ITEM 1: DESCRIPTION OF BUSINESS
Business Development
We were incorporated in the State of Delaware under the name Renfrew, Inc. on July 22, 2003 as a blank check company as defined under Rule 419 of the Securities Act. On August 2, 2005, we filed Articles of Amendment with the State of Delaware changing our name to ASAH Corp. On January 9, 2007, we filed Articles of Amendment with the State of Delaware changing our name to American Surgical Holdings, Inc. (“ASHI”).
Pursuant to a Stock Purchase Agreement and Share Exchange between us and American Surgical Assistants, Inc., (“ASA”) dated October 10, 2005; we acquired all of the shares of ASA, a Texas corporation, from Zak Elgamal, CEO, and Jaime Olmo-Rivas, Executive Director. As a result of and in consideration for the issuance of 1,714,286 shares of our common stock to Mr. Elgamal and 1,714,286 shares of our common stock to Mr. Olmo-Rivas for an aggregate amount of 3,428,572 shares of our common stock, ASA became our wholly owned subsidiary.
We had operated as a blank check company until the merger in October 2005 and the purpose for this reorganization with ASA was to obtain an operating company which we believed has a successful business plan. Now, through ASA, we provide professional surgical assistant services to patients, surgeons and healthcare institutions.
Our other wholly-owned subsidiary, ATS Billing Services, Inc. (“ATS”) was incorporated in Texas in April 2006 to provide HIPAA-compliant billing and collection services for healthcare industry professionals, mainly, but not exclusively, surgical assistants.
Our Company
Through ASA we provide professional surgical assistant services to patients, surgeons, and healthcare institutions. Our high quality services result in cost savings for patients, insurance carriers, hospitals, surgeons, and healthcare institutions without compromising the quality of service. We are certified by the Joint Commission.
Surgical assistants are highly skilled, fully trained professionals credentialed through an extensive process similar to that utilized to evaluate physicians. These assistants are an integral part of the surgical team and they provide their services to surgeons and their patients. These services include, but are not limited to; identification of anatomical landmarks, securing blood vessels, recognizing pathological situations and providing and securing adequate, safe and proper assistance in exposure of the operative field, closure of the surgical wound, and the application of casts and dressings. They also perform other duties within the scope of their professional license as instructed or delegated by the operating surgeon. ASA surgical assistants are trained in general surgery, obstetrics and gynecology, orthopedic surgery, plastic surgery, urology, cardiovascular surgery, neurosurgery and other surgical disciplines. ASA’s recruiting strategies are designed to attract and retain surgical assistant professionals from both domestic and international sources.
We market our services to hospitals, surgeons and healthcare facilities. Presently, we provide service in Houston and Corpus Christi, Texas, Lawton, Oklahoma and Suffolk, Virginia. We plan to extend our services to other healthcare facilities in Texas and ultimately, we plan to offer our services throughout the country.
Our licensed and/or certified professionals work as full time salaried employees, hourly employees or independent contractors. Currently, we have a total of seventy three (73) surgical assistants, of which sixty two (62) are full or part time employees and eleven (11) are independent contractors. We also have twelve (12) full time administrative and billing employees.
The majority of our revenue comes in the form of Service Fees paid by third party insurers on behalf of their clients (the patients). A smaller percentage of Service Fee revenue is generated from payments by the patients for deductibles and co-pays not covered by the insurers and payments from patients who self-insure. We generate additional revenue in the form of fees earned under contracts for “On Call Coverage” from hospitals and other healthcare facilities.
At the end of 2008, our surgical assistants were on assignment at more than sixty (64) hospitals and healthcare facilities throughout Texas, Oklahoma and Virginia. Our hospital and healthcare facility clients utilize our services so that they can effectively manage their surgical staffing needs without having to deal with fluctuations due to attrition, new unit openings, seasonal patient census variations, etc. and other short and long-term staffing needs. Our ability to meet the clients’ specific staffing needs, our flexible staffing assignments, and our reliable and superior customer service contribute to the facilities’ desire to enter into service contracts with us to utilize our uniquely qualified and skilled surgical assistant professionals, This dynamic and effective business model has been developed over more than twenty years of continuous research and improvement, monitoring the quality of service and examination of feedback from our clients.
Industry Overview
In 2008, total healthcare expenditure was expected to rise 6.9 percent - two times the rate of inflation. Total spending was $2,4 trillion in 2007 which represented 17 percent of gross domestic product (GDP). U. S. health care spending is expected to increase at similar levels for the next decade reaching $4.3 trillion in 2017, or 20 percent of GDP.
We expect healthcare professional services to grow in 2009 based on economic conditions and the anticipated increase in hospital staff job openings and turnover. While this growth is expected to be positive and expand the opportunities available to healthcare professionals, the available supply of professionals is not expected to keep pace with the increase in demand.
As the U.S. population ages and medical technology advances result in longer life expectancy, it is likely that the number of patients with chronic illnesses and patients’ hospital populations will continue to increase. We believe that these factors will increase the demand for the need for outsourcing of both temporary and permanent allied healthcare professionals (Dependent and independent providers other than physicians).
In addition, enhanced healthcare technology has increased the demand for highly specialized surgical assistants who are qualified to assist in surgery and who are competent in operating advanced medical equipment and in performing complex medical procedures. We believe most regions of the United States are experiencing pronounced shortages of medical professionals.
Faced with continuing fiscal constraints, increasing demand, and tightening supply of allied health professionals. Hospitals are increasingly resorting to outsourcing and temporary staffing to meet the fluctuations in their staffing needs .
Our Business Model
Since our inception, we developed and are continually refining our business model to improve our level of productivity and efficiency. Our model is designed to optimize the communication with, and service to, both our surgical assistant professionals and our hospital and healthcare facility clients.
The critical factors contributing to the success of our business model are:
Building a strong management team - The founding management of our company is comprised of a team of highly skilled and experienced surgical assistants with extensive experience. We continue to focus on training and professional development for all levels of management and acquiring additional experienced members of management personnel as needed.
Marketing and Recruitment of additional Surgical Assistants - We attract surgical assistants to our Company through our outstanding customer service and relationship-oriented approach, our competitive compensation and benefits package, and our diverse offering of work assignments that provide the opportunity for the assistant to become involved in multiple surgical disciplines. We believe that our recruiting strategy makes us successful and effective at attracting some of the best available surgical assistants.
Screening, Background Checks, Licensing and Quality Management - Through our Credentialing, Risk Management, and Human Resources departments, we screen all prospective candidates prior to placement, and continue to evaluate them both annually and randomly to ensure adequate performance and to manage risk, as well as to determine feasibility of future placements. Our internal processes are designed to ensure that our staff has the appropriate experience, credentials and the necessary skill set. Our experience has shown us that well-matched placements result in satisfied surgeons and client facilities, with the best possible results and the safest outcome for the patients.
Assignments- Hospitals and surgeons notify us of their needs on a daily basis. Service requests are entered into our information network by our hospital account managers and scheduling personnel. These assignments are promptly scheduled by our operations managers, who always attempt to select the best suited surgical assistant for the procedure, and confirm placements with the hospital, the surgeon’s office or the facility. Our operations management team is available around the clock and assignments are fulfilled within an average response time of thirty (30) minutes. We pride ourselves in our understanding of the personal and distinctive technique of each surgeon, which leads to the development of a higher standard of interaction and remarkable familiarity with the surgeon’s preferences and individual technique. Thus bringing superior quality to the surgical teamwork and contributing favorably to the quality of the service and to the safest possible outcome of the surgery to the patient.
Employee Professional Compensation and Benefits - Our surgical assistants are compensated at competitive rates. In our effort to attract and retain highly qualified surgical assistants and employees, we offer a variety of benefits. These benefits may include:
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Annual paid vacation time for full time employees
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Workers Compensation Insurance
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401K Retirement Plan for qualified employees
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Reimbursement for Professional Liability Insurance premium and other qualified educational expenses
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Major Medical and Dental insurance available and sponsored in part by the company
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Flexible Spending Account for full time employees
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Digital pagers and other necessary communication equipment
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Membership in the Houston Federal Credit Union
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Long Term Disability Insurance
· Personal Accident Indemnity Plan
· Personal Sickness Indemnity Plan
· Hospital Protection
· Hospital Intensive Care Protection
· Specified Health Event Protection
· Cancer Indemnity Insurance
· Disability Income Protection
Information Systems
Our primary management information systems are centralized and controlled in our corporate headquarters in Houston, Texas. We have developed and currently operate information systems that include integrated processes for dispatching and scheduling, billing services and hospital and contract management. These systems provide our staff with fast, reliable, and detailed information regarding individual cases, hospitals and clients. We are continually seeking any available improved systems that would be feasible and advantageous for our Company to acquire or adopt.
Regulation
The healthcare services industry is subject to extensive and complex federal and state laws and regulations related to professional licensure, conduct by providers, reimbursement for services, and prohibit payment for referrals. Our business, however, is not directly impacted by or subject to the extensive and complex laws and regulations that generally govern the healthcare industry, however the laws and regulations governing our client facilities could indirectly impact our business to a certain extent. We do not receive compensation for services to Medicare and Medicaid patients. We receive a stipend from our contracted facilities to offset the cost of covering On-Call services.
State licensing for surgical assistants is relatively recent, only a few states have licensing requirements and legislation in place. Surgical assistants employed by ASA are either licensed by the state of Texas, or certified by one of the national certifying boards. Those who are not yet licensed either have applications for license pending or are currently being processed. We continually observe all measures to ensure compliance with all state licensure requirements and Joint Commission compliance. ASA was the first surgical assistant services company to earn the seal of approval of The Joint Commission.
Competition
The surgical assistant services industry is highly competitive. We compete in regional and local markets with similar, but much smaller firms. We also compete with facilities who developed their own recruitment and staffing departments to attract highly qualified healthcare professionals. We compete for hospital and healthcare facilities driven by the quality of our providers, the timely availability of our professionals, superior skills, the high quality and reasonable cost of our services, our customer service, and our recruitment expertise.
To the best of our knowledge, throughout the state of Texas there are an estimated 600 surgical assistants of which approximately 330 are licensed by the Texas Medical Board. Although a considerable percentage of these surgical assistants are employed by either the surgeons or the hospitals, there remain a significant number of independent contractors, either in solo practices or in small groups. We have identified several surgical assistant services groups currently operating in our region that may be potential acquisition candidates.
We believe that a larger firm enjoys a distinct competitive advantage over smaller competitors in the professional healthcare services industry. As well, established firms may have a larger pool of available candidates, a substantially larger network and a more recognizable brand name, enabling it to attract a consistent flow of new prospects. We developed a comprehensive infrastructure with well thought-out policies and procedures to provide the foundation for national recognition, which eventually contributed to our coveted certification by The Joint Commission. In addition, the greater financial resources of a larger firm allows it to offer a competitive compensation package to its providers.
Surgical Assistants
There are two levels of surgical assistants:
First Assistant:
A first assistant is defined as the individual providing primary assistance to the surgeon during the surgical procedure. This individual must be listed on the Operative Record as such.
Although descriptions may vary from institution to institution, the role of the first assistant requires active participation during the surgical procedure. This involves providing exposure, homeostasis, tying and suturing plus other functions as instructed by the surgeon responsible for the patient and the procedure. Surgical assistants practice within the scope permitted by their license and as outlined in the job descriptions published by the American Medical Association, the American College of Surgeons and the certifying bodies.
Second Assistant:
A second assistant may be needed in certain procedures where there is a need for the primary surgeon to have either another surgeon assisting in the first assistant capacity or two surgical assistants.
Each Licensed/Certified Surgical Assistant is required to maintain continued medical education, and a certain number of procedures done for recertification purposes. (American Board of Surgical Assistants: Standards for Recertification). The actual number of procedures and hours required may vary according to the specific rules and regulations of different licensing and certifying bodies.
Included in our comprehensive package are: reimbursement for the premium of the professional liability insurance, paid vacation, subsidy for health insurance, available disability and life insurance, reimbursement for continuing education, licensing and recertification fees, etc.
We strongly believe that we are successful in attracting and retaining the highest quality surgical assistants due to our long-standing reputation for providing a high quality service, our numerous job opportunities, our comprehensive benefits package, our innovative programs and the word-of-mouth referrals from our clients and our associates.
A surgical assistant directly and materially assists the surgeon by exposing the proper area of the surgical field and maintaining a clean and dry field. This may be achieved through suctioning any excess fluids, drying the area where the surgeon is working, securing bleeding either through clamping or ligation of blood vessels or by other means. He or she also assists the surgeon in operating complex equipment and devices utilized in the surgery, assists the surgeon in applying any prosthetic devices, total joints, plates, screws, etc., and providing a clear and steady video imaging in endoscopic procedures, manipulating and positioning organs for proper exposure; in addition to closing the surgical site, applying dressings, casts, immobilizers, catheters, etc. under the instruction and supervision of the primary surgeon. The role of the surgical assistant also includes pre and post-operative positioning of the patient and safe transfer to and from the operating room table. Assistants are also required by The Joint Commission to take part in the National Patient Safety Goals during surgery.
The scope of services we provide includes a multitude of surgical disciplines:
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General and bariatric surgery (weight management surgery, etc.)
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Obstetrics and Gynecology, including laparoscopic procedures
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Vascular surgery: peripheral vascular
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Cardiac surgery: (Coronary Artery Bypass surgery, etc., including both open and laparoscopic vein harvesting), valve replacement, minimally invasive procedures, etc.
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Orthopedic surgery, including total joint replacements, spinal surgery, including instrumentation, arthroscopic joint surgery, etc.
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Neurosurgery, both central and peripheral
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Urology and genital system
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Plastic, cosmetic and reconstructive surgery
Surgical assistants provide highly specialized services to the patient. The basic qualifications and performance standards for highly trained surgical assistants are:
Extensive knowledge of aseptic techniques and practices
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Detailed knowledge of surgical procedures and techniques in all surgical specialties and sub-specialties, including gynecology and obstetrics
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Skilled in the use of all instrumentation required for the performance of different surgical procedures
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Ability to effectively communicate with other members of the patient care team at the client institution
Surgical assistants must be proficient in the use of the following equipment:
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LASERs and smoke evacuation equipment, De-fibrillation equipment, Electro Cardiogram and vital signs monitors, and patient warming devices
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Operating Room tables and related attachments and accessories, Patient positioning devices, Surgical Microscopes, Powered equipment; drills, saws, etc. Dermatomes
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Endoscopic and Laparoscopic surgery equipment and other related equipment, Arthroscopic surgery equipment and related equipment, medical video equipment, cameras and accessories
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Electro-surgery units, Tourniquets, Nucleotomes and/or equivalent, Surgilav and simpulse suction/irrigation equipment, or equivalent and Surgical lights
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Suction and Suction Assisted Lipectomy (SAL) Equipment
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Equipment and instruments utilized in caesarian section, obstetrics gynecology and related endoscopic procedures, Equipment utilized in different gynecological procedures
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Saline/blanket patient warmer equipment, all surgical instrumentation and related equipment currently utilized in the operating room
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Endoscopic Vein Harvesting equipment
Work Environment:
Surgical Assistants are required to:
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Wear approved scrub attire and or required gear as needed
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Incorporate universal precautions and National Patient Safety Goals into daily performance of the job
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Incorporate safety rules and regulations into the daily performance of the job
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Physical requirements include, but are not limited to, the ability to stand for long periods of time, lifting objects weighing 40 pounds or more, stooping and bending
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Encounter certain hazardous materials including, but are not limited to, radiation, radioactive materials, LASER beams and plume, anesthetic materials and gases, etc.
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In addition to scheduled cases, accepts assignment to cover emergency call duty on 24 hour basis, including weekdays, weekends and holidays, covering surgical procedures and labor and delivery departments as required covering call schedule
ITEM 1A.
ITEM 1A. RISK FACTORS.
Not Applicable
We need additional capital to repay promissory notes due in December 2009. We have a series of promissory notes in the amount of $2,715,000 plus accrued interest which are due for repayment half in March 2009 and half in December 2009. The amount due in March 2009 of $1,357,500 was paid according to terms. We expect to raise the necessary amount needed to repay the remaining half due in December 2009 through internal earnings or borrowings however, if we are unable to do so we may be in default under the terms of the note.
We are dependent on a small number of insurance companies. Approximately eighty three percent (83%) of our revenue is generated from patients that have insurance coverage with five (5) insurance companies. However, our clients are the surgeons, the hospitals and the patients, not the insurance companies. We provide our services to the patient, upon the request of the surgeon, and at the facility of the surgeon’s and patient’s choice”
Insurance companies may alter their claim reimbursement policies in ways that adversely impact us. In general, insurance companies may, without prior notice, adjust their claim reimbursement policies in the future in such a way as to be detrimental to us. These changes may include changing the criteria for paying claims and the calculation of the percentage of each claim that they will pay.
We are currently involved in disputes with United Healthcare and Aetna and other carriers over non-payment of claims submitted. We expect to go to arbitration sometime this year with Aetna; We are currently scheduled for trial in Harris County, Texas sometime this year with United.
Our internal disclosure controls may not reduce to a relatively low level the risk that a material error in our financial statements may go undetected. Our certifying officers establish and maintain our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Accordingly, the certifying officers designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under their supervision, to ensure that material information relating to the Company, including our consolidated subsidiaries, is made known to the certifying officers. We regularly evaluate the effectiveness of our disclosure controls and procedures and report our conclusions about the effectiveness of the disclosure controls in our periodic reports. The last few reports of our certifying officers regarding our disclosure controls concluded that our disclosure controls were not adequately effective to ensure that information required to be disclosed by us in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Although we have continued to try to improve our disclosure controls, we are also continuing to discover deficiencies in them. Inferior disclosure controls could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock. Additionally, weak disclosure controls could lead to inaccurate or untimely periodic reports being filed by us, and ultimately may have negative or undesirable effects.
Although our management remains committed to improving our disclosure controls and has taken steps already to improve them, our relatively small management team and our rapidly changing business environment may affect management’s ability to be successful with this initiative. Continuous monitoring and improvement is required.
Legislative or regulatory reform of the healthcare system may affect our ability to provide our services profitably. There have been legislative and regulatory proposals to change the healthcare system in ways that could impact our ability to provide our services at a reasonable fee. Policies may change and additional government regulations may be enacted, which could adversely affect our services and personnel. We cannot predict the likelihood, nature, or extent of government regulations that may arise from future legislation or administrative action.
Our operating results may fluctuate significantly in the future, which may cause our results to fall below the expectations of securities analysts, stockholders and investors. Our operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our control. These factors include:
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the demand for our services;
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our ability to obtain sufficient cost-effective financing;
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the timely and successful implementation of programs with customers;
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our ability to attract and retain personnel with the necessary technical knowledge and with the skill sets required for effective operations;
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professional liability, and other litigation including class action and derivative action litigation;
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the availability of funds and timing of capital expenditures and other costs relating to the expansion of our operations;
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Government regulation and legal developments regarding our business model and general economic conditions.
As a strategic response to changes in the competitive environment, we may from time to time make service pricing, technical or marketing decisions or acquisitions that could have a material effect on results of our operations. Due to any of these factors, our operating results may fall below the expectations of securities analysts, stockholders and investors in any future period, which may cause our stock price to decline.
Our budgeted expense levels are based in part on our expectations concerning future revenue. However, the size of future revenue depends on the choices and demand for our services, which are difficult to accurately forecast. We may be unable to adjust our operations in a timely manner to compensate for any unexpected shortfall in revenue. Accordingly, a significant shortfall in demand for our services could have an immediate and material adverse effect on our business, results of operations and financial condition. Further, our cost of revenue, business development, and marketing expenses will increase significantly as we expand our operations. To the extent that such expenses precede or are not rapidly followed by increased revenue, our business, results of operations and financial condition may be materially adversely affected.
We must be able to develop and implement an expansion strategy and manage our growth. Our success depends in part on our ability to grow and take advantage of efficiencies of scale. Our ability to develop and implement an expansion strategy, manage the same and respond to growth was severely hampered in 2007 and 2008 due to cash flow problems. To accomplish our growth strategy, we will be required to raise and invest additional capital and resources and expand our geographic markets. We cannot be assured that we will be successful in raising the required capital.
Our future growth depends on our ability to develop and retain customers. Our future growth depends to a large extent on our ability to effectively anticipate and adapt to customer requirements and offer services that meet customer demands.
We are dependent on our key management personnel, and the loss of any of these individuals could harm our business. We are dependent on the efforts of our key management and medical staff. The loss of any of these individuals, or our inability to recruit and train additional key personnel in a timely manner, could materially and adversely affect our business and our future prospects. A loss of one or more of our current officers or key personnel could severely and negatively impact our operations. We have employment agreements with most of our key management personnel, but some of these people are employed “at-will” and any of them may elect to pursue other opportunities at any time. We have no present intention of obtaining key man life insurance on any of our executive officers or key management personnel.
We will need to continue to attract, train and retain additional highly qualified senior executives and technical and managerial personnel in the future. We are in the process of seeking additional senior executives, as well as technical and managerial staff members. There is a high demand for highly trained executive, technical and managerial personnel in our industry
If we are unable to effectively promote our service and establish a leading position in the marketplace, our business may suffer. Our name is relatively new. We believe that the importance of recognition will increase over time. We may increase our marketing and advertising budgets to create and maintain current and future client loyalty.
We may conduct future offerings of our common stock and preferred stock and pay debt obligations with our common and preferred stock which may diminish our investors’ pro rata ownership and depress our stock price.We reserve the right to make future offers and sales, either public or private, of our securities, including shares of our preferred stock, common stock or securities convertible into common stock at prices differing from the price of the common stock previously issued. In the event that any such future sales of securities are affected or we use our common or preferred stock to pay principal or interest on our debt obligations, an investor’s pro rata ownership interest may be reduced to the extent of any such future sales.
Our Board of Directors may issue additional shares without stockholder approval. Our Articles of Incorporation, as amended, authorizes us to issue up to 10,000,000 shares of preferred stock, at par value $0.001 and up to a total of 100,000,000 shares of common stock at par value of $0.001. The Board of Directors is authorized to determine the rights and preferences of any additional series or class of preferred stock. The Board of Directors may, without stockholder approval, issue shares of preferred stock with dividend, liquidation, conversion, voting or other rights which are senior to our shares of common stock or which could adversely affect the voting power or other rights of the existing holders of outstanding shares of preferred stock or common stock. The issuance of additional shares of preferred stock may also adversely affect an acquisition or change in control of the Company.
We have not declared any dividends on our common stock to date and do not anticipate doing so in the foreseeable future.The payment of cash dividends on our common stock rests within the discretion of our Board of Directors and will depend, among other things, upon our earnings, unencumbered cash, capital requirements and our financial condition, as well as other relevant factors. Payments of dividends on our outstanding shares of preferred stock must be paid prior to the payment of dividends on our common stock. We do not anticipate making any cash distributions on the common stock in the foreseeable future and investors in our common stock cannot rely on dividend income.
There is a limited public trading market for our common stock; the market price of our common stock has been volatile and could experience substantial fluctuations.Our common stock is currently quoted on the OTC Bulletin Board and there is a limited public trading market for the common stock. Without an active trading market, there can be no assurance of any liquidity or resale value of the common stock. In addition, the market price of our common stock has been, and may continue to be, volatile. Such price fluctuations may be affected by general market price movements or by reasons unrelated to our operating performance or prospects, such as, among other things, announcements concerning us or our competitors, government regulations, and litigation or other factors.
We may be subject to litigation. Currently, we are not a party to any legal proceeding nor are we aware of any claim or demand made against us that may reasonably result in a legal proceeding. We may become involved from time to time in various legal matters arising out of our operations in the normal course of business. On a case-by-case basis, we will evaluate the likelihood of possible outcomes of such litigation. Based on this evaluation, we will determine whether the recognition of a liability is appropriate.
Insurance coverage. We maintain various types of insurance including professional liability for us and for individual providers, Director and Officer Insurance, General Business Liability and Disability insurance. In recent years insurance cost has been spiraling upwards, while reducing the level of coverage. Our ability to maintain adequate insurance coverage at a reasonable cost may be impacted by market conditions beyond our control
Our critical accounting policies and significant estimates made may not be appropriate or accurate. We have selected accounting policies that we believe are appropriate for the business conducted and that comply with accounting policies generally accepted in the United States. Such accounting policies and their application may change from time to time, as new standards and interpretations emerge or the applications of existing standards change. Additionally, financial statements involve the use of estimates and the application of professional judgment, which may be challenged by auditors, regulators and investors from time to time. Qualified people exercising due care, may make judgments at any point in time utilizing the best available information, including the use of subject matter experts, and may reach conclusions that are not appropriate. You are encouraged to read and obtain a full understanding of the financial statements and related notes contained in our securities filings and the related reports of the independent auditor. The critical accounting policies we selected and identified may require thorough study and assessment by you in order for you to reach a conclusion about the appropriateness and reasonableness of the policy or estimate, given the facts and circumstances. You should reach your own conclusion on the appropriateness, fairness and application of the accounting policies we have applied and estimates we have made in consultation with your financial and other advisors before making any decision to invest in us.
As a public company, our business is subject to numerous reporting requirements that are currently and continuously evolving and could substantially increase our operating expenses and divert management’s attention from the operation of our business. The Sarbanes-Oxley Act of 2002 (the “Act”) has required changes in some of our corporate governance, securities disclosure and compliance practices. In response to the requirements of that Act, the SEC has promulgated new rules covering a variety of subjects. Compliance with these new rules has significantly increased our legal and financial and accounting costs, and we expect these increased costs to continue. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest all appropriate resources to comply with evolving standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.
In addition, the requirements have taken a significant amount of management’s and the Board of Directors’ time and resources. These developments may make it more difficult for us to attract and retain qualified members for our board of directors, particularly independent directors, or qualified executive officers.
Additional Information about the Company
For further information about our Company, you may read the materials we have filed with the SEC without charge at the Public Reference Section of the SEC at Room 1024, Judiciary Plaza, 100 F Street, NE, Washington, D.C. 20549. You can also obtain copies of these materials at prescribed rates from the Public Reference Section of the SEC in Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms.
Our SEC filings and the registration statement can also be reviewed by accessing the SEC’s internet site at http://www.sec.gov, which contains reports, proxy and information statements and other information regarding registrants that are filed electronically with the SEC.
Our internet address is http://www.asainc.us. We maintain an external link on the “Investor Relations” section of our website which takes users directly to our filings with the SEC. All such filings are available free of charge.
ITEM 2:
ITEM 2: DESCRIPTION OF PROPERTY
We currently lease office space at 10039 Bissonnet Suite 250, Houston, Texas 77036-7852. During 2001, the Company entered into a sublease agreement with a company owned by a related party, this was resorted to mainly because of the then Company’s lack of sufficient credit to qualify for the lease. Effective October 1, 2006, this sublease was terminated and the lease was assigned directly to the Company. This lease agreement was amended in September 2007 when the Company expanded its’ leased space and extended the lease term through December 31, 2011. Monthly lease payments increased to $8,117 through December 2007. Future monthly minimum lease payments are $8,304 for 2008, $8,484 for 2009, $8,751 for 2010 and $8,846 for 2011.
Future annual minimum lease payments are as follows:
ITEM 3:
ITEM 3: LEGAL PROCEEDINGS
Presently, the Company is not a party to any legal proceeding nor is it aware of any claim or demand made on the Company that may reasonably result in a legal proceeding.
ITEM 4:
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5:
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock is currently listed on the OTC Bulletin Board under the symbol “ASRG.OB.” Our common stock was approved to quote on the OTC Bulletin Board on December 14, 2006 under the symbol ASAO. On January 31, 2007 the Company’s symbol was changed to ASUH based upon the name change of the Company to American Surgical Holdings, Inc. Trading commenced in our common stock on the OTC Bulletin Board on March 1, 2007. All OTC Bulletin Board quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. The Closing stock price on March 30, 2009 was $.30.
The table below sets forth our high and low bid prices per share of common stock. These prices represent inter-dealer quotations without retail markup, markdown or commission and may not necessarily represent actual transactions.
Shareholders
As of March 30 2009, there are approximately 93 shareholders of our common stock. Such shareholders of record hold a total of 8,475,484 shares of our common stock.
Dividends
Since inception we have not paid any dividends on our common stock. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Although we intend to retain our earnings, if any, to finance the exploration and growth of our business, our Board of Directors will have the discretion to declare and pay dividends in the future.
Payment of dividends in the future will depend upon our earnings, capital requirements, and other factors, which our Board of Directors may deem relevant.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth certain information as of March 30, 2009, with respect to compensation plans under which our equity securities are authorized for issuance:
ITEM 6:
ITEM 6: SELECTED FINANCIAL DATA
Not Applicable.
ITEM 7:
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
General
American Surgical Holdings, Inc. (“ASHI”) (formerly known as ASAH, Corp. and Renfrew, Inc.) was incorporated in the State of Delaware on July 22, 2003. On October 10, 2005, pursuant to a Stock Purchase Agreement and Share Exchange by and between ASHI, American Surgical Assistants, Inc. (“ASA”) and the shareholders of ASA, ASHI acquired all of the outstanding shares of ASA for a total of 3,428,572 shares of our common stock. Pursuant to the agreement, ASA became our wholly owned subsidiary.
ASA is a Texas corporation, it provides professional surgical assistant services to surgeons and healthcare institutions throughout Houston and Corpus Christi, Texas, Oklahoma, and Virginia The utilization of our services assists in reducing the cost of care for patients, insurance companies, hospitals, and surgeons, without compromising the quality of service to the patient. Our strategy is to become a nationwide leader in the professional surgical assistant industry.
ASA is certified by The Joint Commission.
Our staff and associates are currently credentialed and providing services to surgeons and patients at numerous hospitals and surgery centers. The majority of our revenue comes in the form of Service Fees paid by third party insurers on behalf of their clients (the patients). A small percentage of our revenue is generated from payments by the patients for deductibles and co-pays not covered by the insurers and payments from patients who are self-insured. We generate additional revenue in the form of fees earned under contracts for “On-Call Coverage” from hospitals and other healthcare facilities. Our agreements with these healthcare facilities usually include an exclusivity arrangement whereby ASA is the only entity entitled to provide surgical assistants within the client facility except under very limited and clearly defined circumstances.
Our cost of revenue includes those costs and expenditures that are incurred directly by or associated with the surgical assistants’ performance of their duties. The following items are included in the cost of revenue:
Insurance - Worker’s Comp, Malpractice, Medical, Dental
Licenses & Permits
Professional Contract Services
Professional Development
Salaries & Wages
Payroll Taxes
Telephone and communications
Travel Expenses
Revenue Recognition
We generate revenue largely from patient claims submitted to and reimbursed to us by insurance carriers. The total claims we submit to carriers are referred to as “Total Charges.” The average percentage of the Total Charge actually paid by insurance companies for surgical assistant services is referred to as the “Collection Percentage.” The Collection Percentage is based on the standard percentage of the billed amount each carrier pays for a certain procedure and varies by carrier, procedure, and any contractual commitments between us and the carrier.. The Total Charges multiplied by the Collection Percentage results in our actual service fees received.
During fiscal 2008, our “Collection Percentage” was 17.3 % of gross billing. During fiscal 2007 and fiscal 2006 our Collection Percentage was 15% and 17.5% respectively.
In March 2007, we signed a contract with Aetna which has proven to be unprofitable. Aetna is the insurance company for approximately 22% of our business. As a result of signing this contract, we experienced a significant decline in our Collection Percentage with respect to Aetna claims resulting in a decrease in the average Collection Percentage for fiscal 2007, the first quarter of 2008 and one and a half months in the second quarter of 2008. The 17.3% collection rate mentioned earlier is an average for the year. The first half of the year was 16% and the second half of the 2008 was 18%. The cancellation of the Aetna, Blue Cross, and Humana contracts played a significant part in the increased percentage for 2008.
In addition, during fiscal 2007, United Healthcare charged back $200,000 from current invoices, and charged back an additional $160,000 in the first quarter of 2008. The charge back continued in 2008 but at a smaller rate. United’s position is that it overpaid us on claims paid in 2006, 2007 and 2008 and is therefore entitled to these refunds. Our legal counsel is challenging these allegations.
There is currently a dispute between us and both carriers over what we consider under payment by a carrier far below its contractual commitment.
Immediate Liquidity Needs
We experienced losses and negative cash flow from operations in 2007. The following steps were implemented: (i) the contract with Aetna was terminated effective May 15, 2008, (ii) we are disputing the United’s chargeback, which has also reduced our collection percentage; (iii) we are re-assigning staff to assure full utilization; (iv) we terminated all our outside consulting agreements and we will continue to limit the hiring of outside consulting to what is needed and required for a public company. Change takes time, the Company at the end of the second quarter of the year had a net loss from operations of $965,437 and ended up with a net income from operations by the end of 2008 of $482,055. Thus in the second half of 2008 the Company generated an income from operations of $ 1,447,492.
The income from operations for the year ended December 31, 2008 was $482,055 in comparison to a net loss from operations in 2007 of $(2,670,556). This is an improvement of $3,152,611. The Company’s liquidity position and the trend has improved substantially in 2008 versus 2007.
In July 2008, the original promissory notes were renegotiated. The maturity date was extended to March 31, 2009. If 50% or more of the Notes have been repaid pro rata to the Note holders by March 31, 2009, and there are no other outstanding defaults on the provisions of the Note, the maturity date for the remainder of the Notes would automatically extend to December 31, 2009. For the remaining balance one of the major considerations given to the note holders was the re-pricing of the warrants. The original $2.00 warrants were re-priced with one half re-priced at $0.10 cents per warrant and one half re-priced at $0.75 cents per warrant (the half re-priced at $0.75 cents per warrant would have been re-priced to $0.20 cents per warrant if the company did not repay $1,350,000 of the notes by March 31, 2009). The fair value of the warrants was reset to $245,150. As of December 31, 2008, $113,657 was charged to interest expense and $131,493 remains to be amortized.
RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2008 COMPARED TO THE TWELVE MONTHS ENDED DECEMBER 31, 2007
Revenue:
Revenues increased to $11,279,511 for the twelve months ended December 31, 2008 from $8,964,057 for the twelve months ended December 31, 2007 an increase of $2,315,454 over the revenue for 2007 This amounts to a 26% increase in revenue. The increase is due to a number of factors which are difficult to quantify, however, they can be listed in management’s opinion in order of importance:
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The cancellation of the Aetna, Blue Cross, and Humana contracts.
·
15% increase in billable procedures in 2008 versus
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Additional surgical procedures per surgical assistant. The Company’s surgical assistant’s staff did not materially change in 2008 from 2007. Thus greater utilization of the available workforce.
·
Improved billing procedures including conversion to electronic billing whenever possible
·
We received a settlement from a dispute we had with an insurance company in the amount of $98,000 net to the company after attorney’s fees.
The bulk of the increase occurred after May 15, 2008 when the Aetna contract was cancelled. The trend is positive and management expects this to continue in 2009.
Cost of Revenue:
Cost of revenue increased to $ 6,977,986 for the twelve months ended December 31, 2008 from $ 6,660,552 for the twelve months ended December 31, 2007, an increase of $ 317,434 . The increase is relatively small, 5% in comparison to the 26% increase in revenue. The action items management put into place the latter part of 2007 and during 2008 have allowed the company to make more money per procedure, and to increase the number of procedures with little to no increase in surgical assistant staff which results in a lower cost of revenue in comparison to the increase in revenue
In 2008, we added new hospitals in Houston, however, we continued to monitor the staffing needs We have by reassigning some of the full time salaried assistants to contract or PRN status. This allows us to more effectively manage our cost of labor while efficiently utilizing the salaried assistants and using the part time or PRN (Pro Re Nata) assistants to fill in only as needed. Management continually monitors staffing and compensation needs in order to maximize the utilization and efficiency of the surgical assistants.
Gross Profit:
Gross profit increased to $ 4,301,525 for the twelve months ended December 31, 2008 from $ 2,303,505 for the twelve months ended December 31, 2007, an increase of $1,998,020. The gross profit improved dramatically in the second half of the year after the Aetna contract was cancelled. The gross profit for the first half of 2008 was $1,174,913 and the second half was $3,126,612for a total of $4,301,525 for the fiscal year 2008. The trend is positive and management expects this to continue in 2009.
Operating Expenses:
Management has cut expenses and kept the same number of surgical assistants as last year. In addition, the four principals and the Board of Directors took a 20% reduction in compensation and expenses beginning in May of 2008. The end of July 2008, the four principals took an additional 10% reduction in salaries. This along with other measures such as reducing the number of consultants has reduced operating expenses. Operating expenses for the twelve months ended December 31, decreased to $ 3,819,470 from $ 4,974,061 for the twelve months ended December 31, 2007 representing a decrease of $ 1,154,591 . The two main categories of operating expenses are 1) general and administrative and 2) salaries. General and administrative for the twelve months ended December 31, 2008 decreased to $ 1,710,354 from $ 2,393,716 for the twelve months ended December 31, 2007 representing a decrease of $ 683,362 or 29%. Salaries followed the same trend. Salaries for the twelve months ended December 31. 2008 decreased to $ 2,011,126 from $ 2,500,164 for the twelve months ended December 31, 2007 representing a decrease of $ 489,038 or 20%.
Interest Expense:
Interest expense for the year ended December 31, 2008 was $ 1,623,749 compared to $ 1,474,048 in the year ended December 31, 2007. Included in interest expense for the year ended December 31, 2008 is $ 420,097 of interest accrued at 15% on the face amount of both the convertible notes payable of $2,715,000 and the note payable- related party dated June 2008 in the amount of $150,000. $ 881,131 related to the accretion of the discount on the Notes, and $ 322,521 of amortization of the deferred financing costs. For the year ended December 31, 2007 interest expense was comprised of $219,721 of interest accrued at 15% on the face amount of the convertible notes payable of $2,715,000, $863,632 related to the accretion of the discount on the Notes, and $390,695 of amortization of the deferred financing costs. Interest expense as a result increased $ 149,701 in 2008 over the fiscal year 2007. Eighty percent (80%) of the interest expense occurred in the first six months of 2008.
Income Tax Expense:
We recorded an income tax benefit in 2008 in the amount of $ 47,808 compared to an income tax benefit of $ 1,022,848 for the twelve months ended December 31, 2007. Additional benefits will be utilized in future years to offset income required to be recognized by us under IRC section 481, relating to a mandated change of method from the cash to accrual basis for tax return filing purposes. The Company has a $508,590 loss carry forward at the end of December 2008. The Section 481 (a) adjustment is over a three year period with 2009 being the last year. This adjustment is $600,424 and this is applied to the loss carry forward which will result in taxable income effective January 1, 2009 of $91,864 or $31,244 of taxes payable. This payable is shown as deferred income tax on the balance sheet as of December 31, 2008.
RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2007 COMPARED TO THE TWELVE MONTHS ENDED DECEMBER 31, 2006
Revenue:
Revenues decreased to $8,964,057 for the twelve months ended December 31, 2007 from $10,191,447 for the twelve months ended December 31, 2006 a decrease of $1,227,390. Revenues for 2007 were negatively affected by the signing of a contract with Aetna and the charge backs deducted by United. These matters were discussed previously under Risk Factors and Revenue Recognition.
Cost of Revenue:
Cost of revenue increased to $6,660,552 for the twelve months ended December 31, 2007 from $5,509,898 for the twelve months ended December 31, 2006, an increase of $1,150,654. This increase was primarily attributable to the increase in professional contract services, salaries and related payroll cost paid to the surgical assistants in the amount of $1,101,788. We also experienced an increase in insurance, telephone, and other direct costs incurred by the surgical assistants as they perform their duties. These increases were partially offset by a reallocation and reclassification of some of the salaries and other costs associated with the four principals. In 2007, the principals devoted a significant amount of their time to management duties and less time was spent by them performing surgical assistant duties. As a result, a higher percentage of their attendant costs were reallocated from cost of revenue to operating expenses.
In 2007, we added a number of full time salaried surgical assistants in anticipation for the then planned expansion. At that time, we had a number of prospects for acquisitions, and targets for new hospitals to sign contracts in Houston that looked favorable. With further due diligence, these projects did not materialize which meant we were overstaffed in surgical assistants. As a result of the added assistants, compensation and other related direct costs associated with the surgical assistants increased as discussed above. We have been addressing and continue to address and monitor this matter by reassigning some of the full time salaried assistants to contract or PRN status. This allows us to more effectively manage our costs while efficiently utilizing the salaried assistants and using the part time or PRN (Pro Re Nata) assistants to fill in only as needed. Management continually monitors staffing and compensation needs in order to maximize the utilization and efficiency of the surgical assistants.
Gross Profit:
Gross profit decreased to $2,303,505 for the twelve months ended December 31, 2007 from $4,681,549 for the twelve months ended December 31, 2006, a decrease of $2,378,044. Our gross margin decreased due to decreased reimbursements from a major insurance carrier and charge backs from another carrier.
Operating Expenses:
Operating expenses for the twelve months ended December 31, 2007 increased to $4,974,061 from $3,080,625 for the twelve months ended December 31, 2006, representing an increase of $1,893,436. The increase was due in part to additional management and administrative costs (approximately $840,000), the hiring of outside consultants to assist us in our transition to being a public company (approximately $800,000) and the retention of the initial outside Board of Directors (approximately $250,000). Now that we have been a public company for more than one and a half years we are no longer relying on consultants for transition purposes and in the future consultants will be used sparingly.
Interest Expense:
Interest expense for the year ended December 31, 2007 was $1,474,048, compared to $150 in the year ended December 31, 2006. Included in interest expense for the year ended December 31, 2007 is $219,721 of interest accrued at 15% on the face amount of the convertible notes payable of $2,715,000, $863,632 related to the accretion of the discount on the Notes, and $390,695 of amortization of the deferred financing costs.
Income Tax Expense:
We recorded an income tax benefit in 2007 in the amount of $1,022,848 compared to an income tax expense of $651,846 for the twelve months ended December 31, 2006. We anticipate a Federal income tax refund of approximately $575,000 based on the net operating loss generated in 2007 and carried back to 2006. Additional benefits will be utilized in future years to offset income required to be recognized by us under IRC section 481, relating to a mandated change of method from the cash to accrual basis for tax return filing purposes. Our future cash flow will be affected by the reversal of temporary income tax deferrals.
Contractual Obligations
The following table summarizes the payments due under contractual obligations as of December 31, 2008:
Note 1 - Mr. Elgamal, CEO, and Mr. Olmo-Rivas, executive directors of the Company, are each entitled to receive annual cash compensation of $564,400 plus health, disability and life insurance coverage pursuant to Ten year employment agreements as CEO of American Surgical Holdings and Vice president of ASA respectively, entered into on May 1, 2006 ending 2016. James A. Longaker, CFO, was hired in November 2007 at an annual salary of $120,000 ending November 2009.
The Company renewed, amended and revised Ten year service agreements with corporations owned by Mr. Elgamal and Mr. Olmo-Rivas. The agreements automatically renew at maturity unless cancelled by either party with sixty days written notice. The corporations were each paid a monthly expense fee of $11,000 during 2007. Each agreement includes an option to purchase 5% of any shares issued by the Company during the term of these agreements at a discounted price equal to 25% of the closing price on the date the shares are issued by the Company. Mr. Elgamal and Mr. Olmo-Rivas have waived their rights to the options under the agreements for the years ended December 31, 2007, and 2006. These agreements also include an annual bonus to each valued at 2% of the increase, year over year, of the gross revenue of the company to be paid during the first quarter of the current fiscal year for the increase in gross revenue in the prior year. Mr. Elgamal and Mr. Olmo have waived the right to this bonus for the years ending December 31, 2007 and 2006. The employment agreements for Mr. Elgamal and for Mr. Olmo-Rivas include an early termination provision that proscribes a contract termination payment to either officer equal to $3,000,000 if the Company terminates their service agreements without cause or for a cause that is less than a conviction of a federal felony prior to the expiration date, as renewed.
Note 2 - In November 2005, Mr. Chamberlain and Mr. Chapa, senior consultants to the Company, entered into employment agreements and consulting agreements between the Company and corporations owned by them individually. Pursuant to these multiple agreements, Mr. Chamberlain and Mr. Chapa are each entitled to receive an annual combined cash compensation of $344,000 for the employment agreement and the consulting agreements plus health and disability insurance coverage. In addition, their corporations are paid a monthly consulting fee of $6,000 each. Each consulting agreement includes an option to purchase 5% of any shares issued by the Company during the term of these agreements at a discount price equal to 25% of the closing price on the date the shares are issued by the Company. Mr. Chamberlain and Mr. Chapa have waived their rights to the options under the agreements for the years ended December 31, 2007 and 2006. The consulting agreements include an early termination provision that proscribe a contract termination payment to either shareholder equal to $3,000,000 if the Company terminates their service agreements without cause prior to the expiration date.
Note 3 - The Company had one consultant whose contract expires on April 30, 2009. The agreed amount is $3,000 a month. This contract will not be renewed
Note 4 - See the discussion regarding the Company’s leased office space at Item 2 above.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
We had cash on hand of $431,731 at December 31, 2008 compared to $1,145,359 at December 31, 2007, a decrease of $713,628. Our working capital (defined as current assets less current liabilities) at December 31, 2008 was $832,247 compared to $584,849 at December 31, 2007. The cash at December 31, 2008 does not include the restricted cash of $373,653 which will be used to pay down the note at March 31, 2009. In addition, the Company’s cash position has improved each quarter. Below per the internal records rounded to the nearest $50,000 are our average monthly collections per quarter in 2008.
Our collections are increasing each quarter and the Company made a net income from operations in the third and fourth quarters. Management is pleased with the improvement in cash collections and expects this upward trend to continue.
Accounts receivable increased $ 1,271,563 from the year before, Our collections have improve in 2008 as compared to 2007. The increase is due mainly to increase sales in the fourth quarter and receiving more money per procedure. The cancellation of the Aetna, Humana and Blue Cross contracts have improved collections.
Our accounts payable decreased by $219,034 at December 31, 2008, over the balance from the year before. Our cash flow has improved in the fourth quarter and we are paying our bills upon receipt.
Operating Activities
Operating activities used $483,930 of cash during 2008 compared to cash used in operations of $ 2,543,817 for the twelve months ended December 31, 2007.
The net loss for the year of $1,087,976 includes noncash items in the amount of $ 1,351,403. These non cash items included the fair value assigned to the stock, options and warrants that were issued during the year as well as the amortization of the deferred financing and discount to the notes incurred in the sale of the Units discussed below under Financing Activities.
Additionally, accounts receivable net of provision for uncollectible accounts increased by $1,057,334.
Investing Activities
The Company purchased office furniture and equipment costing $6,045 in 2008 compared to $25,846 in 2007.
Restricted cash increased $373,653 under the renegotiated terms of the convertible notes payable.
Financing Activities
In May 2007, the Company began offering for sale, at a price of $100,000 per Unit, a limited number of Units pursuant to a private placement memorandum. Each Unit consisted of (i) a one year 15% interest bearing unsecured promissory note (“Note”) in the principal amount of $100,000 and (ii) a warrant to purchase 100,000 shares of the Company’s common stock at an exercise price of $2.00 per share (the Warrants”).
Dawson James Securities, Inc. (“Dawson”) was hired as the exclusive placement agent for the offering. For its services Dawson earned a cash commission equal to 10% and a non-accountable expense allowance equal to 3% of the gross proceeds of each Unit sold. In addition, for each Unit sold Dawson earned warrants to purchase 20,000 shares of the Company’s common stock at an exercise price of $2.00 per share.
The offering had a minimum offering size of 12 Units and a maximum size of 35 Units. On June 7, 2007 the minimum was achieved with the sale and acceptance of 12.30 Units. The net proceeds of $1,070,100 were forwarded to the Company at that time and the balance of the proceeds, $159,900, was paid to Dawson. The Company executed Notes in the principal amount of $1,230,000 and issued warrants to purchase 1,230,000 shares of common stock to the note holders. The value of these warrants was determined by management to be $734,583. The value of the warrants was recorded as a discount on the Notes and is being charged to interest expense and accreted to the balance of the Notes over the life of the Notes. As at December 31, 2008 and 2007 $416,599 and $317,984 were charged to interest expense and $0 and $416,599 remain unamortized, respectively.
Upon completion of this first round of the offering the Company issued warrants to Dawson to purchase 246,000 shares of common stock. The value of these warrants was determined by management to be $146,917. The value of the warrants and the cash commission paid to Dawson was recorded as deferred financing costs and is being amortized to interest expense over the life of the Notes. As at December 31, 2008 and 2007 $85,701 and $61,216 were charged to interest expense and $0and $85,701remain to be amortized, respectively.
On July 2, 2007 the second and final round of the offering was completed with the acceptance of an additional 14.85 Units. The net proceeds of $1,291,950 were forwarded to the Company at that time and the balance of the proceeds, $193,050, was paid to Dawson. The Company executed Notes in the principal amount of $1,485,000 and issued warrants to purchase 1,485,000 shares of common stock to the note holders. The value of these warrants was determined by management to be $896,523. The value of the warrants was recorded as a discount on the Notes and is being charged to interest expense and accreted to the balance of the Notes over the life of the Notes. As at December 31, 2008 and 2007 $447,033 and $ 449,490 were charged to interest expense and $0 and $447,033 remain unamortized, respectively.
Upon completion of the second round of the offering the Company issued warrants to Dawson to purchase 297,000 shares of common stock. The value of these warrants was determined by management to be $179,305. The value of the warrants and the cash commission paid to Dawson was recorded as deferred financing costs and is being amortized to interest expense over the life of the Notes. As at December 31, 2008 and 2007 $97,800 and $81,505 were charged to interest expense and $0 and $97,800 remain to be amortized, respectively.
In July 2008, the original notes were renegotiated with half due in March of 2009 and the other half would be automatically extended to December 2009 upon payment of the March 31, 2009 principal balance. One half was paid in March 2009 with the other half due December 2009. The warrants were re-priced with one half re-priced at 10 cents per warrant and one half re-priced at 75 cents per warrant (the half re-priced at 75 cents per warrant would have been re-priced to 20 cents per warrant if the company did not pay half the notes by March 31, 2009). The fair value of the options was reset to $245,150. As of December 31, 2008, $113,657 was charged to interest expense and $131,493 remains to be amortized. The Notes were secured by the Company's accounts receivable and an assignment of any proceeds received by the Company from any actions for past claims from legal action against or settlement with insurance carriers. The proceeds from the legal actions would be given to the note holders.
The interest rate was 15% on the original notes and is the same on the re-negotiated notes. The maturity date of the original notes was June 30, 2008 and the re-negotiated notes were one half due March 31, 2009 with an automatic extension of the remaining amount to December 31, 2009 if certain conditions were met.
The Company incurred deferred financing costs of $34,044 associated with the offering in the form of legal and blue sky fees.
The Notes are convertible into the Company’s common stock if the Company commences a Qualified Offering prior to the maturity date of the Notes. In lieu of repayment of principal and interest on the Notes, the Holder of the Notes may acquire Company securities in the amount of such principal and interest at a purchase price equal to 85% of the price per security sold in the Qualified Offering. In this regard, a Qualified Offering means the completion of an offering or offerings of Company securities, including any offering of debt or equity securities, or securities convertible into debt or equity securities, in an amount not less than $3.0 million. At this time the Company has not completed a Qualified Offering.
The net proceeds from the offering were used for general corporate and working capital needs.
The note payable due to a related party of $150,000 was signed on June 12, 2008 and extended on September 12, 2008 to a new maturity date of June 15, 2009. The note incurs interest at a rate of 15% annually. During 2008 $12,452 was charged to interest expense and $12,452 of accrued interest is included in accrued expenses. All accrued interest on this note as of December 31, 2008 was paid in January 2009 and the principal and accrued interest from January 1, 2009 was paid in full during March of 2009.
Critical Accounting Policies
Our significant accounting policies are summarized in Note 1 of our Consolidated Financial Statements attached hereto as Exhibit. Policies determined to be significant are those policies that have the greatest impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 160, "Non controlling Interests in Consolidated Financial Statements-an amendment of ARB No. 51." This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, with earlier adoption prohibited. This statement requires the recognition of a non controlling interest (minority interest) as equity in the consolidated financial statements and separate from the parent's equity. The amount of net income attributable to the non controlling interest will be included in consolidated net income on the face of the income statement. It also amends certain of ARB No. 51's consolidation procedures for consistency with the requirements of SFAS 141(R). This statement also includes expanded disclosure requirements regarding the interests of the parent and its non controlling interest. We are currently evaluating this new statement and anticipate that the statement will not have a significant impact on the reporting of our results of operations.
In March 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133. This Statement amends and expands the disclosure requirements in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities to provide users of financial statements with an enhanced understanding of (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flow. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008 with early application permitted. The Company expects to adopt SFAS No. 161 on January 1, 2009, and has not yet determined the effect of SFAS No. 161 on its Financial Statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162 identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented in conformity with GAAP. The current GAAP hierarchy has been criticized because it is directed to the auditor rather than the entity, it is complex, and it ranks FASB Statements of Financial Accounting Concepts, which are subject to the same level of due process as FASB Statements of Financial Accounting Standards, below industry practices that are widely recognized as generally accepted but that are not subject to due process. The Board believes the GAAP hierarchy should be directed to entities because it is the entity (not its auditors) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. SFAS 162 is effective 60 days following the SECs approval of PCAOB Auditing Standard No. 6, Evaluating Consistency of Financial Statements (AS/6). The adoption of FASB 162 is not expected to have a material impact on the Company’s financial position.
In May 2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee Insurance Contracts-an interpretation of FASB Statement No. 60. Diversity exists in practice in accounting for financial guarantee insurance contracts by insurance enterprises under FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises. This results in inconsistencies in the recognition and measurement of claim liabilities. This Statement requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This Statement requires expanded disclosures about financial guarantee insurance contracts. The accounting and disclosure requirements of the Statement will improve the quality of information provided to users of financial statements. SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of FASB 163 is not expected to have a material impact on the Company's financial position.
In June 2008 the FASB ratified FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities,” which addresses whether instruments granted in share-based payment awards are participating securities prior to vesting and, therefore, must be included in the earnings allocation in calculating earnings per share under the two-class method described in SFAS No. 128, “Earnings per Share.” FSP No. EITF 03-6-1 requires that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend-equivalents be treated as participating securities in calculating earnings per share. FSP No. EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and shall be applied retrospectively to all prior periods. We do not anticipate that the adoption of FSP No. EITF 03-6-1 will have an effect on our previously reported losses per share from 2007 to 2008.
In June 2008 the FASB ratified EITF No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock,” which requires that an instrument’s contingent exercise provisions be analyzed first. If this evaluation does not preclude consideration of an instrument as indexed to the company’s own stock, the instrument’s settlement provisions are then analyzed. EITF No. 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and requires reporting of a cumulative effect of a change in accounting principle to retained earnings for all instruments existing at the effective date to the balance of retained earnings. We currently do not anticipate adoption of EITF No. 07-5 will have a significant effect on our consolidated financial statements.
In June 2008 the FASB ratified EITF No. 08-3, “Accounting by Lessees for Maintenance Deposits,” which specifies that maintenance deposits that are contractually and substantively related to maintenance of leased assets, and which are refundable only if the lessee performs specified maintenance activities, shall be accounted for as deposit assets. EITF No. 08-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, with recognition of a cumulative effect of a change in accounting principle to the opening balance of retained earnings for the first year presented.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We conduct our business in United States dollars. Our market risk is limited to the United States domestic, economic and regulatory factors. Healthcare “reform” may affect our ability to conduct a profitable business and may require adjustments to our business model that would be based on the final outcome of any regulatory changes.
ITEM 8:
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements beginning on pages.
ITEM 9:
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A(T):
ITEM 9A(T): CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements in accordance with United State’s generally accepted accounting principles (US GAAP), including those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with US GAAP and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of our internal control over financial reporting. Based on this assessment, Management concluded the Company maintained effective internal control over financial reporting as of December 31, 2008.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.
ITEM 9 - B: OTHER INFORMATION
Not Applicable
PART III
ITEM 10:
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE COMPANY; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Board of Directors, Executive Officers and Significant Employees
Listed below are the Executive Officers and members of the Board of Directors. Following the table is a brief description of their business experience for at least the past five years.
Zak W. Elgamal, Executive Chairman, Chief Executive Officer, and President
Mr. Elgamal has been the President and Director of the Company since October 31, 2003. Since 1983, Mr. Elgamal has been a Certified Surgical Assistant in Houston, Texas. In such capacity, Mr. Elgamal has practiced as an assistant in General, Endoscopic and Advanced Endoscopic Surgery, Orthopedic and Endoscopic Orthopedic Surgery, Spinal Surgery, Vascular Surgery, Neurosurgery, Gynecology, Obstetrics, Laparoscopy Assisted Gynecological Surgery, and Plastic & Re-constructive Surgery. Since 1999, Mr. Elgamal has been President and the Executive Director of American Surgical Assistants, L.L.P. He then became the President of its successor American Surgical Assistants, Inc. in Houston, Texas, which was founded to contract with hospitals for the services of Surgical Assistants. Since 1983 he has also been the President of C.S.A. Services, Inc. (incorporated in 1995) in Houston, Texas, which became the General Partner in American Surgical Assistants, L.L.P.
Mr. Elgamal received his M.D. degree (M.B., B.Ch) from the Faculty of Medicine at Ain-Shams University in Cairo, Egypt in 1972. He also received his graduate training in Healthcare Management in Cairo, Egypt in the early eighties. He is a Vanguard member of the American College of Physician Executives, a member of the American College of Healthcare Administrators, an affiliate member of the American College of Surgeons, a member of the Advisory Council of The Joint Commission on Staffing, and a member of the Sub-committee on Allied Health at Memorial Hospital Healthcare System, Southwest.
Jaime Olmo-Rivas, Executive Director and Vice President of American Surgical Assistants, Inc
Mr. Olmo-Rivas is the Vice President of our wholly owned subsidiary, American Surgical Assistants, Inc. Mr. Olmo-Rivas is a highly trained cardio-vascular surgical assistant with very special capabilities in endoscopic vein harvesting and open heart surgery. In addition to performing surgical assisting duties, he is responsible for everyday management and supervision of all our surgical assistants working in the field. Mr. Olmos-Rivas, Executive Director, is supported by three additional employees who comprise a field supervision team which is on call 24 hours per day to receive, schedule and assign work to our assistants. He also maintains an open line of communication with the surgeons in various healthcare facilities to receive and act upon their feed back as needed. He interviews prospective assistants and evaluates the quality of the existing work force regularly.
Mr. Olmo-Rivas graduated from medical school in the Dominican Republic in 1980. He is the current President of the American Board of Surgical Assistants.
Henry Y. L. Toh, Lead Independent Director
Mr. Toh currently serves as a member of the Board of Directors of four other publicly traded companies. Since 2001, Mr. Toh has served as a director of Teletouch Communications Inc. Since 1992, Mr. Toh has served as an officer and director of C2 Global Technologies Inc., a publicly held voice-over-IP company. Since December 1998, Mr. Toh has served as a director of Idna Inc., a specialized finance and entertainment company. Since 2004, Mr. Toh has served as a director of Isolagen, Inc. Mr. Toh has served as an officer and director of Four M International, Inc., a privately held offshore investment entity since 1992, Since 2004, Mr. Toh has served as a director of Labock Technologies, Inc. Mr. Toh began his career with KPMG Peat, Marwick from 1980 to 1992, where he specialized in international taxation and mergers and acquisitions. Mr. Toh is a graduate of Rice University.
Charles W. Bailey, Jr., MD, JD, Director
Dr. Bailey received his law degree from the South Texas School of Law in 1980 and received his Medical Degree from the University of Texas Medical Branch. Dr. Bailey has been in private practice in plastic surgery since 1973. He is listed in Best Doctors in America for the Central Region and was named by Town & Country Magazine as one of the top Cosmetic Surgeons in the United States. From 1980 to the present, Dr. Bailey has also been a medico-legal consultant to various law firms and insurance companies, providing medical record review and evaluations. From 1972 through 1993, he held various teaching appointments with the University Of Texas Medical School in Houston, South Texas College of Law, and Baylor College of Medicine. Dr. Bailey has published over 45 papers, and has held various positions, including most recently President of the Texas Medical Association in 2003 and 2004. He is a current Delegate to the American Medical Association. Dr. Bailey is also a member of the Mediation Panel for Federal District Courts, Southern District of Texas.
Dr. Michael Kleinman, Director
Dr. Kleinman graduated from Rice University, attained his medical degree at the University of Texas, Albert Einstein College of Medicine in Dallas, Texas in 1983. He is a Board Certified surgeon with a private practice in Houston, Texas, Clinical Assistant Professor of Surgery at Baylor University and at the University of Texas, Physician Liaison for Memorial Care System. Fellow of the American College of Surgeons, , Member of the American Society of General Surgeons, the Society of American Gastrointestinal Laparoscopic Surgery, Houston Surgical Society, Harris County Medical Society, and the American Medical Association. Past member of Texas Medical Association, International College of Surgeons, American College of Physician Executives, and the American Board of Utilization Review Physicians. Physicians Recognition Award 2003, 2006, 10 citations for top doctors.
James A. Longaker, Chief Financial Officer, CPA, CFE
James A. Longaker, the Company’s Chief Financial Officer, was hired in November 2007. Prior to joining the Company Mr. Longaker worked from October 2006 to November 2007 as an independent consultant. From May 2005 to October 2006, Mr. Longaker was the Chief Financial Officer of Trulite, Inc., a research and development company. From December 2001 to May 2005 Mr. Longaker was a partner at the Forte Group, LLC a management consulting firm that specialized in emerging businesses. From February 1999 to December 2001, Mr. Longaker worked as a consultant with Glass and Associates serving as an interim CFO for companies. From 1990 to 1999, Mr. Longaker had his own consulting business. Mr. Longaker received his Bachelor’s degree from Louisiana Polytechnic Institute in 1967 and a Master’s degree in Business Administration in 1969 from Louisiana State University. Mr. Longaker is a CPA and a Certified Fraud Examiner, CFE.
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s executive officers and directors, and persons who beneficially own more than ten percent (10%) of a registered class of the Company’s equity securities (collectively “Reporting Persons”), to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Reporting Persons are required by rules of the Securities and Exchange Commission to furnish the Company with copies of all Section 16(a) reports they file. Based solely upon a review of the copies of such forms furnished to the Company and written representations from the Reporting Persons, the Company believes that during the fiscal year ending December 31, 2008 all persons subject to the reporting requirements of Section 16(a) filed the required reports.
Code of Ethics
We have adopted a Code of Ethics applicable to all directors, officers and employees, including the chief executive officer, senior financial officers and other persons performing similar functions. The Code of Ethics is a statement of business practices and principles of behavior that support our commitment to conducting business while maintaining the highest standards of business conduct and ethics. Our Code of Ethics covers topics including, but not limited to, compliance resources, conflicts of interest, compliance with laws, rules and regulations, internal reporting of violations and accountability for adherence to the Code. Any amendment of the Code of Ethics or any waiver of its provisions for a director, executive officer or senior financial officer must be approved by the Board of Directors. We will publicly disclose any such waivers or amendments pursuant to applicable SEC and NASDAQ Marketplace Rules and Regulations.
Corporate Governance
Audit and Governance Committee
The Audit and Governance Committee assists the Board of Directors in its oversight of the quality and integrity of the accounting, auditing and reporting practices of the Company. .The Audit and Governance Committee has the authority and responsibility to hire one or more independent auditors to audit the Company’s books, records and financial statements and to review the Company’s systems of accounting (including its systems of internal control), to discuss with such independent auditors the results of such audit and review, to conduct periodic independent reviews of the systems of accounting (including systems of internal control), and to make reports periodically to the Board of Directors with respect to its findings. The Board of Directors has determined that each Audit and Governance Committee member has sufficient knowledge in financial and auditing matters to serve on the Committee. The committee is also responsible for making recommendations to the Board of Directors or otherwise acting with respect to corporate governance matters, including board size and membership qualifications, new director orientation, committee structure and membership, communications with shareholders, and board and committee self-evaluations. The Audit and Governance Committee operates under a written charter adopted by our Board of Directors.
The members of the Audit and Governance Committee are independent of the Company (as defined under Rule 4200(a) (15) of the NASDAQ Marketplace Rules). We consider Mr. Toh a “financial expert” as defined under Item 407 of Regulation S-B.
Compensation Committee
The Compensation Committee is responsible for reviewing and approving, on behalf of our Board of Directors, management recommendations regarding all forms of compensation to be provided to our executive officers and directors, including stock compensation, and all bonus and stock compensation to all employees.
Nominating Committee
The Nominating Committee is responsible for recommending candidates to the Board of Directors for approval and nomination by the Board of Directors.
ITEM 11:
ITEM 11: EXECUTIVE COMPENSATION
Compensation of Executive Officers and Senior Personnel
The following table sets forth information concerning the annual and long-term compensation awarded to, earned by, or paid to the named executive officers and Senior Consultants and other named executive officers for all services rendered in all capacities to our company, or any of its subsidiaries, for the years ended December 31, 2008, 2007 and 2006:
SUMMARY COMPENSATION TABLE
Note 1 - Mr. Elgamal, CEO, and Mr. Olmo-Rivas, executive directors of the Company, are each entitled to receive annual cash compensation of $564,400 plus health, disability and life insurance coverage pursuant to Ten year employment agreements as CEO of American Surgical Holdings and Vice president of ASA respectively.
The Company renewed, amended and revised Ten year service agreements with corporations owned by Mr. Elgamal and Mr. Olmo-Rivas. The agreements automatically renew at maturity unless cancelled by either party with sixty days written notice. The corporations were each paid a monthly expense fee of $11,000 during 2007. Each agreement includes an option to purchase 5% of any shares issued by the Company during the term of these agreements at a discounted price equal to 25% of the closing price on the date the shares are issued by the Company. Mr. Elgamal and Mr. Olmo-Rivas have waived their rights to the options under the agreements for the years ended December 31, 2007, 2006 and 2005. These agreements also include an annual bonus to each valued at 2% of the increase, year over year, of the gross revenue of the company to be paid during the first quarter of the current fiscal year for the increase in gross revenue in the prior year. Mr. Elgamal and Mr. Olmo have waived the right to this bonus for the year ending December 31, 2007. The employment agreements for Mr. Elgamal and for Mr. Olmo-Rivas include an early termination provision that proscribes a contract termination payment to either officer equal to $3,000,000 if the Company terminates their service agreements without cause or for a cause that is less than a conviction of a federal felony prior to the expiration date, as renewed.
Note 2 - In November 2005, Mr. Chamberlain and Mr. Chapa, senior consultants to the Company, entered into employment agreements and consulting agreements between the Company and corporations owned by them individually. Pursuant to these multiple agreements, Mr. Chamberlain and Mr. Chapa are each entitled to receive an annual combined cash compensation of $344,000 for the employment agreement and the consulting agreements combined, plus health and disability insurance coverage. In addition, their corporations are paid a monthly consulting fee of $6,000 each. Each consulting agreement includes an option to purchase 5% of any shares issued by the Company during the term of these agreements at a discount price equal to 25% of the closing price on the date the shares are issued by the Company. Mr. Chamberlain and Mr. Chapa have waived their rights to the options under the agreements for the years ended December 31, 2007, 2006 and 2005. The consulting agreements include an early termination provision that proscribes a contract termination payment to either shareholder equal to $3,000,000 if the Company terminates their service agreements without cause prior to the expiration date.
Note 3 - James A. Longaker, CFO, was hired in November 2007 at an annual salary of $120,000.
Note 4 - William McGinnis, Controller, was hired in January 2007 at an annual salary of $85,000. During 2007, his salary was increased to $100,000 per year, On July 15, 2008, Mr. McGinnis accepted employment with another firm and is no longer associated with our company.
Note 5 - In March 2007, Mr. Elgamal and Mr. Olmo-Rivas were each granted 500,000 options to purchase the Company’s common stock. These options vest ratably over 3 years. For each officer the fair value of the options amortized in 2008 and 2007 was $ 37,045 and $56,600 respectively.
Note 8 - In November 2005, the Company issued 1,428,573 shares of common stock to Mr. Chamberlain and Mr. Chapa for future services under consulting agreements ending in November 2010. The value of these shares was determined to be $250,000 based on a recent cash offering price. The Company expensed $50,000 in 2008 and 2007 and 2006. The unamortized balance at December 31, 2008 of $93,750 will be amortized on a straight-line basis over the remaining life of the agreements.
Note 8 - These are the amounts paid to the respective corporations owned by the four principal stockholders as discussed above at Notes 1 and 2.
Compensation of Directors
Independent directors are entitled to receive monetary and stock consideration for serving on the board of directors. Executive directors are not entitled to director fees of any type.
DIRECTORS COMPENSATION TABLE
At the initial Board of Directors meeting during March of 2007, the board established the fees for independent directors as follows:
Annual board fee of $36,000, plus $1,000 per meeting fee
Lead independent director - $15,000 annually
Chair of the Audit Committee and Governance - $10,000 annually
Chair of the Nominating Committee - $5,000 annually
Chair of the Compensation Committee - $5,000 annually
Mr. Toh received an initial board fee of $25,000. In addition he was issued 25,000 shares of common stock and 75,000 options to purchase common stock. Dr. Bailey and Dr. Kleinman each received 25,000 options.
For 2008 and 2007, the fees paid and the fair value of the stock and options granted to the members of the Board are as follows:
Term of Office
Our directors are each appointed for a one-year term to hold office or until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until removed by the board.
Our directors will remain in office until the next annual meeting of our stockholders, and until their successors have been duly elected and qualified. There are no agreements with respect to the election of Directors. We will compensate our Directors for service on our Board of Directors, and any committees thereof, and we will reimburse them for expenses incurred for attendance at meetings of our Board of Directors and/or any committee of our Board of Directors. Our Board of Directors appoints officers annually and each Executive Officer serves at the discretion of our Board of Directors.
Outstanding Equity Awards at Fiscal Year-End
At year end the unexercised stock options, warrants or other rights to purchase our common stock made to the named executive officers are included in the Summary Compensation Table at Item 10, Note 6 and are detailed further below.
Compensation Discussion and Analysis
Summary
This report is the Compensation Discussion and Analysis of our executive compensation program and an explanation and analysis of the material elements of total compensation paid to each of our named executive officers. Included in the discussion is an overview and description of the following:
Our compensation philosophy and program;
The objectives of our compensation program;
What the compensation program is designed to reward;
Each element of compensation;
Why we choose to pay each element;
How we determine the amount or formula (where applicable), for each element; and
How each compensation element and our decision regarding that element fit into our overall compensation objectives and affect decisions regarding other elements.
In reviewing our executive compensation program, we considered issues pertaining to policies and practices for allocating between long-term and currently paid out compensation; and those policies for allocating between cash and non-cash compensation. We also considered the determinations for granting awards, performance factors for the Company and our named executive officers, and how specific elements of compensation are structured and taken into account in making compensation decisions.
Questions related to the benchmarking of total compensation or any material element of compensation, the tax and accounting treatment of particular forms of compensation and the role of executive officers (if any) in the total compensation process also are addressed where appropriate.
General Executive Compensation Philosophy
The Compensation Committee of the Board of Directors, which acts pursuant to authority delegated to it by the Board of Directors, has established our general executive compensation philosophy.
We compensate our executive management through a combination of salaries, merit based performance bonuses, and long-term equity compensation that is designed to be competitive with comparable companies within the healthcare industry. Our executive compensation program is structured to align management’s incentives with the long-term interests of our shareholders, and to maximize profitability and shareholder value.
We adhere to the following compensation policies, which are designed to support the achievement of our business strategies:
•
Our executive compensation program should strengthen the relationship between compensation, both cash and equity-based, and performance by emphasizing variable, at-risk compensation that is dependent upon the successful achievement of specified corporate, business unit and individual performance goals.
•
A portion of each executive’s total compensation should be comprised of long-term, at-risk compensation to focus management on the long-term interests of shareholders.
•
An appropriately balanced mix of at-risk incentive cash and equity-based compensation aligns the interests of our executives with that of our shareholders. The equity-based component promotes a continuing focus on building profitability and shareholder value.
•
Total compensation should enhance our ability to attract, retain, motivate and develop knowledgeable and experienced executives upon who, in large part, our successful operation and management depend.
We set compensation by establishing targeted compensation levels for each senior executive and allocating that compensation amount among base salary, incentive-based compensation, and long-term equity compensation. At the highest and most senior levels we offer incentive based compensation to reward companywide performance and by attributing awards primarily to maximize future profitability, stock appreciation and shareholder value.
A fundamental core principle of our executive compensation program is the belief that compensation paid to executive officers should be closely aligned with our near- and long-term success, while simultaneously giving us the flexibility to recruit and retain the most qualified key executives. Our compensation program is structured so that it is related to our achieving corporate and operational milestones, as well as our stock performance and other factors, direct and indirect, all of which may influence long-term shareholder value and our success. As a result, we have designed our total executive compensation plan to include the following elements:
•
Annual Base Salaries;
•
Annual Performance-Based Cash Bonuses;
•
Long-Term Equity -Based Compensation; and
•
Certain Other Benefits.
We utilize each of these elements of executive compensation in an attempt to attain the proper balance between our short- and long-term successes, as well as between our financial performance and shareholder return. We believe that the executive compensation program for our named executive officers is consistent with our financial performance and the performance of each named executive officer.
Elements of Compensation
Base Salaries
Base salaries for our executives are established based on the scope of their responsibilities, taking into account competitive market compensation for similar positions, as well as seniority of the individual, our ability to replace the individual, our Board of Directors’ and Compensation Committee’s assessment of the contribution and competence of the individual and other primarily judgmental factors deemed relevant by our Board of Directors and Compensation Committee.
Base salaries are reviewed annually by our Compensation Committee and our Board of Directors, and adjusted from time to time pursuant to such review or at other appropriate times. Where possible and appropriate, salaries are realigned based upon market levels after taking into account individual responsibilities, performance and experience.
Bonuses
Amounts shown as Non-Equity Incentive Plan Compensation in the Summary Compensation Table are based the individual meeting performance criteria objectives. Our Compensation Committee makes the final determination for all bonus payments. Actual bonus awards are paid at a level commensurate with performance against pre-established objectives set forth in a bonus performance grid.
We set bonuses based on performance measures in an effort to align the interests of our officers with those of our shareholders. Although the performance goals established for purposes of determining bonus awards are fixed at the inception of a period, we have and will occasionally consider additional performance rating goals when evaluating the bonus compensation structure of our executive management. In addition, in instances where the employee has responsibility over a specific area, individual performance goals may be directly tied to the overall performance of that particular area and bonus compensation may be varied accordingly, the Agreements with Messer's. Elgamal and Olmo-Rivas provide for an annual bonus of 2% of the year over year increase in the gross revenue to each.
Equity Incentive Grants
In keeping with our philosophy of providing a total compensation package that favors at-risk components of pay, long-term incentives comprise a significant component of our executives’ total compensation package. These incentives are designed to motivate and reward executives for maximizing shareholder value and encourage the long-term employment of key employees. Our objective is to provide executives with above-average, long-term incentive award opportunities.
We view stock options as our primary long-term compensation vehicle for our executive officers. Stock options are granted at the prevailing market price on the date of grant and will have value only if our stock price increases. Grants of stock options generally are based upon our performance, the level of the executive’s position, and an evaluation of the executive’s past and expected future performance. Our Compensation Committee grants stock options periodically, but not necessarily on an annual basis.
Backdating and Spring-loading Options
We do not backdate options or grant options retroactively. In addition, we do not intentionally coordinate grants of options so that they are made before announcement of favorable information, or after announcement of unfavorable information. Our options are granted at fair market value on a fixed date or event (such as the first day of an employee’s hire) with all required approvals obtained in advance of or on the actual grant date. All grants to executive officers require the approval of our Compensation Committee. We consider fair market value to be the closing price of our common stock on the grant date.
Other Benefits
Severance Benefits
We offer severance benefits to our executive management and to the rest of our employees on a case-by-case basis as required under the terms of each respective employment agreement. Under our severance agreements, benefits may be provided when there is termination for “good reason” or without “cause.” The definitions for these terms are set forth in the respective employment agreements.
Change in Control
There have been no changes of control or other provisions that provide additional financial rewards to our executives or management.
Executive Compensation Process
Our Compensation Committee oversees and approves all compensation and awards made to executive officers under our executive compensation program. The Compensation Committee reviews the performance and compensation of the Chief Executive Officer, President, and other named executive officers, and establishes their compensation accordingly with consultation from others when appropriate. The Compensation Committee also makes grants of equity compensation in the form of stock options and restricted stock awards based in part on recommendations from the Chief Executive Officer.
Involvement in Certain Legal Proceedings
None of our officers and/or directors have filed any personal bankruptcy petition, been convicted of or been the subject of any criminal proceedings or been the subject of any order, judgment or decree involving the violation of any state or federal securities laws within the past five (5) years.
ITEM 12:
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth the number and percentage of shares of our common stock owned as of March 31, 2009 by all persons: (i) known to us who own more than 5% of the outstanding number of such shares, (ii) by all of our directors, and (iii) by all officers and directors as a group. Unless otherwise indicated, each of the stockholders has sole voting and investment power with respect to the shares beneficially owned.
APPROVAL AND ADOPTION OF THE EMPLOYEE STOCK OPTION PLAN
On or about March 23, 2007 (the “Approval Date”), the Board of Directors and majority shareholders of the Company approved the Employee Stock Option Plan (the “Plan” or “ESOP”), which is subject to notice to the shareholders. The Plan should be effective by the end of April 2007. The Plan will provide a total of 3,000,000 shares of our common stock to be issued to our employees, directors, independent contractors, agents or other eligible persons. The Exercise Price shall be 100 percent of the Fair Market Value per common share for all eligible participants on the Grant Date, provided that the Exercise Price for Options granted to any person who directly or by attribution owns more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company shall not be less than one hundred ten percent (110%) of the Fair Market Value of the Shares on the date of grant. Fair Market Value is deemed to be the average of the last five (5) closing sales prices of the Common Stock on a Primary Market or on the exchange that the Common Stock is then listed as quoted by Bloomberg Financial Markets. The term of the Options shall be no greater than ten years from the Grant Date.
The purpose of the Employee Stock Option Plan (i) is to provide long term incentives for employees and rewards to our employees, directors, consultants, independent contractors or agents; (ii) assist us in attracting and retaining employees, directors, independent contractors or agents with experience and/or ability on a basis competitive with industry practices; and (iii) associate the interests of such employees, directors, independent contractors or agents with those of our stockholders. These incentive plans have assisted us in hiring qualified individuals to consult and work with us as we have recommenced our operations. In addition, these incentive plans have enabled us to hire qualified and well-respected professionals to assist us in various legal and consulting matters. Our Board of Directors has been granted sole power to issue the 3,000,000 shares of common stock.
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company has compensation arrangements in place with four of its significant shareholders for services rendered to the Company directly by them or by entities controlled by them. The highlights of those compensation arrangements are detailed in the following paragraphs.
Mr. Elgamal and Mr. Olmo-Rivas, executive directors of the Company, pursuant to 10 year employment agreements that were renewed and amended in 2006 and 2007 are each entitled to receive annual compensation of $564,400, plus health, disability and life insurance benefits. Under the ESOP adopted on or about March 23, 2007 Mr. Elgamal and Mr. Olmo-Rivas each received 500,000 stock options that vest over a three year period. Subsequent, to year-end, the non-compete agreements with both executive officers were extended to three years from two years. Additionally, in circumstances where either shareholder disposes of more than 250,000 shares in any single year between 2007 and 2012, the non-compete is automatically extended to five years. Additionally, commencing in 2007, both officers are entitled to performance-based compensation equal to 2% of the growth in year over year gross revenue from the prior calendar year. The agreements provide for monthly consulting fees in the amount of $11,000 per month payable to their closely held corporations. Each agreement includes an option to purchase 5% of any shares issued by the Company during the term of these agreements at a discount price equal to 25% of the closing price on the date the shares are issued by the Company. Mr. Elgamal and Mr. Olmo-Rivas have waived their rights to the options under the agreements for the years ended December 31, 2007, 2006 and 2005. The agreements also include an early termination provision that provides for a contract termination payment equal to $3,000,000 if the Company terminates the agreement without cause or is terminated with a cause less than a conviction of a federal felony prior to the expiration date, as renewed. These agreements replaced the prior agreements with Mr. Elgamal and Mr. Olmo-Rivas and with their closely held corporations.
During July 2005, the Company renewed service agreements with corporations owned by Mr. Elgamal, CEO, and Mr. Olmo-Rivas, Executive Director. The agreements were renewed for an initial term of Ten (10) years and they renew automatically unless cancelled by either party within sixty days of maturity with a written notice.
Mr. Chamberlain and Mr. Chapa, senior consultants of the Company, pursuant to multiple year agreements are entitled to receive combined annual employment and consulting compensation of $344,000 plus health and disability insurance benefits. In addition corporations owned by Mr. Chamberlain and Mr. Chapa have service agreements in place whereby they earn consulting fees of $6,000 per month. Their agreements include an option, exercisable by Mr. Chamberlain and Mr. Chapa, to purchase 5% of any shares issued by the Company during the term of the agreements at a discount price equal to 25% of the closing price on the date issued by the Company. Mr. Chamberlain and Mr. Chapa have waived their rights to the options under the agreements for the years ended December 31, 2007, 2006 and 2005. The agreements include an early termination provision that provides for a contract termination payment equal to $3,000,000 if the Company terminates the agreement without cause prior to the expiration date, as renewed.
Mr. Bland Chamberlain loaned the Company $150,000 at 15% interest on June 12, 2008. The loan was renewed on September 12, 2008 with a maturity date of June 15, 2009.
ITEM 14:
ITEM 14: EXHIBITS
(b)
Exhibits
3.1
Certificate of Incorporation; Certificate of Amendment to Certificate of Incorporation (1)
3.2
By-Laws (2)
10.1
Employee stock option plan(4)
10.2
Amendment to the Service/Consulting Agreement and Employment Agreements for Zak Elgamal, Jaime Olmo-Rivas, Bland Chamberlain and Jose Chapa Dated March 18, 2007 (5)
10.3
Amendment to the Service/Consulting Agreement and Employment Agreements for Zak Elgamal and Jaime Olmo-Rivas dated March 18, 2007 (6)
14.1
Code of Ethics (3)
14.2
Charter for the Audit Committee (7)
14.3
Charter for the Compensation Committee (8)
14.4
Charter for the Nominating Committee (9)
31.1
Certification of Zak W. Elgamal pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of James A. Longaker pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Zak W. Elgamal pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of James A. Longaker pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(1)
Incorporated by reference to Exhibit 3.1 to our Form 10-SB filed with the SEC on July 10, 2003
(2)
Incorporated by reference to Exhibit 3.2 to our Form 10-SB filed with the SEC on July 10, 2003
(3)
Incorporated by reference to Exhibit 14 to our Annual Report on Form 10-KSB for the year ended December 31, 2004, filed with the SEC on March 22,
(4)
Incorporated by reference to the Preliminary 14(c) filed with the SEC on March 26,
(5)
Incorporated by reference to Exhibit 10.2 to our Annual Report on Form 10-KSB for the year ended December 31, 2006, filed with the SEC on April 2,
(6)
Incorporated by reference to Exhibit 10.3 to our Annual Report on Form 10-KSB for the year ended December 31, 2006, filed with the SEC on April 2,
(7)
Incorporated by reference to Exhibit 14.2 to our Annual Report on Form 10-KSB for the year ended December 31, 2006, filed with the SEC on April 2,
(8)
Incorporated by reference to Exhibit 14.3 to our Annual Report on Form 10-KSB for the year ended December 31, 2006, filed with the SEC on April 2,
(9)
Incorporated by reference to Exhibit 14.4 to our Annual Report on Form 10-KSB for the year ended December 31, 2006, filed with the SEC on April 2,
ITEM 15:
ITEM 15: PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The following table summarizes the aggregate fees billed to us by Webb & Company, P.A. for the fiscal years ended December 31, 2008, 2007 and 2006:
(a)
Audit Fees include the aggregate fees billed by our auditors, for professional services rendered for the audit of the Company’s annual financial statement, along with fees for the reviews of the financial statements included in the Company’s Quarterly Reports on Form 10-QSB during that fiscal year.
(b)
Audit Related Fees include the aggregate of fees billed for services related to the Company’s SEC and NASDAQ filings and applications and preparation of special audit reports filed with the CRTC.
(c)
Tax Fees include the aggregate fees billed by our auditors for taxation compliance related services.
(d)
All Other Fees include the aggregate fees billed by our auditors for services rendered to the Company, other than the services covered in “Audit Fees”. These fees primarily related to non-audit acquisition services relating to the Company’s due diligence review and other due diligence engagements.
Audit and Non-Audit Service Pre-Approval Policy
In accordance with the requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated there under, the Audit Committee has adopted an informal approval policy that it believes will result in an effective and efficient procedure to pre-approve services performed by the independent registered public accounting firm.
Audit Services. Audit services include the annual financial statement audit (including quarterly reviews) and other procedures required to be performed by the independent registered public accounting firm to be able to form an opinion on our financial statements. The Audit Committee pre-approves specified annual audit services engagement terms and fees and other specified audit fees. All other audit services must be specifically pre-approved by the Audit Committee. The Audit Committee monitors the audit services engagement and may approve, if necessary, any changes in terms, conditions and fees resulting from changes in audit scope or other items.
Audit-Related Services. Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of our financial statements which historically have been provided to us by the independent registered public accounting firm and are consistent with the SEC’s rules on auditor independence. The Audit Committee pre-approves specified audit-related services within pre-approved fee levels. All other audit-related services must be pre-approved by the Audit Committee.
Tax Services. The Audit Committee pre-approves specified tax services that the Audit Committee believes would not impair the independence of the independent registered public accounting firm and that are consistent with SEC rules and guidance. The Audit Committee must specifically approve all other tax services.
All Other Services. Other services are services provided by the independent registered public accounting firm that do not fall within the established audit, audit-related and tax services categories. The Audit Committee pre-approves specified other services that do not fall within any of the specified prohibited categories of services.
Procedures. All proposals for services to be provided by the independent registered public accounting firm, which must include a detailed description of the services to be rendered and the amount of corresponding fees, are submitted to the Chairman of the Audit Committee and the Chief Financial Officer. The Chief Financial Officer authorizes services that have been pre-approved by the Audit Committee. If there is any question as to whether a proposed service fits within a pre-approved service, the Audit Committee chair is consulted for a determination. The Chief Financial Officer submits requests or applications to provide services that have not been pre-approved by the Audit Committee, which must include an affirmation by the Chief Financial Officer and the independent registered public accounting firm that the request or application is consistent with the SEC’s rules on auditor independence, to the Audit Committee (or its Chair or any of its other members pursuant to delegated authority) for approval.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this amended report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ Zak W. Elgamal
Director
April 1, 2009
Zak W. Elgamal
President, Chief Executive Officer
(Principal Executive Officer)
/s/ Jaime Olmo-Rivas
Director
April 1, 2009
Jaime Olmo-Rivas
Vice President
/s/ James A. Longaker
Chief Financial Officer
April 1, 2009
James A. Longaker, CPA
(Principal Financial and Accounting Officer)
/s/ Dr. Charles Bailey
Director
April 1, 2009
Dr. Charles Bailey
/s/ Dr. Michael Kleinman
Director
April 1, 2009
Dr. Michael Kleinman
/s/ Henry Y. L. Toh
Director
April 1, 2009
Henry Y. L. Toh
AMERICAN SURGICAL HOLDINGS, INC. AND SUBSIDIARIES
(F/K/A ASAH, CORP.)
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008 AND 2007
AMERICAN SURGICAL HOLDINGS, INC. AND SUBSIDIARIES
(F/K/A ASAH, CORP.)
CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of:
American Surgical Holdings, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of American Surgical Holdings, Inc. and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years ended December 31, 2008, 2007 and 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly in all material respects, the financial position of American Surgical Holdings, Inc. and subsidiaries as of December 31, 2008 and 2007 and the results of its consolidated operations and its cash flows for the years ended December 31, 2008, 2007 and 2006 in conformity with accounting principles generally accepted in the United States of America.
WEBB & COMPANY, P.A.
Boynton Beach, Florida
March 25,
AMERICAN SURGICAL HOLDINGS, INC. AND SUBSIDIARIES
(F/K/A ASAH, CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008, 2007 AND 2006
NOTE 1-BUSINESS AND ORGANIZATION, BASIS OF PRESENTATION
American Surgical Holdings, Inc. f/k/a ASAH Corp. and Renfrew, Inc., a Delaware corporation (the “Company”) is the parent company of American Surgical Assistants, Inc., a Texas corporation (“ASA”) and the parent company of ATS Billing Services, Inc., a Texas corporation (“ATS”). The Company was incorporated in the State of Delaware under the name Renfrew, Inc. on July 22, 2003 as a blank check company as defined under Rule 419 of the Securities Act. On August 2, 2005, the Company filed Articles of Amendment with the State of Delaware changing its’ name to ASAH Corp. and on January 9, 2007, the Company filed Articles of Amendment with the State of Delaware changing its’ name to American Surgical Holdings, Inc. (“ASHI”).
The Company completed a 1 for 1.75 common stock consolidation in January 2007 and a 1 for 2 common stock consolidation in April 2007. All share and per share amounts have been retroactively restated for the both the 1 for 1.75 and the 1 for 2 stock consolidations.
ASA provides professional surgical assistants to surgery centers and hospitals in Houston and Corpus Christi, Texas, Lawton, Oklahoma and Suffolk, Virginia.
ATS was formed in April 2006 to engage in HIPAA-compliant billing and collection services for healthcare industry professionals, mainly, but not exclusively, surgical assistants. ATS’ services include primary claim billing to insurance companies and to patients, with follow-up through to collection in 2006 and 2007. The services provided by ATS were transferred to ASA in 2008.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in U.S. dollars, in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for financial reporting. All inter-company accounts and transactions have been eliminated upon consolidation. The consolidated results for each of 2008, 2007 and 2006 include ASA and ASHI. ATS’ operations are included from inception.
Certain balances in the financial statements as of and for the years ended December 31, 2008, 2007 and 2006 have been reclassified to conform to the current period’s presentation. These changes had no effect on the previously reported net income, total assets, liabilities or stockholders’ equity.
Revenue Recognition
The Company recognizes revenue over the period the service is performed in accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements” (“SAB 104”). In general, SAB 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services rendered, (3) the fee is fixed and determinable and (4) collectability is reasonably assured.
Service Fees, net are recorded based on established billing rates less estimated discounts for insurance reimbursements and patient payments. Management also uses historical collection data to assure the collectability of the resulting accounts receivable. No revenue is recorded for services performed for patients covered by Medicare and/or Medicaid.
Established billing rates are not the same as actual pricing. They generally do not reflect what the Company is ultimately paid and therefore are not displayed in our Consolidated Statements of Operations. The Company is typically paid amounts based on individual insurance company rates.
The Company also recognizes Contract Fee Revenues billed under contracts with hospitals for providing twenty-four hour a day on call coverage for these hospitals. These amounts are billed on a monthly basis throughout the respective contract period as services are provided.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. These accounts may from time to time exceed federally insured limits. The Company has not experienced any losses on such accounts. At December 31, 2008 and 2007, the Company had approximately $225,414 and $1,034,014, respectively, in excess of FDIC insurance limits.
AMERICAN SURGICAL HOLDINGS, INC. AND SUBSIDIARIES
(F/K/A ASAH, CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008, 2007 AND 2006
Allowance for Doubtful Accounts
The Company generally provides for an allowance against accounts receivable for an amount that could become uncollectible whereby such receivables are reduced to their estimated net realizable value. The Company estimates this allowance based on the aging of our accounts receivable, our historical collection experience and other relevant factors. There are various factors that can impact the collection trends, such as changes in the number of uninsured patients, the increased burden of co-payment to be made by patients with insurance and business practices related to collection efforts. These factors continuously change and can have an impact on collection trends and our estimation process.
The Company evaluates the collectability of its receivables at least quarterly, using various factors including the financial condition and payment history on patient accounts, an overall review of collections experience on accounts and other economic factors or events expected to affect the Company’s future collections experience.
As part of the evaluation discussed above concerning Service Fees Revenue and the appropriate Collection Percentage, the Company determined that an allowance was necessary at December 31, 2008 in the amount of $210,000 compared to a reserve of $243,355 for the twelve months ended at December 31, 2007. $190,000 of the $210,000 in 2008 and the $243,355 in 2007 were for estimated charge backs.
Advertising Costs
Advertising costs are expensed as incurred and include the costs of public relations activities. These costs are included in selling, general and administrative expenses and totaled $7,392, $8,819, and $8,396 in the years ended December 31, 2008, 2007 and 2006, respectively.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is provided using the straight-line method over the estimated useful life of three to five years.
Leasehold improvements are amortized over the initial term of the lease.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates include revenue recognition, the allowance for doubtful accounts and share based compensation. These estimates have the potential to have a significant impact on our financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events which are continuous in nature.
Convertible Notes Payable
The Company issued convertible notes payable in 2007. The conversion feature of the notes becomes effective only if the Company commences a Qualified Offering. Insofar as the Company has not commenced a Qualified Offering and does not plan to do so at this time, the Company has assigned no value to the conversion feature of the notes payable. A more detailed discussion is contained herein at Note 6.
Credit Risk
The Company’s customers are surgeons, hospitals and other healthcare facilities. The Company also has exposure related to the collectability of patient accounts from the insurance companies who act as third party payers. The Company has identified five insurance companies that comprise approximately 83% of the total paid by insurance companies. From time to time, the Company may experience difficulty in collecting amounts due from various insurance companies on a timely basis. Additionally, the insurance companies’ reimbursement rates may change from time to time and may change in such a way as to be detrimental to the Company.
AMERICAN SURGICAL HOLDINGS, INC. AND SUBSIDIARIES
(F/K/A ASAH, CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008, 2007 AND 2006
Geographic Risk
Approximately 97% in 2008, 100% in 2007 and 2006 of the Company’s customers were concentrated in the areas of Houston and Corpus Christi, Texas.
Sales Risk
No single patient accounted for over 10% of the revenues in the years ended December 31, 2008, 2007 or 2006. However, as explained above the Company does have some concentration of risk in that approximately 83% of the third party payments are derived from five insurance companies. Additionally, the Company has identified two hospitals at which the Company performed over 36% of its billable surgeries in 2008, a decrease from over 50% in 2007 and 2006. Obviously, any change that affects either group could have a significant impact on the Company and its results of operations.
Income Taxes
The Company records deferred taxes in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS 109”). The statement requires recognition of deferred tax assets and liabilities for temporary differences between the tax bases of assets and liabilities and the amounts at which they are carried in the financial statements, based upon the enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.
Stock-Based Compensation
The Company accounts for its stock-based compensation under the provisions of SFAS No.123(R) Accounting for Stock Based Compensation. Under SFAS No. 123(R), the Company is permitted to record expenses for stock options and other employee compensation plans based on their fair value at the date of grant. Any such compensation cost is charged to expense on a straight-line basis over the periods the options vest. If the options had cashless exercise provisions, the Company utilizes variable accounting.
Common stock, stock options and common stock warrants issued to other than employees or directors are recorded on the basis of their fair value, as required by SFAS No. 123(R), which is measured as of the date required by EITF Issue 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. In accordance with EITF 96-18, the stock options or common stock warrants are valued using the Black-Scholes model on the basis of the market price of the underlying common stock on the valuation date, which 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 vesting period. Where expense must be recognized prior to a valuation date, the expense is computed under the Black-Scholes model on the basis of the market price of the underlying common stock at the end of the period, and any subsequent changes in the market price of the underlying common stock up through the valuation date is reflected in the expense recorded in the subsequent period in which that change occurs.
In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123(R), requiring prominent disclosure in annual and interim financial statements regarding a company’s method for accounting for stock-based employee compensation and the effect of the method on reported results.
Basic and Diluted Net Income/Loss Per Share
Basic and diluted net (loss) or income per common share is computed based upon the weighted average common shares outstanding as defined by Financial Accounting Standards No. 128, “Earnings Per Share.” The Company did not have any dilutive securities outstanding as of December 31, 2008, 2007 and 2006. In 2008 and 2007 the Company had 4,541,000 and 4,541,000 warrants and options outstanding, but the Company has excluded these common stock equivalents from the 2008 and 2007 calculation of diluted net loss per share because these would be anti-dilutive. The Company did not issue any warrants or options in 2008.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments including accounts receivable, accounts payable, accrued expenses and notes payable approximate their fair value due to the relatively short period to maturity for these instruments.
AMERICAN SURGICAL HOLDINGS, INC. AND SUBSIDIARIES
(F/K/A ASAH, CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008, 2007 AND 2006
Business Segments
The Company operates in one segment and therefore segment information is not presented.
Restricted Cash
Funds in the escrow account are labeled as “Restricted Cash” as the Company does not have access to the escrowed amounts under the terms of the Escrow Agreement.
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements-an amendment of ARB No. 51." This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, with earlier adoption prohibited. This statement requires the recognition of a non-controlling interest (minority interest) as equity in the consolidated financial statements and separate from the parent's equity. The amount of net income attributable to the non-controlling interest will be included in consolidated net income on the face of the income statement. It also amends certain of ARB No. 51's consolidation procedures for consistency with the requirements of SFAS 141(R). This statement also includes expanded disclosure requirements regarding the interests of the parent and its non-controlling interest. We are currently evaluating this new statement and anticipate that the statement will not have a significant impact on the reporting of our results of operations.
In March 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133. This Statement amends and expands the disclosure requirements in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities to provide users of financial statements with an enhanced understanding of (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flow. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008 with early application permitted. The Company expects to adopt SFAS No. 161 on January 1, 2009, and has not yet determined the effect of SFAS No. 161 on its Financial Statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162 identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented in conformity with GAAP. The current GAAP hierarchy has been criticized because it is directed to the auditor rather than the entity, it is complex, and it ranks FASB Statements of Financial Accounting Concepts, which are subject to the same level of due process as FASB Statements of Financial Accounting Standards, below industry practices that are widely recognized as generally accepted but that are not subject to due process. The Board believes the GAAP hierarchy should be directed to entities because it is the entity (not its auditors) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. SFAS 162 is effective 60 days following the SECs approval of PCAOB Auditing Standard No. 6, Evaluating Consistency of Financial Statements (AS/6). The adoption of FASB 162 is not expected to have a material impact on the Company’s financial position.
In May 2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee Insurance Contracts-an interpretation of FASB Statement No. 60. Diversity exists in practice in accounting for financial guarantee insurance contracts by insurance enterprises under FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises. This results in inconsistencies in the recognition and measurement of claim liabilities. This Statement requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This Statement requires expanded disclosures about financial guarantee insurance contracts. The accounting and disclosure requirements of the Statement will improve the quality of information provided to users of financial statements. SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of FASB 163 is not expected to have a material impact on the Company's financial position.
In June 2008 the FASB ratified FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities,” which addresses whether instruments granted in share-based payment awards are participating securities prior to vesting and, therefore, must be included in the earnings allocation in calculating earnings per share under the two-class method described in SFAS No. 128, “Earnings per Share.” FSP No. EITF 03-6-1 requires that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend-equivalents be treated as participating securities in calculating earnings per share. FSP No. EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and shall be applied retrospectively to all prior periods. We do not anticipate that the adoption of FSP No. EITF 03-6-1 will have an effect on our previously reported losses per share from 2007 to 2008.
AMERICAN SURGICAL HOLDINGS, INC. AND SUBSIDIARIES
(F/K/A ASAH, CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008, 2007 AND 2006
In June 2008 the FASB ratified EITF No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock,” which requires that an instrument’s contingent exercise provisions be analyzed first. If this evaluation does not preclude consideration of an instrument as indexed to the company’s own stock, the instrument’s settlement provisions are then analyzed. EITF No. 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and requires reporting of a cumulative effect of a change in accounting principle to retained earnings for all instruments existing at the effective date to the balance of retained earnings. We currently do not anticipate adoption of EITF No. 07-5 will have a significant effect on our consolidated financial statements.
In June 2008 the FASB ratified EITF No. 08-3, “Accounting by Lessees for Maintenance Deposits,” which specifies that maintenance deposits that are contractually and substantively related to maintenance of leased assets, and which are refundable only if the lessee performs specified maintenance activities, shall be accounted for as deposit assets. EITF No. 08-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, with recognition of a cumulative effect of a change in accounting principle to the opening balance of retained earnings for the first year presented.
NOTE 2 - ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 2008 and 2007 consisted of the following:
The bad debt expense in each of 2008, 2007 and 2006 was $50,590, $17,500 and ($16,215), respectively.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2008 and 2007 consisted of the following:
Depreciation expense for the years ended December 31, 2008, 2007 and 2006 was $ 40,646 $37,677 and $31,882 respectively.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Operating Lease
During 2001, the Company entered into a sublease agreement with a company owned by related parties for a term of seven years ending December 2008. Effective October 1, 2006, this sublease was terminated when the lease was assigned directly to the Company. This lease agreement as amended September 1, 2007 calls for monthly lease payments of $8,117 for the period September 1, 2007 through December 31, 2007. Monthly rent payments will increase to $8,304 for 2008, $8,484 for 2009, $8,751 for 2010 and $8,846 for 2011 plus a Consumer Price Index adjustment capped at 5% plus reimbursement of Common Area Maintenance expenses if they exceed a specified percentage of the costs. Rent expense for the years ended December 31, 2008, 2007 and 2006 were $$97,990, $80,181, and $109,268 respectively.
Employment Agreements
The Company has various compensation agreements with its’ Executive Officers, Senior Consultants and consultants. The table below summarizes the Commitments that the Company has pursuant to these agreements in future years. A more detailed discussion of the Officers and Senior Consultants compensation arrangements follows the table below and also at Note 8.
AMERICAN SURGICAL HOLDINGS, INC. AND SUBSIDIARIES
(F/K/A ASAH, CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008, 2007 AND 2006
Note 1 - Mr. Elgamal, CEO, and Mr. Olmo-Rivas, executive directors of the Company, are each entitled to receive annual cash compensation of $564,400 plus health, disability and life insurance coverage pursuant to Ten year employment agreements as CEO of American Surgical Holdings and Vice president of ASA respectively, entered into on May 1, 2006 ending 2016. James A. Longaker, CFO, was hired in November 2007 at an annual salary of $120,000 ending November 2009.
The Company renewed, amended and revised Ten year service agreements with corporations owned by Mr. Elgamal and Mr. Olmo-Rivas. The agreements automatically renew at maturity unless cancelled by either party with sixty days written notice. The corporations were each paid a monthly expense fee of $11,000 during 2007. Each agreement includes an option to purchase 5% of any shares issued by the Company during the term of these agreements at a discounted price equal to 25% of the closing price on the date the shares are issued by the Company. Mr. Elgamal and Mr. Olmo-Rivas have waived their rights to the options under the agreements for the years ended December 31, 2007, and 2006. These agreements also include an annual bonus to each valued at 2% of the increase, year over year, of the gross revenue of the company to be paid during the first quarter of the current fiscal year for the increase in gross revenue in the prior year. Mr. Elgamal and Mr. Olmo have waived the right to this bonus for the years ending December 31, 2007 and 2006. The employment agreements for Mr. Elgamal and for Mr. Olmo-Rivas include an early termination provision that proscribes a contract termination payment to either officer equal to $3,000,000 if the Company terminates their service agreements without cause or for a cause that is less than a conviction of a federal felony prior to the expiration date, as renewed. The original agreement was dated July 1, 2002 and the term was amended on May 1, 2006 with an expiration of ten years from May 1, 2006.
Note 2 - In November 2005, Mr. Chamberlain and Mr. Chapa, senior consultants to the Company, entered into employment agreements and consulting agreements between the Company and corporations owned by them individually. Pursuant to these multiple agreements, Mr. Chamberlain and Mr. Chapa are each entitled to receive an annual combined cash compensation of $344,000 for the employment agreement and the consulting agreements plus health and disability insurance coverage. In addition, their corporations are paid a monthly consulting fee of $6,000 each. Each consulting agreement includes an option to purchase 5% of any shares issued by the Company during the term of these agreements at a discount price equal to 25% of the closing price on the date the shares are issued by the Company. Mr. Chamberlain and Mr. Chapa have waived their rights to the options under the agreements for the years ended December 31, 2007 and 2006. The consulting agreements include an early termination provision that proscribe a contract termination payment to either shareholder equal to $3,000,000 if the Company terminates their service agreements without cause prior to the expiration date.
NOTE 5 - INCOME TAXES
Income tax expense for the years ended December 31, 2008, 2007 and 2006 reflects an effective tax rate different from the statutory federal tax rate (generally, 34%). For the years ended December 31, 2008, 2007 and 2006 the Company’s effective tax rate was (10.93%), (24.97%) and 40.44%, respectively. The differences arise because some items that are deductible for financial statement purposes are not deductible for Federal income tax purposes. These include life insurance premiums, expenses related to unexercised options, amortization of discount, political contributions and 50% of meals and entertainment expenses.
Income tax expense (benefit) for the periods ended December 31, 2008, 2007 and 2006 is summarized as follows:
AMERICAN SURGICAL HOLDINGS, INC. AND SUBSIDIARIES
(F/K/A ASAH, CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008, 2007 AND 2006
The table below presents a reconciliation between the reported income taxes and the income taxes that would be computed by applying the Company’s normal tax rate (34%) to income before taxes for the periods ended December 31:
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31, 2008, 2007 and 2006 are as follows:
For the year 2007, the Company’s reported a net operating loss (NOL) was carried back to 2006 and the Company received a refund of prior tax payments in the amount of $575,408. The remaining NOL of approximately $500,000 is available for carry forward to reduce future tax liabilities of the Company. The Company changed from the cash method to the accrual method in reporting taxable income in 2006. The Section 481 (a) adjustment which is the difference between cash and accrual difference is spread over a three year period. The final adjustment of approximately $600,000 will be applied to the net operating carry-forward of $ $500,000 which will result is a taxable income on January 1, 2009 of approximately $100,000. The taxable income of $100,000 times the Federal tax rate of 34% is shown as the deferred income tax on the liability section of the balance sheet.
NOTE 6 - CONVERTIBLE NOTES PAYABLE
In May 2007, the Company began offering for sale a limited number of Units pursuant to a Private Placement Memorandum (“PPM”). Each Unit consisted of (i) a one year 15% interest bearing unsecured promissory note in the principal amount of $100,000 and (ii) a warrant to purchase 100,000 shares of the Company’s common stock at an exercise price of $2.00 per share (the Warrants”). The notes were extended on July 23, 2008 to December 31, 2009.
Dawson James Securities, Inc. (“Dawson”) was hired as the exclusive placement agent for the PPM. For its services Dawson earned (i) a cash commission equal to 10% and (ii) a non-accountable expense allowance equal to 3% of the gross proceeds of each Unit sold. In addition, for each Unit sold Dawson earned warrants to purchase 20,000 shares of the Company’s common stock at an exercise price of $2.00 per share.
The PPM had a minimum offering size of 12 Units and a maximum size of 35 Units. On June 7, 2007 the minimum was achieved with the sale and acceptance of 12.30 Units. The net proceeds of $1,070,100 were forwarded to the Company at that time and the balance of the proceeds, $159,900, was paid to Dawson. The Company executed Notes in the principal amount of $1,230,000 and issued warrants to purchase 1,230,000 shares of common stock. The value of these warrants was determined by management to be $734,583. The value of the warrants was recorded as a discount on the Notes and was being charged to interest expense and accreted to the balance of the Notes over the life of the Notes.
Upon completion of this first round of the PPM the Company issued warrants to Dawson to purchase 246,000 shares of common stock. The value of these warrants was determined by management to be $146,917. The value of the warrants and the cash commission paid to Dawson were recorded as deferred financing costs and will be amortized to interest expense over the life of the Notes.
AMERICAN SURGICAL HOLDINGS, INC. AND SUBSIDIARIES
(F/K/A ASAH, CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008, 2007 AND 2006
On July 2, 2007 the second and final round of the PPM was completed with the acceptance of an additional 14.85 Units. The net proceeds of $1,291,950 were forwarded to the Company at that time and the balance of the proceeds, $193,050, was paid to Dawson. The Company executed Notes in the principal amount of $1,485,000 and issued warrants to purchase 1,485,000 shares of common stock. The value of these warrants was determined by management to be $896,523. The value of the warrants will be recorded as a discount on the Notes and was being charged to interest expense and accreted to the balance of the Notes over the life of the Notes. The remaining unamortized balance of $317,984 was charged as interest expense when the terms of repayment were extended through December 31, 2009.
Upon completion of the second round of the PPM the Company issued warrants to Dawson to purchase 297,000 shares of common stock. The value of these warrants was determined by management to be $179,305. The value of the warrants and the cash commission paid to Dawson will be recorded as deferred financing costs and were amortized to interest expense over the life of the Notes.
The Company incurred deferred financing costs of $34,044 during the execution of the PPM in the form of legal and blue sky fees.
The net proceeds from the PPM were used for general corporate and working capital needs.
Conversion of the Notes
The Notes are convertible into the Company’s common stock if the Company commences a Qualified Offering prior to the maturity date of the Notes. In lieu of repayment of principal and interest on the Notes, the Holder of the Notes may acquire Company securities in the amount of such principal and interest at a purchase price equal to 85% of the price per security sold in the Qualified Offering. In this regard, a Qualified Offering means the completion of an offering or offerings of Company securities, including any offering of debt or equity securities, or securities convertible into debt or equity securities, in an amount not less than $3.0 million. At this time the Company has not commenced a Qualified Offering and has no plans to do so.
The Notes matured in June, 2008 and the discount was amortized over the life of the note.In July 2008, the original notes were renegotiated with half due in March of 2009 and the other half would be automatically extended to December 2009 upon payment of the March 31, 2009 principal balance. One half was paid in March 2009 with the other half due December 2009. The warrants were re-priced with one half re-priced at 10 cents per warrant and one half repriced at 75 cents per warrant (the half re-priced at 75 cents per warrant would have been re-priced to 20 cents per warrant if the company did not pay half the notes by March 31, 2009). The fair value of the options was reset to $245,150. As of December 31, 2008, $113,657 was charged to interest expense and $131,493 remains to be amortized.
The Company has agreed with Dawson James Securities, Inc., as the Note holders Agent to the following revisions to the terms of the Notes and warrants:
The Notes to be secured by the Company's accounts receivable and an assignment of any proceeds received by the Company from any actions for past claims from legal action against or settlement with insurance carriers. The proceeds from the legal actions would be given to the note holders.
●
The note holders have a first priority lien. The lien and security interest of the receivables would be released to make available as collateral for financing facility, if, $1.0 million is paid to reduce the principal balance outstanding.
●
The maturity date of the notes was extended to March 31, 2009. If 50% or more of the Notes have been repaid pro rata to the Note holders, by March 31, 2009, and there are no other outstanding defaults on the provisions of the Note, then maturity date shall be automatically extended to December 31, 2009 on any remaining balance and accrued interest.
●
The Company will make two monthly payments into an escrow account (Restricted Cash) jointly controlled by the Company and Dawson James Securities Inc.
●
One monthly installment of $50,000 beginning in August, 2008 (increasing to $65,000 beginning in January 2009) will be for the benefit of Note holders and distributed pro rata to the Note holders. The timing of the distribution will be determined by Dawson James Securities Inc.
●
An additional monthly installment of $52,000 beginning in the third quarter of 2008, a holdback of the principals compensation, is being escrowed as additional collateral for the repayment of the Note.
●
If 50% of the Notes are not repaid by March 31, 2009, then the escrow shall be distributed to the Note holders. If the Notes are extended to December 31, 2009, the monthly holdback escrow will continue and the escrowed amounts held until maturity and used to pay off the principal balance of the note then outstanding.
●
within five (5) business days of approving any individual expenses in excess of $25,000 and/or any expenditure not in the ordinary course of business, the Company shall deliver to the Note Holders Agent a copy of the relevant board or audit committee minutes or written consent setting forth the resolutions approving such expense(s).
AMERICAN SURGICAL HOLDINGS, INC. AND SUBSIDIARIES
(F/K/A ASAH, CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008, 2007 AND 2006
●
The Company will not, in any form or any manner, increase or add to the compensation and/or benefits received the four principals unless unanimously consented to by the independent members of the board of directors.
As of December 31, 2008, the Company has made a total of $373,653 to the escrow which is broken down into two parts: (1) interest and (2) holdbacks. Interest due to the note holders is paid on a periodic basis.
The $2.00 per share warrants issued in 2007 to the Note holders upon the issuance of the original notes has been modified as follows:
●
The exercise price has been re-priced to $0.10 for half the warrants and to $0.75 for the remaining half of the warrants.
●
If the Note holders have not been repaid 50% or more of their principal by March 31, 2009, then the warrants price at $0.75 will be re-priced to $.20 per share. The Company has treated the re-pricing of these warrants as a contingency.
●
All warrants will expire four years from the execution date of the loan modification and any extension agreements thereof.
The Note holders received new warrants in exchange for old warrants for the extension of the debt. The value of the new warrants issued with the debt is recorded as a discount and amortized to interest expense. APB 14 states from the point of view of the issuer, the sales of a debt security with warrants results in a lower cash interest cost than otherwise be possible or permits financing not otherwise practicable.
The incremental value of 50% of the warrants using the $0.10 exercise price is expensed over the period from the modification date (July 23, 2008) to December 31, 2009. The incremental value of the remaining 50% of the warrants using the $0.75 exercise price is expensed over the modification date (July 23, 2008) to March 31, 2009 The interpretation is from paragraph 51 of SFAS 123R. The paragraph states a modification of the terms or conditions of an equity award shall be treated as an exchange of the original award for a new award. In substance, the entity repurchases the original instrument by issuing a new instrument of equal or greater value, incurring additional compensation cost for any incremental value.
Due Dates of Notes Payable
The first 12.30 Units, in the principal amount of $1,230,000 plus accrued interest of $187,575 matures on June 7, 2008. The second 14.85 Units in the principal amount of $1,485,000 plus accrued interest of $226,462 matures on July 2, 2008. In July 2008, the original notes were renegotiated with half due in March of 2009 and the other half would be automatically extended to December 2009 upon payment of the March 31, 2009 principal balance. One half was paid in March 2009 with the other half due December 2009. The warrants were re-priced with one half re-priced at 10 cents per warrant and one half repriced at 75 cents per warrant (the half re-priced at 75 cents per warrant would have been re-priced to 20 cents per warrant if the company did not pay half the notes by March 31, 2009). The fair value of the options was reset to $245,150. As of December 31, 2008, $113,657 was charged to interest expense and $131,493 remains to be amortized.
NOTE 7 - NOTES PAYABLE
The note due to a related party of $150,000 was signed on June 12, 2008 and extended on September 12, 2008 to a new maturity date of June 15, 2009. The note incurs interest at a rate of 15% annually. During 2008, $12,452 was charged to interest expense and $12,452 of accrued interest is included in accrued expenses.
NOTE 8 - RELATED PARTY TRANSACTIONS
In 2007 Mr. Olmo-Rivas’s sister returned to the company’s employment from the billing company.
In June of 2008 Mr. Chamberlain loaned the company $150,000 (see Note 7).
The Company has compensation arrangements in place with four of its significant shareholders for services rendered to the Company directly by them or by entities controlled by them (see Note 4).
Mr. Elgamal and Mr. Olmo-Rivas, executive officers of the Company, pursuant to multiple year employment agreements that were renewed, amended and revised in 2006 and 2007 are each entitled to receive annual cash compensation of $564,400 plus health, life and disability insurance coverage and a bonus of 2% of the increase, year over year, of the gross revenue of the company (see Note 4).
AMERICAN SURGICAL HOLDINGS, INC. AND SUBSIDIARIES
(F/K/A ASAH, CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008, 2007 AND 2006
The Company renewed, amended and revised Ten year service agreements with corporations owned by Mr. Elgamal and Mr. Olmo-Rivas. The agreements automatically renew at maturity unless cancelled by either party with sixty days written notice. The corporations were each paid a monthly expense fee of $11,000 during 2007. Each agreement includes an option to purchase 5% of any shares issued by the Company during the term of these agreements at a discounted price equal to 25% of the closing price on the date the shares are issued by the Company. Mr. Elgamal and Mr. Olmo-Rivas have waived their rights to the options under the agreements for the years ended December 31, 2007, and 2006. These agreements also include an annual bonus to each valued at 2% of the increase, year over year, of the gross revenue of the company to be paid during the first quarter of the current fiscal year for the increase in gross revenue in the prior year. Mr. Elgamal and Mr. Olmo have waived the right to this bonus for the years ending December 31, 2007 and 2006. The employment agreements for Mr. Elgamal and for Mr. Olmo-Rivas include an early termination provision that proscribes a contract termination payment to either officer equal to $3,000,000 if the Company terminates their service agreements without cause or for a cause that is less than a conviction of a federal felony prior to the expiration date, as renewed.
In November 2005, Mr. Chamberlain and Mr. Chapa, senior consultants of the Company, entered into employment agreements with the Company and corporations owned by them entered in to consulting agreements with the Company. Pursuant to these multiple year agreements, Mr. Chamberlain and Mr. Chapa are each entitled to receive annual cash compensation (salaries and/or consulting fees) of $344,000, and health and disability insurance coverage and their closely held corporations earn a fee of $6,000 per month. Each consulting agreement includes an option to purchase 5% of any shares issued by the Company during the term of these agreements at a discount price equal to 25% of the closing price on the date the shares are issued by the Company. Mr. Chamberlain and Mr. Chapa have waived all rights to these options for the years 2007, 2006 and 2005. The consulting agreements include an early termination provision that proscribes a contract termination payment to either shareholder equal to $3,000,000 if the Company terminates the agreements without cause prior to the expiration date, as renewed.
NOTE 9 - EQUITY
Stock Issued for Services
In January 2007, the Company issued 100,000 shares of common stock for consulting and strategic business planning services, with a fair value of $220,000.
Deferred Compensation
In November 2005, the Company issued 1,428,573 shares of common stock to Mr. Chamberlain and Mr. Chapa for future services under consulting agreements ending in November 2010. The value of these shares was determined to be $250,000 based on a recent cash offering price. The Company expensed $50,000 in 2008, 2007 and 2006. The unamortized balance at December 31, 2008 of $93,750 will be amortized on a straight-line basis over the remaining life of the agreements.
Stock Issued for Cash
In April 2006, the Company issued 10,089 shares of common stock to individuals for total cash of $30,000.
In May 2006, the Company issued 857 shares of common stock to individuals for total cash of $2,550.
Stock Issued to Directors
In March 2007, the Company issued 25,000 shares of common stock to the lead independent director as part of his initial board fees, with a fair value of $55,000.
Options Issued to Directors/Officers
In March 2007, Mr. Elgamal and Mr. Olmo-Rivas were each granted options to purchase 500,000 shares of common stock. The options vest quarterly on a ratable basis over 3 years. The Company also granted 75,000 options to the lead independent director and 25,000 options to each of the other two independent directors.
Stock Options and Warrants
The fair market value of the stock options at the date of grant was estimated using the Black-Scholes option-pricing model with the following assumptions:
Expected Life
to 5 years
Interest Rate
4.25%
Dividend Yield
$0
Volatility
28%
Forfeiture Rate
AMERICAN SURGICAL HOLDINGS, INC. AND SUBSIDIARIES
(F/K/A ASAH, CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008, 2007 AND 2006
Expected life represents the period of time that options are expected to be outstanding and is based on the Company’s historical experience or the simplified method, as permitted by SEC Staff Accounting Bulletin No. 107 where appropriate. The risk-free interest rate is based on U.S. Treasury interest rates at the time of the grant whose term is consistent with the expected life of the stock options.
Expected dividend yield was considered to be $0 in the option pricing formula since the Company does not pay dividends and has no current plans to do so in the future. Expected volatility is based on the Company’s historical experience. The forfeiture rate was considered to be none insofar as the historical experience of the Company is very limited. As required by SFAS No. 123(R), the Company will adjust the estimated forfeiture rate based upon actual experience.
The Company recognized an expense of $107,695 and $245,150 for stock options and warrrants earned during the twelve months ended December 31, 2008, respectively.
The following tables summarize all stock option grants as of December 31, 2008 and 2007, and the related changes during these periods are presented below.
Of the total options granted, 918,417 are fully vested, exercisable and non-forfeitable.
AMERICAN SURGICAL HOLDINGS, INC. AND SUBSIDIARIES
(F/K/A ASAH, CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008, 2007 AND 2006
The following tables summarize information about stock options for the Company at December 31, 2008 and 2007:
The following tables summarize all stock warrants granted as of December 31, 2008 and 2007, and the related changes during these periods are presented below.
Of the total warrants granted, all 3,258,000 are fully vested, exercisable and non-forfeitable.
AMERICAN SURGICAL HOLDINGS, INC. AND SUBSIDIARIES
(F/K/A ASAH, CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008, 2007 AND 2006
The following tables summarize information about stock warrants for the Company at December 31, 2008 and 2007:
NOTE 10- SUBSEQUENT EVENTS
January 20, 2008 the independent members of the Board of Directors upon the recommendation, of the Compensation Committee approved the reinstatement of the expense and salary reductions taken in the second and third quarter of 2008 for the four principals (Mr. Elgamal, Mr. Jamie Olmo-Rivas, Mr. Bland Chamberlain and Mr. Jose Chapa) of the Company. In addition, 1,000,000 common share options were granted to Mr. Elgamal, and Mr. Jaime Olmo-Rivas. The Board also approved a 10% raise, a onetime bonus of $18,000 and 800,000 common share options to Jim Longaker, CFO.
The Board also approved 250,000 common stock options each to the other two Principals, Mr. Chamberlain and Mr. Chapa and 100,000 common share options to each of the three independent board members. The Board also approved the reinstatement of their compensation from 80% to 100%.
February, 2009, we reached an agreement with Coastal Surgical Assistants in Virginia to join the Company. The agreement becomes effective March 1, 2009. The agreement gives the current owner $50,000 in cash upon execution, a salary, 50,000 shares of common stock and an incentive bonus based on profits.
In March 2009, the $150,000 note at 15% interest to a related party with accrued interest was paid in full.