement were secured by
all
of the Company's assets, and were subordinated to amounts owing under the line
of credit with the Bank. The Agility Loan Agreement did not contain financial
covenants; however, the Company is subject to other customary covenants,
including reporting requirements, and events of default. The Company was
obligated to pay interest on borrowings under the Agility Loan Agreement at
the
prime rate, as quoted in
The
Wall Street Journal
,
plus 6%
. The Agility Loan Agreement term was 60 days, and all amounts outstanding
thereunder were due and payable on November 20, 2007. The Company paid an
origination fee of $20 to Agility in connection with the Agility Loan Agreement.
The origination fee and legal expenses were amortized over the term of the
Agility Loan Agreement at $10 per month, and is included in Interest and Other
Expense on the Income Statement. The Company further covered $15 of Agility’s
legal fees in connection with the Agility Loan Agreement, which were recorded
as
general and administrative expenses.
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
On
October 18, 2007, the Company entered into a First Amendment (the “First
Amendment”) to the Agility Loan Agreement. The First Amendment provides for
advances of up to $1,000. Amounts advanced under the Agility Loan Agreement
are
subordinated to the existing line of credit provided by the Bank. In addition,
within the First Amendment, Agility consented to the Company incurring up to
$500 of subordinated unsecured indebtedness to Mr. John A. Friede or an entity
owned or controlled by him (“Friede”), provided that Friede executes and
delivers to Agility a subordination agreement pursuant to which the debt owed
by
the Company to Friede will be subordinated to the debt owed to Agility. The
Company paid an origination fee of $10 to Agility in connection with the First
Amendment.
On
November 20, 2007, the Company executed a Second Amendment to the Agility Loan
Agreement (the “Second Amendment”) with Agility to extend the maturity date of
the Agility Loan Agreement from November 20, 2007 to December 21,
2007.
On
December 20, 2007, the Company executed a Third Amendment to the Agility Loan
Agreement (the “Third Amendment”) with Agility. The Third Amendment includes (i)
an extension of the maturity date of the Loan Agreement to February 1, 2008,
(ii) a loan modification and extension fee of $20, paid by the Company upon
the
execution of the amendment, and (iii) a consent from Agility to allow the
Company to repay its outstanding loan from Friede in the amount of $250. The
loan modification and extension fee has been amortized over the term of the
loan
and is included in Interest and Other Expense at July 31, 2008. The Company
has
repaid the balance on the Agility Loan Agreement, plus accrued interest as
of
July 31, 2008.
In
connection with the Agility Loan Agreement, on September 21, 2007, the Company
issued a warrant exercisable into 69,079 shares of the Company’s common stock at
an exercise price of $3.80 per share, as determined by the closing price of
the
Company’s common stock on September 20, 2007, the day immediately preceding the
issue date of the warrant (the “Initial Warrant”). The Initial Warrant will
expire in seven years unless previously exercised.
The
Company calculated the fair value of the Initial Warrant of 69,079 shares on
the
date of grant to be $149 using the Black-Scholes model incorporating the
following assumptions:
|
|
|
|
Dividend
yield
|
|
|
0
|
%
|
Expected
volatility
|
|
|
69
|
%
|
Risk-free
interest rate
|
|
|
4.4
|
%
|
Expected
life
|
|
|
7
years
|
|
In
connection with the First Amendment, and in exchange for Agility’s returning to
the Company the Initial Warrant issued on September 21, 2007, the Company
granted Agility a revised $363 warrant to purchase 95,394 shares of the
Company’s common stock at an exercise price of $3.80 per share, as determined by
the closing price of the Company’s common stock on September 20, 2007, the day
immediately preceding the issue date of the Initial Warrant (the “Revised
Warrant”). The Revised Warrant will expire in seven years unless previously
exercised.
The
Company calculated the fair value of the Revised Warrant of 95,394 shares on
the
date of grant to be $253 using the Black-Scholes model incorporating the
following assumptions:
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
|
|
|
|
Dividend
yield
|
|
|
0
|
%
|
Expected
volatility
|
|
|
71
|
%
|
Risk-free
interest rate
|
|
|
4.3
|
%
|
Expected
life
|
|
|
7
years
|
|
The
terms
of the Revised Warrant provided that the price per share and the number of
shares to be issued under the the Revised Warrant will adjust to the price
at
which the Company next issued its common stock or other equity-linked
securities, provided that any amount is outstanding under the Agility Loan
Agreement. In evaluating the terms of the Revised Warrant under EITF 00-19
“Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a
Company’s Own Stock”
(“EITF
00-19”), the Company was unable to determine the price at which it will next
issue its common stock or other equity-linked securities at the date the warrant
was issued. If that next issue price was below a certain price point, the
Company would not have had sufficient authorized shares to settle the warrant
after considering all other commitments that may require the issuance of its
common stock during the life of the Revised Warrant. The Company concluded
that
the Revised Warrant is correctly classified as a liability and has been revalued
to fair value each reporting period. At December 12, 2007, the Company entered
into a Securities Purchase Agreement to issue shares of its Common Stock at
$1.23. Pursuant to the terms of the Revised Warrant, the Company increased
to
294,715 the number of shares to be issued under the Revised Warrant, and
revalued the Revised Warrant at that date.
The
Company calculated the fair value of the Revised Warrant to be $394 and $173
at
December 12, 2007 and October 31, 2007, respectively, using the Black-Scholes
model incorporating the following assumptions:
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
|
|
December 12, 2007
|
|
October 31, 2007
|
|
|
|
|
|
|
|
Dividend
yield
|
|
|
0
|
%
|
|
0
|
%
|
Expected
volatility
|
|
|
74
|
%
|
|
71
|
%
|
Risk-free
interest rate
|
|
|
3.7
|
%
|
|
4.3
|
%
|
Expected
life
|
|
|
7
years
|
|
|
7
years
|
|
The
Initial Warrant has been fair valued and classified as a liability at the time
of the grant. The fair value of $148,830 for the Initial Warrant was classified
as debt discount and has been fully amortized to interest and other expense
as
of July 31, 2008. The Revised Warrant has been fair valued and the change in
the
fair value of the Initial Warrant and the Revised Warrant was expensed as of
October 31, 2007. The subsequent change in the fair value of the Revised Warrant
has been recorded as fair value expense and is included in Interest and Other
Expense at July 31, 2008. The $394 fair value of the Revised Warrant at December
12, 2007 has been reclassified to permanent equity as Additional Paid-in Capital
as of July 31, 2008 in accordance with the guidance under EITF
00-19.
In
connection with the Second Amendment, the Company granted Agility a $231 warrant
to purchase 84,091 shares of the Company’s common stock at an exercise price of
$2.75 per share, as determined by the closing price of the Company’s common
stock on November 19, 2007, the day immediately preceding the issue date of
the
Warrant (the “Agility Second Warrant”). The Agility Second Warrant will expire
in seven years unless previously exercised. Similar to the Revised Warrant,
the
terms of the Agility Second Warrant provided that the price per share and the
number of shares to be issued under the Agility Second Warrant will adjust
to
the price at which the Company next issued its common stock or other
equity-linked securities, provided that any amount is outstanding under the
Agility Loan Agreement. As with the Revised Warrant, the Company concluded
that
the Agility Second Warrant is correctly classified as a liability and has been
revalued to fair value each reporting period. At December 12, 2007, the Company
entered into a Securities Purchase Agreement to issue shares of its Common
Stock
at $1.23. Pursuant to the terms of the Agility Second Warrant, the Company
increased to 188,008 the number of shares to be issued under the Agility Second
Warrant, and revalued the Agility Second Warrant at that date.
The
Company calculated the fair value of the Agility Second Warrant to be $251
and
$161 at December 12, 2007 and November 20, 2007, respectively, using the
Black-Scholes model incorporating the following assumptions:
|
|
December 12, 2007
|
|
November 20, 2007
|
|
|
|
|
|
|
|
Dividend
yield
|
|
|
0
|
%
|
|
0
|
%
|
Expected
volatility
|
|
|
74
|
%
|
|
71
|
%
|
Risk-free
interest rate
|
|
|
3.7
|
%
|
|
3.7
|
%
|
Expected
life
|
|
|
7
years
|
|
|
7
years
|
|
The
Agility Second Warrant has been fair valued and classified as a liability at
the
time of the grant. The $161 fair value of the Agility Second Warrant was
classified as debt discount and has been fully amortized to interest and other
expense as of July 31, 2008. The subsequent change in the fair value of the
Agility Second Warrant has been recorded as fair value expense and is included
in Interest and Other Expense at July 31, 2008. The $251 fair value of the
Agility Second Warrant at December 12, 2007 has been reclassified to permanent
equity as Additional Paid-in Capital as of July 31, 2008 in accordance with
the
guidance under EITF 00-19.
In
connection with the Third Amendment, the Company granted Agility a $200 warrant
(the “Agility Third Warrant”) to purchase 162,601 shares of the Company’s common
stock at an exercise price of $1.23 per share, as determined by the issue price
of the Company’s common stock pursuant to the Securities Purchase Agreements
dated December 12, 2007. The Agility Third Warrant will expire in seven years
unless previously exercised. The Company calculated the fair value of the
warrant on the date of grant to be $158 using the Black-Scholes model
incorporating the following assumptions:
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
Dividend
yield
|
|
|
0
|
%
|
Expected
volatility
|
|
|
79
|
%
|
Risk-free
interest rate
|
|
|
3.7
|
%
|
Expected
life
|
|
|
7
years
|
|
The
value
of the Agility Third Warrant has been amortized over the term of the line of
credit, and is included in Interest and Other Expense on the Income Statement
for the nine months ended July 31, 2008. The $158 fair value of the Agility
Third Warrant at the grant date has been classified as permanent equity in
Additional Paid-in Capital as of July 31, 2008 in accordance with the guidance
under EITF 00-19.
In
addition, in accordance with the terms of the collective outstanding warrants
granted to Agility, the Company filed a registration statement on Form S-3
covering the resale of the warrant shares (the “Registration Statement”) with
the Securities Exchange Commission (the “SEC”) on July 16, 2008. The
Registration Statement was declared effective by the SEC on July 24, 2008
John
Friede Note
On
October 30, 2007, the Company entered into a Loan Agreement (the “Friede Loan
Agreement”) with Friede, at the time a significant stockholder and director of
the Company. Subject to the terms of the Friede Loan Agreement, Friede agreed
to
loan the Company $500 in two installments of $250 each. The loan was unsecured
and subordinated to the loan agreements with Silicon Valley Bank and Agility
Capital LLC. On November 1, 2007, the Company executed the promissory note
underlying the loan, and received the first $250 installment. The Company and
Friede amended the Friede Loan Agreement on November 20, 2007, prior to funding
of the second $250 installment, to extend the maturity date of the Friede Loan
Agreement from November 20, 2007 to December 20, 2007, and to reduce the
borrowing capacity to $250 from $500. The loan balance, plus accrued interest
were paid in full on December 20, 2007.
In
connection with the Friede Loan Agreement, the Company agreed to issue to the
Lender a $200 Warrant (the “Friede Warrant”) to purchase 61,538 shares of the
Company’s common stock at $3.25 Exercise Price. The Friede Warrant will expire 7
years from the date of issue unless previously exercised. The Company calculated
the fair value of the Friede Warrant on the date of grant to be $119 using
the
Black-Scholes model incorporating the following assumptions:
|
|
|
|
Dividend
yield
|
|
|
0
|
%
|
Expected
volatility
|
|
|
71
|
%
|
Risk-free
interest rate
|
|
|
4.2
|
%
|
Expected
life
|
|
|
7
years
|
|
The
value
of the Friede Warrant has been amortized over the term of the line of credit,
and is included in Interest and Other Expense on the Income Statement for the
nine months ended July 31, 2008. The $119 fair value of the Friede Warrant
at
the grant date has been classified as permanent equity in Additional Paid-in
Capital as of July 31, 2008 in accordance with the guidance under EITF
00-19.
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
Three
Arch Capital (et al)
On
December 7, 2007, the Company entered into a Loan Agreement (the “Three Arch
Loan Agreement”) with Three Arch Capital, L.P., TAC Associates, L.P., Three Arch
Partners IV, L.P. and Three Arch Associates IV, L.P. (the “Lenders”). The
Lenders are, collectively, the largest stockholder of the Company, and Dr.
Wilfred Jaeger and Roderick Young, are directors of the Company and affiliates
of the Lenders. The transaction contemplated by the Three Arch Loan Agreement
was approved by a committee of the Company’s Board of Directors consisting only
of disinterested directors.
Under
the
Three Arch Loan Agreement, the Lenders loaned $1.0 million to the Company and
the Company issued notes to the Lender (the “Notes”). The Notes bear interest at
an annual rate equal to the prime rate plus six percent (6%) and are
subordinated to the Company’s indebtedness to Silicon Valley Bank and Agility
Capital LLC. The Notes became due and payable upon the close of the Company’s
private investment public equity financing transaction on January 18, 2008.
The
Company paid $20 loan fee in connection with the Three Arch Loan Agreement,
which has been amortized to Interest and Other Expenses as of July 31, 2008.
The
balance of the Three Arch Loan Agreement, plus accrued interest, were paid
in
full as of July 31, 2008.
In
connection with the Three Arch Loan Agreement, the Company granted the Lenders
warrants (the “Three Arch Warrants”) to purchase, in the aggregate, 205,127
shares of the Company’s common stock at a purchase price of $1.95 per share. The
Three Arch Warrants will expire 7 years from the date of issue unless previously
exercised. The Company calculated the fair value of the Three Arch Warrants
on
the date of grant to be $329 using the Black-Scholes model incorporating the
following assumptions:
|
|
|
|
Dividend
yield
|
|
|
0
|
%
|
Expected
volatility
|
|
|
74
|
%
|
Risk-free
interest rate
|
|
|
3.8
|
%
|
Expected
life
|
|
|
7
years
|
|
The
value
of the Three Arch Warrants has been amortized over the term of the line of
credit, and is included in Interest and Other Expense on the Income Statement
for the nine months ended July 31, 2008. The $329 fair value of the Three Arch
Warrants at the grant date has been classified as permanent equity in Additional
Paid-in Capital as of July 31, 2008 in accordance with the guidance under EITF
00-19.
The
following table summarizes the warrant activity and related interest and fair
value impact on the Company’s operations for the nine months ended July 31,
2008:
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
|
|
|
|
Statement of Operations
|
|
Warrant coverage for:
|
|
Number of
Warrant
Shares
|
|
Amortization
of Interest
Expense
related to Fair
Value of
Warrant
|
|
Adjustment to
Fair Value
Expense
of the
Warrant in
Accordance with
EITF00-19
|
|
Carry
forward from October 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
Deferred
loan discount fees amortized in 2008
|
|
|
—
|
|
$
|
64
|
|
$
|
—
|
|
Issued
in first quarter of 2008:
|
|
|
|
|
|
|
|
|
|
|
Silicon
Valley Bank Line of Credit:
|
|
|
|
|
|
|
|
|
|
|
Amendment
7
|
|
|
18,181
|
|
|
31
|
|
|
—
|
|
Amendment
8
|
|
|
38,461
|
|
|
33
|
|
|
—
|
|
Amendment
9
|
|
|
99,337
|
|
|
—
|
|
|
—
|
|
John
Friede Note
|
|
|
61,538
|
|
|
119
|
|
|
—
|
|
Agility
Capital, LLC Note:
|
|
|
|
|
|
|
|
|
|
|
Fair
value change – 2007 warrants
|
|
|
294,715
|
|
|
—
|
|
|
221
|
|
Amendment
2
|
|
|
188,008
|
|
|
161
|
|
|
90
|
|
Amendment
3
|
|
|
162,601
|
|
|
158
|
|
|
—
|
|
Three
Arch Partners, et al Note
|
|
|
205,127
|
|
|
329
|
|
|
—
|
|
|
|
|
964,051
|
|
$
|
895
|
|
$
|
311
|
|
NOTE
10—STOCKHOLDERS' EQUITY (DEFICIT)
Preferred
Stock
The
Company has authorized the issuance of 2,000,000 shares of preferred stock;
however, no shares have been issued. The designations, rights and preferences
of
any preferred stock that may be issued will be established by the Board of
Directors at or before the time of such issuance.
Sale
of Common Stock and Warrants
2007
PIPE
Pursuant
to the terms of the Securities Purchase Agreement dated December 12, 2007 (the
“2007 Securities Purchase Agreement”), the Company completed a private placement
(the “2007 Private Placement”) of 12,601,628 shares of the Company’s common
stock on January 18, 2008 with Three Arch Partners IV, L.P. and affiliated
funds
(“Three Arch Partners”), SF Capital Partners Ltd. (“SF Capital”) and CHL Medical
Partners III, L.P. and an affiliated fund (“CHL,” and together with Three Arch
Partners and SF Capital, the “Investors”) at a purchase price of $1.23 per share
as well as warrants to purchase an additional 630,081 shares of the Company’s
common stock (the “Warrants”) at an exercise price of $1.23 per share for an
aggregate consideration of approximately $15.5 million (before cash commissions
and expenses of approximately $1.5 million). The purchase price represents
a 40%
discount to the volume weighted average price of the Common Stock on the Nasdaq
Global Market, as reported by Bloomberg Financial Markets, for the 20 trading
day period ending on the trading day immediately preceding the date of the
2007
Securities Purchase Agreement. The Investors purchased the following
amounts of securities in the offering:
Investor
|
|
Shares
|
|
Warrants
(Shares issuable
upon exercise)
|
|
Three
Arch Partners
|
|
|
8,130,084
|
|
|
406,504
|
|
SF
Capital
|
|
|
2,032,520
|
|
|
101,626
|
|
CHL
|
|
|
2,439,024
|
|
|
121,951
|
|
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
Prior
to
the closing of the transaction, Three Arch Partners owned 1,024,327 shares
of
common stock of the Company. After the transaction was consummated, Three Arch
Partners’ percentage ownership of the outstanding common stock increased from
approximately 17.3% to 49.5% (and 43.9% of the common stock on a fully diluted
basis).
The
Warrants are exercisable beginning 180 days after the date of closing until
7
years after the date of closing. The values of the Warrants and common stock
in
excess of par value have been classified as stockholders’ equity in additional
paid-in capital in our Consolidated Balance Sheets. The Warrants were evaluated
under SFAS 133 and EITF 00-19, and the Company determined that the Warrants
have
been correctly classified as equity.
The
terms
of the 2007 Private Placement were approved by a committee of the Company’s
Board of Directors consisting only of disinterested directors. The Company
received approval of a majority of the Company’s stockholders on January 17,
2008 of the 2007 Private Placement and amendment of its Certificate of
Incorporation to increase the number of shares of common stock it is authorized
to issue to 150,000,000 shares.
Holders
of the shares of common stock sold to the Investors (the “Shares”) and the
shares of common stock issuable upon the exercise of the Warrants (the “Warrant
Shares” and collectively, with the Shares, the “Registrable Securities”) are
entitled to certain registration rights as set forth in the 2007 Securities
Purchase Agreement. In accordance with the 2007 Securities Purchase Agreement,
the Company filed a registration statement on Form S-3 to register the resale
of
the Registrable Securities on July 16, 2008, which was declared effective by
the
SEC on July 24, 2008.
Under
the
2007 Securities Purchase Agreement, Three Arch Partners has the right to name
one member to the Board so long as Three Arch Partners beneficially owns greater
than 1,000,000 shares of common stock of the Company (including shares of common
stock issuable upon exercise of the Warrants, and as appropriately adjusted
for
stock splits, stock dividends and recapitalizations). Two of the current members
of the Board, Dr. Wilfred E. Jaeger and Roderick A. Young, have been designated
by Three Arch Partners.
In
connection with the issuance of the Warrants and upon closing of the
transaction, the Company entered into warrant agreements with its transfer
agent
relating to the Warrants. The warrant agreement relating to the Warrants issued
to SF Capital contains a non-waivable provision that provides that the number
of
shares issuable upon exercise of the Warrants granted to SF Capital pursuant
to
the 2007 Private Placement will be limited to the extent necessary to assure
that, following such exercise, the total number of shares of common stock of
the
Company then beneficially owned by such holder and its affiliates does not
exceed 14.9% of the total number of issued and outstanding shares of common
stock of the Company (including for such purpose the shares of common stock
issuable upon such exercise of Warrants). The warrant agreement relating to
the
Warrants issued to the other Investors does not contain this provision.
Stock
Options
The
Company's 1996 Stock Option Plan ("1996 Plan"), as amended April 6, 2001,
provided for the issuance of incentive stock options to employees of the Company
and non-qualified options to employees, directors and consultants of the Company
with exercise prices equal to the fair market value of the Company's stock
on
the date of grant. Options vest in accordance with their terms over periods
up
to four years and expire ten years from the date of grant. The 1996 Plan expired
on April 1, 2006. As of July 31, 2008, options underlying 129,654 shares of
common stock were outstanding under the 1996 Plan.
On
May 3,
2006, the Company’s stockholders approved the North American Scientific, Inc.
2006 Stock Plan (“2006 Plan”). Under the 2006 Plan, the Company may issue up to
340,000 shares, plus any shares from the 1996 Plan that are subsequently
terminated, expire unexercised or forfeited, to employees of the Company through
incentive stock options, non-qualified options, stock appreciation rights,
restricted stock and restricted stock units. Since its inception, 490,717 shares
have been transferred into the 2006 Plan from the 1996 Plan. On April 29, 2008,
the Company’s stockholders approved the adoption of Amendment No. 1 to the 2006
Plan (the “Amendment”) to (i) increase by 2,000,000 million share the number of
shares available to be issued under the 2006 Plan, (ii) increase by 35,000
the
maximum number of shares under the Plan that may be granted in any one fiscal
year to an individual participant from 60,000 to 95,000 and (iii) increase
by
35,000 the maximum number of shares under the Plan, in connection with a
participant’s initial service, such participant may be granted from 60,000 to
95,000 that will not count against the limit set forth in (ii) above. The
exercise price of an option is equal to the fair market value of the Company’s
stock on the date of the grant. During nine months ended July 31, 2008,
1,115,373 stock options were granted under the 2006 Plan, at an exercise price
ranging from $1.35 to $2.10 per share, and for the nine month period ended
July
31, 2007, 122,999 stock options were granted under the 2006 Plan, at an exercise
price ranging from $4.65 to $5.80 per share As of July 31, 2008, options
underlying 1,715,344 shares of common stock were available for grant in the
2006
Plan.
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
On
April
23, 2007, the Company granted stock options with respect to 360,000 shares
of
its common stock in connection with the employment by the Company of its new
CEO, John B. Rush. Options with respect to 150,000 shares of the Company’s
common stock were issued under the 2006 Plan. Options with respect to the
remaining 240,000 shares of the Company’s common stock were issued as a
stand-alone grant outside the 2006 Plan and approved by the written consent
of a
majority of stockholders on April 20, 2007. The stock options have an exercise
price of $5.80, which is equal to the fair market value per share of the
Company’s common stock on the grant date. All of the options have a term of ten
years and vest monthly over a four-year period. The options remain exercisable
until the earlier of the expiration of the term of the option or (i) three
months following Mr. Rush’s date of termination in the case of termination for
reasons other than cause, death or disability (as such terms are defined in
his
employment agreement) or (ii) 12 months following Mr. Rush’s date of termination
in the case of termination on account of death or disability. In the event
that
Mr. Rush is terminated for cause, all outstanding options, whether vested or
not, will immediately lapse. Pursuant to his employment agreement, stock options
issued to Mr. Rush were subject to an anti-dilution clause, triggered in the
event the Company issued additional equity securities within the twenty-four
months immediately following March 22, 2007, the date of his employment, such
that the number of options granted to Mr. Rush under the employment agreement
remains equivalent to 3% of the outstanding common stock of the Company. At
its
January 15, 2008 meeting, the Board of Directors, agreed to make an additional
award to Mr. Rush as part of his employment. As a result of the 2007 Private
Placement, the Company issued 190,000 and 376,094 options underlying common
stock from the 2006 Plan and outside the 2006 Plan, respectively, to Mr. Rush
at
an exercise price of $1.40 per share, the closing price of the Company’s common
stock on January 15, 2008, the date the option grant was approved by the Board
of Directors. The stock options vest 25% upon the first anniversary of the
grant
date, and then evenly over the remaining (36) thirty-six months, such that
all
options are vested after four years, and have a term of ten years.
In
addition, three members of the executive management team were granted
anti-dilution guarantees by the Board of Directors as consideration of their
employment. The Company issued 440,369 stock options to these executives from
the 2006 Plan, at an exercise price of $1.40 per share, the closing price of
the
Company’s on January 15, 2008, the date the option grant was approved by the
Board of Directors. Also at the January 15, 2008 meeting, the Board of Directors
granted, from the 2006 Plan, stock options underlying 156,000 shares of the
Company’s common stock to certain management employees, at a $1.40 exercise
price. The stock options vest 25% after a one year cliff, and then evenly over
the remaining (36) thirty-six months, such that all options are vested after
four years, and have a term of ten years.
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
On
February 15, 2008, the Company’s Board of Directors approved, subject to the
approval of the Company’s stockholders, a plan to re-price all existing employee
stock options at $2.05 per share, the closing price of the Company’s common
stock on February 15, 2008, except for the 2006 Premium Price Awards, which
were
re-priced to $3.25 per share, which is equal to 159% of the re-priced fair
value
of the Company’s common stock. The re-pricing applies to all stock options
outstanding as of February 15, 2008 held by all persons who are currently
employed or actively engaged by us, including our executive officers, and to
certain other persons for which the Board determined that re-pricing was
appropriate (collectively, the “Eligible Participants”). The number of shares
subject to the new stock options was determined based on a Black-Scholes
valuation of the existing stock option such that the Black-Scholes value of
the
new stock option will approximately equal the Black-Scholes value of the
existing stock option. All new stock options continue to vest in accordance
with
the vesting terms of the existing stock options. All new stock options, to
the
extent such option are vested, will be exercisable for a period of seven years.
The Company’s stockholders approved the re-pricing at their annual meeting on
April 29, 2008. As a result of the re-pricing exercise, options underlying
691,852 shares of common stock, with an exercise price ranging from $11.15
to
$83.75, were replaced by options underlying 535,257 shares of common stock,
with
and exercise price of $2.05 or $3.25 for the 2006 Premium Awards.
The
following table summarizes the re-pricing activity approved by the Board of
Directors and stockholders as of July 31, 2008:
|
|
Employee Options Cancelled and Re-priced
|
|
Re-priced Options Granted
|
|
Plan
|
|
Shares
|
|
Range of Exercise Price
|
|
Shares
|
|
Weighted
Avg.
Exercise
Price
|
|
1996 Plan
|
|
|
179,060
|
|
$
|
11.15
|
|
|
—
|
|
$
|
83.75
|
|
|
41,595
|
|
$
|
2.05
|
|
Premium Price
|
|
|
49,900
|
|
|
16.75
|
|
|
—
|
|
|
16.75
|
|
|
22,658
|
|
|
3.25
|
|
2006
Plan
|
|
|
222,892
|
|
|
4.65
|
|
|
—
|
|
|
5.80
|
|
|
231,004
|
|
|
2.05
|
|
CEO
Options
|
|
|
240,000
|
|
$
|
5.80
|
|
|
—
|
|
$
|
5.80
|
|
|
240,000
|
|
$
|
2.05
|
|
|
|
|
691,852
|
|
$
|
4.65
|
|
|
|
|
$
|
83.75
|
|
|
535,257
|
|
$
|
2.05
|
|
On
April
29, 2008, the Company’s stockholders approved the 2008 Non-Employee Directors’
Equity Compensation Plan (the “2008 Director Plan”). The 2008 Directors Plan
supersedes the 2003 Non-Employee Directors' Equity Compensation Plan. Under
the
2008 Director Plan, the Company may issue up to 1,500,000 shares to eligible
non-employee directors of the Company through non-qualified options and/or
restricted stock. The exercise price of an option is equal to the fair market
value of the Company's stock on the date of grant. Options and restricted stock
vest in accordance with the terms set forth at the time of the grant, and will
become exercisable provided that the holder is a non-employee director of the
Company on any such vesting date. The options expire ten years from the date
of
grant. Pursuant to the terms of the 2008 Director Plan, the Board of Directors
and the stockholders approved a one-time non-statutory stock option grant to
each non-employee director, to purchase 30,000 shares of the Company’s common
stock, and to the Chairman of the Board, a non-statutory stock option grant
to
purchase 45,000 shares of the Company’s common stock, in exchange for all of
such director’s and the Chairman’s outstanding stock options. As a result, the
Company cancelled 68,000 stock options, with a range of exercise price between
$6.15 and $44.00 from the 2003 Non-Employee Director Equity Compensation Plan,
and issued 195,000 stock options, from the 2008 Director Plan, at an exercise
price of $2.10 per share, the closing price of the Company’s common stock on the
Nasdaq Capital Market on February 13, 2008, which is the date the Company’s
Compensation Committee approved the exchange.
In
addition, under the terms of the 2008 Director Plan, each non-employee director
elected to serve on the Board at the annual meeting is granted a non-statutory
stock option to purchase 10,000 shares of the Company’s common stock. On the
date of such meeting, the non-employee director elected or appointed Chairman
of
the Board shall be granted an additional 10,000 stock options. Each individual
who is first elected or appointed as a non-employee
director
shall be granted, on the date of such initial election or appointment, a stock
option to purchase 30,000 shares of common stock. Pursuant to these terms,
and
subsequent to its annual meeting on April 29, 2008, the Company issued 100,000
stock options at a $1.65 exercise price, the closing price of the Company’s
common stock on April 29, 2008 to its non-employee Directors appointed at the
annual meeting. The options vest one year from the date of grant and have a
seven-year term from the date of grant.
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
At
July
31, 2008, a total of 2,780,004 shares of the Company’s common stock were
reserved for issuance. The following table summarizes stock option activity
for
both plans:
|
|
|
|
Options Outstanding
|
|
|
|
Options
Available
for Grant
|
|
Number
Outstanding
|
|
Exercise Price
|
|
Balance at October 31, 2005
|
|
|
346,488
|
|
|
482,822
|
|
$
|
0.15 - $122.70
|
|
Granted
|
|
|
(290,600
|
)
|
|
290,600
|
|
$
|
9.60 - $16.75
|
|
Forfeited and expired
|
|
|
(38,888
|
)
|
|
(85,324
|
)
|
$
|
5.55 - $83.75
|
|
Exercised
|
|
|
—
|
|
|
(437
|
)
|
$
|
5.55 - $5.60
|
|
Additional shares reserved
|
|
|
340,000
|
|
|
—
|
|
|
—-
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2006
|
|
|
357,000
|
|
|
687,661
|
|
$
|
0.15 - $122.70
|
|
Granted
|
|
|
(492,894
|
)
|
|
492,894
|
|
$
|
4.65 - $6.15
|
|
Forfeited and expired
|
|
|
296,255
|
|
|
(279,132
|
)
|
$
|
3.50 - $122.70
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Additional shares reserved
|
|
|
240,000
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2007
|
|
|
400,361
|
|
|
901,423
|
|
$
|
0.15 - $117.50
|
|
Granted
|
|
|
(1,649,121
|
)
|
|
1,649,121
|
|
$
|
1.05 - $3.35
|
|
Forfeited and expired
|
|
|
(54,834
|
)
|
|
(55,766
|
)
|
$
|
11.15 -$117.50
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Additional shares reserved
|
|
|
3,921,868
|
|
|
—
|
|
|
—
|
|
Shares cancelled for re-priced
|
|
|
691,852
|
|
|
(691,852
|
)
|
$
|
4.65 – $83.75
|
|
Shares cancelled for exchange
|
|
|
68,000
|
|
|
(68,000
|
)
|
$
|
6.15 – $44.00
|
|
Shares issued for re-pricing
|
|
|
(535,257
|
)
|
|
535,257
|
|
$
|
2.05 – $3.25
|
|
Shares issued in exchange
|
|
|
(195,000
|
)
|
|
195,000
|
|
$
|
2.10
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2008
|
|
|
2,647,869
|
|
|
2,465,183
|
|
$
|
0.15 - $117.50
|
|
There were 256,027 options, 333,904 options and 375,733 options exercisable with weighted
average exercise prices of $17.37, $34.70 and $42.85 at July 31, 2008, October
31, 2007 and 2006, respectively.
The
following table summarizes options outstanding at July 31, 2008 and the related
weighted average exercise price and remaining contractual life
information:
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
|
|
Employee Options Outstanding
|
|
Employee Options Exercisable
|
|
Range of
Exercise Prices
|
|
Shares
|
|
Weighted Avg.
Remaining
Contractual
Life (Years)
|
|
Weighted
Avg.
Exercise
Price
|
|
Shares
|
|
Weighted
Avg.
Exercise
Price
|
|
$1.05 - $1.35
|
|
|
200,054
|
|
|
7.69
|
|
$
|
1.14
|
|
|
1,400
|
|
$
|
0.15
|
|
$1.40
- $1.40
|
|
|
1,132,463
|
|
|
9.46
|
|
$
|
1.40
|
|
|
—
|
|
$
|
—
|
|
$1.60
- $1.65
|
|
|
310,000
|
|
|
7.66
|
|
$
|
1.63
|
|
|
6,250
|
|
$
|
1.62
|
|
$2.05
- $2.05
|
|
|
503,747
|
|
|
8.55
|
|
$
|
2.05
|
|
|
135,084
|
|
$
|
2.05
|
|
$2.10
- $83.75
|
|
|
318,919
|
|
|
3.43
|
|
$
|
14.56
|
|
|
113,293
|
|
$
|
36.50
|
|
|
|
|
2,465,183
|
|
|
|
|
|
|
|
|
256,027
|
|
|
|
|
The
average fair value for accounting purposes of options granted was $0.92, $3.15
and $5.45 for the nine months ended July 31, 2008 and for the years ended
October 31, 2007 and 2006, respectively.
The
following table summarizes the weighted average price, weighted average
remaining contractual life and intrinsic value for granted and exercisable
options outstanding as of July 31, 2008 and October 31, 2007:
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
|
Weighted Avg.
Remaining
Contractual
Life (Years)
|
|
Intrinsic Value
(in
whole $)
|
|
As
of October 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Options Outstanding
|
|
|
901,423
|
|
$
|
17.60
|
|
|
7.54
|
|
$
|
3,710
|
|
Employee
Options Expected to Vest
|
|
|
567,519
|
|
$
|
2.80
|
|
|
2.82
|
|
$
|
—
|
|
Employee
Options Exercisable
|
|
|
333,904
|
|
$
|
34.70
|
|
|
5.26
|
|
$
|
3,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of July 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Options Outstanding
|
|
|
2,465,183
|
|
$
|
3.24
|
|
|
8.12
|
|
$
|
931
|
|
Employee
Options Expected to Vest
|
|
|
2,209,156
|
|
$
|
3.24
|
|
|
8.12
|
|
$
|
—
|
|
Employee
Options Exercisable
|
|
|
256,027
|
|
$
|
17.37
|
|
|
6.20
|
|
$
|
931
|
|
Fair
Value Disclosures
The
Company calculated the fair value of each option grant on the respective date
of
grant using the Black-Scholes option-pricing model as prescribed by
SFAS 123(R) using the following assumptions:
|
|
Nine months
ended July 31,
|
|
Year Ended October 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Dividend
yield
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
Expected
volatility
|
|
|
72
|
%
|
|
61
|
%
|
|
63
|
%
|
Risk-free
interest rate
|
|
|
3.4
|
%
|
|
4.8
|
%
|
|
4.9
|
%
|
Expected
life
|
|
|
5
years
|
|
|
5
years
|
|
|
5
years
|
|
Stockholders'
Rights Plan
In
October 1998, the Board of Directors of the Company implemented a rights
agreement (the “Rights Agreement”) to protect stockholders' rights in the event
of a proposed takeover of the Company. In the case of a triggering event, each
right entitles the Company's stockholders to buy, for $80, $160 worth of common
stock for each share of common stock held. The rights will become exercisable
only if a person or group acquires, or
commences
a tender offer to acquire, 15% or more of the Company's common stock. The
rights, which expire in October 2008, are redeemable at the Company's
option for $0.005 per right. The Company also has the ability to amend the
rights, subject to certain limitations. On May 2, 2007, the Company entered
into
a Third Amendment to Rights Agreement, which amended the Rights Agreement to
provide, among other things, that the Board of Directors of the Company may
determine that a person who would otherwise become an Acquiring Person (as
defined in the Rights Agreement) has become such inadvertently, and provided
certain conditions are satisfied, that such person is not an Acquiring Person
for any purposes of the Rights Agreement.
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
Employee
Stock Purchase Plan
In
March
2000, the Board of Directors authorized an Employee Stock Purchase Plan ("the
ESPP") under which 60,000 shares of the Company's common stock are reserved
for
issuance. Eligible employees may authorize payroll deductions of up to 15%
of
their salary to purchase shares of the Company's common stock at a discount
of
up to 15% of the market value at certain plan-defined dates. In the nine months
ended July 31, 2008 and the years ended October 31, 2007 and 2006, the shares
issued under the ESPP were 22,871, 30,816 shares and 19,298 shares,
respectively. At July 31, 2008 and October 31, 2007, 21,257 shares and
43,951 shares were available for issuance under the ESPP,
respectively.
Common
Stock Repurchase Program
In
October 2001, the Board of Directors authorized a stock repurchase program
to acquire up to $10 million of the Company's common stock in the open
market at any time. The number of shares of common stock actually acquired
by
the Company will depend on subsequent developments and corporate needs, and
the
repurchase of shares may be interrupted or discontinued at any time. As of
July
31, 2008 and October 31, 2007, a cumulative total of 23,399 shares had been
repurchased by the Company at a cost of $227, which shares are reflected as
Treasury Stock on the Balance Sheet at the respective dates.
NOTE
11—COMMITMENTS AND CONTINGENCIES
NASDAQ
Delisting
The
Company received a NASDAQ Stock Market (“Nasdaq”) Staff Deficiency Letter dated
September 21, 2007 indicating that, based on the Quarterly Report on Form 10-Q
for the period ended July 31, 2007, Nasdaq had determined that the Company
was
not in compliance with the minimum $10 million stockholders’ equity requirement
for continued listing on the Nasdaq Global Market set forth in Marketplace
Rule
4450(a)(3). On December 11, 2007, the Company received formal notice that a
Nasdaq Listing Qualifications Panel (the “Panel”) had granted the Company’s
request for a transfer from the Nasdaq Global Market to the Nasdaq Capital
Market, and continued listing on the Nasdaq Capital Market, subject to the
following exception:
|
§
|
On
or before January 17, 2008, the Company was required to inform the
Panel
that it has received funds sufficient to put it in compliance with
the
Nasdaq Capital Market shareholders’ equity requirement of $2.5 million.
Within four business days of the receipt of the funds, the Company
was
required to make a public disclosure of receipt of the funds and
file a
Form 8-K with pro forma financial information indicating that it
plans to
report proforma shareholders’ equity of $2.5 million or greater for the
fiscal year ended October 31, 2007. We informed the Panel of receipt
of
sufficient funds on January 18, 2008. The Company publicly disclosed
receipt of such funds in a press release dated January 22, 2008 and
filed
a Form 8-K with respect to this matter on January 25,
2008.
|
|
§
|
On
or before January 31, 2008, the Company was required to file its
Annual
Report on Form 10-K for the fiscal year ended October 31, 2007, which
shall demonstrate proforma shareholder’s equity of $2.5 million or
greater. The Company filed its Annual Report on Form 10-K on January
29,
2008.
|
Further,
on October 5, 2007, the Company received a notice from Nasdaq, dated October
5,
2007 indicating that for the last 30 consecutive business days, the bid price
of
the Company’s common stock had closed below the minimum
$1.00
per
share requirement for continued inclusion under Marketplace Rule 4450(a)(5).
Therefore, in accordance with Marketplace Rule 4450(e)(2), the Company had
180
calendar days, or until April 2, 2008, to regain compliance. The Company did
not
regain compliance with the Rule by April 2, 2008, and on April 4, 2008, Nasdaq
notified the Company that its common stock would be delisted on April 15, 2008.
On April 10, 2008, The Company appealed the delisting decision pursuant to
the
procedures set forth in the Nasdaq Marketplace Rule 4800 Series, and was granted
a hearing with a Nasdaq Listing Panel on May 22, 2008 The Company’s common stock
continued to trade on the Nasdaq Capital Market pending the outcome of such
hearing.
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
On
February 5, 2008, the Company received a letter from The Nasdaq Stock Market
(“Nasdaq”) dated February 4, 2008 providing notice that the Company has
demonstrated compliance with Nasdaq Marketplace Rules, and that the Nasdaq
Listing Qualifications Panel has determined to continue the listing of the
Company’s securities on Nasdaq. In addition, the Nasdaq Staff has approved the
Company’s application to list its common stock on The Nasdaq Capital Market. The
Company’s common stock was transferred from The Nasdaq Global Market to The
Nasdaq Capital Market effective February 6, 2008.
On
April
29, 2008, the Company’s stockholders approved a 1 share for 5 share reverse
split to regain compliance with the Nasdaq minimum bid price rule. The reverse
split became effective on May 1, 2008. The Company’s common stock traded at or
above the $1.00 minimum bid price for the period May 1, 2008 through May 14,
2008, which marked 10 consecutive trading days in which the closing bid price
exceeded the $1.00 minimum. On May 15, 2008, the Company was notified by Nasdaq
that it had regained compliance with the minimum bid price requirements and
no
further action was required. (see Note 12 – Subsequent Events).
Contract
Commitments
The
Company has entered into purchase commitments of $0.1 million to suppliers
under
blanket purchase orders. The blanket purchase orders expire when the designated
quantities have been purchased.
Lease
Commitments
The
Company leases facilities and equipment under non-cancelable operating lease
agreements which expire at various dates through July 2013, and may be renewed
by mutual agreement between the Company and the lessors under such leases.
Future minimum lease payments are subject to annual adjustment for increases
in
the Consumer Price Index.
Future
minimum lease payments under all operating leases are as follows:
For the Years Ended October 31,
|
|
|
|
|
|
|
|
2008
(remaining three months)
|
|
$
|
201
|
|
2009
|
|
|
180
|
|
2010
|
|
|
161
|
|
2011
|
|
|
161
|
|
Thereafter
|
|
|
42
|
|
|
|
$
|
745
|
|
Third
Party License Agreements
We
license some of the technologies used in our SurTRAK products from IdeaMatrix,
Inc. Minimum royalty payments under the license agreement are payable annually
at $125,000 through 2011.
Outsourcing
On
April
20, 2008, the Company entered into an administrative management agreement with
third-party administrator (the “Administrator”). Under the terms of the
agreement, all of the Company’s employees became employees of the Administrator,
and the Administrator assumed the cost all employee-related health benefit
costs, workers’ compensation insurance and the payroll and Human Resource
functions of the Company. The Company pays a monthly fee to the Administrator
equal to the monthly payroll for its former employees, plus a fixed fee as
a
percentage of the payroll costs, to cover the costs of the employees
participation in the Administrator’s benefit plans, net of employee
contributions, workers’ compensation costs, and the payroll and Human Resource
management costs.
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
Agreements
The
Company maintains agreements with certain key management. The agreements provide
for minimum base salaries, eligibility for stock options and performance bonuses
and severance payments.
Litigation
In
November 2005, the Company was served with a complaint filed in U.S. District
Court in Hartford, Connecticut by World Wide Medical Technologies (WWMT). WWMT’s
six count complaint alleges breach of a confidentiality agreement, fraud, patent
infringement, wrongful interference with contractual relations, violation of
the
Connecticut Uniform Trade Secrets Act, and violation of the Connecticut Unfair
Practices Act. WWMT alleges that the Company fraudulently obtained WWMT’s
confidential information during negotiations to purchase WWMT in 2004 and that
once the Company acquired that information, it allegedly learned that Richard
Terwilliger, (our former Vice President of New Product Development) owned
certain patent rights and that the Company began trying to inappropriately
gain
property rights by hiring him away from WWMT. The Company was served with this
matter at approximately the same time Mr. Terwilliger was served with
a lawsuit in state court and with an application seeking a preliminary
injunction declaring plaintiffs to be the sole owners of the intellectual
property at issue and preventing Mr. Terwilliger from effectively serving
as our Vice President of New Product Development. The Company has agreed to
defend Mr. Terwilliger. The Company has removed the state court claim against
Mr. Terwilliger to federal court and the cases have been consolidated. The
defendants have answered both complaints and discovery has commenced
in each matter. In April 2006, WWMT had its hearing for a preliminary injunction
against Mr. Terwilliger heard in U.S. District Court. Plaintiffs abandoned
that portion of their application for preliminary injunction that was based
on
an alleged misappropriation of trade secrets shortly before the hearing. On
August 30, 2006, Magistrate Judge Donna Martinez issued a ruling ordering
that what remained of plaintiffs' motion be denied. Specifically, the
Magistrate Judge found that plaintiffs do not have a reasonable likelihood
of
success on the merits of their claim for declaratory judgment that some or
all
of plaintiffs are the sole owners of the intellectual property at issues, and
she further found that there do not exist sufficiently serious questions
going to the merits of that claim to make them a fair ground for
litigation.
On
March
12, 2007, the Court administratively dismissed the action. On or about April
30,
2007, the parties filed a Joint Motion to Reopen the Case after Administrative
Dismissal, which the court subsequently denied without prejudice. The parties
re-filed the Joint Motion to Reopen the Case, and the Court issued an order
reopening the case on July 3, 2008. On August 22, 2008, the Court set a
scheduling order in this matter. The Company denies liability and intends to
vigorously defend itself in this litigation as it progresses.
In
October 2s007, the Company was served with a demand for arbitration by
AnazaoHealth Corporation (“AnazaoHealth”). AnazaoHealth provides needle loading
services for our Prospera brachytherapy products pursuant to a Services
Agreement dated as of June 1, 2005, as amended (the “Services Agreement”). In
its demand for arbitration, AnazaoHealth is seeking indemnification from the
Company under the Services Agreement for damages arising out of a litigation
filed against AnazaoHealth in the U.S. District Court for the District of
Connecticut (the “Connecticut Litigation”) by Richard Terwilliger, Gary
Lamoureux, World Wide Medical Technologies, LLC, IdeaMatrix, Inc., Advanced
Care
Pharmacy, LLC, Advanced Care Pharmacy, Inc., and Advanced Care Medical, Inc.
The
plaintiffs in the Connecticut Litigation claim that AnazaoHealth’s provision of
services in the brachytherapy field infringes their patent rights, and certain
of the plaintiffs claim that our Prospera products infringes their patent
rights. The Company denies liability and intends to vigorously defend itself
in
this arbitration.
In
February 2008, an individual plaintiff, Richard Hodge, filed a complaint in
the
Multnomah County Circuit Court of the State of Oregon against Bay Area Health
District, North American Scientific, Inc., NOMOS Corporation and Carl Jenson,
M.D., alleging the defendants caused Mr. Hodge to receive excessive radiation
during the course of his IMRT treatment, as a result of a manufacturing and/or
design defect(s) in the Company’s former CORVUS and BAT products. The plaintiff
is seeking a judgement of up to $3 million in economic damages and $3 million
of
non-economic damages. The Company denies liability and intends to vigorously
defend itself in this litigation as it progresses. No trial date has
yet been set.
The
Company is also subject to other legal proceedings, claims and litigation
arising in the ordinary course of business. While the outcome of these matters
is currently not determinable, management does not expect that the ultimate
costs to resolve these matters will have a material adverse effect on the
Company's consolidated financial position, results of operations, or cash
flows.
North
American Scientific, Inc.
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
(in
thousands, except share and per share data)
NOTE
12—SUBSEQUENT EVENTS
NASDAQ
Delisting
The
company received a letter from The NASDAQ Stock Market (“NASDAQ”) dated August
20, 2008 indicating that for the last 30 consecutive business days, the bid
price of the Company’s common stock closed below the minimum $1.00 per share
requirement for continued inclusion under Marketplace Rule 4450(a)(5) (the
“Rule”). Therefore, in accordance with Marketplace Rule 4450(e)(2), the Company
has 180 calendar days, or until February 17, 2009, to regain compliance. If,
at
anytime before February 17, 2009, the bid price of the Company’s common stock
closes at $1.00 per share or more for a minimum of 10 consecutive business
days,
the Company understands that NASDAQ’s Staff will provide written notification
that the Company has achieved compliance with the Rule. If the Company does
not
regain compliance with the Rule by February 17, 2009, the Company understands
that NASDAQ’s Staff will provide written notification that the Company’s common
stock will be delisted. At that time, the Company may appeal the Staff’s
determination to delist its common stock to a NASDAQ Listing Qualifications
Panel.
Beyond
the risk of delisting arising from the $1.00 minimum closing bid price
requirement, the Company is subject to a number of other requirements under
Maintenance Standards for continued listing on the Nasdaq Capital Market,
including but not limited to, a $2.5 million minimum stockholders’ equity under
Maintenance Standard 1, as set forth in Marketplace Rule 4310(c)(3). Currently,
the $0.8 million of stockholder’s’ equity at July 31, 2008 is not sufficient to
meet the minimum required under Maintenance Standard 1.
Sale
of Non-Therapeutic Assets
On
August
29, 2008, the Company entered into an agreement relating to the sale of its
non-therapeutic product line to EZIP. The sale was completed on September 5,
2008. Under the terms of the definitive agreement, EZIP purchased certain
assets of the Company valued up to $6,000. See further discussion in Note 3
–
Discontinued Operations.
Loan
Amendment
On
September 11, 2008, the Company entered into the Tenth Amendment to the Loan
Agreement (the “Tenth Amendment”) with the Bank. The Tenth Amendment provides a
waiver to the Company for its non-compliance with the Tangible Net Worth
Covenant for an indefinite period.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion and analysis provides information, which our management
believes is relevant to an assessment and understanding of our financial
condition and results of operations. The discussion should be read in
conjunction with the Consolidated Financial Statements contained herein and
the
notes thereto. Certain statements contained in this Form 10-Q, including,
without limitation, statements containing the words “believes”, “anticipates”,
“estimates”, “expects”, “projections”, and words of similar import are forward
looking as that term is defined by: (i) the Private Securities Litigation
Reform Act of 1995 (the "1995 Act") and (ii) releases issued by the
Securities and Exchange Commission (“SEC”). These statements are being made
pursuant to the provisions of the 1995 Act and with the intention of obtaining
the benefits of the "Safe Harbor" provisions of the 1995 Act. We caution that
any forward looking statements made herein are not guarantees of future
performance and that actual results may differ materially from those in such
forward looking statements as a result of various factors, including, but not
limited to, any risks detailed herein or detailed from time to time in our
other
filings with the SEC including our most recent report on Form 10-K. We are
not undertaking any obligation to update publicly any forward-looking
statements. Readers should not place undue reliance on these forward-looking
statements.
Overview
We
manufacture, market and sell products for the radiation oncology community,
including Prospera® brachytherapy seeds and SurTRAK™ needles and strands used
primarily in the treatment of prostate cancer. We also develop and market
brachytherapy accessories used in the treatment of disease and calibration
sources used in medical, environmental, research and industrial
applications.
In
November 2006, we announced the introduction of ClearPath
TM
, our
unique multicatheter breast brachytherapy device for Accelerated Partial Breast
Irradiation (“APBI”). APBI is a standard radiation treatment appropriate for all
women with early stage breast cancer. Typically, patients undergoing radiation
treatment for breast cancer are treated with external beam radiation (EBR).
The
EBR treatments are delivered daily for a period of six weeks. Women who receive
APBI instead of EBR can be treated in just 5 days with the same level of
efficacy and with better control of radiation dose to surrounding tissue.
Management estimates that approximately 250,000 women in the United States
are
diagnosed with breast cancer each year. With early detection on the rise, we
believe the total market for APBI devices in the United States to be as high
as
$500 million per year.
Our
ClearPath systems are designed to place the radiation source directly into
the
post-lumpectomy site which reduces the treatment time to approximately 5 days
compared to six weeks and reduces the risks associated with the external beam
radiation treatment. Our ClearPath device is placed through a single incision
and is designed to conform to the tumor resection cavity, allowing physicians
to
deliver a more conformal therapeutic radiation dose distribution following
lumpectomy compared to other methods of APBI. Our ClearPath family of devices
are designed to deliver either high-dose rate treatment, (ClearPath-HDR™) or
low-dose rate continuous treatments (ClearPath-CR™).
We
have
received 510(k) approval from the United States Food and Drug Administration
for
both ClearPath-CR™ to enable a low-dose rate, or continuous release treatment
utilizing our Prospera® brachytherapy seeds, and for ClearPath-HDR™ to enable a
high-dose rate treatment. Throughout 2007 and the first half of 2008, we have
been gaining clinical experience with the first generation ClearPath-HDR in
2007, and we intend to launch the second generation devices in 2008, to be
followed by the general commercial release of our ClearPath-CR.
On
September 17, 2007, we completed the sale of all significant assets, including
licenses, trademarks and brand-names, and selected liabilities of NOMOS
Corporation to Best Medical, Inc. for $500. We expect that the divestiture
of
NOMOS will allow us to better utilize financial resources to benefit the
marketing and development of innovative brachytherapy products for the treatment
of cancer. The financial results of NOMOS are reported as a discontinued
operation in accompanying financial statements.
On
September 5, 2008 we completed the sale of certain assets, principally our
non-therapeutic product line to EZIP for an amount valued up to $6,000. The
assets sold are reported as assets held for sale and the revenues and related
expenses are reported as a discontinued operation in accompanying financial
statements.
We
have
incurred substantial net losses since fiscal year 2000. We expect the losses
to
continue for at least the next fiscal year as we continue to develop our
ClearPath product, and obtaining adequate financing is an important part of
our
business strategy. In January 2008, we completed a financing transaction in
which we raised a net of $14.0 million through a private placement of our common
stock with three of our major shareholders. The inflow of cash has allowed
us to
meet our operating expenses and continued development of our ClearPath
product.
Results
of Operations
Three
Months Ended July 31, 2008 Compared to Three Months Ended July 31,
2007
Total
Revenue
|
|
Three Months Ended July 31,
|
|
|
|
2008
|
|
2007
|
|
% Change
|
|
|
|
|
|
|
|
|
|
Radiation
Sources
|
|
$
|
3,418
|
|
$
|
2,702
|
|
|
26
|
%
|
Total
revenue increased $716 or 26% to $3,418 for the three months ended July 31,
2008
from $2,702 for the three months ended July 31, 2007. The increase in revenue
is
due to an approximate $700 or 24% increase in sales volume, primarily of
our
palladium brachytherapy seeds. Average selling prices remained consistent
period
over period.
Gross
profit
|
|
Three Months Ended July 31,
|
|
|
|
2008
|
|
2007
|
|
% Change
|
|
|
|
|
|
|
|
|
|
Radiation
Sources
|
|
$
|
1,174
|
|
$
|
604
|
|
|
94
|
%
|
(%
of Revenue)
|
|
|
|
|
|
|
|
|
|
|
Radiation
Sources
|
|
|
34
|
%
|
|
22
|
%
|
|
54
|
%
|
Gross
profit increased $570, or 94%, to $1,174 for the three months ended July
31,
2008 from $604 for the three months ended July 31, 2007. The increase in
gross
profit is due to the $700 increase in revenue noted above and, to a lesser
extent, an approximate $500 reduction in seed production costs as a result
of
lower material costs and increased efficiency in material usage. The increases
in gross margin were partially offset by an approximate $600 increase in
material and labor costs as a result of a shift in our product mix to palladium
seeds from iodine seeds and increased volume and costs of packaging for our
SurTrak product. Gross profit as a percent of sales increased 54% to 34%
in the
three months ended July 31, 2008 from 22% in the three months ended July
31,
2007. The increase in our gross profit as a percent of sales is primarily
due to
the higher volume in revenue and cost controls implemented to reduce our
per
seed production costs, offset somewhat by a shift in product mix to palladium
from iodine seeds and increased packaging costs for our Surtrak product.
Selling
and marketing expenses
|
|
Three Months Ended July 31,
|
|
|
|
2008
|
|
2007
|
|
% Change
|
|
|
|
|
|
|
|
|
|
Selling
and marketing expenses
|
|
$
|
1,168
|
|
$
|
985
|
|
|
19
|
%
|
As
a percent of total revenue
|
|
|
34
|
%
|
|
36
|
%
|
|
|
|
Selling
and marketing expenses, comprised primarily of salaries, commissions, and
marketing costs, increased $183, or 19%, to $1.168 for the three months ended
July 31, 2008, from $985 for the three months ended July 31, 2007. The increase
in selling and marketing expenses is primarily attributed to $77 increase
in
sales commissions related to the increased sales of brachytherapy products
and a
collective $106 increase in printing costs for marketing materials associated
with our product re-branding, consulting fees and other marketing
expenses.
General
and administrative expenses ("G&A")
|
|
Three Months Ended July 31,
|
|
|
|
2008
|
|
2007
|
|
% Change
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
$
|
2,229
|
|
$
|
2,072
|
|
|
8
|
%
|
As
a percent of total revenue
|
|
|
65
|
%
|
|
77
|
%
|
|
|
|
G&A
increased $157, or 8%, to $2,229 for the three months ended July 31, 2008,
from
$2,072 for the three months ended July 31, 2007. The increase in G&A is
primarily attributed to a $81 increase in the allowance for bad debts, a
$60
increase in professional fees and a $99 net increase in other general and
administrative expense categories, partially offset by a $83 decrease in
compensation and related expenses.
Research
and development (“R&D”)
|
|
Three Months Ended July 31,
|
|
|
|
2008
|
|
2007
|
|
% Change
|
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
$
|
843
|
|
$
|
518
|
|
|
63
|
%
|
As
a percent of total revenue
|
|
|
25
|
%
|
|
19
|
%
|
|
|
|
R&D
increased $325 or 60%, to $843 for the three months ended July 31, 2008,
from
$518 for the three months ended July 31, 2007. The increase in R&D spending
is primarily due to an increase in outside services and spending on product
development for our ClearPath™ breast brachytherapy device.
Severance
Expense
|
|
Three Months Ended July 31,
|
|
|
|
2008
|
|
2007
|
|
% Change
|
|
|
|
|
|
|
|
|
|
Severance
expenses
|
|
$
|
1,064
|
|
$
|
—
|
|
|
100
|
%
|
As
a percent of total revenue
|
|
|
31
|
%
|
|
—
|
%
|
|
|
|
Severance
expense of $1,064 is related to negotiated severance contracts with three
employees whose positions with the Company were eliminated.
Interest
and other income (expense), net
—
reflects
interest income on our cash balances from overnight sweep activities during
the
three months ended July 31, 2008, and, for the three months ended July 31,
2007,
reflects $162 warrant amortization expense, partially offset by interest
income
on our cash balances.
Nine
months ended July 31, 2008 Compared to Nine months ended July 31,
2007
Total
Revenue
|
|
Nine months ended July 31,
|
|
|
|
2008
|
|
2007
|
|
% Change
|
|
|
|
|
|
|
|
|
|
Radiation
Sources
|
|
$
|
10,589
|
|
$
|
8,156
|
|
|
30
|
%
|
Total
revenue increased $2,433 or 30% to $10,589 for the nine months ended July
31,
2008 from $8,156 for the nine months ended July 31, 2007. The increase in
our
Radiation Sources business primarily reflects both an increase in sales of
and
shift in product mix to our palladium brachytherapy seeds.
Gross
profit
|
|
Nine months ended July 31,
|
|
|
|
2008
|
|
2007
|
|
% Change
|
|
|
|
|
|
|
|
|
|
Radiation Sources
|
|
$
|
3,512
|
|
$
|
2,028
|
|
|
73
|
%
|
(%
of Revenue)
|
|
|
|
|
|
|
|
|
|
|
Radiation
Sources
|
|
|
33
|
%
|
|
25
|
%
|
|
32
|
%
|
Gross
profit increased $1,484, or 73%, to $3,512 for the nine months ended July
31,
2008 from $2,028 for the nine months ended July 31, 2007. The increase in
gross
profit is the result of the increases in total revenue as noted above, and
to a
lesser extent, an approximate $400 reduction in seed production costs as
a
result of lower material costs and increased efficiency in material usage.
The
gains in gross profit were somewhat offset by an approximate $1,300 increase
in
overall costs due to a shift in product mix to palladium seeds sales. Our
gross
profit as a percent of sales increase 32% to 33% for the nine months ended
July
31, 2008 from 25% for the nine months ended July 31, 2007, primarily due
to
lower average production costs per seed, offset by the change in product
mix
towards palladium seeds.
Selling
and marketing expenses
|
|
Nine months ended July 31,
|
|
|
|
2008
|
|
2007
|
|
% Change
|
|
|
|
|
|
|
|
|
|
Selling
and marketing expenses
|
|
$
|
3,382
|
|
$
|
2,713
|
|
|
25
|
%
|
As
a percent of total revenue
|
|
|
32
|
%
|
|
33
|
%
|
|
|
|
Selling
and marketing expenses, comprised primarily of salaries, commissions, and
marketing costs, increased $669, or 25%, to $3,382 for the nine months ended
July 31, 2008, from $2,713 for the nine months ended July 31, 2007. The increase
in selling and marketing expenses is primarily attributed to a $174 increase
in
research grants provided to qualified organizations, a $202 increase in
commissions related to the increased sales of brachytherapy products, a $72
increase in consulting fees, $146 in costs incurred for re-branding and an
approximate $75 net increase all other marketing expenses.
General
and administrative expenses ("G&A")
|
|
Nine
months ended July 31,
|
|
|
|
2008
|
|
2007
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
$
|
7,634
|
|
$
|
6,516
|
|
|
17
|
%
|
As
a percent of total revenue
|
|
|
72
|
%
|
|
80
|
%
|
|
|
|
G&A
increased $1,118, or 17%, to $7,634 for the nine months ended July 31, 2008,
from $6,516 for the nine months ended July 31, 2007. The increase in G&A is
primarily attributed to a $291 increase in bad debt expense, $88 increase
in
loan origination fees related to borrowing activities in the first quarter
of
2008, a $508 increase in compensation and related expenses, an increase of
$80
in travel expenses, $87 increase in share based compensation expense and
a $129
net increase in other general and administrative expense categories, partially
offset by a $65 decrease in insurance costs as a result of the disposition
of
the NOMOS operation.
Research
and development (“R&D”)
|
|
Nine months ended July 31,
|
|
|
|
2008
|
|
2007
|
|
% Change
|
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
$
|
3,282
|
|
$
|
1,282
|
|
|
156
|
%
|
As
a percent of total revenue
|
|
|
31
|
%
|
|
16
|
%
|
|
|
|
R&D
increased $2,000 or 156%, to $3,282 for the nine months ended July 31, 2008,
from $1,282 for the nine months ended July 31, 2007. The increase in R&D
spending is primarily due to a $1,479 increase in spending on product
development for our ClearPath™ breast brachytherapy device, a $327 increase in
salaries and related employment expenses, a $92 increase in travel expenses
and
a $102 increase in professional fees relating to new product development.
Severance
Expenses
|
|
Nine months ended July 31,
|
|
|
|
2008
|
|
2007
|
|
% Change
|
|
|
|
|
|
|
|
|
|
Severance
expenses
|
|
$
|
1,410
|
|
$
|
—
|
|
|
100
|
%
|
As
a percent of total revenue
|
|
|
13
|
%
|
|
—
|
%
|
|
|
|
Severance
expense of $1,410 is related to negotiated severance contracts with three
employees whose positions with the Company were eliminated.
Interest
and other income (expense), net
—
increased
by $850 to $948 due to an increase in our borrowing activities in the first
six
months of 2008 and the last half of 2007. Interest expense for the nine months
ended July 31, 2008 includes $895 amortization of warrants issued as debt
discount in connection with the debt and $53 of cash paid for loan origination
and interest on debt.
Adjustment
for fair value of derivatives
—
increased from $0 to $311 as a result of fluctuations recorded in the fair
value
of warrants issued in connection with our borrowing activities.
Liquidity
and Capital Resources
To
date,
our short-term liquidity needs have generally consisted of working capital
to
fund our ongoing operations and to finance growth in inventories, trade accounts
receivable, new product research and development, capital expenditures,
acquisitions and strategic investments in related businesses. We have
satisfied these needs primarily through a combination of cash generated by
operations, short-term borrowings, public offerings, private placements of
our
common stock and most recently the sale of certain assets. We expect that
we will be able to satisfy our longer term liquidity needs for research and
development, capital expenditures, and acquisitions through a combination
of
cash generated by operations, short-term and long-term borrowings, lines
of
credit and our ability to raise capital through the sale of our common stock,
and/or securities convertible to debt.
To
supplement our available cash, on May 28, 2008, we entered into a Ninth
Amendment to our previously expired borrowing arrangement with Silicon Valley
Bank. The Ninth Amendment provides us with $6,000 available borrowing capacity
as follows:
|
§
|
a
$3.0 million Growth Capital term loan, to be funded one half in
June 2008
and one half no later than September 2008. Interest accrues at
the Bank
prime rate plus 2.25% and is payable on the outstanding principal
balance
monthly from the date of the first borrowing. The principal balance
of the
Growth Capital loan is repayable in equal installments of $83,333
over
thirty-six (36) months beginning in the month after the loan is
fully
funded; and
|
|
§
|
a
$3.0 million revolving credit facility based upon eligible receivables
balance as defined by the Ninth Amendment, which is payable monthly.
Interest on the revolving credit facility is payable monthly at Bank
prime
plus 0.50% per annum, and may increase to Bank prime plus 1.5% if
we fail
to meet the Quick Ratio Test as defined in the Ninth Amendment. The
revolving line of credit matures in twenty-four (24) months from
the date
of signing. The revolving line of credit is subject to certain financial
covenants, which cross over to the Growth Capital Loan in the event
that
both facilities have an outstanding balance on any given
month.
|
The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and liquidation of liabilities
in
the normal course of business. However, the Company has continued to incur
substantial net losses and used substantial amounts of cash. As of July 31,
2008, the Company has an accumulated deficit of $161,533; cash, cash equivalents
and marketable securities of $1,667, long-term debt of $1,342 and remaining
available financing arrangements of $4,500.
Based
on
our current operating plans, management believes that the existing cash
resources and cash forecasted by management to be generated by operations,
as
well as our short-term and long-term borrowings, lines of credit and our ability
to raise capital through the sale of our common stock and/or securities
convertible to debt, will be sufficient to meet working capital and capital
requirements through at least the next twelve months. In this regard, we raised
additional financing in the first quarter of fiscal 2008 to fund our continuing
operations, support the further development and launch of ClearPath™, our unique
multicatheter breast brachytherapy device for Accelerated Partial Breast
Irradiation, and other activities. In addition, on May 28, 2008, we negotiated
a
$3,000 term loan and renewed our expired line of credit for $3,000 with a bank
and most recently the sale of certain assets. However, there is no assurance
that we will be successful with our plans. If events and circumstances occur
such that we do not meet our current operating plans, we are unable to raise
sufficient additional equity or debt financing, or such financing is
insufficient or not available, we may be required to further reduce expenses
or
take other steps which could have a material adverse effect on our future
performance, including but not limited to, the premature sale of some or all
of
our assets or product lines on undesirable terms, merger with or acquisition
by
another company on unsatisfactory terms, or the cessation of
operations.
We
also
expect that in future periods new products and services will provide additional
cash flow, although no assurance can be given that such cash flow will be
realized, and we are presently placing an emphasis on controlling
expenses.
As
of
July 31, 2008, we had cash, and cash equivalents aggregating approximately
$1,667, an increase of approximately $1,058 from $609 at October 31, 2007.
The
increase was primarily attributed to $13,768 net proceeds from the sale of
our
common stock in January 2008, proceeds of $1,500 from the Growth Capital Loan,
partially offset by $3,323 in payment of debt, $9,804 used in operating
activities and $1,053 used for capital expenditures.
Cash
flows used in operating activities, excluding cash used in discontinued
operations, increased $3,036, or 43%, to $10,022 for the nine months ended
July
31, 2008 from $6,986 for the nine months ended July 31, 2007, primarily due
to
|
§
|
$4,884
million increase in our net loss from continuing
operations;
|
|
§
|
$1,062
decline in collections of accounts receivable due to higher sales
volume
and extended terms offered to certain
customers;
|
which
were partially offset by
|
§
|
$455
reduction in inventory expenditures resulting from lower inventory
costs
and increased efficiency in inventory
usage;
|
|
§
|
$1,125
increase from accounts payable and accrued liabilities as we attempt
to
more closely align our expenditures with our collections;
and
|
|
§
|
$1,288
increase generated by non-cash expenses such as the amortization
of
warrants, the change in fair value of warrant derivative liabilities,
share-based compensation expense and the provision for doubtful
accounts,
|
Cash
used
in discontinued operations during the nine months ended July 31, 2008 reflects
the cash generated by the discontinued operations of the non-therapeutic product
line, partially offset by payments of legacy accounts payable and accrued
liabilities retained by us in accordance with the terms of sale of our NOMOS
operation.
Cash
used
in investing activities decreased $9,246 to $1,053 cash used in investing
activities to purchase machinery and equipment relating to research and
development activities, from $8,193 cash provided by investing activities from
liquidating short-term investments to supply cash to support
operations.
Cash
provided by financing activities increased $10,509 to $11,915 for the nine
months ended July 31, 2008 from $1,406 for the nine months ended July 31, 2007.
The increase reflects proceeds from the 2007 Private Placement and proceeds
from
the Growth Capital Loan, partially offset by the repayment of short-term
borrowings from activity prior to closing the 2007 Private
Placement.
Critical
Accounting Policies
The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect
the
amounts reported in the Consolidated Financial Statements included in the
Company’s Form 10-K for the year ended October 31, 2007, and accompanying notes.
Note 1 to the Consolidated Financial Statements describes the significant
accounting policies and methods used in the preparation of the Consolidated
Financial Statements. Estimates are used for, but not limited to, the accounting
for revenue recognition, allowance for doubtful accounts, goodwill and
long-lived asset impairments, loss contingencies, and taxes. Estimates and
assumptions about future events and their effects cannot be determined with
certainty. We base our estimates on historical experience and on various other
assumptions believed to be applicable and reasonable under the circumstances.
These estimates may change as new events occur, as additional information is
obtained and as our operating environment changes. These changes have
historically been minor and have been included in the consolidated financial
statements as soon as they became known. The following critical accounting
policies are impacted significantly by judgments, assumptions and estimates
used
in the preparation of the Consolidated Financial Statements and actual results
could differ materially from the amounts reported based on these
policies.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are recorded at the invoiced amount and do not bear interest. The
allowance for doubtful accounts is our best estimate of the amount of probable
credit losses in our existing accounts receivable. We determine the allowance
based on historical write-off experience and customer economic data. We review
our allowance for doubtful accounts monthly. Past due balances over 60 days
and
over a specified amount are reviewed individually for collectibility. Account
balances are charged off against the allowance when we believe that it is
probable the receivable will not be recovered. We do not have any
off-balance-sheet credit exposure related to our customers.
Equipment
and Leasehold Improvements
Equipment
and leasehold improvements are stated at cost. Maintenance and repair costs
are
expensed as incurred, while improvements are capitalized. Gains or losses
resulting from the disposition of assets are included in income. Depreciation
and amortization are computed using the straight-line method over the estimated
useful lives as follows:
Furniture,
fixtures and equipment
|
3-7
years
|
Leasehold
improvements
|
Lesser
of the useful life or term of lease
|
Long-Lived
Assets
In
accordance with SFAS No. 144, “
Accounting
for the Impairment or Disposal of Long-Lived Assets
,”
long-lived assets, such as property, plant, and equipment, and purchased
intangibles subject to amortization, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured
by
a comparison of the carrying amount of an asset to the estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount
of an asset exceeds its estimated future cash flows, an impairment charge is
recognized equal to the amount by which the carrying amount of the asset exceeds
the fair value of the asset. Assets to be disposed of are separately presented
in the consolidated balance sheet and reported at the lower of the carrying
amount or fair value less costs to sell, and are no longer
depreciated.
Intangible
Assets
License
agreements are amortized on a straight-line basis over periods ranging up to
fifteen years. The amortization periods of patents are based on the lives of
the
license agreements to which they are associated or the approximate remaining
lives of the patents, whichever is shorter. Purchased intangible assets with
finite lives are carried at cost less accumulated amortization and are amortized
on a straight-line basis over periods ranging from three to twelve
years.
We
review
for impairment whenever events and changes in circumstances indicate that such
assets might be impaired. If the estimated future cash flows (undiscounted
and
without interest charges) from the use of an asset are less than the carrying
value, a write-down is recorded to reduce the related asset to its estimated
fair value.
Derivative
Liabilities
The
Company issued warrants in connection with its borrowing activities that
included an uncertain purchase price. The Company evaluated the warrants under
SFAS No. 133 -
Accounting
for Derivative Instruments and Hedging Activities
and
Emerging Issues Task Force Issue 00-19 -
Accounting
for Derivative Financial Indexed to, and Potentially Settled in, a Company’s Own
Stock
and
determined the warrants should be accounted for as derivative liabilities at
estimated fair value, and marked-to-market at subsequent measurement dates.
The
Company used the Black-Scholes option-pricing model to determine the fair value
of the derivative liabilities at each measurement date. Key assumptions of
the
Black-Scholes option-pricing model include applicable volatility rates,
risk-free interest rates and the instruments’ expected remaining life. The
fluctuations in estimated fair value are recorded as Adjustments to Fair Value
of Derivatives in Other Expenses in the Statement of Operations. On December
12,
2007, the uncertain purchase price became certain, and the derivative features
were eliminated. See further discussion in Note 8 and Note 9 of the Financial
Statements.
Revenue
Recognition
We
sell
products for radiation therapy treatment, primarily brachytherapy seeds used
in
the treatment of cancer.. We apply the provisions of SEC Staff Accounting
Bulletin (“SAB”) No. 104, “
Revenue
Recognition
”
for
the
sale of non-software products. SAB No. 104, which supersedes SAB No. 101,
“
Revenue
Recognition in Financial Statements
”,
provides guidance on the recognition, presentation and disclosure of revenue
in
financial statements. SAB No. 104 outlines the basic criteria that must be
met to recognize revenue and provides guidance for the disclosure of revenue
recognition policies. In general, we recognize revenue related to product
sales when (i) persuasive evidence of an arrangement exists, (ii) delivery
has
occurred, (iii) the fee is fixed or determinable, and (iv) collectibility is
reasonably assured.
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to
taxable income in the years in which those temporary differences are expected
to
be recovered or settled. The Company has recorded 100% valuation allowance
against its deferred tax assets until such time that becomes more likely than
not that the Company will realize the benefits of its deferred tax assets.
On
November 1, 2007, the Company implemented Financial Accounting Standards Board
(“FASB”) Interpretation No. 48, “
Accounting
for Uncertainty in Income Taxes — An Interpretation of FASB Statement
No. 109”
.
Stock-based
Compensation
We
account for our share-based payments under the guidance set forth in SFAS
No. 123(R),
Share-Based
Payment
(“SFAS
123(R)”), which requires the measurement and recognition of compensation expense
for all share-based payment awards made to employees and directors, including
stock options and employee stock purchases related to our Employee Stock
Purchase Plan (the “Employee Stock Purchase Plan”), based on their fair values.
We also apply the guidance found in SEC
Staff
Accounting Bulletin No. 107
(“SAB
107”) to with respect to share-based payments and SFAS 123(R).
Under
SFAS 123(R), we attribute the value of share-based compensation to expense
using
the straight-line method. We use a 10% forfeiture rate, and a 40%
forfeiture rate for the 2006 Premium Price Awards, under the straight-line
method based on historic and estimated future forfeitures.
We
use
the Black-Scholes option-pricing model for estimating the fair value of options
granted. The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. We use projected volatility rates, which are based primarily upon
historical volatility rates. Because our employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management’s opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of our options.
For purposes of financial statement presentation and pro forma disclosures,
the
estimated fair values of the options are amortized over the options’ vesting
periods.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “
Fair
Value Measurements
”,
(“SFAS
No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles (GAAP), and
expands disclosures about fair value measurements. This Statement applies under
other accounting pronouncements that require or permit fair value measurements,
and does not require any new fair value measurements. The application of SFAS
No. 157, however, may change current practice within an organization.
SFAS 157 is effective for fiscal years beginning after November 15,
2007. On February 12, 2008, the FASB issued FASB Staff Position FSP 157-2
which defers the effective date of SFAS No. 157 for one year for
non-financial assets and non-financial liabilities that are not recognized
or
disclosed at fair value in the financial statements on a recurring basis. The
Company does not believe that SFAS No. 157 will have a material impact on the
Company’s financial position, results of operations or cash flows.
In
February 2007, the FASB issued SFAS No. 159,
“The
Fair Value Option for Financial Assets and Financial
Liabilities.”
SFAS 159
provides companies with an option to report selected financial assets and
liabilities at fair value. The standard’s objective is to reduce both complexity
in accounting for financial instruments and the volatility in earnings caused
by
measuring related assets and liabilities differently. The standard requires
companies to provide additional information that will help investors and other
users of financial statements to more easily understand the
effect
of
the company’s choice to use fair value on its earnings. It also requires
companies to display the fair value of those assets and liabilities for which
the company has chosen to use fair value on the face of the balance sheet.
The
new standard does not eliminate disclosure requirements included in other
accounting standards, including requirements for disclosures about fair value
measurements included in SFAS 157,
“Fair
Value Measurements,”
and SFAS
107,
“Disclosures
about Fair Value of Financial Instruments.”
SFAS 159
is effective as of the start of fiscal years beginning after November 15,
2007. Early adoption is permitted. The Company is evaluating this standard
and
therefore has not yet determined the impact that the adoption of SFAS 159 will
have on our financial position, results of operations or cash
flows.
In
March
2007, the FASB ratified Emerging Issues Task Force Issue 06-11,
Accounting
for Income Tax Benefits of Dividends on Share-Based Payment Awards
,
(“EITF
Issue 06-11” ). Beginning January 1, 2008, the Company adopted EITF Issue
06-11. In accordance with EITF Issue 06-11, the Company records a credit to
additional paid-in capital for tax deductions resulting from a dividend payment
on non-vested share awards the Company expects to vest. The adoption of EITF
Issue 06-11 did not have any impact on the Company’s consolidated financial
statement during the quarter ended July 31, 2008.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "
Business
Combinations
"
("SFAS 141R"). SFAS 141R establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree and the goodwill acquired. SFAS 141R also
establishes disclosure requirements to enable the evaluation of the nature
and
financial effects of the business combination. SFAS 141R is effective for
fiscal years beginning after December 15, 2008.The Company is currently
evaluating the potential impact, if any, of the adoption of SFAS 141R on
its consolidated results of operations and financial condition.
In
December 2007, the FASB issued SFAS No. 160, "
Noncontrolling
Interests in Consolidated Financial Statements—an amendment of Accounting
Research Bulletin No. 51
"
(“SFAS
160”). SFAS 160 establishes accounting and reporting standards for ownership
interests in subsidiaries held by parties other than the parent, the amount
of
consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parent's ownership interest, and the valuation of
retained noncontrolling equity investments when a subsidiary is deconsolidated
SFAS 160 also establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners SFAS 160 is effective for fiscal years beginning after
December 15, 2008.The Company is currently evaluating the potential impact,
if any, of the adoption of SFAS 160 on its consolidated results of operations
and financial condition.
In
March
2008, the FASB issued SFAS No. 161,
Disclosures
about Derivative Instruments and Hedging Activities - an amendment of FASB
Statement No. 133
.
The new
standard is intended to improve financial reporting about derivative instruments
and hedging activities by requiring enhanced disclosures to enable investors
to
better understand their effects on an entity’s financial position, financial
performance, and cash flows. Entities are required to provide enhanced
disclosures about: (a) how and why an entity uses derivative instruments;
(b) how derivative instruments and related hedged items are accounted for
under SFAS No. 133 and its related interpretations; and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. This standard is effective
for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008, with early application encouraged. The Company is
currently evaluating the impact, if any, SFAS No. 161 will have on its
consolidated financial position, results of operations or cash flows.
In
May
2008, the FASB issued SFAS No. 162, “
The
Hierarchy of Generally Accepted Accounting Principles”, (“SFAS No.
162”
).
SFAS
No. 162 identifies the sources of accounting principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP)
in
the United States (the GAAP hierarchy). This Statement is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles”. The Company currently adheres to the
hierarchy of GAAP as presented in SFAS No. 162, and does not expect its adoption
will have a material impact on its consolidated results of operations and
financial condition.
In
June
2008, the FASB issued Financial Accounting Standards Board Staff Position EITF
03-6-1,
Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities
(“FSP
EITF 03-6-1”). The FSP provides that unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend equivalents (whether
paid
or unpaid) are participating securities and shall be included in the computation
of earnings per share pursuant to the two-class method in accordance with SFAS
128, Earnings per Share. The FSP is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those years. Upon adoption, the Company is required to retrospectively adjust
its earnings per share data to conform with the provisions in this FSP. Early
application of this FSP is prohibited. The Company is currently evaluating
the
impact this FSP will have on its consolidated financial statements.
.
Item
3.
Quantitative
and Qualitative Disclosures about Market Risk
Information
about market risks for the nine months ended July 31, 2008 does not differ
materially from that discussed under Item 7A of the registrant's Annual Report
on Form 10-K for the fiscal year ended October 31, 2007.
Item
4.
Controls
and Procedures
Evaluation
of Disclosure Controls and Procedures
As
required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the
“Exchange Act”), we have carried out an evaluation, under the supervision and
with the participation of our management, including our Chief Executive Officer
(“CEO”) and, principal financial officer, of the effectiveness, as of the end of
the fiscal quarter covered by this report, of the design and operation of our
“disclosure controls and procedures” as defined in Rule 13a-15(e)
promulgated by the SEC under the Exchange Act. Based upon that evaluation,
our
CEO concluded that our disclosure controls and procedures, as of the end of
such
fiscal quarter, were adequate and effective to ensure that information required
to be disclosed by us in the reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms.
Changes
in Internal Controls
There
has
been no change in our internal control over financial reporting during the
quarter ended July 31, 2008, that has materially affected or is reasonably
likely to materially affect our internal control over financial
reporting.
PART
II – OTHER INFORMATION
The
Company was not required to report the information pursuant to Items 1 through
6
of Part II of Form 10-Q except as follows:
Item
1. Legal Proceedings
See
Note
11 of Condensed Notes to Consolidated Financial Statements for information
regarding legal proceedings.
Item
1A. Risk Factors
We
operate in a rapidly changing environment that involves a number of risks,
some
of which are beyond our control. In addition to other information in this Form
10-Q, you should carefully consider the risks described below before investing
in our securities. This discussion highlights some of the risks that may affect
future operating results. The risks described below are not the only ones facing
us. Additional risks and uncertainties not presently known to us, which we
currently deem immaterial or which are similar to those faced by other companies
in our industry or business in general, may also impair our business operations.
If any of the following risks or uncertainties actually occurs, our business,
financial condition and operating results would likely suffer.
We
have experienced significant losses and expect to incur losses in the future.
As
a result, the amount of our cash, cash equivalents, and investments in
marketable securities has materially declined. We raised additional equity
financing in January 2008 to fund our continuing operations, support the further
development and launch of ClearPath and other activities. If we continue to
incur significant losses and are unable to access sufficient working capital
from our operations or through external financings, we will be unable to fund
future operations and operate as a going concern.
We
have
incurred substantial net losses in each of the last six fiscal years. As
reflected in our financial statements, we have experienced net losses of $12.7
million in the nine months ended July 31, 2008, and $21.0 million and $17.1
million in our fiscal years ended October 31, 2007 and 2006, respectively.
In
addition, we have used cash in operations of $9.8 million in the nine months
ended July 31, 2008, and $12.3 million and $15.9 million for our fiscal years
ended October 31, 2007 and 2006, respectively. As of July 31, 2008, we had
an accumulated deficit of $160.7 million; cash and cash equivalents of $1.7
million, and long-term debt of $1.6 million.
To
supplement our available cash, on May 28, 2008, we entered into a Ninth
Amendment to our previously expired borrowing arrangement with Silicon Valley
Bank. The Ninth Amendment provides us with $6.0 million available borrowing
capacity as follows:
|
§
|
a
$3.0 million Growth Capital term loan, to be funded one half in June
2008
and one half no later than September 2008. Interest accrues at the
Bank
prime rate plus 2.25% and is payable on the outstanding principal
balance
monthly from the date of the first borrowing. The principal balance
of the
Growth Capital loan is repayable in equal installments of $83,333
over
thirty-six (36) months beginning in the month after the loan is fully
funded; and
|
|
§
|
a
$3.0 million revolving credit facility based upon eligible receivables
balance as defined by the Ninth Amendment, which is payable monthly.
Interest on the revolving credit facility is payable monthly at Bank
prime
plus 0.50% per annum, and may increase to Bank prime plus 1.5% if
we fail
to meet the Quick Ratio Test as defined in the Ninth Amendment. The
revolving line of credit matures in twenty-four (24) months from
the date
of signing. The revolving line of credit is subject to certain financial
covenants, which cross over to the Growth Capital Loan in the event
that
both facilities have an outstanding balance on any given
month.
|
The
negative cash flow we have sustained has materially reduced our working capital.
Continued negative cash flow could materially and negatively impact our ability
to fund future operations and continue to operate as a going concern. Management
has taken and continues to take actions intended to improve our results. These
actions include sales of certain product lines, reducing cash operating
expenses, developing new technologies and products, improving existing
technologies and products, and expanding into new geographical markets. The
availability of necessary working capital, however, is subject to many factors
beyond our control, including our ability to obtain additional financing, our
ability to increase revenues and to reduce further our losses from operations,
economic cycles, market acceptance of our products, competitors’ responses to
our products, the intensity of competition in our markets, and the level of
demand for our products.
The
amount of working capital that we will need in the future will also depend
on
our efforts and many factors, including:
|
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Our
ability to successfully develop, market and sell our products, including
the successful further development and launch of our new ClearPath
device
for treatment of breast cancer;
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Continued
scientific progress in our discovery and research
programs;
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Levels
of selling and marketing expenditures that will be required to launch
future products and achieve and maintain a competitive position in
the
marketplace for both existing and new
products;
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Structuring
our businesses in alignment with their revenues to reduce operating
losses;
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Levels
of inventory and accounts receivable that we
maintain;
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Level
of capital expenditures;
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Acquisition
or development of other businesses, technologies or
products;
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The
time and costs involved in obtaining regulatory
approvals;
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The
costs involved in preparing, filing, prosecuting, maintaining, defending
and enforcing patent claims; and
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The
potential need to develop, acquire or license new technologies and
products.
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We
completed a private placement of $15.5 million of our common stock in January
2008, raising a net $14.0 million; however, we may need to raise additional
equity financing, reduce operations and take other steps to achieve positive
cash flow.
In
September 2008, we sold our non-therapeutic product line, which resulted in
immediate cash proceeds of $3.0 million. However, we will no longer generate
revenue from the sales of our non-therapeutic products and our revenue will
be
entirely based on sales of our therapeutic products.
We
also
may be required to curtail our expenses or to take steps that could hurt our
future performance, including but not limited to, the termination of major
portions of our research and development activities, the premature sale of
some
or all of our assets or product lines on undesirable terms, merger with or
acquisition by another company on unsatisfactory terms or the cessation of
operations. We cannot assure you that we will be successful in these efforts
or
that any or some of the above factors will not negatively impact us. We believe
that we will have or be able to obtain sufficient cash to sustain us at least
through the next twelve months.
Future
financing transactions will likely have dilutive and other negative effects
on
our existing stockholders.
In
January 2008, we completed a private placement of 12,601,628 shares of our
common stock that also included 630,081 shares of common stock issuable upon
exercise of warrants. This financing resulted in significant dilution of our
current stockholders, such that the three participants in the private placement
transaction now control in excess of 70% of our outstanding common stock. If
we
raise additional equity financing in the future, the percentage ownership held
by existing stockholders would be further reduced, and existing stockholders
may
experience further significant dilution. In addition, new investors may demand
rights, preferences or privileges that differ from, or are senior to, those
of
our existing shareholders, such as warrants in addition to the securities
purchased and other protections against future dilutive
transactions.
Our
stock price currently does not meet the minimum bid price for continued listing
on the Nasdaq Capital Market. Our ability to publicly or privately sell equity
securities and the liquidity of our common stock could be adversely affected
if
we are delisted from the Nasdaq Capital Market or if we are unable to transfer
our listing to another stock market.
At
points
during the past 52 weeks, the minimum bid price for our common stock listed
on
the Nasdaq Capital Market has closed below the $1.00 minimum. On October 5,
2007, we received a notice from Nasdaq, dated October 5, 2007 indicating that
for the last 30 consecutive business days, the bid price of our common stock
had
closed below the minimum $1.00 per share requirement for continued inclusion
under Marketplace Rule 4450(a)(5). We were able to regain compliance with the
$1
minimum bid requirement by effecting a 1 share for 5 share reverse
stock split, which was approved by our stockholders on April 29, 2008 and became
effective on May 1, 2008. Our common stock traded at or above the $1.00 minimum
bid price for the period May 1, 2008 through May 14, 2008, which marked 10
consecutive trading days in which the closing bid price exceeded the $1.00
minimum. On May 15, 2008, we were notified by Nasdaq that our common stock
had
regained compliance with the minimum bid price requirements and no further
action was required on our part.
On
August
20, 2008, we received notice from Nasdaq indicating that for the last 30
consecutive business days, the bid price of the Company’s common stock closed
below the minimum $1.00 per share requirement for continued inclusion under
Marketplace Rule 4450(a)(5) (the “Rule”). The Company has 180 calendar days, or
until February 17, 2009, to regain compliance. If, at anytime before February
17, 2009, the bid price of the Company’s common stock closes at $1.00 per share
or more for a minimum of 10 consecutive business days, the Company understands
that NASDAQ’s Staff will provide written notification that the Company has
achieved compliance with the Rule. If the Company does not regain compliance
with the Rule by February 17, 2009, the Company understands that NASDAQ’s Staff
will provide written notification that the Company’s common stock will be
delisted. At that time, the Company may appeal the Staff’s determination to
delist its common stock to a NASDAQ Listing Qualifications Panel.
If
our
common stock is delisted by Nasdaq, our common stock may be eligible to trade
on
the American Stock Exchange, the OTC Bulletin Board maintained by Nasdaq,
another over-the-counter quotation system, or on the pink sheets where an
investor may find it more difficult to dispose of or obtain accurate quotations
as to the market value of our common stock, although there can be no assurance
that our common stock will be eligible for trading on any alternative exchanges
or markets.
In
addition, delisting from Nasdaq could adversely affect our ability to raise
additional financing through the public or private sale of equity securities.
We
may need to raise additional financing in fiscal 2008 to fund our continuing
operations, support the launch and further development of ClearPath, and other
activities. Delisting from Nasdaq also would make trading our common stock
more
difficult for investors, potentially leading to further declines in our share
price. It would also make it more difficult for us to raise additional capital.
Our
common stock is subject to continued listing requirements of the Nasdaq Capital
Market. Our ability to publicly or privately sell equity securities and the
liquidity of our common stock could be adversely affected if we are delisted
from the Nasdaq Capital Market.
Beyond
the risk of delisting arising from the $1.00 minimum closing bid price
requirement, our common stock is subject to a number of other requirements
under
Maintenance Standards for continued listing on the Nasdaq Capital Market,
including but not limited to, a $2.5 million minimum stockholders’ equity under
Maintenance Standard 1, as set forth in Marketplace Rule 4310(c)(3). Currently,
our $0.8 million of stockholder’s’ equity at July 31, 2008, which balance does
not reflect the September 2008 sale of certain assets from our non therapeutic
product line, is not sufficient to meet the minimum required under Maintenance
Standard 1. However, after including the
results
of the September 2008 sale of certain assets from our non therapeutic product
line, we did have sufficient stockholders' equity to satisfy Maintenance
Standard 1.
Delisting
from Nasdaq could adversely affect our ability to raise additional financing
through the public or private sale of equity securities. We may need to raise
additional financing in fiscal 2008 to fund our continuing operations, support
the launch and further development of ClearPath, and other activities. Delisting
from Nasdaq also would make trading our common stock more difficult for
investors, potentially leading to further declines in our share price. It would
also make it more difficult for us to raise additional capital.
Success
of our ClearPath breast brachytherapy device will be dependent upon a variety of
factors.
We
previously have announced the introduction of ClearPath, a new brachytherapy
device for the treatment of breast cancer. Because we believe that our ClearPath
device has certain technical and market advantages, we expect that this device
may generate significant revenues in the future. There are a number of factors
which could affect our ability to achieve this goal, including:
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The
successful further development of a commercially marketable
device;
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The
successful launch of a marketing and sales program for this
device;
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Our
ability to protect our intellectual property through patents and
licenses
and avoid infringement of intellectual property of
others;
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The
successful completion of technical improvements to the
device;
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Our
ability to successfully manufacture production quantities of the
device;
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The
acceptance of the device by physicians and health professionals as
an
alternative to other approaches to delivering radiation to a cancer
patient’s breast tissue or to other products using a similar approach but
employing different competitive technologies;
and
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Our
ability to hire and train a direct sales force to sell the
device.
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We
may encounter insurmountable obstacles or incur substantially greater costs
and
delays than anticipated in the development process.
From
time
to time, we have experienced setbacks and delays in our research and development
efforts and may encounter further obstacles in the course of the development
of
additional technologies, products and services. We may not be able to overcome
these obstacles or may have to expend significant additional funds and time.
Technical obstacles and challenges we encounter in our research and development
process may result in delays in or abandonment of product commercialization,
may
substantially increase the costs of development, and may negatively affect
our
results of operations.
New
product developments in the healthcare industry are inherently risky and
unpredictable. These risks include:
•
failure
to prove feasibility;
•
time
required from proof of feasibility to routine production;
•
timing
and cost of regulatory approvals and clearances;
•
competitors' responses to new product developments;
•
manufacturing cost overruns;
•
failure
to obtain customer acceptance and payment; and
•
excess
inventory caused by phase-in of new products and phase-out of old
products.
The
high
cost of technological innovation is coupled with rapid and significant change
in
the regulations governing the products that compete in our market, by industry
standards that could change on short notice, and by the introduction of new
products and technologies that could render existing products and technologies
uncompetitive. We cannot be sure that we will be able to successfully develop
new products or enhancements to our existing products. Without successful new
product introductions, our revenues likely will continue to suffer, as
competition erodes average selling prices. Even if customers accept new or
enhanced products, the costs associated with making these products available
to
customers, as well as our ability to obtain capital to finance such costs,
could
reduce or prevent us from increasing our operating margins.
All
of our product lines are subject to intense competition. Our most significant
competitors have greater resources than we do. As a result, we cannot be certain
that our competitors will not develop superior technologies, larger more
experienced sales forces or otherwise be able to compete against us more
effectively. If we fail to maintain our competitive position in key product
areas, we may lose or be unable to develop significant sources of
revenue.
We
believe that our Prospera brachytherapy seeds, our SurTRAK strands and needles
and our new ClearPath device can generate substantial revenues in the future.
We
will need to continue to develop enhancements to these products and improvements
on our core technologies in order to compete effectively. Rapid change and
technological innovation characterize the marketplace for medical products,
and
our competitors could develop technologies that are superior to our products
or
that render such products obsolete. We anticipate that expenditures for research
and development will continue to be significant. The domestic and foreign
markets for radiation therapy are highly competitive. Many of our competitors
and potential competitors have substantial installed bases of products and
significantly greater financial, research and development, marketing and other
resources than we do. Competition may increase as emerging and established
companies enter the field. In addition, the marketplace could conclude that
the
tasks our products were designed to perform are no longer elements of a
generally accepted treatment regimen. This could result in us having to reduce
production volumes or discontinue production of one or more of our
products.
Our
primary competitors in the brachytherapy seed business include: C.R.
Bard, Inc. Oncura, and Core Oncology, all of whom manufacture and sell
Iodine-125 brachytherapy seeds, as well as distribute Palladium-103 seeds
manufactured by a third party (in the case of Oncura and Core Oncology, we
currently manufacture a portion of their Palladium-103 seed requirements
pursuant to distribution agreements reached with Oncura in July 2005 and with
Core Oncology in August 2007); and Theragenics Corporation, which manufacturers
Palladium-103 seeds, and sells Palladium-103 and Iodine-125 brachytherapy seeds
directly and its Palladium-103 brachytherapy seeds through marketing
relationships with third parties. Several additional companies currently sell
brachytherapy seeds as well. Our SurTRAK strands and needles are subject to
competition from a number of companies, including Worldwide Medical
Technologies, Inc.
Our
new
ClearPath-HDR device for treatment of breast cancer is, like its competitors,
designed to connect to a source of high-dose-rate (HDR) radiation, which is
administered in a specially shielded room in a hospital. It faces competition
from Hologic, Inc., SenoRx, Inc. and Cianna Medical (previously BioLucent,
Inc.). The MammoSite RTS device from Hologic, Inc., currently the market leader,
uses a balloon and catheter system to place the radiation source directly into
the post-lumpectomy cavity. The Contura MLB device developed by SenoRx, Inc.
also uses a balloon and catheter system to deliver the radiation dose. The
SAVI
device manufactured by Cianna Medical does not use a balloon and is comprised
of
an expandable bundle of 6 catheters.
Our
radiation reference source business also is subject to intense competition.
Competitors in this industry include AEA Technology PLC and Eckert &
Ziegler AG. Eckert & Ziegler purchased our Non-Therapeutic Product Line in
September 2008. We believe that these companies have a dominant position in
the
market for radiation reference source products.
Because
we are a relatively small company, there is a risk that potential customers
will
purchase products from larger manufacturers, even if our products are
technically superior, based on the perception that a larger, more established
manufacturer may offer greater certainty of continued product improvements,
support and service, which could cause our revenues to decline. In addition,
many of our competitors are substantially larger and have greater sales,
marketing and financial resources than we do. Developments by any of these
or
other companies or advances by medical researchers at universities, government
facilities or private laboratories could render our products obsolete. Moreover,
companies with substantially greater financial resources, as well as more
extensive experience in research and development, the regulatory approval
process, manufacturing and marketing, may be in a better position to seize
market opportunities created by technological advances in our
industry.
We
are highly dependent on our direct sales organization, which is small compared
to many of our competitors. Also, we will need to hire and train additional
sales representatives to sell our ClearPath device. Any failure to build, manage
and maintain our direct sales organization could negatively affect our
revenues.
Our
current domestic direct sales force is small relative to many of our
competitors. There is intense competition for skilled sales and marketing
employees, particularly for people who have experience in the radiation oncology
market. Accordingly, we could find it difficult to hire or retain skilled
individuals to sell our products. Any failure to build our direct sales force
could adversely affect our growth and our ability to meet our revenue
goals.
As
a
result of our relatively small sales force the need to hire and train additional
sales representatives to sell our ClearPath device, and the intense competition
for skilled sales and marketing employees, there can be no assurance that our
direct sales and marketing efforts will be successful. If we are not successful
in our direct sales and marketing, our sales revenue and results of operations
are likely to be materially adversely affected.
We
depend partially on our relationships with distributors and other industry
participants to market some of our products, and if these relationships are
discontinued or if we are unable to develop new relationships, our revenues
could decline.
Our
2005
agreement with Oncura, Inc. and our 2007 agreement with Core Oncology, Inc.
for
distribution of our Palladium-103 brachytherapy seeds are important components
of that business. In addition, we do not have a direct sales force for our
non-therapeutic radiation source products, and rely entirely on the efforts
of
agents and distributors for sales of those non-brachytherapy products. We cannot
assure you that we will be able to maintain our existing relationships with
our
agents and distributors for the sale of our Palladium-103 brachytherapy seeds.
We
depend partially on our relationships with two large customers that each
comprise more than 10% of our revenue. If these relationships are discontinued
or if we are unable to develop new relationships, our revenues could
decline.
Our
sales
to Oncura, Inc. comprised more than 10% of our revenue for fiscal 2007. We
cannot assure you that we will be able to maintain our existing relationships
with our large customers for the sale of our Palladium-103 brachytherapy seeds.
If
we are sued for product-related liabilities, the cost could be prohibitive
to
us.
The
testing, marketing and sale of human healthcare products entail an inherent
exposure to product liability claims. Third parties may successfully assert
product liability claims against us. Although we currently have insurance
covering claims against our products, we may not be able to maintain this
insurance at acceptable cost in the future, if at all. In addition, our
insurance may not be sufficient to cover particularly large claims. Significant
product liability claims could result in large and unexpected expenses as well
as a costly distraction of management resources and potential negative publicity
and reduced demand for our products.
Currently,
our revenues are primarily derived from products predominantly used in the
treatment of tumors of the prostate. If we do not obtain wider acceptance of
our
products to treat other types of cancer, our sales could fail to increase and
we
could fail to achieve our desired growth rate.
Currently,
our brachytherapy products are used almost exclusively for the treatment of
prostate cancer. Further research, clinical data and years of experience will
likely be required before there can be broad acceptance for the use of our
brachytherapy products for additional types of cancer. If our products do not
become more widely accepted in treating other types of cancer, our sales could
fail to increase or could decrease.
We
rely on several sole source suppliers and a limited number of other suppliers
to
provide raw materials and significant components used in our products. A
material interruption in supply could prevent or limit our ability to accept
and
fill orders for our products.
We
depend
upon a limited number of outside unaffiliated suppliers for our radioisotopes.
Our principal suppliers are Nordion International, Inc. and Eckert &
Ziegler AG. We also utilize other commercial isotope manufacturers located
in
the United States and overseas. To date, we have been able to obtain the
required radioisotopes for our products without any significant delays or
interruptions. Currently, we rely exclusively upon Nordion International for
our
supply of the Palladium-103 isotope; if Nordion International ceases to supply
isotopes in sufficient quantity to meet our needs, there may not be adequate
alternative sources of supply. If we lose any of these suppliers (including
any
single-source supplier), we would be required to find and enter into supply
arrangements with one or more replacement suppliers. Obtaining alternative
sources of supply could involve significant delays and other costs and these
supply sources may not be available to us on reasonable terms or at all. Any
disruption of supplies could delay delivery of our products that use
radioisotopes, which could adversely affect our business and financial results
and could result in lost or deferred sales.
If
we are unable to attract and retain qualified employees, we may be unable to
meet our growth and revenue needs.
Our
success is materially dependent on a limited number of key employees, and,
in
particular, the continued services of John B. Rush, our president and chief
executive officer, Troy A. Barring, our chief operating officer and Brett L.
Scott our Senior Vice President and Chief Financial Officer. Our future business
and financial results could be adversely affected if the services of Messrs.
Rush, Barring, Scott or other key employees cease to be available. To our
knowledge, none of our key employees have any plans to retire or leave in the
near future.
Our
future success and ability to grow our business will depend in part on the
continued service of our skilled personnel and our ability to identify, hire
and
retain additional qualified personnel. Although some employees are bound by
a
limited non-competition agreement that they sign upon employment, few of our
employees are bound by employment contracts, and it is difficult to find
qualified personnel, particularly medical physicists and customer service
personnel, who are willing to travel extensively. We compete for qualified
personnel with medical equipment manufacturers, universities and research
institutions. Because the competition for these personnel is intense, costs
related to compensation may increase significantly.
Even
when
we are able to hire a qualified medical physicist, engineer or other technical
person, there is a significant training period of up to several months before
that person is fully capable of performing the functions we need. This could
limit our ability to expand our business.
The
medical device industry is characterized by competing intellectual property,
and
we could be sued for violating the intellectual property rights of others,
which
may require us to withdraw certain products from the
market.
The
medical device industry is characterized by a substantial amount of litigation
over patent and other intellectual property rights. Our competitors, like
companies in many high technology businesses, continually review other
companies' products for possible conflicts with their own intellectual property
rights. Determining whether a product infringes a patent involves complex legal
and factual issues, and the outcome of patent litigation actions is often
uncertain. Our competitors could assert that our products and the methods we
employ in the use of our products are covered by United States or foreign patent
rights held by them. In addition, because patent applications can take many
years to issue, there could be applications now pending of which we are unaware,
which could later result in issued patents that our products infringe. There
could also be existing patents that one or more of our products could
inadvertently be infringing of which we are unaware.
While
we
do not believe that any of our products, services or technologies infringe
any
valid intellectual property rights of third parties, we may be unaware of
third-party intellectual property rights that relate to our products, services
or technologies. As the number of competitors in the radiation oncology market
grows, and as the number of patents issued in this area grows, the possibility
of a patent infringement claim against us going forward increases. We could
incur substantial costs and diversion of management resources if we have to
assert our patent rights against others. An unfavorable outcome to any
litigation could harm us. In addition, we may not be able to detect infringement
or may lose competitive position in the market before we do so.
To
address patent infringement or other intellectual property claims, we may have
to enter into license agreements and technology cross-licenses or agree to
pay
royalties at a substantial cost to us. We may be unable to obtain necessary
licenses. A valid claim against us and our failure to obtain a license for
the
technology at issue could prevent us from selling our products and materially
adversely affect our business, financial results and future
prospects.
If
we fail to protect our intellectual property rights or if our intellectual
property rights do not adequately cover the technologies we employ, or if such
rights are declared to be invalid, other companies may take advantage of our
technology ideas and more effectively compete directly against us, or we might
be forced to discontinue selling certain products.
Our
success depends in part on our ability to obtain and enforce patent protections
for our products and operate without infringing on the proprietary rights of
third parties. We rely on U.S. and foreign patents to protect our intellectual
property. We also rely significantly on trade secrets and know-how that we
seek
to protect. We attempt to protect our intellectual property rights by filing
patent applications for new features and products we develop. We enter into
confidentiality or license agreements with our employees, consultants,
independent contractors and corporate partners, and we seek to control access
to
our intellectual property and the distribution of our products, documentation
and other proprietary information. We plan to continue these methods to protect
our intellectual property and our products. These measures may afford only
limited protection. In addition, the laws of some foreign countries may not
protect our intellectual property rights to the same extent as do the laws
of
the United States.
If
a competitor infringes upon our patent or other intellectual property rights,
enforcing those rights could be difficult, expensive and time-consuming, making
the outcome uncertain. Competitors could also bring actions or counterclaims
attempting to invalidate our patents. Even if we are successful, litigation
to
enforce our intellectual property rights or to defend our patents against
challenge could be costly and could divert our management's
attention.
In
2006, we licensed intellectual property which was later the subject of
litigation brought by WorldWide Medical Technologies in U.S. District Court
against both us and our former employee, Richard Terwilliger, who was previously
our Vice-President of New Product Development. This intellectual property
relates to our brachytherapy business, specifically, certain needle-loading
and
stranding technologies. While we do not believe that we have any liability
in
this matter, and are vigorously defending ourselves in the litigation, we cannot
predict what effect an adverse result from this litigation would have on our
future sales of the products at issue.
We
use radioactive materials which are subject to stringent regulation and which
may subject us to liability if accidents occur.
We
manufacture and process radioactive materials which are subject to stringent
regulation. We operate under licenses issued by the California Department of
Health which are renewable every eight years. We received a renewal of our
licenses for our North Hollywood and Chatsworth facilities in 2007. California
is one of the "Agreement States," which are so named because the Nuclear
Regulatory Commission, or NRC, has granted such states regulatory authority
over
radioactive materials, provided such states have regulatory standards meeting
or
exceeding the standards imposed by the NRC. Most users of our products must
obtain licenses issued by the state in which they reside (if they are Agreement
States) or the NRC. Use licenses are also required by some of the foreign
jurisdictions in which we may seek to market our products.
Although
we believe that our safety procedures for handling and disposing of these
radioactive materials comply with the standards prescribed by state and federal
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident, we could
be
held liable for any damages that result. We believe we carry reasonably adequate
insurance to cover us in the event of any damages resulting from the use of
hazardous materials.
As
part
of the sale of our Non-Therapeutic Product Line in September
2007 , we will be closing our North Hollywood facility
and h a ve agreed to decommission the site
at our expense . While we believe that our
current reserves for decommissioning costs are adequate , the actual
costs may exceed such estimate .
Healthcare
reforms, changes in health-care policies and unfavorable changes to third-party
reimbursements for use of our products could cause declines in the revenues
of
our products, and could hamper the introduction of new
products.
Hospitals
and freestanding clinics may be less likely to purchase our products if they
cannot be assured of receiving favorable reimbursement for treatments using
our
products from third-party payors, such as Medicare, Medicaid and private health
insurance plans. Generally speaking, Medicare pays hospitals, freestanding
clinics and physicians a fixed amount for services using our products,
regardless of the costs incurred by those providers in furnishing the services.
Such providers may perceive the set reimbursement amounts as inadequate to
compensate for the costs incurred and thus may be reluctant to furnish the
services for which our products are designed. Moreover, third-party payors
are
increasingly challenging the pricing of medical procedures or limiting or
prohibiting reimbursement for some services or devices, and we cannot be sure
that they will reimburse our customers at levels sufficient to enable us to
achieve or maintain sales and price levels for our products. There is no uniform
policy on reimbursement among third-party payors, and we can provide no
assurance that procedures using our products will qualify for reimbursement
from
third-party payors or that reimbursement rates will not be reduced or
eliminated. A reduction in or elimination of third-party payor reimbursement
for
treatments using our products would likely have a material adverse effect on
our
revenues.
Furthermore,
any federal and state efforts to reform government and private healthcare
insurance programs could significantly affect the purchase of healthcare
services and products in general and demand for our products in particular.
We
are unable to predict whether potential reforms will be enacted, whether other
healthcare legislation or regulation affecting the business may be proposed
or
enacted in the future or what effect any such legislation or regulation would
have on our business, financial condition or results of operations.
The
federal Medicare program currently reimburses hospitals and freestanding clinics
for brachytherapy treatments. Medicare reimbursement amounts typically are
reviewed and adjusted at least annually. Medicare reimbursement policies are
reviewed and revised on an ad hoc basis. Adjustments could be made to these
reimbursement policies or amounts, which could result in reduced or no
reimbursement for brachytherapy services. Changes in Medicare reimbursement
policies or amounts affecting hospitals and freestanding clinics could
negatively affect market demand for our products.
Medicare
reimbursement amounts for seeding are currently significantly less than for
radical prostatectomy, or RP. Although seeding generally requires less physician
time than RP, lower reimbursement amounts, when combined with physician
familiarity with RP, may create disincentives for urologists to perform
seeding.
Private
third-party payors often adopt Medicare reimbursement policies and payment
amounts. As such, Medicare reimbursement policy and payment amount changes
concerning our products also could be extended to private third-party payor
reimbursement policies and amounts and could affect demand for our products
in
those markets as well.
Acceptance
of our products in foreign markets could be affected by the availability of
adequate reimbursement or funding, as the case may be, within prevailing
healthcare payment systems. Reimbursement, funding and healthcare payment
systems vary significantly by country and include both government-sponsored
healthcare and private insurance. We can provide no assurance that third-party
reimbursement will be made available with respect to treatments using our
products under any foreign reimbursement system.
Problems
with any of these reimbursement systems that adversely affect demand for our
products could cause our revenues from our products to decline and our business
to suffer.
Also,
we,
our distributors and healthcare providers performing radiation therapy
procedures are subject to state and federal fraud and abuse laws prohibiting
kickbacks and, in the case of physicians, patient self-referrals. We may be
subjected to civil and criminal penalties if we or our agents violate any of
these prohibitions.
We
are subject to extensive government regulation applicable to the manufacture
and
distribution of our products. Complying with the Food And Drug Administration
and other domestic and foreign regulatory bodies is an expensive and
time-consuming process, whose outcome can be difficult to predict. If we fail
or
are delayed in obtaining regulatory approvals or fail to comply with applicable
regulations, we may be unable to market and distribute our products or may
be
subject to civil or criminal penalties.
We
and
some of our suppliers and distributors are subject to extensive and rigorous
government regulation of the manufacture and distribution of our products,
both
in the United States and in foreign countries. Compliance with these laws and
regulations is expensive and time-consuming, and changes to or failure to comply
with these laws and regulations, or adoption of new laws and regulations, could
adversely affect our business.
In
the
United States, as a manufacturer and seller of medical devices and devices
utilizing radioactive by-product material, we and some of our suppliers and
distributors are subject to extensive regulation by federal governmental
authorities, such as the United States Food and Drug Administration, or FDA,
and
state and local regulatory agencies, such as the State of California, to ensure
such devices are safe and effective. Such regulations, which include the U.S.
Food, Drug and Cosmetic Act, or the FDC Act, and regulations promulgated by
the
FDA, govern the design, development, testing, manufacturing, packaging,
labeling, distribution, import/export, possession, marketing, disposal, clinical
investigations involving humans, sale and marketing of medical devices,
post-market surveillance, repairs, replacements, recalls and other matters
relating to medical devices, radiation producing devices and devices utilizing
radioactive by-product material. State regulations are extensive and vary from
state to state. Our brachytherapy seeds constitute medical devices subject
to
these regulations. Future products in any of our business segments may
constitute medical devices and be subject to regulation as such. These laws
require that manufacturers adhere to certain standards designed to ensure that
the medical devices are safe and effective. Under the FDC Act, each medical
device manufacturer must comply with requirements applicable to manufacturing
practices.
In
the
United States, medical devices are classified into three different categories,
over which the FDA applies increasing levels of regulation: Class I,
Class II and Class III. The FDA has classified all of our
brachytherapy products as Class I devices. Before a new device can be introduced
into the United States market, the manufacturer must obtain FDA clearance or
approval through either a 510(k) premarket notification or a premarket approval,
unless the product is otherwise exempt from the requirements. Class I
devices are statutorily exempt from the 510(k) process, unless the device is
intended for a use which is of substantial importance in preventing impairment
of human health or it presents a potential unreasonable risk of illness or
injury.
A
510(k)
premarket notification clearance will typically be granted for a device that
is
substantially equivalent to a legally marketed Class I or Class II
medical device or a Class III medical device for which the FDA has not yet
required submission of a premarket approval. A 510(k) premarket notification
must contain information supporting the claim of substantial equivalence, which
may include laboratory results or the results of clinical studies. Following
submission of a 510(k) premarket notification, a company may not market the
device for clinical use until the FDA finds the product is substantially
equivalent for a specific or general intended use. FDA clearance generally
takes
from four to twelve months, but it may take longer, and there is no assurance
that the FDA will ultimately grant a clearance. The FDA may determine that
a
device is not substantially equivalent and require submission and approval
of a
premarket approval or require further information before it is able to make
a
determination regarding substantial equivalence.
Most
of
the products that we are currently marketing have received clearances from
the
FDA through the 510(k) premarket notification process. For any devices already
cleared through the 510(k) process, modifications or enhancements that could
significantly affect safety or effectiveness, or constitute a major change
in
intended use require a new 510(k) submission and a separate FDA determination
of
substantial equivalence. We have made minor modifications to our products and,
using the guidelines established by the FDA, have determined that these
modifications do not require us to file new 510(k) submissions. If the FDA
disagrees with our determinations, we may not be able to sell one or more of
our
products until the FDA has cleared new 510(k) submissions for these
modifications, and there is no assurance that the FDA will ultimately grant
a
clearance. In addition, the FDA may determine that future products require
the
more costly, lengthy and uncertain premarket approval process under
Section 515 of the FDC. The approval process under Section 515
generally takes from one to three years, but in many cases can take even longer,
and there can be no assurance that any approval will be granted on a timely
basis, if at all. Under the premarket approval process, an applicant must
generally conduct at least one clinical investigation and submit extensive
supporting data and clinical information establishing the safety and
effectiveness of the device, as well as extensive manufacturing information.
Clinical investigations themselves are typically lengthy and expensive, closely
regulated and frequently require prior FDA clearance. Even if clinical
investigations are conducted, there is no assurance that they will support
the
claims for the product. If the FDA requires us to submit a new pre-market
notification under Section 510(k) for modifications to our existing
products, or if the FDA requires us to go through the lengthier, more rigorous
Section 515 pre-market approval process, our product introductions or
modifications could be delayed or cancelled, which could cause our revenues
to
be below expectations.
In
addition to FDA-required market clearances and approvals, our manufacturing
operations are required to comply with the FDA's Quality System Regulation,
or
QSR, which addresses the quality program requirements, such as a company's
management responsibility for the company's quality systems, and good
manufacturing practices, product design, controls, methods, facilities and
quality assurance controls used in manufacturing, assembly, packing, storing
and
installing medical devices. Compliance with the QSR is necessary to receive
FDA
clearance or approval to market new products and is necessary for us to be
able
to continue to market cleared or approved product offerings. There can be no
assurance that we will not incur significant costs to comply with these
regulations in the future or that the regulations will not have a material
adverse effect on our business, financial condition and results of operations.
Our compliance and the compliance by some of our suppliers with applicable
regulatory requirements are and will continue to be monitored through periodic
inspections by the FDA. The FDA makes announced and unannounced inspections
to
determine compliance with the QSR's and may issue us 483 reports listing
instances where we have failed to comply with applicable regulations and/or
procedures or Warning Letters which, if not adequately responded to, could
lead
to enforcement actions against us, including fines, the total shutdown of our
production facilities and criminal prosecution.
If
we or any of our suppliers fail to comply with FDA requirements, the FDA can
institute a wide variety of enforcement actions, ranging from a public warning
letter to more severe sanctions such as:
•
fines,
injunctions and civil penalties;
•
the
recall or seizure of our products;
•
the
imposition of operating restrictions, partial suspension or total shutdown
of
production;
•
the
refusal of our requests for 510(k) clearance or pre-market approval of new
products;
•
the
withdrawal of 510(k) clearance or pre-market approvals already granted;
and
•
criminal prosecution.
Similar
consequences could arise from our failure, or the failure by any of our
suppliers, to comply with applicable foreign laws and regulations. Foreign
regulatory requirements vary by country. In general, our products are regulated
outside the United States as medical devices by foreign governmental agencies
similar to the FDA. However, the time and cost required to obtain regulatory
approvals from foreign countries could be longer than that required for FDA
clearance and the requirements for licensing a product in another country may
differ significantly from the FDA requirements. We rely, in part, on our foreign
distributors to assist us in complying with foreign regulatory requirements.
We
may not be able to obtain these approvals without incurring significant expenses
or at all, and the failure to obtain these approvals would prevent us from
selling our products in the applicable countries. This could limit our sales
and
growth.
Our
future growth depends, in part, on our ability to penetrate foreign markets,
particularly in Asia and Europe. However, we have encountered difficulties
in
gaining acceptance of our products in foreign markets, where we have limited
experience marketing, servicing and distributing our products, and where we
will
be subject to additional regulatory burdens and other
risks.
Our
future profitability will depend in part on our ability to establish, grow
and
ultimately maintain our product sales in foreign markets, particularly in Asia
and Europe. However, we have limited experience in marketing, servicing and
distributing our products in other countries. In fiscal 2007 and the first
nine
months of fiscal 2008, less than 5% of our product revenues and less than 5%
of
our total revenues were derived from sales to customers outside the United
States and Canada. Our foreign operations subject us to additional risks and
uncertainties, including:
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our
customers' ability to obtain reimbursement for procedures using our
products in foreign markets;
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the
burden of complying with complex and changing foreign regulatory
requirements;
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language
barriers and other difficulties in providing long-range customer
support
and service;
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longer
accounts receivable collection
times;
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significant
currency fluctuations, which could cause our distributors to reduce
the
number of products they purchase from us because the cost of our
products
to them could fluctuate relative to the price they can charge their
customers;
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§
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reduced
protection of intellectual property rights in some foreign countries;
and
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§
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the
interpretation of contractual provisions governed by foreign laws
in the
event of a contract
dispute.
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Our
foreign sales of our products could also be adversely affected by export license
requirements, the imposition of governmental controls, political and economic
instability, trade restrictions, changes in tariffs and difficulties in staffing
and managing foreign operations. In addition, we are subject to the Foreign
Corrupt Practices Act, any violation of which could create a substantial
liability for us and also cause a loss of reputation in the market.
As
part of our business strategy, we intend to pursue transactions that may cause
us to experience significant
charges
to earnings that may adversely affect our stock price and financial
condition.
We
regularly review potential transactions related to technologies, product
candidates or product rights and businesses complementary to our business.
Such
transactions could include mergers, acquisitions, strategic alliances, licensing
agreements or co-promotion agreements. Our acquisition of Theseus Imaging
Corporation in October 2000 and the acquisition of NOMOS, in May 2004, are
examples of such transactions. In the future, if we have sufficient available
capital, we may choose to enter into such transactions. We may not be able
to
successfully integrate newly acquired organizations, products or technologies
into our business and the process could be expensive and time consuming and
may
strain our resources. Depending upon the nature of any transaction, we may
experience a charge to earnings which could be material.
Operating
results for a particular period may fluctuate and are difficult to
predict.
The
results of operations for any fiscal quarter or fiscal year are not necessarily
indicative of results to be expected in future periods. Our operating results
have in the past been, and will continue to be, subject to quarterly and annual
fluctuations as a result of a number of factors. As a consequence, operating
results for a particular future period are difficult to predict. Such factors
include the following:
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Our
net sales may grow at a slower rate than experienced in previous
periods
and, in particular periods, may
decline;
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Our
future sales growth is highly dependent on the successful introduction
of
our ClearPath device;
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Our
brachytherapy product lines may experience some variability in revenue
due
to seasonality. This is primarily due to three major holidays occurring
in
our first fiscal quarter and the apparent reduction in the number
of
procedures performed during summer months, which could affect our
third
fiscal quarter results;
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Estimates
with respect to the useful life and ultimate recoverability of our
carrying basis of assets, including goodwill and purchased intangible
assets, could change as a result of such assessments and
decisions;
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As
a result of our growth in past periods, our fixed costs have increased.
With increased levels of spending and the impact of long-term commitments,
we may not be able to quickly reduce these fixed expenses in response
to
short-term business changes;
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§
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Acquisitions
that result in in-process research and development expenses may be
charged
fully in an individual quarter;
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§
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Changes
or anticipated change in third-party reimbursement amounts or policies
applicable to treatments using our
products;
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Timing
of the announcement, introduction and delivery of new products or
product
enhancements by us and by our
competitors;
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§
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The
possibility that unexpected levels of cancellations of orders or
backlog
may affect certain assumptions upon which we base our forecasts and
predictions of future performance;
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Changes
in the general economic conditions in the regions in which we do
business;
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Unfavorable
outcome of any litigation; and
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Accounting
adjustments such as those relating to reserves for product recalls,
stock
option expensing as required under SFAS No. 123R and changes in
interpretation of accounting
pronouncements
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Being
a public company significantly increases our administrative
costs.
The
Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the
SEC
and listing requirements subsequently adopted by NASDAQ in response to
Sarbanes-Oxley, have required changes in corporate governance practices,
internal control policies and audit committee practices of public companies.
These rules, regulations and requirements have significantly increased our
legal, financial, compliance and administrative costs, and have made certain
other activities more time consuming and costly, as well as requiring
substantial time and attention of our senior management. We expect our continued
compliance with these and future rules and regulations to continue to require
significant resources. These new rules and regulations also may make it more
difficult and more expensive for us to obtain director and officer liability
insurance in the future, and could make it more difficult for us to attract
and
retain qualified members for our Board of Directors, particularly to serve
on
our audit committee.
Our
publicly-filed SEC reports are reviewed by the SEC from time to time and any
significant changes required as a result of any such review may result in
material liability to us and have a material adverse impact on the trading
price
of our common stock.
The
reports of publicly-traded companies are subject to review by the SEC from
time
to time for the purpose of assisting companies in complying with applicable
disclosure requirements and to enhance the overall effectiveness of companies
public filings, and comprehensive reviews of such reports are now required
at
least every three years under the Sarbanes-Oxley Act of 2002. While we believe
that our previously-filed SEC reports comply, and while we intend that all
future reports will comply in all material respects with the published rules
and
regulations of the SEC, we could be required to modify or reformulate
information contained in prior filings as a result of an SEC review. Any
modification or reformulation of information contained in such reports could
be
significant and result in material liability to us and have a material adverse
impact on the trading price of our common stock.
Market
volatility and fluctuations in our stock price and trading volume may cause
sudden decreases in the value of an investment in our common
stock.
The
market price of our common stock has historically been, and we expect it to
continue to be, volatile. The price of our common stock has ranged between
$0.50
and $5.65 per share in the fifty-two week period ended July 31, 2008. The stock
market has from time to time experienced extreme price and volume fluctuations,
particularly in the medical device sector, which have often been unrelated
to
the operating performance of particular companies. Factors such as announcements
of technological innovations or new products by our competitors or disappointing
results by third parties, as well as market conditions in our industry, may
significantly influence the market price of our common stock. Our stock price
has also been affected by our own public announcements regarding such things
as
quarterly sales and earnings. Consequently, events both within and beyond our
control may cause shares of our stock to lose their value rapidly.
In
addition, sales of a substantial number of shares of our common stock by
stockholders could adversely affect the market price of our shares. In
connection with our January 2008 sale of common stock and accompanying warrants,
we intend to file resale registration statements covering an aggregate of up
to 12,601,628 shares of common stock and 630,081 shares of common
stock issuable upon exercise of warrants for the benefit of the selling security
holders. The actual or anticipated resale by such investors under these
registration statements may depress the market price of our common stock. Bulk
sales of shares of our common stock in a short period of time could also cause
the market price for our shares to decline.
Item
6.
Exhibits
(a)
Exhibits.
Exhibits
No.
|
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Title
|
|
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3.1
|
|
Amended
and Restated Certificate of Incorporation of the Company, as amended
on
April 30, 2008 by the Certificate of Amendment of Amended Certificate
of
Incorporation, incorporated by reference to Exhibit 3.1 to the Company’s
Quarterly Report on Form 10-Q, filed on June 16, 2008.
|
3.2
|
|
Bylaws
of the Company, (as amended December 5, 2007), incorporated by reference
to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on
December 11, 2007.
|
10.1
|
|
Ninth
Amendment to Loan and Security Agreement, dated as of May 28, 2008,
by and
among the Company, North American Scientific, Inc., a California
corporation and Silicon Valley Bank, incorporated by reference to
Exhibit
10.1 to the Company’s Current Report on Form 8-K, filed on June 16,
2008.
|
10.2
|
|
Form
of Warrant to purchase common stock of Company, incorporated by reference
to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on June
16, 2008.
|
31.1
|
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a),
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
31.2
|
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a),
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to
Section
906 of the Sarbanes-Oxley Act of
2002
|
SIGNATURES
Pursuant
to the requirements 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.
NORTH
AMERICAN SCIENTIFIC, INC.
September
12, 2008
|
By:
|
/s/
John B. Rush
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Name:
|
John
B. Rush
|
|
|
Title:
|
President,
|
|
|
|
Chief
Executive Officer and
|
|
|
|
Acting
Chief Financial Officer
|
|
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|
(Principal
Executive Officer) and
|
|
|
|
(Principal
Financial Officer)
|
Exhibit
Index
Exhibit
#
|
|
|
3.1
|
|
Amended
and Restated Certificate of Incorporation of the Company, as amended
on
April 30, 2008 by the Certificate of Amendment of Amended Certificate
of
Incorporation, incorporated by reference to Exhibit 3.1 to the Company’s
Quarterly Report on Form 10-Q, filed on June 16, 2008.
|
|
|
|
3.2
|
|
Bylaws
of the Company, (as amended December 5, 2007), incorporated by reference
to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on
December 11, 2007.
|
|
|
|
10.1
|
|
Ninth
Amendment to Loan and Security Agreement, dated as of May 28, 2008,
by and
among the Company, North American Scientific, Inc., a California
corporation and Silicon Valley Bank, incorporated by reference to
Exhibit
10.1 to the Company’s Current Report on Form 8-K, filed on June 16,
2008.
|
|
|
|
10.2
|
|
Form
of Warrant to purchase common stock of Company, incorporated by reference
to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on June
16, 2008.
|
|
|
|
31.1
|
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a),
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
31.2
|
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a),
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to
Section
906 of the Sarbanes-Oxley Act of
2002.
|
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