Filed On 12/9/05 10:43am ET ˇ SEC File 0-50506 ˇ Accession Number 1000096-5-691
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
12/09/05 Assuretec Holdings Inc 10SB12G/A 5:151 1000096
Amendment to Registration of Securities of a Small-Business Issuer ˇ Form 10-SB
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10SB12G/A Amendment No. 1 117 486K
2: EX-2.1 Certification of Designation of Rights 15 55K
3: EX-10.1 Lease 17 79K
4: EX-10.2 Letter 1 6K
5: EX-23.1 Consents of Experts and Counsel 1 6K
FORM 10-SB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 1 to Form 10-SB
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GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(g) of
The Securities Exchange Act of 1934
Commission File Number: 000-50506
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AssureTec Holdings Inc.
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(Name of Small Business Issuer in its Charter)
Delaware
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(State or other jurisdiction of incorporation or organization)
20-0007441
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(I.R.S. Employer Identification No.)
200 Perimeter Road
Manchester, NH
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(Address of principal executive offices)
03103
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(Zip Code)
Issuer's telephone number:
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(603) 641-8443
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
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(Title of Each Class)
TABLE OF CONTENTS
PART I........................................................................1
ITEM 1 DESCRIPTION OF OUR BUSINESS.................................1
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............20
ITEM 3 DESCRIPTION OF PROPERTY....................................27
ITEM 4 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.............................................27
ITEM 5 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS............................................33
ITEM 6 EXECUTIVE COMPENSATION.....................................36
ITEM 7 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............43
ITEM 8 DESCRIPTION OF SECURITIES..................................45
PART II......................................................................48
ITEM 1 MARKET PRICE FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................48
ITEM 2 LEGAL PROCEEDINGS..........................................49
ITEM 3 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.......................49
ITEM 4 RECENT SALES OF UNREGISTERED SECURITIES....................50
ITEM 5 INDEMNIFICATION OF DIRECTORS AND OFFICERS..................56
PART F/S ...........................................................57
INDEX TO FINANCIAL STATEMENTS...........................................57
PART III..................................................................III-1
ITEM 1 INDEX AND DESCRIPTION OF EXHIBITS.......................III-1
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PART I
Under the Private Securities Litigation Reform Act of 1995, companies are
provided with a "safe harbor" for making forward-looking statements about the
potential risks and rewards of their strategies. Forward-looking statements
often include the words "believe," "expect," "anticipate," "intend," "plan,"
"estimate" or similar expressions. In this registration, forward-looking
statements also include:
o statements about our business plans;
o statements about the potential for the development, regulatory
approval and public acceptance of new services;
o estimates of future financial performance;
o predictions of national or international economic, political or market
conditions;
o statements regarding other factors that could affect our future
operations or financial position; and
o other statements that are not matters of historical fact.
These statements may be found under "Management's Discussion and Analysis,"
"Plan of Operations" and "Description of Business" as well as in this Amendment
1 to Form 10-SB generally. Our ability to achieve our goals depends on many
known and unknown risks and uncertainties, including changes in general economic
and business conditions. These factors could cause our actual performance and
results to differ materially from those described or implied in forward-looking
statements.
These forward-looking statements speak only as of the date of this
Amendment 1 to Form 10-SB. We believe it is in the best interests of our
investors to use forward-looking statements in discussing future events.
However, we are not required to, and you should not rely on us to, revise or
update these statements or any factors that may affect actual results, whether
as a result of new information, future events or otherwise.
ITEM 1 DESCRIPTION OF OUR BUSINESS
a. Organization of AssureTec Holdings
AssureTec Holdings, Inc. ("AssureTec Holdings", "Holdings" or "the
Company"- formerly named Tech Ventures, Inc.) was formed as a Delaware
corporation on June 12, 2002 by Element 21 Golf Company ("Element 21"- formerly
named BRL Holdings, Inc.), a publicly traded company quoted on the
Over-the-Counter Bulletin Board (the "OTCBB") under the symbol EGLF. Element 21
acquired all the common stock of AssureTec Systems, Inc., a privately held
company engaged in security solutions for identification documents ("AssureTec
Systems" or "Systems") in November 2001. On April 1, 2002, Element 21 exchanged
2,852,000 of the shares of Systems common stock that it had received in the
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acquisition of Systems for 5,704,000 shares of Element 21 common stock, from
substantially all the founders and consultants from whom Element 21's interest
in Systems was originally acquired. In addition, options to acquire 4,750,000
shares of Element 21 common stock then held by these individuals were cancelled.
As a result of these transactions and the issuance of additional shares of
Systems common stock to employees upon the exercise of stock options, Element
21's ownership of Systems decreased to 34.2% of the outstanding shares of
Systems' common stock. Element 21 undertook this latter transaction because
Systems, a development stage company, is in a entirely different industry that
requires a different management focus, a different business and strategic focus,
different operating characteristics, a different investment profile, different
sources of capital, and a different identity. It is our understanding that
Element 21 did not believe it could focus its financial and management resources
properly on its own business and still be able to generate sufficient capital to
support Systems as a wholly owned subsidiary.
After Holdings was formed by Element 21, Element 21 contributed to Holdings
all the Systems common stock owned by Element 21. At the time of the formation
of Holdings, these 2,716,900 shares of Systems common stock represented a 34.2%
ownership of Systems by Holdings. Element 21 also contributed into Holdings
stock ownership it held in three corporations, Biorelease Technologies, Inc.,
IJAM Inc, and Advanced Conductor Technologies, all of which were inactive and
carried by Element 21 at no value. A total of 5,433,800 shares of Holdings
common stock were issued to Element 21 Golf in consideration for the
contribution of Element 21's investment in Systems along with the other three
zero value entities contributed by Element 21. Since its formation, Holdings'
only material asset has been its investment in Systems.
Systems, a development stage company, was formed as a Delaware corporation
in October 2001. Systems' business is the selling of technology that identifies
and authenticates documents that are used to enable its customers to recognize
and validate a large variety of travel documents automatically. (See - The
Business of AssureTec Systems, Inc.).
In March 2004, Holdings acquired the remaining outstanding common stock of
Systems by issuing to each holder of the common stock of Systems two shares of
Holdings common stock in exchange for one share of Systems common stock (the
"Systems Exchange"). Since that date, Systems has been a wholly owned subsidiary
of Holdings. Immediately after the Systems Exchange, Holdings effected a
1-for-31 reverse split of Holdings common stock and securities convertible into
Holdings common stock. As part of the Systems Exchange, Holdings also issued one
share of Holdings Preferred Stock in exchange for each outstanding share of
Preferred Stock of Systems (a total of 601 shares).
In April 2004, Holdings commenced a private offering of its Series A-2
Preferred Stock, pursuant to which it issued 25.2 shares of Series A-2 Preferred
Stock to officers of the Company and of its subsidiary for gross proceeds of
$67,800 in cash and in satisfaction of a total of $184,200 of debt. The shares
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of Series A-2 Preferred Stock were later cancelled, upon approval of the Series
A-2 holders, and exchanged for a total of 252 shares of Series A-1 Preferred
Stock.
Between May 2004 and November 2005 the Company issued an additional 3,560
shares of Series A-1 Preferred Stock for aggregate proceeds of $3.2 million
pursuant to one private placement. As of November 15, 2005, there were a total
of 4,161 shares of Series A-1 Preferred Stock outstanding.
On September 1, 2005 Holdings initiated a private placement to accredited
investors only of up to $1 million of debentures with warrants to purchase
common stock. These debentures have a six month term and bear interest at 12%
annually. For each $3.00 of debentures purchased, Holdings issued one warrant to
purchase one share of Holdings common stock at $6.00 per share for a period of
one year from the date of investment or upon an initial public offering by
Holdings, whichever occurs earlier. This private offering raised gross proceeds
of $1.125 million and net proceeds of approximately $1.035 million and in
October 2005, the Company issued warrants to acquire 375,667 shares of Common
Stock.
On September 15, 2005 Holdings commenced a private offering to accredited
investors only of up to 1,250,000 shares of Holdings common stock. Pursuant to
this private offering, the Company is offering units for gross proceeds of
$12.00 per unit. Each unit is comprised of two shares of common stock at $6.00
per share with one warrant to acquire one share of common stock at $6.00 per
share, for each two shares of common stock purchased. The warrants issued in
this offering are exercisable for a period of one year from the date of
investment or upon an initial public offering by Holdings, whichever occurs
earlier. As of October 31, 2005, a total of 333,333 shares have been sold, and
166,667 warrants have been granted, pursuant to this offering raising gross
proceeds of $2.0 million, of which $1.125 million was applied to retire the
September 1, 2005 debentures.
AssureTec Holdings has no operations except for the activities of AssureTec
Systems, Inc. and, therefore, the following discussion of products, markets and
business opportunities relates solely to AssureTec Systems, Inc.
The financial information has been prepared using the historical records of
both AssureTec Holdings, Inc. and AssureTec Systems, Inc. The operations of
AssureTec Holdings, Inc. are limited and consist primarily of certain management
costs, such as compensation and third party management and accounting services.
Historical references to the Company's operations primarily consist of those
transactions executed by AssureTec Systems, Inc. in the development of its
integrated identity document management applications.
Element 21 intends to effect a spin-off of Element 21's interest in
Holdings (the "Holdings Spin-Off") pursuant to an exemption from registration
under the Securities Act of 1933, as amended (the "Act"). The Holdings Spin-Off
will be pro-rata to Element 21 stockholders of records as of October 4, 2002,
excluding, in accordance with the consent of such stockholders, shares held by
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stockholders who received shares of Element 21 common stock as of October 3,
2002, in connection with the acquisition by Element 21 of Systems.
b. The Business of AssureTec Systems, Inc.
AssureTec Systems is a development stage company that is a provider of
technology that enables security solutions to automatically recognize, manage
and authenticate identification documents. With its shipment in early 2004 of
hardware and software to be used at the international airport in Santiago,
Chile, AssureTec Systems commenced entry into this document security field as an
integrated solution provider combining its proprietary hardware and software
product lines - i-Dentify(TM) Reader/Authenticator and AssureID(TM) Software and
Knowledge Base, respectively. These products, combined with biometrics and
associated integration software provided by others, provide a cost-effective and
automated answer to an essential security question--"What is the risk of entry
associated with this identity as presented?"
In addition to the Chilean government, we have sold our products and
services either for production usage or pilot testing for several end-users
including the U.S. Transportation Security Agency, U.S. Department of State,
Ministry of Immigration of Australia, and multiple U.S. state and Canadian
provincial motor vehicle departments. Systems has generated revenues of
approximately $9,700, $290,000 and $767,000 in fiscal years ended June 30, 2003,
2004 and 2005, respectively. We are continuing to develop our business by
aggressively targeting end users and major systems integrators and value-add
resellers serving our target markets as described further below under "Target
Markets" and "Marketing Strategy."
Government-issued ID documents come in various sizes, colors and quality
levels. Unlike the field of telecommunications in which all manufacturers agree
in advance on conventions and standards so as to enable network services and
solutions, the world of passports and government-issued ID documents has few
standards. Countries issuing approximately 60% of the most widely used passports
subscribe to International Civil Aviation Organization ("ICAO") standards
developed by the airline industry almost 10 years ago. But even these "ICAO
standard" passports are quite often issued and printed "off spec." In addition,
national identity cards, drivers' licenses, and visas represent over a thousand
additional types of government issued ID documents worldwide.
Since the terrorist events of September 11, 2001 in the United States,
almost every government is struggling with increasing the security of its issued
documents in order to strengthen its borders and protect critical
infrastructure. New biometric and smart card solutions are proposed and tested
every day. Absent a cooperative effort to replace every issued identity document
by virtually every government in the world, identity documents that are already
issued in multiple formats and pursuant to multiple standards will be in
circulation for another twenty to thirty years. Additionally, when new smart
card and enhanced passport systems are placed in service, they will add to a
growing list of disparate documents that a border agent or facilities control
agent must monitor and evaluate.
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We sell our identity document authentication products and services
primarily through domestic and international resellers, distributors and systems
integrators into three target markets: border management, travel, and access
control.
We maintain a web site describing our products and services in detail
(http://www.assuretec.com).
Targeted Market Segments
The lack of worldwide standards for over 192 countries(1) results in
identification documents coming in various sizes, colors, quality levels, and
varying significantly in security features. Absent a cooperative effort to
replace all identity documents throughout the world, documents that are already
in use are likely to be in circulation for up to thirty years. By enabling
effective authentication methods to existing documents already in circulation,
we immediately add value and significance to the automated authentication and
security industry.
Public concern and new pending legislation that is affecting border
management and travel security is stimulating demand for improved security
operations with methods in place to protect the public's privacy. Based upon
published data, management believes that aggregate worldwide revenues for the
automated authentication and security industry could approximate $10 billion by
2008(2).
The following points relate to market opportunities, where our technology
could be specifically applied:
1) The Government Accounting Office (GAO) reports that in 2002, there
were about 440 million primary inspections conducted at the 330
primary land, air and sea entry points, by 4,775 inspectors(3) of
which 279 million inspections were of foreign nationals(4). In
addition, management estimates there are over several thousand
secondary land, air and sea entry points.
2) Commercial air travel use exceeded 1.5 billion passengers at over
5,000 public and 13,000 private airports(5).
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(1) www.countrywatch.com
(2) GAO, Brookings Institution, HISA, IATA, Lehman Brothers
(3) "Protecting the American Homeland; A Preliminary Analysis" 2002 Pg 32 and
ibid Report to Congressional Committees pg30
(4) ibid Report to Congressional Committees pg 54
(5) Department of Transportation Statistics December 2002
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3) There are 4.6 million commercial buildings, 500 skyscrapers, 12,000
chemical facilities and 300 major arenas and stadiums in the United
States(6).
4) There are over 50,000 bank branches across the United States(7) and
over 500,000 branches around the world that need time-effective, proof
of identification in opening a bank account or for transferring large
sums of money.
Market Advantages
We have established a market presence and preferred partnering status with
large integrators including Lockheed Martin Corporation, Unisys Corporation, and
Science Applications International Corporation (SAIC) along with specialty niche
providers for the United States and international border markets. Our
relationship with Unisys Corporation in providing security solutions to the
government of Chile significantly strengthens our visibility.
Several companies, with competing identification document reading devices,
have approached us for licensing opportunities. We expect to focus on the
integration of our software with a variety of devices being developed for the
growing commercial and governmental markets, thereby becoming the industry
standard for authentication and document classification devices. Additionally,
we expect to license or develop biometric and external database management
capability and to offer security solutions tailored to specific markets such as
transportation, banking, automated public access applications, and restricted
goods purchases including chemicals and firearms. Recently, we announced a
strategic alliance with Digimarc Corporation to provide solutions to state and
province driver's license issuing authorities to authenticate "breeder
documents" used to get new licenses.
Common Customer Need
We believe that we meet, in whole or in part, several common customer
requirements across all of our markets, which include our ability to:
(i) quickly and effectively identify and read any identification document
types issued by a myriad of organizations;
(ii) facilitate the correlation of biometric markers (facial, fingerprints,
etc.) and other security information between the document and its
presenter;
(iii) assess the risk that the document presented is unaltered, contains
the appropriate characteristics, and shows not to be expired;
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(6) "Protecting the American Homeland; A Preliminary Analysis" 2002 pg 47 & pg
55
(7) "Bank Geographic Structure" The Conference of State Bank Supervisors;
www.pacb.org/pacb_h11.htm
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(iv) maintain throughput at control point; and
(v) preserve and protect established personal privacy and security
protocols.
Our security products and services are designed to incorporate these goals
into market-driven solutions.
Our Platform and Management System
We have developed an integrated identity document management platform that
can automatically identify and validate many identity document types being
presented, regardless of whether the document has been printed according to ICAO
standards.
Furthermore, our platform includes a proprietary document specifications
library that ascertains the degree to which security features and known document
characteristics are present or absent in any document being presented, whether
ICAO standard or not. This capability enables a higher level of automation, with
a higher degree of public access and security risk management, to a border,
passenger check-in terminal, sensitive facility, or other control point.
As a subset of this document management software product, we offer document
authentication management for each document type supported. The software
utilizes a weighted risk-scoring scheme for each security feature confirmed, or
absent, based on the individual requirements of a particular access point.
Once a document that is already enrolled in our data library has been
recognized by our automated identity document management system, predetermined
protocols are applied according to the specific requirements of the local
control point. These rules and protocols drive the level of data extraction and
enable further analyses including: biometrics, document security feature
analysis (authentication), matching to watch lists, stolen document lists,
passenger manifests, and the like.
Because of its ability to recognize virtually any travel document in
circulation, our automated identity document management system can be deployed
immediately in public transportation or other infrastructure applications,
including existing airline, travel, and facility control systems, without
waiting for enrollment under new document issuance. For example, its proprietary
software can be programmed to develop transportation manifests automatically,
prioritize baggage handling, and integrate with security watch lists. The
software can work across networks of large facilities to deliver higher levels
of confidence as to the identity of those persons within the facility.
Comparison with Competitive Technologies
Competitive ID document automated reader technology is constrained by
reading limited areas of single document types. On the other hand, because of
its omni-font capability and advanced pattern matching, our i-Dentify(TM)
document management system reads the entire document, enabling it to extract
substantially more data from a travel document than that contained in the
machine-readable portion of the document. Further, the technology can be applied
to any travel document types in its library.
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Our ability to recognize a large number of different document types is a
direct result of our patent-pending technology that recognizes any document
registered in its proprietary document library. By using our proprietary reader
to register issued document standards, we achieve a high level of sensitivity
and resolution by controlling image quality and lighting uniformity. This
maximizes the amount of information being read.
The resulting document library knowledge base has been built by registering
both ICAO and non-ICAO documents in its knowledge base, thus ensuring a broad
and high level of document classification and authentication. Also, the
machine-readable portion of the document is the least secure and easiest portion
for a forger to modify.
Our ability to read and extract data from the secure portion of a document
while matching the data to that contained in the machine-readable portion
enables the processing of a significantly higher percentage of travel documents
with higher levels of security and automation.
The automated manner used by the system to extract data permits automation
of a control point with only limited manual clerical intervention. Our high
level of automation allows inspectors to be "face to face," evaluating human
behavior, rather than "heads-down," interacting with a keyboard.
Processing time is another significant advantage of our document management
software. We use our proprietary knowledge-based software hierarchy to process
only the images and information necessary to identify a particular document and
complete the processing protocol. This makes the system faster and keeps lines
moving.
We believe our performance advantages will allow us to capture
substantial market share.
Marketing Strategy
Target end-users of our products and services include security
management firms and solution providers, corporate trustees of facility
security, domestic government agencies, U.S. Department of Homeland Security,
U.S. Transportation Security Agency, U.S. Department of State, U.S. Customs,
state departments of motor vehicles, and comparable organizations in foreign
countries. Some of the end-users currently using our products and services
either in production usage or pilot testing include the Chilean government, U.S.
Transportation Security Agency, U.S. Department of State, Ministry of
Immigration of Australia, and multiple U.S. state and Canadian provincial motor
vehicle departments. There is no assurance that any of these entities will
continue to be end-users or that we will secure new end-users.
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Our marketing approach seeks to generate product "pull," through our
program of accessing and influencing high-level agency and government
specifiers, as described below.
We distribute our products primarily through reseller and systems
integrator channels that have significant leadership positions in each targeted
market segment. For U.S. government applications such as borders and
transportation, we intend to create market "push" through relations with large
government integrators such as: Northrop-Grumman, Lockheed Martin, Unisys, CSC,
SAIC, and comparable integrators located overseas. We currently have reseller
agreements with, or purchase orders from, Lockheed Martin, Unisys, SAIC, Bearing
Point, Digimarc and other systems integrators, however, there is no assurance
that we will be able to maintain these working relationships or establish any
additional relationships.
"Pull" is created by regular publication and presentation of projects by
our founders and product managers before domestic and international industry
forums, supplemented by personal visits to government specifiers. We expect that
this "Pull" combined with the marketing efforts of the leading integrators will
carry our products into these government channels.
End users routinely conduct pilot programs to evaluate new technologies. We
have products and services currently being used in several pilot programs,
including international travel applications, banking applications, and border
management applications, however, there is no assurance that these pilots will
progress from pilot testing into fully-deployed programs. We expect our
technology will be a participant in several additional pilot programs both
domestically and overseas, although there is no assurance that this will occur.
Specific Products and Services
We offer an integrated solution that consists of an identity document
manager software platform, a proprietary document library that can be "trained"
to recognize almost any document to enable operation without manual
intervention, and a proprietary, full color, digital document reader. Our
integrated solution offers competitive security solutions without disrupting the
efficient flow of people and products. Appropriate privacy protection for all
citizens is enabled as a matter of design.
The i-DentifyTM Document Reader is the basis of our family of advanced ID
Reader/Authenticator products. Current models have the capability of reading and
authenticating passports and other travel documents regardless of which set of
government standards or to which Travel Document standards they conform, as well
as providing the capability of reading and authenticating driver's licenses and
state-issued ID cards. The product is capable of being programmed to read and
authenticate virtually any document that can be placed in a 3" x 5" viewing
window.
i-DentifyTM products incorporate patented and patent-pending technologies
to inspect and analyze a document, enable biometrics, link the presenter to that
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document, and enable a search against relevant databases or "watch" lists to
derive an ultimate risk assessment "score". Most often, these processes happen
in a matter of seconds, in a manner that minimizes invasion of an individual's
privacy.
The AssureID(TM) Software and Document Library Knowledge Base is designed
to be a software platform that will serve as an enterprise-wide central document
authentication and analysis solution.
Our ability to recognize a large number of different document types is a
direct result of our patented(8) and patent-pending technology that recognizes
any document registered in its proprietary document library (see Proprietary
Information following). By using our proprietary reader to register issued
document standards, we achieve the highest level of sensitivity and resolution
by controlling image quality and lighting uniformity. This maximizes the amount
of information being read.
The resulting document library knowledge base has been built by registering
both ICAO and non-ICAO documents in its knowledge base, thus ensuring the
broadest and highest level of document classification and authentication. We
currently do not support other document readers, but we may in the future modify
our software to enable licensing of our software to other competitive reader
manufacturers.
As a subset to the overall platform, we offer rules-based document
authentication management for each document type supported, along with a
weighted risk-scoring scheme for each security feature confirmed or found absent
based on the requirements of a particular control or access point.
The i-DentifyTM Reader/Authenticator and AssureID(TM) Software and Document
Library Knowledge Base platform is designed to permit easy integration into
existing systems, centralized management of multiple clients, and as a secure
node, to link to disparate, trust-authority databases.
We offer Maintenance Services for its i-DentifyTM Readers and Subscription
Services for our AssureID(TM) Software and Document Library Knowledge Base to
insure end-users stay current with the latest software revisions and updates to
the Library Knowledge Base of documents. While these services are optional, we
believe that the majority of our customers will opt for these services, however,
we cannot provide any assurances that our customers will purchase post-contract
support from us.
Competition
Currently, the market for ID document readers is fragmented, without a
dominant player. The competitive field is comprised of low profile divisions of
large corporations or small companies. Both lack any real differentiating
competitive advantage. We believe that our patent pending intellectual property
and advanced technology platform, including its ability to read an entire
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8 The Company was issued patent #6,785,405 B2 on August 31, 2004 entitled
Apparatus and Method for Document Reading and Authentication with 22
approved claims.
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document and process a document quickly with its omni-font capability and
advanced pattern matching against any document registered in its proprietary
document library knowledge base, will allow it to dominate the market,
effectively creating a barrier to entry for competing solutions that can meet
the demanding throughput and forensic requirements of the emerging applications;
however, there is no assurance that other companies will not develop competing
solutions.
We believe that companies such as Canadian Bank Note (Canada), AIT Corp
(Canada, now affiliated with 3M), Imaging Automation (9), Bundesdruckerei
(Germany), OCE (Germany), Dynjab (Australia), Rochfort-Thompson (U.K.), Smiths
Heimann Biometrics and DataStrip (U.K./U.S.) have only some of the necessary
components of the technology necessary to deliver a competitive solution. These
companies currently occupy an ancillary place in the overall security market.
Although there is no assurance, they may, in fact, represent a strategic source
of funding (revenue or equity) as they seek to enhance their product
capabilities and gain access to our platform technology.
The market's evolution towards a better definition of its needs and
required solutions is influencing the strategic direction of several of the
players. 3M acquired AIT in 2002 to access its reader technology and passport
issuance position. Identix acquired Visionics, forming a half-billion dollar
biometrics enterprise. Viisage acquired Imaging Automation. Companies such as
Intellicheck, IDLogix and others are trying to adapt existing products
originally developed for underage screening applications to the general document
reader/authenticator market. Numerous biometrics companies such as Viisage,
BioKey, Identix and others are looking for broader ways to deliver their limited
biometrics offerings.
Proprietary Information
We have been granted one patent (US Patent 6,785,405 B2, "Apparatus and
Method for Document Reading and Authentication" issued on August 31, 2004) and
we have applied for four additional U.S. patents in the fields of document
automation, security and authentication, respectively. Each of these remaining
patent applications has been petitioned for accelerated review based on its
application to counter-terrorism activities. There is no assurance that these
remaining patent applications will ever be issued or, if issued, that our
business will not be challenged by a competitor as infringing on its respective
issued patent. Our intellectual property includes our web site, web site
organization, our domain name, and the name, "AssureTec Systems, Inc."
Effects of Existing or Probable Government Regulation
Currently, we are not subject to direct federal, state or local regulation
other than regulations applicable to businesses generally or directly applicable
to privacy regulation. However, as we begin to establish an installed base and
our systems become more widely employed, of which there is no assurance, it is
possible that a number of laws and regulations may become applicable along with
other laws and regulations which will be adopted with respect to ID document
management.
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9 In September 2004, subsequent to the original date of filing this Form
10SB, Viisage acquired Imaging Automation.
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We are not certain how our business operations and liability may be
affected by the application of existing laws governing issues such as property
ownership, copyrights, encryption and other intellectual property issues,
taxation, libel, qualification to do business, and personal privacy. The vast
majority of these laws were adopted prior to the events of September 11, 2001 in
New York and Washington, D.C. As a result, they do not contemplate or address
the unique issues of ID document management and related technologies. Changes in
laws intended to address these issues could create uncertainty in the
marketplace. This uncertainty could reduce demand for our services; increase the
cost of doing business as a result of litigation costs, and/or increase service
delivery costs.
Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") imposes a wide
variety of new regulatory requirements on publicly held companies and their
insiders. Many of these requirements will affect us. For example:
o Our chief executive officer and principal financial officer must now
certify the accuracy of all our periodic reports that contain
financial statements;
o At a later date, our periodic reports must disclose our conclusions
about the effectiveness of our disclosure controls and procedures; and
o On and after July 30, 2002, we may not make any loan to any director
or executive officer, and we may not materially modify any loans that
existed prior to that date.
The Sarbanes-Oxley Act has required us to review our current procedures and
policies to determine whether they comply with the Sarbanes-Oxley Act and the
new regulations promulgated thereunder. We will continue to monitor our
compliance with all future regulations that are adopted under the Sarbanes-Oxley
Act.
Penny Stock
If traded, our common stock would likely be a "penny stock" as defined in
Rule 3a51-1 of the Securities and Exchange Commission. Penny stocks are stocks:
o with a price of less than five dollars per share;
o that are not traded on a "recognized" national exchange;
o whose prices are not quoted on the NASDAQ automated quotation system;
or in issuers with net tangible assets less than $2,000,000, if the
issuer has been in continuous operation for at least three years, or
$5,000,000, if in continuous operation for less than three years, or
with average revenues of less than $6,000,000 for the last three
years.
Section 15(g) of the Exchange Act and Rule 15g-2 of the Securities and
Exchange Commission require broker/dealers dealing in penny stocks to provide
potential investors with a document disclosing the risks of penny stocks and to
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obtain a manually signed and dated written receipt of the document before making
any transaction in a penny stock for the investor's account. You are urged to
obtain and read this disclosure carefully before purchasing any of our shares.
Rule 15g-9 of the Securities and Exchange Commission requires
broker/dealers in penny stocks to approve the account of any investor for
transactions in these stocks before selling any penny stock to that investor.
This procedure requires the broker/dealer to:
o get information about the investor's financial situation, investment
experience and investment goals;
o reasonably determine, based on that information, that transactions in
penny stocks are suitable for the investor and that the investor can
evaluate the risks of penny stock transactions;
o provide the investor with a written statement setting forth the basis
on which the broker/dealer made his or her determination; and
o receive a signed and dated copy of the statement from the investor,
confirming that it accurately reflects the investor's financial
situation, investment experience and investment goals.
Compliance with these requirements may make it harder for our stockholders
to resell their shares.
Reports to Security Holders
We are required to file periodic reports with the SEC pursuant to the
requirements of the Securities Exchange Act of 1934. These reports include,
among others, a Quarterly Report on Form 10-QSB within 45 days after the end of
each of the first three quarters of the Company's fiscal year, and an Annual
Report on Form 10-KSB within 90 days after the end of the Company's fiscal year.
You may read and copy any materials we file with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may also
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC at (http://www.sec.gov).
Section 14(a) of the Exchange Act requires all companies with securities
registered pursuant to Section 12(g) of the Exchange Act to comply with the
rules and regulations of the Securities and Exchange Commission regarding proxy
solicitations, as outlined in Regulation 14A. Matters submitted to stockholders
of our Company at a special or annual meeting thereof or pursuant to a written
consent will require our Company to provide our stockholders with the
information outlined in Schedules 14A or 14C of Regulation 14; preliminary
copies of this information must be submitted to the Securities and Exchange
Commission at least 10 days prior to the date that definitive copies of this
information are forwarded to our stockholders.
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Small Business Issuer
The integrated disclosure system for small business issuers adopted by the
Securities and Exchange Commission in Release No. 34-30968 and effective as of
August 13, 1992, substantially modified the information and financial
requirements of a "Small Business Issuer," defined to be an issuer that has
revenues of less than $25,000,000; is a U.S. or Canadian issuer; is not an
investment company; and if a majority-owned subsidiary, the parent is also a
small business issuer; provided, however, an entity is not a small business
issuer if it has a public float (the aggregate market value of the issuer's
outstanding securities held by non-affiliates) of $25,000,000 or more. We are
deemed to be a "small business issuer."
Cost of Environmental Compliance
We do not believe that the production and use of our products represents
any significant environmental impact or risk since its products are constructed
of readily available commercial components.
Sources and Availability of Raw Materials
We currently outsource our manufacturing of hardware instrumentation to a
private company, Jewell Instruments, located approximately one mile from our
facilities in Manchester, New Hampshire. The Company has qualified an additional
manufacturer, EPE Corporation of Manchester, New Hampshire, but is not currently
using its services. Camera components, lenses and associated circuit boards are
available from at least two suppliers and we believe this will result in no
significant risk of supply interruption. Current principal suppliers include:
Pixelink of Ottawa, Canada; Sunex Inc. of Carlsbad, CA; Optical Devices/Miyakawa
Corp. of Tokyo, Japan; and Abbyy Software House of Fremont, CA.
Research and Development
Costs incurred prior to technological feasibility of our technology
products are expensed as research and development costs. From inception to June
30, 2005 the Company and its subsidiary have incurred approximately $5.8 million
in research and development costs. We have not capitalized any research and
development costs to date.
Employees
At June 30, 2005, we employed 14 full-time employees.
Risk Factors
Our business is subject to many risk factors; including the following
(references to "our," "we" and words of similar meaning in these Risk Factors
refer to the Company and to AssureTec Systems):
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From our inception, we have recognized revenue of approximately $1 million
and have had significant losses to date and we might not be able to achieve
meaningful revenues or earnings in the future. AssureTec Systems has been
operational since October of 2001 and has achieved revenues well short of those
necessary to allow the Company to break even. The consolidated development stage
loss from inception is in excess of $12 million.
We have limited assets, working capital and negative shareholders' equity,
and we might not be able to continue in operation without the infusion of
additional capital. We have very limited assets; negative working capital and
limited financial resources. We continue in business by raising capital from
investors and soliciting advances from affiliated parties. We cannot be certain
that such capital and advances will be available to the Company when we need
them and under terms favorable to the Company. Our financial condition may not
improve.
Our independent auditors' report indicates a substantial doubt about our
ability to continue as a going concern which means that an investment in our
shares is extremely risky. Our auditors' report (see page F-1) indicates that
there is substantial doubt about our ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. If our business fails, the value of any capitalized
items would be adjusted to reflect a distressed market value. We currently have
no cash reserves and rely on cash from capital raised from investors. There is
no assurance these funds will continue to be available, however, we have
operated in this manner since our inception. Now that we have begun to ship
product, it is more likely outside investment capital can be found, but there
can be no assurance that outside financing will be available to us. In any
event, we cannot continue without continuing additional capital from affiliates
or outside investment capital.
We expect to continue to incur losses at least through fiscal year end June
2006 and we may not ever operate profitably. We have incurred losses since
inception through June 30, 2005 of approximately $12 million. During that
period, the Company has generated just over $1 million in revenues. We expect,
but cannot be sure, that our revenues will increase during the next several
fiscal years. Unless revenues in excess of $2 million annually can be generated,
we will continue to run a deficit. There is no assurance that we will reach
these annual revenues or can we be assured that we can operate profitably.
Because we need to raise additional funds and these funds might not be
available to us when we need them, we might need to change our business plan,
sell or merge our business, or face bankruptcy. From its inception in October
2001 through June 30, 2005, we have raised a total of $2.9 million from
unaffiliated investors. Further, as of this date, affiliates of Dr. Reeves have
invested $958,000 in equity of the Company and have advanced the Company an
additional $557,374. AssureTec Systems' employees have voluntarily agreed to
defer $3.5 million in unpaid salaries and related compensation expenses, of
which $2.2 million was converted in December 2004, into 769,000 options to
purchase a like number of shares of Common Stock in the Company. Without this
invested capital, these advances and employee deferrals, we could not have
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continued in business. See "Certain Relationships And Related Transactions"
beginning at page 43. We will require additional capital to provide tooling for
manufacturing certain hardware products and will need to spend money for travel
and collateral materials in order to develop cash flow. Additional capital might
not be available to us on favorable terms when required, or at all. In addition,
our issuance of equity or equity-related securities will dilute the ownership
interest of existing stockholders and our issuance of debt securities could
increase the risk that we may not survive.
We cannot be certain that our products will continue to operate as planned.
Currently we have produced approximately 265 hardware units and multiple
releases of development software, which have been released to about a dozen
integrators and smaller developers in the U.S. and in Europe. We have delivered
60 units of the i-DentifyTM reader authenticator to a reseller in Chile and
delivered 90 units to a reseller as part of a pilot for the Transportation
Security Administration, both of whom reported that both hardware and software
operated as planned. Notwithstanding the foregoing, we have too few of our
products in service to allow us to be certain that our products will operate as
planned. If our products do not meet customers' needs and expectations, we will
lose customers and our business could fail.
Our chief executive officer, who is also our sole director (10), has
majority control over our common stock and is a major creditor, which will allow
him to have significant influence over our affairs. After consummation of the
reverse stock split by Holdings and the Systems Exchange, R.T. Robertson
Consultants, Inc. ("RTRC') and Robertson Financial Advisors, LLC, ("Advisors")
each controlled by Dr. Reeves, our CEO, owns a combined 958 shares of AssureTec
Holdings' Series A-1 Preferred Stock. (The "Holdings Preferred"). Each share of
the Holdings Preferred, which is described in greater detail in "Description of
Securities" beginning on page 45, is convertible into 322.58 shares of our
common stock and, as a result, as of June 30, 2005 these two entities
beneficially owned approximately 309,032 shares, or approximately 16.2% of our
common stock. In addition, (i) the Holdings Preferred is entitled to vote on an
"as converted" basis on all matters in which the common stock is entitled to
vote, and (ii) the holders of our Preferred Stock are entitled to elect three of
up to seven directors of AssureTec Holdings. RTRC is 90% owned by Dr. Reeves'
wife, Dr. Reeves is Advisors' Managing Director and controlling member and,
therefore, Dr. Reeves is deemed to beneficially own the shares of stock owned by
RTRC and Advisors. Taking into account the shares owned by Dr. Reeves directly,
along with the shares owned by RTRC and Advisors, Dr. Reeves beneficially owns
511,365 shares, or approximately 26.8% of our common stock. As a result, Dr.
Reeves can exercise substantial control of the affairs of AssureTec Holdings.
Dr. Reeves and his affiliates have also made advances to AssureTec Systems
and, therefore, his interest as a creditor may be different from the interests
of the other stockholders. For example, Dr. Reeves may desire to cause us to use
our funds to repay these advances under terms that may cause us to divert funds
away from operations at critical times, or that may cause us to fail. Dr. Reeves
-------------------
10 As of the date of this Amended Form 10SB, Dr. Reeves is the Company's sole
director.
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could use his existing control and his position as creditor to acquire more of
our shares which would give him even more control. Any such actions by Dr.
Reeves would not require shareholder approval. As of June 30, 2005 the Company
owed Dr. Reeves' affiliates approximately $557,374 exclusive of $126,972 in
unpaid interest on advances.
We might not succeed in establishing our technologies in the marketplace,
which would adversely affect customer acceptance and our revenues. The market
for document automation and authentication products is new since September 11,
2001. Although we believe our products and technologies will be integrated into
new U.S. exit/entry border technologies and other document automation and
authentication technologies in the U.S. and around the world, this is a new,
untested market. We cannot offer assurances that we will have the capital and
technological advantage to compete with larger and better financed companies in
this developing market nor can we offer assurances that the market for automated
identity document authentication will ever develop.
We must enter into strategic relationships with integrators of our
technology, and if we fail to develop, maintain or enhance these relationships,
we might not be able to attract and retain customers, generate adequate market
exposure, build our AssureTec Systems brand, or enhance our sales and marketing
capabilities. We believe that our ability to attract customers, generate
interest in our hardware and software products, facilitate broad market
acceptance of our services and of the AssureTec Systems brand, and to enhance
our sales and marketing capabilities depends on our ability to develop and
maintain strategic relationships with related product integrators that can
deliver product solutions to customers in diverse product areas. If we are
unsuccessful in developing or maintaining these relationships, or if these
relationships do not assist us in attracting or retaining customers, it will be
difficult to grow our business. At the present time, we rely on these
integrators to adapt our software development kit to specific applications in
border control applications facilities access control systems, and public
transportation solutions.
The success of our business depends on selling our products and services to
a large number of government and commercial integrators and we have no current
relationships or arrangements with these integrators. We believe that our
reliance on unaffiliated companies to integrate our products into products
developed by these respective companies for specific market applications as our
primary marketing strategy will enable us to develop a customer base more
quickly and cost effectively than the employment of traditional marketing
methods involving sizable development, a sales staff, and advertising to sell
products directly to end users. There can be no assurance that this belief or
strategy is correct. As a new company with new technology applications, we lack
historic recognition in the market. Our success depends, in large part, on
attracting a large number of application integrators that advertise in the
traditional media and that have existing end user relationships and product
support. Our success is also dependent, in large part, upon ensuring that these
customers remain loyal long-term customers to the integrators, resulting in a
continuing flow of our product into theirs. Furthermore, we may be required to
-17-
incur higher and more sustained advertising and promotional expenditures than we
currently anticipate in order to create direct market demand for our products.
As a result, we might not be able to achieve or sustain profitability.
Competition from traditional providers of border passport readers could
result in price reductions and decreased demand for our automated document
authenticator technology that could cause our business to fail. The market for
document readers is competitive. Although we believe our shorter processing
speed and ability to read and automatically authenticate identification
documents will provide additional value to our potential target market,
traditional and established document reader companies may lower their prices to
compete with us. Competition is expected to intensify in the future, which also
could result in price reductions, fewer customer orders and reduced gross
margins. We currently compete with, or may in the future compete with, a variety
of companies located in the United States, Canada and Europe that provide a part
of what our products provide. Many of these companies are established and have
greater financial, technical, marketing and other resources than we do.
Additionally, many of these organizations have proven operating histories, which
we lack. Although we expect to compete on the basis of the quality and
uniqueness of our product and services and, to a lesser extent, on the basis of
price, this strategy may not be successful.
We might not be able to adequately protect or enforce our intellectual
property rights due to our lack of funds and if we failed to protect our rights,
we could lose market recognition, which would reduce our sales. Our intellectual
property includes one patent and four patent applications covering the process
of identifying documents and validating the existence or absence of securities
features to determine a document's validity. Any encroachment upon our
proprietary information, the unauthorized use of our trademark, the use of a
similar name by a competing company, or a lawsuit initiated against us for our
infringement upon another company's proprietary information or improper use of
existing trademarks could affect our ability to create brand name recognition,
cause customer confusion, and/or have a detrimental effect on our business.
Litigation or proceedings before the U.S. Patent and Trademark Office or the
European Patent Office might be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets and domain name, and
to determine the validity and scope of the proprietary rights of others. Any
litigation or adverse proceeding could result in substantial costs and diversion
of resources and could seriously harm our business and operating results. If and
when we develop markets in Europe and Asia and other places internationally, the
laws of many countries do not protect our proprietary rights to as great an
extent as the laws of the United States.
It is possible that third parties might claim infringement by us with
respect to past, current or future technologies, although we do not expect any
such claims. We expect that participants in our markets will increasingly be
subject to infringement claims as the number of services and competitors in our
industry segment grows. Any claim, whether meritorious or not, could be
time-consuming, result in costly litigation, and could cause service upgrade
delays or require us to enter into royalty or licensing agreements. These
royalty or licensing agreements might not be available on terms acceptable to us
or at all.
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Our systems and operations, and those of our customers, are vulnerable to
natural disasters and other unexpected problems, which could reduce customer
satisfaction and reduce our sales. Substantially all of our computer and
hardware and our systems infrastructure are housed at our facility in
Manchester, New Hampshire. Our systems and operations are vulnerable to damage
or interruption from fire, flood, power loss, telecommunications failure and
similar events. In addition, our servers are vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions that could lead to
interruptions, delays, loss of data or the inability to sell and support our
network of software products and customer support. Currently, we do not have
fully redundant systems or a formal disaster recovery plan and do not carry
business interruption insurance to compensate for losses that could occur. Our
customers also face these risks. We depend on the efficient operation of
Internet connections from customers to our systems. These connections, in turn,
depend on the efficient operation of web browsers, Internet service providers
and Internet backbone service providers, all of which have had periodic
operational problems or outages. Any system delays or failure or loss of data,
whatever the cause, could reduce customer satisfaction with our applications and
services together with the number of visits to our website and also could harm
our sales of ID document services and data base libraries. A significant barrier
to online communications is the secure transmission of confidential information
over public networks, and our failure to prevent security breaches could harm
our business. The service providers rely on encryption and authentication
technology to effect secure transmission of confidential information. Advances
in computer capabilities, new discoveries in the field of cryptography, or other
developments might result in a compromise or breach of the technology used by
the service providers to protect customer data. Any compromise of their security
could harm our reputation and expose us to a risk of loss or to litigation and
possible liability and, therefore, result in harm to our business. In addition,
a person who is able to circumvent security measures could misappropriate
proprietary information or cause interruptions in our operations. To date, we
have had no security breaches.
The loss of the services of key employees could have a negative impact on
our business or cause it to fail. At June 30, 2005, the Company had 14
employees, several of whom have not been paid their full compensation for many
months. Any one or all employees could decide to leave us before we can assure
the employees' long-term services, which may not happen. If we lose the services
of these key employees who have spent many months developing our products and
technology, our business could be harmed seriously. In addition, we may not be
able to attract new, skilled employees.
If the market for automated document authentication fails to gain
widespread acceptance, our business could fail. The market for ID document
authentication is in its infancy. If this market does not gain widespread
acceptance, our business could fail. Our success will depend on our ability to
engage both end users and product integrators, who have established existing
customer bases in our targeted markets of borders, travel and transportation and
facilities access control. In addition, a large proportion of our early
customers might begin using our products because they are new and different
rather than because they believe our products represent the best long-term
solution. These early customers may use our products only once or twice and then
return to more traditional solutions.
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We may not be able to respond to rapid technological changes to serve our
customers and meet their expectations and we may lose customers as a result. As
the document authentication and automation industry evolves, we will need to
license leading technologies useful in our business, enhance our existing
services, develop new services and technology that address the increasingly
sophisticated and varied needs of our prospective customers, and respond to
technological advances and emerging industry standards and practices on a
cost-effective and timely basis. We might not be able to successfully implement
new technologies, proprietary technology and transaction-processing systems to
customer requirements or emerging industry standards. If we are unable to do so,
it could adversely impact our ability to build the AssureTec Systems brand and
to attract and retain customers.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read together with our financial statements and related
notes included elsewhere in this Amendment 1 to Form 10-SB. This Amendment 1 to
Form 10-SB, including the following discussion, contains trend analysis and
other forward-looking statements within the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Any statements in this
Amendment 1 to Report on Form 10-SB that are not statements of historical facts
are forward-looking statements. These forward-looking statements are based on a
number of assumptions and involve risks and uncertainties. Actual results may
differ materially from those set forth in such forward-looking statements as a
result of factors set forth elsewhere in this Amendment 1 to Form 10-SB,
including under "Risk Factors."
Overview
We develop integrated identity document management applications for use in
government and commercial security applications. Our proprietary document
management platform automatically reads, records and authenticates
identification documents, such as passports, visas or driver's licenses, through
our proprietary database software thereby reducing the risk of human error in
detecting falsified or tampered forms of identification. We are considered to be
a development stage enterprise, as we have not generated significant revenues
since our inception. We are subject to a number of risks similar to those of
other companies in an early stage of development. Principal among these risks
are dependencies on key individuals, competition from other substitute products
and larger companies, the successful development and marketing of our products
and the need to obtain adequate financing necessary to fund our future
operations.
-20-
Our historical results of operations have been prepared using the
historical accounting records of AssureTec Holdings and our wholly owned
subsidiary AssureTec Systems. Although our ownership of AssureTec Systems was
less than 50% prior to March 31, 2004 (the date of the Systems Exchange) we
consolidated the results of these two entities because the two companies shared
common management and control. The operations of AssureTec Holdings are limited
and consist primarily of certain management costs, such as compensation and
third party management and accounting services. Historical references to our
operations primarily consist of those transactions executed by AssureTec Systems
in the development of our integrated identity document management applications.
Our historical results of operations and financial condition do not include
any adjustments relating to the recoverability of assets or the classification
of liabilities that might be necessary should we be unable to continue as a
going concern. Our independent auditors' report for the fiscal year ended June
30, 2003 indicates that there is substantial doubt about our ability to continue
as a going concern.
Plan of Operation
Since our inception on October 2, 2001, our operations have been primarily
funded through:
(i) cash payments made on our behalf by RTRC and Advisors, corporations
owned and controlled by our chief executive officer and his family,
(ii) the voluntary deferral of employee salaries and wages and consultant
fees and
(iii) the raising of $2,878,000 from unaffiliated investors as of June 30,
2005.
Currently, without further salary deferrals and stock for services, our
cash expenses, on an annualized basis, are expected to run at an annual level of
$2.5 million. We believe that we will require at least approximately $3,000,000
to fund our operating plan through fiscal year 2006.
We currently have limited cash and working capital. Our plan of operations
is highly dependent on our ability to raise significant additional capital.
Without this capital, it is unlikely we will be able to execute our operating
plan or continue as a going concern. We intend to attempt to raise this capital
from individual investors and other private equity sources, and we also may seek
funding from industrial partners. At the present time, we have no commitments
from any sources.
We intend to use the proceeds of any financing transactions primarily to
market our existing technology products and enhance our sales and marketing
capabilities. We believe our success, if any, in these endeavors will be highly
determinative of our ability to become profitable. As part of our strategy, we
will continue to attempt to attract and develop strategic partnerships with
related security product integrators. In September 2003, we initiated the sale
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of our technology products through a strategic partner to the government of
Chile. In late 2004 and early 2005 we delivered units to our reseller in the
U.S. who won the pilot for the Transportation Worker Identity Credential
program. We recently announced a development relationship with Digimarc
Corporation for applications related to the recently passed federal "Real ID
Act" which requires the states to issue more secure drivers' licenses. We
believe that strategic partnerships like these will allow us to better
distribute our technology in the United States and worldwide.
On September 1, 2005, we initiated a private placement to accredited
investors of debentures with warrants to purchase common stock. These debentures
have a six month term and bear interest at 12% annually and are to be repaid at
the rate of one dollar of debenture for each two dollars raised in a subsequent
offering. For each $3.00 of debentures purchased, Holdings issued one warrant to
purchase one share of Holdings common stock at $6.00 per share for a period of
one year from the date of investment or upon an initial public offering by
Holdings, whichever occurs earlier. This private offering raised gross proceeds
of $1.125 million and net proceeds of approximately $1.035 million and in
October 2005, the Company issued warrants to acquire 375,667 shares of Common
Stock.
On September 15, 2005, we commenced a private offering to accredited
investors of up to 1,250,000 shares of Holdings common stock. Pursuant to this
private offering, the Company is offering units for gross proceeds of $12.00 per
unit. Each unit is comprised of two shares of common stock at $6.00 per share
with one warrant to acquire one share of common stock at $6.00 per share, for
each two shares of common stock purchased. The warrants issued in this offering
are exercisable for a period of one year from the date of investment or upon an
initial public offering by Holdings, whichever occurs earlier. As of October 31,
2005, a total of 333,333 shares have been sold, and 166,667 warrants have been
granted, pursuant to this offering raising gross proceeds of $2.0 million, of
which $1.125 million was applied to retire the September 1, 2005 debentures.
We will use the balance of new proceeds from these offerings, if any, after
retiring the debenture, primarily to strengthen our sales and marketing efforts
and to better position us for another private placement or a public offering. We
believe that this additional outside financing will be available to us; however,
there can be no assurance that we will obtain this additional financing in an
amount sufficient to meet our future needs.
We plan to continue our development and enhancement of our technology
products during the next twelve months. If we are successful in obtaining
additional financing, we will need to hire additional employees, primarily in
the areas of marketing, sales, finance, administration, engineering and quality
assurance. This will require us to purchase additional computer equipment;
however, any such purchases are not expected to be significant.
-22
Critical Accounting Policies
Our accounting policies are fully described in Note 2 to our consolidated
financial statements. The following describes the application of accounting
principles that have significant impact on our consolidated financial
statements:
Going Concern Assumption - The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
assets or the amounts and classification of liabilities that might be necessary
should we be unable to continue as a going concern. If the consolidated
financial statements were prepared on liquidation basis, the carrying value of
our assets and liabilities would be adjusted to net realizable amounts. In
addition, the classification of the assets and liabilities would be adjusted to
reflect the liquidation basis of accounting.
Deferred Compensation - Our employees and management have been voluntarily
deferring a portion of their earned compensation since our inception. At
December 2004 the employees converted $2.2 Million of their deferred
compensation owed as of June 30, 2004 into stock options to acquire common stock
of the Company. This $2.2 million of deferred compensation was converted into
approximately 769,000 fully vested options exercisable at a price of $0.50 for a
period of 7 years. We have expensed these obligations and the corresponding
employment taxes associated with these deferred wages and salaries.
Revenue Recognition - Revenue is recognized upon shipment to the customer
(which constitutes delivery), provided that persuasive evidence of an
arrangement exists, the fee is fixed or determinable, and collection is
reasonably assured. To the extent that one or more of these conditions are not
met, which has occurred in the past, revenue is deferred until such time as all
four criteria are met. Revenue from sales to integrators, value-added resellers
and distributors is recognized on a "sell-through" basis, that is, when these
parties report to us that resale of the product to the ultimate end customer has
occurred.
In general, we require an upfront deposit for significant customer
purchases. If we receive a payment from a customer prior to meeting all of the
revenue recognition criteria, the payment is recorded as deferred revenue. Our
current arrangements with third party integrators, value-added resellers and
distributors do not provide for any rights of return, price-protection or other
contingencies. Our general credit terms require complete payment within 30 days
of shipment.
We record a provision for estimated sales returns and allowances on product
sales in the same period as the related revenue is recorded. These estimates are
based on known and estimated factors.
To date, we have not established vendor specific objective evidence
("VSOE") of fair value for our software, products and services. For sales where
maintenance is the only undelivered element, we recognize the total sale ratably
over the term of the embedded maintenance period. We believe that we will
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establish VSOE of fair value for maintenance; however, the exact timing is
uncertain. Once VSOE of fair value for maintenance and other services is
established, we will utilize the residual method of accounting as permitted by
Statement of Position 98-9, "Modification of SOP 97-2, `Software Revenue
Recognition,' With Respect to Certain Transactions," and defer the VSOE of
maintenance and recognize the residual amount of the total sale as software and
product revenue in the period in which the arrangement exists, the software and
products are delivered and the fee is collectible. Maintenance revenue will then
be recognized ratably over the maintenance period.
Deferred Income Taxes -We account for income taxes and deferred tax assets
and liabilities in accordance with SFAS No. 109, "Accounting for Income Taxes."
Because we project future operating losses in the near term, we have provided a
full valuation allowance against the deferred tax assets created by these
losses.
Stock-based Compensation - As part of our compensation programs offered to
our employees, we grant stock options. We grant stock options to employees based
on their fair value at the grant date. As allowed under SFAS No. 123,
"Accounting for Stock-Based Compensation," and SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," we have adopted the
disclosure-only requirements of these accounting standards. Accordingly, we do
not recognize stock-based compensation expense for stock options granted to
employees at their fair value. We record stock-based compensation when we issue
common stock in lieu of cash compensation for services rendered to us or if we
issue options to purchase common stock to non-employees. Stock-based
compensation is recorded based on the fair value of the services received. See
Notes 2 and 8 to our consolidated financial statements for the impact on
earnings had we fully adopted SFAS 123 and 148.
Off-Balance Sheet Arrangements - With the exception of our facility lease,
we do not have off-balance sheet arrangements, financings or other relationships
with unconsolidated entities known as "special purpose entities."
Results of Operations - Three Months Ended September 30, 2003 and 2002
Net revenues for the three months ended September 30, 2003 and 2002 were
$7,500 and $0, respectively. The revenues of $7,500 in the quarter ended
September 30, 2003 resulted from the sale and shipment of hardware and software
to a potential distributor. We had no sales in 2002.
Cost of revenues for the three months ended September 30, 2003 and 2002 was
$4,300 and $0, respectively. This cost represented the cost of the hardware we
shipped in connection with our net sales and related third-party software.
Selling, general and administrative expenses for the three months ended
September 30, 2003 increased $155,813, or approximately 66%, to $392,198 from
$236,385 in the comparable period in 2002. This increase was due primarily to
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increased spending in the areas of selling expenses and sales consultants as we
began marketing and selling our products in fiscal 2004. The increase was also
attributable to an increase in personnel in selling, general and administrative
capacities.
Engineering, research and development expenses for the three month period
ended September 30, 2003 increased $146,866 or approximately 97% to $297,657
from $150,791 in the comparable period in 2002. The increase of engineering,
research and development expense consisted primarily of additional staffing
salaries and related personnel costs.
Interest expense increased $26,400 for the three months ended September 30,
2003 compared to $0 for the three months ended September 30, 2002. This increase
was primarily attributable to the accrual of interest on related party
obligations due to RTRC, and interest on deferred employee compensation. Imputed
interest rates vary from 3% to 5%.
For the three months ended September 30, 2003 and 2002 net loss was
$735,555, or $4.20 per share (basic and diluted), and $409,676, or $2.34 per
share (basic and diluted), respectively. The increase in net loss of $325,879
was primarily attributed to increased staffing and related costs associated with
the increase of personnel during the Company's development stage.
Years Ended June 30, 2003 and 2002
In 2003, we recorded $9,747 in the initial sale of our technology products
to two unrelated parties. Cost of revenues of $6,557 was recorded in connection
with the company's initial sales and represented the cost of the hardware,
software and other related costs. We had no sales in 2002.
Selling, general and administrative expenses consist primarily of salaries
and wages of executive management, finance, marketing, sales and administrative
personnel, office and occupancy costs, legal, accounting and other professional
services. Selling, general and administrative expenses increased approximately
182% or $692,647 in 2003 to $1,072,384 from $379,737 in 2002. The increase in
selling, general and administrative expenses was primarily attributable to an
increase in personnel costs and associated overhead as additional employees and
consultants were hired to expand our operations. In addition, the results of
2002 only include nine months of operations since we were formed on October 2,
2001.
Engineering, research and development expenses consist primarily of
salaries and wages of engineers, quality control technicians and external
development consultants. Engineering, research and development expenses
increased approximately 285%, or $1,066,342, in 2003 to $1,440,027 from $373,685
in 2002. The majority of our operations and costs have been incurred in the
development of our technology products. The increase in engineering and research
and development expenses was attributable to the necessary costs of developing
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our integrated identity document management applications. In addition, the
results of 2002 only include nine months of operations as we were not formed
until October 2, 2001.
We record stock-based compensation when we issue common stock or options to
purchase common stock to non-employees or in lieu of cash compensation for
services rendered. In 2002, the Company's subsidiary, AssureTec Systems, issued
215,638 shares of its common stock to unrelated third parties in lieu of cash
compensation. We recorded $123,744 in connection with the issuance of these
shares of common stock based on the fair value of the services we received. In
March 2004, the shares of the subsidiary's stock were exchanged for shares of
the Company. In 2002, the Company's subsidiary, AssureTec Systems issued options
to purchase 100,000 (6,452 post split) shares of its common stock to a
non-employee at $0.001 per share. We recorded $1,279 in stock-based compensation
relating to this grant. The fair value of the stock options awarded to
non-employees was calculated using the Black-Scholes method. Subsequently the
options to purchase shares of the subsidiary were exchanged for options to
purchase shares of the Company.
Interest expense represents imputed interest applied to deferred
compensation, advances from RTRC as well as interest recorded based on stated
interest rates on notes payable by the Company to an individual stockholder.
Imputed interest rates vary from 3% to 5%. Interest expense increased to $63,903
in 2003 from $12,131 in 2002.
For the years ended September 30, 2003 and 2002 net loss was $2,681,600, or
$15.30 per share (basic and diluted), and $848,900, or $4.84 per share (basic
and diluted), respectively. The increase in net loss of $1,832,700 was primarily
attributed to increased staffing and related costs associated with the increase
of personnel during the Company's development stage.
Financial Condition, Liquidity and Capital Resources
We were formed in October 2001 and since our formation through June 30,
2005, have raised $3.8 million through financing activities, including $958,000
from parties affiliated with our CEO, Dr. Reeves. In addition to these funds, we
have relied on our employees' deferment of $2.1 million in compensation and
$557,374 in advances by a related party as of June 2005. Additionally, at
December 31 2004 the employees converted $2.2 million of deferred compensation
into options to purchase 769,000 shares of common stock in the Company. At June
30, 2005, compensation in the aggregate of $1.3 million had been formally
deferred by the employees until the Company's Board of Directors deems cash is
sufficient from operating cash flow to make payments on these deferred amounts.
At June 30, 2005, we had a working capital deficiency of approximately $3.9
million. Our continuation as a going concern will require that we raise
significant additional capital and there is no assurance that we will be able to
do so.
We believe that we will continue to be successful in obtaining additional
financing, from which the proceeds will be primarily used for general corporate
purposes, including working capital, capital expenditures, research and
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development and other strategic investments. However, no assurances can be
provided that we will obtain additional financing sufficient to meet our future
needs on commercially reasonable terms or otherwise. We have not yet developed
revenues sufficient to bring us to a positive cash flow position and our
auditors have stated in their audit report that there is substantial doubt about
our ability to continue as a going concern. Our continuation as a going concern
is dependent upon our ability to raise additional capital, and to generate
sufficient cash flow to meet our obligations on a timely basis and ultimately
attain profitability.
As of October 31, 2005, we had sufficient cash, in our estimation, to
sustain operations for a period of six months. In addition, we are currently in
the process of discussing with a partner in Japan the possibility of its
investing an additional $2 million in Holdings. If we are able to close this
subscription and receive this $2 million, we believe the $2 million, plus the
cash currently on hand, would allow us to operate for a period in excess of one
year without significant revenues.
With the exception of our facility lease, which has been personally
guaranteed by our chief executive officer, we have no material off-balance sheet
commitments. Our facility lease runs through June 30, 2007 and requires minimum
annual payments of approximately $48,000 though its expiration.
ITEM 3 DESCRIPTION OF PROPERTY
Neither AssureTec Holdings nor its Subsidiaries presently own any real
property. In June 2002, AssureTec Systems entered into a three-year lease of the
building where both AssureTec Holdings and AssureTec Systems are located, at 200
Perimeter Road, Manchester, NH 03103. The current lease calls for monthly
payments of $4,041. One of Dr. Reeves' family-controlled entities has guaranteed
the lease. This lease was extended for an additional three-year term in June
2004. These facilities occupy approximately 5,600 square feet and are located
adjacent to the runway of the Manchester Airport. The space that AssureTec
Holdings and AssureTec Systems currently occupy is expected to be adequate to
meet immediate needs, but additional facilities may be required if AssureTec
Systems begins to expand and hire additional personnel, of which there is no
assurance. AssureTec Holdings owns personal property (equipment), comprising
primarily of furniture, computer and office equipment.
ITEM 4 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For each director and officer of AssureTec Holdings, Inc. and AssureTec
Systems, Inc., and for each person known by AssureTec Holdings to be the
beneficial owner of 5% or more of the voting securities of AssureTec Holdings as
of June 2005, the table below lists the beneficial ownership of AssureTec
Holdings' common stock (i) after completion of the Holdings Spin-Off, and (ii)
after completion of both the Holdings Spin-Off and the Systems Exchange and
(iii) taking into effect the 1-for-31 reverse stock split. AssureTec Holdings
was a wholly owned subsidiary of Element 21 and no other person or entity owned
any shares of AssureTec Holdings prior to the Holdings Spin-Off.
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Amount and
Nature of
Name and Address of Beneficial Percentage
Beneficial Owner Position Ownership Owned
---------------- -------- --------- -----
Officers and Directors
R. Bruce Reeves, Ph.D. AssureTec Holdings - 755,612(1,2) 35.1%
754 Straw Hill Chairman and CEO
Manchester, NH 03104 Director
AssureTec Systems -
Chairman and CEO
Kevin T. McGuire Assure Tec Holdings - 24,453(1,3) 1.3%
148 Robinson Road Treasurer and Secretary
Hudson, NH 03051-3124 AssureTec Systems -
Treasurer and Secretary
Bruce Monk AssureTec Systems - 259,291(1,4) 13.2%
8 Robin Drive Chief Technology
Hudson, NH 03051 Officer and Director
of subsidiary
Robert J. Schmitt AssureTec Systems Vice 58,452(1,5) 3.0%
21 Grand Hill Road President Business
Mont Vernon, NH 03057 Development
Richard G. Search AssureTec Systems 32,545(1,6) 1.7%
116 Chestnut Street Executive Vice
Upton, MA 01568 President, Engineering
and Product Marketing
James L. Riffer AssureTec Systems Vice 58,972(1,7) 3.0%
24 Charles Chase Drive President Sales and
Manchester, NH 03104 Marketing
Robert C. Babbitt AssureTec Systems - 250,541(1,8) 11.9%
82 Hawthorne Village Road Director
Nashua, NH 03062
Officers and Directors of 1,439,867(1,9) 56.4%
AssureTec Holdings,
AssureTec Systems as a
Group (7 persons)
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Amount and
Nature of
Name and Address of Beneficial Percentage
Beneficial Owner Position Ownership Owned
---------------- -------- --------- -----
Other 5% or greater owners:
Element 21 Golf Company - Stockholder 175,284 (10) 9.2%
Nataliya Hearn, CEO
3171 Sandwich Street
37 Windsor, Ontario
H3A P7S
Canada
R.T. Robertson Consultants Stockholder 276,957(11) 13.8%
200 Perimeter Road
Manchester, NH 03103
Robertson Financial Stockholder 136,774 7.2%
Advisors, LLC
200 Perimeter Rd
Manchester, NH 03103
James Barrons Stockholder 241,935 12.6%
8236 N. 62nd Place
Paradise Valley, AZ 85253
John Tiedemann AssureTec Systems 176,689(12) 8.6%
11 Wakefield Dr employee
Nashua, NH 03062
Andre Dawson Stockholder 145,161 7.6%
10601 Southwest 72nd Ave
Miami, FL 95030
Theodore Kuklinski AssureTec Systems 117,598(13) 5.9%
24 Hershaw Terrace Chief Information
West Newton, MA 02465 Technologist
John & Elaine Proudman Stockholder 96,774 5.1%
Little Westcott Farm
Westcott,Rockbeare, Exeter,
Devon
United Kingdom
EX5-2LU
Percentage owned includes options exercisable as of August 31, 2005.
(1) "Beneficial ownership" is defined in the regulations promulgated by the
U.S. Securities and Exchange Commission as having or sharing, directly or
indirectly (1) voting power, which includes the power to vote or to direct
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the voting, or (2) investment power, which includes the power to dispose or
to direct the disposition, of shares of the Common Stock of an issuer. The
definition of beneficial ownership includes shares underlying options or
warrants to purchase Common Stock, or other securities convertible into
Common Stock, that currently are exercisable or convertible or that will
become exercisable or convertible within 60 days. Unless otherwise
indicated, the beneficial owner has sole voting and investment power.
(2) Immediately prior to the Element 21 Acquisition, Dr. Reeves owned 1,344,160
shares, or approximately 49.5% of the outstanding shares of common stock of
Element 21 (then BRL Holdings, Inc.). In connection with the proposed
distribution of AssureTec Holdings shares to Element 21 stockholders of
record on October 4, 2002 (see (10) below), Dr. Reeves will receive
2,688,320 (86,720 post split) shares of common stock of AssureTec Holdings,
which represents two shares of AssureTec Holdings issued for each share of
Element 21 owned by him on the record date for the distribution of Holdings
shares. Stockholders who acquired shares in connection with the Element 21
Acquisition have consented to not participate in the Holdings Spin-Off.
Pursuant to the Systems Exchange, Dr. Reeves received 107,548 shares of
AssureTec Holdings common stock and options to acquire 139,548 shares of
AssureTec Holdings common stock at a price per share of $0.50 until June
30, 2012. Additionally AssureTec Holdings Preferred Stock owned by RTRC and
Advisors is convertible into 309,032 shares of AssureTec Holdings common
stock. In addition to the 86,720 shares of Element 21 beneficially owned by
him, Dr. Reeves is deemed to beneficially own the shares of AssureTec
Holdings held by RTRC, Robertson Financial Advisors, and 8,065 shares owned
by Dr. Reeves' spouse.
(3) Immediately prior to the Element 21 Acquisition, Mr. McGuire owned 61,443
shares, or approximately 2.3% of the outstanding shares of common stock of
Element 21 (then BRL Holdings, Inc.). In connection with the distribution
of AssureTec Holdings shares to Element 21 stockholders of record on
October 4, 2002 (see (10) below), Mr. McGuire will receive 122,886 (3,964
post split) shares of common stock of AssureTec Holdings. Pursuant to the
Systems Exchange, Mr. McGuire received options to acquire 8,065 shares of
AssureTec Holdings common stock at a price per share of $.83 until July 1,
2009 and 6,618 options to acquire a like number of shares of Holdings
common stock at a price per share of $.50 until June 30, 2012 In addition,
the 18 shares of Holdings Series A-1 Preferred Stock owned by Mr. McGuire
are convertible into 5,806 of AssureTec Holdings common stock.
(4) Mr. Monk owns 209,032 shares of Holdings' common stock. He received options
to acquire 130,259 shares of common stock at $.50 per share until June 30,
2012, of which he exercised 80,000 during the fiscal year ended June 30,
2005.
(5) Mr. Schmitt owns 56 shares of Series A-1 Preferred Stock convertible into
18,064 shares of common stock. Mr. Schmitt also has 6,048 options to
acquire common stock at $3.10 per share through April 1, 2011; 22,243
options to acquire Holdings common stock at $.50 per share exercisable
until December 31, 2011; and options to acquire 12,097 shares of Holdings
common stock at $3.10 per share exercisable until April 1, 2012 and options
to acquire 6,048 shares of Holdings common stock at $3.10 per share
exercisable until April 1, 2013.
(6) Mr. Search has options to acquire 6,048 shares of Holdings common stock at
$3.10 per share; options to acquire 14,400 shares of common stock at $.50
per share exercisable until December 31, 2011; and options to acquire
10,097 shares of common stock at $3.10 per share exercisable until April 1,
2012 and options to acquire 6,048 shares of Holdings common stock at $3.10
per share exercisable until April 1, 2013.
(7) Mr. Riffer has options to acquire 6,048 shares of Holdings common stock at
$3.10 per share exercisable until October 13, 2010; options to acquire
12,097 shares at $3.10 per share until October 13, 2011; options to acquire
40,827 shares at $.50 per share exercisable until December 31, 2011 and
options to acquire 6,048 shares at $3.10 per share exercisable until April
13, 2012.
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(8) Includes 44,677 shares of common stock and common stock equivalents owned
by Mr. Babbitt. Also includes options to purchase 12,903 shares of common
stock at a price per share of $3.10, exercisable until September 30, 2008,
and options to purchase 22,581 shares of common stock at a price per share
of $3.10 exercisable until December 31, 2011, options to purchase 19,355
shares of common stock at a price per share of $3.10 vesting through
January 20, 2004, which are exercisable until December 31, 2011, options to
purchase 85,402 shares of common stock at a price per share of $.50 fully
vested options which are exercisable until December 31, 2011, options to
purchase 22,581 shares of common stock at a price per share of $4.96
exercisable until December 31, 2011, options to purchase 24,373 shares of
common stock at a price per share of $7.44 exercisable until February 12,
2010 and options to purchase 18,669 shares of common stock at a price of
$10.34 exercisable until February 12, 2010.
(9) Includes Footnotes (1)-(8).
(10) Element 21 Golf Company owns 175,284 shares (9.2%) of Holdings common
stock. These shares were issued for contribution of Element 21's equity
interest in Systems. Element 21 shareholders of record as of October 4,
2002 are the beneficial owners of these shares of which Dr. Reeves and his
affiliates control 49.5% of these shares. Element 21 has committed to cause
a distribution of these shares to these beneficial owners. Subsequent to
Element 21's distribution of Holdings common stock, Element 21 will have no
ownership in AssureTec Holdings and these shares will be owned by
approximately 3,600 shareholders.
(11) RTRC owns 534 shares of Holdings Series A-1 Preferred Stock convertible
into 172,258 shares of AssureTec Holdings common stock. RTRC also has
options to acquire 104,699 shares of Holdings common stock at $.50 until
December 31, 2011. Sandra J. Reeves, Dr. Reeves' spouse, owns 90 percent of
RTRC.
(12) Includes 157,334 options exercisable as of August 31, 2005.
(13) Includes 99,211 options exercisable as of August 31, 2005.
Change of Control
From inception to December 2003, Element 21 owned 100% of AssureTec
Holdings' issued and outstanding common stock. Upon completion of the Holdings
Spin-Off, Element 21 will own no shares of AssureTec Holdings and AssureTec
Holdings will be owned by approximately 3,600 stockholders.
Following the completion of the Holdings Spin-Off, Dr. Reeves will
beneficially own 26.8 % of AssureTec Holdings common stock and securities
convertible into common stock.
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ITEM 5 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The directors and officers of AssureTec Holdings and AssureTec Systems are
as follows:
Name Age Position
---------------- --- ---------------------------------------------
R. Bruce Reeves 65 President and Director of AssureTec Holdings
and Chief Executive Officer and Director of
AssureTec Systems
Kevin T. McGuire 55 Treasurer and Secretary of AssureTec Holdings
and AssureTec Systems
Bruce Monk 58 Chief Technology Officer and Director of
AssureTec Systems
Robert C. Babbitt 62 Director of AssureTec Systems
Richard C. Search 58 Executive Vice President of Engineering and
Product Management of AssureTec Systems
Robert J. Schmitt 61 Vice President of Business Development of
AssureTec Systems
James L. Riffer 60 Vice President of Sales & Marketing of
AssureTec Systems
The officers and directors listed will serve until the next annual meeting
of the stockholders or until death, resignation, retirement, removal or
disqualification, or until their successors have been duly elected and
qualified. Vacancies in the Board are filled by majority vote of the remaining
directors. Officers of AssureTec Holdings and AssureTec Systems serve at the
will of the Board.
Background
Executive Officers and Directors
--------------------------------
R. Bruce Reeves, Ph.D. is Chairman, Cofounder, Chief Executive Officer and
Director of AssureTec Systems and AssureTec Holdings. Dr. Reeves has over
twenty-five years of experience in start-up ventures, and has spent over ten
years in high-tech business and product development, including five years with
General Electric Company on several new business development operations. In
1998, Dr. Reeves successfully led the acquisition, by his affiliate, of Meridian
Instruments, a leading developer of laser based imaging instrumentation. Dr.
Reeves subsequently sold the Meridian manufacturing assets to Genomic Systems,
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Inc. a biotechnology genomic instrumentation company that was subsequently
acquired by Perkin Elmer Corp. From 1992 to October 2, 2002, Dr. Reeves was an
officer and director of Element 21, which was involved in sponsoring development
stage businesses, including a venture to develop artificial blood, as well as
initially sponsoring AssureTec Systems during that time period. Dr. Reeves has a
Bachelor of Science degree in Chemistry and a Ph.D. in Physical Chemistry.
Kevin T. McGuire. Kevin T. McGuire has been AssureTec Systems' Treasurer
and Secretary since its inception in October 2001 and has been AssureTec
Holdings' Treasurer and Secretary since its inception in June 2002 and was the
Treasurer of Element 21 from June 1992 until October 2, 2002. He works on a
contracted as-needed basis through an accounting firm owned by the spouse of Mr.
McGuire. Mr. McGuire is a graduate of Bentley College of Accounting. Mr. McGuire
has 32 years of business experience including 16 years with public accounting
firms.
Bruce Monk. Since April 2003, Mr. Monk has served as Chief Technology
Officer of AssureTec Systems and has served as a Director of the subsidiary
since its inception in October 2001. From AssureTec Systems' inception through
March 2003, Mr. Monk served as President and Chief Operating Officer. Mr. Monk
has more than 20 years of senior management level experience in engineering,
marketing and sales management in the high technology field. Since November
2000, Mr. Monk has served as President of Integrated Security Technologies, LLC,
which is a distributor of forensic products. From 1991 to 2000, Mr. Monk served
as an officer and director for Imaging Automation, which, under Mr. Monk's
leadership, developed the first version of a document recognition and
authentication product technology platform. Mr. Monk coordinates technical and
industry efforts to develop our leadership position in versatile imaging-based
document authentication devices and systems. Prior to founding Imaging
Automation, Mr. Monk served in development, engineering and marketing/sales
positions with Chorus Data Systems, Analogic, Sanders Associates and Hewlett
Packard. Mr. Monk is a graduate of Rennselear Polytechnic Institute with a BS in
Electrical Engineering.
Robert J. Schmitt, Vice-President Business Development - Mr. Schmitt is a
veteran of IBM and Digital Equipment Corp, where he held positions in sales and
marketing. He worked at IBM from 1968-1978 in various sales and marketing
positions, his last position being sales manager of the IBM office in Buffalo,
New York. He joined Digital in New Hampshire as sales manager for the
telecommunications business. He held various positions during his tenure at
Digital including VP of Marketing for the United States, VP of Sales and
Marketing for Far East Area, and VP of Technical Support for the US, and was
responsible for the operations of the sales support organization of over 2,000
people. Mr. Schmitt left Digital in 1997 to become VP of Marketing for Viisage
Technology, and left Viisage in 1998 to form Biometrica Systems, Inc. Mr.
Schmitt is a graduate of Hobart College with a BA in English.
Richard G. Search, Executive Vice President Engineering and Product
Management- Mr. Search is a 35 year veteran in the computer industry. He has
held executive positions in hardware and software engineering, product
management, marketing and sales in Fortune 100 corporations as well as emerging
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firms. Prior to joining AssureTec Systems in May 2004, Richard was SVP/VP of
Marketing & Product Management at McDATA Corporation, DotHill Corporation and
Hitachi Data Systems, where he provided the leadership in designing and
implementing new product and marketing strategies, successfully growing revenues
and increasing market recognition and penetration of existing and newly
introduced product lines. Previously, Mr. Search spent 13 years at Digital
Equipment Corporation where he was VP of Storage Solutions Engineering and
Director of Product Management and Marketing, playing a key role in the
development and successful launching of DEC's StorageWorks product line into the
open storage market, with revenues in excess of $1.6B. Additionally, Richard
spent 18 years at IBM where he held numerous management positions in
engineering, marketing, and sales. Mr. Search holds a B.S. from Penn State
University.
James L. "Monty" Riffer -VP Sales & Marketing- Mr. Riffer was formerly VP
of Sales & Marketing at Acadient, a business-to-business software developer. He
previously held management positions at Geac Computers, Cantoc Business Systems,
Pilot Software, and Pansophic Systems. Prior to Pansophic he spent 10 years with
Polaroid in management. Mr. Riffer is a graduate of Southern Illinois University
where he earned both undergraduate and graduate degrees in Education.
Robert C. Babbitt. Mr. Babbitt served AssureTec Systems as its Chief
Operating Officer and President from June 2003 to February 2, 2005 (the date of
his retirement). Prior to that time he served as Executive Vice President of
Sales after joining AssureTec Systems in January 2003. He currently is a member
of the Board of Directors of the subsidiary. He has over thirty years of
experience in leading sales, technical support, and service organizations in
both the information technology and communications industries. Mr. Babbitt is a
graduate of Ohio University where he earned both undergraduate and graduate
degrees in Mathematics.
Key Consultant
--------------
Ken Gorton- Consultant, Financial Compliance- Mr. Gorton, serves as a
financial consultant to the Board of Directors and serves as a consultant to our
Audit Committee and to our Compensation Committee. Over the past 35 years, Mr.
Gorton has been involved in financial and strategic planning roles in both the
private and public sector. Mr. Gorton is currently the Director-Finance &
Operations for a $60 million school district in the Pittsburgh area. He is the
former President of a Foundation Chapter, and served as the Managing Director of
a non-profit organization. From 1994 to 2000, he was the CFO of a New England
college directing financial management, and was instrumental in formulating a
five-year strategic plan, resulting in property acquisition and expansions,
funded by innovative financing vehicles. For the previous twenty-five years, Mr.
Gorton's career was with major corporations involved in natural resource -
DuPont, Consol Energy and Conoco, where he coordinated finance functions
responsible for cash management, project finance, accounts receivable
management, treasury operations, and business process improvement. Mr. Gorton
received his MBA from Oklahoma State University, and did post graduate work at
Columbia University.
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Family Relationships
There are no family relationships between or among the directors, executive
officers or persons nominated or charged by AssureTec Holdings to become
officers and directors.
Committees
Compensation Committee
Dr. Reeves, the Company's President and sole Director, serves as the sole
member of the Company's Compensation Committee. Ken Gorton, who is engaged by
the Company as a consultant, serves as an advisor to the Compensation Committee.
Audit Committee
Dr. Reeves, the Company's President and sole Director, serves as the sole
member of the Company's Audit Committee. Dr. Reeves, our "audit committee
financial expert", is not considered to be an "independent" director pursuant to
Securities and Exchange Commission rules and regulations. Ken Gorton, an outside
consultant to the Company serves as an advisor to the Audit Committee. Under the
direction of Dr. Reeves, Mr. Gorton oversees the audits of the Company by its
independent auditors, and directly communicates with the independent auditors
regarding the Company's financial statements and financial disclosures.
Professional biographical information concerning Mr. Gorton is included above
under "Directors, Executive Officers, Promoters and Control Persons - Key
Consultant".
ITEM 6 EXECUTIVE COMPENSATION
AssureTec Holdings has only two employees, both of whom are officers and
who currently do not receive any cash or other compensation from AssureTec
Holdings, nor have they received any compensation from us in the past. These two
individuals also serve as officers of AssureTec Systems for which they are
compensated. Dr. Reeves has agreed to act as President of Holdings without
compensation. However, AssureTec Holdings may in the future from time to time
authorize the payment of cash or the issuance of common stock and/or options to
purchase common stock for payment for services provided to AssureTec Holdings by
its officers and/or their family controlled companies. To date, AssureTec
Holdings has not issued any common stock or options, as payments for services to
Holdings, to either of these two officers.
Neither AssureTec Holdings nor its Subsidiaries have adopted a retirement,
pension, profit sharing, stock option, insurance programs or other similar
programs. It is anticipated that AssureTec Systems will adopt an employee stock
option plan upon approval of the stockholders.
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The following table sets forth in summary form the compensation of the
current Chief Executive Officer and each other executive officer that received
total salary and bonus exceeding $100,000 since its inception ("Named Executive
Officers") of the subsidiary, AssureTec Systems.
ˇ Enlarge/Download Table
Long-Term Compensation
--------------------------------
Annual Compensation Awards Payouts
--------------------------------- ---------- -----------------
Name and Fiscal Other Annual Restricted Options/ LTIP All Other
Principal Position Year Salary(A) Bonus ($) Compensation Stock Awards SARs (#) Payout Compensation
------------------ ---- --------- --------- ------------ ------------ -------- ------ ------------
Dr. R. Bruce Reeves, 2005 $180,000 0 0 0 139,548 0 0
CEO(1)(2) 2004 $171,000 0 0 0 11,489 0 0
2003 $150,000 0 0 0 0 0 0
2002 $99,000 0 0 0 0 0 0
Bruce C. Monk, Chief 2005 $180,000 0 0 0 130,259 0 0
Technology
Officer(1)(3) 2004 $171,000 0 0 0 4,494 0 0
2003 $150,000 0 0 0 0 0 0
2002 $99,000 0 0 0 64,517 0 0
Robert J. Schmitt, 2005 $138,000 0 0 0 40,388 0 0
Vice-President
Business Development
(1)(4) 2004 $34,500 0 0 0 6,048 0 0
Richard Search, 2005 $138,000 0 0 0 38,593 0 0
Executive Vice
President Engineering
and Product
Management (1)(5) 2004 $23,000 0 0 0 6,048 0 0
James L. Riffer, Vice 2005 $138,000 0 0 0 58,972 0 0
President Sales and
Marketing (1)(6)
2004 $138,000 0 0 0 0 0 0
2003 $103,500 0 0 0 6,048 0 0
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----------------------------
(A) A portion of the salaries of the above named executive officers have been
deferred until such time as the company has sufficient funds available to
pay such compensation and the board of directors approves such payments.
(1) Pursuant to a September 30, 2003 letter agreement between AssureTec Systems
and the employees and consultants who are deferring compensation, the
Company will allocate out of funding that becomes available, an aggregate
of $335,000 for salary and related costs, plus the amount necessary to pay
FICA and other required amounts, to pay a previously agreed to portion of
the deferred compensation of all participating employees, on a
proportionate basis. Also, pursuant to the September 30, 2003 letter
agreement, interest shall accrue at 3% on unpaid gross compensation until
such compensation is paid in full.
(2) Dr. Reeves was appointed CEO on October 21, 2001. Dr. Reeves' compensation
was $10,000 per month from October 21, 2001 through December 31, 2001.
Effective January 1, 2002, Dr. Reeves' salary increased to $11,500 per
month ($138,000 per year). During the fiscal year ended June 30, 2002, Dr.
Reeves was paid $0 and during the fiscal year ended June 30, 2003 Dr.
Reeves was paid $0. Dr. Reeves' salary is, effective January 1, 2003,
$162,000 per year, and $180,000 effective January 1, 2004. Pursuant to the
September 30, 2003 letter agreement, Dr. Reeves received an option to
purchase one share of common stock for each dollar of deferred take home
compensation, at a price per share of $5.81 until September 30, 2008. See
note (1) above.
(3) Mr. Monk served as President of Systems from October 10, 2001 to May 1,
2003. Mr. Monk's salary was $10,000 per month from October 10, 2001 through
December 31, 2001. Effective January 1, 2002, Mr. Monk's salary increased
to $11,500 per month ($138,000 per year) and to $13,500 per month ($162,000
per year) effective January 1, 2003 and to $180,000 effective January 1,
2004. During the fiscal year ended June 30, 2002, Mr. Monk was paid $12,000
and during the fiscal year ended June 30, 2003 Mr. Monk was paid $2,660.
The remainder of his salary for these periods was deferred. Pursuant to the
September 30, 2003 letter agreement, Mr. Monk received an option to
purchase one share of common stock for each dollar of deferred take home
compensation, at a price per share of $5.81 until September 30, 2008. See
note (1) above. For the period December 1, 2004 through December 31, 2005,
50% of the balance of Mr. Monk's compensation in excess of $7,500 per month
is currently being deferred and the remaining 50% is being granted in
options to purchase one share of common stock for each dollar of
compensation, at a price per share of $0.50.
(4) Mr. Schmitt serves Systems as the Vice-President of Business Development
since April 1, 2004. Mr. Schmitt's salary is $11,500 per month. For the
period December 1, 2004 through December 31, 2005, 50% of the balance of
Mr. Schmitt's compensation in excess of $7,500 per month is currently being
deferred and the remaining 50% is being granted in options to purchase one
share of common stock for each dollar of compensation, at a price per share
of $0.50.
(5) Mr. Search serves Systems as the Executive Vice President of Engineering
and Product Management since May 12, 2004 at a salary of $11,500 per month.
For the period December 1, 2004 through December 31, 2005, 50% of the
balance of Mr. Search's compensation in excess of $7,500 per month is
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currently being deferred and the remaining 50% is being granted in options
to purchase one share of common stock for each dollar of compensation, at a
price per share of $0.50.
(6) Mr. Riffer serves Systems as the Vice President of Sales and Marketing
since October 13, 2003 at a salary of $11,500. For the period December 1,
2004 through December 31, 2005, 50% of the balance of Mr. Riffer's
compensation in excess of $7,500 per month is currently being deferred and
the remaining 50% is being granted in options to purchase one share of
common stock for each dollar of compensation, at a price per share of
$0.50.
Aggregated Option Exercises And Fiscal Year-End Option Value Table
The following table provides certain summary information concerning
individual grants of stock options made to Named Executive Officers during each
of the fiscal years ended June 30, 2005, 2004 and 2003, respectively. Except as
set forth in the table below, during fiscal year 2005, the Company did not grant
any stock options under the Company's Incentive Plans to any of the Named
Executive Officers.
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ˇ Enlarge/Download Table
Option Grants In Fiscal Year June 30, 2005
-----------------------------------------------------------------------------------------------------------------
Number of % of Total
Securities Options Potential Realizable Value at
Underlying Granted to Exercise Assumed Annual Rates of Stock
Options Employees in Price Expiration Price Appreciation for Option
Name Granted (#) Fiscal Year ($/Share) Date Term
------------------- ----------- ------------ --------- --------- -----------------------------
5% 10%
-------------- ------------
Dr. R. Bruce Reeves 139,548 10.3% n/a n/a n/a n/a
Bruce C. Monk 130,259 10.4% n/a n/a n/a n/a
Kevin T. McGuire 14,683 0.1% n/a n/a n/a n/a
Richard C. Search 38,593 3.1% n/a n/a n/a n/a
Robert J. Schmitt 40,388 3.2% n/a n/a n/a n/a
James L. Riffer 58,972 4.7% n/a n/a n/a n/a
------------------------------------------------------------------------------------------------------------------
Aggregated Option Exercises For Fiscal Year Ended
June 30, 2004 And Year-End Option Values
Number of % of Total
Securities Options Potential Realizable Value at
Underlying Granted to Exercise Assumed Annual Rates of Stock
Options Employees in Price Expiration Price Appreciation for Option
Name Granted (#) Fiscal Year ($/Share) Date Term
------------------- ----------- ------------ --------- --------- -----------------------------
5% 10%
-------------- ------------
Dr. R. Bruce Reeves 0 0.0% n/a n/a n/a n/a
Bruce C. Monk 0 0.0% n/a n/a n/a n/a
Kevin T. McGuire 0 0.0% n/a n/a n/a n/a
Richard C. Search 0 0.0% n/a n/a n/a n/a
Robert J. Schmitt 0 0.0% n/a n/a n/a n/a
James L. Riffer 0 0.0% n/a n/a n/a n/a
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Aggregated Option Exercises For Fiscal Year Ended
June 30, 2003 And Year-End Option Values
----------------------------------------------------------------------------------------------------------------------------
Number of Securities Underlying Value of Unexercised
Unexercised Options at Fiscal In-the-Money Options at Fiscal
Year-End (#) Year-End ($)
-------------------------------- ------------------------------
Shares
Acquired on Value
Name Exercise Realized ($) Exercisable Unexercisable Exercisable Unexercisable
------------------- ----------- ------------ ----------- ------------- ----------- -------------
Dr. R. Bruce Reeves 0 $0 0 0 $0 $0
Bruce C. Monk 0 $0 0 0 $0 $0
Kevin T. McGuire 0 $0 0 0 $0 $0
The Company has no supplemental benefits or incentive arrangements except
for specific incentive statutory options given to employees and officers of
AssureTec Systems as a part of employment agreements. As of December 10, 2003
AssureTec Holdings has 183,026 shares of common stock outstanding. Pursuant to
the Systems Exchange, in March 2004, AssureTec Holdings issued 474,717 shares of
common stock, 601 shares of Series A-1 Preferred Stock and 448,127 options to
purchase Holdings common stock.
Employment Agreements
Dr. Reeves is party to an Employment Agreement with AssureTec Systems dated
October 2, 2001. Pursuant to the agreement, Dr. Reeves was to serve as Chief
Executive Officer until October 2, 2004, unless sooner terminated by death or
disability. This agreement currently runs from year to year. The Company expects
to extend the agreement. The agreement provides that from October 2, 2001
through December 31, 2001, Dr. Reeves earned compensation at the rate of $10,000
per month and, effective January 1, 2002 the rate of compensation was increased
to $138,000 per year. Effective January 1, 2003, Dr. Reeves' salary was
increased to $162,000 per year and to $180,000 effective January 1, 2004. In
addition to the compensation described above and pursuant to his employment
agreement, Dr. Reeves received options to purchase 45,161 shares of common stock
at an exercise price of $0.000001 per share that were exercised in fiscal 2002.
Bruce C. Monk entered into an employment agreement with AssureTec Systems
on October 10, 2001, pursuant to which he agreed to serve as President and Chief
Operating Officer of AssureTec Systems. The term of the agreement is three
years, unless sooner terminated by death or disability. This agreement currently
runs from year to year. Pursuant to this agreement, from October 10, 2001
through December 31, 2001, Mr. Monk earned compensation at the rate of $10,000
per month and, effective January 1, 2002, the rate of compensation increased to
$138,000 per year. Effective January 1, 2003 Mr. Monks salary was increased to
$162,000 per year and to $180,000 effective January 1, 2004. In addition,
pursuant to the agreement, Mr. Monk purchased 1,000,000 (64,516 post split)
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founder's shares at $.000001 per share and received options to purchase
1,000,000 (64,516 post split) shares of common stock of AssureTec Systems, which
options were fully vested on October 10, 2001 and exercised in June 2002. Also,
pursuant to the September 30 2003 letter agreement Mr. Monk received an option
to acquire 69,661 post-split shares of AssureTec Holdings common stock at a
price of $5.81 per share until September 30, 2008. A portion of Mr. Monk's
compensation is being deferred pursuant to the September 30, 2003 letter
agreement, as described below.
Pursuant to a September 30, 2003 letter agreement between the Company and
the employees and consultants who are deferring compensation, and all other
officers of Systems, the Company will allocate out of funding that becomes
available, an aggregate of $335,000 for salary and related costs, plus the
amount necessary to pay FICA and other required amounts, to pay previously
deferred compensation of all employees, on a proportionate basis. Also, pursuant
to the September 30, 2003 letter agreement, interest shall accrue at 3% on
unpaid gross compensation until such compensation is paid in full. In addition,
each employee or consultant could elect to receive an option to either (i)
convert any portion of his or her deferred compensation at June 30, 2003, net of
affiliate advances, into common stock at a price of $0.375 ($5.81 post split)
per share, or (ii) purchase options to purchase one share of AssureTec Systems
common stock, at an exercise price per share of $0.75 ($11.63 post split) until
September 30, 2008, at the rate of one dollar of deferred compensation in
exchange for an option to acquire one share of AssureTec Systems common stock.
As part of the Systems Exchange the options covered by the September 30, 2003
letter agreement will be modified to be options to purchase shares of AssureTec
Holdings.
Under the terms of the September 30, 2003 letter agreement with officers,
employees and consultants, $335,000 in deferred compensation will be paid out of
future financing. The amount of distribution to be paid to each individual will
be determined on a pro rata basis, taking into account the amount of
compensation that has been deferred by that individual and the total amount of
deferred compensation by all participating individuals. The portion of this
amount relating to officers of Systems and all others is set forth below:
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Name Deferred % of Total Deferred Prorated
Compensation(1) Comp.(2) Payment
--------------------------------------------------------------------------------
Bruce Reeves(3) $260,400 --
Bruce Monk $243,140 10% $34,503
Kevin T. McGuire $15,000 1% $2,129
------- -- ------
Subtotal $518,540 11% $36,632
Other (24 people) $2,102,606 89% $298,368
---------- --- --------
TOTAL $2,621,146 100% $335,000
========== ==== ========
(1) Total deferred compensation, excluding employee advances and
associated accrued payroll taxes as of 9/30/2003
(2) Calculated as % of total deferred compensation amount, excluding
amount owed to Dr. Reeves ($2,360,746)
(3) Dr. Reeves has elected not to participate
Deferred Compensation Agreements
Pursuant to the September 30, 2003 letter agreement described above, as of
September 30, 2003 there was $2,621,146 in deferred compensation outstanding,
excluding employee advances and associated accrued payroll taxes. Also, pursuant
to the September 30, 2003 letter agreements as amended by the Exchange
Agreement, options were issued to acquire a total of 80,874 post split shares of
Holdings common stock at a price per share of $6.21 per share, and a total of
33,157 shares of Holdings, at $5.81 per share, have been issued.
ITEM 7 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This section describes the transactions we have engaged in with our current
and past directors and current and past officers and persons known by us to be
the beneficial owners of 5% or more of our common stock during the past two
fiscal years, other than the transactions described above in "Employment
Agreements and Deferred Compensation Agreements" and in "DESCRIPTION OF
BUSINESS", and in "RECENT SALES OF UNREGISTERED SECURITIES."
Dr. Reeves, our President and a Director, and Kevin T. McGuire, our
Treasurer and Secretary, have been officers, directors or investors in various
companies that at one point in time have been related to AssureTec Holdings,
including Element 21 Golf Company. Dr. Reeves and Mr. McGuire resigned their
positions as officers of Element 21 on October 4, 2002 which was the date of the
acquisition of Element 21.
Prior to the Systems Exchange, AssureTec Holdings had 183,026 post split
shares of common stock outstanding. On April 1, 2004, upon the completion of the
Systems Exchange, AssureTec Holdings issued 474,717 shares and 448,127 options
to shareholders of Systems. AssureTec Holdings now owns 100% of Systems. Dr.
Reeves currently serves as President and director of AssureTec Holdings. Dr.
Reeves also serves as Chairman and CEO of Systems and as of June 30, 2005
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beneficially owns approximately 26.8% of AssureTec Holdings common stock and
common stock equivalents. As described above in "Executive Compensation," Dr.
Reeves currently receives a salary of $180,000 pursuant to his Employment
Agreement with Systems, which salary is being deferred.
In April 2004, Holdings commenced a private offering of its Series A-2
Preferred Stock, pursuant to which it issued 25.2 shares of Series A-2 Preferred
Stock to officers of the Company and of its subsidiary for gross proceeds of
$67,800 in cash and in satisfaction of a total of $184,200 of debt. The Series
A-2 Preferred shares were later cancelled, upon approval of the Series A-2
holders, and exchanged for a total of 252 shares of Series A-1 Preferred Stock.
A large percentage of the Company's obligations have been paid to date on
its behalf by RT Robertson Consultants, Inc. and Robertson Financial Advisors,
LLC, companies owned and controlled by Dr. Reeves and his family. The Company
believes that the interest rate applied to the RTRC and Advisors obligation is
on terms as favorable as those it could obtain from independent sources.
In November 2002, a mutual agreement between Dr. Reeves and AssureTec
Systems was created whereby, at the close of each quarter, any advances from Dr.
Reeves made to AssureTec Systems from inception became convertible into
Preferred Stock of AssureTec Systems. At the written request of AssureTec
Systems, it could "Put" the cumulative balance to Dr. Reeves forcing conversion
of all balances at a price of $3.10 per share (post split) in the alternative,
Dr. Reeves could "Call" shares using the advances at his option at a price of
$3.88 (post split) per share until cancelled in writing subject to a 30 day
advance notice in writing. This mutual option was terminated on November 28,
2003.
Effective December 31, 2003, a portion of the money owed by Systems to RTRC
and Advisors was converted into 462 shares of Holdings Series A-1 Preferred
Stock at the ratio of 1 share for each $1,000 of debt outstanding. (See
discussion of Holdings Preferred under "Description of Securities" below). This
debt was converted into shares of Series A-1 Preferred Stock at the same
purchase price as was previously offered to outside investors for the Series A-1
Preferred Stock. The Holdings Preferred has preferential rights, including the
right to vote on an "as converted" basis on all matters on which the common
stock is entitled to vote and the right to appoint three directors of AssureTec
Holdings. The Holdings Preferred also has conversion rights.
As of June 30, 2005, and after the conversion of $958,160 into 958 shares
of Holdings Preferred, AssureTec Systems owed approximately $557,374 to RTRC and
Advisors, entities owned by Dr. Reeves and his family. Dr. Reeves functions as
President of AssureTec Holdings and Chief Executive Officer of AssureTec
Systems, and performs the duties and services normally associated with these
titles in accordance with the terms of this agreement. After the consummation of
the Holdings Spin-Off, Element 21 will own no AssureTec Holdings stock and Dr.
Reeves will own 10.6% of Holdings while RTRC and Advisors will own 16.2% of
Holdings' outstanding shares of common stock and common stock equivalents. All
holders of shares and options issued or exchanged in connection with the Element
21 Acquisition waived any rights with respect to the Holdings Spin-Off.
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RTRC and Advisors has provided advances to approximately 20 employees of
Systems, none of whom are officers or directors of the Company, in the form of
non-recourse loans between these entities and the individual employees,
respectively. Repayment of these advances by the individual employees is
contingent upon the payment of deferred compensation by the Company to the
individual employees. As of October 31, 2005 there is approximately $37,000 of
unsettled advances to employees outstanding.
AssureTec Systems entered into a three-year lease of the building where
both AssureTec Holdings and AssureTec Systems are located. The lease calls for
monthly payments of $4,041 through June 2007. Both Dr. Reeves and RTRC have
guaranteed the lease and no consideration was received by either party in
exchange for the guarantee. The lease was extended for a period of three years.
ITEM 8 DESCRIPTION OF SECURITIES
AssureTec Holdings, Inc.
AssureTec Holding's authorized capital stock consists of one hundred
million (100,000,000) shares of common stock with a par value of $0.001 per
share and five million (5,000,000) shares of Preferred Stock at a par value of
$0.001 per share. Effective June 30, 2005 there were 659,493 shares of common
stock outstanding, options to acquire up to 1,902,522 shares of common stock
outstanding, and 3,871 shares of Series A-1 Preferred Stock outstanding. The
following discussion of the capital stock and options of AssureTec Holdings is a
summary only and is qualified in its entirety by the provisions of AssureTec
Holdings' Certificate of Incorporation, as amended.
Common Stock
------------
All shares of common stock have equal voting rights and, when validly
issued and outstanding, are entitled to one vote per share in all matters to be
voted upon by stockholders. The shares of common stock have no preemptive,
subscription, conversion or redemption rights and may be issued only as fully
paid and nonassessable shares. Cumulative voting in the election of directors is
not permitted, which means that the holders of a majority of the issued and
outstanding shares of common stock represented at any meeting at which a quorum
is present will be able to elect the entire Board, if they so choose. In the
event of liquidation of AssureTec Holdings, each stockholder is entitled to
receive a proportionate share of AssureTec Holding's assets available for
distribution to stockholders after the payment of liabilities and after
distribution in full of preferential amounts, if any. All shares of AssureTec
Holdings common stock issued and outstanding are fully paid and nonassessable.
Holders of the common stock are entitled to share pro rata in dividends and
distributions with respect to the common stock, as may be declared by the Board
out of funds legally available therefore.
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Preferred Shares
----------------
Shares of Preferred Stock may be issued from time to time in one or more
series, as may be determined by the Board. The Board shall establish the voting
powers, preferences and the relative rights of each such series and the
qualifications, limitations and restrictions.
AssureTec Holdings has designated 1,000,000 shares of Preferred Stock as
Series A-1 Preferred Stock. The Holdings Preferred shares are entitled to voting
rights on an "as-converted" basis. The holders of Holdings Preferred are
entitled to dividends at the rate of 5% of the Holdings Preferred price per
share ($1,000, as adjusted to reflect any stock split, stock dividend,
combination, reclassification or reorganization). The Holdings Preferred shares
have a liquidation preference over all other junior shares of capital stock,
including the common stock. Any transaction or series of transactions which
results in a change in control is deemed to be a liquidation, dissolution or
winding up, unless the holders of at least 75% of the outstanding shares of
Holdings Preferred approve the transaction. Each share of Holdings Preferred is
convertible, any time at the option of the holder, into 322.58 shares of
AssureTec Holdings common stock at a price per share of $3.10, which may be paid
for with cash or conversion into common stock. Each share of Holdings Preferred
shall be automatically converted into shares of common stock upon the closing of
a public offering of common stock. Stockholders of the Holdings Preferred Stock
shall be entitled to receive dividends when declared on the common stock, on an
as-converted basis. The holders of the Holdings Preferred have, so long as 20%
of the shares initially issued as Holdings Preferred are outstanding, the right
to elect three of the seven directors of AssureTec Holdings. The shareholders of
the Holdings Preferred, voting on an "as converted to common stock" basis, and
the holders of common stock will vote together as one class on all matters to be
voted upon by the holders of common stock, including the election of the other
four directors, two of whom will be independent directors, and one of whom will
be the Chief Executive Officer.
Options
-------
Over time, Element 21 has issued options to various individuals pursuant to
a directors' plan and to consultants and employees in exchange for services
rendered, which options totaled 51,200 at June 30, 2005 (the "Element 21
Options"). Each holder of an Element 21 Option, upon the exercise of his or her
Element 21 Options, will receive two shares of AssureTec Holdings common stock
in addition to one share of Element 21 common stock. As a result, up to 102,400
(3,303 post split) shares of AssureTec Holdings could be issued pursuant to the
exercise of the Element 21 Options.
Change in Control. AssureTec Holdings' Certificate of Incorporation, as
amended by the Holdings Preferred designations, could delay, defer or prevent a
change in control of AssureTec Holdings. Pursuant to the Holdings Preferred
designations, any transaction or series of related transactions that results in
a Change of Control (as defined below) will be deemed to constitute a
liquidation, dissolution or winding up of AssureTec Holdings, giving rise to
liquidation rights (each share of Holdings Preferred is entitled to the
applicable Holdings Preferred initial price per share plus all unpaid and
accrued dividends), unless the holders of at least 75% of the then outstanding
shares of Holdings Preferred, voting together as a single class (on an
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as-converted basis), elect to waive this provision. For this purpose, the term
"Change in Control" means any merger, consolidation, or reorganization of
AssureTec Holdings, or sale of all or substantially all of its assets or the
effectuation of any transaction or series of related transactions in which more
than 50% of the voting power of AssureTec Holdings is disposed of, excluding any
capital raising transaction approved in advance by a majority of the outstanding
Holdings Preferred (voting together as a single class and on an as-converted
basis).
In any of such events, if the consideration received by AssureTec Holdings
is other than cash, the value of the Preferred Stock will be deemed its fair
market value as determined in good faith by the Board of Directors of AssureTec
Holdings. At least ten days prior to the closing of any transaction that would
constitute a Change of Control (without giving effect to the paragraph above),
AssureTec Holdings shall provide written notice to each holder of Holdings
Preferred of its reasonable estimate of the amount that the holder of Holdings
Preferred would be entitled to receive upon the completion of such Change of
Control and the amount that such holder would otherwise be entitled to receive
if all outstanding Holdings Preferred were converted into Common Stock
immediately prior to the occurrence of such Change of Control. Any securities
shall be valued as follows:
(1) If traded on a securities exchange or through the NASDAQ National
Market, the value shall be deemed to be the average of the closing prices of the
securities on such exchange over the thirty-day period ending three (3) days
prior to the closing;
(2) If actively traded over-the-counter, the value shall be deemed to be
the average of the closing bid or sale prices (whichever is applicable) over the
thirty-day period ending three (3) days prior to the closing; and
(3) If there is no active public market, the value shall be the fair market
value thereof, as mutually determined by the disinterested members of the Board
of Directors of AssureTec Systems and the holders of at least a majority of the
voting power of then outstanding shares of System Preferred.
In the event of a merger or consolidation of AssureTec Holdings with or
into another corporation or entity or a sale by AssureTec Holdings of all or
substantially all of its assets, and in the case of successive such mergers,
consolidations or sales (except for any such transactions as are treated as a
liquidation), thereafter the shares of Holdings Preferred then outstanding shall
be convertible into the number and kind of securities of the acquiring or
surviving corporation (or such other entity whose securities are delivered in
exchange for the Common Stock of AssureTec Holdings) to which the holders of the
Holdings Preferred would have been entitled if such holders had converted their
Holdings Preferred into Common Stock or the common stock of any successor to
AssureTec Holdings upon the consummation of such sale, merger or consolidation;
and, in such case, appropriate adjustment (as determined in good faith by the
Board of Directors) shall be made with respect to the rights and interest
thereafter of the holders of Holdings Preferred, to the end that the provisions
set forth in the Holdings Preferred designations (including provisions with
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respect to changes in and other adjustments of the Conversion Prices) shall
thereafter be applicable, as nearly as reasonably may be, in relation to any
shares of stock or other property thereafter deliverable upon the conversion of
Holdings Preferred.
PART II
ITEM 1 MARKET PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no trading market for AssureTec Holdings common stock at present
and there has been no trading market to date. Management has not undertaken any
discussions, preliminary or otherwise, with any prospective market maker
concerning the participation of such market maker in the after-market for
AssureTec Holdings securities. There is no assurance that a trading market will
ever develop or, if such a market does develop, that it will continue.
As of June 30, 2005, 3,303 shares were subject to issuance upon the
exercise of Element 21 Options.
Currently 35 stockholders hold AssureTec Holdings common stock. After the
Holdings Spin-Off, there will be approximately 3,600 stockholders of AssureTec
Holdings common stock.
AssureTec Holdings has not paid any dividends to date, and has no plans to
do so in the immediate future.
Upon completion of the Holdings Spin-Off, the Company will act as its own
transfer agent and registrar for AssureTec Holdings.
Securities Authorized for Issuance Under Equity Compensation Plans
In December 2004, the Company's Board of Directors adopted a Stock Option
Plan (the "Option Plan') authorizing the issuance of up to 1,500,000 options
from currently authorized but un-issued shares of common stock for services to
the Company and Systems. Non-qualified stock options may be granted by an Option
Committee designated by the Board of Directors to employees and consultants for
their services to the Company and Systems. At June 30, 2005, 769,000 options
have been granted in lieu of $2.2 million of deferred compensation. At June 30,
2005, the total number of options issued under this option plan is 1.3 million
at an exercise price of $.50 per share, deemed by the Option Committee to be the
fair market price of the common stock after reflecting both the senior
liquidation preference of the Series A-1 Preferred Stock as well as the then
uncertain financial condition of the Company.
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ˇ Enlarge/Download Table
Number of Securities
Remaining Available for
Future Issuance under
Number of Securities to be Equity Compensation
Issued Upon Exercise of Weighted-Average Exercise Plans (Excluding
Outstanding Options, Price of Outstanding Options, Securities Reflected in
Plan Category Warrants and Rights Warrants and Rights Column (a))*
----------------------------- -------------------------- ----------------------------- -----------------------
(a) (b) (c)
Equity compensation plans
approved by security holders 0 0 0
Equity compensation plans not
approved by security holders 1,292,912 $0.50 207,088
--------- ----- -------
Total 1,292,912 $0.50 207,088
------------------
* At June 30, 2005
ITEM 2 LEGAL PROCEEDINGS
There is no litigation pending or threatened by or against AssureTec
Holdings to the knowledge of its management.
ITEM 3 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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ITEM 4 RECENT SALES OF UNREGISTERED SECURITIES
AssureTec Holdings
------------------
On March 31, 2004, Holdings acquired all outstanding common stock of
Systems by issuing to each holder of the common stock of Systems two shares of
Holdings common stock in exchange for one share of Systems common stock (the
"Systems Exchange"). Holders of 7,358,115 shares of Systems common stock and
options to purchase 6,945,966 shares of Systems common stock exchanged these
securities and their associated rights for 474,717 shares of Holdings common
stock and options to purchase 448,127 shares of Holdings common stock. As a
result of this transaction, as of March 31, 2004, Systems became a wholly owned
subsidiary of Holdings. Also as part of the Systems Exchange, Holdings issued
one share of Holdings Preferred Stock in exchange for each outstanding share of
Preferred Stock of Systems (a total of 601 shares). Immediately after the
Systems Exchange, Holdings effected a 1-for-31 reverse split of Holdings common
stock and of securities convertible into Holdings common stock.
On March 31, 2004, 601 shares of Convertible Preferred Stock of Systems
were exchanged for a like number of shares of Holdings Series A-1 Preferred
Stock. Each share is convertible into 322.58 shares of common stock. The holders
of Series A-1 Preferred Stock shall be entitled to receive dividends out of
funds legally available, therefor, at the rate of 5% of the applicable "Series
A-1 Price", adjusted to reflect any stock-split, stock dividend, combination,
recapitalization or reorganization occurring after the original issue date.
In April 2004, Holdings commenced a private offering of its Series A-2
Convertible Preferred Stock, pursuant to which it issued 25.2 shares of Series
A-2 Convertible Preferred Stock to officers of the Company and of its subsidiary
for gross proceeds of $67,800 in cash and in satisfaction of a total of $184,200
of debt. The Series A-2 Preferred shares were later cancelled, upon approval of
the Series A-2 holders, and exchanged for a total of 252 shares of Series A-1
Preferred Stock.
In July 2004, the Company granted employee stock options to purchase 6,400
shares of common stock for services provided. The stock options are exercisable
at $3.20 per share. The Company did not recognize additional stock based
compensation since there was no intrinsic value from the granting of the
options.
On August 13, 2004 the Company offered, in an Amended Private Placement
Offering, the sale of up to 1,250 shares of Series A-1 Convertible Preferred
Stock, to Accredited Investors Only, at a price of $1,000 per share (10 share
minimum). In case of over-subscription, the Company may accept up to an
additional 500 shares. The Related Party was issued 300 shares in settlement of
$300,000 owed by the Company to the Related Party under terms identical to those
of the Private Placement Offering. On February 21, 2005, the Company amended the
Private Placement Offering from 1,250 shares to 2,500 shares of the Company's
-49-
Series A-1 Convertible Preferred Stock. As of November 15, 2005, there have been
4,161 shares issued, raising approximately $3.2 million in net proceeds from the
offering.
In September 2004, the Company granted non-employee stock options to
purchase 500 shares of common stock at an exercise price of $4.00 per share for
services provided. Under the Black-Scholes option valuation model the valuation
of the option was approximately $1,360.
During the quarter ended September 30, 2004, the Company sold to a
non-affiliate 295 shares of Series A-1 Preferred Stock for gross proceeds of
$295,000
During the quarter ended December 31, 2004, the Company sold to a
non-affiliate 875 shares of Series A-1 Preferred Stock for gross proceeds of
$875,000.
During the quarter ended December 31, 2004, the Company issued 300 shares
of Series A-1 Preferred Stock for settlement of related party debt of $300,000.
During the quarter ended December 31, 2004, the Company converted 860
shares of common stock to 19 shares of Series A-1 Preferred Stock. No additional
consideration was received for this transaction.
During the quarter ended December 31, 2004, an officer and employee of the
Systems performed an exercise of 80,000 employee stock options at a price of
$0.50 per share for the settlement of debt owed to him of $40,000.
During the quarter ended December 31, 2004, the Company converted 4,000
shares of common stock to 14 shares of Series A-1 Preferred Stock. The
transaction originally occurred during the year ended June 30, 2004 as a sale of
the Company's common stock for gross proceeds of $14,000.
During the quarter ended December 31, 2004, an ex-employee returned 72
shares of the Company common stock and had it converted it to $418 of accrued
compensation to participate in the settlement of accrued compensation for
employee stock options. The Company retired the 72 shares of common stock.
In December 2004, the Company granted employee stock options to purchase
708,632 shares of common stock at a price of $0.50 per share for the settlement
of approximately $1.9 million of accrued compensation.
In December 2004, at the option of the stockholder, the Company retired
31,867 shares of common stock and granted 90,632 employee stock options at a
price of $0.50 per share. The options were valued under APB No. 25 and carried
an intrinsic value amount of approximately $236,000.
In December 2004 the Company granted employee stock options to purchase
43,334 shares of common stock at a price of $0.50 per share for services
provided. The options were valued under APB No. 25 and carried an intrinsic
value amount of approximately $113,000.
-50-
In December 2004, the Company granted employee stock options to purchase
68,506 shares of common stock at a price of $0.50 per share for the settlement
of approximately $186,000 of accrued compensation. The term of the settlement is
13 months and the Company will recognize a settlement of accrued compensation of
approximately $14,350 per month.
During the quarter ended December 31, 2004, the Company granted options to
purchase 79,337 shares of common stock at a price of $0.50 per share to outside
vendors for the settlement of payables of approximately $212,000.
During the quarter ended December 31, 2004, the Company granted
non-employee options to purchase 63,214 shares of common stock at a price of
$0.50 per share to outside parties for services provided. Under the
Black-Scholes option valuation model the valuation of the options was
approximately $172,000 which was included in stock-based compensation. The
services were for consulting fees incurred for capital raising.
During the quarter ended March 31, 2005, the Company sold 465 shares of
Series A-1 Preferred Stock for gross proceeds of $465,000.
In June 2005, the Company issued 21,774 shares of common stock to an
ex-employee and officer of Systems as part of a severance package. The shares
were valued at $6.20 per share and the Company recognized stock-based
compensation of $135,000.
On June 20, 2005, the Company granted employee stock options to purchase
3,300 shares of common stock at a price of $0.50 per share for services
provided. The options were valued under APB No. 25 and carried an intrinsic
value amount of approximately $8,600.
During the quarter ended June 30, 2005, the Company sold 1,050 shares of
Series A-1 Preferred Stock for gross proceeds of $1,050,000.
During the quarter ended June 30, 2005, the Company rescinded employee
stock options to purchase 80,874 shares of common stock at a price per share of
$6.21 granted on September 30, 2003, and in their place granted employee stock
options to purchase 460,882 shares of common stock at a price of $0.50 per share
for services provided. The options were valued under APB No. 25 and carried an
intrinsic value amount of approximately $1.2 million
During the quarter ended June 30, 2005, the Company granted 74,436 options
to non-employees at a price of $0.50 per share for services provided. Under the
Black-Scholes option valuation model the valuation of the options was
approximately $75,760.
-51-
In July 2005, the Company granted employee stock-options to acquire 16,129
shares of Common Stock exercisable at $0.50 per share for the settlement of
accrued compensation of $50,000. The employee stock-options are fully vested and
have a life of seven years.
In July 2005, at the option of the stockholder, the Company retired 21,774
shares of Common Stock for consideration of $135,000 and in their place granted
employee stock options to acquire 21,838 shares of Common Stock exercisable at
$0.50 per share.
In September 2005, the Company granted employee stock options to acquire
900 shares of Common Stock, exercisable at $6.00 per share, for services
provided. The employee stock options will vest over a period of three years and
have a life of five years.
During the quarter ended September 30, 2005, the Company sold 290 shares of
A-1 Preferred Stock for gross proceeds of $290,000.
On September 1, 2005 Holdings initiated a private placement to accredited
investors of debentures with warrants to purchase common stock. These debentures
have a six month term and bear interest at 12% annually. For each $3.00 of
debentures purchased, Holdings issued one warrant to purchase one share of
Holdings common stock at $6.00 per share for a period of one year from the date
of investment or upon an initial public offering by Holdings, whichever occurs
earlier. This private offering raised gross proceeds of $1.125 million and net
proceeds of approximately $1.035 million and in October 2005, Holdings issued
warrants to acquire 375,667 shares of Common Stock.
On September 15, 2005 Holdings commenced a private offering to accredited
investors of up to 1,250,000 shares of Holdings common stock. Pursuant to this
private offering, the Company is offering units for gross proceeds of $12.00 per
unit. Each unit is comprised of two shares of common stock at $6.00 per share
with one warrant to acquire one share of common stock at $6.00 per share, for
each two shares of common stock purchased. The warrants issued in this offering
are exercisable for a period of one year from the date of investment or upon an
initial public offering by Holdings, whichever occurs earlier. As of October 31,
2005, a total of 333,333 shares had been sold, and 166,667 warrants have been
granted, pursuant to this offering raising gross proceeds of $2.0 million, of
which $1.125 million was applied to retire the September 1, 2005 debentures.
In September 2005, the Company granted warrants to acquire 73,548 shares of
Common Stock exercisable at $3.255 per share to the registered broker dealers
and their assigns for services provided with capital raising efforts related to
the Preferred A-1 offering. The warrants are fully vested and have a life of 5
years.
In October 2005, the Company granted warrants to acquire 200,000 shares of
Common Stock, exercisable at $6.00 per share, to a related party in exchange for
a covenant not to request repayment of advances to the Company by Affiliates
which were in excess of $600,000. The warrant coverage was identical to that
-52-
offered to unrelated parties under the September 1, 2005 offering of debentures.
The warrants are fully vested and have a life of one year or upon an initial
public offering by Holdings, whichever occurs earlier.
In October 2005, the Company granted warrants to acquire 16,667 shares of
Common Stock exercisable at $6.30 per share to the registered broker dealers and
their assigns for services provided with capital raising efforts related to the
September 1, 2005 debenture offering. The warrants are fully vested and have a
life of 5 years.
In October 2005, the Company granted warrants to acquire 33,333 shares of
Common Stock exercisable at $6.30 per share to the registered broker dealers and
their assigns for services provided with capital raising efforts related to the
September 15, 2005 private offering. The warrants are fully vested and have a
life of 5 years.
In October 2005, the Company granted employee stock options to acquire
103,000 shares of Common Stock, exercisable at $6.00 per share, for services
provided. The employee stock options will vest over a period of three years and
have a life of five years.
In October 2005, the Company sold 25 shares of A-1 Preferred Stock for
gross proceeds of $25,000.
In October 2005, at the option of the stockholder, the Company retired 25
of 50 shares of Preferred A-1 Stock and returned the investment of $25,000 to
the former stockholder and ex-director of the Company.
Element 21 intends to effect a spin-off of Element 21's shares of common
stock of Holdings (the "Holdings Spin-Off") pursuant to an exemption from
registration under the Securities Act of 1933, as amended (the "Act"). The
Holdings Spin-Off will be pro-rata to Element 21 stockholders of records as of
October 4, 2002, excluding, in accordance with the consent of such stockholders,
shares held by stockholders who received shares of Element 21 common stock in
connection with the acquisition by Element 21 of Systems.
Each of the above issuances was made pursuant to Section 4(2) of the
Securities Act of 1933 and pursuant to Regulation D promulgated thereunder.
AssureTec Systems
-----------------
AssureTec Systems made the following issuances of unregistered securities
during the past three years, all of which were made pursuant to Section 4(2) of
the Securities Act and pursuant to Regulation D promulgated thereunder.
In 2002, AssureTec Systems issued options to purchase 100,000 (6,452 post
split) shares of its common stock to a non-employee at $0.001 per share. We
recorded $1,279 in stock-based compensation relating to this grant. In 2002,
AssureTec Systems issued 215,638 shares of its common stock to unrelated third
-53-
parties in lieu of cash compensation. We recorded $123,744 in connection with
the issuance of these shares of common stock based on the fair value of the
services we received. The fair value of the stock options awarded to
non-employees was calculated using the Black-Scholes method.
In November 2002, AssureTec Systems issued shares of Common Stock for the
acquisition of $9,167 of property and equipment.
In January 2003, AssureTec Systems issued options to purchase 200,000
shares of common stock at a price per share of $0.375 to Robert Babbitt,
President of Systems, vesting September 2003 and expiring in September 2008
pursuant to his employment agreement. In addition, pursuant to his agreement,
Mr. Babbitt received options to purchase a total of 1,800,000 shares of common
stock of AssureTec Systems; of which options to purchase 350,000 shares at
$0.375 are exercisable effective January 20, 2003 and expire on September 30,
2008; of which options to purchase 300,000 shares at $0.375 per share vest
through January 2004 and expire on December 31, 2011; of which options to
purchase 350,000 shares at $0.60 per share vest through January 2005 and expire
on December 31, 2011; of which options to purchase 400,000 shares at $0.90 vest
through January 2006 and expire on February 12, 2010; and of which options to
purchase 400,000 shares at $1.25 vest through December 31, 2006 and expire on
February 12, 2010. Upon the completion of the Exchange Agreement with Holdings,
these 2,000,000 Systems options were converted to 129,032 Holdings options at
exercise prices ranging from $5.81 to $19.38.
In March 2003, AssureTec Systems sold 33,334 (2,151 post split) shares for
$17,000 to an accredited investor with no prior relationship with the Company.
In July 2003, AssureTec Systems sold 135,000 shares of common stock at a
price per share of $0.37 to Thomas Colatosti, a director of the Company and of
AssureTec Systems. In March 2004 these shares were converted to 50 shares of
convertible Series A Preferred Stock.
In July 2003, AssureTec Systems issued options to acquire 150,000 shares of
common stock at a price per share of $0.37 to Tom Colatosti, which vest over a
twelve-month period in consideration for executing a consulting agreement. On
March 31, 2004, at the time of the Systems Exchange, Holdings assumed these
options and converted them to options to acquire 9,677 shares of common stock of
Holdings at $5.74 per share.
As described under "Deferred Compensation" on page 43, pursuant to the
September 30, 2003 letter agreements as amended by the Exchange Agreement,
options were issued to acquire a total of 80,874 post split shares of Holdings
common stock at a price per share of $6.21 per share, and a total of 33,157
shares of Holdings, at $5.81 per share, have been issued.
In December 2003, AssureTec Systems issued shares of its Common Stock to
employees for settlement of approximately $192,700 of accrued compensation.
-54-
During the fiscal year ended June 30, 2004, AssureTec Systems issued shares
of its Common Stock to related and unrelated parties in lieu of cash
compensation, primarily for services rendered on behalf of AssureTec Systems.
AssureTec Systems recorded $423,664, in stock-based compensation relating to the
issuance of these shares of its Common Stock for the year then ended. The value
of the stock-based compensation was based on the fair value of the services
received in accordance with SFAS No. 123 and EITF No. 96-18.
As described under "Securities Authorized for Issuance Under Equity
Compensation Plans" on page 48, pursuant to the Company's Option Plan, at June
30, 2005, 769,000 options have been granted in lieu of $2.2 million of deferred
compensation. At June 30, 2005, the total number of options issued under this
option plan is 1.3 million at an exercise price of $.50 per share, deemed by the
Option Committee to be the fair market price of the common stock at the time of
issuance of the options, after reflecting both the senior liquidation preference
of the Series A-1 Preferred Stock as well as the then uncertain financial
condition of the Company.
ITEM 5 INDEMNIFICATION OF DIRECTORS AND OFFICERS
AssureTec Holdings' Certificate of Incorporation provides for the
indemnification of directors to the fullest extent of Delaware law.
Specifically, it provides that no director shall be liable to the corporation or
any of its stockholders for monetary damages for breach of fiduciary duty as a
director, except with respect to (1) a breach of the director's duty of loyalty
to the corporation or its stockholders, (2) acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (3)
liability under Section 174 of the Delaware General Corporation Law or (4) a
transaction from which the director derived an improper personal benefit.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
issuing company pursuant to the foregoing provisions, AssureTec Holdings has
been informed that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is
therefore unenforceable.
-55-
PART F/S
ASSURETEC HOLDINGS, INC.
(a development stage enterprise)
INDEX TO FINANCIAL STATEMENTS
ANNUAL REPORT FOR YEAR ENDED JUNE 30, 2003 and 2002 Page
---------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
Consolidated Balance Sheets as of June 30, 2003 and 2002 F-2
Consolidated Statements of Operations for the Years F-3
Ended June 30, 2003 and 2002 and for the Period from
October 2, 2001 (Dated of Inception) to June 30, 2003
Consolidated Statement of Stockholders' Deficiency for F-4
the Period From October 2, 2001 (Date of Inception) to
June 30, 2003
Consolidated Statements of Cash Flows for the Years Ended F5-F6
June 30, 2003 and 2002 and for the Period From
October 2, 2001 (Date of Inception) to June 30, 2003
Notes to Consolidated Financial Statements F7-F34
INTERIM REPORT FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
------------------------------------------------------------
Consolidated Balance Sheet as of September 30, 2003 (Unaudited) F-35
Consolidated Statements of Operations for the Three Months F-36
Ended September 30, 2003 and 2002 and for the Period
From October 2, 2001 (Date of Inception) to
September 30, 2003 (Unaudited)
Consolidated Statements of Cash Flows for the Three Months F-37-F38
Ended September 30, 2003 and 2002 and for the Period
From October 2, 2001 (Date of Inception) to
September 30, 2003 (Unaudited)
Notes to Unaudited Consolidated Financial Statements F-39 - F-57
-56-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
AssureTec Holdings, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of AssureTec
Holdings, Inc. and Subsidiary (a Development Stage Enterprise) (the "Company")
as of June 30, 2003 and 2002, and the related consolidated statements of
operations, stockholders' deficiency, and cash flows for each of the years ended
June 30, 2003 and 2002 and for the period from October 2, 2001 (date of
inception) to June 30, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
AssureTec Holdings, Inc. and Subsidiary (A Development Stage Enterprise) as of
June 30, 2003 and 2002, and the results of its consolidated operations and
its consolidated cash flows for each of the years ended June 30, 2003 and 2002
and for the period from October 2, 2001 (date of inception) to June 30, 2003, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has had recurring losses from
operations and has a working capital deficiency as of June 30, 2003. These
conditions raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning those matters also are described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Marcum & Kliegman LLP
January 14, 2005, except for Note 11
as to which the date is October 31, 2005
F-1
ˇ Enlarge/Download Table
ASSURETEC HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
2003 2002
Current Assets:
Cash and cash equivalents $ 7,714 $ 2,152
----------- -----------
Total current assets 7,714 2,152
Property and equipment - net 42,094 37,437
Patents 28,090 --
Other assets 3,544 3,607
----------- -----------
Total Assets $ 81,442 $ 43,196
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICENCY
Current Liabilities:
Accounts payable and accrued liabilities $ 499,100 $ 144,822
Accrued compensation and related payroll taxes 2,054,983 293,485
Notes payable - related party 164,265 155,205
Advances from affiliates 641,683 196,584
----------- -----------
Total current liabilities 3,360,031 790,096
----------- -----------
Commitments and Contingencies (Note 9)
Stockholders' Deficiency:
Convertible Preferred stock - $0.001 par value; authorized
5,000,000 shares; issued and outstanding, 0 shares -- --
Common stock - $0.001 par value; authorized, 100,000,000
shares; issued and outstanding, 175,284 shares 175 175
Additional paid- in capital 251,736 101,825
Deficit accumulated during the development stage (3,530,500) (848,900)
----------- -----------
Total Stockholders' Deficiency (3,278,589) (746,900)
----------- -----------
Total Liabilities and Stockholders' Deficiency $ 81,442 $ 43,196
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-2
ASSURETEC HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period from
For the Years Ended June 30, October 2, 2001
---------------------------------- (Date of Inception) to
2003 2002 June 30, 2003
------------------------------------------------------------
Net revenues $ 9,747 $ -- $ 9,747
Cost of revenues 6,557 -- 6,557
----------- ----------- -----------
Gross profit 3,190 -- 3,190
----------- ----------- -----------
Costs and expenses:
Selling, general and administrative (1) 1,072,384 379,737 1,452,121
Engineering, research and development (1) 1,440,027 373,685 1,813,712
Management fees - related party 90,000 -- 90,000
Consulting fees - related party 21,236 83,347 104,583
----------- ----------- -----------
2,623,647 836,769 3,460,416
----------- ----------- -----------
Loss from operations (2,620,457) (836,769) (3,457,226)
----------- ----------- -----------
Other income (expense):
Interest expense - related party (42,000) (7,800) (49,800)
Interest expense (21,903) (4,331) (26,234)
Other income 2,760 -- 2,760
----------- ----------- -----------
Net loss $(2,681,600) $ (848,900) $(3,530,500)
=========== =========== ===========
Net loss per share - basic and diluted $ (15.30) $ (4.84)
=========== ===========
Weighted average shares outstanding - basic
and diluted 175,284 175,284
=========== ===========
(1) Includes compensatory element of stock issuances as follows:
Selling, general and administrative $ 70,237 $ 1,279 71,516
Engineering, research, and development 53,507 -- $ 53,507
----------- ----------- -----------
$ 123,744 $ 1,279 $ 125,023
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-3
ASSURETEC HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
For the Period from October 2, 2001 (Inception) to June 30, 2003
Deficit
Accumulated
Preferred Common Additional During The Total
------------------ ------------------- Paid-in Development Stockholders'
Date Shares Amount Shares Amount Capital Stage Deficiency
--------- ------ -------- --------- -------- ----------- ---------- ----------
Balance at October 2, 2001 -- $ -- -- $ -- $ -- $ -- $ --
(Inception)
--------------------------
Issuance of common stock 10/2/2001 -- -- 175,284 175 100,546 -- 100,721
to founders
Effect of subsidiary's equity
transaction - issuance
of option to acquire
shares of common stock
for legal services rendered 6/25/2002 -- -- -- -- 1,279 -- 1,279
Net loss -- -- -- -- -- (848,900) (848,900)
------ -------- --------- --------- ----------- ----------- ---------
Balance at June 30,2002 -- -- 175,284 175 101,825 (848,900) (746,900)
-----------------------
Effect of subsidiary's equity
transaction - issuance of
common stock for the
acquisition of
property and equipment 11/14/2002 -- -- -- -- 9,167 -- 9,167
Effect of subsidiary's equity
transaction - compensatory
elements of stock issuance
of common stock 12/31/2002 -- -- -- -- 123,744 -- 123,744
Effect of subsidiary's equity
transaction - issuance
of common stock for net
proceeds of $17,000 3/10/2003 -- -- -- -- 17,000 -- 17,000
Net loss -- -- -- -- -- (2,681,600) (2,681,600)
------ -------- --------- --------- ----------- ----------- -----------
Balance at June 30,2003 -- $ -- 175,284 $ 175 $ 251,736 (3,530,500) (3,278,589)
----------------------- ------ -------- --------- --------- ----------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial statements
F-4
ASSURETEC HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Period from
For the Years Ended June 30, October 2, 2001
------------------------------- (Date of Inception)
2003 2002 to June 30, 2003
----------------------------------------------------
Cash flows from operating activities:
Net loss $(2,681,600) $ (848,900) $(3,530,500)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 14,126 956 15,082
Compensatory element of stock issuances 123,744 1,279 125,023
Changes in operating assets and liabilities:
Other assets 63 (3,607) (3,544)
Accounts payable and accrued liabilities 354,278 144,822 499,100
Accrued compensation 1,770,558 376,690 2,147,248
----------- ----------- -----------
Net cash used in operating activities (418,831) (328,760) (747,591)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (9,616) (38,393) (48,009)
Acquisition of patents (28,090) -- (28,090)
----------- ----------- -----------
Net cash used in investing activities (37,706) (38,393) (76,099)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of equity securities by
subsidiary 17,000 -- 17,000
Issuance of common stock to founders -- 100,721 100,721
Proceeds from notes payable - related party -- 72,000 72,000
Advances from affiliates 445,099 196,584 641,683
----------- ----------- -----------
Net cash provided by financing activities 462,099 369,305 831,404
----------- ----------- -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 5,562 2,152 7,714
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 2,152 -- --
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,714 $ 2,152 $ 7,714
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-5
ASSURETEC HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Period from
For the Years Ended June 30, October 2, 2001
--------------------------- (Date of Inception)
2003 2002 to June 30, 2003
-------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ -- $ -- $ --
========= ========= =======
Income taxes paid $ -- $ -- $ --
========= ========= =======
Non-Cash Investing Activities:
Issuance of common stock for property and equipment $ 9,167 $ -- $ 9,167
========= ========= =======
Non-Cash Financing Activities:
Conversion of accrued compensation into notes payable $ 9,060 $ 83,205 $92,265
========= ========= =======
The accompanying notes are an integral part of these consolidated financial statements.
F-6
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Operations
The Company
AssureTec Holdings, Inc. and Subsidiary (a development stage enterprise)
(the "Company") develops integrated identity document management
applications for use in government and commercial security applications.
The Company's proprietary document management platform automatically reads,
records and authenticates identification documents, such as passports,
visas or driver's licenses, through its proprietary database software,
thereby reducing the risk of human error in detecting falsified or tampered
forms of identification.
The Company has not generated significant revenues from products that have
been developed to date; accordingly, the Company is considered a
development stage enterprise as defined in Financial Accounting Standards
Board No. 7, "Accounting and Reporting for Development Stage Companies."
The Company is subject to a number of risks similar to those of other
companies in an early stage of development. Principal among these risks are
dependencies on key individuals, competition from other substitute products
and larger companies, the successful development and marketing of its
products and the need to obtain adequate financing necessary to fund future
operations.
Going Concern
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
The Company has experienced accumulated losses of approximately $3.5
million since inception. As of June 30, 2003, the Company has a working
capital deficit of approximately $3.4 million. The Company's continued
existence is dependent upon its ability to obtain needed working capital
through additional equity and/or debt financing, and the acceptability of
its integrated identity document management applications for use in
government and commercial security applications to create sales that will
help the Company achieve a profitable level of operations.
These matters raise substantial doubt about the Company's ability to
continue as a going concern. However, the accompanying consolidated
financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of the
liabilities in the normal course of business. The financial statements do
not include any adjustments relating to the recovery of assets or the
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
F-7
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Operations (continued)
Going Concern (continued)
Management believes that it will be successful in obtaining additional
financing, from which the proceeds will be primarily used to execute its
operating plan. However, no assurances can be provided that the Company
will obtain additional financing or achieve a profitable level of
operations.
Business Development
On June 12, 2002, AssureTec Holdings, Inc ("ATH") was incorporated under
the laws of the state of Delaware. The sole stockholder of ATH was Element
21 Golf Company ("Element 21"). Upon incorporation, Element 21 transferred
certain assets and liabilities into ATH, including cash, accounts
receivable and payable and all of Element 21's ownership of AssureTec
Systems, Inc. (a development stage enterprise) ("ATS"). At the time of
transfer, Element 21 owned approximately 34.2% of the issued and
outstanding common stock of ATS.
In addition, all of Element 21's ownership in three non-operating entities
was transferred into ATH. The three non-operating entities were (i)
Biorelease Technologies, Inc., (ii) I-Jam Entertainment, Inc. and (iii)
Advanced Conductor Technologies, Inc. The ownership of these three
non-operating entities was transferred to two stockholders of ATH, one of
whom is the Company's chief executive officer, effective April 21, 2003 in
consideration for the complete indemnification of ATH by the two
stockholders of all current and future liabilities associated with these
entities.
Several individuals incorporated AssureTec Systems, Inc. (a development
stage enterprise) ["ATS"] under the laws of the state of Delaware on
October 2, 2001. ATS was formed to develop integrated identity document
management applications for use in government and commercial security
applications. Effective November 9, 2001, Element 21 acquired 100% of the
issued and outstanding shares of ATS common stock in exchange for shares of
Element 21 common stock. Element 21 is a Delaware corporation that, until
October 2003, was doing business under the name BRL Holdings, Inc. ("BRL").
Element 21 was controlled by the same individuals who incorporated ATS.
This transaction was executed between Element 21 and the individual owners
of ATS to provide a better means of raising capital financing to further
the commercialization of both ATS and Element 21 technologies.
ATS operated as a wholly owned subsidiary of Element 21 until April 1,
2002. On April 1, 2002, Element 21 transferred approximately 65.8% of its
ownership of ATS to the original individual owners of ATS in exchange for
shares of Element 21 common stock held by these individuals. This
transaction was executed as Element 21 was unsuccessful in obtaining
significant capital financing for both its and ATS' technologies and
Element 21 was unable to support ATS' operations as a wholly owned
subsidiary.
F-8
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Operations (continued)
Basis of Presentation
On March 10, 2004, the Company's Board of Directors authorized a 1-for-31
reverse stock split of its common stock and common stock equivalents. This
reverse stock split was effective on March 10, 2004. All historical
references to shares of common stock and price per share have been restated
to reflect the 1-for-31 reverse stock split.
On March 31, 2004, the Company completed its common stock and common stock
equivalent share exchange with the individual stockholders of ATS (the
"Share Exchange"). Holders of 7,358,115 shares of ATS common stock and
options to purchase 6,945,966 shares of ATS common stock exchanged these
securities and their associated rights for 474,717 shares of the Company's
common stock and options to purchase 448,127 shares of the Company's common
stock. The Share Exchange was accounted for as a common control merger.
Effective as of March 31, 2004, there were no minority interests in ATS.
The Company has complete ownership of the issued and outstanding shares of
ATS common stock and common stock equivalents.
The consolidated financial statements have been prepared using the
historical accounting records of both ATH and ATS as the same management
controlled both entities prior to the Share Exchange. The operations of ATH
are limited and consist primarily of certain management costs, such as
compensation and third party management and accounting services. Historical
references to the Company's operations primarily consist of those
transactions executed by ATS in the development of its integrated identity
document management applications. See Notes 8 and 11.
2. Summary of Significant Accounting Policies
Principles of Consolidation - As described in Note 1, the consolidated
financial statements include the accounts of ATH and ATS as the same
management controls each development stage enterprise.
For all periods presented, losses attributable to minority interest were in
excess of any investment in ATS by such minority interest investors. In
addition, individual entities comprising minority interest did not have any
commitment to fund any losses of ATS; accordingly no minority interest is
presented in the accompanying financial statements.
All material intercompany balances and transactions have been eliminated.
Issuance of Stock by Subsidiary - The Company's subsidiary, ATS, has issued
stock to related and unrelated parties during the normal course of its
business (see Note 8). As a result of these stock issuances, the Company's
net investment decreases. The Company records the decrease in its
Consolidated Statements of Stockholders' Deficiency as "Effect of
subsidiary's equity transactions". All historical references to the shares
issued by subsidiary have been restated to the March 31, 2004 share
exchange.
F-9
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management 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 the
reported amounts of revenues and expenses during each of the reporting
periods. Actual results could differ from those estimates.
Cash and Cash Equivalents - Cash and cash equivalents consist of cash and
temporary investments with maturities of three months or less when
purchased. The Company had no cash equivalents as of June 30, 2003 and
2002.
Inventory - Inventory consists of finished goods and is stated at the lower
of cost or market utilizing the first-in, first-out method. The Company had
no inventory as of June 30, 2003 and 2002.
Advertising Costs - Advertising costs are expensed as incurred. Advertising
costs, which are included in selling, general and administrative expenses,
were immaterial for each of the years ended June 30, 2003 and 2002,
respectively.
Shipping and handling costs - Shipping and handling costs are expensed as
incurred as part of cost of revenues. These costs were deemed to be
immaterial during each of the reporting periods.
F-10
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
Fair Value of Financial Instruments - Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments"
requires that the Company disclose estimated fair values of financial
instruments. The carrying amounts reported in the statement of financial
position for current assets and current liabilities qualifying as financial
instruments approximate fair value because of their short maturities. The
fair value of the Company's notes payable and advances to related and
affiliated parties are not reasonably determinable based on the related
party nature of the transactions.
Property and Equipment - Property and equipment consists primarily of
computer equipment and is stated at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives
(generally three to seven years) of the related assets. Expenditures for
maintenance and repairs, which do not extend the economic useful life of
the related assets, as charged to operations as incurred. Gains or losses
on disposal of property and equipment are reflected in the statement of
operations in the period of disposal.
Impairment of Long-Lived Assets - The Company periodically reviews the
carrying value of property and equipment to determine if events and
circumstances exist indicating that the assets might be impaired. When
evaluating assets for potential impairment, the Company first compares the
carrying amount of the asset to the asset's estimated future cash flows
(undiscounted and without interest charges). If the estimated future cash
flows used in this analysis are less than the carrying amount of the asset,
an impairment loss calculation is prepared. The impairment loss calculation
compares the carrying amount of the asset to the asset's estimated future
cash flows (discounted and with interest charges). If the carrying amount
exceeds the asset's estimated futures cash flows (discounted and with
interest charges), the loss is allocated to the long-lived assets of the
group on a pro rata basis using the relative carrying amounts of those
assets.
Patents - Patents consist of unamortized patent costs. The Company
capitalizes external costs such as legal fees and patent application fees
it incurs until a patent is granted from the United States Patent and
Trademark Office. Once a patent is granted, the Company amortizes its
capitalized patent costs using the straight-line method over 17 years. At
June 30, 2003, none of the Company's pending patents have been approved or
granted. The Company assesses the carrying value of its patents for
impairment each year. Based on its assessments, the Company did not incur
any impairment charges for the years ended June 30, 2003 and 2002.
F-11
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
Accrued Compensation - Employees and management of the Company have been
deferring their earned compensation since the Company's inception due to
the Company's insufficient working capital levels. The Company properly
expensed these obligations and the corresponding employment taxes
associated with these deferred wages and salaries as incurred. The Company
has accrued interest costs at a rate of 3% per annum on the unpaid
balances. Certain employees have converted their deferred compensation into
unsecured, zero-interest notes payable by the Company. During the fiscal
years ended June 30, 2003 and 2002, $9,060 and $83,205, respectively, were
converted from accrued compensation to notes payable.
Revenue Recognition - Generally, revenue is recognized upon shipment to the
customer (which constitutes delivery), provided that persuasive evidence of
an arrangement exists, the fee is fixed or determinable, and collection is
reasonably assured. To the extent that one or more of these conditions are
not met, which has occurred in the past, revenue is deferred until such
time as all four criteria are met. Revenue from sales to integrators,
value-added resellers and distributors is recognized on a "sell-through"
basis, that is, when these parties report to the Company that resale of the
product to the ultimate end customer has occurred.
In general, the Company requires an upfront deposit for significant
customer purchases. If the Company receives a payment from a customer prior
to meeting all of the revenue recognition criteria, the payment is recorded
as deferred revenue. The Company's current arrangements with its third
party integrators, value-added resellers and distributors do not provide
for any rights of return, price-protection or other contingencies. The
Company's general credit terms requires a 50% deposit on order and complete
payment within 30 days of shipment. As of June 30, 2003 and 2002, there
were no deposits for open orders.
The Company records a provision for estimated sales returns and allowances
on product sales in the same period as the related revenue is recorded.
These estimates are based on known and estimated factors. Sales returns and
allowances during each of the reporting periods have been deemed
immaterial.
F-12
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
To date, the Company has not established VSOE ("Vendor Specific Objective
Evidence") of fair value for its software, products and services. For sales
where maintenance is the only undelivered element, the Company recognized
the total sale ratably over the term of the embedded maintenance period.
The Company believes that it will establish VSOE of fair value for
maintenance however, the exact timing is uncertain. Once VSOE of fair value
for maintenance and other services is established, the Company will utilize
the residual method of accounting as permitted under Statement of Position
98-9, "Modification of SOP 07-2, `Software Revenue Recognition, ` With
Respect to Certain Transactions," and defer the VSOE of maintenance and
recognize the residual amount of the total sale as software and product
revenue in the period in which the arrangement exists, the software and
products are delivered and the fee is collectible. Maintenance revenue will
then be recognized ratably over the maintenance period.
Research and Development Costs - Research and development costs are
expensed as incurred.
Software Development Costs - Costs incurred prior to technological
feasibility of the Company's software products are expensed as research and
development costs. Certain costs incurred after technological feasibility
has been established are capitalized. As of June 30, 2003 and 2002, the
Company has not capitalized any software costs.
Income Taxes - Deferred tax liabilities and assets are determined based on
the difference between the financial statement carrying amounts and tax
bases of existing assets and liabilities, using enacted tax rates. The
effect of a change in rates is recognized as income or expense in the
period of the change. A valuation allowance is established, when necessary,
to reduce the deferred income tax assets to the amount that is more likely
than not to be realized.
Stock-Based Compensation - The Company accounts for stock-based employee
compensation arrangements using the intrinsic value method in accordance
with Accounting Principles Board Opinion ("APB) No. 25, "Accounting for
Stock Issued to Employees" and complies with the disclosure provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation" as amended by SFAS No. 148 "Accounting for
stock-based compensation - Transition and Disclosure, an amendment of FASB
123", issued in December 2002.
F-13
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
Equity instruments issued to non-employee vendors are accounted for in
accordance with the provisions of SFAS No. 123, and Emerging Issues Task
Force ("EITF") Issue No. 96-18, "Accounting for Equity Instruments That Are
Issued To Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services." All transactions in which goods or services
are the consideration received for the issuance of equity instruments are
accounted for based on the fair value of the equity instrument issued,
whichever is more reliably measurable. The measurement date of the fair
value of the equity instrument issued is the date on which the counter
party's performance is complete.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation- Transition and Disclosure - an Amendment of FASB Statement
No. 123." This statement amends SFAS No. 123 to provide alternative methods
of transition for a voluntary change to the fair-value based method of
accounting for stock-based employee compensation, In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect
of the method used on reported results. SFAS No. 148 also requires that
those effects be disclosed more prominently by specifying the form, content
and location of those disclosures. The Company has adopted the disclosure
only requirements of SFAS No. 148.
The Company does not maintain a formal incentive compensation plan covering
its employees, directors and independent contractors. Options to purchase
the Company's common stock vest at varying intervals, but in general,
typically vest over two to four year periods. An option's maximum term is
ten years. See Note 8 for additional information regarding the Company's
stock options.
F-14
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
The following table provides an expanded reconciliation for all periods
presented that adds back to reported net loss the recorded expense under
APB No. 25, deducts the total fair value expense under SFAS No. 123, and
shows the reported and pro forma earnings per share amounts:
ˇ Enlarge/Download Table
Years Ended June 30,
2003 2002
------------------------------------
Net loss, as reported $(2,681,600) $ (848,900)
Add: stock-based employee compensation costs included
in net loss, as reported -- --
Less: stock-based employee compensation as determined
under fair value based method for all awards (110,466) (57,154)
----------- -----------
Pro forma net loss $(2,792,066) $ (906,054)
=========== ===========
Weighted average shares outstanding, basic and diluted 175,284 175,284
=========== ===========
Net loss per share, basic and diluted, as reported $ (15.30) $ (4.84)
=========== ===========
Net loss per share, basic and diluted, pro forma $ (15.93) $ (5.17)
=========== ===========
The fair value of each employee option grant is estimated on the date of
the grant using the Black-Scholes option-pricing model. Key
weighted-average assumptions used to apply this pricing model are as
follows:
2003 2002
-------------------------
Risk-free interest rate 3.25% 3.25%
Expected life of option grants 4 years 4 years
Expected volatility of underlying stock 20% 20%
Net Loss Per Share - Net loss per share is computed in accordance with
Statement of Financial Standards No. 128, "Earnings Per Share"("SFAS No.
128"). SFAS No. 128 requires the presentation for both basic and diluted
earnings per share.
F-15
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
Basic net loss per common share is computed by dividing net loss applicable
to common stockholders by the weighted average number of common shares
outstanding during the year. Diluted net loss per common share reflects, in
addition to the weighted average number of common shares, the potential
dilution if common stock options were exercised into common stock, unless
the effects of such exercise would be anti-dilutive.
Basic and diluted loss per common share are the same for 2003 and 2002 as
potentially dilutive stock options totaling 248,003 at June 30, 2003 and
70,906 at June 30, 2002 have not been included in calculations of diluted
net loss per share, as their inclusion would be anti-dilutive.
Comprehensive Loss - Comprehensive loss is equal to net loss for each of
the reporting periods presented.
F-16
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
Recently Issued Accounting Pronouncements - In January 2003, the FASB
issued FASB interpretation No. 46, "Consolidation of Variable Interest
Entities". In December 2003, the FASB issued FIN No. 46 (Revised), ("FIN
46-R") to address certain FIN 46 implementation issues. This interpretation
requires that the assets, liabilities, and the results of activities of a
Variable Interest Entity ("VIE") be consolidated into the financial
statements of the enterprise that has a controlling interest in the VIE.
FIN 46R also requires additional disclosures by primary beneficiaries and
other significant variable interest holders. For variable interest entities
acquired or created before February 1, 2003, this interpretation is
effective no later than the end of the first interim or reporting period
ending after December 15, 2003, for all entities acquired subsequent to
January 31, 2003, this interpretation is effective as of the first interim
or annual period ending after December 31, 2003. In December 2003, the FASB
issued Interpretation No. 46R which revised certain provisions of FIN 46.
Publicly reporting entities that are small business issuers must apply FIN
46R to all entities subject to FIN 46R no later than the end of the first
reporting period that ends after December 15, 2004 (as of December 31,
2004, for a calendar year enterprise). The effective date includes those
entities to which FIN 46 had previously been applied. However, prior to the
application of FIN 46R, a public entity that is a small business issuer
shall apply FIN 46 or FIN 46R to those entities that are considered
special-purpose entities no later than as of the end of the first reporting
period that ends after December 15, 2003. The adoption of FIN 46R did not
have a material impact on the Company's results of operations or financial
position.
In April 2003, the FASB issued SFAS No 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and
for hedging activities under SFAS No. 133, "Accounting for Derivative
instruments and Hedging Activities." SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003. The adoption of
SFAS No. 149 did not have a material impact on the Company's results of
operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS No. 150 did not have a material impact on the Company's
results of operations or financial position.
F-17
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
In October 2004, the FASB ratified the consensus reached in EITF Issue No.
04-8, "The Effect of Contingently Convertible Instruments on Diluted
Earnings per Share." The EITF reached a consensus that contingently
convertible instruments, such as contingently convertible debt,
contingently convertible preferred stock, and other such securities should
be included in diluted earnings per share (if dilutive) regardless of
whether the market price trigger has been met. The consensus became
effective for reporting periods ending after December 15, 2004. Management
is evaluating the impact of this pronouncement on the Company's financial
statements.
In December 2004, the FASB issued SFAS No. 123R "Shared Based Payment".
This statement is a revision of SFAS Statement No. 123, "Accounting for
Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and its related implementation guidance.
SFAS 123R addresses all forms of shared based payment ("SBP") awards,
including shares issued under employee stock purchase plans, stock options,
restricted stock and stock appreciation rights. Under SFAS 123R, SBP awards
result in a cost that will be measured at fair value on the awards' grant
date, based on the estimated number of awards that are expected to vest and
will be reflected as compensation cost in the historical financial
statements. This statement is effective for public entities that file as
small business issuers - as of the beginning of the first interim or annual
reporting period that begins after December 15, 2005. The Company is in the
process of evaluating whether the SFAS No. 123R will have a significant
impact on the Company's overall results of operations or financial
position.
In May 2005, the FASB issued SFAS 154 "Accounting Changes and Error
Corrections" a replacement of APB Opinion No. 20 and FASB Statement No. 3.
This statement replaces APB Opinion No. 20, "Accounting Changes," and FASB
Statement No. 3, "Reporting Accounting Changes in Interim Financial
Statements," and changes the requirements for the accounting for and
reporting of a change in accounting principle. This statement applies to
all voluntary changes in accounting principle. It also applies to changes
required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. When a
pronouncement includes specific transition provisions, those provisions
should be followed. This statement is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15,
2005. Management is evaluating the impact of this pronouncement on the
Company's financial statements.
f-18
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
In June 2005, the EITF reached consensus on Issue No. 05-6, "Determining
the Amortization Period for Leasehold Improvements" (EITF 05-6). EITF 05-6
provides guidance on determining the amortization period for leasehold
improvements acquired in a business combination or acquired subsequent to
lease inception. The guidance in EITF 05-6 will be applied prospectively
and is effective for periods beginning after June 29, 2005. EITF 05-6 is
not expected to have a material impact on the Company's consolidated
financial position or results of operations.
In September 2005, the FASB ratified the Emerging Issues Task Force's
("EITF") Issue No. 05-7. "Accounting for Modifications to Conversion
Options Embedded in Debt Instruments and Related Issues", which addresses
whether a modification to a conversion option that changes its fair value
affects the recognition of interest expense for the associated debt
instrument after the modification, and whether a borrower should recognize
a beneficial conversion feature, not a debt extinguishment, if a debt
modification increases the intrinsic value of the debt. EITF 05-7 is not
expected to have a material impact on the Company's consolidated financial
position or results of operations.
On September 28, 2005, the FASB ratified the following consensus reached in
EITF Issue 05-8 ("Income Tax Consequences of Issuing Convertible Debt with
a Beneficial Conversion Feature"): a) The issuance of convertible debt with
a beneficial conversion feature results in a basis difference in applying
FASB Statement of Financial Accounting Standards SFAS No. 109, Accounting
for Income Taxes. Recognition of such a feature effectively creates a debt
instrument and a separate equity instrument for book purposes, whereas the
convertible debt is treated entirely as a debt instrument for income tax
purposes. b) The resulting basis difference should be deemed a temporary
difference because it will result in a taxable amount when the recorded
amount of the liability is recovered or settled. c) Recognition of deferred
taxes for the temporary difference should be reported as an adjustment to
additional paid-in capital. This consensus is effective in the first
interim or annual reporting period commencing after December 15, 2005, with
early application permitted. The effect of applying the consensus should be
accounted for retroactively to all debt instruments containing a beneficial
conversion feature that are subject to EITF Issue 00-27 , "Application of
Issue No. 98-5 to Certain Convertible Debt Instruments" (and thus is
applicable to debt instruments converted or extinguished in prior periods
but which are still presented in the financial statements). Management is
evaluating the impact of this pronouncement on the Company's financial
statements.
F-19
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Property and Equipment
Property and equipment, net at June 30, 2003 and 2002 consists of the
following:
2003 2002
-------------------
Computer equipment $48,806 $31,282
Furniture, fixtures and office equipment 8,370 7,111
------- -------
Total 57,176 38,393
Less: accumulated depreciation and amortization (15,082) (956)
------- -------
Property and equipment - net $42,094 $37,437
======= =======
Depreciation expense for the years ended June 30, 2003 and 2002 was $14,126
and $956, respectively.
4. Accounts Payable and Accrued Liabilities
Accounts Payable and Accrued Liabilities at June 30, 2003 and 2002 consists
of the following:
2003 2002
---- ----
Trade Payables $286,213 $120,911
Professional fees 142,500 5,000
Accrued Interest 70,387 10,987
Other -- 7,924
----------------------------
$499,100 $144,822
============================
F-20
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Notes and Loans Payable to Stockholders
The Company has issued several interest and non-interest bearing unsecured
notes payable to individual stockholders of the Company. Notes payable at
June 30, 2003 and 2002 consisted of the following:
2003 2002
------------------------
Note payable to a stockholder accruing
interest at 5.0% per annum. One half of the
principal note balance, plus accrued
interest, is payable at such time as the
Company raises additional capital financing
in excess of $1.0 million. Remaining unpaid
balance is payable on demand. $72,000 $72,000
Unsecured, zero-interest notes payable -
converted from accrued compensation. 92,265 83,205
-------- --------
$164,265 $155,205
======== ========
Interest expense is included, as part of interest expense-related party as
part of the statements of operations, of approximately $3,600 and $1,800
for the years ended June 30, 2003 and 2002, respectively.
6. Income Taxes
The Company has federal and state tax net operating loss carryforwards
available for future periods of approximately $994,000 at June 30, 2003.
The federal tax net operating loss carryforwards expire beginning in 2022.
As a result of the changes in the ownership of the Company, there may be
limitations on the amounts of net operating loss carryforwards that may be
utilized in any one year.
The tax effect of significant items, comprising the Company's net deferred
tax assets at June 30, 2003, is as follows:
Deferred tax assets: 2003 2002
---- ----
Net operating loss carryforwards $268,000 $89,000
Valuation allowance (268,000) (89,000)
--------- -------
Net deferred tax assets $ -- $ --
========= =======
The Company believes that uncertainty exists with respect to future
realization of the deferred tax assets and has established a valuation
allowance for the full amount as of June 30, 2003. The valuation allowance
in 2003 increased by approximately $179,000. The Company is delinquent in
its annual tax filings.
F-21
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Stockholders' Deficiency
Equity Issuances of AssureTec Holdings
Common Stock
The Company has 100,000,000 authorized shares of common stock, $0.001 par
value. At June 30, 2003 and 2002, there were 175,284 shares of common stock
issued and outstanding.
Preferred stock
The Company has 5,000,000 shares of Convertible Preferred Stock, $0.001 par
value, authorized, issuable in series with rights, preferences, privileges
and restrictions as determined by the Board of Directors.
At June 30, 2003 and 2002 there were no outstanding shares of Preferred
Stock. See Subsequent Events - Note 11.
Common Stock of ATH
-------------------
In October of 2001, ATH issued to founders 175,284 shares of common stock
for their investment in ATS formerly known as Tech Ventures.
Equity Issuances of AssureTec Systems
Common Stock of ATS
-------------------
In June 2002, ATS granted options to purchase 6,452 shares of its Common
Stock to a non-employee for services provided. These options were fully
vested at the grant date and carried an exercise price of approximately
$0.001 per share. The Company recognized a stock-based compensation charge
of $1,279 relating to the granting of these options. The fair value of the
stock option awarded to the non-employee was calculated using the
Black-Scholes method. The options vested immediately and have a life of
five years.
In November 2002, ATS issued shares of common stock for the acquisition of
$9,167 of property and equipment.
In March 2003, ATS issued shares of its common stock to an accredited
investor in connection with an unregistered private placement for proceeds
of $17,000 in cash.
F-22
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Stockholders' Deficiency (continued)
During the fiscal year ended June 30, 2003, ATS issued shares of its common
stock to related and unrelated parties in lieu of cash compensation,
primarily for services rendered on behalf of ATS. ATS recorded $123,744 in
stock-based compensation relating to the issuance of these shares of its
common stock for the year ended June 30, 2003. The value of the stock-based
compensation was based on the fair value of the services received in
accordance with SFAS No. 123 and EITF No. 96-18.
8. Stock Options
The Company does not maintain a formal incentive compensation plan covering
its employees, directors and independent contractors. Options to purchase
the Company's common stock vest at varying intervals, but in general,
typically vest over two to four year periods. An option's maximum term is
ten years.
As discussed in Note 2, the Company accounts for stock options granted to
employees using the intrinsic value method in accordance with APB No. 25
and complies with the disclosure provisions of SFAS No. 123. Stock options
are granted to employees at exercise prices the Company's Board of
Directors believes reflects the fair value of the Company.
The Company records stock-based compensation when it grants options to
purchase its or its subsidiary's common stock to non-employees.
F-23
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Stock Options (continued)
The stock option activity reflected in the table below takes into effect
the 1-for-31 reverse stock split and the Share Exchange.
ˇ Enlarge/Download Table
Number of Weighted Average
Options Exercise Price Fair Price
------- -------------- ----------
Outstanding at October 2, 2001 (inception) -- $ -- $ --
Granted 226,301 0.73 0.29
Exercised (153,226) 0.00 0.20
Forfeited (2,169) 1.55 0.34
-------- -------- --------
Outstanding June 30, 2002 70,906 $ 2.28 $ 0.49
Granted 178,710 9.82 2.13
Exercised -- -- --
Forfeited (1,613) 9.69 2.10
-------- -------- --------
Outstanding June 30, 2003 248,003 $ 7.66 $ 1.66
======== ======== ========
Exercisable at June 30, 2002 45,543
========
Exercisable at June 30, 2003 136,587
========
Weighted Average Weighted Number
Number of Range of Remaining Life Average Currently
Options Exercise Price (In Years) Exercise Price Exercisable
------- -------------- ---------- -------------- -----------
70,201 $ 1.55 5.1 $ 1.55 70,201
85,867 $ 4.00 to $ 7.75 7.2 $ 5.86 45,732
66,129 $ 9.30 to $15.50 7.9 $11.93 17,966
25,806 $19.38 8.6 $19.38 2,688
------- -------
248,003 136,587
======= =======
Pro Forma Disclosure - SFAS No. 123 requires the disclosure of pro forma
information as if the Company adopted the fair value method for grants or
awards made to employees. For purposes of the pro forma disclosures, the
fair value of options on their grant date was measured using the
Black-Scholes option-pricing model. Forfeitures are recognized as they
occur.
F-24
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Commitments and Contingencies
The Company has a non-cancelable facility lease for office space with an
unrelated third party lessor, which expires on June 30 2007. Total rent
expense, included as part of selling, general and administrative costs in
the consolidated statement of operations was approximately $58,100 and
$15,000 for the years ended June 30, 2003 and 2002, respectively. Future
minimum rental payments under the Company's non-cancelable office lease are
approximately $48,000 in 2004 through 2007. The Company's chief executive
officer has personally guaranteed this non-cancelable facility lease with
the Company's landlord.
Systems has employment agreements with its key executive officers. The
employment agreements provide for termination without cause by providing
continuance of salary. The continuation period varies from three to twelve
months. The maximum amount of salary continuation under these employment
agreements was approximately $393,000 at June 30, 2003. The employment
agreement between Systems and its former president provided for the
conversion of earned and unpaid salary into shares of common stock in the
event that the termination is a result of the Company's inability to meet
its financial obligations as they become due.
Litigation
In the normal course of business, the Company may be involved in legal
proceedings in the ordinary course of business. Such matters are subject to
many uncertainties, and outcomes are not predictable with assurance.
F-25
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Related Party Transactions
The majority of the Company's obligations have been paid to date on its
behalf by RT Robertson Consultants, Inc. and Robertson Financial Advisors,
LLC, companies owned and controlled by the Company's chief executive
officer (the "Related Party"). At June 30, 2003, the Company owes the
Related Party approximately $642,000. Effective July 1, 2002, the Company
agreed to accrue interest on these amounts at 5.0% per annum. The Company
recorded approximately $42,000 in 2003 and $7,800 in 2002 in interest
expense - related party in the consolidated statements of operations.
The Company believes that the interest rate applied to the Related Party
obligation is on terms as favorable as those it could obtain from
independent sources.
The Related Party advanced approximately $450,100 and $181,500 in fiscal
years ended June 30, 2003 and 2002, respectively, to employees of ATS in
the form of non-recourse loans between the Related Party and the individual
employees, respectively. Repayment of these advances by the individual
employees is contingent upon the payment of deferred compensation by the
Company to the individual employees.
F-26
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Subsequent Events
On October 28, 2003, ATS authorized 1,000,000 shares of Series A
Convertible Preferred Stock, $0.001 par value, designated as Series A. The
price per share was $1,000. Each share is convertible into 5,000 shares of
Common Stock of ATS. At March 31, 2004, the Shareholders of the Series A
Convertible Preferred Stock converted their shares into 601 shares of
Series A-1 Preferred Stock of ATH.
On March 10, 2004, the Company's Board of Directors authorized a 1-for-31
reverse stock split of its common stock and common stock equivalents. This
reverse stock split was effective on March 10, 2004. All historical
references to shares of common stock and price per share have been restated
to reflect the 1-for-31 reverse stock split.
On March 31, 2004, the Company completed its common stock and common stock
equivalent share exchange with the individual stockholders of ATS (the
"Share Exchange"). Holders of 7,358,115 shares of ATS common stock and
options to purchase 6,945,966 shares of ATS common stock exchanged these
securities and their associated rights for 474,717 shares of the Company's
common stock and options to purchase 448,127 shares of the Company's common
stock. Effective March 31, 2004, there were no minority interests in ATS.
The Company has complete ownership of the issued and outstanding shares of
ATS common stock and common stock equivalents.
In April 2004, ATH authorized 500 shares of Series A-2 Convertible
Preferred Stock, $0.001 par value. The price per share was $10,000. Each
share is convertible into 2,000 shares of common stock. The holders of
Series A-2 Preferred Stock shall be entitled to receive dividends in the
form of shares of common stock. Dividends shall accrue at an annual rate of
200 shares of Common stock per share of Series A-2 Preferred Stock on a
pro-rata basis based upon the Original Issue Date. In August 2004, holders
of Series A-2 Preferred Stock were given rescission rights and/or rights to
exchange their shares for Series A-1 Preferred Stock. At June 30, 2004
there were 25.2 shares of Series A-2 Preferred Stock outstanding.
F-27
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Subsequent Events (continued)
In July 2003, a director of the Company purchased shares of ATS's common
stock for cash proceeds of $50,000. Subsequently, in December 2003, the
director converted the common stock into 50 shares of Series A-1
Convertible Preferred Stock.
In December 2003, the Company issued 7,742 shares of its common stock for
services valued at $120,000.
In December 2003, the Related Party converted approximately $462,200 of the
amounts owed into 462 shares of Series A-1 Convertible Preferred Stock.
In December 2003, ATS issued shares of its common stock to employees for
settlement of approximately $192,700 of accrued compensation.
At December 31, 2003, officers of the Company converted approximately
$89,000 of the amounts owed into 89 shares of Series A-1 Convertible
Preferred Stock.
In March 2004, ATH issued 4,000 shares of its common stock for net proceeds
of $14,000.
In April 2004, ATH issued 19.6 shares of its Series A-2 Preferred Stock to
the Related Party for the settlement of approximately $184,600 of debt,
plus a cash payment, by the Related Party in the amount of approximately
$11,400. These shares were subsequently converted to 196 shares of Series
A-1 Preferred Stock in August 2004.
In April 2004, ATH issued 5.6 shares of its Series A-2 Preferred Stock for
net proceeds of $47,000. These shares were subsequently converted to 56
shares of Series A-1 Preferred Stock in August 2004.
F-28
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Subsequent Events (continued)
During the three months ended June 30, 2004, ATH granted employee
stock-options to acquire 110,615 shares of Common Stock for services
provided. The exercise prices of the employee stock-options range from
$3.10 to $15.50 per share and the life of the options range from five to
seven years. The Company did not recognize an additional charge for stock
based compensation since there was no intrinsic value from the granting of
the options.
During the fiscal year ended June 30, 2004, ATS issued shares of its Common
Stock to related and unrelated parties in lieu of cash compensation,
primarily for services rendered on behalf of ATS. ATS recorded $423,664, in
stock-based compensation relating to the issuance of these shares of its
Common Stock for the year then ended. The value of the stock-based
compensation was based on the fair value of the services received in
accordance with SFAS No. 123 and EITF No. 96-18.
On August 13, 2004 the Company offered, in an Amended Private Placement
Offering, the sale of up to 1,250 shares of Series A-1 Convertible
Preferred Stock, to Accredited Investors Only, at a price of $1,000 per
share (10 share minimum). In case of over-subscription, the Company may
accept up to an additional 500 shares. On February 21, 2005, the Company
amended the Private Placement Offering from 1,250 shares to 2,500 shares of
the Company's Series A-1 Convertible Preferred stock.
Shareholders of Series A-2 Convertible Preferred Stock, in the aggregate of
25.2 shares of Series A-2 Convertible Preferred Stock were given rescission
rights for their Series A-2 Preferred Stock and given the option of either
a refund of their purchase price or given the right to acquire Series A-1
Convertible Preferred Stock. In August 2004, all of these shareholders
converted their 25.2 shares of Series A-2 Convertible Preferred Stock into
252 shares of Series A-1 Convertible Preferred Stock. Therefore, an
additional 227 shares of Series A-1 Preferred Stock are transacted in
addition to the previous 25 for a total of 252 Series A-1 Preferred Stock.
Of these shareholders, the Related Party owned 19.6 shares of Series A-2
Convertible Preferred Stock and converted all shares into Series A-1
Convertible Preferred Stock.
In December 2004, the Company's Board of Directors adopted a Stock Option
Plan (the "Option Plan') authorizing the issuance of up to 1.5 million
options from currently authorized but un-issued shares of common stock for
services to the company. Non-qualified stock options may be granted by an
Option Committee designated by the Board of Directors to employees and
consultants for their services to the Company. At June 30, 2005, 769,000
options have been granted in lieu of $2.2 million of deferred compensation.
At June 30, 2005, the total number of options issued under this option plan
is 1.3 million at an exercise price of $.50 per share, deemed by the Option
Committee to be the fair market price of the common stock after reflecting
both the senior liquidation preference of the A-1 Preferred Stock as well
as the then uncertain financial condition of the Company.
F-29
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Subsequent Events (continued)
In July 2004, the Company granted 6,400 of employee stock options for
services provided. The stock options are exercisable at $3.20 per share.
The Company did not recognize additional stock based compensation since
there was no intrinsic value from the granting of the options. The employee
stock-options vested immediately and have a life of seven years.
In September 2004, the Company granted 500 non-employee options exercisable
at $4.00 per share for services provided. Under the Black-Scholes option
valuation model the valuation of the option was approximately $1,360. The
options vested immediately and have a life of seven years.
During the quarter ended September 30, 2004, ATH sold 295 shares of A-1
Preferred Stock for gross proceeds of $295,000 (net cash proceeds of
$267,425).
During the quarter ended December 31, 2004, the Company sold 875 shares of
A-1 Preferred Stock for gross proceeds of $875,000 (net cash proceeds of
$746,500).
During the quarter ended December 31, 2004, ATH issued 300 shares of A-1
Preferred Stock for settlement of related party debt of $300,000.
During the quarter ended December 31, 2004, ATH converted 860 shares of
common stock to 19 shares of A-1 Preferred Stock. No additional
consideration was received for this conversion.
During the quarter ended December 31, 2004, an officer and employee of the
subsidiary performed an exercise of employee stock options for the
settlement of debt owed to him of $40,000. The exercise price was $0.50 for
80,000 shares of common stock. During the quarter ended December 31, 2004,
certain holders of common stock contributed to the Company 65,321 shares,
the Company effectively retired the common stock.
F-30
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Subsequent Events (continued)
During the quarter ended December 31, 2004, certain holders of common stock
contributed to the Company 1,613 shares, the Company effectively retired
the common stock.
During the quarter ended December 31, 2004, certain holders of common stock
contributed to the Company 291 shares the Company effectively retired the
common stock.
During the quarter ended December 31, 2004, ATH converted 4,000 shares of
common stock to 14 shares of A-1 Preferred Stock. The transaction
originally occurred during the year ended June 30, 2004 as a sale of ATH
common stock for gross proceeds of $14,000.
During the quarter ended December 31, 2004, an ex-employee of the
subsidiary returned 72 shares of the Company common stock and had the
shares converted to $418 of accrued compensation to participate in the
settlement of accrued compensation for employee stock options. The Company
retired the 72 shares of common stock.
In December 2004, ATH granted 708,632 of employee stock-options exercisable
at $0.50 per share for the settlement of approximately $1.9 million of
accrued compensation. The employee stock-options vested immediately and
have a life of seven years.
In December 2004, at the option of the stockholder, ATH retired 31,867
shares of common stock and granted 90,632 employee stock-options
exercisable at $0.50 per share. The options were valued under APB No. 25
and carried an intrinsic value amount of approximately $236,000. The
employee stock-options vested immediately and have a life of seven years.
In December 2004, ATH granted 43,334 of employee stock-options exercisable
at $0.50 per share for services provided. The options were valued under APB
No. 25 and carried an intrinsic value amount of approximately $113,000. The
employee stock-options vested immediately and have a life of seven years.
In December 2004, ATH granted 68,506 of employee stock-options exercisable
at $0.50 per share for the settlement of approximately $186,000 of accrued
compensation. The term of the settlement is 13 months and will recognize a
settlement of accrued compensation of approximately $14,350 per month. The
employee stock-options vested immediately and have a life of seven years.
During the quarter ended December 31, 2004, ATH granted 79,337 options
exercisable at $0.50 per share to outside vendors for the settlement of
payables of approximately $212,000. The stock-options vested immediately
and have a life of seven years.
F-31
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Subsequent Events (continued)
During the quarter ended December 31, 2004, ATH granted 63,214 non-employee
options exercisable at $0.50 per share to outside parties for services
provided. Under the Black-Scholes option valuation model the valuation of
the options was approximately $172,000 which was included in stock-based
compensation. The services were for consulting fees for capital raising.
The stock-options vested immediately and have a life of seven years.
During the quarter ended March 31, 2005, ATH sold 465 shares of A-1
Preferred Stock for gross proceeds of $465,000 (net cash proceeds of
$414,950).
In June 2005, ATH issued 21,774 shares of common stock to an ex-employee
and officer of the subsidiary as part of a severance package. The shares
were valued at $6.20 per share and the Company recognized stock based
compensation of $135,000.
On June 20, 2005, ATH granted 3,300 of employee stock-options exercisable
at $0.50 per share for services provided. The options were valued under APB
No. 25 and carried an intrinsic value amount of approximately $8,600. The
employee stock-options vested immediately and have a life of seven years.
During the quarter ended June 30, 2005, ATH sold 1,050 shares of A-1
Preferred Stock for gross proceeds of $1,050,000 (net cash proceeds of
$896,750).
During the quarter ended June 30, 2005, ATH rescinded 80,874 employee stock
options granted on September 30, 2003, and in their place granted 460,882
of employee stock options exercisable at $0.50 per share for services
provided. The options were valued under APB No. 25 and carried an intrinsic
value amount of approximately $1.2 million. The employee stock-options
vested immediately and have a life of seven years.
During the quarter ended June 30, 2005, ATH granted 74,436 options
exercisable at $0.50 per share to non-employees for services provided.
Under the Black-Scholes option valuation model the valuation of the options
was approximately $75,760. The stock-options vested immediately and have a
life of seven years.
In July 2005, the Company granted employee stock-options to acquire 16,129
shares of Common Stock exercisable at $0.50 per share for the settlement of
accrued compensation of $50,000. The employee stock-options are fully
vested and have a life of seven years.
In July 2005, at the option of the stockholder, the Company retired 21,774
shares of Common Stock for consideration of $135,000 and in their place
granted employee stock-options to acquire 21,838 shares of Common Stock
exercisable at $0.50 per share.
In September 2005, the Company granted employee stock-options to acquire
900 shares of Common Stock, exercisable at $6.00 per share, for services
provided. The employee stock-options will vest over a period of three years
and have a life of five years.
F-32
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Subsequent Events (continued)
During the quarter ended September 30, 2005, the Company sold 290 shares of
A-1 Preferred Stock for gross proceeds of $290,000 (net cash proceeds of
$252,300).
On September 1, 2005 the Company initiated a private placement to
accredited investors only of up to $1 million of debentures with warrants
to purchase common stock. These debentures have a six month term and bear
interest at 12% annually. For each $3.00 of debentures purchased, the
Company issued one warrant to purchase one share of Holdings common stock
at $6.00 per share for a period of one year from the date of investment or
upon an initial public offering by Holdings, whichever occurs earlier. This
private offering raised gross proceeds of $1.125 million and net proceeds
of approximately $1.035 million, and in October 2005, the Company issued
warrants to acquire 375,667 shares of Common Stock. The Company is
evaluating the financial and accounting impact of this transaction.
On September 15, 2005 the Company commenced a private offering to
accredited investors only of up to 1,250,000 shares of Holdings common
stock. Pursuant to this private offering, the Company is offering units for
gross proceeds of $12.00 per unit. Each unit is comprised of two shares of
common stock at $6.00 per share with one warrant to acquire one share of
common stock at $6.00 per share, for each two shares of common stock
purchased. The warrants issued in this offering are exercisable for a
period of one year from the date of investment or upon an initial public
offering by the Company, whichever occurs earlier. As of October 31, 2005,
a total of 333,333 shares have been sold, and 166,667 warrants have been
granted, pursuant to this offering raising gross proceeds of $2.0 million,
of which $1.125 million was applied to retire the September 1, 2005
debentures. The Company is evaluating the financial and accounting impact
of this transaction.
In September 2005, the Company granted warrants to acquire 73,548 shares of
Common Stock exercisable at $3.255 per share to the registered broker
dealers and their assigns for services provided with capital raising
efforts related to the Preferred A-1 offering. The warrants are fully
vested and have a life of 5 years.
In October 2005, the Company granted warrants to acquire 200,000 shares of
Common Stock, exercisable at $6.00 per share, to a related party in
exchange for a covenant not to request repayment of advances to the Company
by Affiliates which were in excess of $600,000. The warrant coverage was
identical to that offered to unrelated parties under the September 2005
offering of debentures. The warrants are fully vested and have a life of
one year or upon an initial public offering by Holdings, whichever occurs
earlier.
In October 2005, the Company granted warrants to acquire 16,667 shares of
Common Stock exercisable at $6.30 per share to the registered broker
dealers and their assigns for services provided with capital raising
efforts related to the September 1, 2005 debenture offering. The warrants
are fully vested and have a life of 5 years.
F-33
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Subsequent Events (continued)
In October 2005, the Company granted warrants to acquire 33,333 shares of
Common Stock exercisable at $6.30 per share to the registered broker
dealers and their assigns for services provided with capital raising
efforts related to the September 15, 2005 private offering. The warrants
are fully vested and have a life of 5 years.
In October 2005, the Company granted employee stock options to acquire
103,000 shares of Common Stock, exercisable at $6.00 per share, for
services provided. The employee stock options will vest over a period of
three years and have a life of five years.
In October 2005, the Company sold 25 shares of A-1 Preferred Stock for
gross proceeds of $25,000 (net cash proceeds of $21,750).
In October 2005, at the option of the stockholder, the Company retired 25
of 50 shares of Preferred A-1 Stock and returned the investment of $25,000
to the former stockholder and ex-director of the Company.
F-34
ASSURETEC HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEET
September 30,2003
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 93
Inventory 152,400
-----------
Total current assets 152,493
Property and equipment - net 37,093
Patents 28,090
Other assets 3,544
-----------
Total Assets $ 221,220
===========
LIABILITIES AND STOCKHOLDERS' DEFICENCY
Current Liabilities:
Accounts payable and accrued liabilities $ 643,900
Accrued compensation and related payroll taxes 2,597,526
Customer deposits 111,697
Notes payable - related party 164,265
Advances from affiliates 667,975
-----------
Total current liabilities 4,185,363
-----------
Commitments and Contingencies
Stockholders' Deficiency:
Convertible Preferred stock - $0.001 par value; authorized
5,000,000 shares; issued and outstanding, 0 shares --
Common stock-$0.001par value; authorized,100,000,000 shares;
issued and outstanding, 175,284 shares 175
Additional paid- in capital 301,737
Deficit during the development stage (4,266,055)
-----------
Total Stockholders' Deficiency (3,964,143)
-----------
Total Liabilities and Stockholders' Deficiency $ 221,220
===========
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
F-35
ˇ Enlarge/Download Table
ASSURETEC HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) For the Period from
For the Three Months Ended October 2, 2001
September 30, (Date of Inception) to
------------------------------- September 30, 2003
2003 2002 (Unaudited)
------------------------------------------------------
Net revenues $ 7,500 $ -- $ 17,247
Cost of revenues 4,300 -- 10,857
----------- ----------- -----------
Gross profit 3,200 -- 6,390
----------- ----------- -----------
Costs and expenses:
Selling, general and administrative (1) 392,198 236,385 1,844,319
Engineering, research and development (1) 297,657 150,791 2,111,369
Management fees - related party 22,500 22,500 112,500
Consulting fees - related party -- -- 104,583
----------- ----------- -----------
712,355 409,676 4,172,771
----------- ----------- -----------
Loss from operations (709,155) (409,676) (4,166,381)
----------- ----------- -----------
Other income (expense):
Interest expense - related party (11,900) -- (61,700)
Interest expense (14,500) -- (40,734)
Other income (expense) -- -- 2,760
----------- ----------- -----------
Net loss $ (735,555) $ (409,676) $(4,266,055)
=========== =========== ===========
Net loss per share - basic and diluted $ (4.20) $ (2.34)
=========== ===========
Weighted average shares outstanding - basic
and diluted 175,284 175,284
=========== ===========
(1) Includes compensatory element of stock issuances as follows:
Selling, general and administrative $ -- $ -- $ 71,516
Engineering, research, and development -- -- 53,507
----------- ----------- -----------
$ -- $ -- $ 125,023
=========== =========== ===========
The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-36
ASSURETEC HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) For the Period from
For the Three Months Ended October 2, 2001
September 30, (Date of Inception)
-------------------------------- to September 30, 2003
2003 2002 (Unaudited)
---------------------------------------------------------
Cash flows from operating activities:
Net loss $ (735,555) $ (409,676) $(4,266,055)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 5,000 660 20,082
Compensatory element of stock issuances -- -- 125,023
Changes in operating assets and liabilities:
Change in inventory (152,400) -- (152,400)
Other assets -- -- (3,544)
Accounts payable and accrued liabilities 144,802 (2,561) 643,902
Customer deposits 111,697 -- 111,697
Accrued compensation 542,543 297,569 2,689,791
----------- ----------- -----------
Net cash used in operating activities (83,913) (114,008) (831,504)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment -- -- (48,009)
Acquisition of patents -- -- (28,090)
----------- ----------- -----------
Net cash used in investing activities -- -- (76,099)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of securities by
subsidiary 50,000 -- 67,000
Issuance of common stock -- -- 100,721
Proceeds from notes payable - related party -- -- 72,000
Advances from affiliates 26,292 113,143 667,975
----------- ----------- -----------
Net cash provided by financing activities 76,292 113,143 907,696
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (7,621) (865) 93
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 7,714 2,152 --
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 93 $ 1,287 $ 93
=========== =========== ===========
The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-37
ASSURETEC HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) For the Period from
For the Three Months Ended October 2, 2001
September 30, (Date of Inception)
-------------------------- to September 30, 2003
2003 2002 (Unaudited)
-----------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ -- $ -- $ --
======= ======= =======
Income taxes paid $ -- $ -- $ --
======= ======= =======
Non-Cash Investing Activities:
Issuance of common stock for property and equipment $ -- $ -- $ 9,167
======= ======= ========
Non-Cash Financing Activities:
Conversion of accrued compensation into notes payable $ -- $ -- $ 92,265
======= ======= ========
The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-38
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Operations
The Company
AssureTec Holdings, Inc. and Subsidiary (a development stage enterprise)
(the "Company") develops integrated identity document management
applications for use in government and commercial security applications.
The Company's proprietary document management platform automatically reads
records and authenticates identification documents, such as passports,
visas or driver's licenses, through its proprietary database software,
thereby reducing the risk of human error in detecting falsified or tampered
forms of identification.
The Company has not generated significant revenues from products that have
been developed to date; accordingly, the Company is considered a
development stage enterprise as defined in Financial Accounting Standards
Board No. 7, "Accounting and Reporting for Development Stage Companies."
The Company is subject to a number of risks similar to those of other
companies in an early stage of development. Principal among these risks are
dependencies on key individuals, competition from other substitute products
and larger companies, the successful development and marketing of its
products and the need to obtain adequate financing necessary to fund future
operations.
Going Concern
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
The Company has experienced accumulated losses of approximately $4.3
million since inception. As of September 30, 2003, the Company has a
working capital deficit of approximately $4.0 million. The Company's
continued existence is dependent upon its ability to obtain needed working
capital through additional equity and/or debt financing, and the
acceptability of its integrated identity document management applications
for use in government and commercial security applications to create sales
that will help the Company achieve a profitable level of operations.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset amounts or the
classifications of liabilities that might be necessary should the Company
be unable to continue as a going concern.
These matters raise substantial doubt about the Company's ability to
continue as a going concern. However, the accompanying consolidated
financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of the
liabilities in the normal course of business. The financial statements do
not include any adjustments relating to the recovery of assets or the
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
F-39
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Operations (continued)
Going Concern (continued)
Management believes that it will be successful in obtaining additional
financing, from which the proceeds will be primarily used to execute its
operating plan. However, no assurances can be provided that the Company
will obtain additional financing or achieve a profitable level of
operations.
Business Development
On June 12, 2002, AssureTec Holdings, Inc ("ATH") was incorporated under
the laws of the state of Delaware. The sole stockholder of ATH was Element
21 Golf Company ("Element 21"). Upon incorporation, Element 21 transferred
certain assets and liabilities into ATH, including cash, accounts
receivable and payable and all of Element 21's ownership of AssureTec
Systems, Inc. (a development stage enterprise) ("ATS"). At the time of
transfer, Element 21 owned approximately 34.2% of the issued and
outstanding common stock of ATS.
In addition, all of Element 21's ownership in three non-operating entities
was transferred into ATH. The three non-operating entities were (i)
Biorelease Technologies, Inc., (ii) I-Jam Entertainment, Inc. and (iii)
Advanced Conductor Technologies, Inc. The ownership of these three
non-operating entities was transferred to two stockholders of ATH, one of
whom is the Company's chief executive officer, effective April 21, 2003 in
consideration for the complete indemnification of ATH by the two
stockholders of all current and future liabilities associated with these
entities.
Several individuals incorporated AssureTec Systems, Inc. (a development
stage enterprise) ["ATS"] under the laws of the state of Delaware on
October 2, 2001. ATS was formed to develop integrated identity document
management applications for use in government and commercial security
applications. Effective November 9, 2001, Element 21 acquired 100% of the
issued and outstanding shares of ATS common stock in exchange for shares of
Element 21 common stock. Element 21 is a Delaware corporation that, until
October 2003, was doing business under the name BRL Holdings, Inc. ("BRL").
Element 21 was controlled by the same individuals who incorporated ATS.
This transaction was executed between Element 21 and the individual owners
of ATS to provide a better means of raising capital financing to further
the commercialization of both ATS and Element 21 technologies.
F-40
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Operations (continued)
ATS operated as a wholly owned subsidiary of Element 21 until April 1,
2002. On April 1, 2002, Element 21 transferred approximately 65.8% of its
ownership of ATS to the original individual owners of ATS in exchange for
shares of Element 21 common stock held by these individuals. This
transaction was executed as Element 21 was unsuccessful in obtaining
significant capital financing for both its and ATS' technologies and
Element 21 was unable to support ATS' operations as a wholly owned
subsidiary.
Basis of Presentation
On March 10, 2004, the Company's Board of Directors authorized a 1-for-31
reverse stock split of its common stock and common stock equivalents. This
reverse stock split was effective on March 10, 2004. All historical
references to shares of common stock and price per share have been restated
to reflect the 1-for-31 reverse stock split. See Note 7.
On March 31, 2004, the Company completed its common stock and common stock
equivalent share exchange with the individual stockholders of ATS (the
"Share Exchange"). Holders of 7,358,115 shares of ATS common stock and
options to purchase 6,945,966 shares of ATS common stock exchanged these
securities and their associated rights for 474,717 shares of the Company's
common stock and options to purchase 448,127 shares of the Company's common
stock. The Share Exchange was accounted for as a common control merger.
Effective as of March 31, 2004, there were no minority interests in ATS.
The Company has complete ownership of the issued and outstanding shares of
ATS common stock and common stock equivalents. See Note 7.
The consolidated financial statements have been prepared using the
historical accounting records of both ATH and ATS as the same management
controlled both entities prior to the Share Exchange. The operations of ATH
are limited and consist primarily of certain management costs, such as
compensation and third party management and accounting services. Historical
references to the Company's operations primarily consist of those
transactions executed by ATS in the development of its integrated identity
document management applications. See Note 7.
F-41
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies
Principles of Consolidation - As described in Note 1, the consolidated
financial statements include the accounts of ATH and ATS as the same
management controls each development stage enterprise.
For all periods presented, losses attributable to minority interest were in
excess of any investment in ATS by such minority interest investors. In
addition, individual entities comprising minority interest did not have any
commitment to fund any losses of ATS; accordingly no minority interest is
presented in the accompanying financial statements.
All material intercompany balances and transactions have been eliminated.
Issuance of Stock by Subsidiary - The Company's subsidiary, ATS, has issued
stock to related and unrelated parties during the normal course of its
business. As a result of these stock issuances, the Company's net
investment decreases. The Company records the decrease in its Consolidated
Statements of Stockholders' Deficiency as "Effect of subsidiary's equity
transactions".
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management 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 the
reported amounts of revenues and expenses during each of the reporting
periods. Actual results could differ from those estimates.
Cash and Cash Equivalents - Cash and cash equivalents consist of cash and
temporary investments with maturities of three months or less when
purchased. The Company had no cash equivalents at September 30, 2003.
Inventory - Inventory consists of finished goods and is stated at the lower
of cost or market utilizing the first-in, first-out method.
Advertising Costs - Advertising costs are expensed as incurred. Advertising
costs, which are included in selling, general and administrative expenses,
were immaterial for the three months ended September 30, 2003 and 2002,
respectively.
Shipping and handling costs - Shipping and handling costs are expensed as
incurred as part of cost of revenues. These costs were deemed to be
immaterial during each of the reporting periods.
F-42
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
Fair Value of Financial Instruments - Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments"
requires that the Company disclose estimated fair values of financial
instruments. The carrying amounts reported in the statement of financial
position for current assets and current liabilities qualifying as financial
instruments approximate fair value because of their short maturities. The
fair value of the Company's notes payable and advances to related and
affiliated parties are not reasonably determinable based on the related
party nature of the transactions.
Property and Equipment - Property and equipment consists primarily of
computer equipment and is stated at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives
(generally three to seven years) of the related assets. Expenditures for
maintenance and repairs, which do not extend the economic useful life of
the related assets, as charged to operations as incurred. Gains or losses
on disposal of property and equipment are reflected in the statement of
operations in the period of disposal.
Impairment of Long-Lived Assets - The Company periodically reviews the
carrying value of property and equipment to determine if events and
circumstances exist indicating that the assets might be impaired. When
evaluating assets for potential impairment, the Company first compares the
carrying amount of the asset to the asset's estimated future cash flows
(undiscounted and without interest charges). If the estimated future cash
flows used in this analysis are less than the carrying amount of the asset,
an impairment loss calculation is prepared. The impairment loss calculation
compares the carrying amount of the asset to he asset's estimated future
cash flows (discounted and with interest charges). If the carrying amount
exceeds the asset's estimated futures cash flows (discounted and with
interest charges), the loss is allocated to the long-lived assets of the
group on a pro rata basis using the relative carrying amounts of those
assets.
Patents - Patents consist of unamortized patent costs. The Company
capitalizes external costs such as legal fees and patent application fees
it incurs until a patent is granted from the United States Patent and
Trademark Office. Once a patent is granted, the Company amortizes its
capitalized patent costs using the straight-line method over 17 years. At
June 30, 2003, none of the Company's pending patents have been approved or
granted. The Company assesses the carrying value of its patents for
impairment each year. Based on its assessments, the Company did not incur
any impairment charges for the three months ended September 30, 2003.
F-43
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
Accrued Compensation - Employees and management of the Company have been
deferring their earned compensation since the Company's inception due to
the Company's insufficient working capital levels. The Company properly
expensed these obligations and the corresponding employment taxes
associated with these deferred wages and salaries as incurred. The Company
has accrued interest costs at a rate of 3% per annum on the unpaid
balances. Certain employees have converted their deferred compensation into
unsecured, zero-interest notes payable by the Company. As of September 30,
2003, $92,265 of accrued compensation has been converted into unsecured,
zero-interest notes payable.
Revenue Recognition - Generally, revenue is recognized upon shipment to the
customer (which constitutes delivery), provided that persuasive evidence of
an arrangement exists, the fee is fixed or determinable, and collection is
reasonably assured. To the extent that one or more of these conditions are
not met, which has occurred in the past, revenue is deferred until such
time as all four criteria are met. Revenue from sales to integrators,
value-added resellers and distributors is recognized on a "sell-through"
basis, that is, when these parties report to the Company that resale of the
product to the ultimate end customer has occurred.
In general, the Company requires an upfront deposit for significant
customer purchases. If the Company receives a payment from a customer prior
to meeting all of the revenue recognition criteria, the payment is recorded
as deferred revenue. The Company's current arrangements with its third
party integrators, value-added resellers and distributors do not provide
for any rights of return, price-protection or other contingencies. The
Company's general credit terms requires a 50% deposit on order and complete
payment within 30 days of shipment. At September 30, 2003 there was a 50%
deposit of $111,697 on orders that were shipped subsequent to September 30,
2003.
The Company records a provision for estimated sales returns and allowances
on product sales in the same period as the related revenue is recorded.
These estimates are based on known and estimated factors. Sales returns and
allowances during each of the reporting periods have been deemed
immaterial.
F-44
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
To date, the Company has not established VSOE ("Vendor Specific Objective
Evidence") of fair value for its software, products and services. For sales
where maintenance is the only undelivered element, the Company recognized
the total sale ratably over the term of the embedded maintenance period.
The Company believes that it will establish VSOE of fair value for
maintenance however, the exact timing is uncertain. Once VSOE of fair value
for maintenance and other services is established, the Company will utilize
the residual method of accounting as permitted under Statement of Position
98-9, "Modification of SOP 07-2, `Software Revenue Recognition, ` With
Respect to Certain Transactions," and defer the VSOE of maintenance and
recognize the residual amount of the total sale as software and product
revenue in the period in which the arrangement exists, the software and
products are delivered and the fee is collectible. Maintenance revenue will
then be recognized ratably over the maintenance period.
Research and Development Costs - Research and development costs are
expensed as incurred.
Software Development Costs - Costs incurred prior to technological
feasibility of the Company's software products are expensed as research and
development costs. Certain costs incurred after technological feasibility
has been established are capitalized. As of September 30, 2003, the Company
has not capitalized software costs.
Income Taxes - Deferred tax liabilities and assets are determined based on
the difference between the financial statement carrying amounts and tax
bases of existing assets and liabilities, using enacted tax rates. The
effect of a change in rates is recognized as income or expense in the
period of the change. A valuation allowance is established, when necessary,
to reduce the deferred income tax assets to the amount that is more likely
than not to be realized.
Stock-Based Compensation - The Company accounts for stock-based employee
compensation arrangements using the intrinsic value method in accordance
with Accounting Principles Board Opinion ("APB) No. 25, "Accounting for
Stock Issued to Employees" and complies with the disclosure provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation" as amended by SFAS No. 148 "Accounting for
stock-based compensation - Transition and Disclosure, an amendment of FASB
123", issued in December 2002.
F-45
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
The following table provides an expanded reconciliation for all periods
presented that adds back to reported net loss the recorded expense under
APB No. 25, deducts the total fair value expense under SFAS No. 123, and
shows the reported and pro forma earnings per share amounts:
ˇ Enlarge/Download Table
Three Months Ended September 30,
2003 2002
---------------------------------
Net loss, as reported $(735,555) $(409,676)
Add: stock-based employee compensation costs included
in net loss, as reported -- --
Less: stock-based employee compensation as determined
under fair value based method for all awards (242,192) (8,101)
--------- ---------
Pro forma net loss $(977,747) $(417,777)
========= =========
Weighted average shares outstanding, basic and diluted 175,284 175,284
========= =========
Net loss per share, basic and diluted, as reported $ (4.20) $ (2.34)
========= =========
Net loss per share, basic and diluted, pro forma $ (5.58) $ (2.38)
========= =========
The fair value of each employee option grant is estimated on the date of
the grant using the Black-Scholes option-pricing model. Key
weighted-average assumptions used to apply this pricing model are as
follows:
2003 2002
-----------------------
Risk-free interest rate 3.25% 3.25%
Expected life of option grants 4 years 4 years
Expected volatility of underlying stock 20% 20%
Net Loss Per Share - Net loss per share is computed in accordance with
Statement of Financial Standards No. 128, "Earnings Per Share"("SFAS No.
128"). SFAS No. 128 requires the presentation for both basic and diluted
earnings per share.
F-46
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
Basic net loss per common share is computed by dividing net loss applicable
to common stockholders by the weighted average number of common shares
outstanding during the year. Diluted net loss per common share reflects, in
addition to the weighted average number of common shares, the potential
dilution if common stock options were exercised into common stock, unless
the effects of such exercise would be anti-dilutive.
Basic and diluted loss per common share are the same for 2003 and 2002 as
potentially dilutive stock options totaling 341,768 at September 30, 2003
and 81,213 at September 30, 2002 have not been included in calculations of
diluted net loss per share, as their inclusion would be anti-dilutive.
Comprehensive Loss - Comprehensive loss is equal to net loss for each of
the reporting periods presented.
Recently Issued Accounting Pronouncements - In January 2003, the FASB
issued FASB interpretation No. 46, "Consolidation of Variable Interest
Entities". In December 2003, the FASB issued FIN No. 46 (Revised), ("FIN
46-R") to address certain FIN 46 implementation issues. This interpretation
requires that the assets, liabilities, and the results of activities of a
Variable Interest Entity ("VIE") be consolidated into the financial
statements of the enterprise that has a controlling interest in the VIE.
FIN 46R also requires additional disclosures by primary beneficiaries and
other significant variable interest holders. For variable interest entities
acquired or created before February 1, 2003, this interpretation is
effective no later than the end of the first interim or reporting period
ending after December 15, 2003, for all entities acquired subsequent to
January 31, 2003, this interpretation is effective as of the first interim
or annual period ending after December 31, 2003. In December 2003, the FASB
issued Interpretation No. 46R which revised certain provisions of FIN 46.
Publicly reporting entities that are small business issuers must apply FIN
46R to all entities subject to FIN 46R no later than the end of the first
reporting period that ends after December 15, 2004 (as of December 31,
2004, for a calendar year enterprise). The effective date includes those
entities to which FIN 46 had previously been applied. However, prior to the
application of FIN 46R, a public entity that is a small business issuer
shall apply FIN 46 or FIN 46R to those entities that are considered
special-purpose entities no later than as of the end of the first reporting
period that ends after December 15, 2003. The adoption of FIN 46R did not
have a material impact on the Company's results of operations or financial
position.
F-47
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
In April 2003, the FASB issued SFAS No 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and
for hedging activities under SFAS No. 133, "Accounting for Derivative
instruments and Hedging Activities." SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003. The adoption of
SFAS No. 149 did not have a material impact on the Company's results of
operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS No. 150 did not have a material impact on the Company's
results of operations or financial position.
In October 2004, the FASB ratified the consensus reached in EITF Issue No.
04-8, "The Effect of Contingently Convertible Instruments on Diluted
Earnings per Share." The EITF reached a consensus that contingently
convertible instruments, such as contingently convertible debt,
contingently convertible preferred stock, and other such securities should
be included in diluted earnings per share (if dilutive) regardless of
whether the market price trigger has been met. The consensus became
effective for reporting periods ending after December 15, 2004. Management
is evaluating the impact of this pronouncement on the Company's financial
statements.
In December 2004, the FASB issued SFAS No. 123R "Shared Based Payment".
This statement is a revision of SFAS Statement No. 123, "Accounting for
Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and its related implementation guidance.
SFAS 123R addresses all forms of shared based payment ("SBP") awards,
including shares issued under employee stock purchase plans, stock options,
restricted stock and stock appreciation rights. Under SFAS 123R, SBP awards
result in a cost that will be measured at fair value on the awards' grant
date, based on the estimated number of awards that are expected to vest and
will be reflected as compensation cost in the historical financial
statements. This statement is effective for public entities that file as
small business issuers - as of the beginning of the first interim or annual
reporting period that begins after December 15, 2005. The Company is in the
process of evaluating whether the SFAS No. 123R will have a significant
impact on the Company's overall results of operations or financial
position.
In May 2005, the FASB issued SFAS 154 "Accounting Changes and Error
Corrections" a replacement of APB Opinion No. 20 and FASB Statement No. 3.
This statement replaces APB Opinion No. 20, "Accounting Changes," and FASB
Statement No. 3, "Reporting Accounting Changes in Interim Financial
Statements," and changes the requirements for the accounting for and
reporting of a change in accounting principle. This statement applies to
all voluntary changes in accounting principle. It also applies to changes
required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. When a
pronouncement includes specific transition provisions, those provisions
should be followed. This statement is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15,
2005. Management is evaluating the impact of this pronouncement on the
Company's financial statements.
F-48
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
In June 2005, the EITF reached consensus on Issue No. 05-6, "Determining
the Amortization Period for Leasehold Improvements" (EITF 05-6). EITF 05-6
provides guidance on determining the amortization period for leasehold
improvements acquired in a business combination or acquired subsequent to
lease inception. The guidance in EITF 05-6 will be applied prospectively
and is effective for periods beginning after June 29, 2005. EITF 05-6 is
not expected to have a material impact on the Company's consolidated
financial position or results of operations.
In September 2005, the FASB ratified the Emerging Issues Task Force's
("EITF") Issue No. 05-7. "Accounting for Modifications to Conversion
Options Embedded in Debt Instruments and Related Issues", which addresses
whether a modification to a conversion option that changes its fair value
affects the recognition of interest expense for the associated debt
instrument after the modification, and whether a borrower should recognize
a beneficial conversion feature, not a debt extinguishment, if a debt
modification increases the intrinsic value of the debt. EITF 05-7 is not
expected to have a material impact on the Company's consolidated financial
position or results of operations.
On September 28, 2005, the FASB ratified the following consensus reached in
EITF Issue 05-8 ("Income Tax Consequences of Issuing Convertible Debt with
a Beneficial Conversion Feature"): a) The issuance of convertible debt with
a beneficial conversion feature results in a basis difference in applying
FASB Statement of Financial Accounting Standards SFAS No. 109, Accounting
for Income Taxes. Recognition of such a feature effectively creates a debt
instrument and a separate equity instrument for book purposes, whereas the
convertible debt is treated entirely as a debt instrument for income tax
purposes. b) The resulting basis difference should be deemed a temporary
difference because it will result in a taxable amount when the recorded
amount of the liability is recovered or settled. c) Recognition of deferred
taxes for the temporary difference should be reported as an adjustment to
additional paid-in capital. This consensus is effective in the first
interim or annual reporting period commencing after December 15, 2005, with
early application permitted. The effect of applying the consensus should be
accounted for retroactively to all debt instruments containing a beneficial
conversion feature that are subject to EITF Issue 00-27 , "Application of
Issue No. 98-5 to Certain Convertible Debt Instruments" (and thus is
applicable to debt instruments converted or extinguished in prior periods
but which are still presented in the financial statements). Management is
evaluating the impact of this pronouncement on the Company's financial
statements.
3. Inventory
Inventory consisted of $152,400 in finished goods at September 30, 2003.
F-49
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Stockholders' Deficiency
Equity Issuances of AssureTec Holdings
Common Stock
The Company has 100,000,000 authorized shares of common stock, $0.001 par
value. At September 30, 2003 and 2002, there were 175,284 shares of common
stock issued and outstanding.
Preferred stock
The Company has 5,000,000 shares of Convertible Preferred Stock, $0.001 par
value, authorized, issuable in series with rights, preferences, privileges
and restrictions as determined by the Board of Directors.
At September 30, 2003 and 2002 there were no outstanding shares of
Preferred Stock. See Subsequent Events - Note 7.
Equity Issuances of AssureTec Systems
Preferred Stock of ATS
----------------------
In July 2003, a director of the Company purchased shares of ATS's common
stock for $50,000. Subsequently in December 2003, the director converted
the common stock into 50 shares of Series A-1 Convertible Preferred Stock.
5. Commitments and Contingencies
Litigation
In the normal course of business, the Company may be involved in legal
proceedings in the ordinary course of business. Such matters are subject to
many uncertainties, and outcomes are not predictable with assurance.
F-50
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Related Party Transactions
The majority of the Company's obligations have been paid to date on its
behalf by RT Robertson Consultants, Inc. and Robertson Financial Advisors,
LLC, companies owned and controlled by the Company's chief executive
officer (the "Related Party"). At September 30, 2003, the Company owes the
Related Party $667,975. Effective July 1, 2002, the Company agreed to
accrue interest on these amounts at 5.0% per annum. The Company recorded
approximately $11,900 in the three months ended September 30, 2003 and $0
in 2002 in interest expense - related party in the consolidated statement
of operations.
The Company believes that the interest rate applied to the Related Party
obligation is on terms as favorable as those it could obtain from
independent sources.
The Related Party advanced $509,632 and $325,643 through September 30, 2003
and 2002, respectively, to employees of ATS in the form of non-recourse
loans between the Related Party and the individual employees, respectively.
Repayment of these advances by the individual employees is contingent upon
the payment of deferred compensation by the Company to the individual
employees.
7. Subsequent Events
On October 28, 2003, ATS authorized 1,000,000 shares of Series A
Convertible Preferred Stock, $0.001 par value, designated as Series A. The
price per share was $1,000. Each share is convertible into 5,000 shares of
Common Stock of ATS. At March 31, 2004, the Shareholders of the Series A
Convertible Preferred Stock converted their shares into 601 shares of
Series A-1 Preferred Stock of ATH.
On March 10, 2004, the Company's Board of Directors authorized a 1-for-31
reverse stock split of its common stock and common stock equivalents. This
reverse stock split was effective on March 10, 2004. All historical
references to shares of common stock and price per share have been restated
to reflect the 1-for-31 reverse stock split.
On March 31, 2004, the Company completed its common stock and common stock
equivalent share exchange with the individual stockholders of ATS (the
"Share Exchange"). Holders of 7,358,115 shares of ATS common stock and
options to purchase 6,945,966 shares of ATS common stock exchanged these
securities and their associated rights for 474,717 shares of the Company's
common stock and options to purchase 448,127 shares of the Company's common
stock. Effective as of March 31, 2004, there were no minority interests in
ATS. The Company has complete ownership of the issued and outstanding
shares of ATS common stock and common stock equivalents.
F-51
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Subsequent Events (continued)
In April 2004, ATH authorized 500 shares of Series A-2 Convertible
Preferred Stock, $0.001 par value. The price per share was $10,000. Each
share is convertible into 2,000 shares of common stock. The holders of
Series A-2 Preferred Stock shall be entitled to receive dividends in the
form of shares of common stock. Dividends shall accrue at an annual rate of
200 shares of Common stock per share of Series A-2 Preferred Stock on a
pro-rata basis based upon the Original Issue Date. In August 2004, holders
of Series A-2 Preferred Stock were given rescission rights and/or rights to
exchange their shares for Series A-1 Preferred Stock.
In December 2003, the Company issued 7,742 shares of its common stock for
services valued at $120,000.
In December 2003, the Related Party converted approximately $462,200 of the
amounts owed into 462 shares of Series A-1 Convertible Preferred Stock.
In December 2003, ATS issued shares of its common stock to employees for
settlement of approximately $192,700 of accrued compensation.
At December 31, 2003, officers of the Company converted approximately
$89,000 of the amounts owed into 89 shares of Series A-1 Convertible
Preferred Stock.
In March 2004, ATH issued 4,000 shares of its common stock for net proceeds
of $14,000.
In April 2004, ATH issued 19.6 shares of its Series A-2 Preferred Stock to
the Related Party for the settlement of approximately $184,600 of debt,
plus a cash payment, by the Related Party in the amount of approximately
$11,400. These shares were subsequently converted to 196 shares of Series
A-1 Preferred Stock in August 2004.
In April 2004, ATHissued 5.6 shares of its Series A-2 Preferred Stock for
net proceeds of $47,000. These shares were subsequently converted to 56
shares of Series A-1 Preferred Stock in August 2004.
During the three months ended June 30, 2004, ATH granted employee
stock-options to acquire 110,615 shares of Common Stock for services
provided. The exercise prices of the employee stock-options range from
$3.10 to $15.50 per share and the life of the options range from five to
seven years. The Company did not recognize an additional charge for stock
based compensation since there was no intrinsic value from the granting of
the options.
F-52
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Subsequent Events (continued)
During the fiscal year ended June 30, 2004, ATS issued shares of its Common
Stock to related and unrelated parties in lieu of cash compensation,
primarily for services rendered on behalf of ATS. ATS recorded $423,664, in
stock-based compensation relating to the issuance of these shares of its
Common Stock for the year then ended. The value of the stock-based
compensation was based on the fair value of the services received in
accordance with SFAS No. 123 and EITF No. 96-18.
On August 13, 2004 the Company offered, in an Amended Private Placement
Offering, the sale of up to 1,250 shares of Series A-1 Convertible
Preferred Stock, to Accredited Investors Only, at a price of $1,000 per
share (10 share minimum). In case of over-subscription, the Company may
accept up to an additional 500 shares. On February 21, 2005, the Company
amended the Private Placement Offering from 1,250 shares to 2,500 shares of
the Company's Series A-1 Convertible Preferred Stock.
Shareholders of Series A-2 Convertible Preferred Stock, in the aggregate of
25.2 shares of Series A-2 Convertible Preferred Stock were given rescission
rights for their Series A-2 Preferred Stock and given the option of either
a refund of their purchase price or given the right to acquire Series A-1
Convertible Preferred Stock. In August 2004 all of these shareholders
converted their 25.2 shares of Series A-2 Convertible Preferred Stock into
252 shares of Series A-1 Convertible Preferred Stock. Therefore, an
additional 227 shares of Series A-1 Preferred Stock are transacted in
addition to the previous 25 for a total of 252 Series A-1 Preferred Stock.
Of these shareholders, the Related Party owned 19.6 shares of Series A-2
Convertible Preferred Stock and converted all shares into Series A-1
Convertible Preferred Stock.
In December 2004, the Company's Board of Directors adopted a Stock Option
Plan (the "Option Plan') authorizing the issuance of up to 1.5 million
options from currently authorized but un-issued shares of common stock for
services to the company. Non-qualified stock options may be granted by an
Option Committee designated by the Board of Directors to employees and
consultants for their services to the Company. At June 30, 2005, 769,000
options have been granted in lieu of $2.2 million of deferred compensation.
At June 30, 2005, the total number of options issued under this option plan
is 1.3 million at an exercise price of $.50 per share, deemed by the Option
Committee to be the fair market price of the common stock after reflecting
both the senior liquidation preference of the A-1 Preferred Stock as well
as the then uncertain financial condition of the Company.
In July 2004, the Company granted 6,400 of employee stock options for
services provided. The stock options are exercisable at $3.20 per share.
The Company did not recognize additional stock based compensation since
there was no intrinsic value from the granting of the options. The employee
stock-options vested immediately and have a life of seven years.
In September 2004, the Company granted 500 non-employee options exercisable
at $4.00 per share for services provided. Under the Black-Scholes option
valuation model the valuation of the option was approximately $1,360. The
options vested immediately and have a life of seven years.
During the quarter ended September 30, 2004, ATH sold 295 shares of A-1
Preferred Stock for gross proceeds of $295,000 (net cash proceeds of
$267,425).
F-53
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Subsequent Events (continued)
During the quarter ended December 31, 2004, the Company sold 875 shares of
A-1 Preferred Stock for gross proceeds of $875,000 (net cash proceeds of
$746,500).
During the quarter ended December 31, 2004, ATH issued 300 shares of A-1
Preferred Stock for settlement of related party debt of $300,000.
During the quarter ended December 31, 2004, ATH converted 860 shares of
common stock to 19 shares of A-1 Preferred Stock. No additional
consideration was received for this conversion.
During the quarter ended December 31, 2004, an officer and employee of the
subsidiary performed an exercise of employee stock options for the
settlement of debt owed to him of $40,000. The exercise price was $0.50 for
80,000 shares of common stock. During the quarter ended December 31, 2004,
certain holders of common stock contributed to the Company 65,321 shares,
the Company effectively retired the common stock.
During the quarter ended December 31, 2004, certain holders of common stock
contributed to the Company 1,613 shares, the Company effectively retired
the common stock.
During the quarter ended December 31, 2004, certain holders of common stock
contributed to the Company 291 shares the Company effectively retired the
common stock.
During the quarter ended December 31, 2004, ATH converted 4,000 shares of
common stock to 14 shares of A-1 Preferred Stock. The transaction
originally occurred during the year ended June 30, 2004 as a sale of ATH
common stock for gross proceeds of $14,000.
During the quarter ended December 31, 2004, an ex-employee of the
subsidiary returned 72 shares of the Company common stock and had the
shares converted to $418 of accrued compensation to participate in the
settlement of accrued compensation for employee stock options. The Company
retired the 72 shares of common stock.
In December 2004, ATH granted 708,632 of employee stock-options exercisable
at $0.50 per share for the settlement of approximately $1.9 million of
accrued compensation. The employee stock-options vested immediately and
have a life of seven years.
In December 2004, at the option of the stockholder, ATH retired 31,867
shares of common stock and granted 90,632 employee stock-options
exercisable at $0.50 per share. The options were valued under APB No. 25
and carried an intrinsic value amount of approximately $236,000. The
employee stock-options vested immediately and have a life of seven years.
In December 2004 ATH granted 43,334 of employee stock-options exercisable
at $0.50 per share for services provided. The options were valued under APB
No. 25 and carried an intrinsic value amount of approximately $113,000. The
employee stock-options vested immediately and have a life of seven years.
F-54
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Subsequent Events (continued)
In December 2004, ATH granted 68,506 of employee stock-options exercisable
at $0.50 per share for the settlement of approximately $186,000 of accrued
compensation. The term of the settlement is 13 months and will recognize a
settlement of accrued compensation of approximately $14,350 per month. The
employee stock-options vested immediately and have a life of seven years.
During the quarter ended December 31, 2004, ATH granted 79,337 options
exercisable at $0.50 per share to outside vendors for the settlement of
payables of approximately $212,000. The stock-options vested immediately
and have a life of seven years.
During the quarter ended December 31, 2004, ATH granted 63,214 non-employee
options exercisable at $0.50 per share to outside parties for services
provided. Under the Black-Scholes option valuation model the valuation of
the options was approximately $172,000 which was included in stock-based
compensation. The services were for consulting fees for capital raising.
The stock-options vested immediately and have a life of seven years.
During the quarter ended March 31, 2005, ATH sold 465 shares of A-1
Preferred Stock for gross proceeds of $465,000 (net cash proceeds of
$414,950).
In June 2005, ATH issued 21,774 shares of common stock to an ex-employee
and officer of the subsidiary as part of a severance package. The shares
were valued at $6.20 per share and the Company recognized stock based
compensation of $135,000.
On June 20, 2005, ATH granted 3,300 of employee stock-options exercisable
at $0.50 per share for services provided. The options were valued under APB
No. 25 and carried an intrinsic value amount of approximately $8,600. The
employee stock-options vested immediately and have a life of seven years.
During the quarter ended June 30, 2005, ATH sold 1,050 shares of A-1
Preferred Stock for gross proceeds of $1,050,000 (net cash proceeds of
$896,750).
During the quarter ended June 30, 2005, ATH rescinded 80,874 employee stock
options granted on September 30, 2003, and in their place granted 460,882
of employee stock options exercisable at $0.50 per share for services
provided. The options were valued under APB No. 25 and carried an intrinsic
value amount of approximately $1.2 million. The employee stock-options
vested immediately and have a life of seven years.
During the quarter ended June 30, 2005, ATH granted 74,436 options
exercisable at $0.50 per share to non-employees for services provided.
Under the Black-Scholes option valuation model the valuation of the options
was approximately $75,760. The stock-options vested immediately and have a
life of seven years.
In July 2005, the Company granted employee stock-options to acquire 16,129
shares of Common Stock exercisable at $0.50 per share for the settlement of
accrued compensation of $50,000. The employee stock-options are fully
vested and have a life of seven years.
F-55
ASSURETEC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Subsequent Events (continued)
In July 2005, at the option of the stockholder, the Company retired 21,774
shares of Common Stock for consideration of $135,000 and in their place
granted employee stock-options to acquire 21,838 shares of Common Stock
exercisable at $0.50 per share.
In September 2005, the Company granted employee stock-options to acquire
900 shares of Common Stock, exercisable at $6.00 per share, for services
provided. The employee stock-options will vest over a period of three years
and have a life of five years.
During the quarter ended September 30, 2005, the Company sold 290 shares of
A-1 Preferred Stock for gross proceeds of $290,000 (net cash proceeds of
$252,300).
On September 1, 2005 the Company initiated a private placement to
accredited investors only of up to $1 million of debentures with warrants
to purchase common stock. These debentures have a six month term and bear
interest at 12% annually. For each $3.00 of debentures purchased, the
Company issued one warrant to purchase one share of Holdings common stock
at $6.00 per share for a period of one year from the date of investment or
upon an initial public offering by Holdings, whichever occurs earlier. This
private offering raised gross proceeds of $1.125 million and net proceeds
of approximately $1.035 million, and in October 2005, the Company issued
warrants to acquire 375,667 shares of Common Stock. The Company is
evaluating the financial and accounting impact of this transaction.
On September 15, 2005 the Company commenced a private offering to
accredited investors only of up to 1,250,000 shares of Holdings common
stock. Pursuant to this private offering, the Company is offering units for
gross proceeds of $12.00 per unit. Each unit is comprised of two shares of
common stock at $6.00 per share with one warrant to acquire one share of
common stock at $6.00 per share, for each two shares of common stock
purchased. The warrants issued in this offering are exercisable for a
period of one year from the date of investment or upon an initial publ