acquisition of the assets of NovaVision, Inc. on November 30, 2010 and $363,472 as part of the acquisition of the assets of Sight Science Limited
on January 4, 2012. For the years ended December 31, 2012 and 2011 there was no capitalization of software development costs.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimated. To the extent managements estimates prove to be incorrect, financial results for future periods may be adversely affected. Significant estimates and assumptions contained in the accompanying consolidated financial statements include managements estimate of the allowance for uncollectible accounts receivable, amortization of intangible assets, and the fair values of options and warrants included in the determination of debt discounts and share based compensation.
The Company recognizes the cost of all share-based payments under the relevant authoritative accounting guidance. Share-based payments include any remuneration paid by the Company in shares of the Companys common stock or financial instruments that grant the recipient the right to acquire shares of the Companys common stock. For share-based payments to employees, which consist only of awards made under the stock option plan described below, the Company accounts for the payments in accordance with the provisions of ASC Topic 718, Stock Compensation (formerly referred to as SFAS No. 123(R)). Share-based payments to consultants, service providers and other non-employees are accounted for under in accordance with ASC Topic 718, ASC Topic 505, Equity Payments to Non-Employees or other applicable authoritative guidance.
We evaluate and account for conversion options embedded in convertible instruments in accordance with ASC 815 Derivatives and Hedging Activities.
Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
We account for convertible instruments (when we have determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: We record when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption. The embedded conversion option in connection with our convertible debt could not be exercised unless and until we completed a Qualifying Financing transaction. Accordingly, we determined based on authoritative guidance that the embedded conversion option is deemed to be a contingent conversion rather than active conversion option that did not require accounting recognition at the commitment dates of the issuances of the Notes.
We classify as equity any contracts that require physical settlement or net-share settlement or provide us a choice of net-cash settlement or settlement in our own shares (physical settlement or net-share settlement) provided that such contracts are indexed to our own stock as defined in ASC 815-40 ("Contracts in Entity's Own Equity"). We classify as assets or liabilities any contracts that require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside our control) or give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). We assess classification of our common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required.
We adopted the provisions of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.
The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments. The carrying amounts of our short and long term credit obligations approximate fair value because the effective yields on these obligations, which include contractual interest rates taken together with other features such as concurrent issuances of warrants and/or embedded conversion options, are comparable to rates of returns for instruments of similar credit risk.
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 quoted prices in active markets for identical assets or liabilities
Level 2 quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 inputs that are unobservable (for example cash flow modeling inputs based on assumptions)
Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of incremental shares issuable upon exercise of stock options and warrants and conversion of preferred stock and convertible debt. Such potentially dilutive shares are excluded when the effect would be to reduce a net loss per share. No dilution adjustment has been made to the weighted average outstanding common shares in the periods presented because the assumed exercise of outstanding options and warrants and the conversion of preferred stock and debt would be anti-dilutive.
The following table sets forth the potential shares of common stock that are not included in the calculation of diluted net loss per share:
From time to time new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that may have an impact on the Companys accounting and reporting. The Company believes that such recently issued accounting pronouncements and other authoritative guidance for which the effective date is in the future will not have an impact on its accounting or reporting or that such impact will not be material to its financial position, results of operations and cash flows when implemented.
As of December 31, 2012, $1,316,362 of Company's notes payable are secured by a first security interest in all of the assets of the Company. The company assesses the value of the beneficial conversion feature of its convertible debt by determining the intrinsic value of such conversion, under ASC 470, at the time of issuance. At the time of issuance of each of the convertible debt instruments set out above, the fair value of the stock was either the same or less than the conversion price, and so there was no value attributable to any beneficial conversion feature.
The Company operates in two business segments: Vycor Medical, which focuses on devices for neurosurgery; and NovaVision, which focuses on neuro stimulation therapies and diagnostic devices for the treatment and screening of vision field loss. Set out below are the revenues, gross profits and total assets for each segment.
|
|
|
|
December 31,
|
|
2012
|
2011
|
Total Assets:
|
|
|
Vycor Medical
|
1,055,026
|
2,068,084
|
NovaVision
|
1,506,134
|
1,503,556
|
Total Assets
|
2,561,160
|
$3,571,640
|
(b) Geographic information. The Company operates in two geographic segments, the United States and Europe. Set out below are the revenues, gross profits and total assets for each segment.
|
|
|
|
December 31,
|
|
2012
|
2011
|
Revenue:
|
|
|
United States
|
$952,256
|
$740,967
|
Europe
|
253,007
|
230,400
|
Total Revenue
|
$1,205,263
|
$971,367
|
Gross Profit:
|
|
|
United States
|
$810,809
|
$607,702
|
Europe
|
214,924
|
194,651
|
Total Gross Profit
|
$1,025,733
|
$802,353
|
Total Assets:
|
|
|
United States
|
$2,475,933
|
$3,470,993
|
Germany
|
85,227
|
100,647
|
Total Assets
|
2,561,160
|
$3,571,640
|
7. PROPERTY AND EQUIPMENT
As of December 31, 2012 and 2011, Property and Equipment and the estimated lives used in the computation of depreciation are as follows:
|
|
|
|
|
Estimated Useful Lives
|
December 31,
2012
|
December 31,
2011
|
|
|
|
|
Machinery and equipment
|
3 years
|
123,355
|
$106,368
|
Leasehold Improvements
|
5 years
|
6,206
|
-
|
Purchased Software
|
3 years
|
17,833
|
15,607
|
Molds and Tooling
|
5 years
|
234,230
|
234,230
|
Furniture and fixtures
|
7 years
|
21,533
|
21,130
|
Therapy Devices
|
3 years
|
76,513
|
59,065
|
Internally Developed Software
|
5 years
|
923,215
|
559,304
|
|
|
1,402,885
|
995,704
|
|
|
|
|
Less: Accumulated depreciation and amortization
|
|
(575,496)
|
(324,413)
|
|
|
|
|
Property and Equipment, net
|
|
$827,389
|
$671,291
|
Depreciation expense for the years ended December 31, 2012 and 2011 was $247,156 and $157,676 respectively, including $22,610 and $16,725 respectively for Therapy Devices which is allocated to Cost of Sales.
8. INTANGIBLE ASSETS
As of December 31, 2012 and 2011,
Intangible Assets consists of:
|
|
December 31,
|
|
|
2012
|
|
2011
|
Amortized intangible assets: Patent (8 years useful life)
|
|
|
|
|
|
|
|
|
Gross carrying Amount
|
|
$
|
705,662
|
|
|
$
|
492,147
|
|
Accumulated Amortization
|
|
|
(202,767
|
)
|
|
|
(112,568
|
)
|
|
|
$
|
502,895
|
|
|
$
|
379,579
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets: Website (5 years useful life)
|
|
|
|
|
|
|
|
|
Gross carrying Amount
|
|
$
|
18,909
|
|
|
$
|
18,909
|
|
Accumulated Amortization
|
|
|
(16,137
|
)
|
|
|
(14,003
|
)
|
|
|
$
|
2,772
|
|
|
$
|
4,906
|
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject to amortization
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
251,157
|
|
|
|
130,000
|
|
Intangible asset amortization expense for the periods
ended December 31, 2012 and 2011 was $104,344 and $69,022, respectively.
9. EQUITY
Certain Equity Transactions
In January and February 2011, the Company issued an aggregate of 50,527 shares of common stock to three investors at a price of $2.85 per share for aggregate gross proceeds of $144,000.
During the period from January 1, 2011 through December 31, 2011, the Company issued 5,920 shares of Common Stock (valued at $20,000) to Steven Girgenti and 645 shares of Common Stock (valued at $2,174) Dr Oscar Bronsther
in consideration for services provided to the Board of Directors; and 1,217 shares of Common Stock (valued at $6,250) to Alvaro Pasual-Leone, and 926 shares of Common Stock (valued at $6,250) to each of Jason Barton and Jose Romano, in respect of their roles
as members of the NovaVision, Inc. Scientific Advisory Board.
On March 2, 2011, the Company issued warrants to seven parties to purchase 98,070 shares of the Company's common stock at a price of $4.50 per share. The warrants are exercisable over a period of three years from the date of issuance.
On March 25, 2011, in connection with the issuance by the Company of a term note for $300,000 to EuroAmerican Investment Corp, the Company issued warrants to purchase 2,667 shares of Company common stock at an exercise price of $4.50 per share for a period of three years from the date of issuance. The estimated fair value of this warrant was recorded as a debt discount at issuance and was amortized over the three-month term of the loan as interest expense.
In April 2011, the Company issued 162,965 shares of common stock together with Warrants to purchase 81,842 shares of common stock at an exercise price of $4.50 per share for a period of three years for aggregate gross proceeds of $550,000.
In April 2011, in connection with a consultancy agreement, the Company issued 120,000 shares of common stock (valued at $360,000) to Jerrald Ginder. On June 25, 2011, pursuant to an amendment to this consultancy agreement, the Company issued an additional 17,778 shares of common stock to Mr. Ginder in lieu of aggregate monthly cash payments due under the agreement totaling $60,000.
In May 2011, the Company issued 57,779 shares of common stock together with Warrants to purchase 28,889 shares of Company common stock at an exercise price of $4.50 per share for a period of three years for aggregate gross proceeds of $195,000.
On June 7, 2011, the Company completed the sale of 31.4 Units comprising Series C Convertible Preferred Shares and Warrants (the "Units") to accredited investors (the "Investors") (the "Preferred Offering") for aggregate proceeds of $1,570,000. The Units were issued pursuant to separate Series C Convertible Preferred Stock Purchase Agreements (the "Agreements") between the Company and each of the Investors. This sale was an initial closing (the "Initial Closing") under the Agreements which allows for maximum proceeds of $3,000,000.
Each Unit was priced at $50,000 and comprised one share of Series C Preferred Convertible Stock convertible (at the Holder's option or mandatorily upon the occurrence of certain events) into 14,815 shares of the Company's Common Stock ($3.38 per share) and a
Warrant to purchase 7,408 shares of the Company's Common Stock at $4.50 per share (subject to adjustments) for a period of three years (the "Warrant" or "Warrants"). A total of 31.4 shares of Series C Convertible Preferred Stock
convertible into 465,186 shares of the Company's Common Stock and Warrants to purchase 232,593 shares of the Company's Common Stock were issued. On June 28, 2011, the Company completed a second closing of the Preferred Offering (the "Second
Closing") with the sale of an additional 15.40 Units to Investors for aggregate proceeds of $770,000. An additional 15.40 shares of Series C Convertible Preferred Stock convertible into 228,149 shares of the common stock and Warrants to purchase
114,074 shares of the Company's common stock were issued in connection with the Second Closing. The Company entered into a Registration Rights Agreement with the Investors with respect to the Warrants. In December 2011, by mutual consent for
technical reasons, the sale of 1 unit of Series C Convertible Preferred Stock convertible into 14,815 shares of the Company's Common Stock was
rescinded; the Company returned the $50,000 invested and the investor returned the preferred share and the warrants to purchase 7,408 shares of the Company's Common Stock.
On June 3, 2011, in connection with a consultancy agreement, the Company issued 103,334 shares of common stock (valued at $348,750) to GreenBridge Capital Partners IV, LLC. 68,889 of these shares remained held in escrow and are subject to clawback options, at the Company's sole descretion, exerciseable in equal tranches by April 15 and 30, 2012.
On June 6, 2011, in connection with a consultancy agreement, the Company issued 6,667 shares of common stock (valued at $22,500) to Burnham Hill Advisors, LLC.
Burnham Hill Partners LLC ("BHP") served as placement agent in connection with the sale of 24.8 Units in the Preferred Offering. Pursuant to a placement agent agreement with BHP, the Company paid BHP a cash placement fee equal to seven percent (7%) of the gross proceeds received by the Company from Units placed by BHP. Also pursuant to the placement agent agreement, the Company issued BHP Warrants (the "Placement Agent Warrants") to purchase a number of shares equal to seven percent (7%) of the number of shares of common stock issuable upon conversion of the 24.8 Units placed by BHP (25,719 shares) in the Preferred Offering. The Placement Agent Warrants are exercisable for three years from the date of issuance at an exercise price of $3.38 per share. In connection with the investor rescinding in December 2011 referred to above, the number of warrants was reduced to 24,682.
On June 30, 2011, the entire principal and unpaid interest on a Debenture dated December 3, 2010 payable to Berardino Investment Group in the original principal amount of $40,000 was converted into 14,453 shares of common stock at a conversion price of $2.85 per share.
Under the terms of a Consulting Agreement dated February 10, 2010 with Fountainhead, the Company was required to issue to Fountainhead fully vested warrants to purchase 260,425 shares of the Company's common stock should certain conditions be met during the term of the Consulting Agreement. These warrants are exercisable at $1.88 per share for a period of five years from February 2010. These warrants became issuable upon completion of the Preferred Offering and were issued in June 2011.
In July 2011 the Company issued Warrants to purchase 15,334 shares of Company common stock at an exercise price of $4.50 per share for a period of three years to Millenium Capital Corporation in respect of consulting and advisory services.
On August 4, 2011, the Company completed a final closing of the Preferred Offering (the "Final Closing") with the sale of an additional 13.2 Units to Investors for aggregate proceeds of $660,000. An additional 13.2 shares of Series C Convertible Preferred Stock convertible into 195,556 shares of the Company's Common Stock and Warrants to purchase 97,778 shares of the Company's Common Stock were issued in connection with the Final Closing. An aggregate of 60 Units were sold to Investors in the First Closing, Second Closing and Final Closing of the Preferred Offering for total proceeds of $3,000,000. A total of 60 shares of Series C Convertible Preferred Stock, convertible into an aggregate of 888,889 shares of Common Stock, and Warrants to purchase 444,444 shares of the Company's Common Stock.
In August 2011 2,858 shares of Common Stock (valued at $10,000) to McCombie Group, LLC in respect of consulting agreements.
On August 26, 2011, the Company completed a new sale of 3.8 Units comprising Series C Convertible Preferred Shares and Warrants (the "Units") to an accredited investor (the "Investor") (the " New Preferred Offering") for aggregate proceeds of $190,000. Each Unit was priced at $50,000 and comprised one share of Series C Preferred Convertible Stock convertible (at the Holder's option or mandatorily upon the occurrence of certain events) into 14,815 shares of the Company's Common Stock ($3.38 per share) and a Warrant to purchase 7,408 shares of the Company's Common Stock at $4.50 per share (subject to adjustments) for a period of three years (the "Warrant" or "Warrants").
In September 2011 the Company entered into a Consulting Agreement with Dr Oscar Bronsther with regard to certain potential clinical studies utilizing Vycor's VBAS product. Under the terms of the agreement, Dr Bronsther received warrants to purchase up to 2,667 of the Company's Common Stock for a period of three years from September 30, 2011 at a price of $4.50 per share.
On September 30, 2011 the Company issued 3,400 shares of Company common stock to Joe Simone in respect of an amendment to a previously disclosed consulting agreement.
In December 2011 the Company issued 2,687 shares of Common Stock to Fountainhead Capital Partners Limited in respect of the exercise of December 2006 warrants, and received $443.26 in cash.
On January 4, 2012, an aggregate of 95,667 restricted shares of the Company were issued to Prof. Sahraie and the University of Aberdeen, relating to the acquisition of all of the shares of Sight Science, Ltd. (Sight Science) by NovaVision.
During the period from January 1, 2012 through December 31, 2012, the Company issued 5,928 shares of Common Stock (valued at $20,000) to each of Steven Girgenti and Dr Oscar Bronsther in consideration for services provided to the Board of Directors, 3,704 shares of Common Stock (valued at $12,500) to each of Alvaro Pasual-Leone, Jason Barton and Jose Romano, and 2,778 shares of Common Stock (valued at $9,375) to Josef Zihl in respect of their roles as members of the NovaVision, Inc. Scientific Advisory Board.
In April 2012 the Company issued 8,889 shares of Common Stock (valued at $30,000) to Brunella Jacs, LLC in respect of consultancy services provided the Company.
In June 2012, following the exercise of the Companys option to repurchase shares of Common Stock from Greenbridge Capital Partners, IV, LLC, a total of 68,889 shares were repurchased into Treasury Stock at $1,033.33.
In August 2012, 137,778 shares of Common Stock previously issued to Mr. Jerrald Ginder under the terms of Consulting Agreement were returned to the Company in consideration of a full settlement of performance and amounts due under the Consulting Agreement; the shares were retired.
During the period from January 1, 2012 through December 2012, the Company issued a total of 348,152 shares of Common Stock in respect of conversion of Series C Preferred Stock.
During the period from May 1, 2012 through December 31 2012, the Company issued a total of 50,372 shares of Common Stock at $3.375 for a total consideration of $170,000 to four investors.
On November 30, 2012 the Company made a charitable donation of 14,815 shares of Common Stock valued at $16,667 to The Fiducuary Foundation.
On November 30, 2012 the Company entered into 12 month consulting agreements with Del Mar Consulting, Inc and Alex Partners, LLC to provide investor relations and investor awareness consultancy services. Under these agreements, Del Mar and Alex Partners received shares 140,000 and 93,334 Common Shares valued at $157,500 and $105,000 respectively.
10. SHARE-BASED COMPENSATION
Stock Option Plan
The Company adopted the Vycor Medical, Inc. Employee, Director, and Consultant Stock Plan (the Plan) as of February 13, 2008. The Plan provides for both incentive stock options and nonqualified stock options to be granted to employees, officers, consultants, independent contractors, directors and affiliates of the Company. The board of directors establishes the terms and conditions of all stock option grants, subject to the Plan and applicable provisions of the Internal Revenue Code. Incentive stock options must be granted at an exercise price not less than the fair market value of the common stock on the grant date. The options granted to participants owning more than 10% of the Companys outstanding voting stock must be granted at an exercise price not less than 110% of the fair market value of the common stock on the grant date. The options expire on the date determined by the board of directors,
but may not extend mare than 10 years from the grant date, while incentive stock options granted to participants owning more than 10% of the Companys outstanding voting stock expire five years from the grant date. The vesting period for employees is generally over three years. The vesting Period for non-employees is determined based on the services being provided. The maximum number of shares of stock which may be delivered under the plan shall automatically increase by a number sufficient to cause the number of shares covered by the plan to equal 10% of the total number of shares of stock then outstanding on a fully diluted basis.
Under ASC Topic 718, the Company estimates the fair value of option awards on the date of grant using an option pricing model. The grant date fair value is recognized over the option vesting period, the period during which an employee is required to provide service in exchange for the award. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. Under these standards, compensation cost for employee cost for employee stock-based awards is based on the estimated grant-date fair value and recognized over the vesting period of the applicable award on a straight-line basis. No employee stock options were granted for the years ended December 31, 2012 and 2011.
Initial grants of options to purchase 3,334 shares were issued under the Plan on February 13, 2008 to each of Kenneth T. Coviello, the Companys Chief Executive Officer and Heather N. Vinas, the Companys President at an exercise price of $20.25 per share. The options vested 33-1/3% on each of the first, second, and third anniversary of the grant and expire February 12, 2018. Following Heather Vinas resignation as President of the Company in May 2010, 667 unvested options were cancelled. For the years ended December 31, 2012 and 2011, the Company recognized share-based compensation of $0 and $0, respectively.
Stock appreciation rights may be granted either on a stand alone basis or in conjunction with all or part of any other stock options granted under the plan. As of December 31, 2012 there were no awards of any stock appreciation rights.
The Company from time to time issues common stock, stock options or common stock warrants to acquire services or goods from non-employees. Common stock, stock options and common stock warrants issued to other than employees or directors are recorded on the basis of their fair value, which is measured as of the measurement date using an option pricing model. The measurement date for options and warrants related to contracts that have substantial disincentives to non-performance is the date of the contract, and for all other contracts is the vesting date. Expense related to the options and warrants is recognized on a straight-line basis over the shorter of the period over which services are to be received or the life of the option or warrant.
The details of the outstanding rights, options and warrants and value of such rights, options and warrants are as follows:
|
|
|
|
STOCK WARRANTS:
|
Number of shares
|
|
Weighted average exercise price
per share
|
Outstanding at December 31, 2010
|
777,371
|
|
$2.35
|
Granted
|
987,869
|
|
3.78
|
Exercised
|
(2,687)
|
|
0.17
|
Cancelled or expired
|
(15,212)
|
|
12.96
|
Outstanding at December 31, 2011
|
1,747,341
|
|
$3.07
|
Granted
|
4,667
|
|
4.50
|
Exercised
|
-
|
|
-
|
Cancelled or expired
|
(2,140)
|
|
36.00
|
Outstanding at December 31, 2012
|
1,749,868
|
|
$3.03
|
|
|
|
|
|
|
|
|
STOCK OPTIONS:
|
Number of shares
|
|
Weighted average exercise price
per share
|
Outstanding at December 31, 2010
|
5,557
|
|
$20.25
|
Granted
|
-
|
|
-
|
Exercised
|
-
|
|
-
|
Cancelled or expired
|
-
|
|
-
|
Outstanding at December 31, 2011
|
5,557
|
|
$20.25
|
Granted
|
-
|
|
-
|
Exercised
|
-
|
|
-
|
Cancelled or expired
|
-
|
|
-
|
Outstanding at December 31, 2012
|
5,557
|
|
$20.25
|
As of December 31, 2012, the weighted-average remaining contractual life of outstanding warrants and options is 1.93 and 5.12 years, respectively.
Non-Employee Stock Compensation
Under the terms of a consulting agreement dated February 2010, the Company issued fully vested warrants to Fountainhead to purchase up to 260,425 shares of the Company's common stock at $1.88 per share. The warrants are valid from February 10, 2010 for a period of five years. The fair value of these warrants was estimated using the Black-Scholes option pricing model and was amortized over the two-year life of the consultancy agreement, to February 2012. For year the ended December 31, 2012, $20,397 was recognized as share-based compensation in connection with this agreement.
During the year ended December 31, 2012, the Company issued an aggregate of 5,928 shares of common stock, valued at $20,000, to each of Steven Girgenti and Oscar Bronsther for services rendered to the board of directors. For the ended December 31, 2012, 2012, a total of $30,000 was recognized as share-based compensation for the issuance of these shares.
During the year ended December 31, 2012 the Company issued an aggregate of 3,704 shares of common stock, valued at $12,500, to each of Alvaro Pascual-Leone, Jason Barton and Jose Romano and 2,778 shares of Common Stock, valued at $9,375, to Josef Zihl for services rendered to the Scientific Advisory Board of NovaVision. For the ended December 31, 2012, an aggregate of $46,875 was recognized as share-based compensation for the issuance of these shares.
Under the terms of a one-year consultancy agreement with Mr. Jerrald Ginder dated March 2011, as amended June 2011, the company issued an aggregate of 137,778 restricted shares of common stock of the Company. The stock was valued by the Company at $420,000 and was amortized over the life of the agreement as share-based compensation expense. For the year ended December 31, 2012, aggregate compensation recognized in respect of the Consulting Agreement, as amended, was $109,570. The consultancy was fully expensed as of March 31, 2012. This Agreement is further discussed in Note 14.
In June 2011, the Company entered into a one-year Consulting Agreement with GreenBridge Capital Partners, IV, LLC, to provide consulting and advisory services to the Company. Under the terms of this agreement, GreenBridge was to receive up to 103,334 shares of the Companys common stock. The stock was valued by the Company at $348,750 and was amortized over the life of the agreement as share-based compensation expense, in accordance with the performance under that agreement. As further discussed in Note 14, in May 2012 the Company exercised its option to repurchase 68,889 shares. Accordingly, a total of $116,250 was recognised as expense under this agreement. As at December 31, 2011, $113,344 had been recognized and for the year ended December 31, 2012, $2,906 was recognized as share-based compensation in connection with this agreement.
In April 2012 the Company entered into a consultancy agreement with Brunella Jacs, LLC for certain corporate and strategic advisory services. Under the terms of the agreement, Brunella Jacs was issued 8,889 shares of Common Stock, valued at $30,000. For the year ended December 31, 2012, aggregate compensation recognized in respect of this agreement was $30,000.
On May 14, 2012, the Company entered into a three-month Consulting Agreement with OneSource Advisors, LLC to provide consulting and advisory services to the Company, which was amended on August 31, 2012. Under the terms of the Consulting Agreement, on September 30, 2012 OneSource received warrants to purchase up to 4,667 of the Companys Common Stock for a period of three years from May 14, 2012 at a price of $4.50 per share. The fair value of these warrants was estimated at $8,708 using the Black-Scholes model and the full value was recognized immediately.
On November 30, 2012 the Company entered into 12 month consulting agreements with Del Mar Consulting, Inc and Alex Partners, LLC to provide investor relations and investor awareness consultancy services. Under these agreements, Del Mar and Alex Partners received shares Common Shares valued at $157,500 and $105,000 respectively. The value of these shares is being amortized over the period of the agreement, and for the year ended December 31, 2012 stock compensation of $21,875 was recognized as share-based compensation in connection with this agreements.
Aggregate stock-based compensation expense charged to operations on stock and warrants granted to the above non-employees the year ended December 31, 2012 is $280,331. As of December 31, 2012, there was $240,625 of total unrecognized compensation costs related to warrant and stock awards and non-vested options.
Stock-based compensation expenses related to employee options and warrants granted to non-employees are recognized as the stock options and warrants are earned. The fair value of the stock options or warrants granted is estimated at the grant date, using the Black-Scholes option pricing model, and the expense is recognized on a straight-line basis over the shorter of the period over which services are to be received or the life of the option or warrant. The grant date fair value of employee share options and similar instruments is estimated using the Black-Scholes option pricing model on the basis of the fair value of the underlying common stock on the measurement date, adjusted for the unique characteristics of those equity instruments, using the assumptions noted in the table below. The fair value of the common stock is determined by the then-prevailing private placement purchase price. Expected volatility was based on the historical volatility of a peer
group of publicly traded companies. The expected term of options and warrants was based upon the life of the option, and the risk-free rate used was based on the U.S. Treasury Constant Maturity rate.
The following assumptions were used in calculations of the Black-Scholes option pricing model in years ended December 31, 2012 and 2011:
|
|
|
|
Year ended December 31,
|
|
2012
|
2011
|
Risk-free interest rates
|
0.31-2.39 %
|
0.42-1.60 %
|
Expected life
|
3 years
|
3 years
|
Expected dividends
|
0%
|
0%
|
Expected volatility
|
96-99%
|
96-99%
|
Vycor Common Stock fair value
|
$1.88-$4.50
|
$3.00-$4.50
|
12. INCOME TAXES
Loss Before Taxes
|
|
|
|
|
|
|
December 31,
2012
|
|
December 31,
2011
|
Domestic
|
|
$
|
2,613,733
|
|
|
$
|
4,455,038
|
|
Foreign
|
|
|
312,477
|
|
|
|
323,505
|
|
|
|
|
$2,926,210
|
|
|
$
|
4,778,543
|
|
Deferred Income Taxes
The Company has incurred net operating losses since inception. The Company has not reflected any tax benefit related to such net operating losses in the financial statements. Prior to August 15, 2007 the Company was a limited liability company and losses were passed through to the individual members, therefore the Company only has potential tax benefits from the date it became a C corporation.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company and its subsidiaries deferred tax assets at December 31, 2012 and December 31, 2011 are as follows:
|
|
|
|
|
|
|
December 31,
2012
|
|
December 31,
2011
|
Operating loss carry-forward
|
|
$
|
2,700,000
|
|
|
$
|
2,100,000
|
|
Deferred tax asset before Valuation allowance
|
|
|
2,700,000
|
|
|
|
2,100,000
|
|
Valuation allowance
|
|
|
(2,700,000
|
)
|
|
|
(2,100,000
|
)
|
Net deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income.
The authoritative guidance requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on the level of historical taxable losses and projections of future taxable income (losses) over the periods in which the deferred tax assets can be realized, management currently believes that it is more likely than not that the Company will not realize the benefits of these deductible differences. Accordingly, management has determined that a 100% valuation allowance is appropriate at December 31, 2012 and December 31, 2011.
Net Operating Loss Carry-Forwards
As of December 31, 2012 and 2011, the Company has U.S. accumulated losses for tax purposes of approximately $7,600,000 and $6,000,000 respectively, which may be carried forward and offset against U.S. taxable income, and which expire during the tax years 2027 through 2031.
Federal tax laws impose significant restrictions on the utilization of net operating loss carry-forwards and in the event of a change in ownership of the Company, as defined by the Internal Revenue Code Section 382. The Companys net operating loss carry-forwards may be subject to the above limitations.
As of December 31, 2012 and 2011, had German accumulated losses for tax purposes of approximately $490,000 and $450,000 respectively, which may be carried forward and offset against German taxable income subject to certain restrictions and limitations. Such carry-forwards are subject to certain restrictions and limitations in the event of changes in the NovaVision GmbHs ownership.
As of December 31, 2012 and 2011, had UK accumulated losses for tax purposes of approximately $100,000 and $0 respectively, which may be carried forward and offset against UK taxable income subject to certain restrictions and limitations.
Tax Rates
The applicable US income tax rate for the Company for both of the years ended December 31, 2012 and 2011 was 35%.
Non-US subsidiaries are taxed according to the tax laws in their respective country of residence. The German applicable rate for both of the years ended December 31, 2012 and 2011 was 35%; the UK applicable rate for the year ended December 31, 2012 was 24% respectively.
US income taxes and foreign withholding taxes were not provided for on undistributed earnings of the Companys foreign subsidiaries. The Company intends to reinvest these earnings indefinitely in its foreign subsidiaries. If these earnings were distributed to US in the form of dividends or otherwise, after the repayment of intercompany debt, the Company would be subject to additional US income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes.
Uncertain Tax Position
The Company has recorded no liability for income taxes associated with unrecognized tax benefits at the date of adoption and has not recorded any liability associated with unrecognized tax benefits during 2012 and 2011. Accordingly, the Company has not recorded any interest or penalty in regard to any unrecognized benefit.
13. COMMITMENTS AND CONTINGENCIES
Lease
The Company leases approximately 10,000 sq. ft. located at 6401 Congress Ave., Suite 140, Boca Raton, FL 33487 from Catexor Limited Partnership for a gross rent of
$14,260 plus sales tax per month. The term of the lease is 5 years and 6 months terminating July, 2017. The Company’s subsidiaries in Germany and the UK occupy properties on short term lease agreements.
Rent expense for the years ended December 31, 2012 and 2011 were $190,023 and $180,255, respectively.
Potential German tax liability and connected professional fees
In June 2012 the Company's German subsidiary received a preliminary assessment for Magdeburg City trade tax of approximately €75,000 (approximately $94,000). This assessment is for the 2010 fiscal year and relates to the Company's acquisition of the assets of the former NovaVision, Inc. An initial assessment for corporate tax for the same period has been preliminarily reduced to zero. The Company has not accepted this trade tax assessment and is in discussion with the relevant tax authorities with a view to its reduction. To the extent that this assessment, a higher or a reduced amount, is ultimately confirmed by the tax authorities, the Company believes it has a very strong claim against certain professional advisors which would offset the liability in full. Accordingly, the Company has made no provision for this liability for the period ended December, 2012.
Related to the above tax situation, the Company has incurred advisory fees. The Company believes it also has a strong claim against certain professional advisors for a recovery of the full amount of the fees, however such recovery may be limited to a statutory minimum. Accordingly the Company has made a provision in the period ended December 31, 2012 for the full amount of these fees, being approximately €39,000 ($50,105).
Potential Patent Infringement
The Company is aware that potential competitors are developing products similar to VBAS for sale in foreign markets. If those products come to market, Vycor has the option to take action to enforce its patent rights. As with all patent infringement actions, there is some risk that the accused infringer will not be found to infringe the claims, and an additional risk that the accused infringer will successfully challenge the validity of the asserted claims.
VBAS Limited Product Recall
In August 2012 the Company initiated a limited product recall having identified a microscopic fiber in a single lot of its TC171105 model. Further investigation concluded that there was a very low incidence of this microscopic fiber in the lot, which had not been picked up during the inspection process. The FDA was notified and all customers with units that had been distributed (a total of 5 customers in the U.S. and 2 customers internationally) were contacted and the units were recalled and replaced with re-inspected
and passed units, or internationally re-inspected under 100% enhanced inspection guidelines; this recall and replacement process was completed in November 2012 and there are no affected units on the marketplace. In January 2013, following their review, classified the recall as a Class I. The Company is in the process of closing out this recall with the FDA.
Vycor re-inspected all remaining units in the lot prior to shipment under 100% enhanced inspection procedures and took steps to ensure that this issue was contained to this lot and that other lots and products were not affected (this is one of 12 products sold by Vycor). The likely source of the fiber was identified and corrective steps implemented in both the manufacturing and inspection processes to ensure that the issue would not re-occur.
Vycor is not able at this time to determine whether there will be any financial impact on the Company as a result of this recall. However, the limited replacement of defective units is immaterial and at this time the Company does not believe there are additional costs of sufficient materiality to make a reserve provision in its financial statements. Vycors customers have appreciated that Vycor took swift voluntary action to remove this product from the marketplace, even though the incidence of this fiber and therefore the risk was low, before any units could be used, and to maintain Vycors high safety and quality standards.
14. CONSULTING AND OTHER AGREEMENTS
The Company has entered into the following consulting and other agreements during the year ended December 31, 2012:
Consulting Agreement with OneSource Advisors, LLC.
On May 14, 2012, the Company entered into a three-month Consulting Agreement with OneSource Advisors, LLC to provide consulting and advisory services to the Company, which was amended on August 31, 2012. Under the terms of the Consulting Agreement, on September 30, 2012 OneSource received warrants to purchase up to 4,667 of the Companys Common Stock for a period of three years from May 14, 2012 at a price of $4.50 per share.
Consulting Agreement with Del Mar Consulting Group, Inc and Alex Partners, LLC.
On November 30, 2012 the Company entered into 12 month consulting agreements with Del Mar Consulting, Inc and Alex Partners, LLC to provide investor relations and investor awareness consultancy services. Under these agreements, Del Mar and Alex Partners received shares Common Shares valued at $157,500 and $105,000 respectively.
The following agreements remained in force during the period:
Consulting Agreement with Fountainhead Capital Management Limited ("Fountainhead")
In February 2010 the Company entered into a Consulting Agreement with Fountainhead, which was the subject of a Supplement Agreement in May, 2011 to recognize Fountainhead's expanded responsibilities as a result of the acquisition by the Company of the assets of NovaVision, Inc. Under the terms of the Agreement and Supplement, the Company will pay to Fountainhead a monthly retainer of $37,500 ($8,500 under the Original Agreement and $29,000 under the Supplement). This monthly retainer shall be accrued and paid out to Fountainhead at the option of Fountainhead as follows: (i) in Vycor stock at any time at $1.88 per share for the Original Agreement and $3.38 per share for the Supplement; or (ii) in cash following the closing of a fundraising of no less than $2.5 million or on the sale of the Company or a substantial part of the assets thereof at any time after June 30, 2011. Notwithstanding, Fountainhead has the option to receive up to $5,000 of monthly retainer in cash each
month, commencing April 1, 2011. The term of the Consulting Agreement is to May 5, 2013.
Consulting Agreement with Jerrald Ginder
In March 2011, as amended June 2011, the Company entered into a one-year consultancy agreement with Mr. Jerrald Ginder, a sales executive of Stryker Corporation, effective April 1, 2011. Under the terms of the agreement Mr. Ginder received 137,778 restricted shares of common stock of the Company. The stock was valued by the Company at $420,000 and was amortized over the life of the agreement ending March 30, 2012 as share-based compensation expense.
On August 7, 2012, the Company and Mr. Ginder reached a Settlement and Mutual General Release Agreement relative to the Consulting Agreement whereby it was acknowledged by all parties that the Consulting Agreement expired as of April 1, 2012 and that Mr. Ginder would cause to be delivered to the Company 137,778 shares of Company Common Stock previously issued to Mr. Ginder in consideration of a full settlement of performance and amounts due under the Consulting Agreement and a mutual general release among the parties. As of September 12, 2012, these shares were returned to the Company and retired.
Consulting Agreement with GreenBridge Capital Partners, IV, LLC
On June 3, 2011, the Company entered into a Consulting Agreement ("Consulting Agreement") with GreenBridge Capital Partners, IV, LLC, a Delaware limited liability company ("GreenBridge"), to provide consulting and advisory services to the Company. Under the terms of this agreement GreenBridge was to receive up to 103,334 shares of the Company's Common Stock. Said shares were subject to a Company repurchase option, which could be exercised within specified time periods at the Company's sole discretion.
As of June 30, 2012, the Company had exercised its option to repurchase 68,889 of the 103,334 shares for a total purchase price of $1,033.33. The Company also believes that it is entitled to the return of the remaining 34,445 shares because it contends that GreenBridge breached the Consulting Agreement and failed to deliver the services it was obligated to perform pursuant to the terms of the Consulting Agreement. The Company has filed an action relative to this matter with the American Arbitration Association alleging causes of action based upon breach of contract and fraud. In March 2013
Greenbridge
returned to the Company all of the 34,445 shares being sought by the Company. At this time, the Company cannot project whether it will achieve a successful result in connection with the remainder of the action or any other related actions. The Company has reserved its right to claim legal costs.
Agreement with Partizipant, LLC
On July 31, 2011, the Company entered into an Agreement (the "Agreement") with Partizipant, LLC, a Delaware limited liability company ("Partizipant"), to provide a broad range of investor relations and public relations services. Pursuant to the Agreement, the Company agreed to pay Partizipant a one-time payment of $300,000.
The Company believes that Partizipant has not adequately performed its services under the Agreement and that it is entitled to the return of a substantial portion of the amounts paid under the terms of the Agreement. The Company has filed an action relative to this matter with the American Arbitration Association alleging causes of action based upon breach of contract and fraud. This action is still in its early stages and a hearing is set for September 2013. At this time, the Company cannot project whether it will achieve a successful result in this action.
15. RELATED PARTY TRANSACTIONS
During July to December 2012, the Company issued unsecured, subordinated loan notes to: Fountainhead for a total of $309,900; and to Peter Zachariou, a director of the Company, for a total of $115,550. The loan notes are subordinated to the Companys secured debentures and Preferred C Stock of the Company, bear interest at a rate of 6% are due on demand or by their one-year anniversary.
In November 2012, Fountainhead and Peter Zachariou, a director of the Company, extended the maturity of secured loans totaling $1,016,362 and $300,000 respectively from December 31, 2012 to March 31, 2013. These have been subsequently extended to December 31, 2013.
On November 30, 2012 the Company entered into an Option Agreement with Heather Vinas, a director of the Company, to purchase up to 54,834 warrants to purchase Common Stock held by Mrs Vinas at $0.87. On January 1, 2013 and on the first day of each calendar month thereafter, the Company shall have the right to an Option Exercise with respect to 4,570 Warrants. The Company, in its sole discretion, may elect to cease its Option Exercises at any time. This was subsequently amended on January 15, 2013 to commence on February 15, 2013. The Company and Mrs Vinas are currently in discussions regarding this agreement.
There were no other related party transactions during the year ended December, 2012 other than the payment or accrual of fees under the Fountainhead Consulting agreement described in 14 above.
16. SUBSEQUENT EVENTS
Share Issuance
During January 2013, the Company issued 1,482 shares of Common Stock (valued at $5,000) to each of Steven Girgenti and Oscar Bronsther, M.D. in consideration for services provided to the Board of Directors, and 926 shares of Common Stock (valued at $3,125) to each of Alvaro Pasual-Leone and Josef Zihl in respect of their roles as members of the NovaVision, Inc. Scientific Advisory Board.
Reverse Stock Split
On January 11, 2013, the Company filed a Certificate of Amendment of its Certificate of Incorporation with the Secretary of State of the State of Delaware to effect a
reverse stock split of 1 for 150 on the issued and outstanding Common Stock par value $0.0001 (Common Stock). On January 15, 2013 (the Effective Date), the Company effectuated
its reverse stock split. On the Effective date, the Company implemented a one for 150 share reverse split of its Common Stock. On the Effective Date, the Companys pre-split 892,749,897
shares of Common Stock became 5,951,744 post-split shares of Common Stock, including the issuance of 79 shares of Common Stock for the round-up of partial shares. In connection with the reverse split,
the Companys authorized capital was not changed. All relevant information relating to the number of shares and per share information has been retrospectively adjusted to reflect the recerse stock split for all periods presented.
Loan Funding
During January to March, the Company issued unsecured, subordinated loan notes to: Fountainhead for a total of $130,000; and to Peter Zachariou, a director of the Company, for a total of $145,000. The loan notes are subordinated to the Companys secured debentures and Preferred C Stock of the Company, bear interest at a rate of 6% are due on demand or by their one-year anniversary.
Sight Science Acquisition Deferred Consideration Amendment
In February 2013, The Company and its subsidiary, Nova Vision, Inc. agreed, among other things, to extend the payment schedule for the payment of the cash consideration and working capital excess by the Company to the University of
Aberdeen and Prof. Arash Sahriae pursuant to the original Sale Agreement between the parties dated as of January 2012 to a period ending June 30, 2013.
GreenBridge Litigation
In March 2013
Greenbridge
returned to Vycor all of the 34,445 shares being sought by the Company. At this time, the Company cannot project whether it will achieve a successful result in connection with the remainder of the Action or any other related actions.
Loan Extensions
In March 2013, Fountainhead and Peter Zachariou, a director of the Company, extended the maturity of secured loans totaling $1,016,362 and $300,000 respectively from March 31, 2013 to December 31, 2013.
Option Agreement
On October 12, 2012 the Company entered into an Option Agreement with Kenneth T. Coviello, the Companys former Chief Executive Officer, to purchase up to 109,668
warrants to purchase Common Stock held by Mr. Coviello at $0.87. On January 1, 2013 the Company shall have the right to an Option Exercise with respect to 27,417 Warrants. On the first day of each calendar
month therafter, the Company shall have the right to an Option Exercise with respect to 9,139 Warrants per month, for a period of 9 months. On January 15, 2013 this was amended to commence on February 15, 2013.
The Company, in its sole discretion, may elect to cease its Option Exercises at any time.
On November 30, 2012 the Company entered into an Option Agreement with Heather Vinas, a director of the Company, to purchase up to 54,834 warrants to purchase Common Stock held by Mrs Vinas at $0.87. On January 1, 2013 and on the first day of each calendar month thereafter, the Company shall have the right to an Option Exercise with respect to 4,570 Warrants. On January 15, 2013 this was amended to commence on February 15, 2013. The Company, in its sole discretion, may elect to cease its Option Exercises at any time.